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Indonesia: U.S. Tilt To Business Stirs Backlash

by Peter WaldmanThe Wall Street Journal
February 11th, 2004

In January of 2000, Lawrence Summers, then U.S. Treasury secretary, visited Indonesia to meet its first democratically elected president and cheer its emergence from three decades of dictatorship and crony capitalism under President Suharto.

"The word must go out," Mr. Summers told a luncheon of business leaders, "that in a new Indonesia, no one is above the law." America would be a model for the emerging democracy, he said, and "the most important component of our bilateral support ... (is) the quality of the examples we are able to suggest."

On the same day, a Jakarta court dismissed a corruption lawsuit against a power project -- part-owned by U.S. companies and linked to Suharto relatives -- that had saddled Indonesia with high electricity costs. The American ambassador played a central role in getting the corruption case dropped.

Washington's discordant signals have left a bitter legacy here. A nation once robustly pro-American has become a bastion of anti-U.S. hostility. In 1999, 75 percent of Indonesians held a favorable view of the U.S., according to the Pew Research Center. In a poll last last year, the figure was just 15 percent. It's the worst anti-Americanism here in 25 years, says Sidney Jones of the International Crisis Group, a nonprofit group that monitors global hot spots.

This shift has multiple causes, including the war in Iraq. But among them is a widely held view here that in the aftermath of the Suharto dictatorship -- a time of crisis but also of promise -- the U.S. threw its weight behind its business interests to the detriment of Indonesians.

While anti-U.S. sentiment in the developing world is hardly new, its upsurge here is especially untimely. Facing one of its major challenges of the era -- terrorism rooted in militant Islam -- America now finds limited public support in the world's largest Muslim country.

The case illustrates a particular challenge the U.S. faces as a superpower with a democratic system. Its policies toward an overseas nation can at times be swayed by determined groups at home: defense interests, human-rights advocates or multinational corporations.

In Indonesia's case, "protecting the interests of major investors and creditors was at the center of the table in everything we did," says Edmund McWilliams, who was chief political counselor at the U.S. embassy in Jakarta from 1996 to 1999. "Concerns about stability made it to the margins. Concerns about human rights, democracy, corruption never made it onto the table at all."

After Mr. Suharto resigned amid the 1998 Asian economic crisis, U.S. officials poured into Indonesia to advocate a new era of democracy, transparency and rule of law. But at the same time, amid talk in Jakarta of canceling business deals that had enriched Suharto friends, American diplomats and legislators strove to protect the contracts.

Washington also pressed the Indonesian government to bail out private banks to restore liquidity. Most of the banks were owned by Suharto associates, who had withdrawn large amounts of money, much of which they didn't have to pay back.

"The moment Indonesians threw out Suharto, we told them they had to honor contracts that favored his cronies. People are asking, 'What kind of principle is that?' " says Joseph Stiglitz, a Nobel-laureate economist who became a critic of U.S.-led globalization after posts in the Clinton White House and at the World Bank. "We imposed Pax Americana," Mr. Stiglitz says, "yet it wasn't a pax that tried to create a fair global regime but one reflecting our own commercial interests."

Former Treasury Secretary Summers himself didn't intervene on the Paiton project's behalf, according to people familiar with the case. Mr. Summers, now president of Harvard University, says, "Our general approach at Treasury was to focus on broad national interests, rather than specific commercial interests, in our economic diplomacy."

No serious critics say Washington should shy from defending the interests of American companies. But in the case of Indonesia, the pendulum swung far in that direction.

At the same time as the U.S. was defending U.S. power-project contracts, the International Monetary Fund, working with the Clinton administration, was prescribing a program of economic austerity for Indonesia. Such medicine -- higher interest rates combined with lower government spending -- can bolster a nation's currency and restore public confidence. In Indonesia's case, however, it appears to have exacerbated what became a deep depression. Nearly half of the Indonesian population sank into poverty. The IMF later acknowledged mistakes in its prescription for Indonesia.

Indonesia's economy has since stabilized, but rates of poverty and unemployment remain higher than before the economic crisis. Many Indonesians blame the Washington-based IMF and its perceived hometown boss, the U.S. government. Their suspicion: That the Americans wanted to bolster the currency so Indonesian borrowers could afford to repay Western creditors.

How differently Indonesians view America today is evident in the disparate experiences of U.S. presidents on two visits nine years apart. When President Bush stopped for several hours in Indonesia during an Asian tour in October, he avoided its heavily Muslim capital and went to Bali, a mostly Hindu tourist island. In a 1994 presidential visit, three Indonesian babies born during the four-day trip were named for the American visitor, Bill Clinton.

On that visit, Mr. Clinton and his Commerce secretary, the late Ron Brown, announced $40 billion of agreements for new U.S. corporate investment in Indonesia. These are the deals that later became the focus of controversy.

Many were joint ventures to produce electricity for sale to Indonesia's state-owned utility, PLN. All but one were sealed without competitive bidding. One result: Electric power would cost PLN 30 percent more than the average cost in the rest of the world, according to an analysis by Deutsche Bank AG. In many cases, local partners who were relatives or friends of Mr. Suharto gained substantial financial stakes in the projects without putting up much or any money up front.

The first venture, called Paiton One, set the tone. It was led by the Mission Energy unit of California-based Edison International, with smaller roles for General Electric Co. and Japan's Mitsui & Co. The main local partner was a Suharto relative by marriage, Hashim Djojohadikusumo. A firm part-owned by him and by a Suharto daughter, Siti Hediati Prabowo, gained a 15 percent interest in the $2.6 billion project. Their shares were paid for by a $49.6 million loan from Mission Energy, GE and Mitsui, to be repaid by some of the future dividends on the shares.

When the price the venture would get for its power was being negotiated, Mr. Hashim persuaded Mr. Suharto to increase steeply what Indonesia was willing to pay, project documents show. The price went up to about 8.6 cents per kilowatt-hour, from 5.2 cents, for the first 12 years. Several PLN technocrats and outside advisers say they were shocked at the high price but powerless to oppose it.

The Asian Development Bank in Manila refused to lend to the project because of the Suharto-clan connection. But the U.S. government' Export-Import Bank and a sister U.S. agency, the Overseas Private Investment Corp., together provided $805 million of loans and political-risk guarantees.

Edison's Mission unit and the other Western companies say the contracts were legal and vetted by outside counsel, and that the Indonesians had top-notch financial advisers. They said at the time that the power price reflected extra construction demands and a risk premium for tackling Indonesia's first private power venture. A Mission official denied that Mr. Hashim's role had boosted the price the venture would get for its power. "We are not now nor ever have been aware of any corrupt payments or other activity in connection with the Paiton project," says Raymond Vickers, general counsel of Edison Mission Energy.

As for Mr. Hashim, he acknowledged at the time that he had spoken to Mr. Suharto often about the project but said aides to the former president advised him on price issues.

Local criticism of the deals was at first muffled by a thriving Indonesian economy and Mr. Suharto's authoritarian regime. But both began to falter after Indonesia was swept up, in late 1997 and 1998, by the financial crisis that began in Thailand and spread through Asia.

As Indonesia faced economic turmoil, officials in Washington debated what to do. Economists at the Treasury Department and the IMF favored an orthodox currency-bolstering program in which Indonesia would cut government spending, raise interest rates and restructure insolvent companies. State Department and World Bank officials warned that such measures risked scarcity and instability, but "Treasury and IMF got their way," at least in the critical first months, says Stuart Eisenstadt, then a U.S. undersecretary of state.

As a kind of silver lining to the crisis, many Indonesians saw an opportunity to scrap the costly power deals widely regarded in Indonesia as corrupt. A post-Suharto government sought to cancel or postpone them as unaffordable. Several Indonesian officials say they assumed that the IMF, which had prompted Jakarta to try to alter the deals, and the U.S. would help Indonesia mollify the foreign companies involved.

But in the U.S., corporate lobbyists went to work. They painted the idea of scrapping the deals not as a repudiation of Suharto-era corruption but as a dangerous blow to the sanctity of contracts. Six U.S. senators and some members of the House of Representatives then wrote to Indonesian officials and to the IMF on behalf of U.S. contractors.

Edison International sent former Secretary of State Warren Christopher, a member of its board, to Jakarta. He warned Indonesian officials their credibility would suffer if they broke the deals.

The U.S. embassy cabled back to Washington that Mr. Christopher was seeking a solution that would "maintain debt coverage and the sanctity of contract" and "focus on financial rather than legal issues," meaning the sides should seek a commercial settlement rather than battle in court.

Mr. Christopher referred questions about Paiton to Mr. Vickers, the Edison Mission general counsel. Mr. Vickers said Mr. Christopher sought a financial arrangement to permit the Paiton project to meet its debt obligations during Indonesia's financial crisis, while assuring future profits for the project's investors once the crisis was overcome.

The American embassy itself became a forceful advocate for U.S. companies. A stream of officials came through from the state and commerce departments, the Export-Import Bank and the Overseas Private Investment Corp., known as OPIC. Cables reveal debates about strategies for countering the Indonesians' complaints of corruption and nepotism.

J. Stapleton Roy, U.S. ambassador to Indonesia at the time, says, "There's a legitimate question how much pressure the U.S. should have put on Indonesia. But think of the implications of a U.S. government that leans heavily on one country over a contractual obligation and not on another. You need a firm, consistent policy." Shortly after retiring from the State Department in 2001, Mr. Roy joined Kissinger Associates, one of the firms that had lobbied for the U.S. multinationals. He says he never lobbied for Paiton after leaving the government.

Mr. Roy's successor as American ambassador to Jakarta, Robert Gelbard, warned Indonesian officials in 2000 that their country would be a "pariah" if it didn't honor the power contracts, says Alwi Shihab, who was Indonesia's foreign minister. On another occasion, Ambassador Gelbard told the Indonesian press the U.S. might seize Indonesian assets if Jakarta didn't reimburse OPIC for an insurance claim on one of the deals. He warned that such a move would cause "a dramatic deterioration of the rupiah," Indonesia's currency.

And in an unusual role for an ambassador, Mr. Gelbard personally negotiated with Indonesian state utility PLN to kill the corruption suit it had filed against the Paiton project, says PLN's president at the time, Kuntoro Mangkusubroto. The suit sought to invalidate the contract on the grounds that corruption and nepotism had made it unfair to Indonesia.

Indonesian government auditors accused the energy consortium of bribing Suharto-era officials to get the project launched and referred the case to Indonesia's attorney general. But the attorney general, Marzuki Darusman, says U.S. diplomats made clear to Indonesian officials they didn't want to hear about corruption. "If we'd had the openness and support of the Washington side that they were also concerned about foreign corrupt practices, then of course it would have encouraged us to pursue these cases," he says. "But we had to accept that the American companies were in a stronger position to impose a settlement."

Some Indonesians had hoped the U.S. Justice Department would investigate whether there had been violations of the U.S. Foreign Corrupt Practices Act. The law bars U.S. companies from paying foreign officials for business favors. It doesn't, however, explicitly prohibit helping officials' relatives, such as by making loans to them to buy a stake in a project. Louis Wells, a Harvard Business School professor who is writing a book about Indonesia's private power deals, says some U.S. companies exploited a "gaping hole" in the act by helping friends and relatives of officials rather than officials themselves.

After tense negotiations, says the Indonesian utility's Mr. Kuntoro, he and U.S. Ambassador Gelbard agreed the utility would drop its corruption suit against the power project if the project dropped arbitration claims it had filed in Sweden.

Mr. Gelbard, now a business consultant in Washington, acknowledges he acted as a strong advocate for U.S. companies and as a "go between" in negotiations with the Indonesian utility. But he says he was an equally strong advocate of judicial reform and other measures to combat corruption and improve Indonesia's investment climate. Mr. Gelbard says he repeatedly asked Indonesian officials "for any shred of proof they had" that U.S. companies were involved in corruption, "but they never gave us a single thing." He says officials "made no effort that we saw to clean house."

On the day the corruption suit was dismissed, then-Treasury Secretary Summers told the luncheon of Indonesian business leaders: "We are absolutely committed to the enforcement of the U.S. Foreign Corrupt Practices Act. This is something Ambassador Gelbard has taken a particularly strong interest in."

Abdurrahman Wahid, who headed Indonesia's first democratic government after Mr. Suharto's fall, contends, without offering details, that "the private power projects were full of corruption. But since American companies benefited, the U.S. looked the other way."

This view comes as no surprise to Mr. McWilliams, the U.S. political attache in Jakarta in the mid-to-late 1990s. He says he had attended meetings at the embassy where American trade officials briefed U.S. businessmen on how to avoid violating federal anticorruption law by using Indonesian partners to handle ties with local officials. "I was slack-jawed," Mr. McWilliams says.

The power imbroglio helped sour much of Indonesia's post-Suharto elite on the U.S. "It was as if the U.S. condoned corruption, but we were in no position to quarrel with them," says Mr. Shihab, the former foreign minister. "A lot of momentum for reform was lost."

Indonesia is still living with the legacy of the mismanaged transition from the Suharto regime. One of every three dollars the country earns from exports goes to service debt, unemployment is in double digits, and corruption continues.

After five years of anemic recovery, Indonesia this summer ended its IMF program and announced that 26 of 27 Suharto-era power contracts had been canceled or restructured. For Paiton One, Indonesia negotiated a lower electricity rate, but it also agreed to buy more power each year and delay the time when the plant transfers to Indonesian hands.

Yet the squabbling continues. The last project -- led by Caithness Energy L.L.C. and a unit of Florida Power & Light Co. unit, and involving a son-in-law of a Suharto official -- won a $241 million breach-of-contract award against Indonesia from Swiss arbitrators three years ago. Indonesia appealed in a U.S. court. A judge has frozen $500 million of Indonesian oil proceeds in New York banks.

"Clearly, the private companies did put a lot of pressure on, and there was an effort to try to protect them as much as we could," says Mr. Eisenstadt, the former U.S. undersecretary of state. "I think everyone should have taken a haircut. That probably would have sent a better message."


Inside the Deal

Details of the controversial Paiton One generating station.

* Coal-fired, 1,230-megawatt plant in East Java, Indonesia

* Deal signed: 1994; opened 1999

* Investors: Edison Mission Energy, Mitsui & Co. of Japan, General Electric Capital Corp., PT Batu Hitam Perkasa of Indonesia (part-owned by relatives of former President Suharto)

* Coal supply: PT Adaro Indonesia (part-owned by relatives of Suharto and brother of a top Indonesian minister.)

* Cost: $2.6 billion

* Financing: $1.8 billion of private loans; $800 million of loans and political-risk guarantees from U.S. agencies


Wielding Influence

Major groups that lobby on issues of international business.

Group: Business Roundtable

Membership (number of companies): 150

Budget (in millions): $3.0(1)

Recent Issues Addressed: Free-trade negotiations with Australia, WTO "Doha Round" of trade talks

Group: Emergency Committee for American Trade

Membership (number of companies): About 45

Budget (in millions): 0.8

Recent Issues Addressed: Standards used in agreements involving U.S. investments overseas; implementation of free trade with Central America

Group: National Foreign Trade Council

Membership (number of companies): 300

Budget (in millions): 3.5

Recent Issues Addressed: Free-trade agreements between U.S. and Morocco, U.S. and Bahrain and U.S. and the South African Customs Union

Group: U.S. Council for International Business

Membership (number of companies): 300-plus

Budget (in millions): 8.0

Recent Issues Addressed: Human-rights responsibilities of U.S. multinational companies

Group: National Association of Manufacturers

Membership (number of companies): 14,000

Budget (in millions): 0.9(1)

Recent Issues Addressed: Value of dollar; WTO industrial tariffs, Free Trade Area of the Americas, China trade, bilateral trade agreements

(1) For international trade issues

Source: the organizations





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