Pulp & paper heading for trouble

Down to Earth No. 48, February 2001

The pulp industry in Indonesia is financially, socially and ecologically unsustainable, but the Indonesian government, local authorities and investors alike are failing to take responsibility.

Indonesia has prided itself on being one of the world's lowest cost producers of paper pulp. Foreign investors have supported the growth of this industry, despite its reliance on the destruction of natural forests and illegal logging for raw materials. Pulp and paper companies are financially as well as ecologically unsustainable: most are heavily indebted. Nevertheless, there is considerable resistance to reducing overcapacity by closing pulp plants - not least from foreign investors - and some local governments are welcoming new pulp plants.

A CIFOR research paper* shows how Indonesia's pulp and paper industry has grown by nearly 700% since the late 1980s, far outpacing the development of pulpwood plantations. Indonesia's pulp production capacity increased from 606,000 tonnes per annum in 1988 to 4.9 million in 1999, while annual paper processing capacity rose from 1.2 million to 8.3 million tonnes for the same period. The most recent increases are due to the recent start up of PT Tanjung Enim Lestari (PT TEL) in South Sumatra (450,000 tonnes at present) and increased capacity in PT Indah Kiat and PT Riau Andalan Pulp & Paper in Riau. This capacity requires 24 million cubic metres of wood per year - the total annual "sustainable" level of timber harvest from natural forests. Plantations supplied only 8% of the wood consumed by the industry between 1998 and 1999. Most of the wood came from clear-cutting natural forest, resulting in over 800,000 ha of deforestation. As much as 70% may be the result of illegal logging. (For more background on PT TEL see our website campaigns page: www.gn.apc.org/dte/camp/htm.)

The CIFOR report points out that Indonesia's largest pulp mills face growing shortages of timber within the next 5-7 years since increases in plantation yields cannot meet the demand. Prices of raw materials are bound to rise and this presents increased financial risks, especially for international investors who helped to finance the expansion of capacity.

*Profits on Paper: Fiber, Finance and Debt in Indonesia's Pulp and Paper Industry, C. Barr, November 2000, available from CIFOR's website: www.cifor.cgiar.org/

Source: adapted from C. Barr, Nov 2000, CIFOR

Public funding keeps mills running

Some pulp mills and plantations, owned by large Indonesian conglomerates are now in the hands of the IMF-sponsored Indonesian Bank Restructuring Agency (IBRA) due to collapse of banks owned by the same conglomerates after the 1997 financial crash. The same companies also have massive outstanding overseas debts (see table). The result is that millions of ordinary Indonesians are subsidising the pulp and paper industry through debt rescheduling, the conversion of private debt into public debt and other deals. For example, the Indonesian government has ploughed US$900 million into Sinar Mas's Bank Internasional Indonesia. Bob Hasan's Kiani Kertas owes IBRA US$370 million. Prayogo Pangestu has not been forced to sell his share in PT TEL and its feeder plantation, despite the US$723 million debt on his PT Chandra Asri petrochemical plant.

Despite the enormous debt load they carried when the financial crisis struck, none of Indonesia's major pulp and paper producers has been forced to close due to bankruptcy. Instead, IBRA and international creditors have allowed the same management to continue and even, in the case of APRIL, financed further expansion of capacity. Their argument is that the pulp producers can then repay their debts faster.

Sinar Mas, which owns internationally listed Indah Kiat Pulp & Paper and the Tjiwi Kimia paper plant, is one of Indonesia's largest corporate debtors. It raised over US$10 billion to expand its pulp and paper operations in Indonesia and China through its Singapore-based holding company Asia Paper and Pulp (APP). The company could soon be delisted in the USA because its shares have traded at below US$1 for 30 consecutive days. This breaks US Security & Exchange Commission rules. APP's shares on the New York Stock Exchange have plummeted recently, due to fears that the company cannot repay its creditors. If delisted, APP will immediately have to repay options worth US$870 million. It will also become much harder for the company to refinance outstanding bonds and reschedule longer term loans. 
(Dow Jones 7/Dec/2000; Kompas 18/Jan/2000)

Indorayon becomes Toba Pulp Lestari

Indorayon's beleaguered Porsea operations have been effectively closed down since late 1998 by local protests and blockades. The Habibie government ordered a complete review of the environmental and social impacts of Indonesia's only integrated pulp and rayon fibre plant in response to long-standing complaints from the surrounding community about air, water and noise pollution, land rights violations, lack of employment and unfair compensation. President Wahid's cabinet has been split over Indorayon, with the Department of Trade and Industry pressing for the plant to resume production to provide more jobs and exports while the Environment Minister argued that it should be shut down for good due to its appalling pollution record. Violent confrontations as police and military clamped down on protests have resulted in over a dozen deaths and hundreds of serious injuries during the past two years.

In May 2000 the government decided that Indorayon's pulp operations could resume, but not the production of rayon fibre. This stimulated further local protests. Indorayon's increasingly desperate bids to address local people's grievances with promises of more employment, business opportunities and a community foundation funded by the company and its foreign investors were rejected. The Porsea plant could not start up again and Indorayon suffered heavy financial losses. By September, the company's foreign backers were losing patience and 1,000 of the 7,000 workforce were dismissed.

To break the deadlock Indorayon changed its name to PT Toba Pulp Lestari and changed its board. A consortium reported to include the Bank of Boston, Bank of New York, Bank Nomura, ABN Amro Bank, and Credit Lyonnais provided another US$4 million support. The new management's promises of better relationships with the local community might have convinced the company's financial backers to hold on for a little longer, but have done nothing to change local opinions. Inhabitants of Porsea and other villages affected by the plant refuse to accept the 'new' company and the Department of Trade and Industry has so far not dared to grant it a new operating licence.

Indorayon/Toba Pulp Lestari's parent company, the Raja Garuda Mas group has a similar set up to Sinar Mas (although it is much smaller). Raja Garuda Mas borrowed over US$2 million on international markets through its holding company Asia Pacific Resources International Limited (APRIL), also based in Singapore. RGM 'spun off' Indorayon from APRIL in late 1999, so that it would be easier to raise funds overseas to expand its larger, more modern pulp plant Riau Andalan Pulp & Paper. 
(Jakarta Post 17/Nov/2000; Pulp & Paper Online 11/Dec/2000; Kompas 10/Jan/2001).

The construction of the first pulp plant in South Kalimantan is due to start in June 2001. The 600,000 tonne/year plant at Sungai Danau in Kotabaru district, is only part of an ambitious plan to attract various industries and foreign investment to this area near Banjarmasin. The US$1.2 billion joint venture between Indonesian timber company PT Marga Buana Bumi Mulia and a consortium of foreign investors from 8 countries is apparently a direct outcome of the South Kalimantan local government's participation in the Hanover Expo in Germany last year . An Indonesian newspaper reported that the German company had signed the deal, but other sources indicate that the Dutch/Swedish industrial company Akzo-Nobel is involved. PT Marga Buana Bumi Mulia is part of the Mercu Buana Group, owned by ex-president Suharto's half-brother, Probosutedjo. The main raw material is intended to be acacia, pine and albizia from 240,000 hectares of industrial timber plantations established in the province by Menara Hutan Buana, PT Kodeco, Kirana Rimba, Inhutani II, Fast Forest and others. However, a local official described these as 'alternatives' implying that timber may be used from natural forest in South Kalimantan or, more likely, neighbouring Central Kalimantan. Probosutedjo has been questioned over the misuse of Rp144 billion (US$15.5 million) he received from the Reforestation Fund to establish the 70,000ha Menara Hutan Buana plantation.

The Kusan Hilir community's apparent enthusiasm for the new pulp plant may reflect their hopes for employment or opportunities for local elites to set up associated businesses. A local official is reported to have made the improbable claim that the plant will employ 20,000 people in the construction phase and 200,000 workers once operational. He dismissed NGOs' fears that the South Kalimantan pulp operations would generate the same kind of problems as Indorayon. Local government officials in Sulawesi also have plans to set up pulp plants. District administrators from Boalemo in North Sulawesi and Goa and Enrekang in South Sulawesi are going to see an 'environmentally friendly' pulp plant on the Mississippi with a view to setting up similar ones in Indonesia. Boalemo bupati Iwan Bokings hoped that US investors would jointly finance a pulp plant with the local government. The plant would use the shrub kenaf (to be grown by local farmers) instead of tropical timber as its raw material.

A programme on pulp and paper mills backed by foreign investors and export credit agencies in Sumatra is in preparation for European TV in March. It will show the environmental and social effects of Riau Andalan, Indah Kiat (Riau); Lontar Papyrus (Jambi) and Tanjung Enim Lestari (S. Sumatra). Indonesian and international NGOs are holding a national workshop in April on "ECAs and the pulp and paper industry in Indonesia" to be attended by local people and NGO activists from localities affected by pulp developments.
(Banjarmasin Post 2/Dec/2000, 11/Jan/2001; Kompas 22/Nov/2000; Indonesian Observer 21/Dec/2000; Tempo Interaktif 15/Jan/2001)