III. Baseline Results: 1994/1995

At the end of 1995, our study found that Indonesia had 585 timber concessions covering 62 million hectares. These figures fit fairly closely with statistics published that year by the Department of Forestry which counted 565 concessions totaling 60 million hectares (Departemen Kehutanan, Sekretariat Jenderal dan Biro Perencanaan 1996). In this section, we look at how concession holdings were divided amongst Indonesia's various timber groups. This section also looks at how timber concessions in each group correlate with the licensed plywood mill and sawmill capacities of each group, and each group's ability to supply its own timber. Finally, we look at the implications of the above for the supply and demand of timber in the country.

Indonesia's timber concessions were divided amongst 64 timber groups, not including 98 concessions that were not a part of any timber group. The following table ranks the concession holdings of these timber groups from largest to smallest. The "Balance" column shows the net raw material deficit or surplus of each timber group, assuming that its sawmills and plymills were running at their full licensed capacity.

Table 3.1 Ranking of timber groups by HPH holdings, 1994/1995

In 1995, the five largest private groups holding concessions were Barito Pacific, Djajanti, Alas Kusuma, Kayu Lapis Indonesia (KLI), and the Bob Hasan group. Together, these five timber companies controlled 18 million hectares, or 30 percent of Indonesia's total timber concession holdings of 62 million hectares. Inhutani I is a state-owned timber company, and is therefore not included in the following discussion of private timber companies.

What accounted for the concentrated timber concession holdings of Indonesia's top five private timber groups? The answer to this question depends on whether we are talking about those groups that are more or less political. The more-political companies are the Barito Pacific and Bob Hasan groups. These are well-diversified financial empires whose purposes were, and to some extent still are, to enrich the former President and his family, and to provide them with funds to dispense for the purposes of political patronage. The Alas Kusuma and KLI groups are more straightforward timber companies, with little involvement in non-timber financial activities and few or no ties to the first family. The Djajanti group may be thought of as an intermediate case. We turn now to each of these five companies, starting with the more political ones.

Barito Pacific is the largest holder of HPHs in Indonesia. The reason the conglomerate was granted so many concessions was due, in part, to its willingness to provide shares and directorships in those concessions to members of the former first family.

Table 3.2 Barito Pacific timber concessions in which former first family members are either board members or shareholders

Note: Sangkulirang Bakti’s operating license was withdrawn by the Department of Forestry because the concession had little timber left in it. It is now in the hands of Inhutani I.

However, it is in the context of allowing the Barito Pacific conglomerate to possess the financial wherewithal to provide business services to the former first family that the conglomerate's access to 68 timber concessions should be understood. Detailing Barito's ties to the former first family - on this and the next page - is an important undertaking because it demonstrates the extent to which rent from Indonesia's forests was informally captured to meet the financial and personal objectives of the Suharto clan, rather than formally captured by the government.

The relationship between Barito Pacific and the former President got off the ground in the 1980's when Barito bought the rights to 35 timber concessions belonging to other timber companies (PDBI 158-159). Barito could not have secured the bank financing to purchase so many timber concessions had the former President not exerted influence upon a number of state banks. Barito has taken loans from three of Indonesia's six state-owned banks, Bank Bumi Daya, Bapindo, and Bank Dagang Negara. Accounts differ as to whether Barito initially received state bank financing due to its strong balance sheet or its political connections but there is little doubt that the company's political ties became more important over time, as in the case of the securing of a US$45 million subsidy from state-owned forestry corporation Inhutani II, and a US$550 million uncollateralized loan from state-owned Bank Bumi Daya, both in 1991 at the insistence of Suharto (Schwarz 1994: 141).

Barito's loans from Indonesia's state banks are now so large that, according to a document reportedly leaked in 1994 by a joint Bank Indonesia-Ministry of Finance committee, Barito Pacific was the country's single largest debtor to state banks, owing them Rp3.8 trillion at that time (Brown 1998: 5-6). A more recent press report suggests that Barito has now slipped to the number three position in the queue of debtors to state banks, behind two of the former President's sons (Jakarta Post 1999j). The author's own recent analysis of Indonesian Bank Restructuring Agency (IBRA) data suggests Barito is the sixth-most indebted conglomerate to Indonesian state banks.

Besides money borrowed from banks, Barito's substantial concession holdings provided a continuous stream of revenues (Brown 1998: 8-9) that enabled it to pursue a broad range of business activities, mostly, it would seem, in partnership with the former President and his family.

To begin with, in 1991 Barito helped the former President achieve his desire to be both a player, and chief arbiter, in the world of Indonesian high finance. Barito provided around US$220 million to bail out Bank Duta, a bank owned by Nusamba, a holding company 80 percent controlled by the former President's three largest yayasans (charitable foundations). Another major timber conglomerate - the Salim group, Indonesia's sixteenth largest concession holder at the time - matched Barito's contribution million in the Bank Duta bailout (Schwarz 1994: 128; 141).

Barito also helped the former President to reign in the ambitions of the Astra group. During the 1970's Astra and Indonesia's biggest corporate giant, the Salim group, were the two most important Suharto family-linked conglomerates in Indonesia (see Robison 1986). While the Salim group has always remained close to the first family, Astra began to show increasing independence, a trend culminating in the decision of Astra's Bank Summa to pursue a retail banking venture with cooperative banks linked to Gus Dur's independent and secularist Nahdlatul Ulama movement. When both Astra and Bank Summa were threatened with bankruptcy - due to currency trading losses by Bank Summa - former President Suharto reportedly asked Barito Pacific to bail out Astra, with a view toward being able to re-assert control over the conglomerate, this time through Barito Pacific's Delta Mustika affiliate (Brown 1998: 10). The Salim group also contributed to the Astra bailout .

In addition to using the proceeds from its timber business to support the politico-corporate objectives of the former President, Barito has also used these funds to go into business with two of the former President's children. Barito's US$1.1 billion Tanjung Enim Lestari pulp plant has given shares to Suharto's daughter (and former Minister for Social Affairs) Siti Hardijanti Rukmana (a.k.a. Tutut) amounting to 15 percent (Brown 1998: 5). Tutut also owns 36 percent of Musi Hutan Persada, the industrial pulpwood plantation that will feed the pulp mill. Finally, Tutut and Prajogo have teamed up on a large sugar plantation in Sulawesi (Schwarz 1994: 141).

The owner of Barito Pacific, Prajogo Pangestu, also has substantial joint business holdings with the former President's son, Bambang Trihatmodjo. Prajogo owned 50 percent of the former Bank Andromeda, while Bambang owned 25 percent. The bank was shut down in part because - in violation of Indonesian banking laws - more than 20 percent of its loans went to its sister company, Chandra Asri, in which both Prajogo and Bambang hold shares. Chandra Asri is an olefins facility which "cracks" naptha, an oil by-product, into ethylene and propylene, the basic building blocks for plastic compounds. Chandra Asri holds the sole right to manufacture propylene in Indonesia, and is also protected by a 40 percent import tariff. The major buyer of Chandra Asri's output is another Barito-linked company, Tripolyta, in which Prajogo is a 37 percent shareholder. In what amounts to a sweetheart deal for Chandra Asri, Tripolyta is obligated to buy propolene from the company at 10 to 20 percent above the market price (Brown 1998: 11-12). Chandra Asri now occupies the number four position on the list of debtors to Indonesian banks.

Barito continues to move in an agile fashion between business and politics. A recent report says that of the Rp350 billion which the Golkar party spent in the June 1999 elections, nearly a quarter of that amount, or Rp80 billion, was a personal contribution from Barito's owner Prajogo Pangestu (Cohen 1999: 17). Pangestu is also alleged to have made a substantial transfer of funds to the personal bank account of former Attorney General Andi Ghalib, who before being asked to step down was investigating Pangestu for banking violations.

The report turns now to a discussion of Bob Hasan, the owner of the second of two political timber groups that dominate the ranking of national timber concession holdings. The reason Bob Hasan was granted so many concessions was due, in part, to his willingness to provide shares and directorships in those concessions to members of the former first family. Members and associated businesses of the former first family serve on the boards and control shares in the following Bob Hasan timber concessions.

Table 3.3 Timber concessions licensed to Bob Hasan group in which former first family members are either board members or shareholders

Again, in seeking to explain why Bob Hasan was given access to the fifth-largest private pool of timber concessions in the country, it is important not to overlook the fact that a steady stream of income has accrued to the Suharto family over the years from its directorships and shareholdings in those concessions. The Department of Forestry effectively acknowledged this when they announced the revocation of Alas Helau, one of the concessions in Table 3.3 (above), on the grounds that it had been controlled "jointly by former president Soeharto's children and their business associates and because they were allegedly granted through corruption, nepotism and collusion" (Jakarta Post 1999n).

However, it is equally if not more important to take note of the fact that Bob Hasan's concession holdings have given him the ongoing financial wherewithal to provide business services to the former first family outside the forest products sector. The main vehicle for their shared interests was Nusantara Ampera Bhakti (usually referred to by its abbreviated name, "Nusamba"), a Suharto family holding company. Bob Hasan is the chairman, and a 10 percent shareholder in Nusamba. The remaining shares of the Nusamba group are held by Suharto's son Sigit Harjojudanto (10 percent), and the three largest and most prominent of the yayasans ("charitable foundations") started by the former president, Darmais, Supersemar, and Dekab, which between themselves control the remaining 80 percent (Time 1999: 22).

The Nusamba group's holdings include Bank Duta, whose shareholding structure mirrors that of Nusamba itself (Time 1999: 22). Hasan was one of seven directors of Bank Duta, but resigned that position in June, 1998. Hasan (through Nusamba), Suharto's second son Bambang Trihatmodjo, and the state oil company Pertamina also jointly control Bank Umum Tugu.

Other Nusamba projects have included: control of Indonesia's tin plate manufacturing monopoly (Schwarz 1994: 141); a near-monopoly on the lucrative oil-sector indemnity insurance business, worth US$120 million a year in revenues, via the Nusamba affiliate Tugu Pratama Indo (Pura 1995a, Jakarta Post 1998g); 10 percent of the shares in Unocal production sharing contracts in two blocks off the coast of East Kalimantan - the national oil company Pertamina estimates that during the Suharto years, it entered into 159 contracts with companies owned by the Suharto family and friends (Jakarta Post 1998e); a 5 percent interest in Freeport Indonesia, whose copper and gold mine in West Irian is the world's largest (Time 1999: 22).

Nusamba was also used as the vehicle by the former President in his ongoing efforts to re-assert control over the Astra conglomerate. Following by a few years the first Suharto-instigated buy-out of Astra shares with the help of Barito Pacific (as discussed in the final paragraph of page 15 of this report), the second Nusamba play was designed to prevent the quasi-independent cigarette magnate Putra Sampoerna from obtaining too large an interest in Astra, according to interviews conducted with officials from both the Astra and Sampoerna corporations. Hasan engineered a buyout where Nusamba and Anthony Salim (son of Liem Sioe Liong, of the Salim group) matched Sampoerna's buyout of shares, with the final result being that Bob Hasan was handed the title of President Director of Astra.

The rent accruing to Hasan from his timber concession holdings also enable him to purse numerous partnerships with the former President's children. In addition to his partnership with Suharto's eldest son Sigit Harjojudanto in the Nusamba group, Hasan and Sigit have other joint ventures as well. Both men hold 25 percent shares of the Kertas Kraft Aceh paper mill, and the attached Alas Helau industrial timber plantation.

Hasan and the former President's second son Bambang Trihatmodjo also have a number of joint ventures. The ITCI timber concession is 35% held by Bambang's Bimantara conglomerate, 15% held by Nusamba, and 51% held by the Army's Tri Usaha Bhakti foundation (PDBI 1994: 166-167). Bambang, Nusamba and the state oil company Pertamina are co-shareholders in Bank Tugu (Australian Financial Review 1997).
Hasan and the former president's third son, Hutomo Mandala Putra (Tommy), jointly control a vast network of businesses. Most prominent among them is the monopoly on the import of crude oil and fuel products held by Perta Oil Marketing, in which the two men hold a 50% share, with Pertamina, the state oil company holding the remaining shares (Pura 1995a, Jakarta Post 1998a). Pertamina recommended to the DPR that an end be put to the two men's involvement in the monopoly, but had that recommendation denied when the former President told Pertamina that decisions on how oil imports and exports were handled was "my responsibility" (Jakarta Post 1998a). Other Hasan-Tommy ventures included the soybean meal production monopoly Sarpindo, in which Liem Sioe Liong (the head of the Salim group) shared a controlling interest (Schwarz 1994: 133-135). Hasan and Tommy also held 60 percent of the now-bankrupt Sempati airlines, one of only four domestic air carriers in Indonesia (Schwarz 1994: 143).

Again, detailing Bob Hasan's ties to the former first family - as has been done in the last few pages - is an important undertaking because it demonstrates the extent to which rent from Indonesia's forests was used to meet the financial and personal objectives of the Suharto clan.

A similar inference can made regarding the Bob Hasan's appointment by the former President to the head of the Indonesian plywood producers' association (Apkindo) in 1983. Apkindo became over the next decade-and-a-half the most powerful forest-related entity in Indonesia. While the organization deserves credit for turning Indonesia into the undisputed world leader in hardwood plywood, it will more likely be remembered for the ruthlessness with which it squeezed economic rent from its membership. A number of mechanisms were used by Apkindo toward this end.

The first and perhaps best-known rent-extraction ploy was the fees Apkindo required its members to pay to the organization for each cubic meter of plywood exported. The fees totaled US$15/m3, and were comprised of a promotional fee of US$10/m3, and a handling fee of US$5/m3. A rule of thumb is that the promotional fee alone put US$1 billion into Apkindo coffers between 1983 and 1993, including interest (Barr: 22,30).

A second rent-extraction mechanism was the requirement that all shipping of plywood to foreign markets be carried out through Hasan's personal shipping agency. To quote an internal Apkindo memorandum dated 8 January 1993, the "Booking of ships will be done directly through Karana lines and therefore mills may not book ships themselves." According to documents on file with the corporate registry, Karana is a company 33.2% owned by Hasan, 66.4% owned by two Hasan companies, with one of the two 0.2% minority positions held by Nanang Bambang Sardjono Gatot Subroto, presumably a relative of Hasan's adoptive father.

A third Apkindo gatekeeping function was the requirement that its members use the insurance company Tugu Pratama Indo to insure their plywood shipments. Tugu Pratama Indo was until early this year 35 percent owned by Nusantara Ampera Bhakti (usually referred to by its abbreviated name, "Nusamba"), the Suharto family holding company. During the roughly four years they were in operation, Apkindo's shipping and insurance requirements together netted an estimated US$250-350 million a year (Pura 1995a).

A measure of the costs associated with the various Apkindo fees and requirements is provided by the 1996 annual report of Barito Pacific Timber. As one of only four concession-plymill timber companies in Indonesia to sell shares to the public, Barito must adhere to more stringent reporting requirements than privately-held companies. Barito's annual report shows that in 1996, the company paid Rp3 billion for association charges, plus another Rp7 billion for freight and insurance. Together, these charges came to about 40% of what accountants classify as the "selling" component of Barito's operating expenses, and 10% of the company's net profits for that year (Brown 1998: 10). Apkindo was located so precisely at the nexus of political and economic power that even a politically-connected company like Barito Pacific could not protect itself from Apkindo.

A fourth and final Apkindo rent extraction mechanism was its requirement that members sell their plywood through various Hasan-owned-or-linked marketing organizations. These organizations were located at the gateways to the world's most important markets for Indonesian plywood, including Singapore (which handled all sales to Europe), Hong Kong (which handled all sales to China), South Korea and Japan. Hasan was a 100 percent owner of the Singapore agency, and admitted that the other three were owned by nominee concerns that "represented" Apkindo's interests. It is believed that Hasan used these marketing organizations to pay his members rock bottom prices for their plywood, sell the plywood at a significant mark-up to buyers, and pocket the difference himself (Pura 1995a, 1996). This was a situation that neither Indonesian producers nor foreign buyers were happy about, but could nothing to change, given that Indonesia accounted for 70 percent of the world's hardwood plywood exports, and Apkindo was the gatekeeper by which all that plywood had to pass.

Money from various Apkindo-erected tollgates were not the only source of timber wealth enjoyed by Hasan. At various points, he was allowed to borrow money from the state reforestation fund, itself the single largest official source of timber revenue to the Indonesian government. At one point, a presidential decree was handed down to lend Hasan Rp250 billion from the reforestation fund to finance a portion of his US$1.1 billion Kiani Kertas pulp plant (Borsuk 1997). The Minister of Forestry at the time suggested that the loan from the reforestation fund could also be used by Hasan to repay his earlier borrowings from the same fund (Barr 1998: 23, footnote 76). The Kiani Kertas plant was also given a ten year tax holiday by the government. Finally, during the last two months of the Suharto government, as the international community pumped money into Indonesia's central bank in an effort to stem the monetary crisis, the central bank extended Rp2 trillion to Hasan's now-bankrupt Bank Umum Nasional (BUN), much of which Hasan used to finance his pulp plant (Jakarta Post 1998b).