By Frances Carr, DOWN TO EARTH, November 2000, Updated Jan 2001


A shorter version of this article appeared in Inside Indonesia, Jan-March 2001

It looks as though the fate of PT Indorayon Inti Utama’s controversial paper pulp and rayon fibre plant in North Sumatra has been sealed – less by the Wahid government than by thousands of local protestors. Indorayon’s financial backers are tired of waiting for the company to break the deadlock with the Batak community in the Porsea district which has cost over two years of lost production and run up massive debts. Foreign banks and bondholders which own 86% of Indorayon stopped making monthly US$1 million operational payments on 1st September 2000. The company announced that it could hold out no longer and started to lay off its 7,000 workforce within weeks. A US$400 million debt for equity swap agreed last year was dependent on pulp production resuming (AXA Asia 25th Sept 2000). Meanwhile, the central government, after much wavering, seems to have lost the will to prop it up.
Why was Indorayon singled out among the plethora of cases in Indonesia where companies flout environmental regulations and violate local communities’ rights? What message does Indorayon’s closure send out to investors in other socially and environmentally damaging investments in Indonesia? What about the negative impacts of the pulp and paper industry as a whole?

Long-standing grievances against Indorayon over environmental and health issues erupted soon after the downfall of Suharto. Production virtually came to a halt in mid-1998 when thousands of local residents prevented trucks from bringing raw materials to the mill for 4 months. Months of violent confrontations between local people and the security forces resulted, in March 1999, in a presidential order to close the pulp plant pending a full audit of its social and environmental impacts. However, it never happened.

Shut down

Indorayon has become a test case for the credibility of Wahid’s government at home and abroad. As an opposition figure during the Suharto years, ‘Gus Dur’ developed links with many leaders of civil society groups. Environmental NGOs broadly welcomed his appointment as president last October. His environment minister, Sonny Keraf, was quick to point out that companies investing or operating in the ‘new’ Indonesia must expect more scrutiny of the social and environmental impacts of their operations. A team would investigate the most obvious cases, including mines owned by Freeport, Rio Tinto and Newmont, but Indorayon was the only pulp plant. Although the independent review promised by Habibie never took place, the departmental review revealed that the company had violated pollution and toxic waste edicts and had not implemented its environmental management plans. On this basis, Sonny Keraf announced in early 2000 that Indorayon should be shut down for good.

Meanwhile, the company (part of local conglomerate Raja Garuda Mas, RGM) and its supporters (which include important local government figures) denied the allegations, promised to address community concerns and lobbied Jakarta intensively to allow the pulp plant to reopen. Jusuf Kalla, then Minister for Trade and Industry explained that Indorayon “is a big investment. Such a factory today will need US$1 billion investment to establish. The export value, which reaches about US$100 million a year, and the ability to absorb 7,000 workforce mean something to the state and the people.”(Indonesian Observer, 25th November 1999) Despite Keraf’s recommendations, no company in Indonesia has ever been shut down on environmental grounds and there was genuine uncertainty in Jakarta about how legally to do this.

In May 2000, the government decided that the paper pulp side of Indorayon’s operations could start up again, but the production of dissolving pulp (the raw material for rayon fibre) should not be resumed. The decision provoked appeals from all directions. Environmentalists argued that the company’s past pollution and community record justified a complete shutdown. The company claimed its survival depended on the Porsea plant’s unique facility to switch between pulp for the paper and textiles industries according to market conditions and relative profitability. The community was split between those who wanted the plant to close on environmental and health grounds and others, mainly workers at the factory, who supported its reopening. Protests involving thousands of local people, backed by students and NGOs, once again prevented the mill from resuming production. A student was shot dead by police in clashes between protestors in June. Around a dozen people have been killed and many hundreds seriously injured in the 27 month conflict. Indorayon’s increasing desperate bids to address local people’s grievances with promises of more employment, business opportunities and a community foundation funded by the company and its foreign investors have been rejected.

Business as usual?

The Wahid government is clearly reluctant to let Indorayon go to the wall. The closure of a company once listed on the Jakarta and New York stock exchanges sends out all the wrong signals to the investment community at a time when the government is desperate to attract foreign investment, increase tax revenues and boost Indonesia’s exports. It has lost at least $50 million in tax revenues and other fees from Indorayon last year alone (Jakarta Post, 2nd December 1999). Some companies have already threatened to take their investment elsewhere unless they can continue ‘business as usual’, even if this rides roughshod over local communities’ interests. Indonesian environmentalists are now disillusioned about the government’s stance. As Mas Achmad Santosa, executive director of the Indonesian Centre for Environmental Law (ICEL) said at a press conference this May, “Unfortunately, what the government cares about now is getting as many investments as possible. The preservation of the environment has taken a back seat.” (Jakarta Post May 15th 2000)

Given the terms of the IMF’s economic ‘rescue package’, Wahid’s government can hardly afford to close down export-orientated pulp plants. Indonesia exported about 3 million tonnes of pulp and 3 million tonnes of paper in 1999 (Jakarta Post 5th July 2000). Paper pulp prices on world markets have risen sharply in 2000, to US$579 per ton in September compared with US$372 per ton this time last year (IO 4/8/00). This has benefited Indonesian companies which export most of their production. These include pulp producer Indah Kiat and paper manufacturer Tjiwi Kimia – both part of the Sinar Mas/Asian Pulp and Paper group group, headed by Eka Tjipta Widjaja – and Riau Andalan Pulp and Paper, also owned by Sukanto Tanoto’s Raja Garuda Mas group (RGM). They have also benefited from the weak rupiah as their input costs are mainly in local currency but revenues are paid in dollars. This has helped the big pulp and paper companies to ride out economic and political storms despite shortages of raw materials, lack of domestic demand and investigations into their financial connections with the Suharto family.

On the other hand, the Indonesian government might decide to accept Indorayon’s closure as the lesser of two evils. To facilitate the resumption of production against the majority of the community’s wishes would smack of the excesses of the Suharto years. The North Sumatra pulp mill was a flagship development for the Suharto regime. The economy was booming when construction of the paper pulp mill began in 1986. The government wanted to boost the growth of Indonesia’s textile industry by developing rayon fibre production in order to reduce dependence on imported cotton. By 1993, Indorayon was the first Indonesian plant to produce dissolving pulp. It is now relatively old and small with a capacity to produce either 240,000 metric tons of paper pulp or 60,000 tonnes of rayon fibre a year.

Private financing and public debt

It is possible that RGM decided to abandon Indorayon with all its problems with the local community and the government to ensure the survival of the Raja Garuda Mas Group. The disruption of pulp production at Porsea put an added strain on the parent group’s cash flow and threatened to undermine its financial ratings at a time when RGM had been hard hit by the Asian financial crisis and the collapse of Indonesia’s banking system.

Raja Garuda Mas controlled both Indorayon and Riau Andalan Pulp & Paper through the Singapore-based holding company, APRIL (Asia Pacific Resources International Limited). RGM listed APRIL on the New York Stock Exchange in 1994 to generate equity capital and facilitate loans. The group borrowed over US$ 2 billion in offshore financing through APRIL (compared with total assets of US$3 billion in 1998). Even so, its exposure to US dollar denominated debt was far less than other big groups such as Sinar Mas/APP (C. Barr 2000*).

RAPP is a larger, newer plant than Indorayon, with a pulp production capacity of 850,000 tonnes per year. Despite the serious over-capacity in the pulp and paper industry in Indonesia, RAPP was seeking to expand its capacity to 2.0 million tonnes in two stages by 2004. The original plan was to finance this through a deal with Finnish paper giant UPM-Kymmene which included a share swap between RAPP and a paper mill in China owned by APRIL. Then the economic crisis struck, just as some of APRIL’s longer-term dollar loans were coming due. In late-1999 APRIL’s creditors agreed to reschedule US$ 800 million of RAPP’s debts so the expansion could go ahead, partly in the hope that a larger mill will help to pay off the debts faster (JP 30/Sept/1999). By that time, APRIL had already spun off Indorayon, in order to make itself more attractive. The share deal with UPM-Kymmene fell through in early 2000. The Finnish company converted its share option to a short-term loan and bought out APRIL’s interests in the Changsu mill for US$ 150 million in August 2000.

Millions of ordinary Indonesians are subsidising the pulp and paper industry through debt repayments to the IMF and international creditors. Despite the enormous debt load they carried when the financial crisis struck, none of Indonesia’s major pulp and paper producers has been forced to halt its operations due to bankruptcy. Like other major forestry and pulp companies, RGM had also borrowed heavily from domestic banks. When these banks went bankrupt in the Asian financial meltdown, their debts were taken over by the bank restructuring agency, IBRA. This agency is funded by IMF loans, to be repaid by increased taxes and decreased public expenditure on schools, hospitals and subsidies of basic necessities. Oddly, IBRA did not insist that APRIL sold its assets in China to repay the group’s debts. Instead, it allowed APRIL to delay payments on US$1.3 billion in outstanding loans, effectively giving the group a US$165 million capital subsidy. At the same time, APRIL can use the Changsu proceeds to pay off short-term debts to foreign creditors as they fall due. In this way, as with other companies, APRIL’s private debt has become Indonesia’s public debt.

Pollution costs

Indorayon is a landmark case for the Indonesian environmental movement which had also boomed during the 1980s. It established the important legal precedent that NGOs had the right to sue companies or even the government over environmental issues. The largest and best known environmental group WALHI (Indonesian Forum for the Environment) filed a law suit against PT IIU and five government departments for failure to comply with the 1982 Environment Law. The case was lost on the flimsy grounds that the company had not started full commercial production when the action was brought (in late 1988), so the court considered it impossible to gauge potential pollution.

The outcome was that inhabitants of Sodorladang and other villages near the Indorayon plant suffered a decade of polluted air and water. The acrid fumes which poured out of the smoke stacks day and night could be smelt several kilometres away. Local people blame the high incidence of asthma, chest infections and other respiratory ailments on the factory, but health care facilities are so poor that there is no proof. The evidence of acid rain is obvious: corrugated iron roofs of houses and churches used to last two generations; since Indorayon, they corrode away within five years. There has been a dramatic improvement in environmental quality during the two years that the pulp mill has effectively been closed. Trucks no longer thunder through Batak villages every minute day and night, destroying roads and bridges. The air is refreshingly clear, as elsewhere in the Lake Toba region, and local people are again able to drink the water and to fish in the River Asahan.

Although Indorayon has been a cause celebre for environmentalists, the Indonesian government can rest assured in that this is one of the very few paper and pulp cases to receive NGO attention at local, national and international levels. There is no network of Indonesian civil society groups which focuses on the pulp industry comparable to the national information and advocacy networks which exist for the forest, mining and, more recently palm oil sectors. Indorayon is far from being Indonesia’s largest or most polluting pulp operation. The worst environmental problems may well be associated with the smallest and oldest pulp and paper mills, especially those in Java which are located in densely populated areas. The industry is keen to point out that it has cleaned up its act. Larger plants in Sumatra, like PT RAPP and Indah Kiat’s Perawang units have installed more advanced pulping, bleaching and waste management technologies.

Moreover, Indonesian groups have been strongly influenced by international campaigning on pulp industry pollution in the ‘North’ where – led by Greenpeace – the debate has largely centred around dioxins. Fears about the long-term health risks posed by minute quantities of these carcinogens promoted the introduction of ‘elemental chlorine-free’ technology (ECF), which use chlorine compounds rather than chlorine gas, in Europe, North America and some plants in South East Asia. ECF technology only became compulsory for new plants in Indonesia after a chlorine tank burst at Indorayon in November 1993. Thousands of people fled the Porsea area fearing another Bhopal incident.

Paradoxically, concerns about dioxins or accidental chemical releases have diverted attention from the everyday realities of people living in the pollution shadow of a pulp and paper plant. The fact remains that all current technologies turning wood chips into pulp require a large amount of fresh water, fuel and a cocktail of highly corrosive chemicals and produce substantial quantities of noxious wastes.

The Tanjung Enim Lestari plant (PT TEL) in South Sumatra is a case in point. This paper pulp mill which came on line in late 1999 will be one of the largest in Indonesia, with production rising from 450,000 tonnes to 1 million tonnes of pulp per year. Communities in the Muara Enim district complained to the local branch of WALHI about the stench from the factory and tainted water supplies within weeks of start-up. PT TEL’s environmental impact assessment, approved by local and central government, reveals that even when waste treatment units are working optimally over 18 tonnes of sulphurous gases will be released every day. Giant pipes, over two metres wide pour 80,000 cubic metres of waste per day into the River Lematang – the main source of water for drinking and all other domestic needs for the tens of thousands of people whose homes live along its banks. These discharges will deplete oxygen levels in the river and make the water murkier, affecting the aquatic ecosystems on which local fisherfolk depend for a living.

It is important to note that these levels of pollution are the norm: more serious impacts will result if waste treatment plants fail, as happened at Indorayon on several occasions, resulting in entensive fish kills. There are many examples of pulp plants which try to reduce costs by not using all technology intended to reduce pollution. In a telling phrase, PT TEL’s environmental impact document states that “the plant can produce 100% ECF pulp if needed”. In other words, unless local authorities insist, the company could opt for more polluting options.

Pulp and plantations

The impacts of Indonesian paper pulp production extend beyond the effects of pollution and social conflict in the vicinity of pulp mills. The Indonesian pulp industry is inevitably linked to the destruction of natural forests. The myth, promoted by pulp and paper producers and their financial backers, that pulp is produced from Indonesia’s industrial timber plantations (HTI) has two fatal flaws. Firstly, pulp plantations are established on forest land, not degraded areas or grassland. Secondly, too few plantations have been established to supply the pulp industry. Back in the 1980s ministers talked of Indonesia becoming one of the world’s top paper producers soon after 2000, with as much as 10% of its ‘forest land’ converted to plantations. Indonesia certainly has a natural advantage: trees which take 20, 40 or even 60 years to mature in Scandinavia, North America or even Australia can be harvested within 8 years in Indonesia. However, the government’s HTI programme to support the pulp industry never really took off. At best, only half of the 4.7 million hectares area officially allocated to HTI plantations became timber estates (World Bank, OED Report, Jan 2000). Furthermore, it takes time for the timber estates to reach maturity. Plantations established in the early 1990s will only be ready to harvest now. This means that the vast majority of the rapid growth experienced by Indonesia’s pulp and paper industry from the late 1980s until the mid 90s took place at the expense of the country’s tropical rainforest.

Indonesia’s vast forest resources, cheap labour, lax environmental controls and proximity to expanding Asian markets have attracted investment in the pulp and paper industry. It is three times cheaper to produce paper pulp in Indonesia than Sweden.** The key to the profitability of Indonesia’s pulp producers lies in the vertical integration of the timber industry. The most commercially valuable timber is first extracted by a logging company, then a sister company clear fells the remaining trees and sells them as raw material to a pulp factory (owned by another company in the same group) while yet another company from the same conglomerate may establish the plantation intended to supply the pulp mill in future. It is cheaper for a pulp plant belonging to a big group like Barito Pacific or Sinar Mas to use what the industry euphemistically calls “the waste material from logging operations, oil palm plantations and forest conversion activities”(JP August 29th 2000) rather than relying on its own plantations which must be protected against disease, fire and timber raids.

That over capacity in the pulp industry is an important factor driving illegal logging in Indonesia is clearly indicated by figures on the exports and imports of pulp and paper. In 1998, Indonesia exported 6.7 million tonnes of paper and pulp – three times 1997 levels – while domestic demand fell by half to 1.3 million tonnes. This level of production consumes the equivalent of 16 million cubic metres of timber (after imports of pulp and waste paper have been taken into account). Yet the official supply of all Indonesian timber, including ‘conversion forest’ was only 21 million cubic metres – just the capacity of Indonesia’s plymills (Scotland et al, ITFMP 1999). Nevertheless, the pulp and paper industry is set to expand further. Industry spokesman Muhammad Mansur claimed pulp production would reach 6.6 million tonnes and paper 10.3 million tonnes in 2000, although he did not indicate where the extra capacity would come from (JP 17th March 2000

It must also be remembered that the large forest and plantation concessions which the Suharto government granted to favoured business colleagues like Mohammed ‘Bob’ Hasan and Pangestu Prayogo were not ’empty land’. These locations and the sites for pulp mill complexes in Sumatra and Kalimantan were the traditional lands of indigenous peoples. Deprived of their agroforestry systems or subsistence agriculture, local communities were dispossessed and destitute. Plantations established with fast-growing exotic species such pine (P. merkusii), acacia (A. mangium), albizzia (A. falcataria) and eucalyptus (E. deglupta) do not provide the same social, economic, cultural and ecological functions. Local people are not allowed to cultivate the land, cut timber for firewood or to build homes. The forest products which supplemented people’s household needs are not to be found in this artificial environment. As a result, Indorayon, Indah Kiat, Riau Andalan have all been the focus of local struggles over land and forest tenure over a number of years. As at Porsea, social conflict is intensified due to lack of employment opportunities for local people. Typically, companies use transmigrant labour in their logging concessions and plantations and skilled labour imported from urban areas in the pulp plants. Horizontal conflicts arise within communities where some people have become dependent on their lowly jobs at the pulp plant while their neighbours are demanding fair compensation for land or property taken or damaged by pollution.

The bottom line

Indonesia used to boast that it was one of the world’s lowest cost sources of paper and pulp. Yet the real cost for ordinary Indonesians, especially indigenous forest peoples, is very high. It may also be higher than some foreign investors expected. Indorayon may be international financiers’ first salutary lesson that investing in socially and environmentally damaging developments can also hit them where it hurts.

UPDATE (9th January 2001)


Events have taken yet another dramatic turn since the above piece was written for the magazine ‘Inside Indonesia’ in early November. PT Indorayon Inti Utama decided to change its name and its senior management at a shareholders meeting in Jakarta on November 15th. The company’s new name, PT Toba Pulp Lestari, reflects the fact that the government had put a stop to rayon fibre production at its Porsea plant in North Sumatra on environmental grounds. The factory would resume paper pulp production immediately. The announcement was made within a few days of Indorayon’s statement that the rayon and pulp company had run out of finance during nearly two years of lost production and that hundreds of workers were being laid off (Kompas 16/Nov/2000)

The management line-up is:

Chairman: Bilman Philipus Butarbutar MBA
Directors: Lennardi P, Anggijono BSc, Rosman and Dedy Sutanto.
Comissioners: Julian Christopher Hill (chair), Dr Raider Per Haugen and Michael Utama Purnama MA.

The new management said that it would be setting up an independent commission and an audit committee before December 2001 to review social and environmental issues. The company had promised in October that it would upgrade the technology and improve its commitment to the community.

Foreign investors are reported to have stepped in with US$4 million on top of the $25 million invested over the past three years. The consortium includes the Bank of Boston, Bank of New York, Bank Namura, ABN Amro Bank and Credit Lyonnais ( Pulp and Paper Online 11/Dec/2000). PT IIU has outstanding bonds amounting to US$285 million and owes another US$70 million to banks.

At the time of writing , PT Toba Pulp had not restarted operations. The Porsea factory remained the target of protests even though, according to North Sumatra governor, traditional and religious leaders had urged local people to accept the company and its new promises to the community (SP 30/Nov/2000). In a move strongly reminiscent of the Suharto years, Governor Rizal Nurdin has ordered military personnel to guard the plant against protestors (IO 5/Dec/2000).

Local community organisations and NGOs have strongly condemned the governor’s position. They claim that prominent local figures, tribal groups and NGOs totally reject the decree issued by the central government on May 10 to reopen Indorayon. They still want Indorayon to hold talks with grass-roots representatives (not so-called community leaders in Medan or Jakarta) about the losses caused by the environmental damage. Compensation should be paid and the company must pledge to contribute positively in future to local development (MI 5/Dec/2000).

Trade and Industry Minister, Luhut Panjaitan, visited the Lake Toba area (his homeland) on January 8th 2001 to attend an traditional thanksgiving ceremony. In his address, he told thousands of local people that the reopening of the pulp plant under its new name PT Toba Pulp Lestari was going ahead, starting with a big public awareness initiative. “If the community still refuses (to accept the reopening of the plant), we must convince them otherwise,” he said (SP 9/Jan/01).


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