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.