PULPING THE PEOPLE

BARITO PACIFIC'S PAPER PULP FACTORY AND PLANTATIONS
IN SOUTH SUMATRA

PT TANJUNG ENIM LESTARI & PT MUSI HUTAN PERSADA


DOWN TO EARTH, JUNE 1997

Contents

NGOs participating in campaign
Summary
The Companies
The Financing
The Paper Pulp Mill - Facts, the Product and the Issues
The Feeder Plantation - Facts and Issues
Summary of Foreign Involvment in PT TEL

Additional Information:



NGOs PARTICIPATING IN THE CAMPAIGN

Down to Earth (DtE) is a UK-based non-governmental organisation (NGO) campaigning for ecological justice in Indonesia. Founded in 1988 to focus international attention on the struggles of local communities, DtE links people in the North and South who challenge destructive, top-down development. The aims of bringing development issues to the attention of a wider audience including NGOs, governments, donors, technical advisors, the media, consumers and others whose decisions affect development policy and practice. These aims are achieved through supporting the documenting the struggles of local people, campaigning in the North, monitoring the Indonesian press, producing special reports and disseminating information.

Forests Monitor was established in July 1993 in response to the need for corporate based information in the forestry sector. Forests Monitor is a not for profit non-governmental organisation incorporated as a private limited company in January 1995. Forests Monitor seeks to inform the debate on sustainable forest management through the collation and dissemination of corporate based information to interested parties. This information is used to raise corporate governance issues with policy makers, companies and their institutional investors around the world. This is achieved through the collation and dissemination of information on corporate environment and social performance and institutional investors in the North.

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SUMMARY

A massive new paper pulp mill project at Muara Enim in Southern Sumatra, Indonesia, is devastating the livelihoods of thousands of local people and causing environmental degradation. The paper pulp mill and its associated plantation are controlled by two subsidiaries of the Barito Pacific Group - Tanjung Enim Lestari (PT TEL) and Musi Hutan Persada (PT MHP). The mill, which will initially produce 450,000 tonnes of pulp per year, is being financed by an international syndicate of foreign banks as well as export credit agencies from Europe, North America and Japan who are providing over two-thirds of the financing for the US$1.29 billion development. President Suharto's daughter, Tutut, and Japanese companies are also involved in the joint venture.

The PT TEL pulp project is currently progressing in the face of protests from local communities and local and national environmental and human rights organisations to government authorities. The company has cleared the site without securing all the rights to use the land from local people and has not paid due compensation. International financial backers have implicitly condoned the illegal preparations for the development by signing the loan agreements before the Indonesian government had issued a business licence or approved the Environmental Impact Assessment (EIA) for the project. Business licences for such projects can only be issued after an EIA has been approved.

The EIA, commissioned by the company, has been severely criticised for ignoring the negative impacts of land clearance on local rubber tappers and farmers and for failing to consider the link between the pulp mill and its timber estate. Nevertheless, the Ministry of Trade and Industry's Commission endorsed the EIA in late June this year. The companies have refused to release information about the mill and its potential impacts and will not discuss the issues with local people or NGOs.

Given the situation as outlined above and on the grounds that:

Indonesian NGOs and local community groups
have called on international NGOs to stop the PT TEL pulp mill project and demand that:

  1. The Indonesian government should cancel the PT TEL plant as it will cause serious environmental and social problems.

  2. All institutional investors and export credit guarantee agencies should withdraw from the project as the mill and plantation contravene environmental guidelines and are incompatible with the principles of sustainable development.

  3. PT TEL and PT MHP should pay fair compensation to local people whose plantations, property and forests have been destroyed for the pulp mill and the plantation.

  4. Any future similar developments should respect local people's land rights, the Indonesian 1982 Environmental Law and subsequent amendments and the 1986 and 1993 Regulations on Environmental Impact Assessments.

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THE COMPANIES

The paper pulp mill is controlled by Tanjung Enim Lestari - PT TEL - and is a joint venture involving Indonesian and Japanese companies:

        Barito Pacific Group         51%
        Sumatra Pulp (Japanese )         33%
       Citro Group (PT Tridan Satriaputri)         16%

PT Tridan Satriaputri (aka Citro Lamtoro Gung Persada) is controlled by President Suharto's eldest daughter, Siti Hardiyanti Rukmana (usually called Tutut).

The Japanese partnership comprises the Marubeni Corporation, Nippon Paper Industries and Japan's Overseas Economic Cooperation Fund. Founded in October 1995, the Sumatra Pulp Corporation has, so far, spent 2.5 billion yen (12.5 million sterling) in PT TEL.

No Indonesian national banks or state-owned companies are involved in the pulp mill.

PT Musi Hutan Persada is the concession holder for the Industrial Plantation which will supply the mill. PT MPH is a partnership between the Barito Pacific Group subsidiary - PT Musi Enim Lestari (80%) and a state-owned forestry company - Inhutani II (20%).

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THE FINANCING

Company Where Based Financials (US$)
PT. Tridan Satriaputra Indonesia ?
PT. Barito Pacific Timber Group Indonesia 200,000,000
Sumatra Pulp Corporation:    
OECF Japan 45,000,000
Marubeni Corporation Japan 47,000,000
Nippon Paper Industries Japan 8,000,000
Foreign Export Credit Agencies N. Am & Europe 650,000,000
International Banks various 341,000,000
TOTAL   1,291,000,000

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THE PAPER PULP MILL - THE FACTS, THE PRODUCT + THE ISSUES


THE FACTS


THE PRODUCT


THE ISSUES

Land rights
Many villagers are refusing to give up their land rights. PT TEL has only been able to clear 800 ha of the 1250 ha which it wants to use for the pulp mill site. Local rubber farmers at Desa Dalam claim their land rights are worth Rp20 million per hectare (approx £5,000). This is what they could earn from their rubber plantations over a 30 year rotational cycle. The local government is now offering around Rp 5 million per hectare. PT TEL officials have made some villagers unofficial offers of Rp10 million per hectare in an effort to get them off their land. Villagers who are still holding out have been subjected to intimidation by the authorities.

Compensation
Some cases have taken several years to settle, due to delays on the part of PT MHP and PT TEL in accepting liability and villagers' reluctance to accept low rates of compensation for their crops. PT TEL has set aside Rp 4-5 million per hectare for the mill site. In the meantime, the land has been cleared so most people have no source of income. This has resulted in some villagers being forced to accept amounts as low as Rp 300 per square metre for their land. The Palembang Legal Aid Bureau is currently handling cases against PT TEL and PT MHP involving over 20 villages spread over 7 sub-districts in South Sumatra.

Corruption
According to Indonesian law, land rights negotiations should be conducted directly by the company and the landowners. In the Muara Enim district, individual landowners have had to sign letters handing over their land to the local government authorities in order to obtain any compensation at all from PT TEL. There is a difference between the amount the company is offering and what landowners receive from the authorities as compensation.

Flood damage
Land clearance for the pulp mill site by PT TEL's contractors - Holland, Ballast, Theiss - has caused flooding of local rubber farmers' plantations. They can no longer tap the trees, some of which are submerged to a depth of 1.5m and their trees are dying. Company representatives did not show up to discuss this at a meeting called by the local administrator (camat). SR 5/3/97

Waste disposal
The Environmental Impact Assessment commissioned by PT TEL apparently states that waste from the pulp mill will be discharged into the river Lematang. It provides little information about waste treatment. This river is the main source of water for drinking, bathing and domestic use for some 32 villages. It also provides an income for local fishermen, fish farmers and others. PT TEL's intended production of 500,000 - 1 million tonnes of pulp a year presents a substantial threat of air and water pollution.

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THE FEEDER PLANTATION - FACTS AND ISSUES

THE FACTS


THE ISSUES

Forest destruction at Benakat
Barito Pacific have been involved in illegal logging in this area. In 1992, one third of a 3,000 ha community forest was felled by the PT MHP without permission to set up their timber estate. Seven villages depend on the forest's resources for food, medicines and building materials. The forest also protects their villages from flooding and drought. Further deforestation was eventually prevented by protests and petitions to the authorities, but no compensation has been paid.

In another incident, a local man tried to stop two men with a chainsaw from felling trees. Although they told him they were acting under ABRI's instructions (the army), he confiscated their chainsaw. They reported to KODIM (military police), who summoned him, then interrogated and beat him up. Far from being intimidated, he complained to the military police and to LBH Palembang who are currently representing his case. This is a clear example of the collusion of the military in illegal logging.

Destruction of villagers' crops
In three separate cases, at the villages of Pelawe, Babat and Sungai Ibul, PT MHP has destroyed local people's fruit trees, rubber trees and other crops by bulldozing and burning the land to set up its plantations. Indonesian Forestry Department regulations state that only unproductive or 'critical' land can be used for Industrial Plantations.

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SUMMARY OF FOREIGN INVOLVEMENT IN PT TEL

Austria Bank Austria (?)
Austrian subsidiaries of Klockner
Germany German export credits
Klockner Industrie Anlagen GmbH (turnkey contractors)
Deutsche Morgan Grenfell (advisers)
Sweden Celmark (export to Europe)
Swedish export credits
Sunds Defibrator
Skandinaviske Enskilda Banken
Finland Finnish Guarantee Board
Finnish Export Credit
Kvaerner Group (Tampella Power)
Ahlstrom
Merita Pankki (Union Bank of Finland)
Canada Canadian export credits
Canadian subsidiaries of Klockner
USA AT & T Capital Corporation
UK Bank of Scotland
Netherlands John Holland (contractor)
Ballast (contractor)
Figro (contractor)
Australia Theiss (contractor)
Dames and Moore
Japan Marubeni Corporation
OECF
Nippon Paper
Fuji Bank (syndicate investor)
Sukura Bank (syndicate investor)
Bank of Tokyo-Mitsubishi
Korea Korea First Bank

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ADDITIONAL INFORMATION


CHRONOLOGY

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GENERAL ISSUES

A unique feature of Indonesia's paper industry is that it makes widespread use of mixed hardwoods i.e. timber from tropical rainforests.

  • To feed the pulp industry, the Indonesian government issues concessions for industrial timber plantations (HTI). These are promoted as part of its 'reforestation programme', although much of the land is covered with natural forest.

  • Companies clear fell forest in order to create plantations. They profit twice: from logging the forest and from timber estate production.

  • Plantations take at least 8 years to become productive. Some fail due to soil mineral deficiencies, pests and fire damage. Natural forests are felled to meet the pulp mills' demands for raw materials, until feeder plantations are sufficiently mature and extensive. This destroys biodiversity, violates local people's traditional landrights and deprives communities of their livelihoods.

  • Indonesia intends to increase paper and pulp exports in order to reduce the economy's dependence on oil and gas revenues.

  • Annual pulp production in Indonesia is expected to increase to 11.1 million tonnes p.a. by the year 2010 from about 2 million tonnes in 1995.

  • Around a dozen big new pulp mills are planned to start production around the end of the decade. Many of these will be on forest sites in Sumatra and Kalimantan and have ambitiously high capacities. If all these plants are built, more than 1 million hectares of rainforest will be destroyed.

  • The key players are Indonesian business conglomerates with close connections to President Suharto and his family. There is no evidence that timber estates can replace the economic, social, cultural and ecological functions of the natural forest which have sustained indigenous communities for generations.

  • Industrial Plantations are officially intended to reforest unproductive land (particularly areas vulnerable to erosion) and land where less than 20m3 timber per ha can be extracted.

  • In practice, companies do not start planting timber estates on those parts of their concessions most in need of reforestation. The first areas selected are usually those covered with forest, as the company can sell the timber. Alternatively, the areas closest to transmigration units are cleared, using settlers as cheap labour.

  • After any saleable timber has been extracted, the sites are cleared by bulldozing and burning before re-planting with introduced species. The timber estates are planted with fast-growing trees which are suitable for pulping: commonly, Acacia manium, Eucalyptus sp., Pinus sp. and Gmelina arborea. The seedlings are provided from the company's nursery plots. In optimum conditions, harvesting from plantations can start within 8 years.

  • Problems associated with these industrial plantations include: the disregard for traditional land rights; the displacement of local people and removal of their livelihoods; the reduction of biodiversity as natural vegetation is replaced by monoculture.

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    THE PULP SECTOR - RECENT DEVELOPMENTS

    The focus of Indonesian forest industry exports moved from round logs to value-added processed wood in the 1980s. In the early 1990s pulp and paper took over from wood chips as the chief export. Exporting and economies of scale became the key to success for the pulp business, average mill size increasing explosively from 5,000 t/y in the 1970s to 85,000 t/y in 1991 to 217,000 t/y in 1994 with big players like Sinar Mas becoming heavily involved. Doubling pulp prices in 1995 added impetus to expanding pulp sector, spawning plans for new mills. In the light of volatile pulp prices which plummeted in 1996 and have looked shaky in 1997 it is highly likely that these new mills will contribute to the over-supply problem.

    Despite evidence of overcapacity in pulp production, depressed world prices and continued Indonesian supply expansion, PT Tanjung Enim Lestari (PT TEL) has succeeded in raising finance for the construction of the 450,000 t/y market pulp mill that it plans to build at Muara Enim in South Sumatra. PT TEL is controlled by Barito Pacific Timber. A consortium of 25 international banks will provide $991 million of export credits and commercial loans to the project. The mill will come on stream in 1999 and reach full production in 2000.

    PT TEL's plans look certain to contribute to the overcapacity in pulp exacerbated by the following recent and planned developments

    • PT Kiani Kertas's 500,000 t/y bleached hardwood kraft market mill in the northern Berau district of East Kalimantan which came on stream in May.

    • The new pulp dryers at APP's Indah Kiat, a subsidiary of Sinar Mas, Perawang and Lontar Papyrus Jambi mills which came on stream late last year. These added 270,000 t/y of capacity.

    • A new 500,000 t/y pulp line at Indah Kiat's Perawang mill. This will start-up in mid-1997.

    • A 250,000 t/y expansion of APRIL's Riau Andalan pulp mill due on-stream in 1998.

    • A new 1.0 million t/y pulp line at Riau pulp scheduled to start-up in 1999.

    • Two of the three 750,000 t/y mills planned to be built in Sarawak/Sabah

    Responding to overcapacity problems, other big players in the Indonesian pulp sector have had a rethink. The Sinar Mas subsidiary, Asia Pulp and Paper (APP), has made important changes to its investment plans which will have a significant impact on the future supply of market pulp from Indonesia. Rather than build a further new 750,000 t/y pulp line (Pulp 10) at Indah Kiat's Perawang mill in Sumatra, APP will instead use the funds from the forthcoming Indah Kiat rights issue to build two 400,000 t/y coated and uncoated woodfree paper machines (PM4 and PM5) at Perawang.

    Although changes in APP's investment plans mean reduced medium term overcapacity, Indonesian supplies of market pulp will still increase sharply over the next several years. Indonesia's total market pulp availability is now expected to rise from an estimated 1.3 million tons in 1996 to approximately 1.7 million tons in 1997, 2.2-2.3 million tons in 1999-2000. There is also increased competition from Malaysia's Borneo island states of Sabah and Sarawak as production here could rise to as much as 1.9 million tons at the beginning of the next decade.

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    SOUTH SUMATRA -THE PLACE AND THE PEOPLE

    • The province of South Sumatra is divided into 9 districts (kabupaten); the main city - Palembang - lies a major river, the R. Musi.

    • Most of the province towards the coast (45% of the total) is swampy lowland (rawa). The rest is scrub or lowland forest, some of it primary. The south-west corner is hilly and borders on Bukit Barisan/Kerinci Sebelat National Park. The province is rich in natural resources (including oil).

    • The local people - a mixture of Sumatran ethnic groups - live in villages and most have at least primary school education.

    • Most traditional land use is based on settled agriculture. The land is used in long-term rotation of 15,000 ha blocks. The forest or scrub is cleared, then rice is grown for a few years before the land is planted with tree crops - mainly rubber and fruit trees like durian. These plantations demonstrate ownership. There are no physical boundaries or certification of land, but everyone knows the extent of their property.

    • Under the old 'marga' system of administration, traditional land rights were much stronger, some was for the 'marga' i.e. the whole community comprising several villages. It is this 'marga' land which the government now claims as 'state land'. Under Indonesia's Constitution, the government can dispose of state land as it sees fit without consultation 'in order to benefit the people'.

    • In this part of Sumatra landholdings of 10 ha are common. The only external sign of wealth is satellite dishes on otherwise simple wooden platform houses. Hence if landowners lose their land to 'development', they have lost everything. At compensation rates of Rp300 per square metre, people cannot afford to buy land elsewhere.

    • In the area affected by PT TEL's development, local people's rubber plantations are 7-10 years old and will be productive for another 20 or so - thus guaranteeing an income for their children. They make a reasonable living from tapping rubber for only 5 hrs per day: Rp400,000 per ha per month. The rest of the time is free for fishing, cultivating vegetables, trading or domestic life.

    • Factory work (where available) only pays Rp120,000 per month for at least an 8hr day. The two hectares offered under a Trans-PIR scheme will not support a rubber farmer's family. "If they take our land away, we might as well drink Baygon" (i.e. commit suicide by drinking insecticide), said one local.

    • Many people from similar villages threatened by the PT TEL have already given in and are awaiting compensation for their land rights. Other villagers are holding out and are supported in their action by local, national and international groups.


    Translations of articles from the Indonesian press used in the preparation of the above information are available upon request from Down to Earth.


    CONTACT ADDRESSES

    Mr Prayogo Pangestu
    PT Barito Pacific
    Wisma Barito Pacific Tower, 9th Floor
    Jl Let. Jen. S. Parman, Kav 62-3
    Slipi
    Jakarta 11410
    Indonesia
    fax ++ 62 21 5306680

    Mr Jansen Wiraatmaaja
    President
    PT TELPP
    Jl Ir Juanda III No 17A-B
    Jakarta 10120
    Indonesia

    Mr Yohannes Hardian
    President Director
    PT Musi Hutan Persada
    Jl Basuki Rachmat No 98
    Palembang 30127
    South Sumatra
    Indonesia
    fax ++ 62 711 363084

    Mr Tunky Aribowo
    Minister of Trade and Industry
    Jl Gatot Subroto Kav 52-3
    Jakarta 12950
    Indonesia
    fax ++ 62 21 5201606

    Mr Djamaluddin Soeryohadikusumo
    Minister of Forestry
    Gedung Manggala Wanabhakti
    Blok I Lt IV
    Jl Gatot Subroto
    Jakarta Pusat
    Indonesia
    fax ++ 62 21 5700226

    Mr Sarwono Kusumaatmadja
    Environment Minister
    Jl Medan Merdeka Barat No 15
    Jakarta 10110
    fax ++ 62 21 3857 579

    Mr H. Ramli Hasan Basri
    Governor of South Sumatra
    Jl Kapt A Rivai No 3
    Palembang 30135
    South Sumatra
    Indonesia
    fax ++ 62 711 357 483

    Nabiel Makarim
    Deputy Head
    The Environmental Monitoring
    Agency, (BAPEDAL)
    Lt8 Gedung Arthaloka
    Jl Jend. Sudirman No 2
    Jakarta 10220
    Indonesia
    fax ++ 62 21 2511 547

    Mr Akira Nishigaki
    President
    Overseas Economic Co-operation Fund
    1-4-1 Ohte-machi Chiyoda-ku
    Tokyo 100
    Japan
    fax ++ 813 3215 1533

    Mr Kazou Haruna
    Marubeni Coorperation
    1-4-2 Ohte-machi Chiyoda-ku
    Tokyo 100
    Japan
    fax ++ 813 3282 9550

    Nippon Paper Industries Co. Ltd.
    Shin-Yurakucho Bldg
    1-12-1 Chiyoda-ku
    Tokyo
    Japan
    fax ++ 813 3216 8337

    Sir Bruce Portillo
    Governor of the Bank of Scotland
    The Mound
    Edinburgh EH1 1YZ
    U.K.
    fax ++ 44 131 243 7082
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