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.