Corruption, Collusion and Nepotism

Down to Earth No.85-86, August 2010

The case of Rio Tinto, BP, the Bakrie Brothers and Kaltim Prima Coal.

By Andrew Hickman, DTE

It is a sad fact that more than 10 years after the fall of Suharto and the establishment of democratic rule in Indonesia corruption, collusions and nepotism, known in Indonesian as KKN - remain key problems and challenges faced by Indonesia today.

As we all know, the issue of corruption is not something that is exclusive to Indonesia. Its roots can be traced far and wide. One of Indonesia's foremost writers, Pramoedya, writes vividly about the historical roots of this problem in Indonesia's colonial past; its powerful and corrupt bureaucracies and shameful inequalities tied Indonesia with Europe. Similar powerful and unequal connections exist today between Europe and Indonesia in the form of multinational business interests. These include the giant UK and Australian registered multinational mining company Rio Tinto, which has large mining interests in Indonesia.

Recently, Rio Tinto has become associated with corruption, too. In the last year, four Rio Tinto employees have been accused (and found guilty) of accepting bribes in a case related to the steel industry in China.¹

At the company's AGM in London on the 15th April 2010, the issue of corruption was raised repeatedly by shareholders. Down to Earth, in collaboration with the Indonesian Mining Advocacy Network (JATAM), questioned Rio Tinto's board about corruption in relation to the Kaltim Prima Coal (KPC) mine in East Kalimantan and the transfer of ownership of the mine to Bumi Resources, part of the Bakrie and Brothers group, the holding company for the Bakrie family business interests.²

KPC and corruption

KPC is one of the world's largest coal mines, previously owned and run by Rio Tinto. Even though it is now about 7 years since Rio Tinto and its then partner BP sold their stake in KPC, the legacy of these companies' involvement in this mine continues to have big repercussions in today's Indonesia.

In 2002 - the year before Rio Tinto and BP finally sold their 50-50 stakes in KPC - this mine near Sangatta, in East Kutai district of East Kalimantan province, was producing around 15 million tonnes of high quality coal per year and held reserves estimated to last another 20 years. It already had a history of strikes, land disputes and environmental problems affecting local communities.³

With an initial investment of more than USD 1 billion and profits of nearly USD 300 million per year, stakes were high for all concerned. The Contract of Work, signed in 1982, required Rio Tinto and BP to divest 51% of the shares to Indonesian investors over 5 years, starting in 1996.⁴ In 2003, Rio Tinto and BP finally (and apparently reluctantly) divested all their shares in KPC, following stricter government requirements to return the mine to Indonesian ownership. Not only did this process take many years to conclude, but it was also an unhappy one for Rio Tinto and BP and others looking to gain control over KPC and its prize assets.⁵ It appears that the two companies were forced to sell their shares in the company for near to half of the going rate, for a total of USD 500 million. A consortium of business interests in East Kalimantan, connected to the local provincial government, previously offered near to double the price finally paid.⁶

After years of legal wrangling, there are still questions as to why BP and Rio Tinto sold out so suddenly and how that came about. There is more than a suspicion that the deal struck was more about political and power relations than about doing business in an honest and transparent manner. What has been, and is, the real price of doing business with Aburizal Bakrie? There are legal and political processes still running that challenge the 2003 sale of shares in KPC and that allege serious irregularities (including continuing investigations in the East Kalimantan parliament). Most recently, the current East Kalimantan governor, Awang Farouk Ishak, has been named by the Attorney General's Office in Jakarta as a corruption suspect (from when he was head of East Kutai district) in the divestment of its KPC shares to Bumi Resources.⁷ (See also separate article 'Food, coal and Makroman Village'.)

The fact that the final outcome of all this should leave KPC under the control of Bumi Resources, part of Aburizal Bakrie's business empire, has more serious consequences for the public and communities that continue to be affected by the mining industry in East Kalimantan and elsewhere in Indonesia.
 

Bakrie and Brothers

The transfer of KPC to the Bumi Resources in 2003 marked a turn around in fortune for the Bakrie family's business empire. Since the Asian Financial crisis in 1997-1998, when PT Bakrie and Brothers had accumulated more than USD1 billion in debt, the Bakrie conglomerate has been repeatedly bailed out by investment banks and sovereign wealth funds.⁸ The most recent was in October 2009 when Bumi Resources signed a USD 1.⁹ billion 6 year loan deal with the China Investment Corporation.9 This recent deal has helped the Bakrie group buy up a controlling stake in PT Newmont Nusa Tenggara,¹⁰ which includes the controversial Batu Hijau gold and copper mine on Sumbawa Island, West Nusa Tenggara.¹¹ This expansion in the Bakrie family's interests in the mining sector adds to an already dominant position in Indonesia's mining industry with Bumi Resources, itself owning both KPC and another of the biggest Indonesian coal companies, PT Arutmin Indonesia.¹²

Aburizal Bakrie, the eldest of four siblings and one of Indonesia and East Asia's richest men,¹³ controls this vast business empire that includes mining, energy, media and property interests.¹⁴ In 2004, he was appointed Coordinating Minister for Economy and then in 2005 Coordinating Minister for People's Welfare, in the government of President Susilo Bambang Yudhoyono. In 2009, he was elected chairman of the Golkar party, the political power base of the former dictator Suharto. Despite a request from President Yudhoyono to divest personal business interests to avoid allegations of conflict of interest, Bakrie has continued in control of his business empire.

It is highly ironic that in 2006, during his tenure as Coordinating Minister for People's Welfare, one of the companies controlled by Bakrie, PT Lapindo Brantas was responsible for an oil drilling disaster in East Java. This caused a mud-volcano that has engulfed thousands of homes, displaced some 30,000 families, is blamed for the deaths of 14 people and that continues pouring out mud to this day.¹⁵ In 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 USD2 to an offshore company.¹⁶ To date, many of the victims of the mudflow disaster have received only 20% of the compensation due to them.¹⁷ There are parallels with the recent BP oil disaster in the Gulf of Mexico. However, tragically for Indonesia and the communities affected, it appears unlikely that these companies will ever be forced to remedy and give compensation to the equivalent extent that BP is being forced to in the United States.¹⁸

In the political arena, Aburizal Bakrie is not shy of being accused of conflicts of interest. Indeed his record here is equally, if not more disturbing. He is currently linked with various cases of bribery and tax evasion, most notably in relation to an ongoing investigation into the activities of KPC and Bumi Resources. Over the past year, various attempts have been made by government officials to investigate the tax dealings of both KPC and Bumi Resources. This process has been resisted in the courts by company lawyers. More recently, an official from the tax office has claimed that he was bribed by Bakrie-owned companies to help them with their tax affairs.¹⁹ However, more worryingly from a wider perspective, is the resignation in May 2010 of the Finance Minister Sri Mulyani after a long political vendetta by Bakrie.²⁰ Sri Mulyani was noted for her anti-corruption campaigning. As an indication of these shifting political sands, two days after Mulyani's departure, Bakrie was appointed 'managing chairman' of a joint government secretariat to determine government policy.²¹ It appears that Aburizal Bakrie's political fortunes are directly linked to his business fortunes and vice versa.²²

KPC: a shared history and responsibility

It is clear that wherever the exploitation of natural resources in Indonesia, and particularly in the mining, oil and gas sector, money, power and corruption follow close behind. It is clear also that local communities and the Indonesian public are most likely to be victims of this apparent bonanza, whether directly from environmental consequences or indirectly through political and financial corruption. The Sangatta coal mine and Kaltim Prima Coal, whose history goes back more than 30 years, is central to this web of intrigue and environmental degradation. For more than a decade - from when the mine started exporting coal in 1992 to the Bumi Resources takeover in 2003 - Rio Tinto and BP benefited from the huge profits generated by KPC. In leaving East Kalimantan, Rio Tinto and BP have left behind a poisonous legacy.

When confronted with that legacy at the recent company AGM in London, Rio Tinto's reply to DTE's question was perfunctory: both the Chairman, Jan du Plessis and the Chief Executive Officer, Tom Albanese simply denied that there was anything amiss. It was shocking to see how little this problem was appreciated by the directors of the company, how far removed they appeared to feel from this issue and how casually they denied association and responsibility for their part in promoting the problem of corruption in Indonesia.²³

Now, seven years on from the sale of KPC, one overriding fact stands out in this depressing picture of corruption, collusion and nepotism. It is that Rio Tinto and its then partner BP, sold their stake in KPC to the business empire of Aburizal Bakrie, so strengthening the financial and political power of a man repeatedly accused of corruption and malpractice and who is at the centre of a society still at the mercy of KKN. In continuing to operate in Indonesia, both Rio Tinto and BP no doubt benefit, and hope to continue benefiting, from business and political connections inherited from their operations in East Kalimantan.
 

Notes

1. For additional information on this case and Rio Tinto's attempt to distance itself see: www.abc.net.au/news/stories/2010/04/16/2874320.htm
2. To view video footage of this question and the rest of the 2010 Rio Tinto London AGM see: www.riotinto.com/shareholders/12361_agm2010.asp, or www.youtube.com/watch?v=04t-ZpsDpaY
3. See articles in DTE 47 & DTE 52
4. Business Week, May 20th 2002. See: www.minesandcommunities.org//article.php?a=7468&highlight=Kaltim,Prima,Coal
5. For an account of part of this process, see DTE 52, February 2002.
6. A complete account of this divestment process is written up in 'Indonesia's bitter mining endgame' by Bill Guerin: www.atimes.com/atimes/Southeast_Asia/EG24Ae01.html
7. The case centres around claims of embezzlement of state funds in the transfer of shares between 3 companies; Kutai Timur Energi (KTE), Bumi Resources and Kutai Timur Sejahtera (KTS). See www.thejakartapost.com/news/2010/04/13/solid-evidence-graft-kpc-divestment-ago.html, www.thejakartapost.com/news/2010/07/09/east-kalimantan-governor-named-graft-suspect.html; www.antaranews.com/en/news/1280319320/president-to-process-permit-for-governors-questioning.
8. For an account of the financial backing behind the Bakrie family's business empire see: 'Politics and business mix in Indonesia' by Bill Guerin: www.atimes.com/atimes/Southeast_Asia/HG22Ae01.html
9. See: thejakartaglobe.com/business/bumi-to-seek-buys-armed-with-cic-war-chest/334622
10. See: www.thejakartaglobe.com/business/the-bakrie-group-coal-hard-cash-and-chinese-whispers/345131
11. See: DTE 47 and DTE 67
12. It was alleged that Bumi Resources used funds from a state-run workers' insurance firm to pay for this deal. See: 'Indonesia's bitter mining endgame' as in note 6.
13. See: www.thejakartaglobe.com/home/bakrie-gains-750-million-in-2009-globe-asia-magazine-reports/378566
14. For an account of the Bakrie family's business interests see 'Politics and business mix in Indonesia' by Bill Guerin: www.atimes.com/atimes/Southeast_Asia/HG22Ae01.html
15. Estimates as to the numbers of people affected have varied enormously. These figures come from a 2010 report by Academics from the University of Durham. This report also clearly blamed drilling as the cause of the mud volcano. See: www.cbc.ca/technology/story/2008/11/03/mud-drilling.html, and www.thejakartaglobe.com/home/lapindo-disaster-caused-by-human-error-study/358242
16. For more information on the Lapindo mudflow disaster including attempts at avoiding liability see: www.foeeurope.org/publications/2007/LB_mud_volcano_Indonesia.pdf; also: DTE 71 and DTE 72.
17. See: articles.latimes.com/2010/jul/10/world/la-fg-indonesia-mudslide-20100710
18. One recent article comparing the BP oil spill with Lapindo: www.smh.com.au/business/heres-mud-in-your-eye-says-presidentinwaiting-20100726-10sr8.html
19. Article outlining recent history of allegations of financial irregularities of Bakrie controlled companies: www.thejakartapost.com/news/2010/07/30/state-capture-how-bakrie-group-dodges-bullet-again.html
20. See: www.eastasiaforum.org/2010/05/09/exit-sri-mulyani-corruption-and-reform-in-indonesia/
21. See: uk.asiancorrespondent.com/asiasentinel/indonesia%e2%80%99s-bakrie-grabs-new-post
22. See 'Reformasi in trouble': uk.asiancorrespondent.com/asiasentinel/reformasi-in-trouble-in-indonesia
23.  For an account of the Rio Tinto AGM see: londonminingnetwork.org/2010/04/report-on-the-london-agm-of-rio-tinto-15-april-2010/ also an opinion piece at: www.minesandcommunities.org/article.php?a=10056