What Indonesia's Wahid Has To Do And Fast

The crises range from high-profile corporate disputes to prosecuting Suharto

For Indonesia's new President, Abdurrahman Wahid, the honeymoon will have to be brief. When Wahid named his Cabinet on Oct. 26, he didn't hand his new ministers portfolios so much as crises in need of immediate attention. In the power, telecom, and banking industries, major disputes with foreign contractors threaten to boil over. In Aceh, the long-restive province in northern Sumatra, pressure is mounting for a vote on independence. And everyone, it seems, wants to see Wahid prosecute deposed President Suharto and his six children on corruption charges.

Progress on these problems is urgent for Wahid and his "national unity" government. For one thing, Jakarta needs to secure the nation's newfound political stability and restart the economy. For another, foreign investors view these issues as test cases--and are watching closely to judge Wahid's reliability. "We've got a month," says Mulya Lubis, a prominent corporate lawyer in Jakarta. "People want results."

The President's team is moving swiftly. As soon as he was sworn in as Finance & Economics Coordinating Minister, Kwik Kian Gie signaled that he intended to resolve a scandal surrounding Bank Bali and the agency restructuring it. Laksamana Sukardi, the new Investment & Privatization Minister, soon after promised to order state-run power and phone utilities to settle their differences with foreign partners. "The new approach is simply for the government to be clean," Kwik said in an interview with BUSINESS WEEK (below).

Investors applaud. But Wahid has a long way to go. Foreign contractors--and the Indonesian Chinese who fled ethnic violence amid Suharto's fall last year--want concrete progress before they commit to the new Indonesia. Sofjan Wanandi, chairman of Gemala Group, a Jakarta manufacturer, recently returned from more than a year in Singapore. But he says it will take at least a year of sound government before Indonesian Chinese repatriate much of the $10 billion they shifted offshore.

Wahid's first major test is imminent. By Dec. 4, Acehnese leaders want his approval of an independence referendum. It's no easy choice. On Nov. 8, a quarter of Aceh's 4 million people marched in the provincial capital to demand independence. Diplomats say the army would fight even harder to hold onto Aceh than it did in East Timor.

BLOWUP? Violence would threaten Mobil Corp.'s onshore gasfields and liquefaction plant--a $3 billion investment in the province. It could cost Indonesia a major new investment, too. When Wahid and Kwik visited Singapore on Nov. 6, BUSINESS WEEK has learned, Prime Minister Goh Chok Tong proposed moving shipyards operated by state-owned Keppel Corp. to Indonesia's Karimun island. A blowup in Aceh, say sources close to the talks, would almost certainly scotch that deal.

Another pressing test involves the $2.5 billion Paiton power plant in East Java. When Edison Mission Energy of Irvine, Calif., began building 10 years ago, economic growth was 7% and power short. But by the time switches were thrown this year, the rupiah was in the cellar, and Perusahaan Listrik Negara, the national utility, couldn't afford Paiton's power. PLN refuses to connect Paiton to Java's grid, and on Oct. 7, it sued Edison, alleging it was coerced into a five-year contract during the Suharto years. Edison denies it was party to any corruption. Although Jakarta has told PLN to drop its suit, it's not clear how the case will be resolved. In the balance is a $1.8 billion loan syndication that the U.S. Export-Import Bank has agreed to support. Says Edison CEO Edward R. Muller: "Indonesia can't leave such problems unresolved and continue to expect investment."

Paiton is one of many such messes. State-run PT Telekom promised annual rate rises when it formed five international consortiums in 1995. But earlier this year, Telekom decided against an increase in 2000. "Telekom is making commercial decisions based on political concerns," asserts Gilles Vaillant, a manager seconded to a consortium by France Telecom. Vaillant says current rates are half what France Telecom needs to break even.

ON THE BLOCK. More visible is the Bank Bali fiasco. After Standard Chartered Bank agreed in July to buy the bank from the Indonesian Bank Restructuring Agency, $80 million was found diverted from the bank to associates of Golkar, the former ruling party. Although Standard Chartered wants to go ahead, the scandal has frightened buyers from other banks Jakarta has on the block.

Wahid knows he must demonstrate the primacy of law and judicial independence if he is to gain international confidence. But he's walking a fine line. One example of treading cautiously: After he ordered Attorney General Marzuki Darusman to prosecute Suharto, Wahid announced that he will pardon the former dictator. Investors wish Wahid well. But they won't forgive him if he fails to show he's in command.