Bakrie looks exposed in meltdown
By Jacqueline Hicks
JAKARTA - As Indonesia grapples with the consequences of a possible worldwide
recession, the spectacular disintegration of one of its major conglomerates,
Bakrie & Brothers, is drawing the most media attention.
Saddled with more than US$2 billion in debt, many of the business group's
companies have suffered drastic falls in their share prices, wiping billions of
dollars off their market values, intensifying in the past few weeks. The
political reverberations of the meltdown have now moved the Bakrie story from
the business section to the front pages of local newspapers.
Bakrie & Brothers is owned by the family of Aburizal Bakrie, the
minister of people's welfare and one of the country's most influential
politicians. He was appointed to President Susilo Bambang Yudhoyono's cabinet
in 2004.
Early this month, the head of the Indonesian Stock Exchange, Erry Firmansyah,
announced that "the government" had overridden a decision by Bappepam, the
stock exchange regulator, which had indicated it would allow a resumption of
trading in Bakrie & Brothers stock, ending a suspension of some weeks. Erry
refused to say which government institution had ordered the reversal, which
analysts say forestalled a further fall in the company's share price.
Allegations of favoritism, carried in the local media and echoed by
non-governmental organizations, were compounded when several state-owned firms
announced their participation in the purchase Bakrie shares. The move was
viewed by some as a state-endorsed bailout.
As this issue unfolds, analysts are beginning to unravel what it says about the
nature of business-government relations and the extent to which money politics
will likely feature in next year's elections.
The Bakrie family's business empire has been linked to political power for over
60 years. Developed from a small regional trading firm by Aburizal's father,
Achmad Bakrie, the company initially benefited from a government program in the
1950s to develop indigenous businesses.
As one of the few companies with the business savvy to cash in on the market
opportunities, its big break came when it gained access to the country's steel
industry, which was nationalized from Dutch ownership after independence in
1945. Years later, when Aburizal took over from his father in 1988, the
business grew from strength to strength on the back of government contracts and
monopolies in the oil, electricity and media sectors.
"Bakrie's business was built on political connections, which gave it business
access," says Edwin Tobing, director of business information group Capricorn
Indonesia Consult.
Those political connections were put to good use during the Asian financial
crisis of 1997-98, when a Bakrie-owned bank, Bank Nusa Nasional, became the
sixth-largest recipient of emergency government funds, amounting to just over 3
trillion rupiah (US$240 million at today's rate). Nonetheless, huge debts drove
the Bakries to the brink of bankruptcy. Debt-for-equity swaps with creditors
eroded their stake in the family conglomerate to 2.5%, down from nearly 60%
before the crisis.
Fast forward to 2007 and the Bakries were ranked by Forbes magazine as the
richest family in Indonesia. During his time in government, first as economics
minister and then as people's welfare minister, the net worth of Aburizal
Bakrie's family jumped to $5.4 billion in 2007, from $1.2 billion in 2006.
Net profit for the conglomerate's Bakrie Telecom touched 223 billion rupiah,
while Bakrie Sumatera Plantations's profit cleared 207 billion rupiah.
Addressing allegations of conflicts of interest, Bakrie said in an interview
with Forbes published last week that he has not abused his political office "at
any time".
Nonetheless analysts have raised questions. "The Bakrie business grew after the
acquisition, on very favorable terms, of Kaltim and Arutmin coal mines in 2001
and 2003," Edwin said. Together, Arutmin and Kaltim account for nearly 40% of
Indonesia's coal exports. At the time, Kaltim's sale stirred controversy when
the purchase by a Bakrie company was given the go-ahead by the central
government.
Foreign mining firms Rio Tinto and BP had agreed to divest 51% of their shares
in the coalmine by the late 1990s, but a deal with the local government to buy
the stake had ground to a halt after years of fruitless negotiations. "[Our
company] was listed as a bidding participant," one mining executive with inside
knowledge of the deal and who requested anonymity said. "But we weren't invited
to tender our proposal. In the end, we were just informed that the Bakrie group
won the tender."
The Bakrie business empire seemed as if it might founder again in 2006 when a
natural underground well of mud erupted under a gas-drilling operation by one
of its subsidiaries, Lapindo Brantas. The company blamed the eruption on a
nearby earthquake that happened at about the same time as the mud eruption.
Although a recent meeting of international geologists in South Africa found
that the mudflow was caused by the drilling, a few dissenting voices have given
the company enough wriggle room to claim it was caused instead by the tremor,
which could limit its liabilities. Two-and-a-half years after the mudflow
began, it has permanently displaced 30,000 people, who have yet to receive full
compensation. Lapindo has consistently missed government deadlines to pay even
the first 20% tranche of compensation to the mudflow victims, citing
difficulties in proving land ownership.
The issue has done little to dent Bakrie's political standing, nor threatened
his family's business group's core interests or finances.
It was the Bakrie family's desire to regain more ownership control of the
conglomerate it founded that apparently led to its current predicament.
According to news reports, loans now being called in were made in April to
allow for the internal acquisition of several Bakrie & Brothers'
subsidiaries, including Energi Mega Persada and Bakrieland.
One of the subsidiaries that Bakrie & Brothers was trying to regain more
control over was Bumi Resources - formerly the jewel in the crown of the Bakrie
empire and which now has to be sold off to raise funds. Bumi is also the unit
on which media and non-governmental organization claims of government
favoritism are focused.
For much of this year, Bakrie group shares have lost value in line with the
general fall in the Indonesian and global stock markets. The Indonesian stock
market's benchmark index is down 60.8% since it peaked in January this year. In
early October, Bakrie & Brothers' losses turned into a rout as investor
concerns mounted over the company's high debt level.
In 2007, Bakrie & Brothers had a debt-to-equity ratio of 148%, up from 71%
in 2006. This year the company borrowed almost $2 billion more between April
and October, putting up shares in some of its companies as collateral.
When the share prices of the group's companies started to fall, the collateral
that backed its debts also declined in value and creditors started to call in
their loans. Unable to raise the cash needed to prop up its share prices, the
Bakries were forced to sell down some of their assets, including Bumi
Resources, owner of the Kaltim and Arutmin coal mines.
Allegations of government favoritism arose over the suspension of trading in
Bumi shares imposed by the stock exchange watchdog, Bappepam. It is normal
practice to suspend trade in highly volatile shares to prevent them from going
into complete freefall. But after a full month, Bappepam decided to lift the
suspension - despite the apparent pleas of the Bakries to keep it in place and
avoid a further decline in their share values.
The crunch came on November 5, when Bappepam officially announced the lifting
of the suspension, only for the decision to be reversed minutes before trading
began. The head of Bappepam told the press a "member of the government" had
blocked the lifting of the suspension, but refused to elaborate.
A government spokesperson denied it was Yudhoyono who had given the order. Vice
President Jusuf Kalla publicly claimed there was no favoritism at play, but
rumors were already circulating that widely respected Finance Minister Sri
Mulyani Idrawati, a former International Monetary Fund official, was
threatening to resign over the matter.
"We would expect to see the share suspension lifted earlier than it was," a
senior international investment banker working in Jakarta says.
More eyebrows were raised when the name of the company that was lined up to buy
Bumi was made public. The company, Northstar, is headed by Patrick Walujo, a
known Bakrie family friend who was also active in Yudhoyono's 2004 presidential
election campaign team.
A few days after denying that the government had given any special treatment to
the Bakries, Kalla made an about-turn, publicly saying, "Bakrie gets a little
help for one or two days, what's wrong with that? There is no discrimination.
Just asking for oversight is such a small favor compared to others."
The vice president may have a point. In times of crisis, governments do help
out big firms whose failure could impact on the broad economy - as recently
witnessed in the United States with its treatment of investment banks. The
Bakrie group accounts for 35% of the total Indonesian stock market in terms of
market capitalization, with Bumi accounting for 26%. That means that any sharp
decline in Bakrie & Brothers' share price impacts the entire bourse, as
well as the value of the rupiah.
The money trail
Critics say the entire episode has lacked transparency, particularly
surrounding the government's assistance to the company. With no clear criteria
for which businesses the government will help and no transparency over what
state assistance may consist of, politicians and businessmen have left
themselves vulnerable to rumors and allegations.
It is no easy task to trace campaign donations in Indonesia, where even senior
members of the government have difficulty working out their donors' identity,
perhaps one reason conflicting statements have emerged on donations that may or
may not have been made by the Bakries.
"As far as I know [Bakrie's donation] wasn't the biggest. You can check at the
National Election Commission, there are audits there," Kalla said on November
18.
That's exactly what anti-corruption watchdog, Indonesian Corruption Watch
(ICW), did. "There is no record at all of a Bakrie donation for the 2004
elections," says Adnan Topan Husodo, political funding coordinator for ICW.
"Generally, it is impossible to know who the political donors are in this
country. There are so many loopholes in the law."
One of the biggest problems with the law on campaign finance, which was revised
late last year, is the lax rules for party members. Donations made through
candidates can be passed on to the candidates' parties without an audit - and
they are not subject to any upper limits. Although the candidates have to make
reports on their donations, they do not have to specify from where they were
received.
Election watchdogs expect the same practices, including the widespread use of
fictitious donors and illicit bank accounts, as well as the poor quality of
donation audits, will characterize next year's elections. With only six months
left before the April 2009 legislative polls, Adnan says he is frustrated by
the lack of focus on campaign funding issues.
"Both the National Election Commission and the international institutions put a
lot of time and money into areas like raising the participation of voters,"
said Adnan. "But one of the key reasons for low participation is that voters
think all politicians are corrupt. More energy needs to go into making sure
this is a clean election."
In the meantime, Aburizal Bakrie appears to be losing his taste for the
political limelight. He told Forbes in the interview published last week that
he would retire from politics after the 2009 elections, though many believe
he'll continue to play a behind-the-scenes role. "He'll still play in politics
no matter what," one party source said. "His company may have difficulties, but
as an individual, he is still rich."
For many, the questions over Bakrie underscore how little Indonesia has changed
since former strongman Suharto's rule, when opaque business-political
collaborations were the norm. Yet to others it highlights the ongoing struggle
at the heart of government between reformers and those in defense of the status
quo. The old moves may be the same, but in today's more open Indonesia they are
challenged more than ever.
Dr Jacqueline Hicks is a political analyst based in Jakarta. She
may be reached at hicks.jacky@gmail.com.
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