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Trials and travails of Indonesia's richest man JAKARTA - Publicity-shy paper and plantation magnate Sukanto Tanoto is in Indonesia's national headlines after topping two high-profile lists. Forbes Asia last month listed the 56-year-old tycoon as the richest individual in Indonesia, with assets worth about US$2.8 billion (Rp25.2 trillion). In June, the self-made ethnic-Chinese tycoon also topped a list of state-owned Bank Mandiri's six biggest debtors.

Although Vice President Jusuf Kalla and senior cabinet minister Aburizal Bakrie, both ethnic-Malay Indonesians, known locally as pribumi, also featured prominently on Forbes' wealth list, media attention has focused on Tanoto. The businessman has recently been linked to a revived financial-fraud investigation, although no formal charges have yet been filed against the tycoon.

After a joint decision by the national police chief and the attorney general, a corruption investigation has after five years in abeyance been restarted involving Unibank, a financial institution once owned by Tanoto. Corruption allegations first surfaced against Tanoto in September 2000 when a central-bank investigation into Unibank discovered discrepancies with the bank's outstanding debt, which was in the form of an export draft worth $230 million, or about Rp2.3 trillion.

The revived charges come as President Susilo Bambang Yudhoyono heats up his "war on corruption", which includes vigorous investigations into bad loans parked at state banks. Some international observers have insinuated that the anti-graft campaign is disproportionately targeting ethnic-Chinese businessmen over indigenous Indonesians.

Singapore's founding father and Minister Mentor Lee Kuan Yew last month accused Indonesia of just that, discriminating against its ethnic-Chinese minority. "Our neighbors [Indonesia and Malaysia] both have problems with their Chinese. They are successful. They are hard-working and, therefore, they are systematically marginalized, ", the elder statesman said.

Many of Indonesia's ethnic-Chinese business leaders fled to majority-Chinese Singapore after killings, rapes and looting of their businesses in Indonesia followed strongman Suharto's May 1998 downfall. The local media estimate that they parked billions of dollars in Singaporean banks, and some have declined to reinvest their funds in Indonesia. Others, accused of corruption and pilferage, fled to Singapore to escape prosecution, according to the Attorney General's Office.

Fairly or not, Tanoto, son of a migrant shopkeeper and an Indonesian citizen, has often been viewed as part of that diaspora to Singapore. His Asia Pacific Resources International Holdings Ltd (APRIL) is managed from Singapore and is one of the world's leading pulp-and-paper companies, with production operations in both Indonesia and China.

APRIL is the flagship of Tanoto's Raja Garuda Mas, or RGM International Forestry Group, which is likewise based in Singapore. The global company has assets in excess of $5 billion and has established a corporate presence in Singapore, Indonesia, mainland China, Hong Kong, the Philippines, Finland and Brazil. One of its subsidiaries, PT Asianagro Agung Jaya, is one of the biggest producers of crude palm oil in Indonesia.

With rubber and cocoa estates and more than 200,000 hectares of oil-palm plantations, AAJ is now aggressively investing in alternative energy, including plans for a $38 million bio-diesel factory in Riau designed to produce 100%-pure bio-diesel, which can be used as automobile fuel without being mixed with petroleum-based diesel fuel. The planned investment is notably in line with a new government policy to promote the production of more biofuels.

Wealthy minority

Although it accounts for only 3% or 4% of Indonesia's 238 million population, the mostly urban-based ethnic-Chinese community dominates retail business and controls many of the country's major industrial conglomerates. Upon achieving independence, Indonesia's ruling pribumi military leaders, including Suharto, preferred to outsource development of the country's natural resources to ethnic-Chinese businessmen.

Through that patronage system, Tanoto developed and has maintained strong political connections with the country's ruling pribumi elite, including inside the current administration. And several of his business interests overlapped with Indonesia's largest conglomerate, the Salim Group, once closely and corruptly linked to the ruling Suharto family.

When Tanoto established RGM in 1974 as a humble plywood manufacturer, Suharto notably presided over the company's opening ceremony. Yet to date there is no evidence that Tanoto, who has consistently denied receiving any special privileges from the former strongman, secured any government-tendered concessions or contracts through corrupt means.

To the contrary, foreign investors at the time often viewed his business empire as more market-oriented than most other, patronage-driven Indonesian conglomerates. In a heady era when the World Bank famously praised Indonesia as a "miracle" economy, Tanoto listed APRIL on the New York Stock Exchange in 1994 to generate equity capital and facilitate bank loans.

Still, Tanoto's enterprises were often a source of controversy. One of the most notorious cases involved his original pulp and rayon mill, PT Indorayon Inti Rayon, which was highly criticized by the local community and environmentalists for its lax pollution controls. The plant was forced to close in 1998 after violent protests by local residents angered about alleged pollution of nearby Lake Toba - Southeast Asia's largest lake and Sumatra's biggest tourist attraction. The company was later investigated for illegal logging operations - though those charges were never substantiated.

Deep in debt

As with many big conglomerates during Indonesia's era of rapid economic growth, Tanoto established a bank to finance and expand his multibillion- dollar businesses. In late 1987 he acquired United City Bank and thereafter changed the financial institution to Unibank.

A decade later, what had been a small private bank was a major publicly listed company with total assets of Rp1.9 trillion and chaired by respected economist Irzan Tanjung. However, the 1997-98 Asian financial crisis hit Tanoto's businesses hard and sent his bank's balance sheet deep into the red. In May 1998, Bank Indonesia, the country's central bank, revealed that Unibank had violated a legal limit that restricts banks from lending more than 20% of their total assets to their own affiliated companies.

It was later revealed that some 51% of Unibank's total assets were tied up in loans to companies linked directly or indirectly to Tanoto. By October 2000, Unibank had a capital-adequacy ratio of negative-221. 43%, and its capital was Rp2.41 trillion in the red. On August 21, 2001, two months before its assets were legally frozen by government regulators, 73% of Unibank shares, or 2.47 billion shares valued at Rp61.8 billion, were sold in a shadowy transaction on the Jakarta Stock Exchange.

Tanoto's securities house, PT Unisecurindo Abadi, was the most active trader that day, and Unibank notified regulators about the change in ownership only days before its state-ordered closure. That raised eyebrows with some stock-market analysts, who believed the move was engineered to protect Tanoto from his obligations as the controlling shareholder.

Yet under Indonesia's capital market law, the obligation to report to the regulatory Capital Market Supervisory Agency (Bapepam) applies only to those who own more than 5% shares of an issuer. The bank had Rp4.4 trillion in assets when it was shuttered, and the government later imposed a travel ban on Tanoto, his wife, and Unibank's directors and commissioners.

Now, Tanoto is apparently being linked to a corruption scandal over alleged improper lending activities at the government's biggest financial institution, Bank Mandiri. The country's largest lender began operations in August 1999, formed from the merger of four state banks devastated by the 1997 financial crisis. Mandiri is 68% owned by the government, and its role in the purchase of distressed assets from companies controlled by businessmen linked to former president Suharto has come under new scrutiny.

Mandiri Bank's former president director, vice president and corporate banking director were all tried over an $18.5 million lending scandal but were exonerated from all charges in South Jakarta District Court in February this year. Together with state-owned Bank BNI, the country's second-largest, Bank Mandiri accounts for the bulk of the Rp27 trillion of outstanding non-performing loans in Indonesia's banking industry, which represent about half of the total assets in the banking system. Bank Mandiri's NPLs stand currently at a whopping 26.6%.

Bank Mandiri's chief executive officer, Agus Martowadojo, has said, "If only five or six of these major debts were settled, Mandiri's NPL level would return to normal." President Yudhoyono launched a probe into Mandiri Bank in early 2005, which has brought Tantono's accounts with the state financial institution under the regulatory microscope. APRIL had borrowed a total of $1 billion from a consortium of Mandiri, BNI, and Panin, Niaga, and Danamon banks to finance the development of its integrated paper-manufacturing plant known as Riau Complex.

Though the company benefited from the hugely depreciated local currency - because its input costs were mainly procured in local currency and revenues received in US dollars - RGM managers say APRIL incurred an additional $500 million in accumulated debt because some lenders insisted their credits be converted from rupiah to dollars at depreciated market spot rates.

By 2000, when APRIL's eventual debt workout was concluded through a state-run debt-restructuring facility, the company's debts had swelled to about $1.5 billion. Debt-related cash flow problems were later compounded by the collapse in confidence and devaluation of paper and plantation assets across the region after the corporate bond default in 2001 of its rival Asia Pulp and Paper (APP).

APP's aggressive expansion into China had led to overcapacity and a mountain of unwanted pulp, and APRIL requested that lenders amend its cash-flow projections to reflect the collapse in global pulp prices, which fell about 50% in a few months between 2000 and 2001. Bankers countered by accusing APRIL of using low pulp prices as an excuse to wriggle out of their debts.

They also charged that APRIL, despite its alleged capital crunch, was expanding its pulp production lines and aiming to add another paper mill. APRIL still owes its biggest creditor, Mandiri Bank, Rp5.3 trillion, but repayments to the state-owned bank and other financial institutions are reportedly being made in line with their original agreement, according to company executives.

The political winds are blowing against big corporate debtors, however. State Minister for State Enterprises Sugiharto complains that Mandiri has given too much tolerance to debtors. Now delisted from the Jakarta Stock Exchange, APRIL does not publicly publish its profit figures, but Mandiri has been pressing for almost two years for an increase in repayments from $61.2 million to $120 million per year, reasoning that the global price of paper and pulp has jumped from about $400 per ton in 2002 to some $700 today. Martowardojo justifies such demands through a revised government regulation that grants authority to state-owned banks to take firmer measures against bad debtors. "Basically, they'll not escape the long arm of the law," he said recently.

The China connection

The Forbes revelations that Tanoto is worth more than $2.8 billion and still one of the country's largest corporate debtors has clearly irked certain powerful elements of the political establishment.

Yet there are few, if any, indications that Yudhoyono, who is vigorously trying to lure new foreign investment into the country, wishes to alienate unnecessarily Indonesia's ethnic-Chinese business community, which, despite shipping billions of dollars' worth of assets to Singapore, still dominates the local economy. And that same community is playing an increasingly important role in strengthening and expanding trade and investment ties with China.

For instance, Tanoto's RGM plans to invest up to $6 billion in China by 2010, funding a series of major power-project investments that include a gas-fired combined-cycle gas-turbine power plant in the Chinese coastal city of Xiamen. Announced in August 2005, the investment was widely viewed as a confidence-building measure toward improving Indonesia-China diplomatic and economic ties under Yudhoyono's administration.

Those ties came under strain after the government's perceived in Beijing as a tepid response to the 1998 riots targeting Indonesia's ethnic-Chinese community. Yudhoyono has moved aggressively to rebuild that lost trust and has, over the past two years, secured pledges of billions of dollars' worth of new Chinese investment into Indonesia. Significantly, Beijing is also playing a behind-the-scenes brokering role between ethnic-Chinese Indonesian businessmen and Yudhoyono's government.

In a closed-door meeting last year in Beijing between Vice President Kalla and several top Chinese-Indonesian businessmen, they agreed gradually to repatriate $1 billion parked overseas in the wake of the 1997-98 financial crisis, according to local media reports. Among the Chinese-Indonesian tycoons in attendance at the meeting were Sofjan Wanandi, Tomy Winata, Pradjogo Pangestu, Anthony Salim and Tanoto.

According to Chinese-Indonesian businessmen present at the meeting, they demanded that the government immediately raise fuel prices to reduce the massive cost of the fuel subsidy and create a more stable and sustainable economic climate. In return, they pledged to invest more in Indonesia if there was a clear indication that the government would not impose new subsidies, the cost of which they would disproportionately have to shoulder. One month later, Yudhoyono, in his most far-reaching economic decision since his election a year earlier, slashed fuel-price subsidies.

That clearly indicates that the likes of Tanoto still have a large measure of political clout inside the Yudhoyono administration. Restoring confidence in the political and business environment would arguably go a long way toward encouraging new investment flows from Indonesia's ethnic-Chinese community. As such it seems just as likely that the president's anti-graft campaign will act to absolve rather than prosecute many embattled tycoons, including perhaps Tanoto.

RGM president Ibrahim Hasan told Asia Times Online on Tuesday that a new repayment deal had already been negotiated with Bank Mandiri, which will be announced in the near future. As for the corruption allegations, they remained tight-lipped on the grounds that they had "no official information" on the claims. It seems that Tanoto could stay on top of both the Forbes and state debtors lists for a long time to come.

Posted in General @ 15 October 2006 by Jeroen · 'Blog' RSS feed · permalink

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