Jan 12, 2013

Indonesia - Bakrie, Bumi a losing Indonesian ticket

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DENPASAR - In democracies, it is not unusual for candidates to go into debt to finance their election campaigns. It is also not unusual to see members of wealthy families, from George Washington to Franklin Roosevelt to Mitt Romney to Thaksin and Yingluck Shinawatra, become candidates for public office.

What is unusual is for a candidate to be billions of dollars in debt before beginning a campaign, especially if that candidate hails from an extraordinarily wealthy family. Meet Indonesian presidential hopeful Aburizal Bakrie, a truly exceptional man.

Bakrie has already secured the 2014 presidential nomination of Golkar, the ruling vehicle of General Suharto's former authoritarian regime and still the largest and most cohesive political party in the country.

Bakrie Group, the family business, is one of Indonesia's largest conglomerates, with interests from property to television, plantations to telecoms. Aburizal, the eldest son of founder Achmad Bakrie, joined the company in 1972 and served as its chairman from 1999 to 2004.

Bakrie has retired from his business post, at least officially, but still controls the company and is believed to remain involved. The group's 10 listed companies account for more than a quarter of all transactions on Jakarta's stock exchange and have a combined market capitalization of more than US$10 billion.

Business success helped to give Bakrie a foothold in politics. After a decade as the head of the Indonesian Chamber of Commerce, known as Kadin, Bakrie unsuccessfully sought Golkar's presidential nomination in 2004.

The winner of that election, Susilo Bambang Yudhoyono of the Democratic Party, tapped Bakrie as Coordinating Minister for the Economy in a coalition cabinet. A year later, he was moved sideways to Coordinating Minister for People's Welfare.

In 2009, he left the cabinet and was elected chairman of Golkar. Last year, he won the party's presidential nomination. In part, Golkar turned to Bakrie because of his wealth, which party leaders likely expect him to spread among the party faithful. But that may have been a false perception based on history rather than fact.

After topping the Forbes list of richest Indonesians in 2007, Bakrie fell out of the top 40 this year. The Bakrie Group has been plagued by rising concerns over debt estimated at more than $10 billion, much of it secured by shares whose prices are falling and other assets that may be overvalued.

The controversy over London listed Bumi Plc provides insights into how the Bakries operate and the group's current dire financial situation.

In January 2011, Nathaniel Rothschild of the legendary British financial family teamed with the Bakries to place partial ownership of selected group coal assets into a London shell company they renamed Bumi. Indonesia ranks among the world's lowest-cost coal producers and profits from its proximity to energy hungry China.

The Bumi deal, valued at $3 billion, was meant to combine the energy assets and political clout of the Bakries with the Rothschild reputation. The object was to give the Bakries access to London's capital market and investors access to juicy returns from a fast growing development market in London's trusted market with its world class regulatory standards. Instead, the Bumi deal has confirmed many prejudices against investing in Indonesia.

Bumi shares debuted in London in July 2010 at 1,000 pence and soon began to nosedive, losing as much as 85% of their initial value. Their trading has coincided with a fall in coal prices and demand, but Bumi faces some company-specific issues.

Some assets injected into Bumi - including an Indonesia-listed coal producer confusingly called Bumi Resources - carried heavy debts, and Bakrie Group shuffled shares and assets to avert default. That is standard operating procedure for many of Indonesia's politically connected businesses, which always seem to find a kindly buyer or banker to come to the rescue of their frequently heavily leveraged enterprises.

Within months of the listing, Rothschild was complaining about the state of Bumi's Bakrie-related finances. The ensuing boardroom battle led to Rothschild's ouster as co-chairman of Bumi. His replacement, Indonesian tycoon Samin Tan, paid the Bakries $1 billion for half of their Bumi stake. But even a Bakrie ally could not ignore the share price slide or the red flags Rothschild had raised.

Shell game In September, Bumi announced it was investigating "potential financial and other irregularities" in connection with its Indonesian assets. Focuses of the probe reportedly include $394 million in development funds that seemingly evaporated from the Bumi balance sheet and asset transfers to friendly parties at cut rate prices. A final report from investigators could come this month.

With Bumi's share price recovered to around 270 pence, 73% below its issue price, Rothschild and the Bakries are now competing to buy each other's stake at a discount. British media say the Bakries are ready to give Tan the full price he paid for his shares while asking Rothschild to return the stake he was granted for brokering the deal and offering other stockholders 465 pence, less than half of the shares' original value.

For the Bakries, that's business as usual: take care of your friends and get back what you sold cheap. Whatever the outcome of the negotiations and investigations, electing a key figure in the Bumi deal as Indonesia's next president would hardly represent the best way to restore the country's reputation as a foreign investment destination.

For more than a decade, the Bakries have been fighting government tax collectors over unpaid assessments from their coal business that total more than $250 million. Convicted corrupt tax official Gayus Tambunan skipped jail to watch a tennis tournament in Bali in November 2010 at the same time Bakrie was there. Bakrie denies they met at the match. However, Gayus has since told investigators that he received $7 million from Bakrie Group companies to spread around the bureaucracy to settle the case.

Bakrie orchestrated attacks on former finance minister Sri Mulyani Indrawati, an internationally respected technocrat who pushed hard to collect that tax bill. Widely regarded as a rare effective and honest government official, Mulyani resigned in May 2010 amid relentless pressure over the Bank Century bailout two years earlier and became a deputy director at the World Bank. Mulyani and Bakrie may get an opportunity to settle the score as opponents in next year's presidential election.

There's also the matter of the Sidoarjo mud flow that began in May 2006. Lapindo Brantas, a Bakrie company, was drilling for natural gas in the area when mud began flowing from one of its holes, eventually forcing 9.000 villagers to abandon their homes. Scientists say the drilling caused the mud flow but the Bakries have denied it.

The group later tried to sell the company, in one transaction for the sum of $1, but the deals were barred by authorities that suspected an attempt to evade potential liability. A police investigation to assess blame closed after three years without reaching any conclusions, while a parliamentary panel led by Golkar allies absolved the Bakries based on questionable evidence.

Bakrie says his companies have paid Sidoarjo residents hundreds of millions of dollars in compensation, but whatever has been paid has not come close to satisfying demands or stopping the mud, which is expected to flow for at least another decade. Little wonder then that Bakrie was not among the 18 most popular presidential candidates in a recent survey.

Some Golkar politicians are already calling on Golkar to reconsider the nomination, in light of his lack of popularity and his dwindling financial resources. Family history indicates there's a good chance for Bakrie to find a way to replenish his coffers. But rehabilitating his image with global investors and the Indonesian electorate will likely prove a far bigger challenge.

Gary LaMoshi


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