Reforms to Cut Into Interests of Suharto Kin

At his drink stand tucked at the edge of a shantytown, Papajana, 47, does his small part to contribute to the fortunes of Indonesia’s first family, one of the world’s wealthiest. Every time Papajana sells a pack of clove cigarettes or a bottle of water, flicks on the light or the television or makes a telephone call, one of the children of Indonesia’s president gets a little richer.

President Suharto and his six children have an estimated net worth of $40 billion. Their influence flows to nearly every capillary of Indonesian life: They control assets from oil and electricity to planes and cars and toll roads, newspapers and television.

Their monopolistic grip on the economy is one of the biggest obstacles to the country’s recovery, the International Monetary Fund says. And in the midst of the economic crisis here, as long as Suharto refuses to embrace reforms that would endanger his clan’s interests, the country’s currency continues to drop, prices rise, and people like Papajana get poorer every day.

“He is the head of the country,” Papajana says, pointing to a fading picture of Suharto pasted on the plywood wall of his shack, in a place of honor next to a poster of the Marlboro Man. “We are just the very tip of the tail.”

But in a move that could shake Indonesia from its first family to the last, the IMF is demanding an end to some of the pet projects of Suharto’s children. In an emergency negotiation called to stop the nation’s economic nose dive this week, Suharto has agreed to severe reform measures to retain a $43-billion international bailout package.

Several of the IMF prescriptions slash to the heart of his family’s most closely protected interests. The president agreed to end fuel subsidies and price controls on staple goods that benefit several of his offspring, drop his son’s national car program and shelve an expensive airplane manufacturing project run by a close friend, the technology minister.

For Suharto, 76, who is known across the nation simply as “Father,” the moves are meant to signal that he is, at last, ready to act the part of a national patriarch and put the interests of the country ahead of those of his children. In a week of daring criticism by opposition figures and intense pressure from international leaders--often focusing on the nepotism, cartels and grasping expansion of his children’s interests--many see it as a sign of surrender by Suharto after 32 years of tough rule.

“This is an extremely significant change,” said Sofjan Wanandi, a businessman and leader of a group that helps redistribute a new tax on the largest corporations to help small businesses. “It is a direct hit on the ones he didn’t want to touch. It shows he knows that the only way to survive is to reform.”

Papajana, the vendor, confesses that he identifies a bit with the leader who started life as a poor boy in a village. He thinks that they share the common bond of fathers trying to look out for their children who are a little out of control.

But the similarity ends there.

If they ever met, in the minute it would take to shake hands, Suharto would make more off the interest on his family fortune than Papajana has earned in his life. “If I were president,” the vendor mused, looking at his brown, callused hands, “I might do the same thing.”

Critics say they will believe Suharto’s pledge for reform is sincere only when they see action, since the president has quietly backtracked on plans limiting his clan’s projects before.

In September, a power plant owned by Siti Hardiyanti Rukmana, or Tutut, his eldest daughter, was placed on a list of 156 projects to be postponed. The plant slid off the list two months later, only to be shoved back on, under the IMF’s eye, earlier this week.

The IMF had also called for the closure of 16 banks. Two escaped liquidation, saved by their links to the presidential family, analysts say. Suharto’s cousin bailed out one bank from his own pocket. The other--son Bambang’s Bank Andromeda--was reincarnated under another name.

The children’s widespread wealth and the length to which they were willing to go to acquire it have long been a matter of fascination and resentment for both Indonesians and foreign investors.

Having a family member or one of Suharto’s close circle of tycoon friends as a business partner was once one sure way to win a contract, critics say; often the children would take an equity stake in a venture in exchange for their prestige and an implied promise of presidential favor.

International companies confronting competition--like General Motors, AT&T;, Lucent Technologies, NEC, Hughes and Siemens--all forged ties with a Suharto family member.

But sometimes, the most jostling happened among the siblings. When Indonesia opened telecommunications up to foreign providers in 1989, one Suharto son, Hutomo Mandala Putra, or Tommy, signed on as an agent for NEC and Sumitomo; his sister Tutut represented AT&T.; Officials in the cross-fire, afraid to offend Washington or Tokyo or to pick one sibling over another, decided to double the size of the contract and award half to each.

Last year, brothers Bambang Trihatmodjo and Tommy went head to head in car manufacturing ventures until Tommy won the contract to make a national car, meant to be an affordable vehicle for Indonesia’s streets. Although his vehicle was almost completely built in South Korea by Kia Motors, Tommy received special duty-free status and other tariff exemptions, allowing him to price the car, the Timor, at half that of his rivals.

The family’s controls and resulting lack of real competition beyond sibling rivalry have made Indonesian industries sluggish and scared away foreign investors, analysts say. After Tommy won the auto monopoly, Ford Motor Co. dropped plans to build a car factory in Indonesia. Motorola backed away from a paging joint-venture recently, and GTE decided not to invest here at all.

The new IMF agreement, which will postpone projects like Tommy’s “Indonesian” car, aims to persuade international investors who have abandoned the country to come back.

But companies that have sought Suharto connections and stayed may suddenly find that family ties are uncomfortably binding.

Earlier this week, Peregrine Investments Holdings Ltd., a prominent Hong Kong investment bank, collapsed after a taxi company linked to the Suharto family could not repay a $256-million loan. Another Hong Kong company, Hopewell Holdings Ltd., holds a suddenly doubt-laden 80% share in Tutut’s twice-shelved power plant.

Last week, General Motors bought out the 40% stake of its longtime partner, Probosutedjo, Suharto’s half brother, and took full control of its operations. Analysts think that others may follow.

“There is growing concern about getting involved with politically well-connected companies,” said Bruce Gale, regional director of the Political and Economic Risk Consultancy, which has named Indonesia one of the world’s most corrupt countries. “Investors are trying to avoid it if they can. But in the Suharto family’s case, there aren’t that many areas of the economy that are out of their reach.”

Megawati Sukarnoputri, Indonesia’s best-known opposition leader, has used the public’s long-simmering indignation over the first family’s privileges to pressure Suharto to stop the “cronyism” or step down. “Striped prison uniforms should be sewn for the economic criminals who have destroyed our nation and our economic future,” she said to cheering supporters Saturday.

She knows something about family relationships. Megawati is the daughter of Indonesia’s founding president, Sukarno. But her primary legacy from her powerful father is simply her political appeal.