Apr 23, 2018 Last Updated 11:42 PM, Apr 19, 2018

Indorayon's last gasp?

Published: Jul 30, 2007


Frances Carr

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 Porsea community, 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 1 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. Meanwhile the 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 four 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 non-government organisations (NGOs) broadly welcomed his appointment as president in October 1999. 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. He set up teams to investigate the most obvious cases, including mines owned by Freeport, Rio Tinto and Newmont, but Indorayon was the only pulp plant. Keraf's departmental review revealed that the company had violated pollution and toxic waste edicts and had not implemented its environmental management plans. The minister announced in early 2000 that Indorayon should be shut down for good.

Meanwhile, the company 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.' Despite Keraf's recommendations, no company in Indonesia had 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 either the paper or the 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 2000. Around a dozen people have been killed and many hundreds seriously injured in the 27-month conflict. Indorayon's increasingly desperate bids to address local grievances with promises of more employment, business opportunities and a community foundation funded by the company and its foreign investors were rejected by the people.

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. 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 disappointed over this government stance. 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.'

Given IMF pressure to increase export revenues, Wahid's government can hardly afford to close down export-orientated pulp plants. Indonesia exported about three million tons of pulp and three million tons of paper in 1999. 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. This has benefited Indonesian companies, which export most of their production. Among them are the other giant producers Indah Kiat (pulp) and Tjiwi Kimia (paper), both part of the Sinar Mas group, headed by Eka Tjipta Widjaja, as well as Riau Andalan Pulp and Paper (RAPP), which is controlled (like Indorayon) by Sukanto Tanoto's Raja Garuda Mas Group. They have also benefited from the weak rupiah as their input costs are mainly in local currency but revenues are paid in dollars. Their profitability 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.

Environmental movement

However, the Indonesian government might decide to overcome its reluctance and 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 tons of rayon fibre a year.

The Indonesian environmental movement also boomed during the 1980s. Indorayon has long been a landmark case for it. In 1988, the largest and best-known environmental group Walhi (Indonesian Forum for the Environment) filed a lawsuit against Indorayon 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, so the court considered it impossible to gauge potential pollution. Nevertheless, the case established the important legal precedent that NGOs had the right to sue companies or even the government over environmental issues.

The outcome of the lost case was that inhabitants of 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.

Indorayon has been a cause celebre for environmentalists. Unfortunately it 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 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 and less polluting pulping, bleaching and waste management technologies.

Indonesian environmental groups have been strongly influenced by international campaigning on pulp industry pollution in the 'North' where led by Greenpeace - the debate has largely centred on 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 Southeast 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.

Polluters

It is true that 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. However, the big plants remain major polluters. Concerns about dioxins or accidental chemical releases have diverted attention from the everyday realities of people living in the pollution shadow of 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 tons to 1 million tons 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 tons 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 lie along its banks. These discharges will deplete oxygen levels in the river and make the water murkier, affecting the aquatic ecosystems on which local fisher folk 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 extensive 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.

Other problems

The impacts of Indonesian paper pulp production extend beyond the effects of pollution and social conflict in the vicinity of pulp mills, but space is insufficient to discuss them at length. First, the pulp industry is inevitably linked to the destruction of natural forests. Too few timber plantations have been established to supply the pulp industry. 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. Over-capacity in the pulp industry is an important factor driving illegal logging. In 1998, Indonesia exported 6.7 million tons of paper and pulp three times 1997 levels - while domestic demand fell by half to 1.3 million tons. 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 plywood mills.

Nevertheless, the pulp and paper industry is set to expand further. It is three times cheaper to produce paper pulp in Indonesia than Sweden, mainly because of the industry's vertical integration, in which the whole process from logging to pulp is controlled by giant conglomerates like Sinar Mas and Barito Pacific.

Second, the huge timber plantations violate indigenous communities' rights and destroy their livelihoods. That is why Indorayon, Indah Kiat, and 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 plantation, 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.

Third, even more people are subsidising Indonesia's pulp industry through debt repayments to the IMF and international creditors. A substantial proportion of Indonesia's IMF loans have been to the Indonesian Bank Restructuring Agency, which strives to resolve the crisis in the country's banking sector. Timber tycoons like Bob Hasan and Prayogo Pangestu were major players there and are among the biggest debtors. Bailing out bankrupt banks in effect makes the private debts incurred by these individuals and their business empires into public debts, to be repaid by increased taxes and decreased public expenditure on schools, hospitals and subsidies of basic necessities. The price of one of the world's lowest cost sources of paper and pulp is indeed high for ordinary Indonesians. Indorayon may be international financiers' first salutary lesson that investing in socially and environmentally damaging developments can also hit them where it hurts.

Frances Carr (dte@gn.apc.org) is a campaigner for Down to Earth: the International Campaign for Ecological Justice in Indonesia. A fuller version of her article is available on www.gn.apc.org/dte. 'Inside Indonesia' first covered the Indorayon Porsea mill in its July 1989 edition.

Inside Indonesia 65: Jan - Mar 2001

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