'Pertamina doesn't have funds to pay KBC claim'

Rendi A. Witular and Fitri Wulandari, Jakarta

State oil and gas company PT Pertamina says it wants to fully comply with the arbitration award to U.S.-based power company Karaha Bodas Company (KBC), but due to financial difficulties it will have to postpone making payment, a minister says.

State Minister of State Enterprises Laksamana Sukardi, who is also the chief commissioner of Pertamina, said the arbitration ruling was final and binding, and that Indonesia had no option but to comply.

"We have to honor the ruling. If we don't, we will be ostracized by the international business community. But Pertamina doesn't have the money to pay the claim," said Laksamana to reporters during an exhibition showcasing successful state firms on Thursday.

Laksamana said the government would not bail out Pertamina over the award, but would help the company seek ways of paying the claim or at least reducing the amount of the claim, which now stands at US$294 million plus interest.

The government has set up a special team to negotiate with KBC over a possible reduction in the interest due to the firm.

KBC was one of 27 independent power producers (IPPs) whose projects were terminated by the government following the economic crisis in the late 1990s. KBC at the time had a contract for a joint geothermal energy project with Pertamina.

A Swiss arbitration court ruled in 2000 that Pertamina must pay damages to KBC for the termination of the project. In massively expensive but ultimately fruitless litigation,Pertamina challenged the arbitration ruling in the U.S., Canadian, Hong Kong and Singaporean courts.

But early this year, a U.S. court rejected Pertamina's appeal against the arbitration award.

But several commentators have urged the government not to allow Pertamina to pay the claim amid allegations of irregularities in the KBC power project, like cost mark-ups and the fact that the project was given to KBC without going through a tender process.

"The irregularities in the project should be investigated by the police and proven in court in order for us to be able to annul the contract and escape the arbitration ruling," said economist Dradjat Wibowo from the Economic Development and Finance Institute.

Legal expert Karen Mills agreed with Dradjat, saying that the $380 million project was "illegal" as no tender process had been gone through.

But Laksamana said that criminal convictions would only have had an effect if charges had been laid before the arbitration court handed down its ruling. Currently, there was no way for the government to get around the ruling, he said.

"It is too late for us now to submit allegations of corruption to the arbitration court. We should have done this long before the arbitration court gave its decision if we wanted the case to be dropped," he said.

The government has asked the police to check for graft in the awarding of the contract by Pertamina.

The police have questioned 24 people from Pertamina and KBC, with three suspects charged thus far in respect of fictitious transactions and mark-ups worth US$19 million.

KBC is owned by Caithness Energy of Florida and Power & Light Co., both U.S. firms, and local firm PT Sumirah Daya Sakti.