The Ties That Bind

On a recent plane trip, Ron Landry asked his Indonesian business partner whether he was worried about the criticisms of the partner’s close ties to former Indonesian President Suharto.

Landry’s associate is Hashim Djojohadikusumo, the brother-in-law of Suharto’s youngest daughter. The two men are key players in Jakarta-based Paiton Energy, a company founded by U.S. and Japanese firms to generate electricity for Indonesia.

Landry acknowledges that Paiton’s owners--including Edison Mission Energy, an Irvine-based subsidiary of Edison International--wanted a prominent Suharto family member as a partner to assure a direct link to the nation’s leader.

“To do any business in Indonesia in the last 10 years, particularly the last six, you needed to have a relationship with the first family,” explained Landry, the chief executive of Paiton Energy, which is overseeing the development of two 625-megawatt power plants in East Java.

But suddenly the landscape has changed. Suharto is out of power, and it is an unsettled time for the likes of Edison, Ford, General Electric and other prominent U.S. firms that climbed in bed with the Suharto clan to win contracts.

A public backlash has erupted against Suharto, his six children and close friends, triggering a nationwide inquiry about their use and abuse of political power to amass a fortune estimated between $16 billion and $40 billion.

Landry says partner Hashim is eager to prove he is innocent of claims that he and other members of Suharto’s extended family had abused their close ties to the former president or practiced “collusion, corruption or nepotism” to build up their corporate empires.

Hashim, the son of a prominent Indonesian economist, is not technically a first-family member, though he is generally included in the inner circle. His brother, Lt. Gen. Prabowo Subianto, is married to Suharto’s middle daughter, Siti Hediyati Harijadi, known as Titiek. Hashim and Titiek have significant business interests together.

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While U.S. firms--which are governed by strict anti-corruption laws at home and abroad--insist they have committed no illegal acts, they fear the witch hunt atmosphere will sully their public image and could even lead to the cancellation of business deals or seizure of assets.

“The public is fed up with the rapaciousness of government officials at the highest levels,” said Gregory Churchill, a Western attorney who has worked here since 1976.

Foreign firms are trying to stay out of the line of fire, fearful of alienating present or future partners and sensitive to the charge that they have profited from close connections to corrupt leaders. Under the U.S. Foreign Corrupt Practices Act, U.S. firms are prohibited from paying bribes while doing business abroad.

Landry insists the Paiton I project--a $2.5-billion coal-generated power plant due to come online in 1999--will stand up to public scrutiny. “But I know some other projects that should be worried,” said Landry, who worked in the mining business before taking over the management of Paiton two years ago.

Purnomo Subiantoro, a former key official in the Indonesian Ministry of Mines and Energy, says indeed that not all foreign firms were willing to pay off Suharto family members: “Some of them did it, but some of the foreign companies I know very well did not do it.”

Wealth was transferred to the Suharto family and friends in various ways, according to the Castle Group, a business consulting firm here that has just completed a study of the first-family holdings.

Indonesia requires foreign companies to have local partners in many undertakings. Sometimes, the family members received equity stakes of up to 51% in exchange for their “expertise.” Usually, these contracts did not go through a competitive process, and even when bidding occurred the “family influence was strong,” according to the Castle Group report.

In other cases, licenses for lucrative industries like television broadcasting were awarded to Suharto family members or close associates without any competitive bidding. The government also moved valuable assets--such as satellites--to family companies for little or no payment.

“It was quite clear at those times that you weren’t going to get any approvals at all without the help of a well-connected local partner,” said Jim Castle, chairman of the Castle Group.

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Having an influential Suharto family member on the negotiating team was particularly helpful in the energy arena.

In the 1980s, Indonesia’s vast natural resources, low-cost labor and huge potential market had become a magnet for manufacturers backed by international financing agencies. This development, the basis for the country’s enviable growth rates, put a strain on inadequate electricity sources, and blackouts were common.

Early in this decade, Indonesia’s P.T. Perusahaan Listrik Negara (PLN), the state-owned power company, began encouraging private power projects. Foreign firms eagerly stepped up to the negotiating table.

By May 1997, the Indonesian government had signed 22 power purchase agreements and was negotiating 24 more, according to the World Bank. Those projects--most of which had first-family companies or friends as partners--would have doubled PLN’s capacity.

But in a 1996 report, the World Bank criticized the PLN for paying too much for power because the bidding process was closed. “Negotiated, noncompetitive deals leave room for excess profits for the buyer and the possibility of side payments,” the report stated.

To pursue its Paiton project, Edison Mission Energy teamed up with G.E. Capital, Mitsui and Batu Hitam Perkasa, Hashim’s coal supply company. TransCanada recently bought a portion of G.E. Capital’s share in the project.

Hashim was able to get access to former President Suharto for Paiton’s foreign partners. But Landry declares that the deal was finalized on the basis of its merits and not because any illicit payments were made or undue pressure exerted.

“Certainly he got us in to see the president, but once we were in his office we had to convince him that the economics made sense,” he said.

Landry argues that Hashim, unlike some of the first-family members, brought real benefits to the coal-generated power project by providing the high-quality, indigenous coal required by the Indonesian government.

“This was not a deal where he came in and said, ‘I’ll influence government officials and then I’ll stand on the sidelines and wait for my money,’ ” said Landry. “There was an equity contribution here.”

Politics is hardly the only problem facing these foreign firms. Apart from the change of leadership in Indonesia, they have been broadsided by the regional financial crisis that started in Thailand last summer and quickly spread throughout Southeast Asia and South Korea.

The crash of the Indonesian currency, the rupiah, has led to a dramatic reduction in energy consumption and saddled PLN with dollar-denominated contracts that it can’t cover. At today’s exchange rates, PLN is committed to paying three to five times more for power than its current rupiah selling price. That has left the electrical utility effectively bankrupt and unable to pay its bills.

No matter where it turns, the new Indonesian government will be stepping on some prominent toes. Suharto’s middle son, Bambang Trihatmodjo, has stakes valued at more than $3 billion in three power projects with foreign partners, including Enron Corp.

Suharto’s eldest daughter, Tutut, is involved in a $225-million power project with Tenneco Energy of the U.S. in South Sulawesi. The Panutan Group, controlled by Suharto eldest son Sigit Harjojudanto, formed a joint venture with Omaha-based CalEnergy to build a $220-million power plant on Bali.

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El Segundo-based Unocal Corp. has teamed with the Nusamba Group, which is co-owned by the president’s golfing partner Mohammad “Bob” Hasan and Sigit, on numerous power projects, including three 55-megawatt facilities on Java and a proposed geothermal project in North Sumatra.

Of the 29 projects under review, it is likely the lion’s share will be postponed or canceled, according to Indonesian energy experts. Many of these deals could end up in court.

Ultimately, foreign firms may be able to move into areas once monopolized by the Suharto family, such as oil trading and port and toll road operation. “In my personal opinion, whatever [the new government] can do will better the situation,” said Michael Ball, an accountant and board member of the American Chamber of Commerce in Jakarta. “I already see some people who others would classify as bad apples being pushed aside or down.”

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SUHARTO FAMILY HOLDINGS:

Former President Suharto, his family and friends are believed to have amassed as much as $40 billion during his 32 years in office.

Here is a brief snapshot of some family holdings:

Siti “Tutut” Hardiyanti Rukmana (daughter): Citra Lamtoro Gung Group,Trihasra Group. Monopolies for toll roads, power, other infrastructure projects. Joint venture with Lucent Technology to install and upgrade telephone switch system in Indonesia.

Sigit Harjojudanto (son): Arseto Group, Panutan Group. Plantations, mining, construction, shipping and telecom. Partnered with CalEnergy to build 110-megawatt power plant on Bali.

Bambang Trihatmodjo (son): Bimantara Group. Plastic, electronics, telecom, broadcasting, construction and shipping. Partner with Nestle in food manufacturing and distribution, and with the Salim Group and Enron Corp. on a $508 million power project.

Siti “Titiek” Hediati Probowo (daughter): Datam Group, Maharani Group, Aditya Group. Involved in various arenas, from energy to auto leasing. Extensive partnership with her husband’s brother, Hashim Djojohadikusomo. Married to Lt. Gen. Prabowo Subianto.

Hutomo “Tommy” Mandala Putra (son): Humpuss Group. Petrochemicals, natural gas export, toll roads, wood manufacturing, fertilizer production, advertising and plantations. Had a lucrative monopoly on the clove trade.

Siti Hutami Endang Adining (daughter): Manggala Krida Yudha company. Not very visible in business, owns a tourism company.

Ari Harjo Wibowo (grandson): Notorious for efforts to collect a tax on beer and levy export duties on bird nests, an exotic and very expensive delicacy sold for medicine and food.

OTHERS:

Hashim Djojohadikusomo (Titiek’s borhter-in-law): Era Persada Group, Tirtamas Majutama Group. Owns the coal operation involved in the #2.5 billion Paiton power project with Mission Energy and GE Capital.

Muhammad “Bob” Hassan: (Suharto’s golfing partner). Pasopati Group, Nusamba Group. Partner with Suharto’s eldest son, Sigit, and others in the Nusamba Group, which has teamed with Unocal Corp. in power projects and with Freeport McMoran, the mining company.

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Source: The Castle Group, Political and Economics Risk Consultancy Ltd.; WartaEkonomi, Indonesian business magazine.