Saturday, March 21, 1998
A Familiar Scent of Monopoly

The clove industry epitomizes Indonesia's economic discord. Despite IMF pressure and official government response, the system reeks of nepotism and skimming.
By MAGGIE FARLEY, Times Staff Writer

    ONOKERTO, Indonesia--From his sprawling stone house atop a hill near Java's southern coast, Parmin, a farmer, can see the neglected green brambles of his clove trees half a mile away.
The groves are untended and wild, the boughs of his spice trees laden with unharvested cloves. Since the president's son took control of the industry eight years ago, Parmin's clove harvest has brought him less than what he paid his workers to pick the buds. Finally, he gave up.
    "We just keep them for the flowers," says his wife, shaking her head in bitterness. "We just keep them for the memories."
    Here in the lush hills of Wonokerto, several hours southeast of Jakarta, the capital, Parmin is at the very end of the clove chain, a byzantine bureaucracy contrived eight years ago to help farmers get higher prices for their crop. Instead, it has become a system that has siphoned trillions of rupiah away from the clove farmers and cigarette makers and put them into the pockets of President Suharto's son Hutomo Mandala Putra, also known as Tommy, and his cohorts. And it has brought the nation's clove industry to its knees.
    "Cloves are one of the most distorted industries in the history of the world," says Faisal Basri, an agricultural economist who has studied the industry for more than 20 years. "The monopoly has been a disaster."
    The clove monopoly has become, as well, a symbol of what has brought Indonesia's economy to near collapse: It is a system grounded in nepotism, sanctioned skimming and economic dislocation. This arrangement--where a Suharto family member or friend acts as the overlord of an industry, squeezing out all competition--has been replicated dozens of times throughout Indonesia.
    That is why the International Monetary Fund has targeted the clove monopoly and a handful of other cartels run by Suharto cronies and children as part of the reforms the country must make to receive $43 billion in aid.
    "The IMF has picked its targets quite carefully," says Bruce Gale of the Political and Economic Risk Consultancy, a Hong Kong-based consulting firm. "If he is willing to sacrifice his children's interests, it shows he is serious."
    Indeed, by presidential decree, Suharto eliminated the clove monopoly Feb. 1 and ordered the board that operated it, headed by Tommy, to dissolve by June. But now, after weeks of furious maneuvering, hedging and evasion, the monopoly that seemed for a moment as if it really would die has been reincarnated under a different name. No laws have been passed to enable the reforms; the minister in charge of dismantling the clove monopoly is the man in charge of the timber cartel.
"Nothing has changed," says one industry insider. "And I think nothing will."
    Though business as usual may profit Suharto's inner circle, it could cost the country its economic survival. IMF officials, not yet satisfied that Suharto will see his promises through, have already postponed handing over the next $3-billion installment of the rescue package. Backsliding on clove trading, one of Indonesia's largest and most politically symbolic monopolies, would raise doubts about Jakarta's commitment to the whole reform program and could jeopardize the entire $40 billion to come.

A Long History as a Big Business
    All this may seem high stakes for a spice. But the lowly clove, the dried bud from a flowering tree, has long had a high profile in international commerce. Used mostly as a seasoning now, the spice also has antiseptic properties and became a much-prized medicament during the plague-ridden Dark Ages in medieval Europe. In 1667, the Dutch acquired the Banda Islands, part of the valuable Spice Islands they controlled in present-day Indonesia and a source of cloves and nutmeg, from the English and surrendered New Amsterdam--now known as New York City.
    Today, Indonesia is one of the world's largest producers of cloves, but nearly all of its output is consumed domestically. Elsewhere, the spice is usually used in cooking, to infuse, for example, a Virginia ham with a bit of tang. But in Indonesia, the savory smoke that scents the air wherever people gather signals its main use here: to flavor the tobacco in traditional cigarettes called kretek, named for the distinctive crackling sound the cloves make when they burn.
    In 1913, a Chinese immigrant named Liem Seeng Tee created one of the first brand-name kretek, called 2-3-4 or Dji Sam Soe. The name was a bow to Chinese superstition--the numbers add up to 9, Liem's lucky number. That magic worked. A pricey packet of 2-3-4 became a status symbol; Liem's secret blend of tobacco, cloves and other spices turned a common street smoke into a small luxury. The taste became its trademark, and the original recipe is still used today.
    Now the kretek industry has become big business. It generates $2 billion a year in revenue, even at today's weakened currency rates, and employs 4 million Indonesians one way or another. It is Indonesia's top-selling consumer product and biggest source of excise tax revenue. Only the government employs more people. The conglomerate that grew out of Liem's cottage industry, H.M. Sampoerna, is the most profitable of the Big Six kretek producers. Last year, it sold more than $1 billion worth of cigarettes.
    It's an industry that touches the lives of millions of Indonesians, whether as smokers, clove growers, truck drivers or cigarette makers. In Kediri, a community in central Java that blossomed around the headquarters of Gudang Guram, the country's largest kretek maker, a resident may be born in the company hospital, attend a company nursery school and grow up in company housing until starting work in one of the giant factories that dominate the town. Even the air hangs heavy with the cloying, spicy-sweet smell of Gudang Garam's special tobacco blend.
    In a giant hall the size of an airplane hangar, 7,000 women sit in endless rows, hand-rolling kretek. They wear colorful head scarves to keep their hair back, and most have kicked off their shoes, tucking their bare feet underneath the long wooden benches. As the women work, their chatter floats above the twanging strains of piped-in dandut folk music; the high-roofed hall echoes like an aviary.
    With her long fingers flying, a 38-year-old woman named Partini rolls a cigarette--she puts a pinch of the tobacco blend on a canvas strip, slaps down a cigarette paper and pulls a wooden lever to roll it all together. Her benchmate grabs the cigarettes from a pile and snips the tobacco whiskers away with scissors.
    A fast worker can hand-roll 5,000 cigarettes a day--as many as a machine can roll in one minute--but the government forgives most of the excise tax on hand-rolled cigarettes because of the jobs the industry provides. For seven hours of this, she is paid about 10,000 rupiah or, at today's exchange rates, less than $1. Cloves have made people into millionaires, but not farmers like Parmin, and not factory workers like Partini.

How Farmers Lost Out on a Good Thing
    About the only thing the cigarette makers don't control is the production of the cloves. The delicate spice grows best where the air is cool and moist, placing the best plantations at hard-to-reach sites like the hills of Sulawesi, an island northeast of Java.
    Before 1990, farmers sold directly to local cooperatives or traders who would help store and dry the cloves, then sell them to the cigarette producers. The prices were so good that clove farmers in the island jungle began to buy televisions and refrigerators as status symbols, even though they had no electricity.
    But in a textbook example of a monopoly made in Indonesia, speculators who tried to corner the market and failed went to Tommy for help. They had the cloves--nearly 17,000 tons of them. And Tommy--the president's mustachioed youngest son who likes fast cars and easy money--had the clout.
    They formed a company known as the BPPC, the Indonesian acronym for the Clove Bufferstock and Marketing Agency. In 1990, with his connections, the BPPC was awarded an exclusive license to import, buy and sell cloves. The next year, under pressure from the president--and despite warnings from economic advisors--the Bank of Indonesia advanced the group $325 million in credits and loans, totaling half the central bank's annual budget for agricultural subsidies.
    "We're doing it for the good of the farmers," Tommy claimed at the time.
    The ripples of their plunge into the market were felt almost immediately. The price of cloves jumped, inducing more farmers to grow them. Then the oversupply made prices plummet, and suddenly it cost more to harvest the cloves than they brought in the market. By 1996, Tommy was urging farmers to burn their trees and get out of the business, a move that seriously undermined his argument that the monopoly existed for the farmers' own good.
    "You can see the extent of the interference," says Basri, the economist, thumbing through a thick sheaf of new regulations issued by the BPPC just two months before its dissolution. "The BPPC is the only buyer and seller. When it buys from farmers it sets the price; when it sells to cigarette manufacturers it sets the price. It decides how many cloves should be bought, how they should be stored, even what kind of trucks should be used to transport them."
    Each decision is made, he says, not to benefit the producers, but to add to the BPPC's coffers. "You can't find this kind of blatant monopoly activity anywhere else but Indonesia. And the government has signed off on it to make the family happy."
    Like other monopolies in Indonesia, the BPPC made its money by setting up a series of "tollgates" between the clove farmers and cigarette producers, demanding small fees at every stop in the chain of distribution.
    Parmin sold his cloves to the local cooperative for 5,000 rupiah a kilo (about 50 cents at recent exchange rates) but would receive only 3,000 in cash--the rest "saved" for him by the bureaucracy. The cloves traveled up the BPPC ladder, officials taking 2,000 for "participation in clove trading" fees here, and a 1,000 rupiah charge to persuade farmers to grow other crops there, plus a 2,000 rupiah charge to cover the BPPC's interest and operating costs at the end. By the time the cloves reached Partini's nimble fingers at the cigarette factory, that kilo cost 12,000 rupiah (about $1.20). Before the crash of the country's currency, that was three to four times the world market price.
    Over the years, the BPPC has extracted trillions of rupiah in service fees and commissions. The national cooperative, known by its Indonesian acronym of INKUD, now holds 1.1 trillion rupiah (about $110 million in today's shrunken currency) of the farmers' money that it has promised to rebate. Six years ago, Parmin, who like many Indonesians uses just a single name, was promised a water buffalo from these funds. He is still waiting.
    The rest of the industry, indeed the country and the international bankers of the world, are waiting to see if Suharto will enforce his promise to undo the monopoly's hold on the clove industry. Technically, since Feb. 1, the farmers have been free to sell directly to the cigarette producers.
    In reality, a medley of legal roadblocks, unofficial pressures and inertia have acted to keep the monopoly's structure--and benefits--in place.
    "The form is different, the name is different," says Umar Juoro, a senior economist at the Center for Information and Development Studies in Jakarta, "but the mechanism is still the same."
    Since the president's Jan. 15 decree disbanding the BPPC, the legislation enacting the reforms has sat untouched in the country's rubber-stamp parliament, making it difficult for farmers to sell outside the BPPC chain. But in anticipation of the changes, farmers and cigarette makers began to forge direct paths to each other, bypassing the BPPC bureaucracy. Without the middlemen's hefty margin, prices looked like they would rise for the farmers and drop for the manufacturers--and thus be lower for the country's consumers who are in dire financial straits.
    But activity froze when Minister of Cooperatives Subiakto Tjakrawerdaya announced Feb. 24 that the monopoly would be replaced by "a partnership" among the BPPC, cooperatives and factories that would function in the same way as the BPPC's original trading system. After June, the minister said, the BPPC will nominally dissolve, only to reincarnate as "a consultant" to the partnership because, according to Tommy, the cooperatives are not ready to stand on their own.
    Ministry and BPPC officials who oversee the clove trade would not discuss the industry or make Tommy available for an interview.

Cigarette Makers Face Subtle Pressures
    The BPPC refuses to die because to do so would mean sweeping losses. It is stuck with a two-year stockpile of high-priced cloves, and suddenly factories have no incentive to buy its stocks if they can go to the farmers directly.
    Tommy has hinted that his group could flood the market with cheap cloves, knocking farmers out of the trade unless they continue to sell to the monopoly system. Farmers call it blackmail. Others call it "moral suasion."
    Other subtle pressures are also at work. Even if cigarette makers do buy directly from farmers, they must still show a proof-of-purchase certificate to receive excise tax stickers before they can use the cloves. Until the law is changed, only the BPPC can issue the certificate, which gives the group great potential leverage: Buy from us or let your cloves rot.
    But the clearest sign of the status quo is Suharto's choice last week for his new minister of trade and industry, the official in charge of dismantling the monopolies. It is one of the president's oldest friends, Mohamad "Bob" Hasan, "the Plywood King," who controls one of the country's biggest cartels himself.
    Like the clove monopoly, the plywood monopoly continues to operate informally, industry sources say. "Putting Bob Hasan in charge," said one analyst who didn't want to be named, "is like having a rat to watch the mice."

Copyright Los Angeles Times