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Corruption

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

Conclusion: "Risk Insurance like Candy"?

"As markets expand, as information flows, the roots of open societies will grow and strengthen and contribute to stability", Bill Clinton proclaimed on November 16th, 1994, in Jakarta. Just be­fore, the US President had witnessed the signature of several large investment agreements –including the one on the Paiton I plant. The BD’s memorandum shows that the opposite of Clintons predictions came true: The foreign companies made themselves accomplices of the corrupt Suharto regime, ensured that the market forces could not work, secured themselves exorbitant profits by paying bribes and thus left the Indonesian society with investment ruins carrying price tags in the billions.

Northern governments, international financial institutions and export credit agencies provided political and financial support to the accomplices. "In the go-go years of the Suharto era, building a power plant in Indonesia was one of the best bets going", the Asian edition of the Wall Street Journal commented on this procedure on July 28th, 1999. And it continued: "Western govern­ments, eager to see their giants get a piece of the Indonesian action, were handing out risk in­surance like candy." Ironically, the same government and financial institutions gave out hypo­critical recommendations as to how sustainable development was only possible under the condi­tions of Good Governance.

Private sector representatives argue that foreign companies were not able to do business in Indonesia, unless they rode the bribery carousel too. Foreign companies, however - among them reputed names as ABB, General Electric, Mitsui or Siemens – did not use bribes to secure legitimate business opportunities and to strengthen the Indonesian economy with productive investments. They rather took advantage of the corrupt Suharto regime in order to obtain unpro­ductive orders and exorbitant profit margins to the detriment of the Indonesian population. At the same time, individual companies (such as Entergy from the US) and financial institutions (such as ADB) refrained from getting involved in highly controversial projects due to obvious corrup­tion.

Whereas the members of the Suharto clan, foreign suppliers and investors siphoned off the benefits, the Indonesian population and the public sector of the exporting countries in the form of official export credits and guarantees pay the price for this collusion. "Far from the expectation that privatisation could increase efficiency and therefore cut down production costs, the involve­ment of private investors has only added financial burden to PLN", the NGO Pelangi commented on the IPP contracts. "The utility - and through it, ordinary Indonesians - are on the hook for decades to come for high-priced power that (...) many of its own technocrats and foreign con­sultants argued Indonesia neither needed nor could afford", the Asian Wall Street Journal added.

Export credit and investment insurance agencies such as Exim Bank, OPIC, Hermes or ERG would have the option to void their guarantees for corrupt power plants and to hold the exporters accountable. Instead they rather put pressure on the Indonesian government not to examine or renegotiate the relevant contracts. As Indonesia’s attorney-general Darsuman explained to the Berne Declaration, they do so not without success.

How can the current crisis be overcome? How is the burden of the corrupt past to be shared? As a first step, it would be sensible to check the contracts of PLN with suppliers and IPPs for cor­ruption, collusion and nepotism (or in Bahasa Indonesia: KKN). Should signs of KKN emerge, it would make sense to have the relevant contracts examined in court. Switzerland and other gov­ernments should not hinder such a reappraisal, but should rather clearly and explicitely support it. If desired by the Indonesian authorities, the governments of the northern hemisphere should provide legal and financial assistance for such investigations. In early May 2000, 24 NGOs from various countries which met in Jakarta for a seminar on official export credits called on ERG "not to cover up corrupt practices by Swiss exporters any longer, and to allow the Indonesian gov­ernment to renegotiate contracts which are based on corruption, collusion and nepotism".

If an investigation finds that a contract is lopsided, that bribes have been paid and that the prices agreed upon are excessive, the relevant agreement should be renegotiated. In those cases where corruption has led to the construction of unproductive and therefore useless projects, In­donesia should be free to terminate the corresponding contracts. Debts that have arisen in this context are to be cancelled as “odious”. Government guarantees for corrupt projects (in the case of Switzerland through ERG) should be declared void. Thus, the companies involved would have to pay the price for corruption and unproductive projects, and not the public sector. In its editorial of July 28th, 1999, the Asian Wall Street Journal wrote: "In an ideal world, every company that made one of those sweetheart deals would take a huge haircut." Former PLN advisor Peter Jezek added in the same edition: "Based on what I've seen, there's plenty of ammunition to wage war and get the banks and sponsors to eat their part of the losses." Professor Mark Pieth, head of the OECD working party that established the anti-corruption convention, emphasised that, pursuant to the new criminal law on corruption of May 1st, 2000, Indonesia did no longer have to make any payments for corrupt projects to Swiss creditors.

So far, the foreign governments and export credit agencies have not been prepared to discuss the issue of KKN in the power contracts which they have financed. The Indonesian government would probably be well advised not to continue its efforts in a project-specific, case-by-case, stop-and-go approach. Rather than looking for smoking guns in individual cases, Indonesia could make a coordinated effort to present the overall pattern of corruption, collusion and nepo­tism in the power projects to foreign governments, international organizations, and the interna­tional media. This overall pattern is clearly incompatible with the so-called Good Governance policies of all involved governments, and Indonesia should use the potential for international public support to the fullest in order to bring the creditor governments to the negotiating table.

Since February 15th, 1999, the OECD anti-corruption convention is in force. In most OECD member countries, legislation executing this convention has been enacted as well. Comprehen­sive proposals for the fight against corruption in official export credits and export guarantees were published by Transparency International on February 26th, 1999. Accordingly, exporters, when applying for a guarantee, are to provide a binding declaration that their order is free of corruption. If later on, an act of corruption should emerge in the context of the corresponding order, the government guarantee is to become void. The Berne Declaration supports theses proposals. In addition, companies which have deceived export risk agencies by engaging in cor­ruption, are not to be granted further guarantees for a period of for example five years. This pro­cedure corresponds to the rules of the World Bank and a proposal of the OECD convention re­garding government orders. It is also being supported by the Jakarta Declaration for Reform of Official Export Credit and Investment Insurance Agencies, which was endorsed by 333 NGOs from 44 countries in May 2000.

In Switzerland, Export Risk Guarantee currently conducts talks with the Federal Office of Legal Affairs as to the consequence of the revised law on their guarantees. As the Minister for Eco­nomic Affairs Pascal Couchepin informed the Berne Declaration on July 10th, 2000, ERG will in the future be allowed to withdraw guarantees, if the corresponding projects turn out to be cor­rupt. In cases of severe corruption, companies can be blacklisted by ERG for a certain period. While the BD believes it should be mandatory for government guarantees for corrupt projects to become void, these measures certainly are steps forward. Respective measures should urgently be coordinated internationally by OECD’s Export Credit Group, which reconvenes on 16th/17th November 2000. The Berne Declaration and Italy’s Crocevia again summarized international NGO concerns on export credit agencies and corruption in a letter to OECD dated 1st November 2000.

The corrupt power plant projects in Indonesia are a joint legacy of the Suharto regime, the for­eign companies and financial institutions involved. With the “Reformasi” process, the Indonesian society currently contributes their share to coping with this legacy. Those involved from abroad – including governments, export credit agencies and corporations – are still called upon to take their responsibility and contribute their share. “Reformasi” is needed on the international level as well.

Address of the author: Peter Bosshard, Berne Declaration, P.O. Box 1327, 8031 Zurich, Switzerland; finance@evb.ch, www.evb.ch.

The Berne Declaration (BD) is a Swiss public-interest organisation with 16,000 individual mem­bers. Through research, public education and advocacy work, it has promoted more equitable, sustainable and democratic North-South relations since 1968. Among other efforts, the BD helps to coordinate an NGO campaign for the international reform of export credit agency policies.

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