Tuesday, October 24, 2006

Aiming at Karaha with Old Weapons

No. 08/VII/Oct 24 - 30, 2006
Tempo Magazine, Economy & Business

Both the government and Pertamina are refusing to pay respective claims that have been made. The Karaha corruption case will be re-opened.

THIS time around, the “parcel” that was sent from the United States in the run-up to the Lebaran or Idul Fitri holiday was not the one that had been hoped for. On the first Monday of this month, the US Supreme Court again strengthened the win by Karaha Bodas Company (KBC) in its lawsuit against the Government of Indonesia and PT Pertamina, the country’s state-owned oil & gas company.

This is the very end of any possible legal action that can be taken under the justice system in the US. There is no choice left for the Government of Indonesia and Pertamina but to pay the claim made by Karaha Bodas amounting to US$261 million (Rp2.4 trillion). To this amount still has to be added interest of 4 percent per year, and this is calculated from when the lawsuit was first submitted in 1999.

A new problem has now arisen in Indonesia following this decision: who is going to pay the claim, the government or Pertamina? Two days following this heavy hammer blow in New York, Minister of Finance Sri Mulyani Indrawati stated directly the capability to fulfill this order by the highest court in America. “If all that remains is for it to be executed, then go ahead and execute it,” she said. “It’s an old problem, so the funds and whatever already exist.”

Even more explicitly, Purnomo Yusgiantoro, Minister of Energy & Mineral Resources, even directly indicated that funds belonging to Pertamina were to be used to pay this claim. Pertamina’s funds totaling US$271 million are still legally frozen in the Bank of America and the Bank of New York. The freezing of these two accounts was ordered by the Court of the State of Texas back on February 22, 2000.

In December of the same year, the International Arbitration Institute in Switzerland also found in favor of the company owned by FPL Group Inc of Florida and Caithness Energy LLC headquartered in New York. The court also ordered Pertamina and PT PLN, the State Electricity Company, to pay compensation as a result of the cancellation of the thermal-powered electricity generating plant in Garut, West Java.

The compensation figure originates from the total investment of the US$111 million already paid out of the pockets of KBC, plus 30 years of potential profits totaling some US$150 million. The remainder is made up of interest.

At this stage, the situation was not yet really that complicated because all the appeals were still being processed. Because of this, the case was then moved to courts in New York and Delaware. The lawsuit was even being processed in courts in other countries such as Canada, Hong Kong and Singapore.

In Indonesia, opposition came from Pertamina through the Central Jakarta District Court. And up to now, this is the only court that has clearly found in favor of Pertamina.

Lobbying was also carried out in America in order to support the ongoing appeals. One of these was through a request for assistance from the lobbying firm belonging to Senator Robert Dole, the Alston & Bird Law Firm. With services funds of US$850,000 (Rp7.8 billion), Dole and nine other lobbyists have been asked to help in saving the assets of Pertamina and the government from the claws of KBC.

Among other things, they have arranged dinner receptions and invited senior officials in Washington. However, these efforts failed. In March 2004, the appeal court in New Orleans reconfirmed the arbitration decision.

From here, the situation started to look more serious. The problem was that for this lawsuit amounting to US$261 million, all the funds—a total of US$650 million—in 12 bank accounts in America had been frozen. “And not all of them belong to Pertamina,” said Laksamana Sukardi, the State Minister for State-Owned Enterprises at that time. Some of these funds belonged to the government from the proceeds of oil sales.

Because of this, the government presented a request to the court asking that the assets of the government not be included in the freezing of the accounts. This resulted in US$350 million in funds belonging to the government being released, however those belonging to Pertamina remained still frozen in these two banks.

The failures continued when at the beginning of October 2004, the US Supreme Court stated that it was denying any further checking of the materials relating to the lawsuit until such time as the appeals were eventually made final. Based on this decision, the Bank of America then released US$29 million out of the US$300 million belonging to Pertamina that had been frozen in order to give to KBC.

It is the remainder of these funds that Sri Mulyani and Purnomo Yusgiantoro are now referring to as the funds that are ready. However, like Widya Purnama before him, now the new CEO of Pertamina, Ari Soemarno, has been quite clear about his refusal to pay the claim. “Who stopped this project?” asked Ari. “Don’t always put the burden on Pertamina.”

The cooperation project operational contract for Garut was signed by KBC and Pertamina in November 1994. This signing was made at the same time of the summit meeting by economic leaders of the Asia-Pacific Economic Cooperation, in Bogor.

One month later, KBC signed an electricity sales contract with PLN. The hope at that time was that the thermal energy at Karaha would be capable of supplying 400 megawatts of electricity. After a great deal of gossip, these two contracts did however go smoothly because KBC tied up with a local partner, PT Sumarah Daya Sakti, which was owned by the family of former Vice President Sudharmono.

Then the monetary crisis that all but destroyed Indonesia began in the middle of 1997. And on the recommendation of the International Monetary Fund, the government postponed the implementation of a total of 75 infrastructure projects, including Karaha Bodas. There was much protest until Presidential Decision 47/1997 was issued, stating that the Karaha project could continue.

However, this decision did not last a long time. This was because, on January 10, 1998, President Suharto once again issued a presidential decision that the project had to stop totally. This is what made Pertamina unwilling to bear the burden of the compensation demanded in a lawsuit by KBC on its own.

Two years later, also in the run-up to Lebaran, Widya Purnama even stated that there was no claim that had to be paid either by Pertamina or the government. The reason for this was that there were indications that KBC had carried out manipulation and corruption in this project.

“KBC was not honest in its statement about the amount of money it had invested in Indonesia in front of the International Arbitration Institute,” said Widya at that time. He presented evidence from the Development Finance Controller, which uncovered that there had been markups amounting to US$19.2 million as well as unpaid taxes of Rp5.97 billion.

KBC was also considered to have lied by not revealing that it had already received an insurance claim from Berry Palmer & Lyde totaling US$75 million for the cancellation of this project. “There is sufficient evidence,” he said. Because of this, he did not want to pay. “If the government still wants to pay, then I will resign.”

A joint meeting involving Pertamina, the National Police Headquarters, the Attorney General’s Office and the Directorate General of Taxation at the office of the Corruption Eradication Commission, also succeeded in coming to a conclusion: that criminal charges should be brought against KBC. The government therefore hoped that it still had a chance of avoiding having to pay the claim.

Hadi Purnomo, Director-General of Taxes at that time, even stated that the figure of US$126 million was a tax debt that was already in arrears by KBC. He also issued a seizure order on Loedito S. Poerbowasi, a son-in-law of Sudharmono who became the chief commissioner at Karaha Bodas. Together with the police, the Purnomo also stated that Robert McKitchen, Vice President of KBC from the US, had been classified as a fugitive.

Even when things are squeezed as they are at the moment, it seems as if the strategy will be used again. When interviewed by a team from Tempo in his office on Thursday last week, Vice President Jusuf Kalla made a statement that was different to the ministers. According to him, this time neither the government nor Pertamina will pay the claim. “It has to be clear first,” he said.

While the process continues, Pertamina has been asked to send in a request to be allowed to delay payment. “This has already been agreed to by the US Supreme Court,” said Ari Soemarno, one day later. Kalla also explained that the government had already asked the police to continue the investigation into suspected criminal acts at KBC. “According to the Chief of Police, this is clearly a criminal act,” he said.

It also seems as if the Supreme Audit Agency (BPK) does not want to be left out. “This was corruption, collusion and nepotism involving the Sudharmono family,” said BPK Chairman Anwar Nasution. “Why should the state have to end up bearing the burden?” It seems that Karaha will have to delay its celebration party one more time.

Y. Tomi Aryanto, M. Fasabeni and Yophiandi


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