The key finding
of the CIFOR-WWF report are as follows :
1.
Rapid Growth
Indonesian pulp production capacity grew from 606,000 to
4.9 million metric tonnes per annum between 1988 to 2000 while the paper industry's
processing capacity rose from 1.2 million to 8.3 million tonnes per annum. By
2000, pulp and paper products generated US$2.9 billion in export earnings, accounting
for over 50 per cent of the country's forest-related exports. As a result, Indonesia
suddenly moved into the ranks of the world's top 10 producers.
Four
large conglomerates have dominated Indonesia's pulp industry. The two most significant
players are the Sinar Mas Group and the Raja Garuda Mas Group, each of which is
an integrated producer, operating large-scale pulp processing operations that
are directly related to affiliated paper production facilities. The Sinar Mas
Group has co-ordinated its pulp and paper operations through a Singapore-incorporated
holding company, Asia Pulp & Paper (APP). Raja Garuda Mas Group has used another
Singapore-based holding company to co-ordinate its activities - Asia Pacific Resources
International Ltd (APRIL).
APRIL
controls one pulp processing facility, Riau Andalan Pulp & Paper (RAPP) located
in Riau in Sumatra. RAPP began operating in 1995 and a pulp production capacity
of two million tonnes. At the moment APRIL's paper mill, Riau Andalan Kertas,
has a capacity of 350,000 tonnes per year, but APRIL is intending to install another
paper machine of the same size which would bring its paper production capacity
up to 700,000 tonnes per year.
There
are two other significant producers of pulp in Indonesia. Kiani Kertas, a subsidiary
of 'Bob' Hasan's Kalimanis Group, has a 525,000 tonne pulp mill which came online
in 1998 in East Kalimantan. PT Tanjung Enim Lestari, a joint venture between the
Barito Pacific Group (40 per cent) and a consortium of Marubeni, Nippon Paper
and Japan's Overseas Economic Co-operation Fund (together 60 per cent), has a
450,000 tonne pulp mill which came online in South Sumatra in 2000. Japan's Marubeni
Corporation and Cellmark of Sweden have agreed to purchase the pulp produced for
the first 10 years.
2.
Unsustainable Supply
The massive growth in pulp production capacity in
Indonesia has far outpaced the industry's efforts to secure a sustainable supply
of raw materials by developing plantations. As a result, of the 120 million m³
of wood estimated to have been consumed by the pulp industry between 1988 and
2000, only 10 per cent was harvested from plantations. The rest has almost entirely
been sourced by clear-cutting natural forest.
This
is despite the fact that the Indonesian government has distributed 23 pulpwood
plantation licences covering an area of 4.3 million hectares. The CIFOR-WWF report
estimates that at its year 2000 capacity level, the Indonesian pulp industry would
have only needed a plantation area of 1.1 million hectares to provide its pulp
mills with a sustainable supply of timber. This suggests that the allocation of
such a large area was motivated by the desire to make large areas of natural forest
available to pulp producers regardless of whether the areas would be replanted.
3.
Forest Destruction
On the assumption that, on average, producers are
able to obtain 110 m³ of pulp or wood from each hectare they clear, the pulp and
paper industry in Indonesia seems to be responsible for the destruction of over
900,000 hectares of highly biodiverse rainforest since the late 1980s. Virtually
all this area was cleared to supply wood to four large mills. The pulp and paper
industry will depend upon clearing rainforests to supply their pulp requirements
for at least the next six years and possibly much longer.
A
financial officer from one of Indonesia's pulp companies summed up the industry's
attitude towards the preference for sourcing unsustainable supplies by saying:
"We're in no rush to switch our mill to acacia if there are still cheap supplies
of mixed tropical hardwoods available. Why should we be? As it stands, we have
access to a very low cost supply of raw materials. Developing good plantations
not only involves higher costs, but also a good deal of risk. Right now our HTI's
(plantations) are essentially an insurance policy and we will cash it in
when the MTH (mixed tropical hardwood's - ie wood cleared from natural forests)
is no longer available."
4.
Illegal Logging
In addition to the large volume of legal but unsustainably
harvested wood that has been felled by the pulp and paper industry, a substantial
volume of fibre consumed by Indonesia's pulp and paper industry has come from
undocumented sources. Government statistics indicate that the country's pulp mills
processed approximately 50 million m³ of wood between 1994 and 1999. Of that figure,
only 30 million m³ can be accounted for as originating from licensed forest clearing
operations, pulp plantations or imported wood chips. While these figures are not
conclusive, they suggest that Indonesian pulp producers may have obtained as much
as 20 million m³, or 40 per cent of the wood consumed during this period, from
illegal sources.
5.
Poor Financial Regulation
The Indonesian government's weak regulation
of the country's financial system has enabled pulp and paper companies to gain
economic advantage. Each of the major pulp and paper conglomerates was involved
in the banking industry before the 1997 financial crisis and some have regularly
violated the government's capital adequacy requirements and legal lending limits
for capital loans to related parties, including to their associated pulp and paper
companies. The use of financial 'mark-up' practices - ie, the artificial inflation
of the cost of an investment project - has allowed some pulp and paper producers
to secure much larger amounts of financing for their projects than they actually
need.
Pulp
and paper companies, including APRIL, have also been encouraged to expand to unsustainable
levels by Indonesia's generous tax laws, which allow firms to defer paying substantial
amounts of corporate income tax in the years following large capital investments.
By accelerating fiscal depreciation, Indonesian pulp and paper producers have
been able to avoid tax obligations that would otherwise consume up to 30 per cent
of their corporate earnings.
6.
Debt Driven Expansion
In the case of APRIL, national and international
creditors and the Indonesian Bank Reconstruction Agency (IBRA) have tied debt
restructuring to the installation of new processing lines at the group's Riau
Andalan pulp facility. Between 2000 and 2002 APRIL tripled RAPP's processing capacity
at the same time as it was defaulting on its debt payments to IBRA. The reason
given for this approach is that APRIL will be able to repay its debts sooner if
it is able to expand the volume of pulp that it produces. In entering into this
arrangement, IBRA and the group's other creditors have failed to consider the
financial risks of the impending shortage of fibre at the RAPP mill which has
been exacerbated by the recent expansion of capacity. This approach is highly
unsustainable and is indicative of insufficient due diligence by IBRA and the
creditors.
7.
Financial Risk
The exponential growth of Indonesia's pulp and paper industry
has been fuelled by capital investments of between US$12 billion and US$15 billion
since the late 1980s. This investment was made without financial institutions
first ensuring that the pulp and paper companies had secured a legal and sustainable
raw material supply that would adequately meet the volumes of wood demanded by
their mills. Financial institutions took on a substantial, if not inordinate,
degree of financial risk.
