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Columbia University Press



7. The Pertamina Crisis

If the supply of rice and the role of foreign investment were at the center of Indonesia’s policy concerns in the early 1970s, they were soon replaced as the price of oil rose dramatically in the international market. Even as the students were demonstrating against the Japanese in January 1974, the price of oil was altering Indonesia’s terms of trade, raising its national income, and enriching its public treasury. For more than a decade oil was to be the engine of Indonesian development. This did not occur, however, without an early crisis that was to absorb the energies of senior officials for several years, divert resources from major projects in the government plans, and leave a substantial foreign debt to be serviced for years to come.

Oil was a principal export of independent Indonesia. By the time of the attempted coup on the night of September 30, 1965, however, oil production was in decline, and the new Soeharto administration, eager to get the economy moving, opened the country to exploration by a large number of foreign firms. At the center of this activity, from 1968 on, was a single state oil company, Pertamina. As exploration led to new finds, oil production mounted. And as international oil prices rose following the Arab embargo in 1973, Pertamina became the center of enormous financial resources, its annual budget reaching half that of the national government. With the money came a growing system of political patronage and widening charges of corruption. But Pertamina and its free-wheeling president-director, Lt. Gen. Ibnu Sutowo, were impervious to attack–until, that is, the general’s management of the enterprise provoked an international financial crisis.

At the heart of the crisis was a battle for control of oil revenues. Many saw this battle as a contest between civilian “technocrats,” who were trying to enforce a central economic strategy on the nation, and army “entrepreneurs,” who controlled the state enterprises and were determined to strike out on their own. But the conflict was larger than this suggests. It involved making choices as to how public funds were to be dispersed–at bottom, deciding on the development strategy the government was to pursue. The division within the regime was deep, with Soeharto himself uncertain, and army officers lined up on either side. Powerful foreign interests also were involved, both in the events that led to the crisis and in the steps needed to resolve it. For many members of the Indonesian elite, the Pertamina crisis was a dramatic example of the dilemmas the nation faced in its search for an appropriate governmental role in the economy, and in its search for economic independence in the wider world.

The Pertamina Collapse

On February 18, 1975, Jakarta time, it was reported that Pertamina had failed to repay a short-term loan of $40 million owed to a group of U.S. banks led by Republic National Bank of Dallas.

Ali Wardhana, the Minister of Finance, informed the president. Soeharto is said to have asked him to consult Widjojo Nitisastro, who was at a conference in Algiers, and Rachmat Saleh, the governor of

Bank Indonesia (the central bank), about what action the government should take. 1

The three economists were of the opinion that the government would have to stand behind the Pertamina debt. Rachmat Saleh was later reported as saying: “The overwhelming consideration on our part was how to preserve Indonesia’s creditworthiness. If a big state enterprise like Pertamina turns out to be unable to pay its debts, that means the Indonesian government is out of the market.” 2

The scale of the problem was unknown. Pertamina had several separate systems of accounts, and Pertamina officials were unable to provide the government with reliable data on the scale of its borrowings. Rachmat Saleh is said to have sent cables to some two hundred banks around the world, requesting information on their loans to Pertamina; it seemed the only way to get the information quickly. 3

In addition, there was disagreement about the terms of a bail-out. Rachmat Saleh has acknowledged that “not everyone was equally enthusiastic about the government stepping in.” 4 The economic ministers believed the government could restore confidence only if Pertamina were barred from further independent borrowing. But the economic “technocrats” had been trying to put a rein on Ibnu Sutowo for some years; Sutowo believed they were blowing the problem out of all proportion.

With the international banking community besieging the government with inquiries about its intentions, Ali Wardhana prepared a two- or three-page memorandum and took it to the president. Soeharto read the memorandum and signed his approval. 5 It was none too soon.

On March 10 it was reported that Pertamina had defaulted on a second foreign loan, this one for $60 million from a Canadian bank group led by Toronto Dominion Bank.

On March 14 Bank Indonesia sent a circular to all known creditors of Pertamina stating that the central bank was prepared to meet Pertamina’s foreign currency obligations and that $650 million had been earmarked for this purpose. The circular also stated that Pertamina would not be borrowing funds on the international market in the foreseeable future. 6

By March 31 representatives of three international investment houses–S. G. Warburg of London, Lazard Freres of Paris, and Kuhn Loeb of New York, the so-called troika initially appointed to advise the Indonesian government on the management of its foreign reserves–were working with the government on the refinancing of Pertamina’s short-term obligations. 7

In April Bank Indonesia halted publication of its weekly and monthly statistical reports, presumably out of concern over Indonesia’s precarious foreign exchange holdings.

On May 15 Minister of State J. B. Sumarlin announced that Amer-ican and Japanese banks had agreed to raise funds to replenish Indo-nesia’s foreign exchange reserves, in effect enabling the government to pay off Pertamina’s short-term foreign debt with medium-term credits. 8

On May 20 Sadli, the Minister of Mining and chairman of the Pertamina board, made a detailed statement on the case before Parliament, charging that Pertamina had taken on large financial obligations without the government’s approval or knowledge. He put the total debt of Pertamina at more than $10.5 billion, including $2.5 billion for civil works and commercial credits; $1.9 billion for certain large projects involving liquified natural gas (LNG), fertilizer, a gas pipeline, and other exploration and production projects; $2.1 billion for completing construction of a steel plant; $156 million for telecommunications; $3.3 billion for the hire/purchase of “an armada” of oceangoing and domestic tankers; and other contracts totaling $700 million. “A large part of these activities,” Sadli said, “were not economical and lacked any direct relation with the basic function of Pertamina.” 9

At the end of May it was reported that Maj. Gen. Piet Harjono, budget director in the Ministry of Finance, had been appointed director of Pertamina’s financial affairs. It was said that he had presidential authority to overrule Ibnu Sutowo in all financial matters. 10

On July 25 Widjojo, in his capacity as State Minister for Economic, Financial, and Industrial Affairs, appeared before Parliament to give an account of the government’s handling of the affair. To bring the situation under control, he said, and to prevent a repetition, all Pertamina’s international transactions were now being made through Bank Indonesia, and all state-owned enterprises had been banned from seeking foreign loans on their own accord. A team comprised of Lt. Gen. Hasnan Habib, Maj. Gen. Piet Harjono, and Brig. Gen. Ismail Saleh would review Pertamina as an organization. State Minister Sumarlin would review all aspects of the steel mill project. Supervisory teams would examine the physical and financial plans for other projects, including those concerned with liquified natural gas production, oil refining, and fertilizer production. 11

In October auditors from the international accounting firm of Arthur Young & Co. were reported to have discovered that Ibnu Sutowo, on behalf of Pertamina, had been chartering oil tankers worldwide and that, with shipping fees plummeting, the business was costing Pertamina tens of millions of dollars a day. 12

In his annual budget message the following January, Soeharto said that the amount of funds needed to pay Pertamina’s domestic debts alone was “enormous.” 13

Varying assessments of these startling developments were made at the time. Pertamina was, for many members of the Indonesian elite, the symbol of either the best or the worst of the nation’s drive for modernization: “high-tech” and rich to some, big and corrupt to others. On one point those on either side of the case seemed to agree. Ibnu Sutowo was a central element in the affair.

The Rise of Ibnu Sutowo

Ibnu Sutowo was so closely identified with Pertamina and its extraordinary rise as a center of power that it is difficult to recount the history of one without the other. To his supporters, Ibnu epitomized the modern Indonesian, educated as a medical doctor, honed in the revolution as a leader of men; a nationalist who had succeeded in bending the powerful Western oil companies to his will; and, in an era that otherwise seemed dominated by foreign aid and investment, the one Indonesian who was finally gaining economic independence for Indonesia to match the political freedom it had won three decades earlier.

Ibnu was born into a family of rural gentry in Central Java. He attended medical school in Surabaya, was posted to South Sumatra, became head of the youth wing of the National Party there, and, by 1947, was chief of staff of the revolutionary army. After independence Ibnu returned to medicine, and stayed on in South Sumatra where he had married. The family was “in rubber” and wealthy. He retained his army status, and, in 1957, with rebellion spreading in Sumatra and other “outer” islands, Nasution asked Ibnu to come to Jakarta to help in the new martial law administration. According to an army officer close to General Nasution:

He was in Palembang at the time of the … rebellion, and he had been running a barter trade with Singapore, just like a lot of others at the time. In fact, one of the reasons for bringing him to Jakarta was to cut down on the smuggling. His first assignment was as deputy chief of staff for administration, and in that position he supervised the staff responsible for logistics. The most valuable asset taken over from the Dutch was the oil fields, which included all the fields operating at the time, except for Caltex and Stanvac. He was put in charge of a team to oversee their operations, and when Permina was formed, he was made the first president-director. And that was the beginning of a whole series of things that gave the army, and the whole armed forces, a bad name. 14

As head of Permina, known at the time as “the army company,” Ibnu enlisted the help of an independent American oil man in 1958. With the American’s funds and expertise, abandoned Shell fields in North Sumatra, now in army hands, were restored to marginal production; a small Japanese coastal tanker took the first exported product to Japan in that year. The Japanese themselves had a survey team visiting these same fields in 1958, and in 1960 they reached an agreement with Permina, providing $53 million in credits for equipment and technical assistance, to be repaid in crude oil. Meanwhile, Permina also bought its first river tankers. 15 Although this activity was conducted on an extremely small scale by the oil industry’s standards, all the essential ingredients of Ibnu’s later, large-scale operations were already present in this early experience: enlisting an independent American operator with technical expertise, borrowing capital from the Japanese, repaying the debt with crude oil, and getting into the tanker business on the side.

According to a long-time friend and associate:

Ibnu was accountable only to the army leadership in the way he ran Permina. It was then one of two sources of foreign exchange for the army. The other was Colonel Jusuf in Makassar. . . . Jusuf controlled the rice exports from South Sulawesi; even when Java was in deficit, South Sulawesi rice was sold in Hong Kong for foreign exchange. These funds kept army troops loyal to their commanders for the next five years. 16

The amounts must have been small at first; Permina was repaying the Japanese with 40 percent of its production. 17

In any event, the principal oil fields were elsewhere, and dealing with the major foreign firms that held concessions to exploit them was high politics. The Indonesian constitution had provided that the nation’s mineral resources were the property of the state, but a series of cabinets had been ambivalent about how to treat the concessions. The foreign oil firms–Royal Dutch Shell, Caltex, and Standard Vacuum–were a critical line to foreign exchange, and no Indonesian government could afford to risk that. A “let alone” policy prevailed all through the 1950s; even when all the other Dutch enterprises were taken over in 1958-59, Sukarno had not touched Shell. Nationalist sentiment had to be satisfied, however, and in 1960 Sukarno signed into law a decree providing that “the mining of oil and gas shall only be undertaken by the State” and that “mining undertakings of mineral oil and gas are exclusively carried out by State Enterprises.” The foreign companies were dealt with in a further provision to the effect that: “The Minister may appoint other parties as contractors for the State Enterprises, if required for the execution of operations which can not or can not yet be executed

by the State Enterprises involved as holders of the authority to mine themselves.” 18

The state enterprises that were to perform these functions did not exist at the time; even Permina was legally incorporated as a private company. This gap was filled in due course, however, and as nationalist feeling was rising over the founding of neighboring Malaysia, the foreign firms came under increasing pressure to come to terms with the government. In June 1963, after all-night negotiations in Tokyo in which U.S. government representatives participated, the three “majors” relinquished their concessions, and in return became contractors to what were now three small Indonesian state enterprises. The agreement also provided for the sale of their refineries and domestic distribution and marketing facilities. 19

In 1965, with radical unionists staging walkouts and the Communist party calling for nationalization, Royal Dutch Shell had had enough. The coup attempt that occurred on September 30, 1965, did not appear to be altering things very much, and on December 31 Shell signed a contract of sale. This event soon provided Ibnu with another opportunity. On February 21, 1966, when Sukarno named his last 100-member cabinet, Ibnu was made minister for oil and gas. He retained the presidency of Permina. Before March was out, Ibnu had ordered the transfer of all oil exploration and production activities then in Indonesian hands to his own firm.

The final, seemingly inevitable step was taken the following year by a new minister of mining, Sumantri Brodjonegoro, a one-time aide to Nasution, a chemical engineer, and, at the time of his appointment to the cabinet, the president of the University of Indonesia. Sumantri recommended, and Soeharto approved, the creation of a single national oil company, to be known as Pertamina, and the appointment of Ibnu Sutowo as its president-director. Sumantri said later that his main purpose was to pool the country’s limited manpower and capital. “This shortage of manpower was the single most important factor. I considered the concept of competition, but concluded that this would not override the other considerations.” 20 It was hard not to think that among the other considerations was Soeharto’s desire to see Ibnu given his head.

The new state oil corporation held a monopoly in every aspect of Indonesia’s oil industry, including exploration, exploitation, refining, processing, transportation, and marketing. And it was free to negotiate agreements with any domestic or foreign party as its own management saw fit. The Indonesian oil push was now on in earnest, and Ibnu Sutowo was at the center of it. “Production sharing” contracts were signed with foreign oil firms in a continuing flurry of activity, thirty before 1969 was out, seven more in 1970, and another five in 1971.

By early 1975 Pertamina was operating seven oil refineries with a combined capacity of 400,000 barrels a day, a network of 2,680 domestic gasoline stations, and 29 joint-ventures and subsidiaries engaged in a wide range of activities, including the marketing of oil in Japan, the operation of a tanker fleet that rivaled the Indonesian navy in tonnage, the operation of a fleet of aircraft that rivaled the national airline, and much more. Pertamina was very large and very visible; according to its annual report for 1972, it had forty thousand employees. But it was still producing only a small part of the nation’s oil. In 1972, the most recent year for which data were available, it was producing some 100,000 barrels a day, less than 10 percent of total production. The lion’s share was produced by Caltex, which was pumping a million barrels a day and still working under a contract that did not involve any supervision by Pertamina. 21

Pertamina in early 1975 also was on the way to becoming even larger. Its plans, all to be financed by foreign borrowings, included: two plants, estimated at $1 billion each, to produce liquified natural gas in Aceh, north Sumatra, and in East Kalimantan; petrochemical plants, estimated at $500 million each, to produce raw material for synthetic fiber production in South and North Sumatra; a novel floating fertilizer plant in East Kalimantan; and development of a major refining and transshipment center for petroleum products on Batam island, near Singapore, designed to compete directly with Singapore’s oil processing industry. In addition to these and other oil-related ventures, Pertamina also was completing the construction of a steel mill in West Java, a project left unfinished by the Soviet Union in 1966, and estimated at an additional $1 billion. 22

Ibnu Sutowo, it was said, knew how to get things done.

The Question of Corruption

These developments were not looked on with equal favor in all quarters in Jakarta. The nationalist sentiment among young people that erupted in the anti-Japanese outburst of early 1974 was aroused not only by the influx of Japanese investors, but also by the presence of hundreds of foreign, largely Western, oil men and their families whom Pertamina had introduced into the city. In addition, liberal-minded elements in the society were deeply offended by Ibnu’s flamboyant life-style and accused him of corruption in public print.

The first public attack was launched by Mochtar Lubis in the pages of his newspaper, Indonesia Raya , in a series of articles and editorials between November 22 and 25 of 1969. Lubis charged that Pertamina was rapidly developing into a conglomerate whose activities had little to do with either the oil business or the government’s economic plans. In a November 25 editorial the paper charged:

According to reports . . . the current Pertamina leadership is not really particularly successful. . . . No figures on this can be obtained from Pertamina, because all data on the enterprise are kept secret on the pretext that oil is a vital and strategic commodity. . . . This pretext, however, is used to cover waste, inefficiency, and all kinds of irregularities and unjustifiable expenditures. 23

Indonesia Raya  also published a photograph of Ibnu posing with a new Rolls Royce, which it alleged had been imported as a Volkswagen. Lubis later said the government had protested his charges and had threatened to arrest him; but he had invited the government to take him to court–he had copies of documents to support his charges.

Within a matter of weeks of these accusations, the government increased the official price of gasoline and kerosene. The Jakarta cost of living index rose by 10 percent in a single week. Students demonstrated protesting the increases and corruption in the government. Soeharto responded by arranging for student delegations to meet with government officials to hear more detailed explanations of government policy. But the students were not convinced by these further accounts; on the contrary, they criticized the government economists for espousing theories that were far removed from the everyday realities of Indonesian life. On January 22 the public security agency banned student demonstrations, and schools were cordoned off by government troops. 24

Having shown firmness, Soeharto then offered the students a conciliatory gesture. On January 31 he appointed the Commission of Four headed by Wilopo, the former prime minister, which, as we have seen, was critical of a number of government agencies and figured in the Malari riots of January 1974.

The Commission was especially uncomplimentary regarding Pertamina. It began the first of two reports to Soeharto on the subject with this preamble:

Just becoming a big enterprise . . . is not too difficult if it is singled out by the Government to become the only oil enterprise controlling assets of the People and State that are extremely attractive to the international world. More important is how these assets, which are extremely large, and are not renewable, are managed so as to secure the development of the State. 25

As to Pertamina’s management, the Commission reported that it had found much neglect of and deviation from the regulations set by the Minister of Mining. If this continued, the Commission observed, “there will come about a working situation in which a person will no longer know what is permitted and what is prohibited.” 26

Specifically, the Commission said, Pertamina was obligated to pay 55 percent of its profits to the government, but this had not been done in nine of the previous eleven years. Pertamina also did not pay corporate taxes in the amounts due. 27 (A subsequent report said that Pertamina and its predecessors paid no taxes at all for the years 1958 through 1963, filed no tax return for two or three years thereafter, and owed escalating amounts of unpaid taxes since. 28 )

The Commission concluded that Pertamina had to become the joint responsibility of all its senior managers, not just its executive director. And it needed to be monitored by a board of commissioners composed of independent experts like the Minister of Finance. 29

Reflecting liberal opinion in Jakarta, J. A. C. Mackie went on to discuss aspects of the case that the Commission did not raise in its reports:

It has long been common knowledge that a large part of Pertamina’s oil revenues has not been paid into the state treasury, but has remained under the control of Ibnu Sutowo who has made use of it in his own ways, either as “unconventional finance” for the armed forces and other parts of the government or for diverse purposes of Pertamina or himself. There has been no public accounting for these funds. The figures for Pertamina’s unpaid taxes given in the Commission’s report are the first official estimates of the magnitude involved (and these may not tell the whole story). Much of the expenditure has undoubtedly been for the business purposes of Pertamina. . . . In addition, however, large outlays have been made over the last few years by Pertamina, or Ibnu Sutowo personally, for all sorts of social welfare and semi-political purposes. . . . He has been able to maintain a high degree of independence despite the efforts of several Ministers of Mining to bring him under tighter control. 30

The revelation of the Commission reports to the public by Sinar Harapan  gave considerable support to those both inside and outside the government who already believed that Pertamina needed to be brought under control.

The Problem of the Controllers

The law creating Pertamina in 1968 had made its president-director responsible to the Minister of Mines, had required him to provide the Minister with extensive financial reports, and had given the Minister veto power over both operating and capital budgets. But this one-to-one relationship was not sufficient to provide any serious oversight when, as was routinely the case, Ibnu Sutowo chose to ignore the Minister. The attention given this matter by the Commission of Four obliged the government to do something, and the upshot was a new law, Law no. 8 of 1971, which brought about a real change.

Pertamina was now placed under a board of directors comprised of the ministers of mining, finance, and national planning; these at the time were three of the president’s principal economic advisers, former professors Sadli, Wardhana, and Widjojo. The board was given sweeping powers to determine Pertamina’s policy, supervise its management, and approve its budgets, plans, loans above an amount to be stipulated by the board, the founding of subsidiary and joint-venture companies, sales and purchase agreements, and executive salaries, among other things. In addition, the new law required Pertamina to remit to the state treasury the entire proceeds obtained under the “work contract” with Caltex and sixty percent of the net operating income obtained under its “production-sharing” contracts with other producers, sixty percent of production bonuses payable under the latter, and sixty percent of Pertamina’s own net operating income. 31

The 1971 law brought about a significant change in the government’s revenues. Oil tax receipts as a share of oil exports went from 33 percent in 1969-70 to 48 percent in 1971-72; in the latter year, oil surpassed foreign aid as a source of government finance for the first time. But a still more significant change occurred in the price of oil on the world market as a result of events in the Middle East, highlighted by the Arab oil embargo of October 1973. A barrel of oil, which had been worth $2.00 at the end of 1970, reached $3.70 in mid-1973, and more than $12.00 by mid-1974. Indonesia’s oil exports leapt in value from $590 million in 1971-72 to more than $3 billion in 1974-75. As a result, oil revenues in the latter year for the first time amounted to more than half the government’s entire income from domestic sources. 32

Ibnu Sutowo’s strategy of actively recruiting foreign firms obviously was paying off, and the enterprise appeared to be a huge success. The argument that the spectacular rise in oil income was owing to external events seemed small-minded, and members of the Pertamina board found it impossible to veto Ibnu’s plans. As one member of the new board of directors observed: “Soeharto was always ambivalent when it came to a choice between the economists and the entrepreneurs. He was strongly attracted to the clarity of macro-analysis. But he also admired people like Ibnu who could get things done. We were aware of this, and had to take it into account.” 33

Another consideration was Ibnu’s standing in the international business community. In his address to Parliament in May 1975 Sadli said that the government had agreed to Pertamina’s carrying out various non-oil ventures “so as to take advantage of Pertamina’s potential and the confidence that is held in Pertamina in the business world–especially the foreign business world–in order to attract overseas capital to Indonesia.” 34

Ibnu, confident of the president’s support and that of the international business community, continued to keep his board at arm’s length. The Minister of Finance was said to have difficulty learning what the foreign oil companies were paying to Pertamina. And what Pertamina was able to count as its share, it spent. Sadli reported in mid-1974 that Pertamina’s budget for fiscal year 1974-75 was Rp. 777 billion ($1.9 billion), a sum equal to about half the government budget. Yet, its taxable net profits were not expected to exceed Rp. 2 billion ($5 million). 35

If events had gone no further than this, Ibnu might have survived at the head of Pertamina for a long time. But it was exactly in these

circumstances, with everything going his way, that Ibnu overreached himself. According to the Sadli report to Parliament, Ibnu secretly took on two large financial commitments. One was to increase the planned capacity of the steel plant from 500,000 tons to 2 million tons. The other was to enter contracts for the hire-purchase of oceangoing tankers. 36

The Role of Foreign Banks

Foreign banks began to be a political factor in Jakarta as early as 1970, and they became a powerful force with the arrival of the oil companies. The editor of a leading Jakarta daily newspaper later recalled: “In 1972 or 1973, if Ibnu wanted a loan, the banks would rush to provide it, even if the Minister of Finance did not approve.” The center of power began to shift away from the government economists dealing with foreign governments and their aid agencies. “When the foreign oil companies came in,” said the editor, “Ibnu Sutowo quickly became a major power, able to ignore Widjojo and the rest.” 37

Erland Heginbotham, who was the economic counselor of the U.S. embassy in Jakarta during these years, said in later testimony before a U.S. Senate subcommittee:

I think it is fair to say that General Ibnu was clearly an international glamor stock in his early days. The appeal that his operations had to an immense diversity of interests was very great. Lined up at his door were not only bankers but suppliers and a variety of other financial institutions. . . . There was a developing fever pitch of interest in Pertamina’s activities and what opportunities that might have for the banking sector. 38

Heginbotham attributed the foreign interest in part to Ibnu Sutowo’s personal style. “Ibnu relied on very rapid decision making, and on his personal contacts with international financial and government officials. He moved quickly. He put projects into being rapidly and got a rapid payback, generally in self-liquidating activities.” These qualities earned him the respect of his own president and of the international oil and banking communities. Indeed, Ibnu “acquired . . . a considerable international status and had ready access to heads of government in a variety of major industrial countries.” 39

Starting in about 1971 Ibnu was assigned a number of development projects and was left to find the money to finance them. “It was the tendency of the President to turn to General Ibnu, in whom he had great confidence, and say, General, here is an important project, we would like you to get it done, and nobody discussed where the money was to come from.” 40 By early 1972 it was known in banking circles that Pertamina was borrowing substantially in Europe, and in some cases on unfavorable terms. The U.S. embassy was approached by U.S. banks for advice about lending to Pertamina, but had great difficulty in “getting any kind of indication of the volume of the credit that was being acquired.” 41 The International Monetary Fund (IMF) also was concerned, but had equal difficulty in obtaining information. “They could not find Indonesian Government officials who were willing to take on inquiring of General Ibnu as to exactly what he was doing.” 42

In these circumstances the IMF pressed for and obtained an agreement with the Indonesian government in March 1972 setting a limit on the volume of medium-term loans that the government and its agencies could make–loans with a maturity of between one and fifteen years. The Fund monitored Indonesian performance by requesting information from the governments of countries whose banks were believed to be lending considerable amounts to Pertamina, and from these sources learned that Pertamina was breaching the ceiling. Under further pressure from the Fund, Soeharto signed a decree in October 1972 requiring all state enterprises to obtain the approval of the Minister of Finance and the governor of Bank Indonesia before negotiating any medium-term loans from international sources. 43

Bankers found two ways to skirt the IMF agreement and the Soeharto decree. One was to make a loan for more than fifteen years, but provide for the bulk of it to be repaid in five to ten years. Another was to lend money for less than a year and when it fell due, simply “roll it over”–lend it again for less than a year. The U.S. embassy made representations to U.S. bankers, at least from early 1973 on, Heginbotham said, to cooperate with government authorities by avoiding these circumventions. But these efforts were not effective. With oil prices rising, bankers saw Pertamina as a good credit risk. If they did not agree to circumvent the IMF ceiling, their competitors would. And it seemed inconceivable that the Indonesian government would permit a Pertamina default. 44

The result was unrestrained Pertamina borrowing, until, that is, a series of events altered the entire situation in the latter part of 1974. Toward the end of the year the rise in oil prices was causing a recession in such industrial economies as those of the United States, Germany, and Japan. The demand for oil was slackening. Some major banks collapsed, including Franklin National in the United States and Herstadt in Germany. And in the wave of caution that swept the financial community, liquidity tightened in the international markets. Some of the smaller banks among Pertamina’s international creditors decided it was time to get their money out.

This situation found Pertamina in a highly exposed position. Sadli said in his May 20 statement that, from 1973 on, Pertamina “always exceeded the ceiling that had been laid down by a wide margin.” Rachmat Saleh said that Pertamina was borrowing so heavily in foreign capital markets that it was preempting the government’s ability to raise money for itself. 45

Ibnu told a local reporter in January 1976 that the only real trouble was the failure of a major long-term loan from foreign sources to materialize:

The problem was that in 1974 we made an agreement for a twenty-year loan. The total involved was $1.7 billion. We regarded the loan as secured–the loan agreement had already been signed. Because the money had to be taken in a lump sum–this was part of the agreement–we took steps to use the funds to initiate projects, including Krakatau Steel and Batam Island. We obtained short-term loans which were essentially bridging finance. Well, the long-term credit did not come, and that was the problem. I still don’t understand why the loan disappeared, just like that. 46

Ibnu said that the loan was to come from a source in the Middle East, offered by letter from a London bank. Sadli said later that the government had assented to the deal. A number of commentators have since suggested that Ibnu–and the Indonesian government with him–probably were the victims of confidence men. A remarkably similar experience, at almost the same time, befell the Australian Minister for Mines and Energy, R. F. X. Connor, leading to his resignation and a series of difficulties that eventuated in the fall of Prime Minister Gough Whitlam’s government.

That Ibnu did not resign was owing in part to his character. He believed that the technocrats were exaggerating the default. Equally important was Soeharto’s continued confidence in him. That confidence was shaken only later, with the uncovering of Ibnu’s dealings in the international tanker business.

The Tanker Deals

Pertamina was responsible for the entire domestic distribution of oil and oil products, and, in an island nation, that meant that Pertamina was immersed in the shipping business. A government planning document projected the size of Pertamina’s tanker fleet for 1974-75 at 114 ships, representing 1.87 million DWT, more than half of which was on hire-purchase. 47 Another source put the fleet at almost 3.0 million tons at the end of 1974. This was more tonnage than the Indonesian navy. 48

A mutual interest in tankers brought Ibnu Sutowo into contact with Bruce Rappaport, a Geneva businessman, in 1966. Several press accounts have described Rappaport as having started out in the business of providing ships with supplies in ports around the world, and having gone on to become a ship broker, arranging deals between ship owners and people who wanted to use them. Ibnu Sutowo and Rappaport developed close relations, and Ibnu sent a considerable share of Pertamina’s tanker business his way. Rappaport named one of the tankers he chartered to Pertamina the “Ibnu,” and named one of his firms “Rasu Maritima,” an acronym from the first letters of his and Ibnu’s names.

Rappaport was said to be secretive, and this may have accounted for Ibnu’s behavior in his dealings with him. Some Pertamina agreements with Rappaport firms were unknown even to senior Pertamina staff, and it was these that became a center of controversy as the veils were removed from Ibnu’s activities in the course of 1975. The agreements concerned large, oceangoing tankers, and it was not clear what Pertamina intended to do with them. One guess was that they were to be used for “spot charter” in the Middle East. 49

Contracts for these tankers were written at different times between September 1970 and July 1974. The agreements provided for Pertamina to acquire the tankers on a hire-purchase basis. Thirteen ships were involved, at a total cost of $1.4 billion, payable over a period of ten to twelve years. 50 All but the first of these agreements were signed after the 1971 legislation requiring Ibnu to obtain his board of directors’ approval for such transactions; Sadli told the Indonesian Parliament in May 1975 that no such approval had ever been given or even sought.

Ibnu had made a huge and imprudent gamble. The high price of oil after the 1973 embargo led to decreased demand, oil shipments around the world declined in the course of 1974, and the bottom fell out of the tanker market.

In January 1975, when the Pertamina loan from the Middle East evaporated and the corporation was approaching default, Ibnu and Rappaport met in New York and London to discuss their situation. Rappaport was being pressed by his creditors, who wanted reassurance that their contracts with him would hold. Rappaport pressed Ibnu for assurance that Pertamina would stand by its contracts with him. On one of these occasions, according to an affidavit later executed by Ibnu and submitted to a court in New York, Ibnu signed “approximately 1,600” promissory notes without reading them. 51

Although Ibnu said in his affidavit that the notes were merely intended for Rappaport to show to worried ship owners, that seems highly improbable. Rappaport had a reputation for being highly attentive to the legal aspects of the shipping trade. His agreements with Pertamina were made in the name of four different corporations, all registered in different countries. One team of reporters who investigated the case concluded that if the whole truth were ever to be uncovered, “it would probably be necessary to ransack lawyers’ offices from New York to Jakarta, Panama, London, Hongkong, Monrovia, Oslo, Bermuda, Geneva and Singapore.” 52 Rappaport himself told a visiting reporter early in 1977 that he had “fought in courts around the world” to get his money ahead of other creditors when another shipping empire ran into financial trouble in the early 1960s. 53 With large amounts of money at stake in a volatile market, contract disputes were common in the shipping trade, and the notes gave Rappaport a stronger hand in the event the Pertamina deals went sour and he had to go to court to recover the ships.

When Pertamina defaulted on its repayment of the bank loan in February 1975, payments to various creditors, including Rappaport’s firms, were reduced. When Major General Haryono was installed as director of Pertamina’s financial affairs in May, the payments reportedly stopped altogether. That same month, according to Ibnu’s affidavit, a Rappaport associate flew to Jakarta, met with Ibnu, and gave him a check for $2.5 million. The purpose of the payment is not known; presumably it was intended to enlist Ibnu’s cooperation, either to get the payments renewed, or to help in the legal contest that would ensue if they were not. Ibnu said in his affidavit that the money was a personal loan, but he conceded that he had not repaid it a year-and-a-half later. 54

Both sides had incentives to reach a settlement. The Indonesian government could not have wished to produce Ibnu Sutowo in a foreign court of law; under cross-examination on a witness stand, he might well make statements even more embarrassing to the government than what was already publicly known. In addition, Pertamina was now technically in default to Rappaport’s companies, and the government had to work energetically to keep its foreign bankers from breaking ranks. Rappaport, meanwhile, was under pressure from the ship owners. Sanko Steamship Co. of Japan, for example, was suing one of Rappaport’s companies for $10 million that it claimed it was owed for tankers it had chartered to Rappaport for rechartering to Pertamina. 55

Ibnu Sutowo, interviewed in February 1977–on a golf course in Palm Springs, California, where he and his son were playing in the Bob Hope Desert Classic–did not find fault with Rappaport. Government restrictions had caused the problems with Pertamina’s loans, he said, because they hampered his former ability to bargain. The “unexpected seriousness” of the world recession added to the problem. But he still thought Pertamina might have weathered the storm had the Indonesian government not stepped in. He also criticized the government’s effort to renege on his agreements with Rappaport. That was just bad busi-ness practice, he said. It would have made more sense to talk the problem out. 56

Three weeks later it was disclosed in Jakarta that Ibnu and at least twenty of his associates were under house arrest. The tanker case was said to be one of the reasons, but another was a broadening of the government inquiry into Ibnu’s private business interests. It was reported that Pertamina was believed to have done hundreds of millions of dollars worth of business with thirty-five private corporations owned in whole or in part by Ibnu and his associates. 57

Finally, in August 1977, more than two years after the unauthorized tanker deals were discovered, it was reported that an out-of-court settlement had been reached in the case. It was probably the only decision the Indonesians could have reached. Remaining in the ocean-tanker market was too risky a business for the Indonesian government–probably too risky for any government–to be in. But the cost of Ibnu’s gamble was a high one to come out of a poor country’s treasury.

A government minister later said that the case was the worst example of Ibnu’s mismanagement. “The tanker deals alone involved $3.3 billion, and it cost us $300 million, and cases in 14 courts all over the world, to terminate them. . . . It took us two or three years to clean up the mess.” 58

The Future of Pertamina

The Pertamina crisis had widespread implications for the Indonesian government and economy. The crisis had an immediate impact on the government’s foreign debt, although the full dimensions did not become clear for a year or more, and on the foreign oil companies under contract to Pertamina. The crisis also had consequences for Ibnu Sutowo and for the expansive approach to industrialization that he represented. The first task, in addition to getting control of the financial situation, was deciding what to do with Pertamina.

The state of affairs inside Pertamina was revealed only layer by layer in the course of 1975. The organization had twenty separate units reporting directly to the president-director, and six separate systems of accounts.

One official suggested that the initial problem was simply one of getting an accurate picture of the financial situation in the face of Pertamina’s disorderly bookkeeping. “It wasn’t a matter of trying to hide anything. There was no secrecy. They themselves did not know the details.” 59

The economic ministers were openly contemptuous of Ibnu’s performance as head of the enterprise. “The scale of mismanagement in Pertamina was enormous,” said one. “When we reviewed the contracts, we found that less than half the dollar total could be justified as proper investments.” 60

One of the principal sources of Pertamina’s internal disarray was the speed with which the enterprise had grown. Most of its subsidiaries and joint ventures were created in a single eighteen-month period in 1973 and 1974. The growing volume and complexity of Pertamina’s business overwhelmed the staff. “They just signed anything that came through the mail.” 61

The difficulty was also structural. With so many lines of authority leading to the president-director, no one could possibly have managed the enterprise efficiently. What is surprising is that it took Soeharto until December 1975, acting on the army investigators’ recommendation, to issue a decree streamlining Pertamina’s internal structure. 62

Pertamina’s problems were compounded by its expansion into fields unrelated to oil. The steel mill was the most obvious case, but there were numerous others as well. As the organization became increasingly active in fields in which its staff had no experience, the odds favoring misjudgment and mischance increased.

With Ibnu heavily engaged in arranging international deals, and with the staff unsupervised, venturing beyond their expertise, and handling increasingly large flows of funds, corruption flourished. In October it was reported that some forty top officials in Pertamina had been fired. 63 Indeed, the trail of corruption seemed unending. In 1977 a court case in Singapore revealed that a former Sutowo associate, Achmad Thahir, whom Sutowo had put in charge of the Krakatau Steelworks, died leaving $35 million in Singapore bank accounts; a schedule of payments suggested that he had been receiving kickbacks of 5 percent on Krakatau’s payments to West German firms. 64 His widow argued that the funds were rightly part of Thahir’s estate because such commissions were “an ordinary thing” in Indonesia, and she later charged that an equal amount of commission was shared by Ibnu Sutowo and others. 65

The government had decided as early as May 1976 to reduce Pertamina’s scale of operations, although the actual process of deciding what to do in individual cases extended into the following year. Some projects were canceled altogether, such as the controversial floating fertilizer plant. Others were deferred indefinitely, including the petrochemical projects planned for Sumatra and the proposed development of Batam island. Still others were scaled down and transferred to government departments. The largest of all, the Krakatau Steelworks, which was found to be a victim of large-scale overpricing by its contractors and large-scale corruption by its managing director, was reorganized, its plans reduced to their original size, and the project returned to the department of industries.

The only active major projects that remained with Pertamina were the LNG plants. These were, however, the most lucrative of all. The Intergovernmental Group on Indonesia (IGGI) had already cleared loans for these projects as exceptions to the debt ceiling, in view of Japanese readiness to provide the extra capital needed to develop them–and to buy the LNG that resulted. The East Kalimantan plant, a joint venture with Huffco, went into production in 1977; the Arun plant in Sumatra, a joint venture with Mobil, in 1978. Their joint earnings exceeded $1 billion in 1979. 66

The net result of these decisions was not to reduce the size of Pertamina appreciably; it remained a very large organization, almost certainly the largest employer in the country after the government itself. No public reports were made for a decade. A veil was drawn firmly over its affairs and was not lifted until 1985. In May of that year, Minister of Mines and Energy Subroto declared that Pertamina was accountable and auditable for the first time, and that its debt to the central bank had finally been paid. As of March 30, he said, Pertamina had assets of $11.7 billion, income of $9.59 billion, expenditures of $6.65 billion, and a profit before taxes of $2.9 billion. No figures were given for prior years. 67

In these circumstances, whether Pertamina was any more efficient than it had been a decade before was impossible to say.

The Dismissal of Ibnu

Soeharto distanced himself from Pertamina’s problems. Any political leader would have done the same, but it bespeaks his style, and the strength of his position, that he maintained a majestic silence on the subject for all of 1975. In January 1976 he was scheduled to give his annual budget message to the Parliament, and Pertamina could no longer be ignored. He reviewed the financial history that had first been officially described by Sadli the previous May, although without reference to the government’s lack of knowledge of some of Pertamina’s undertakings. He acknowledged that the “difficulties” Pertamina experienced would have “serious consequences for national development.” They involved “huge amounts of money.” The amount needed simply to meet Pertamina’s domestic obligations was “enormous.” 68

These admissions could not have come easily for Soeharto, and by this time it was rumored in Jakarta that Ibnu was to be replaced. A dignified departure was said to be planned for some time in the first half of the year. 69 The findings of the army and civilian investigators, who had been poring over Pertamina’s affairs for more than six months, left Soeharto no other choice. An army officer involved in the investigation said that Ibnu’s venture into the international tanker trade was the final straw. 70 According to a friend of the president-director: “They laid out the situation, and it was clear that Ibnu had to go.” 71

The decision was long in coming, and several factors seem to have been responsible for Soeharto’s delay.

Some saw the delay as a classic example of Soeharto’s traditional leadership style. A historian said: “The problem of confronting a close friend with damaging information, the concern to avoid reducing a man’s status in public–this is why the process was so prolonged. No Western, and no modern Asian, leader would have failed to act expeditiously in such a case.” 72

The editor of a major daily newspaper observed:

It took Soeharto a long time to change his mind about Ibnu Sutowo. That decision came very late, after Widjojo and Ali Wardhana had submitted a whole series of reports about what they were finding out about the situation in Pertamina. Ibnu gave money to many people; he supplied the extra-budgetary fund of the president. Also, Ibnu was seen as a balance to the Western-trained economists. Ibnu was seen as a nationalist by comparison. The president has always looked for balance. 73

Ibnu helped to prolong the process by his own behavior; a graceful departure was not going to be easy to arrange. He was not cooperative with the men appointed to look into his activities. According to a friend:

As the investigations widened–for example, into the tanker deals–Ibnu was interviewed at home. At one point he blew up, threw the investigators out, and complained to (General) Panggabean (the army chief of staff) that they had been rude. Soeharto ordered a three-star general to be present on all future occasions. But Ibnu also was asked to stay near his phone and avoid company for a while. 74

Ibnu’s free-handed patronage had won him many friends. It is known that he helped provincial governors with projects that were locally significant in the late 1960s. He sat on the Golkar board and was reliably reported to have been the main source of its funds for the 1971 election campaign.

“There was hardly an army commander in the regions who didn’t get help for some local project,” according to an associate. When Soeharto began to face up to the task of dropping Ibnu in late December, according to this source, he turned to the army chief of staff.

Soeharto called in Panggabean . . . and laid out the situation to him. Panggabean said he wanted to clear the plan to drop Ibnu with his commanders, with the heads of 10 or so major units. . . . They agreed, on the understanding that Ibnu would never go to jail. Soeharto accepted these terms but added another of his own: “provided he never talks.” 75

Up to this point the two men had avoided a personal break, but one seems to have occurred in February, at the time of the first meeting of the heads of government of ASEAN on the island of Bali. Having read the foreign press accounts of his rumored departure, Ibnu issued an announcement through Pertamina early in the month that he was taking “a long leave of absence” in the United States; no date was set for his return. On February 23, as the leaders gathered in Bali–at a Pertamina resort complex–Ibnu unexpectedly appeared on the scene and took Ferdinand Marcos, the president of the Philippines, off in a helicopter to play golf. “Soeharto was really upset by that,” according to a friend. “He realized the issue was who was running the country.” 76

The final act came swiftly after this. It was said that Minister Sadli, who was chairman of the Pertamina board, had never called Ibnu to his office. Now he did: “He told Ibnu he had three alternatives: remain as a figurehead, resign, or be fired. Ibnu couldn’t believe it. He didn’t think Sadli would dare to do this. It took him some time to realize that the message was from Soeharto.” 77

Soeharto avoided a personal confrontation to the very end. It was announced that Ibnu was being dismissed “with honor.” Major General Harjono was named as “acting” in his place. Only later, with Ibnu again abroad, did Soeharto install Harjono as president-director at a ceremony attended by the entire cabinet.

Ibnu never went to jail. He also did not talk, except once, to the reporter on the golf course in Palm Springs. Three weeks later it was disclosed that Ibnu and twenty associates were being detained in the widening government inquiry into their personal business affairs. He was not in the news again until July 1978, when the attorney general, Ali Said, announced that all investigations were at an end and that Ibnu had been found “not involved” in any criminal activity. 78

The Foreign Oil Companies

The principal means the government used to recoup the Pertamina losses was to take more money from the foreign oil companies.

In May 1975, in his address on oil problems to the Parliament, Sadli charged that the foreign firms were making excessive profits. It was no more than “just,” he said, that they should be taxed more heavily. This was only in accordance with the aspirations of all developing countries as expressed in their calls for a New International Economic Order. 79 According to one industry source, the basis for Sadli’s charge was a memorandum by members of the IMF staff that compared the share of oil profits being received by the Indonesian government with those being received by governments in the Persian Gulf. 80

In his budget speech of January 1976 Soeharto announced that the government planned an increase in oil revenues to a new total of $4 billion. This would require “the reduction of the profits gained by oil companies on each barrel of crude they produce,” effective January 1. The government, he said, “sincerely seeks the understanding of the oil companies concerned.” 81

Sadli elaborated on the government proposal. Pertamina had contracts at the time with forty-eight foreign oil companies, which had invested a total of more than $1.2 billion and were producing more than 90 percent of Indonesia’s crude output, estimated at 1.3 million barrels a day. The two long-time American producers now accounted for about 70 percent of total production, and the other forty-six foreign firms for about 20 percent. The government proposed to renegotiate the contracts with all these firms. The basic split had been 65:35 in the government’s favor. The split was now to be 85:15. 82

The two American firms were still operating outside the production-sharing system, and Caltex Pacific Indonesia was by far the largest company in the industry, producing 900,000 barrels a day. The government proposed to collect an extra $1.00 out of Caltex’s estimated $2.00 to $2.30 profit per barrel. That meant taking about $300 million of Caltex’s estimated $600 to $700 million annual earnings.

The oil firms were understandably angry. They argued that Indonesia’s oil profits could not be compared directly with those of the Middle East. Indonesia had only one large oil reservoir, the Minas field of Caltex, and that was an old field requiring increasingly costly methods of recovery. Otherwise, Indonesia had a large number of widely scattered small fields, and these required a high level of continuing exploration. Pertamina officials also were opposed to the government proposal. The implication was that they had been receiving payoffs to let the foreign firms get away with excess profits. 83

The first payment was due April 15, and by late March Soeharto was personally involved in meetings with Caltex officials. The ultimatum stuck. On April 15 Julius Tahija, president-director of the firm, called on Soeharto to inform him that the corporation had acquiesced. 84

The principal lesson drawn from the experience has been the obvious one, that the sovereign government of a poor country will take what opportunities it can to assert itself in dealing with foreign firms extracting a nonrenewable natural resource. But two other observations are worth recording. One was that a negative attitude toward foreign oil companies could not be sustained without inhibiting further foreign investment in the industry, and thus jeopardizing Indonesia’s long-term oil prospects. Oil rigs were already down by about a third from the boom years of 1973 and 1974, and there were doubts about how far into the 1990s Indonesia’s proven reserves would last. The other was that oil income, even with the recent increase, was not going to solve the government’s long-term problem of meeting its increased foreign debt. 85

The Foreign Debt

The IGGI was scheduled to meet in March 1976, and at the center of the agenda was the state of Indonesian monetary affairs in the wake of the Pertamina crisis. Donor governments already had received a report from the World Bank that was described as “somber” and was said to suggest that Indonesia faced a “staggering” need for $3.4 billion in foreign loans in the coming year and heavy debt-servicing requirements for the next decade. The impact of Pertamina’s spending spree in 1974 was evident. Earlier figures had shown that service of the foreign debt would peak in 1976 at $348 million and remain below that level until 1985. The new projection was that debt service would rise annually through this entire period, starting at $813 million in 1976 and rising annually to $3.1 billion in 1985. 86

The Indonesian economic ministers were reasonably well prepared for this occasion. Ibnu Sutowo had been removed from Pertamina (the timing perhaps influenced by the IGGI date), commercial loans syndicated by American and Japanese banks had replenished the central bank’s holdings of foreign exchange, and the “lumpy” investment cases of the Krakatau Steelworks and the LNG plants were under discussion with the German and Japanese governments. With the exception of possible losses in the case of the oceangoing tanker fleet, the financial hemorrhage had been brought to a halt. It did require a buoyant view of export earnings, and a national economic growth rate of about 7.5 percent a year for the next decade. But, given these, the government would manage to keep the servicing of its foreign debt just under the danger level of 20 percent of export earnings. 87

The governments of the industrial democracies did not disappoint the Indonesian government. The request for about $1.4 billion in concessional and semiconcessional financing was accepted. So was the proposal for about $1 billion more in export credit and related financing. In addition, in a break with past practice, the IGGI members pledged themselves to helping raise an additional $1 billion in emergency finance to help meet cost overruns on several large Pertamina projects, later identified as the Krakatau Steelworks and the LNG complexes. 88

Even so, while the short-term problem had been met, the long-term one was awesome. Before the Indonesian government assumed responsibility for Pertamina’s foreign obligations, its foreign debt was estimated at $5.6 billion. The size of Pertamina’s obligations was still not firmly established; estimates of the total varied between $6.2 and $11 billion, a substantial portion of which would, in the ordinary course of events, be repaid from operating profits. Pertamina’s short-term debts alone, however, was on the order of $1.0 billion, and that was enough to increase the government’s indebtedness by 18 percent. The larger problem was that another $4.3 billion of Pertamina’s obligations had been transferred to other agencies, including prominently the central bank. Altogether, the government’s decision to “bail out” its state oil enterprise had more or less doubled its foreign debt. 89

The final cost of the Pertamina spending spree probably will never be known. Too many of its obligations were moved to too many other entities, and merged there with much else–” swept under the rug,” as one not unsympathetic observer remarked. 90 The net result, however, was to increase the government’s long-term foreign debt substantially, and to narrow its freedom of action in many years to come. When oil prices were on the rise in the international market, as in 1979, there was even, for a brief period, a new round of fevered interest in large-scale projects. But when oil prices fell, as they did from late 1981 on, debt management was again a major preoccupation, and government options were seriously limited. Thus, one result of the Ibnu era at Pertamina was not to free the Indonesian economy from foreign interests at all, but to anchor it even more deeply in interdependence with the rest of the world.

Oil and National Development

The Pertamina crisis inevitably focused attention at the time on its more lurid aspects, the unrestrained foreign borrowing that provoked it, the billion-dollar projects at stake, the multimillion-dollar corruption that came to light, and the fate of the personalities involved. But larger questions were at issue. These had to do with the role of oil and oil money in the economy, with the sort of development strategy the government was to pursue with its newfound wealth.

One consequence of the early expansion of exploration and production pressed by Ibnu Sutowo was to enable Indonesia to capitalize more fully than would otherwise have been the case on the oil “booms” of the 1970s. World oil prices quadrupled following the Yom Kippur War of 1973, and tripled again following the fall of the Shah of Iran in 1979. Indonesia received an initial windfall of $4.2 billion in 1974, the equivalent of a bonus of 16.5 percent of its nonmining Gross Domestic Product (GDP). The bonus continued at about 16 percent through 1978. Then the earlier “boom” was repeated, increasing the size of the windfall to 26 percent by 1980. As early as 1981, however, the second boom ended, and Indonesia lost oil exports worth almost 9 percent of its nonmining GDP. 91 Prices remained depressed until August 1990, when Iraq occupied Kuwait.

The oil windfall was in most respects worth less to Indonesia than to any other oil-exporting country in the developing world. In dollars per capita, because of its large population, Indonesia’s windfall was extremely modest by comparison with all the rest. Even in total dollars the Indonesian windfall was much smaller than that of countries with better established oil industries, such as Nigeria and Venezuela. And as a percentage of GDP, because of the rich diversity of its other resources, Indonesia’s oil windfall was smaller than in these countries or in, for example, Algeria. 92

The oil windfall in Indonesia was similar to many others in one respect: most of the windfall accrued to the government. As Indonesia’s net energy exports increased from about $1 billion in 1973 to $13.3 billion in 1980, the share of energy in total exports went from 45 percent to 70 percent, and the government’s reliance on oil taxes reached 70 percent of domestic revenues in the 1981-82 budget. 93 The oil boom thus greatly enhanced a process already begun with foreign aid. The government’s need to develop a broader tax base, which would have required that it give more weight to the views of a tax-paying citizenry, was postponed. Ideas about decentralization were stillborn as the new financial resources of “the center” were translated into political reality. Hopes of deregulating the economy also were dashed as, in the wake of the Pertamina crisis, controls over state corporations were expanded. And incentives to promote other products for export, which would have brought income into the hands of at least some of the population without direct government involvement, especially in the long-suffering “outer islands,” ceased to be a matter of high public priority. Much the same happened in other countries that also experienced an oil windfall. 94

One of the costs of easy oil money was that the Indonesian public came to view oil products as more or less free goods. The protest that greeted the domestic oil price increase in 1970 was not an isolated incident, and the government continued to find extreme difficulty in eliminating the subsidy. Pertamina sold its refined products domestically at far below the world market price; they were the lowest in Southeast Asia at least into the early 1980s. At first, the cost was hidden in the Pertamina budget. From 1977-78 on, as part of the process of accounting for Pertamina’s profits and losses in a businesslike way, the subsidy was made an item in the government budget, and, within a few years, ballooned to such a size that it came to rival the entire government payroll. This artificial pricing of oil at home had several negative results. It absorbed government revenues that might have been put to better use. It encouraged rapid domestic consumption of oil products, threatening the share of oil available for export. And it skewed the prices of other goods and services, including electricity, transport, and cement, and this, in turn, had the effect of encouraging capital-intensive investment. 95 An increase in electricity charges in 1989 was greeted with outrage by parliamentarians, who were not consulted, and oil products were still being sold in Indonesia at subsidized prices in 1990. 96 There is evidence from other countries that a more open political system might well have produced even larger consumer subsidies. 97

The largest share of the windfall in Indonesia, as in many other countries, was allocated to public investment. It has been calculated that 49 percent of the first price rise and 36 percent of the second one went to domestic investment in Indonesia. What is unusual and perhaps unique in the Indonesian case is the portion of this investment that went into agriculture and rural development. Bruce Glassburner has estimated that 13 percent of development spending in 1973-74 to 1977-78 went into agriculture, including irrigation; fertilizer subsidies averaged another 11 percent. In addition, much of the spending on physical infrastructure–which was 43 percent of development spending–went to rural public works. In Nigeria, by comparison, agriculture received 2.5 percent of federal capital outlays, and public works did not extend beyond trunk roads. 98

A final outcome of the oil windfall in all oil exporting countries was enhanced public investment in industry. This often took the form of large, capital-intensive projects, usually designed to increase the indigenous role in the oil industry or to promote the development of non-oil sectors. It is in this respect that, as some in Jakarta like to say, the Pertamina crisis was “a blessing in disguise.” Because of the crisis, many large projects, including projects in petrochemicals, were delayed in starting; when the slump occurred in the early 1980s it was still possible to cancel or reschedule them. Also, because of the losses attributable to the Krakatau Steel venture, and the cost overruns on the LNG projects, the government was cautious about commitments to other large undertakings, and foreign funding was arranged to cover most of the costs of later projects, such as the Asahan aluminum complex in Aceh. As a result, Indonesia’s behavior was more conservative with respect to industrial development than was that of many other oil-exporters, and the international involvement helped to ensure foreign market access and a favorable rate of return. 99

Nevertheless, the appeal of heavy industry did not disappear from the Indonesian scene. Ibnu Sutowo articulated the proponents’ view in an article published in February 1976, when his departure from Pertamina was already imminent. Ibnu presented the argument in language that was characteristically direct. Equality of income, he said, was a utopian vision. It had never happened anywhere in the world, no matter what the system of government. Realistically, the best one could hope for was equality in the distribution of benefits. But that required production first. The means of production had to be acquired, and production had to yield increased results. Only then could the benefits be distributed, to the producers of the new wealth, and to everyone else. This task had to begin with the acquisition of technology, and with the development of large organizations to use it. In the Indonesian case, Pertamina was a good example of how this was to be accomplished. Pertamina did not work for a profit, as large organizations did in some other countries. Because the oil industry needed them, Pertamina built physical infrastructure and service industries–ports, highways, communications facilities, hospitals, schools, houses, and much else. In the process of developing the oil industry, Pertamina was developing the country. 100

Ibnu had his successors in the Indonesian government, and, like him, they were not willing to wait. The economists argued rates of return. With the ambivalence of many of his compatriots, Soeharto supported the one, then the other.

Oil money was not responsible for this lack of direction on the part of Soeharto and his government. But oil money did make a bifurcated vision possible. Particularly in the years when oil money was flush, as in 1973-74 and again in 1979-80, it seemed that one could have one’s cake and eat it too. The circumstances were ultimately corrosive. Oil money came too easily. The money was paid by foreign consumers, for oil largely produced by foreign firms, and it flowed into the Indonesian political and economic system at the very top. As Sumitro Djojohadikusumo, the dean of Indonesian economists, mused in 1980, the Indonesians had become rich “without really trying.” 101


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