Indorayon's imbroglio

Indorayon's imbroglio

The latest wave of violent attacks by local protesters at the
pulp and rayon mills of publicly-listed PT Inti Indorayon Utama
near Lake Toba in North Sumatra last week, is an example of the
hazards faced by resource-based ventures operating in Indonesia's
new era of reform.

Since July, Indorayon -- 62 percent owned by Singapore-
registered Asia Pacific Resources International Holdings Ltd.,
which is listed on the New York Stock Exchange -- has been
dealing with a volatile mix of local leaders, pressure groups and
other protesters; some with genuine causes, and several others
seeking to further their self-interests.

The protesters have accused the company of damaging the
environment, polluting the waters of Lake Toba, causing
respiratory ailments among the local population and many other
environmental sins, even though Indorayon's operations have
earned a blue-rating certificate under the government's clean
river program.

The company only resumed production early this month after
belligerent locals blocked the main access roads to the mills,
stopping deliveries of supplies and materials, since late July.
It was the government itself that ordered the reopening of the
mills to allow an independent audit to effectively determine
whether allegations of pollution are legitimate.

However, local protesters, suspecting that the government
would eventually side with the conglomerate, as it had done
during the New Order era, have insisted that the mills be closed
down immediately.

However, many analysts believe that the reasons behind the
latest round of protests actually run deeper than environmental
concerns.

Similar disputes in the mid-1990s were resolved with an
independent audit. U.S. Labat Anderson Inc., a leader in
environmental compliance regulations, conducted an environmental,
safety and health audit of Indorayon in 1995, with the conclusion
that the company met all environmental standards, and posed no
health risk to its more than 7,000 employees, or local residents.

Rather, the main issue of contention seems to be a deep
disillusionment among the local people over what they see as the
company's disregard for the local economy. This frustration was
kept in check under Soeharto's autocratic regime, but is now
vented freely during the era of reform, though still cloaked
behind environmental issues. The residents' anger is apparently
fueled by the perception that the company has benefited hugely
from local resources, but has contributed almost nothing to the
local people. Worse still, the local administration, which
receives none of the taxes paid by Indorayon, has simply adopted
a hands-off stance regarding the protests.

As in the case of the popular resentment against PT Freeport
Indonesia's copper and gold mining operations in Irian Jaya, the
local people around Lake Toba are now clamoring for a share of
the money that Indorayon has been earning from local natural
resources.

The problem though is that taxation and the distribution of
tax revenues are not controlled by Indorayon, but are based on
the laws of the central government. These laws stipulate that all
business taxes (income and value added taxes) and royalties paid
by the company must be transferred to Jakarta. The US$600 million
that Indorayon has invested in its mills and timber estates
should have provided big benefits to the local economy and local
people. But, beyond the employment of 7,000 people, this did not
happen.

Whatever contributions the company has made to the local
community has obviously not satisfied the needs of the local
community. Company-run community relations programs, though
imperative for a company to be regarded as a decent neighbor
rather than a rich and exclusive enclave, are rather minor
compared to what a fair distribution of the wealth would mean to
the community.

The recent Special Session of the People's Consultative
Assembly addressed this sensitive problem by enacting a decree
that provides stronger autonomy to local administrations, and
requires a better fiscal balance between the central government
and local administrations.

But this decree has yet to be fine-tuned into laws which can
be implemented, a process which may take several months.
Meanwhile, the fate of Indorayon, which is owned by tens of
thousands of domestic and international investors, is hanging in
the balance.

The manner in which the government settles Indorayon's dilemma
will surely be a test case for similar disputes, which will most
likely hit many other resource-based ventures before a better
fiscal balance between the central government and local
administrations is legislated and enacted. For now, the best
option seems to be for the government to push ahead with an
independent audit. Simply succumbing to the demand for
Indorayon's closure will cause messy litigation proceedings in
international courts, and will kill whatever confidence foreign
investors still have in Indonesia.