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3.4 The vision in action: asahan

Japanese private business made its first major step towards the implementation of development-import schemes in the South East Asian region on 7 July 1975 when a consortium of Japanese companies signed an official contract with Indonesian President Suharto for the Asahan Aluminium Smelt ery Project, which the press described as unprecedented both in the amount of money involved and in its size among Japanese overseas investment projects. The Asahan Aluminium project is a comprehensive development project for power plants and an aluminium smelter. The plan was to build two hydroelectric power plants with a total productivity of 604 000 kilowatt-hours (kWh) from Lake Toba in the northern part of Sumatra. The power produced by the plants was to be sent to a 225,000 ton-per-year aluminium smelter constructed in Kuala Tanjung, about 95 miles south-east of Mcdan.

The consortium is investing a total of US$900 million through the Japan Asahan Aluminium Company At a cabinet meeting on 4 July INS, only three days before the contract was signed, the Japanese government decided to provide 85 per cent of necessary funds to the consortium. At this meeting, the project was described as economic co-operation, in a major part of Indonesia's Second Five Year Plan, and its purpose was stated to be to secure for Japan a stable supply of aluminium.

The Asahan project is highly controversial. First, the funding process written into the Master Agreement - whereby funds from the Overseas Economic Cooperation Fund and other Japanese government financial institutions were to be provided directly to Japanese companies rather than to the Indonesian government-is in contravention of existing Japanese financial regulations. Second, there is no clear source of the needed raw material (bauxite) available. When the Asahan project was initiated, it was assumed that an American firm, the Aluminium Corporation of America (ALCOA), would provide bauxite from its new mines in Kalimantan and Bintan. But according to officials of the Japan Asahan Aluminium Company in Tokyo, there has been no clear decision by ALCOA to go into bauxite production in Kalimantan and the attempt to secure bauxite from Bintan has been terminated.

The Japanese investment in the Asahan project is thus not a new ideal form of overseas economic co-operation, breaking away from the profit-oriented investment project, but is in fact an investment in another nation's power resources and environment. Not only will this project use US$900 million of public money for private gain, but there are also grave new suspicions that it would not add to the value of Indonesia's mineral resources but would become merely an export platform for Japanese industry to process bauxite from elsewhere for Japan. In the name of national development, foreign aid resources from Japan were mobilized to pay for a project that would bring little if any direct benefit to Indonesia while it drained the power of its most important river to serve Japanese business. In fact, the Asahan project could best be described as a capital- and pollution-intensive Free Trade Zone, or as a case of extraterritoriality for Japanese companies. It would only reinforce the dependency of the Indonesian economy on Japan.

The History of Asahan

The history of the Asahan project began when Indonesia was a Dutch colony. With an annual rainfall of more than 2 000 mm, and an elevation of 900 m, water from Lake Toba becomes a rapid stream within a short distance. The Dutch colonial authority, realizing that Lake Toba would be one of the best sites in the world for hydroelectric power development, carried out a survey of the area in 1908.

Japan planned Indonesia's post-war development during its military occupation of Indonesia in the 1940s. Kubota Yutaka, who was in pre-war days a managing director of Nihon Chisso Hiryo (presently the Chisso Corporation, infamous for the Minamata pollution) and concurrently the president of Korea Hydroelectric Power Company, carried out a survey of the water power of the Asahan River and began preparation for construction of a power station and an aluminium smelter. This plan halted with Japan's defeat. After Indonesia won its independence, the Soviet Union began a feasibility study of the same project in 1960, but this was also suspended due to Sukarno's downfall.

Kubota Yutaka is now chairperson of Nippon Koei Co., Ltd. As soon as the Foreign Investment Act was passed in January 1967 after Suharto had come to power, Nippon Koei proposed a comprehensive Asahan development project to the government of Indonesia. On 5 August of the same year, Nippon Koei concluded a contract for operations with the Indonesian government and began a feasibility study. At that stage, it was planned that Nippon Koei would be responsible for construction of a hydroelectric power plant; and Sumitomo Chemical, Nippon Light Metal, and Showa Denko would be in charge of an aluminium smelter. However, Kaiser and ALCOA indicated that they would compete to build the aluminium smelter.

In May 1972, a Japan-US joint consortium was organized to undertake the project. The international consortium consisted of seven firms-from Japan, Mitsubishi Chemical Industries and Mitsui Aluminium in addition to the above-mentioned three firms, and, from the United States, ALCOA and Kaiser. These firms subsequently decided to jointly tender for the project. Sumitomo Chemical was the principal member of the consortium at this stage.

To secure a source of bauxite, the Japanese aluminium industry had to include the two US firms as partners in the Asahan project. The Japanese aluminium industry depended almost totally on Australia, Malaysia, and Indonesia for bauxite; imports from Indonesia constituted only one-fifth of the total amount imported. Development of bauxite resources in these countries was monopolized by a multinational aluminium cartel, the 'Big Four' of the United States and Europe. The Big Four amlounced suddenly in 1972 that production of bauxite would be decreased to 84 per cent as a self-imposed quota to prevent price reduction (Pacific Basin Report, August 1974: 68).

In tendering for the Asahan project, the Japan-US consortium attached a condition that the construction of a hydroelectric power plant should be separated from the aluminium smelter project, and that it should be carried out by the Indonesian government by means of a separate government loan. This condition was proposed mainly by the two US firms. The Indonesian government, on the other hand, insisted that the project should be a package investment including both the smelter and the power plant. The scheduled date for tendering, 15 July 1972, passed without any compromise between the international consortium and the Indonesian government.

Similar situations have often occurred in other foreign investment projects concerned with the development of resources. However, the Asahan project initiated a new era in Japanese overseas investment. In August 1972, immediately after the Tanaka cabinet was formed, Indonesia sent a governmental envoy to request Japan to finance the Asahan project with government funds in one package including both aluminium smelting and power development. At the same time, Indonesia announced its Second Five Year Plan to begin in April 1974, It was said that the very survival of the Suharto regime depended on the success of the Five Year Plan, which totalled US$20 billion. The Asahan project was of primary importance in the plan. On 15 January 1974, when then Prime Minister Kaknei Tanaka was visiting Jakarta, he discussed the Asahan project with Indonesian leaders as one of his many 'national projects'. Because he promised to provide President Suharto with low-interest loans, the project suddenly became practical.

As a result of several rounds of negotiations between Sumitomo Chemical and the Indonesian government, a basic agreement on the project was officially signed between the two parties on 7 January 1974, one week prior to Tanaka's visit. In the agreement, it was stated that within six months of that date, the Japanese party should talk 'the Japanese government into providing lowinterest loans' to finance the project (Far Eastern Economic Review, 14 February 1975: 40-3). In spite of the progress made on both governmental and private levels, negotiations for implementing the project went on for nearly two years due to several difficulties. The two US companies decided to pull out of the consortium in August 1974 on the grounds that to include construction of the hydroelectric power plants 'would make the project unprofitable'. The US companies seemed to have been more interested in obtaining the right to develop the bauxite resources necessary for the Asahan aluminium smelter than in building the power plants. ALCOA had already begun a feasibility study on the development of a bauxite mine in North Kalimantan and had also begun negotiations with the Indonesian government regarding bauxite resources on Bintan Island (Pacific Basin Report, August 1974). This pull-out presented a problem of where to obtain funds to replace the US companies' 30 per cent share. It was decided to include seven more Japanese-affiliated trading firms in the project in addition to the original five smelters. Thus the Asahan project became a Japanese investment project consisting of a private twelve-company consortium. The second major difficulty was the rising cost of construction due to inflation. In January 1974 construction costs were estimated at US$600 million, but they were projected to eventually be as much as US$900 million, a 50 per cent increase (Far Eastern Economic Review, 4 Mareh 1974: 49-50)

A third difficulty was that Premier Tanaka, who was the strongest promoter of the Asahan project, in September 1974 promised President Geisel of Brazil that Japan would invest in the Amazon aluminium project. This project is a joint venture consisting of five Japanese smelters, including Mitsui Aluminium, and Rio Doce, a Brazilian state-owned mining company. The total investment amounted to US$3 billion, US$1.2 billion of which was to be financed by Japan. The project was expected to produce 320 000 tonnes of aluminium per year. However, the Tanaka cabinet resigned due to the bribery seandal before either project could be finalized.

The fourth obstacle arose from the fact that when it came to financing this enormous amount with government funds, the Ministry of International Trade and Industry (MITI), which was promoting the project. was opposed by other ministries. The financing plan MITI proposed, based on the requests of the five aluminium smelters, was: (1) that the government loan cover 85 per cent of the total business costs; (2) that the aluminium smelter be financed by the Exportlmport Bank of Japan, the power plants by the Overseas Economic Cooperation Fund, and the infrastructure by the Japan International Cooperation Agency (JICA), which was established in August 1974; and (3) that the financing terms for the power plants entail an annual interest rate of 3.5 per cent over 30 years and those for the smelter be set at 6.75 per cent over 20 years (Toyo Keizai, 28 dune 1975: 54-7)

The Export-lmport Bank considered this plan feasible. The Finance Ministry, which administers various funds, stated that it was not able to extend public loans of such amounts at such low interest and with such long terms for a specific overseas investment by private corporations. However, the real reason for the opposition was the fact that the aluminium industry was in a serious depression. The five Japancse smelters were in the midst of the worst slump in their history, and thus were in no position to offer security on the enormous loans. When public loans are provided for domestic investment projects of private firms, the plant facilities to be built or other properties must be mortgaged. This practice was not applicable for the Asahan project because the investment was not domestic but overseas, and thus the plants or other properties could not be mortgaged. The Foreign Ministry was reluctant to approve the plan, saying that a loan of US$300 million beyond the limit set by the IGGI (Inter Governmental Group on Indonesia) for importing crude oil from Indonesia had just been given to the country in 1972 and because the Asahan project exceeded that amount, it would be unfair to other IGGI member countries.

The Japan-Indonesia Master Agreement

In December 1974, a draft of the master agreement concerning the Asahan project was signed in Tokyo between Sumitomo Chemical and the Indonesian government. On 30 April 1975, MITI Minister Komoto Toshio arrived in Jakarta with a signed letter from Premier Miki Takeo, assuring Suharto of the Japanese government's commitment to the Asahan project. The Indonesian government, however, was concerned about the rival Amazon aluminium project and sent a special envoy to try to change Japanese policy. On 4 July 1975 a Takeo cabinet meeting classified Asahan as a 'national project' and decided to finance about 85 per cent of the cost with government funds, calling it an 'exceptional measure'. At the same time, it was called a 'politically oriented' decision, designed to coincide with the scheduled visit of Suharto to Japan.

MITI's support was crucial in reaching this decision. The major promoting force of the Asahan project was the group of senior MITI officials of the Tanaka faction called the 'internationalist group'. To the criticisms of the other ministries, MITI replied that Japan had already cancelled other projects-such as plans for investment in a petrochemical plant in Thailand and the contract for subway construction in Hong Kong-using economic depression as an excuse, and that the scrapping of the Asahan project could only result in serious damage to Japan's reputation in South East Asia. MITI claimed also that Premier Tanaka had made a commitment to President Suharto on the Asahan project and that, therefore, it was actually a national project. As for the problem of the mortgage that was holding up government financing, MITI proposed to the Finance Ministry the following 'unprecedented' financing terms: (1) that the mortgage be on assets overseas such as the power plants and smelter to be constructed in Indonesia; (2) that MITI ask the participating trading firms to assume joint liability for the loans; (3) that the five Japanese smelters ask the OECF to participate in the planned investment company on the Japanese side; and (4) that the five smelters persuade the Indonesian government to assume some form of liability (Toyo Keizai, 28 dune 1975 54-7).

On the other hand, MITI informed the aluminium industry that the ministry had already established a basic agreement with the Finance Ministry and the Export-lmport Bank for the financing of the Asahan project and requested the industry to proceed with negotiations with the Asahan Technical Committee in Indonesia. However, after the ratio of investment of each of the twelve companies was decided and the official contract with Indonesia was about to be concluded, it was revealed that there was no concrete agreement on government financing between MITI and the OECF, the Export-Import Bank, and JICA. The aluminium industry spokesmen then criticized MITI for going too far alone (Nikkei Sangyo Shimbun, 23 July 1975).

TABLE 3.4 - Breakdown of Japanese Funds Invested in the Asahan Project (US$ million)

Sources: Monthly Bulletin of Keidanren September 1975 Far Eastern Economic Review, 14 February 1975.

The Asahan project agreement that was hurriedly signed on 7 July 1975 stated that it was an unprccedcnted national project because of the amount of money involved and its size among post-war Japanese overseas investments. However, this project was not an example of Japanese economic co-operation with Indonesia; rather, it was an example of an investment consortium established across the boundaries of financial circles then being backed by the govenment.

The master agreement establishes an unprecedented pattern of financing. Japan established a private investment company, Japan Asahan Aluminium, which is jointly owned by twelve companies (Tables 3.4 and 3.5). The company was capitalized at US$14.5 million. Half of this capital was provided interest-free as a loan from OECF. The balance was divided among the companies. However, 70 per cent of this amount was provided directly by the government's Export-lmport Bank in loans at 6.75 per cent interest; the remaining 30 per cent was loaned by a consortium of twenty-three Japanese city banks. These twelve parent companies invested nothing in this project, yet control is entirely in their hands. Also, Hasegawa Norishige, president of Sumitomo Chemical, is president of Japan Asahan Aluminium.

TABLE 3.5 - Financing Terms of the Asahan Project

Source: Mainichi Shimbun. 7 April 1976.

In December 1975, PT Indonesia Asahan Aluminium (INALUM) was established with a capital of US 12.5 million, 75 per cent of which was covered by Japan. The remaining 25 per cent-which Pertamina was originally expected to finance-was covered by the Indonesian Regional Government Fund, because Pertamina was in financial difficulties. Within the first year, however, real investment by Indonesia was reduced to 10 per cent. According to the master agreement, Indonesian capital was supposed to increase by 1.5 per cent every year after operations began, reaching 25 per cent within ten years.

PT Indonesia Asahan Aluminium was expected to purchase alumina from ALCOA Indonesia, which was supposed to have developed mines in Kalimantan, and to sell the aluminium ingots produced. However, this part of the plan was in doubt. Nippon Koei was in charge of the construction of the smelter, and Tokyo Electrical Power Co., Ltd., was responsible for both the construction and the technical aspects of the power plants. The feasibility study for the project was completed in 1975 and construction began in 1976

Total construction expenses, taking inflation into account, exceed US$1 billion, doubling the total Japanese investment in Indonesia, which at the end of 1974, was US$1.1 billion. When the investment of US$1.4 billion for another massive project on liquefied natural gas (LNG) development is included, Japan is the largest foreign investor in Indonesia, surpassing the United States.

The Benefits of Asahan

President Suharto called the Asahan project 'an imperishable monument of friendship between Japan and Indonesia'. What benefits would the project bring to both countries? What did the promoters claim? Hasegawa Norishige, president of Sumitomo Chemical and the representative of the Japanese consortium, stated, 'What should be pointed out first is that the purpose of the project is to secure an abundant and inexpensive power source . . . since the oil crisis, a sharp rise in the price of crude oil raised the cost of electrical power greatly. Considering that the power cost, which used to be about 3 yen/kWh, is now nearly 8 yen/kWh, the Asahan project is very appealing.' (Monthly Bulletin of Keidauren, September 1975 38-41.) MITI asserted, 'The power cost of the Asahan project can be held down to less than 3 yen/kWh.' (Toyo Keizai, 28 June 1975 ) This is important, because electric rates constitute about 40 per cent of the production cost of aluminium ingots, and 15.000 kWh of electric power is consumed per tonne of metal.

The second projected benefit was the securing of bauxite resources. Indonesia has bauxite deposits and it is possible to use deposits on Bintan Island and northern Kalimantan as raw material for aluminium.

The third benefit was to be that, since the whole Japanese aluminium industry would participate in the project, which would be administered under Japanese management with Japanese technology, it would be valuable as the first self-sufficient overseas development of aluminium resources. It was also argued that in view of the world demand for and supply of aluminium, the project would enable Japan to become more active internationally in this field.

The merits of the project for Indonesia were also pointed out. The Asahan plan is 'vital for the successful implementation of (lndonesia's) second Five Year Plan, and the key for the development of Sumatra. By the construction of infrastructure such as electric power plants, harbors and roads, the project will promote the development not only of the aluminium industry, but also of other industries in the area ...' and will help by enhancing 'effective use of resources, promoting employment, improving the level of technology, and increasing exports' (Monthly Bulletin of Keidauren, September 1975). In addition, officials of MITI stressed that the project represents a completely new Japanese policy for overseas economic co-operation, moving away from the past pattern of profit-first investment. Now the results bear examination.

The Asahan project has many characteristics of a Free Trade Zone (FTZ). PT Indonesia Asahan Aluminium has the right to develop and operate in the project area, and the right to own the land. Administration and business transactions are to be conducted between the company and the Asahan Authority, which is to be set up in this area by the Indonesian government. Stocks cannot be offered to the public. The period of operation is 30 years, after a construction period of 7-9 years. The period of operation of the smelter, if it is expanded, is 30 years after the completion of the expansion work. Eighty per cent of the electricity produced by the Asahan hydroelectric power plants is to be supplied to the smelter at a cost determined by the Japanese company. Even after 30 years, when the power plants are transferred to Indonesia, the electricity would still be provided at cost.

Construction materials, foreign employees' personal effects, and the alumina, if imported from outside Indonesia, are duty-free. The company will decide the price of ingots produced and where to export them, and even if the domestic demand for ingots increases in Indonesia, no more than one-third of the products will be supplied to the domestic market. At least 75 per cent of the work-force must be Indonesian within five years of the commencement of operation. This five-year term, however, is extendable. Foreigners (i.e. other than Japanese) can be employed only as administrators.

A lump-sum payment of US$2 million shall be paid to the Indonesian government within 30 days after the agreement is signed. A compensation fee of US$6 million shall be paid to the Indonesian government for the expenses of land acquisition, compensation for relocated residents, registration fee for surface rights, toll for roads, and a harbour entry permit. An annual fee for a water concession of US$650,000 is required after commencement of operation of the power plants, with US$520,000 added to this per year for six years.

The corporate tax will be 37.5 per cent for ten years after commencement of operations (the normal corporate tax is 45 per cent). The stoppage at source will be half the normal practice for dividends and royalties. The personal income tax will be half of the usual rate for a foreigner for the first ten years. The project is exempt from all export and import duties and local taxes. Money subscribed for stocks and loans in foreign currency can be held outside Indonesia, as can 60 per cent of income from exports. Freedom of foreign remittance will be guaranteed.

In sum, A. R. Suhud, the head of the Indonesian Asahan Negotiation Team, stated that 'Indonesia is not going to draw any major direct benefit from the project. Apart from providing a steady, if small, source of revenue in the form of company tax and water rights, the project will provide employment for 10,000 people during construction stage and for 2,000 in the smelting plant.' (Far Eastern Economic Review, 14 February 1975.)

The Costs of Asahan

The project is likely to cause several problems. Although it was argued that this project is vital for the development of Sumatra, 80 per cent of the electricity generated by the Asahan hydroelectric power plants is consumed by the smelter and cannot be used for other development in Sumatra. By committing to the Asahan project, the development of northern Sumatra will be controlled by Japan for as long as 30 years, and the whole area, including its resources and assets, will be placed under the control of Japanese enterprises, hindering the independent economic development of Sumatra.

The Asahan project is record-breaking for Japanese overseas investment, both in seale and in form. Such an enormous investment will surely affect Indonesia beyond northern Sumatra. For instance, at the smelter site, there is a small fishing village of about 300 families. However, the plan involves the building of a factory town of 20,000 people, together with a loading port; 2,000 will be employed at the smelter. The number to be employed in the construction of the smelter is 10.000 and a labour force of 30,000 will be required during the busiest period (Mainichi Shimbun, 12 June 1976). To build a factory town of 20,000 people and the hydroelectric power plants, it will be necessary to recruit workers from other parts of Indonesia. To fill this need, the Indonesian government would probably make use of people displaced by its Transmigration Programme. They would probably be farmers from Java, who would be moved off the land where they and their ancestors have long lived, and employed as construction workers in Sumatra, which has a different climate and environment from Java. Unless there is adequate planning for their employment after the construction phase is completed, life will be hard for them there.

Japan's aluminium industry has been given privileged power rates since the pre-Second World War period, because the aluminium is of strategic military importance. Yet the practice continues even today. Before the power rate was raised due to the oil crisis in late 1973, electric power companies in Japan were spending 3-3.5 yen to generate 1 kWh of power and were charging 14 yen/kWh for household use and 7 yen/kWh for industrial use. However, power was supplied to aluminium smelters at a bargain rate of 1.8 yen/kWh, whereas the steel industry, which was generally criticized for obtaining power at an unreasonably low rate, was paying 2.8 yen/kWh. Nevertheless, Japanese aluminium producers complain that due to the rise in the power rate to nearly 8 yen/kWh in 1975, their international competitive position has deteriorated. Canadian companies pay less than I yen/kWh and the United States and Australian competitors pay only 1.5 yen/kWh.

MITI says that the power cost for the Asahan project can be held down to 3 yen/kWh. However, President Hasegawa of Asahan Aluminium later announced that the power cost would be 1.2 yen/kWh (Nihon Keizai Shimbun, l: June 1976). With the rise in construction costs due to inflation, this rate seems unreasonably low even in comparison with the current power generating cost in Canada. One of the motives for Japan's investment in the Asahan project is the guarantee of a cheap electric power supply when smelter operations begin, thus enabling Japan to be internationally competitive again.

The Japanese requested a complete exemption of corporate taxes during the ten years of construction and of income tax of the workers on several hundred thousand man-days, on the grounds that OECF money was 'to be provided to developing countries on the basis of complete tax exemption, and that in the case of the Asahan project the fund was an extra-soft loan at an annual rate of 3.5 per cent'. The Indonesians, however, insisted on only a partial tax reduction, as prescribed in the Agreement (Mainichi Shimbun, 12 June 1976).

During the basic survey, separate bathrooms were built for Japanese and Indonesian workers. This was reported in some local newspapers in Indonesia, and, according to the Mainichi Shimbun (12 June 1976), some students said, 'The next flash point of the antiJapanese movement is Asahan.' Lie Tek Tjeng, an Indonesian scholar and the director of LIPI (National Institute for Cultural Studies), pointed out in his paper, 'The Asahan Project and the Future of Indonesia-Japan Relations', that northern Sumatra will be flooded with Japanese in the next few decades, and there is a possibility that tension will increase between the Japanese and the local population.

To secure the land for the project, the Indonesian Army evicted the residents, and the Indonesian government compensated them. Kuala Tanjung, where the smelter was built, was a fishing village of about 300 households. There were about 100 households on the factory site who were compensated for their losses. However, the other 200 households that were in the area used for the project's roads and other infrastructure were not compensated. Although the 20 households of a village on the site of the power plants were compensated for their eviction, an aboriginal ethnic minority group of 20,000 people living downstream were not supplied electricity from the power plants, and some were evicted.

The difficulty of finding locations for heavy industries in Japan was one of the rationales stated by MITI in proposing that the aluminium smelter be built overseas. This difficulty arises not only because of seareity of land, but also because the citizens' movement of the 1960s against environmental destruction caused by development has become increasingly active. The principle of the alurninium-smelting process has not changed since it was developed in 1885 When cryolite is added in the second process, hydrofluoric gas is generated. Hydrofluoric gas is highly poisonous to humans and plants. In producing one tonne of aluminium, 25-35 kg of hydrofluoric gas are produced, 60 per cent of which is discharged from the furnace as gas. The toxicity of hydrofluoric gas is demonstrated by the fact that no vegetation grows within a radius of 10 km of the smelter at the Kambara Plant of Nippon Light Metal (Shizuoka prefecture), which started its operations 30 years ago on an annual production seale of 120,000 tons, due to hydrofluoric gas pollution. If caustic soda, used in the first process, is to be produced in Indonesia, a large amount of mercury would be discharged from that factory. It is obvious that the Asahan project would pollute the environment but the Japanese consortium, MITI, and the Indonesian government have not taken any measures to prevent pollution.

TABLE 3.6 - Aluminium Supply and Demand in Japan, 1979 and 1981 (tonnes)

Source: Resource Statistics Yearbook, Japan.

According to the proposal, the first justification for overseas investment was that aluminium smelting consumes large amounts of electric power. This, in addition to the fact that pollution controls had been strengthened and the price of land had risen, led the Aluminium Section of the Japanese Industrial Structure Council to believe that it had become impossible to begin construction of new smelters in Japan (The Aluminium Section of the Industrial Structure Council, 12 August 1975) The Council's proposal concerning the next ten years for the aluminium industry (1976-85) recommended finding overseas locations and vertically integrating the smelting and rolling fields. The Council estimated the total Japanese consumption of aluminium in 1985 at 3.t million tonnes, based on the assumption that the Japanese economy would maintain its annual growth rate at 7 per cent for the following ten years. Of this demand, the Council estimated that only 1.8 million tonnes could be produced domestically in 1985, and the balance would have to be imported from abroad. The Council then proposed to bring semi-processed products to Japan from overseas factories constructed by the Japanese aluminium industry. Sites at Asahan in Indonesia and the Amazon in Brazil were specifically recommended.

However, it was obvious in late 1975, when the Council announced its policy, that the aluminium industry was beginning its deepest recession ever. Furthermore, for more than two years it had reduced its annual output from a capacity of 1.5 million tonnes to 1.0 million tonnes, and its stockpile still remained at 400 000 tonnes (Table 3.6). For example, the Toyo plant, which Sumitomo Chemical had built in 1974, had to reduce its operations by 80 per cent. The construction industry was hit most severely by Japan's economic recession at the time of the first oil crisis, and the aluminium industry is dependent on the construction industry for more than 50 per cent of its demand. The five aluminium smelting companies which are members of the Asahan Consortium recorded recurring deficits of 100 billion yen (USS334 million) for AprilSeptember 1976 alone. There was no sign of recovery for the aluminium industry in the foreseeable future, and since Japanese industry would not need the semi-processed aluminium to be produced by the Asahan and Amazon projects, the Council's long-term plan for the aluminium industry was unrealistic indeed.

The Goals of the 'Asahan Method'

So why was the aluminium industry promoting the Asahan project while it was suffering from a recession that was causing a reduction of domestic operations and stockpiling? In addition, why was the project guaranteed a high profit rate through 85 per cent financing by government funds, guaranteed cheap power rates, an FTZ-type investment environment, a cheap labour force, and no pollution control? In the first place, Japan, as the world's second largest consumer of bauxite, was under pressure to secure its sources of this vital material, because bauxite was becoming the next target of resource nationalism. As with oil, Japan had to import nearly 100 per cent of its bauxite, the production of which had been monopolized by the United States and the European major mining companies. The Jamaica Treaty, concluded among the bauxite-rich countries, seemed the first step towards the eventual formation of an international resource cartel among the bauxite-exporting countries in the Caribbean. Japan wanted to secure a long-term, stable supply of bauxite from Indonesia and Brazil-the bauxite-supplying countries in the developing world which were not parties to the Jamaica Treaty. The Asahan project would smelt aluminium using bauxite produced in Indonesia or Australia as the raw material and export it to Japan as semi processed products. This system was guaranteed for 30 years. This strategy-not to oppose Third World resource nationalism with force but to penetrate and subvert it from within-is a true Japanese-style strategy.

The Asahan project was vital to the political life of the Indonesian elites. Pertamina was on the verge of bankruptcy, with debts of US$10 billion, and Indonesia's national debt was US$8.2 billion. As a result of Pertamina's economic crisis, most basic projects of the Second Five Year Plan were shelved. The Asahan project was the only one that survived.

For the Indonesian government, facing a general election in May of that year and a presidential election in 1978, the foreign exchange pouring into the Asahan project was not only a direct relief but was expected to become a political fund for the President himself. For instance, the 26.25 billion yen (US$85 million) from the OECF that had been loaned to PT Indonesia Asahan Aluminium for the construction of the hydroelectric power plants first went through the Indonesian Central Bank and then the Indonesian National Bank, which added an extra 0.5 per cent interest. The Indonesian government then made the actual loan. It was also a boost to Indonesia's investment climate that Japanese corporations would put nearly US$1 billion into a project with the Suharto government.

Recent Developments in the Asahan Project

The most recent developments in the Asahan project indicate that even the short-term viability of the project is questionable. Until 1988 aluminium prices at the London Metal Exchange had remained well below the estimated breakeven price for operation (USS1,500 per tonne). Thus, within the first four years of operation, the aluminium plant (INALUM) incurred a cumulative loss of US$160 million. To save the project, the Export-lmport Bank of Japan granted it a two-year moratorium on the repayment of principals on its loans in 1986. An additional 56 billion yen was injected into the aluminium project in 1987 (32 billion yen from Indonesia and 24 billion yen from Japan). Japan also stretched out maturities on its loans to the project and lowered its interest rate from 7 per cent to 5 per cent, which allowed the project, for the first time, to post a profit of US$50 million in 1987.

But while Japan appeared happy with the operation of the project, the continued strengthening of the Japanese yen against the US dollar (Indonesia's foreign exchange earnings are mostly in US dollars from the sale of gas and oil) raised Indonesia's original debt of 320 billion yen incurred in the project (or US$10.4 billion at the 1975 rate) by more than one-third in US dollar terms by the mid-1980s. This put severe strains on the Indonesian economy which was already hard-hit by the falling petroleum prices. The planned alumina-producing plant at nearby Hintan Island was shelved indefinitely as it was felt that it would be cheaper to import the raw material from Australia.

On the technical side, the project has been threatened by the declining water-level of Lake Toba, which feeds the two hydroelectric stations. Crucial to the aluminium plant is a cheap and abundant power source but deforestation following the construction of a pulp and rayon plant up-river from the hydroelectric stations has greatly reduced the water-catchment area. The lake's water-level has fallen in recent years to a point where serious doubts exist as to the sufficiency of power available through the stations. In 1987, the 225 000-tonne-capacity smelter managed to produce only 191 000 tonnes of aluminium due to power constraints.

Indonesia is also beginning to assert for a more equitable share in the joint venture. The Master Agreement entitled Indonesia to a 33 per cent share of the aluminium produced in return for its 25 per cent equity stake. Under the 1987 restructuring, the Indonesian government converted 32 billion yen of government debts into equity to raise its stake from 25 per cent to 37 per cent in the Asahan project (there is pressure from domestic aluminium users to raise it to 50 per cent) but its request for a third of the aluminium produced for domestic use plus 41 per cent of the remainder was rejected. This dispute over distribution culminated in the suspension of aluminium shipments to Japan in July 1987. Although an interim agreement was made in December 1988 which resumed regular shipments to Japan, no solution had been reached so far. It is possible that a prolonged dispute may well upset the 'economic cooperation' of the two countries which the Asahan project purportedly tried to promote.

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