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Indonesia

Excerpted from: A Race to the Bottom: Creating Risk, Generating Debt and Guaranteeing Environmental Destruction - A compilation of Export Credit & Investment Insurace Agency Case Studies, March 1999

CASE STUDY: EXPORT CREDIT AGENCY FINANCE IN INDONESIA
Titi Soentoro, Bioforum and Stephanie Fried, Environmental DefenseFundIntroduction

ECAs have played a major role in financing environmentally and socially unsustainable investments that have depleted Indonesia's extraordinary natural wealth. As a result, thecountry experienced the rapid depletion of its natural esources. During the Suharto regime,forest degradation reached a rate of two million hectares per year. Investment projects such as factories, plantations, and mines not only destroyed natural resources, but also gave rise to other significant environmental and social impacts including the destruction of the livelihoods of the local peoples who owned, managed, and utilized these resources. Security forces wereused to prevent forest-dwelling, rural, and river-side peoples from defending the naturalresources upon which their livelihoods and communities depended. In resource rich regions,the violation of human rights was a routine occurrence.

ECAs played a key role in assisting many foreign investors in supporting the Suharto regime system of economic and political monopolies. The regime's military security approach assured low costs for land appropriation and a relatively docile and inexpensive labor force. Foreign investors, often supported by ECA finance, competed to align themselves with the powerful business interests close to the Suharto family through economic links -- i.e. the offering of cost-free investment shares -- to Suharto's children, other relatives, and business associates. In return, investors were assured of access to lucrative sectors of the Indonesian economy and were able to receive "assistance" from Indonesia's armed forces when it came to clearing people off of land for their projects, stifling labor unrest, or preventing mobs from storming their polluting factories.

The Role of Export Credit Agencies in Indonesia

Between 1992 and 1996, export credit agencies' exposure in Indonesia grew by 25%. By 1996,24% of Indonesia's total external debt -- approximately $28 billion -- was held by export credit agencies (ECAs) supporting foreign investment in mega-projects linked closely to the Suharto regime.The longer report on which this case study summary is based provides an overview ofthirty-three projects in Indonesia supported by ECAs between 1994 and 1997, valued at total of$15 billion. It explores the relative contributions of the ten ECAs most active in Indonesia,looking in greater detail at the Export-Import Bank of Japan. It then provides a brief overview ofthe ten largest ECA-supported projects which account for $12.4 billion or 83% of the value ofthe thirty-three projects surveyed.Of the 33 projects surveyed, the most significant amount of ECA-leveraged finance wasconcentrated in four sectors, the largest being the power and paper/pulp sectors, includingsupport for a number of controversial mega-projects such as giant paper and pulp mills in Sumatra valued at a total of $4 billion -- Tanjung Enim Lestari (PT.TEL), Indah Kiat, and RiauAndalan Kertas -- and the $4 billion corruption-plagued Paiton coal plants in Java. The thirdand fourth largest sectors with ECA involvement were mining and state-owned refineries,controlled by Pertamina, Indonesia's notoriously corruption-riddled national petroleum company.

The report examines in greater detail a number of the top ten ECA-supported projects,including the following four, which are representative of the environmental destruction andsocial repression in which ECAs have been a major accomplice:

Project Descriptions

*PT. Tanjung Enim Lestari (PT. TEL): (The following chronology is paraphrasedfrom "Pulping the People" by Down to Earth, 1997.) The Barito Pacific Group,Indonesia's largest logging conglomerate, is the majority shareholder in PT. TanjungEnim Lestari (PT.TEL) + slated to become Indonesia's largest paper and pulp mill --and its sister company, PT. Musi Hutan Persada , designated to prepare massive pulp plantations to feed the mill. General Suharto's eldest daughter, Siti HardiyantiRukmana ("Tutut"), is also a significant shareholder in the mill.

In 1994, the German Hermesbuergschaft, Japanese Export Import Bank (JEXIM), Finnish Export Credit,Swedish Exportkreditnamnden, and the Canadian Export Development Corporation supported a $1.5 billion finance package for PT. TEL. In 1997, Hermes, the Export Development Corporation, Exportkreditnamnden, the Finnish Guarantee Board, and Japan's OECF supported a $1.3 billion finance package for the mill. The signing ofthis finance package was predicated upon the signing of a pulp supply agreement with PT. Musi Hutan Persada to guarantee sufficient pulp for the mill.The entire output of the mill is destined for export.

This company, from its pre-construction phase on, has been embroiled in substantial conflicts with surrounding communities. The company's plantation operation has apparently been involved in forced seizures of village lands. Indonesian officials and security forces have also reportedly threatened villagers with subversioncharges if they resist the company's land grabs.

In the wake of the ouster of Suharto, however, local communities in the area of the plant have begun to call for a halt of construction and are demanding the return of their seized lands. Citing environmental and social concerns, Indonesia's largest environmental organization,Walhi, has called for the cancellation of this project.

*APRIL: Riau Andalan Paper and Pulp, Tjiwi Kimia: Riau Andalan's parentconglomerate, Raja Garuda Mas, under its international entity, Asia Pacific Resources International Holdings (APRIL) has financed the expansion of its RiauAndalan mill, through a $750 million investment package supported by the Finnish Guarantee Board and the Swedish Exportkreditnamnden. This expansion allows the mill to convert four million cubic meters of wood into 750,000 tones of pulp eachyear. The company will be harvesting over 50 species of tropical hardwood from its logging concessions while waiting for its plantations to mature.

In October, 1997conflicts between local communities and the company escalated after Riau Andalan announced that it would no longer honor an earlier land compensation plan and that it planned to build a road directly through ancestral lands owned by the communities.Security forces became involved and the resulting protests led to the hospitalization of several villagers and the arrest of the village's legal representative. In April, 1997,Indonesia's Environmental Impact Assessment Agency, BAPPEDAL, blacklisted Riau Andalan for water and air pollution and for conflicts with local villagers.In addition, APRIL runs the troubled 240,000 ton per year Indorayon Utama mill, also in Sumatra, which was shut down by angry villagers and students after Suharto'souster. Over 1,000 members of the security forces were brought into the region tobreak up a blockade by protestors who had hampered production at the mill since mid-June, 1998.

From its earliest stages of development, Indorayon has been involved in conflicts with local villagers as a result of the forced seizure of their lands for pulp plantations and the heavy-handed use of security forces to silence opposition to the mill through the issuance of threats and bribes. The mill was the subject of a court case brought by WALHI as a result of its pollution of the Asahan river.In 1996, Hermes provided a $5.6 million guarantee the shipment of Germanequipment to APRIL's Tjiwi Kimia paper factory which utilizes the pulp produced byAPRIL's troubled Indorayon Utama mill.

*Sinar Mas: Indah Kiat:Indonesia's second-largest conglomerate and the world's largest holder of oil palm plantations, Sinar Mas , owns the Indah Kiat pulp mill inPerawang, Sumatra which is financed through a $500 million investment package supported by Swedish Exportkreditnamnden, the Finnish Guarantee Board, Spain'sCESCE, Denmark's Exportkreditfonden, and Canada's Export DevelopmentCorporation. Hermes and U.S. EXIM have also provided a $5.6 million guarantee,and a $4.5 million loan, respectively, for this mill, under separate financial arrangements. The 790,000 ton per year Indah Kiat mill is slated to consume 200 square kilometers of old growth forest per year until its plantations mature. For years,the mill has been embroiled in conflicts pertaining to the source of its timber for pulping and in 1993 was fined $1.4 million for the utilization of illegally felled timber.To supply land for its pulp plantation program and to obtain an inexpensive pre-plantation timber harvest, Indah Kiat's plantation operation seized and clear-cut over3,000 hectares of the indigenous Sakai people's forest gardens, leaving the Sakai without cultivable land for their subsistence needs.

Indonesia's most prominent environmental coalition, WALHI, documented the terribly polluted conditions of the Siak River downstream from the mill, noting dead fish bobbing by the factory's waste outlet and recording complaints of skin rashes by local villagers bathing and obtaining drinking water from the river downstream from the mill.

*Paiton Power Project:Financing for the massive Paiton coal plant complex in Javawas provided in 1995 by a $2.5 billion finance package for Paiton One, covered byguarantees and loans from JEXIM, MITI, US EXIM, and OPIC and, in 1996, by a $1.7 billion finance package for Paiton Two provided by US EXIM, Hermes, the German Kreditanstaltfuerwiederaufbau (KFW), and C&L Deutsche Revision(Germany's public investment insurance agency- analogous to the U.S. OPIC).
In December, 1998, the Wall Street Journal detailed the staggering corruption involved in the Paiton I deal which had been directly supported, over the years, by former Vice President Dan Quayle, President Clinton, Ron Brown, Robert Rubin, and Warren Christopher and Henry Kissinger, the latter two acting as lobbyists for a Mission Energy-General Electric joint venture which eventually succeeded in winning the project bid.

According to the Wall Street Journal, the Mission-GE megaproject,as Indonesia's first private power venture, set the tone for all such investments to follow, including exorbitant power prices leading to private electricity costs, adjusted for local purchasing power, of 60% more than in the Philippines and 20 times asmuch as in the United States.According to Djiteng Marsudi, the head of Indonesia's now-bankrupt state owned electric utility, PLN, "the U.S. power companies dictated terms to us because they had Indonesia's first family behind them." PLN was ordered to utilize coal from a company owned by Hashim Djojohadikusumo, a Suharto relative by marriage, and Agus Kartasasmita, brother of then-Minister of Mines and Energy and current
Economics Minister -- both partners of Mission-GE. Mr. Hashim's company plannedto charge PLN 30% to 40% more than the going rate for coal. According to the WallStreet Journal, Mission-GE insisted that PLN pay an extremely high tariff for the electricity to be produced by the plant and suggested that more debt could be shifted to OPIC to cover the tariff, finally set at 8.6 cents per kilowatt-hour of electricity, 32% higher than comparable tariffs in Indonesia. When a US Exim Bank official visited Jakarta, several government and PLN officials told her that they didn't want and couldn't afford Paiton. `It was a presidential decision," says Nengah Sudja, a former head of research for PLN. "Everybody knew it was nepotism, but we couldn't do anything about it."According to the Wall Street Journal, government planners knew PLN was not ready for big private-power initiatives and the utility's "transmission grid leaked like a sieve."

Indonesian government power consultants recommended smaller, environmentally and economically more sustainable alternatives such as geothermal and small gas-firedplants, and urged competitive bidding. Instead, Suharto, and then Technology Minister B.J. Habibie, now Indonesia's president, "hand-picked developers to lead the charge into big, high-risk, coal-fired power stations" according to these same consultants.In the aftermath of the Indonesian economic crisis, PLN has told Mission-GE that it will not buy any electricity at all from the Paiton1,230 megawatt coal-fired plant next year,when it is scheduled to go on-line. ECA finance of over a billion dollars- backed by the taxpayers of the industrialized countries- has abetted a gigantic economic and environmental fiasco.

Titi Soentoro, NADI
euron_at_indo.net.id

Stephanie Fried, Environmental Defense
stephf_at_edf.org