The Bankers Forget and Forgive Indonesia’s Sinar Mas

It is a reminder of the ethical void often seen at the heart of Indonesia’s elite, of the mix of greed and stupidity of the investment banking industry, and of the complicity of Singapore in providing sanctuary for the ill-gotten gains of business miscreants and corrupt elites in the region.

Companies in the Sinar Mas group controlled by 91-year-old Fujian-born Eka Tjipta Widjaya have just raised more than US$300 million from bond issues in Asian capital markets. This is the very same group which staged the biggest single private sector default during and after the Asian crisis but whose family wealth largely survived through manipulation at the expense primarily of the people of Indonesia and secondly of the equity and bond investors in its related companies.

Today’s bankers are happy not to worry about the past or to warn investors of the full extent of past dishonesty so long as they get their commissions. In this case developer Bumi Serpang Damal has raised US$225 million from the sale of notes, and Singapore-based Golden-Agri Resources, a huge oil palm company, S$125 million, which has been the subject of numerous criticisms and boycotts for its environmental abuses.

The new note issue is the latest in several such offerings. The Bumi offering is rated Ba3 by Moody’s, the rating agency, a generous level given past history but corporate history it seems is not part of MBA studies and major global financial institutions mostly now lack institutional memory.

The history of the Widjaya group is a microcosm of so much that is wrong with capitalism in Southeast Asia where the greatest success mostly goes not to inventions or good governance but manipulation of political and financial systems combined with the rape of natural resources. The Asia Pulp and Paper subsidiary for decades was accused of being Indonesia’s biggest forest despoiler but last year agreed a pact with Greenpeace and the Rainforest Action Network to halt natural forest clearance and only harvest timber from sustainable resources.

To summarize a few significant events in the history of a group which flourished originally during the Suharto era, Widjaya was one of a small group of first-generation Chinese immigrant businesses used by the Indonesian strongman Suharto to generate revenues whose use he could direct. These businessmen were smart outsiders and dependent on the government for various land and monopoly concessions he handed out, so could be trusted not be involved in local politics.

However everything changed with Suharto’s fall in 1998. Almost the whole Indonesian banking industry collapsed in crisis due to huge foreign borrowings and excessive lending to local corporates. But the biggest failure was the Widjayas’ Bank International Indonesia (BII) which eventually needed two bailouts, one in 1999 and another in 2001 costing the government through the Indonesian Bank Restructuring Agency [IBRA] some Rp11 trillion [US$845.8 million at current exchange rates]. Roughly half of the loans on BII looks had been to Widjaya-linked companies, a gross transgression of banking laws.

How much of that was genuinely lost because of the crisis and economic slump and how much was simply pocketed by Widjaya-related companies in Singapore or obscure island tax havens cannot be known. But it was surely a lot and a fraud on the public, and some foreign lenders, who were picking up the bill. Nor were the Widjayas alone. According to a study by the US-based Institute for Policy Dialogue, as many as 100 Indonesian bankers fled for Singapore with an estimated US$13.3 billion in restructuring funds amid allegations of kickbacks to government and central bank officials. The funds have never been recovered and no bankers have ever been prosecuted.

One big part of the Widjaya empire however seemed to continue to survive 1998, the paper interests represented by Asian Pulp & Paper and its quoted subsidiary Tjiwi Kimia. Pulp and paper prices were high and the group generated cash continued logging of its forest concessions on Sumatra and elsewhere some of which then provided land for oil palm plantations. It even expanded. However in 2000 pulp and paper prices collapsed and the following year it announced a moratorium on debt payments. The group was then revealed to have debts of an astonishing US$13.9 billion.

It had been helped get this far into debt despite the Asian crisis and consequent suspicion of Indonesian debt partly because of its good banking and other connections in Singapore. Advisers to the group then included Koh Beng Seng, formerly deputy head of the Monetary Authority of Singapore, when he was a self-important scourge of foreign bankers, and Elizabeth Sam, a former MAS board member. They quickly resigned when the edifice began to crumble.

Soon after debt revelation came the claim that previous APP financial statements were unreliable and that US$220 million had been lost in foreign exchange dealings and it was having difficulty collecting US$1 billion in receivables from offshore trading companies in the British Virgin Islands.

The company claimed these were genuine third-party transactions but the Wall Street Journal revealed that as another deceit, reporting that APP personnel worked for these companies. Independent audits of APP revealed that US$200 million had been stashed in a “bank” in the Cook Islands and several hundred millions more were moved into assorted other Widjaya-related companies.

Bondholders who then tried to get assets supposedly pledged as security soon found that the notoriously corrupt Indonesian courts were of no help. APP claimed the bond issues were illegal and bondholders also discovered that the forest concessions on which APP operation were based were in the Widjaya family name, not that of the company.

Various time-wasting measures and movement of assets wore down both local and foreign bondholders, some of whom settled for partial payment. But not all succumbed to the Widjaya manipulations. The US Exim Bank held out and so did Deutsche Bank and BNP Paribas. In view of the manipulation of assets which had been going on these latter two banks petitioned the Singapore court to appoint an independent administrator to APP in place of Widjaya nominees. The case was thrown out. The abuse of APP creditors even inspired a joint letter to the Indonesian government in 2003 by the ambassadors of US, Japan, Canada and eight European countries.

There were numerous subsequent twists and turns of the APP story but the bottom line was that the Widjayas kept control of APP – and of their oil palm interests – at the expense of all others and have now returned to official respectability among international bankers. They never lost respect among their peers in Indonesia and elsewhere in Southeast Asia, where cheating is not a crime, it is just being clever businessmen.