PT Gunung Mas Raya

Case study PT Gunung Mas Raya
Assessment of investment risks associated with
environmental and social issues related
to an Indofood Sukses Makmur subsidiary
in Rokan Hilir, Riau (Indonesia)
Report prepared for WWF Asia Pacific Forest Program & WWF Indonesia
July 2003
A I D E nvironment
Case study PT Gunung Mas Raya
Assessment of investment risks associated with environmental and
social issues of an Indofood Sukses Makmur subsidiary in Rokan Hilir,
Riau (Indonesia)
Report prepared for WWF Asia Pacific Forest Program & WWF Indonesia
This report was made possible with the aide of an USAID grant
Eric Wakker (AIDEnvironment)
Jan Willem van Gelder (Profundo)
July 2003
A I D E nvironment
Donker Curtiusstraat 7-523
De Bloemen 24
1051 JL AMSTERDAM
1902 GV CASTRICUM
The Netherlands
The Netherlands
Tel.: +31 20 6868111
Tel.: +31 251 658385
Fax: +31 20 6866251
Fax: +31 251 658386
Email: info@aidenvironment.org
Email: info@profundo.nl
Website: www.aidenvironment.org
Website: www.profundo.nl
A975P975
Summary and conclusions
In the coming years the area planted with oil palm plantations in Indonesia will expand
to at least 9 million hectares compared to around 3.5 million hectares at present and
further expansion is very likely to occur. This development is driven by forecasted
dramatic growth in demand for oil palm products globally and would not be possible
without the substantial financial support of Indonesian and international financial
institutions. We expect that in the coming years, financial institutions will continue to
facilitate significant capital input in the sector.
Up to date, financial services to the oil palm sector have primarily been reviewed against
standard risk assessment parameters. However, in the past five years it is increasingly
recognised that these do not prevent debtors from contributing to extensive tropical
deforestation, forest fires and disruption of local community livelihoods. Most financial
institutions have yet to take such externalities into account in their credit risk
assessments.
This report forms part of a larger research project co-ordinated by WWF Asia & Pacific
Forest Program which aims to show that the various types of financial institutions
providing services to oil palm companies need to adopt effective investment screens that
guarantee socially and environmentally responsible practises. In 2001, the four biggest
Dutch banks (ABN AMRO Bank, Rabobank, Fortis and ING Group) were the first to
take into account new risk assessment parameters for their investments in the
Indonesian oil palm sector. This case study evaluates the effectiveness of the investment
screen of a Dutch bank in relation to a loan arranged to an Indonesian company after it
had committed to introduce new risk assessment standards.
The case refers to a syndicated two-year US$ 100 million loan for Indofood Sukses
Makmur arranged by ING Bank (The Netherlands) in April 2002. The deal was
described as the largest offshore loan financing for an Indonesian corporate since the
start of the Asian financial crisis in 1997. ING Group has stated that this transaction was
subject to its adjusted risk assessment policy and that its credit committee was
convinced that Indofood had complied. The case gained even greater relevance when it
was announced that ING Bank would co-manage the issuance of five-year bonds worth
US 125 million for Indofood in the first week of June 2003.
ING’s forest policy states the bank will not finance companies and projects that are
guilty of illegal deforestation and / or burning of tropical rainforests (HCVF) for the
development of palm oil plantations. Nor will the bank finance companies that do not
sufficiently respect the rights of local communities while also social, labour and other
laws need to be complied to by the client. The policy is not applicable to financing of
holding companies, as long as these are not involved in deforestation / or burning of
tropical rainforest. Specifically to the Indofood transaction, ING specified that the loan
could not be used for the acquisition of new plantation land or take over of existing
plantations.
For the purpose of evaluation, the research focused on the management and expansion
activities of one of several ultimate daughter companies of the Indofood Sukses Makmur,
PT Gunung Mas Raya. This plantation subsidiary operates 12,000 hectares of oil palm
estates in the North of Riau province, Sumatra. Most of its estates were developed in the
1980s, but since 1998-1999 PT Gunung Mas Raya recommenced developing plantation
blocks in a peat swamp forest adjacent to previously planted estates. This development
i
was ongoing at the time that ING Bank arranged its loan under its new investment
policy.
PT Gunung Mas Raya, together with most other Indofood subsidiaries have introduced
a number of “Better Management Practises” in its existing estates. For example, all
organic waste materials produced in the plantation and Crude Palm Oil mill are recycled
in the estates. Also, the company has an Integrated Pest Management program and is
one of the few Indonesian companies that use barn owls for rat control in all of its
estates. Hence, the company is clearly able to address a number of risks associated with
environmental management. However, this study has also found that the company’s
activities also expose Indofood as well as ING Bank to risks:
Type of risk to Type of risk to
Indofood
ING Bank
Reputation risk
Legal liability
Potential
expansion outside risk
Reputation risk
concession
boundaries
Reputation risk Reputation risk
Deforestation of
potential High
Conservation
Value (HCV)
Forest
Peat swamp
Operational risk Reputation risk
conversion
Credit risk
Comments
•
•
•
•
•
•
Illegal logging
Possibly legal
liability risk
Reputation risk
•
•
Burning
Legal liability
Reputation risk
risk
Credit risk
Operational risk
•
•
•
Human-mammal
conflict
Land disputes
Operational risk Reputation risk
•
Operational risk Reputation risk
Credit risk
•
•
According to (government) concession maps
overlaid with satellite images, the company
appears to operate outside its concession area.
Government maps may not be accurate.
The forest provides tiger (endangered, legally
protected) habitat; watershed functions and
the area is subject to land disputes.
The forest block cleared is limited in size (1,000
ha).
Risk of flooding; higher cost of plantation
development; dehydration of swamp forest;
contribution to carbon emissions.
Company appears to address basic operational
risks.
Company benefits from this activity.
Company may not be able to stop these
activities.
Company denies using fire for land clearing.
Company clearly benefits from 'accidental' fires
Company makes no serious effort to extinguish
fires.
Viability of remaining tiger population is in
question
Local communities are frustrated with lack of
interest shown by government and company to
satisfactorily address their land claims.
Indigenous peoples' traditional land claims are
not recognised by Indonesian law.
The extent to which PT Gunung Mas Raya’s activities are in conflict to Indonesian law,
and thereby ING’s policy, could be subject to much debate. There is a lack of hard
evidence on some accounts and, equally important, a far more detailed review of
Indonesian law would be required to come to further conclusions. Even then, it is
expected that in clarity in laws and regulations would still leave open much space for
interpretation. However, regardless of this, even when all of the company’s operations
would be legal then still none of the key concerns regarding oil palm development that
led ING to adopt its investment screen are addressed. We identified the following
weaknesses in ING’s investment screen:
1. ING’s investment screen did not stop the client from expanding its estates in a
sensitive forest area, which is potential High Conservation Value Forest
(HCVF); it did not stop the client from putting out, most likely illegal, fires in
ii
its estates and it did not address the wishes of local communities. One key reason
for failing to address these issues is that ING ultimately only requires legal
compliance. Questions on the legality of the company’s operations remain.
2. It appears that the bank was not aware of PT Gunung Mas Raya’s expansion
activities and this implies that its risk assessment procedure was not well
conducted. However, if ING Group was aware of Indofood's expansion activities,
it may have withheld this information from Friends of the Earth (who requested
information about the Indofood transaction) based on the principle of
confidentiality between banks and clients. But then it could also be argued that
ING breached this agreement by communicating that it believed its client
adhered to the policy.
3. The conditions tied to ING's loan to Indofood are ineffective because:
a. First, holding companies are never involved in actual field level
operations (and, thus, deforestation or burning);
b. Second, ING's condition that its loan could not be used for the
purchasing of new plantations or plantation land ignores the fact that
Indofood is still in the process of land clearing in concessions previously
obtained and faces land disputes with local communities.
c. Third, financing at the holding company level allows for internal rebudgeting by the client. PT Gunung Mas Raya has not attracted new
loans since 1996 and most likely depends on group capital to implement
its expansion program. The investment required for the expansion
activities (including purchasing or renting of land clearing equipment)
could easily have been released through internal re-budgeting.
One of the key problems that ING's risk assessors and its credit committee face is the
lack of reference cadre. Indofood does not have a comprehensive plantation management
and development plan that addresses both agricultural risks and potential ecological and
social externalities. Provided that a good policy is also implemented, it would reduce
risk and, in theory, enable Indofood to attract foreign capital and access certain markets
more easily. Its investors would also be in a better position to reliably communicate
externally about their client’s performance while both parties would be more
accountable to nature conservation interests and local peoples' needs, rights and wishes.
While it is recognised that this case study reviewed only one of Indofood’s various
subsidiaries and that the area affected so far is relatively limited in size, notwithstanding
the impacts, the findings are particularly relevant also in view of Indofood's plans to
significantly expand its plantation area in the near future.
The following overall lessons are drawn from this case study:
1. Investments in the oil palm sector pose reputation and credit risks to investors, not
only because companies may not meet all standard risk parameters but also because
the externalities created by plantation development cause considerable tension with
the interests of external stakeholders.
2. Criteria and procedures to value and address risks related to investments in the oil
palm industry require thorough implementation and monitoring by the investor.
iii
As regards to the performance level required from clients, of course much depends
on the risk that an investor is willing to take. It should be stressed, however, that
requiring compliance to Indonesian national and/or regional laws does not
sufficiently protect investors from many of the risks identified in this report. The
vacuum in Indonesia's regulatory system and international law requires financial
institutions to define specific performance standards that adequately avert
unnecessary risk and avoid the creation of ecological, social and economic
externalities.
3. Loan conditions should be formulated precisely, especially when financial services
are provided at the group level.
4. After contracts have been sealed, monitoring of compliance is required. Management
plans and work plans, which take the investors' criteria into account, will make it
easier to do this.
5. Transparent reporting is hindered by confidentiality agreements between companies
and investors. Such agreements draw heavily on outsiders' trust especially when
public statements are made which can not be verified by third parties.
iv
Acronyms
BCA
BMPs
BPMDN
CGI
CIFOR
CITES
CPO
UNEP FI
FCI
GMR
HCVF
Ha
IBRA
IFC
IOPRI
IPC
KKN
KSDA
NES
PT
Rp
SAKO
WWF
YLBHI
Bank Central Asia
Better Management Practices
Badan Penanaman Modal Dalam Negeri /
Investment Co-ordination Board
Consultative Group on Indonesia
Centre for International Forestry Research
Convention on International Trade in Endangered
Species
Crude Palm Oil
United Nations Environment Program Financial
Initiative
Forest Conversion Initiative
Gunung Mas Raya
High Conservation Value Forest
Hectares
Indonesian Bank Restructuring Agency
International Finance Corporation
Indonesian Palm Oil Research Institute
Integrated Pest Control
Korrupsi, Kolusi & Nepotism / Corruption,
Collusion and Nepotism
Konservasi Sumber Daya Alam /
Conservation and Natural Resource Management
Department
Nucleus Estate and Smallholder scheme
Perseroan Terbatas / Limited company
Rupiah
Surat Angutan Kayu Olahan (Letter of Sawntimber
Transport)
World Wide Fund for Nature
Yayasan Lembaga Bantuan Hukum Indonesia /
Indonesian Legal Aid Foundation
v
vi
CONTENTS
Summary
Acronyms
i
v
CHAPTER 1 BACKGROUND
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
3
EXPANSION OF INDONESIA'S OIL PALM SUB-SECTOR
THE ROLE OF FINANCIAL INSTITUTIONS
EXTERNALITIES
1.3.1 Deforestation
1.3.2 Forest fires and haze
1.3.3 Conflicts with local communities
1.3.4 Legal issues
NEW RISK ASSESSMENT POLICIES
RENEWED MARKET ACTIVITY
WWF'S INITIATIVES ON OIL PALM AND FOREST CONVERSION
OBJECTIVES OF THIS CASE STUDY
SELECTION OF THE CASE STUDY
METHODOLOGY
THE CONTENT OF THIS REPORT
ACKNOWLEDGEMENTS
3
3
4
4
5
6
6
7
8
8
9
9
10
10
10
CHAPTER 2 SALIM GROUP AND INDOFOOD SUKSES MAKMUR PROFILE 13
2.1
2.2
2.3
2.4
2.5
2.6
ADDRESS
THE SALIM GROUP
THE RISE AND FALL OF S ALIM GROUP'S OIL PALM INTERESTS
INDOFOOD SUKSES MAKMUR
INDOFOOD'S OIL PALM PLANTATION OPERATIONS
INDOFOOD'S EXPANSION PLANS
CHAPTER 3 FIELD LEVEL OPERATIONS OF PT GUNUNG MAS RAYA
3.1
3.2
3.3
3.4
THE CONCESSION AREAS
MANAGEMENT OF EXISTING PLANTATIONS
3.2.1 Biodiversity
3.2.2 Integrated Pest Control (IPC)
3.2.3 Recycling nutrients
3.2.4 Labour
EXPANSION ACTIVITIES
3.3.1 Recent land clearings
3.3.2 Expansion in or outside the concession boundaries?
3.3.3 Illegal logging
3.3.4 Floods and drainage of peat swamp forest
3.3.5 Fires and burning
3.3.6 Human-wildlife conflicts
COMPANY - COMMUNITY CONFLICTS
CHAPTER 4 ANALYSIS AND DISCUSSION
4.1
4.2
4.3
4.4
4.5
4.6
RISKS IDENTIFIED
4.1.1 The existing plantation area
4.1.2 The expansion area
WEAKNESSESS IN ING'S POLICY AND LOAN CONDITIONS
EVENT OF DEFAULT?
INDOFOOD'S PLANNED EXPANSION
THE NEED FOR A COMPREHENSIVE MANAGEMENT PLAN
GENERAL LESSONS LEARNED
ENDNOTES
13
13
14
15
16
17
19
19
19
19
20
20
21
21
21
23
24
26
27
29
32
35
35
35
35
36
37
37
38
39
41
1
APPENDIX 1: MAPS OF ROKAN HILIR, RIAU PROVINCE, SUMATRA
APPENDIX 2: ING POLICY ON SUSTAINABLE DEFORESTATION / LOGGING
APPENDIX 3: INDOFOOD'S STAKEHOLDERS
APPENDIX 4: ANSWERS ON AN EMAIL OF MR. PIETER KROON WITH QUESTIONS
47
51
57
65
FOR CLARIFICATION
2
Chapter 1
1.1
Background
Expansion of Indonesia's oil palm sub-sector
In the past 15 years, the area planted with oil palm plantations in Indonesia grew five times to its
present area of 3.5 million hectares. In 1996, the central government had already reserved in total
9 million hectares (ha) for oil palm development and this area is by now probably fully cleared
and partially planted.
The expansion may not stop there. The Indonesian Palm Oil Research Institute (IOPRI)
estimates that Indonesia has 18 million ha of land that is suitable for oil palm development. 1 The
interest from the private sector to develop plantation estates grew to unprecedented heights: in a
letter dated 22 May 2000, the Indonesian Ministry of Forestry and Estates stated that no less
than 1,896 investors had applied for permits to develop plantations in an aggregate area of
30,167,594 ha.2
In January 2001, the Indonesian central government officially pledged a moratorium on further
forest conversion to the donor community (CGI). However this ban is not implementable
because decentralisation policies have put great powers in the hands of local governments on
land use matters. 3 As a result, further commitments to oil palm development by local
governments are likely to be pushed through. According to estimates from Sawit Watch, the
aggregate area that provincial and district governments aim to develop for oil palm plantations
amounts to 22,5 million ha.4
1.2
The role of financial institutions
Palm oil is set to become the internationally most traded and consumed edible oil in the world
by 2012.5 Even though the expansion of Indonesia's oil palm plantation area is ultimately driven
by forecasted growth in demand, this development would not be possible without the financial
support of a large number financial institutions. Especially from the early 1990s onwards, a large
number of Indonesian financial institutions as well as foreign financial institutions from Europe,
North America and East Asia have been financing the expansion of the oil palm sector in
Indonesia with loans, trade financing, stock issuances and other means. It is estimated that the
total investment in Indonesia's oil palm sub-sector amounts US$ 10 billion up to date. A
financial analysis of 27 plantation groups revealed that commercial banks take account for over
80% of all investment provided.6
Table 1-1 Financial institutions financing the Indonesian oil palm sector
Type of institution
Commercial & investment banks
Development banks
Export credit agencies
Asset managers, insurance companies and pension funds
Other financial institutions
Total
Number of
FI’s
Number of
countries
108
8
3
20
17
156
22
7
3
8
8
24
Total
investment
(US$ mln)
3,100
188
12
381
40
3,721
%
83.3
5.1
0.3
10.2
1.1
100
Between 1998 and 2002, investment activity in the oil palm sub-sector slackened significantly
and lack of capital input drastically slowed down planting rates. The Business Intelligence
Report (BIRO) estimated that the oil palm sub-sector needed US$ 3 billion up to 2005 to regain
the pre-crisis rate of expansion.7 However, to fully develop the 6 million ha of additional oil palm
3
plantations, a substantially larger investment is required, approximately in the order of US$ 18
billion.8
1.3
Externalities
Up to date, financial services to the oil palm sub-sector in Indonesia have primarily been
reviewed against standard risk assessment parameters (such availability of greenfields, labour
force, expected yield, pests & diseases, price developments, legality of operations and national
level political and economic risk assessments).
In the past five years, however, it has become increasingly recognised that the commonly applied
parameters and procedures did not suffice to prevent debtors from causing negative impacts on
tropical forest ecosystems and local communities. For investors, this need not necessarily pose
risk when externalities created are within the boundaries of Indonesia's laws. However, the scale
and pace of plantation development has created such intense conflict of interest with of other
stakeholder groups that new types of risk have emerged. Most financial institutions have yet to
take the risks associated with externalities into account in their risk assessments.
1.3.1
Deforestation
From the agribusiness point of view, lowland tropical mineral soils are the preferred sites for oil
palm plantations. The natural vegetation in most of these lands are various types of lowland
tropical moist forests, which are represent the richest terrestrial ecosystems on Earth in terms of
species richness (biodiversity). Indonesia’s forests are especially of high conservation value:
whereas Indonesia's land surface represents only 1.3% of the globe, it harbours 10% of all plant
species of the world, 12% of mammals, 16% of reptiles and amphibians and 17% of birds. 9 Most
of these species depend on the lowland rainforests, which are also home to the key stone species
such as orang-utan, proboscis monkey, Sumatran rhinoceros, tiger and elephant, rhinoceros
hornbill, clouded leopard, sunbear, and several species of crocodile.
Despite their high conservation value, Indonesia's forests are disappearing at an increasing pace.
According to most recent estimates, Indonesia's forest loss (deforestation) amounts to 2.1 million
hectares per year and another 1 million hectares is selectively logged annually. With this rate of
forest degradation it is expected that Indonesia's primary forest is expected to be fully loggedover this decade whereas by 2005, no lowland tropical rainforests will remain in Sumatra and
Kalimantan will have lost these forests by 2010.10
This loss of the Indonesia's High Conservation Value Forests (HCVF) 11 is of grave concern to
many conservationists, environmentalists, scientists, local communities, western consumers and
account holders and the tropical timber trade. Tropical forest loss has been subject to intense
media campaigns and public and policy debates in Indonesia and western countries for many
years now. The need to preserve and sustainably manage tropical forests has been acknowledged
by many governments in national and international policy contexts. The reputation risk
associated with deforestation is also widely acknowledged in the private sector:
"Any company or industry associated with, or considered to be associated with, the destruction of the rainforests
has a PR disaster on its hands" (David Crabtree from London Express Newspapers).
The extent to which tropical forests are cleared for oil palm plantations is presently under debate
in the sector. The Indonesian Palm Oil Research Institute (IOPRI) estimates that 63% of all oil
palm plantations are established in secondary forests and scrub, 3% in primary forests and the
remainder 34% in other vegetation and land use types.12 According to WWF Indonesia, 60
percent of the conversion of tropical forests in Indonesia is due to the development of oil palm
plantations. This represents a much bigger area than the annual area actually planted because the
4
areas that have already been opened, 60 to 70 percent have not been utilised as oil palm
plantations.13
Investors who are also financing timber industries both in Indonesia and export markets are
increasingly exposed to business risks because Indonesia's tropical timber resources are
dwindling fast. But, even when forest conversion is legally sanctioned, investors are especially
exposed to reputation risk in their home markets when their name is, through their clients,
linked to deforestation by NGOs or others.
1.3.2
Forest fires and haze
For most plantation developers especially those in peat swamp areas mechanical land clearing
with heavy equipment is not cost-effective in Indonesia when compared to the use of open
burning.14 Open burning has therefore for many years been considered the most practical,
quickest and cheapest land clearing technique even though its use has been incrementally
prohibited by the Indonesian government. 15
Indonesia's forestlands are subject to fires each year, but during the exceptional draught (El Niño
years) of 1997 and 1998 fires ran out of control in many areas. The smog created blanketed large
parts of rural Indonesia, Singapore and parts of Malaysia for months and over 11.7 million
hectares of forestland, half of which was forest covered, burnt. The environmental and social
costs of these fires were vast. A recent report by CIFOR tags the cost of the 1997/98 fires and
haze at US$ 2.3-3.5 billion, not including the costs of carbon release which may have amounted
to as much as US$ 2.8 billion.16
Photo 1 Forest fires caused by oil palm development (Dumai March 2003)
Assessments showed that 46%-80% of all bigger fires occurred in plantation company
concessions, most of these were lit for land clearing purposes, while some resulted from arson in
connection to conflicts between communities and the companies or other causes.17 The
Indonesian government has banned burning practises by law since 1997 but forest fires in
plantation concessions are still a common phenomenon. Although few companies have been
sued and ultimately prosecuted, plantation companies that apply burning techniques for land
clearing expose themselves and their investors to legal/liability risks as well as reputation risk.
5
1.3.3
Conflicts with local communities
Oil palm plantations need a minimum size of approximately 4,000-5,000 ha to economically
operate a Crude Palm Oil (CPO) mill. However, Indonesian oil palm companies are typically
larger than 100,000 ha whilst the biggest companies may control as much as 300,000 ha or more.
With especially fast growth of privately owned plantations in the past decade, currently around
45% of the oil palm plantation is owned by private companies, 32% by government and 23% by
smallholders. 18 Labour (around 0.2 workers per ha) is usually brought in from other regions.
Indonesia's forestlands provide livelihoods to 40 million indigenous people and other rural
communities. Because these communities rarely have formal rights, licensed palm oil companies
have taken over large tracts of, what communities perceive as, customary rights lands. The
Indonesian Legal Aid Foundation (YLBHI) has stated that in 1998 alone, in 14 provinces,
people lost 827,351 hectares to private companies and investors. In the process, 214,356
households lost their sources of income. Such developments nurture numerous, persistent and
often violent conflicts. Some conflicts have prevented many companies from operating
altogether and in response, many have mobilised and paid the police, army or government
officials to suppress unrest, which often translate in gross human rights violations. 19
Some companies have encountered so much social unrest that they are inclined to return part of
their estates to local communities and there are a few cases in Indonesia where an informal
arrangement has been made. Companies are, however, very reluctant to see any form of formal
recognition of traditional land claims being recognised as this would set a precedent that could
affect many plantation companies throughout the country.
Smallholder schemes are usually promoted as an alternative, which guarantees rights to 2 ha of
land per family head. But such schemes are not acceptable to all communities and Potter and
Lee (1998) found in West Kalimantan that, with some exceptions, oil palm does not appear to
provide smallholders with sustainable livelihoods. Moreover, the credit schemes associated with
smallholder programmes make smallholders highly dependent on the Nucleus company and
they often end up with bad debt. 20
Apart from dispossession of their customary rights land, community resistance to oil palm is also
based on the lack of economic benefits. Local communities are the primary producers of
agroforestry and agricultural commodities (such as rattan, coffee, tea, rubber, cacao and rice) in
Indonesia. Unlike some alternative land uses such as oil palm, Lafranchi (2000) found that such
production systems are relatively resistant to market shocks, and does not require long time
horizons or large initial investments to realise returns. From the local perspective, customary
forest management ultimately provides a greater return to labour than oil palm.21
Although the Indonesian government does not recognise indigenous peoples' ownership of
(state-owned) forestland, the cause of marginalised communities is recognised by several
international conventions and covenants.22 Their plight is also subject to NGO campaigns in key
markets, often in connection to forest issues. Plantation companies that are associated with
human rights violations and marginalisation of local communities face business risks, and
expose themselves and their investors to reputation risk. The failure of the Indonesian
government to adequately recognise traditional land claims and settle community-company
conflicts poses a business risk for the companies in the present situation (prolonged conflict) as
well as in the possible future (potential loss of developed plantation land).
1.3.4
Legal issues
Even though compliance with legal requirements is part of any standard risk assessment
procedure, this issue is highlighted here because of Indonesia's fantastically complex and often
contradicting legal system. In addition, multinational investors and palm oil buyers are
6
increasingly facing the need to adhere to a variety of internationally agreed conventions (such as
ILO-standards) and voluntary codes-of-conduct (e.g. OECD Guidelines).
Some documented illegal activities in the Indonesian oil palm sub-sector include, for example,
land clearing without securing all required permits and illegal burning (see above). However,
because law enforcement in Indonesia is slack and thrives on "KKN" (Corruption, Collusion and
Nepotism) few cases result in prosecution and verdicts with significant impact on business
performance.
For investors, it is extremely difficult to oversee their clients' compliance to the web of laws,
decrees and other regulations. In the Indonesian regulatory context, anything illegal could also
easily be legalised through corruption. Government data may in some cases be so inconsistent
and unreliable that ultimately it is impossible to determine the legality or illegality of a certain
activity. Although inconsistency provides some level of protection to investors as well (charges
may be reversed), there is obviously a reputation risk involved. There is a continuous flow of
charges being announced which may not be followed up but which do tend to sink in, for
example, on the internet.
1.4
New risk assessment policies
The previous sections outlined some of the key environmental and social externalities created by
oil palm development and the types of risk they can represent to investors. Although most
financial institutions and their clients have yet to take these issues into account, the financial
sector is increasingly aware of the risks associated with their investments in environmentally and
socially sensitive sectors.
Specifically for the oil palm sub-sector, the four biggest Dutch banks (ABN AMRO Bank,
Rabobank, Fortis and ING Bank) were the first to take into account new risk assessment
parameters for their new investments in the Indonesian oil palm sub-sector. This commitment
followed a joint campaign of Friends of the Earth and Greenpeace in the Netherlands in 2001
and consultations by the banks with their Indonesian clients and some corporate clients in the
Netherlands.23 The NGOs had requested the banks that when new credits are extended or other
significant financial services are offered to palm oil companies, they would assure that their
clients should:
•
•
•
•
Not be clearing tropical rainforest (High Conservation Value Forest);
Not be involved in burning forestland;
Respect the rights and wishes of local communities;
Respect Indonesia's law and relevant international conventions.
This dialogue between NGOs and the banks had particular relevance because Dutch banks play
an important role in financing the Indonesian oil palm sector, as will be outlined in the next
chapter. As a group, the Dutch banks rank second behind the Malaysian banks and provide
17.1% of foreign financing of the Indonesian oil palm plantation sector. Three Dutch banks rank
among the top-10 of foreign financial institutions and Rabobank and ING Bank are among the
banks involved in recent new lending activity.
Although all four banks use the language as proposed in the four basic investment criteria, there
is considerable variation in the precise wording, the scope and implementation procedures
adopted by each bank and, thereby, their effectiveness.24
The sector specific initiative of the Dutch banks has not yet been followed up by other financial
institutions but discussions are ongoing and in general increasing number of financial
institutions are beginning to review current approaches to risk, sustainability and
7
multistakeholder issues. 25 And buyers of agricultural goods such as Migros (Switzerland),
Unilever (Netherlands-UK), Nestlé (Switzerland) and others have begun to develop, adopt and
implement sustainability guidelines for their (palm oil) suppliers.26
1.5
Renewed market activity
The new Dutch investment screens were developed when virtually no fresh capital flowed into the oil
palm sub-sector. But the resurgence of the CPO price on the world market during the past year has
improved profitability of most plantation groups and has renewed the interest of domestic and foreign
financial institutions in the oil palm sector. The market activity has not yet returned to the level of the
mid-1990s, but the number of new loans and stock issuances to oil palm plantation companies clearly is
rising again since the first quarter of 2002: 27
v Since the beginning of 2002, Kumpulan Guthrie has been planning to issue additional international
Islamic bonds worth US$ 245 million, to repay the rest of its December 2000 loan. The issuance now
is scheduled for somewhere in 2003.28
v In March 2002, Kuala Lumpur Kepong Bhd. started trading of American Depository Receipts (ADRs)
of its shares in the United States. Under the ADR programme a maximum of 3% of KLK’s current
issued and paid-up share capital will be traded in ADRs in the USA in the ratio of one ADR to ten
KLK shares. J.P. Morgan Chase & Co. (United States) is the sponsor of the programme. 29
v Rabobank issued a working capital facility with a maximum value of US$ 15.0 million to PT Astra
Agro Lestari in 2002.
v In 2002 LonSum obtained a Rp 90.0 billion (US$ 10.1 million) long-term bank loan from Bank
Mandiri (Indonesia) to finance its plasma programme.30
v In April 2002, ING Bank (The Netherlands) arranged a syndicated two-year US$ 100 million loan for
Indofood, which was described as “the largest offshore loan financing for an Indonesian corporate
since the start of the Asian financial crisis in 1997”. The loan will be used for working capital and will
mature in April 2004. We estimate ING Bank’s own participation at US$ 20 million.31
v In June 2002, PT Indofood Sukses Makmur issued five-year bonds worth US$ 280 million on
international capital markets. This was the largest offshore bond issue since the 1997-98 Asian
financial crisis. 72% was distributed in Asia as a whole, 8% in Europe and 10% with offshore US
accounts. The bonds were used to repay the US$ 250 million syndicated loan of June 1997. The bond
issuance was managed by Crédit Suisse First Boston (Switzerland). 32
v Rabobank appointed by PT Astra Agro Lestari in February 2003 to help it sell stakes in 10 non-oil
palm plantation subsidiaries to potential investors.
v In April 2003, PT Indofood Sukses Makmur announced it will issue five year bonds worth Rp 1,000
billion (US$ 125 million) in the first week of June 2003. The bond issuance is to be managed by
Bahana Securities, Danareksa Sekuritas, ING Bank and Mandiri Sekuritas (which is part of Bank
Mandiri).33
We expect that in the coming years, financial institutions will facilitate a much larger capital
input in the palm oil sub-sector in Indonesia. It is also expected that these transfers will be
intensively scrutinised by external stakeholders who wish to ensure that their interests (nature
conservation, local communities needs and wishes and legal compliance) are not harmed.
1.6
WWF's initiatives on oil palm and forest conversion
This report forms part of a larger research project co-ordinated by WWF Asia & Pacific Forest
Program and the WWF Forest Conversion Initiative which aim to show that financial
8
institutions providing services to oil palm companies need to adopt effective investment screens
that guarantee socially and environmentally responsible practises.
The outputs of the project are envisaged to be presented at several high level meetings with the
financial sector and other stakeholders organised by WWF and/or its partners (CIFOR, Forest
Trends, IFC, World Bank). Case studies will serve as campaigning tools for relevant WWF
National Offices in Europe and the USA.
1.7
Objectives of this case study
This case study aims to draw lessons from one particular financial transaction by a Dutch bank
that was arranged after it had committed to introduce and implemented new risk assessment
standards and procedures for investments in Indonesia's oil palm industry. As such this case
study does not only review the need for investment screens in general, it also evaluates the
effectiveness of an existing screen.
1.8
Selection of the case study
Indofood is a subsidiary of First Pacific Company in Hong Kong. Both companies belong to the
Indonesian Salim Group. Indofood is the biggest consumer of Crude Palm Oil in Indonesia and,
via its subsidiary PT Salim Ivomas Pratama, the company operates some 60,000 hectares (ha) of
oil palm plantations in Riau, Sumatra. ING Bank has a “long-lasting close relationship” with
First Pacific.34
In April 2002, it was announced that ING Bank (The Netherlands) had arranged a syndicated
two-year US$ 100 million loan for Indofood Sukses Makmur, which was described as “the largest
offshore loan financing for an Indonesian corporate since the start of the Asian financial crisis in 1997”.35
The deal was closed after ING had adjusted its risk assessment procedure guidebook,
communicated these to the group and assigned the credit committee to review cases that were
subject to the new policy.36
Profundo brought the deal to the attention of the Dutch NGOs and in October 2002, Friends of
the Earth Netherlands requested ING Bank to confirm that the agreed investment criteria were
indeed applied in this land mark deal.37 The bank responded on November 28, 2003 stating that
the transaction at hand was "indeed tested against its strengthened investment policy even
though at that time, the policy was not yet officially implemented (March 2002)." With regard to
the Indofood loan, ING stated that the bank was convinced that the transaction took place
within the norms of the new policy. The bank stipulated that the working capital facility could
by no means by used for the purchase of new plantations or for purchasing new land for
cultivation. ING could call an 'event of default' if Indofood failed to meet these conditions.38
A few months later, in January 2003, WWF Riau was informed that a tiger was seen in the PT
Gunung Mas Raya an oil palm estate in Rokan Hilir, in the north of Riau province. The estate
area where the tiger showed up is a full subsidiary of PT Indofood Sukses Makmur. WWF Riau
first visited the estate in February 2003.
The case was also brought to the attention of WWF Asia Pacific Forest Program and WWF
Indonesia who are, just as WWF Riau, partners in the WWF Network Forest Conversion
Initiative. WWF had just allocated a research grant to AIDEnvironment and Profundo to
conduct a case study as outlined above.
9
In March 2003, WWF Riau and the AIDEnvironment consultant visited the Indofood Research
Office in Teluk Siak. The Head of Research, Mr Sugih Wanasuria, reconfirmed that a tiger was
observed in the Sungai Rumbia estate and suggested that WWF and the consultant would visit
the estate.
1.9
Methodology
This report is based on the information gathered during field visits in Indofood's Sungai Rumbia
estate in February and March 2003. The WWF representative and the consultant surveyed the
estate and adjacent forest area in order to determine the reason why the tiger had been begun to
enter the estate. It was clear that this required a broader inventory of the company's activities
and related environmental and social issues. Therefore a number of stakeholders in and around
the plantation area, including people from the Orang Sungai Kubu community, were
interviewed and a boat trip inside the swamp was made to check the condition of the forest.
WWF furthermore collected and prepared the maps presented in this report. The report is
supplemented with a profile on Indofood's financial and market stakeholders, compiled by Jan
Willem van Gelder (Profundo, the Netherlands).
In this report three types of risk are used. Reputation risk refers to the risk that banks and
plantation companies may suffer from declining trust and credibility as a result of public
criticism on their policies and practises based on perceived performance. Business risk refers to a
group of risk factors that may affect the company's productivity, profitability and thus viability.
When this risk affects the company's ability to service debt, this poses credit risk to the investor.
Legal infractions represent legal or liability risks to the plantation company and in potentially
also to the investor.
1.10
The content of this report
Chapter 2 provides background to the corporate structure of PT Indofood and its plantation
companies followed by a description and analysis of the field level practises in one of Indofood's
plantation subsidiaries, PT Gunung Mas Raya. The findings of the case study are analysed in the
broader context of the risks to which Indofood and its major financial and market stakeholders
may be exposed to (Chapter 4).
1.11
Acknowledgements
This report was compiled in close collaboration with Purwo Susanto of WWF Riau. He has
contributed to significant portions of the text. During field trips, the Indofood staff in the
Research Station in Teluk Siak and the PT Gunung Mas Raya plantation estates provided
helpful guidance and assistance to the WWF representative and the consultant. Several
representatives of the Sungai Kubu community in Rokan Hilir provided valuable insights in the
issues that they are facing.
In addition, the following people have provided valuable contributions to this report: Rod
Taylor (WWF Asia Pacific Forest Program), Fitrian Ardiansyah, Ningrum Widyastuty and
Anwar (WWF Indonesia), Duncan Pollard (WWF International), Tom Vellacott and Bella
Roscher (WWF Switzerand), Andrew Ng (WWF Malaysia), Masya Spek (consultant to CIFOR),
Chris Lafranchi and Bellinda Morris (Narual Equity), Paul de Clerck, Monique de Lede and
Hilde Stroot (Friends of the Earth Netherlands), Ed Matthew (Friends of the Earth England,
Wales and Northern Ireland), Ruddy Lumuru and Abet Nego (Sawit Watch), Teoh Cheng Hai
10
(independent consultant), Zul Fahmi (Jikalahari), Gerard Persoon (University of Leiden) and
Ed Colijn (INCL).
This case study was made possible through a grant from the WWF Asia Pacific Forest Program
and was ultimately funded by USAID.
11
12
Chapter 2
2.1
Salim Group and Indofood Sukses Makmur profile
Address
PT Indofood Sukses Makmur Tbk.
Head Office
Ariobimo Sentral Lt. 10,
Jl. HR Rasuna Said Kav. 5 X-2,
Jakarta 12950, Indonesia
Phone : (021) 522-8822
Fax :
(021) 522-6014
Contact Person in Jakarta:
Mrs. Eva Riyanti Hutapea
President Director PT Indofood Sukses Makmur
Mr. Rudyan Kopot
CEO PT Indofood Sukses Makmur
Contact person in Pekanbaru, Riau:
Mr. Chong Kiew Chai
Vice President Operations Indofood Sukses Makmur
2.2
The Salim Group
Until the economic crisis of 1998, the Salim Group was the largest business group in Indonesia.
The group generated US$ 20 billion in annual sales, and comprised 500 companies with 200,000
employees. The Salim Group accounted for 5 percent of Indonesia 's economic output, and was
active in the food industry, agribusiness, the car industry, building materials, property,
telecommunications, banking and trading.
The Salim Group was founded by the Chinese immigrant Liem Sioe Liong, who later changed
his name to Sudono Salim. Liem was one of the closest friends and business partners of former
president Suharto. Presently, the group is still controlled by the Salim family, and is headed by
Sudono’s son Anthony.39
Other important stakeholders in parts of the Salim Group are the family of ex-president Suharto
and the Pribadi family.40 The Salim Group had various business links to Soeharto’s children,
through Bank Central Asia (Siti Hardijanti Rukmana and Sigit Harjojudanto), a power project in
East Java with US power company Enron (with Bambang Trihadmodjo) and Indofood (with
Soeharto’s cousin Sudwikatmono).41 Together with the Suharto family and its close friends Bob
Hasan and Prajogo Pangestu, the Salim Group for a long time also controlled the Astra Group.42
13
During the financial and political crisis of 1998, PT Bank Central Asia - the main bank in the
Salim Group and the largest private bank in the country - ran into serious trouble. Firstly, many
companies in the Salim Group were not able to repay the loans supplied to them by BCA. Then
followed the resignation of President Suharto in May 1998, whose family owned 30% of BCA.
Riots left the Jakarta home of Salim-patriarch Liem Sioe Liong in ruins. These events triggered
a run on the bank, with many of its 8 million depositors trying to withdraw their money within
one week. The government feared BCA's collapse would destroy what remained of the banking
system. By large government loans, the Indonesian Bank Restructuring Agency (IBRA) tried to
keep BCA alive. As a consequence, IBRA was left with a claim of Rp 53,000 billion (US$ 5.9
billion) on the Salim Group. To pay off this debt, the Salim Group at the end of 1998 turned over
shareholdings in 108 companies to the IBRA, including its shareholding in BCA. The IBRA
parked these Salim holdings under the umbrella of PT Holdiko Perkasa, which at this moment
has sold more than half of these companies to third parties. As the proceeds of these sales were
not sufficient to pay off all of Salim’s debts, the Salim Group was forced later to hand over
additional shareholdings to IBRA. In November 2002 IBRA finally announced that all debts of
the Salim group had been settled. 43
Clearly, the Salim Group has survived the financial crisis only by downgrading. Nevertheless, it
remains one of the largest business groups in Indonesia, with extensive holdings in the rest of
Southeast Asia. Its most important holding company is First Pacific Company Ltd. in Hong
Kong.
2.3
The rise and fall of Salim Group's oil palm interests
The Salim Group used to be a major owner of oil palm plantations in Indonesia. Since 1983, the
Salim Group intensively co-operated with the Raja Garuda Mas Group in developing oil palm
plantations in North Sumatra, Jambi and Riau. 44 Between 1984 and 1990, Salim also participated
in the holding company PT Sadang Mas, a joint venture with the Sinar Mas group in Riau, that
developed the PT Ivo Mas Tunggal estates.
Throughout the 1980s and 1990s, the Salim Group expanded its land bank for the development
of, mostly, oil palm plantations in South Kalimantan, Aceh, North Sumatra, Jambi, South
Sumatra and East Kalimantan. Around 1998 the total concession area of the oil palm plantations
of the Salim Group reportedly totalled 1,155,745 hectares, of which 95,310 hectares were already
planted. 45 However, the Group's stronghold on its land bank began to slip in conjunction with
the onset of the Indonesian monetary crisis and the fall of the New Order regime:
• In mid-1998, the Salim Group first lost the rights to develop some 100,000 ha of land for
oil palm in the forest-rich Subuku-Sembakung region in East Kalimantan because these
were allegedly obtained through corruption "KKN-practises".46
• In June 1999, the Samihim Dayak in South Kalimantan won a lawsuit against seven oil
palm subsidiaries of the Salim Group over large-scale forest fires in 1997. The plantation
companies PT Laguna Manidiri I to III, PT Langgeng Muara Makmur II and III, PT
Paripurna Sawkarsa PT Swadaya Andika II and I were found guilty of burning farming
areas owned by local people. The court ordered the seven firms to pay Rp 150 million in
compensation to the landowners. 47
• At the end of 1998, the Salim Group had to transfer shareholdings in 25 oil palm
plantations in Sumatra, Kalimantan and Sulawesi to the IBRA. The total area of these
plantations is 260,000 hectare. In November 2000, Holdiko sold these plantations to the
Malaysian company Kumpulan Guthrie Berhad for Rp 3,400 billion (US$ 368 million).48
14
• Also in November 2000, Holdiko sold a majority stake in Salim Oleochemicals, a group of
seven marketing- and production companies in Indonesia, Singapore, Germany and the
United States. Salim Oleochemicals produces intermediary products for the detergent and
personal care industries, based upon palm oil. The Indonesian investment group PT
Bhakti Investama paid US$ 131 million for Salim Oleochemicals.49
• In April 2003, it was announced that IBRA will sell off a 20% interest in Salim Group's
cooking oil company PT Bitung Menado Oil, and another 20% in the group's retail arm
PT Indomarco Prima.50
2.4
Indofood Sukses Makmur
Salim Group's recent disposals do not mean that the group has left the oil palm business
completely. Through the Indonesian company PT Indofood Sukses Makmur Tbk. - a subsidiary
of First Pacific - the group still owns several oil palm plantations and palm oil processing and
trading companies.
PT Indofood Sukses Makmur is one of the largest Indonesian food companies with a turnover of
US$ 1.8 billion in 2002. Its products account for approximately 90% of Indonesia's instant
noodles market, 80% of its wheat flour market, and more than 60% of the domestic market for
branded cooking oils, shortenings and margarine, baby foods, and snack foods. The company has
factories in Java, Sumatra, Sulawesi and Kalimantan as well as in other countries. Around 12
percent of total sales are exported, to a total of 36 countries.
Indofood has the following relevant palm oil related interests:
• With an annual sales volume of some 9 billion packs, Indofood is one of the world's largest
instant noodles manufacturers. CPO accounts for some 13 percent of the ingredients used
for manufacturing instant noodles. Combined with its large production volumes of
cooking oil and margarine, PT Indofood Sukses Makmur without doubt is the largest
Indonesian consumer of CPO.51
• PT Indofood Sukses Makmur owns 80% of the shares of PT Intiboga Sejahtera, which is
the largest producer of cooking oil, margarine and shortening in Indonesia.52
• PT Indofood Sukses Makmur owns 80% of the trading company PT Salim Oil Grains (PT
SOG), the sixth largest exporter of CPO from Dumai in 2002.
15
Figure 1Organigram Indofood53
• In addition to its Indonesian processing facilities, Indofood operates several palm oil
refineries in Russia, China and elsewhere. Its total CPO usage amounts to 1 million tonnes
per year.54
• PT Indofood Sukses Makmur owns 80% of the shares of PT Salim Ivomas Pratama, which
in turn owns a majority share in four other plantation companies in Riau.
2.5
Indofood's oil palm plantation operations
Indofood's five oil palm plantation companies operate a total area of 59,094 hectares, of which
53,973 hectares were planted at the end of 2001. In addition to its own plantation, PT Salim
Ivomas owns four plantation companies in Riau: PT Cibaliung Tunggal, PT Gunung Mas Raya,
PT Indriplant (Napal estate) and PT Serikat Putra I.55 Its six CPO mills produced 275,651 tons
of CPO in 2001. The Kumpulan Guthrie Group did own minority shareholdings in these five
plantation companies since December 2000, but sold these to Harvest Holders Harmony Ltd.
(Mauritius) and PT Amantara Kalyana (Indonesia) in November 2002. We think these
companies are subsidiaries of Indofood, which would give Indofood full ownership over the five
plantation companies. 56
16
Apart from PT Indofood Sukses Makmur, the Salim Group also is a co-owner of the oil palm
plantation holding company PT Inti Indosawit Subur (PT IIS), together with the Raja Garuda
Mas Group. In 1997, PT IIS operated 108,000 hectares of oil palm plantations and 13 CPO-mills
in Sumatra, with a combined annual production of 500,000 tonnes CPO. PT IIS planned to
double its CPO output by the year 2000, and began opening up 92,000 hectares of oil palm estates
in Central Kalimantan.57
The following table provides an overview of the oil palm plantation companies that at present
belong to the Salim Group.58
Table 2-1 Plantation companies within the Salim Group
Majority shareholdings
Plantation companies and
estates
Salim Ivomas Pratama
- Sungai Bangko
- Sungai Rumbia 1
- Sungai Rumbia 2
Gunung Mas Raya
- Bukit Raja
- Lubuk Raja
- Balam
- Sungai Dua
- Kahyangan
- Kencana
- Cibaliung
Cibaliung Tunggal Plantation
Indriplant (Napal estate)
Serikat Putra I
Cemerlang Abadi59
Bumi Permai Lestari Persada
% owned
Other
Owners
Start of
operations
Area
Location
(ha)
100.0%
1994
21,656 Bengkalis, Riau
100.0%
1992
12,807 Rokan Hilir, Riau
100.0%
1989
100.0%
1989
100.0%
n.a.
n.a.
1990
n.a.
1992
4,816 Rokan Hilir, Riau
Pernanap, Indragiri Hulu,
6,360
Riau
11,911 Pelalawan, Riau
7,412 South Aceh
25,806 Indragiri Hilir, Riau
Minority shareholdings
Gunung Melayu
Inti Indosawit Subur
n.a.
Raja Garuda Mas
1983
n.a.
Raja Garuda Mas
n.a.
Inti Indosawit Subur
Inti Indosawit Subur
Inti Indosawit Subur
Saudara Sedjati Luhur
n.a.
n.a.
n.a.
n.a.
Raja Garuda Mas
Raja Garuda Mas
Raja Garuda Mas
Raja Garuda Mas
n.a.
n.a.
>2000
1970s
2.6
10,375 Asahan, North Sumatra
Indragiri Hulu and
10,565
Bengkalis, Riau
29,300 Jambi
3,062 North Sumatra
92,000 Central Kalimantan
2,319 Asahan, North Sumatra
Indofood's expansion plans
Since the Salim Group lost its control over some 260,000 ha of oil palm plantations and
greenfields in 1998, Indofood's food processing and trading subsidiaries had to buy 55-70% of
their CPO requirements from third parties such as Astra Agro, Sinar Mas and others. With a
total consumption of 1 million tonnes CPO per year, it is estimated that the group would require
at least another 160,000-210,000 ha to fully cover the group's total CPO demand.
Within the licensed area, the Indofood's subsidiaries have very little space left to expand. As of
2000, the five main Indofood subsidiaries in Riau had planted 52,805 to 53,530 ha which means
17
that Indofood had around 4,750 ha to 5,564 ha left unplanted (8-9% of the total area).60 This
explains why Indofood has the intention to expand its oil palm plantation holdings:
• In May 2001, PT Indofood Sukses Makmur agreed to acquire a 30% shareholding in Golden
Agri-Resources for US$ 97.6 million from its majority shareholder Asia Food & Properties,
belonging to the Sinar Mas Group. Subsequently, PT Indofood Sukses Makmur would
increase its shareholding in Golden Agri-Resources to over 50%. ING Barings (United
Kingdom / The Netherlands) advised on this deal. But in August 2001, PT Indofood Sukses
Makmur announced that it had called off the deal, since the financial troubles of the Sinar
Mas Group made a due diligence procedure impossible.
•
PT Indofood Sukses Makmur at the same time announced that the company was looking at
PT Astra Agro Lestari, PT PP London Sumatra Indonesia Tbk., PT Bakrie Sumatera
Plantations Tbk., and PT Socfin Indonesia as possible acquisition targets. PT Indofood
Sukses Makmur aims to achieve greater control of the supply of crude palm oil used to make
noodles and produce edible oils. Analysts believe that PT Astra Agro Lestari is PT Indofood
Sukses Makmur's main target.61
18
Chapter 3
3.1
Field level operations of PT Gunung Mas Raya
The concession areas
PT Gunung Mas Raya commenced commercial operations in 1992.62 In February 4, 1993 the
Investment Coordination Board (BPMDN) in Jakarta issued a plantations operation permit to
PT Gunung Mas Raya through the Letter of Establishment (SP) No. 36/I/PMDN/1993/:04-021993.63 PT Gunung Mas Raya appears to own several separate concession blocks in Rokan Hilir.
Two blocks are located north of overpass road from Bagan Batu to Pekanbaru (see map below).
Map 1 Oil palm concessions in Rokan Hilir, Riau (source: WWF Riau)
3.2
Management of existing plantations
In this paragraph, we will discuss some features of the environmental aspects of the management
in the existing plantations in the Indofood oil palm plantations.
3.2.1
Biodiversity
Numerous tree stumps in the 10-15 year old PT Gunung Mas Raya estates were observed, which
suggests that the company converted tropical lowland rainforest at the time when the first estates
were developed. Since much of the plantation area was established some time ago, a number of
common species such as kingfisher, ayam ayamah (wild chicken) and wild boar can be observed
in the estate area. Although these species are quite common in oil palm estates, they probably
also thrive because the natural forest is not too far away and possibly also because pesticide usage
in the estates is minimised (see below). Fishing (notably gabus, a kind of catfish) and hunting is
a popular activity among workers and does not seem to be restricted by the estate management.
19
3.2.2
Integrated Pest Control (IPC)
According to director of the Research Station, Indofood introduced barn owls (burung hantu) as
a means of pest (rat) control in all its estates. Starting off with 21 individuals in 1997, a
commitment to introduce the owls in all estates and to phase out rhodenticides, the population
increased to almost 12,000 in 2002. Indofood argues it is one of the few companies which has
introduced the barn owl in all of its estates, unlike many other companies who primarily
continue to apply rhodenticides. Indofood is proud of its experiences in this area and may make
a video on the practise.64
Photo 2 Indofood's barn owls (picture P.Susanto)
In addition to barn owls, Indofood uses the commonly applied viruses to counter grasshopper
and locust attacks. 65 No information was gathered about the company's application of herbicides.
3.2.3
Recycling nutrients
In some of Indofood's estates waste materials are fully re-used since 1995. The older palm leaves
are typically stacked in rows for decomposition by the workers in the estate. Furthermore,
Indofood recycles the Empty Fruit Bunches (EFB), wet-solid (WDS) and effluent of the CPO
mills waste in its estates.
Photo 3 Solid waste and EFB recycling in Indofood estates
The EFB and WDS are applied directly in onto the soil as organic fertiliser. The optimum
volume applied is 75 tonnes/ha/year. Alternatively, a mixture of 37.5 tonnes of EFB and 27.2
tonnes of WDS can applied annually. It is found that with 75 tonnes/ha/year, Fresh Fruit Bunch
(FFB) production can be boosted with up to 20%.
20
The liquid effluent from the CPO mills is also recycled in the plantations through a ground
application system of connected open basins in the ground. The effluent gradually penetrates the
soil and fertilises the surrounding oil palms. This system is not commonly applied in Indonesian
oil palm estates and may significantly reduce Biological Oxygen Demand (BOD) in rivers and
streams where effluent is normally released. This is, however, provided that the effluent basins
and canals are properly laid out. In the PT Gunung Mas Raya estate, some canals were in very
close proximity of small streams that may result in nutrient leakage and eutrophication of
surface water. No information is available on the possible impacts of the system of ground water
quality.
Photo 4 Liquid waste recycling in Indofood estates (pictures: P. Susanto)
Although there are many factors in play that determine productivity, the waste recycling
program in the oil palm plantations in the Indofood estates is believed to contribute to the
company's fairly high average yield of 24 T/ha.
The economic benefits of waste recycling in the Indofood estates are impressive. First, the use of
liquid waste (effluent) as fertiliser allows a cost cutback on inorganic fertiliser of Rp.
1,686,400/ha /year. Income from additional yield can be as high as Rp. 1,920,000/ha/year.66
Second, the profit of EFB and WDS recycling was equal to Rp. 383,000/ha in 1999. Such figures
offset investments in equipment and infrastructure within 2 years.
However, waste recycling can not fully replace inorganic fertiliser. In the Teluk Siak estate (exIndofood), the volume of EFB produced in a 10,000 ha estate with a 50T/hr CPO mill suffices to
fertilise 500 hectares whereas the effluent can be applied only in 150 hectares. In other words,
inorganic fertiliser application will still be required in 93% of the plantation area.
3.2.4
Labour
Much of Indofood's plantation work force is not indigenous to the area, a substantial share of the
workers are from (North) Sumatra. Working conditions appear to be similar to those in other
consolidated plantation areas in Riau. A typical workers house is provided for free by the
company and has 2 bedrooms, 1 kitchen and 1 bathroom. Salaries are also at average level in
Riau: Rp 400,000 (US$ 45) basic salary and Rp. 100,000 (US$ 12) for overwork. Workers have
one day off every week.
3.3
Expansion activities
3.3.1
Recent land clearings
The northern end of the present PT Gunung Mas Raya concession area has a typical arch-shaped
form that is easily recognised on satellite images and maps. The forestland was cleared and
planted by PT Sadang Mas between 1984 and 1992 when most plantation blocks were established
21
on mineral soils. In line with the overall shape of the concession area, the company stopped
expanding into the peat swamp in the north in 1989 and for most part of the 1990s, the northern
border between the plantations and the forest remained stable. Satellite images show
furthermore that a major expansion in the early 1990s took place in the eastern part of the
concession and between 1995 and 2000, the Gunung Mas Raya estates expanded further to the
west, neighbouring what appear to be clearings made by local farmers.
Since 1998/99, PT Gunung Mas Raya has been expanding the Sungai Rumbia and Sungai Balai
estates to the Northeast and north of the plantations established in the late 1980s. The recent
land clearings show up on 2000 and 2002 satellite images as pink:
Map 2 The PT Gunung Mas Raya concession and land use cover in April 2000
Red line: plantation area according to PT Gunung Mas Raya; black line: concession area
according to the Riau Department of Forestry and Agriculture.67
Map 3 The PT Gunung Mas Raya concession and land use cover in July 2002
22
PT Gunung Mas Raya cleared approximately 500 ha between 2000 and 2002, mostly in the
Sungai Balam estates on the Northeast. From early 2003 onwards, PT Gunung Mas Raya was
clearing the forests in the northern Sungai Rumbia estate. Company maps suggest that a full row
of 300x800m blocks will be added to the plantation area (approximately 1,000 ha). The recent
expansions involve the conversion of peat swamp forests which, in view of its definition, could
be considered High Conservation Value Forest (HCVF).68
3.3.2
Expansion in or outside the concession boundaries?
According to one of the estate managers, the recently cleared areas are within the boundaries of
the company's concession. Statistics on the total area held and developed by PT Gunung Mas
Raya seem to confirm that until 2000, the company had indeed not fully developed its concession
area. According to Capricorn Indonesia Consult (CIC) the total area allocated to PT Gunung Mas
Raya is 12,807 hectares of which, according to Holdiko, 9,317 ha (73%) was planted in 2000. This
left 3,490 ha undeveloped. 69
However, it could be that the remaining area in 2000 represented the one or two separate PT
Gunung Mas Raya concession blocks Southeast of the PT Ivomas Tunggal concessions north
respectively south of the overpass road. Furthermore there is a lack of clarity with regard to the
total concession area under PT Gunung Mas Raya. According to the Holdiko website, PT
Gunung Mas Raya holds 12,803 ha, whereas a map as of 2000 from the Department of Forestry
in Pekanbaru shows that the PT Gunung Mas Raya concession area is only 8,569.5 ha.
Moreover, concrete indications that the company may be working outside its legally allocated
concession area are derived from an overlay of satellite maps with the concession map issued by
the Riau Department of Agriculture (see maps 2 and 3 above). This overlay clearly shows that
the plantation area developed by the company does not match with both size and shape of the
concession boundaries.
If the company operates outside its concession boundaries then it would be in violation with the
Indonesian Forest Act, article 50 paragraph 3. The responsible company staff could then be held
liable to punishment by imprisonment up to a maximum of 15 (fifteen) years and a fine up to a
maximum of Rp. 5 billion. 70
However, it would at present be premature to conclude that PT Gunung Mas Raya is operating
outside its concession boundaries because no other maps for confirmation could be obtained
(such as the compulsory map in the company's Environmental Impact Statement, AMDAL).71
Moreover, as PT Gunung Mas Raya's clearings as of 2000-2002 mostly fall within the former PT
Essa Indah Timber logging concession, the latter company may have requested the relevant
forest conversion permits, possibly on PT Gunung Mas Raya's behalf. This has not been
researched.72 Last, concession maps issued by various government authorities show major
differences in the location of the PT Gunung Mas Raya concession blocks. Maps from the
Ministry of Forestry consistently show three different blocks with the northern-most archshaped block being mapped out about 5 kilometres east of the actual location of the present
plantation area. 73
The lack of reliable government maps, data about the company's full estate area and permits
issued is a serious problem for the company and its direct stakeholders and for external
stakeholders such as local communities and NGOs. Even the government can not rely on its own
information. This means that the company may be falsely alleged of illegal land clearing
resulting in reputation damage that is not easily restored; it may also mean that an investor bases
its decision on wrong information that suggests that the company works within legal limits.
23
3.3.3
Illegal logging
To the north and east, the logging rights for the peat swamp production forest were until
recently held by PT Essa Indah Timber (100,000 ha, Uni Seraya group), whose concession for
selective logging overlapped with the eastern half of the PT Gunung Mas Raya oil palm
concessions (see appendix I). In April 2003, the Ministry of Forestry withdrew the logging
license because of poor management practises. 74
The limited production forest area directly north of the PT Gunung Mas Raya plantation is
probably not under logging concession anymore. According to a map produced by Forest Watch
Indonesia which was based on the 2001 Ministry of Forestry data, this area and the eastern part
of the PT Gunung Mas Raya concession is under a logging concession held by PT Cipta Jaya
Andalas Timber Industry (PT CAYANTRI). 75 It is probable that this license has since long been
withdrawn as more than 80% of the area is deforested. North of the CAYANTRI area, PT
Sumatra Sinar Plywood Industri (Raja Garuda Mas) is converting a former logging concession of
the Sumalindo group (PT Inti Prona) into a timber plantation.
So, presently, the forest area north and east of the PT Gunung Mas Raya concession is officially
under the ownership and management of the Riau Forest Department and effectively, there is no
management at all. As a result, the whole forest block north of PT Gunung Mas Raya is under
pressure from illegal logging activities and forest clearing (see map 2 and 3). Members of the
local Orang Kubu communities, indigenous to the area, have also begun to extract logs because,
as one of those interviewed stated: "if we don't take the logs, outsiders will come and take them
all the same".
Photo 5 Logging activity near the PT Gunung Mas Raya oil palm plantation
In the area slated for clearing by PT Gunung Mas Raya, logging is also taking place. This is not
completely independent from the plantation company's activities.
There are at least 5 couples of "illegal loggers" active in the forest directly adjacent to the oil palm
plantation. Some of these men reported they are from East Java and arrived in the area as
24
recently as January 2003. They said they were contacted and told by an unknown individual that
"they could earn money from logging in Riau". Using chainsaws, one logging team produces 1
m3/day/per person, which is sold for approximately Rp. 140,000/m3 to middlemen. Together,
they could make around Rp 3,5 million (US$ 400) per person or more per month. The loggers
are not only paid for the timber produced, but also Rp. 75,000 per m3 of wood used to construct
paths inside the forest using planks and flinches. Logs are sawn with chainsaws inside the forest
and planks are subsequently transported out by use of bicycles and the drainage canals inside the
PT Gunung Mas Raya plantation. There, the wood is loaded on pick up trucks that use PT
Gunung Mas Raya access roads. The logging activity is currently organised by a middleman
from Ujung Batu, who is said to on-sell the wood to a local sawmill.
The loggers stated there is no collaboration between PT Gunung Mas Raya and them. In this
case, their operations are illegal and the company must stop them from logging in the concession
area. 76
But PT Gunung Mas Raya does not hinder the loggers access to the forest area and neither does
it stop the middlemen's pickup trucks access via the plantation gates to the forest fringe to haul
the timber from the forest adjacent to the plantation to the main road. Unless the middleman has
obtained, in any way, a Sawntimber Transportation Permit (Surat Angutan Kayu Olahan,
SAKO), the company should also stop the middleman from illegal pickup of illegal timber. 77
Even if there is no formal collaboration between the loggers and the company, the latter directly
benefits from the logging because the larger trees in the peat forest are removed which is difficult
without heavy equipment or burning. Furthermore, some estate workers reported that the
middlemen have repeatedly threatened to fight back if the company would prohibit them to use
the plantation roads. The middlemen are allegedly people living around the plantation area, who
also control the company's access to the highway. If the company would not allow them to use its
access roads to the forest, they could in turn block PT Gunung Mas Raya's trucks from entering
or leaving the plantation.
Photo 6 Timber transport activity in the PT Gunung Mas Raya oil palm plantation
It is not without reason that plantation companies are not allowed to remove logs from
conversion forests themselves: it could provide an incentive to apply for a permit, sell the
25
remaining timber stand and abandon the area. 78 The concept is thus that licensed subcontractors would only take the logs from within the allocation concession, but the illegal
loggers in the PT Gunung Mas Raya area do not know where the company's concession
boundaries are and would understandably be tempted to take logs deeper inside the forest. This
could ultimately reduce the standing timber volume in the forest below the 20m³/ha limit. This
is not necessarily opposed to PT Gunung Mas Raya's interests as it could then inform the
District government that the forest is in a critical condition and thus can not be rehabilitated.
The company could subsequently recommend the government to lift the limited production
forest status and change it to conversion forest status. If the Ministry of Forestry approves the
change in land status, this could ultimately provide the company the legal right to clear the
remaining forest. This step-wise approach to circumvent the spirit of the law is common practise
throughout Riau and, indeed, the rest of Indonesia.
The key threat to the forests surrounding the PT Gunung Mas Raya concession is the lack of
clearly delineated and responsible ownership. Logging activities and forest conversion for oil
palm development are intimately connected to mutual benefit of the loggers and the plantation
company. Illegal logging is a sensitive issue in the international policy and market debate on
forests that investors would not want to be associated with this. The fantastically complex system
of licensing makes it very difficult for investors to judge the legality of its clients' operations.
3.3.4
Floods and drainage of peat swamp forest
PT Gunung Mas Raya's recent expansion activities are taking place in flood prone swamp.
Probably already a few years ago, the company connected its plantations to the natural streams
and drainage canals constructed by PT Essa Indah Timber deeper into the forest via a single
drainage canal inside the forest. On either side of this channel, which was estimated to be 300500 meters long, the forest has been degraded and is partly burned. Along the channel, several
temporary houses/shacks and stacks of lumber were seen, indicating that the PT Gumung Mas
Raya drainage canals provide loggers access deeper into the forest.
The existing drainage system was unable to avoid the flooding of the recently planted row of
blocks adjacent to the forest between October 2002 up to February 2003. Surprisingly, the flood
level did not kill many of the oil palm seedlings although growth appears to be hampered. These
lands appear to be flooding regularly and affect growth. Immature oil palms were observed in
blocks that were planted as long ago as 1998. In normal seasons, the drainage canals are also
believed to affect the hydrological conditions in the swamp area. A member of the Orang Sungai
Kubu who lives and works in the forest area for longer periods of time reported that, overall, the
water level in the swamp forest rivers had been dropping and that water quality had declined in
the past four to five years. He held the expansion activities of PT Gunung Mas Raya responsible
for this trend.
The company realises that the plantation blocks in the expansion area require the development
of a more extensive drainage system. In January 2003, PT Gunung Mas Raya had purchased (or
possibly rented) an excavator which was working round the clock to build drainage canals and
adjacent roads around each new plantation block. Indofood works with a consultant to improve
its drainage systems and fertiliser application practises.
The development of the peat swamp forest poses higher costs for PT Gunung Mas Raya and this
is probably why the company did not significantly expand into the northern swamp until 1998.
At that time, studies of the initial costs of setting up an estate on peat soil suggested that it is
54% more expensive than on mineral soil. 79 More recent estimates put this figure at 40% greater
than on 'ideal' dry, undulating land but the additional costs arise primarily from the necessity to
dig drainage / transport canals instead of making roads, and from the need to compact the peat.80
Assuming that PT Gunung Mas Raya establishes its undeveloped concession area in the swamp
forest, Indofood faces a total additional cost of around US$ 2,000,000 (at 2001 exchange rates).
26
Table 3-1 Typical establishment costs (rupiah) for oil palm including capital and infrastructure
(excluding factory) from the start of land clearing to the end of Year 3 in Sumatra in 1999 by land
type.81
Land type
Secondary forest – undulating
Sandy areas
Secondary forest – hilly (50 percent terraced)
Secondary forest - peat soils
Cost (Rp/ha)
13,100,000
14,100,000
15,100,000
18,400,000
Despite the higher cost of development, nevertheless, with careful water management and the
application of trace elements, fruit yields in peat soils are found to be excellent.82 In fact, because
of the ample ground water and nitrogen stock in peat soils, FFB yields per hectare in peat swamp
tend to exceed those on mineral soils, thereby leveraging longer-term comparative cost-benefit
ratios.
The other side of the coin are the ecological externalities of peat swamp development, which are
not or only partially incorporated in the economic cost-benefit analysis. Drained peat swamps
lose their ecological functions:
•
•
•
•
•
•
•
•
Soaking and storing water to mitigate floods and as a water catchment;
Buffering coastal lands from the intrusion of salty marine water;
Filtering pollutants which will otherwise degrade lakes, rivers and groundwater;
Providing timber and non-timber products;
Providing critical wildlife habitat;
Serving as a key store of the greenhouse gas carbon dioxide; 83
Drainage canals provide loggers access deeper into the forest;
Regeneration and rehabilitation of a damaged peat swamp is virtually impossible. 84
Whereas Indofood seems to address the medium-term business risks associated with peat swamp
conversion, overall doubt remains about the sustainability of developing the oil palm plantations
in such habitat if ecological externalities are considered in the equation.
3.3.5
Fires and burning
There is little doubt that most of the PT Gunung Mas Raya and PT Ivomas Tunggal estates
planted from 1984 onwards were cleared through open burning. Even after more than 15 years
after land clearing, black burn marks on old tree stumps can still be observed inside the now
mature plantations.
Government Regulation No. 28 of 1985 on Forest Protection prohibited forest burning practices
with exception for special cases approved by the legal authority (Article 10, Paragraph 1). 85 It is
unknown if the Salim Group's plantations had obtained such approval but clearly this regulation
has been ineffective in stopping open burning practises.
In the past five years, various laws, governmental decrees and guidelines on burning have been
released. The 1997 Environment Management Act No.23 first recognised corporate liability for
environmental crime, including the crime causing forest and land fires. Thus, that every
concession or plantation company is responsible for fire outbreaks in its concession area. 86
As of February 2001, Government Decree No. 4/2001 Act on Environmental Pollution related to
Forest Fires and/or Land Burning explicitly prohibits all persons and their businesses to cause
forest fires and use fire for land clearing in their locations. They are obliged to extinguish all
fires and take fire prevention measures including monitoring of fire outbreak and reporting
27
(based on satellite images) on a half-yearly basis to the Governor's Office, District Head, the
mayor and other relevant technical institutions (Art. 13-15).87
Violations are subject to sanctions specified in the Environment Management Act. Article 41
states that offenders found guilty of causing haze and damaging the environment can be
sentenced to a maximum of 10-year jail sentence and a fine up to 500 million rupiah (approx.
US$ 58,000), or more depending on the impact of the pollution caused.88 Alternatively, the
Indonesian Forest Act could be applied. Article 50d prohibits the use of fire for land clearing.
Article 78 (ad. 4) specifies that offenders may be penalised Rp. 1.5 billion and imprisonment for
a maximum period of five (5) years. 89
In the past five years, PT Gunung Mas Raya has repeatedly been alleged of causing fires:
•
•
In September 1997, PT Gunung Mas Raya was listed as one of the 176 companies suspected
of burning by the Ministry of Forestry.90
In 2000, PT Gunung Mas Raya was again accused of burning in its estates.91
Neither has been followed up with charges.
During the visit to the PT Gunung Mas Raya estates in March 2003, it was evident that several
recently cleared and yet unplanted blocks had been, and still were, burning. In the eastern end of
the newly cleared area, fires had affected at least 10 hectares spread out over 3-5 blocks. The fires
had partly burned trees and vegetation at the forest fringe and the debris and peat were still
smouldering. At night, several fires could be observed flaring up while at daytime, smoke
emerged from those areas that had been burning.
Photo 7 Burning in the Sungai Rumbia estate
Typically, it is not possible to establish with 100% certainty who set these fires and why. It is for
this very reason that the Indonesian government introduced legislation that holds the company
responsible for fires within its areas.
Prior to the field observations, the Indofood Head of Research vehemently denied that the
company used or uses fire to clear land. PT Gunung Mas Raya has also put up signs warning that
the area in front of the forest fringe is prone to fires. An estate manager explained that the fires
resulted from "careless fishermen who had dropped cigarette butts". A guard stressed that the
company had not lit the fire and that he was making sure that the fire would not spread in the
planted area. However, at the time of the field visit, the company did not seem to be concerned
with putting out these fires and in a few places, there was evidence that the forest fringe had
been burning.
Overall, a strong impression emerged that the company has at all levels well-rehearsed its
response to questions about burning practises while there are many arguments in support of the
28
view that the company continues to proactively burn debris, branches and logs for land clearing
purposes:
1. In Indonesia, burning is cheaper and faster than zero-burning techniques;
2. Recently cleared areas were covered with a large volume of branches and logs which would
significantly slow down planting if they were not removed (by fire);
3. There was no heavy equipment in the area that could be used for zero-burning land clearing
techniques (i.e. wood chippers). The peat soil does not allow bulldozers to work there and
stacking debris by excavator is a slow process. There was no evidence of stacking in recently
established plantations;
4. The fires were burning in the area that was recently cleared;
5. The soils in the burning plots were still quite wet;
6. Several fires were burning at the same time in different locations in the estate. Although all
people working in the area smoke heavily, it is unlikely that cigarette butts would cause
spontaneous fires in three areas at the same time;
7. While the authorities monitor fire hot spots, few offenders face virtually legal charges.
The environmental impacts of the fires are threefold: first, they contribute to the degradation of
the swamp forest that is already under heavy pressure from illegal logging. During a prolonged
dry period, larger parts of this forest could catch fire. Second, burning peat land contributes
heavily to haze and third, as much as 600 tonnes of carbon dioxide per metre depth burned per
hectare is released into the atmosphere. 92
Drawing lessons from many different cases in Sumatra, the EU-Forest Fire Prevention project
(FFPCP) in Palembang concluded:
Agro-industrial scale burning on peat soils is proving a disaster. As well as burning off the surface vegetation, these
fires enter the organic soil particularly where surface drains have been dug either to facilitate log extraction or as
part of the proposed estate drainage system. Once the peat is alight it is extremely difficult to suppress and
seemingly minor fires produce an enormous amount of smoke. Experience shows that suppression occurs only after
heavy rain. Fire hazard is zero under nature's swamp forest but an international problem when the forest is cleared;
the lesson is obvious.93
Even when the burning observed was unintentional and some measures are taken to avoid spread
of fire in the plantation estate, Indofood is legally required to put out any fires in the PT Gunung
Mas Raya area and its failure to do so violates Indonesia's Environmental Management Act No.
23. The fires pose legal liability risk and reputation risk to the company and its investors.
Indofood also faces possible court action by the Riau Provincial Environment Department
(Bapedalda) who successfully filed a case against a Malaysian company, PT Adei Plantation,
which was held responsible for burning in its plantations. The case concluded in April 2003 with
the announcement that both parties had settled the case with US$1.1 million in compensation to
be paid by the company. Bapedalda has been reported to sue five other companies for illegal
burning, including the PT Ivo Mas Tunggul (and ultimately Indofood) subsidiary PT Cibaliung
Tunggul Plantation in Rokan Hilir.94
3.3.6
Human-wildlife conflicts
In the past decade, deforestation in Riau has been rampant. As a result, the province is currently
a “hot-bed” of human-wildlife conflict. At a human-wildlife conflict meeting held in Pekanbaru,
September 26-27, 2002, it was stated that between 1997-2002 there were 57 elephant and 51 tiger
conflicts in Riau. With the devastating rate of deforestation, it is likely that this problem will
only worsen.95
29
The forests in and around Sungai Kubu used to be a vibrant habitat for a great variety of species,
many of which are now considered critically endangered. Among them are the Sumatran
Rhinoceros, Sumatran Elephant, Sumatran Tiger and Arwana, all species which are classified as
endangered and which are listed on Appendix I of the Convention on International Trade in
Endangered Species (CITES). 96
Photo 8 Sungai Kubu swampforest
Sumatran Rhinoceros (Dicerorhinus sumatrensis)
In 1984, the Forest Department and Howlet (UK) conducted a survey to determine the
distribution of the Sumatran Rhinoceros in Riau. They found several rhinoceros in the
forestlands of northern Riau, which were slated for conversion into oil palm plantations. In 1986,
11 Sumatran Rhinoceros were captured in the forestlands close to Kubu River and the Protected
Forests of Mahato. Four of the captured rhinos were sent to one of the zoos in England while the
other 7 were sent to Ragunan Jakarta, a safari park, and the zoo in Surabaya. Ever since, no more
rhinos have been reported to exist in Riau. The species is now considered extinct in Riau as a
result of forest conversion for oil palm plantations.
Sumatran elephant (Elephas maximus sumatranus)
Riau Province has the biggest elephant population of entire Sumatra. According to a WWF
report in 1985, there were about 1,100-1,700 wild elephants amongst Riau forests. By 1999, the
Conservation and Resource Management Department (KSDA) estimated the population at 700800 elephants. Human-elephant conflict is a direct consequence of habitat destruction. In the
1980s, the extent of human-elephant conflicts in Sumatra worsened due to the Transmigration
Program however in the 1990s, competition for land between both elephants and plantations
companies emerged as the main cause of conflicts. The core problem is generally unwise
planning in forestland use and the unfriendly treatment of wild elephants by humans.
Indofood has encountered human-elephant conflicts in its Kandis estate in the period 19861989. Indofood's Head of Research explained that the elephants entered the estate to eat the
young oil palm shoots, which led to the destruction of 2,000 to 5,000 hectares. In addition, an
elephant was killed during a road accident that was believed to lead the group members of the
killed elephant to ravage the estates in retaliation. The company responded first by digging
ditches and, when this did not stop the elephants, electric fencing was introduced as well which
then stopped the elephants from entering the estate.
30
Human-elephant conflicts in oil palm estates can be costly to the plantation companies. A WWF
survey of 2000 found that the estates in Riau suffer financial losses up to Rp. 600,000 (US$
70)/ha/year as a result of elephants damage.97
The staff in the PT Gunung Mas Raya estates does not recall seeing elephants in the estates.
However, surveys by WWF' and KSDA show that the forestland around the Kubu River is
definitely the natural habitat of Sumatran elephants. In this region, a few groups of elephants are
known to survive in the increasingly fragmented parcels of forestland while some elephants
resort to encroaching on young oil palm plantations. The possible explanations to the question
why these elephants have not been seen in the PT Gunung Mas Raya estates is first that they
may have died since the population in this area, overall, has decreased heavily in the past decade.
The second possibility is that the elephant population decreased due to relocations to elephant
training centres.
Tigers (Panthera tigris sumatrae)
Sumatran tigers are one of the few species protected under Indonesian conservation laws. The
tiger population nevertheless continues to decline rapidly. According to the KSDA, there were
still around 400 Sumatran tigers remaining scattered throughout Riau in 1992. However,
between 1998 and 2001 alone, 65 tigers were killed, 60 of which were hunted down and possibly
more deaths have been left unreported. 98
According to estate personnel, tigers were heard back in 1984-1989 in the PT Sadang Mas estates
when the forest was first cleared. The PT Gunung Mas Raya staff did not recall any encounters
with tigers since the 1980s, but in January 2003 an adult female tiger suddenly appeared in the
Sungai Rumba estate. 99 The tiger entered the workers' settlement where it killed a number of
goats. When the tiger was hiding in a small shed, a worker who had climbed on top of the shed,
and fell off. The tiger attacked the man and severely injured his legs.
The incident shook up the estate personnel and ever since the tiger has repeatedly shown up in
the estates. A security officer faced the tiger in an effort to shoot it, but froze upon sight of the
fully-grown animal. Even, a "paranormal" was mobilised to ward off the tiger, but to no avail.
During the field trip in March 2003, the tiger appeared at night and positioned itself under the
excavator at the forest fringe. Currently, the company staff does not intend to kill the tiger but if
further conflicts occur, this may still be the final result.
According to Mr. Adi, a member of the Kubu community who lives and works inside the swamp
forest, there may have been as many as 5 to 10 tigers in the Sungai Kubu area. For sure, this
population is rapidly declining due to habitat loss and human-tiger conflicts. Mr. Adi said that
in 2001, a tiger killed three community members working for PT Essa Indah Timber. This tiger
which was subsequently killed by the logging company staff. In the end of 2002, a truck killed
another young tiger in the area.
The recent confrontations between the tigers and humans are the result of a variety of factors.
The most likely immediate explanation for the appearance of the tiger in the Sungai Rumbia
estate are the heavy floods in the swamp forest between October 2002 and February 2003.
Another probable immediate cause is the extensive illegal logging operations inside the forest
and at the PT Gunung Mas Raya border. The constant unrest in the forest may have driven the
tiger out in search of a more peaceful habitat.
Ultimately, however, the tiger is likely to encounter shortage of pray as its habitat is being
heavily degraded and destroyed. Considering that a lowland forest habitat of 10,000 ha can
sustain a density of no more than 1-3 tigers, habitat loss resulting from illegal logging and land
clearing for oil palm estates is the most likely reason why the tiger enters the plantation estate. 100
Whether or not the tigers will be able to survive depends first on the likelihood of hunting and
31
the prospect of forest conservation. However, where hunting is prevented tigers are thought to
adapt well to mixed landscapes of forest and oil palm.101
Human-mammal conflicts can pose significant problems to estate managers, be it in the form of
economic damage to recently planted oil palms (elephants) or unsafe working conditions to
estate personnel (tigers). The conversion of tiger habitat by PT Gunung Mas Raya poses a
significant reputation risk to Indofood and its investors.
3.4
Company - Community conflicts
The forestlands in which Indofood's oil palm plantations are found today were heavily forested
up to some 15-20 years ago. This does not mean, however, that the Sungai Kubu area was empty
land. For over 200 years the area is used and its ownership claimed under customary rights law
(adat) by the indigenous Orang Sungai Kubu people.
Among themselves and under the auspices of the Dutch colonial government, the village heads
("soekoe") came to an agreement in 1819 through an official document ("Regeling voor de
Koeboe") in which the customary land rights to the forestland ("hoetan tanah"), usufruct rights
and various cultural practises were settled:
We Padoeka Sri Sultan Saidi Sjarif Hasim abdoel Djalim Saifoeddin jang Dipertoean Besar, the almighty, seated on
the throne of the land Siak Sri Indrapura and populace, after deliberations with the karapatan of Datoeqsder of the
four soekoe in the land of Siak Sri Indrapura, in the presence of the Tanah Putih, Bangka and Koeboe, established
the adat between them with all indoeks and tongkats in the area to avoid conflicts or dispute. Therefore, we believe
it is good to consider and distinguish each one's dignities and "hoetan tanah" (…).
This all is clarified below, because we believe that if we do not establish this now, dispute will certainly arise in the
future.102
Despite the leaders' foresight, the agreement would render powerless when logging companies
from Jakarta entered the Kubu territory with permits from the central government some 150
years later. Another 20 years later, plantation companies began to replace the logging operations,
bringing about the final dispossession of the Orang Sungai Kubu customary rights land.
Representatives of the Sungai Kubu communities indicated that many community members are
bitter and frustrated with the big plantation companies' unwillingness to recognise in some form
their traditional claims to the land.
Few Sungai Kubu people are appear to be employed by the plantation companies and they
therefore continue to rely on a much smaller area of land for their subsistence and cash income.
According to Mr. Haji Usman, one of the Kubu community leaders in the area, the plantations
by the Salim group (including PT Gunung Mas Raya), PTPN V and PT Tunggal Mitra overlap
with approximately half of the Kubu customary rights land. Of these company only PTPN V
developed a Nucleus Estate and-Smallholder (NES) scheme but none of the other plantation
companies have developed such scheme. Mr. Usman estimates that as much as 388,000 ha has
been taken over, a figure that corresponds with maps published by a mapping investigation team
which included the Local District Government and Forest Planning Board. The land take-over
has been a source of conflict between the Sungai Kubu people and the companies for many years
now.
When the plantation companies began to clear land privately owned by the Sungai Kubu
community members in 1993, this activity sparked the first demonstration staged by the
community. “We had been working so hard to peacefully defend the land that we inherited from
our ancestors. But we faced many threats and we suffered much oppression. When PT Lahan
Tani Sakti (one of the oil palm companies under Salim Group, south of the overpass road)
cleared 1,500 ha of privately owned oil palm and rubber gardens, we organised a demonstration
32
to utter our discontent." The demonstration ended in violence. Mr Usman still has a scar on his
head where he claims a guard's rifle butt hit him during the demonstration. According to him,
the companies never compensated the communities, not even for crops lost. Today, he said, “we
get to eat the flying dust of their vehicles that all the time pass by this road “, pointing to the dirt
road beside his house where many heavy trucks loaded with acacia logs pass by every day.
Photo 9 Communities living in the PT Kura oil palm plantation
The land rights situation in Sungai Kubu was further complicated in 1999 when the company
PT Armapindo and several local public figures lured thousands of families to the area, promising
them 2 hectares of ready to harvest plantations at a price of Rp 3 - 4 million (US$ 350-470). These
lands were supposedly be those operated by Indofood, as Dr. Mahludin Sali, a public figure of
Riau Malay Community, apparently expected that the company's land rights would to be revoked
in the Reformation period (1998 onward). Some 3,000 families, from South Sumatra and Java
especially, as well as local community members took on the offer.
According to Ir. CH.WH. Siregar, a local journalist lives around the area, the total fund could be
gathered from the outsiders amounted to around Rp 3 billion (US$ 350,000). This has been
confirmed by Maiden E. Purba, the director of Legal Aid Society and Indonesian Advocates of
Forestry Society, a local non-governmental organisation in Rokan Hilir.
But the PT Gunung Mas Raya concession remained under the Indofood group and no land was
transferred to the local communities and the new arrivals. Hundreds of people lost a substantial
amount of money and most families returned in frustration to their home villages. Yet today,
around 600 families still remain in the area. They now live besides the overpass road from Bagan
Batu to Pekanbaru, south of the PT Ivo Mas and PT Gunung Mas Raya concessions. They have
built houses under the oil palm trees in the 1,500 ha plantation owned by PT Kurnia Rahman
(PT Kura), a company whose management also has relations with PT Armapindo. Some of these
people are now believed to resort to illegal logging in the swamp forest north of the PT Gunung
Mas Raya concession.
The leaders of the Sungai Kubu community and some of the newcomers to the area joined in the
struggle for land. They have established no less than 77 co-operatives representing some 60,000
people. They have actively lobbied provincial and national authorities in the past years to
achieve a satisfactory settlement on the land rights issue, for example in the form of a
smallholder credit scheme. "Until recently, these lobby actions have resulted in little more than
empty promises", Mr. Usman stated.
"Nevertheless, during several recent meetings with the local, provincial and central government
offices, the cause of the local communities was acknowledged by some officials and the topic of
compensation for oil palm trees growing on community lands has been discussed." According to
Mr. Usman, a settlement was agreed in principle and he expected that during a meeting in
33
Pekanbaru on March 15. At this meeting the details would be rounded up to put into practise the
recommendation of a multi-stakeholder BPBN team to transfer 2 hectares per family for the
6,000 Orang Sungai Kubu. Although the outcome of this meeting is not known there appears to
be scope for change also laid down in the draft Riau spatial land use plan for 2015. The maps in
this draft plan indicate that the status of the PT Ivomas Tunggal oil palm plantation south of the
PT Gunung Mas Raya estates is to be converted from private company to a smallholder estate.
The present status of the dialogue between the government and the communities was not further
assessed in detail. Nor is it known to what extent the companies are involved. Considering that
some commitments now appear to have been made by some government offices to address the
land ownership and usufruct rights, it is critical that these are realised in a manner that is
satisfactory to the affected communities. Otherwise, the long-lasting smouldering conflict could
nurture further frustration and potentially lead to violent protests and/or land reclaiming.
Naturally, this would pose the companies and their investors to significant business and
reputation risk.
34
Chapter 4
Analysis and discussion
4.1
Risks identified
4.1.1
The existing plantation area
The management of the previously developed oil palm plantation area does not appear to be
subject to extraordinary risks with the notable exception of local peoples' claims over (part of)
the plantation area. In environmental terms, the company has introduced a number of Best
Management Practises (BMPs) in its established plantations that bring about both
environmental and economic benefits. Labour conditions were not fully assessed but appeared to
upkeep provincial standards.
4.1.2
The expansion area
The expansion of the PT Gunung Mas Raya estates exposes the Indofood and ING to a range of
risks:
1. The lack of reliable government data on the company's estate area and permits issued
could result in the company being falsely alleged of illegal land clearing, resulting in
reputation damage. It may also mean that an investor bases its decision on wrong
information that suggests that the company is working within legal limits. However, if
the company expanded outside its concession area, this poses legal liability risk and
reputation risk to Indofood and reputation risk to ING.
2. Although a full stakeholder consultation process would be required, it is probable that
the peat swamp forest should be classified as High Conservation Value Forest (HCVF)
mainly because:
•
•
•
The forest contains globally, regionally or nationally significant concentrations of
biodiversity values (e.g. endemism, endangered species, refugia).
The forest provides basic services of nature in critical situations (e.g. watershed
protection, erosion control).
The forest is critical to local communities’ traditional cultural identity (areas of
cultural, ecological, economic or religious significance identified in co-operation with
such local communities).
Conversion of HCV forests poses reputation risk to both Indofood and ING.
3. Whereas Indofood appears to address the medium-term business risks associated with
peat swamp conversion, overall doubt remains about the sustainability of developing the
oil palm plantations in such habitat if ecological externalities are considered in the
equation. Peat swamp conversion represents operational risks to Indofood and reputation
risk and credit risk to ING.
4. Logging activities and forest conversion for oil palm development are intimately
connected to mutual benefit of the loggers and the plantation company. Illegal logging is
a sensitive issue in the international policy and market debate on forests that investors
would not want to be associated with this. The fantastically complex system of licensing
makes it very difficult for ING to judge the legality of its clients' operations but the bank
faces reputation risk wheras Indofood is exposed to potential legal liability.
35
5. Even when the burning observed was unintentional (which appears unlikely) and some
measures are taken to avoid spread of fire in the plantation estate, the company is legally
required to put out any fires in the area and its failure to do so violates Indonesia's
Environmental Management Act No. 23, thus representing legal liability risk which may
affect the company’s ability to pay back its debt (credit risk). Furthermore, there is a
possibility that the fires would destroy the readily planted areas which poses operational
risk. The fires also expose Indofood and ING to considerable reputation risk.
6. Human-mammal conflicts can pose significant problems to estate managers, be it in the
form of economic damage to recently planted oil palms (elephants) or lack of safe
working conditions to estate personnel (tigers). This represents operational risk to
Indofood. The conversion of tiger habitat furthermore poses a significant reputation risk
to Indofood and ING.
7. It appears that commitments have been made by some government officials to address
the land ownership and usufruct rights conflicts in the area. If this issue is not addressed,
the smoldering conflict could potentially lead to violent protests and/or land reclaiming,
posing operational risk to Indofood. This poses significant credit and reputation risk to
the company and its investors.
4.2
Weaknessess in ING's policy and loan conditions
In response to an inquiry of Friends of the Earth Netherlands on the Indofood loan, ING Bank
stated it had strengthened its investment policy on oil palm plantations (see Appendix II for
details). New guidelines for the credit commission had been incorporated in the credit
conditions and guidebook. ING Bank said it had thereby well adhered to the demand to
implement the investment policy.103
ING publicly stated that its risk assessment procedures are "good and carefully conducted", but
also admitted that it is also a "learning process".104 In this section, we will review the weaknesses
in ING's procedures on the basis of the PT Gunung Mas Raya case.
ING Bank has stated that its April 2002 working capital facility to Indofood was indeed tested
against the policy even though at that time, the policy was not yet officially implemented (March
2002). ING Bank was convinced the transaction took place in line with the policy. It had
specified that the facility and could "absolutely not be used for the purchase of plantations or
land for cultivation". In case Indofood would not adhere to this condition, this could be
considered an 'event of default' which could then lead ING to prematurely call the loan. 105
The PT Gunung Mas Raya case reveals the following weaknesses in the investment screen
developed and applied by ING Bank:
1. ING’s investment screen did not stop the client from expanding its estates in a sensitive
forest area, which is potential High Conservation Value Forest (HCVF); it did not stop
the client from putting out, most likely illegal, fires in its estates and it did not address
the wishes of local communities. One key reason for failing to address these issues is that
ING ultimately only requires legal compliance.
2. It appears that the bank was not aware of PT Gunung Mas Raya’s expansion activities
and this implies that its risk assessment procedure was not well conducted. However, if
ING Bank was aware of Indofood's expansion activities, it may have withheld this
information from Friends of the Earth (who requested information about the Indofood
transaction) based on the principle of confidentiality between banks and clients. But
then it could also be argued that ING breached this agreement by communicating that it
believed its client adhered to the policy.
36
3. The conditions tied to ING's loan to Indofood are ineffective because:
a. First, holding companies are never involved in actual field level operations (and,
thus, deforestation or burning);
b. Second, ING's condition that its loan could not be used for the purchasing of new
plantations or plantation land ignores the fact that Indofood is still in the process
of land clearing in concessions previously obtained and faces land disputes with
local communities.
c. Third, financing at the holding company level allows for internal re-budgeting
by the client. PT Gunung Mas Raya has not attracted new loans since 1996 and
most likely depends on group capital to implement its expansion program. The
investment required for the expansion activities (including purchasing or renting
of land clearing equipment) could easily have been released through internal rebudgeting.
d. A similar situation was identified in another case study involving an ING loan to
PT SMART and it therefore seems that the new investment policy has not been
strengthened on this key issue. 106
4.3
Event of default?
Because ING’s policy ultimately requires nothing more than legal compliance, the bank would
consider the key question: did Indofood or did it not operate outside the law? While there are
clearly indications that laws (e.g. Environment Management Act No. 23) may have been broken,
the extent to which PT Gunung Mas Raya’s activities are in conflict to Indonesian law, and
thereby ING’s policy, could be subject to long debate. There is a lack of hard evidence on some
accounts and, equally important, a far more detailed review of Indonesian law would be required
to come to further conclusions. Even then, it is expected that in clarity in laws and regulations
would still leave open much space for interpretation. It is therefore hard to say if Indofood is in
default with the ING policy.
However, regardless of this it is much more important to realise that, even when all of the
company’s operations would be legal on the basis of some law then still, none of the key concerns
regarding oil palm development that led ING to adopt its investment screen have been
satisfactorily addressed.
4.4
Indofood's planned expansion
Relative to the overall size and scope of Indofood's operations, the PT Gunung Mas Raya case is
of fairly limited scale. Yet, the PT Gunung Mas Raya case is only one in the group's estates,
which are scattered all over Riau. Although some Best Management Practises appear to be
implemented in these estates, there are also indications that other Indofood subsidiaries are also
entangled in land disputes with local communities and illegal burning.
Moreover, the PT Gunung Mas Raya case provides lessons that are relevant in view of Indofood's
future expansion. It is estimated that the company group may require an additional 160,000210,000 ha to supply the group's total CPO demand. If the group manages to acquire new
plantations or concessions (which may be illegal if the group’s area under non-listed holding
companies exceeds 100,000 ha in Indonesia in total), it will thereby face the challenge of
addressing the various issues and related risks in a much bigger area. The company will have to
provide detailed information about its management and development policies and practises to
address, not only the risks directly associated with oil palm agriculture but also the ecological
and social externalities of these operations.
37
4.5
The need for a comprehensive management plan
One of the key problems that ING's risk assessors and its credit committee face is the lack of
reference cadre. Neither Indofood nor First Pacific has publicly available plantation
development and management policy that addresses all relevant environmental and social
impacts of their operations.107 Mr. Sugih Wanasuria, Indofood's Head of Research in Teluk Siak,
verbally stated that the company has had an environmental policy in place for the estates and
CPO mills since 15 years. Furthermore, Mr. Sugih pointed out that Indofood:
1.
2.
3.
4.
5.
Applies Integrated Pest Control in all its estates;
Recycles all nutrients derived from waste materials in some estates;
Indofood has not expanded since 1995 "apart from some little areas here and there";
Does not clear forest for oil palm development;
Does not burn for land clearing.108
This study found that this (informal) policy is not fully implemented by the company. Nor does
this policy fully reflect the scope of the investment criteria that ING adopted.
The lack of an explicit policy hinders the company's investors and its buyers to fully assess and
value the risks involved when providing financial services to the company. To enable such
assessment, Indofood would require a comprehensive plantation management and development
plan that addresses both agricultural risks and potential ecological and social externalities.
Such a plan could be particularly credible if the company took the initiative to engage its
internal and external stakeholders in the process of design and implementation. Relevant
stakeholders (see also Appendix III) would include:
•
•
•
•
Indofood's key investors, notably those which have developed some form of investment
screens on environment and social issues (ING Bank, Crédit Suisse First Boston);
Indofood's main buyers, notably those with some purchasing policy on environment and
social issues (Unilever);
Government bodies, notably those in charge of land use matters (BPN), forest conservation
(KDSA) and smallholders (Department of Forestry and Agriculture);
Non-governmental organisations, especially those working on forest conservation (WWF)
and community concerns (representative co-operatives).
With such policy in place, Indofood would be able to significantly increase its understanding of
its impact on other stakeholder interests and seek, where possible, win-win solutions. Such
policy would, at least in theory, make it easier for Indofood to attract foreign capital and access
certain markets and it would be better prepared to face the issues that would arise from the
possible acquisition of new plantation areas. Investors and buyers would be in a better position
to reliably communicate externally about their client/supplier's performance while nature
conservation interests and local peoples' needs, rights and wishes could be better accommodated.
A crucial prerequisite for such process is, apart from a true commitment to address the issues
identified in this report, the willingness on all parts to be transparent while taking into account
that a process like that described would not or very rarely require insight in commercially
sensitive information.
38
4.6
General lessons learned
The following general lessons are drawn from this case study:
1. Investments in the oil palm sector pose reputation and credit risks to investors, not only
because companies may not meet all standard risk parameters but also because the
externalities created by plantation development cause considerable tension with the interests
of external stakeholders.
2. Criteria and procedures to value and address risks related to investments in the oil palm
industry require thorough implementation and monitoring by the investor.
As regards to the performance level required from clients, of course much depends on the risk
that an investor is willing to take. It should be stressed, however, that requiring compliance to
Indonesian national and/or regional laws does not sufficiently protect investors from many of the
risks identified in this report. The vacuum in Indonesia's regulatory system and international law
requires financial institutions to define specific performance standards that adequately avert
unnecessary risk and avoid the creation of ecological, social and economic externalities.
3. Loan conditions should be formulated precisely, especially when financial services are
provided at the group level.
4. After contracts have been sealed, monitoring of compliance is required. Management plans
and work plans, which take the investors' criteria into account, will make it easier to do this.
5. Transparent reporting is hindered by confidentiality agreements between companies and
investors. Such agreements draw heavily on outsiders' trust especially when public
statements are made which can not be verified by third parties.
39
40
Endnotes
Chapter 1
1
Indonesian PalmOil Research Institute website (www.iopri.go.id).
2
Menteri Kehutanan dan Perkebunan Republik Indonesia. Penghatian/penangguhan pelepasan kawasan hutan.
Nor.603/Menhutbun-VIII/2000.
3
Spek, M. and I. Ng, 2002. “Plantations: A leveraged play on stability.” GK Goh Ometraco Research,
Singapore.
4
Sawit Watch personal communication, June 2003.
5
Oil World 2020 (1999) and Oil World Annual 1999. ISTA Mielke GmbH.
6
Van Gelder, J.W. 2003. Financing of the Indonesian Palm Oil Sector. A Research Paper for WWF
International. Profundo.
7
Palm Oil Industry Needs Rp 20 Trillion Investment. Antara, 25 November 1999.
8
On average each plantation company borrows about 77% of the total establishment of their plantations (ICBS
1997, in: Potter, L. and J. Lee 1999. Oil Palm in Indonesia: Its Role in Forest Conversion and the Fires of
1997/98. Report for WWF Indonesia).
9
Collins, N.M., J.A.Sayer and T.C.Whitmore 1991. The Conservation Atlas of Tropical Forests: Asia and the
Pacific. IUCN.
10
Scotland, N., A.Fraser en N. Newell 1999. Roundwood demand and supply in the forest sector in Indonesia.
UK-Indonesia Tropical Forest Management Program.
11
High conservation value forests ( HCVFs) are defined as forests that need special protection because:
1. They contain globally, regionally or nationally significant concentrations of biodiversity values (e.g.
endemism, endangered species, refugia).
2. They contain globally, regionally or nationally significant large landscape level forests, contained within, or
3. containing the management unit, where viable populations of most if not all naturally occurring species exist
in natural patterns of distribution and abundance.
4. They contain rare, threatened or endangered ecosystems.
5. They provide basic services of nature in critical situations (e.g. watershed protection, erosion control).
6. They are fundamental to meeting basic needs of local communities (e.g. subsistence, health).
7. They are critical to local communities’ traditional cultural identity (areas of cultural, ecological, economic
or religious significance identified in cooperation with such local communities).
12
IOPRI information board, Medan.
13
Fitrian, A. and I. Adriansyah. Green and wealthy: An Indonesian oxymoron? The Jakarta Post, June 07, 2003
14
Wakker, E. 1998. Introducing Zero-burning techniques in Indonesia. Report prepared for WWF Indonesia.
AIDEnvironment; Wakker, E. and J.W. van Gelder 2000. Funding Forest Destruction: the Involvement of Dutch
Banks in the Financing of Oil Palm Plantations in Indonesia. AIDEnvironment, Contrast Advies and Telapak
(Indonesia).
15
See e.g.. Simorangkir, D. and Sumantri 2002. A Review of Legal, Regulatory and Institutional Aspects of
Forest and Land Fires in Indonesia. Project Fire Fight Southeast Asia, WWF and IUCN.
16
Tacconi, L. 2003. Fires in Indonesia: Causes, Costs and Policy Implications. CIFOR Occasional Paper No. 38.
17
See Wakker, E. 1998. Introducing Zero-burning Techniques in Indonesia’s Oil Palm Plantations. Report for
WWF Indonesia.Forest and Vayda, A.P. 1998. Finding Causes of the 1997-98 Indonesian Forest Fires: Problems
and Possibilities. Report for WWF Indonesia for further discussion on fire causes in plantation areas. See also:
Fires in Kalimantan Bring Famine and Dispossession. Down to Earth. 6 November 1998; Schweithelm, J. 1999.
The Fire This Time: An Overview of Indonesia’s Forest Fire in 1997/98. WWF Indonesia.
18
Indonesian Palm Oil Research Instititute (IOPRI) website (http://www.iopri.co.id/).
19
See: Carrere, R. 2001. The Bitter Fruits of Palm Oil . World Rainforest Movement; Sawit Watch website
(www.sawitwatch.or.id).
41
Chapter 1
20
Potter, L. and J. Lee 1999. Oil Palm in Indonesia: Its Role in Forest Conversion and the Fires of 1997/98.
Report for WWF Indonesia); Potter, L.M. and J.L. Lee, 1998. Tree Planting in Indonesia: Trends, Impacts and
Directions. CIFOR; Sawit Watch personal communication June 2003 and other sources.
21
Lafranchi, Chr. 2000. Valuation of a Dayak Benuaq Customary Forest Management System (CFMS) in East
Kalimantan. The benefits of CFMS compared to alternatives. NRM/EPIQ Program/SHK Kalimantan Timur.
22
See for one overview e.g. The Convention on Biological Diversity, State Sovereignty and Indigenous Peoples’
Rights. Legal Briefing. World Rainforest Movement website (http://www.wrm.org.uy/actors/BDC/legal1.pdf)
23
The Nederlandse Investerings Bank (NIB), Financierings Maatschappij Ontwikkelingslanden (FMO) en
Aegon also took measures following this discussion.
See Wakker, E. and Gelder, J.W. van, (forthcoming), Fighting Forest Fires through Financial Institutions.
UNEP-FI Newsletter (www.unepfi.net).
24
Those banks with exposure in the pulp and paper sector (ING Bank, ABN Amro Bank and Fortis) have stated
that similar criteria are now also applicable to this industry.
25
See e.g. UNEP Financial Initiative website ( www.unepfi.net); IFC website (equatorprinciples.ifc.org/)
26
See e.g. Sustainable Agriculture Platform (http://www.saiplatform.org/ ) and Sustainable Palm Oil website
(http://www.sustainable-palmoil.org/).
27
Van Gelder, J.W. 2003. Financing of the Indonesian Palm Oil Sector. A Research Paper for WWF
International. Profundo.
28
Guthrie's US$245m issue awaits right time, Business Times, Kuala Lumpur, 10 December 2002; Guthrie Bond
Issue Set To Raise $245 Million, Carolyn Lim, Asian Wall Street Journal, Singapore, 17 February 2003.
29
Annual Report 2002, Kuala Lumpur Kepong Berhad, Ipoh, December 2002.
30
Annual Report 2002, PT PP London Sumatra Indonesia Tbk., Jakarta, April 2003.
31
Indofood gets $100 million loan, Jakarta Post, Jakarta, 10 April 2002; ING closes $100 million loan for
Indofood, Rob Davies, FinanceAsia.com, 12 April 2002.
32
Indofood to issue US$200m bond to refinance debt, The Jakarta Post, Jakarta, 29 May 2002; Indofood US$
280 million bond wins warm reception at competitive pricing, Press release PT Indofood Sukses Makmur,
Jakarta, 12 June 2002; Indofood heats up Indonesian bond issuance, Asiamoney, July 2002; FinanceAsia
Achievement Awards 2002 - Deals of the year, FinanceAsia.com, 17 December 2002.
33
Announcement to the Surabaya Stock Exchange, PT Indofood Sukses Makmur, Jakarta, 26 March 2003.
34
Hagemeyer Nu in Rol Van Reddende Engel, B. van Kalles, Het Financieele Dagblad, Amsterdam, January
1998; Meerderheid Hagemeyer in Nederland, Het Financieele Dagblad, Amsterdam, 10 March 1998; Hagemeyer
Plaatst Belang Pacific Tegen Koers Hfl. 89, Het Financieele Dagblad, Amsterdam, 20 March 1998.
35
Indofood gets $100 million loan, Jakarta Post, Jakarta, 10 April 2002; ING closes $100 million loan for
Indofood, Rob Davies, FinanceAsia.com, 12 April 2002.
36
Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002.
37
Letter from Monique de Lede (Milieudefensie) to Pieter Kroon (ING Bank) on the implementation of policies
on oil palm and pulp&paper in Indonesia. October 3, 2002.
38
Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002.
39
Indofood to sell Bogasari mill to strategic buyers, The Jakarta Post, Jakarta, 7 October 1999; Year of Living
Dangerously For a Tycoon in Indonesia, by Mark Landler, The New York Times, New York, 16 May 1999.
40
Indonesia: A Tycoon Under Siege - Business Week, New York, 28 September 1998; Anthony Salim's
Comeback May Be Coming Apart, Business Week, New York, 3 May 1999; Year of Living Dangerously For a
Tycoon in Indonesia, by Mark Landler, The New York Times, New York, 16 May 1999; Indofood to sell
Bogasari mill to strategic buyers, The Jakarta Post, Jakarta, 7 October 1999; The myth of Chinese domination,
George J. Aditjondro, The Jakarta Post, Jakarta, 13 August 1998.
41
Head, M. 1998. The Suharto Financial Dynasty. World Socialist Website
(www.wsws.org/news/1998/jun1998)
42
The challenges of growth smoothing the bumpy road, Euromoney Magazine, London, April 1997; Uncle
William is back at ASTRA, Dwi Sandi Merwanto, Ahmad Suhijriah and Beta Ramses, Kapital, Jakarta, 19
42
Chapter 1
October 1999; U S Grp Is Preferred Bidder For Indonesia Astra, Jay Solomon, Dow Jones, Jakarta, 9 December
1999.
43
Indonesia: Crony Bank, Anyone? - BCA's high-profile IPO may go begging, Michael Shari, Business Week,
Los Angeles, 22 May 2000; Indonesia's Plan to Sell Salim Holdings Causes Concern at World Bank, IMF, Jay
Solomon, Wall Street Journal, New York, 1 August 2000; Born Sly, Indonesian Business, Jakarta, September
2000; BCA's Mysterious Suitors, Sadanand Dhume, Far Eastern Economic Review, Hong Kong, 12 July 2001;
Holdiko on target, Maggie Ford, Asiamoney, Hong Kong, May 2001; Salim may avoid criminal charges, The
Jakarta Post, Jakarta, 27 November 2002.
44
Liquid carrier project, The Jakarta Post, Jakarta, 23 April 1997; The Sinar Mas Group, J. Tanja, Paribas Asia
Equity, Singapore, 27 April 1998.
45
Casson, A. 2000. The Hesitant Boom: Indonesia’s oil palm sub-sector in an era of economic crisis and
political change, CIFOR Occasional Paper No. 29, Centre for International Forestry Research.
46
KKN stands for corruption, collusion and nepotism. Source: Wakker, E. and J.W. van Gelder 2000. Funding
Forest Destruction: the Involvement of Dutch Banks in the Financing of Oil Palm Plantations in Indonesia.
AIDEnvironment, Contrast Advies and Telapak (Indonesia).
47
Dayak People Win Lawsuit Against Salim Group. Jakarta Post, 1 June 1999.
48
IBRA And Holdiko Sell Shares In Palm Plantation Companies For USD 350 Million, Press Release Holdiko,
Jakarta, 27 November 2000; Indonesian Government Closes US$368 Million Sale of Oil Palm Assets, Press
Release Ministry of Economic Affairs, Jakarta, 13 March 2001.
49
Holdiko Sells Salim Oleochemicals Group For USD131 Million To a Local Consortium, Press release PT
Holdiko Perkasa, Jakarta, 21 November 2000; IBRA Sells a Controlling Stake In Salim's Oleochemicals Group,
Jay Solomon, Wall Street Journal, New York, 22 November 2000.
50
IBRA to start off selling stakes in 61 companies, Jakarta Post 24 April 2003.
51
Annual Report 2000, PT Indofood Sukses Makmur Tbk., Jakarta, May 2001; AFP Enters Into Strategic
Partnership with Indofood for its Palm Oil Businesses in Indonesia, Press Release Golden Agri-Resources Ltd.,
Singapore, 10 May 2001; Indofood 2002 Financial Results, Press Release PT Indofood Sukses Makmur, Jakarta,
24 March 2003.
52
Indofood to boost food business with expansion, The Jakarta Post, Jakarta, 3 March 1997; Shareholders'
meeting okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Annual Report 1999,
First Pacific Company Ltd., Hong Kong, April 2000; Annual Report 2000, PT Indofood Sukses Makmur Tbk.,
Jakarta, May 2001; First Pacific's Indofood Unit to Acquire A Controlling Stake in Golden Agri-Resources,
Press Release First Pacific Company Ltd., Hong Kong, 10 May 2001; Website PT Indofood Sukses Makmur
Tbk. (www.indofood.co.id), August 2001.
53
Website PT Indofood Sukses Makmur Tbk. (www.indofood.co.id), August 2001.
54
Mr. Sugih Wanasuria (Head of Research Indofood), 6 March 2003.
55
The four estates developed under the Sinar Mas-Salim group joint venture PT. Sadang Mas are also divided as
PT Salim Ivo Mas Tunggal I A, I B, II A, II B. PT. Salim Ivomas I A consists of Balam Estate and Sungai Dua
Estate. PT Salim Ivo Mas I B consists of Kahyangan Estate, Kencana Estate and Cibaliung Estate. When the
joint venture was dissolved in 1990, PT Salim Ivo Mas 1A and 1B were brought under PT. Salim Ivomas
Pratama in the Indofood group whereas PT. Salim Ivomas II A and II B were brought under the Sinar Mas
group.
56
Indofood to boost food business with expansion, The Jakarta Post, Jakarta, 3 March 1997; Shareholders'
meeting okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Annual Report 2001, PT
Indofood Sukses Makmur Tbk., Jakarta, May 2002; Sale Of Shares Held In PT Salim Sawitindo And PT
Bhaskaramulti Permata, Announcement to the Kuala Lumpur Stock Exchange, Kumpulan Guthrie Berhad, Kuala
Lumpur, 20 November 2002.
57
Liquid carrier project, The Jakarta Post, Jakarta, 23 April 1997; Indosawit boosts output, The Jakarta Post,
Jakarta, 15 August 1997; Profile and Directory of Indonesian Plantation 1997/1998, PT Capricorn Indonesia
Consult (CIC), Jakarta, 1998; Annual Report 1997, PT Indofood Sukses Makmur Tbk., Jakarta, March 1998;
The Raja Garuda Mas Group: Hampered By the P.T. Inti Indorayon Case, Indonesian Commercial Newsletter,
Jakarta, 16 February 1999.
43
Chapter 1
58
Indofood to boost food business with expansion, The Jakarta Post, Jakarta, 3 March 1997; Shareholders'
meeting okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Profile and Directory of
Indonesian Plantation 1997/1998, PT Capricorn Indonesia Consult (CIC), Jakarta, 1998; Prospect of the
Plantation & CPO Industry in Indonesia 2000-2010, Business Intelligence Report (BIRO), Jakarta, 1999; Profile
- PT Indofood Sukses Makmur Tbk., Asia Pulse, Jakarta, 14 December 1999; Website Kantor Pemasaran
Bersama (www.geocities.com/kpbjakarta/), Viewed in March 2003.
59
Not transferred to IBRA, linked to Indofood/Salim by BIRO. Investigated by Laporan Tim Investigasi
Komite Aliansi Untuk Masyarakat Pantee Rakyat (KAMPARA) Kecamatan Kuala Batee Aceh Selatan.
60
Website PT Holdiko Perkasa, viewed 20 february 2001; Profile and Directory of Indonesian Plantation
1997/1998, PT Capricorn Indonesia Consult (CIC), Jakarta, 1998; Prospect of the Plantation & CPO Industry in
Indonesia 2000-2010, Business Intelligence Report (BIRO), Jakarta, 1999.
61
First Pacific's Indofood Unit to Acquire A Controlling Stake in Golden Agri-Resources, Press Release First
Pacific Company Ltd., Hong Kong, 10 May 2001; AFP Enters Into Strategic Partnership with Indofood for its
Palm Oil Businesses in Indonesia, Press Release Golden Agri-Resources Ltd., Singapore, 10 May 2001;ING
Barings is advising on a deal between two of Indonesia’s most high profile families, Steven Irvine, FinanceAsia,
Singapore, 10 May 2001; Sinar Mas woes stall acquisition deal, The Jakarta Post, Jakarta, 6 July 2001; Astra
sees profit if rupiah stays below 9,500 to dollar, The Jakarta Post, Jakarta, 2 August 2001; Indofood's
Conditional Put and Call Option Agreement on Golden Agri Resources Ltd. ("GAR"), Press Release PT
Indofood Sukses Makmur Tbk., Jakarta, 11 August 2001; Indofood mulling purchase of oil palm plantations'
stakes, The Jakarta Post, Jakarta, 14 August 2001; Indofood Expansion Plans Threaten Stk, Leigh Murray, Dow
Jones Newswires, Jakarta, 16 August 2001.
62
PT Holdiko Perkasa website. Viewed 20 February 2001.
63
It is normal for the BPN to issue operation permits up to three years after operations have commenced. R.
Lumuru (Sawit Watch), personal communication, July 2003.
64
Personal communication, Mr Sugih Wanasuria (Head of Research Indofood), 6 March 2003.
65
Mr. Sugih Wanasuria (Head of Research Indofood), 6 March 2003.
66
Based on an average production of 24 tonnes/ha * 20% increase in production * Rp. 400,000,-/ton of FFB.
67
Dinas Kehutanan dan Perkebunan 2002. Map processed by WWF Riau.
68
See footnote 11.
69
Profile and Directory of Indonesian Plantation 1997/1998, PT Capricorn Indonesia Consult (CIC), Jakarta,
1998; Website PT Holdiko Perkasa, viewed 20 february 2001.
70
The Law of the Republic of Indonesia No. 41 on Forestry (1999), unofficial translation.
71
Also, it should be noted that the coordinates from from the Riau Department of Agriculture estate concessions
map were derived from a rather large-scale map and this may have created a bias in the exact scale and position
of the concession boundary.
72
However, the company's recent clearings in Limited Production Forests would require a much more complex
and lengthy process, especially with the January 2001 ban on release of forest conversion.
73
According to maps issued by the Ministry of Forestry and Estates, the arch-shaped concession is located northeast of the actual plantation's site, in the middle of a presently forested area. There is also some unclarity with
regard to the total concession area under PT Gunung Mas Raya. According to the Holdiko website, PT Gunung
Mas Raya holds 12,803 ha, whereas a map as of 2000 from the Department of Forestry in Pekanbaru shows that
the PT Gunung Mas Raya concession area is only 8.569,5 ha.
Adding to the confusion is that SGS Malaysia reported there is another PT Gunung Mas Raya concession to the
northeast of Dumai and southwest on the peninsular where the PT Diamond Raya Timber (HPH) concession is
located. This oil palm concession is said to be part of an economic development zone on the western end of the
(certified) logging concession. SGS first noted PT Gunung Mas Raya's name, in the context of an FSCcertification reassessment report on PT Diamond Raya. SGS wrote: "In November 2001, the assessment team
found "there were concerns of illegal logging on the south-western portion of the PT Diamond Raya concession
area. The team visited 2 of the sawmills suspected of felling and processing material illegally from PT Diamond
Raya. Both sawmills were located within the Gunung Mas Raya oil palm plantation that is adjacent to the southwestern portion of the PT DR concession. (..) There are thought to be up to 5 small sawmills of similar size
operating in the area of Gunung Mas Raya Oil Palm Plantation on the south-western border of PTDR forest.
44
Chapter 1
Following up on the earlier assessment, SGS wrote: "the police from Dumai station made an inspection of the
sawmills in the PT Gunung Mas Raya area on the border of PT Diamond Raya concession on Saturday 9 March
2002. The police found 4 sawmills not operating but one sawmill still operating - enforcement action was taken
to cease its activities and the owner arrested. The police found none of the sawmills had permits for operation in
the area." Souce: SGS Qualifor, PT Diamond Raya Surveillance Report 6489-ID / SGS (M) F104_026, 27-30
November 2001.
The reference to PT Gunung Mas Raya in this particular area is remarkable, because it has not been shown on
any maps issued by the Ministry of Forestry or the Ministry of Agriculture. Nor has Indofood ever mentioned
this estate. In April 2003, SGS reconfirmed the presence of a PT Gunung Mas Raya area (6,000 to 8,000 ha) at
borders the southeast of the PT DRT concession. Source: Personal communication Kevin Grace, SGS Malaysia.
74
Ministry of Forestry Indonesia website (www.dephut.go.id).
75
Peta Sebaran HPH Provinsi Riau, Forest Watch Indonesia 2001.
76
If they do collaborate with the company, they or the middleman should be the party subcontracted under the
company's Izin Pemanfaatan Kayu (IPK), the wood utilization permit. Plantation companies are required to
subcontract logging operations (Mr. G. Brown [PT London Sumatra], personal communication January 1998;
Vidal, J. 1997. When the Earth caught Fire. The Guardian. November 8).
77
Other than through bribing officials, a SAKO permit can only be obtained based on a Izin Pemanfaatan Kayu
(IPK),which at the time of field research should have been held by PT GMR, which would imply that the
plantation company is collaborating with the middleman and the loggers who supply the middleman.
78
This has happened in many places, especially in Kalimantan where hundreds of oil palm permits were
withdrawn after the investors took the timber but left the land unplanted.
79
Daswir et al. 1989 quoted by CIFOR.
80
Sargeant, H.J. 2001. Vegetation Fires In Sumatra, Indonesia. Oil Palm Agriculture in the Wetlands of
Sumatra: Destruction or Development? Forest Fire Prevention and Control Project. European Union & Dinas
Kehutanan Sumatra Selatan.
81
Source: PT. SMART Tbk in: Sargeant, H.J. 2001. Vegetation Fires In Sumatra, Indonesia. Oil Palm
Agriculture in the Wetlands of Sumatra: Destruction or Development? Forest Fire Prevention and Control
Project. European Union & Dinas Kehutanan Sumatra Selatan.
82
Sargeant, 2001.
83
WRM's bulletin Nº 65, December 2002.
84
Tan Cheng Li. Vital to save peat swamps; The peat fires of Southeast Asia. (11 November 1997).
85
Simorangkir, D. and Sumantri 2002. A Review of Legal, Regulatory and Institutional Aspects of Forest and
Land Fires in Indonesia. Project Fire Fight Southeast Asia, WWF and IUCN.
86
Simorangkir & Sumatri op cit.
87
Peraturan Pemerintah Republik Indonesia Nomor 4 Tahun 2001 tentang Pengedalian Kerusakan dan atau
Pencemaran Lingkungan Hidup yang Berkaitan dengan Kebakaran Hutan dan atau Lahan. Presiden Republik
Indonesia.
88
Environment Act No. 27, 1997. Republic of Indonesia.
89
Lumuru, R. (Sawit Watch), Personal communication, April 20, 2003. It is not entirely clear if the Forest Act
could be applied in this case as burning occurs within forestland that had already been released for conversion
purposes.
90
http://www.tempo.co.id/ang/min/02/30/nas8.htm
91
Vegetation fires and haze in Sumatra, Sony 'powerless' to cope with forest fires Source: Jakarta Post, July 31,
2000.
92
Sargeant, 2001.
93
http://www.mdp.co.id/ffpcp/fire_central.htm
94
Companies warned over forest fires, The Jakarta Post 4 June 2003; Ketika Asap Ganggu Negara Tetangga Minggu, Kompas, 29 Juni 2003.
45
Chapter 1
95
Sumatra Project Update November 2002, Susan K. Mikota and Hank Hammatt, Elephant Care International.
http://www.aazv.org/sumatraelephprojectnov2002.htm
96
Arwana (Scleropages formosus). The peatswamp forests in which the company is encroaching is also believed
to be the habitat of the Indonesian Arwana, locally better known as the `ikan silok' or 'dragon fish' which is
believed to bring luck to its owners. Due to its popularity and great demand, red arwanas have been fiercely
hunted at its native habitat. According to local people, only small arwana can these days be found in the streams
and rivers in the peatswamp forests north of the Indofood estates.
97
WWF Indonesia, 2001. Human-Elephant Conflict Loss Survey, Tesso Nilo.
98
Sumatran Tiger faces extinction, The Jakarta Post, June 07, 2002.
99
Tigers were also entering the Serikat Putra estate (now Kumpulan Guthrie) in 2001 via an acacia estate.
100
Santiapillai and Widodo 1997, http://www.5tigers.org/Indonesia/PHVA/widodo.htm CHECK FIGURE
101
Palm oil, forests and sustainability: Discussion paper for the Round Table on Sustainable Oil Palm. First draft
for review by the WorkING Bank, Proforest, 17 June 2003.
102
"Peta Rekonstruksi, Regeling voor Kubu, Adatrechtsbundels XIII, Gemend 1819" (Translated from Dutch).
The village leaders whom came to this agreement represented the villages of Hamba Raja, Haroe, Rawa, Bebas
Indra Bangsawan and Panglima Moeda Setia Raja.
103
Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002
104
Ham, M. 2003. Driegesprek: Bankgeheim belemmert verantwoord ondernemen. Milieudefensie tijdschrift.
105
Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002.
106
See: Wakker, E. and R. Ranaq 2002. PT Matrasawit: relations between ING, Rabobank and ABN-Amro and
forest destruction and poverty in East Kalimantan, Indonesia. A PT SMART Corporation case study.
AIDEnvironment and Puti Jaji.
107
It its 2001 Interim Report, Indofood states it continues "to implement corporate governance initiatives to align
Indofood’s practices with international best practice" (www.indofood.co.id). However, no reference is made
with regard to environmental or social best practise.
108
Mr. Sugih Wanasuria (Head of Research Indofood), 6 March 2003.
46
Appendix I: Maps of Rokan Hilir, Riau
Upper: Gunung Mas Raya in 1992 (source: Indonesianforest.com)
Below: Gunung Mas Raya in 1995 (source: Indofood)
47
Appendix I: Maps of Rokan Hilir, Riau
Gunung Mas Raya in 2000 (Source: Indonesianforest.com)
Gunung Mas Raya in 2002 (Source: WWF Riau, processed)
48
Appendix I: Maps of Rokan Hilir, Riau
Upper: Gunung Mas Raya concession area (Riau Department of Agriculture and Forestry)
Below: concession areas in the vicinity of Gunung Mas Raya (pink names: oil palm plantations,
black names logging companies, blue names: pulpwood plantation companies; green and
yellow: forest)
49
Appendix I: Maps of Rokan Hilir, Riau
50
Appendix II: ING Policy
Subject:
Policy on sustainable deforestation / logging
Letter to Milieudefensie
21 December 2001
Unofficial translation
In reference to recent discussions regarding the financing of oil palm plantations in
Indonesia we are pleased to provide an addendum to the ING policy on the financing of
palmoil plantations in Indonesia as laid out in our letter dated 27 February 2001.
ING in Society
ING's position in society is based on mutual respect and active collaboration between
ING and that society. ING furthermore highly values sustainability in business. Caring
for the environment is an important component of this care. ING therefore shares the
concerns of Greenpeace and Milieudefensie with regard to the destruction of the tropical
rainforest in Indonesia.
Like we have previously stated, ING's involvement is of relatively limited size. In
addition, it must be considered that most of current financing refers to re-financing.
This means that the companies involved can not or only partially service their debt. It is
our goal to finalise these refinancing deals in a responsible manner as quickly as
possible.
As discussed with you, future financing of activities that lead to the destruction of
tropical forest will be subject to the criteria included below. We believe that these
criteria, which ING will apply to its best cunning, affluently guarantee that these
transactions will not lead to the destruction of tropical rainforest.
For new financing in the sector, ING will take into account legal requirements, the
"Forest Policy" of the World Bank and the ING Business Principles. This means that for
future financing requests ING will base its decision whether or not to extend financing
on the following:
1. ING will not finance companies and projects that are guilty of illegal 1 deforestation
and / or burning of tropical rainforests (HCVF) for the development of palmoil
plantations. In addition, ING will not finance companies that are guilty of illegal
deforestation and/or burning of tropical rainforest for any other objective, such as
sales and/or wood processing.
2. ING will consider the financing of new oil palm plantation development or tree
plantations of any other kind, which are planted on readily deforested soils, only
when the following conditions are met:
•
•
A period of at least three years should be taken into account between the
deforestation and the moment when planting of oil palm or tree plantations of
another kind commences. There should be no relationship between the
deforestation and the plantation development.
Relevant social- and / or labour and other relevant laws and regulations on
deforestation and environment, as determined by the local government should
be met. ING will confirm that the relevant laws and regulations are met by the
company at hand.
51
Appendix II: ING Policy
•
•
In addition, screening will be done on the basis of the World Bank "Forest
Policy".
The ING Business Principles apply to the ultimate decision whether or not a
company is eligible for financing.
3. ING will not finance companies and projects that insufficiently respect the rights of
the local communities. 3 For the financing request ING will conduct specific research
(as part of the Due Diligence4 research). If in the past social conflicts have occurred,
and the company or project involved has not adjusted its policy or activities, ING
will refrain from financing.
4. All financing in Indonesia with impacts on the environment are treated on a case to
case basis at the Credit Management level. Only after a Due Diligence study has
taken place, if necessary by an external consultant, and the above has been addressed,
ING will decide whether or not financing will be provided. ING will do this research
to the best of its cunning accurately and carefully. ING wishes to emphasise that
whatever decisions are made, these are also based on information supplied by third
parties and ING assumes this to be correct and complete.
5. ING will adopt a standard operational procedure with the client to agree on a legal
document for the purpose of credit or financing. If during the currency of the credit
or financial transaction practise illegal activities take place or if the funds are used in
another manner than agreed, ING reserves the right to declare an event of default.
During the annual review of the credit or financial transaction the use of the
financing is checked. If the client is in default, the credit can, in principle, be called.
6. The aforementioned policy is not applicable to financing of holding companies, as
long as these are not involved in deforestation / or burning of tropical rainforest.
In conclusion, we feel that these conditions contain adequate guarantees to prevent the
avoidance of involvement of ING in the destruction of tropical rainforest. This policy is
applicable to the whole ING Group and will be actively communicated and applied.
Appendix 1
1.
Illegal logging5
ING defines the following as illegal logging:
• Outside permitted areas
• Within a protected area (with or without permit)
• Beyond allowable cut
• Without required permits
• Protected species
52
Appendix II: ING Policy
•
•
•
•
•
•
•
2.
In disregard of legal tendering
Without business plan
When trees are sickened unconventionally such that these can be "legally" logged
When environmentally damaging substances are used
Via bribes
For the use of production processes for which the required permits are not
obtained or where national or social laws are not respected
For private use
High Conservation Value Forest
In defining "High Conservation Value Forests" ING will conform to the definition given
by the Forest Stewardship Council.
3.
Local communities
"Local community" is defined as a broad group of people living in or nearby the tropical
rainforest and plantations and who largely depend on these.
4.
Due Diligence
The following points are researched (on the basis of a checklist) and juridical laid down
with the company, prior to the decision regarding financing, logging and environment
related transactions:
•
•
•
•
•
•
•
•
•
•
•
5.
History of the company
Ownership structure
Assessment of legally required permits
Compliance to local laws, the ING Business Principles and World Bank
guidelines regarding land clearing and environment
Production facilities
Age
State of maintenance
Planned investments, including replacements and expansion
Quality and background of suppliers
Quality and type of clients
Financial structure of the company.
Source:
Forest Policy World Bank; Illegal Felling Activities in Russia, Greenpeace.
Comments of the consultants to the ING Policy on "Sustainable Deforestation /
Logging":
Overall assessment
ING Group's "Policy on sustainable deforestation / logging" does not require that its
clients go beyond legal compliance. This approach is consistent with ING's Business
Principle 4.1
Chapter 1
1
ING website (http://www.ing.nl).
53
Appendix II: ING Policy
Assuming that ING oversees all relevant local laws, ING's policy still does not "affluently
guarantee that (ING's) transactions will not lead to the destruction of tropical rainforest".
It allows for legal conversion of High Conservation Value Forests (HCVF) and it poorly
defines rights of local communities. In terms of scope, the policy is much too vague with
regards to financing of company holdings and allows for loopholes.
Main specific comments
"ING's involvement is of relatively limited size."
•
Profundo's review of the international and national banks and other investors
behind a group of 27 major companies revealed that ING Group is the fifth
biggest investor in the Indonesian oil palm sub-sector.2
"For new financing in the sector, ING will take into account legal requirements, the "Forest
Policy" of the World Bank and the ING Business Principles."
•
•
The World Bank's 1991 "Forest Policy" referred to focused primarily on reducing
deforestation, forest resource creation and conservation.3 This policy did not
translate into practical criteria that could have applied to ING's oil palm
investments.
The International Finance Corporation (IFC)'s Plantations criteria were in place in
April 2002 and state that "the development or conversion of land for plantation crops
should conform to the environmental objectives of preserving regional bio-diversity,
ecologically sensitive areas, unique habitats, forests, endangered species and sites of
cultural significance." 4
"ING will not finance companies and projects that are guilty of illegal deforestation and / or
burning of tropical rainforests (HCVF) for the development of palmoil plantations."
•
•
This means that ING will allow legal deforestation of HCVF.
All burning for oil palm plantation development is illegal in Indonesia since
1997.
"Relevant social- and / or labour and other relevant laws and regulations on deforestation and
environment, as determined by the local government should be met"
•
•
In February 2000, the Government of Indonesia committed to the
Consultative Group on Indonesia to halt forest conversion until a National
Forest Programme is in place. 5
"Local government" should be defined more precisely considering that
national, provincial and district governments in Indonesia may have
contradictionary laws.
Chapter 1
2
Van Gelder, J.W. 2003. Financing of the Indonesian Palm Oil Sector. A Research Paper for WWF
International. Profundo.
3
World Bank website (http://web.worldbank.org). The Revised World Bank Forest Strategy policy
(October 2002) was not in place when ING extended its April 2002 loan to Indofood.
4
Environment, Health and Safety Guidelines for Plantations. International Finance
Corporation, 1 July 1998. Furthermore, the World Bank Strategy may “not apply in its
entirety to IFC”(World Bank Forest Strategy).
5
Agro Indonesia website (http://www.agroindonesia.com).
54
Appendix II: ING Policy
"ING will not finance companies and projects that insufficiently respect the rights of the local
communities."
•
•
ING does not specify what is 'insufficient' and for whom.
ING may not have the capacity to determine this.
“The aforementioned policy is not applicable to financing of holding companies, as long as
these are not involved in deforestation / or burning of tropical rainforest.”
•
Holding companies are never involved in field level practises, its subsidiaries
are.
"If during the currency of the credit or financial transaction practise illegal activities or if the
funds are used in another manner than agreed, ING reserves the right to declare an event of
default."
•
This condition does not prevent the client from internal rebudgeting.
"The aforementioned policy is not applicable to financing of holding companies, as long as these
are not involved in deforestation / or burning of tropical rainforest."
•
This condition suggests that all other (legal, social etc.) conditions are
dropped.
"ING defines the following as illegal logging:"
•
•
The list looks nice but provides a random set of possible illegal practises that
is also irrelevant, as any activity that does not adhere to the (Indonesian) law
is illegal.
The list is partially based on illegal logging practises in Russia, which may
not be applicable in Indonesia.
"In defining "High Conservation Value Forests" ING will conform to the definition given by the
Forest Stewardship Council."
•
•
This looks nice but renders useless as ING allows all legal conversion of
HCVF.
Indonesian law does not recognise HCVF or FSC.
"Within the bounds of commercial confidentiality, ING places the greatest importance on open
and transparent communications with its customers, employees and shareholders, as well as
society at large." (ING Business Principle No. 5)."
•
It is unclear which are the boundaries of commercial confidentiality.
55
Appendix II: ING Policy
56
Appendix III: Analysis of Indofood's stakeholders
1
financial stakeholders
1.1 Capital structure
At the end of 2002, PT Indofood Sukses Makmur and its subsidiaries owned total assets worth
Rp 15,252 billion (US$ 1,706 million). These assets were being financed by the following
stakeholders: 6
•
•
•
•
•
Shareholders
Subsidiary shareholders
Banks
Bondholders
Others
Rp 3,663 billion
Rp 876 billion
Rp 4,524 billion
Rp 3,682 billion
Rp 2,507 billion
24.0%
5.7%
29.7%
24.1%
16.4%
Of the total assets of PT Indofood Sukses Makmur in 2001 only 20.5% was attributable to its
Edible Oil and Fats division. As palm oil is also an important ingredient for its Noodles, Snack
Foods and Baby Foods divisions, we estimate that 35% of Indofood’s total assets are related to
the production and processing of palm oil. 7
1.2 Key financial stakeholders
Our financial analysis (which concentrated on general funding and specific oil palm related
funding) leads to the following assessment of the most important financial stakeholders of PT
Indofood Sukses Makmur:
1.
2.
3.
4.
5.
6.
First Pacific / Salim family Indonesia Dominant shareholder
Crédit Suisse
Switzerland Various loans, bond issuance, currency swap
agreement
ING Bank
Netherlands Various loans, corporate advice, bond issuance
JP Morgan Chase & Co.
USA
Largest outside shareholder
Bank Central Asia (BCA) Indonesia Loan, currency swap
Capital Group
USA
Largest outside shareholder of First Pacific
1.3 Investment policies
Below, we briefly describe each of Indofood's most important (external) financial stakeholders.
Crédit Suisse Group
Crédit Suisse is a Swiss banking group. Its US division, Crédit Suisse First Boston, has provided
a range of financial services to Indofood Sukses Makmur in the past years.
In its sustainability report 2001 Crédit Suisse states: “We do not enter into any business with
undesirable borrowers. The description ‘undesirable’ applies, in particular, to borrowers who do
not comply with the law or violate ethical principles.” It also indicates that lending transactions
with ‘excessive risks’ or those ‘which are unjustifiable for legal, ethical or environmental
reasons’ will be refused.8
Chapter 1
6
Indofood 2002 Financial Results, Press Release PT Indofood Sukses Makmur, Jakarta, 24 March 2003.
Annual Report 2001, PT Indofood Sukses Makmur Tbk., Jakarta, May 2002.
8
Worm, J., J.M. Dros and J.W. van Gelder. 2003. The financing of large dams; A research paper prepared for
WWF International - Living Waters Programme. AIDEnvironment/Profundo.
7
57
Appendix III: Analysis of Indofood's stakeholders
ING Group
ING Group is a Dutch insurance and banking group. It has a “long-lasting close relationship”
with members in the Salim group.9 ING formulated a corporate environmental policy in 1995.
ING is in the process of developing a set of Corporate Social Responsibility (CSR) statements for
dealing with environmental, social and reputation risk. Natural resources and electricity
generation are mentioned as industry sectors that will be subject to such CSR statements. 10
JP Morgan Chase & Co.
JP Morgan Chase & Co. is an American commercial and investment banking group. JP Morgan
Chase's corporate responsibility report mentions that its foundation, trust and bank jointly
donated US$ 74 million to charity, mostly in the US. The report does not mention any other
activities relevant to corporate responsibility.
No information is available on JP Morgan Chase's environmental and risk assessment policy for
the oil palm sub-sector.
Bank Central Asia (BCA)
Since March 2002, Indonesia's largest retail bank, BCA, is 51% majority owned by Farallon
Capital, a private equity firm from the US.
No information is available on BCA's environmental and risk assessment policy for the oil palm
sub-sector.
Capital Group
Capital Group is an American investment fund manager.
No information is available on Capital Group's environmental and risk assessment policy for the
oil palm sub-sector.
2.
Market stakeholders
stakeholders
2.1 Key buyers
Via PT Salim Oil Grains (PG SOG), Salim Group ranked among the sixth largest exporters of
palmoil products in Riau. In 2002, PT SOG exported 148,000 tonnes of CPO whereas PT
Gunung Mas Raya sold 2,000 tonnes of CPO. The main markets supplied by PT SOG are
Malaysia, India and Africa. The main foreign buyers of PT SOG in 2002 were:
Buyer
Ruchi
Summerwind
Avanti Feeds
Safic Alcan
Agritrade
Sogescol
Gardner Smith
Cargill
Other
Related company (country)
Ruchi Soya (India)
Summerwind-Seas (Philppines)
Avanti Feeds (India)
Safic Alcan (USA)
Agritrade International (Australia)
Socfinasia SA (Luxembourg)
Gardner Smith (Singapore)
Cargill (USA)
CPO volume
(Tonne)
44.720
27.500
16.640
10.100
6.800
6.500
6.000
3.250
26.185
Share
30%
19%
11%
7%
5%
4%
4%
2%
18%
Chapter 1
9
Hagemeyer Nu in Rol Van Reddende Engel, B. van Kalles, Het Financieele Dagblad, Amsterdam, 13 January
1998; Meerderheid Hagemeyer in Nederland, Het Financieele Dagblad, Amsterdam, 10 March 1998;
Hagemeyer Plaatst Belang Pacific Tegen Koers Hfl. 89, Het Financieele Dagblad, Amsterdam, 20 March 1998.
10
Worm, J., J.M. Dros and J.W. van Gelder. 2003. The financing of large dams; A research paper prepared for
WWF International - Living Waters Programme. AIDEnvironment/Profundo.
58
Appendix III: Analysis of Indofood's stakeholders
Total
147.695
Sogescol Gardner
4%
4%
Safic Alcan
7%
100%
Cargill
2%
Ruchi
30%
Agritrade
5%
Avanti
11%
Summerwind
19%
Other
18%
Figure 1 Palm oil buyers of PT Salim Oil Grains from Riau (2002)
Mexico
1%
Rotterdam
2%
Other
14%
India
41%
Africa
13%
Malaysia
29%
Figure 2 Main markets for palm oil from PT Salim Oil Grains in Riau (2002)
59
Appendix III: Analysis of Indofood's stakeholders
Furthermore, PT Intiboga Sejahtera in Java, supplies companies like Unilever and Nabisco.
Intiboga uses CPO partially from the Indofood plantations, part is bought from third parties.11
2.2
Purchasing
Purchasing policies
Ruchi Soy Industries
With sales totalling 45,000 tonnes, Ruchi Soy was the main client of the Salim group companies
in Riau in 2002. All products were exported to India. Ruchi Soya Industries Limited is an agribusiness company, the flagship company of the Ruchi Group of Industries based in Indore,
India. Ruchi Group has manufacturing and trading facilities of soyabean products, agribusiness, oils and fats, flat steel, galvanized steel & cold rolled steel. 12 Apart from its range of soy
products, the company sells Ruchi Gold Refined Palmolein oil as a "health consciencious"
product.
No information was found on Ruchi's environmental purchasing policies.
Summerwind-Seas Co.
With 28,000 tonnes of CPO, Summerwind-Seas Corporation in the Philippines was the second
largest buyer of CPO from the Salim group companies in Riau in 2002. All exports from Dumai
are cleared in Malaysia, most probably for further processing and/or re-export.
Summerwind-Seas Co. is a distributor/agent and supplier of high-precision tools, i.e.,
carbide/HSS cutting tools. Summerwind-Seas' UK client, RS Clare, specialises in specialty
greases such as bearing greases, wire rope lubricants, open gear greases, damping greases and
food lubricants. 13
No information was found on Summerwind-Seas Co.'s environmental purchasing policies.
Avanti Feeds Ltd.
With 17,000 tonnes of CPO, Avanti was the third biggest client of Salim group companies in
Riau in 2002. All products were exported to India. Avanti Feeds Ltd. is a shrimp feed
manufacturing company based in Hyderabad, India. 14
No information was found on Avanti Feeds' environmental purchasing policies.
Safic Alcan SA
With 10,000 tonnes of CPO, Safic Alcan was the fourth biggest client of the Salim Group
companies in Riau in 2002. The Safic-Alcan Group in France is active in adhesives, glues, food
industry, animal feed industry, elastomers, soap, oil, paper, plastics, coatings and water
treatment. The end users of the various products come from the rubber, automotive, cable and
construction industries. Raw materials are also supplied for the life science areas of cosmetics
and pharmaceuticals. Safic Alcan Group is 100% owned by Solvadis, a major chemicals group
based in Germany.15
No information was found on Safic Alcan's or Solvadis' environmental purchasing policies.
Chapter 1
11
Indofood to boost food business with expansion, Jakarta Post, Jakarta, 3 March 1997; Shareholders' meeting
okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Annual Report 1999, First Pacific
Company Ltd., Hong Kong, April 2000; First Pacific's Indofood Unit to Acquire A Controlling Stake in Golden
Agri_Resources, Press Release First Pacific Company Ltd., Hong Kong, 10 May 2001; Website PT Indofood
Sukses Makmur Tbk. (http://www.indofood.co.id), August 2001.
12
http://www.ruchigroup.com/
13
Summerwind-Seas Co website ( http://www.angelfire.com/on4/ssc/mainpage; http://www.ddl.at/summerco/);
RS Clare website (http://www.rsclare.com)
14
http://moneycontrol.co.in/stocks/cptmarket/cobackgrd.php?sc_did=W04
15
Safic Alcan website (http://www.safic-alcan.fr); Solvadis website (http://www.solvadis.com)
60
Appendix III: Analysis of Indofood's stakeholders
Agritrade International Pte. Ltd.
With 6,800 tonnes of CPO, Agritrade International is the fifth biggest buyer of Salim Group
companies in Riau in 2002. All products were shipped to India. Agritrade is involved in trading
and manufacturing in palm oil and related products, cocoa and related produts and other edible
oils. Agritrade has offices in, among other, London, Toronto, Jakarta, Kuala Lumpur, Hong
Kong, Karachi etc. The company has a joint venture factory in Wuxi, Jiangsu province, China
processing cocoa beans into cocoa butter for exports to USA and Europe. 16
No information was found on Agritrade's environmental purchasing policies.
Sogescol
With 6,500 tonnes in 2002, Sogescol was Salim Group's sixth' biggest buyer in Riau. All products
were exported to Cameroon. Sogescol is based in Belgium. It is one of the companies under
Socfinal (Societe Financiere Luxembourgeoise) SA, a financial holding company with divisions
involved in palm oil, rubber, coffee and flower production, 17 In Indonesia, Socfinal is well
known for its Socfindo plantations in North Sumatra and Aceh. Socfinal is ultimately controlled
by the French Bolloré conglomerate. Sogescol has certifications approved by some of the largest
industrial conglomerates in their individual fields, including Unilever, Cargill, Michelin,
Goodyear, Bridgestone and others. 18
No information was found on Sogescol's environmental purchasing policies.
Gardner Smith
With 6,000 tonnes, Gardner Smith is the sevenths largest buyer of Salim group companies in
Riau in 2002. All products were destined for Africa. Gardner Smith has its roots in Australia.
Today, it has a global network of offices spanning Australia, New Zealand, Singapore, China,
the USA, South Africa and the UK. Gardner Smith (S.E. Asia) Pte Ltd in Singapore was
established in 1980 when the Group's vegetable oil trading was centralised in Singapore, due to
its proximity to the source of a variety of oils from Malaysia, Indonesia & Philippines. Gardner
Smith SEA also trades Argentine, American and Brazilian products thus enabling it to supply a
wide range of commodities including palm oils, laurics (coconut oil, palm kernel oil) & soft oils
(soybean oil, canola oil, sunflower oil). Gardners Smith's markets are spread through Asia, the
Indian sub-continent, Europe, North, Central and South America as well as the Pacific region. It
services the European market through a representative office in London. 19
No information was found on Gardner Smith' environmental purchasing policies.
Cargill
With 3,250 tonnes in 2002, Cargill was one of the smaller buyers of CPO from the Salim group
companies in Riau. All products were exported to Rotterdam.
Cargill is involved in agriculture, commodity trading, food processing, industrial manufacturing
and finance. Cargill is based in the US and has operations in 59 countries today. It also has its
own plantations in Sumatra, but largely it purchases palm oil from third party suppliers. Cargill
also had a joint venture with Golden Agri Resources (Sinar Mas), which is now dissolved.
Cargill published Environment, Health and Safety (EHS) report which states:
Chapter 1
16
Agritrade website (http://www.agritrade.com.sg/); also: http://aeup.brel.com/visiting/food-process/v1259.html
Business.com website Socfinal profile
(http://www.business.com/directory/financial_services/asset_management/investment_management_firms/euro
pe/socfinalste_financiere_luxembourgeoise/
18
Socfin website (http://www.socfinal.be/socfinal.html)
19
Gardner Smith website (www.gardnersmith.com)
17
61
Appendix III: Analysis of Indofood's stakeholders
"One way we fulfill Cargill's mission to be responsible neighbors in our communities is by protecting and
conserving resources such as air and water quality, participating in land preservation and by protecting the
health and safety of our employees and neighbors. We believe that public responsibility extends beyond
running a safe and environmentally sound plant. It also extends to helping build stronger communities
where we live and work (...). We want to protect the environment for future generations, and recognize our
responsibility to manage natural resources. We are working to transform the concepts of eco-efficiency and
sustainable development into tangible goals and results.20
Unilever
Unilever is one of the buyers of PT Inti Boga Sejahtera. Unilever has its basis in the
Netherlands and United Kingdom, but its operations span over more than 90 countries. Its
products are divided in two main categories: foods, and home and personal care. The Unilever
portfolio includes food brands such as Rama, Lipton, Magnum, Iglo, Ragú, Bertolli, Annapurna,
Birds Eye. Unilever trades around 6% of the world's palmoil produced on an annual basis.
Recently, Unilever has begun a process to dispose of its direct interests in oil palm plantation
companies and as such will rely ever more on its suppliers to take on the same responsibilities as
Unilever has. Unilever explicitely accepts the responsibility for assuring that its products are
subject to environmental guidelines:
Our consumers trust in us to supply them with high-quality goods that are produced in an environmentally
and socially responsible way. We therefore have a responsibility to act as agents for our consumers,
ensuring their expectations are understood along the supply chain (...). We are major buyers of these items
on world markets and are also involved in agriculture, either directly or with contract growers. This gives
us some influence on how the materials are produced and considerable social responsibility to use our
influence wisely (…).Ultimately, we want the market to work for sustainable development and to
encourage fully sustainable agricultural systems. We want to contribute to their development and benefit
from them. 21
Unilever's palm oil Good Agricultural Practise (GAP) guidelines are arranged under 10
indicators of sustainability. Within each good practices are defined and potential areas for
improvement outlined. Requirements of specific relevance include:
•
•
•
•
•
Legal compliance is specifically mentioned in the guidelines for workers’
conditions and transactions.
Extension of plantations into areas of ‘primary’ forest is never acceptable.
Extension into degraded lands or land previously under other crops is preferred
over extension into (partially degraded) forests or wetlands.
Before extension into new areas a full environmental impacts assessment must be
carried out and results followed.
During clearing burning should be avoided unless serious pest and disease
problems require it. Periods of no ground cover should be minimised.
Practices to maintain soil fertility and soil nutrients, and to minimise soil loss,
are described in detail.
Chapter 1
20
Cargill website (http://www.cargill.com/about/envir.htm); Cargill, 2001. Environment, Health and Safety
(EHS) report.
21
Unilever 2002. Growing for the Future: Unilever and Sustainable Agriculture.
62
Appendix III: Analysis of Indofood's stakeholders
•
•
•
•
•
•
•
Use of pesticides should be minimised though use of integrated pest
management; workers applying pesticides must be properly trained and
equipped.
Biodiversity within the plantation should be conserved by providing appropriate
habitat and adopting appropriate cultural practices.
Efficient use of renewable energy resources (including the use of shell and fibre
as fuel) should be targeted, while greenhouse gas and polluting gas emissions are
minimised.
The volume of water used in irrigation and extraction from sustainable sources
need to be considered. Water use in the factory should be minimised. Output
from effluent ponds should be monitored and contamination of
streams/groundwater avoided.
Competitive local goods and services should be used where practical; maximum
employment opportunities should be provided for local people.
Legislation on employment benefits and conditions, child labout and social
security should be complied with. Where there is no legislation in-house
standards should be developed.
Contracts with suppliers should be fair; payments and supplies should be on time
and at the agreed price.22
Unilever presently plays a lead role in the Sustainable Agriculture Initiative Platform (SAI
Platform) which is concerned about the potential impacts of palm oil plantations on tropical
forests. SAI supports agricultural practices and production systems that preserve the future
availability of the current resources and enhance their efficiency. This increases agriculture’s
contribution to the optimal satisfaction of society’s environmental, economic and social
requirements. The SAI Platform has been founded by Groupe Danone, Nestlé and Unilever.
Other member companies are Campina, Coberco, Danisco, Dole, Findus, Kraft, McCain
Europe, McDonald’s and Neumann Kaffee Gruppe. Within the SAI Platform structure, the
member companies are developing action plans for their key raw materials. Through one of its
member companies (Unilever) , SAI Platform is actively contributing to the organisation of a
Roundtable on sustainable palm oil which will be held in August 2003.23
Nabisco
Nabisco is one of the buyers of PT Inti Boga Sejahtera. Nabisco is a cookie and crackers
manufacturer. It is part of the Philip Morris group of companies in the US. Nabisco's cookies
and crackers are presumably marketed through Kraft Foods, also part of Philip Morris whose
main products are, among other, Kraft, Jacobs, Toblerone and Milka. Kraft is also member of
the Sustainable Agriculture Initiative (SAI).
Chapter 1
22
Jennings et al., 2003. Defining sustainability in oil palm production: an analysis of existing sustainable
agriculture and oil palm initiatives, ProForest.
23
SEI Platform, Position on Palm Oil. (www.saiplatform.org).
63
Appendix III: Analysis of Indofood's stakeholders
In 2001, Nabisco declined to participate in Corporate Responsibility Rating (environmental or
social) Assessment by OEKOM Research. 24 No further information was found on Nabisco's
environmental purchasing policies.
Chapter 1
24
Werner, F. 2001. Corporate Responsibility Industry Report, Food and Consumer Goods. A corporate
responsibility survey of 28 companies from the industry. OEKOM Research Aktien Gesellschaft.
64
Appendix IV:
IV ANSWERS ON AN EMAIL OF MR. PIETER
KROON WITH QUESTIONS FOR CLARIFICATION
In reply to a number of questions for clarification in an email to Mr. Pieter Kroon (ING
Group) on 18 July 2003, the following answers were sent by ING Manager Public Affairs Ms.
Miriam de Wolff on September 10, 2003:
1. The ING Policy on "Sustainable deforestation" suggests that ING allows all legal conversion
of High Conservation Value Forests as well as all legal burning (in Indonesia). Is that right?
It is not so that by definition ING never requires compliance beyond local laws. (Local) laws and
regulations are not the only guideline for ING, the ING Business Principles also apply.
2. What are 'local laws and regulations'? National and/or district level law? What if both are not
consistent?
In case of inconsistency, ING will (have to) act according to its own judgement.
3. The policy suggests that ING itself determines what 'insufficient' respect for the rights of
local communities entails. What does ING consider 'insufficient'?
No reply
4. The policy does not apply to holdings companies as long as these are not involved in illegal
deforestation and burning. Should this guideline not read: "as long as the plantation
companies are not involved…"? If not, does that mean that all other legal and social
requirements are not applicable?
Although the policy does not apply as long as the financed company is not involved in deforestation
and/or burning of HCVF and as long as the financing does not aim at deforestation and/or burning of
HCVF, still the ING Business Principles apply.
5. Why does ING use a definition for illegal logging that (mostly) appears to be based on illegal
forestry practises in Russia?
After consultation with the Structured Finance department that is concerned with the sector at hand it
is not quite clear to us to which definition of illegal practises in Russia you refer. We wish to
emphasise that the ING Policy is written for a broader area than Indonesia. ING uses the World
Bank Forest Policy as stated in the Policy.
6. Which World Bank Policies does ING apply? IFC policies or or the more generic World
Bank Forest policy (that dealt with commercial logging)?
ING uses the World Bank Forest Policy as stated in the Policy.
65
Appendix IV:
IV ANSWERS ON AN EMAIL OF MR. PIETER
KROON WITH QUESTIONS FOR CLARIFICATION
7. Has the April 2002 working capital facility for Indofood already been reviewed and can we,
considering the recent support by ING for Indofood's bond issuance, assume that ING still
has full confidence in the company (in relation to the Policy)?
With regard to the Indfood financing and the Policy and ING Business Principles we wish to inform
you that this is approved based on the fact that the company financed is not involved in deforestation
and/or burning of palmoil plantations 25 as well as due to the fact that the financing is meant as
working capital and not for the financing of deforestation/burning; this is (again) included in the
description of the goal of the financing.
Chapter 1
25
Instead of palmoil plantations, this should read: High Conservation Value Forest.
66