Elephant Forests on Saled2ouvy59p0dg6k.cloudfront.net/downloads/elephantforestsonsale.pdf · Elephant Forests on Sale Rain Forest loss in the Sumatran Tesso Nilo region and the ...

Elephant Forests on Sale

Rain Forest loss in the Sumatran Tesso Nilo region and therole of European banks and markets

A report commissioned by WWF Germany with supportfrom WWF US

Titelbild: © WWF

Written byRob Glastra, AIDEnvironment, Amsterdam, Netherlands

EditorsMartin Geiger, WWF Germany

Produced byoctopus media, Dreieich, Germany

Designed bydülk.mediadesign, Neu-Isenburg, Germany

Graphics byWWF Indonesia AREAS Riau Project

First edition March 2003© 2003 WWF Deutschland

3WWF Deutschland

Table of Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

2. Profile of the Tesso Nilo forest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

3. Major threats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133.1 General overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133.2 Industrial clear-cutting for pulp plantations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133.3 Oil palm plantations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153.4 Illegal logging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

4. Main players behind the threats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184.1 Indonesian government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184.2 Indonesian companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194.2.1 Paper & Pulp Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194.2.2 Oil palm companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .304.2.3 Timber Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .304.2.4 Links between sectors and companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

5. WWF’s position and actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

6. Recommendations by this study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

7. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

ANNEX 1 – Imports of pulp and paper products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

ANNEX 2 – Banks’ responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

ANNEX 3 – Position papers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

List of abbreviations:

APP Asia Pulp & Paper Company Ltd.APRIL Asia Pacific Resources International

Holdings Ltd.AREAS Asian Rhino and Elephant Action

StrategyBHK Bleached Hardwood KraftCIFOR Center for International Forestry

ResearchCPO Crude Palm OilDBH Diameter Breast HeightFFPCP Forest Fire Prevention and Control

ProjectFoE Friends of the EarthFWI Forest Watch IndonesiaGFW Global Forest WatchJV Joint Ventures

HCVF High Conservation Value ForestHPH(k) Hak Pengusahaan Hutan (kecil)HTI Hutan Tanaman IndustriIBRA Indonesian Bank Restructuring AgencyIKPP Indah Kiat Pulp & PaperIPK Ijin Pemanfaatan KayuMoF Ministry of ForestryMTH Mixed Tropical HardwoodNYSE New York Stock ExchangePKM Palm Kernel MealPKO Palm Kernel OilRAK Riau Andalan KertasRAPP Riau Andalan Pulp & PaperRGM Raja Garuda Mas GroupSGS Societé Générale de SurveillanceTNPA Tesso Nilo Protected Area

Summary

This report focuses on the forces thatthreaten the Tesso Nilo forest in Riauprovince on the Indonesian island ofSumatra. Covering an area of almost200,000 ha, the Tesso Nilo forest ap-pears to be the largest remainingstretch of lowland tropical rainforeston the island. Covering half a millionha only two decades ago, today itstands like an island in an ocean ofplantations. It has both extremelyhigh plant diversity and extremelyhigh levels of threat. This documenthas been prepared for WWF Ger-many by AIDEnvironment. It isbased to a large extent on data pro-vided by WWF’s Asian Rhino andElephant Action Strategy (AREAS)Riau Project which has worked on-site since 1999. The report presentsthe status of the Tesso Nilo forest asof the end of 2002, elaborates on theforces that threaten this forest andthe landscape in which it resides. Itexplains how Riau-based wood andpalm oil companies threaten the re-maining forests and discusses theglobal markets that drive their activi-ty. It concludes with strategies andrecommendations that might be ableto ensure the survival of this uniqueforest.

Forest loss on Sumatra

Between 1990 and 2002, Sumatra lostover 60% of its remaining lowlandforest through conversion to settle-ments, oil palm and pulpwood planta-tions and other forms of agriculture. Atthis rate of deforestation, according tothe World Bank, Sumatra is expected tolose its last lowland forests by 2005.Demand for timber of all types has putenormous pressure on Riau’s forests.Demand for land for oil palm planta-tions has been very high, making RiauIndonesia’s leading province for landarea under this crop. As a result, morethan 1,7 million hectares in thisprovince alone had been deforested bythe mid 1990s, 29% of Riau’s originalforest land. Especially its lowland andpeat forests are heavily threatened bysmall and large-scale forest conversion.

Tesso Nilo’s values and threats

The Tesso Nilo Forest Complex in Riauhas one of the highest levels of plant di-versity ever recorded by scientists any-where on earth and supports popula-tions of Sumatra’s threatened elephantsand tigers. Lack or absence of effectivelaw enforcement, in part due to thechaotic decentralisation process startedafter the fall of president Suharto, isconsidered to be the major enablingfactor.

Primary threats to the Tesso Nilo forestare:> Industrial clear-cutting for pulpwood

plantations to supply two giant pulpmills: RAPP and IKPP. In 2000, thetwo mills consumed half of Indone-sia’s or double (!) of Riau’s legalwood supply and accounted foraround 60% of Indonesia’s total pulpproduction. The mills have to operateat capacity to pay back the huge debttheir construction cost, but they cannotoperate at capacity with the timberlegally available from natural forestsclearings and plantations. This dis-crepancy has become a major drivingforce behind the illegal logging in theprovince of Riau.> Industrial and community-based legal

and illegal forest clearance for oilpalm plantations to supply palm oilmills with local, regional, nationaland international customers: Woodfrom the clearings supplies pulp, ply-wood and saw mills.>Legal and illegal logging for local, re-

gional, national and international use:The province has a concentration ofwood-based industries, including ply-wood mills, moulding factories andhundreds of legal and illegal saw-mills. Some 80% of the Tesso Niloforest continues to be managed byfour logging companies. Illegal log-ging is very common in Tesso Nilo.

Secondary threats are:>Encroachment after forests are

opened by construction of roads andcorridors to facilitate log extraction.> Poaching of wildlife after access to

the forest is eased by new roads and

more and more people enter the forestto extract timber.> Fires used for clearing that jump con-

tainment lines and damage surround-ing forests.

International trade links

Indonesia’s logging and plantation in-dustries produce timber, pulp, paperand palm oil for the rapidly expandingglobal market. Europe is a major cus-tomer. Riau ranks third among 27provinces, supplying 12.5% of thecountry’s non-oil & gas export value,mostly based on industries that dependon forest conversion.

Over 50% of the stationary paperwholesale supply business in the UnitedKingdom may contain Indonesian paperfrom Asia Pulp and Paper Ltd. (APP),quite possibly coming from its plantnear Tesso Nilo. Among Europeancountries importing Indonesian pulp,Germany ranks 5th. The web site of theNational Agency for Export Develop-ment lists four Dutch companies as im-porters of Indonesian paper, one ofthem is a world leader in graphic board.

Two years ago, the Finnish paper gi-ant UPM-Kymmene bought Asia Pacif-ic Resources International HoldingsLtd. (APRIL) share of a large papermill in China and became the sole own-er. APRIL is a Singapur-based Holdingcompany which owns also the pulp gi-ant RAPP that is active in RiauProvince. This was followed by anagreement between the two companiesthat made UPM-Kymmene the biggestcustomer of RAPP. The companies alsohave financial ties, a UPM-Kymmenegranted APRIL a US$ 121 million loanin 1999.

Foreign financial institutions havefinanced to a large extent the strong ex-pansion of pulp & paper and oil palmcompanies operating in Tesso Nilo andthe surrounding forests in the provinceof Riau, by helping them to issue sharesand bonds, by buying their shares andbonds, by providing loans, and by ex-tending credit guarantees. Especiallywith respect to the financing of the gi-ant IKPP pulp mill in Perawang, a large

4 WWF Deutschland

number of German financial institutionsplayed a significant role. IKPP is themost important Indonesian subsidiaryof the Singaporean company Asia Pulp& Paper (APP), which has been en-gaged in complicated negotiations onthe restructuring of its giant US$ 13.4billion debt since March 2001. ThreeGerman financial institutions, DeutscheBank, HypoVereinsbank and HermesKreditversicherung, are actively in-volved in these debt restructuring talks.The debt restructuring negotiations cen-ter on determining the cash flow IKPPcan generate and how much of that cashshould be repaid to the creditors. IKPPgenerates a lot of its cash by pulpingmixed tropical hardwood forests. Thenegotiations of the creditors thereforedirectly influence the survival of Riau’sremaining natural forests. They wouldhave the ability to tie strong environ-mental protection terms to any agree-ment they sign.

A conservation framework for Tesso Nilo

Tesso Nilo is strategically located be-tween four existing reserves, togetherthey would form an ecological networkof 600,000 ha of protected forest. In the1980s and again in the 1990s, Tesso Ni-lo had been proposed as a protectedarea. The proposals were rejected afterheavy lobbying by the timber industry,because Tesso’s flat lowland forest waseasy to harvest and too valuable toleave standing. In April 2001, WWFproposed to the Ministry of Forestry todeclare 153,000 ha of Tesso Nilo anelephant conservation area. The propos-al received wide local political supportand has been accepted by local commu-nities and various commercial stake-holders. At the time of writing in March2003, the final decision by the Ministerof Forestry was still pending.

However, official protection statusfor Tesso Nilo would only be a veryfirst step. Subsequently, the forestwould need to be secured by stoppingrampant tiger poaching and illegal log-ging and by stabilising the conversionfrontier. The largely industrial land use

practices in adjacent lands would needto be made more compatible with con-servation needs, such as allowingwildlife movements and protecting wa-ter supplies and watershed functions.WWF-AREAS Riau’s ultimate vision isa three million ha multiple-use conser-vation landscape that includes five pro-tected areas.

While a certain momentum for theprotection of Tesso Nilo started build-ing up in the past two years, threats tothe forest remain strong, however.Dozens of illegal sawmills receive end-less truck loads of illegally cut timberevery day, tiger poaching is rampant,and communities are converting smallforest patches into oil palm plantations.Threats to the wider Tesso Nilo land-scape and the whole province of Riauare even more severe. Each of the twopulp and paper conglomerates operatingin Riau plans to clear at least another200,000 ha of forest, most of it likely inthe fragile peat swamps.

WWF’s campaign work

WWF calls on these main players towork together to save Tesso Nilo andother High Conservation Value Forests:

• The Indonesian Governmentshould declare the whole Tesso Niloforest as a protected area and ensurethat it is effectively managed. The Gov-ernment of Indonesia should help createwildlife corridors to link Tesso Nilo toother existing protected areas and en-sure their full protection. GoI shoulddevelop, communicate, and enforce aclear policy that protects all High Con-servation Value Forests (HCVF). WWFis prepared to help develop that policyand provide tools for the identificationof High Conservation Value Forests.

• Riau’s provincial and districtgovernments should review land-useplans to prevent further conversion ofHigh Conservation Value Forests andensure that the province’s natural re-sources are developed sustainably.WWF is prepared to help develop newor re-design existing land use plans in

partnership with government authoritiesand other stakeholders.

• Riau’s pulp and paper industryshould protect the High ConservationValue Forests within their concessionsand those of all their suppliers, operatewithin the limits of clearly defined legaland environmentally and socially sus-tainable wood supply plans, and ensuresound forest stewardship in plantationsfrom which they source fibre for paper.

• Financial Institutions and Bankswho invest in the pulp and paper in-dustry in this region should ensure thattheir investments are not being used tosupport the conversion of HCVF or theviolation of traditional land rights.

• Customers of products from thisregion should ask for environmentallysustainable manufacturing processes sotheir purchases do not lead to the de-struction of more natural forest and thedeaths of elephants and other wildlife.

Recommendations by this study

The following recommendations byAIDEnvironment are complementary tothe numerous actions and initiativesthat WWF, other NGOs and parts of theprivate sector have taken already to saveTesso Nilo and other forests in Riau.Some of the recommendations beloware already implemented or currentlybeing discussed by the NGOs active inRiau; in that case, their mentioning hereis meant as encouragement.

It has become clear that the next fewyears will be critical in preventing com-plete deforestation of the Tesso NiloForest and other natural forest blocksremaining in the Tesso Nilo Conserva-tion Landscape. Land use decisions inthe province are influenced by a com-plex web of public and private entitiesoperating at local, provincial, nationaland international levels.

The fundamental recommendation ofthis study is that, in view of the urgencyof the situation in Tesso Nilo, it is es-sential that the multi-stakeholderprocess involving the private sector,

5WWF Deutschland

government and NGOs gains force andmomentum. Vigorous campaigning byNGOs and by consumers of productsthat may have been produced in theTesso Nilo region must maintain thenecessary pressure.

Recommendations directed at thegovernment sector refer to:

• Creation of enabling policy envi-ronments for sustainable land use, in-dustry and trade, by the Indonesiangovernment and by governments ofconsumer countries.

• Effective implementation of a new,sound land use plan for Riau.

• Establish a trust fund to ensurelongterm financial sustainability ofmanaging and protecting the Tesso Niloprotected area.

• ‘Good governance’ donor programsthat help strengthen provincial and localgovernment institutions.

• Enact legislation, both in Indonesiaand in countries importing goods fromtropical forest lands, on transparencyrequirements for business corporations.

• Help establish an independentmonitoring / watchdog structure.

To the private sector:• Logging concessionaires should

adopt certain conservation principles.• Willingness to agree on fair take-

overs of concessions with high biodi-versity values by a conservation organi-sation.

• Develop and apply best practicesfor their sector, and apply transparencyrules in their entire production or in-vestment chain.

• Corporations in the supply chainfor timber, pulp & paper and palm oilshould join WWF’s efforts to evaluatethe conservation value of the forestswhich would be converted, and asktheir suppliers to respect the evaluationand to not convert high conservationvalue forests. A temporary moratoriumon forest conversion should be put intoplace until all forests have been evaluat-ed.

To the financial sector:• Loans granted by investors, finan-

cial institutions and export credit agen-cies should be based on strict environ-mental and social criteria and relatedmonitoring mechanisms.

• Facilitate investments and contribu-tions to a sustainable development trustfund that supports alternative livelihoodoptions for local communities.

• Improved due diligence practicesfor funding projects in the sectors ofagriculture and forests.

6 WWF Deutschland

The author gratefully acknowledges the valuable support received from his col-leagues Lilian Spijkerman, Eric Wakker and Wolfgang Richert. Jan Willem vanGelder (Profundo) provided vital inputs in the financial sections. Michael Stuewe(WWF-US AREAS) provided essential backstopping and feedback to drafts of thereport. Patrick Anderson (AREAS Riau), Nazir Foead (WWF Indonesia), andChristine Wulandari (WWF Indonesia) provided welcome feedback and inputs. EdMatthew (FoE) and Chris Barr (CIFOR) generously made recent statistics avail-able. Finally, AIDEnvironment thanks Alois Vedder, Martin Geiger, BernhardBauske and Markus Radday of WWF Germany for commissioning this paper andfor their valuable support.

Large sections of this study are based on reports, data, maps and opportunisticinformation compiled by Nazir Foead, Purwo Susanto, Bambang Hartono and theirteam at WWF Indonesia’s Asian Rhino and Elephant Action Strategy (AREAS) Ri-au Project. AREAS Riau had identified the Tesso Nilo Forest as essential habitatfor the Sumatran elephant and tiger and as an absolutely outstanding forest on theglobal biodiversity scale. The AREAS Riau project has been supported by the AR-EAS Technical Support Network’s Steve Osofsky (WWF US), Michael Stuewe(WWF US), Ajay Desai and Martin Hardiono, and several professionals from theWWF Network, among them Agus Purnomo and Agus Satiaso (WWF Indonesia),Jennifer Biringer, Jim Fuschetti, Francis Grant-Suttie, and Eugene Lee (all WWFUS), Tom Vellacott (WWF CH), M. Eishi (WWF Japan), Christy Williams and RodTaylor (WWF International).

For more information on AREAS, please check www.worldwildlife.org/area.

Acknowledgements

7WWF Deutschland

1. Introduction

This study brought together and syn-thesised the findings and insights ob-tained in recent years by the WWF-AREAS project, by the Centre forInternational Forestry Research(CIFOR, Barr and Potter & Badcock)and by Forest Watch Indonesia /Global Forest Watch. Apart fromthis, the study examined trade linksbetween Tesso Nilo and the Europeanmarket.

What is at stakeThe Tesso Nilo Forest Complex in

the Indonesian province of Riau (seeFigure 1), is one of the last and largestremaining tracts of lowland rainforestin Sumatra. The forest has one of thehighest levels of plant diversity everrecorded by scientists anywhere onearth and supports populations ofSumatra’s threatened elephants andtigers. The Tesso Nilo complex, espe-cially its lowland and peat forests, hascome under heavy pressure from rapid-ly advancing, largely industry-drivendeforestation and forest degradation. Inmany other parts of Sumatra, and Riauin particular, large areas of naturalforest have been clear-cut and plantedwith hundreds of thousands of oil palmsand fast-growing trees for the pulp andpaper mills. Until recently, that ap-peared to be Tesso Nilo’s future as well.Since 1985, the forest has lost over300,000 ha to the oil palm and pulp andpaper industry, only about 190,000 haremain today.

Legal and illegal logging and planta-tion industries in this part of Riau pro-duce timber, paper and palm oil for therapidly expanding global market. Eu-rope is one of the biggest consumers. Inthe Netherlands, Siak Raya plywoodand APRIL’s PaperOne copying paperare sold. In the UK people write onAPP paper. In Italy, use tissues aremade from Riau pulp. Supermarketssell a variety of products that are likelyto contain palm oil from the plantationsof PT Inti Indosawit Subur or the SinarMas Group. The various companies in-volved in the process of forest destruc-tion hold financial relations with Euro-pean banks and other financial institu-tions.

In short, there is a web of internation-al market actors behind the companiesthreatening Tesso Nilo, many of whomare not aware of the fact that their activi-ties play a role in the destruction of oneof Indonesia’s biodiversity hotspots. Ifcurrent patterns continue, Tesso Nilo’snatural treasures will be lost within thenext few years. Saving Tesso Nilo there-fore requires changes in internationaltrade and production policies and con-sumption patterns.

WWF’s goalsIn February 1999, WWF’s Asian

Rhino and Elephant Action Strategy(AREAS) project1 began establishing a“safe haven” for one of the largest re-maining populations of the Sumatranelephant in Riau, Sumatra. The island’selephant population has come under in-creasing threat by rapid forest conver-sion. As forests are lost, elephants feedin fields and plantations, generatingconflict with humans that often resultsin the death of the elephants by poison-ing or captures. Elephants need largeforests to feed in and they need adjacentland uses that do not attract them intofields and plantations where they mightget killed by angry farmers. AREASfound the Tesso Nilo Lowland Forest tobe the largest remaining block of idealSumatran elephant habitat. Fortunately,the remaining forest was surrounded toa large extent by a land use type -acaciapulp plantations- that was unlikely to

attract elephants, and thus would notcreate major human-elephant conflicts.The AREAS project therefore suggest-ed to protect the Tesso Nilo forest fromconversion to plantations, phase out theon-going logging operations, and createa protected area. The new reservewould have a strategic location betweenKerumutan Wildlife Reserve, BukitRimbang Bukit Baling Wildlife Re-serve, Bukit Bungkuk Reserve, andBukit Tigapuluh National Park (seefigure 1). The establishment of a TessoNilo Protected Area (TNPA) and theprotection and rehabilitation of forestedwildlife corridors connecting some ofthe reserves would create a 600,000 haprotected ecological network within a 3 million ha conservation landscape.

Achieving official protection statusfor Tesso Nilo would only be a veryfirst step. Subsequently, the protectedforests in the whole conservation land-scape would need to be maintained andsecured by stabilising the conversionfrontier, and by making both industrialand community land use practices inadjacent lands more compatible withthe conservation needs of the forests.

Since 2001, WWF has been workingon these two fronts: establishing a pro-tected area and promoting changes toland use practices in the adjacent lands.In 2002, the momentum towards a vi-able conservation scenario for the wholelandscape began building up when theCritical Ecosystems Partnership Fund

8 WWF Deutschland

Figure 1. Location of the Tesso Nilo Forest and three of four existing reserves; their position within Riau and Indonesia (WWF-AREAS Riau, Martin Hardiono).

declared it an investment hotspot, and24 local non-governmental organiza-tions joined in an alliance to protect thenow called Tesso Nilo – Bukit Tigapu-luh Conservation landscape.

Momentum for changeIn 1984 and in 1992, Tesso Nilo has

been proposed as a protected area. Eachtime, the proposal was rejected afterheavy lobbying by the timber industry.In the latest attempt, in April 2001, theMinistry of Forestry’s Department ofConservation and WWF proposed153,000 ha of Tesso Nilo to be declaredan elephant conservation area. The finaldecision by the Minister was still pend-ing in March 2003.

Two international pulp and paperconglomerates operate pulpwood plan-tations adjacent to Tesso Nilo. After ne-gotiations with WWF these companiesdeclared that they will not convert anymore Tesso Nilo forest, stop purchasingwood illegally cut in the forest, and

support the declaration of a Tesso NiloProtected Area. If the companies takethese commitments seriously, it wouldmean a great step forward in reducingthe pressure on Tesso Nilo. Four log-ging companies hold licenses to log in-side Tesso Nilo. The government-owned company Inhutani IV has agreedto hand over its concession to a newprotected area. The three private com-panies have agreed, in principle, towork with the Indonesian Governmentand WWF to select areas of their con-cessions inside Tesso Nilo to be put offlimits to logging. Several local commu-nities which have been heavily involvedin illegal logging, have indicated theirwillingness to give up land claims incase Tesso Nilo would be declared aprotected area, to refrain from illegallogging and to assist in preventing ille-gal logging by outsiders. In return, theyexpect government to stop all illegallogging in the forest, and WWF to sup-port them in sustainable development

projects. They are inspired by the expe-riences of several community represen-tatives in other protected areas in Suma-tra and Java during recent visits organ-ised by WWF.

The need to remain alertThreats to the Tesso Nilo forest re-

main, however. There are dozens of ille-gal sawmills that receive illegally cutwood from Tesso Nilo. There appear tobe high levels of tiger poaching, likelyfacilitated by the density of illegal log-gers in the forest. There is constant un-certainty about the possible expansionof community oil palm plantations intoprotected forest. And in the fragile In-donesian political climate there is al-ways the possibility that the pulp andpaper companies are able to use theirpower to influence political decisionmakers to overturn agreements andopen the forest for conversion after all.

Each of the two mother companiesof the pulp & paper mills operating inTesso Nilo still plans to convert at leastanother 200,000 ha of forest to pulpwood plantation for their mills. Thismeans that the campaign work by con-servation organisations to save TessoNilo needs to be expanded to otherparts of Riau province as well.

9WWF Deutschland

Figure 2. Actual land use cover forRiau in 2001. Focus on S-Riau, withthe proposed Tesso Nilo ProtectedArea. Categories (WWF-AREAS Riauprogram, Marin Hardiono); Lightgreen lines indicate existing andplanned protected areas

Peat forest

Acacia plantations

Oil palm

Lowland forest

unclassified

Proposed Tesso NiloProtected Area

2. Profile of the Tesso Nilo forest

Location and descriptionThe Tesso Nilo Forest covers an area

of 188,000 ha and is located in thePelalawan, Kuantan Singingi, Kamparand Indragiri Hulu Districts, in theprovince of Riau in the central part ofthe Indonesian island Sumatra (ca.102°E and equator). Acacia plantationssurround about ca. 80% of the TessoNilo Forest, 15% is surrounded by oilpalm estates and 5% of the forest bor-ders village gardens. About 1.5 hoursdrive north of the Tesso Nilo forest liesPekanbaru, the capital of the Sumatranprovince of Riau that has the characterof a “gold rush” town built by timberand oil barons. Riau is one of the rich-est provinces in Indonesia, yet morethan 40% of the population lives belowthe poverty line.

The Tesso Nilo Forest Complex har-bours humid tropical lowland forestsand some peat swamp forests and its al-titude ranges from 25 to 500 metersabove sea level. With annual rainfalls of2000-3000 mm, this lowland tropicalrainforest classifies as super humid.During the occurrence of the El Niñophenomenon, however, many trees maybe defoliated and some eventually dieoff. Episodic droughts of this kind facil-itate forest removal by human-inducedfire, as has been the case in recent years.

Biodiversity and flagship species A recent survey commissioned by

WWF in the Tesso Nilo forest found upto 218 vascular plant species in single200 square metre plots. This equals onedifferent vascular plant species on everysquare meter, a much higher diversitythan the authors found in over 1800similar plots studied with the sametechnique in tropical lowland rain-forests in 19 other countries, includingBrazil, Cameroon, New Guinea, andPeru. In short, Tesso Nilo appears to beone of the most diverse forests onearth.2

Tesso Nilo is also home to a widerange of large wildlife including Suma-tran elephant (Elephas maximus suma-trensis), Sumatran tiger (Panthera tigrissumatrae), gibbons (Hylobates spp.),tapir (Tapirus indicus) and severalthreatened bird and reptile species.

According to the Ministry of Forestry’sexecuting conservation department atthe provincial level, up to 170 of thefew hundred elephants that may stillsurvive in the province may live in theforests of Tesso Nilo.

Another flagship species on theverge of becoming extinct but still pres-ent in the Tesso Nilo forest is the Suma-tran tiger. Around 1900 there were threesubspecies of the tiger (Panthera tigris)in Indonesia. Today, both the Bali andJava tiger have become extinct and onlythe Sumatran subspecies survives.

Prior to 1950, the tiger was more orless continuously distributed through-out the entire island of Sumatra. Now,as a result of the conversion of naturalforest to agricultural holdings andpoaching, the tiger distribution has be-come fragmented and substantially re-duced. Tigers in Sumatra can maintain adensity of 1 per 100 km2 in mountain-ous areas and 1-3 per 100 km2 in morefavourable lowland habitats.4 At pres-ent, estimates of tiger densities in theforests of Tesso Nilo are not known.Sadly, the apparently high density of

10 WWF Deutschland

Human-Elephant conflict

Asian elephants may face extinction onthe island of Sumatra if the mixture ofgrassland and forest which is their pre-ferred habitat continues to be de-stroyed. The remaining population inSumatra is almost impossible to deter-mine, some guess that it may be about3000 individuals. As forests becomefragmented, elephants no longer findenough food and start feeding in vil-lage gardens and oil palm plantationsthat replaced the forest. This causesconflicts with the new land owners whotry to keep elephants out of their fields.If unsuccessful, they either poison thecrop raiders or call in capture teamsfrom the Ministry of Forestry’s execut-ing conservation department to re-move them. The latter have not beenvery successful in keeping capturedelephants alive. A dramatic decline ofthe elephant population is the result.Experts consider such human-ele-phant conflicts to be the leading causeof elephant deaths throughout theirAsian range states. The situation isparticularly pressing in Riau. Theprovince holds a large percentage ofSumatra’s total elephant population,but also harbours Indonesia’s largestarea under oil palm. As human popula-tions increase and more and moreforest is converted to estates and agri-cultural lands, elephant-human con-flicts are on the rise. Riau’s elephantsare increasingly forced to raid planta-tions and village gardens that surroundthe forests,

in search of food and safety. They areconstantly chased by angry farmersand in grave danger of being poisonedor shot by the farmers. In one dramaticcase in Riau in 1996, an oil palm com-pany poisoned 12 elephants at once.In another on the border of Riau andNorth-Sumatra, a community poisoned17 elephants who all died within just200 meters of each other. Single ele-phant deaths by poisoning are regular-ly reported. Still more elephants, how-ever, are captured and put into a so-called Elephant Training Centers bygovernment teams with poor trainingand equipment. Most of these cap-tured elephants eventually succumb totheir capture trauma or subsequentpoor holding conditions. Direct damagecaused by elephants (trampling ofhouses, injuring and killing people anddamage to small and large scale plan-tations) in and around Tesso Nilo is es-timated at 4.5 million US$ over the pe-riod 1997-2000.3 During the past fouryears, at least 10 people were killedand 6 others wounded in attacks bywild elephants in areas adjoining theSouth Bukit Barisan National Park insouthern Sumatra.Sources : WWF Endangered SpeciesProgramme (www.panda.org/species,then follow ‘Asian Elephants’); Forests,People and Rights, Down to EarthSpecial Report: June 2002; JakartaPost, 14 Feb.2002; WWF Indonesia,2001.

tigers in Tesso Nilo so far has only beenconfirmed by the frequency of attackson illegal loggers and evidence ofpoaching incidents. At least 33 tigerswere poached in the last four years inthe Tesso Nilo Landscape. The mainthreat to the tiger population in TessoNilo appears to be poaching. The manylegal and illegal loggers in the forest arelikely to find and report tiger signs topotential poachers, and their numbersmake it difficult for authorities to iden-tify the actual poacher.

The tiger, the elephant, and some ofthe world’s richest forests are with theirbacks against the wall in Sumatra.Prospects for the long-term survival ofboth forest and wildlife appear to begrim if natural forests continue to beconverted to monocultures. But eventhe existing protected areas are underthreat from illegal logging and tigerpoaching. Only an effectively managed

ecological network of protected areasand corridors and anti-poaching meas-ures would allow far-ranging wildlifesuch as elephants and tigers to disperseand form viable populations.

Deforestation and forest statusFifty years ago, millions of hectares

of tropical rainforest covered the lengthof the Sumatran island. Over the last 12years more than 60% of the remainingSumatran lowland forest was lostthrough logging, conversion to settle-ments, oil palm and pulpwood planta-tions and other forms of agriculture.6

With the current rate of deforestation,Sumatra is expected to lose the last re-maining tracts of lowland forest by2005, leaving clear-cut wastelands andpulp wood and palm oil plantations vir-tually devoid of forest species.7

By the mid-1990s, more than 1,7million hectares in Riau alone had been

deforested, 29% of Riau’s originalforest land. Riau has been particularlyaffected by deforestation, the overallpercentage for Sumatra is “only” 17%.8

Based on studies carried out by theWWF-AREAS project, conservative es-timates indicate that from 1999 on-wards the Tesso Nilo forest has beendisappearing at a rate of 56 ha per day.

The 188,000 ha of natural forest re-maining in the Tesso Nilo Forest Com-plex may be divided into three sections.Tesso Nilo West consists of about33,000 ha with conversion forest statusleased by several companies. Thisforest is slated to be converted to plan-tations. Tesso Nilo Central covers about120,000 ha, with a “limited production”forest status and has been leased tothree companies for selective logging(PT Siak Raya, PT Hutani Sola Lestarien PT Nanjak Makmur). Tesso Nilo Easthas about 35,000 ha of “limited produc-

11WWF Deutschland

Figure 3. Concessions and plantations in and around the Tesso Nilo Forest (WWF-AREAS, Martin Hardiono): Blue - acacia plantations, green - lowland forest, yellow -oil palm plantations.

tion” forest status leased by the govern-ment company Inhutani IV for rehabili-tation and/or logging (see figure 3).

Poorly controlled logging practicesin the proposed conservation area haveresulted in widespread damage to stand-ing vegetation, changes in local hydrol-ogy and extensive in-filling of streams.The statutory 500m limit to clear-felling on either side of the main roadnetwork in the RAPP plantation conces-sion has been exceeded in many cases.Moreover, roads are providing easy ac-cess to illegal loggers and poachers.9

Conservation history The Tesso Nilo forest was first pro-

posed as elephant reserve in 1984. Theforest area was 496,000 ha at that time.The Ministry of Forestry rejected theproposal after intensive lobbying by thelocal logging industry. In 1992, the areawas proposed again, the remainingforest area at this time was 300,000 ha.Again, the Ministry of Forestry rejectedit because of lobbying by the loggingand plantation industries. In April 2001,WWF proposed 153,000 ha of the re-maining 188,000 ha to be declared anelephant conservation area, and againthe local industries responded by initiat-ing an intensive lobbying campaign.The decision on WWF’s latest proposalto protect the Tesso Nilo Forest Com-plex is still pending. However, there arerumours that the Government may soonannounce the protection of the firstphase of Tesso Nilo: the 33,000 ha Tes-so Nilo East which the Governmentcontrols through a state company.

The 2000 forestry reform stated thatexisting logging concessions wouldgradually be phased out and no newlogging permits would be issued as ofJanuary 2001. In 2000, the leases of thelogging concessions in Tesso Nilo hadexpired and the majority of local dis-tricts and villages supported the conser-vation proposal. However, just beforethe deadline, the licenses were renewedfor another 20 years. Today, 155,000 hahave been designated for selective log-ging (Hak Pengusahaan Hutan: HPH)in Tesso Nilo Central and East. If no re-zoning happens, the forest could onlyobtain a legally protected status after

the current concession rights expire inanother 17 years. Another 33,000 ha offorest has been designated for conver-sion to plantations (Hutan Tanaman In-dustri: HTI).

12 WWF Deutschland

3. Major threats

3.1 General overview

Some of Riau’s forests have been ex-ploited for many decades and over acentury. But since the 1970s, vaststretches of Riau’s original land coverhave been exposed to three or four ma-jor exploitation cycles. First, very highvalue tree species were selectively cutfor export as round logs. Next, moresaturating cutting of species with lowervalue for furniture, plywood and roundlog export began. Then over-logged so-called wastelands were cleared to sup-ply pulp mills. And finally, either acaciaor palm oil plantations were establishedon many of the clear-cut areas.10

The area surrounding the Tesso NiloForest complex is in the third or fourthcycle, having either plantations orclearcut areas that are not being replant-ed because of land disputes. Tesso Niloitself is in the first or second cycle, withlegal, selective logging operations feed-ing the provincial sawmill industry.However, illegal loggers and small andlarge-scale forest conversions continueto threaten the remaining natural forest.

The shift from logging natural forestto irreversible forest conversion in theregion is the result of relatively simplemarket dynamics. A logging companymay now find it difficult to attract fi-nancial institutions that are willing tofinance long-term forest managementprograms which have to compete withshort-term plantation alternatives: if thelogged natural forest is converted intopalm oil plantations positive cash flowscan be achieved three years after plant-ing and profits may be expected afterseven years. Similarly, conversion ofnatural forest into rapidly growing soft-wood plantations can generate positivecash flow within seven years. Annualcrops, such as soybean, could provideeven quicker incomes.

In summary, exploitation of TessoNilo is driven by four overridingmotives:

• Legal logging for the timber (sawn-wood and plywood) industry.

• Illegal logging for local and out-of-state illegal and commercial sawmillsand export to Singapore and Malaysia.

• Industrial clear-cutting of naturalforests to establish pulpwood (mostlyacacia) or oil palm plantations.

• Small-scale clear-cutting to gener-ate wood for the pulp industry and toestablish community oil palm planta-tions.

Questionable legal and obviouslyillegal operations are facilitated byfour overriding factors:

• Poor “interpretation” of laws andregulations when licenses are issued.

• Construction of roads and corridorsto facilitate legal log extraction.

• Poor enforcement of laws and regu-lations.

• Willingness of the legal industry toaccept illegally harvested timber.

Underlying factors that drive thesethreats are:

• Poorly functioning government in-stitutions (lack of staff and resources,uncertainty about mandates, widespreadcorruption).

• Absence of planning and consulta-tion with all relevant stakeholders.

• Severe overcapacity of wood-pro-cessing industries in relation to whatcan be supplied from sustainable timberand pulpwood sources in the region.

• Huge corporate debts, incurred byunsustainable company growth and si-phoning off of profits and loans bymanaging families, which force compa-nies to operate at maximum capacity.

• A rather chaotic decentralisationprocess which has led to responsibilityconflicts between national and lower-level governments.

• Indonesia’s and the region’s gener-al financial and economic crisis.

• Uncontrolled markets, in the senseof inadequate social and environmentalregulations regarding the sources of rawmaterials harvested from forests orfrom converted forest lands, and -if reg-ulations and legislation do exist- theirpoor enforcement.

The wider Tesso Nilo area representsa clear case of the usual cycle of con-glomerate-driven forest destruction inIndonesia: first, a company associatedwith one of the conglomerates appliesand receives a permit to selectively log

an area. The harvested logs go to a con-glomerate-owned sawmill. Although In-donesia’s forest law allows selectivelogging under a system that wouldleave the forest 35 years to recover,companies seem to over-log the areadeliberately. Next, an application issubmitted to the government to have theover-logged area declared “degraded”,which implies that the area is no longerfit to be called a forest and should beconverted to a plantation. This changein status requires an official reclassifi-cation of the forest land.

Once that change of status is ap-proved, another company – often a sis-ter belonging to the same conglomerate– applies for a license to convert thatnew “wasteland” forest to either oilpalm or acacia pulp wood plantation.Whichever plantation it will be, the re-maining trees are removed and go to apulp mill. Then either oil palm or acaciaplantations are established, the productsof which go to the respective mills,likely to be members of the same con-glomerate. Indonesian law regulates thesize of concession areas any given par-ent company can hold, however, thetrue ownership of the various sistercompanies is often kept secret so theyappear as separate parents on the appli-cations and the laws regulating conces-sion size can be circumvented. The fol-lowing box presents the various forestharvesting licences issued by theforestry administration.

3.2 Industrial clear-cutting forpulp plantations

Indonesia’s pulp and paper industry hasexperienced a spectacular growth overthe past decade. National pulp produc-tion capacity has grown from 606,000tonnes in 1988 to 4.9 million tonnes in1999, i.e. an increase by 700%, whilethe paper industry’s processing capacityrose from 1.2 million to 8.3 milliontonnes annually.11 As a result, the coun-try has become the world’s 9th largestpulp and 12th largest paper producer in2001.12

The growth in production capacitywas not matched by efforts to secure a

13WWF Deutschland

14 WWF Deutschland

Forest Harvesting Licenses

There are several types of licensesthat may be granted to parties to ex-ploit forest lands. The main ones are:HPH (Hak Pengusahaan Hutan), HTI(Hutan Tanaman Industri) and IPK (IjinPemanfaatan Kayu).

• HPH: A license that is granted forthe selective harvest of natural forestsover a given period, typically 20 yearsand renewable for another 20 years.The license intends to maintain theforest as permanent production forest,assumes a 35 year forest recovery cy-cle and only allows harvesting of treeswith more than 50cm DBH. HPH li-cences should prevent land degrada-tion and do not allow clear-cutting with-out partial replanting. A special form oflogging permit is the HPHk (kecil =small), which applies to small, 100 haconcessions and can be granted bythe district administrator, e.g. to villagecompanies. The original purpose ofthis license was to increase local in-comes and discourage illegal logging.In some areas, however, these permitshave been issued in large numbersand with no planning or control, prov-ing to be as damaging as the old-stylelarge HPHs.

• HTI: A license to grow an industrialtimber or wood plantation to supplytimber or fiber, usually pulpwood. Thelicense is valid for a period of 35 yearsbeyond the rotation period of the mainsilvicultural species, renewable for an-other 35 years. Licensees are allowedto convert only 80 percent of the landarea, 20% of natural forest have to re-main as green belts and infrastructure.This limited planting requirement is notalways met. Industrial forests are sup-posed to be established on degradedland, i.e. forests with a timber volumeof less than 20 m3 per hectare as per aMinistry of Forestry Decree from 2000,but in practice they are often estab-lished after clear-cutting natural forest.The controversy about the definition ofthe word “degraded” between timberand conservation groups runs high.The timber industry maintains

that a forest that has few if any cash value trees left is degraded. Conserva-tion groups maintain that a forest thathas saplings and young trees with theoriginal mature forest species compo-sition will grow back to its original stateand cannot possibly be considered de-graded. Especially, if a “degraded”classification means the forest can beclear-felled and converted to mono-culture tree farms. HTIs were expectedby the government to supply raw mate-rials for the pulp and paper industry,which otherwise would have been tak-en from natural forests. In reality, how-ever, planting schemes have not metthe minimum of 25%, which has result-ed in an ongoing heavy reliance onnatural forests.

• IPK: IPKs are permits to utilise thewood which is released by clear-fellingforests slated for conversion to agricul-tural (especially oil palm) or industrialwood plantations. The costs of thesepermits are minimal, making mixedhardwood extraction very attractive toconcessionaires that should primarilybe interested in establishing planta-tions for other purposes.Before the re-cent decentralisation process, conces-sion licenses were issued by the Min-istry of Forestry in Jakarta. A decreefrom November 2000 permitted localgovernments to issue HPHk licenses.In May 2001, another decree was an-nounced that would allow districtheads to issue full-scale logging con-cessions. The following Megawati gov-ernment, however, expressed its oppo-sition to this decree and pledged to re-gain central government control overthe country’s forest resources. A newdecree in early 2002 banned provincesand districts again from issuing licens-es, but the situation remains confusedbecause of the absence of implement-ing regulations for the new ForestryLaw and the unwillingness at localgovernment levels to return recentlygained power back to the central gov-ernment

Source: FWI/GFW, 2002 and Downto Earth, 2002.

legal and sustainable supply of raw ma-terials, and this has proved to be devas-tating for the country’s natural forests.Of all wood consumed by the pulp in-dustry between 1988 and 1999, lessthan 8% came from plantations, most ofthe rest was supplied by clearing natu-ral forest.13 Plantations imply invest-ment and maintenance costs, whereas inthe Indonesian policy context woodfrom natural forest is much cheaper, es-pecially when it can easily be obtainedillegally.

Ironically, the Indonesian govern-ment has allocated almost five times thearea which would be sufficient tosource the industry with plantationpulpwood, to plantation companies un-der the HTI program (against 1.1 mil-lion ha that would be enough if the cur-rent industry would operate sustain-ably). This suggests that the expansionpolicy was driven by a desire to makelarge volumes of hardwood from natu-ral forests available to pulp producerswith IPK clearance permits, regardlessof whether the areas would ever be re-planted.14

The growth of the pulp and paper in-dustry has been fuelled by massive in-jections of capital investment of be-tween US$ 12 bln. and US$ 15 bln.Foreign financial institutions madethese investments with apparently littleconcern for the legality and sustainabil-ity of the supply of raw materials. As aresult, these institutions not only tookenormous financial risks, but must alsoaccept indirect responsibility for the de-struction of Indonesia’s forests.15

The pulp and paper industry hasbeen responsible for the deforestationof almost 835,000 ha of tropical rain-forest in Sumatra. Almost all of thisarea was cleared to supply four largemills, which include the world’s twobiggest pulp mills, located within a dis-tance of 100 km of each other in Riauprovince. In 2000, these two megamills,Riau Andalan Pulp and Paper (RAPP)and Indah Kiat Pulp and Paper (IKPP)consumed 5.7 and 8.8 million m3 ofwood, respectively. Wood produced inRiau’s acacia plantations is not suffi-cient to feed the pulp mills and coveredin 2000 no more than 30% of the mills’

15WWF Deutschland

capacities. Most of the pulpwood there-fore came from natural tropical forestssuch as Tesso Nilo. A study by AREASRiau found that about 900 m3 timber aday was transported from the Tesso Ni-lo forest complex to the two pulp millsin early 2001. The mills’ wood con-sumption was the equivalent of abouthalf of all of Indonesia’s legal woodsupply.17 It was about double that of Ri-au’s legal timber production from natu-ral forests which amounted to only 6million m3 in 1999.18 Where did thewood come from? Company profilesand a description of activities of RAPPand IKPP are presented in chapter 4.

The current overcapacity of thesepulp mills is a clear example of agrowth process based on ‘perverse in-centives’ that was started under theSuharto regime.19 Once the high-capac-ity mills had been established, pulp andpaper companies had to aim for thehighest possible production level to payoff their massive debts to foreign in-vestors. Revenues were siphoned off bypuppet companies. IBRA (Indonesian

Some basic information on pulpand paper

The pulp & paper production chainstarts with the sourcing of fiber, ei-ther by clear-cutting natural forests orfrom dedicated pulpwood planta-tions. The fiber is transported to apulp mill, which turns the fiber intobleached hardwood kraft (BHK) pulp.In Indonesia, imported softwood pulpis often added to produce a pulp mixfor higher quality paper. Pulp is trad-ed world-wide and margins are low.Pulp mills need to be large-scale tobe able to profit from the economy ofscale. This means that one profitablepulp mill may require over US$1 bil-lion in investments.

The pulp is being sold to produc-ers of all kinds of paper and packag-ing materials. Depending on the typeof paper or packaging product, thesefacilities can be relatively small-scale.

Source : Van Gelder, 2001;Stuewe, pers.comm.

Some basic information on oil palm

To establish an oil palm plantation, acompany will set up a nursery, con-struct roads and clear the land. All veg-etation is removed. Any timber that isnot considered valuable enough, e.g.where a first round of logging has tak-en place, will be sold to pulp millswhere available, burnt, because this isthe cheapest method of land clearing,or mechanically removed, where non-burning laws are enforced. In Indone-sia mechanical clearing is on average2.3 time more expensive. Often, labouris brought in from other regions. Threeyears after planting the palms are al-ready productive. The costs of estab-lishing an oil palm plantation vary be-tween US$ 2,500 – 3,500 per ha, most

of which the company would normallyneed to raise externally. When estab-lished in primary forest areas, the saleof the cleared timber might generatethe funds required to establish theplantation.Oil palm fruits must beprocessed within 24 hours after har-vesting, which requires that processingmills are close by, often inside theplantation area and the area must bemade well accessible. No other plantproduces a higher yield of edible oilsthan the oil palm: per ha yields can be10 times higher than those of soybean.However, the yields in plantations arecommonly far below optimal levels,particularly in developing countriessuch as Indonesia.

Bank Restructuring Agency) and inter-national government credit agencieshad to bail out these companies. Themills and their owners were thus ulti-mately financed by Indonesian and for-eign tax payers. They became every-body’s business.

3.3 Oil palm plantations

According to Oil World, the leadingmarket research institute for the palmoil sector based in Germany, the worlddemand for palm oil was forecasted toincrease from 22,500,000 tonnes in

Figure 4. Expansion of the area of oil palm planted in Indonesia (1967-2000). Based on Wakker, 2000.

1999 to 40,000,000 tonnes in 2020. Ifthis demand is to be met, producercountries will have to plant around 6million ha of new estates until 2020.20

The EU-supported Forest Fire Preven-tion and Control Project (FFPCP) pre-dicts that about 50% of new plantationland will come from within Indonesia,with Sumatra absorbing most of this ex-pansion (1.6 million ha).21

From the mid-1980s onward, In-donesia has already experienced a spec-tacular expansion of oil palm planta-tions. Starting from 0.6 Mha in 1985,the planted area reached about 1.0 Mhain 1990 and around 3.0 Mha in 2000(Figure 4).

In 2001, Indonesia accounted for32% of global production and 29% ofglobal exports of oil palm products(crude palm oil, palm kernel oil andpalm kernel meal), being the world’ssecond producer, after Malaysia. Thebiggest importers of Indonesia’s crudepalm oil (CPO) in 2001 were India (29%), China (11 %), Netherlands (8 %)and Germany (5%). Germany is theNumber One importer of palm kerneloil (PKO). It imports 28% of all ofIndonesia’s PKO exports. Indonesiasupplies 85% of all German PKO im-ports.22

The success of oil palm cultivation ineconomic terms has led to the beliefthat this crop would bring quick bene-fits for small farmers as well. In fact, alltypes of small-scale forest users, both(former) shifting agriculturists, trans-migrants, even former hunters/gatherersregard planting oil palm seedlings as away forward to economic prosperity.However, the Indonesian government,backed by international financial insti-tutions and commercial conglomerates,has been pushing the large-scale indus-trial and not a small-scale diversifiedmodel.

Indonesia’s palm oil industry is dom-inated by a small number of large con-glomerates.23 Some of them (notablySalim, Sinar Mas, Raja Garuda Masand Surya Dumai) also hold major log-ging concessions, thus linking largescale forest clearance, wood supply andplantation establishment under onecompany umbrella.24 Both the Raja

Garuda Mas and the Sinar Mas groupshave a strong presence in the Tesso Niloarea (see section 4.2.3 for corporate di-agram). Foreign investments in oil palmare considerable: in 1998 total foreigninvestments valued US$3 billion.25 In-donesia’s state-owned forestry compa-nies, such as Inhutani IV, are also in-creasingly involved in the oil palm busi-ness.

Riau is now Indonesia’s leadingprovince for the area of land under oilpalms.26 However, it is not yet leadingin terms of production, because muchof the planted area is still immature.The business is so attractive that manyrubber smallholders have started toclear old rubber holdings and convertthem to oil palm.27

3.4 Illegal logging

Surveys by Forest Watch Indonesia,Global Forest Watch and the WorldResources Institute in 2000 showed that50-70% of Indonesia’s total wood sup-ply was obtained illegally.28 Illegal log-ging in the country is a complex issue,which involves industries, communi-ties, politicians, bureaucrats, militarypersonnel and buyers.

The 2002 Annual Report of Trans-parency International29, the world’sleading NGO documenting and expos-ing corruption, now lists Indonesiaamong the eight most corrupt countries.A symptom of Indonesia’s institutionaland economic crisis, the rise in corrup-tion is one of the main factors that al-low illegal logging to thrive.

In general, there are two kinds of il-legal logging with a large grey zone inbetween. The first is carried out by le-gitimate operators who violate theterms of their licenses. The second in-volves timber theft, whereby trees arefelled by people who have no legal rightto cut down trees whatsoever.

WWF-AREAS found both kinds ofillegal logging to be common in TessoNilo. In December 2000, the project de-tected 47 illegal sawmills in and aroundthe area. In all but one case, the ownercould easily be identified. Many opera-tors not only owned the sawmill but al-

so bought timber directly from localcommunities. Thirty-four separate log-ging groups operating in the Tesso Niloforest at the time of the survey wereidentified, 28 of them were local, theothers came from Jambi, Pekanbaru andNorth Sumatra. The groups employed277 people. During the six-day surveyperiod, both legal and illegal loggingtrucks that left the Tesso Nilo forestcomplex were recorded. The extractedvolume was estimated at 1,670 m3 aday, 87% of which the survey team be-lieved to be illegally harvested.30

Figure 5 models a deforestation sce-nario for the Tesso Nilo Forest Com-plex assuming illegal logging continuesat the 2000 rates.

In the WWF-AREAS survey, about63% of the total wood taken from theTesso Nilo area was most likely des-tined for pulp mills. Investigations re-vealed that one of the mega pulp mills,Indah Kiat, was actually buying illegal-ly obtained wood from former fisher-men that had been forced to give upfishing due to pollution created by thesame mill. As one fisherman stated,“now there are no fish left. They haveall been poisoned by the factory, sochopping down the forest is the onlyway we can make money.”31

Factors that facilitate illegal logging inthe Tesso Nilo area are32:- the resource -round logs, plywood

timber, pulp timber- is readily avail-able.

- the infrastructure necessary to illegal-ly harvest timber even without heavyequipment was created by the legallogging operations and has been in-geniously modified by the localgangs.

- a market that buys the contraband andencourages its harvest exists.

- laws regulating timber harvest are notenforced.

There are five main players in the ille-gal logging game33:- villages provide labor and organize

small harvesting operations; this in-cludes traditional, transmigration andrefugee villages. Villagers participatebecause of the economic crisis which

16 WWF Deutschland

17WWF Deutschland

led to increasing poverty, becausethey see an overall breakdown of therule of law and do not want outsidersto profit from ‘their’ resources, andbecause of land right and resource ac-cess conflicts they fear they will loseanyway.

- “mobsters” organise gangs at theprovince level which provide fundsand hire labour either from villages orfrom a refugee community.

- military, police, and other enforce-ment personnel provide protection,transport and sometimes funding torun operations.

- government officials provide illegal or“grey” permits to conduct some of theoperations.

- companies “encourage” illegal opera-tions to be able to buy feed stock fortheir pulp and plywood factories.Illegal logging operations use so-

called “brokers” as intermediaries be-tween processing mills and loggers.They are assumed to be employees oflocal or provincial authorities or justpeople from the villages. The logginggangs are mostly made up of aroundfive loggers, sometimes migrants fromnorthern Sumatra that live in illegalcamps in the forests, easy to be seen bylegal companies and forest police butworking undisturbed. Each team mem-ber earns around 28.000 Rupiah per dayafter paying the broker’s fee and for thetransport. That is slightly more than theaverage employee of RAPP earns.34

Figure 5. Projection of the potential impact of illegal logging on the Tesso Nilo Forest Complex should logging continue at 2000 rates (for year 2001, 2004 and 2006).The model assumes illegal logging to advance at increasing distances from existing logging roads; dark grey = forest, light grey = severely degraded due to advanceof illegal logging (Martin Hardiono, WWF-AREAS, December 2001).

0 70 kilometres

4.1 Indonesian GovernmentAgencies

The decentralisation contextIn May 1998, the autocratic Suharto

Regime was replaced by a new govern-ment. The regime change seriously af-fected the political structures in thecountry. The role of various levels ofgovernment in the Tesso Nilo areachanged dramatically as the new gov-ernment began a decentralisationprocess. This process towards regionalautonomy rapidly and often chaoticallyshifted power from the centre to theprovinces and districts. That affectedmany functions of government, includ-ing land use planning, and forest policyand management. The changes presentboth opportunities and risks for forestconservation.35

Democratisation and decentralisationallowed previously marginalized play-ers such as environmental NGO’s, ruralcommunities, local authorities, reli-gious leaders and academics to have avoice in the formulation of natural re-source policies. Decision-making washanded down to district authorities whomay be more aware of the local socialcontext and may be more ready to listento local communities whose livelihoodinterests are directly at stake.

District heads were given the right tohand out small logging concessions(HPHk). In some areas they have doneso in large numbers without any landuse policy in place. Many were eagerfor license fees in the absence of reli-able income sources to cover theirbudgets. Others simply felt their timehad come to benefit from the exploita-tion of forest resources. In many cases,the result was accelerated forest degra-dation and deforestation. A new decreeby the Ministry of Forestry in October2000 tried to stop this practice but wasignored in many areas.

In May 2001, a decree was an-nounced that would have allowed dis-trict heads to issue full-scale loggingconcessions and would have handedthem considerable power to manageprotected forest areas. The incomingMegawati government, however, ex-pressed its opposition to this decree and

pledged to regain central governmentcontrol over the country’s forest re-sources. A new decree in early 2002banned provinces and districts againfrom issuing licenses. This re-centrali-sation of power was complicated by thefact that provincial and district officialshad already tasted the power and profitsthat come with local control over forestand other natural resources and conse-quently were not ready to give awaythat recently gained power. Such powerconflicts and confusion over who hasthe authority created a “get-what-you-want-before-it-is-too-late” atmosphere,resulting in accelerating forest loss.

Disputes also arose over the degreeto which local land use plans could beoverruled by central government plan-ning and about which level of govern-ment has the authority to change thestatus of forest lands, e.g. from protec-tion to production forest where timbermay be harvested selectively from natu-ral forest stands, or from production toconversion forest where natural forestmay be cleared and converted to indus-trial wood or estate crop plantations.Many provincial land use plans tendedto increase the amount of forest classi-fied as conversion forest at the expenseof production forest in comparison withplans and maps prepared by the Min-istry at the national level. The provincesclaim that their plans reflect the situa-tion on the ground more accurately, butthey make it easier to have logged-overforest cleared for oil palm and pulp-wood plantations.36

Also in the case of Riau, there hasbeen some arm wrestling between thecentral and provincial governments asto which of the land use plans preparedat either level was valid. The Ministryof Forestry claims that Riau has moreproduction forest than the provincialland use plan indicates. In 2000, almost1.6 million ha of production forest hadbeen rezoned as conversion forest in Ri-au (18% of the province’s mainlandarea); 1.1 million ha were beingprocessed but large areas were disal-lowed because many claims were foundto overlap, a symptom for the high de-mand for forest conversion in thisprovince.37

On the other hand, provincial plan-ning authorities have also been infavour of placing more forest land un-der protection, especially the peatforests near the coast that prove to bevery vulnerable to protracted burningafter clearing.

The agencies involvedThe main government institution de-

termining the fate of Tesso Nilo is theMinistry of Forestry (MoF), which hasthe right to declare Tesso Nilo a protect-ed area, but which also issues loggingand conversion permits. Chapter 2 haspresented the latest developments as tothe designation of forest lands in andaround Tesso Nilo.

Within the Ministry, three directorategenerals (DG) are most involved:

• “Forest Protection and Nature Con-servation”, which would formally man-age the Tesso Nilo protected area, onceit receives legal protected status; thisDG has applied for such a declaration.

• “Forest Planning”, which evaluatesthe application; this bureau appears tobe in favour of declaring the Tesso Niloforest a protected area.

• “Production Forests”, which is incharge of the Tesso Nilo forests. Achange in land use status would meanthat “their” area would have to be hand-ed over to “Forest Protection and Na-ture Conservation”. The DG of Produc-tion Forests has not yet made up itsmind, but appears to be conservative.

KSDA-Riau38 is MoF’s executingagency in the province. Daily manage-ment of the protected area would be del-egated to this agency, unless it is rankedas a national park which is managed bycentral agencies. KSDA duties includecurbing illegal activities, unless there isan agreement for joint management byseveral parties. However, the poorlystaffed and funded KSDA has not beenvery successful in effectively protectingother protected areas in Riau against en-croachment, illegal logging and monitor-ing overlapping concessions. Some of itsmain and most controversial duties at themoment appear to be to provide help tofarmers and plantations that are beingraided by elephants and to maintain apopulation of captured crop-raiders.

18 WWF Deutschland

4. Main players behind the threats

The Riau Forest Service is a provin-cial government agency that managesand controls all non-protected forestsand has shown similar weaknesses asthe KSDA. It is in charge of controllingillegal logging outside of protected ar-eas but appears to have little controlover it. The Riau Planning Board facili-tates the creation of land use plans, andin 2002 floated a highly controversialnew plan to replace the old 25-yearplan.

The Riau Governor’s office is tryingto boost revenue and to provide em-ployment opportunities in the provinceand is therefore interested in re-desig-nating more and more areas for com-mercial use. Still, it has endorsed theprotection of Tesso Nilo.

District governments and parlia-ments have expressed their support to aTesso Nilo Protected Area in generalterms, but they are also constantly be-ing lobbied by businesses and commu-nities to open more forest for logging orconversion.

4.2 Indonesian companies

Indonesian exports in generalIndonesian government statistics for

2001 show the top ten export destina-tions for non-oil & gas products. TheUSA was the number one destination,taking a 17% share of total export val-ue. The next were five Asian countries,which together imported 37% of the to-tal export value. They were followed bythree EU countries : the Netherlands,the UK and Germany, ranking 7, 8 and9, respectively. Together, the three EUcountries accounted for almost 10% ofIndonesia’s export value from the non-oil sectors.39

Riau is said to be one of the richestprovinces in Indonesia, economically.This is largely due to vast crude oil andgas production along Riau’s coast line.The oil is produced by Caltex, aChevron and Texaco collaboration, andvalue is added by the state owned refin-ery Pertamina. Profit sharing in the oilrevenues has always been a contentiousissue between the central and provincialgovernment, most profits went into cen-

tral government’s coffers. After a lot of“independence” talk in the province, inJanuary 2002, the governor of Riauwith the blessing of the central govern-ment signed a first “new” deal that willgive the province a 50% share in theprofits of one of the oil fields that hadbeen up for re-negotiation.40

Riau also occupies a front positionregarding its provincial share of non-oil-and-gas national exports. Riau ranksthird among 27 Indonesian provinces,accounting for 12.5% of the country’snon-oil-and-gas export value. In vol-ume, Riau even has a number one posi-tion, with 94 million tonnes of non-oil-and-gas exports41, that is 45% of In-donesia’s total export volume. Secondand third placed South and East Kali-mantan together account for another31% of the national export volume.42

Most of Riau’s non-oil-and-gas is fromindustries that depend on the conver-sion of its forests.

4.2.1 Pulp & Paper companies

Mega-millsTwo integrated pulp and paper mill

complexes are located in Riau less than100 km distance from each another andfrom the Tesso Nilo forest: 1. IKPP/AA (Indah Kiat Pulp and Paper

owns the pulp and paper mill, AraraAbadi owns the pulp-wood conces-sions), and

2. RAPP/RAK (Riau Andalan Pulp andPaper owns the pulp mill and pulp-wood concessions, Riau AndalanKertas owns the associated papermill). Together, these two operations ac-

count for ca. 60% of Indonesia’s totalpulp production43 and rank among thelargest stand-alone pulp production fa-cilities in the world.44 These two com-panies are, without doubt, the most sig-nificant players from the private sectorthat determine the fate of the Tesso Nilolandscape and other high conservationvalue forests in Riau. The two mills arerelated to all other pulpwood conces-sion owners in the Tesso Nilo area, ei-ther through joint venture partnershipsor through third party delivery con-

tracts. Most of these relationships arekept secret because of competition be-tween the two mills but also because oflaws governing the size of land any giv-en corporate entity and its clan of com-panies can hold.

Riau’s industries consumed 16 mil-lion m3 of wood in 1999.45 Of that, theIndah Kiat and RAPP mills account-ed for roughly two-thirds, ca. 11 mil-lion m3. That alone is almost doublethe 6 million m3 of natural wood thatcould legally be harvested in Riau thatyear: 1.5 million from HPH timberconcessions and 4.3 million throughforest conversion permits.46 These fig-ures clearly show the absolutely dra-matic effect these two mills have onRiau’s natural forests and how muchtheir simple existence appears to havebeen encouraging illegal logging andforest conversion.

Both mills, especially RAPP’s, nowcover part of their fiber needs from aca-cia plantations bordering the Tesso Niloforest. But both still rely mainly on nat-ural wood from forest conversion intheir own concessions and in those ofthird parties and joint venture partners.Some of those clear-fell inside TessoNilo and inside the Tesso Nilo land-scape, sometimes without proper per-mits. Based on data provided by the twocompanies, Barr (2002) calculated thatboth will eventually be able to satisfyup to 50% of their mills’ capacities withplantation wood generated from theirown concessions (see graphs in figures6 and 7). The remaining 50% will ini-tially be covered by mixed tropicalhardwood (MTH) and later by planta-tion acacia from third party or jointventure (JV) sources. Yield projectionsby the companies for their own pulp-wood plantations have proven to beover-optimistic time and again. Still thediscussion about percentages of mill ca-pacity covered by plantation wood orby MTH misses one critical point:analysis of historical sequences of satel-lite images clearly show that most plan-tations operated by the mills today weretropical forest yesterday.

The mills’ pulpwood needs presentan enormous pressure on Riau’s few re-maining natural forests and are consid-

19WWF Deutschland

ered by some to be a major drive for il-legal logging operations: a CIFORstudy estimates that Indonesian pulpproducers may have obtained as muchas 40% of the wood they consumed be-tween 1994 and 1999 from illegalsources.47 Indah Kiat and RAPP claimthat their mills will be exclusively sup-plied by plantation wood by 2009 and2007, respectively (Fig. 6 and Fig. 7).To reach those targets, the companiesplan to convert 200.000 to 240.000 haof natural forest, each mainly in peatswamps, the only forest type remainingin sufficiently large blocks. However,conversion rights to these lands havenot yet been fully secured. In the mean-time, RAPP and Indah Kiat run severaloperational and financial risks in pursu-ing their ‘sustainability’ targets48:1) Continued heavy reliance on the

conversion of natural forest furtheraway, at increased costs, until expan-sion into peat swamps is secured.

2) Technical challenges and ecologicalrisks associated with plantation de-velopment in peatlands.

3) Social conflicts, because those landsare claimed by local people, and theuncertainties surrounding regionalautonomy.

4) Financial constraints for new invest-ments because of the companies’heavy debt loads.

5) Extremely optimistic projections ofplanting rates and production vol-umes on their plantations.

Public interest in the destructive im-pacts of the Indonesian pulp and paperindustry as a result of NGO campaignsin consumer countries has not gone un-noticed by the conglomerates. It is feltas a threat to the ability to market theirproducts in some countries. As a result,companies such as APP and APRILhave designed marketing strategies toobscure their identity as the originalmanufacturer of the paper. As part of itspromotion strategy, APRIL falselyclaims that it clears degraded forest andthat its forestry operations help preservebiodiversity49, whereas there is ampleevidence that many of the forest areasbeing cleared, such as Tesso Nilo, are infact High Conservation Value Forests.

In addition to the pulp wood conces-sions directly owned by RAPP andArara Abadi, three other companiesown timber concessions along the bor-der of the proposed TNPA:- PT Rimba Lazuardi - PT Rimba Peranap Indah - PT Nusa Warna Raya.

Some of them have or are negotiat-ing contracts as third party suppliers,joint venture partners, or are take-over

targets. Figure 3 shows the pulpwoodconcessions (HTI) around the Tesso Ni-lo forest.

20 WWF Deutschland

Figure 6. RAPP Wood Supply Plan from All Sources (Barr, 2002).

Figure 7. Indah Kiat Wood Supply Plan from All Sources (Barr, 2002).

Parent group: Raja Garuda Mas

PT Riau Andalan Pulp & Paper is 98.5% owned by Asia Pa-cific Resources International Holdings Ltd. (APRIL) in Sin-gapore. PT Riau Andalan Kertas is 99.8% owned by APRIL.

APRIL is part of the Indonesian Raja Garuda Mas Group(RGM), which is ultimately owned by Sukanto Tanoto andhis family. RGM is active in agribusiness, forestry, pulp &paper, steel, chemicals, finance, trading, mining, property andservices.50

Key data

• Production capacities The pulp mill of PT Riau Andalan Pulp & Paper (RAPP) inKerinci (Riau) has an annual production capacity of2,000,000 tonnes of bleached hardwood kraft pulp, making itone of the largest pulp mills in the world.

The associated paper mill of PT Riau Andalan Kertas(RAK) has an annual production capacity of 350,000tonnes.51

• Consumer productsPrinting and writing paper (63%), boards and coated paper(24%), tissue (8%), and other paper (5%).52

• Brand NamesPaperOne, Copy & Laser, Crystal Copy, Perfect Copy, DuniaMas.

• Financial figuresIn 2000, APRIL realised a turnover of US$ 652.3 million. Ofthis turnover, 59.6% was attributable to pulp and 40.4% topaper. Exports accounted for 85.1% of the turnover. The mainexport markets are Asia, the Middle East, and Europe.53

Foreign financial involvement

Foreign financial institutions have helped finance the strongexpansion of Riau Andalan Pulp & Paper, Riau Andalan Ker-tas and their parent company APRIL by issuing shares andbonds, buying their shares and bonds, providing loans, andextending credit guarantees. German financial institutions didnot play a significant role in this respect.54

Because of the Asian financial crisis APRIL ran into finan-cial trouble at the end of the 1990s. The company and its sub-sidiaries had to restructure most of their US$ 1.3 billion debt.Still they were looking for capital to expand annual pulp pro-duction from 850,000 to 2 million tonnes and to double paperproduction from 350,000 to 700,000 tonnes per year.

• In September 1997, PT Riau Andalan Kertas secured atotal loan package of US$ 436 million from an internationalbanking consortium, advised by Barclays Bank (United

Kingdom) and Macquarie Bank (Australia). The loan pack-age was meant to finance a second paper line, which woulddouble annual capacity to 350,000 tonnes. The loan packagewas partially guaranteed by the export credit agencies ofSweden, Finland and Germany (Hermes Kreditversicherung),as companies from these countries would supply machineryfor the second paper line. But when the Asian financial crisisbroke out at the end of 1997, the loan package was put onhold by the banks and/or the export credit agencies. Early1998 the loan package was cancelled entirely. Lacking suffi-cient funds, Riau Andalan Kertas today still has not estab-lished a second paper line.55

• The Finnish company UPM-Kymmene in September1999 terminated its strategic alliance with APRIL, when itbecame clear that APRIL would not succeed in bringing itssecond paper machine in Riau on-line before the end of 1999.The strategic alliance of January 1998 had meant to bring theentire paper production of the two companies under jointcontrol as APRIL expanded its paper production in Riau andChangshu (China).56

As part of the alliance UPM-Kymmene had taken a 49%share in APRIL’s fine paper and stationery companies inChangshu and Suzhou (China) in March 1998, and had ad-vanced a US$ 121 million loan to APRIL in December 1998.These two commercial ties between the two companies con-tinued to exist after September 1999.57

• In June 2000, APRIL signed a debt restructuring agree-ment with its Indonesian creditors headed by the IndonesianBank Restructuring Agency (IBRA), which had taken overthe bad loans of some commercial banks. Around US$ 800million of RAPP and RAK debt was restructured. The agree-ment extended these loans to the end of 2005. It allowedAPRIL to defer interest payments for a maximum of US$ 160million until March 2001, to assist in financing the comple-tion of the first phase of the second pulp line at RAK. Suchan arrangement is unusual and therefore the IBRA first ob-jected to the deal which had already been signed by the In-donesian banks in September 1999. Only when IBRA-chiefGlenn Yusuf was replaced by Cacuk Sudarijanto the govern-ment agency changed its position and also signed the agree-ment.

Several members of the Indonesian parliament, as well asforeign creditors of APRIL, criticised the fact that IBRAsigned this debt restructuring agreement. The foreign credi-tors, headed by ING Barings (United Kingdom), a subsidiaryof ING Bank (The Netherlands), refused to sign. The foreigncreditors have total loans of US$ 117.8 million outstanding toAPRIL.58

• In August 2000, APRIL agreed to sell its 51% interest inthe Changshu paper mill to UPM-Kymmene for US$ 150million, to raise money for the expansion of its Riau pulpmill. That gave UPM-Kymmene full ownership. The convert-ing plant in Suzhou was transferred to APRIL. APRIL will al-

21WWF Deutschland

Company profile:Riau Andalan Pulp & Paper (RAPP), Riau Andalan Kertas (RAK)

so continue to hold the US$ 121 million loan from UPM-Kymmene and the loan's new collateral now is formed by ap-proximately 12 percent of PT Riau Andalan Pulp & Paper 'sshares.59

• In October 2000 United City Bank (Unibank) was putunder the control of the Indonesian Bank RestructuringAgency (IBRA). Unibank was the banking subsidiary of theRaja Garuda Mas Group and had lent hundreds of millions ofdollars to companies within the Raja Garuda Mas Group,such as APRIL. Many of these loans were not repaid, bring-ing Unibank into trouble. Despite efforts by IBRA to revivethe bank, it was closed down at the end of October 2001 byBank of Indonesia, the Indonesian central bank. Unibank'sclosure left the IBRA with the obligation to pay back aroundUS$ 230 million to the customers of the bank. The IBRAtried to hold Sukanto Tanoto responsible for the repayment,but Mr. Tanoto had sold its shareholdings in the bank to anumber of new owners as early as 1999. The share-owners,which are unknown to the Bank of Indonesia, are believed tobe fronts for Mr. Tanoto.60

• Despite the favourable terms of its June 2000 debt re-structuring, APRIL soon ran into trouble again when worldpulp prices collapsed. In February 2001, APRIL asked itscreditors to revise the debt restructuring agreement. APRILasked lenders to grant a three-year grace period for the repay-ment of principal and to extend repayment until 2012. It alsowanted lower interest charged on the loans. Creditors werebalking, as APRIL at the same time invested large sums intoan expansion of its pulp production in RAPP.61 This wasmade possible in part because of UPM-Kymmene had boughtAPRIL's share in their joint Chinese mill.

• In March 2001, APRIL’s subsidiaries defaulted on thefirst scheduled principal repayment for the month of March2001. Interest was again being paid.62

• In June 2001, APRIL announced that it could not meetinterest payments on its debts because of a steep decline inpulp prices. Again, the company began discussing a debt re-structuring with its creditors.63

• In September 2001, the New York Stock Exchange sus-pended trading in shares of Asia Pacific Resources Interna-tional Holdings Ltd., because the price of APRIL's shares hadtraded below US$ 1 over a 30-day period. The company hadbeen listed on the NYSE since April 1995. Instead, APRILstarted trading its shares on the American over-the-counterBulletin Board at the end of September 2001.64

• In April 2002 APRIL reported that discussions with itscreditors on the restructuring of its US$ 1.2 billion debt werestill going on. Some lenders had not signed and were askingfor better terms.65

• In April 2002, UPM-Kymmene and APRIL agreed upona restructuring of UPM’s US$ 121 million loan to APRIL.The loan will now be repaid through regular instalments, firstof which was paid in April 2002. The final maturity of theloan was extended until December 31, 2006. Shares in PT Ri-au Andalan Pulp & Paper would continue as collateral for theloan.66

Fibre supply

From 1995, the start of pulp production, to 2000, RAPP'spulp production relied fully on the clearance of naturalforests for its fibre supply. It is estimated that by the end of2001 Riau Andalan Pulp & Paper had cleared 220,000hectares of rainforest. By the company’s own estimates, itwill be clearing an additional 147,000 hectares of rainforestuntil 2008, but this probably is strongly under-estimated.67

The Raja Garuda Mas Group holds a plantation concessionwith a gross area of 280,500 hectares in Riau, which will beused to supply Riau Andalan Pulp & Paper’s mill. Excludingareas reserved for infrastructure and natural forest, the netplantable area is 192,000 hectares. Furthermore, the companyhas access to a net plantable area of 138,000 hectares held byassociated and joint-venture companies and a net plantablearea of 20,000 hectares managed by nearby communities aspart of an out-grower scheme. The total planned plantationarea therefore is 350,000 hectares. The company claims thatin mid-2002 an area of 171,000 hectares had been planted onall these sites.68

Harvesting of the company’s plantations started in 2001and supplied 20% of fibre needs in that year. According to thecompany this percentage should increase to 100% in 2008.69

The company claims that an annual output of 2 milliontonnes of pulp would require 9 million tonnes of acacia. It ex-pects annual yields of 126-315 m3/hectare in a seven year ro-tation period. When the company succeeds in actually plant-ing 350,000 hectares (50,000 hectares per year), this wouldyield an annual production of somewhere between 6.3 and15.8 million tonnes of acacia. That is: between 70 and 175%of its total fibre need. So even the company’s own figures in-dicate that the plantation yield could be far (30%) below itsactual fibre needs.70

Independent analysts are less optimistic, arguing that RiauAndalan Pulp & Paper will probably need 10 million m3 ofacacia to produce 2 million tonnes of pulp annually. Accord-ing to studies by forestry analysts like Jaakko Poyry, an eightyear rotation period and an estimated yield of 150-190m3/hectare are more realistic parameters. Using these param-eters and assuming that the total area of 350,000 hectares isplanted, APRIL’s plantations would have a maximum annualyield of somewhere between 6.6 and 8.3 million m3. That is:between 66 and 83% of its total fibre need.71

It therefore seems probable that Riau Andalan Pulp & Pa-per will be needing additional supplies to complement its in-sufficient yields of plantation wood, even when its plantations

22 WWF Deutschland

are fully operational. And it must be emphasized that its plan-tations are far from fully operational yet. Independent ana-lysts doubt that the company will succeed in (re)planting50,000 hectares each year in the near future. In recent yearsplanting rates stayed far from this goal, which means that theactual yield of APRIL’s plantations will be considerably low-er than projected at least until 2007. It is expected that by2007 the plantations will supply no more than 32% of RiauAndalan Pulp & Paper’s fibre need.72

APRIL’s supply shortfall has to be met by other supplies,quite probably by logging natural forests elsewhere. APRILdoes not have many natural forest concessions outside of Tes-so Nilo, it appears obvious that APRIL focused on the TessoNilo forest as the largest remaining patch of unconverted low-land forest in Sumatra when the company designed the plansfor the pulp mill. The pulp mill is located at the Kampar river,a large navigable river that allows supplies and products to bebrought in and out by ship. The river and the mill border Tes-so Nilo, thus allowing for short trucking distances betweenthe logging sites and the mill. Logging companies apparentlyassociated with RGM began cutting the forest long before theAPRIL pulp mill was built and delivered the round logs toRGM-owned sawmills. As logging operations were comingto an end, APRIL apparently applied for changes of foreststatus from “limited production” to “production”. As they re-ceived some of the permits they had applied for, they imme-diately began clear-felling these forests, shipped the timber tothe RAPP pulp mill and began to grow acacia on the convert-ed land.

In 2000, RAPP began a new phase of trying to convert thecore of Tesso Nilo. Maps at the Riau Forest Service showRAPP conversion permit applications right inside the naturalforest, often on land for which the logging company HutaniSola Lestari held concession rights. In July 2001, RAPP be-gan clear-felling through the middle of the forest along themain logging road, converting natural forest to acacia planta-tions. Apparently anticipating, that this clearing activitywould create controversy, it was backed up by huge militaryand police support. Ironically, these operations began afterthe Ministry of Forestry's KSDA office had applied to set thisforest aside as a national park. Operations went on as WWFwas conducting biodiversity surveys in the same area to pro-vide baseline data for the proposed protected area. While thebiologists were sampling the plot, RAPP loggers were wait-ing with their chain saws running. Within hours, the plot be-came a truly “historical data set”, a case study on the historyof Indonesia's forests. The results of the biodiversity surveysshowed that these forests had one of the highest vascularplant diversities ever recorded in the world. RAPP would lat-er claim that they were only converting “degraded” forest.The company argued that it had permits for these operationsbut until today has refused to show them.

RAPP today claims that it planted acacia along the loggingcorridor to prevent encroachment of the surrounding naturalforest by villagers. However, RAPP had no official legal in-terest in that forest. And the company's maps seem to show a

different story. One kilometer wide strip acacia strips link ex-isting RAPP acacia plantations and divide the remaining Tes-so Nilo forest into three distinct sections, each bordering anexisting major RAPP acacia plantation (see figure 3). The re-maining forest appears to be readily parcelled to convert oneat a time in a next round of applications for change of statusdue to “degradation”.

Another point of frequent criticism concerns the way inwhich Riau Andalan Pulp & Paper treats the land rights of theindigenous communities in its concession area. A study bythe independent auditors Societé Générale de Surveillance(SGS), commissioned by APRIL in 1998, found that over40,000 hectares of APRIL’s concession area has been claimedby local communities. The area where the Riau Andalan Pulp& Paper factory has been built is land claimed by the indige-nous people of the Delik, Sering and Kerinci villages. As aresult of this dispute the legal representative of these villageswas imprisoned for three years. In another land dispute casewithin APRIL’s concession area, a member of the communityof Lubuk Jambi village is reported to have been stabbed todeath during a protest in 1998.73 Until today, RAPP is stillunable to plant acacia on some lands to which they hold con-cession rights because of territorial disputes.

NGO campaigns

Because of its unsustainable fibre supply, land right conflictswith local communities and disregard for the biodiversity andconservation values of the Tesso Nilo forest, APRIL has beenheavily criticised by Indonesian and international NGOs. In2001, local NGOs, WWF and Friends of the Earth askedAPRIL to stop the clearing of Tesso Nilo and other forestsaround its concession lands.74

The NGOs were not alone in calling on APRIL to conductbusiness in a more environmentally friendly way. UPM-Kymmene, one of APRIL’s investors and important pulp cus-tomers, had been negotiating with APRIL on a modificationof their existing loan repayment and pulp supply agreementfor UPM-Kymmene's paper plant in Changshu (China). InApril 2002, APRIL announced a number of environmentalimprovements that had been demanded by UPM-Kymmene,which had been lobbied by WWF-Finland and Friends of theEarth-Finland for many years regarding its Sumatran invest-ments.

• RAPP announced it would conduct a third party audit byan independent auditor, concerning allegations on receivingillegally harvested wood. The audit was completed late 2002and RAPP has promised to take corrective actions.

• RAPP also has certified six of its forest concession areasaccording to the ISO 14001 Environmental Management Sys-tem. The company announced it would continue the processto certify the rest of the concession areas and the mills.

• In March 2002, APRIL announced a temporary moratori-um on logging in the Tesso Nilo forest, while they are en-gaged in discussions with relevant stakeholders to find mutu-

23WWF Deutschland

ally acceptable solutions to preserve the biodiversity in thearea.75 From September 2002 on, APRIL also agreed not tosource from outside suppliers any wood originating from Tes-so Nilo.

• From September 2002 on, APRIL agreed to no longertransport trucks carrying timber without license on their com-pany ferry.

24 WWF Deutschland

Parent group: Sinar Mas

PT Indah Kiat Pulp & Paper Tbk. is 58% owned by the Sin-gaporean company Asia Pulp & Paper Company Ltd. (APP).APP is the holding company for the pulp and paper interestsof the Sinar Mas Group, one of Indonesia’s largest businessgroups. The group is mainly active in pulp & paper, palm oil,food, property development, hotels, telecommunications andfinance. It is founded by the Chinese immigrant Oei EkTjhong, who later changed its name into Eka Tjipta Widjaja.The Widjaja family is still controlling the Sinar Mas Group.76

The financial crisis of 1997/98 left the Sinar Mas Grouprelatively untouched. The group “now towers over all surviv-ing conglomerates in Indonesia”, concluded Asiamoney inJuly 1999. During the 1990s APP had built up an aggregatepulp production capacity of 2.3 million tonnes, located in In-donesia. Its paper and packaging production capacity in In-donesia, China and India totalled 5.7 million tonnes. In 1999,APP was the largest Asian paper producer outside Japan, andranked 10th among the world’s paper and packaging compa-nies.77

APP’s tremendous expansion was financed mainly by for-eign money. Weak due diligence procedures and unrealisticgrowth estimates had lured virtually all globally active finan-cial institutions to inflate APP with a massive US$ 13.4 bil-lion of debt, making it the largest corporate debtor in Asia.78

Key data

• Production capacities PT Indah Kiat Pulp & Paper Tbk. is one of the largest produc-ers of bleached hardwood kraft (BHK) pulp in Asia (exclud-ing Japan), operating four BHK pulp mills in Perawang (Ri-au) with a combined annual production capacity of approxi-mately 1,781,000 tonnes. The adjacent paper mill has a pro-duction capacity of 654,000 tonnes. In West-Java Indah Kiatowns a paper mill with an annual production capacity of90,000 tonnes and a packaging board mill with an annualproduction capacity of 980,000 tonnes. The West-Java millsare supplied with pulp from the Riau mill.79

• Consumer productsCoated and uncoated printing and writing papers, container-board and boxboard.80

• Brand NamesSinar Spectra, Signature Bond, Golden Plus and others.

• Financial figuresAnnual sales of Indah Kiat in 2001 amounted to US$ 1,100.2million, resulting in a net loss of US$ 182.4 million.81

Foreign financial involvement

Foreign financial institutions have financed to a large extentthe strong expansion of Indah Kiat and its parent companyAPP, by helping them to issue shares and bonds, by buyingtheir shares and bonds, by providing loans, and by extendingcredit guarantees. German financial institutions played a sig-nificant role in all these fields:82

• Buying shares of Indah KiatAPP owns ca. 58% of PT Indah Kiat Pulp & Paper shares.The rest are owned by institutional and private investors, in-side and outside Indonesia. Since APP’s debt crisis broke outtwo years ago, many of them have dumped their shares. Thefollowing German financial institutions bought Indah Kiatshares at the end of the 1990s, thus supplying the companywith part of the equity it needed for its vigorous expansion:• Commerz International Capital Management, a subsidiary

of Commerzbank• Montgomery Asset Management (United States), a sub-

sidiary of Commerzbank• Union Investment• Universal Investment• WestLB Asset Management, a subsidiary of Westdeutsche

Landesbank

• Issuing bonds for Indah KiatThe following German banks helped Indah Kiat to issuebonds on the international capital market in the 1990s:• Bank Austria (Austria), which now is a subsidiary of

HypoVereinsbank• Norddeutsche Landesbank

• Providing loans to Indah KiatThe following German banks participated in bank syndicatesproviding loans or export credits to Indah Kiat in the 1990s :• Bank Austria (Austria), which is now part of HypoVereins-

bank• Bankers Trust (United States), which is now part of

Deutsche Bank• Berliner Handels und Frankfurter Bank, which is now

part of ING Bank (The Netherlands)• Commerzbank• Deutsche Bank• Dresdner Bank• IKB Deutsche Industriebank• Landesbank Schleswig-Holstein• Norddeutsche Landesbank

• Providing export credit guaranteesThe German export credit agency Hermes Kreditversicherunghas issued various export credit guarantees in the 1990s forloans to finance German machinery supplies to Indah Kiat.

25WWF Deutschland

Company profile: Indah Kiat Pulp & Paper

• Buying shares of APPThe dominant shareholder of APP is the Widjaja family,which owns around 67% of the APP shares. The rest of itsshares is owned by institutional and private investors, insideand outside Indonesia. Many of them have dumped theirshares. The following German financial institutions boughtAPP shares at the end of the 1990s:• Deutsche Asset Management, which is part of Deutsche

Bank• Deutsche Postbank • DWS Investment, which is part of Deutsche Bank• Zürich Scudder Investments (United States), which is part

of Deutsche Bank

• Issuing bonds for APP and its subsidiariesThe following German banks helped APP and its subsidiaries(others than Indah Kiat) to issue bonds on the internationalcapital market in the 1990s:• Deutsche Morgan Grenfell (United Kingdom), which is part

of Deutsche Bank• Dresdner Bank

• Providing loans to APP and its subsidiariesThe following German banks participated in bank syndicatesproviding loans or export credits to APP and its subsidiaries(others than Indah Kiat) in the 1990s:• Baden-Württembergischen Bank, which is part of Landes-

bank Baden-Württemberg• Bankers Trust (United States), which is now part of

Deutsche Bank• Bayerische Landesbank• Bayerische Vereinsbank, which is now part of

HypoVereinsbank• Berliner Handels und Frankfurter Bank, which is now

part of ING Bank (The Netherlands)• Commerzbank• Deutsche Bank• Dresdner Kleinwort Benson (United Kingdom), which is

part of Dresdner Bank• HypoVereinsbank• IKB Deutsche Industriebank• Norddeutsche LandesbankThe German banks and financial institutions were asked tocomment on their involvement. Their responses are given inAnnex 2.

• Debt restructuring APPWhen global pulp prices collapsed and the growth of the Chi-nese paper market slowed down in 2000, APP defaulted on itsdebt repayments. In March 2001, APP appointed Crédit Su-isse First Boston (Switzerland) to co-ordinate the restructur-ing of its debt. A week later, APP announced that the compa-ny and all its subsidiaries would immediately halt payment ofinterest and principal on all debts.83

These events started complicated debt restructuring negoti-ations between APP and its creditors, which are still not fi-

nalised today, two years later. Some of the highlights in thisprocess include:

• Trading of APP-shares was suspended by the New YorkStock Exchange in April 2001, and APP was delisted in Sep-tember 2001.84

• In April 2001, the creditors of APP organised themselvesinto several committees, which would represent the differentcreditor groups in the debt restructuring discussions with thecompany. Separate committees were formed for the Chinesestate banks, the commercial banks, the export credit agencies,the bondholders and the trading company creditors. Together,these committees elected an umbrella steering committee.Among its thirty members are Deutsche Bank and Hy-poVereinsbank.85 Hermes Kreditversicherung plays a lead-ing role.

• In May 2001, the international accounting firm KPMGwas appointed as the financial advisor to the creditor commit-tees.86

• All APP assets in Indonesia, including Indah Kiat andArara Abadi, were put under control of the Indonesian BankRestructuring Agency (IBRA) in May 2001.87

• After much delay, APP at the end of January 2002 pre-sented preliminary debt restructuring proposals for its In-donesian subsidiaries to the umbrella steering committee.APP promised to repay its debt over a period of 13 years, ifall creditors would agree to a reduction of around 50% of thedebt owed by APP’s Indonesian subsidiaries. The proposalswere instantly rejected by most of the creditors.88

• In May 2002, the creditors’ umbrella steering committeeput forward its own proposals concerning the debt restructur-ing. This plan included measures such as the conversion ofdebt into equity and a proposal for the Widjaja family tomake some form of contribution to APP. The company ac-cepted some elements of the plan, but didn’t endorse it fully.The umbrella steering committee was very disappointed bythis response, according to a statement issued by ABN AM-RO Bank (The Netherlands) on behalf of the committee.89

• Angered by the slow progress in the debt restructuringprocess, two of APP’s main financial creditors in June 2002petitioned the Singapore High Court to appoint an independ-ent management. The two banks which went to court wereDeutsche Bank and BNP Paribas (France), which are owedUS$ 193 million and US$ 20 million respectively. They wereafraid the private creditors might lose out to Indonesia's gov-ernment during the debt restructuring process. The two bankslater won support of a number of other creditors.90

• In a clear response to the court case pursued by part ofthe creditors, the Indonesian Bank Restructuring Agency(IBRA) threatened to unilaterally recover its US$ 1 billiondebt from APP. Despite the debt-standstill, IBRA secured aUS$ 90 million debt repayment by APP in June 2002.91

• At the end of August 2002, the Singapore High Courtruled against the petition of Deutsche Bank and BNP Paribasto appoint independent judicial managers for APP. Problemswould increase by such a move, the court argued, as APP isincorporated in Singapore as a holding company and the judi-

26 WWF Deutschland

cial managers therefore would find it difficult to restructurethe group's units in Indonesia and China. But the court alsowarned that the outcome of a second petition may not be sofavourable for APP if debt restructuring efforts were stalledagain.

• The export credit agencies from Germany (HermesKreditversicherung), Japan, and the U.S. decided to team upwith IBRA in July 2002. They signed an agreement whichgave IBRA the task to reach a debt restructuring with APP bythe end of September 2002.93

• At the end of September 2002 APP finalised a frameworkoutlining the debt restructuring plan for the US$ 6.6 billion ofdebt owed by its Indonesian subsidiaries, including Indah Ki-at. The plan was accepted by IBRA, the export credit agen-cies of Germany (Hermes Kreditversicherung), Austria,Canada, Spain, Sweden, Italy, France, Denmark and Finland,and Nippon Export and Investment Insurance (Japan). Underthe agreement US$ 1.2 billion will be paid back in full withinterest over 10 years, US$ 3 billion will only receive interestfor 10 years after which a refinancing can be arranged andUS$ 2.4 billion will be rolled into a convertible bond.94

• Other APP creditors, especially its bondholders, criti-cised the debt restructuring plan as it did not provide enoughguarantees in the case APP would default again, and becausethe deal is signed before the debt restructurings of APP’s Chi-nese operations (US$ 2 billion) and of the holding companyitself (US$ 4.5 billion) have been finalized. Despite thesecriticisms, IBRA and 29 other creditors (representing 52 percent of the debts of APP’s Indonesian subsidiaries) signed adeal with APP in December 2002. Hermes Kreditver-sicherung and the other foreign ECAs did not sign, becausekey requests to be included in the restructuring plan were notyet addressed. The ECAs and the other creditors were givenuntil 31 March 2003 to join the deal, else it would be con-cluded without them.95

• Deutsche Bank and BNP Paribas (France) in January2003 appealed the August 2002 decision by Singapore's HighCourt rejecting their application to have the management ofAsia Pulp replaced. The first hearing is scheduled for mid-March 2003.96

• In February 2003 a group of 11 foreign export creditagencies – including the US Exim Bank and the European,Japanese and Canadian ECAs – proposed the establishmentof a holding company called APP Trading and an equity trustto hold the majority of APP's four Indonesian operating com-panies' shares until the full debt is repaid. The ECAs, whichare owed about US$ 960 million by APP, are only prepared tosign IBRA’s debt restructuring plan when these conditionsare met. APP and IBRA are opposing the proposal. The hopethat the debt restructuring of APP could be finished after twoyears of negotiations, is now quickly vanishing.97

Fibre supply

APP has fed its Indah Kiat pulp mills in Riau by clearing287,000 hectares of natural forests over the past 12 years.That is about one third of all forests logged by pulp and papercompanies in Indonesia.98

The main supplier of pulpwood to Indah Kiat is PT AraraAbadi, an independent company also belonging to the SinarMas Group. Arara Abadi holds concessions with a total area of300,000 hectares in Riau, part of which were part of the TessoNilo Forest only a few years ago. From 1997 to 2000, AraraAbadi supplied 72% of Indah Kiat’s total wood purchases,mainly by logging the natural forests in its concession areas.

The remaining 28% were sourced from various other sup-pliers. This wood came primarily from land cleared for agri-cultural purposes by villagers, resettlements, the state forestryenterprise Inhutani IV and large-scale palm oil, rubber andother agricultural plantations with conversion permits.99

Indah Kiat has been constantly back shifting predictions ofthe year by which it will source all of its fiber from pulpwood plantations. It now maintains that to be the case in2007. Only around 20% of Indah Kiat’s fiber needs weresourced from plantations in 1999. An independent study by aSingapore brokerage house indicated that Indah Kiat willsource no more than 50% of the company’s timber needsfrom plantations by 2005. But planting levels dropped sub-stantially in 1998 and 1999, so the plantation fiber percentagemay actually drop to around 30% in 2007, in spite of the100% target set by the company for 2007.100 In November2001, an independent, preliminary supply assessment com-missioned by APP concluded that much higher planting ratesthan presently realised were necessary to accomplish the tar-geted shift to plantation wood in 2007.101

Even when planting rates are increased Indah Kiat willfind it very difficult to source its total hardwood requirementsfrom the Arara Abadi plantation area, which has a netplantable area of 178,000 hectares. Additionally, the SinarMas Group has also taken steps to develop 25,000 hectares ofadditional areas through joint ventures with local coopera-tives. Total plantable area therefore is 203,000 hectares.102

An annual production of 1.8 million tonnes of pulp willneed 9.0 million m3 of plantation wood. Acacia yields in theArara Abadi plantation area are estimated to reach 175 to 200m3 per hectare and presumably a eight year rotation period isused. Using these parameters, one can estimate that the AraraAbadi plantation area (including joint venture areas) willhave a maximum annual yield of between 4.4 and 5.1 millionm3, which is between 48 and 56% of Indah Kiat’s annual fi-bre need.103

While Arara Abadi’s plantation yield is insufficient to sus-tain Indah Kiat’s annual fibre need, several sources estimatethat Arara Abadi’s legal supply of timber from natural forestsis also nearly exhausted. Indah Kiat will therefore have noother alternative than to purchase timber elsewhere, probablycontributing to further deforestation of tropical forests in In-donesia.104

27WWF Deutschland

The operations of Arara Abadi have raised other criticismalso over the past five years. In 1997, Arara Abadi was one ofthe 176 companies in Indonesia identified by the Forestry De-partment, whose concessions had been affected by fire. Be-cause they reportedly failed to submit proofs that they had notstarted fires in their concession area, their wood use licensewas temporarily suspended.105

Large parts of the forestry concessions held by Arara Aba-di traditionally belongs to the local Sakai people. There havebeen several reports on conflicts between Arara Abadi and theSakai over the destruction of forest gardens, sacred placesand burial places.

There have been several clashes between employees ofArara Abadi and villagers of the Betung village(Pangkalankuras subdistrict) trying to protect their land. InFebruary 2001 the villagers of Betung were attacked by 700employees of Arara Abadi. At least five villagers were injuredin the attack, two seriously.106

In January 2003, New York-based Human Rights WatchAsia released a report accusing Arara Abadi to be a “complic-it in human rights abuses,” including having knowledge of at-tacks against villagers by security forces and militant groupsin Sumatra over the past two years. The locals were protest-ing the logging by Arara Abadi of land which they believewas unlawfully taken from them under the government offormer President Suharto.107

NGO campaigns

An international coalition of NGOs including Walhi (Indone-sia), Friends of the Earth and WWF has been exposing APP’sIndonesian operations over the past few years. As a conse-quence of this NGO pressure, APP in June 2002 commis-sioned an extensive environmental and wood supply assess-ment by the independent consultants AMEC Forest IndustryConsulting and APSE. The assessment will include “a multi-stakeholder dialogue to develop real solutions to issues iden-tified in the assessment process” and should result in thecompletion of a 12-year Sustainable Wood Supply Plan forSinar Mas operations in Sumatra.108

APP promised the reports of this study would be available bythe end of 2002. Yet, by the time of writing, March 2003,much of the necessary fieldwork has not even begun. At thesame time, APP teams are clearing natural forest for newplantations every day.

28 WWF Deutschland

Paper links between Tesso Nilo andEurope

Between 1997 and 2001, the totalvalue of Indonesia’s paper and paperproduct exports world-wide increasedfrom US$ 938 million to US$ 2,034million, a 117% increase. The total ex-port volume for paper in 2001 was 3.2million tonnes.109

The Annex 1 lists the top five EUcountries as importers of Indonesianpulp and paper, for the period 1999 –2001. The second table in the Annexspecifies the type of product importedby Germany. EU figures show a re-markable increase in 2001 as comparedto the previous years. Also striking isItaly’s top position, especially in pulpimports (32% of EU imports).

Web sites of many European paperfactories have sections explaining howthey deal with environmental issues intheir production process. The compa-nies are apparently very keen on show-ing a green image. However the sitesvisited for this survey did not indicatewhere the raw material comes from orhow it is produced. Transparency ap-pears to be limited. A special case isUPM-Kymmene (see paragraph on Fin-land).

United KingdomInvestigations by Friends of the

Earth (FoE) have shown that in the UKfew paper products are sold that arebranded as APP products. Instead thefocus is on selling un-branded paper toUK agents and distributors, rather thanon selling under those companies' ownbrands. It appears that both the re-branded products and un-branded prod-ucts sourced from APP do not evenhave country of origin labels. Using in-direct marketing distribution ensuresthat the origin of the paper is “un-known”.110

An analysis of Indonesian pulp andpaper exports to the UK by weight andvalue shows that there has been a sig-nificant increase in recent years. Be-tween 1995 and 1999, pulp and paperimports into the UK rose from approxi-mately 10,000 tonnes to 117,000 tonnes(see Annex). In sourcing their raw ma-terial by clear cutting rainforest and

avoiding the costs of setting up sustain-able plantations, APP and APRIL areable to provide their paper at very lowcost and significantly undercut many oftheir competitors.

While it is extremely difficult toidentify all the paper products in theUK made from APP paper, in-depth re-search by FoE has identified the follow-ing companies as being involved in theimport of APP paper into the UK. FoEpoints out that the extent to which anyof them are aware of APP's social andenvironmental record is not clear.- Robert Horne - Spicers - Kingsfield Heath

It is estimated that given the size ofthese distributors and the buyers groupsthat they feed in to, over 50% of the sta-tionary wholesale supply business iscontaminated with Indonesian paperfrom Asia Pulp & Paper.111

GermanyAmong the importing EU countries

of Indonesian pulp, Germany ranks 5th,with 27,000 tons in 2001, and for paperit is not in the top five (see Annex 1).

Hamburg-based Papier Union GmbHis a subsidiary of Inapa Group, which isbased in Lisbonne, Portugal. PapierUnion sells 460,000 tonnes of paper an-nually, of which 110,000 tonnes con-sists of office papers (DIN A4). 15,000tonnes of these office papers are boughtin Indonesia, exclusively from APRIL.This concerns only the brand “PaperOne “, which, according to APRIL, ismade purely from acacia pulp.113

Karstadt, the EU's largest departmentstore chain used to carry APP paper un-til 2002, when they reacted to a pres-sure campaign by Hamburg-basedRobin Wood and decided to no longersource from the Indonesian paper mar-ket.114

FinlandFinland's UPM-Kymmene has close

ties with RAPP via APRIL. UPM-Kymmene is one of the leading papercompanies in the world, with produc-tion facilities in 17 countries and aturnover in 2001 of nearly 10 billioneuros.

UPM states that environmental pro-tection and management are an integralpart of its activities, and that it ‘ob-serves the principles of sustainable de-velopment’. An important objective inits choice of raw materials, sources ofenergy, production processes and inproduct development is to minimise theimpacts on nature and the environment.UPM is listed in the Dow Jones Sus-tainability Index (DJSI) that representsthe top 10% of the leading sustainabili-ty companies in the 33 countries cov-ered by the biggest 2500 companies inthe Dow Jones Global Index.114

In September 1997, UPM-Kymmeneand APRIL announced an alliance forthe production and marketing of finepaper products. The alliance was to es-tablish two new companies: (1) UPM-Kymmene Fine Paper, consisting ofUPM-Kymmene's paper mills, Kymi inFinland and Nordland Papier in Ger-many, and (2) APRIL Fine paper, con-sisting of paper mills in Riau andChangshu, China. The original plan wasnever accomplished as announced offi-cially in September 1999. After thisthere has been no cooperation betweenUPM-Kymmene and APRIL regardingmarketing or manufacturing. The com-panies have financial relations. In April2002, they signed an agreement to ex-tent until 2006 the USD 121 millionloan UPM-Kymmene had grantedAPRIL in 1999.115

RAPP shares will remain as collater-al for the loan. In connection with theloan extension, a series of environmen-tal improvements regarding RAPP'spulp supply have been agreed on; theyinclude a third party audit concerningillegal logging allegations and certify-ing concessions and mills according toISO 14001 standards. UPM-Kymmenealso expressed its support for the TessoNilo protected area projects.116

In August 2000,UPM-Kymmenebought APRIL's share of the Changshufine paper mill in China, making it thesole owner. Simultaneously, the compa-nies agreed that APRIL's Riau pulpmill, RAPP, would provide the Chang-shu mill with 200 000 tonnes of pulpannually for the next six and a halfyears. This makes UPM-Kymmene the

29WWF Deutschland

biggest single customer of RAPP.UPM-Kymmene is currently workingwith WWF to encourage their supplierRAPP to establish operational proce-dures that are based on sustainablewood supplies.

NetherlandsOn the web site of the Indonesian

National Agency for Export Develop-ment, four Dutch companies are listedas importers of Indonesian paper :- Kappa Graphic Board (Sappemeer)- Timboost BVBA (Netherlands

Antilles)- Transibex International bv (Nether-

lands Antilles)- Verhoeven bv (Arnhem)

Kappa Graphic produces 300,000tonnes of graphic board annually, from100% waste paper. It is unclear whythis company is listed on the NAFEDweb site as importer of Indonesian pa-per.118

4.2.2 Oil palm companies

Riau's rapid land use changes in recentyears are mainly due to the expansion ofoil palm plantations, either by convert-ing natural forest or change over fromsmallholder rubber holdings. Riau nowhas more land covered by oil palm thanany other province in Indonesia. Thisgrowth has frequently led to social un-rest, when after the fall of Suharto vil-lages tried to reclaim land appropriatedby large oil palm companies. In recentyears, some companies tried to obtainvillage land by intimidating the localpopulation or they have crossed the lim-its of their legal concessions ending uptrespassing onto village lands.119 Landdisputes have thus become common.

On the other hand, many villageshave become interested in convertingforest or rubber holdings into coopera-tive smallholder oil palm land. This isdriven by a multitude of factors. Vil-lages prefer regular income through oilpalm but usually do not have the moneyto pay for the development. They arelooking for investors and offer timberoften without harvesting license as in-

centive. There appear to be plenty of in-vestors looking for such opportunities.Some are interested in selling individ-ual oil palm plots once the plants areharvestable at ca. 3 years of age to yetother investors who then integrate theminto larger holdings. Others are only in-terested in the timber part of the dealand disappear before they have paid forthe development of the freshly clearedforest land with oil palm.

As shown on the map in figure 3, themain oil palm companies with conces-sions in the vicinity of the Tesso Niloforest are :- Mitra Unggul Pusaka, owned by

RGM group (Raja Garuda Mas)- Surya Bratasena, owners unknown- Musim Mas, owned by the Musim

Mas Group- Inti Indosawit Subur, owned by RGM

and Salim Group- Wana Jingga Timur, owned by the

Darmex / Surya Darmadi Group- Suntara Gajapati, owners unknown- Warnasari Nusantara, owned by

RGM group

Inti Indosawit is the main oil palmcompany active in the Tesso Nilo area,with a total of 130,000 ha as plantationsin 1998.121 No research reports areavailable on the financial links of othercompanies.

PT Wana Jingga Timur, an affiliatedfirm of PT DPN (Duta Palma Nusan-tara) is in conflict with a local commu-nity. People are claiming land from theplantation area and demand that thecompany give them ownership rights asa compensation.122

4.2.3 Timber companies

The third sector with concessionsdirectly in the Tesso Nilo forest is thetimber industry. This sector always ar-rives first and begins the long cycle ofland use change. The first round of log-ging began several decades ago whenvery high value tree species were selec-tively cut for export as round logs. Thesecond round was and still is the moresaturating cutting of species with lower

value, for furniture and plywood but al-so round log export.

Some 80% of the Tesso Nilo forestcomplex continues to be managed bythe logging companies Siak Raya Tim-ber, Hutani Sola Lestari, Nanjak Mak-mur and the state-owned company In-hutani IV. Some 20% of the area isnominated to be cleared for the devel-opment of pulp plantations, mostly bySiak Raya companies. Several logginglicenses were renewed at the end of

30 WWF Deutschland

COMPANY PROFILE

Inti Indosawit Subur120

OwnershipPT Inti Indosaw-it Subur is ownedjointly by two of Indonesia's largestcorporations : Raja Garuda Mas andthe Salim Group. Salim Group wasIndonesia's largest until the financialcrisis in 1997, which it managed tosurvive by considerable downgrad-ing. Their joint-venture operated108,000 hectares of oil palm planta-tions and 13 CPO-mills in Sumatra in1997. Inti Indosawit falls under PTAsian Agri Plantation, the plantationflagship of RGM, which describes it-self as the world's leading integratedpalm oil producer with 200,000 ha ofplantations in Sumatra and Kaliman-tan. In 2002, RGM sold large Indo-sawit holdings in Riau to a Malaysiangroup. RGM also owns RAPP, thepulp and plantation company dis-cussed in the previous section.

Foreign financial involvementAs far as foreign financiers are con-cerned, Inti Indosawit mainly has re-lations with Fortis bank from theNetherlands :

- a Fortis subsidiary (Mees PiersonTrust) manages two financing compa-nies in The Netherlands owned by In-ti Indosawit (Asian Agro Int'l and IntoIndosawit Int'l), in order to reduce taxpayments on international loans.

- In 1997, $ 300 million in bondswere issued to the Swiss bank UBS.Van Gelder (2001) considers UBS' in-fluence on the company as 'strong'.The bonds are due in 2003.

2000 just before new laws on timberconcessions were about to go in effectand just when permit issuing govern-ment officials were “rotating” out oftheir positions.

Figure 2 shows timber concessionsin and around the proposed Tesso Niloconservation area, with a considerableoverlap between timber (HPH) and es-pecially pulpwood (HTI) concessions.

Several other concessions directlyborder the proposed area. These areowned by Wira Karya Sakti, PeranapTimber, Dwi Marta (now Inhutani) andBrata Jaya Utama. Hutani Sola Lestariand Nanjak Makmur appear to haveconnections to the Raja Garuda Masgroup.

Siak RayaSiak Raya Timber plans to deforest

the northern part of Tesso Nilo. Thecompany is part of KEA Industries inSingapore and has concession rights toselectively log and clear-cut forests foracacia plantations. Together with In-hutani IV in the East, the forest area ofSiak Raya Timber represents some ofthe best elephant habitat in Tesso Nilo.The company manages a sawmill and aplywood mill in Riau where meranti,bitangor, kempas and balau areprocessed. Research by WWF Riau hasshown that Siak Raya Timber buys logsfrom logging gangs. Siak Raya's millalso supplies plywood to the EU mar-ket.123

Inhutani IVInhutani IV plays an important role

in Indonesian forestry since, beingstate-owned, it can assume managerialauthority over logged-over and aban-doned concessions, and undertake re-forestation. As a result of the nationalfinancial crisis in 1997-98, many timbercompanies have been forced into a part-nership with companies of the Inhutanigroup. In Riau, there have been com-plaints that Inhutani IV has done verylittle on reforestation and was simplyholding large areas of forest, generatingresentment among local communities.Many Inhutani concessions do not seemto be under any form of control, andhave been entered by illegal loggers or

leased to pulp companies for clearing,something which falls outside In-hutani's mandate.124 There have beennumerous cases of illegal log extractionby community groups on the Inhutaniconcession, especially going after high-value species such as balau, kempasand meranti to be sold to sawmills.125

The two largest clear-cuts inside the In-hutani IV concessions have been organ-ized by the Riau Landgrant College andthe Air Hitam community.

Inhutani IV admitted that they lackthe capacity to control the concessionadequately, and offered to hand over theformer Dwi Marta concession toWWF.126 In September 2002, the Min-istry of Forestry suggested that thisconcession could form the first stage ofa Tesso Nilo Protected Area.

4.2.4 Links between sectors and companies

Figure 8 shows companies active in dif-ferent sectors in the Tesso Nilo area,that belong to one of the most dominantconglomerates, Raja Garuda Mas. Notethat this is a simplified scheme, omit-ting several other RGM businesses andseveral intermediate levels; for instance,PT Asian Agri is the overall holdingcompany for the oil palm sector, whichincludes many other companies and in-termediates across Indonesia.

Regarding the other concession com-panies, no evidence was found of simi-lar cross-sectoral links within the sameconglomerate.

31WWF Deutschland

Figure 8. Companies active in different sectors in the Tesso Nilo area, belonging to Raja Garuda Mas.

32 WWF Deutschland

ing both industrial and community landuse practices in adjacent lands morecompatible with the conservation needsof the forests.

In 2000, WWF began promoting theTesso Nilo Conservation Landscape ina complex matrix of negotiations withcommunities; government at all levels;and several logging, pulp-and-paper,and oil palm companies, and their in-vestors and customers around theglobe. Everyone has a stake in thislandscape. The task is to arrive togetherat an economically, socially, and envi-ronmentally sustainable land use planthat will determine the future of thisarea and everyone living there.

A few highlights of these negotia-tions include the expressed willingness:

- of APRIL and APP to not convertany more Tesso Nilo forest, stop pur-chasing wood illegally cut in the forest,support the declaration of a Tesso NiloProtected Area, help secure the pro-posed protected area along a commonborder, and identify high conservationvalue forests in their concessions.APRIL has followed up with some veryconcrete steps on the ground. But muchmore needs to be done, especially byAPP:

- of the Government of Indonesia toconvert its logging concession InhutaniIV into the first part of the proposedTesso Nilo National Park, and process-ing of the necessary paper work.

- of the logging companies who holdconcessions for the remainder of theTesso Nilo Forest to negotiate whichparts of their concessions could imme-diately be transferred into the proposedpark and what would happen then to therest.

- of communities bordering the TessoNilo forest to negotiate ways that wouldmake them stop illegal logging in theforest in return for fair access to theprovince's economic market place andfor insurances that outsiders are pre-vented form illegal logging also.

In 2002, the Critical EcosystemsPartnership Fund (CEPF) selected theTesso Nilo Conservation Landscape asone of four Sumatran conservation

hotspots to focus on. CEPF began sup-porting NGOs in their work to protectthe landscape. WWF is now part of analliance of 24 local and national NGOsworking on the social, ecological, poli-cy, and economical issues that will de-termine the survival of the landscape'sremaining natural forests.

Since 1999, WWF Indonesia's workin Riau and on the national and globalissues connected to it has been support-ed by the Critical Ecosystems Partner-ship Fund, NancyAbraham, RumbaiEcology Club, Sall Family Foundation,US Fish and Wildlife Service, WWFGermany, WWF Japan, WWF Nether-lands, WWF Switzerland and WWFUS.

WWF calls on these main players towork together to save Tesso Nilo andother high conservation value forests:

• The Indonesian Governmentshould declare the whole Tesso Niloforest as a protected area and ensure thatit is effectively managed. The Govern-ment of Indonesia should help createwildlife corridors to link Tesso Nilo toother existing protected areas and en-sure their full protection. The Govern-ment of Indonesia should develop, com-municate, and enforce a clear policy thatprotects all high conservation valueforests. WWF is prepared to help devel-op that policy and provide tools for theidentification of high conservation valueforests.

• Riau's provincial and districtgovernments should review land-useplans to prevent further conversion ofhigh conservation value forests and en-sure that the province’s natural re-sources are developed sustainably.WWF is prepared to help develop newor re-design existing land use plans inpartnership with government authoritiesand other stakeholders.

• Riau's pulp and paper industryshould protect the High ConservationValue Forests within their concessionsand those of all their suppliers, operatewithin the limits of clearly defined legaland environmentally and socially sus-tainable wood supply plans, and ensuresound forest stewardship in plantationsfrom which they source fibre for paper.

WWF's Asian Rhino and Elephant Ac-tion Strategy (AREAS) grew out of therecognition that conservation successfor these endangered large mammalspecies will only be possible through alandscape-based approach that goes be-yond isolated protected areas and in-cludes the surrounding landscapes andrelated land-use practices. The AREASprogram brings together conservationbiology with trade monitoring, socioe-conomic analysis, land use planning,and policy advocacy. AREAS works innine priority landscapes across Southand Southeast Asia and Indochina. Tes-so Nilo in Riau, Sumatra, Indonesia isone of them.

WWF calls on the government of In-donesia to set aside Tesso Nilo as a pro-tected area. Tesso Nilo is one of thelargest remaining block of Sumatranlowland forest and has one of theworld's highest plant diversities. Previ-ous calls for its protection remainedunanswered and this forest block haslost over 300,000 ha (62%) since 1985.WWF, and a wide range of partners,will try to integrate Tesso Nilo into anetwork of existing protected areas soelephants and tigers can move long dis-tances and form large, viable popula-tions. The ca. 3 million ha Tesso NiloConservation Landscape would secureca. 600,000 ha of natural forests amonga kaleidoscope of plantations, agricul-ture, settlements and infrastructure.

All of Riau's protected areas and theforests that connect them remain vul-nerable to the pressures of developmentacross Riau province. Therefore WWFcalls on all companies who manageforests in Riau, their investors, creditorsand customers a) to support the creation of the Tesso

Nilo protected area, b) to protect all remaining High Con-

servation Value Forests in theprovince, and

c) to act immediately to restore the bal-ance between forest conservationand development across Riau.

The remaining High ConservationValue Forests will need to be secured,maintained and/or restored by stabilis-ing the conversion frontier, and by mak-

5. WWF's position and actions

WWF is prepared to work with the in-dustry to develop the relevant manage-ment practices.

• Financial Institutions and Bankswho invest in the pulp and paper in-dustry in this region should ensure thattheir investments are not being used tosupport the conversion of forests ofhigh conservation value or the violationof traditional land rights. WWF is pre-pared to assist financial institutions andbanks to develop their investment poli-cy and criteria for forest industries andto advise on future investments in thesector.

• Customers of products from thisregion should ask for environmentallysustainable manufacturing processes sotheir purchases do not lead to the de-struction of more natural forest and thedeaths of elephants and other wildlife.WWF is prepared to advise companiesin the development of sustainable pro-curement policies.

33WWF Deutschland

This study, which brought together andsynthesised the findings and insightsobtained in recent years by various ex-perts and organisations, confirms clear-ly that the next few years will be criticalin preventing complete deforestation ofthe Tesso Nilo Forest and other naturalforest blocks remaining in the Tesso Ni-lo Conservation Landscape. Land usedecisions in the province are influencedby a complex web of public and privateentities operating at local, provincial,national and international levels. It is upto conservation organizations to seek toinfluence decision making at any of theabove levels. No single organizationwill be strong enough to advocate theprotection and sustainable use of re-sources that are in such high demand bygovernment, industry and the generalpublic. At a time when natural forestresources have become so rare that thefew remaining blocks draw the interestof all the major players in this game,only a strong alliance of local, nationaland international conservation organi-zations is likely to stand a chance toinfluence the scene.

Particular attention is to be given toidentifying potential early adopters ofsustainability policies and practicesfrom the non-conservation sector thathave the clout and credibility to gener-ate a critical mass within their own eco-nomic and governmental sectors, at dif-ferent positions in the trade chains. Suc-cessful campaign work by WWF andFoE has generated initial momentumthat is to be expanded. They play a cru-cial role in the so-called mainstreamingprocess, which starts with the develop-ment and subsequent adoption of prac-tices that comply with ecological, so-cial, institutional and economic sustain-ability criteria. The early adopters with-in each sector are the ones that shouldconvince the mainstream to follow theirexample. This mainstreaming processcan be facilitated and accelerated by thedevelopment of incentives and the re-moval of disincentives, in which gov-ernments, international financial agen-cies, donors and NGOs are key players.

Local communities are a targetgroup in their own right, which requirea socially sensitive approach. They can

be both opponents and supporters ofconservation programs, depending onwhether their immediate and longer-term interests are at stake, whether theirland rights are recognised and secure orbeing threatened or denied, and on acombination of awareness raising, in-troduction to successes elsewhere andconcrete incentives.

The following recommendations byAIDEnvironment are complementary tothe numerous actions and initiativesthat WWF, other NGOs and parts of theprivate sector have taken already to saveTesso Nilo and other forests in Riau.These have been presented in otherchapters in this report. Some of the rec-ommendations below are currently be-ing discussed by the NGOs active inRiau; in that case, their mentioning hereis meant as encouragement.

Overall recommendation• In view of the urgency of the situa-

tion in Tesso Nilo, the private sector hasto contribute to reduce its pressure onthis area. Therefore, it is essential thatthe multi-stakeholder process involvingthe private sector, government andNGOs gains force and momentum. Itmight be necessary that the key marketactor representatives at one point in thenot too distant future come together tomake commitments – otherwise the“prisoner dilemma” will make it impos-sible for each actor to move forward.Vigorous campaigning by NGOs and byconsumers of products that may havebeen produced in the Tesso Nilo regionmust maintain the necessary pressure.

Recommendations to Governments• The Indonesian Government, from

national to local levels, can and shouldcreate an enabling environment by re-moving negative and applying positiveincentives towards sustainable land use.Examples are the elimination of incen-tives for further pulp & paper capacityexpansion in Indonesia (tax incentives,wood supply subsidies), adoption of de-velopment policies that are based onsustainable supply planning to preventover-capacity in the first place, and in-troduction of certificates of legal originplus a corresponding tracking system.

• Similarly, governments of con-sumer countries can and should createan enabling environment by removingnegative and applying positive incen-tives towards sustainable industry andtrade practices. Examples arefavourable import tariffs for importedcertified products, transparency legisla-tion (see below) and a ban on importsof illegally sourced timber.

• Indonesia and consumer countriesshould enact legislation on transparencyrequirements for business corporations:investments, trade in forest products(e.g. timber, pulp, paper, palmoil),chain-of-custody tracking and practicesby (Western) companies in Indonesia.

• The Government of Riau should ef-fectively implement and monitor a newprovincial land use plan that meets sus-tainability criteria (it is not sufficientthat WWF is invited to help prepareone).

• A trust fund and/or a public-privatefoundation should be established to en-sure the necessary long-term financialsustainability needed to cover the costsof managing and protecting the TessoNilo protected area and the surroundinglandscape. The fund could be capi-talised with contributions from donorsthat are directly, indirectly or not linkedto Riau province, and could possibly in-clude contributions from debt-for-na-ture swaps.

• Indonesian government agencies atall levels are likely to remain weak forsome time to come. Therefore, ‘goodgovernance’ donor programs can helpstrengthen provincial and local govern-ment institutions, including support to acredible anti-corruption offensive.Curbing illegal logging should be a pri-ority goal in such programs.

• Any development strategy or finan-cial support from governments of con-sumer countries should be integratedwith such good governance programs.

• Any development strategy involv-ing local industries and their respectiveglobal business partners would need tobe integrated with local governmentand community concerns. Educationprograms, conservation-compatible de-velopment projects and special incen-tives (e.g. compensations based on op-

34 WWF Deutschland

6. Recommendations by this study

portunity costs, support in securing jus-tified land claims) would need to beconsidered.

• An independent monitoring /watchdog structure should be estab-lished, similar to the role the NGO“Global Witness” plays in Cameroonand Cambodia after agreements be-tween the respective governments andthe World Bank were reached.

Recommendations to the Private Sector

Corporations which lobby Indone-sian authorities to obtain permits toconvert large stretches of natural forestto plantation crops pose the highestthreat to the Tesso Nilo landscape. Thelarger these companies are the morelikely it is that they are linked to theweb of the global economy. They needto make money, either from investors orfrom customers. Both are likely to in-clude international partners. Some ofthese potential or existing internationalbusiness partners may view it un-favourably to be associated with a sup-plier who converts some of the last re-maining tropical forests in Sumatra.These partners may be able to influencethe company operating in Riau.

International campaign work may beable to attract companies that are will-ing to engage in strategic conservationpartnerships designed to bring aboutsustainable operations of the Indonesiansuppliers. Should these partnershipsshow positive results in their operationsother companies might be convinced tofollow the example thus creating a criti-cal mass that might drive conservationthinking in the whole province.

• Logging concessionaires shouldadopt sustainable forest managementand certain conservation principles, e.g.to refrain from logging high conserva-tion value forest areas by setting themaside as conservation zones within theirconcessions.

• Corporations should be willing toagree on fair take-overs of concessionswith high biodiversity values by a con-servation organisation that transfers thearea to a local management structure.

• Corporations should be willing todevelop and apply best practices for

their sector, and apply transparencyrules in their entire production or in-vestment chain (origin of their raw ma-terials or imported goods, chain-of-cus-tody tracking, independently verifiableimpact assessment reports etc.).

• All corporations in the supply chainfor timber, pulp & paper and palm oilshould join WWF's efforts to evaluatethe conservation value of the forestswhich would be converted, and asktheir suppliers to respect the evaluationand to not convert high conservationvalue forests. A temporary moratoriumon forest conversion should be put intoplace until all forests have been evaluat-ed.

Recommendations to Investors andFinancial Institutions

As this and other reports have madeclear, the expansion of Indonesia’splantation industry requires largeamounts of capital. The role and re-sponsibility of financial institutions istherefore of particular importance, asthey provide the credits, equity andother financial services that plantationcompanies require to open and expandtheir estates. Financial institutions thatare substantially involved in providingthis capital must assume their responsi-bility and, therefore, be prepared to in-fluence the environmental policies oftheir clients.

• Loans granted by investors, finan-cial institutions and export credit agen-cies should be based on clear environ-

mental and social criteria and on relatedmonitoring mechanisms to be compliedby the timber, plantation and pulp andpaper companies that are active outsidein the broader Tesso Nilo landscape(WWF is in dialogue with HERMES,USExIm, Swedish ECAs).

• Investments and contributionsshould be made to a sustainable devel-opment trust fund that supports alterna-tive livelihood options for local com-munities.

• Improved due diligence practicesshould be applied by financial institu-tions funding projects in the agro- orforestry sector (assessment of environ-mental risk, codes ensuring that fundsare not used for illegal activities, inde-pendent audits).

35WWF Deutschland

Early international adopters insustainable palm oil

• The Migros supermarket chain inSwitzerland has committed itself in2002 to buy only palm oil from eco-logically sound and socially accept-able sources (that e.g. exclude plan-tations on converted forest land). Mi-gros has begun working with certifiedsources in Ghana.

• In 2002, four Dutch banks havecommitted to stop or substantially re-strict financing oil palm developmentin Indonesia if this has been preced-ed by the conversion of natural forest.

Barr, C. 2000. Profits on Paper: The Political-economy ofFiber, Finance, and Debt in Indonesia’s Pulp & paper In-dustries. CIFOR / WWF International MacroeconomicsProgram Office, Jakarta.

Barr, C. 2001. Banking on Sustainability: Structural Adjust-ment and Forestry Reform in Post-Suharto Indonesia.CIFOR / WWF International Macroeconomics ProgramOffice, Jakarta.

Barr, C. 2002. Fiber Resources, Finances and Strategies ofIndonesian Pulp and Paper Companies: Critical Chal-lenges Facing APP and APRIL. Paper presented at the Se-nior Management Symposium, Asian Paper 2002, Singa-pore, April 25-26.

Casson, A. 2000. The Hesitant Boom: Indonesia’s oil palmsub-sector in an era of economic crisis and politicalchange, CIFOR Occasional Paper No. 29, Centre for In-ternational Forestry Research, Jakarta.

Down to Earth 2002. Forests, People and Rights, Down toEarth Special Report.

FAO. 1999. Road infrastructures in tropical forests. Road todevelopment or road to destruction? Rome: FAO.

FWI / GFW 2002. The State of the Forest: Indonesia. Bogor,Indonesia: Forest Watch Indonesia, and Washington DC:Global Forest Watch.

Gillison, A.N. 2001. Vegetation survey and habitat assess-ment of the Tesso Nilo Forest Complex. WWF US.

Kartodihardjo, H. & Supriono, A. 1999. The impact of sec-toral development on natural forest: the case of timber andtree crop plantations in Indonesia. CIFOR, Bogor, Indone-sia.

Kessler, J.J. & Wakker, E. 2000. Forest Conversion and theEdible Oils Sector. An AIDEnvironment research paperprepared for WWF Switzerland.

Matthew, E. & Van Gelder, J.W. 2001. Paper Tiger, HiddenDragons. The responsibility of international financial in-stitutions for Indonesian forest destruction, social conflictand the financial crisis of Asian Pulp & Paper. Friends ofthe Earth EWNI, London.

Matthew, E. & Van Gelder, J.W. 2002. Paper Tiger, HiddenDragons 2: APRIL Fools – The forest destruction, socialconflict & financial crisis of Asia Pacific Resources Inter-national Holdings Ltd. (APRIL) & the role of financial in-stitutions & paper merchants. Friends of the Earth EWNI,London.

Persoon, G. & Wakker, E. 2002. The forests of Sumatra:use, conversion, and conservation. Paper prepared for theEDEN II Workshop, Leiden, June 2002.

Potter, L. & Badcock, S. 2001. The effects of Indonesia's de-centralisation on foretss and estate crops in Riau Province:case studies of the original districts of Kampar and Indra-giri Hulu. CIFOR case studies 6 & 7.

Sargeant, H.J. 2001. Vegetation fires in Sumatra, Indonesia.Oil Palm agriculture in the wetlands of Sumatra: Destruc-tion or development? From : Summary of Report 1998 –2001. Forest Fire Prevention and Control Project (FP-PCP). EU / Government of Indonesia.

Scotland, N., Fraser, A. & Jewell, N. 1999. Roundwoodsupply and demand in the Forest Sector in Indonesia. In-donesia-UK Tropical Forestry Programme ReportPFM/EC/99/08, Jakarta: DFID.

Van Gelder, J.W. 2001. European banks and palm oil & pulp& paper in Indonesia. A research paper for WWF Interna-tional.

Wakker, E. 2000. Funding Forest Destruction. The In-volvement of Dutch Banks in the Financing of Oil PalmPlantations in Indonesia. AIDEnvironment report forGreenpeace Netherlands.

Wakker, E. 2002. Meranti in the Market. Preliminary re-view of key actors involved in the production of and tradein Meranti (Shorea spp.) from Malaysia and Indonesia.Draft report for Greenpeace Netherlands.

WWF Indonesia. 2001. Loss analysis and the perception onhuman-elephant conflict in companies and community ofTesso Nilo area. Riau Elephant Conservation Program,WWF Indonesia.

36 WWF Deutschland

7. References

1 See <www.worldwildlife.org/areas>2 Gillison, 20013 WWF Indonesia, 20014 Santiapillai and Widodo, 19875 Michael Stuewe, pers. comm6 Persoon and Wakker, 20027 FWI/GFW, 20028 FWI/GFW, 2002 (calculated from table 2.6)9 Gillison, 200110 briefing by Michael Stuewe, WWF-AREAS (Jan.2001)11 Barr, 200012 see www.paperloop.com13 Barr, 200114 Barr, 2001; FWI/GFW, 2002.15 Matthew and Van Gelder, 200216 Barr, 200017 Barr, 200118 Potter & Badcock, 200119 Forest subsidies and perverse incentives: Government

policies encourage improper logging through windfallprofits, inadequate monitoring and policing, inefficientprocessing, conflicts with agricultural and other nationaldevelopment policies, and pressure for graft and corrup-tion. Government incentives, subsidies, and tax creditslower production costs, and make alternative land usesmore profitable, sometimes with absurd results. Anotherfrequently cited cause of deforestation is short-term forestconcessions. Concessions, often as short as five to twentyyears, induce timber operations to harvest larger quantitiesover a short time period than can be sustained over thetypical forest growing cycle.

20 Oil World 2020, 1999. ISTA Mielke GmbH.21 Sargeant (FFPCP), 200122 Oil World 2020, 1999. ISTA Mielke GmbH.23 According to Casson (2000), 8 conglomerates hold over

100,000 ha of oil palm concession areas; in asecnding or-der x 1,000 ha : Surya Dumai (178), Texmaco (203), Astra(318), Napan (324), Hashim (349), Raja Garuda Mas(355), Sinar Mas (434) and Salim (1,251).

24 FWI/GFW, 2002 (table 3.9).25 Kartodihardjo and Supriono, 2000 26 Potter & Badcock, 2001 (page 11); they quote conflicting

official figures for 2000, probably due to different defini-tions, ranging between 658,000 and 1 million ha.

27 Potter & Badcock, 200128 FWI/GFW, 200229 see www.transparency.org30 “Investigation of Illegal Logging Around the Tesso Nilo

Forest Complex in January 2001” and “Logging Activitiesand Forest Conversion in the TNFC, Riau, Sumatra, In-donesia” (Dec.2001), by the WWF-AREAS Riau project.<www.worldwildlife.org/areas>.See also Potter & Badcock, 2001, p.36-37.

31 The Guardian,#26 June 200132 draft strategic analysis on Tesso Nilo by WWF-AREAS

Riau (Michael Stuewe), Jan.2001

33 draft strategic analysis on Tesso Nilo by WWF-AREASRiau (Michael Stuewe), Jan.2001

34 Pers.comm. Vedder and Radday (WWF Germany),Sep.2002

35 the main source for the following sections was FWI/GFW,2002.

36 Potter & Badcock, 200137 Potter & Badcock, 200138 KSDA = Konservasi Sumber Daya Alam (Natural Re-

sources Conservation Agency)39 Central Board of Statistics, National Agency for Export

Development (www.nafed.go.id)40 briefing by Michael Stuewe, WWF-AREAS (Jan.2001)41 NAFED statistics do not specify what the volume refers

to, but nevertheless give an indication of Riau’s relativeimportance.

42 Central Board of Statistics, National Agency for ExportDevelopment (www.nafed.go.id)

43 Barr, 200144 Potter & Badcock, 200145 Potter & Badcock, 200146 Potter & Badcock, 200147 Barr, 2000.48 Pers. comm. Barr, 200249 Matthew & Van Gelder, 200250 The Raja Garuda Mas Group: Hampered By the P.T. Inti

Indorayon Case, Indonesian Commercial Newsletter,Jakarta, 16 February 1999.

51 APRIL starts up 700,000 tonne/yr bleached hardwoodpulp line, Paperloop.com, Singapore, 1 June 2001; APRILEnvironmental and Social Review 2000 - 2001, Asia Pa-cific Resources International Holding Ltd., Singapore,April 2002.

52 APRIL’s Corporate Social Responsibility, Asia Pacific Re-sources International Holding Ltd., Singapore, 23 October2002

53 Annual Report 2000, Asia Pacific Resources InternationalHolding Ltd., Singapore, April 2001.

54 Paper tiger, hidden dragons 2: APRIL Fools - The forestdestruction, social conflict & financial crisis of Asia Pacif-ic Resources International Holdings Ltd. (APRIL) & therole of financial institutions & paper merchants, EdMatthew & Jan Willem van Gelder, Friends of the EarthEngland, Wales & Northern Ireland, London, February2002.

55 April Announces Full Year 1997 Results, Press ReleaseAsia Pacific Resources International Holding Ltd., Singa-pore, 6 April 1998; Projectware, Capital Data Ltd., Lon-don, June 2001.

56 UPM-Kymmene and APRIL to Form a Major Alliance inEuropean and Asian Fine Paper, Press Release UPM-Kymmene Corporation and APRIL (Asia Pacific Re-sources International Holdings Ltd.), Helsinki, 12 Sep-tember 1997; UPM-Kymmene And APRIL To ContinueNegotiations, Press Release UPM-Kymmene Corporation,Helsinki, 19 April 1999; APRIL Updates UPM-Kymmene

37WWF Deutschland

Notes

Alliance And Riaupulp Expansion Announces Signing OfDebt Restructuring M.O.U., Press Release Asia PacificResources International Holdings Ltd., Singapore, 16 Sep-tember 1999; APRIL Achieves Record Production AndSales Figures For Third Quarter 1999 And Notes Contin-ued Strength In Pulp And Paper Markets, Press ReleaseAsia Pacific Resources International Holdings Ltd., Singa-pore, 14 October 1999.

57 UPM-Kymmene To Acquire Interest In April’s China-Based Operations With USD 235 Million Investment,Press Release UPM-Kymmene Corporation and APRIL(Asia Pacific Resources International Holdings Ltd.),Helsinki, 6 March 1998; UPM-Kymmene And APRIL An-nounce Signing Of A USD 250 Million Term Loan Facili-ty For China Joint Venture, Press Release UPM-KymmeneCorporation and APRIL (Asia Pacific Resources Interna-tional Holdings Ltd.), Helsinki, 1 December 1998; APRILReports Fourth Quarter And Full Year 1998 Results PressRelease Asia Pacific Resources International HoldingsLtd., Singapore, 16 April 1999.

58 APRIL Reports 119% Increase In 4Q 1999 EBITDA,Press Release Asia Pacific Resources International Hold-ing Ltd., Singapore, 4 April 2000; Foreign Banks Ques-tion Ruling Of Indonesia's IBRA, Asia Pulse, Jakarta, 12April 2000; APRIL debts questioned, Kompas, Jakarta, 12April 2000; Singapore's April Units Sign Indonesia DebtRestructuring, Christopher Wellisz, Dow JonesNewswires, Singapore, 30 June 2000; APRIL CompaniesSign US$ 1.2 Billion Debt Restructuring Agreements withIndonesian Lenders, Press Release Asia Pacific ResourcesInternational Holding Ltd., Singapore, 30 June 2000; In-donesia APRIL/Creditor -2: Chinese Plant Sale, SimonMontlake, Dow Jones Newswires, Jakarta, 9 November2000; April Creditors Balk at Debt Deal, Reuters, Jakarta,13 November 2000; Annual Report 2000, Asia Pacific Re-sources International Holding Ltd., Singapore, April 2001;Annual Report 2000, Indonesian Bank RestructuringAgency (IBRA), Jakarta, April 2001; Unibank closuredraws back Sukanto Tanoto despite exit, Berni K.Moestafa and Moch. N. Kurniawan, The Jakarta Post,Jakarta, 1 November 2001.

59 APRIL Reports Second Quarter 1999 Production AndSales Data, Updates Operations And Notes ContinuedStrength In Market Conditions, Press Release Asia PacificResources International Holdings Ltd., Singapore, 19 July1999; UPM-Kymmene will become a sole owner ofChangshu fine paper mill in China, Press Release UPM-Kymmene Corporation, Helsinki, 23 August 2000.

60 Unibank closure draws back Sukanto Tanoto despite exit,Berni K. Moestafa and Moch. N. Kurniawan, The JakartaPost, Jakarta, 1 November 2001; Former Unibank workersdemand severance and service payments, Apriadi Gu-nawan, The Jakarta Post, Jakarta, 2 November 2001; Riseand Fall of United City Bank, Budi Putranto, IndonesianBusiness, Jakarta, December 2001.

61 Indonesia's APRIL Seeks To Ease Debt Terms, Simon

Montlake, Dow Jones Newswires, Jakarta, 14 February2001.

62 APRIL Reports FY2000 Net Profit Of US$50 Million(US$ 0.16 Per Share) and Updates Operations, ProjectStatus and Market Outlook, Press Release Asia Pacific Re-sources International Holding Ltd., Singapore, 9 April2001.

63 Annual Report 2000, Asia Pacific Resources InternationalHolding Ltd., Singapore, April 2001; Indonesia's AprilSays It Can't Meet Interest Payments, Sara Webb, AsianWall Street Journal, Singapore, 7 June 2001.

64 Asia Pacific Res Gets Delisted For Low Bid Price, Con-sella A. Lee, Dow Jones Newswires, New York, 31 August2001; NYSE Will Suspend, Delist Asia Pacific Resources,Richard Borsuk, Asian Wall Street Journal, Singapore, 2September 2001; NYSE To Trade Asia Pacific ResourcesUntil Thurs., Dow Jones Newswires, New York, 24 Sep-tember 2001; APRIL To Trade On the U.S. Over theCounter Bulletin Board Starting Thursday 27 September,Press Release APRIL Ltd., Singapore, 26 September2001.

65 Pulp Industry Needs To Be More Disciplined, Lee Chuen,Dow Jones, Singapore, 30 April 2002.

66 UPM-Kymmene and APRIL to agree on loan repaymentterms and higher environmental standards, Press ReleaseUPM-Kymmene, Helsinki, 10 April 2002.

67 Profits on Paper: The Political-economy of Fibre, Finance,and Debt in Indonesia’s Pulp & paper Industries, Christo-pher Barr, CIFOR / WWF International MacroeconomicsProgram Office, Jakarta, 30 November 2000; Paper tiger,hidden dragons 2: APRIL Fools - The forest destruction,social conflict & financial crisis of Asia Pacific ResourcesInternational Holdings Ltd. (APRIL) & the role of finan-cial institutions & paper merchants, Ed Matthew & JanWillem van Gelder, Friends of the Earth England, Wales& Northern Ireland, London, February 2002.

68 APRIL’s Corporate Social Responsibility, Asia Pacific Re-sources International Holding Ltd., Singapore, 23 October2002

69 Annual Report 2000, Asia Pacific Resources InternationalHolding Inc., Singapore, April 2001.

70 APRIL’s Corporate Social Responsibility, Asia Pacific Re-sources International Holding Ltd., Singapore, 23 October2002.

71 Indonesia Forestry Sector - Out to test the limits ofgrowth, Masya Spek, GK Goh, Singapore, 29 November2000; Banking on Sustainability: Structural Adjustmentand Forestry Reform in Post-Suharto Indonesia, Christo-pher Barr, Centre for International Forestry Research(CIFOR) & WWF Macroeconomics Program Office,Jakarta/Washington, October 2001.

72 Banking on Sustainability: Structural Adjustment andForestry Reform in Post-Suharto Indonesia, ChristopherBarr, Centre for International Forestry Research (CIFOR)& WWF Macroeconomics Program Office, Jakarta/Wash-ington, October 2001.

38 WWF Deutschland

73 Paper tiger, hidden dragons 2: APRIL Fools - The forestdestruction, social conflict & financial crisis of Asia Pacif-ic Resources International Holdings Ltd. (APRIL) & therole of financial institutions & paper merchants, EdMatthew & Jan Willem van Gelder, Friends of the EarthEngland, Wales & Northern Ireland, London, February2002.

74 Action Alert on Indonesian forests, UPM-Kymmene andAPRIL, Friends of the Earth Finland, Helsinki, November2002.

75 UPM-Kymmene and APRIL to agree on loan repaymentterms and higher environmental standards, Press ReleaseUPM-Kymmene, Helsinki, 10 April 2002.

76 The Sinar Mas Group, J. Tanja, Paribas Asia Equity, Sin-gapore, 27 April 1998; Form 20-F: Annual report pursuantto section 13 or 15(d) of the securities exchange act of1934 for the fiscal year ended December 31, 1999; AsiaPulp and Paper Company Ltd., Singapore, 26 June 2000.

77 Family fortunes - the winners and losers, Asiamoney,Hong Kong, July/August 1999; Form 20-F: Annual reportpursuant to section 13 or 15(d) of the securities exchangeact of 1934 for the fiscal year ended December 31, 1999;Asia Pulp and Paper Company Ltd., Singapore, 26 June2000; World and European Top 10 forest industry groups,Reuters, Helsinki, 30 August 2000.

78 Paper Tiger, Hidden Dragons - The role of internationalfinanciers in the financial crisis of Asia Pulp & Paper andtheir responsibility for fuelling forest destruction and so-cial conflict in Indonesia, Ed Matthews & Jan Willem vanGelder, Friends of the Earth England, Northern Irelandand Wales, London, June 2001.

79 Form 20-F: Annual report pursuant to section 13 or 15(d)of the securities exchange act of 1934 for the fiscal yearended December 31, 1999, PT Indah Kiat Pulp & PaperTbk., Jakarta, 12 June 2000.

80 Form 20-F: Annual report pursuant to section 13 or 15(d)of the securities exchange act of 1934 for the fiscal yearended December 31, 1999, PT Indah Kiat Pulp & PaperTbk., Jakarta, 12 June 2000.

81 APP issues Indonesian subsidiaries' audited results for2001, warns debt workout will take time, Paperloop.com,14 November 2002.

82 Original sources to be found in: Paper Tiger, HiddenDragons, Ed Matthew and Jan Willem van Gelder, Friendsof the Earth England, Wales & -Northern Ireland, London,June 2001; European banks and palm oil and pulp & paperin Indonesia - A research paper prepared for WWF Inter-national, Jan Willem van Gelder, Profundo, December2001.

83 APP appoints CSFB to assist debt deal, Soraya Per-matasar-i, Reuters, Jakarta, 2 March 2001; APP NamesCrédit Suisse to Spearhead Restructuring of $12 Billion ofDebt, Sara Webb, Wall Street Journal, New York, 5 March2001; Asia Pulp & paper announces debt standstill, PressRelease APP, Singapore, 12 March 2001; APP Is StoppingIts Debt Payments Amid a Rash of Creditor Lawsuits,

Richard Borsuk and Sara Webb, Wall Street Journal, NewYork, 13 March 2001.

84 NYSE says to continue trading halt of Asia Pulp, Reuters,New York, 5 April 2001; NYSE: Asia Pulp & Paper Does-n't Meet Listing Criteria, Dorothea Degen, Dow JonesNewswires, 3 July 2001; Indonesia's IBRA says may sellAPP assets, Reuters, Jakarta, 6 September 2001.

85 Asia Pulp & Paper holds creditors meeting, Press ReleaseAPP, Singapore, 9 April 2001; Asia Pulp seeks $200 mlnto stablize ops, Reuters, New York, 9 April 2001; APPunits meet creditors on Wednesday, Lily Kurniawati,Reuters, Jakarta, 10 April 2001; APP Says Debts Now To-tal $13.4 Billion; Creditors May Not Get Plan UntilMarch, Sara Webb, The Wall Street Journal, New York, 10April 2001; Asia Pulp & Paper Obtains Stay Of Winding-Up Petition Proceedings, Press Release APP, Singapore, 9May 2001; Asia Pulp, creditors agree on terms for talks,Bloomberg, Singapore, 14 May 2002.

86 Asia Pulp & Paper Obtains Stay Of Winding-Up PetitionProceedings, Press Release APP, Singapore, 9 May 2001.

87 Asia Pulp & Paper clarifies collateral provided to IBRA,Press Release APP Co., Ltd., Singapore, 2 May 2001; AsiaPulp & Paper Says Some of Its Assets Are IBRA's, andOff-Limits to Creditors, Sara Webb, Wall Street Journal,New York, 4 May 2001.

88 Asia Pulp & Paper Company Ltd Announces Details OfIts February 1st Meeting With Its Combined Creditors’Steering Committee At Which Preliminary RestructuringProposals Were Presented, Press Release APP, Jakarta, 1February 2002; APP Creditors Slam Debt-RestructuringProposal, Sara Webb, Asian Wall Street Journal, Singa-pore, 4 February 2002.

89 Creditors Express Disappointment With APP's Responseto Debt Plan, Izham Ahmad, Dow Jones, Singapore, 16May 2002.

90 Foreign Creditors Call For Independent APP Mgmt, DowJones, Jakarta, 24 June 2002; Creditors Urge SingaporeCourt To Replace APP's Mgmt, Dow Jones, Singapore, 11July 2002; : APP Defends Its Mgmt, Reforms In Singa-pore Court, Dow Jones, Singapore, 14 August 2002.

91 IBRA Head Unwilling To Wait For APP Creditors, DowJones, Jakarta, 25 June 2002; APP Group meets June pay-ment obligation to IBRA - IBRA agrees to play lead rolein consensual restructuring, Press Release APP, Singapore,29 June 2002.

92 Singapore Court Rules Against APP Creditors Petition,Dow Jones, Singapore, 22 August 2002; Judge dismissesjudicial management petition but warns APP to pushahead with debt restructuring, Paperloop.com, 22 August2002.

93 APP Creditors To Work With Indonesia On Debt Settle-ment, Dow Jones, Jakarta, 10 July 2002; APP Will MakePartial Payment To Creditors by End of October, TomWright, Dow Jones, Jakarta, 3 September 2002; APPAgrees To Pay $40M In Sept To Help Reach Debt Pact,Dow Jones, Jakarta, 11 September 2002.

39WWF Deutschland

94 Paper giant seals debt deal, BBC, London, 30 September2002; APP reaches preliminary agreement on debt, com-pany restructuring, Press Release Asia Pulp & Paper Com-pany Ltd., Singapore, 1 October 2002.

95 APP/Foreign Creditors: Rejects Alternative Plan, DowJones, Singapore, 11 December 2002; APP agrees $6.6bndebt restructure with creditors, Shawn Donnan and TaufanHidayat, Financial Times, London, 19 December 2002;APP signs draft debt restructuring agreement,Paperloop.com, 14 January 2003.

96 Asia Pulp creditors reject payment plan, Jag Dhaliwall(Bloomberg News), International Herald Tribune,#Paris,18 December 2002; Deutsche Bank makes fresh bid tooust APP management, Jake Lloyd-Smith, South ChinaMorning Post, 7 January 2003.

97 Export credit agencies call for changes to APP debt deal,Shawn Donnan, Financial Times, London, 7 February2003; APP lenders seek changes to debt deal, Reuters,Jakarta, 7 February 2003; 11 APP debtors propose anti-de-fault measures, Dow Jones, Jakarta, 10 February 2003; Op-timism over APP deal is quickly vanishing, Shawn Don-nan, Financial Times, 18 February 2003; The CreditorsHave a Plan, Michael Vatikiotis and Sara Webb, Far East-ern Economic Review, Hong Kong, 20 February 2003.

98 Profits on Paper - The Political Economy of Fiber, Fi-nance and Debt in Indonesia’s Pulp and Paper Industries,Christopher Barr, Centre for International Forestry Re-search (CIFOR) & WWF International MacroeconomicsProgram Office, Jakarta/Washington, 30 November 2000.

99 Form 20-F: Annual report pursuant to section 13 or 15(d)of the securities exchange act of 1934 for the fiscal yearended December 31, 1999, PT Indah Kiat Pulp & PaperTbk., Jakarta, 12 June 2000; Asia Pulp & Paper clarifiescollateral provided to IBRA, Press Release Asia Pulp &Paper Company Ltd., Singapore, 2 May 2001.

100 Indah Kiat - Company Update, Masya Spek, G.K. Goh,Singapore, 1 August 2000; Banking on Sustainability:Structural Adjustment and Forestry Reform in Post-Suhar-to Indonesia, Christopher Barr, Centre for InternationalForestry Research (CIFOR) & WWF MacroeconomicsProgram Office, Jakarta/Washington, October 2001.

101 APP Pulp Mills & Sinar Mas Group Forest CompaniesPreliminary Sustainable Wood Supply Assessment,AMEC Simons Forest industry Consulting, Singapore, 11November 2001.

102 Fiber Resources, Finances, and Strategies of IndonesianPulp and Paper Companies: Critical Challenges FacingAPP and APRIL, Christopher Barr, Center for Internation-al Forestry Research (CIFOR), Paper prepared for SeniorManagement Symposium Asian Paper 2002, Singapore,25-26 April 2002.

103 Indah Kiat - Company Update, Masya Spek, G.K. Goh,Singapore, 1 August 2000; Banking on Sustainability:Structural Adjustment and Forestry Reform in Post-Suhar-to Indonesia, Christopher Barr, Centre for InternationalForestry Research (CIFOR) & WWF Macroeconomics

Program Office, Jakarta/Washington, October 2001; FiberResources, Finances, and Strategies of Indonesian Pulpand Paper Companies: Critical Challenges Facing APPand APRIL, Christopher Barr, Center for InternationalForestry Research (CIFOR), Paper prepared for SeniorManagement Symposium Asian Paper 2002, Singapore,25-26 April 2002.

104 Indah Kiat - Company Update, Masya Spek, G.K. Goh,Singapore, 1 August 2000; Banking on Sustainability:Structural Adjustment and Forestry Reform in Post-Suhar-to Indonesia, Christopher Barr, Centre for InternationalForestry Research (CIFOR) & WWF MacroeconomicsProgram Office, Jakarta/Washington, October 2001; Miss-ing the Wood for the Trees, John McBeth, Far EasternEconomic Review, Hong Kong, 11 April 2002.

105 Down to Earth No. 49, London, May 2001.106 Families flee after attack by pulp paper company, Detik,

Jakarta, 5 February 2001; Paper Tiger, Hidden Dragons -The role of international financiers in the financial crisisof Asia Pulp & Paper and their responsibility for fuellingforest destruction and social conflict in Indonesia, EdMatthews & Jan Willem van Gelder, Friends of the EarthEngland, Northern Ireland and Wales, London, June 2001.

107 Human Rights Watch Says APP 'Complicit' In RightsAbuses, Dow Jones, New York, 7 January 2003.

108 Asia Pulp & Paper to Assess Sustainable Forestry Pro-gram, PaperAge Magazine, Singapore, 19 June 2002.

109 Central Board of Statistics, National Agency for ExportDevelopment (www.nafed.go.id).

110 Friends of the Earth UK briefing on Asia Pulp and Paper,June 2001.

111 Matthews & Van Gelder, 2001.112 www.nafed.go.id/importer/search_importer.php, data from

June 2001113 Erklärung der Papier Union zur Diskussion mit Robin

Wood, 10. Februar 2003; mld. Mitteilung Papier Union30.1.2003

114 Hamburger Illustrierte, 21st November 2002;http://archiv.hamburger-illustrierte.de/arc2002/inland/umweltnatur/arstadtziehtkonsequenzen.html

115 see Friends of the Earth Finland’s web site www.maanys-tavat.fi; Matthew & Van Gelder, 2002; UPM press releaseof April 10, 2002.

116 UPM press release of April 10, 2002117 www.nafed.go.id/importer/search_importer.php, data from

June 2001118 Kappa's graphic board is marketed under the brand name

Eska. More than 95% of the board is exported. KappaGraphic Board is a subsidiary of the Kappa PackagingGroup, an international concern with over 100 subsidiariesin 17 European countries (in Germany in Essen) and aturnover of over 3.0 billion Euro. Also see the companyweb site www.kappa-eskaboard.com.

119 Potter & Badcock, 2001120 Van Gelder, 2001121 Wakker, 2000.

40 WWF Deutschland

122 WWF Indonesia briefing on 'gap analysis in the oil palmcampaign'.

123 Persoon & Wakker, 2002.124 Potter & Badcock, 2001.125 WWF Indonesia. 2001b. The latest PT. Inhutani IV condi-

tions survey report. WWF Riau elephant conservation pro-gram.

126 WWF Indonesia. 2001a. The elephants conservation planarea condition observation in PT. Inhutani IV concession.WWF Riau elephant conservation program.

41WWF Deutschland

42 WWF Deutschland

Annex 1

European Union imports of pulp and paper products from Indonesia 1999-2001

Legend:4702 Chemical wood pulp, dissolving grades4703 Chemical wood pulp, soda or sulphate bleached, non-dissolving grades4810 Coated paper for writing/printing4819 Packaging4820 Books of stationery, exercise books, albums4823 Other paper/paperboard (mainly for writing/printing)

Source: World Trade Atlas (monthly time series) (via Ed Matthew / James Hewitt, Friends of the Earth)

German imports of pulp and paper products from Indonesia 1999-2001

WWF asked the German banks and financial institutionspresented in this study to comment on their relations withAPP. Their responses are summarised in this Annex.WWF cannot accept responsibility for the correctness ofthese statements.

Commerzbank

1. Loans to Indah KiatCommerzbank has not been in credit relations with this com-pany for more than a year.

2. Loans to APP groupWe have severely cut back our credit involvement in recentyears. Our present, very low credit risk is based exclusivelyon HERMES credit insurance.

3. Indah Kiat sharesCICM, our subsidiary, had some Indah Kiat shares in an in-dex fund. The goal of such a fund is to reflect the perform-ance of the basic market index. This reflection basically takesplace without analytically evaluating the business in question.Here it is simply about representing the market index. Theshares were sold in 2002. Now that we have sold Mont-gomery Asset Management, we naturally can't make anycomments on that.

Dresdner Bank

We have carefully reviewed the statements in your study, es-pecially those on whether the bank has business relationswith the businesses in Indonesia and Singapore mentioned inthe study. Out of the bank's duty to maintain confidentiality,we are prevented from giving information on the mentionedevents or on the question of whether or not business relationsexist with the companies named in the study. To bypass thislegal hurdle, we are trying to obtain written permission to re-lease information, freeing us from the bank's duty to maintainconfidentiality, especially regarding those companies whereno credit relations have existed for years. We are very inter-ested in correcting the information cited in the study.

But in general we can note that in our last statement on thepalm oil industry, we drew attention at that time to theframework conditions of our credit involvement. They in-clude:• As the first signatory to the UNEP Statement by Financial

Institutions on the Environment and Sustainable Develop-ment, the Dresdner Bank pledged as long ago as 1992 totake environmental interests into consideration in all ourbusiness activities and to fulfil all regional, national, and in-ternational environmental requirements;

• Our environmental programme and environmental guide-lines, which apply for our whole group, expressly prescribe

that environmental risks and factors be included in the cred-it risk investigation;

• Information for all customer advisors and specialists are setdown in our in-house handbook, “Environmental Risks inCredit Transactions”;

• Operatively, our guidelines for credit transactions abroadprescribe that the latent risk of environmental problems isalso taken into consideration during the investigation ofcredit worthiness.

HVB Group

Financial backing extended by HVB Group to Indah Kiat,Asia Pulp & Paper or Sinar Mas Group is largely state-guar-anteed loans for orders such as paper machines. The problemhere is that the influence of banks on sustainability is verylow when it comes to loans for orders because - loans are often just for partial consignments in larger proj-

ects,- banks are only called in at a very late stage and therefore

see project details correspondingly late in the process,- delivered products often don't have detrimental environ-

mental impact (such as printing machines), and- in most cases, state insurers guarantee the loans and there-

fore their environmental principles are decisive.

The last point has led us to call for the observation of WorldBank standards by state credit insurers in relevant committeesin all OECD member states. We have advocated this view, es-pecially in the German government's Interministerieller Auss-chuss (IMA) [inter-ministerial committee] and in the Associ-ation of German Banks, but we couldn't assert ourselvesagainst the majority.

To do justice to this demand, HVG Group prescribes in itscredit principles that the bank also orients its credit-grantingfacility on basic ethical values. In particular, this includes en-vironmental protection and the observation of World Bankstandards. Thus, the investigation of environmental risk is anintegral component in investigating credit worthiness. Theminimum standard for financing projects and orders is theobservation of World Bank standards and all local, nationaland international laws. For us, these principles have alreadyled several times to us turning down a request for credit. Inview of these financing principles, requests today from SinarMas Group for credit would have been decided differently.

We would also like to point out that during debt restruc-turing negotiations between banks and state credit insurerswith Sinar Mas Group, HVB Group has insisted that sustain-able wood supplies from reforested areas are used in produc-tion and that Sinar Mas Group implements World Bank stan-dards. Negotiations to restructure debt are based on cashflow planning that assumes the raw material costs of wood inthe long term will be pegged to the market price of woodfrom such reforestation projects. These ongoing discussionswith Sinar Mas Group have also led to the hiring of AMEX

43WWF Deutschland

Annex 2 – Banks' responses

Simons, an independent firm of experts on forest affairs, todevelop a long-term wood and raw material plan for thefuture.

Norddeutsche Landesbank (Nord LB)

As a matter of principle we do not release information aboutour customers to third parties. But since you have explicitlynamed us as a reference in the draft of your “Tesso Nilo”study, we would like to tell you that we1. have not issued any bonds for Indah Kiat Pulp & Paper,2. have given only temporary, short-term loans to Indah Kiat

Pulp & Paper,3. have not provided any syndicated facilities to APP Group

in the 1990s.

Nord LB has not had any business relations with Sinar MasGroup or group companies for some time.

Deutsche Bank

There aren't any objections regarding the study's contents asfar as they have to do with the Deutsche Bank.

Union Investment

Indah Kiat – we don't carry shares in our portfolios any more.We sold our shares several months ago.

Baden-Württembergische Bank, a subsidiary ofBaden-Württemberg Landesbank

Regarding your inquiry, we inform you that Robin Wood hasalready asked about Baden-Württembergische Bank involve-ment in Southeast Asia in a check of banks Robin Wood car-ried out on 13 February 2002. We were asked whether wehave financial associations with the Southeast Asian oil palmand paper industry. At the time, we replied to Robin Woodthat we do not offer financial services to the Indonesian oilpalm or paper industry; rather, the bank's involvement in thisregion is limited to export financing in the interest of our cus-tomers, and to business with local banks. Thus, through ourHong Kong branch, we did in this case contribute a smallamount to a syndicated loan for APP Paper Trading Pte Ltd,Singapore. The arrangers at that time were Bank Boston,Norddeutsche Landesbank, Development Bank of Singaporeand KBC Bank.

The borrower was a sales subsidiary of APP Group. APPGroup, listed on the New York Stock Exchange, also has pro-duction sites for manufacturing paper in Indonesia, China andIndia. Our credit was a structured loan and served only to pre-finance the export earnings of this APP Group subsidiary.

As a matter of principle, these syndicated loans are madepublic; in this respect, the names of the banks giving the syn-dicate credit and the borrower are available to everyone.

44 WWF Deutschland

45WWF Deutschland

Annex 3 – Position papers

Forest Conversion During the last twenty years of the twentieth century, 300 million hectares of tropical forests were converted to non-forest land-uses worldwide. The conversion of forests to other land uses imposes severe environmental and social costs due to the ecological impacts of clearance, uncontrolled burning, and disregard for the rights and interests of local or indigenous communities. Without significant changes in policy and practice, the process of forest conversion is likely to continue at a rapid rate and pose a major threat to High Conservation Value Forests (HCVF – see separate position paper), freshwater ecosystems, livelihoods of forest dependant peoples and habitats of endangered species such as elephants, rhinos, tigers and great apes. Reduction of wildlife habitat leads to increased human-wildlife interaction and conflict. WWF defines forest conversion as a continuous process of forest degradation, leading from natural forests over one or several steps to the replacement of forests by other forms of land use, such as plantations, agriculture, pasture, mining and urbanization. The driving forces behind forest conversion vary and are often interrelated. Among the most important are: the fact that forests are not valued for the long-term benefits that they provide, and that conversion often costs very little money. This creates incentives to log and sell the valuable timber out of forests and then convert the degraded forest land to more profitable land uses rather than to undertake sustainable forest management. Non-existent or insufficient landscape planning procedures and lack of guarantee of land ownerships and tenure rights often set the ground for uncontrolled and unwanted forest conversion processes. WWF believes that forests are amongst the most diverse and valuable ecosystems around the globe. They provide a wide range of products and benefits for humans and nature that can rarely be substituted through other means. Therefore in general every effort should be made to prevent any forest, but especially HCV Forests from, being converted. WWF recognizes that under certain conditions planned and targeted conversion can be beneficial or necessary to reach specific goals of public interest without endangering the overall functionality of forests. Where conversion is planned the following conditions shall be fulfilled: • Identified High Conservation Value Forests should not be affected by any forest

conversion • At a minimum, conversion must not contribute in any way to the extinction of species,

or to the loss of significant subpopulations of an endangered species • The total forest cover within a country or region should not be below an agreed long-

term goal described in a National Forest Programme or planning documents developed through a multi-stakeholder process

• There should be proven and agreed public interest and benefits from the new land-use, that surpasses public interest in forest conservation

• There should be a transparent planning process on a landscape level, involving all relevant stakeholders

• Independent environmental and social impact assessments should be conducted and the necessary measures to prevent negative impacts of the conversion implemented

WWF will work together with governments, public and private institutions and other partners towards the elimination of unplanned and damaging forms of conversion to safeguard biodiversity and social values by: • Calling for transparent planning processes to achieve an optimal distribution of

natural forests, plantations, agricultural areas, urban areas and other land-uses in a given landscape. This includes well-informed negotiations among a wide range of stakeholders to balance ecological, social and economic dimensions of natural resource use across the landscape

• Enforcing adequate safeguards that recognize and guarantee the legal and

customary rights of indigenous peoples and rural population to own, use and manage their lands, territories, and resources

• Engaging with financial institutions and market actors in forest conservation and

lobbying for the elimination of policy incentives that contribute to forest conversion and forest destruction

Position Paper

February 2002One of a series of position

papers produced as WWF’s response to the WWF/IUCN Forests for

Life strategy and WWF’s current five-year target-

driven programme on forests

For further details contactDamian Oettli

WWF Switzerland Tel: +41-1-297-2121

[email protected]

Oil palm According to the WWF Living Planet Index, the tropical forest species index declined by 25% in the last thirty years. Worldwide, 300 million hectares of tropical forest were converted to non-forest land-uses during the last two decades of the twentieth century. Most of the world’s oil palm plantations are within these converted hectares. Oil palm plantations have often imposed environmental and social costs due to indiscriminate forest clearing, uncontrolled burning with related haze, and disregard for the rights and interests of local communities. Without significant changes in policy and practice, the expansion of oil palm plantations poses a major threat to high conservation value forests, freshwater ecosystems, livelihoods of forest dependant peoples and habitats of endangered species such as elephants, rhinos, tigers and orang-utans.

WWF recognizes that palm oil is a basic foodstuff with high consumer demand. The industry generates valuable foreign exchange earnings and employment opportunities for tropical producer countries. WWF is, however, deeply concerned at the prospect of the industry continuing to expand and operate in an unsustainable manner. WWF calls upon the industry, regulators, financiers, buyers and other stakeholders to work collectively to develop and promote adoption of environmentally appropriate, socially beneficial and economically viable practices in the oil palm industry.

WWF believes that key elements of sustainability within the oil palm industry are: • Maintenance of high conservation value forests: Oil palm plantations should not

replace high conservation value forests (see separate position paper). This will normally require well-informed negotiations among a wide range of stakeholders to achieve optimal integration of oil palm plantations with the mosaic of other land-uses in a given landscape or ecoregion.

• Sound environmental management practices: Industry participants should adopt management practices to minimize environmental impacts such as air and water pollution, forest fires, soil erosion, pest invasion, human/wildlife conflict and biodiversity loss.

• Respect for rights of local communities and indigenous peoples: Industry participants should recognise the legal and customary rights of local communities and indigenous peoples to own, use and manage their lands, territories, and resources. Plantation development should not proceed in areas over which there are unresolved tenure disputes.

• Positive social impacts: The industry should maintain or enhance the long-term social and economic well being of plantation workers and local communities. In many cases this will include the strengthening and diversification of the local economy to avoid dependence on a single plantation product.

• Proficient regulatory frameworks: Regulatory frameworks should encourage practices that will achieve the desired environmental, social and economic outcomes described above. At a minimum, industry participants shall respect all applicable laws of the country in which their plantations and mills are sited. However, responsible behaviour will often require standards of performance that exceed the requirements of local and national laws, especially where regulatory frameworks are underdeveloped or governance is weak.

• Transparency: Industry participants should adopt and make public their policies, practices and implementation plans pertaining to their social and environmental performance. They should encourage independent monitoring of their performance and make public their findings. They should involve local stakeholders both in the development of standards and performance monitoring.

WWF will work with governments, private companies, financial institutions and civil society organizations to: • Develop and promote adoption of policies and practices consistent with this position • Eliminate incentives for oil palm plantations to replace high conservation value forests

Position Paper

February 2002One of a series explaining the

WWF/IUCN Forests for Life strategy and WWF’s current

five-year target-drivenprogramme on forests. For

further details contact

Rodney TaylorWWF Forest Futures Tel: +62-361-247-125

[email protected]

Illegal Logging and Forest Crime Introduction The global trade in illegally extracted timber is a multi-million dollar industry. Illegal logging: occurs when timber is harvested, transported, processed, bought or sold in violation or circumvention of national or sub-national laws. Although generally portrayed as a problem in tropical forests, illegality also occurs in developed countries and economies in transition. Even those countries that pride themselves on good domestic management are not exempt. Illegal activities have a particularly devastating impact on biodiversity because they often deliberately target remaining pristine forests, including protected areas, which contain the highly valuable hardwood species that have been logged out elsewhere. Forest crime also affects human communities through loss of natural forest resources and sometimes through intimidation and violence. The hundreds of millions of dollars of tax revenues lost around the world as a result of forest crime also has a wider social impact. WWF believes that illegal logging and other forms of forest crime are part of a larger problem that includes issues of forest governance and corruption. They extend far beyond some individuals violating resource-management laws. WWF uses the term “illegal logging and forest crime” to include both large and small-scale timber theft and a variety of issues such as transfer pricing, breaching tax rules, any illegal aspects of timber sourcing and circumvention of concession agreements through bribery or deception. Poor governance and forest management can also lead to increased access to, and unsustainable utilisation of forests and an increase in activities such as illegal mining, bushmeat hunting and settlement. There is also a whole range of corrupt activities, which has the cumulative effect of reducing effectiveness of governance even if the precise letter of the law is not breached. Up to 65 per cent of WWF’s Global 200 forested ecoregions are threatened by illegal logging. WWF believes that illegal logging and forest crime are best stopped using a combination of existing tools and the development of new policies: WWF will work with partners, international organisations and governments to: . • Promote improved transparency and enforcement of existing laws.

Where necessary encourage amendment or drafting of new legislation and strengthening of implementation

• Promote independent monitoring and auditing schemes such as that provided by the Forest Stewardship Council for forest management and tracking wood products from the forest to the end user

• Encourage consumer countries to provide aid and technical assistance to producer countries to address the root causes of forest crime (including poverty alleviation)

• Support Global Forest and Trade Networks linking buyers and consumers of certified forest products

• Work to build human resource and institutional capacity to plan and manage the forest estate (protected areas, production forests and community-managed forests)

• Assist the implementation of systems for the verification of legal compliance, especially in countries where certification will take some time to develop

• Promote and encourage the use of government public procurement to specify timber and wood products from legal and sustainably managed forests

• Support the adoption of voluntary bilateral trade agreements that ensure the supply of legal timber as a first step in applying responsible procurement policies

Position Paper

April 2002One of a series of

position papers producedas WWF’s response to

the WWF/IUCN Forestsfor Life strategy and

WWF’s current five-year target-driven programme

on forests For further details contact

Paul ToyneWWF UK

Tel: [email protected]

• Raise awareness of the social and economic impacts of illegal logging and forest crimes amongst key audiences: governments, business, industry and consumers

• Increase the use of CITES as a tool against timber-related crime • Engage with financial institutions to ensure adequate forest policy

safeguards are in place so that investments do not facilitate illegal logging and forest crime

WWF Deutschland

Rebstöcker Straße 55

60326 Frankfurt am Main

Tel.: 069 /79144 -0

Fax: 069 /617221

E-Mail: [email protected]

www.wwf.de

©C

opyr

ight

des

WW

F In

tern

atio

nal ®

War

enze

iche

n de

s W

WF

Inte

rnat

iona

l • G

edru

ckt a

uf 1

00%

Rec

yclin

gpap

ier

• S

tand

:3/0

3

WWF is the world’s largest and most experienced independent conservationorganization. It has 4.7 million regular supporters and global network active in 96 countries.

WWF’s mission is to stop the degradation of the planet’s natural environmentand to build a future in which humans live in harmony with nature, by:• conserving the world’s biological diversity• ensuring that the use of renewable natural resources is sustainable• promoting the reduction of pollution and wasteful consumption.