One step forward, two steps back

Down to Earth No 68  February 2006

United Fiber System (UFS) is going ahead with a wood chip mill and paper pulp plant in South Kalimantan as well as running the Kiani Kertas plant in East Kalimantan - all in the face of international opposition.

UFS received a boost to its plans to become one of the world's major paper pulp producers when the Indonesian Supreme Court ruled in its favour in a dispute between the company and the Indonesian government in early October 2005. This decision ended a legal battle that started in November 2002 after a former forestry minister withdrew the concession rights of the South Kalimantan industrial timber plantation PT Menara Hutan Buana. Due to corruption, the company had made insufficient contributions to the Reforestation Fund. The department of forestry argued that UFS was responsible for the missing payments. The court rejected this claim.

UFS has a complicated history. It was originally owned by Singapore construction company, Poh Lian, then a group of Finnish, Swedish and Indonesian investors took control in April 2002 in a reverse takeover. The companies assets, then estimated at US$330 million, were the plantation concession, now called PT Hutan Rindang Banua (HRB) and a pulp mill licence. The value of its shares surged then crashed as UFS was unable to get access to the timber plantation.

UFS can now use wood from the 268,000ha timber plantation (HTI) concession in South Kalimantan for its wood chip plant, currently under construction on Pulau Laut (see DTE 67). Alternatively, the concession could become the main source of raw material for UFS' proposed Satui pulp mill, controlled by PT Marga Buana Bumi Mulia (MBBM). The 600,000 tonne/year pulp plant was scheduled to start production in 2007, but the legal tussle over PT HRB's funds had been a serious stumbling block. It is likely that UFS will soon try to get the plantation certified, in an attempt to convince investors and future customers that the pulp plant has a legal and sustainable source of timber.

Rainforest threat
European and Indonesian NGOs have been saying for some time that UFS' figures don't add up. Their conclusions are supported by a report from the international forest research body, CIFOR. The company assigns the same plantations (their own PT HRB areas plus state-owned Inhutani II and Inhutani III areas) to all three of its projects - the chip mill, the pulp mill at Satui and the Kiani Kertas pulp mill - depending on whom it is talking to. The figures are largely supplied by the giant Finnish forestry consutancy Jaakko Pöyry. It looks as though UFS has under-estimated the total amount of timber needed for the three plants and over-estimated wood production from its acacia plantation. If these three projects go ahead, they could destroy over 100,000 hectares of natural rainforest in South Kalimantan and would threaten additional forest elsewhere. The NGOs argue that the chip mill and two pulp mills should be considered in the context of an Indonesian pulp industry with a structurally unsustainable wood supply.

Protests against Deutsche Bank
UFS must have thought all its Christmases had come at once when, also in October last year, Deutsche Bank announced it would head a consortium to buy PT Kiani Kertas, the bankrupt East Kalimantan pulp plant which UFS has been operating since September 2005. The buyout was reported to cost US$200 million plus another US$170 million to pay off Kiani's debts to Indonesia's Bank Mandiri.

The German campaigning NGOs, Robin Wood, Rettet den Regenwald, Watch!Indonesia and Urgewald worked closely together to put pressure on Deutsche Bank to review its planned loans to help UFS procure Kiani Kertas. Letters requesting a meeting to discuss the issue were backed with demonstrations outside Deutsche Bank's main office. Deutsche Bank announced in late December that it was putting its involvement "on hold".

In January 2006, PT Sampoerna Strategic (an arm of the giant Indonesian clove cigarette company) announced that it would not be investing in Kiani Kertas. The deal had foundered over the repayment of debts due to Bank Mandiri.

Austrian groups are continuing to lobby Andritz AG, which is supplying some of the equipment, and Raiffeisen Zentralbank (RZB). Global2000 (FoE Austria) and the US NGO Environmental Defense launched a letter-writing campaign to Andritz and RZB in November. Among other points, the letter said: "Every major pulp mill in Indonesia has caused either major social problems, pollution or deforestation -- in most cases all of these. Research indicates that the proposed pulp mill in South Kalimantan will be no exception". It calls on the companies to carry out appropriate due diligence and withdraw from the project.

A similar letter, signed by 65 NGOs from 19 countries, was sent to the World Bank agency MIGA (Multilateral Investment Guarantee Agency) in 2003 to persuade MIGA against the project. UFS withdrew their application from MIGA, but may be considering a new application. NGOs are also preparing to brief the Austrian export credit agency, OeKB, in case they were thinking of entering the game.

The Austrian bank RZB has agreed to fund US$21 million (53%) of the chip mill and says that it cannot pull out of the deal. Apparently US$5 million has already been transferred to UFS and the bank has guaranteed the remaining US$16 million. The bank went ahead with its investment even though it had received a report by Jaakko Pöyry that stated that environmental management by government authorities is not effective and that legal confusion over indigenous people's land rights prevails. As a signatory to the UN Environmental Programme Finance Initiative, RZB has a commitment to prevent environmental damage and to apply the precautionary approach. It now faces the uncomfortable choice of writing off a substantial amount of money or its good reputation.

Andritz AG, which has supplied machinery to several controversial pulp mills in Indonesia and in other parts of the world, has yet to respond to the NGO letter.

Meanwhile, Dutch NGOs have been pressing chemical manufacturer EKA, a subsidiary of Azko Nobel, not to go back on its decision to withdraw from plans to supply UFS' Satui plant with a unit to produce bleaching agents. At a meeting with NGOs in October, EKA made a clear commitment that it would not get involved unless the mill was operating on a sustainable wood supply.

(Straits Times 31/Oct/05; Dow Jones 31/Oct/05; Kompas 19/Jan/06; pers com with Global 2000, Environmental Defense, Watch!Indonesia, Milieu Defensie. The NGO letter to Andritz AG and RZB is available at forests.org/action/alert.asp?id=indonesia.)