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 firstname.lastname@example.org.