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
Kalimantan 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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