Indorayon's fate

Indorayon's fate

State Minister of Environment Sonny Keraf's recommendation to
the Cabinet that PT Inti Indorayon's pulp and rayon plants in
Porsea near Lake Toba in North Sumatra be closed down or
relocated has probably made him very popular with environmental
organizations and a number of local people, but it could
devastate what remains of investor confidence in resource-based
ventures in Indonesia.

Simply ordering the closure or relocation of Indorayon's mills
without due process of the law boils down to the government
succumbing to mob ultimatum, a precedent that could threaten the
fate of numerous other resource-based investment ventures
throughout the country.

Only when there is certainty of the application of the law so
that the course of an investment can be predicted will
international investors be willing to invest in Indonesia.
Domestic and foreign investors understand that laws or rules can
change over time to address social issues, but they will not
accept unilateral official verdicts taken without any clear legal
basis but only because of public protests.

True, bonafide foreign investors and the majority of consumers
overseas support the closure of any plants found to damage the
environment or pose public hazards, but such measures should be
based on legal, objective evidence and not simply on public
protests or demands from environmental organizations.

Keraf should have acted quickly to push ahead with the
independent audit on Indorayon that the government has planned
since late 1998 after the US$600 million Indorayon industrial and
forest plantation complex became the target of protesters in mid-
1998.

What the company has experienced since June 1998 is an example
of the hazards faced by resource-based ventures operating in
Indonesia's new era of reform. The protesters consist of a
volatile mix of local leaders, pressure groups and other
imbroglios, some with genuine causes and several others with
self-seeking interests who have accused Indorayon of almost all
kinds of sins such as damaging the environment, causing health
hazards and contributing almost nothing to the local economy.

All these protests occurred even though Indorayon took
corrective measures ordered by the government and has gained blue
rating certificates under the government's clean river program
since 1995. The company was also certified as mostly compliant
with environmental standards by independent auditor Labat-
Anderson of the U.S. in 1996.

If the government suspects that all the certificates or good
ratings were gained through collusion with environmental
officials -- something that was highly possible during the
corruption-infested rule of former president Soeharto -- this
should have been a more compelling reason to immediately assign
an international auditor to investigate Indorayon. Moreover,
Indorayon itself has repeatedly pledged its willingness to bear
the cost associated with such an investigative audit.

There might be some truth in allegations that Indorayon-- like
many other major businesses during the Soeharto era-- possibly in
collusion with some officials, bulldozed its way through the
licensing system to get all the necessary permits for its
operations beginning in 1989. But the fact is the company has
operated with all the necessary legal permits and is a
legitimate, corporate taxpayer and employer, which the government
accepted as fact until the waves of massive demonstrations broke
out in mid-1998. Indorayon also is partly owned by thousands of
investors in the United States through their ownership of
American Depositary Receipts and is subject to the tough rules of
the U.S. Securities and Exchange Commission.

It is probable that the reasons behind the 1998-1999 protests
and frays actually run deeper than environmental concerns.
Rather, the main issue seems to be a deep disillusionment among
the local people over what they see as the company's negligible
contribution to the local economy. This frustration was kept in
check under the autocratic Soeharto regime but is now being
vented freely under the reform era, though still under the
umbrella of environmental issues. Worse still, the local
administration, which does not get a share of the income or
value-added taxes paid by Indorayon, simply took a hands-off
stance in regard to the demonstrations.

The problem though is that taxation and the distribution of
tax revenue are outside Indorayon's control but are based on the
central government's laws. A better revenue-sharing arrangement
will take place only in 2001 when the laws on regional
administration and intergovernmental fiscal relations come into
force.

The best way to resolve the Indorayon issue is for the
government to push ahead with an independent audit based on
international-standard terms of reference to evaluate the
company's total compliance with existing laws. Simply
implementing Keraf's recommendation would put the fate of many
other major resource-based investment ventures in the balance as
groups of people could be encouraged to resort to mob rule to
fight for their interests.