Political Dangerous liaisons A sea of flag-waving school children greeted Russian President Vladimir Putin at Jakarta’s airport on September 6 on his first visit to
Indonesia. Among the Russian dignitaries treated to this display of national goodwill were several businessmen whose presence may yet prove to be highly significant for
Indonesia. The businessmen are high-ranking officials from one of
Russia’s top conglomerates, the Alfa Group. If mounting suspicions about the purpose of their visit prove correct, they will become bit players in a saga with all the ingredients of a good political thriller. Official sources say the executives from Alfa’s telecommunications wing, Altimo, are in town to consider an investment in
Indonesia’s multi-billion dollar telecom sector.            However, according to a leaked document currently circulating among
Jakarta’s political elite, this is no ordinary transaction. It will depend on backroom political deals at the highest level, a forced takeover of legally bought shares, and the reputation of a quasi-governmental watchdog that has been painstakingly built over the past seven years. The VP factor Back in 2003 a cash-strapped Indonesian government sold almost 42 percent of its shares in the telephone operator Indosat to a chorus of domestic criticism. The buyer, Singapore Technologies Telemedia (STT), was considered by some politicians here to have gained a valuable asset at a bargain price. Calls for the return of Indosat to public ownership intensified throughout 2004 and 2005, as the telcom suffered financial losses and concerns about national security implications were voiced. Several nationalist politicians filed a series of lawsuits against the government over the sale and in late 2005 then minister of state-owned enterprises Sugiharto formally asked STT to sell its shares back to the government. But the Singaporean company wasn’t interested and the legal action came to an end at the close of 2006 when the final suit was rejected by the Supreme Court.            It was then, according to a document obtained by the Report, that those intent on the government’s buyback of Indosat turned their attentions to a higher power: Vice President Jusuf Kalla. This unsubstantiated dossier details a plan hatched between Russian firm Altimo, Sugiharto and Kalla to force the sale of STT’s Indosat shares. In return, Altimo would loan funds to the government for a share buyback and expect 27 percent of Indosat immediately after the sale, with a further 15 percent at a later date. For their efforts in the backroom deals, those behind the sale could expect to share a cool US$40 million. KPPU Investigates According to this scenario, the government’s strongest bargaining chip for forcing STT out of Indosat is an investigation by the Anti-Monopoly Commission (KPPU). It is a matter of public record that the KPPU has been investigating the Singaporean company for alleged monopolistic practices in the Indonesian telecom sector since March this year. With the results of the KPPU investigation not due until the end of this month, there is growing concern that Putin’s visit could tip the balance in Altimo’s favour. The fear is that political influence at the highest level will push the KPPU to go against STT, obliging the company to sell its Indosat shares. The KPPU case centres around STT’s shares in both Indosat and Telkomsel, which together control some 90 percent of the cellular phone market in
Indonesia. Pande Radja Silalahi is a former member of the KPPU who has intimate knowledge of the case. In his opinion the allegations that STT has a monopoly in the Indonesian telecom market and is engaged in price-fixing are clearly false. “STT holds shares in Telkomsel and Indosat indirectly. The ownership structure is complicated, but if you study it you can see that STT does not control more than 50 percent of the market. It has only 30.6 percent Indosat’s shares and 18.9 percent of Telkomsel,” he told the Report. A widely quoted
University of
Indonesia study that found indications of price fixing between Indosat and Telkomsel is misleading, according to Pande. “The study is misunderstood, it does not conclude that price-fixing has taken place,” he said. “Yes, there are similarities in the trends of prices from the two companies, but one of the reasons for this is the upper and lower limits on prices set by the government.” Nevertheless after a preliminary investigation into the issue, the KPPU announced in May this year that the Singaporean company “might have broken the law,” before saying that more time was needed to study the case in full. Political observers note that the KPPU is at a difficult juncture in its development and could be vulnerable to political influence.            Last year, the commissioners who manage the body were changed for the first time since it was formed in 2000 and in some ways this is a test case for them. The wild east While there are some circumstantial grounds for concern about the KPPU’s lack of bias, there are much stronger reasons for suspecting Altimo’s intentions. The Russian company has left a wake of controversy in almost every investment it has made. In Norway, Altimo is locked in a dispute with its former partner, Norwegian state-owned telecom company Telenor over a business venture in the
Ukraine. Telenor is currently awaiting the resolution of a lawsuit it filed against Altimo, which claims that the company funded a media smear campaign against Telenor in an effort to take full control of the venture. In
Turkey, Altimo is also in a dispute with Swedish company TeliaSonera over control of the country’s biggest mobile phone operator, Turkcell. TeliaSonera is suing Altimo and another company for allegedly blocking its rights to a majority stake in Turkcell. Another legal battle is unfolding on Altimo’s home turf, with an international investment fund, IPOC, claiming that Altimo illegally acquired a stake in a major Russian mobile phone operator, Megafon. In
Indonesia, there have also been indications that Altimo is employing questionable tactics to enter the telecom market. Earlier this year allegations that Altimo was conducting a smear campaign against
Singapore’s STT came to light (see Report, Vol. IX, no.9).            Most recently demonstrations were held outside the KPPU’s office at the end of June by the “Forum for Indonesian-Russian Friendship” urging the KPPU to find STT guilty of monopolistic practices and give Altimo preference for buying STT’s Indosat shares. The vice president of Altimo, Kiriil Babaev, meanwhile, has publicly denied the company had any links to the Friendship Forum. Partners in crime? In the event that Putin does pressure
Jakarta on behalf of Altimo, how are officials here likely to react? So far, there are strong indications that the government will not play ball. At the end of May, Minister for State-Owned Enterprises Sofyan Djalil stated that “the government has no interest in buying back [Indosat’s stake]. Neither does it want to ride piggy-back on another party which has interest.” Although there have been recent calls from several members of the DPR for the government to buy back Indosat’s shares, other more senior legislators have voiced their opposition to the plan. Theo Sambuaga, who chairs DPR’s Commission I on defense, foreign affairs and information, told the press in July that “a share buyback by the government could potentially hinder fresh investment into the telecommunications industry,” adding that the commission had made such a recommendation in a parliamentary hearing to the minister of information. As for the document containing Altimo’s masterplan to take over Indosat, there are three possible scenarios. Either it is completely fabricated; it is a leftover plan from Sugiharto’s time as minister, which has since lost traction; or it remains an active plan. Only time will tell which of these three scenarios is the truth. Making hard work out of contracts The government’s stated plan to re-evaluate working contracts with large foreign companies has two mining giants in its sights. But is this a serious undertaking, or just politicians playing to the nationalist benches? Vice President Jusuf Kalla is known for his ability to cause a stir, and create one he did on August 24, at least among the local media. Speaking from the presidential palace before a crowd of reporters, the country’s number two called for a serious reassessment of contracts signed between the government and major foreign companies. “The government wants to make evaluations of the big production contracts.” Kalla was reported as saying in English newspaper The Point. “[
US miner] PT Freeport has already been evaluated inter-ministerally [sic]. Next we will begin an re-evaluation by involving local administrations so we can see how well contracts are implemented.” This part of Kalla’s speech was unlikely to raise any eyebrows. Regular checks on the implementation of contracts of work are a normal part of business-to-government relationships. However, later the Vice President linked this evaluation to a more sensitive issue, the terms of these contracts and the revenues paid to the government. In his speech, Kalla noted that nearly all the prices of
Indonesia’s natural resources, such as nickel, gold and coal, were soaring on the international market. A re-evaluation of contract implementation would ensure the state received a “fair income”, he said. This statement was duly reported the next day in the Indonesian newspapers with some going so far as to say that Kalla was planning unilateral changes to these contracts. A canny politician, Kalla was careful not to say this, but officials lower down the chain have been less cautious in their utterances. With little regard for contractual law, they have focused public attention on
Freeport and nickel mining giant Inco. One of the most vocal of these officials is Simon Sembiring, the director-general of minerals, coal and geothermal energy at the energy ministry. Â Â Â Â Â Â Â Â Â Â Â In a recent interview, Sembiring claimed the government could unilaterally change terms in the contract with
Freeport whenever it wanted. “If we ask for something, as long as it doesn’t disrupt
Freeport’s contract with other parties or its loans, they must accept it,” he told the Tempo Interactive website. Meanwhile, Sembiring’s head of mining inspections, Witoro S. Soelarno, made the ministry’s position on
Freeport’s contract clear. Speaking to AFP, Soelarno said the ministry wanted an increase in the royalty the firm paid on gold; from 1 percent to 3.5 percent of the total sales price. These changes were to be adjusted in line with the Government Regulation No. 45/2003 on State Royalty Revenues, he said. Soelarno’s legal reasoning, while it might sound convincing, has no grounds in reality. Like most other large international miners,
Freeport’s existing contracts of work with the government are lex-specialis, which means they are not supposed to be affected by changes to Indonesian law. If the existing terms were honoured, the next time a CoW for
Freeport’s main Grassberg mine would come up for renegotiation would be in 2021. The firm currently operates this mine under a 30-year agreement, with provisions for two 10-year extensions until 2041. Similar backtracking is going on with nickel miner Inco. Having signed an agreement 1998 to extend its contract from 20 years starting in 2008, the government is now looking to change the royalty system, from a fixed scheme, to a combination fixed-floating rate. This change is supposed to ensure the government gains more from high nickel prices. It is hard to see what the government hopes to achieve by tinkering with mining royalties. This is because the most money going into government coffers comes not from these payments but from the massive tax bills both
Freeport and Inco pay to the state. Last year PT Freeport
Indonesia reportedly paid a total of US$1.6 billion in revenues to the government. That sum comprised $1.29 billion in taxes, $159 million in dividends and only $146 million in royalties. With higher international prices for gold and copper; the tax bill was 33 percent greater than what the miner paid in 2005. So what is the reason for this renewed pressure? A likely theory is that politicians are using these reassessments to prepare the ground for some resource extracting of their own before the general elections in 2009. Once these funds enter opaque government accounts it will take little time before they find their way into the coffers of the political parties. There is also likely to be some serious image-making going on. Kalla’s stern words about foreign contracts are likely meant to placate nationalist sentiments in his Golkar Party, while Sembiring, also a Golkar member, is known to have his eyes on the energy minister’s job. Taking a tough stance now is likely to raise his stature among politicians who could pick him for this future role.            However, there is also resistance in the government to such politicking, and this comes mostly from the technocrats in cabinet. Energy and Mineral Resources Minister Purnomo Yusgiantoro is understood to be strongly against any major contract renegotiations, and so is Coordinating Minister of the Economy Boediono. Just which side will win out remains to be seen. Blaming the ref Disagreements among friends can become serious if left unchecked, but quarrels among family often cause the most rancour. This is certainly true in the row that recently erupted between two “sibling nations”—Indonesia and
Malaysia. The dispute began on August 24, when four Malaysian police detectives leapt out of a van in
Negri
Sembilan
State and seriously assaulted karate referee Donald Kolopita. It is an illustration of the tension that simmers between the two countries, that the attack quickly became a major story across the
Malacca
Strait. Shortly after reports of the incident broke, anti-Malaysian demonstrations swept the country and karate students began daily protests outside the nation’s embassy in
Central Jakarta. On a diplomatic level things were also strained, with President Susilo Bambang Yudhoyono snubbing
Malaysia’s 50th independence celebrations and sending his deputy, Jusuf Kalla, instead. Things only improved two weeks later, when Malaysian Prime Minister Abdullah Badawi personally phoned Yudhoyono to apologise. While Kolopita’s beating was the flashpoint for the discord, it was not the only thing on the minds of the Indonesian demonstrators. For many here, the referee’s treatment at the hands of police was yet another example of the one-sided relationship that continues to exist between Indonesia and
Malaysia. Politicians in
Jakarta were quick to link Kolopitia’s attack to the fates of the thousands of Indonesian migrants in the country, with the ill-treatment of illegal workers and maids put under special focus. Other areas of disagreement also become part of the story. These included longstanding territorial disputes – most recently over the Ambalat block, an oil-rich field in waters off Boerno. In the pages of media comment that followed, it was perhaps inevitable that Soekarno’s 1950s konfrontasi with
Malaysia was also mentioned, proof that the reverberations of this short-lived action are still being felt today.
           Since that time, Malaysians have stereotyped Indonesians as inferior, incompetent and dishonest, while they are in turn are cast by Indonesians as superior, conceited and bullying. Such negative pigeon-holing is certainly not the grounds on which to build a healthy relationship. Except that in this case, the Indonesian view of Malaysians seems to have been proven right. Commentators here have made much of the Malaysian authorities’ initial silence over the attack, noting that
Kuala Lumpur at first refused to acknowledge the assault on Kolopita had even occurred. Almost a fortnight went by before an apology was made. Perhaps the Malaysians could learn something from their Australian counterparts? This is because Canberra has proven far more responsive when dealing with threats to its relationship with
Jakarta. A case in point is the damage control entered into this May, after a diplomatic gaffe involving New South Wales Police and former
Jakarta governor Sutiyoso. At the time, the angry leader cut short his visit to
Sydney after police burst into his hotel room and asked him to appear in court over an historical human rights case. It later turned out they had the wrong man. Despite uncertainty about the legal aspects of the case, NSW Premier Morris Iemma quickly penned an apology to the governor, which was followed up by a similar missive from Foreign Minister Alexander Downer. Relationship mending was still going in August, when the Queen’s representative, NSW Governor Marie Bashir, visited Sutiyoso in
Jakarta. Malaysia may be more developed than
Indonesia and have a higher GDP per capita. But its leaders also need to recognize that
Indonesia is one of its most important neighbors. There is too much at stake in the relationship to risk it by acting arrogantly.–END
