Boardrooms Are Abuzz as Jakarta Begins to Clean House

The cozy system of crony capitalism that allowed former President Suharto’s family to amass billions of dollars in personal wealth began unraveling this weekend as Indonesia’s new government sought to distance itself from the sins of the past.

Dewi Fortuna Anwar, a presidential advisor, said Monday evening that incoming President B.J. Habibie is determined to prove that he is serious about doing away with the nepotism, corruption and collusion that were standard operating practice during his predecessor’s 32-year reign.

That is why he encouraged his brother and eldest son to step down from top positions in the Batam Industrial Development Authority, the agency responsible for developing a major industrial zone near Singapore, and the Agency for Research and Application of Technology, the government’s research and technology board, according to Anwar.

“This is a feudal society and the changes must come from the top down,” she said. The president “intends to show by example.”

But some critics of Habibie, a German-trained aerospace engineer and close friend of Suharto’s, fear that the changes are window dressing and that the real economic power will remain in the hands of a few well-connected individuals. The Habibie family reportedly controls at least 80 companies and is worth billions of dollars.

They argue that the only way for Indonesia to regain investor confidence is for Habibie to call for early elections and step down, clearing the way for the selection of a leader whose fortunes aren’t so closely tied to Suharto’s. Reformists are seeking an investigation into the source of the former president’s wealth and the return of any ill-gotten gains.

“We needed a clear sweep so we could worry about chasing the sins of the old guard later,” said Mari Pangestu, executive director of the Jakarta-based Centre for Strategic and International Studies.

Although Habibie’s sincerity may be in question, there is little doubt that the events of the last few days represent a sharp, and dizzying, repudiation of the Suharto era, a period marked by dramatic economic growth and the consolidation of private wealth.

Consider the following:

* Over the weekend, Habibie’s brother, Junus, resigned from his job as the head of the Batam Industrial Development Authority and Habibie’s eldest son, Ilham, stepped down from a senior post at the government research and technology agency. Ilham, 35, will continue, however, to head a controversial passenger jet development program at the state-run plane maker Industri Pesawat Terbang Nusantara.

* The Indonesian government on Monday ordered a review of contracts held by the powerful state-owned Pertamina energy company with Perta and Permindo, firms linked to Suharto’s second and third sons. Pertamina uses the two companies as middlemen for its trades on the international market in crude and oil products.

* The government ordered officials at Bulog, the government distribution agency, to examine its contracts for evidence of political favoritism. In one well-known case, Liem Sioe Liong, the country’s wealthiest ethnic Chinese businessman and a longtime Suharto associate, was awarded an exclusive license to supply flour to Bulog in 1970. Through that monopoly, Liem’s Salim Group gained a dominant share of the country’s instant-noodle market and other related businesses.

* The Jakarta city government canceled two controversial water contracts signed with joint venture firms controlled by a Suharto son and one of Liem’s sons. Officials said those deals to supply water to Jakarta customers were improperly awarded to companies based on their presidential connections rather than expertise.

Anwar, the Habibie political advisor, predicted many other “sweetheart” deals will be reevaluated in the coming weeks as Indonesian officials begin to recognize that the new president is serious about establishing a “clean and transparent” government.

But Anwar also said the new president’s seven siblings and other family members should be allowed to pursue “legitimate business.” For example, she described Habibie’s son, Ilham, as an “extremely gifted aerospace engineer” and defended the decision to allow him to remain at the helm of his father’s pet project, a controversial passenger jet development program.

“There should be some rational boundary between what is conflict of interest and what is legitimate business,” she said.

The latest purge by Indonesia’s new government has boardrooms in Jakarta abuzz, as executives try to guess who will emerge as winners and losers in the post-Suharto era.

Those firms controlled directly by Suharto family members or closely allied with the former president’s family, such as Liem’s Salim Group and timber barons Bob Hasan and Prajogo Pangestu, are expected to face stepped-up scrutiny.

The shares of PT Bimantara Citra, a conglomerate headed by Bambang Trihatmodjo, Suharto’s second son, have lost about 90% of their value since the devaluation of the rupiah last summer. On Monday, the stock slid an additional 25 rupiah to close at 350.

One group that could gain strength in the post-Suharto era is pribumi, or indigenous Indonesian businesses, according to business analysts.

Since Dutch colonial times, the ethnic Chinese have dominated the Indonesian business scene, in part, because they were not allowed jobs in the government or military. Over the years, Suharto extended lucrative contracts, licenses and monopolies to Liem and several other prominent ethnic Chinese business leaders.

But some Indonesian officials, including Ginandjar Kartasasmita, the new government’s senior economic minister, have fought to improve the position of pribumi businesses. In the 1980s, he championed an affirmative action program that set aside a portion of the government’s business for pribumi firms.

One Indonesian businessman who risked his fortune on the student reform movement is Arifin Panigoro, chairman of Medco Group, a $200-million energy conglomerate that includes Dragon Oil, a London-based oil exploration firm. Panigoro, who has been hit hard by the fiscal crisis and the drop in oil prices, has put Dragon Oil on the market.

But while his finances have suffered, Panigoro has gained visibility as an ally of popular Muslim leader Amien Rais and a provider of moral and fiscal support to the student movement. After the shooting death of six Jakarta students prompted thousands of students to take to the streets and occupy the Parliament, the oil executive stepped forward with moral and fiscal support, including the donation of 300,000 meals to hungry protesters.

“The strength of Panigoro was to show the middle class that they could have a voice in reform,” said Wimar Witoelar, a prominent Indonesian social commentator.

How changes in Indonesia will affect foreign firms remains unclear. The Japanese have the largest stake in Indonesia. But U.S. energy firms such as Irvine-based Edison Mission Energy, Omaha-based CalEnergy Co., Los Angeles-based Atlantic Richfield Co. and El Segundo-based Unocal Corp. are also major players.

One Indonesian banker urged foreign firms to begin distancing themselves from Suharto family firms or risk becoming a scapegoat for tensions arising from the country’s deteriorating economic situation.

James Castle, a prominent American business consultant based in Jakarta, expects the Habibie government to review some contracts to determine whether they are still profitable given the sharp fall in the rupiah, rising inflation and a sharp contraction in the economy.

But he voiced confidence that the new Indonesian government will not attack foreign firms with ties to the Suharto government because it needs their talent and capital to rebuild its economy.

“If a venture makes sense, and it’s not a cartel or a special licensing deal, then I think it still makes sense,” Castle said. “I don’t think there’s going to be a witch hunt into businesses involved with the first family.”

* MAIN STORY: A1