Category: Research

Which is where a flamboyant attorney named Hotman Paris Hutapea comes in. Hutapea became famous during a high-profile drug smuggling trial a decade ago for sporting a hairstyle reminiscent of mid-1980s Van Halen, keeping a white-handled pistol in a holster in his suit, and flaunting romantic relationships with local celebrities.

Tan hired him to fight Standard Chartered’s insistence that it be paid. The trial quickly became a test case for a string of other coal projects in Indonesia, including the Japanese-backed project. If digging up coal to fire power-generating plants using 19th-century technology was to be Indonesia’s energy policy of the future, the industry would need to show—even more than that it had the coal—that it could finance the multibillion-dollar infrastructure projects needed to dig it up and turn it into electricity.

Reports vary, but the British bank’s liability on just the single loan is usually estimated to fall between $630 million and $750 million. That’s a large enough amount that a problem with just this one client could kneecap a major London institution’s stock price and send the rest of the coal market tumbling. The overall package of loans to Tan was the largest debt extended to a single person in all of Asia that year.

Other large multinationals not in the habit of throwing away millions had been minority partners in the deal, and if the Indonesian court invalidated the terms of the loan—blocking Standard Chartered’s attempt to collect from a company Tan said was not bankrupt—they too would lose between tens and hundreds of millions. Among the investors was Caterpillar, the Peoria, Illinois–based manufacturer of bulldozers and other heavy equipment used in the mining industry, which was in for just over $100 million.

The trial would take place in Jakarta, and a better place for a show trial about a coal mine may not exist. The capital of a nation of coral reefs and dense rainforest, Jakarta is home to 20 million residents surrounded by toxicity. It’s hard to take a walk along Jalan M.H. Thamrin, the heart of the business district, without the risk of stepping into an open sewer. “The combination of untreated domestic sewage, solid waste disposal, and industrial effluents has led to a major public health crisis” along Jakarta’s main river, the soupy Ciliwung, the Asian Development Bank found in 2012. (ADB helps arrange funding for many public works projects, such as water treatment plants, in Indonesia and elsewhere. Little evidence exists for any improvement in water quality or sanitation since the ADB’s report.) Air pollution—mainly from vehicle exhaust—is so bad that in May, U.S. Ambassador Robert Blake proudly announced that two air quality meters had been installed in a complex housing American diplomatic staff, whose worries about the city’s pollution had converted it into a hardship posting. Sixty percent of people in Jakarta had seen their health harmed significantly by the smeary air, said Blake, citing results of a 2013 joint Indonesian-American study. If a lawyer ever wished to argue against a coal mine by bringing the judge to the courthouse steps to sniff the air, Jakarta was the place.

As the trial got under way in March, Hutapea was preparing to argue that a bank enabling a coal mine should not be allowed to collect on a $1 billion loan. It wasn’t his first time arguing in court that an Indonesian company working in an environmentally shady industry shouldn’t have to pay back a foreign partner: In 2001, he represented local companies in a $14 billion case brought by American creditors against Indonesian logging company Asia Paper & Pulp, which owned plantations in Borneo. Hutapea argued that the contracts establishing the loans had been invalid. He won.

His argument in the Standard Chartered case: There had never been a loan to Borneo Lumbung in the first place, the $1 billion that changed hands notwithstanding.

The Standard Chartered–led consortium had lent Tan the money so he could buy a stake in a rival mining company called Bumi Resources (“bumi” means “Earth” in Indonesian). Tan used mines owned by his company as collateral. But Hutapea argued that Indonesia’s coal is a state asset, even if mined privately. So Tan needed the Indonesian government’s approval to use his own coal mines as collateral for the loan—and he hadn’t requested that. Standard Chartered hadn’t either. The loan, Hutapea maintained, was therefore invalid. There was nothing to collect.

In April, the court ruled in Tan’s favor. As with the Asian Pulp & Paper case 15 years earlier, Hutapea had saved a company led by an Indonesian oligarch hated by local environmentalists. “You screw my country’s laws, my country’s laws will screw you,” he told a finance industry newsletter.

Yet Hutapea became the environmentalists’ most unlikely ally, because the victory fouled the entire Indonesian coal economy as badly as the air above Jakarta.

The world of energy finance, predictably, went nuts. “Any creditor on the hook to Indonesia’s coal mining industry will not be sleeping easily these days,” wrote International Financing Review, a trade publication. Like most commentators, IFR seemed unclear why Indonesia wanted to continue digging coal mines in the first place. Despite plans to expand the country’s coal portfolio, wrote credit analyst Jonathan Rogers, “the fact is that Indonesia’s coal sector is a sunset industry that is likely to shrink substantially in size in the face of collapsing demand from China, its biggest client.”

China was shifting to wind and solar power, another reason it was buying less Indonesian coal.

Hutapea’s victory has been closely watched beyond Jakarta and London. In Tokyo, where $3.4 billion was riding on the Central Java coal-powered electrical plant, JBIC issued a statement saying it intended to stick with the project and had faith its loan would be repaid even if the plant went bankrupt. The announcement had the effect, presumably unintended, of telling the world that the Japanese interest was worried. By persuading an Indonesian court to approve what appeared to be an Indonesian company’s swindle of $1 billion from Standard Chartered’s consortium, Hutapea sent a chill across every banking office from New York to Tokyo with a bet on a coal mine in Indonesia, one of the places still aggressively courting those bets.

Will that money dry up? So far, it hasn’t. But if Indonesia keeps investing in coal, it may not be the environmentalists fighting hardest against it. It’ll be the bankers. It’s hard to breathe most days in Jakarta. But lose your shirt in London, and you’ll end up twice as sick.