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Indonesia: Asia Pulp and Paper

Asia Pulp and Paper: Clear-Cutting Out of Bankruptcy
By Pacific Environment

The deposed Suharto regime of Indonesia was notorious for it's corruption, cronyism, and profiteering. Many of the ill-gotten gains of Suharto and his cohorts were made possible through export credit agency-supported projects. The pulp giant Asia Pulp and Paper is but one example of how ECA financing not only fuelled environmental and human rights abuses, but also aided in propping up a poorly-run company that is now in financial ruin.

Indonesia's natural forests, which are among the world's most vast, were mostly wild until the 1970s, and provided a home and livelihood to the many indigenous peoples. When Suharto came to power, he began doling out logging concessions in these regions to his closest friends. One of these friends, Eka Tjipta Widjaja, founded APP with these concessions, which allowed massive plywood, sawn-timber and pulp operations, according to Wall Street Asia. These operations were expanded through massive debt financing, leading to an ever-increasing production and associated demand for raw materials.

Massive international investment and backing soon followed from over 300 financial institutions, among them the ECAs Exportkreditnamnden (Sweden), the Finish Guarantee Board, Spain's CESCE, Denmark's Exportkreditfondeon, Canada's Export Development Corporation, Germany's Hermes, and U.S. Export-Import Bank, as well as many more private banks, according to a report from Environmental Defense.

With this debt-driven investment, APP built itself into one of the biggest paper companies in the world, contributing hugely to a national industry in Indonesia that grew from 606,000 metric tons of production in 1988 to 4.9 million metric tons in 1999. APP accounts for about 40% of this national total, according to a report from Friends of the Earth.

Much of the rapid growth of APP came from felling large areas of rainforest. As they cleared forests they moved on to new forestland rather than replant denuded areas. As a result, in 1999 only 13.4% of its fiber was coming from second-growth plantations, while the rest was coming from continually clearing out pristine rainforest.

APP's Indah Kiat mill is one of the world's biggest. Operating in the same region that the indigenous Sakai people call home, Indah Kiat has seized and clear-cut over 3,000 hectares of the forest surrounding the mill, and in the process destroyed the forest the Sakai needed for their subsistence needs. An investigation into the mill by the Indonesian NGO WALHI found that Indah Kiat was heavily polluting the river that ran through the area, leaving dead fish bobbing near where the factory dumps its waste. The investigators also recorded complaints by villagers of skin rashes appearing after bathing in and drinking from the river.

These conditions have fueled poverty and social conflict in the area. There were serious clashes between pulp-mill workers and the local Sakai people living around the Indah Kiat plant in February, 2001. The clashes left five people injured, and 52 people were arrested. It is believed that the clashes resulted from an attack on the villagers following their blockade of the road that goes through their village to the plant. Similar conflicts have occurred with APP and indigenous peoples on the island of Borneo.

The year 2001 saw the financial downfall of APP. The faltering Asian economies, a drop in the worldwide price for pulp, and the failure of APP to replant the areas that they cut all took their toll. The very banks that sung the praises of APP in the early- to mid-90s were filing writs against APP, demanding repayment of their investment. The New York Stock Exchange delisted APP in July.

Years of postponed investments in reforestation and dire debt meant that APP has had to cut its way into more frontier forests to repay its debts. The case of APP story demonstrates how ECAs are not only blind to environmental concerns, but also to economic ones.

The mining industry has a track record of being one of the most environmentally destructive, as well as being one of the most obstinate. Mining companies from the world's wealthy countries have struck deals with some of the world's most brutal and corrupt regimes to have access to their minerals. And dozens of the damaging mining projects are backed with the full support of ECAs.

A case in point is the Ok Tedi Copper and Gold Mine project in Papua New Guinea. This project was supported by Australia's EFIC, which provided a $243.8 million line of credit for Australian goods and services. Japan's JEXIM, and the U.S.' Ex-Im Bank provided additional support. The project is run by Ok Tedi Mining Limited (OTML), a consortium led by the Australian company Broken Hill Properties (BHP).

The mine, leased by the PNG government in 1981, is located near the Ok Tedi and Fly Rivers in the Star Mountains of Papua New Guinea, and is the third largest open-cut copper mine in the world. This remote region is home to several thousand indigenous people who depend on clean water and healthy wildlife to maintain their subsistence economy.

OTML, however, has created an ecological dead zone, dumping 80,000 tons of waste rock tailings containing lead, cadmium, zinc, and copper into the rivers on a daily basis. The PNG government originally required the mine to maintain a dam to hold back these tailings; however, a 1984 landslide destroyed the dam, and BHP never bothered to rebuild it.

According to the Australian Conservation Foundation, nearly 70 kilometers of the Ok Tedi river has become "almost biologically dead," and 130 kilometers of river bank have been "severely degraded." Fish stocks have declined between 50 and 80%, according to OTML's own internal report. Some 30,000 downstream landowners have lost their ability to live off their own land.

Attempts in the mid-1990s by villagers from over 30 clans to gain compensation for their losses were met with harassment by OTML. After villagers filed a lawsuit, OTML drafted and advocated for national legislation that would have levied fines of up to $75,000 against anyone who sues the company, or legally challenges the constitutional validity of the proposed law.

Ultimately, a compensation package was passed by a regional legislature, allowing for a settlement that worked out to only $12 per year for each person over the course of the mine's remaining 15 years. Subsequently, an act was passed making it illegal for PNG landowners to take future legal actions if they are affected by other resource projects in the country.

Sources:

ECA Finance in Indonesia: Ecological Destruction and Corruption, Stephanie Fried and Titi Soentoro, Environmental Defense and Bioforum, December 1, 2000
Engineering and Mining Journal, September/October 1981
Mining Monitor, 1996
Drillbits and Tailings Newsletter, 1996
AAP Newsfeed, February 15, 1999; January 28, 1998
Wall Street Journal, June 14, 1982

Titi Soentoro, NADI
Stephanie Fried, Environmental Defense