This WSJ story of 2004 discloses a corrupt deal and a corrupt aftermath. Two
US ex-Secretaries of State, Kissinger and Warren Christopher, worked on saving
the corrupt deal for the corrupt investors.
This is six years old but never got connected by MSM, or anyone else besides
the WSJ to "Why They Hate us".
The search function on the WSJ reaches back only 2 years now but I have the
full article.
Gene Coyle
February 11, 2004
Washington's Tilt to Business
Stirs a Backlash in Indonesia
Defense of Suharto-Era Deals
Shows How Interest Groups
Can Sway Foreign Policy
By PETER WALDMAN
Staff Reporter of THE WALL STREET JOURNAL
JAKARTA, Indonesia -- 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%
of Indonesians held a favorable view of the U.S., according to the Pew Research
Center. In a poll last year, the figure was just 15%. 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."
< snip >
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.
Expensive Energy
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% 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% 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.
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
The Asian Development Bank in Manila refused to lend to the project because of
the Suharto-clan connection. But the U.S. government's 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.
Suit Dropped
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 attaché 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.
Lost Momentum
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."
Write to Peter Waldman at [email protected]
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
