New NGO Report Criticizes Export Credit Agencies on Corruption in Indonesia
13. November 2000
see also in annex: The OECD, Export Credit Agencies and Corruption, NGO letter to OECD PUBLICLY GUARANTEED CORRUPTION, article by Peter Bosshard
Berne Declaration press release for the media in South-East Asia
A new report published by the Berne Declaration documents that export credit agencies are heavily involved in corrupt power projects in Indonesia. Instead of supporting efforts to investigate the corrupt legacy, the agencies pressurize Indonesia’s government to honour the project contracts irrespective of the bribes involved. The OECD’s Export Credit Group meets in Paris on 16/17 November to discuss measures to combat corruption. An international NGO letter calls for collective and effective measures by export credit agencies to prevent corruption in the projects which they fund.
During the Suharto years, Indonesia was one of the most important recipient countries of official export credits and guarantees. A new report prepared by the Swiss advocacy group, the Berne Declaration, documents that export credit agencies funded many power plant contracts which were tainted by corruption. As a consequence, the power plants are highly overpriced, and in many cases produce electricity which the country does not need at all. If all power purchasing agreements were fulfilled, Indonesia’s power utility would have to pay a full 50 % of its current budget for private power which it does not need. After President Suharto resigned in 1998, the new government started an investigation into the corruption affecting Indonesian power plants, and filed a court case against the particularly corrupt Paiton I project. Instead of supporting these good governance efforts, the foreign governments put heavy pressure on Indonesia to honour all power contracts irrespective of corruption. The Berne Declaration report documents that the export credit agencies from the U.S., Japan, Germany and Switzerland made several visits to Jakarta and sent a series of letters to the new government, threatening that any action against the foreign power companies would hurt Indonesia’s investment climate. ”The future investment climate will be shaped by a long-term resolution that protects the fundamental rights of the investors”, the export credit agencies stipulated in a joint letter in July 1999. The Berne Declaration report calls the support for corrupt projects in Indonesia ”an embarrassment for the involved export credit agencies”. According to the Swiss advocacy organization, their pressure tactics contradict and undermine the OECD convention to combat corruption which entered into force in February 1999. On paper, several export credit agencies have established guidelines so that credits and guarantees for corrupt projects can be declared void. Yet the Indonesian example demonstrates that in practice, the agencies prefer to protect the interests of their corrupt exporters rather than to effectively combat bribery in international business transactions. On 16/17 November, the OECD’s Export Credit Group convenes in Paris in order to discuss how export credit agencies can combat corruption in the projects they fund. Preparing for the meeting, the Berne Declaration and Italy’s Crocevia sent a letter to OECD’s Secretary General Donald Johnston. The NGO letter, which was endorsed by 81 groups from 33 countries, puts forward seven recommendations. Most importantly, the letter proposes that official export credits or guarantees should be declared void if corruption is discovered in the contracts covered by them, and that companies involved in illegal payments related to such contracts should be debarred from receiving further credits or guarantees for five years. Further, the NGOs ask that export credit agencies should not cover commissions as parts of the contracts which they fund, should work together with borrowing governments in investigating evidence regarding corruption, and should suspend credits or guarantees while such investigations are carried out. Peter Bosshard of the Berne Declaration, the author of the new report, comments: ”So far, export credit agencies have very effectively coordinated their pressure tactics against a poor, newly elected government. At the same time, they have failed to adopt any collective measures to combat corruption. This is a shame: Indonesia and foreign investors share the responsibility for the corrupt legacy of the Suharto years. The Indonesian society has accepted its responsibility and started its process of ‘reformasi’. We urgently call on the export credit agencies to initiate a process of ‘reformasi’ themselves.” For further information: Peter Bosshard, Berne Declaration, ph +41 1 277 70 07, finance@evb.ch, www.evb.ch Transparency International is also working on the issue of export credit agencies and corruption. Contact: Carel Mohn, TI Germany, ph. +49 30 343 82 00, cmohn@transparency.org Attachment: ”Publicly Guaranteed Corruption” (Berne Declaration report, October 2000) Annex: International NGO letter to OECD’s Secretary General The Berne Declaration (BD) is a Swiss public-interest organization with 16,000 individual members. Through research, public education and advocacy work, the BD has promoted more equitable, democratic and sustainable North-South relations since 1968. Among other efforts, the group has been involved in the effort to set up the World Commission on Dams, is campaigning against destructive dam projects such as Three Gorges or Ilisu, and is helping to coordinate international NGO efforts to reform export credit agencies.
Annex: NGO letter to OECD
Mr. Donald Johnston Secretary General, OECD 2, rue André Pascal 75775 Paris CEDEX 16
5 November 2000The OECD, Export Credit Agencies and Corruption
Dear Mr. Johnston It is generally accepted that corruption has a massive impact on economic development, social equity and democratic accountability both in the North and South. Globally, the World Bank estimates the amount of “pay-offs” and bribes to reach $ 80 billion a year. Such practices add significant costs to the procurement of goods and services a surcharge which according to the Asian Development Bank can increase costs by between 20 and 100 per cent. Corruption also distorts the selection of projects and whole sectors for investment. It is thus an important cause of indebtedness and social injustice. Again according to the ADB, corruption diverts “resources away from social sectors and towards defense and major infrastructure projects”. Therefore, “the costs of corruption are often borne disproportionately by the poor, while the provision of public goods and services is skewed towards the rich, the powerful and the well connected”. Many large infrastructure projects in non-OECD countries are funded or guaranteed by public finance institutions such as multilateral development banks or export credit agencies. In 1997, a World Bank memorandum concluded that between 20 and 30 per cent of Indonesia’s development budget, and of World Bank projects in the country, were leaked in the form of bribes. Since the mechanisms analyzed by the memorandum were generic, it must be assumed that the projects of export credit agencies (ECAs) were affected by corruption to the same extent. Case studies from Kenya, Lesotho, Malaysia or Pakistan equally illustrate the involvement of export credit agencies in corrupt projects. (Cf. The Corner House, Underwriting Corruption, Britain’s Role in Promoting Corruption, Cronyism and Graft, October 2000.) In February 1999, the OECD Conventionon Combating Bribery of Foreign Public Officials in International Business Transactions, which makes the bribing of all foreign government officials a criminal offence, entered into force. We applaud the enactment of this Convention. We are concerned however that the Convention should have clear and binding consequences on the policies of export credit agencies. A brief survey conducted by NGOs indicates that several ECAs have already adopted policies to combat corruption in the projects they fund. Others are in the process of doing so. About half of all the major export credit agencies which were contacted did not bother to respond to the NGO inquiry. In several respects, existing policies are not sufficient to effectively prevent corruption in ECA projects. And disturbingly, the recent experience in countries such as Indonesia indicates that even where policies exist, agencies often do not seem to implement them in practice. In Indonesia, corruption was particularly rampant in the power sector. “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 28 July, 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.” In many cases, foreign companies offered free shares and other benefits to friends and relatives of General Suharto. In return, they received contracts to build power plants or sell power at sometimes ridiculously high prices, and often for power which the country did not need at all. After the fall of the dictator in May 1998, the state power utility PLN, the national audit commission and the media produced considerable evidence about the corruption involved in several power projects. All of the projects in question had been funded or guaranteed by export credit agencies of OECD countries. The state power utility and Indonesia’s attorney-general attempted to investigate the suspected corruption, and to renegotiate the contracts in question. Yet the ECAs, some of which had strict anti-corruption guidelines in force, did not cooperate with the Indonesian authorities in order to overcome the corrupt legacy of the Suharto years. They rather chose to apply harsh political and economic pressure on the government to honor the power contracts regardless of whether they were corrupt or not. (Cf. the enclosed memorandum by the Berne Declaration, Publicly Guaranteed Corruption, Corrupt Power Plant Projects and the Responsibility of Export Credit Agencies in Indonesia, October 2000.) In Lesotho, nine companies, three international consortia and three officials of dam building companies are currently on trial under the charge of bribing the former head of the Lesotho Highlands Water Project to the tune of $ 2 million. In cooperation with South African and Swiss colleagues, magistrates from Lesotho have managed to document bribes which the companies had paid between 1988 and 1998. The World Bank, which has been a catalyst for the funding of the project, is implementing an internal investigation into the matter, even if narrowly restricted to the contracts directly funded through Bank loans. Export credit agencies from several OECD and non-OECD countries have also supported the Lesotho Highlands Water project from the very start. Yet we are not aware that any of them have so far opened an investigation into the matter. They do not seem to be concerned about the coverage of corrupt practices by public credits or guarantees. (Cf. the enclosed report by the Reform the World Bank Campaign, Dams on Trial, The World Bank and the ‚Cancer of Corruption‘, September 2000.) In order to resolve the problems of corruption and non-productive investments both as a legacy and an ongoing practice we propose that the members of the OECD’s Export Credit Group adopt the following measures: (1) Exporters applying for official export credits or guarantees should be requested to declare in writing that no illegal payments related to the contract have been made. (2) Export credit agencies should not fund commissions as part of the contracts which they cover. In its Working Paper on ECAs and corruption of February 1999, Transparency International called the practice of underwriting commissions “an indirect encouragement to bribe” and “close to complicity with a criminal offence”. (3) If evidence arises that illegal payments related to contracts covered by ECAs have been made, the respective governments should initiate due diligence investigations into the matter. The respective credits and guarantees should be suspended until the investigations have been concluded. (4) If borrowing governments raise suspicions that illegal payments related to ECA projects have been made, the agencies and the creditor governments should not apply any political pressure on borrowers in order to defend the interests of their exporters. Pursuant to article 9 of the Convention, they should rather cooperate fully in order to investigate the matter. (5) If illegal payments related to contracts covered by ECAs are documented, the respective credits should be cancelled and guarantees should be declared void. Pursuant to article 3 of the Convention, the proceeds of a bribery should be seized and confiscated. This sanction is not confined to bribes which have been made after the Convention entered into force. Consequently, no payments should be made for corrupt contracts even if they were concluded before February 1999, and export credit agencies should cancel all respective loans and guarantees. (6) In line with paragraph 24 of the Commentaries on the Convention, companies involved in illegal payments related to ECA projects should be debarred from receiving further export credits or guarantees for a period of five years. (7) Sunlight is the best disinfectant. Providing public access to all information on ECA projects which is not directly linked to commercial interests will allow parliaments, NGOs and other civil society institutions to raise problems of corruption early in the process, and to monitor the use of public credits and guarantees. E.g. information about preliminary applications for all major projects should be made available to the public. These proposals were also reflected in the June 2000 Jakarta Declaration for Reform of Official Export Credit and Investment Insurance Agencies, which was endorsed by more than 350 NGOs from 45 countries and of which you have received a copy. The Export Credit Group will meet on 16/17 November, 2000, in Paris. Dealing with non-productive investments is on the agenda of the meeting. We ask that the members of the ECG adopt the above measures in order to avoid incoherences with the Convention to Combat Corruption in an area which is of great public concern. We also ask that representatives of the undersigned organizations be invited to a consultation by the ECG so that they can have a direct input into the debate. We understand that Transparency International has been invited to make a presentation on the subject on 16 November. Thank you for your interest. Sincerely yours, Peter Bosshard, Berne Declaration, Switzerland Francesco Martone, Crocevia, Italy Nicholas Hildyard, The Corner House, United Kingdom cc. Ms. Birgitta Nygren, Chair, Export Credit Group Ms. Janet West, Head, Exports Credits Division, Trade Directorate Ms. Enery Quinones, Head, Anti-Corruption Unit, Directorate for Financial, Fiscal and Enterprise Affairs This letter is being endorsed by the following 81 NGOs from 33 countries: AUSTRALIA James Arvanitakis, Aid/Watch Helen Jagoe, Bathurst Justice Group Igor O’Neill, Mineral Policy Institute John Seed, Rainforest Information Centre BANGLADESH Saleem Samad, Like-Minded Environmental Activists Group BELGIUM Saskia Ozinga, Fern BRAZIL Sadi Baron, Movimento dos Atingidos por Barragens (MAB) CAMEROON Jean Koueda Koung, Global Village CANADA Pamela Foster, Halifax Initiative Coalition ESTONIA Peep Mardiste, Friends of the Earth Estonia FRANCE Helene Ballande, Les Amis de la Terre Roberto E. Epple, European Rivers Network Sharon Courtoux, Survie FIJI Claire Slatter, DAWN (Development Alternatives with Women) GEORGIA Rusudan Simonidze, Friends of the Earth Georgia GERMANY Hok An, IMBAS Rettet den Regenwald Heffa Schuecking, URGEWALD Antje Mißbach, Watch Indonesia! Heike Drillisch, WEED (World, Economy, Ecology and Development) HUNGARY Jozsef Feiler, CEE Bankwatch Network INDIA Ambrose Pinto, Indian Social Institute Stan Lourduswamy, JOHAR (Jharkhandis Organisation for Human Rights) Xavier Dias, Mines, Minerals & People) Alok Agarwal, Narmada Bachao Andolan INDONESIA Titi Soentoro, Bioforum Syamsul Asinar, IMPALM Foundation Agus Sari, Pelangi Abdul Wahib Situmorang, WALHI (Friends of the Earth Indonesia) Wardah Hafidz, Urban Poor Consortium JAPAN Ikuko Matsumoto, Friends of the Earth Japan Satoru Matsumoto, Mekong Watch Tomoko Sakuma, People’s Forum 2001 ITALY Francesco Martone, Crocevia KENYA Grace Akumu, Climate Network Africa LATVIA Fanija Bluma, Green Liberty MALAYSIA Colin Nicholas, Center for Orang Asli Concerns NETHERLANDS ANPED Wiert Wiertsema, Both ENDS Paul Horsman, Greenpeace International Yvette Lawson, Komitee Indonesia Mira, GPDI/CSVI Ophelia Cowell, Transnational Institute Peer de Rijk, WISE (World Information Service on Energy) NORWAY FIVAS (Association for International Water and Forest Studies) PAKISTAN Naeem Iqbal, Pakistan Network of Rivers, Dams and People ROMANIA Bako Mihaly, Strawberry Net Foundation RUSSIA Vladimir Slivyak, ECODEFENSE! Alexandra Koroleva, Public Council on Environment Education Galina Ragouzina, WISE (World Information Service on Energy) SLOVAK REPUBLIC Juraj Zamkovsky, Jennifer Kalafut, Friends of the Earth/Slovak Republic SOUTH AFRICA Liane Greeff, Environmental Monitoring Group Anna Weekes, South African Municipal Workers Union Stiaan van der Merwe, Transparency International SWEDEN Klas Rönnbäck, Miljöförbundet Jordens Vänner (Friends of the Earth/Sweden) SWITZERLAND Gertrud Ochsner, Aktion Finanzplatz Schweiz Denis von der Weid, Antenna Technology Peter Bosshard, Berne Declaration John Künzli, Bruno-Manser-Fonds Brigitte Anderegg, SOLIFONDS Peter Niggli, Swiss Coalition of Development Organizations THAILAND Shalmali Guttal, Focus on the Global South Margie Law, TERRA (Towards Ecological Recovery and Regional Alliance) TOGO Kodjovi Edjame, NGO IREDD UNITED KINGDOM Karen Joyner, Christian Aid Duncan McLaren, Friends of the Earth, England Wales and Northern Ireland Jean Lambert, Member of the European Parliament for the London Region Angie Zelter, Reforest the Earth Nick Hildyard, The Corner House Paul Barber, TAPOL Barry Coates, World Development Movement (WDM) URUGUAY CEUTA (Centro de Estudios Uruguayo de Tecnologías Apropiadas) Celita Eccher, REPEM (Red de Educacion Popular Entre Mujeres de America Latina y el Caribe) Teresa Perez, World Rainforest Movement USA Emilie Thenard, Center for International Environmental Law Stephanie Fried, Environmental Defense Patrick McCully, Aviva Imhof, International River Network Douglas Norlen, Pacific Environment Resource Center
PUBLICLY GUARANTEED CORRUPTION
Corrupt Power Projects and the Responsibility of Export Credit Agencies in Indonesia
By Peter Bosshard Berne Declaration, November 2000
This memorandum is based on information and comments from, among others, Inge Altemeier (journalist), Arief Arryman (head, ECONID), Norbert Bärlocher (Swiss embassy in Jakarta), Udibowo Ciptomulyono (president, PLN trade union), Marzuki Darusman (attorney-general, Indonesia), Agam Fatchurrochman (Indonesia Corruption Watch), Stephanie Fried (Environmental Defense), David Liebhold (TIME Magazine), Djiteng Marsudi (former director, PLN), Eva Philipps (INFID), Barbara Rigassi (seco, chair, ERG), Kurt Schärer (seco), Peter Silberschmidt (director, ERG), and Jeffrey Winters (North Western University). The responsibility for errors and mis-judgements lies with the author.
Introduction
On February 15th, 1999, the OECD Convention to Combat Corruption came into force. Several OECD member states have enacted laws executing this convention in the meantime. In Switzerland, e.g., a new criminal law on corruption entered into force on May 1st, 2000. Both the Convention and the respective national laws ban bribing foreign government officials. The fight against corruption is also a priority concern for the World Bank, and ranks highly among the foreign policy objectives of Switzerland and many other countries. However, the impact of the new convention on official export credit agencies, including the Swiss Export Risk Guarantee, remains open. Will the guarantees granted by such government agencies lose their validity if bribes were paid to win the corresponding projects? A current dispute between Indonesia and several creditor governments illustrates just how delicate the issue is. During the Suharto regime, Indonesia received large streams of foreign investment flowing into the country. Numerous companies used the corrupt nature of the regime to their advantage and won lucrative orders for large, unnecessary and over-priced projects, for example in the energy sector. Such projects were frequently insured by foreign export credits or guarantees. In recent times, however, the new democratic government of Indonesia has been trying to clean up the corrupt legacy of the Suharto dictatorship. Burdened by the economic crisis, it attempts to investigate and renegotiate obviously corrupt contracts, or to challenge them in court. Officially, Switzerland and other creditor countries support Good Governance and anti-corruption efforts in Indonesia. When it comes to the corrupt contracts, however, vested interests of foreign companies and of export credit agencies are at stake. In the case of Switzerland, Indonesia is one of the focus countries of ERG. With guarantees exceeding one billion Swiss Franks, the country ranked first among all the recipient countries of ERG when General Suharto resigned his presidency. Several large ERG projects feature the typical indications of corruption. What is Switzerland’s policy with regard to Indonesia now? Will Switzerland support anti-corruption efforts, even though vested interests of ERG are at stake? In view of the new criminal law on corruption, this question is particularly pertinent. The present memorandum focuses on the corruption policy of the Swiss Export Risk Guarantee. The issues raised in this context are also of significance for other countries – in particular for countries such as Germany, Japan and the US. The export credit agencies of these countries have also financed corrupt power plant projects in Indonesia. Finally, the Indonesian experience is also of relevance for OECD’s Export Credit Group, which is supposed to coordinate the policies of export credit agencies regarding corruption.
Export Credits and Indonesia
During the Suharto era (1965-1998), Indonesia was one of the major recipient countries of official export credits and export guarantees. At 29 billion USD in the end of 1995, Indonesia ranked third internationally, preceded only by Russia and China. At that time, government export credits corresponded to 27 percent of Indonesian debt. As remains to be shown, Indonesia’s attractiveness for publicly guaranteed export orders was directly related to the corrupt nature of the Su-harto regime. Indonesia is also one of the major recipient countries of the Swiss Export Risk Guarantee (ERG). By the end of 1997, towards the end of the Suharto era, the ERG exposure in Indonesia amounted to CHF 1.098 billion. At 17.1 percent of the total exposure, Indonesia took the leading position among all of ERG’s recipient countries. By the end of 1999, an exposure of CHF 953 million put Indonesia on the second position, just behind Turkey. Up to 1995, Indonesia was considered a low-income country as defined by the OECD. When granting guarantees in such countries, ERG is to take into account by law whether the corresponding projects are compatible with the principles of Swiss development policy. The ERG exposure in Indonesia is mostly accounted for by three thermal power plants listed in the following: * In 1992, ERG granted ABB a guarantee for the Tanjung Priok project, a combined-cycle plant with a capacity of 1180 megawatt, located near the port of Jakarta. * In 1994, ERG granted a guarantee for the Muara Tawar project, another thermal power plant of ABB in the Jakarta area with a capacity of 1090 megawatt. Out of the order volume of CHF 1.1 billion, CHF 580 million were accounted for by ABB. * In 1996, ERG granted ABB a guarantee for the Sengkang project, a combined-cycle power plant project with a capacity of 135 megawatt in southern Sulawesi. As opposed to Tanjung Priok and Muara Tawar, Sengkang is not operated by Indonesia’s state electricity board PLN, but by a private company. The order volume amounted to USD 185 million. UBS and Bank BZW Asian extended a loan, and ERG insured an order of ABB Switzerland of a total of USD 115 million. Sengkang went on-line in September 1997. ABB will be in charge of the operation during the first six years. As remains to be seen, the role of the Independent Power Producers (IPP) in Indonesia is highly controversial. The project giving rise to the greatest controversy is the coal-fired Paiton power plant with a total of eight blocks. Paiton is based on a feasibility study conducted by Elektrowatt. ABB holds a large order in the project. Mission Energy, Mitsui and General Electric are the main investors in the Paiton I project, and Siemens and PowerGen, in Paiton II. After the Asian Development Bank (ADB) had refused to fund Paiton I on the grounds of obvious nepotism, Exim Bank and OPIC from the US plugged the gap in April 1995. JEXIM and MITI from Japan extended further coverage for Paiton I. The US Exim Bank, Hermes and KfW from Germany provided funds for Paiton II. ERG is not involved in Paiton.
The Background of Corruption in Indonesia
In particular during the regime of General Suharto, Indonesia had a reputation of being a highly corrupt country. In 1997 – the last year the dictator was in power – the island nation was number 46 out of 52 countries on the corruption list of Transparency International – by no means a flattering position. In the end of 1995, the then Swiss ambassador Peter Hollenweger accused Indonesia of „enormous corruption, legal uncertainty and bureaucratic arbitrariness”. Daniel Zuberbühler, Director of the Swiss Federal Banking Commission, described President Suharto in May 1998 as “highly corrupt”. In Indonesia, the phenomenon of corruption, collusion and nepotism is known as KKN (“korupsi, kolusi, nepotisme”). In August 1998, an internal working group of the World Bank prepared a confidential survey on the extent and the mechanism of corruption in Indonesia. The Berne Declaration published the document in 1998 under the title “7 Milliarden Dollar für die Korruption?”. In their survey, the Bank’s working group provided an in-depth account of all the positions to be bribed during the various stages of a project, including the amount of the relevant bribes expressed as a percentage of the project budget. It is also and in particular the foreign suppliers that are involved in this process. The working group concluded that a minimum of 20 to 30 percent of the Indonesian development budget are misappropriated. This amount largely corresponds to the estimates by other experts, such as the US-American professor Jeffrey Winters or former Indonesian Finance Minister Sumitro Djodjohadikusomo. Both estimate the misappropriated share to range between 30 percent and one third of the project budgets. Internationally as well as in Indonesia, the power industry has a reputation of being particularly prone to corruption. In June 1998, as a prerequisite for an agreement with Indonesia, the International Monetary Fund demanded that an audit according to international standards be conducted in the electricity board PLN. In summer 1999, a gigantic corruption scandal at the Lesotho Highlands Water Project, a dam project of the World Bank in southern Africa, became public. A great number of large power plant companies worldwide were involved, among them ABB, Acres International, Balfour Beatty, Impregilo and Spie Batignolles. In Germany, Italy, Denmark, India and Malaysia, action was brought against ABB because of further cases of bribery and illegal cartel agreements.
Corruption in ABB and ERG Projects in Indonesia
The confidential World Bank survey of August 1998 provided a picture of the Indonesian economy according to which the allocation of any large project required the systematic and consistent payment of bribes. Unambiguous signs of corruption are the allocation of orders without previous public tendering procedure, granting excessive prices and fees, payment of so called commissions and project development cost, as well as the involvement of relatives and friends of General Suharto in the companies and the projects. These characteristics emerge in several ABB projects in Indonesia, some of which were guaranteed by ERG: (1) “In the good old days, there was little of that nonsense about competitive bidding”, the Asian Wall Street Journal sardonically remarked on July 28th, 1999. “You simply hooked up with a Su-harto relative or friend and, in a typical arrangement, offered to ‘lend’ them 15 percent equity, repayable only when the electricity started to flow.” 26 out of 27 orders for private power plants were allocated without a previous invitation to tender. ABB won orders for at least six Indonesian power plant projects without a bidding procedure having taken place. Among these projects are the ERG projects Muara Tawar and Sengkang. In a letter to the Indonesian organisation Corruption Watch, former PLN head Djiteng Marsudi complained on March 23rd, 2000, that he had been forced by political pressure to sign the Sengkang contract, even though the contract had been established without a competitive bidding pro cess. The terms of the contract for Muara Tawar gave rise to a fierce debate within the Indonesian expert community. The World Bank was also concerned because the deal was rushed through without due diligence or competitive bidding. In negotiations with PLN the con-tract was revised and ABB reduced the price by 18.5 percent in February 1994. Indonesian en-gineering companies still maintained that the price was excessive. The French company GEC Alsthom offered the government to build three power plants – among them Muara Tawar – for 20 percent less. Nevertheless, the order remained with ABB. (2) Suharto’s eldest daughter Siti Hardiyanta Rukmana (Tutut) holds a stake of 5 percent in the private company that operates the Sengkang power plant. Within the next two decades, her share is to be increased to 20 percent. Among Suharto’s children, Tutut is known to be particularly corrupt. Equity shares in private projects have repeatedly been offered for free to members of the Suharto clan. The suppliers, in turn, enjoyed particularly favourable conditions. “Cronyism is not the number one problem in Indonesia now”, the director of the Australian operator of Sengkang downplayed Tutut’s stake; “it would be at number six or number seven.” ABB’s interests were often represented by B. J. Habibie. In 1995, ABB founded a large joint venture with the Coordinating Body of Strategic Industries of the former Technology Minister and later interim president Habibie, under the name of ABB Energy Systems Indonesia. The purpose was to assemble power plant components in Indonesia. (3) The gigantic Paiton I power plant is particularly controversial. In this project, members and friends of the Suharto clan – among them the businessman Hashim Djodjohadikusomo, a relative of Suharto, as well as Agus Kartasasmita, a brother of the Energy Minister and later Minister for Economic Affairs have been attributed a 15 percent stake without payment. An official investigation conducted by the new government discovered the item „Project development cost“ in the project accounting, which amounted to USD 22.2 million and was not further documented. In the budget, the item had amounted to USD 50 million. Conspicuously, Djodjohadikusomo had refused to sign an anti-corruption declaration for his participation in the project. A company owned by Djodjohadikusomo and Kartasasmita won the order for the supply of coal to the thermal power plant without having competed in a public tendering procedure. The company had not previously been active in the coal business. Ironically, the Paiton consortium later explained that Suharto’s brother-in-law had been recommended as a business partner by the US embassy. Under government pressure, the order for the supply of the boiler was allocated to ABB Combustion, which ran a joint venture with the Technology Minister B. J. Habibie. The price of the boiler supplied by ABB exceeded a competitive offer by USD 20 million.
The Burden of Corruption
Corruption not only controlled which company won certain orders, it also allowed suppliers to bill excessive prices. In addition, the country saw the implementation of projects that there was no need for. Up to the mid-nineties, the electricity board PLN built and operated all the power plants. As with Muara Tawar, corruption forced PLN – and indirectly the Indonesian government – to overpay their projects and unnecessarily increased their debt. Corruption also rendered private power plants more expensive. The Indonesian national audit commission and an advisor to the president of PLN estimate that corrupt contracts increased the cost for Paiton I plant by USD 600 to 1000 million. After all, at a price of USD 2.5 million, the plant cost more than double the Tanjung Jati B plant, which is of practically equal size (and cost USD 1.15 billion). However, by means of lopsided power purchase agreements, private operators succeeded in shifting the excessive cost to PLN and therefore to society. Paiton is a typical example of this mechanism. In an extensive report, the Asian Wall Street Journal informed on December 24th, 1998, about the price negotiations between the Paiton I consortium and the PLN delegation. PLN tried to insist on market prices for electricity. Top government officials, however, forced the agency to accept the utterly unusual and exorbitant purchasing tariff of 8.6 US cent/kWh. “It was a presidential decision”, commented Nengah Sudja, a former head of research of PLN, in the Asian Wall Street Journal. “Everybody knew it was nepotism, but we couldn’t do anything about it.” And Djiteng Marsudi, president of PLN between 1995 and 1998, said in more general terms: “The power companies dictated terms to us because they had Indonesia’s first family behind them. Resisting them was like suicide.” The Paiton I project proved to be even costlier for Indonesia because foreign contractors quickly used its lopsided power purchase agreement as a model for further contracts. And due to a very questionable and detrimential Presidential decree, Indonesia continued accepting unsollicited proposals for further IPPs. So power projects were not commissioned based on the actual needs of the country, but based on the political clout of foreign companies and their domestic partners to get unfavourable contracts accepted by PLN. At least since 1993, the World Bank had been increasingly concerned about the development of the Indonesian power sector. In 1994, the Bank warned that the Indonesian government should „urgently reject the time schedule and the tariffs of all private projects“, or else „they would run the risk of inevitable and major increases in the cost of electricity” [quoted from Der Spiegel, English translation of the German source]. In several other public documents and letters to the Indonesian government, the financial institution also warned that the intransparent decision-making process would lead to unwarranted projects and unfavourable contracts. According to an observer, the foreign governments and contractors, when confronted with the World Bank’s concerns, simply argued that after all, the questionable contracts were backed by the Indonesian government. Private power plants usually sell electricity at 5-6 US cents/kWh. In early June 2000, ABB announced their intention to introduce wind energy plants to the market which will produce at a price of approximately 4 cents/kWh. The IPPs’ tariffs in Indonesia amount to 5.5 – 9.8 cents. A study by Deutsche Bank concludes that, in Indonesia, private power is some 30 percent more expensive than in the rest of the world. High electricity tariffs of this order are in no way justified, as Indonesia, at least in the central grid, doesn’t need the power generated by IPPs. For more than ten years, the country has been generating more electricity than it consumes. An energy advisor to the Indonesian government recommended in the early nineties to build small-scale, flexible geothermal and combined-cycle plants instead of commissioning large-scale projects like Paiton. What’s more, the power transmission network has been and still is leaking „like a sieve“ according to the Asian Wall Street Journal. So revamping the grid would be more cost-efficient by far. When the representative of the US Exim Bank visited Indonesia, several experts of the government and PLN pointed out to her that the country did not need Paiton I. But the plant was built nevertheless, and equipped with a contract that committed the government to purchase the over-priced electricity over the next 30 years. The ERG-funded Sengkang power plant has also been provided a government purchasing guarantee for a duration of 20 years. The electricity tariff of 6.7 US cents has (as in the case of other IPPs) to be paid to over 90 percent in USD, and not in local currency. When, in the course of the Asian economic crisis, the Indonesian rupiah slumped, PLN did not even in the remote distribution network on the island of Sulawesi buy power from Sengkang, but purchased from cheaper diesel power plants instead. Likewise, the PLN-owned Grati geothermal power plant, which produces power at 4.5 cents, had to cut back production because PLN was forced to buy private power at a much higher rate from the Paiton I plant. PLN representatives argue that their utility does not need the electricity from Sengkang. Other observers believe that on Sulawesi – as opposed to Java – there is no power surplus and that the construction of the Sengkang power plant was therefore justified. The purchasing guarantee, however, obliges PLN to pay 400 billion rupiah in the year 2000 (almost CHF 100 million) for Sengkang power either way. In 1998, PLN had an output capacity of 14,000 megawatt. Even without the economic crisis, this would be enough to meet Indonesia’s entire demand. Additionally, since 1994, PLN has entered into contracts with 27 IPPs, making available an additional output capacity of 11,000 megawatt. In September 1997, the government decided that only ten out of these 27 private power plants (with a total capacity of 4730 megawatt) should be further pursued. Three of these – among them Paiton I und Sengkang – have already started production, and six further IPPs would be able to do so. These plants represent an enormous strain on the state budget. Had the contracts agreed upon been fulfilled, PLN would have had to spend 7.0 percent in 1997 and 10.1 percent in 1998 of the entire operating budget for private power (according to data of the US embassy in Jakarta). The exchange rate of 6000 rupiah against the US Dollar would drive this percentage up to 49.9 percent in 2000 – for power which the country does not even need. PLN is considered to be inefficient. Under pressure from the International Monetary Fund, the Indonesian government had the power utility audited by Arthur Andersen consultants, who put the potential in efficiency improvement at an annual USD 720 million. As a comparison, the unnecessary purchasing agreements with the IPPs cost PLN USD 3 billion in the current year. The ERG project Sengkang alone accounts for power supplies of a value of USD 67 million in 2000. In the financial year 1999, PLN should have serviced its debt with an amount of USD 1.46 billion. In 1997, 40.0 percent of the agency’s debt were with the World Bank, 26.4 percent with the Asian Development Bank, 8.8 percent each with the German KfW and the Japanese JEXIM, 3.1 percent with the Swiss banks and 2,0 percent with the US Exim Bank. The electricity tariff in Indonesia stands at an average 3 US cents/kWh. Private power provided by the IPPs, for which PLN is to pay 5.5 to 9.8 cents, has to be heavily subsidised by the government. In May 1998, in the midst of the economic crises, PLN tried to raise the electricity tariffs. Due to heavy protest by the population, the authorities were forced to back down and largely cancel the price hikes. Industrial consumers have also made it clear that they would not accept tariff increases. “Sooner or later, PLN will definitely go bankrupt”, Indonesia’s Tempo magazine concluded in September 2000.
Reformasi in the Power Sector
In the fall of 1997, the economic crisis broke out in Thailand, South Korea and Indonesia. Even without the crisis, PLN would have been left with expensive contracts for purchasing unneeded private power. The economic crisis led to the deterioration of the situation in two ways: The collapse of the Indonesian economy resulted in a drop in the demand for electricity. At the same time, the exchange rate of the dollar – on the basis of which private power had to be bought – went through the roof: Between 1997 and July 1998, the rate rose from 4600 to 15,000 rupiah. PLN was quite obviously no longer able to meet its obligations as stipulated by the lopsided con-tracts. From January 1998 on, the authorities continued to pay 2450 rupiah for private power, a price which was based on the Dollar exchange rate of 1996. Up to March 1998, the Ministry of Finance paid the IPPs the difference to the real exchange rate, but then ran out of funds. Thus, up to the end of 1999, Indonesia accumulated a debt of USD 64.7 million with the operator of the Sengkang plant alone. PLN proposed to the IPPs a new purchasing price of 3 – 3.5 US cents/kWh (at an exchange rate of 7000 – 8000 rupiah/Dollar). Even though the IPPs refused, PLN continued to pay a mere 30 percent of the amount due to most IPPs. For at least two projects, the electricity board refused to pay altogether. With most operators, however, PLN entered into negotiations on future tariffs. On September 29th, 1999, the electricity board and the operators of Sengkang concluded an interim agreement. It was the first of its kind. A temporarily negotiated tariff should allow Sengkang to pay at least for gas and operation, and to make interest payments. (The figures were not disclosed.) The agreement was set to expire by the end of April 2000 and allow both parties to negotiate a definitive tariff agreement. In the beginning of June 2000, the interim agreement was prolonged through to July 31st, 2000. In early March 2000, PLN had concluded a similar interim agreement with the operator of Paiton I. Again, the temporarily negotiated tariff was not disclosed. In the beginning of June 2000, PLN paid the Sengkang operators outstanding bills amounting to USD 33.5 million. Only a few days later, however, PLN announced that, during the current year, it was not able to buy any more power from the IPPs. Parliament had authorised only 24.5 trillion rupiah of the proposed PLN budget of 35 trillion rupiah. On May 21, 1998, due to heavy protests by the population that had taken to the streets, General Suharto was forced to resign his presidency. Thus, the patron of numerous corrupt contracts imposed on PLN was no longer at the helm. Only a few weeks later, the government announced its intention to check the IPP contracts for corruption and nepotism. “If such things could be proven,” explained Markus Permadi, a top official of the Ministry for State Enterprises (which PLN comes under), “it stands to reason that by law those contracts will be declared null.” Since then, PLN has been focussing its legal efforts on five independent power plants which are considered very corrupt – among them Paiton I, Sengkang and the geothermal power plant Patuha. An investigation by the national audit commission uncovered numerous irregularities at the Paiton plant (see above). In October 1999, in a move to void the power purchasing contracts, PLN filed an action against the consortium of US, Japanese and Indonesian companies that operate Paiton I. Obviously under pressure himself, President Abdurrahman Wahid advised PLN in December 1999 to discontinue these legal proceedings and charged his cabinet with the negotiations with the plant operators (see also the following chapter). The President further instructed the government to dismiss PLN head Adhi Satriya and the head of its negotiating team, Hardiv Situmeang. To Inge Altemeier, free-lance researcher for the Berne Declaration, Indonesia’s at-torney-general Marzuki Darusman explained on May 9th, 2000: “We are in possession of unambiguous evidence for corruption. So far, however, we have been forced by political pressure to suspend our investigations until an interim agreement has been concluded. Once we are able to proceed with the investigations, it will become clear which companies have been paying bribes.“ Despite the discontinuation of proceedings and the conclusion of the interim agreement, the is-sue of corrupt contracts has not yet been settled. In the case of the geothermal IPP Patuha, then Finance Minister Bambang Soedibyo assured as late as in March 2000 that Indonesia was not going to meet its contractual obligation due to evidence of corruption. The Indonesian parliament is furthermore planning to establish a special committee to look into the matter of independent plant operators. Non-governmental organisations such as Corruption Watch or the PLN trade union maintain their pressure on the government to challenge the corrupt legacy of the Suharto dictatorship in court.
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.
The Corruption Policies of Switzerland and other Creditors
On February 15th, 1999, the OECD anti-corruption convention entered into force. It requires OECD member states among other things to ban the bribing of foreign officials in international business and to confiscate bribes and other benefits of corruption. As a means of sanctioning, it not only proposes prosecution, but also the exclusion of companies that have paid bribes abroad from the government procurement procedures in their own country. On May 1st, 2000, the bill executing the convention entered into force in Switzerland. In an interview with Inge Altemeier, free-lance researcher to the Berne Declaration, ERG director Peter Silberschmidt on May 22nd, 2000, commented on corruption in the Indonesian power plant projects. He admitted offhand that the export credit agencies had joined together to “exercise pressure on Indonesia”. To this end, he indicated, the agencies would also increasingly cooperate with the International Monetary Fund and the World Bank. Silberschmidt took the view that the Indonesian government had signed the power purchasing agreements, and consequently had to honour these contracts. As the ERG director saw it, corruption was a problem of the recipient country and “had to be dealt with by Indonesia itself”. In the foreword to ERG’s 1999 annual report, published in the end of June 2000, ERG chair Barbara Rigassi described the problems in Indonesia in a more conciliatory fashion, while failing to mention corruption. She pointed out that the massive devaluations could make „comprehensive renegotiations of important initial aspects of the contracts necessary”. Whereas at home, profit expectations were rising, “social compatibility was a necessary yardstick for measuring commercial necessities” in Indonesia, the ERG chair noted. ERG director Silberschmidt’s attitude to lay the blame for corruption solely on the host country, is not logical and politically unacceptable. “It takes two to tango”, the conservative Sunday Times wrote on April 30th, 2000, in an editorial on the issue of corruption. The article continued: “If influential government officials in a developing country are offered enormous bribes and succumb to the temptation, the fault must be shared equally by those who offer the funds to secure some considerable unfair advantage for themselves. (…) [The First World conglomerates] corrupt officials and whole societies with offers of unimaginable wealth, and then, when their contract is complete, they pull out and return to Europe or the US, leaving widespread moral and financial contamination in their wake.” The combat of corruption and the promotion of Good Governance are among the official objectives of the Swiss foreign and development policy. Then Federal President Flavio Cotti in 1998 confirmed, in a debate in the national parliament as well as in a letter to the Berne Declaration, that Switzerland was pursuing this objective also in Indonesia. At the meetings of the Consultative Group on Indonesia, in which partners of development cooperation with Indonesia meet an-nually, Switzerland also repeatedly advocated the promotion of Good Governance. Furthermore, the Swiss Agency for Development and Cooperation, on September 25th, 1998, adopted com-prehensive guidelines on the fight against corruption. These guidelines favour among other measures the promotion of judiciary independence. If the competent authorities do not show any effort to combat corruption, a last resort may be to stop Swiss development cooperation altogether. And according to the guidelines, “companies guilty of bribing [in development cooperation] are to be blacklisted”. The pressure exercised by Export Risk Guarantee to prevent the Indonesian government from challenging the validity of corrupt contracts in court squarely contradicts the official Swiss policy on corruption. ERG, however, did not even inform the Ministry of Foreign Affairs about its lobbying tactics in Indonesia. “All we do is making hotel reservations”, a spokesman of the Swiss embassy in Jakarta commented on ERG’s visits. Despite the commitment to coherence in foreign policy, the offices responsible for the external economic policy are apparently playing close to their chest. The ERG chair remarked to the Berne Declaration that, in this instance, consultation with the Foreign Ministry had “not been called for”, because the talks in Jakarta “had exclusively been concerned with the debt service for business insured by ERG”. Even though the contracts in question had been concluded before the enforcement of the Swiss criminal law on corruption, the procedure of ERG in Indonesia is against the Swiss policy on corruption. Is the granting of guarantees for corrupt contracts compatible with ERG legislation? Even this is doubtful, to say the least. Pursuant to article 9 of the ERG act, the exporters are required to supply the information necessary for the business deal to be assessed. The ERG commission, however, does not receive any information on the payment of bribes, even though this would be of relevance for the assessment of a business deal. In addition (pursuant to article 5 of the same law) “losses incurred by the exporter because of not conforming to the contract, (…) are not covered by the guarantee”. This is another reason for ERG not to make any compensations to exporters when their contracts are challenged because of bribes. In a conversation with the Berne Declaration on July 8th, 1998, ERG’s then chair Rolf Jeker said that the interpretation of this article was “an open question”, to be solved based on a real case. The conflict with the Indonesian government is the real case which calls for a clarification of this question. In a detailed letter of July 10th, 2000, the Swiss Minister of Economic Affairs Pascal Couchepin responded to the criticism of the Berne Declaration. He basically shared the BD’s view that all forms of corruption had to be combated. According to his letter, ERG did however not examine the supply and financing contracts submitted in guarantee applications. The basis of the ERG order was – following the principle of trust – the data provided by the applicant. In no phase of the negotiations between ERG and Indonesia, the Minister wrote, had Indonesia put forward corruption as an argument. Therefore, corruption was not a matter of discussion during the most recent round of negotiations. Contrary to this statement, the Indonesian authorities had indeed suspended the PLN payments on the grounds of corruption. Also, Federal Councillor Couchepin did not deny that Switzerland had exercised pressure on Indonesia in this matter. Finally, the Minister of Economic Affairs announced that the new OECD convention was going to have an effect on ERG. Where evidence of bribery was found, the options of revoking guarantees or of refusing compensation for losses incurred was to be introduced for ERG. The US Exim Bank, OPIC, Germany’s Hermes, Great Britain’s Export Credit Guarantee Department and Australia’s EFIC have procedures in place which allow them to declare the coverage of corrupt projects void. Indonesia’s experience demonstrates that while such policies exist, they do not always stop export credit agencies from defending the interests of corrupt clients. Canada’s Export Development Corporation is presently reviewing its policies regarding corruption. Several other major export credit agencies were not prepared to inform the Berne Declaration about their policies regarding corruption. In his letter to the Berne Declaration, dated November 5th, 1998, then Federal President Cotti emphasised that “[the corruption problem] could only be combated in an internationally concerted effort”. Therefore, OECD’s Export Credit Group (ECG) according to Cotti discussed the question as to „how the corruption problem in the field of export credit guarantees can be tackled internationally”. Indeed, dealing with so-called “non-productive investments” has been on the ECG’s agenda for some time. It is a tedious discussion, however, and has hardly led to any practical consequences so far. For the time being, OECD governments confine themselves to voluntarily exchanging information on official export credits to highly indebted countries (so called HIPC countries). The G7 are trying to put pressure on the OECD countries not to grant any export credits at all for unproductive projects in poor countries. The discussion will be taken up again by the ECG on November 13th-17th, 2000. So far, export credit agencies have obviously found it easier to coordinate themselves internationally in order to pressurize a poor country like Indonesia which is willing to fight corruption than to stop funding corrupt projects.
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 Clin-tons 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 In-donesia, 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 le-gitimate business opportunities and to strengthen the Indonesian economy with productive in-vestments. 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 cor-ruption. 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 cor-responds to the rules of the World Bank and a proposal of the OECD convention regarding gov-ernment orders. It is also being supported by the Jakarta Declaration for Reform of Official Ex-port 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. * * * Note on currencies: On October 24th, 2000, the following exchange rates applied: 1 Swiss Franc = 0.5559 US Dollar 1 US Dollar = 1.7990 Swiss Franc 1,000 Indonesian Rupiah = 0.1115 US Dollar 1 US Dollar = 8,965 Indonesian Rupiah Address of the author: Peter Bosshard, Berne Declaration, P.O. Box 1327, 8031 Zurich, Switzer-land; 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. Abbreviations ABB Asea Brown Boveri ADB Asian Development Bank BD Berne Declaration CEO Chief Executive Officer CGI Consultative Group on Indonesia ECG Export Credit Group (of OECD) EDA (Swiss) Ministry of Foreign Affairs ERG Export Risk Guarantee IMF International Monetary Fund IPP Independent Power Producer JEXIM Japan Export Import Bank KKN korupsi, kolusi, nepotisme (corruption, collusion, nepotism) kWh kilowatt hour NGO Non-governmental organisation OECD Organisation for Economic Cooperation and Development OPIC Overseas Private Investment Corporation PLN Perusahaan Listrik Negara (Indonesia’s State Electricity Board) SDC Swiss Agency for Development and Cooperation References The Corner House, Exporting Corruption. Privatisation, Multinationals and Bribery, June 2000 Erklärung von Bern, Schweiz-Indonesien: Die Helfershelfer des Suharto-Regimes, 22. Juli 1998 Erklärung von Bern, 7 Milliarden Dollar für die Korruption? Die Korruption in Indonesien, die Weltbank und die Schweiz, 22. September 1998 Jakarta Declaration for Reform of Official Export Credit and Investment Insurance Agencies, May 2000 Stephanie Fried, Environmental Defense Fund, and Titi Soentoro, Bioforum, Export Credit Agency Finance in Indonesia, Draft, March 1999 Transparency International Working Paper: Export Credit Insurance and the Fight Against International Corruption, Brussels, 26 February 1999 www.eca-watch.org (Website of the international NGO campaign to reform export credit agencies)
