Net closes round Suharto

THE NET is closing around Indonesia's ruling Suharto family's financial dealings, credited by many to have driven the Indonesian economy to the brink of collapse. President Suharto, in power for 32 years, last week agreed to scale back the business interests of his family in order to secure a $40bn (pounds 24.5bn) rescue package from the International Monetary Fund.

He pledged to end special deals like the tax and tariff breaks given to PT Timor Putra Nasional, a car company run by his youngest son Hutomo Mandala Putra, known in Jakarta as Tommy. At the same time General Motors bought out its minority partner in PT General Motors Buana Indonesia. The shareholder who sold out was President Suharto's half-brother Probosutedjo.

Tommy's company had long enjoyed a cosy deal to import Kia cars from Korea free of government taxes that doubled the price of rival vehicles. The idea was to give Tommy a nice ride until Timor Putra opened its own pounds 800m car plant this September. Meanwhile he sold lots of cars to departments of Daddy's government.

Not everybody bets that the reforms will succeed. Tommy himself arrived at a press conference last week declaring: "This does not mean we are finished." He departed, not in an imported Kia, but in a chauffeur driven Rolls-Royce.

The Suharto family dominates Indonesia's economy - with estimated assets of $40bn, or about half of the country's annual GDP. Until now doing business in the country meant doing business with the presidential clan.

General Motors signed up Probosutedjo in September 1993 and prospered. In 1995 - its first year - it sold 750 vehicles. That rose to 3,600 in 1996 and 4,100 last year.

Did the ties to Suharto help? "Certainly hasn't done us any harm," said William S Botwick, GM's managing director in Jakarta.

But companies that once saw a Suharto connection as a meal ticket increasingly see it as a liability. Others may follow GM's lead in cutting ties with the family.

Some have no choice. Hong Kong entrepreneur Gordon Wu is among them. His company, Hopewell Holdings, has an 80 per cent share in an Indonesian power plant partly owned by President Suharto's eldest daughter. The plant was to sell power to the state monopoly and have a guaranteed return.

In September the power plant was put on a list of projects to be delayed as the government cut back on spending. Two months later the project, along with 14 others, was revived. Last week, in an apparent effort to appease the IMF, the 15 projects were again postponed. Hopewell lost a quarter of its value on the Hong Kong stock exchange.

Suharto's eventual departure may unleash pent-up anger against the family.

"The main losers would probably be the presidential family, at least initially," said Bruce Gale, regional analyst for Political and Economic Risk Consultancy.

"Fund managers are saying Suharto is going to fall, and one of the biggest companies on the exchange is owned by his son - sell," said Peter Arkell, head of sales at Kleinwort Benson Securities.

The risk is greatest when the businesses are based on government contracts or rely on government-granted monopolies. For instance, PT Citra Marga Nusaphala, run by Suharto's eldest daughter, Siti Hardiyanti Rukmana, is the largest private toll road operator.

"It's absolute nepotism," said Vivek Gandhi, Indonesian stock manager for Aberdeen Asset Management Asia. "She gets the best toll roads, the best deals."

If Indonesia's economy is going to catch up to more advanced nations, it has to break the Suharto family's grip on businesses - both domestic and foreign.

Copyright: IOS & Bloomberg

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