Los Angeles Times, June 9, 1992

COLUMN ONE

Japan Aid: The Give and Take
Tokyo's $8-billion-a-Year Program Often Seems to Serve the Donor More than the Recipients. A Joint Venture with Indonesia Offers a Case Study

By KARL SCHOENBERGER, Times Staff Writer

PARITOHAN, Indonesia A thin ribbon of water spills quietly at the spot where the Asahan River once cascaded over a steep canyon wall as Siguragura Falls. The mighty force of the river has been harnessed by a hydroelectric project, built with a massive infusion of Japanese aid money that brought promises of power, light and industrial development for this impoverished patch of North Sumatra.

But downstream in the jungle and pine forests of the Asahan Valley, villages of Batak-minority tribesmen, with their characteristic horned-roof cottages, are lit only by oil lamps, receiving none of the 513 megawatts of electricity generated by the project.

Nearly all of the 2,600 jobs created by the two hydroelectric plants and a related coastal aluminum smelter are filled by workers imported from the central island of Java, not local labor. The supporting industrial strata expected to grow from the new power grid never materialized.

And burdened by a mountain of inflated yen-based debt, the Japanese-controlled joint-venture company that operates the project has been in the red for all but two years since the turbines started spinning in 1984. These days, with the dollar-fixed price of aluminum going through the floor, the enterprise is in deep trouble.

The $2-billion Asahan hydroelectric and aluminum project -- an enterprise of such national prestige that the Indonesian government engraved the image of one of its dams on the 100-rupiah note -- stands today as an icon of Japan's awkward presence in developing Asia.

"This is a big, ambitious project for both Indonesia and Japan," said Osamu Kitamura, finance director for PT Indonesia Asahan Aluminum, or Inalum. "I think Asahan can be called successful, but we are now facing some serious problems."

Critics of the Asahan project say it is a classic example of the kind of commercially oriented foreign aid that serves the strategic interests of Japan, the donor, far more than the recipients of official assistance.

A potent symbol of skewed priorities, one observer notes, is the nine-hole golf course carved out of the jungle in Paritohan, built with aid money for Inalum employees and used most enthusiastically by Japanese visitors and expatriate engineers.

Profitable or not at this end, Inalum provides a cheap and secure supply of aluminum to the cartel of Japanese aluminum makers who invested in a majority stake of the project, using low-interest Tokyo government financing.

Tokyo's track record on foreign aid is likely to undergo additional scrutiny as it pursues new initiatives, such as a plan floated recently at the Earth Summit in Rio de Janeiro: Japan would commit more than $6 billion in environmental aid for developing nations over five years. While ostensibly no strings would be attached to the loans, Japanese companies possess the most advanced pollution-control technology, and much of the aid money probably would be recycled back home in sales.

The Asahan project, if not a complete boondoggle, illustrates the close collaboration between the government and private sector in Japan that calls to question the motives and the humanitarian intent behind Tokyo's $8-billion-a-year aid program.

Throughout developing Asia, Japanese aid is highly prized as a key source of much-needed capital. But over the years a pattern has emerged, analysts say: The bulk of the aid has gone into large infrastructure projects that provide lucrative contracts for Japanese construction firms and equipment suppliers, even when ostensibly "untied" aid is involved.

Once completed, the ports, roads and industrial parks provide a strategic base for a second wave of Japanese private investment, critics contend, assisting Japanese manufacturers who transplant operations abroad to take advantage of low wages.

Whether by master plan or spontaneous instinct, Japan's double-edged sword of aid and investment appears aimed at integrating the economies of the region into a structural division of labor, with Tokyo at the top of the pyramid.

"I think Japan is benefiting more than Indonesia from its ODA (Official Development Assistance) program," said Hartojo Wignjowijoto, a Harvard-trained economist who is president of the Jakarta consulting firm Asia Pacific Economic Consultancy Indonesia.

"Japan has a monopolistic role in the Indonesian economy," Hartojo said. "It all starts with Japanese aid, which lays down a kind of infrastructure for Japanese trade and investment."

The old saw that Japan surreptitiously rebuilt its imperialistic "Greater East Asia Co-Prosperity Sphere" through peaceful means after World War II -- having failed militarily -- may be a crude exaggeration that distorts the complex picture of entrepreneurship and economic growth trends in Asia.

But as Japan swarmed the region with its private economic armies, especially after the yen nearly doubled in value in the mid-1980s, the Tokyo government clearly played a guiding, cheerleading role.

Foreign aid was seemingly the state's most effective tool. One program hatched by the powerful Ministry of International Trade and Industry (MITI), for example, combined low-interest loans to develop industrial infrastructure in Southeast Asia with relief for small Japanese manufacturers who wanted to build offshore factories to flee high yen-based wages at home.

"It cannot be denied that the Japanese aid has contributed much to the construction of highways, railroads, seaports and development of energy resources," Abdul Hakim G. Nusantara, director of Jakarta's Legal Aid Foundation, said in a speech in Yokohama in March. But these are "linked to the interests of Japan in promoting and marketing its export products while maintaining a steady supply of raw materials."

Indonesia bears the distinction of being the biggest recipient of Japanese aid (getting about 15% of the total), and although large-scale private investment has geared up only over the last three years, economic ties are deeply entwined. Japanese traders have long had a fix on the potential for a mass-consumer market in what is now the fourth-most-populous nation on Earth with 180 million people.

Relations haven't always been smooth, though. It was here that anti-Japanese rioting broke out when former Prime Minister Kakuei Tanaka visited in 1974, and it was here that protesters first denounced the Japanese as "economic animals."

Japan still dominates aid to Indonesia, providing $1.2 billion, or more than one-fourth of the total foreign aid to Jakarta.

The Asahan aluminum project is a classic example of how aid has been deployed for commercial gain, but it isn't the only program to raise eyebrows.

Environmental critics are protesting a proposal to build another hydroelectric dam in Kotapanjan in western Sumatra with Japanese assistance. The scheme would submerge 50 acres of prime farmland and displace about 22,000 people to produce 110 megawatts of hydroelectric power, which the local population, opponents claim, doesn't really need.

Yet to Japanese power-plant vendors such as Hitachi, Toshiba and Mitsubishi -- contract winners at Asahan -- the benefits of the project are clear.

Similar misgivings about Japanese-financed pork-barrel development are expressed by non-governmental watchdog groups throughout Asia. Thai journalist Nusara Thaitawat wrote in the Bangkok Post that Japan's ODA, to its critics, stands for "Official Destruction and Alienation."

"Japanese ODA isn't humanitarian, and it isn't aimed at benefiting the local people," said David Arase, assistant professor of government at Pomona College and an expert on Japan's aid. "The difficulty is that Japanese commercial interests bribe people in power, so the injustices are not brought to light."

Toshio Sano, first secretary for development affairs at the Japanese Embassy in Jakarta, recoils at criticism of Japanese aid, especially at the "cliche" that even untied aid has commercial strings attached.

Sano concedes, however, that a large proportion of Japan's aid falls technically under the category of "LDC (less-developed country) untied," meaning contractors from advanced countries like the United States or those in Europe are barred, while Japanese firms compete only against Third World bidders -- and other Japanese firms.

Also, feasibility studies, which set standards and specifications, are paid for by technical grants, not low-interest ODA loans, and therefore are restricted to Japanese consultants. Critics say this imposes a bias toward Japanese contractors. Sano argued that the practice is justifiable because "our feasibility studies are high quality compared to the World Bank and other agencies."

He defended the pragmatic philosophy behind Japanese aid, which aims at development that will eventually spread the wealth. That's true even in the case of the Asahan aluminum smelter, he asserted.

"This was support for industry," Sano said. "There is the fundamental question whether foreign aid should support industry or social development. But both are necessary, and in order to raise the level of the economy, they need infrastructure. Gradually the people will enjoy the indirect benefits."

The vision of building a hydroelectric power plant at Siguragura Falls dates back to the Dutch colonial period. Authorities saw the great potential for power generation in the Asahan River, which makes precipitous drops as it flows from Lake Toba, a volcanic crater similar to California's Lake Tahoe, to the Strait of Malacca.

The Dutch first conducted a feasibility study in 1919 and finally unveiled a dam project at Siguragura Falls in 1941, but they never pursued the project because of the Japanese invasion in World War II.

An engineer and Imperial Navy officer, Yutaka Kubota, later surveyed the site, and the Japanese tried to revive the Dutch plan. The war's end, however, cut off construction, according to research by Arase, the foreign-aid scholar at Pomona College.

French and Soviet consultants studied the river after the war, but the plan didn't get off the ground again until the late 1960s, when Kubota, then president of a foreign-aid contractor named Nihon Koei, returned to the scene to conduct another survey -- for free.

The "new order" regime of President Suharto took Kubota's bait, seizing on the Asahan power-and-aluminum scheme as a prestigious national development project and hiring Nihon Koei to conduct a detailed study, with ODA financing from Tokyo.

The oil shocks of the 1970s made access to cheap power a priority for Japan's aluminum industry cartel, and, under MITI's stewardship, Asahan also became a national project for Japan. Similar "developmental import" aluminum projects were built in Brazil and Australia.

Today, deep embarrassment reigns for both sides of the Indonesian project. Kitamura, the Sumitomo Chemical Co. executive serving as financial officer of the joint venture, retracted an invitation initially extended to The Times for an on-site tour of the hydroelectric stations and aluminum smelting plant.

Kitamura blamed objections by the Indonesian side; Indonesian sources suggested it was the Japanese who didn't want a reporter investigating.

"Because of the general election (Wednesday) . . . Indonesian government is getting more sensitive," a nervous-voiced Kitamura said by telephone. "They're asking companies like ours to close off any requests for visits by the press."

Financial results could not be disclosed, he said, despite the extensive involvement of Japanese taxpayer funds.

"Our company is a very exclusive joint venture between the government of Indonesia and Japanese investors," Kitamura said. "Unfortunately, because of the current market situation, we are suffering heavy losses."

Officials at the scene, however, allowed a reporter to view the project from the outside. They complained of upstream water pollution by a rayon pulp mill that discolors the water and, they fear, may damage turbine blades with corrosion.

Other problems vex the project. Most significant is the fact that Lake Toba doesn't hold as much water as projected. The flow rate of the river was anticipated to be well above 100 cubic meters per second, but actual conditions have shown the volume to be as much as 40% below that rate.

Because the power generation falls short of expectations, the aluminum plant takes almost all of the electricity -- 95% or more -- leaving nothing for the local community and providing a fraction of the power promised for prospective industry around nearby Medan, the capital of North Sumatra state.

"Inalum has no benefit for the people living in the area," said Henry Sargih, head of an environmental watchdog group in nearby Kisara. "Just a few Batak villages along the river have electricity, and only because my group helped them build micro-hydroelectric generators. The others use oil lamps."

Yet the trickle-down from the Asahan project isn't entirely nonexistent. Jakobus Yasoeki, assistant manager of Inalum's industrial security department, for one, has his own personal economic cooperation scheme.

Living in the idyllic Asahan Valley has inspired Yasoeki, who is from Java, to buy a rather large plot of land, where he plans to build a retirement home and cultivate an experimental farm "to teach modern agricultural methods to the local Batak tribesmen."

Yasoeki professes nothing but respect and admiration for his Japanese employers. He also admits to being one of the few Indonesians who play regularly at the Inalum golf course.

"The Japanese are very hard-working and diligent," he said. "There is still a great deal we can learn from them."
 
The Asahan Project

Indonesia's Asahan hydroelectric project, funded with Japanese aid, is on the Asahan River in an impoverished area of North Sumatra. The project, with its promises of power light and economic development is of such national prestige that the Indonesian government engraved the image of one of its dams on the 100 rupiah note (worth about a nickle).

GRAPHIC: Map, Sumatra, Indonesia. VICTOR KOTOWITZ / Los Angeles Times