APSN Banner

Costly Borneo mill opens as Hasan makes pulp move

Wall Street Journal - August 7, 1997

Richard Borsuk, Mangakajang – Plywood baron Mohamad "Bob" Hasan, longtime confidant of President Suharto, has finally fulfilled his dream of building a huge, high-tech pulp mill in the jungle. Making it profitable, however, may take many years.

Even though the government is very likely to provide the $1.3 billion project with tax breaks, some paper and pulp industry analysts question how the mill will perform financially, given high infrastructure costs.

On Wednesday, Mr. Suharto officially opened PT Kiani Kertas, a 500,000 metric ton-a-year mill on the eastern coast of the island of Borneo. The remote mill, in a sparsely developed part of East Kalimantan, can be reached only using the airport or the port that Mr. Hasan has built for it.

Unusually, the ceremonial opening took place before the start of commercial production. Production had been scheduled to begin earlier this year but has been delayed by technical hitches. Kiani Kertas executives say all processes have been successfully tested, and commercial production is now scheduled to start Aug. 15.

Two dominant players

The mill is the largest single project undertaken by the 66-year-old Mr. Hasan, who has interests in timber, manufacturing, media and other businesses. He has long wielded influence because of his strong ties to Mr. Suharto, but only in the past year has Mr. Hasan consistently been in the public eye – after he bought 10% of listed auto assembler Astra International and later became its chairman.

For nearly 40 years, Messrs. Hasan and Suharto have been golfing partners. After Wednesday's mill opening, the pair went fishing off nearby islands.

In the early 1990s, Mr. Hasan, who basically controls the country's plywood industry as head of the producers association, made plans to move into pulp. Until now, the Indonesian pulp industry has been dominated by two players, the Sinar Mas Group and the Raja Garuda Mas Group.

This project hasn't come cheap. Mr. Hasan spent about $30 million to build a runway and airport that can accommodate small jets, and Kiani Kertas executives estimate overall infrastructure costs at about $100 million. Also, the mill cost more than originally planned and faces a hefty burden from interest on loans, they say.

About 90% of the mill's production will be exported, Kiani Kertas executives said. Long-term buyers have been secured for nearly all output, they added. One paper industry analyst said that while the commitments are critical, these are based on world pulp prices, which can fluctuate widely.

Tax request 'under consideration'

Mr. Hasan said he isn't worried about the mill's financial performance, and added that he is confident Kiani Kertas will be a low-cost producer in an industry with bright prospects. Without specifying a figure, he said interest payments "are a little high," but added he expects the cost to be reduced through a loan-restructuring. He also clearly expects some government largess. On Tuesday, Mr. Hasan first said that "most probably" Kiani Kertas will get some kind of tax incentives, and he later strengthened that to assert: "I know we will be able to get it." Indonesia's director-general of tax, Fuad Bawazier, who was present at Kiani Kertas's opening, said the company's request for help is "under consideration."

If a tax holiday is awarded, it would be the second time Kiani Kertas has benefited from government help. Last December, the president ordered the government's reforestation fund – created from fees paid by forest concessionaires – to lend 250 billion rupiah ($96.2 million) to Kiani Kertas. Critics of the loan said they believe Kiani Kertas needed money to finish the mill. Mr. Hasan denied this, saying the loan was offered because a state company is his partner in a timber estate supplying trees to the pulp mill. He said Kiani Kertas hasn't drawn any of the loan.

The businessman said his Kalimanis Group, which comprises many of his timber interests, owns most of Kiani Kertas. Some shares, he added, are owned by two foundations chaired by Mr. Suharto, although he didn't specify how much was owned by the foundations.

Setio Anggoro Dewo, Kiani Kertas's finance director, said that Mr. Hasan's group has directly put in $250 million in equity and supplied another $330 million in intragroup loans.

Other funding for the mill has come from Indonesian banks, which have lent $410 million, and a $120 million foreign-bank syndication. Gerry White, a Kalimanis executive, said foreign banks "initially couldn't see themselves clear to invest" in the project, so Mr. Hasan was "forced to go to local banks, which did a good job."

Pulp industry executives and analysts suggest that Mr. Hasan's entry into the pulp business may already be affecting plans of other companies. They say that Sinar Mas early this year canceled its plans for expanding a mill in Sumatra. Also, Astra International this year dropped its plans for a joint venture with Siam Pulp & Paper Co. for a pulp mill in East Kalimantan.