Politics and business mix in Indonesia
By Bill Guerin
JAKARTA - On taking office, Indonesian President Susilo
Bambang Yudhoyono advised his officials to divest their
personal business interests to avoid any allegations of
conflict of interest hounding his reform-oriented government.
Nearly two years into his term, that call
hasn't been universally heeded, and the growing nexus of
public and private interests is starting to win his administration
unfavorable comparisons to former president Suharto's New
Order government, where business and politics openly and
often mixed to corrupt effect.
Nowhere is Yudhoyono's reform discrepancy
more apparent than with the publicly listed conglomerate
PT Bakrie & Brothers, which currently has a market capitalization
of about US$500 million and is 80% owned by the family of
Coordinating Minister for People's Welfare Aburizal Bakrie,
a holdover tycoon from the Suharto era.
The company accumulated more than $1 billion
in debts at the height of the 1997-98 Asian financial crisis,
but the minister since has returned to the top echelon of
Indonesia's richest people. Forbes magazine reckoned Bakrie
was worth an estimated $735 million in 2004, making him
the fourth-wealthiest person in the country after the three
tobacco barons who owned cigarette makers Gudang Garam,
Djarum Group and Sampoerna.
Bakrie's businesses were still running in
the red that year, nursing high debt loads left over from
financial crisis and generating total losses of about Rp200
billion ($21.9 million). After Yudhoyono's first full year
in office in 2005, Bakrie dramatically returned to the black,
generating positive net earnings and profits of Rp267 billion
and Rp223 billion, respectively. And industry analysts predict
that Bakrie's profits will soar this year.
Back in business
Nowadays, the diversified Bakrie group businesses are locked
into several government projects and there are apparently
many more in the pipeline. This week the government's Downstream
Oil and Gas Regulatory Body, BPH Migas, announced it had
picked Bakrie Pipe Industries as its preferred bidder to
build a controversial new $1.26 billion gas pipeline connecting
Java and Kalimantan, the Indonesian portion of Borneo island.
Bakrie championed the 1,219-kilometer East
Kalimantan-Java gas pipeline, part of the Trans-ASEAN Gas
Pipeline (TAGP) project, in his former government capacity
as coordinating minister for the economy. He is on record
as saying the government could appoint the contractor of
the project, which was later won by his family business,
without competitive bidding.
State-owned gas transmission and distribution
company PT Perusahaan Gas Negara (PGN) - which had teamed
up with the China National Offshore Oil Corp (CNOOC, that
country's largest offshore oil producer) and landed funding
from the World Bank and the Asian Development Bank - has
subsequently claimed that its bid had been leaked, although
not pointing the finger at any specific competitor.
The deal has nonetheless gone through, and
Bakrie is now negotiating with Kalimantan gas producers
to secure supplies for the pipeline project, which the company
expects to finish by 2009, according to Bobby Gafur Umar,
Bakrie's president. The pipeline is expected to carry 1
billion cubic feet of natural gas per day from gas fields
in East Kalimantan to users in Central Java by 2009. Umar
told reporters on Tuesday, "I'm sure the government
will go all out to see this project gets completed."
Those estimates are highly controversial,
however. Some industry analysts say the level of gas reserves
in East Kaliman-tan are not sufficient for the project's
scope and could quickly represent a conflict with Indonesia's
liquefied natural gas (LNG) contractual export commitments
to major customers in Japan, South Korea and Taiwan.
Indonesia has in recent years been the world's
largest LNG exporter, but the government is now considering
importing the fuel to help meet its ballooning domestic
energy demand. A recent government study shows it may cost
Indonesia as much as Rp18 trillion a year in lost gas-export
revenues to divert the gas for domestic purposes from gas-rich
Kalimantan - raising big cost-benefit questions that some
industry analysts contend have not been properly analyzed.
Shipping gas to Java, industry experts say,
would be far more economical. LNG production at the Bontang
plant in Kalimantan could fall to nearly half its current
volume from 2009-10 when the new pipeline comes online,
the same experts say. Bontang is already struggling to meet
annual production commitments because of a shortfall in
gas supplies from increasingly spent gas fields operated
by Total, Chevron and Vico Indonesia.
With global oil prices soaring, the government's
current push to switch to non-petroleum fuels to lower dependence
on oil arguably makes good policy sense. At the same time,
it will clearly benefit energy conglomerates such as PT
Bakrie & Brothers as national power stations are converted
to use more natural gas or coal and biofuel is given government
priority over fossil fuel usage.
Bakrie, 59, who was chairman of the Indonesian
Chamber of Commerce, Trade and Industry for 10 years until
2004, bats back any criticism of conflict of interest and
that certain government policies favor his family's private
concerns over national interests. He frequently maintains
that he no longer has any management role or formal position
in his family-run company.
Moreover, all government decisions for the
energy sector, he insists, are made collectively. Bakrie
admits he pressed for the controversial Kalimantan-Java
pipeline project, but notes that "among 18 factories
producing pipes, one of them is the Bakrie Group. That can't
be helped."
Riches to rags to riches
Achmad Bakrie founded Bakrie & Brothers in 1942 as a
general merchant and trading company. His eldest son, Aburizal
Bakrie, took control of the family business upon his death
in 1988, and along with his two brothers, Nirwan and Indra,
the second generation of entrepreneurs rapidly expanded
into areas as diverse as steel-pipe manufacturing, telecommunications,
rubber and oil-palm plantations, petrochemicals, property,
banking, insurance, infrastructure, mining, and media. By
the 1990s, an era when Indonesia was heralded by the World
Bank as a "miracle" economy, Bakrie & Brothers
was one of the country's leading conglomerates.
Then the Asian financial crisis hit. By December
1999, Bakrie's three main holding companies owed Rp4.3 trillion
to the government-run Indonesian Bank Restructuring Agency,
making it IBRA's fourth-largest debtor. Combined with the
debts it owed to hundreds of different foreign creditors,
its total debts peaked at about Rp10 trillion.
The debt-restructuring agreement the family
signed with IBRA in November 2001 left the Bakries with
a mere 2.92% shareholding in what had been the largest conglomerate
in Indonesia with about $5 billion in net assets and 71
different subsidiaries. About 95% of the companies' shares
were transferred to creditors in debt-for-equity swaps,
while the remaining 2.08% of the company belonged to the
public.
The Bakrie family's fortunes reversed again
beginning in 2003, when the assets of one of the world's
biggest thermal coal mines, PT Kaltim Prima Coal, were scooped
up by the family soon after the government started negotiations
with global mining giants BP and Rio Tinto, which were forced
to sell their concessions to resources under new nationalistic
mining laws.
Bakrie-affiliated PT Bumi Resources said it
had received loans amounting to $404.5 million from international
lenders to help finance the $500 million acquisition. Singapore's
United Overseas Bank and Credit Suisse First Boston provided
a combined $318 million, according to company statements.
Bumi already owned PT Arutmin Indonesia, another big coal
producer it had bought in 2001 from BHP Biliton Australia
for $180 million in another government-forced sale. Together,
these two mines accounted for nearly 40% of Indonesia's
total coal exports last year.
Bumi, currently with a market capitalization
of $1.76 billion, announced in March it would offload both
mines to a consortium of local companies led by Jakarta-based
investment bank Renaissance Capital for $3.2 billion, thus
giving the company an apparent windfall profit of more than
$2.5 billion.
Those earnings will provide capital to finance
Bakrie's new plans to invest heavily in Indonesia's underdeveloped
oil-and-gas sector. With the industrialization of China
and India pushing up demand for oil and gas to unprecedented
levels, and the upward impact the conflict in the Middle
East has had on crude prices, Bakrie has its eye on plumbing
Indonesia's under-exploited fuel reserves to cash in on
spiraling global fuel prices.
Ken Farrell, Bumi's director of operations,
reportedly described the opportunity as too good to miss.
"After we've paid for a dividend and a share buyback,
we will have - including debt - up to $5.5 billion in the
war chest." Bumi is also in the process of taking over
its sister company, PT Energi Mega Persada Tbk, a provider,
developer and explorer in the upstream oil and gas business
with a market value of about $841.7 million.
Big government deals
Bumi can use the cash from its divestment in coal-mining
assets to bankroll Energi's mostly undeveloped oil and gas
blocks and also make further acquisitions. Energi bought
five oil and gas blocks in Indonesia late last year. If,
as expected, the merger goes through, it will create a national
energy champion that has the potential to be the biggest
oil-and-gas concern in the Asia-Pacific region, with a market
value of some $2.8 billion based on current prices.
Next year Energi will begin supplying between
120 million and 130 million cubic feet of gas per day to
several electricity-generating power plants in East Java.
The contract runs for 15 years and is worth an estimated
$3 billion. It will also supply gas to PGN, state oil-and-gas
company Pertamina, and PT Petrokimia Gresik.
The first phase of Energi's 100%-owned Terang-Sirasun-Batur
field development off Java is targeting a production startup
by 2008 and will cost at least $275 million. Bumi plans
to issue 14.4 billion new shares to finance the acquisition,
while each Energi shareholder will have the right to convert
their shares to Bumi on a 1:1 basis. The domestic and foreign
minority shareholders of both companies will vote on the
merger plan at the end of July and the deal is due for completion
on August 9.
Investor confidence in Energi has recently
been hit to a degree by a drilling accident at one of its
fields in Java, alleged to have been caused by subsidiary
Lapindo Brantas. Energi says the damages are manageable
and are partly covered by insurance, but traders believe
the ecological disaster could result in huge damages and
compensation payouts.
The government has recently announced an
ambitious bio-energy program that will include a massive
Rp200 trillion investment over the next five years to promote
the use of alternative fuels such as bio-diesel and ethanol
made from palm oil, cassava, jatropha and sugarcane. Toward
that end, state planners hope to develop another 3 million
hectares of plantations over the next five years to help
meet biofuel demand.
In line with that policy, PT Bakrie Sumatera
Plantations, which generates about 33% of Bakrie's total
revenues, plans to expand by 2008 its oil-palm plantations
in Sumatra and Kalimantan to 40,000 hectares. The company
also holds a 70% stake in Bakrie Rekin Bio-Energy, a joint
venture with state-owned contractor Rekayasa Industri, which
was established to construct a big new bio-diesel plant
early next year.
The $25 million bio-diesel factory is expected
to come onstream in mid-2008, and will have an initial capacity
of 60,000-100,000 tons of bio-diesel. Bakrie will provide
the raw materials needed, including crude palm oil and other
feedstock, while Rekayasa Industri would provide engineering
and construction expertise.
The bigger Bakrie money, however, will come
from old-fashioned infrastructure. About 55% of Bakrie's
revenues come from the infrastructure sector, which is highly
dependent on government contracts and licenses for its livelihood.
Bakrie has recently won several big-ticket infrastructure
projects, including a $66 million gas pipeline connecting
Java to Sumatra and a gas-distribution project to West Java
worth $37 million.
Bakrie Power, meanwhile, is working with China-owned
Chengda Engineering Corp and the Bank of China to resurrect
the once-stalled Tanjung Jati project, a steam-powered 1,320-megawatt
electricity-generating plant project in Cilacap, Central
Java - the same area that was hit by Monday's tsunami. The
project is worth an estimated $1.1 billion and will receive
funding from the Bank of China.
The Bakrie subsidiary has also set aside $1.7
billion to build a 1,320MW coal-powered electricity plant
with the help of state electricity firm PT Perusahaan Listrik
Negara (PLN) and an integrated steel factory. The $1.4 billion
power project will begin next year and is estimated to take
about three years to complete. The $300 million integrated
steel factory, meanwhile, is likely to be built in West
Java and have an annual production capacity of 1 million
tons.
Together with Indian firm Welspun Gujarat
Stahl Rohren Ltd, PT South East Asia Pipe Industries (Seapi),
a Bakrie subsidiary, won a tender to supply a 168.6-kilometer
undersea gas pipeline for PGN. The pipeline will stretch
from Maringgai harbor in Lampung, South Sumatra, to the
Bekasi Estuary in West Java. Seapi won $65.8 million of
the project's total $84.2 value.
Never been burned
The Bakrie Group has never in its long history been linked
to any scandal or government corruption, despite perennial
concerns about possible conflict of interest with the family's
strong political connections. Unlike most developed countries
and some regional neighbors such as Thailand, Indonesia
has no legal regulations barring government officials from
having business interests while they hold public office.
Anung Karyadi, a staffer with global corruption
watchdog Transparency International's Indonesian affiliate,
contends that the Indonesian government should establish
clear regulations on how family members and close associates
of government officials conduct their business.
The government has long planned to set up
an independent national public procurement office to reform
the procurement system, but those plans are still on the
drawing board. There have notably been few, if any, government
moves toward developing a national competitiveness framework
aimed at breaking up big business monopolies and promoting
more growth-promoting entrepreneurialism.
Some analysts argue that the growing mix of
business and politics under Yudhoyono's administration looks
familiar to those who remember Suharto's government. Then,
Suharto's six children and a handful of his favored business
associates controlled large swaths of the Indonesian economy.
And, they note, the Bakrie family business was then, and
is today, Indonesia's top conglomerate.
Bill Guerin, a Jakarta correspondent for Asia
Times Online since 2000, has worked in Indonesia for 20
years, mostly in journalism and editorial positions. He
has been published by the BBC on East Timor and specializes
in business/economic and political analysis related to Indonesia.
He can be reached at softsell@prima.net.id
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