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.