A new DTE report by Betty Tio Minar, entitled No Chip Mill Without Wood, focuses on the wood chip mill as an example of the problems in Indonesia's wood processing industry. The study is based on fieldwork in South Kalimantan. Minar and Deddy Ratih from WALHI South Kalimantan spent two weeks in the Netherlands, Austria and Germany, discussing the findings with NGOs and companies who are backing the project.
The wood chips produced by the mill, owned by PT Mangium Anugrah Lestari (PT MAL), will be exported to China to feed paper pulp factories there. The construction company, China National Machinery and Equipment Import and Export Corporation (CMEC) has built the PT MAL plant at the village of Alle-Alle on a turnkey basis. CMEC has a contract to buy 80% of the mill's output, with first option on the remaining 20%. The wood chip mill, which has a capacity of 700,000 tonnes per year will require over 1 million m3 of timber annually for full production. This is equivalent to nearly 86,000 hectares of pulp wood plantation.
PT MAL's parent company, Singapore-based United Fiber System (UFS), does control an industrial timber estate in mainland South Kalimantan. But although the PT Hutan Rindang Banua (HRB) concession officially covers 269,595 ha, it overlaps with eleven oil palm plantations, a coal mining concession and community mining operations. This plantation was also the subject of legal action in 2003 against former president Suharto's half-brother, Probosutedjo, who cheated the national Reforestation Fund of at least Rp100 billion (over US$40 million at pre-1997 exchange rates) by claiming to have replanted a more extensive area than was the case.
UFS' 2005 Annual Report states that only 46,000 ha have been planted with acacia and plantation staff have said that as little as 15,000 ha is in good condition. If true, this means UFS can currently only supply its wood chip mill for 1.5 years from its own plantations.
Firstly, it wants to build a 600,000 tonne per year bleached pulp mill in Satui sub-district of South Kalimantan, through its subsidiary PT Buana Bumi Mulia (MBBM). This project has been delayed by the forestry department's attempt to get its Reforestation Fund contributions back from UFS. Now the court case has been settled in UFS' favour, plans could go ahead as early as next year. CMEC had, at one time, committed US$690 million to build the plant. The Austrian company Andritz was to supply equipment for this and the wood chip mill worth US$250 million. The Dutch chemical company Akzo Nobel initially offered to build a chemicals plant. Cellmark (Sweden) would purchase the pulp produced for the first ten years.
Secondly, UFS still seems set on buying the Kiani Kertas pulp plant in East Kalimantan, originally established by disgraced timber tycoon 'Bob' Hasan. It has been operating the mill since July 2005, but has serious problems in meeting its timber demand from Kiani's plantation, PT Tanjung Redep Hutani. Prolonged negotiations to purchase the plant have resulted in several failed deals. These have put a financial strain on UFS to the extent that the company may be unable to pay its workers. There have been a number of recent strikes at Kiani Kertas over pay negotiations and late payment of wages. Union leaders have been dismissed and over 100 workers held a demonstration in late October. Bankers Merrill Lynch (US) and ANZ (Australia) are currently involved in the takeover deal.
Meanwhile, the construction of the chip mill and dedicated harbour are causing serious environmental and social problems. The communities nearest the PT MAL site depend on marine resources for their livelihoods. Yet coral reefs have been dug up to make the foundations for the port facility. The local fisheries office issued a warning to the company to stop this illegal practice, but the effects are already noticeable.
Local villagers who collect sea grass to weave into mats and baskets complain that previously sustainable supplies of sea grass are decreasing. Large vessels bringing timber supplies in and wood chips out of the port will cut through local fishing grounds causing damage to nets and loss of income for fishermen. Run off from stacks of raw timber or wood chips may also affect waters close to the shore where local women traditionally catch crabs and collect seashells for sale on mainland Kalimantan.
Local people are already disappointed and disillusioned with PT MAL. The process of land procurement has been socially divisive and compensation rates were low. The wood chip plant provides few jobs for local people - only 30 people from the south of the island and 6 from the village of Alle-Alle out of a total of 320 workers. People who sold their land to PT MAL expected jobs - now they have no land and no jobs. The community in Alle-Alle recently formed an association in an attempt to strengthen their position vis-à-vis the company.
The World Bank's investment guarantee agency, MIGA, only withdrew from plans to provide guarantees for UFS' chip and pulp mills in South Kalimantan after NGOs from all over the world lobbied by letter in late 2004. Nevertheless, by early 2006, MIGA representatives had visited South Kalimantan and restarted discussions with UFS. International and Indonesian campaigners put further pressure on MIGA at the September WB/IMF meeting in Singapore. Campaigners from WALHI Kalsel, Solidaritas Perempuan, NADI and Environmental Defense were told that the multilateral risk agency would not support UFS. It told the NGOs, "MIGA is not considering this project. We no longer have interest in it".
"The World Bank admits that forest loss and forest crime dominate the Indonesian forestry sector," said Stephanie Fried of Environmental Defense, referring to the June 2006 World Bank Indonesian forestry strategy for 2006-2009. This policy document points out that inappropriate forest sector financing and poor due diligence studies by investors are a significant factor behind Indonesia's high deforestation rate - one of the worst in the world at over 3 million ha per year. It concludes that risky or ill-advised initiatives cause unsustainable demands on forests and "the same kind of debt, risk and overexposure that contributed to the financial crisis of the late 1990s".
Indonesia has passed legislation which holds financial institutions responsible for transactions causing forest crimes (No 25/2003). Indonesia’s central bank, Bank Indonesia, strengthened this with a regulation that requires all Indonesian banks to assess the environmental impact of their loans (BI Regulation No7/Feb/2005).
In a joint statement with Indonesian NGOs WALHI Kalsel, CAPPA, PADI-Indonesia and NADI, Environmental Defense urged Merrill Lynch, ANZ Bank, MIGA and its sister World Bank Group institution the IFC, to reject UFS and Kiani Kertas projects.
Surprisingly, Austrian investors Raiffeisen Zentralbank (RZB) told DTE and Global 2000 (Friends of the Earth Austria) that the due diligence it had carried out did not reveal any problems. Finnish forestry consultants Jaakko Poyry advised RZB that UFS has sufficient supplies of timber from its plantations. Although the bank now realises its mistake, its senior managers said it was too late for it to withdraw its US$5 million loan.
On the other hand, RZB could withdraw its guarantee of US$16 million to Andritz for the chip mill machinery. This may not be as difficult as RZB claims as any company associated with PT MAL is technically backing an illegal operation because construction of the chip mill and harbour has gone ahead without the permits required under Indonesian law. Andritz did not respond to a request by DTE and Global 2000 to meet.
Akzo Nobel held a series of consultations in Indonesia in 2005 with NGOs. They told WALHI South Kalimantan that they were not in UFS' Satui pulp project. Their spokesman is reported as saying: "You know our policy - we do not invest in plants which do not have sustainable supplies". Dutch NGOs led by Milieudefensie (Friends of the Earth Netherlands) are making sure that the company realises that sustainable pulp production in still a long way off in South Kalimantan.
| Mill | Capacity (t/y) | Timber consumption/y (cubic m RTE) |
Equivalent area HTI (ha) | Equivalent Area Natural Forest (ha) |
| PT MAL (Alle-Alle) chip mill | 700,000 | 1.02 million | 85,895 | 22,310 |
| PT MBBM (Satui) pulp mill | 600,000 | 2.79 million | 193,300 | 50,727 |
| PT Kiani Kertas (Mangkajang) pulp mill | 525,000 | 2.44 million | 170,800 | 44,364 |
| TOTAL | 6.25 million | 451,995 | 117,401 |
Official data from Indonesia's forestry department shows that, by April 2006, there were only 248 HTI in the country with a total area of 10,226,374 ha, yet less than 3 million hectares had actually been planted. WALHI Kales says that the demand for timber in the province was around 4.7 million m3 while total supply was only 500,000 m3 in early 2006.
UFS had an agreement with Inhutani II to supply its ventures with 1 million m3 of timber from its plantation on Pulau Laut. However, Inhutani II may not fulfil this contract. In May 2006, it signed up to become Indonesia's first member of Nusa Hijau - the Indonesian chapter of WWF's Global Forest and Trade Network. This commits member companies to strive for certification of sustainable timber within 5 years - hardly compatible with UFS new demands that the majority of the timber is delivered in the first year or two of the chip mills' operations. Also, prices for sawnwood are higher than pulpwood and Inhutanti II is involved in a project to use acacia in furniture for export.
Down to Earth concludes that the chip mill's raw material can only come from the natural forests of South Kalimantan and further afield. No Chip Mill without Wood advises international investors that they should not invest in projects like the Alle-Alle mill that have the potential to cause serious environmental and social damage, do not respect communities' rights and have not secured the fee prior informed consent of indigenous communities.
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Central Kalimantan pulp plant plans change
Korindo has changed its plans to build a pulp and paper plant in Central Kalimantan. Instead it will just build a pulp plant. The initial capacity is modest at 200,000t/yr, but this is highly likely to increase in years to come. Things are going ahead fast - it is expected that contracts will be signed in December and that construction will start in early 2007. The company intends to supply the pulp mill from its 92, 000 ha PT Korintiga plantation concession of acacia and eucalyptus. The development will cost around US$450 million. The South Korean government expressed interest in investing in Indonesia's pulp plantations during a visit by forestry minister Kaban in May. The company, from South Korea, is one of the largest timber operators in Kalimantan and Papua. The pulp mill is likely to be in the southern lowlands of Central Kalimantan - an area notorious for illegal logging - where its plantations are. Korindo also has a plymill close to Tanjung Puting National Park in Central Kalimantan.
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The report No Chip Mill Without Wood, published August 2006, can be downloaded in English and in Bahasa Indonesia. Hard copies are available on request in both languages.
(Sources: Jakarta Post 2/Nov/06; WALHI Kalsel pers com; Environment Defense pers com; Sustaining Indonesia's Forests: Strategy for the World Bank, 2006 - 2009, p10, 30/Jun/06; chrislang.blogspot.com/, Indonesian Department of Forestry, Rekapitulasi Pembangunan HTI s.d April 2006; Press release, WALHI Kalimantan Selatan, Community Alliance for Pulp and Paper Advocacy (CAPPA), PADI-Indonesia, NADI, Environmental Defense, 16/Sept/06)