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Corruption

Publicly Guaranteed Corruption
Corrupt Power Projects and the Responsibility of Export Credit Agencies in Indonesia

Pressure from Abroad

As mentioned previously, the ERG exposure in Indonesia amounted to CHF 953 million by the end of 1999. The agency guarantees an annual service of Indonesian debt of some CHF 100 million to the private Swiss creditors. As a consequence of the economic crisis, PLN or the Sengkang operators respectively were no longer able to fully maintain debt servicing as guar­anteed by ERG. The debt was rescheduled. ERG compensated the exporters for the loss in­curred, and insured them against the risk of a total failure. According to the auditors’ reports for 1999, there is “significant uncertainty” regarding the ability in particular of the Sengkang opera­tors to pay their debt. Based on the payment problems experienced, ERG scaled up provisions for their engagement in Indonesia from 10 to 35 percent. These provisions reduce ERG’s ability to repay its debt to the Swiss government, where ERG debt stood at CHF 650 million by the end of 1999.

Behind the Paiton I power plant were – from California’s Edison Mission Energy to Indonesia’s Lippo Bank – several companies which had heavily backed President Clinton during his first presidential campaign. In turn, the US President and several ministers of his cabinet lent their support to the US orders for the project. John Bryson, head of Mission Energy, stated in a letter of thanks to the then Minister of Trade Ronald Brown in 1995: “The US Government, from the President on down, has put a high priority on the Paiton Project – the U.S. Export-Import Bank (Exim) and the U.S. Overseas Private Investment Corporation (OPIC) have given the Project more support than any in their history (...)."

When the Indonesian government appealed against the corrupt basis of the Paiton contract, the support by the US government paid off once again. "If the government reneges on this contract, they'll get absolute turmoil", warned Ronald Landry, CEO of the Paiton I operating company in June 1998 and announced that interventions may be undertaken by the US and the Japanese government. The US company El Paso Energy, which operates the Sengkang plant together with the Australian company EEC, called on OPIC, the US Ministry of Finance, the World Bank and the IMF to support their interests at the Indonesian Ministry of Finance.

Indeed, Western governments soon backed their IPPs and their export financing agencies in the struggle over corruption in Indonesia. They generally argued that in a legalistic sense, giving away free shares to friends and relatives of the Indonesian President did not formally constitute corruption. In July 1999 – two weeks before the renegotiation of international development co­operation with Indonesia – a delegation of export credit agencies travelled to Indonesia. The delegation included representatives of Exim Bank and OPIC (USA), JEXIM (Japan), Hermes (Germany) and the Swiss Export Risk Guarantee. The delegation held meetings with various ministers and warned that a renegotiation of the power purchasing contracts with the IPPs would have a detrimental effect on the Indonesian investment climate. "The future investment climate will be shaped by a long-term resolution (...) that protects the fundamental rights of the inves­tors", the agencies pointed out in a letter to the Indonesian Finance Minister. They added that a refusal to pay would "impair Indonesia and our ability to work with you in the future". Two weeks before Indonesia’s negotiations with donor governments, this was certainly a clear message. According to insider information, Japan – Indonesia’s most important creditor - played a particu­larly active role within the delegation. According to Tempo magazine, the US delegation brought up the matter of the IPPs in the Paris Club negotiations as well.

In order to emphasise their resolve, the US government in August 1999 tried to stop a credit over USD 400 million of ADB to Indonesia – in vain. The export credit agencies, however, con­tinued their lobbying activities. In early November 1999, an OPIC delegation met with the Indo­nesian Minister of Economic Affairs in Singapore. According to the Indonesian magazine Gatra, the US government warned at the same time that it would invoke the so called Helms amend­ment. This would have led the US to vote against Indonesian interests in all financial institutions as well as to take other measures. On December 9th, 1999, the five export credit agencies men­tioned above sent a letter to the Minister of Economic Affairs, the Finance Minister, the Foreign Minister and the Energy Minister of Indonesia, to inform the government that "the private power problem (...) should be settled as among first priority and as soon as possible". In late 1999, the government gave in to the pressure and withdrew the action brought against the Paiton opera­tors (as mentioned earlier).

In early January 2000, OPIC representatives once again travelled to Jakarta and met with vari­ous ministers in order to push for an amicable settlement between PLN and the Paiton opera­tors. On March 8th, 2000, representatives of the German, the Japanese and the Swiss export credit agencies revisited Jakarta to put pressure on the Indonesian government. This is of par­ticular significance in the case of ERG, because in the meantime, PLN had concluded an interim agreement with Sengkang, the most controversial of all ERG plants. Also on March 8th, OPIC threatened to seize Indonesian assets abroad, if the government was not to meet their payments to US power plant companies. Robert Gelbard, US ambassador in Jakarta, repeated this warn­ing in summer 2000. The head of the Indonesian negotiating team of that time, Kwik Kian Gie, put his statement into perspective though: “If you are talking with Gelbard, you have to be care­ful, because he is a temperamental person.“

As Marzuki Darusman informed the Berne Declaration, the pressure from abroad was successful in so far as it prevented him in his capacity as attorney-general from continuing his investigations into corrupt PLN contracts. Some observers believe that the creditor governments not only try to defend the interests of their companies, but also hope that PLN will go bankrupt under the finan­cial burden. This would open the prospects for the creditors to take over one of the largest power utilities in Asia at low prices.

At least in one case, the US tried to stop an ADB loan to Indonesia in order to exercise pressure on the Indonesian government. Apart from that, the export credit agencies involved take the at­titude that Indonesia should incur extra debt in order to service the power purchasing agree­ments of PLN. During and after the Suharto regime, the creditors and the official development institutions generously provided funds to Indonesia. On February 1st/2nd, 2000, the partners of the Indonesian development cooperation met in the form of the so called Consultative Group on Indonesia (CGI). They noted a need for external financing amounting to USD 6.6 billion for the current year. Of this amount, USD 2.2 billion was covered by private and public creditors and USD 4.4 billion by the official development institutions.

In this fashion, the payments to the IPPs are re-financed by the public sector of the industrialised countries even when official export credit agencies don’t need to step in to socialise the losses of the power companies. As always, the official payments were made conditional on Indonesia’s economic policies. The most recent CGI agreement is based on a treaty between the Indonesian government and the International Monetary Fund. In this, the government had to agree among other things to cut back subsidies for electricity – subsidies that are inevitable because of the IPPs’ distorted tariffs.

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