Indonesian tanker deal greases old wheels
http://www.atimes.com/atimes/Southeast_Asia/FF19Ae06.html
Southeast Asia
By Gary LaMoshi DENPASAR, Bali -
Entering the home stretch of Indonesia's first direct presidential election on July 5, there are only a couple of sure bets. One is that all the candidates promise to fight corruption. You may find that hard to believe since the candidates are or recently were in leading positions to address this problem and neglected to act. The fate of a tanker order from state oil company Pertamina will help set the betting line on whether the next presidential administration will take a different attitude toward corruption. Don't bet on any candidates racing to seize the opportunity to take the lead on this issue. The tanker case illustrates the pervasiveness and persistence of KKN - korupsi, kolusi, nepotisme - in Indonesian business, particularly in the areas where it intersects directly with government. The chronology indicates how quickly the window for seriously combating corruption opened and how fast it can slam shut. The required marathon effort to reduce corruption seems to have been cut to a dash that's already been run. Perky PertaminaPertamina has occupied a special place among Indonesia's state companies. Founded in 1968 just after Suharto's election to the presidency from oil companies formerly controlled by the military, Pertamina quickly became a cash cow for the connected. The monopoly ran up foreign borrowing of US$10 billion by the mid-1970s, much of it for projects that had no connection to the energy business, then prompted the New Order's first economic crisis when it tried to renege on some of that debt. While the methods and tactics changed over the years, Petramina produced steady gushers of graft. In 2000, president Abdurrahman Wahid appointed an outsider, Baihaki Hakim, from petroleum rival Caltex Indonesia, as Pertamina's new top executive with a mandate to clean up the company. The appointment followed a special audit of Pertamina's books that turned up startling abuses. Auditors counted losses of more than $6 billion in a period of just two years. That's more than a $250 million per month, $8.2 million a day, including Saturdays, Sundays and holidays. One leading driver of abuse was Pertamina's sweetheart contracts to transport oil. Pertamina paid about one-third above market to charter tankers, and a small circle of local operators comprised winning bidders. Those grateful shipping magnates could share the wealth with the Pertamina executives greasing the skids for them. Hakim acted to remove the distortions and limit the drain on company - in this case, public - cash. He opened bidding to foreign shippers and applied greater oversight to the process. Hakim also persuaded the company's board to beef up Pertamina's own transport capabilities. Cutting down on tanker leasing would be the surest way to cut down on corruption. In 2002, Pertamina signed a $130 million contract to buy two new tankers in the Very Large Crude Carrier (VLCC) class from South Korea's Hyundai Heavy Industries. Each tanker measures 330 meters long - it could fit the Eiffel Tower and a 747 or two in its hold - with a capacity for 2 million barrels of oil. The first tanker is due to be delivered within weeks. The question now is whom to deliver it to. Outsider outWhile Hyundai was building the tankers, the old guard was rebuilding its influence at Pertamina. Like many other New Order interests, it found renewed sympathy when Megawati Sukarnoputri replaced Wahid as president. Megawati's regime backed a management overhaul at Pertamina last September. Hakim was ousted as president in favor of Pertamina lifer Ariffi Nawawi, and Megawati loyalists took seats on the firm's oversight boards. One of their top priorities - while Indonesia was sliding from net oil exporter to importer - was scuttling the tanker deal. That would bring back the good old days of exorbitant profits for all. Pertamina's new managers don't say that, of course. Nawawi argues that owning two VLCC tankers is a luxury that Pertamina cannot afford. He also claims leasing will save money and increase flexibility for the state company. Even assuming Pertamina's assertion that it could negotiate charter contracts like a normal business instead of charity for the wealthy, outside experts dispute those savings estimates and other claimed benefits. With the impending end of its monopoly, many industry analysts assert that owning tankers could give Pertamina advantages on the home front to help it weather the transition. Frontline reportPertamina has reportedly reached an agreement to sell the tankers to oil-transport specialists Frontline Ltd for $184 million. (Pertamina has declined to confirm the agreement.) In the event of a sale, given the lack of VLCCs available at the moment, there's a strong chance Pertamina could lease back one of the tankers. The apparent premium in the price reflects that current supply gap - it takes about two years from order to delivery for a VLCC tanker - but it's not much after factoring in Pertamina's financing costs, as well the commission to investment bank Goldman Sachs for brokering the sale. (Nice to see how globalization lets Wall Street get a piece of Indonesian graft.) In connection with the deal, 15 key legislators from the energy and mining committee of the House of Representatives went on a junket to Hyundai's shipyard in Ulsan, South Korea, and to the Goldman Sachs conference room in Hong Kong. They came away persuaded to support the sale. However, House Speaker Akbar Tanjung, who knows a thing or two about corruption cases himself (see Tanjung acquittal: Verdict against reform, February 14), has passed the decision to President Megawati, in the midst of campaigning for re-election. After her party's lousy showing in the April legislative election with 49% fewer votes than in 1999, Megawati's campaign has taken to waving the reformasi banner once again. She's pledging to stamp out corruption, even promising to put Suharto on trial. The Pertamina tanker deal would be a good place to start her war on corruption, if she is serious. Explanations from Nawawi about the advantages of selling aren't fooling anyone. Throughout the economy, the voters know what's going on. Foreign investors know - they cut their new investments in Indonesia by 41% in the first five months of 2004. It's time for politicians to show they're not getting fooled, or taking the public for fools, either. It's a good bet that Megawati's government won't announce a decision before July 6, three days ahead of the first tanker's scheduled delivery date and one day after balloting in the presidential election. It's an even better bet that players with big bankrolls will know the answer in time to place their wagers before election day. (Copyright 2004 Asia Times Online, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
Southeast Asia
By Gary LaMoshi DENPASAR, Bali -
Entering the home stretch of Indonesia's first direct presidential election on July 5, there are only a couple of sure bets. One is that all the candidates promise to fight corruption. You may find that hard to believe since the candidates are or recently were in leading positions to address this problem and neglected to act. The fate of a tanker order from state oil company Pertamina will help set the betting line on whether the next presidential administration will take a different attitude toward corruption. Don't bet on any candidates racing to seize the opportunity to take the lead on this issue. The tanker case illustrates the pervasiveness and persistence of KKN - korupsi, kolusi, nepotisme - in Indonesian business, particularly in the areas where it intersects directly with government. The chronology indicates how quickly the window for seriously combating corruption opened and how fast it can slam shut. The required marathon effort to reduce corruption seems to have been cut to a dash that's already been run. Perky PertaminaPertamina has occupied a special place among Indonesia's state companies. Founded in 1968 just after Suharto's election to the presidency from oil companies formerly controlled by the military, Pertamina quickly became a cash cow for the connected. The monopoly ran up foreign borrowing of US$10 billion by the mid-1970s, much of it for projects that had no connection to the energy business, then prompted the New Order's first economic crisis when it tried to renege on some of that debt. While the methods and tactics changed over the years, Petramina produced steady gushers of graft. In 2000, president Abdurrahman Wahid appointed an outsider, Baihaki Hakim, from petroleum rival Caltex Indonesia, as Pertamina's new top executive with a mandate to clean up the company. The appointment followed a special audit of Pertamina's books that turned up startling abuses. Auditors counted losses of more than $6 billion in a period of just two years. That's more than a $250 million per month, $8.2 million a day, including Saturdays, Sundays and holidays. One leading driver of abuse was Pertamina's sweetheart contracts to transport oil. Pertamina paid about one-third above market to charter tankers, and a small circle of local operators comprised winning bidders. Those grateful shipping magnates could share the wealth with the Pertamina executives greasing the skids for them. Hakim acted to remove the distortions and limit the drain on company - in this case, public - cash. He opened bidding to foreign shippers and applied greater oversight to the process. Hakim also persuaded the company's board to beef up Pertamina's own transport capabilities. Cutting down on tanker leasing would be the surest way to cut down on corruption. In 2002, Pertamina signed a $130 million contract to buy two new tankers in the Very Large Crude Carrier (VLCC) class from South Korea's Hyundai Heavy Industries. Each tanker measures 330 meters long - it could fit the Eiffel Tower and a 747 or two in its hold - with a capacity for 2 million barrels of oil. The first tanker is due to be delivered within weeks. The question now is whom to deliver it to. Outsider outWhile Hyundai was building the tankers, the old guard was rebuilding its influence at Pertamina. Like many other New Order interests, it found renewed sympathy when Megawati Sukarnoputri replaced Wahid as president. Megawati's regime backed a management overhaul at Pertamina last September. Hakim was ousted as president in favor of Pertamina lifer Ariffi Nawawi, and Megawati loyalists took seats on the firm's oversight boards. One of their top priorities - while Indonesia was sliding from net oil exporter to importer - was scuttling the tanker deal. That would bring back the good old days of exorbitant profits for all. Pertamina's new managers don't say that, of course. Nawawi argues that owning two VLCC tankers is a luxury that Pertamina cannot afford. He also claims leasing will save money and increase flexibility for the state company. Even assuming Pertamina's assertion that it could negotiate charter contracts like a normal business instead of charity for the wealthy, outside experts dispute those savings estimates and other claimed benefits. With the impending end of its monopoly, many industry analysts assert that owning tankers could give Pertamina advantages on the home front to help it weather the transition. Frontline reportPertamina has reportedly reached an agreement to sell the tankers to oil-transport specialists Frontline Ltd for $184 million. (Pertamina has declined to confirm the agreement.) In the event of a sale, given the lack of VLCCs available at the moment, there's a strong chance Pertamina could lease back one of the tankers. The apparent premium in the price reflects that current supply gap - it takes about two years from order to delivery for a VLCC tanker - but it's not much after factoring in Pertamina's financing costs, as well the commission to investment bank Goldman Sachs for brokering the sale. (Nice to see how globalization lets Wall Street get a piece of Indonesian graft.) In connection with the deal, 15 key legislators from the energy and mining committee of the House of Representatives went on a junket to Hyundai's shipyard in Ulsan, South Korea, and to the Goldman Sachs conference room in Hong Kong. They came away persuaded to support the sale. However, House Speaker Akbar Tanjung, who knows a thing or two about corruption cases himself (see Tanjung acquittal: Verdict against reform, February 14), has passed the decision to President Megawati, in the midst of campaigning for re-election. After her party's lousy showing in the April legislative election with 49% fewer votes than in 1999, Megawati's campaign has taken to waving the reformasi banner once again. She's pledging to stamp out corruption, even promising to put Suharto on trial. The Pertamina tanker deal would be a good place to start her war on corruption, if she is serious. Explanations from Nawawi about the advantages of selling aren't fooling anyone. Throughout the economy, the voters know what's going on. Foreign investors know - they cut their new investments in Indonesia by 41% in the first five months of 2004. It's time for politicians to show they're not getting fooled, or taking the public for fools, either. It's a good bet that Megawati's government won't announce a decision before July 6, three days ahead of the first tanker's scheduled delivery date and one day after balloting in the presidential election. It's an even better bet that players with big bankrolls will know the answer in time to place their wagers before election day. (Copyright 2004 Asia Times Online, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
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