JAKARTA - The long-running
dispute between Indonesia's state oil and gas firm Pertamina
and US-based power company Karaha Bodas Co (KBC) has
taken yet another twist after a court ruling last
week that threatens to further deteriorate Indonesia's
poor image in the eyes of would-be foreign investors and
raises big questions over President Susilo Bambang
Yudhoyono's ability to regenerate serious interest from
major foreign investors in the short term.
The Indonesian Supreme Court last Tuesday ruled in favor of
KBC against Pertamina, overturning a lower court ruling.
The ruling came just as President Yudhoyono was
promoting the merits of investing in Indonesia to
leaders at the Asian Pacific Economic Cooperation (APEC)
summit in Santiago, Chile - making it appear that
officials back home were shooting him, and the country,
in the foot.
At the summit, Yudhoyono
held individual meetings with nine leaders and met with
several business groups. He met US President George W Bush in
a Santiago hotel and stressed the importance of
US investment to Indonesia. In a separate meeting with the
US Chamber of Commerce, Yudhoyono invited investors
to attend an infrastructure summit in Jakarta on
January 17-18. Yet in Jakarta, the tax office, the
police and the government itself were hard at work
piling the pressure on KBC.
The
case relates to a joint contract between KBC
and Pertamina to operate two geothermal power plants
in West Java. KBC signed the contract with
Pertamina in 1994 and state electricity firm Perusahaan
Listrik Negara (PLN) contracted to buy the power. But in
September 1997, just after the onset of the Asian
financial crisis, the government decided to scrap the
plants, along with several other major infrastructure
projects, with the proviso that they could be restarted
when the economic situation
improved.
Pertamina, the main player in the
dispute, has, with the government's full support,
steadfastly refused to pay up on a US$261 million
(Rp2.35 trillion) international arbitration award
granted to KBC in December 2000 in Geneva,
Switzerland.
Caymans-registered KBC is 80%
owned by privately held Florida Power and Light and
Caithness Energy of New York. Sumarah Daya Sakti, a
local company linked to Tantyo Sudharmono, the son of a
former vice president of Indonesia, owns 10%, as does
Tomen Corp of Japan.
Around the time
of the ruling last week, the tax office, which
comes under the Ministry of Finance, said the government
had approved its moves to jail three KBC executives on
charges of tax evasion and accounting fraud. Government
regulation No 137/2000 authorizes the Directorate
General of Tax to detain alleged tax evaders without
charge or trial for up to a year. On Tuesday, Loedito
Setyawan Poerbowa, Sudharmono's son-in-law and a
director and shareholder of Sumarah Daya Sakti, was
detained by the tax office.
According to the
Directorate General of Taxation, KBC owes the state $126
million, accumulated since 1998. This includes $21
million in unpaid income taxes in 1998, $1.3
million in value-added tax (VAT) revenue since 1999 and
$104 million in income tax stemming from the arbitration
award.
Under the terms
of the arbitration ruling, Pertamina was
ordered to pay compensation to KBC amounting to $261
million, including $111.1 million in lost investment and
$150 million in lost profits, with an annual interest
rate of 4% starting in January 2001. But despite
the Supreme Court's ruling, Pertamina has refused to pay
up on the award.
Pertamina's case
for not paying up is based on
its claims that KBC invested only $40 million
in the project and that it was, in
any case, covered by political risk insurance. KBC claimed
that it had invested more than $100 million
to identify geothermal energy reserves and develop infrastructure and
community resources in areas surrounding the project.
Under the KBC contract, investors
were excused from performance by political force
majeure and KBC chased after both
Pertamina and PLN for breach of contract.
After the
December 2000 ruling, Pertamina filed two unsuccessful appeals in
Switzerland before taking the battle to Jakarta courts
in a series of failed and futile attempts to thwart the
Geneva verdict and avoid paying compensation. KBC fought
back on several fronts and filed numerous lawsuits in
the US, Hong Kong, Canada and Singapore to freeze
Pertamina assets in those countries.
The ruling
was subsequently upheld by courts in the US, Hong Kong,
Singapore, Canada and Switzerland, and a New York court
froze funds worth $650 million owned by Pertamina and
the government that was revenue from oil and gas
exports. After losing all the appeals, Pertamina in
March this year finally agreed to pay the compensation,
and the government was able to withdraw $350 million of
these funds.
In August, the management at
Pertamina was replaced after widespread media exposure
of vested interests at play in the controversial sale of
two supertankers constructed for the company. KBC had
reportedly filed a request to a South Korean court to
confiscate the tankers. "Pertamina will not
pay ... because the project has inflicted losses
on the state and the company," Pertamina's new president,
Widya Purnama, told his first press conference after
being appointed.
Allegations of
corruption, collusion and nepotism as well as tax manipulation in
the KBC project first started to surface around this
time, with police naming the former head of Pertamina's
geothermal division, Priyanto, his aide Syafei Sulaiman,
and KBC 's vice president Robert D McCutchen as suspects
for their alleged roles in fictitious transactions and
cost mark-ups in the project.
In October, KBC,
with the help of a New York court order, withdrew $29
million of the remaining $300 million in frozen funds in
New York, and Purnama threatened to resign if the
government paid the compensation award. A 1999 report
from Pertamina's finance comptroller showed a mark-up of
$19.16 million in the project's investment cost, though
KBC claimed it had invested $110 million. The project
reportedly involved eight exploration wells being
drilled for around $100 million, but analysts said the
wells should have cost a total of only $32 million based
on international costs. There was no tender process to
determine who would get the projects. The involvement of
a former vice president's son was also questioned.
International arbitration rulings are
enforceable in Indonesia because of the country's 1981
ratification of the New York Convention on recognition
and enforcement of foreign arbitration awards. Law No
30/1999 on arbitration stipulates that an international
arbitration ruling can be executed through the Central
Jakarta District Court. At Pertamina's request, the
Central Jakarta District Court in 2002 ruled to annul
the arbitration ruling but since then, Indonesia's
Supreme Court has said that because Pertamina appealed
to the Swiss Supreme Court against the arbitration
ruling, the Central Jakarta District had no authority to
decide on Pertamina's request to annul the ruling.
Copies of the Supreme Court ruling
were distributed by KBC on the day its executive
was arrested, prompting media reports that it was a
brand new ruling, though it was dated March 8, 2004.
Minister of State Enterprises Sugiharto points out
that the ruling only decided on the "right" of the
Central Jakarta District Court and did not address "the
content" of Pertamina's complaint. He added, tellingly,
that the government would use tax fraud and corruption
charges to press KBC to accept an out-of-court
settlement.
A former US Ambassador to Jakarta,
Robert Gelbard, is a consultant for US-based
international law firm White & Case, whose Sinagpore
office acts for the government and for Pertamina. Local
media reported Minister of Finance Yusuf Anwar as saying
the lawyers had filed an appeal to the US Supreme Court
to seek the release of around $271 million of frozen
funds in Bank of America Corp and Bank of New York as
the funds are government oil and gas export revenues
that do not belong to Pertamina.
A report in
local media last week that the Indonesian Advocacy
Reform Institute (LARI) alleged that the current
Minister of Energy and Mineral Resources Purnomo
Yusgiantoro had received a share of a $10 million
"commitment fee" paid by KBC met with a swift official
denial from the ministry. The spokesman of the ministry,
Sutisna Prawira, explained in a letter that in 1990,
Purnomo was a member of a team hired by consultants PT
Persada Adhi Cipta that was commissioned by PT Sumarah
Dayasakti to conduct a feasibility study on geothermal
development. In 1994, Purnomo was appointed head of the
Geothermal Implementation Team at the ministry that
produced reports on geothermal energy development
programs. "Allegations that Purnomo Yusgiantoro received
$10 million are not true, and evidence is needed to
support such claims," Prawira said.
Even if
the case were to go to court again and Pertamina could
prove corruption, it would not affect the validity of
the arbitration ruling, though KBC could possibly be
sued under the vigorously enforced US Foreign
Corrupt Practices Act (FCPA), which prohibits the bribery of
foreign government officials by US nationals and
prescribes accounting and record-keeping practices.
This is why the government has repeatedly
said it favors an out-of-court settlement with the
plaintiffs. But at the end of the day, the continued refusal
to execute final and binding international
arbitration rulings, and treating KBC's executives as criminals
and tax evaders to avoid the arbitration ruling, adds
yet another layer of uncertainty to the investment
climate. The business-friendly investment regime so badly
needed may remain unachievable as long as high-profile disputes
like this remain unresolved.
Bill
Guerin, a weekly Jakarta correspondent for Asia
Times Online since 2000, has worked in Indonesia for 19
years in journalism and editorial positions. He has been
published by the BBC on East Timor and specializes in
business/economic and political analysis in
Indonesia.
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