Forests under threat from debt-laden firms: Report
Forests under threat from debt-laden firms: Report
BOGOR, West Java (JP): A new study sponsored by two international organizations shows that Indonesia's forests - widely regarded as among the most biologically important tropical forests in the world - are under dire threat as heavily debt- laden companies struggle to obtain sufficient wood for continuous production.
A sevenfold rise in mill capacity over the past decade, financed by multibillion dollar investments, has enabled Indonesia to become one of the world's top 10 pulp and paper producers.
According to the report by the Center for International Forestry Research (CIFOR) and the World Wide Fund for Nature (WWF)'s Macroeconomic Program Office, which has been made available to The Jakarta Post, Indonesia's pulp and paper industries have grown by 700 percent since the late 1980s, backed by US$12 billion credit and investments
CIFOR researcher Christopher Barr, who conducted the study from mid-1999 until the end of this year, reports that the combined production capacity of Indonesia's pulp and paper industries has grown since 1988 from 1.8 million tonnes a year to more than 13 million tonnes a year.
The report notes that the country's pulp and paper producers, dominated by four conglomerates, secured backing for major growth, in part, by pledging to obtain their raw material from sustainably managed tree plantations. Yet so far, only 8 percent of the wood the industries consume (100 million cubic meters since 1988) has come from plantations. The rest is mixed hardwood timber from natural forests - much of it thought to be harvested illegally.
"The fact that companies have made investments on this scale without first securing a legal and sustainable supply of raw material suggests that many pulp and paper projects in Indonesia are at considerable financial risk," Barr writes in the CIFOR-WWF report, Profits on Paper: The Political Economy of Fiber, Finance, and Debt in Indonesia's Pulp and Paper Industries.
Barr calculated that more than 800,000 hectares of natural forest have been cleared since 1988 to supply the rapidly expanding mills. The government of Indonesia has allowed the country's pulp and paper companies, which are concentrated in Sumatra's Riau province, to exploit large areas of natural forest at low cost. But the CIFOR-WWF study concludes that as much as 40 percent of the wood that mills now obtain from natural forests comes from undocumented and probably illegal sources.
The nation's rapidly diminishing forests will continue to face heavy pressure for at least the next seven years, the report warns, as plantation yields fall far short of meeting the volumes of wood the country's mills need to operate at projected processing capacities. Barr speculates that the quest for additional sources of wood could hasten deforestation in Kalimantan and Papua (formerly Irian Jaya), as pulp and paper companies seek raw materials from beyond their current base in Sumatra.
Growing Risk
The study looks particularly at the performance and economic conditions of two of Indonesia's largest pulp and paper companies, owned by Asia Pulp & Paper (APP) and Asia Pacific Resources International Ltd. (APRIL). Both have made considerable headway since the 1990s in establishing industrial pulpwood plantations. Fast-growing acacia and other species favored for plantations can generally be harvested in seven to eight years.
But the CIFOR-WWF report shows that large capital investments in pulp and paper processing facilities have rapidly outpaced plantation development efforts, with companies expected to face growing shortages of raw material over the next five to seven years.
"Besides putting added pressures on Indonesia's remaining natural forests, debt-driven expansion will raise the financial risks if these companies are not able to secure low-cost fiber over the long term," Barr observes. Conflicts between companies and communities over forest access and environmental issues further raise the financial stakes, as illustrated by the ongoing suspension of operations at the $600 million Indorayon pulp mill in North Sumatra.
The study shows that Indonesian pulp and paper producers have been willing to invest enormous sums in the expansion of mill capacity because the financial risk to their owners has been diminished by government subsidies (such as access to pulpwood at costs well below its stumpage value), weak regulation of Indonesia's financial sector and inadequate risk assessment by international financial institutions involved in the investments.
The economic crisis in Indonesia has magnified the problems. Some of the nation's largest mills and pulpwood plantations have been placed in receivership under the Indonesian Bank Restructuring Agency (IBRA) because of their heavy debt loads.
"IBRA has allowed the companies to continue operating under their precrisis management teams, and there are strong reasons to believe the agency may write off a substantial portion of their outstanding debts, thereby providing yet another capital subsidy," says Barr.
Furthermore, agreements between major pulp producers APP and APRIL and their foreign investors to resolve outstanding debts have been linked to further expansion of the companies' processing operations.
Recommendations
The report suggests a number of policy options that government agencies and financial institutions could adopt to put Indonesia's pulp and paper industries on a more sustainable track.
The recommendations are best read in the context of the full report and they relate to corrective action on: further expansion of pulp and paper processing capacity; wood supply subsidies to Indonesia's pulp industry; allocation of new forest conversion licenses; independent monitoring of plantation development; stricter application of due diligence by financial institutions on major investments in major pulp and paper projects in the face of financial risks; and potential reliance on illegally obtained raw material.