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  May 29, 2001  

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Asian Crisis

Indonesia's Chandra Asri: A case study
By Bill Guerin

JAKARTA - Although rarely spotlighted outside Indonesia, the saga of Chandra Asri is at the core of deliberations on the consequences of the Asian financial crisis and the rampant cronyism that preceded it in Indonesia. Unfortunately for the Indonesian taxpayer, political favoritism may cost them dearly yet again, and the sorry tale does not bode well for Ibra (the Indonesian Bank Restructuring Agency) in its efforts to bring major debtors properly to account.

The giant forest of half-rusting metal at Anyer, 80 miles from Jakarta, is the heartland of Indonesia's main petrochemical industry. Here, overlooking the grumbling volcano Mount Krakatau, is Chandra Asri, the first and only olefin complex in Indonesia. Controversial from the outset, the US$1.5 billion megaproject, awarded through the tried and tested "KKN" (collusion, corruption and nepotism) patronage of the "New Order" era, swallowed up vast amounts of money, suffered extraordinarily unfortunate timing at each phase in its history, and yet today remains as much of a political hot potato as it did at the start.

"Awarded" in 1990 to Bambang Trihatmodjo, Suharto's eldest son, the ethylene and polypropylene started to flow in 1995. Bambang's new $1.2 billion stranglehold on a strategic industry was set up as a 75:25 joint venture, with Marubeni Corp holding the lion's share of the Japanese 25 percent stake and the Barito Pacific Group heading the Indonesian investors. Those were heady times, with Indonesia's potential for petrochemical opportunities exciting big names from all over the globe. Forecasts then were for an ethylene capacity of 1.5 billion pounds per year.

In 1991, the Indonesian government halted the project for two years following loud "noises" from the World Bank about Indonesia's foreign debt exposure. The Indonesians then cannily set up a "shell" overseas corporation in Hong Kong and channeled funds through it, so the Hong Kong entity became the main sponsor of the project as a "100 percent foreign-funded" investment. But the halt took its toll - the construction was funded mainly through yen loans and the freeze coincided with a historically high yen. Not only that, the plastics finally came on stream at a time of depressed petrochemical prices. The company estimated it lost $500 million, including currency fluctuations, interest and lost revenue.

A decade later, the issue is now of urgent national importance with Chandra Asri likely to run out of cash and be forced to halt production by the end of June if the divvying up of its massive $730 million debt is not resolved. The project's revolving credit of $30 million from Bank Internasional Indonesia has dried up and the Government Bank Mandiri insists the restructuring deal is finalized before it will give credit. Worse still, polypropylene producer PT Tri Polyta Indonesia, just across the road from the Chandra Asri plant, has not paid a bean for its deliveries since December, running up debts of $40 million. This is ostensibly over the price charged for the polypropylene, but the case smacks of a money merry-go-round as both companies were owned by the same shareholders, led by indebted tycoon Prajogo Pangestu, who controls the forestry Barito Group.

Chandra Asri needs cash to buy naphtha, the raw material for olefin, which is still imported until the Indonesian dream comes true and state owned oil company Pertamina produces the stuff. Tri Polyta itself, listed on the stock markets in Jakarta and New York, is suffering from a downturn in the price of polypropylene, almost the only product it manufactures.

By 1997, when the Asian financial crisis smothered demand for the intermediate materials for plastics and polyester fibers it produces, Chandra Asri had accumulated debts of almost $2 billion, yet conversely, if the project had kicked off on time it would have captured the high margins made from historically high petrochemical prices, and Bambang would have been laughing all the way to the bank. In 1999, there was a flurry of excitement when Jakarta prematurely announced that British Petroleum Amoco would merge with Chandra Asri. BP Amoco would become a 50 percent shareholder, with the government owning 25 percent and the rest held by a Japanese consortium. Alas, they forgot just how serious a problem the outstanding debt of $830 million to Japanese and Indonesian banks was. BP disappeared from the limelight. The attraction for UK-based BP Amoco would have been to merge its local polyethylene venture, PT Petrokimia Nusantara Interindo, (PT Peni), with Chandra Asri, and give them a cheap, reliable source of ethylene feedstock for Peni, which already buys about 140,000 tons a year but needs more.

Later, by the time the new government had been appraised of this thorny issue, an Ibra team started lengthy negotiations with Marubeni. In the end, President Abdurrahm Wahid himself flew to Tokyo and signed an MoU in May last year approving an agreement that gave the Japanese trading company better treatment than Ibra itself would have. Wahid's involvement in the restructuring of the Marubeni debt deal was seen as little different from the political favoritism that gave birth to the project in the first place. An Asian Wall Street Journal article charged that the deal was the result of political pressure on Wahid (from Japan) and backroom political maneuvering. Economist Sri Mulyani Indrawati, however, hinted at why the deal was bad for Indonesia when saying bluntly, "I can't understand why a president who doesn't understand economics was given the authority to make a technical decision on such matters as the Chandra Asri case."

The Barito Group's Pangestu is among a group of tycoons singled out by Wahid as major contributors to the country's exports and thereby effectively immune from prosecution. These sweetheart debt workouts smack of political favoritism, if not worse, and cast a giant cloud over Ibra's efforts (and those of the attorney-general, for that matter) to bring debtors properly to account.

The Financial Sector Policy Committee (FSPC), a group of several senior economic ministers, including the finance minister, is chaired by Coordinating Minister for the Economy Rizal Ramli, and was formed in 1999 to provide bank and corporate debt restructuring guidelines, particularly for Ibra. But in the course of its development, the committee grabbed greater executive powers for itself and now has the final say on approval of any debt restructuring of more than Rp1 trillion ($100 million).

As the negotiations with Marubeni dragged on, the FSPC decided to take over the process, leaving Ibra nonplussed in the back seat. Now, after 19 months of negotiations, the FSPC finally decided last month on a debt-restructuring workout for Chandra Asri. Marubeni approved the FSPC's decision. The proposal is that Marubeni converts $100 million of its total $730 million in loans to Chandra Asri into a 20 percent equity stake in the company, and allows the loan repayment over 15 years at an interest rate of 1.5 percent over Libor. Marubeni also agreed to drop its status as the sole creditor of Chandra Asri, allowing Ibra to also become a creditor with an outstanding loan of $50 million. Wahid's Tokyo deal was for Libor plus 2.5 percent and a repayment period of 12 years.

Ibra would convert $375 million of the $425 million loans it took over from domestic banks into 31 percent ownership and leave the remaining $50 million as an outstanding loan to Chandra Asri. The man who started all this, Pangestu, would own the other 49 percent of the petrochemical company.

However, this is in no way a done deal. Ibra is fighting back.

Major multinationals went in with their eyes open to shotgun weddings with the Suharto clan, and although the foreign partners had to do all the work and take all the risk, they blatantly capitalized on the political access they had bought. While economists are right to say these practices boosted inflation, slowed growth, discouraged the development of a dynamic, competitive economy, and contributed to the 1997 economic collapse, the fact remains that major national assets were built. If the cost of servicing the debt were excluded, Chandra Asri today would be a profitable concern.

With a budget deficit in danger of ballooning skyward and a desperate need for Ibra to top up the state coffers, something has to give. Tokyo, as Indonesia's biggest creditor and bilateral lender, will continue to push Wahid. After all, the Japan Bank for International Cooperation, the biggest Chandra Asri creditor, is owed a whopping $430 million. The agency's success will be pivotal in resuscitating the economy, reviving the confidence of foreign investors and plugging the soaring budget deficit, but whatever happens, those paying the bills for Chandra Asri are the Indonesian people, not Bambang Trihatmodjo or Prajogo Pangestu. The Wahid administration cannot have its cake and eat it - it cannot succumb to political ploys like backing off the Texmaco style conglomerate prosecutions and still expect Ibra to have the teeth to bite deep and extract more value for the government and the country from such deals. If Japanese clout secures this deal, Ibra is effectively absorbing all the losses.

Suharto protected Chandra Asri with a special import tariff of 25 percent for chemical products. First former president B J Habibie and now Wahid have ensured Chandra Asrih will not face bankruptcy. The president should back off. Why should Indonesia be involved at the government-to-government level to save a Japanese corporation? As the International Monetary Fund's Indonesia representative, John Dodsworth, said after Wahid's Tokyo deal, the agreement (with Marubeni) highlights the need for more oversight of such major restructuring decisions. "We have some concerns about the quality of this restructuring," said Dodsworth. "What the Chandra Asri deal indicates is that the government has to pay great attention to the quality of restructuring deals," he said. "Perhaps some form of second opinion system needs to be put in place so that we have assurances that the taxpayers' interests are protected."

Spare some sympathy for Ibra too, which has never agreed to the deal. Eko Budianto, head of loan recovery at Ibra at the time, highlighted the danger: "Not only is it not fair, but it sets a precedent for others."

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