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All roads led to Suharto for Indonesian contracts

Michael Harrison
Friday 29 May 1998 23:02 BST

DISCREDITED regime awards Trafalgar House pounds 385m toll road contract. The people rise up and discredited regime is removed from power. Question mark over future of toll road project. No, we are not talking about the Birmingham Northern Relief Road (although we just as easily could be). The above scenario actually relates, unsurprisingly, to Indonesia, where a consortium involving Trafalgar (now part of the Norwegian group Kvaerner) and a company controlled by former President Suharto's eldest daughter may forfeit the concession to build a 59km toll road in West Java.

As with many of the "UK firm set to lose Indonesian order" stories that are now emerging from Jakarta, the fog of war, or at least civil uprising, has served to cloud the picture. Trafalgar, for what it is worth, says it shelved the project nine months ago and declared "force majeure" after deciding that the road could not be financed if its costs were to be in dollars and revenues in the (plunging) local currency.

Indonesian officials, on the other hand, say they lost patience with Trafalgar, which was supposed to have built the first stage of the road by now, and are determined to re-issue the concession.

It is a similar picture of confusion in East Java, where PowerGen is said to be in danger of losing a pounds 1bn contract to build a coal-fired station. The governor of the region says the contract has been put under review. PowerGen says it is 80 per cent complete and remains on course to be commissioned ahead of schedule next year.

The discrepancies arise, in part, because no one in Indonesia knows for sure what is going to happen. After living under one-man rule for 33 years, local officials are testing out the perimeters of their new-found powers for the first time. Meanwhile in Jakarta itself, an awful lot of post-Suharto rationalisation is going on. The government officers who now solemnly swear to withdraw any contracts that are tainted with nepotism or corruption are the same ones who awarded them in the first place.

Trafalgar and PowerGen are not alone. A large number of other UK companies, ranging from British Aerospace, Rolls-Royce and Thames Water to BP, Rio Tinto and United Biscuits, have interests in Indonesia. Does the purge now taking place there matter to them? And could they have done anything to avoid the situation in the first instance? The answer to the first is a qualified yes. The answer to the second is a qualified no.

The headline numbers sound big but the actual exposure of British companies is much smaller. For instance PowerGen's equity investment in the Paiton 2 power station in East Jarva so far is a modest pounds 37m since the project is 80 per cent debt-financed. Similarly, Trafalgar's direct financial liabilities are small, even though the revenues it would forgo if the concession is withdrawn would be more significant.

Thames' contract to provide water supplies for one half of Jakarta, now also suspended because of its Suharto links, could generate pounds 225m in revenues over the next 25 years. But its maximum exposure is $80m, not all of which has yet been invested.

In the case of both Thames and United Utilities, it is worth noting that business misjudgements have cost them far more than political misjudgements. Two years ago Thames wrote off pounds 95m on ill-fated overseas expansion programmes while United Utilities has lost pounds 90m in the sewers beneath Bangkok.

Could those companies that now risk losing their Indonesian contracts have avoided getting into this position? The short answer is no. As one British executive wearily explained, tendering for any large project in Jakarta automatically meant giving Suharto, or one of his extended family, a piece of the action.

Of course, corporate Britain could have pursued an ethical business policy, which might have led to it boycotting Indonesia. But where was the pressure for that? Certainly not from the Government, whose ethical arms policy is in some disarray and which has been strangely silent this week on this issue of our commercial links to Indonesia. That just leaves shareholder pressure but how often do ethics get in the way of good business?

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