An Indonesian coal company on the London Stock Exchange

DTE 91-92, May 2012

Campaigners are calling for the UK government to tighten up the rules for companies listed on the London Stock Exchange. A new report, launched in February 2012, includes a case study by DTE on the newly created Bumi plc. This company, is jointly owned by Indonesia’s Bakrie brothers - powerful players in national politics as well as business – and the UK financier Nat Rothschild. Bumi operates one of the world’s biggest coal mines, Kaltim Prima Coal in East Kalimantan, a vast open pit project long associated with evictions, livelihood loss, pollution, strikes and dubious business deals.[1]

London Mining Network, an alliance of 27 human rights, development and environmental groups,  is calling on the British government to firm up the rules for companies listing on London’s Stock Exchange (LSE) as part of the discussion on a new Financial Services Bill.  Looking at eight case studies, UK-Listed Mining Companies & the Case for Stricter Oversight  argues that:

• Many mining companies listed in London have very poor records of complicity in human rights abuse, environmental pollution or destruction of people’s cultures and livelihoods around the world.
• Once listed in London, some mining companies have continued to flout the law in the countries where they operate, or engage in damaging tax avoidance, or break accepted international mining industry standards, with no move by the UK Listing Authority to discipline them.

The report follows on from dramatic developments at the end of February in which a proposed opencast coal mine in Bangladesh being developed by GCM, one of the eight case studies used in the report, was condemned as “threatening human rights” by an independent panel of UN experts.[2] At the launch, John McDonnell MP said “We cannot stand by and witness these global mining companies brutally impoverishing and destroying the lives and environments of whole communities. We need not only to expose this exploitation but also to demand that a firm system of international regulation, control and accountability is put in place that halts the destructive activities of these corporate pirates.”

In addition to Bumi, the seven London-listed mining companies looked at in the report are African Barrick, Brinkley Mining, African Minerals, London Mining, Vedanta Resources, Glencore and GCM Resources.

In April and September 2011, LMN submitted comments to the UK Treasury's consultations on the new proposals which include establishing a new body called Financial Conduct Authority (FCA). Based on knowledge of the social, environmental and human rights impacts of mining around the world, LMN considers that this new body needs to be equipped with the authority, expertise, personnel and funding to enable it to exercise vigilance over all UK-listed companies in a way that has been lacking in the past. Reform of securities regulation must result in much stricter oversight, particularly of companies involved in mining and trading in minerals.

Bumi arrives in London

One of the companies highlighted in the LMN report is Bumi plc, because its listing on the LSE demands greater scrutiny. The following is extracted from the LMN report.

In June 2011, after a ‘reverse takeover’[5] with Vallar plc – a shell company set up by the financier Nat Rothschild[6] – an Indonesian coal company arrived on the London Stock Exchange (LSE) through a deal with the Bakrie business empire.[7] A year previously, Indra Bakrie, the chair of newly named Bumi plc, had declared an intention that Bumi should become the world’s biggest exporter of power station coal by 2013.[8] Ambition and rhetoric were not in short supply.

This venture was the outcome of the meeting of two powerful business families from West and East: Nat Rothschild, corporate financier and scion of the Rothschild family, and Indra Bakrie, youngest of four siblings, owners of the Indonesian business group PT Bakrie & Brothers.

The Bakrie Group has business interests in agriculture (including palm oil), property, media, insurance, banking, trade, shipping, construction, manufacturing and mining.[9] Aburizal Bakrie, the eldest son, is currently chairman of Golkar, the political party of the Suharto regime, and a potential presidential candidate for the Indonesian elections in 2014. In 2006, one of the companies controlled by the Bakrie Group, PT Lapindo Brantas, was responsible for an oil drilling disaster in East Java. This caused a mud-volcano that has engulfed thousands of homes and displaced some 30,000 families, is blamed for the death of 14 people, and continues pouring out mud to this day.[10] In what could be seen as an attempt to avoid paying compensation to the thousands of victims of this ongoing disaster, Energi Mega Persada, the Bakrie-owned company controlling the majority of shares in PT Lapindo Brantas, twice attempted to sell this company for US$2 to an offshore company.

In the political arena, the Bakrie family’s record is disturbing also. The family is linked with cases of bribery and tax evasion, most notably in relation to an investigation into the activities of the Kaltim Prima Coal (KPC) mine and its parent company Bumi Resources.[11] In 2010, attempts were made by Indonesian Government officials to investigate the tax dealings of both KPC and Bumi Resources. This process has been stayed by the courts thanks to interventions by company lawyers.

Recently, an official from the Indonesian tax office claimed that he was bribed by Bakrie-owned companies to help them with their tax affairs.[12] More worrying was the resignation in May 2010 of Finance Minister Sri Mulyani after a long political vendetta by Bakrie.[13] Sri Mulyani was noted for her anti-corruption campaigning. Two days after her departure, Bakrie was appointed ‘managing chairman’ of a joint secretariat to determine government policy.[14] Politics and business continue to be very closely linked. In an article about the partnership between Bakrie and Rothschild, the head of research of a foreign brokerage company was quoted as advising investors to avoid too powerful business groups in Indonesia as they are often ‘too big and risky to challenge’.[15]

For Nat Rothschild, it appears that the risks and challenges of doing business with the Bakries were outweighed by the potential profits that Indonesian coal offered. Indonesia is currently the world’s largest exporter of thermal coal, and demand for coal from China and India is prompting more growth.[16] The business model employed by Rothschild has been to create London-listed shell companies as investment vehicles for mining companies and oil and gas companies around the world. In July 2010, the IPO (initial public [share] offering) for Vallar raised US$1.1 billion.[17] Since then, Rothschild has launched a similar enterprise under the name of Vallares to invest in oil and gas projects in Kurdistan, together with former BP CEO Tony Hayward.

A Financial Times article about the Bumi coal deal highlighted Rothschild’s hunger for making money above all other considerations. ‘You have to make hay while the sun shines,’ he said on his initial visit to Indonesia to look at the Kalimantan coal mines he was about to buy.[18] Given the rapidly disappearing rainforests of Borneo and the livelihoods they provide for local people, there is a certain irony to this remark. Rothschild’s ‘hay-making’ is unlikely to benefit Kalimantan’s forests and the people whose lives depend on them.

Much has been written in financial columns about the arrival of Bumi plc on the LSE. This process has been rapid and subject to minimal oversight. It took little over six months from the initial announcement of the US$3 billion deal in Jakarta to Bumi’s LSE listing.[19] A further six months on from this listing, the tangled web of business intrigue is already becoming evident, throwing up serious questions about the effectiveness of the ‘due diligence’ process undertaken prior to the company’s launch on 28 June 2011.[20] On 8 November 2011, a letter from Rothschild in the Financial Times surprisingly denounced the corporate governance of Bumi Resources, the Indonesian partner company of Bumi plc, and called for the repayment of debts by connected parties.[21]

Whether Rothschild is genuinely concerned about the corporate governance of Bumi Resources and its debts has been much debated in the financial media. Most ascribe more cynical reasons to the letter. The Bakries are reported to be investigating their new partner for trying to manipulate the price of shares in order to gain a bigger stake in the company. Indeed, soon after the letter was published, Rothschild spent GBP1 million buying more shares in the company.[22] The fact that both Bumi Resources and the Bakries are heavily indebted is old news, which Rothschild would have known before embarking on any business deals with them. In the Asian financial crisis of the late 1990s, the Bakries’ empire nearly collapsed because of debt.[23] A recent Reuters report describes the Bakrie Group as being ‘known for its acquisitions funded through debt that is linked to shares in its firm’, commenting that this is a ‘strategy that backfires when global financial crises hit equity and debt markets’.[24]

In the rush to take advantage of Indonesia’s vast natural resources and the world’s hunger for energy, both parties appear to see only money and profit and to give little consideration to impacts on local communities and the environment, let alone the world’s climate, of bulldozing the forests of Borneo for coal. The LSE and financial institutions are now playing a key part in enabling and encouraging this to happen. In this connection it also appears that the LSE’s reputation is starting to be questioned abroad. In reference to a Jakarta Globe article about the Bumi deal, one commentator wrote: ‘A question to ask is why very many of the world’s oligarchs are based in UK ... Arab, Russian, Indian, Chinese, etc. Mainly because in the City of London anything goes.’[25]

Have the regulators simply given up? The head of the UKLA was quoted last autumn as saying: ‘We don’t see our role as one to ensure or underwrite best practice in relation to the combined code, nor do we have powers to do so.’ He continued weakly: ‘The role of shareholders is greatly underestimated.’[26] Does this mean that the UKLA is expecting Indra Bakrie and Nat Rothschild to regulate themselves?

The full LMN report can be downloaded from http://londonminingnetwork.org/docs/lmn-the-case-for-stricter-oversight.pdf.