APP and debt-financed forest destruction

The following report draws extensively on notes by Chris Barr of the Bogor-based Centre for Indonesian Forestry Research (CIFOR).

The environmental audit was commissioned by APP in response to reports which said the company was destroying forests, sparking social conflict and using illegal timber to supply its pulp mills in Riau and Jambi provinces, Sumatra. The Riau mill - one of Indonesia's largest - is operated by PT Indah Kiat Pulp and Paper, 58% owned by APP.

A report by Friends of the Earth, Paper Tiger, Hidden Dragons, which took international financial institutions to task for investing in APP, was extensively quoted in the British Guardian newspaper in June 2001, and prompted all the company's major buyers in the UK to suspend contracts of APP products.

The FoE report cites a 2000 report by CIFOR and WWF. This exposed the high level of indebtedness of Indonesia's pulp companies and focused on the economic, social and environmental unsustainability of the country's pulp industry as a whole (see DTE 48 for more on this.)

German groups also protested over the involvement of their government's export credit agency, Hermes Buergschaften, in APP and other destructive and conflict-ridden projects. (see DTE 49).

The rapid expansion of pulp and paper production in Indonesia during the last decade was subsidised by cheap land and easy access to raw materials in the form of mixed tropical hardwood from natural forests. This meant there was little motivation to develop and harvest pulpwood plantations - between 1988 and 2000 only 10% of the 120 million m3 of wood estimated to have been consumed by the pulp industry came from plantations.

Rights to lands and resources traditionally held by local communities were ignored, with the result that much of the forested lands slated for pulpwood are now being reclaimed or subject to demands for compensation. Plantation sites belonging to both of Indah Kiat's affiliates in Riau and Jambi are under dispute. Unconfirmed reports say that the Jambi-based affiliate, Wira Karya Sakti, was forced to relinquish 60,000 ha from its concession to local claimants. The response has been heavy-handed in some cases: in February last year, staff of the Riau-based company, PT Arara Abadi, supported by paramilitary and police forces, raided a local village, destroyed homes and arrested 58 villagers opposing the takeover of their land by the company (see also DTE 49).

APP's Indah Kiat mill in Riau uses an estimated 9 million cubic metres of wood per year to produce 1.8 million tonnes of pulp. There are plans to raise the mill's capacity to 2 million tonnes, which would increase the wood demand by a further 1 million m3.

Most of this wood still comes from natural forests - according to the CIFOR-WWF report, Indah Kiat's operations have accounted for 287,000 hectares of deforestation or almost a third of the entire area attributable to all of Indonesia's pulp and paper companies. The wood comes from company concessions as well as from third-party suppliers. The company responds to critics by claiming it will source all of its pulpwood requirements from plantations by the year 2007 (revised from a previous target of 2004). Yet current planting targets have not been met and technical difficulties with part of Arara Abadi's 300,000 ha plantation site are anticipated due to the peat soils. According to company figures, only 130,000 ha of the site's total area are now planted with acacia. The CIFOR-WWF study estimates that by 2005 Indah Kiat will still be sourcing no more than 50% of the company's timber needs from plantations.

APP acknowledges that Indah Kiat's pulpwood demand cannot be met by Arara Abadi's concession alone and plans to clear a further 182,000 ha of forested land. This will be converted to acacia plantations and managed through joint ventures with local 'co-operatives'. APP say the new area consists of logging concessions (HPH) that have been 'degraded' and have been 'abandoned' by concessionaires. However, APP has not received permits to convert the forested areas to plantation use and, since this would go against a 1998 government moratorium on issuing new conversion permits, there are doubts whether this land can be used in the near future. It is also not clear where this new land is or how far it is subject to customary claims by local people.

The audit commissioned by APP has confirmed some of the concerns raised by CIFOR and FoE. It questions whether the company will continue to have access to cheap, sustainable wood supplies and raises the possibility of using potentially more expensive alternatives to meet production targets. The auditors warn the company that it faces "critical challenges" to the medium and long-term wood supplies. They also point out that plantation development may be subject to forces outside the control of the company. Indonesia's decentralisation programme is bringing conflicts over land: local governments are reported to have issued permits to co-operatives that overlap with some of APP's concessions. Such conflicts over land could have a "severe impact" if claims escalate.

All these influences have financial implications for APP, but there is no evidence that the company's creditors are taking environmental and social risks into account when making decisions about APP's debt problems.

The audit also investigated claims that the APP was using illegally felled logs to feed its mills. APP has always denied these claims and the auditors, who checked trucks entering the pulp mills, say they found no logs from illegal sources. However, serious questions remain over the legality of wood supplies given the known levels of corruption in the government and in the security forces. Forestry sector law enforcement is weak and it is widely alleged that permits can be readily bought to give illegal wood the appearance of legality. With wood consumption levels far outstripping legal supplies, it is highly likely that some illegal wood does make its way into APP mills.

The audits were carried out by AMEC Simons Forestry Industry Consulting of Vancouver and Asia Pacific Systems Engineering. As far as DTE is aware, there was no civil society input in the design or implementation of the audit. There have been questions over the independence of the auditors - AMEC Simons carried out feasibility and marketing studies for APP in Indonesia and China. It also reportedly carried out the feasibility studies for the Indah Kiat mill in Riau and APP's other Sumatra mill, Lontar Papyrus Pulp and Paper.

APP has claimed that the recent audits of its operations show that "the mill is clean, and is receiving wood from licensed and legally documented sources". The group played down the worrying conclusions on sustainability of supply, by separating them out from the official audit and calling them "preliminary findings."

Debt

APP announced a standstill on interest and capital payments on its staggering $13.4 billion of debt in March last year. This is owed to more than 300 companies including some of the world's major banks: Barclays, Deutsche Bank, ABN Amro and Credit Suisse First Boston. Around US$ 1 billion is owed to the Indonesian Bank Restructuring Agency (IBRA). To give an idea of its size, the $13.4 billion debt is more than four times the total assistance pledged by the CGI creditor group to the Indonesian government in 2001.

Sinar Mas, APP's parent conglomerate, has been forced to pledge most of its physical assets to IBRA to cover the government's guarantee of US$1.3 billion in loans from the group's Bank Internasional Indonesia to Sinar Mas affiliated companies.

The debt also acts as a hindrance to costly social and environmental improvements at APP's operations. Its commitments to repaying creditors will oblige the company to renege further on its responsibilities to local communities. It could also force cuts which affect the development of plantations leading to an even longer reliance on natural forests to feed its mills. Essentially, the financial interests of international financial institutions are being put before the basic needs of people affected by the company's operations.

The fact that the debt is so large and that so many international and Indonesian institutions have so much at stake also prompted the decision to go for a rescue attempt rather than declare bankruptcy. This goes against the policy that Indonesia agreed with the CGI group to close down highly-indebted companies in order to reduce overcapacity.

A draft restructuring plan to repay the debt over a 13-year period was rejected by APP's creditors in February.