If you don’t follow the stock market, you probably didn’t notice that shares in Asia Pulp & Paper (APP) lost two thirds of their value since September. You should. APP is Asia’s largest pulp and paper maker outside Japan. What happens to it could greatly affect forests in Indonesia, China, and elsewhere.
APP’s current troubles reflect wider problems. Over the last ten years, a handful of Indonesian conglomerates have spent large sums to raise pulp and paper capacity seven-fold, making Indonesia one of the world’s top ten pulp and paper producers. In the process, the companies ran up $12 billion in foreign and domestic debt.
This strategy proved very risky. The Asian crisis hit. Cost overruns and corruption drove up costs. To show a profit, pulp mills must run at full capacity. But the conglomerates never ensured they had a sustainable and legal source of pulpwood fiber. The companies claimed they would plant enough tree plantations to meet their entire fiber requirements. Yet, as of 1998 / 1999, plantations supplied only 8% of their timber. The rest came from clear-cutting natural forests. So far they have cleared around 800,000 hectares. A sizable portion of the Indonesia forest product industry’s wood originates from illegal sources. As access to cheap timber from natural forest declines, raw materials costs rise. Conflicts between companies and communities over access to forests and environmental issues present another financial risk. For example, such conflicts have kept the $600 million Indorayon pulp mill in North Sumatra closed for over a year.
Why would anyone invest billions of dollars in such risky activities? Chris Barr’s disturbing report, ’Profits on Paper: The Political Economy of Fiber, Finance, and Debt in Indonesia’s Pulp and Paper Industries’, provides some answers. Barr prepared the report for WWF’s Macroeconomic Program Office and CIFOR.
Barr points out that the companies have mostly gambled with other people’s money and forests. If the companies win, they can earn big profits. If they lose, international banks and the government pay most of the costs. The government has subsidized the process, by giving cheap access to natural forests, reforestation funds, and low interest loans. Many domestic loans came from banks partly or fully controlled by the conglomerates themselves. These banks had few incentives to critically assess the companies’ claims and little was done to regulate them. The international banks involved failed to adequately assess the risks related to timber supply and social conflict. In some cases, this was because export credit agencies guaranteed the companies’ loans. Under President Suharto, the companies could count on the government to favor them in any conflict with communities.
Experts widely acknowledge that avoidance of future financial crises will require greater regulation of domestic and international lending. Barr says that in the case of forest industries, banks and regulators should pay special attention to whether the corporations have a long-term legal source of raw materials and to the risk of social conflict. Once companies go bust, regulators must help banks recuperate the money they lent. But they must also discourage illegal activities and promote corporate strategies that can be sustained over the long-term. They paper specifically recommends that the Indonesia governments declares a temporary moratorium on expanding pulp and paper facilities and enforces the moratorium on allocating new licenses for forest conversion. It also suggests that the government eliminate subsidies for the pulp and paper industry and creates an independent program to monitor plantation development.
To obtain a free electronic version of the paper (in word or pdf format) or send comments, you can write Chris Barr at C.Barr@cgiar.org