Pertamina refuses to pay damages to KBC, alleging corruption

Pertamina refuses to pay damages to KBC, alleging corruption

Fitri Wulandari, The Jakarta Post, Jakarta

The newly appointed state oil and gas firm PT Pertamina
president Widya Purnama said on Wednesday the company would not
pay damages to U.S.-based energy firm Karaha Bodas Company (KBC)
as ruled by an international court, because of alleged corruption
in KBC's local power project.

"Pertamina will not pay ... because the project has inflicted
losses to the state and to the company," Widya briefed the press.

The International Arbitration Court in Geneva ruled that
Pertamina must pay damages of US$299 million, including accrued
interest, to KBC after the government suspended the company's
power project in the wake of the late 1990s financial crisis.

However, Widya said there was evidence of corruption in KBC's
power project, as indicated in a 1999 report from the Development
Finance Comptroller, which showed a mark-up of $19.16 million in
the project's investment cost.

An independent appraisal also showed the project was worth
only $50 million, while the KBC claimed it had invested $110
million, Widya said.

Pertamina has been mired in a lengthy dispute with KBC, one of
27 independent power producers (IPPs) whose projects were
terminated by the government as recommended by the International
Monetary Fund.

The KBC, which held a contract for a joint geothermal energy
project with Pertamina, filed a lawsuit at the arbitration court.

The court ruled in 2000 that Pertamina must pay damages to KBC
for the termination of the project.

Pertamina challenged the ruling at U.S., Canadian, Hong Kong
and Singaporean courts in a fruitless litigation bid.

Early this year, a U.S. court rejected Pertamina's appeal
against the arbitration court's ruling.

Widya said the company expected the police to speed up
investigations into the alleged graft in the project.

The police have questioned several officials from Pertamina
and the KBC with respect to the awarding of the contract, and
have charged three suspects thus far for fictitious transactions
and mark-ups.

"If the investigation uncovers corruption in the project, it
will serve as new evidence in the appeal to the U.S. Supreme
Court to annul the (arbitration court's) ruling," Widya said.

Meanwhile, Coordinating Minister for the Economy Dorodjatun
Kuntjoro-Jakti said Pertamina should not pay damages while the
graft investigation was ongoing.

Widya said Pertamina had hired international auditor Ernst and
Young to carry out an investigative audit on all its ventures,
including the KBC project.

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