Indonesia's Big Cleanup
President Yudhoyono says he’ll fight corruption, improve laws and rebuild after the tsunami. To do so, he needs to win billions of dollars from skeptical foreign investors.
‚Bill Long says he thought that, after 10 years, he knew all the pitfalls of working in Indonesia, where his employ- er, Newmont Mining Corp., operates a $2.2 billion copper and gold mine. Then last September, he and four other ex- ecutives were thrown into a rat-infested, unairconditioned jail for 32 days on suspicion of polluting the sea near a former mine site where Long, 58, was general man- ager. While Long hasn’t been charged with any wrong- doing, he is still barred from leaving the country. And Newmont, which denies the accusations, is facing a $100 million lawsuit.
“That has to put shivers through all potential foreign investors,” says Dan Desjardins, 42, Newmont’s finance director at the company’s mine headquarters on remote Sumbawa island. The world’s biggest gold miner has carved out a 1,000-meter-wide, 500-meter-deep open- cut mine, built a U.S.-style town for 6,800 workers and constructed from scratch a seaport from which to export the 12 billion pounds of copper and 13 million ounces of gold it aims to extract over the next 28 years.
Seven hundred miles (1,127 kilometers) away in Jakar- ta, Indonesian President Susilo Bambang Yudhoyono says he’s listening to Newmont and other investors who say they’ve fallen foul of a corrupt, incomprehensible legal system. “I have to fix my country,” says Yudhoyono, 55, a retired general who became the country’s first popularly elected leader on Sept. 20. “I have to change the bad image of Indonesia to a good one. I will improve the legal framework, fight corruption, ensure transparency.”
To boost the economy, which grew 5.1 percent last year, he plans to build toll roads, power plants and telecommunications networks that will cost some $150 billion over the next five years. Yudhoyono is also spending $4.5 billion to rebuild the devastated Aceh province, where the tsunami in December killed 220,000 people in what Yudhoyono describes as “the most trying moment in the history of Indonesia.” The World Bank says the tsunami will reduce Indonesia’s economic growth this year by 0.5–5 percent and add 1 million more unemployed to the 40 million who don’t have full-time work.
To finance all of the building projects, Yudhoyono is wooing foreign contractors and investors. He also planned to announce in March the sale of $1 billion of bonds and to increase oil and gas production, which has been falling in the only East Asian member of the Organization of Petroleum Exporting Countries. Oil output has dropped below 1 million barrels a day from a high of 1.64 million barrels in 1977 after exploration investment hit a 36-year low in 2004, according to Hans Vriens, managing director of Apco Indonesia, an energy and mining consulting firm. In March, Yudhoyono slashed by 34 percent subsidies that had long given Indonesians cheap gasoline, a move that will narrow the $3.5 billion budget deficit by $805 million. The last time a government tried to cut the subsidy, two weeks of street protests ensued, and the measure was withdrawn.
Many investors and Indonesian consumers are betting Yudhoyono will reach his goal of lifting gross domestic product growth in the world’s fourth largest country to 7.2 percent in 2009. After his election, the Jakarta Composite Index rose 37 percent to a record 1114.207 on March 8. That compares with an 8 percent rise in the Standard & Poor’s 500 Index in that period. GDP jumped 6.7 percent in the final quarter of 2004—the most in nine years—from a year earlier as Indonesians bought more products ranging from cars and motorcycles to clove cigarettes.
In December, S&P raised Indonesia’s long-term foreign- currency credit rating to B+ from B, putting it one level above Venezuela, though still four levels below investment grade. On Feb. 18, Moody’s Investors Service raised its B2 debt rat- ing outlook to “positive” from “stable.” “Investors are coming back,” says Kenneth Courtis, Tokyo-based vice chairman for Asia at Goldman Sachs Group Inc. “The stock market is hot, people want to buy the currency and Yudhoyono has com- modities—copper, iron, oil and gas and timber—for which there’s an insatiable demand.” On March 14, New York–based Altria Group Inc. offered $5.1 billion for PT HM Sampoerna, Indonesia’s third-largest cigarette maker.
More cautious is Mark Mobius, 68, Singapore-based managing director of Templeton Asset Management Ltd., who oversees $17 billion of emerging-market securities. Mobius says he’s not adding to his Indonesian investments yet. “So far, so good, but actions speak louder than words,” he says of Yudhoyono’s plans.
Emil Wolter, 30, who helps manage $2.5 billion at London- based Polar Capital Partners Ltd., says stocks are too expensive. “Indonesia is a lot more stable and has better prospects than a few years back, but this is largely reflected in share prices,” says Wolter, who sold all of his Indonesian holdings in December. “People’s expectations are quite elevated. I’m strug- gling to identify cheap first- or second-tier companies.”
Along list of woes still plagues Indonesia, which has a population of 238.5 million—including more Muslims than any other nation—that’s spread over 18,000 islands. In addition to the effects of the tsunami, the country is facing secessionist revolts in the provinces of Aceh and Papua. Indonesia has also been the site of three al-Qaeda- linked terrorist attacks on Western targets: a 2002 nightclub bombing on the resort island of Bali that killed at least 202 people, the 2003 bombing of Jakarta’s J.W. Marriott Hotel that killed 12 and the September 2004 bombing of the Australian embassy, in which 11 died.
Then there are the legal battles that have ensnared companies, including Newmont. “This kind of thing is more dangerous for Indonesia’s reputation than a bomb in front of the Australian embassy or Marriott hotel,” says James Castle, 59, a Jakarta-based business consultant and governor of the American Chamber of Commerce in Indonesia who has been based in Jakarta for 28 years. “Personal security is an issue here, but it’s not a deterrent to investment.”
Still, Castle says, if anyone can fix Indonesia, it’s Yudhoy- ono. “This is the first Indonesian government that has come to power with a pro-business agenda,” he says. Indonesians are more optimistic since Yudhoyono’s election, says Kevin O’Rourke, author of Reformasi: the struggle for power in post-Suharto Indonesia (Allen & Unwin, 2002). “It’s almost entirely because of him that the atmosphere has changed,” says O’Rourke, 33, a New York–born former investment banker who has lived in Indonesia since 1994. “He’s politically astute, and he has a clean reputation. He’s almost alone among the national political elite in terms of his ability to communicate with the public.”
The son of an army lieutenant, Yudhoyono grew up in the small town of Pacitan in eastern Java. After finishing first in his class in high school, he won a place at the national mili- tary academy, where he again graduated at the top. “I needed to compete, to fight really hard to achieve these things,” says Yudhoyono, a thickset 6-footer.
After three years as an army platoon leader and com- mander of airborne troops, Yudhoyono made the first of five visits to the U.S. for language and military training in 1976. “He was very studious,” says Jim Filgo, 56, a Jakarta-based former U.S. Army major who attended one of the courses with him and took him fishing for a weekend in Florida. “He wasn’t interested in partying. He remained a good Muslim, didn’t drink or smoke. He had a dry sense of humor. I assumed this guy was going to be a quick mover as long as pro- motion was on merit.”
In 1991, Yudhoyono spent a year at the Com- mand and General Staff College at Fort Leaven- worth, Kansas. He then moved to Kansas City, Missouri, where he earned an MA in organiza- tional management at Webster University.
In 1995, when he was 45, Yudhoyono was appointed commander of United Nations peacekeeping operations in the former Yugosla- via, leading officers from 32 countries. Back in Jakarta the following year, he was named chief of staff for territorial affairs, a role in which Yudhoyono says he began lobbying the govern- ment to reduce the army’s role in politics.
In 1998, he played a behind-the-scenes role in the removal of Indonesian dictator Suharto, another former general who had seized power 32 years earlier, author O’Rourke says. Yudhoy- ono then quit the army to serve as minister of mines and energy, then politics and security minister in the cabinet of Abdurrahman Wahid, who was elected by parliament in 1999. The next president, Megawati Soekarnoputri, named him politics and security minister. He quit in March 2004 to run against her and another former boss, ex–army commander Wiranto. After Wiranto was eliminated on the first of two ballots, Yudhoyono easily won a runoff with Megawati, gaining 61 percent of the vote.
“He somehow managed to stay honest yet not antagonize his fellow officers,” says Dennis Heffernan, 62, a Cleveland- born partner in Van Zorge Heffernan & Associates, a Jakarta-based risk consulting firm. That’s no small task in the Indonesian military, where officers have been tainted by corruption and allegations of human rights abuses. In 1992, the U.S. canceled its training cooperation program with the Indonesian military after troops opened fire on unarmed demonstrators in East Timor, the former Portuguese colony that Indonesia invaded in 1975 and occupied until 1999. In February, the U.S. State Department announced plans to resume military ties, without giving a date.
‘This is the first government that has come to power with a pro-business agenda,’ a consultant in Jakarta says.
Yudhoyono says his role model in government is another soldier-statesman, the World War II allied commander and 34th president of the U.S., Dwight D. Eisenhower. “Eisen- hower was a successful president who could apply military doctrines, strategies and tactics into politics, administration and government,” he says.
Yudhoyono is surrounding himself with business and eco- nomics professionals. Vice President Jusuf Kalla, 62, is a vet- eran entrepreneur, and the chief coordinating minister for economic affairs, Aburizal Bakrie, 58, is chairman of PT Bak- rie & Brothers, a Jakarta-based building products company. Minister for National Development Sri Mulyani In- drawati, 42, is the former Jakarta-based executive di- rector for Indonesia at the International Monetary Fund. “We want to make infrastructure investments in Indonesia so secure and profitable that you will want to invest your pension funds in it,” she told a conference of investors in January at which the gov- ernment announced its plan to offer $22.5 billion of contracts for bid in March. The projects include roads, gas pipelines, power plants and seaports.
Sri Mulyani says the investment will help halve unemployment, currently 9.5 percent, and poverty. More than half of the population now lives on less than $2 a day, according to the World Bank.
It won’t be easy to raise the money for these projects, says Richard Deitz, 39, president of VR Capital Group Ltd., a Moscow-based hedge fund manager specializing in distressed debt securities, including Indonesian debt. “It has only been a few years since a lot of lenders suffered big losses lending to Indonesian companies, many of which have shown extremely poor willingness to service their debts and have been highly inventive in developing tactics to evade their creditors,” Deitz says. “The problems are so deep and corrosive that to induce investors to come in in a big way is going to need some confidence building.”
When the Asian financial crisis struck in 1997, Indonesia’s rupiah plunged 85 percent against the U.S. dollar, sinking to 16,525 on June 17, 1998, from 2,431 on July 4, 1997. In 1998, the economy contracted by 13 percent, and hundreds of In- donesian companies, including most major banks, became insolvent. Some, such as Asia Pulp & Paper Ltd., an Indone- sian-controlled, Singapore-incorporated company that in 2001 defaulted on $13.9 billion of debt, still haven’t settled with all of their creditors.
Sofjan Wanandi, 63, chairman of the Indonesian Employers’ Association, says he’ll be watching to see how the government awards contracts for the projects as a test of how Yudhoyono is tackling corruption. Indonesia ranks as the 10th-most-corrupt country in the world, according to Transparency Inter- national, a Berlin-based research group. Under Suharto, crony businessmen were favored for such lucrative deals, Wanandi says. “There has to be no monkey business this time,” he says. “There has to be a true tender. It’s a test of the president and cabinet and administration. No cronies. It’s In- donesia’s last chance.”
Disputes with Indonesian partners can result in profitable multinational companies’ being declared bankrupt by Indo- nesian judges. On Jan. 14, two former contractors filed a petition in Jakarta Commercial Court to force the Indonesian unit of Total SA, the world’s second-largest liquefied natural gas producer, into bankruptcy. The contractors, PT Sanggar Kaltim Jaya and PT Istana Karang Laut, claimed the Total unit owed them $7.2 million. Total, the biggest gas producer in Indonesia, denies the allegations and says the contractors submitted a bill higher than had been agreed upon, Total attorney Todung Mulya Lubis said at the time. The court rejected the petition on March 8, Judge Agus Subroto said. It was the first time the court had ruled in favor of foreign investors since 2001, Lubis said.
At Newmont’s Batu Hijau mine, on a jungle-swathed mountainside on Sumbawa, Phil Brumit, 44, general manager of operations for PT Newmont Nusa Tenggara, traces the company’s legal woes in Indonesia. For eight years, he says, New- mont operated a smaller gold mine at Minahasa in North Sulawesi province. Then, last year, when it was winding up operations there after having mined out all of the gold, a group of villagers filed a complaint claiming they were suffering health problems caused by pollution in nearby Buyat Bay.
Five company executives were jailed in September after police named them as suspects under a law that allows peo- ple under investigation to be detained. They are still barred from leaving Indo- nesia, Newmont spokesman Rubi Purnomo says. The week they were arrested, then U.S. ambassador Ralph Boyce met then President Megawati to express U.S. concern about the detainments. “We don’t think it’s necessary or appropriate,” he said. The U.S. embassy spokesman, M. Max Kwak, says, “That is a matter between an American corporation and the Indonesian government.” On March 9, Environment Minister Rachmat Witoelar told Bloomberg News he is seeking about $100 million for damage to the environment and the effect on villagers’ livelihoods despite a Jakarta court ruling in December that evidence gathered by police was invalid. Police have claimed dumping of waste from the mine in the bay had increased arsenic by 10 times the permitted level.
Newmont denies the charges, Brumit says. “He’s going to have to get control of his ministers,” Brumit says of Yudhoyono. “The old regime in the government still wants to do business the old way. He needs to get his new government to do business by the business norms of the rest of the world.”
Yudhoyono says he’s watching the case closely, though he can’t interfere with legal proceedings. “The decision must be logical, consistent with our own law and be accepted by the international community,” he says.
Yudhoyono says he also wants to prevent corrupt Indonesians from hiding abroad and wants to sign an extradition treaty with nearby Singapore, a city where many Indonesians like to keep their money. “The world will see there is no safe haven for corruptors,” he says. At a joint news conference with Yudhoyono in Singapore on Feb. 15, Prime Minister Lee Hsien Loong said that both sides were working toward an agreement.
Yudhoyono says he’s also making progress in the war on terrorism. The Indonesian government has captured the bombers responsible for the 2002 Bali at- tack. On March 3, an Indonesian court sentenced Muslim cleric Abu Bakar Bashir, 66, to two and a half years in jail. Bashir, who prosecutors said is the spiritual leader of Jemaah Islamiyah, a group linked to al-Qaeda, was found guilty of conspiring to take part in the Bali attack. Western govern- ments criticized the light sentence, and the U.S. and Australian governments still warn their citizens against nonessential travel to Indonesia.
Even if corruption and terrorism are tamed, investors in Indonesia still face a host of challenges. Exxon Mobil Corp., the world’s biggest oil company and the largest foreign investor in Aceh province, was forced to halt its production in 2002 at the Arun gas fields for four months when rebels attacked. In 2001, the Washington-based International Labor Rights Fund filed a human rights lawsuit against Exxon in U.S. District Court in Washing- ton on behalf of 11 villagers who said they had been tortured by Indonesian military units hired to provide security for its fields. “We have com- municated to the government of Indonesia our opposition to human rights abuse in any form by any organization or individual, as well as our concern over the violence in Aceh,” Houston-based Exxon Mobil spokeswoman Susan Reeves says.
Exxon Mobil, which has invested $17 billion in Aceh since 1968, largely escaped damage during the tsunami; only two of its 600 workers were killed, says Maman Budiman, a Jakarta- based vice president for the company.
Yudhoyono’s government has also restarted peace talks with Acehnese rebels. Negotiators on both sides of the talks have met twice this year in Helsinki, under the auspices of the Finnish government, to seek a resolution, the first talks since Mega- wati imposed martial law in Aceh in May 2003.
Even with its murky business environment, investors can make money in Indonesia, according to Goldman Sachs’s Courtis. “You don’t catch big fish in clear water,” he says. Al- though Indonesia is the world’s 55th poorest country, with percapita GDP of $872, consumer spending accounts for 70 percent of GDP, according to the World Bank.
When Indonesian companies with U.S. dollar debt defaulted on their loans in 1998, the Indonesian government seized 11 of the nation’s 12 largest banks, injected $40 billion worth of interest-bearing bonds and began selling off majority Source: Bloomberg stakes in some of them to foreign investors. San Francisco–based hedge fund firm Farallon Capital Management LLC was the first buyer, paying $568 million for 51 percent of PT Bank Central Asia, the country’s second-biggest lender by assets, in 2002. Since then, the bank’s share price has more than tripled to 3,350 rupiah on March 8 from Rp975. Last year, the bank’s net in- come rose 32 percent to Rp3.15 trillion ($336 million), as economic growth spurred companies and individuals to borrow more. “The best way to get investors to Indonesia is for people in New York and London to see the first people in the door are making money,” says Raymond Zage, Farallon’s Singapore-based managing director.
Singapore’s state-owned Temasek Holdings Pte in 2003 acquired Indonesia’s fifth- and sixth-biggest lenders, PT Bank Danamon and PT Bank Internasional Indonesia. Danamon’s share price has also more than tripled to Rp5,050, and BII’s almost doubled to Rp200 on March 8. Bank Danamon’s profit rose 58 percent to Rp2.41 trillion in 2004 from Rp1.53 trillion a year earlier. BII’s profit more than doubled to Rp821.6 billion from Rp309.1 billion in 2003.
Last year, London-based Standard Chartered Plc, a British bank that makes 75 percent of its profits in Asia, teamed up with automobile distributor PT Astra Inter- national to pay $305 million, or 3.18 times book value, for a controlling stake in PT Bank Permata, Indonesia’s seventh- largest lender, with assets of $3.2 billion. “We are perceived to have paid a high value for Permata, but this is what the values are today,” says Stewart Hall, 42, Jakarta-based chief executive officer for Indonesia at Standard Chartered. “When people look back in hindsight, it will be seen as a very good strategic move. This country is too big to fail.”
Even as it battles a $100 million lawsuit, Newmont Mining is also looking at unexpectedly large profits. General Manager Brumit says the company had budgeted to break even if cop- per prices were $1 a pound. On March 8, copper was trading at $1.49. Last year, the Batu Hijau mine, which has a life span of another 26 years, contributed $123 million to Newmont’s net income. Indonesia, Brumit says, is well placed to supply resource-hungry China. Now, he and his team are hoping an as-yet-unexplored deposit 60 kilometers away will prove to be even richer. “Indonesia is a resource-rich country, and we plan to stay here for a very long time,” Brumit says.
The next deposit may be easier to mine if Yudhoyono’s campaign against corruption succeeds. Eugene Galbraith, 52, the American-born president commissioner of Bank Central Asia, says he’s already seen results. He cites the disappear- ance late last year of a system that operated at the immigration line at Sukarno-Hatta International Airport in Jakarta. To avoid long lines, arriving business executives could go to an unmarked booth nicknamed jalan toll—the toll road— where a bribe to an immigration official ensured they were ushered through ahead of the pack. “There’s a subterranean message that’s got out,” says Galbraith, who has lived in Indonesia for 23 years.
It may take a change of generations before that message reaches the whole of Indonesian society, Economics Minister Bakrie says. “The new generation should believe that it can live and can prosper without corruption, but I do not put a lot of hope on the generation of my age,” he says. “Indonesia is a paternalistic society: If the leaders give a very good example, everybody will follow.” In Yudhoyono, Indonesia has someone striving to set high standards. Investors can only hope that the nation lives up to them.