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November 30, 2000

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AsiaweekTimeAsia NowAsiaweek story

DECEMBER 24, 1999 VOL. 25 NO. 51

Past vs. Future
The Texmaco scandal is a test case - one in which Indonesian business confronts Suharto's legacy

Sinivasan believes he can steer Texmaco out of its current troubles Yvan Cohen for Asiaweek
There is a term in Indonesian business parlance: 'katebelece'. Derived from Dutch, it literally means "cat's bell." Figuratively, though, it refers to a note or letter from a powerful figure cadging a favor or requesting an action. It is the kind of thing Indonesian businessmen would take to a bank to get credit or to a state company to win a contract. For a long time, this was part of how business was done in Indonesia. But it turned out to be a very costly part, as revealed by the latest business scandal to hit the country.

On Nov. 29, Minister of State Enterprises and Investment Laksamana Sukardi testified in parliament that former president Suharto and industrial giant Texmaco Group had engaged in "high-level collusion and conspiracy" to have a state bank extend credit to the conglomerate. According to Laksamana, Texmaco's alleged misdeeds date back to late 1997, when the government approved a huge export-assistance program aimed at increasing Indonesia's non-oil-and-gas export earnings. Under the scheme, Bank Indonesia, the central bank, would hand out pre-shipment facilities - credit that could be used to buy materials and arrange financing for exports - instead of the usual post-shipment bridging loans. The catch was that only 50% of the shipment's value would be provided.

Texmaco was one of the companies that participated in the program. According to news reports, in November 1997 it received $276 million from Bank Negara Indonesia (BNI), the nation's largest bank and one of several state banks charged with disbursing loans under the program. The following month, threatened with default on some of its foreign debt, Texmaco again requested assistance: $100 million, to be deposited in BNI's Cayman Islands' branch. Then on Dec. 29, Texmaco chairman Marimutu Sinivasan asked Suharto for a 100% pre-shipment facility. Suharto released a note of approval.

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This practice of asking for - and getting - more funds continued into 1998, often with Suharto's help. In February, Sinivasan again wrote to the leader asking for $200 million and 450 billion rupiah (about $62 million). Again, Suharto's response was a note approving the loan. In the end, BNI's total exposure to Texmaco came to around $754 million and 1.9 trillion rupiah ($260 million) - more than $1 billion in all, which far exceeds BNI's legal lending limit (Indonesian banks are not allowed to lend more than 20% of their capital to a single conglomerate). In Texmaco's case, its debts to various state banks and IBRA (the Indonesian Bank Restructuring Agency, which has taken over a number of ailing financial institutions) total some $2.2 billion.

Another sticking point is where the money ended up. The credit was ostensibly for financing exports, but Sinivasan recently told Tempo magazine that some $300 million had been used for short-term obligations. The rest went into the expansion of his factories. Thus, a day after Laksamana's testimony in parliament, attorney-general Marzuki Darusman named Sinivasan as a suspect in misuse of credit. Darusman is also seeking to investigate Suharto himself for his role in the affair. Sinivasan's and Suharto's lawyers insist that their clients have done nothing wrong.

It is not hard to see why Suharto's government would have been eager to help Texmaco out. With interests in everything from textiles to trucks to machinery, Texmaco is one of Indonesia's biggest single exporters. It employs 150,000 people and has five factories across Java. Three of its companies are listed on the Jakarta Stock Exchange, including the flagship, Polysindo Eka Perkasa, which is the world's leading polyester producer and the 12th-largest company in Indonesia.

But there is more to Texmaco's favored position than its size and economic importance. There is its founder, Sinivasan, who built up the conglomerate from a sarong factory in Pekalongan, Central Java, in 1963. His industrialist ambitions, coupled with his skill in making the right connections, enabled him to expand aggressively into machinery, machine tools and polyester in the 1980s and into automobiles in the '90s. Ever a master lobbyist, he grew chummy with Suharto, and Texmaco became one of 18 companies that were granted tax holidays. Texmaco was charged with producing a "national truck," along the same lines as the ill-fated "national car" project of Suharto's youngest son Hutomo Mandala Putra.

Sinivasan kept good connections in B.J. Habibie's Indonesia as well. In June 1998, Habibie appointed him one of his seven special business envoys, Sinivasan's portfolio being South Asia. His younger brother, Marimutu Manimaren, was vice treasurer of the Golkar party and a member of the "Habibie Success Team" that was tasked with raising funds and maneuvering for Habibie's re-election. Sinivasan was also in the military's good graces: the armed forces ordered 100 of his trucks (though later they trimmed the order down to 80 because of cost-cutting). There is even unconfirmed talk that he made contributions to Megawati Sukarnoputri's Indonesian Democratic Party of Struggle (PDI-P), the big winner in June's elections.

His luck could be running out under the current administration. President Abdurrahman Wahid has said that the Texmaco case must be settled under due process of the law. In the eyes of reform-minded officials - as represented by Laksamana, Darusman and Kwik Kian Gie, coordinating minister for the economy, finance and industry - as well as of many other Indonesians, Texmaco is a test case. It symbolizes the struggle between the country's future and its past - between economic sense, which demands that business and finance adhere to strict professional standards, and economic nationalism, which states that those standards can be bent for the country's interests. Dealing firmly with Texmaco would represent a step forward, away from the corrupt legacy of Suharto's rule.

But the process won't be easy. For all the reformist leanings of Wahid's new Indonesia, Sinivasan is not without his supporters. Many MPs and local economists have jumped to his defense, with one PDI-P legislator calling Texmaco a "national asset." Laksamana, Darusman and Kwik have all felt the heat from MPs while testifying in parliament. One lawmaker demanded that Laksamana resign for putting a spanner in Texmaco's restructuring. (Before the scandal broke, Polysindo had been close to signing an agreement to reschedule $700 million worth of bonds - but the deal was postponed in the wake of the revelations.) There have been questions in the press as to whether Texmaco is a political target, while Sinivasan has suggested that foreigners just want to take over Indonesian companies this way.

Perhaps a bigger obstacle to facing up to the Suhartoist past is that Texmaco is merely the tip of the iceberg. Kwik told parliament that there were 12 other cases in which the pre-shipment facilities were evidently abused. Pointing out that total corporate bad loans could reach some $85 billion, or three times the state budget, Kwik warned that if all these cases were prosecuted, most of the country's business elite would be in jail. "This is a dilemma the government is facing," he said.

So what happens to Texmaco now? In characteristic businessman's bluster, Sinivasan promises to clean everything up. His proposed solutions range from listing some of Texmaco's subsidiaries on Nasdaq to swapping some of the debt for equity in his company. (The latter idea was recently accepted by IBRA and the state banks, despite opposition from Laksamana and, initially, the Finance Ministry.) Sinivasan also claims that projected export earnings will be more than enough to cover the debts.

Yet Texmaco's problems may be too big even for Sinivasan to prevail over. Recently, the group's bank, Bank Putera Multikarsa, suffered a run of about $81 million in two days, leading the central bank to suspend its clearing activities. On Dec. 11, IBRA formally took over Bank Putera's management.

However the Texmaco tale unravels, one thing is certain: the big loser is the Indonesian public, who will be the one ultimately holding the bill. Kwik has said that this scandal is not the biggest. And it is sure not to be the last, as Indonesia continues to pay the price for its past way of doing business.

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