May 29, 2001 Asia Times
Asian Crisis Indonesia's Chandra Asri: A case study
By Bill Guerin
JAKARTA - Although rarely spotlighted outside Indonesia, the saga of Chandra Asri is at the core of deliberations on the consequences of the Asian financial crisis and the rampant cronyism that preceded it in Indonesia. Unfortunately for the Indonesian taxpayer, political favoritism may cost them dearly yet again, and the sorry tale does not bode well for Ibra (the Indonesian Bank Restructuring Agency) in its efforts to bring major debtors properly to account.
The giant forest of half-rusting metal at Anyer, 80 miles from Jakarta, is the heartland of Indonesia's main petrochemical industry. Here, overlooking the grumbling volcano Mount Krakatau, is Chandra Asri, the first and only olefin complex in Indonesia. Controversial from the outset, the US$1.5 billion megaproject, awarded through the tried and tested "KKN" (collusion, corruption and nepotism) patronage of the "New Order" era, swallowed up vast amounts of money, suffered extraordinarily unfortunate timing at each phase in its history, and yet today remains as much of a political hot potato as it did at the start.
"Awarded" in 1990 to Bambang Trihatmodjo, Suharto's eldest son, the ethylene and polypropylene started to flow in 1995. Bambang's new $1.2 billion stranglehold on a strategic industry was set up as a 75:25 joint venture, with Marubeni Corp holding the lion's share of the Japanese 25 percent stake and the Barito Pacific Group heading the Indonesian investors. Those were heady times, with Indonesia's potential for petrochemical opportunities exciting big names from all over the globe. Forecasts then were for an ethylene capacity of 1.5 billion pounds per year.
In 1991, the Indonesian government halted the project for two years following loud "noises" from the World Bank about Indonesia's foreign debt exposure. The Indonesians then cannily set up a "shell" overseas corporation in Hong Kong and channeled funds through it, so the Hong Kong entity became the main sponsor of the project as a "100 percent foreign-funded" investment. But the halt took its toll - the construction was funded mainly through yen loans and the freeze coincided with a historically high yen. Not only that, the plastics finally came on stream at a time of depressed petrochemical prices. The company estimated it lost $500 million, including currency fluctuations, interest and lost revenue.
A decade later, the issue is now of urgent national importance with Chandra Asri likely to run out of cash and be forced to halt production by the end of June if the divvying up of its massive $730 million debt is not resolved. The project's revolving credit of $30 million from Bank Internasional Indonesia has dried up and the Government Bank Mandiri insists the restructuring deal is finalized before it will give credit. Worse still, polypropylene producer PT Tri Polyta Indonesia, just across the road from the Chandra Asri plant, has not paid a bean for its deliveries since December, running up debts of $40 million. This is ostensibly over the price charged for the polypropylene, but the case smacks of a money merry-go-round as both companies were owned by the same shareholders, led by indebted tycoon Prajogo Pangestu, who controls the forestry Barito Group.
Chandra Asri needs cash to buy naphtha, the raw material for olefin, which is still imported until the Indonesian dream comes true and state owned oil company Pertamina produces the stuff. Tri Polyta itself, listed on the stock markets in Jakarta and New York, is suffering from a downturn in the price of polypropylene, almost the only product it manufactures.
By 1997, when the Asian financial crisis smothered demand for the intermediate materials for plastics and polyester fibers it produces, Chandra Asri had accumulated debts of almost $2 billion, yet conversely, if the project had kicked off on time it would have captured the high margins made from historically high petrochemical prices, and Bambang would have been laughing all the way to the bank. In 1999, there was a flurry of excitement when Jakarta prematurely announced that British Petroleum Amoco would merge with Chandra Asri. BP Amoco would become a 50 percent shareholder, with the government owning 25 percent and the rest held by a Japanese consortium. Alas, they forgot just how serious a problem the outstanding debt of $830 million to Japanese and Indonesian banks was. BP disappeared from the limelight. The attraction for UK-based BP Amoco would have been to merge its local polyethylene venture, PT Petrokimia Nusantara Interindo, (PT Peni), with Chandra Asri, and give them a cheap, reliable source of ethylene feedstock for Peni, which already buys about 140,000 tons a year but needs more.
Later, by the time the new government had been appraised of this thorny issue, an Ibra team started lengthy negotiations with Marubeni. In the end, President Abdurrahm Wahid himself flew to Tokyo and signed an MoU in May last year approving an agreement that gave the Japanese trading company better treatment than Ibra itself would have. Wahid's involvement in the restructuring of the Marubeni debt deal was seen as little different from the political favoritism that gave birth to the project in the first place. An Asian Wall Street Journal article charged that the deal was the result of political pressure on Wahid (from Japan) and backroom political maneuvering. Economist Sri Mulyani Indrawati, however, hinted at why the deal was bad for Indonesia when saying bluntly, "I can't understand why a president who doesn't understand economics was given the authority to make a technical decision on such matters as the Chandra Asri case."
The Barito Group's Pangestu is among a group of tycoons singled out by Wahid as major contributors to the country's exports and thereby effectively immune from prosecution. These sweetheart debt workouts smack of political favoritism, if not worse, and cast a giant cloud over Ibra's efforts (and those of the attorney-general, for that matter) to bring debtors properly to account.
The Financial Sector Policy Committee (FSPC), a group of several senior economic ministers, including the finance minister, is chaired by Coordinating Minister for the Economy Rizal Ramli, and was formed in 1999 to provide bank and corporate debt restructuring guidelines, particularly for Ibra. But in the course of its development, the committee grabbed greater executive powers for itself and now has the final say on approval of any debt restructuring of more than Rp1 trillion ($100 million).
As the negotiations with Marubeni dragged on, the FSPC decided to take over the process, leaving Ibra nonplussed in the back seat. Now, after 19 months of negotiations, the FSPC finally decided last month on a debt-restructuring workout for Chandra Asri. Marubeni approved the FSPC's decision. The proposal is that Marubeni converts $100 million of its total $730 million in loans to Chandra Asri into a 20 percent equity stake in the company, and allows the loan repayment over 15 years at an interest rate of 1.5 percent over Libor. Marubeni also agreed to drop its status as the sole creditor of Chandra Asri, allowing Ibra to also become a creditor with an outstanding loan of $50 million. Wahid's Tokyo deal was for Libor plus 2.5 percent and a repayment period of 12 years.
Ibra would convert $375 million of the $425 million loans it took over from domestic banks into 31 percent ownership and leave the remaining $50 million as an outstanding loan to Chandra Asri. The man who started all this, Pangestu, would own the other 49 percent of the petrochemical company.
However, this is in no way a done deal. Ibra is fighting back.
Major multinationals went in with their eyes open to shotgun weddings with the Suharto clan, and although the foreign partners had to do all the work and take all the risk, they blatantly capitalized on the political access they had bought. While economists are right to say these practices boosted inflation, slowed growth, discouraged the development of a dynamic, competitive economy, and contributed to the 1997 economic collapse, the fact remains that major national assets were built. If the cost of servicing the debt were excluded, Chandra Asri today would be a profitable concern.
With a budget deficit in danger of ballooning skyward and a desperate need for Ibra to top up the state coffers, something has to give. Tokyo, as Indonesia's biggest creditor and bilateral lender, will continue to push Wahid. After all, the Japan Bank for International Cooperation, the biggest Chandra Asri creditor, is owed a whopping $430 million. The agency's success will be pivotal in resuscitating the economy, reviving the confidence of foreign investors and plugging the soaring budget deficit, but whatever happens, those paying the bills for Chandra Asri are the Indonesian people, not Bambang Trihatmodjo or Prajogo Pangestu. The Wahid administration cannot have its cake and eat it - it cannot succumb to political ploys like backing off the Texmaco style conglomerate prosecutions and still expect Ibra to have the teeth to bite deep and extract more value for the government and the country from such deals. If Japanese clout secures this deal, Ibra is effectively absorbing all the losses.
Suharto protected Chandra Asri with a special import tariff of 25 percent for chemical products. First former president B J Habibie and now Wahid have ensured Chandra Asrih will not face bankruptcy. The president should back off. Why should Indonesia be involved at the government-to-government level to save a Japanese corporation? As the International Monetary Fund's Indonesia representative, John Dodsworth, said after Wahid's Tokyo deal, the agreement (with Marubeni) highlights the need for more oversight of such major restructuring decisions. "We have some concerns about the quality of this restructuring," said Dodsworth. "What the Chandra Asri deal indicates is that the government has to pay great attention to the quality of restructuring deals," he said. "Perhaps some form of second opinion system needs to be put in place so that we have assurances that the taxpayers' interests are protected."
Spare some sympathy for Ibra too, which has never agreed to the deal. Eko Budianto, head of loan recovery at Ibra at the time, highlighted the danger: "Not only is it not fair, but it sets a precedent for others."
KBR November 18, 2005
KBR's SCORETM Technology Selected for Ethylene Furnace Expansion in Inodnesia
KBR’s proprietary SCORETM (Selective Cracking Optimum
REcovery) ethylene technology has been selected by PT Chandra Asri
West Java, Indonesia, for an ethylene furnace expansion. KBR has
signed agreements to provide the technology license and begin
design work on the furnace design. KBR is the engineering and
construction subsidiary of Halliburton (NYSE: HAL).
“This selection of our SCORE technology recognizes KBR’s superior technology offering in naphtha and gas oil cracking,” said Tim Challand, vice president of technology for KBR Energy and Chemicals. “This is the first time KBR’s ethylene technology will be used in Indonesia and is one of several new SCORE liquid cracking furnaces applied in the Asia Pacific region.”
The furnace expansion will allow PT Chandra Asri to expand its ethylene production at the facility to 590,000 metric tonnes per year by mid-2007, an increase of 70,000 metric tonnes per annum over the present capacity of 520,000 metric tonnes per annum. KBR’s SCORE technology features pyrolysis furnaces, which have the highest ethylene yield in the industry, a superior mechanical design for increased reliability and greater on-stream efficiencies.
KBR is a global engineering, construction, technology and services company. Whether designing an LNG facility, serving as a defense industry contractor, or providing small capital construction, KBR delivers world-class service and performance. KBR employs more than 60,000 people in 43 countries around the world.
Halliburton, founded in 1919, is one of the world's largest providers of products and services to the petroleum and energy industries. The company serves its customers with a broad range of products and services through its Energy Services Group and KBR. The company's World Wide Web site can be accessed at www.halliburton.com.
ＫＢＲ (旧 Kellogg Brown & Root)
Chandra Asri's new ethylene capacity to come on-stream by end-Oct
Indonesia's Chandra Asri
expects the newly-added ethylene production at its Anyer naphtha
cracker to be on-stream by the end of October, a company source
The mechanical work needed to expand the cracker by 70,000 mt/year, to 590,000 mt/year, has already been completed, the source said.
It remains unclear if the company will sell spot ethylene cargoes after the expansion is brought online as it will depend on the requirements of its domestic customers, the source explained.
Chandra Asri's downstream customers include vinyls producer PT Sulfindo Adiusaha. Sulfindo recently expanded its ethylene dichloride production capacity by 10-15% from 265,000 mt/year.
Indonesia's Chandra Asri completes naphtha cracker expansion
Indonesia's Chandra Asri
has completed an expansion of its naphtha cracker at Anyer in
west Java, and plans to link the new and existing facilities over
the weekend, a company source said Friday.
The cracker will not be taken offline for the tie-in, but its run rate will be reduced temporarily from 100% of capacity.
The plant's ethylene capacity has been boosted by 70,000 mt/year to 590,000 mt/year, and the propylene capacity raised by 10-15% from 260,000 mt/year.
Chandra Asri has committed all its new ethylene capacity to its term contract buyers and expects to sell spot cargoes only occasionally. Some of its ethylene output is directed towards its two polyethylene plants which are capable of producing up to 300,000 mt/year. Chandra Asri also produces styrene monomer through the wholly owned subsidiary Styrindo Mono Indonesia, which it acquired in April this year.
Chandra Asri is Indonesia's sole olefins producer.