Nani Afrida, Jakarta – A lack of transparency surrounding the procurement of 15 passenger aircraft produced by China's Xi'an Aircraft Company (XAC) has led to allegations of misconduct by the government and state-owned Merpati Nusantara Airlines. The Jakarta Post's Nani Afrida explores the issue.
Merpati Nusantara Airlines, which takes the first part of its name from the Indonesian word for dove, serves many remote cities in eastern Indonesia – an area ignored by most of the nation's carriers.
However the state-owned airline had a handful of feathers plucked from its wings after one of its Chinese-made MA-60 planes plunged into the sea while landing in West Papua on May 7, killing all 27 people on board.
Although the National Transportation Safety Committee is still investigating the crash, critics are questioning the quality of Merpati's Chinese-made MA-60s, which now account for the largest part of the airline's fleet. Top politicians have been quick to join in, alleging that there were irregularities in how the government and the airline procured 15 MA-60 aircraft from China's Xi'an Aircraft Company (XAC).
Meanwhile other critics have claimed that officials and the airline inflated the cost of the aircraft – and used international politically wired brokers who traded the procurement for loans to build power plants.
Former vice president Jusuf Kalla first ignited the controversy when he alleged that one minister, later identified Trade Minister Mari Elka Pangestu, was obstinate and forced the government to approve the purchase of the Chinese-made aircraft.
"I even scolded the minister for being too pushy in nailing the deal," Kalla said, recalling a meeting in his office when he was vice president. Mari has denied the allegation. Mari has denied the allegation.
The proposal to buy the aircraft was widely opposed at the time on fears that it might disrupt the financial health of Merpati, which had been struggling to keep its head above water in a sea of debt.
Other critics claimed that the procurement was poorly conceived as XAC was a relatively new company and its MA-60 aircraft had a poor safety record, as evidenced by deadly accidents in the Philippines and Africa.
Despite concerns, Merpati signed a contract with XAC in June 2006 to buy 15 MA-60 aircraft for US$232 million. Funds for the purchase were provided by a subsidiary loan agreement (SLA) provided by the Export-Import Bank of China (China Eximbank).
The price was deemed expensive. Merpati paid $15.46 million per aircraft, while Nepal purchased two identically equipped MA-60s from XAC for $11 million per aircraft around the same time – and was given a third aircraft for free. XAC also reportedly sold an MA-60 to Zimbabwe for $11 million.
Suspicious of cost inflation, the State-Owned Enterprises (SOE) Ministry asked the State Development Comptroller to audit the procurement in March 2010. The watchdog recommended in April that Merpati renegotiate the procurement, determining that the airline had paid too much for the aircraft.
The airline complied, and in April negotiated a reduced price for the aircraft of $12 million per unit, while the SLA was reduced to $220 million. Merpati pays the Indonesian government 3 percent interest on the SLA, while the government pays 2.5 percent interest to China Eximbank.
"The final (SLA) loan scheme for buying the planes was set at $220 million. Why did it become so expensive?" Kalla said. He said Merpati officials told the government the price for each aircraft would be $12 million, meaning that a loan of only $180 million would be needed to buy 15 planes.
While Kalla refused to speculate on which officials were behind the contract negotiations, legislator Epyardi Asda said he believed politically wired lobbyists brokered the deal despite opposition at the House of Representatives. Epyardi said he had been monitoring the deal since his tenure on the House of Representatives' Commission VI overseeing state companies and trade and industry between 2004 and 2009.
The legislator currently sits on House Commission V overseeing transportation and infrastructure. "We were questioning the reasons behind the MA-60 purchase back then because of safety concerns. We preferred that other manufacturers, including PT Dirgantara Indonesia, provide the aircraft instead," Epyardi, who is supported by the United Development Party (PPP), said.
Epyardi alleged that one member of the Cabinet between 2004-2009 was engaged in the first round of negotiations for the deal.
State-Owned Enterprises workers union chairman Arief Puyuono, also a Merpati employee with 20 years of service, recently alleged that two businessmen, who he identified as "MS" and "AH", and a presidential special staff member he identified as "JW", played the largest roles in negotiating the contract.
He also said Mari was aware of the trio's lobbying efforts, something the Trade Minister denied on sidelines of a Cabinet meeting last week. "There will be explanation. Many people are involved in this issue, so just wait. I also did not have any role in the negotiations," Mari said.
According to Arief and Epyardi, MS was a "field operator" who was connected to AH and JW. Arief said MS had jury-rigged the inflated price for the aircraft by including items such as training, additional equipment and aircraft simulators in the SLA loan scheme.
"Usually those items are free of charge because they are included as one package. If we had to pay additional costs, the price would have been less than $1 million," Arief said.
MS, JW and AH also allegedly used Merpati's procurement of the MA-60s as part of a deal for Chinese loans to build 10,000 megawatt power plants in Indonesia.
The loans were put on hold in 2009 after Merpati said it wanted to cancel the MA-60 purchase. The row was settled in mid-2009 after then coordinating economic minister Sri Mulyani Indrawati flew to China to renegotiate the settlement.
"Before flying to China, Sri Mulyani was furious after learning that the President had ordered the purchase of the MA-60s even though he fully understood the decision would harm Merpati's financial condition," a legislator aware of the deal said, declining to be named.
Merpati president director Sardjono Jhony, who took over in Ma 2010, denied that there was any pressure behind the purchase.
"We considered the MA-60 because it was suitable for our operation – and we also received a SLA from the government, with lenient terms. XAC is also good company. The parts and other equipment are from Europe. So the MA-60 is very safe and reliable," he said.
MA-60: Aircraft procurement timeline
Procurement assessment:
2002 - Xi'an Aircraft Company (XAC) promotes the MA-60 to the Indonesian market.
2005 - During the 7th international Indonesia-China joint commission meeting on economics, trade and technical cooperation in Beijing, China, the Chinese government agrees to provide concessional loans for the purchase of MA-60s.
Sep. 14, 2005 - The operational director of state airline Merpati Nusantara Airlines conveys interest and seeks procedures to the Chinese Embassy in Jakarta for the aircraft purchase.
Nov. 24, 2005: Merpati president director Hotasi Nababan signs a memorandum of understanding (MoU) with XAC executives for the purchase.
Procurement process and contract:
March 3, 2006 - Merpati president director Hotasi Nababan asks the State-Owned Enterprises (SOE) Ministry to approve the company's business plan to buy 15 MA-60s. The ministry is expected to follow up on the request with the National Development Planning Agency (Bappenas) and the Finance Ministry.
March 22, 2006 - Merpati president director Hotasi Nababan requests an approval from the SOE Ministry to take advantage of the concessional loans provided by China to purchase the 15 planes.
May 9, 2006 - The Transportation Ministry validates the airworthiness of MA-60 aircraft.
Jun 7, 2006 - Merpati signs a contract with XAC to buy 15 MA-60s worth US$232 million.
Sep. 27, 2006 - Merpati's board of commissioners supports the procurement using the concessional loan facility. The SOE ministry also grants its approval. The loan will have a maturity period of 15 years, with a 3-year grace period and 3 percent annual interest rate.
Nov. 28, 2006 - XAC and Merpati sign a MoU to lease two MA-60s to Merpati.
May 22, 2007 - Bappenas approves the financing of the MA-60s through a subsidiary loan agreement (SLA) worth $232 million provided by the Chinese government.
Jun 28, 2007 - The SOE minister approves the Bappenas proposal for the SLA.
Aircraft delivery and operation:
Aug. 28, 2007 - Two MA-60 leased aircrafts arrive. Merpati signs the certificate of acceptance.
Aug. 19, 2008 - XAC announces to Merpati the procurement contract has been in effect since Aug. 5.
May 8 and Aug. 12, 2009 - Merpati technicians find some cracks on the vertical tail (rudder) of the leased MA-60s. XAC then fixes the problem, with the Chinese civil aviation authorities providing a security and safety guarantee.
Price evaluation and contract review:
Jun. 7, 2006 - Initial contract states that the price of the MA-60s, including costs for supporting equipment – airborne equipment, buyer's optional equipment, training devices and training for crew and technicians – is set at $14.1 million per unit.
2008 - State asset management company PT Perusahaan Pengelola Aset (PPA), tasked with restructuring ailing Merpati, reviews the aircraft price. The PPA believes the price should be between $11 million and $12.5 million per unit, including costs for facilities and equipment.
Sep. 4, 2008 - Merpati president director Bambang Bhakti asks the vice president, the finance minister and the Bappenas chair to revise the loan agreement from a purchase to a lease.
Aug. 5, 2008 - Indonesia and China sign a government concessional loan agreement for the procurement of aircraft. Indonesia is represented by the Finance Ministry while China by the Export-Import Bank of China.
Aug. 27, 2008 - XAC insists the contract continue, and says it is ready to deliver the remaining 13 MA-60 aircraft.
Sept. 8 and 12, 2008 - Exim Bank of China sends a letter to the vice president and the finance minister requesting the acceleration of the SLA process for the MA-60 purchases.
Sept. 24, 2008 - The SOE Ministry sends a proposal to the Finance Ministry, Bappenas and the Office of the Coordinating Economic Minister to renegotiate the purchasing contract, covering the price, the aircraft condition and the SLA composition, which will comprise a 50 percent loan from China while the remaining will come from the state capital participation scheme (PMN).
Oct. 16, 2008 - XAC asks Merpati to halt operating the leased MA-60s following the contract uncertainty. XAC says if Merpati refuses to comply the company will file the case with the international arbitrate in Singapore.
Renegotiation:
Nov. 13, 2008 - XAC receives reports from Merpati's restructuring team of the company's financial woes, asking to revise certain terms and conditions in the purchasing contracts that will enable Merpati to purchase and operate the MA-60s.
Nov. 14, 2008 - XAC reminds Merpati it is ready to deliver the 13 aircraft.
Dec. 16, 2008, March 19 and April 15, 2009 - Indonesia renegotiates the purchasing contract with its Chinese counterparts.
April 24, 2009 - Renegotiation reports:
Merpati requests a gradual delivery time in line with pilot recruitments. XAC and the Chinese government agree to deliver the planes starting in September of 2009.
Merpati requests more capital for aircraft procurement worth $68 million to guarantee the company's operational sustainability. It says the aircraft price is too high. But, XAC believes otherwise.
Merpati proposes the possibility of a fixed-rate interest loan and payment in yuan-rupiah exchange. China considers extending the loan maturity to 20 years from 15 years.
Merpati asks XAC and the Chinese authorities to issue a performance and buyback guarantee related to aircraft performance.
Aug. 26, 2009 - The SOE Ministry agrees with Merpati's business plan and loan restructuring.
March 23, 2010 - The SOE ministry requests the State Developmen t Comptroller (BPKP) to audit the MA-60 procurement.
April 9, 2010 - The BPKP issues several recommendations:
- Renegotiate the contract price.
- Seek a guarantee from XAC for aircraft damages for ten years.
- All correspondence should be attached with the purchasing contract.
April 16, 2010 - Merpati and XAC amend the purchasing:
- XAC provides spare-part and components guarantees, including airworthiness certifications for 25 years.
- XAC provides a buyback guarantee based on the latest book value of the aircraft should Merpati stop operating the aircraft due to failures in design or in the fabrication process that cannot be repaired by XAC.
- The price is set at $11.2 million per unit, excluding additional costs for optional equipment requested by the buyer. The total price is set at $12 million per unit.
April 7, 2010 - Merpati, XAC and state aircraft producer PT Dirgantara Indonesia sign a MoU on maintenance, repair and training for pilots and technicians.
April 7, 2010 - The Transportation Ministry issues a safety certification for MA-60s.
April 16, 2010 - The SOE ministry and state airline Garuda Indonesia, as Merpati shareholders, approve the loan for the MA-60 purchases.
Source: SOE ministry
Former top officials involved in the deal:
- Former vice president Jusuf Kalla
- Former state-owned enterprises ministers Sugiharto and Sofyan Djalil
- Former chairperson of the National Development Planning Agency (Bappenas) Paskah Suzetta
- Former finance minister Sri Mulyani Indrawati
- Trade Minister Mari Elka Pangestu
- Former transportation minister Jusman Syafii Djamal