In a landmark deal, the Indonesia government has finally sold Bank Central Asia (BCA) to private equity firm, Farallon, which beat Standard Chartered at the post. Laksamana Sukardi explains the significance of the sale and why StanChart lost. He also talks about other privatizations likely to happen this year.
How important for Indonesia is the BCA asset disposal?
It's very important. It is the next step of our economic restructuring and will help boost the confidence of investors and reboot our economy. The reason we got hit by a crisis initially was because our banking sector was very weak, and so the first step was to bail out the banks and recapitalize them. We restructured and sanitized the banks by taking out the NPLs.
Now the banks have to be managed by strong and sound institutions. We don't want to repeat past mistakes. So now we are getting sound, credible institutions as owners and managers of the banks and that will bring confidence. We believe the banking sector is of paramount importance, and is a pillar of the economy.
Why did you choose the route of selecting a private equity firm, rather than a bank that would bring with it management experience?
Of course, we would rather have had Standard Chartered take over BCA, but we need to preserve the integrity of the bidding process. On the deadline for bid submissions on 28th January, Standard Chartered gave a very stringent sales and purchase agreement, which they cancelled two weeks later [Editor's note: Standard Chartered states that it was asked by IBRA to re-examine its bid at this point and put in a new one. It says it did not cancel its sale and purchase agreement.]
We need to have public accountability and fair treatment. We need to preserve the integrity of the process or else be criticized for double standards, especially where there are suspicions in Indonesia of corruption. We still have a lot of banks for sale, and so the process must not be tarnished.
We had a scoring system and had weightings. In the 'institution' section, Standard Chartered scored highly, but in the 'sales and purchase agreement' section they lost to Farallon. We made the scoring system public and it had to be based on submissions at a certain date and not after a revision.
Originally Standard Chartered put in their conditionalities that were not in favour of the government. For example, they requested that 15% of the proceeds be put in an escrow account in case of future claims. They requested 21% should be paid as a put and call option to be exercised on 31 December 2002. And that the price could be adjusted if the government of Indonesia defaulted on its bonds. There were also technical assistance fees which were very handsome.
I have to be accountable, and there has to be a proper bidding process. There is a lot of public scrutiny. Indonesia is a different country. Everything is now transparent. The credibility of the process is more important than the winner because we still have a lot of things to sell.
So the Farallon sale and purchase agreement was much more straightforward?
Yes, and the business plans were very similar. The prices were not much different.
The business plan is to keep the bank as it is, as a retail bank?
Yes, and for the intermediation role of the bank to be restored. Farallon will also not make a drastic shake-up of the management or employees. BCA is already profitable, but the profit comes from holding the government bonds rather than from loans. They really need to make loans to stimulate the economy.
So Farallon has made an undertaking to start lending again, rather than just sitting on the government bonds?
Yes, that is what is important for us, in terms of providing stimulus to economic growth. If they just sit on the bonds, it's profitable of course, but it is an idle bank and is not functioning as an intermediary. They will bring in Deutsche Bank to improve the risk management.
You are an ex-Citibanker. In your view, has credit risk management improved in Indonesian banks since 1997?
It is very much improved. We are one of the countries that has taken some painful steps to reform our banking system. We cleaned up the NPLs. If you compare it to Japan, where they keep on accumulating debt, we compare favourably. Also the environment that we are working in is very transparent at the moment, unlike in the past. Historically, lending was by banks to their own group and political connections, and the bankers were not really trained to have a real commercial style of lending. But the banking system has seen what is wrong with such past behaviour and has started to be more cautious and prudent.
On the other hand, people want to get banks to lend aggressively for the sake of the economy. So they have to balance the two. With the right management and the right owners, and much better transparency, lending will become prudent.
Do you think the real test of confidence will be the success of the Bank Mandiri IPO?
The litmus test was BCA, and after that Bank Niaga will be next, and then Bank Mandiri. Recently some of the best performing stocks have been bank stocks from emerging markets such as Indonesia. The stock price of BCA increased from Rp900 to Rp2000 - it has more than doubled and has been one of the best performing stocks for that period. Bank Niaga's stock has also doubled.
Is this because they are a leveraged play on investors' confidence in Indonesia?
I think so. After we had the economic crisis, and after September 11, investors avoided buying banks, especially from emerging countries and now this is the best performing share. From that indication, you can conclude that confidence is coming back. One of our goals is to jumpstart confidence by selling the bank.
When will the Bank Mandiri IPO happen?
In the first half of this year. I think a large chunk will be bought by foreign investors.
Is the government planning to sell down control of Indosat?
Our policy is to accelerate the divestment of companies in sectors that are highly competitive and technologically-driven. Telecoms is technology-driven, and some of the technological developments have rendered the past capex obsolete. We invested a lot in analog and then came the GSM system and now we have 3G. It requires continuous capital expenditure. So the government decided to push ahead with the sale of Indosat. It is not only in a competitive sector, but it needs to spend a lot on capex to survive.
The government's policy seems to be to sell down control of Indosat, but keep control of Telkom.
That's true. But we would like to increase competition, which will be good for the consumer.
Do you worry that when Telkom floats its mobile subsidiary Telkomsel, it will damage Telkom, because investors feel all the value is in Telkomsel?
That's a real concern, and is why we need to accelerate the divestment of Telkom. Fixed line is no longer attractive.
So the government is concerned about a Telkomsel IPO happening before it gets a chance to divest more of its Telkom stake?
We have some financial advisors, advising us on what to do in order to maximize shareholder value for the government of Indonesia.
Will the Telkomsel IPO happen this year?
We don't know. We want to divest Indosat first.
How is Indonesia going to regain confidence in its power generation sector among international strategic investors?
We have regained interest. I went to Japan and they expressed their interest in expanding in Indonesia. We have 21 IPP projects and we have been able to complete their restructuring of these such as Paiton I and II. Why? Because Indonesia has a steadily growing demand for electricity, which is growing at 9-10% per year, even in spite of the crisis. If we didn't have this increasing demand for power the restructuring would be more difficult. So, after we restructured a lot of Japanese investors saw we would be short of power supply and so investment in power plants will become feasible again.
So you think we could see the signing of a new deal from Japanese investors in 2002?
They have made requests, because they see a captive market.
What sort of guarantees do they want that the contracts will be honoured, unlike the past?
One should understand that the culture of investment decisions in the past. You don't have to be a genius to see that every Suharto sibling needed to have a huge power plant, and what went wrong as a result. You should not blame only the government, but also say we need to impose good governance on the investors also. Now we are working on the basis of transparency and commercial viability.
The past is the past and I admit there were problems, but we are now dealing with problems and finding solutions. Once we've consolidated restructuring and sold off the banks, we can go into a new phase of economic growth.
One comment is that an added level of complexity now is the power of provincial governments. For example, they derailed the Semen Gresik sale.
We are in the euphoric phase of regional autonomy. We will face problems, but once people realize the benefits it will become easier.
Some of the natural resources companies say they face problems with regional government questioning contracts signed with the central government. This creates a lot of uncertainty.
This is a temporary problem. Once the provinces realize the importance of the foreign direct investor and the benefits they bring to their constituencies in terms of employment and taxes, they will then compete with each other to lure investors. Now things are difficult, because we are at the beginning of the process. But don't look at Indonesia as a snapshot, but as an overall motion picture. It's a process. We are in a transition from authoritarian rule to democracy. At the end of the day, they will learn that they have to lure foreign strategic investors.
Is this motion picture going to have a happy ending, like an American movie?
I hope so.