Wall Street Journal
December 30, 1998

The Suharto Regime Blew 
Many Chances to Amass Wealth


JAKARTA, Indonesia -- For 32 years, the family of President Suharto took a bite of countless businesses here, from billboards to Boeings. It should have made for one of the world's colossal fortunes.

But a great revelation of the tumultuous collapse of the Suharto regime this year isn't that it enriched itself beyond imagination at the expense of Indonesia's 200 million people. It's that it didn't.

The Suhartos are surely rich. But interviews and documents gathered on four continents turn up a cold irony: Given -- and having taken -- many opportunities to profit from a nation steeped in treasure from forests to oil to gold, the Suhartos blew a remarkable number of the corporate schemes they touched. Far from having a fortune that some political rivals have estimated at $40 billion or more, the Suhartos appear to have at most one-tenth that.

That's enough to keep generations of Suhartos wealthy, and a grand sum indeed set against the deepening poverty of ordinary Indonesians. Still, the Suhartos' efforts to parlay their influence into productive corporate assets -- the stuff huge and lasting fortunes are made of -- often failed spectacularly. So sure of themselves were they right up to the regime's bitter end, and so averse to investing their own money, that the Suhartos often ended up amassing more debt than assets. Many of their known holdings have negative net worth today.

"Whatever they wanted, they got," says George Benson, a former U.S. military attache in Jakarta who went on to work for the Suharto regime for 25 years, mostly as a Washington lobbyist. Building value, he says, was neither a family priority nor talent. "They'd get 10% of some project without putting up any money, then sit back and collect the dividends."

Mr. Suharto and family members declined to respond to numerous interview requests and faxed questions for this article. Since leaving office in May, the former president has offered to cooperate fully with investigators looking into possible corruption in his administration, and has been questioned twice by Indonesia's attorney general's office. He has denied doing anything improper and says he didn't stash money away illicitly. Indonesian authorities have found roughly $3 million in his name in domestic bank accounts, which Mr. Suharto says were his life's savings as a public servant. Other family members have said they violated no laws in their business dealings and only pursued the best interests of the country and fellow shareholders in their companies.

Yet it's clear now, many experts say, that the scale of first-family avarice, graft and business blundering was a key reason so many international investors fled Indonesia last year, aggravating the economic collapse that brought down the Suharto regime. Consider the fate of just some of the state contracts, licenses and loans channeled to Suharto children, detailed by company records and executives involved:

The Suhartos still sit astride many valuable businesses. Some of the holdings now underwater may rebound if the Indonesian economy does. Among the remaining plums is the country's most popular television station, controlled by one son. A daughter dominates toll roads in Jakarta. The family owns huge tracts of timber and shares in sumptuous hotels. Overseas, a cousin owns a chunk of a Hong Kong group that recently bought the Philippines' main phone company. Hundreds of millions in cash is squirreled away in offshore trusts, bankers say. The family still has interests in the once-huge empire of Indonesian tycoon Liem Sioe Liong.

Though eroded, "the pyramid is basically still in place," says a senior foreign banker here. However, he and others say, it's now clear that the family's holdings were worth less than $10 billion before the economic collapse, and may be worth as little as $2 billion now.

Many Indonesians now demand, sometimes in bloody street protests, that the government go after those assets. But Mr. Suharto's successor, B.J. Habibie, was Mr. Suharto's vice president and a Suharto business partner, and military leaders loyal to the Suhartos remain in power. Laws and presidential decrees promulgated by the Suharto regime itself may make seizing the family's assets illegal, some legal experts say. Tuesday, a government commission investigating corruption said it had found hundreds of millions of dollars of allegedly tainted deals, most linked to the Suhartos.

The Suhartos, meanwhile, are replacing family names on shareholder lists and boards of directors with nominees. The goal is to end the companies' open ties to the Suhartos, while preserving the family's wealth by avoiding liquidations at today's distressed prices, Suharto friends say.

How the Suhartos amassed -- and squandered -- so much money traces back to Mr. Suharto's fusion of modern capitalism and Javanese traditions of noblesse oblige. The "crony capitalism" it produced helped him rule one of the world's biggest and most divisive populations by ensuring that the right people had ample opportunities to make money. Even some of Mr. Suharto's critics believe that for him, if not for some of his relatives, the system was more about building political power than wealth. Mr. Suharto himself generally eschews the trappings of big money.

Mr. Suharto's financial master stroke was his yayasans -- presidential foundations funded by "voluntary" contributions for "charity." Actually, the contributions often were collected through levies on everything from utility bills to movie tickets. The foundations funded many good works, like schools. But they also bought votes for Mr. Suharto's political group, Suharto associates say. And, bankers say, the foundations served as his personal merchant banks, lending to and investing in favored projects, such as his daughter's toll-road company.

One former chief executive of a yayasan-owned bank recalls how Suharto family members dipped into foundation accounts for free capital. First, family cronies would coax bank managers into lending them yayasan deposits, collateralized by Suharto-linked deposits at the same bank. The yayasan funds would never get repaid, this banker says, yet nobody would dare seize the Suharto money.

Facing public wrath, Mr. Suharto recently ceded control of seven yayasans, valued at roughly $530 million, to the government. The Suhartos and friends still control dozens more.

Mr. Suharto's late wife, Tien Suharto, was instrumental in building the fortune -- and in launching the Suharto children into business. Known as "Madame Tien Percent" for her own alleged role in crony capitalism, she hailed from Javanese aristocracy and raised their six children with a keen sense of pedigree and entitlement, Suharto associates say. Unlike the children of many wealthy Asians, most Suharto kids never earned university degrees. The Suharto name itself was "summa cum laude," recalls a family confidant.

Suharto associates say Mrs. Tien, who died in 1996, had her own relatives and friends installed in key positions at institutions like Pertamina, the state-owned oil company. Most Indonesian crude is exported by the big Western oil companies who drill it; proceeds are shared with Pertamina. But a small proportion is pumped by Pertamina itself. Until the contracts were canceled this summer, much of that oil was consigned for sale to several Hong Kong and Singapore trading companies controlled by Suharto children, according to Pertamina officials and other executives. They say that family companies also handled all of Indonesia's oil-product imports.

In total, industry executives estimate, the companies traded $500 million or more of oil products annually. Pertamina officials say that since the Suharto-linked contracts were canceled, the company has saved itself roughly $30 million by selling the products itself.

When they tried going beyond simply taking a cut, however, the Suhartos often stumbled. In 1992, Mr. Suharto's second son, Bambang Trihatmodjo, consolidated many of his oil-related shipping assets in a Singapore company called Osprey Maritime Ltd. The move allowed Osprey to tap Singapore's capital markets with a $104 million initial public offering. Mr. Bambang stayed out of management; Osprey was well run. It grew, thanks to petroleum transport contracts landed through Mr. Bambang's links with Pertamina.

But Mr. Bambang and his cronies wanted more, say people who worked with them. When Osprey issued more stock in 1997 to buy another shipping company, Mr. Bambang and his partners borrowed money so they could buy new shares and avoid dilution. The loan was secured by their Osprey stock, Mr. Bambang's associates say. Now those holdings are in jeopardy because Osprey's share price, dependent on the Bambang links with Pertamina, has plunged. Mr. Bambang's associates say he isn't paying on the loan. The lender, a Jakarta company connected to Mr. Bambang, is in bankruptcy proceedings itself. It hasn't foreclosed on the Osprey shares, Bambang associates say.

"The Suhartos fell from greed and overconfidence," says a close Bambang associate. Mr. Bambang didn't respond to requests for comment for this article.

Mr. Bambang fared little better with another freebie, a 10% stake in Atlantic Richfield Co.'s Kangean gas field, north of Bali. In 1989, Mr. Bambang's Bimantara Group received the stake essentially for free after the government ordered Arco to take on Bimantara as its local partner, according to Arco and other executives involved. But rather than simply lapping up profits from Arco's guaranteed gas-sales agreement with Indonesia's electric utility, Bimantara insisted on developing the project's underwater pipeline itself, Pertamina and Arco executives say.

But instead of a $250 million pipeline through shallow waters and open countryside, as Arco had planned, Bimantara built a $400 million pipeline through deep waters and dense settlements. Bimantara cited commercial reasons for the route, but executives involved in the project say Bimantara's economic assumptions were dubious, at best.

The project was a year and a half late in coming on line and cost Arco, Bimantara and Pertamina a total of hundreds of millions of dollars of lost revenue, the companies say. Now, because Bimantara and Pertamina never formalized land procurement along the pipeline, managers are having trouble keeping settlers away from the area, a serious problem, they say, for maintenance and safety.

Recently, Bimantara relinquished its 10% stake in the gas field to Arco. Joseph Dharmabrata, director of Bimantara's pipeline affiliate, confirms that the company will likely default on the project's loans soon. He blames the economic collapse, not any Bimantara mistakes. Prospects for the project, he says, "are quite gloomy."

Mr. Bambang also stumbled in telecommunications. In 1993, a company he controlled, known as Satelindo, was granted three coveted telecom licenses without any competitive bidding, Satelindo executives acknowledge. The licenses covered rights to sell long-distance and mobile-phone services, plus exclusive control over a new series of communications satellites. Satelindo, started with just $50 million of equity capital -- actually provided by military-controlled investment companies, Satelindo executives say -- sold a 25% stake to Deutsche Telekom AG of Germany for $586 million.

But in 1996, for Deutsche Telekom's own initial public offering, the company disclosed it paid $676 million for its Satelindo stake, or 15% more than Satelindo reported receiving. The $90 million gap "was clearly a facilitation" fee, says a U.S. investment banker who worked on the deal. "I know what the numbers were, and this was completely on the side."

Under German law at the time, such "facilitation fees" were generally legal. In Frankfurt, a Deutsche Telekom spokesman denies the company paid off anyone to get the stake. He says the final purchase price mushroomed because of brokerage and consulting costs and various "transaction fees." Financial advisers involved in the deal say legitimate fees couldn't have totaled even $20 million, much less $90 million.

Iwa Sewaka, who was president of Satelindo at the time, and A. Kadir Assegaf, a top official of Bimantara, say they have no knowledge of the $90 million in fees.

Allegations of rake-offs also arose in Satelindo's purchase of roughly $800 million in cellular-phone equipment, mostly from French manufacturer Alcatel SA, say executives and bankers familiar with the deals. On average, they say, the equipment was sold, through associates of Mr. Bambang, at prices marked up by 25% to 30%. Executives close to the deals say the inflated prices were another form of "facilitation fee" for Mr. Bambang and his cronies.

An Alcatel spokesman declines to comment on Satelindo sales.

The bloated costs from such deals pushed Satelindo's foreign debt to over $500 million. Now Satelindo is being restructured; Mr. Bambang, say bankers involved, is likely to emerge with no Satelindo equity. That is, if he even still controls Satelindo shares. Corporate documents show that Mr. Bambang's stake, owned through one of his companies, was pledged in 1997 as collateral for a $125 million loan from Deutsche Bank AG, though officials close to Deutsche Bank say the deal never materialized.

After Mr. Bambang, the most active Suharto child in business was youngest son Hutomo Mandala Putra, better known as Tommy. His top executives tended to be avid race-car drivers like himself. In 1989, Mr. Tommy's Humpuss Group won the right to establish Indonesia's first private airline with jet aircraft.

Sempati Airlines was an instant success in this nation of far-flung islands. Its new jets and snappy service won business passengers from stodgy flag-carrier Garuda. Sales peaked at about $700 million in 1996. Investment bankers valued the company at $400 million to $500 million for a possible IPO.

But the low-margin, high-capital-cost airline business didn't generate the kind of cash for Mr. Tommy that he wanted, say executives who ran Sempati. So his cronies created a separate company to broker Sempati's aircraft leases, resulting in jacked-up rates, these executives say. Later, they say, Mr. Tommy forced Sempati to buy the planes at wildly inflated prices. Then, the executives say, Mr. Tommy assigned Sempati's maintenance operations to another Humpuss unit that more than doubled the airline's maintenance bill.

Sempati, wallowing in debt, has been grounded since earlier this year.

A former top Sempati manager says Mr. Tommy had no clue what building corporate value meant. "He got cash from other businesses counting sheep," he says. Mr. Tommy didn't respond to requests for comment.

Actually, sheep haven't worked out, either. In the early 1990s, as their businesses multiplied, the Suharto kids diversified their holdings overseas. One early foreign foray was Mr. Tommy's sheep ranch in the snowy mountains of New Zealand's Southern Alps.

Gerard Olde-Olthof, a former professional hunter, says he persuaded Mr. Tommy to invest in the hunter's dream of converting the Lilybank ranch from a sheep operation into an exclusive hunting lodge when the two men met at the Monaco Grand Prix auto race in 1989. With Singapore insurance broker Alan Poh Lye Yee, they poured $2.5 million into building a rustic, stone-and-timber inn with eight plush guest suites, majestic views and a trophy room bristling with antlers. (Mr. Tommy's prize-winner, a giant wapiti elk, presides in the corner.) It opened in 1995, but even at $580 a night per suite, Lilybank never came close to breaking even, Mr. Olde-Olthof says. It's up for sale.

Mr. Tommy also tried to buy New York's Plaza Hotel, says Doug Hercher, the Jones Lang Wootton agent who brokered the sale of the Manhattan landmark and who worked with Mr. Tommy on other failed real-estate bids. Mr. Hercher says Mr. Tommy's Plaza offer was never taken seriously because he insisted on highly concessionary terms from the bank group coordinating the sale and wasn't willing to plunk down his own cash.

"It wasn't like the Sultan of Brunei, who comes in with a suitcase full of cash and says, 'I'll take this and this,"' Mr. Hercher says. "Tommy was just a rich kid with 14 bodyguards and seven black cars in tow."

Mr. Tommy's acquisition of Italian sports-car maker Lamborghini SpA in 1993 was another flight of folly, says Setiawan Djody, Mr. Tommy's Indonesian partner in the venture. Though Mr. Tommy sold Lamborghini for a profit this year, the company never came close to fulfilling Mr. Tommy's purpose in buying it: to put Indonesia and Asia on the map in big-time auto racing. According to Mr. Djody, a partner in several Suharto-family businesses, Mr. Tommy's meddling drove several key Lamborghini executives to quit, leaving it rudderless. "Tommy never listened to anybody," the Indonesian says.

Several Suharto siblings sought haven in Singapore, but floundered there as well. In the mid-1990s, in what was hailed as the "coming of age" of Indonesian companies, brothers Bambang and Sigit and their cronies targeted more than a dozen publicly traded Singapore companies for possible acquisition. Their aim, say Singapore-based investment bankers who advised them, was to tap Singapore's sophisticated capital markets, to legitimize connection-dependent businesses at home and to build a beachhead for regional expansion.

But the family's loose business style didn't play well in Singapore, advisers on the deals say. Take Van der Horst Ltd., a sleepy Singapore marine-engineering company until Bambang-associate Johannes Kotjo acquired control of it in 1993. Soon, the company won a series of big Indonesian contracts, and its shares soared 450%. In 1995, Mr. Bambang himself bought a 10% stake in the company.

Cronyism quickly took its toll, however. Some of Van der Horst's most lucrative projects on paper turned out to be subcontracting jobs for Mr. Bambang's older brother, Mr. Sigit, that stuck Van der Horst with big potential liabilities, says Chia Yew Boon, former research director in Singapore of defunct Peregrine Securities, which handled a $100 million bond offer for Van der Horst. In addition, when Mr. Kotjo was punished for stock manipulation by Singapore authorities in connection to a different investment with Mr. Bambang, Van der Horst's image suffered by association.

Mr. Kotjo didn't respond to requests for comment. Last year, with Van der Horst's shares trading at less than one-third of their peak price, banks liquidated much of Mr. Bambang's Van der Horst holdings, which he had pledged as collateral for more loans.

Today, in Jakarta, Mr. Suharto still glows over his children's achievements, say friends. Sometimes, Mr. Bambang picks up Mr. Suharto and his closest friends in a Jeep Cherokee and drives them to the elegant mosque at Bimantara's skyscraper headquarters to pray. No one mentions that the second son's business group -- once the towering symbol of Suharto Inc. -- is today but a house of sand. Mr. Suharto's friends aren't sure he even knows.

"We never talk about those painful things," says Bustanil Arifin, a retired general and close Suharto confidant. "He is so proud of those kids."

-- Darren McDermott and S. Karene Witcher contributed to this article