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Palm oil nepotism adds fuel to disaster

Australian Financial Review - October 13, 1997

President Soeharto and his family are the most reluctant to make the necessary sacrifices because of their business interests, contends George J. Aditjondro.

Last week, Indonesian President Soeharto called for the International Monetary Fund to patch Indonesia's financial system, after the rupiah suffered a dramatic 20 per cent plunge over the previous two weeks. But who will fight the forest fires which have been raging since July in many of the main islands of Indonesia, at the same time as the rupiah's exchange rate began its dramatic plunge?

In this case, is not only a problem of extinguishing the fire. It is a matter of halting the alarming rate of tropical deforestation in Indonesia. In this case, nobody has more power than Soeharto himself. Yet the President, two of his brothers, five of his children and one grand-child are the most reluctant to make the necessary sacrifices, due to their logging operations, oil palm plantations, a mega-project to convert 200,000 Ha of peat swamps in Central Kalimantan into rice fields for transmigrants from overcrowded Java, coal mines, pulp and paper production, as well as palm oil marketing.

Many of those companies were targetted when the Forestry Department issued a list of 176 companies, which had fires burning on their properties. On October 3, licences were revoked for 29 of those companies, since they still had not managed to extinguish those fires. Several companies in Kalimantan owned by Soeharto's charities and managed by the timber tycoon Bob Hasan were among those 29. So were companies from the Raja Garuda Mas (RGM) Group in Sumatra, owned by another business man, Sukanto Tanoto, who also has joint ventures with Soeharto's children and in-laws.

The initial Forestry Department blacklist indicates the major culprits of tropical deforestation in Indonesia since the New Order began in 1967. Most are plantation companies, mostly rubber and oil palm, followed by timber estates to grow the raw material for pulp and paper factories. And a smaller group of land-clearing contractors for transmigration schemes exposed tens of thousands of hectares of peat soil, which sprang into flames in the heat of the fires from neighbouring forests and plantations. Oil palm illustrates the power of Indonesia's First Family, since three generations of the Soeharto family are involved this lucrative business. It began in the mid-1980s, through a joint venture of the Salim and Sinar Mas Groups, which involved Soeharto's eldest son, Sigit Harjojudanto, his youngest brother, Tommy Soeharto, and Soeharto's cousin, Sudwikatmono. In the late 1980s, Salim and Sinar Mas split their joint venture and each group developed their own crude palm oil (CPO) division. The Soeharto family interests were still represented in both groups, especially in Salim Group, where apart from Sudwikatmono, two Soeharto siblings, Sigit Harjojudanto and Siti Hardiyanti Rukmana, are major shareholders in the group's Bank Central Asia (BCA).

In the meantime, Sinar Mas developed its edible oil division in co-operation with Soeharto's second son, Bambang Trihatmojo, who is also a minor shareholder in a plantation company of another conglomerate close to the First Family, the Bakrie Brothers.

Bambang's younger sister, Siti Hediyati Hariyadi, also got involved in this business. She and her brother-in-law, Hashim Djojohadikusumo, formed a joint venture with a Sino-Malaysian tycoon, Robert Kuok, to open a 44,000 Ha oil palm plantation in South Sumatra in 1994.

This is when the third generation came into the picture. A company owned by Sigit's eldest son, Ari Harjo Wibowo, received a quota from the Indonesian Logistics Board (Bulog) to market 70,000 tonnes of crude palm oil a month, more than the crude palm oil marketing quota for Salim jointly with Sinar Mas.

Ari, however, not only wanted to sell other companies' palm oil but wanted to manage his own plantations. So, the Transmigration Minister gave him a contract to develop an 80,000 Ha oil palm plantation in East Kalimantan, using transmigrants as "captive labour."

Capital was no problem for Ari, as grand-uncle Sudwikatmono would lend to him from Salim's cement factory. And with his First Family connections in March 1996 Ari signed a memorandum of understanding with a Pakistani trading corporation to export US$ 1.24 billion ($ 1.7 billion) worth of crude palm oil to Pakistan.

This oil palm (family) story and the cancerous growth of plantations, timber estates, and mining operations in primary forest land indicate the extent of nepotism of the Soeharto family and its effect on Indonesia's economy and ecology.

This nepotism has often been justified by playing on Indonesian nationalism, by making the people proud of becoming "the largest plywood producer", then "the largest paper and pulp producer", and eventually "the largest oil palm producer" in the world. But this misplaced nationalistic pride has contributed to Indonesia's growing public and private debts, as well as to the displacement of tens of thousands of local farmers and tribal communities by the logging concessions, timber estates, and other mega-projects. And it may also boomerang on the Australian economy and on Australian consumers.

The most immediate effect will be on edible oils. As mentioned, most companies on the Forestry Department blacklist are plantations which were growing, or at least were supposed to grow, oil palm. Most of them were members of the Sinar Mas and Salim Groups, or were involved in marketing arrangements with Sinar Mas, Salim, or Ari Haryo Wibowo's Arha Group. This will affect Goodman Fielder's edible oil supply from Indonesia. This largest Australian food producer has two 50:50 joint ventures with Sinar Mas: one in cooking oil and the other one in snack foods, a total investment of $ 47 million. The first joint venture produces the well-known brands of cooking oil and margarine, Meadow Lea and Mother's Choice. The Indonesian forest fires will force Goodman Fielder – and so ordinary Australian consumers – to pay more for their palm oil-derived margarine, cooking oil, and soap. As an oil palm marketing manager told the Business Times in Singapore, last week, the haze will shrink yields more after the natural three-month cyclical fall in production. Oil palm needs sunlight and rain. The prolonged drought caused by El Nino and the lack of sunlight due to the smog will take their toll on yields in six months time, so he predicted.

The second commodity in Australia which may be hit is paper. The second-largest group of forest fire culprits are the timber estates which were developed to produce the raw material for Indonesia's growing paper and pulp factories. The two largest paper and pulp producers in Indonesia are Raja Garuda Mas and Sinar Mas, which have listed their paper and pulp offshoots in Singapore and New York, respectively, as APRIL (Asia Pacific Resources International) and APP (Asia Pulp & Paper).

With their domestic and overseas mills, these two Indonesian paper tigers have assaulted the Australian market. An Amcor subsidiary, Dalton Fine Paper, is the agent for APP copy paper, while a 42% per cent subsidiary of Amcor, Spicer Paper, is a full range agent for APP. In the coming months, however, the Indonesian assault on the 15,000 tonne paper market in Australia may be slowed by the losses from the burned plantations in Indonesia, which have to be cleared and planted with new seedlings. In the meantime, the ordinary people still have to suffer from the increasing prices due to the plunging rupiah, the foul air left behind by the forest fires, the landslides from denuded hillsides in the coming monsoon rains,the increasing prices of cooking oil and margarine, and the increasing prices of paper – a major problem for tens of millions of school kids.