Stephanie FriedEnvironmental Defense

"ECAs in Indonesia Destroy the Environment"

Export Credit Agency Finance in Indonesia

andTiti SoentoroBioforum

December, 2000

Export Credit Agency Finance in Indonesia

Stephanie Fried and Titi SoentoroSenior Scientist CoordinatorInternational Program BioforumEnvironmental Defense

A bottle of black water taken from portion of the river where the PT. TanjungEnim Lestari paper and pulp mill has its outflow pipe. This black waste waterwas dumped from the PT. TEL outflow directly into the river water which is usedfor bathing and washing by villagers that inhabit the shoreline. Villagers report-ed skin lesions and sores after bathing in the river after PT. TEL had starteddumping operations.

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Table of Contents

Page Number

Introduction 1

The Role of Export Credit Agencies in Indonesia 3

Project Finance Packages 5

The Top 10 ECAs in the Survey of 33 Indonesia Projects 5

The Export-Import Bank of Japan 6

The Top 10 Projects in the Survey of 33 Indonesia Projects 9

Four Project Case Studies: The Paper and Pulp and Power Sectors 11

PT. Tanjung Enim Lestari 11

P.T. Riau Andalan Paper and Pulp (APRIL) 12

Sinar Mas Group: Indah Kiat 13

Indonesian Power Projects: The Paiton Debacle 14

Conclusion 16

Appendix A: The Jakarta Declaration 18

Appendix B: Newspaper articles 31

A productive rubber garden in a village affected by the PT. TanjungEnim Lestari paper and pulp mill.

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Appendix C:

Export Credit Agency Finance in Indonesia1

Stephanie Fried2 and Titi Soentoro3

Introduction

After thirty two years under the Suharto regime, Indonesia is now trapped in aneconomic crisis with no clear signs of resolution in the near term. In the Suharto era,export credit agencies (ECAs) played a major role in financing environmentally andsocially unsustainable investments that have depleted Indonesia’s extraordinary naturalwealth. Forest degradation reached a rate of close to two million hectares per year.Investment projects such as factories, plantations, and mines not only destroyed natu-ral resources, but also gave rise to other significant environmental and social impactsincluding the destruction of the livelihoods of the local peoples who owned, managed,and utilized these resources. Security forces were routinely used to prevent forest-dwelling, rural, and river-side peoples from protecting and managing the naturalresources upon which their livelihoods and communities depended. In resource-richregions, the violation of human rights was a routine occurrence.ECAs played a key roleby assisting foreign investors in supporting General Suharto’s system of economic andpolitical monopolies. The regime's military security approach assured low costs for landappropriation and a relatively docile and inexpensive labor force. Major foreigninvestors, supported by ECA finance, competed to align themselves with powerful busi-ness interests close to the Suharto family, often by offering cost-free investment sharesto Suharto’s children, other relatives, and business associates. In return, investors wereassured of access to lucrative sectors of the Indonesian economy and were able toreceive "assistance" from Indonesia’s armed forces when it came to clearing people offof land for their projects, stifling labor unrest, or preventing mobs from storming theirpolluting factories.

After Suharto’s fall, export credit agencies with heavy exposure in Indonesiafound that the web of business contracts that they had underwritten -- most of whichwere directly dependent on links to various Suharto relatives -- were endangered. Asa newly independent Indonesian press brought to light evidence of the massive corrup-tion, malfeasance, improper contracting procedures, environmental devastation, andhuman rights violations linked to ECA-backed investments, the likelihood of substantialclaims against ECA political risk insurance and guarantees increased dramatically.

1 A draft of this report was presented at the Third Annual NGO Workshop on Export Credit Agencies, Jakarta, Indonesia, May,2000.2 Senior Scientist, International Program, Environmental Defense, P.O. Box 520, Waimanalo, HI, 96795 USA. Email:stephf@edf.org. Adjunct Fellow, Environmental Studies, East West Center, Honolulu, HI, USA.3 Coordinator, BIOFORUM, Bogor, Indonesia.

Recommendations

The report suggests a number of policy options that government agencies and financial institutions could adopt to put Indonesia's pulp and paper industries on a more sustainable track.

The recommendations are best read in the context of the full report and they relate to corrective action on: further expansion of pulp and paper processing capacity; wood supply subsidies to Indonesia's pulp industry; allocation of new forest conversion licenses; independent monitoring of plantation development; stricter application of due diligence by financial institutions on major investments in major pulp and paper projects in the face of financial risks; and potential reliance on illegally obtained raw material.

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In the case of significant ECA-guaranteed investments like the notorious Paitonpower plants, foreign ECA officials attempted to intervene in Indonesia’s national poli-cy-making process in order to reduce their own exposure. For example, the industrial-ized countries making up the Consultative Group on Indonesia (CGI), had scheduledtheir international donor meeting for July 28, 1999. At this meeting, the CGI was tofinalize the details of various aid and loan packages which were to be made availableto Indonesia during the economic crisis. Two weeks before the July 28th meetings, anECA "SWAT team" consisting of government officials who were representatives ofJapan’s Export Import Bank, Germany’s Hermes Agency, the Swiss Export RiskGuarantee Agency, the U.S. Export Import Bank and OPIC – all from CGI countries --descended upon Indonesia’s new government in an attempt to force it to honor theSuharto-era power sector contracts which had been written under conditions ofextreme corruption. These contracts -- backed by ECA insurance and guarantees –had been made by companies which – as the Wall Street Journal reported -- "cut over-priced politically influenced deals that undermined the Indonesian economy."4

Two weeks before Indonesia’s July, 1999, CGI donor meeting, the team of interna-tional ECA representatives warned the new government that a failure to honor con-tracts such as the massively corrupt Paiton power contract would "harm new foreigninvestment and delay Indonesia's economic recovery."5

A later investigation into power contracts by Indonesian Corruption Watch identifiedpossible markups totaling US$400 million in the country's foreign-funded power trans-mission projects. In October, 2000, the President of Indonesia’s National PowerAgency, Kuntoro Mangkusubroto, stated that most power transmission projectsfinanced by foreign export credit agencies, Kredit Expor or KE, in Bahasa Indonesia,"smacked of markup practices. All KE [ECA] projects are problem sources ... we foundthat on average they cost 37 percent more compared to projects that underwent inter-national tenders," Kuntoro said during a meeting with Indonesian House ofRepresentatives Commission for Energy Affairs.6

It is clear that under the current conditions of democratization in Indonesia, exportcredit agencies -- whether through their links to corrupt Suharto-era business venturesor because of the secrecy with which they conduct their transactions -- remain athrowback to the politics and economic practices of the Suharto dictatorship.

Export Credit Agencies

Export Credit Agencies (ECAs) are governmental or quasi-governmental entitiesthat subsidize and promote a country’s exports and investment abroad. The amount ofinvestment that ECAs support globally is large and growing—significantly greater thanthe total amount of lending from the World Bank, IMF, and all other multilateral institu-tions combined.i Most ECAs are not required to consider the social and environmentalimpacts of the projects they support. As a result, many projects funded by ECAsseverely degrade the natural environment and lead to the impoverishment of directlyaffected local communities. Many of these projects would not go forward without theinsurance against commercial and political risk, loan guarantees, and direct loans thatECAs provide.

In recent years, environmental and development NGOs have begun to call on all4 "Power Deals With Cuts for First Family In Indonesia are Coming Under Attack," Wall Street Journal, 12/23/98.5 "Credit Agencies Pressure Indonesia On Power Contracts," Dow Jones Newswires, 7/13/99.6 "Foreign-funded power projects marked up: PLN", Jakarta Post, 10/17/00.

fall far short of meeting the volumes of wood the country's mills need to operate at projected processing capacities. Barr speculates that the quest for additional sources of wood could hasten deforestation in Kalimantan and Papua (formerly Irian Jaya), as pulp and paper companies seek raw materials from beyond their current base in Sumatra.

Growing Risk

The study looks particularly at the performance and economic conditions of two of Indonesia's largest pulp and paper companies, owned by Asia Pulp & Paper (APP) and Asia Pacific Resources International Ltd. (APRIL). Both have made considerable headway since the 1990s in establishing industrial pulpwood plantations. Fast-growing acacia and other species favored for plantations can generally be harvested in seven to eight years.

But the CIFOR-WWF report shows that large capital investments in pulp and paper processing facilities have rapidly outpaced plantation development efforts, with companies expected to face growing shortages of raw material over the next five to seven years.

"Besides putting added pressures on Indonesia's remaining natural forests, debt-driven expansion will raise the financial risks if these companies are not able to secure low-cost fiber over the long term," Barr observes. Conflicts between companies and communities over forest access and environmental issues further raise the financial stakes, as illustrated by the ongoing suspension of operations at the $600 million Indorayon pulp mill in North Sumatra.

The study shows that Indonesian pulp and paper producers have been willing to invest enormous sums in the expansion of mill capacity because the financial risk to their owners has been diminished by government subsidies (such as access to pulpwood at costs well below its stumpage value), weak regulation of Indonesia's financial sector and inadequate risk assessment by international financial institutions involved in the investments.

The economic crisis in Indonesia has magnified the problems. Some of the nation's largest mills and pulpwood plantations have been placed in receivership under the Indonesian Bank Restructuring Agency (IBRA) because of theirheavy debt loads.

"IBRA has allowed the companies to continue operating under their precrisis management teams, and there are strong reasons to believe the agency may write off a substantial portion of their outstanding debts, thereby providing yet another capital subsidy," says Barr.

Furthermore, agreements between major pulp producers APP and APRIL and their foreign investors to resolve outstanding debts have been linked to further expansion of the companies' processing operations.

2 35

ECAs to adopt and upwardly harmonize their environmental and social policies in orderto put a halt environmentally destructive investments supported by these agencies.Governments have begun to acknowledge the problem but are slow in taking decisiveaction. At present, an international grassroots movement is working to hold the world’sindustrial leaders to their commitments and ensure that they enact common environ-mental and social standards for ECAs.

The Role of Export Credit Agencies in Indonesia

In 1996, officially supported export credits accounted for more than 24% of the totalindebtedness of developing countries.7 The years 1990-1995 saw export credit expo-sure to developing countries increase at an average growth rate of 11%.8 In 1996, thetop four recipients, Russia, China, Indonesia, and Nigeria, accounted for 40% of theexport credit agencies’ total exposure.9 For the top four recipients, export creditsaccounted for between 24% to 71% of total external debt.10

1996 1996 1996Total External Debt ECA Exposure ECA Exposure Billions Billions As % ofTotalDebt

Russia 129 52.9 41%China 128 44.8 35%Indonesia 120.2 28.2 24%Nigeria 34.9 24.8 71%

Figure 1a. Export Credit Agency Exposure and Debt11

Between 1992 and 1996, export credit agencies’ exposure in Indonesia grew by 25%.By 1996, the level of ECA exposure in Indonesia – largely in support of foreign invest-ment in mega-projects closely linked to the Suharto regime – was equivalent to 24% ofIndonesia’s total external debt, approximately $28 billion.12 In this analysis, we will pro-vide an overview of thirty-three projects in Indonesia supported by export credit agen-cies between 1994 and 1997, valued at total of $15 billion dollars.13 We will examinethe relative contributions of the ten ECAs most active in Indonesia, looking in greaterdetail at the Export-Import Bank of Japan, and provide a brief overview of the tenlargest ECA-supported projects which account for $12.4 billion or 83% of the value ofthe thirty-three projects surveyed. Figure 1b indicates the distribution of project financeover time for the 33 projects.

7 Boote, A., D. Ross, et al. "Official Financing for Developing Countries," IMF, February, 1998, p.118 ibid, p119 ibid, p1210 ibid, based on data from pp. 12, 1411 ibid, based on data from pp.12, 1412 Given the climate of secrecy under which ECAs operate and the ensuing lack of data, the extent to which ECA exposure islinked to an increase in external debt of a host country is not easily determined. In quite a few cases, host governments of coun-tries where ECA-supported projects have been financed were and are required to post callable counter-guarantees which exposethe host country to a significant debt burden should the counter-guarantees be called. Data on the level of this type of exposure isnot readily available.13 It has been very difficult to obtain information on ECA financed projects. The 33 sample projects analyzed in this report by nomeans represent an exhaustive list of ECA-financed projects in Indonesia from 1994-1997. The US Export-Import Bank aloneapproved 37 projects for finance during this period, of which only 17 are included in the above analysis. The value of the projectslisted is the total value of the finance package, of which ECA coverage may only make up a small part.

The Jakarta PostDecember 12, 2000

Forests under threat from debt-laden firms: Report

BOGOR, West Java (JP): A new study sponsored by two international organizations shows that Indonesia's forests -widely regarded as among the most biologically important tropical forests in the world - are under dire threat as heavily debt-laden companies struggle to obtain sufficient wood for continuous production.

A sevenfold rise in mill capacity over the past decade, financed by multibillion dollar investments, has enabled Indonesia to become one of the world's top 10 pulp and paper producers.

According to the report by the Center for International Forestry Research (CIFOR) and the World Wide Fund for Nature (WWF)'s Macroeconomic Program Office, which has been made available to The Jakarta Post, Indonesia's pulp and paper industries have grown by 700 percent since the late 1980s, backed by US$12 billion credit and investments

CIFOR researcher Christopher Barr, who conducted the study from mid-1999 until the end of this year, reports that the combined production capacity of Indonesia's pulp and paper industries has grown since 1988 from 1.8 million tonnes a year to more than 13 million tonnes a year.

The report notes that the country's pulp and paper producers, dominated by four conglomerates, secured backing for major growth, in part, by pledging to obtain their raw material from sustainably managed tree plantations. Yet so far, only 8 percent of the wood the industries consume (100 million cubic meters since 1988) has come from plantations. The rest is mixed hardwood timber from natural forests - much of it thought to be harvested illegally.

"The fact that companies have made investments on this scale without first securing a legal and sustainable supply of raw material suggests that many pulp and paper projects in Indonesia are at considerable financial risk," Barr writes in the CIFOR-WWF report, Profits on Paper: The Political Economy of Fiber, Finance, and Debt in Indonesia's Pulp and Paper Industries.

Barr calculated that more than 800,000 hectares of natural forest have been cleared since 1988 to supply the rapidly expanding mills. The government of Indonesia has allowed the country's pulp and paper companies, which are concentrated in Sumatra's Riau province, to exploit large areas of natural forest at low cost. But the CIFOR-WWF study concludes that as much as 40 percent of the wood that mills now obtain from natural forests comes from undocumented and probably illegal sources.

The nation's rapidly diminishing forests will continue to face heavy pressure for at least the next seven years, the report warns, as plantation yields

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Figure 1b. Value of 33 Export Credit Agency-financed projects in Indonesia, 1994-1997. (Only lead ECAs are shown.)

Of the 33 projects surveyed, the most significant amount of ECA-leveraged financewas concentrated in four sectors, the largest being the power and paper and pulp sec-tors. ECA-backed investments included support for a number of controversial mega-projects such as the giant Tanjung Enim Lestari (PT. TEL), Indah Kiat, and RiauAndalan paper and pulp mill projects in Sumatra and the notorious $4 billion corruption-plagued Paiton coal plants in Java.

In our sample, the third and fourth largest sectors with ECA involvment were miningand state-owned refineries14 with projects valued at $2.5 billion and $2.1 billion, respec-tively, followed by cement, satellite technology, technology, and military transport.

Figure 2. Thirty-three ECA-supported projects in Indonesia. Sorted by sector,15

1994-1997. (Only lead ECAs are shown.)14 These refineries are controlled by Pertamina, Indonesia’s astonishingly corrupt national petroleum company.15 Please note that there are significant questions about the finance package for PT. TEL in the paper and pulp sector. Publiclyavailable records state that two finance packages were signed for the mill – one in 1994 for $1.5 billion, and one in 1997 for $1.3billion. Further research is needed to determine whether both of those packages were actually disbursed -- i.e. for a total projectvalue of $2.8 billion or whether only one of the packages were disbursed. Figure 2 assumes that both finance packages were dis-bursed. If only one package was disbursed, the level of ECA support for the paper and pulp sector in our sample would be closeto the level of ECA support provided for the mining sector. (See Figure 2.)

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Figure 2. Thirty-three ECA-Supported Projects in Indonesia, 1994-1997 Sorted by Sector (Only lead ECAs are shown.)

Netherlands-NCMSwitzerland-ERG Sweden-EKN

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4 33

“ECAs In Indonesia Destroy theEnvironment”

Project Finance Packages

The finance packages for the larger ECA-supported projects typically involve a num-ber of tranches (or parts), including long term commercial loans (some covered by pri-vate or public guarantees or insurance), equity, revolving credit, and often an "ECAtranche" which may be a commercially syndicated loan covered by ECA guarantees.ECAs also provide some direct loans. A 1997 $1.3 billion loan to PT. TEL for the con-struction of a controversial pulp mill in South Sumatra, for example, involved 6 tranches:

1. A $200 million, 10 year term commercial loan financed by 19 banks in 6 countries;2. $350 million in equity provided by two Indonesian companies (one under General

Suharto’s eldest daughter, Siti Hardiyanta Rukmana , or "Tutut"), two Japanesecompanies, and Japan’s OECF;

3. A $650 million, 12 year Export Credit tranche involving the Finnish GuaranteeBoard, the Swedish Exporkreditnamden, Germany’s Hermes, and Canada’s ExportDevelopment Corporation, funded by Germany’s KfW, two German commercialbanks, a Finnish bank, Canada’s EDC and Finland’s FGB, and apparently guaran-teed by FGB, EKN, Hermes, and EDC;

4. A $41 million loan from Germany’s KfW;5. A $50 million, 5-year revolving credit line financed by 19 banks from 6 countries;6. A $50 million, 10 year loan arranged by Japanese, German, Korean, and Finnish

Banks and AT&T.

The provision of the ECA guarantees in one tranche of the loan -- $267.7 millionfrom Hermes (the lead ECA),$205.3 million from EDC, $129 million from FGB, and$52.6 million from EKN – leveraged total project finance of over $1.3 billion.

The Top 10 ECAs in the Indonesia Projects

In the 33 projects examined in this study, ten ECAs took lead roles in projectfinance. Lead ECAs are those which contribute the largest amount of coverage orloans in a given project. They also may act to coordinate other banks or as arrangersfor commercial loan syndication on a given project. The top three lead ECAs active inthe Indonesia projects in our sample were JEXIM, US EXIM, and Hermes. TheScandinavian ECAs -- FGB and EKN – as well as the Canadian Export DevelopmentCorporation also played a significant role in the finance of these projects. The SwissECA, Export Risk Guarantee also played a role, especially in the financing of powerand refinery investments. (See Figures 3 and 4.)

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“Export Credit Projects are Generally Full of Corruption, Collision, and Nepotism”

Appendix B: Indonesian Newspaper articles on export credit agencies.

“NGO’s: ECA Bankrupt the Country”

Figure 3. Thirty-three ECA-supported projects in Indonesia. Sorted by Lead ECA,1994-1997. (Only Lead ECAs shown.)

In addition to lead roles, ECAs may play secondary roles in project finance and areable to leverage significant additional project value in a supporting role – i.e. by provid-ing additional guarantees or loans for a tranche led by another ECA, as in the aboveexample of Canadian, Finnish, and Swedish support for the Hermes-led tranche for the$1.3 billion finance package for PT. TEL. The table below demonstrates the totalfinance leveraged by ECAs acting as lead financers and that leveraged by ECAs intheir capacity as secondary financers in the 33 Indonesia projects.

Figure 4. Project finance leveraged by ECAs providing lead and secondary cover-age for 33 projects, 1994-1997

The Export-Import Bank of Japan (JEXIM)

JEXIM, as the most significant ECA in our sample of Indonesia projects, merits clos-er study. An analysis of the 10 JEXIM-supported projects in our sample indicates that, asa lead ECA, JEXIM focussed on projects in the power and mining sectors with additional

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lead funding in the refinery and cement sectors.16 As a secondary financer, JEXIM par-ticipated in a $750 million tranche of a $1.5 billion investment in the PT. TEL paper andpulp project and in the troubled $580 million INCO mine, which has been the site ofhuman rights abuses, land seizures, and environmental destruction.

Figure 5. The Value of Ten JEXIM-Supported Projects in Indonesia 1994-1997,Sorted by Sector.

Looking at this another way, we can examine the amount of leverage, in terms ofadditional project finance, that each dollar of JEXIM exposure – in its role as lead ECA-- provided in the 10 projects in our study.

Figure 6. Comparison of JEXIM Exposure, Tranche Size, Total Project Value forten projects, 1994-1997

One way to calculate leverage is to compare the amount of JEXIM exposure –guarantee or loan – to the total value of the project supported by JEXIM. The front rowin the chart in Table 6 represents actual JEXIM exposure17 for a given project. Since

16 Value of power projects where JEXIM was lead financer appears to be $2.7 billion; mining, $1.88 billion; refinery:$1,28 billion;cement: 662 million.17 The data do not clearly differentiate between loans and guarantees in all cases, therefore exposure comprises both loans andguarantees.

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Figure 5. The Value of Ten JEXIM-Supported Projects in Indonesia, 1994-1997 Sorted by Sector

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International Rivers NetworkLeavenworth Audubon Adopt-a-ForestMangrove Action ProjectNative Forest CouncilNatural Resources Defense CouncilOxfam AmericaPacific Environmental Resource CenterPreamble CenterProject UndergroundRainforest Action NetworkRainforest Foundation USARainforest ReliefRockefeller Brothers FundWorldview, Ltd.Dennis V. Brutus, Professor Emeritus, University of PittsburghTerence Turner, Professor, Cornell University

URUGUAY:Instituto del Tercer MundoWorld Rainforest Movement

ZIMBABWE:African Forum and Network on Debt and Development

the amount of JEXIM exposure was not available for all of the 10 projects surveyed, itwas necessary, in addition, to come up with a proxy for JEXIM exposure. Data wereavailable on the size of the tranche involving JEXIM for a given project. From anexamination of the data, however, it was impossible to ascertain what percent of agiven tranche had JEXIM coverage. If we take the most conservative estimate, andassume that JEXIM exposure was equivalent to the entire tranche (in many cases, itwould likely be less than that), we can come up with a comparison of JEXIM tranchesize to total project value. JEXIM tranche size is represented in the middle row of thegraph in Figure 6. The back row represents the total project value leveraged by ECAfinance.

Another way to explore the leverage per JEXIM dollar of exposure is to examineleverage ratios. For projects where data exists on the dollar amount of JEXIM expo-sure, the leverage ratio is the amount of JEXIM exposure divided by the total projectvalue:

Total Project ValueJEXIM Exposure

A value of one indicates that the value of the project was equivalent to the amountof coverage provided by JEXIM – i.e. a $100 million JEXIM guarantee supported a$100 million investment. Values higher than one indicate that JEXIM dollars of expo-sure are leveraging more finance than is covered by JEXIM.

Figure 7. Leverage Ratios for Six JEXIM-Supported Projects Indonesia: 1994-1997

Figure 7 indicates that, for the six projects for which JEXIM exposure data are avail-able, one dollar of JEXIM coverage can leverage as much as six dollars of privatefinance. The average amount of dollars leveraged for the six JEXIM projects was $4for every dollar covered by JEXIM. For the remaining four projects for which no JEXIMexposure data was available, Figure 8 shows the leverage ratio for tranches of loans inwhich JEXIM was involved, averaging $2.6 for the four projects analyzed. Given theconservative nature of the tranche estimates, one would expect ratios calculated usingtranch figures would be lower than those calculated using JEXIM exposure data.

Swiss Labour AssistanceSwissaid

TAIWAN:Taiwan Environmental Protection Union

THAILAND:EarthRights InternationalMangrove Action ProjectNorthern Development FoundationTowards Ecological Recovery & Regional Alliance (TERRA)Yadfon Association

UGANDA:Uganda Debt Network

UNITED KINGDOM:Campaign Against Arms TradeCentre For Alternative Technology (Wales)Christian AidDown to EarthFern/WRM Northern OfficeForest Peoples ProgrammeForests MonitorFriends of the Earth (England, Wales and Northern Ireland)GLOBE UK All Party Parliamentary GroupGreen Party of England & WalesIlisu Dam CampaignIndonesian Human Rights Campaign (TAPOL)Jubilee 2000UKKurdish Human Rights ProjectMinewatchPartizans (People Against Rio Tinto and Subsidiaires)Rights and Accountability in Development (University of Oxford)The Corner HouseWales Green Party/Plaid Werdd CymruWorld Development MovementJean Lambert MEP, Green Party Member of the European Parliament (London Region)

UNITED STATES:50 Years Is Enough: U.S. Network for Global EconomicAmazon WatchCenter for International Environmental LawEnvironmental DefenseFirst Peoples WorldwideFriends of the EarthGlobal ResponseInstitute for Policy StudiesInternational Primate Protection League

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Figure 8.Tranche Leverage Ratios for JEXIM: Four Indonesian projects 1994-1997

Top 10 ECA-Supported Projects in Sample of 33 Projects

The ten largest ECA-supported projects in our sample of 33 projects have a com-bined value of $12.4 billion, equivalent to 83% of the value of all projects analysed.

Figure 9. The value of the top ten ECA-supported Indonesia projects: $12.4 bil-lion (total $15.1 billion), or 82% of total value of the 33 projects surveyed.

Again, in these top ten projects, the power and paper/pulp sectors take up the largestamount of finance, $4.2 billion and $4 billion, respectively.

ISAR-SiberiaKamchatka League of Endependent ExpertsKrasnoyarsk Regional Public Fund for Forest ProtectionMagadan Center for the EnvironmentPublic Ecological Center "Dauria"Public Ecological Charitable Fund "Baikal"Republic of Sakha (Yakutia) Center for Ecological EducationRepublic of Sakha (Yakutia) Public Ecological CenterRepublic Public Environmental Fund "Baikal"Sakhalin Environment WatchSiberian Association for NTFP UseSiberian Environmental CenterSocio-Ecological Union/Antinuclear CampaignSt. Petersburg Society of NaturalistsTaiga RangersTaiga Research and Protection AgencyTele-radio Company "Katun"Tomsk Ecological Student InspectionToyeon Ecological CenterTransbaikal Center for Biodiversity ConservationWorld Information Service on Energy Russia

SLOVAKIA:Center for Environmental Public Advocacy/Friends of the Earth Slovakia

SOUTH AFRICA:Alternative Information & Development Centre (AIDC)Timberwatch Coalition

SWEDEN:FältbiologernaMiljoefoerbundet Jordens Vaenner/Friends of the Earth SwedenSwedish Society for Nature ConservationPeter Söderbaum, Professor i ekonomi med inriktning på ekologisk ekonomiMälardalens högskola, Sweden

SWITZERLAND:Aktion Finanzplatz SchweizArbeitskreis Tourismus & EntwicklungBasel MissionBerne DeclarationBruecke-Cecotret/Development Agency of Swiss Confederation of Christian Trade UnionsCaritas SwitzerlandGreen Party SwitzerlandHonduras Group SwitzerlandNetzwerk für sozial verantwortliche Wirtschaft NSW/RSESolifondsSwiss Coalition of Development OrganizationsSwiss Energy Foundation

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Top 10 Projects

23 Remaining Projects

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Figure 10. Top ten ECA-supported Indonesia projects, 1994-1997 sorted by sectorand ECA

The top ten projects in Indonesia were awarded to seven companies, with threecompanies – PT.TEL, Paiton Power, and Pertamina, Indonesia’s notoriously corruptnational petroleum company -- receiving two of the top ten projects each. The remain-ing projects provided support for companies involved in environmentally and sociallyproblematic paper and pulp operations in Sumatra – the Sinar Mas conglomerate’sIndah Kiat mill and the APRIL conglomerate’s Riau Andalan mill -- and a new mine sitefor Newmont, a company already facing environmental complaints for its existing oper-ations elsewhere in Indonesia.

Figure 11. Indonesian recipients of top ten ECA-supported finance packages, 33project survey, 1994-1997 ($US billions)

MEXICO:Grupo Mesófilo A.C.Red Mexicana de Accion frente al Libre Comercio (RMALC)Trasparencia, S.C.

NETHERLANDS:Both ENDSCampagne tegen WapenhandelCorporate Europe ObservatoryFriends of the Earth InternationalGreenpeace InternationalKomitee IndonesiaThe Northern Alliance for SustainabilityThe Transnational InstituteWorld Information Service on Energy (WISE)

NEW ZEALAND:The Pacific Institute of Resource Management

NIGERIA:African Network for Environmental and Economic JusticeEcowas Network on Debt and Development (ECONDAD)The Flood and Erosion Victims Association(FEVA)

NORWAY:FIVAS, Association for International Water and Forest StudiesForum for Environment and DevelopmentRegnskogsfondet/Rainforest Foundation Norway

PAKISTAN:Pakistan Network of Rivers, Dams, and People

PAPUA NEW GUINEA:NGO Environmental Watch Group

PHILIPPINES:Cordillera Peoples AllianceNUCLEAR FREE PHILIPPINES COALITION

RUSSIA:Agency for Public Ecological ReviewsAltai State University EcoclubAngara-Yenisei Rescue AssociationASMO-Press Association of Young Journalists of Tomsk RegionBaltic Resource and Information CenterBayangol Ethno-Ecological CenterBureau for Public Regional CampaigningBuryat Regional Union for BaikalECODEFENSE! Int'lFund for 21st Century AltaiGreen Light Environmental Center

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10 27

Four Company Case Studies: Paper/Pulp and Power Sectors

Paper and Pulp in Indonesia

The government of Indonesia has been supporting the expansion of the paper andpulp industry which, before the economic crisis, was expected to grow from its current2 million ton annual production capacity to a 10 million ton capacity by 2010 with theaddition of 16 new paper and pulp mills. The mills currently operating in Indonesia rely,for the most part -- despite their public statements -- on the clearcutting of natural orcommunity managed forests, often on indigenous lands. In a few cases, they have uti-lized pine plantations planted under Dutch colonial authority. The Indonesian govern-ment’s campaign to rapidly expand the country’s paper and pulp production has beenhaunted by concerns that, given the lack of sufficient pulpwood plantations, industryexpansion would lead to the wholesale clearcutting of hundreds of thousands ofhectares of the nation’s remaining forests, often inhabited by indigenous and other for-est farming peoples.18 Indeed, this has often been the case, sparking unrest , litigation,the continual harassment of local communities by security forces, and, in the post-Suharto era, massive public protests against the forced seizures and clearcutting ofcommunity forests, air pollution, and the pollution of major waterways by paper andpulp mills and factories.

1. PT. Tanjung Enim Lestari

The Barito Pacific Group, Indonesia’s largest logging conglomerate, is the majorityshareholder in PT. Tanjung Enim Lestari, (PT.TEL) – slated to become Indonesia’slargest paper and pulp mill -- and its sister company, PT. Musi Hutan Persada , wasdesignated to prepare massive pulp plantations to feed the mill. From the beginning ofthe establishment of the financing package for the mill, General Suharto’s eldestdaughter, Siti Hardiyanti Rukmana ("Tutut"), was sought as a significant shareholder.In 1994, Germany’s Hermes, Japan’s JEXIM, Finnish Export Credit, Sweden’sExportkreditnamnden, and the Export Development Corporation approved a $1.5 billionfinance package19 for the mill. In 1997, Hermes, the Export Development Corporation,Exportkreditnamnden, the Finnish Guarantee Board, and Japan’s OECF approved a$1.3 billion finance package for the mill. The signing of this finance package corre-sponded with the signing of a pulp supply agreement with PT. Musi Hutan Persada toguarantee pulp for the mill. The entire output of the mill is destined for export.

This company, from its pre-construction preparation phase on -- including mill con-struction and plantation preparation -- has generated substantial conflicts with the sur-rounding communities. In the 1990 and 1992, the Barito Pacific Group – alreadyembroiled in conflicts with local communities in and near its logging concessionsthroughout Indonesia – began clearing concession land in the Benakat region.20 In1992, the company moved transmigrants from Java and elsewhere into the area to pro-vide the labor force for its operations. In 1992, despite protests from local inhabitants,

18 See, for example, Jakarta Post editorial, "Pulping the forests", 4/11/96; WALHI, YLBHI, "Mistaking Plantations for Indonesia’sTropical Forest," Jakarta, 1992. 69 pages.19 Please note that, to date, it has not been possible to ascertain whether both or only one of these finance packages actuallycame to fruition. This underscores the need for transparency in the provision of data by ECAs.20 The ensuing chronology is paraphrased from "Pulping the People: Barito Pacific’s Paper Pulp Factory and Plantations in SouthSumatra: PT. Tanjung Enim Lestari and PT Musi Hutan Persada", Down to Earth, June, 1997, p.8.

Riforma mondiale della SACEService Civil International/Branca ItalianaUn Ponte per...Xaverian Missionaries (Italy and many other countries)Fausto Bertinotti (Dep. and Member of the European Parliament) PRCUgo Boghetta (Dep.), PRCFranco Bonato (Dep.) PRCLuca Cangemi (Dep.) PRCAurelio Crippa (Sen.) PRC Fausto Co' (Sen.) PRCWalter De Cesaris (Dep.) PRCGiuseppe Di Lello Finuoli, Member of European Parliament PRCFranco Giordano (Dep.) PRCMaria Lenti (Dep.) PRCGiorgio Melentacchi (Dep.) PRCRamon Mantovani (Dep.) PRC Luisa Morgantini, Member of European Parliament, PRCMaria Celeste Nardini (Dep.) PRCEdo Rossi (Dep.) PRCGiovanni Russo Spena (Sen.) PRCTiziana Valpiana (Dep.) PRCNicola Vendola (Dep.) PRCLuigi Vinci (Capogruppo), Member of European Parliament, PRC

JAPAN:A SEED JAPAN Campaign for Future of Filipino Children (CFFC)Friends of the Earth JapanGreen Energy "Law" NetworkJapan Center for a Sustainable Environment and Society (JACSES)Japan NGO Network on IndonesiaJapan Tropical Action Network (JATAN)Mekong WatchPeople's Forum 2001Society for Creation of Future of Yoshino River

KENYA:Forest Action NetworkRelief and Environmental Care Africa (RECA)

KYRGYZSTAN:Bureau on Human Rights and Rule of Law

MALAYASIA:Centre for Orang Asli Concerns (COAC).Partners of Community Organisations (PACOS).

1126

Musi Hutan Persada (MHP) began illegal logging of the forested lands of the Benekatvillagers. The inhabitants of Benakat were threatened by local authorities and securityforces who insisted that they give up 1,250 hectares of their productive rubber gardens(see photo), upon which their livelihoods depended, or risk being officially branded withthe serious charge of "hindering development", a subversion charge.21

The farmers were repeatedly summoned for interrogations and threatened withprison. Those who openly resisted the efforts at intimidation were accused of involve-ment with Indonesia’s banned Communist Party, an accusation with serious ramifica-tions. Those who did finally agree, under great pressure, to give up their landsreceived negligible compensation.

In 1995, 500 villagers in the Muara Niru and Kuripan areas signed a letter to theVice President of Indonesia rejecting the development of the pulp mill in their area.Over the next few years, local villagers whose lands had been seized without warningor compensation by MHP to provide plantations for the paper and pulp mill, repeatedlypetitioned local, district, provincial, and national government officials stating that theydid not want the PT. TEL plantations on their lands. In June, 1997, representatives oflocal communities went to the Department of Trade and Industry to protest the compa-ny’s presentation of its internal environmental impact assessment. Citing environmen-tal and social concerns, Indonesia’s leading environmental organization, WALHI, calledfor the cancellation of the project. The National Legal Aid Foundation protested to sen-ior government ministers that the local people’s rights as well as environmental lawshad been violated. In the aftermath of Suharto’s ouster, feeling the winds of "reformasi",local villagers in the area surrounding PT.TEL have once again requested a halt to theconstruction of the mill and are demanding the return of their lands.

In May, 2000, the authors of this study and over 40 representatives ofIndonesian, Japanese, European, Middle Eastern, Australian, and American NGOsmade a site visit to the PT. TEL region. At a village located on a portion of the rivernear the company’s wastewater disposal site, the group heard from representatives ofa range of neighboring riverside communities and saw direct evidence of skin ulcera-tions on adults and children who had bathed in the village river after PT. TEL had start-ed its operations. They were also shown containers of black liquid which had been col-lected by villagers from the river – which provides their water supply -- near the com-pany’s outfall pipes. The villagers described the manner in which they had beenexcluded from any meaningful consultation during the process of the siting of the plant.They described the forced land seizures carried out by the company under militaryguard and the heavy-handed way in which the security forces had terrorized themwhen they had dared to voice their opinions.

2. APRIL: Riau Andalan Paper and Pulp

Riau Andalan’s parent conglomerate, Raja Garuda Mas, under its international enti-ty, Asia Pacific Resources International Holdings (APRIL) financed the expansion of itsRiau Andalan mill, through a $750 million investment package supported by theFinnish Guarantee Board and the Swedish Exportkreditnamnden. Riau Andalan isIndonesia’s second largest pulp producer.22 This expansion allows the mill to convertfour million cubic meters of wood into 750,000 tones of pulp each year. The company

WaldaWalhi AcehWalhi Jawa BaratWalhi Jawa TimurWalhi Kalimantan TengahWalhi Sulawesi SelatanWalhi Sulawesi TengahWalhi Sulawesi UtaraWalhi SultraWalhi Sumatera SelatanWalhi Sumatra UtaraWALHI/National SecretariatWWF SahulYappikaYascitaYasintaYayasan AsriYayasan BantayaYayasan Bina Potensi DesaYayasan Gemi NastitiYayasan HAPSARI PerbaunganYayasan IMPALMYayasan KAPPALA IndonesiaYayasan Kelola MenadoYayasan Lembaga Bantuan Hukum IndonesiaYayasan Pelangi IndonesiaYayasan pengembangan Masyarakat Desa (Papua)Yayasan PeranYayasan tahanjungan Tarung PalangkarayaYLK-SulselYPBB

ISRAEL:GreenAction - for Social Ecological ChangeIsraeli Association for Earthday Events

ITALY:Amici della TerraAssociazione Nuova Solidarieta/Bottega del Mondo di Finale LigureCampagna per la Riforma della Banca MondialeCentro Internazionale CroceviaCircolo di San Salvo del Partito della Rifondazione ComunistaCOCISCoordinamento Lombardo Nord/Sud del MondoGEVAM/ONLUSOperatore nella cooperazione InternazionalePartito della Rifondazione Comunista (PRC)Rete Italiana botcottaggio NestleRete Romana sul Consumo Critico

21 Subversion is a capital crime in Indonesia.22 Barr, C. "Profits on Paper: The Political Economy of Fiber, Finance, and Debt in Indonesia’s Pulp and Paper Industries", CIFOR,Bogor, Indonesia, November 2000.

12 25

has harvested over 50 species of tropical hardwood by clearing natural forests while"waiting for its plantations to mature."23 In October, 1997, conflicts between local com-munities and the company escalated after Riau Andalan announced that it would nolonger honor an earlier land compensation plan and that it planned to build a roaddirectly through ancestral lands owned by the communities. Security forces becameinvolved and the resulting protests led to the hospitalization of several villagers and thearrest of the village’s legal representative.24 In April, 1997, Indonesia’s EnvironmentalImpact Assessment Agency, BAPPEDAL, blacklisted Riau Andalan for water and airpollution and for conflicts with local villagers.25

In addition, APRIL runs the troubled 240,000 ton per year Indorayon Utama mill,also in Sumatra, which was shut down by public riots after Suharto’s ouster. Over1,000 members of the security forces were brought into the region to break up a block-ade of protestors who had hampered production at the mill since mid-June, 1998.From its earliest stages of development, Indorayon has been involved in conflicts withlocal villagers as a result of the forced seizure of their lands for pulp plantations andthe heavy-handed use of security forces to silence opposition to the mill through theissuance of threats and bribes.26 The mill was the subject of a court case brought byWALHI as a result of its pollution of the Asahan river.

In 1996, Hermes provided a $5.6 million guarantee for the shipment of Germanequipment to APRIL’s Tjiwi Kimia paper factory which utilizes the pulp produced byAPRIL’s troubled Indorayon Utama mill.

3. Sinar Mas: Indah Kiat

Asia’s largest paper and pulp company outside of Japan, Asia Pulp and Paper(APP), owns the Indah Kiat pulp mill in Perawang, Sumatra which is financed througha $500 million investment package supported by Exportkreditnamnden, the FinnishGuarantee Board, Spain’s CESCE, Denmark’s Exportkreditfonden, and Canada’sExport Development Corporation. Hermes and U.S. EXIM have also apparently provid-ed a $5.6 million guarantee, and a $4.5 million loan, respectively, for this mill, underseparate financial arrangements.27 The 790,000 ton per year Indah Kiat mill is slatedto consume 200 square kilometers of old growth forest per year "until its plantationsmature."28 According to the head of Indonesia research at a Singapore brokerage firm,Indah Kiat accounts for 77 percent of APP’s paper capacity and 50% of its operatingprofit.29 In 1999, Indah Kiat used 8.9 million cubic yards of pulpwood, approximately87% of which was mixed tropical hardwoods from natural forests, not from plantations.According to research conducted by the Center for International Forestry Research(CIFOR), Indah Kiat has deforested about 278,000 hectares (1,074 square miles) overthe past 12 years, an area about the size of Luxembourg.30 Indah Kiat revised its goalof obtaining all of its wood from plantations -- the company formerly claimed that it

23 Barr, C. ibid. and Carerre, R. and L. Lohmann, Pulping the South: Industrial Tree Plantations and the World PaperEconomy, Zed Books, London, 1996. pp. 212,220.24 "The Final Cut: Illegal Logging in Indonesia’s Orangutan Parks", Environmental Investigation Agency and TelapakIndonesia, p25.25 ibid, p.2526 Walhi, Down to Earth, Carerre27 Barr, C. ibid. , and Bloomberg, "Asia Pulp and Paper Faces Shortages of Wood Fiber, Research Shows" 11/27/0028 Carerre, p.22029 Bloomberg, ibid, 11/27/0030 Barr, C. ibid, cited in Bloomberg, 11/27/00

FPMP-SulselGabungan Anak Seni SriwijayaGita PertiwiICELIndonesian Prosperity Trade UnionInstitute DayakologyInstitute of Development and Economic Analysis (IDEA)Jagat-NTTJARI IndonesiaJaringan Kerja Masyarakat AdatJaringan Organisasi Independen untuk Penguatan Rakyat(JOIPaRa)JatamKonsorsium Pendukung Sistem Hutan KemasyarakatanKSKP LahatKSPPMLBH Palembang IndonesiaLembaga Advokasi RakyatLembaga Bela Benua TalinoLembaga GemawanLembaga Konsumen HijauLembaga Olah HidupLembaga Pemetaan Aset Produksi RakyatLembaga Pendukung dan Pemberdayaan Sosial Ekonomi Petani KaretLeskapLORIESNADINational Development FundNGO'S CAFÉNRMOman Women's CommitteePalembang Legal Aid InstitutionPERBBUNIPersatuan Perempuan Sama/The Women's Union For EqualityPIAR/NTTPijar IndonesiaPLASMAPPSDAK/Yayasan pancur KasihPusat Informasi dan Komunikasi Perempuan (PIKP)Puti JajiRMI - Institute for Forest and EnvironmentSahabat Persada AlamSarekat Nelayan Sumatra UtaraSEN/LPISTSerikat Demokrasi SosialSolidamorSolidaritas PerempuanTelapakUrban Poor ConsortiumWadah Pengembangan Alternatif Pesisir (WPAP)

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would be using plantation timber by 2004. In a recent filing with U.S. regulators, thecompany now says that it is aiming at 2007.31 According to CIFOR researcher, ChrisBarr, "It is clear that Indonesian pulp and paper producers have assumed a highdegree of financial risk by developing large-scale processing facilities without firstsecuring a legal and sustainable fiber supply."32

For years, the mill has been embroiled in conflicts pertaining to the source of its timber forpulping and in 1993 was fined $1.4 million for the utilization of illegally felled timber.33 To sup-ply land for its pulp plantation program and to obtain an inexpensive pre-plantation timberharvest, Indah Kiat seized and clear-cut over 3,000 hectares of the indigenous Sakai peo-ple’s forest gardens, leaving the Sakai without cultivable land for their subsistence needs.34

One of Indonesia’s most prominent environmental coalitions, WALHI, documented the terriblypolluted conditions of the Siak River downstream from the mill, noting dead fish bobbing bythe factory’s waste outlet and recording complaints of skin rashes by local villagers bathingand obtaining drinking water from the river downstream from the mill.35 The results ofWALHI’s surveys indicated that Indah Kiat appeared to utilize its wastewater treatment facilityprimarily when there was an official pollution inspection and only sporadically, otherwise.36

4. Indonesian Power Projects: The Paiton Debacle

Financing for the massive Paiton coal plant complex in Java was provided in 1995by a $2.5 billion finance package for Paiton One covered by guarantees and loans fromJEXIM, MITI, US EXIM, and OPIC and, in 1996, by a $1.7 billion finance package forPaiton Two provided by US EXIM, Hermes, the German Kreditanstaltfuerwiederaufbau(KfW), and C&L Deutsche Revision (Germany’s public investment insurance agency –analogous to the U.S. OPIC). In December, 1998, the Wall Street Journal -- whichidentified Paiton One as "one of the most expensive power deals of the decade, any-where" -- detailed the staggering corruption involved in the Paiton I deal which hadbeen directly supported, over the years, by former Vice President Dan Quayle,President Clinton, Ron Brown, Robert Rubin, Warren Christopher and Henry Kissinger,the latter two acting as lobbyists for a Mission Energy-General Electric joint venturewhich eventually succeeded in winning the project bid.37 In Indonesia, only one of thecountry’s private power contracts had ever been competitively bid, meaning that mostof the billions of dollars of foreign power investments in Indonesia "went throughcronies and relatives of Mr. Suharto."38 According to the Wall Street Journal, theMission-GE megaproject, as Indonesia’s first private power venture, set the tone for allinvestments to follow. The company

"bagged one of the richest private-power contracts of the 1990swhen its local partner, a relative of Mr. Suharto by marriage who received shares in the project essentially free, sealed the deal by getting Mr. Suharto himself to weigh in favor of Mission-GE at a key juncture in price negotiations."39

31 Bloomberg, ibid, 11/27/0032 Bloomberg, ibid, 11/27/0033 "Laporan Utama," Majalah Prospek, 10/16/93; see also Carerre, p.22134 Walhi p.38, Carerre p. 22235 Walhi, p.3636 Walhi, p.3637 "Power Deals With Cuts for First Family in Indonesia are Coming Under Attack," Wall Street Journal, 12/23/98.38 ibid.39 ibid.

GABON:Les Amis du Pangolin

GEORGIA:Sakartvelos Mtsvaneta Mozraoba/Friends of the Earth Georgia

GERMANY:Aktionszentrum 3. Welt e.V.Berliner Landesarbeitsgemeinschaft Umwelt und Entwicklung (Blue 21)EarthLink/The People & Nature NetworkECOROPA EuropeEURONATURForum Umwelt & EntwicklungIMBASInstitute of Interdisciplinary Study and Research (IfSF)Naturschutzbund Deutschland (NABU) e.V.,Rettet den Regenwald e.V.Society for Threatened PeoplesUmwelt-AG der Anne-Frank-GesamtschuleUrgewaldWeltwirtschaft, Oekologie & Entwicklung e.V. (WEED)

GUATAMALA:Maya Pedal (Guatamala and Canada)Tropico Verde

HONDURAS:Comité para la Defensa y Desarrollo de la Flora y Fauna del Golfo de Fonseca (COD-DEFFAGOLF)

INDIA:Adivasi Mahila Manch/Indigenous Women's PlatformBindrai Institute for Research Study & ActionEnvironment Support GroupJharkhandis Organisation Against Radiation (JOAR)Jharkhandis Organisation for Human Rights (JOHAR)KALPAVRIKSHNorth and North East Mines Minerals & PeopleSouth Asia Network on Dams, Rivers and People

INDONESIA:Aliansi Masyarakat Adat KalbarAliansi Masyarakat Adat NusantaraAliansi Perempuan Adat NusantaraBioforumBP-Konsorsium Pembaruan AgrariadebtWATCH IndonesiaElsamFOKER LSM PAPUA (Forum Kerjasama LSM Papua)

14 23

According to Djiteng Marsudi, the head of Indonesia’s now-bankrupt state ownedelectric utility, PLN, "the U.S. power companies dictated terms to us because they hadIndonesia’s first family behind them."40 PLN was ordered to utilize coal from a companyowned by Mission-GE partners Hashim Djojohadikusumo, a Suharto relative by mar-riage,41 and Agus Kartasasmita, brother of then-Minister of Mines and Energy and cur-rent Economics Minister now overseeing Indonesia’s relations with the World Bank andthe IMF. Mr. Hashim’s company planned to charge PLN 30% to 40% more than thegoing rate for coal. Despite repeated requests by GE, Mr. Hashim refused to sign anti-corruption forms or statements.42 The government ordered Mission-GE to purchase boil-ers for the plant from ABB Combustion Engineering. Combustion’s state-owned affiliatewas chaired by Mr. Habibie and a Suharto son was the company’s commercial agent inJakarta. The purchase of the boilers from this company added $20 million in costs.Mission-GE insisted that PLN must pay an extremely high tariff for the electricity to beproduced by the plant and suggested that more debt could be shifted to OPIC to coverthe tariff, finally set at 8.6 cents per kilowatt-hour of electricity, 32% higher than compa-rable tariffs in Indonesia. When a US Exim Bank official visited Jakarta, severalgov1ment and PLN officials told her that they didn’t want and couldn’t afford Paiton.

‘‘It was a presidential decision," says Nengah Sudja, a former head of research for PLN. "Everybody knew it was nepotism,but we couldn’t do anything about it."43

According to the Wall Street Journal, government planners knew PLN was not readyfor big private-power initiatives and the utility's "transmission grid leaked like a sieve."Indonesian government power consultants recommended smaller, environmentally andeconomically more sustainable alternatives such as geothermal and small gas-firedplants, and urged competitive bidding. Instead, Suharto, and then Technology MinisterB.J. Habibie, now Indonesia's president, "hand-picked developers to lead the chargeinto big, high-risk, coal-fired power stations" according to these same consultants.

In the aftermath of the economic crisis, PLN has told Mission-GE that doesn’t planto buy any electricity at all from the consortium’s 1,230 megawatt coal-fired plant nextyear, when it is scheduled to go on-line. ECA finance of over a billion dollars – backedby the taxpayers of the industrialized countries – has abetted a gigantic economic andenvironmental fiasco.

40 ibid41 Mr. Hashim is the brother of the notorious General Prabowo, who is married to a Suharto daughter and who was the formerhead of Indonesia’s brutal Kopassus special forces (active in East Timor and West Papua), and who currently faces charges oforchestrating the murder of student demonstrators by sniper fire. 42 Another sought-after investor, Mr. Djojohadikusumo’s sister-in-law (the wife of General Prabowo) "flew into a rage" whenEntergy, a U.S. company also interested in the Paiton deal , "insisted she sign some anticorruption documents." As a result,Entergy dropped the deal as did Southern Co., the biggest U.S. power producer in Asia, "because of concerns over cronyism andother risks." GE – backed by ECA insurance and guarantees – went on with the deal. Wall Street Journal, 12/23/98.43 ibid

CAMEROON:Partnership, Management And Support Programme

CANADA:AlternativesCanadian Auto WorkersCanadian Council for International CooperationCanadian Friends of BurmaCanadian Labour CongressCanadian Lawyers Association for International Human RightsDemocracy WatchEast Timor Alert NetworkFalls Brook CentreHalifax InitiativeMiningWatch CanadaProject PloughsharesRESULTS CanadaSocial Justice Committee of MontrealSociety Promoting Environmental ConservationSteelworkers Humanity FundSweet Land CollectiveWest Coast Environmental Law Association

COSTA RICA:Asociación Latinoamericana de Organizaciones de Promoción (NGO association with45 members in 20 countries)FoE International's Campaign on the Environmental and Social Impacts of Mining

DENMARK:Danish Association for International Co-operation

FINLAND:Coalition for Environment and DevelopmentFinnish Asiatic SocietyFinnish Association for Nature ConservationFinnish Energy Political Association/Alternative to Nuclear PowerFinnish Nature League/Forest Group

FRANCE:Agir ici pour un monde solidaireAmis de la TerreAttac France Fédération Artisans du MondeFrance-Libertés Fondation Danielle MitterrandHELIO INTERNATIONALInfo BirmanieL'Observatoire des Transferts d'ArmementsReseau d'information sur le Tiers Monde (RITIMO)Reseau Jeunes SolidairesSurvie

1522

Conclusion

Export credit agencies have provided massive support for environmentally damag-ing and socially destructive infrastructure projects in Indonesia – many of which tradi-tional multilateral development banks, such as the World Bank, did not support as aresult of their environmental and social regulations and standards. Given the ECAs’lack of transparency and accountability, it is clear that a significant amount of interna-tional pressure – most likely from civil society organizations and social movementsaround the world, and perhaps from enlightened governments – will be needed to stopthe destruction and violations of human rights associated with ECA finance.

In May, 2000, representatives of over 50 NGOs from 19 countries met in Jakarta toassess the current state of export credit agency finance. The groups heard testimonyfrom villagers in Indonesia who lived in the path of giant ECA-supported mines, paperand pulp mills, and other projects. They listened to presentations from around the worldon ECA-facilitated dams slated to displace impoverished communities, often of ethnicminorities (including Kurds in a civil war zone in Turkey), ECA-facilitated support for mil-itary equipment to regimes with troubling human rights records, and ECA support formassive and often troubled energy projects, including nuclear power plants.

They heard from civil society representatives from the United States andSwitzerland who had been allowed -- "unofficially" – to address two closed and secre-tive meetings of the ECA representatives gathered at the Organization for EconomicCooperation and Development (O.E.C.D) in Paris. They also heard from civil societyrepresentatives from Indonesia and Kurdistan/Turkey who had been barred from theO.E.C.D. meetings. They reviewed a September, 1999, Financial Times article whichpointed out that careless export credit agencies shared a major responsibility for "vio-lence in East Timor and economic disaster in Indonesia."

The NGOs then drew up a document titled, "The Jakarta Declaration for Reform ofOfficial Export Credit and Investment Insurance Agencies." The Jakarta Declaration --endorsed by 340 civil society organizations representing millions of citizens in 45 coun-tries -- calls for transparency, public access to information, and consultation with civilsociety and affected people in both O.E.C.D. and recipient countries

The Jakarta Declaration also calls for binding common environmental and socialguidelines and standards at least as rigorous as existing international procedures andstandards for public international finance. The Declaration notes that in Indonesia andelsewhere, ECAs have not only supported arms exports directly linked to egregioushuman rights abuses, and that their support for mining, paper and pulp mills and othermajor infrastructure investments has often been accompanied by destruction of localpeoples' rights to land and livelihood, the armed suppression of dissent, and the sup-pression of press freedom to criticize such abuses. The NGOs call for the adoption ofexplicit human rights criteria -- designed in consultation with affected peoples and civilsociety, and based on existing regional and international human rights conventions – toguide the activities of ECAs.

Citing Transparency International’s finding that the continued lack of action by ECAsto address the issue of corruption had brought some ECA practices "close to complicitywith a criminal offense," the Jakarta Declaration calls for the adoption of detailed bind-ing criteria and guidelines to end the abetting of corruption by ECAs. It also calls for anend to ECA finance for non-productive investments, including military purchases, andwhite elephant projects such as nuclear power plants -- investments rejected by OECD

We call upon concerned citizens and organizations around the world to turn their atten-tion to ECAs and their negotiating forum, the OECD, and to press their governments toundertake reform without further delay.

Undersigned Non-Governmental Organizations and Individuals:

AUSTRALIA:Action for World Development NSW Inc.AID/WATCHAustralian Council for Overseas AidBougainville Freedom MovementCampaign Against Corporate Tyranny in Unity and Solidarity (CACTUS)Community Aid Abroad (Oxfam Australia)Economic Reform AustraliaFriends of the Earth AustraliaInformation for ActionJubilee 2000 AustraliaMineral Policy InstituteNative Forest Network/Southern HemispherePeople for Nuclear DisarmamentPublic Interest Advocacy CentreRainforest Information CentreTEAR Australia (Christian Action with the World's Poor)The Bathurst Justice GroupThe LEAD Group Inc.Wordwit International (Australia and China)World Vision Australia (WVA)

AUSTRIA:Erlaßjahr 2000 ÖsterreichNATURFREUNDE INTERNATIONALE

BANGLADESH:Like-Minded Environmental Activists Group (LMEAG)

BELGIUM:EurodadFernInternational NGO Forum on Indonesian Development(INFID)

BOLIVIA:Plan de Desarrollo Indigena (PDI)

BRAZIL:Conselho Indigenista Missionario (Espiritu Santo)EcoaMovimento dos Atingidos por Barragens-Brasil (MAB)Rios Vivos Coalition (America Latina/Europa/USA)

16 21

bilateral aid agencies and multilateral development agencies such as the World Bank.The NGOs echo their support for the proposal of the Koalisi Anti-Hutang, theIndonesian Anti-Debt Coalition, for the cancellation of Indonesian ECA obligations,which have provided support for highly corrupt and destructive projects.

The Jakarta Declaration ends by stating that:

These ECAs have so far refused to accept any responsibility fortheir past mis takes, and to draw any meaningful lessons from them. The current practices of the ECAs embody a form of corrupt, untransparent, environmentally and socially destructive globalization as serious and reprehensible as the concerns raised by civil society and activists around the world about the World Trade Organization, the proposed Multilateral Agreement on Investment, and the International Monetary Fund and World Bank.

We call upon concerned citizens and organizations around the world to turn their attention to ECAs and their negotiating forum, the OECD, and to press their governments to undertake reform without further delay.

Thus civil society organizations have begun to take steps to rein in the threats to the natural environment and human rights posed by secretive and untransparent export credit finance agencies.

rights abuses, their support for mining, paper and pulp mills and other major infra-structure investments often has been accompanied by destruction of indigenousand local peoples' rights to land and livelihood resources, armed suppression ofdissent, and suppression of press freedom to criticize such abuses.

4. The adoption of binding criteria and guidelines to end ECAs' abetting of corrup-tion. According to Transparency International, the continued lack of action by ECAsto address this issue is bringing some ECA practices "close to complicity with acriminal offense." We endorse the recommendations of Transparency Internationalsubmitted to the OECD and European Union in September, 1999, on how ECAsshould avoid continued complicity in corruption. These include, inter alia, recom-mendations that export credit applicants must state in writing that no illegal pay-ments related to a contract were made, and that any contravention of the ban onillegal payment should entail cancellation of the state's obligation to pay.Companies found guilty of corruption should be banned from further support forfive years, and export credit agencies should not underwrite commissions as partof the contracts they support.

5. ECAs must cease financing non-productive investments. The massive ECA sup-port for military purchases and white elephant projects, such as nuclear powerplants, that would be rejected by OECD bilateral aid agencies and multilateraldevelopment agencies such as the World Bank must end.

6. The cancellation of ECA debt for the poorest countries, much of which has beenincurred for economically unproductive purposes. We support the call of theIndonesian anti-debt coalition for the cancellation of Indonesian ECA obligations,now placing an insupportable burden on the Indonesian people.

Conclusion

The OECD Development Assistance Committee declared in 1996 that " weshould aim for nothing less than to assure that the entire range of relevant industri-alized country policies are consistent with and do not undermine developmentobjectives." The OECD ECAs, and the OECD Export Credit Working Party, com-pletely disrespect this call. These ECAs have so far refused to accept any respon-sibility for their past mistakes, and to draw any meaningful lessons from them. Thecurrent practices of the ECAs embody a form of corrupt, untransparent, environ-mentally and socially destructive globalization as serious and reprehensible as theconcerns raised by civil society and activists around the world about the WorldTrade Organization, the proposed Multilateral Agreement on Investment, and theInternational Monetary Fund and World Bank.

1720

Appendix A:

June 13, 2000

Jakarta Declaration For Reform of Official Export Credit andInvestment Insurance Agencies

Over 50 representatives of Indonesian and international non-governmental organi-zations (NGOs), and social movements convened in Jakarta and South Sumatra 1-7 May, 2000 for a strategy meeting on official export credit and investment insur-ance agencies (ECAs). They agreed on the following Declaration, endorsed by 347NGOs from 45 countries.

Introduction

Non-governmental organizations around the world call the attention of gov-ernments and international institutions to the mounting adverse environmental,social, human rights and economic consequences of ECA activities. We havedirectly witnessed the unconscionable human suffering and environmental devasta-tion that ECAs have produced in Indonesia, which is only one of many countryexamples. ECAs have supported many projects—e.g. in the mining, pulp andpaper, oil and power sectors—which have had devastating social and environmen-tal impacts. ECAs have supported the export of arms used for human rights abus-es by the Suharto government. In 1996, ECA exposure in Indonesia was $28 bil-lion, an amount equivalent to 24% of Indonesia's external debt. The IndonesianECA debt places an unacceptable burden on the Indonesian people, crippling theirfuture development. As a 22 September 1999 "Financial Times" article pointed out,careless industrialized country export credit agencies share a major responsibilityfor "violence in East Timor and economic disaster in Indonesia."

Official Export Credit and Investment Insurance Agencies have become thelargest source of public international finance, supporting in 1998 over eight percentof world exports. In 1998 ECAs supported $391 billion in private sector businessand investment, of which $60 billion was for middle- and long-term guarantees andloans, mainly supporting large-scale project finance in developing countries. Thisexceeds all bilateral and multilateral development assistance combined, which hasaveraged some $50 billion over the past decade. ECAs account for 24 percent ofall developing country debt, and 56 percent of the debt owed to official governmen-tal agencies.

In April, 1998 163 NGOs from 46 countries sent to the finance and foreign min-istries of the major industrialized OECD countries a "Call of National andInternational Non-Governmental Agencies for the Reform of Export Credit andInvestment Insurance Agencies." The NGOs called for transparency in ECA deci-sion making, environmental assessment and screening of ECA financial commit-ments, including participation of affected populations, social sustainability (equity

and human rights concerns) in appraisal of ECA commitments, and for an internationalagreement in the OECD and/or G8 on common environmental and social standards forECAs.

Over the past two years the major industrialized countries have only made the min-imal commitment to work towards common environmental approaches and guidelines inthe OECD. The lack of transparency and meaningful public consultation in the OECDWorking Party on Export Credits and Credit Guarantees, particularly the lack of anyconsultation with representatives of affected groups and organizations from non-OECDrecipient countries, has rendered this process a travesty. ECAs have consistentlylearned no lessons from the past and continue to approve financing for environmentallyand socially destructive operations.

The social and environmental negligence, support for human rights violations, andlack of transparency of ECAs must come to a halt. ECA financing for major arms trans-actions, for obsolete technologies rejected or illegal in their home countries, and foreconomically unproductive investments is a scandal of global proportions.

Call for Reform

Based on the experiences of Indonesia and many other countries, NGOs fromaround the world reiterate the April, 1998 international Call for Reform of Export Creditand Investment Insurance Agencies. We call upon OECD governments, ministers andnational legislatures to undertake with due dispatch the following reform measures fortheir ECAs:

1. Transparency, public access to information and consultation with civil society andaffected people in both OECD and recipient countries at three levels: in the assess-ment of ongoing and future investments and projects supported by individual ECAs; inthe preparation within national ECAs of new procedures and standards; and in thenegotiation within the OECD and other fora of common approaches and guidelines.

2. Binding common environmental and social guidelines and standards no lower andless rigorous than existing international procedures and standards for public internation-al finance such as those of the World Bank Group and OECD Development AssistanceCommittee. These guidelines and standards need to be coherent with other ongoinginternational social and environmental commitments and treaties, for example, the con-ventions of the International Labor Organization and the United Nations Convention onBiological Diversity. In addition ECAs must conduct full, transparent accounting for cli-mate change impacts and move to increase investments in sustainable renewableenergy. So far, some governments have established, or are establishing, environmen-tal and social policies which substantially deviate from, and are below these internation-ally recognized standards and guidelines.

3. The adoption of explicit human rights criteria guiding the operations of ECAs. Thisshould be done in consultation with affected people and civil society, and based onexisting regional and international human rights conventions. In Indonesia and else-where ECAs have not only supported arms exports directly linked to egregious human

18 19

Appendix A:

June 13, 2000

Jakarta Declaration For Reform of Official Export Credit andInvestment Insurance Agencies

Over 50 representatives of Indonesian and international non-governmental organi-zations (NGOs), and social movements convened in Jakarta and South Sumatra 1-7 May, 2000 for a strategy meeting on official export credit and investment insur-ance agencies (ECAs). They agreed on the following Declaration, endorsed by 347NGOs from 45 countries.

Introduction

Non-governmental organizations around the world call the attention of gov-ernments and international institutions to the mounting adverse environmental,social, human rights and economic consequences of ECA activities. We havedirectly witnessed the unconscionable human suffering and environmental devasta-tion that ECAs have produced in Indonesia, which is only one of many countryexamples. ECAs have supported many projects—e.g. in the mining, pulp andpaper, oil and power sectors—which have had devastating social and environmen-tal impacts. ECAs have supported the export of arms used for human rights abus-es by the Suharto government. In 1996, ECA exposure in Indonesia was $28 bil-lion, an amount equivalent to 24% of Indonesia's external debt. The IndonesianECA debt places an unacceptable burden on the Indonesian people, crippling theirfuture development. As a 22 September 1999 "Financial Times" article pointed out,careless industrialized country export credit agencies share a major responsibilityfor "violence in East Timor and economic disaster in Indonesia."

Official Export Credit and Investment Insurance Agencies have become thelargest source of public international finance, supporting in 1998 over eight percentof world exports. In 1998 ECAs supported $391 billion in private sector businessand investment, of which $60 billion was for middle- and long-term guarantees andloans, mainly supporting large-scale project finance in developing countries. Thisexceeds all bilateral and multilateral development assistance combined, which hasaveraged some $50 billion over the past decade. ECAs account for 24 percent ofall developing country debt, and 56 percent of the debt owed to official governmen-tal agencies.

In April, 1998 163 NGOs from 46 countries sent to the finance and foreign min-istries of the major industrialized OECD countries a "Call of National andInternational Non-Governmental Agencies for the Reform of Export Credit andInvestment Insurance Agencies." The NGOs called for transparency in ECA deci-sion making, environmental assessment and screening of ECA financial commit-ments, including participation of affected populations, social sustainability (equity

and human rights concerns) in appraisal of ECA commitments, and for an internationalagreement in the OECD and/or G8 on common environmental and social standards forECAs.

Over the past two years the major industrialized countries have only made the min-imal commitment to work towards common environmental approaches and guidelines inthe OECD. The lack of transparency and meaningful public consultation in the OECDWorking Party on Export Credits and Credit Guarantees, particularly the lack of anyconsultation with representatives of affected groups and organizations from non-OECDrecipient countries, has rendered this process a travesty. ECAs have consistentlylearned no lessons from the past and continue to approve financing for environmentallyand socially destructive operations.

The social and environmental negligence, support for human rights violations, andlack of transparency of ECAs must come to a halt. ECA financing for major arms trans-actions, for obsolete technologies rejected or illegal in their home countries, and foreconomically unproductive investments is a scandal of global proportions.

Call for Reform

Based on the experiences of Indonesia and many other countries, NGOs fromaround the world reiterate the April, 1998 international Call for Reform of Export Creditand Investment Insurance Agencies. We call upon OECD governments, ministers andnational legislatures to undertake with due dispatch the following reform measures fortheir ECAs:

1. Transparency, public access to information and consultation with civil society andaffected people in both OECD and recipient countries at three levels: in the assess-ment of ongoing and future investments and projects supported by individual ECAs; inthe preparation within national ECAs of new procedures and standards; and in thenegotiation within the OECD and other fora of common approaches and guidelines.

2. Binding common environmental and social guidelines and standards no lower andless rigorous than existing international procedures and standards for public internation-al finance such as those of the World Bank Group and OECD Development AssistanceCommittee. These guidelines and standards need to be coherent with other ongoinginternational social and environmental commitments and treaties, for example, the con-ventions of the International Labor Organization and the United Nations Convention onBiological Diversity. In addition ECAs must conduct full, transparent accounting for cli-mate change impacts and move to increase investments in sustainable renewableenergy. So far, some governments have established, or are establishing, environmen-tal and social policies which substantially deviate from, and are below these internation-ally recognized standards and guidelines.

3. The adoption of explicit human rights criteria guiding the operations of ECAs. Thisshould be done in consultation with affected people and civil society, and based onexisting regional and international human rights conventions. In Indonesia and else-where ECAs have not only supported arms exports directly linked to egregious human

18 19

bilateral aid agencies and multilateral development agencies such as the World Bank.The NGOs echo their support for the proposal of the Koalisi Anti-Hutang, theIndonesian Anti-Debt Coalition, for the cancellation of Indonesian ECA obligations,which have provided support for highly corrupt and destructive projects.

The Jakarta Declaration ends by stating that:

These ECAs have so far refused to accept any responsibility fortheir past mis takes, and to draw any meaningful lessons from them. The current practices of the ECAs embody a form of corrupt, untransparent, environmentally and socially destructive globalization as serious and reprehensible as the concerns raised by civil society and activists around the world about the World Trade Organization, the proposed Multilateral Agreement on Investment, and the International Monetary Fund and World Bank.

We call upon concerned citizens and organizations around the world to turn their attention to ECAs and their negotiating forum, the OECD, and to press their governments to undertake reform without further delay.

Thus civil society organizations have begun to take steps to rein in the threats to the natural environment and human rights posed by secretive and untransparent export credit finance agencies.

rights abuses, their support for mining, paper and pulp mills and other major infra-structure investments often has been accompanied by destruction of indigenousand local peoples' rights to land and livelihood resources, armed suppression ofdissent, and suppression of press freedom to criticize such abuses.

4. The adoption of binding criteria and guidelines to end ECAs' abetting of corrup-tion. According to Transparency International, the continued lack of action by ECAsto address this issue is bringing some ECA practices "close to complicity with acriminal offense." We endorse the recommendations of Transparency Internationalsubmitted to the OECD and European Union in September, 1999, on how ECAsshould avoid continued complicity in corruption. These include, inter alia, recom-mendations that export credit applicants must state in writing that no illegal pay-ments related to a contract were made, and that any contravention of the ban onillegal payment should entail cancellation of the state's obligation to pay.Companies found guilty of corruption should be banned from further support forfive years, and export credit agencies should not underwrite commissions as partof the contracts they support.

5. ECAs must cease financing non-productive investments. The massive ECA sup-port for military purchases and white elephant projects, such as nuclear powerplants, that would be rejected by OECD bilateral aid agencies and multilateraldevelopment agencies such as the World Bank must end.

6. The cancellation of ECA debt for the poorest countries, much of which has beenincurred for economically unproductive purposes. We support the call of theIndonesian anti-debt coalition for the cancellation of Indonesian ECA obligations,now placing an insupportable burden on the Indonesian people.

Conclusion

The OECD Development Assistance Committee declared in 1996 that " weshould aim for nothing less than to assure that the entire range of relevant industri-alized country policies are consistent with and do not undermine developmentobjectives." The OECD ECAs, and the OECD Export Credit Working Party, com-pletely disrespect this call. These ECAs have so far refused to accept any respon-sibility for their past mistakes, and to draw any meaningful lessons from them. Thecurrent practices of the ECAs embody a form of corrupt, untransparent, environ-mentally and socially destructive globalization as serious and reprehensible as theconcerns raised by civil society and activists around the world about the WorldTrade Organization, the proposed Multilateral Agreement on Investment, and theInternational Monetary Fund and World Bank.

1720

Conclusion

Export credit agencies have provided massive support for environmentally damag-ing and socially destructive infrastructure projects in Indonesia – many of which tradi-tional multilateral development banks, such as the World Bank, did not support as aresult of their environmental and social regulations and standards. Given the ECAs’lack of transparency and accountability, it is clear that a significant amount of interna-tional pressure – most likely from civil society organizations and social movementsaround the world, and perhaps from enlightened governments – will be needed to stopthe destruction and violations of human rights associated with ECA finance.

In May, 2000, representatives of over 50 NGOs from 19 countries met in Jakarta toassess the current state of export credit agency finance. The groups heard testimonyfrom villagers in Indonesia who lived in the path of giant ECA-supported mines, paperand pulp mills, and other projects. They listened to presentations from around the worldon ECA-facilitated dams slated to displace impoverished communities, often of ethnicminorities (including Kurds in a civil war zone in Turkey), ECA-facilitated support for mil-itary equipment to regimes with troubling human rights records, and ECA support formassive and often troubled energy projects, including nuclear power plants.

They heard from civil society representatives from the United States andSwitzerland who had been allowed -- "unofficially" – to address two closed and secre-tive meetings of the ECA representatives gathered at the Organization for EconomicCooperation and Development (O.E.C.D) in Paris. They also heard from civil societyrepresentatives from Indonesia and Kurdistan/Turkey who had been barred from theO.E.C.D. meetings. They reviewed a September, 1999, Financial Times article whichpointed out that careless export credit agencies shared a major responsibility for "vio-lence in East Timor and economic disaster in Indonesia."

The NGOs then drew up a document titled, "The Jakarta Declaration for Reform ofOfficial Export Credit and Investment Insurance Agencies." The Jakarta Declaration --endorsed by 340 civil society organizations representing millions of citizens in 45 coun-tries -- calls for transparency, public access to information, and consultation with civilsociety and affected people in both O.E.C.D. and recipient countries

The Jakarta Declaration also calls for binding common environmental and socialguidelines and standards at least as rigorous as existing international procedures andstandards for public international finance. The Declaration notes that in Indonesia andelsewhere, ECAs have not only supported arms exports directly linked to egregioushuman rights abuses, and that their support for mining, paper and pulp mills and othermajor infrastructure investments has often been accompanied by destruction of localpeoples' rights to land and livelihood, the armed suppression of dissent, and the sup-pression of press freedom to criticize such abuses. The NGOs call for the adoption ofexplicit human rights criteria -- designed in consultation with affected peoples and civilsociety, and based on existing regional and international human rights conventions – toguide the activities of ECAs.

Citing Transparency International’s finding that the continued lack of action by ECAsto address the issue of corruption had brought some ECA practices "close to complicitywith a criminal offense," the Jakarta Declaration calls for the adoption of detailed bind-ing criteria and guidelines to end the abetting of corruption by ECAs. It also calls for anend to ECA finance for non-productive investments, including military purchases, andwhite elephant projects such as nuclear power plants -- investments rejected by OECD

We call upon concerned citizens and organizations around the world to turn their atten-tion to ECAs and their negotiating forum, the OECD, and to press their governments toundertake reform without further delay.

Undersigned Non-Governmental Organizations and Individuals:

AUSTRALIA:Action for World Development NSW Inc.AID/WATCHAustralian Council for Overseas AidBougainville Freedom MovementCampaign Against Corporate Tyranny in Unity and Solidarity (CACTUS)Community Aid Abroad (Oxfam Australia)Economic Reform AustraliaFriends of the Earth AustraliaInformation for ActionJubilee 2000 AustraliaMineral Policy InstituteNative Forest Network/Southern HemispherePeople for Nuclear DisarmamentPublic Interest Advocacy CentreRainforest Information CentreTEAR Australia (Christian Action with the World's Poor)The Bathurst Justice GroupThe LEAD Group Inc.Wordwit International (Australia and China)World Vision Australia (WVA)

AUSTRIA:Erlaßjahr 2000 ÖsterreichNATURFREUNDE INTERNATIONALE

BANGLADESH:Like-Minded Environmental Activists Group (LMEAG)

BELGIUM:EurodadFernInternational NGO Forum on Indonesian Development(INFID)

BOLIVIA:Plan de Desarrollo Indigena (PDI)

BRAZIL:Conselho Indigenista Missionario (Espiritu Santo)EcoaMovimento dos Atingidos por Barragens-Brasil (MAB)Rios Vivos Coalition (America Latina/Europa/USA)

16 21

According to Djiteng Marsudi, the head of Indonesia’s now-bankrupt state ownedelectric utility, PLN, "the U.S. power companies dictated terms to us because they hadIndonesia’s first family behind them."40 PLN was ordered to utilize coal from a companyowned by Mission-GE partners Hashim Djojohadikusumo, a Suharto relative by mar-riage,41 and Agus Kartasasmita, brother of then-Minister of Mines and Energy and cur-rent Economics Minister now overseeing Indonesia’s relations with the World Bank andthe IMF. Mr. Hashim’s company planned to charge PLN 30% to 40% more than thegoing rate for coal. Despite repeated requests by GE, Mr. Hashim refused to sign anti-corruption forms or statements.42 The government ordered Mission-GE to purchase boil-ers for the plant from ABB Combustion Engineering. Combustion’s state-owned affiliatewas chaired by Mr. Habibie and a Suharto son was the company’s commercial agent inJakarta. The purchase of the boilers from this company added $20 million in costs.Mission-GE insisted that PLN must pay an extremely high tariff for the electricity to beproduced by the plant and suggested that more debt could be shifted to OPIC to coverthe tariff, finally set at 8.6 cents per kilowatt-hour of electricity, 32% higher than compa-rable tariffs in Indonesia. When a US Exim Bank official visited Jakarta, severalgov1ment and PLN officials told her that they didn’t want and couldn’t afford Paiton.

‘‘It was a presidential decision," says Nengah Sudja, a former head of research for PLN. "Everybody knew it was nepotism,but we couldn’t do anything about it."43

According to the Wall Street Journal, government planners knew PLN was not readyfor big private-power initiatives and the utility's "transmission grid leaked like a sieve."Indonesian government power consultants recommended smaller, environmentally andeconomically more sustainable alternatives such as geothermal and small gas-firedplants, and urged competitive bidding. Instead, Suharto, and then Technology MinisterB.J. Habibie, now Indonesia's president, "hand-picked developers to lead the chargeinto big, high-risk, coal-fired power stations" according to these same consultants.

In the aftermath of the economic crisis, PLN has told Mission-GE that doesn’t planto buy any electricity at all from the consortium’s 1,230 megawatt coal-fired plant nextyear, when it is scheduled to go on-line. ECA finance of over a billion dollars – backedby the taxpayers of the industrialized countries – has abetted a gigantic economic andenvironmental fiasco.

40 ibid41 Mr. Hashim is the brother of the notorious General Prabowo, who is married to a Suharto daughter and who was the formerhead of Indonesia’s brutal Kopassus special forces (active in East Timor and West Papua), and who currently faces charges oforchestrating the murder of student demonstrators by sniper fire. 42 Another sought-after investor, Mr. Djojohadikusumo’s sister-in-law (the wife of General Prabowo) "flew into a rage" whenEntergy, a U.S. company also interested in the Paiton deal , "insisted she sign some anticorruption documents." As a result,Entergy dropped the deal as did Southern Co., the biggest U.S. power producer in Asia, "because of concerns over cronyism andother risks." GE – backed by ECA insurance and guarantees – went on with the deal. Wall Street Journal, 12/23/98.43 ibid

CAMEROON:Partnership, Management And Support Programme

CANADA:AlternativesCanadian Auto WorkersCanadian Council for International CooperationCanadian Friends of BurmaCanadian Labour CongressCanadian Lawyers Association for International Human RightsDemocracy WatchEast Timor Alert NetworkFalls Brook CentreHalifax InitiativeMiningWatch CanadaProject PloughsharesRESULTS CanadaSocial Justice Committee of MontrealSociety Promoting Environmental ConservationSteelworkers Humanity FundSweet Land CollectiveWest Coast Environmental Law Association

COSTA RICA:Asociación Latinoamericana de Organizaciones de Promoción (NGO association with45 members in 20 countries)FoE International's Campaign on the Environmental and Social Impacts of Mining

DENMARK:Danish Association for International Co-operation

FINLAND:Coalition for Environment and DevelopmentFinnish Asiatic SocietyFinnish Association for Nature ConservationFinnish Energy Political Association/Alternative to Nuclear PowerFinnish Nature League/Forest Group

FRANCE:Agir ici pour un monde solidaireAmis de la TerreAttac France Fédération Artisans du MondeFrance-Libertés Fondation Danielle MitterrandHELIO INTERNATIONALInfo BirmanieL'Observatoire des Transferts d'ArmementsReseau d'information sur le Tiers Monde (RITIMO)Reseau Jeunes SolidairesSurvie

1522

would be using plantation timber by 2004. In a recent filing with U.S. regulators, thecompany now says that it is aiming at 2007.31 According to CIFOR researcher, ChrisBarr, "It is clear that Indonesian pulp and paper producers have assumed a highdegree of financial risk by developing large-scale processing facilities without firstsecuring a legal and sustainable fiber supply."32

For years, the mill has been embroiled in conflicts pertaining to the source of its timber forpulping and in 1993 was fined $1.4 million for the utilization of illegally felled timber.33 To sup-ply land for its pulp plantation program and to obtain an inexpensive pre-plantation timberharvest, Indah Kiat seized and clear-cut over 3,000 hectares of the indigenous Sakai peo-ple’s forest gardens, leaving the Sakai without cultivable land for their subsistence needs.34

One of Indonesia’s most prominent environmental coalitions, WALHI, documented the terriblypolluted conditions of the Siak River downstream from the mill, noting dead fish bobbing bythe factory’s waste outlet and recording complaints of skin rashes by local villagers bathingand obtaining drinking water from the river downstream from the mill.35 The results ofWALHI’s surveys indicated that Indah Kiat appeared to utilize its wastewater treatment facilityprimarily when there was an official pollution inspection and only sporadically, otherwise.36

4. Indonesian Power Projects: The Paiton Debacle

Financing for the massive Paiton coal plant complex in Java was provided in 1995by a $2.5 billion finance package for Paiton One covered by guarantees and loans fromJEXIM, MITI, US EXIM, and OPIC and, in 1996, by a $1.7 billion finance package forPaiton Two provided by US EXIM, Hermes, the German Kreditanstaltfuerwiederaufbau(KfW), and C&L Deutsche Revision (Germany’s public investment insurance agency –analogous to the U.S. OPIC). In December, 1998, the Wall Street Journal -- whichidentified Paiton One as "one of the most expensive power deals of the decade, any-where" -- detailed the staggering corruption involved in the Paiton I deal which hadbeen directly supported, over the years, by former Vice President Dan Quayle,President Clinton, Ron Brown, Robert Rubin, Warren Christopher and Henry Kissinger,the latter two acting as lobbyists for a Mission Energy-General Electric joint venturewhich eventually succeeded in winning the project bid.37 In Indonesia, only one of thecountry’s private power contracts had ever been competitively bid, meaning that mostof the billions of dollars of foreign power investments in Indonesia "went throughcronies and relatives of Mr. Suharto."38 According to the Wall Street Journal, theMission-GE megaproject, as Indonesia’s first private power venture, set the tone for allinvestments to follow. The company

"bagged one of the richest private-power contracts of the 1990swhen its local partner, a relative of Mr. Suharto by marriage who received shares in the project essentially free, sealed the deal by getting Mr. Suharto himself to weigh in favor of Mission-GE at a key juncture in price negotiations."39

31 Bloomberg, ibid, 11/27/0032 Bloomberg, ibid, 11/27/0033 "Laporan Utama," Majalah Prospek, 10/16/93; see also Carerre, p.22134 Walhi p.38, Carerre p. 22235 Walhi, p.3636 Walhi, p.3637 "Power Deals With Cuts for First Family in Indonesia are Coming Under Attack," Wall Street Journal, 12/23/98.38 ibid.39 ibid.

GABON:Les Amis du Pangolin

GEORGIA:Sakartvelos Mtsvaneta Mozraoba/Friends of the Earth Georgia

GERMANY:Aktionszentrum 3. Welt e.V.Berliner Landesarbeitsgemeinschaft Umwelt und Entwicklung (Blue 21)EarthLink/The People & Nature NetworkECOROPA EuropeEURONATURForum Umwelt & EntwicklungIMBASInstitute of Interdisciplinary Study and Research (IfSF)Naturschutzbund Deutschland (NABU) e.V.,Rettet den Regenwald e.V.Society for Threatened PeoplesUmwelt-AG der Anne-Frank-GesamtschuleUrgewaldWeltwirtschaft, Oekologie & Entwicklung e.V. (WEED)

GUATAMALA:Maya Pedal (Guatamala and Canada)Tropico Verde

HONDURAS:Comité para la Defensa y Desarrollo de la Flora y Fauna del Golfo de Fonseca (COD-DEFFAGOLF)

INDIA:Adivasi Mahila Manch/Indigenous Women's PlatformBindrai Institute for Research Study & ActionEnvironment Support GroupJharkhandis Organisation Against Radiation (JOAR)Jharkhandis Organisation for Human Rights (JOHAR)KALPAVRIKSHNorth and North East Mines Minerals & PeopleSouth Asia Network on Dams, Rivers and People

INDONESIA:Aliansi Masyarakat Adat KalbarAliansi Masyarakat Adat NusantaraAliansi Perempuan Adat NusantaraBioforumBP-Konsorsium Pembaruan AgrariadebtWATCH IndonesiaElsamFOKER LSM PAPUA (Forum Kerjasama LSM Papua)

14 23

has harvested over 50 species of tropical hardwood by clearing natural forests while"waiting for its plantations to mature."23 In October, 1997, conflicts between local com-munities and the company escalated after Riau Andalan announced that it would nolonger honor an earlier land compensation plan and that it planned to build a roaddirectly through ancestral lands owned by the communities. Security forces becameinvolved and the resulting protests led to the hospitalization of several villagers and thearrest of the village’s legal representative.24 In April, 1997, Indonesia’s EnvironmentalImpact Assessment Agency, BAPPEDAL, blacklisted Riau Andalan for water and airpollution and for conflicts with local villagers.25

In addition, APRIL runs the troubled 240,000 ton per year Indorayon Utama mill,also in Sumatra, which was shut down by public riots after Suharto’s ouster. Over1,000 members of the security forces were brought into the region to break up a block-ade of protestors who had hampered production at the mill since mid-June, 1998.From its earliest stages of development, Indorayon has been involved in conflicts withlocal villagers as a result of the forced seizure of their lands for pulp plantations andthe heavy-handed use of security forces to silence opposition to the mill through theissuance of threats and bribes.26 The mill was the subject of a court case brought byWALHI as a result of its pollution of the Asahan river.

In 1996, Hermes provided a $5.6 million guarantee for the shipment of Germanequipment to APRIL’s Tjiwi Kimia paper factory which utilizes the pulp produced byAPRIL’s troubled Indorayon Utama mill.

3. Sinar Mas: Indah Kiat

Asia’s largest paper and pulp company outside of Japan, Asia Pulp and Paper(APP), owns the Indah Kiat pulp mill in Perawang, Sumatra which is financed througha $500 million investment package supported by Exportkreditnamnden, the FinnishGuarantee Board, Spain’s CESCE, Denmark’s Exportkreditfonden, and Canada’sExport Development Corporation. Hermes and U.S. EXIM have also apparently provid-ed a $5.6 million guarantee, and a $4.5 million loan, respectively, for this mill, underseparate financial arrangements.27 The 790,000 ton per year Indah Kiat mill is slatedto consume 200 square kilometers of old growth forest per year "until its plantationsmature."28 According to the head of Indonesia research at a Singapore brokerage firm,Indah Kiat accounts for 77 percent of APP’s paper capacity and 50% of its operatingprofit.29 In 1999, Indah Kiat used 8.9 million cubic yards of pulpwood, approximately87% of which was mixed tropical hardwoods from natural forests, not from plantations.According to research conducted by the Center for International Forestry Research(CIFOR), Indah Kiat has deforested about 278,000 hectares (1,074 square miles) overthe past 12 years, an area about the size of Luxembourg.30 Indah Kiat revised its goalof obtaining all of its wood from plantations -- the company formerly claimed that it

23 Barr, C. ibid. and Carerre, R. and L. Lohmann, Pulping the South: Industrial Tree Plantations and the World PaperEconomy, Zed Books, London, 1996. pp. 212,220.24 "The Final Cut: Illegal Logging in Indonesia’s Orangutan Parks", Environmental Investigation Agency and TelapakIndonesia, p25.25 ibid, p.2526 Walhi, Down to Earth, Carerre27 Barr, C. ibid. , and Bloomberg, "Asia Pulp and Paper Faces Shortages of Wood Fiber, Research Shows" 11/27/0028 Carerre, p.22029 Bloomberg, ibid, 11/27/0030 Barr, C. ibid, cited in Bloomberg, 11/27/00

FPMP-SulselGabungan Anak Seni SriwijayaGita PertiwiICELIndonesian Prosperity Trade UnionInstitute DayakologyInstitute of Development and Economic Analysis (IDEA)Jagat-NTTJARI IndonesiaJaringan Kerja Masyarakat AdatJaringan Organisasi Independen untuk Penguatan Rakyat(JOIPaRa)JatamKonsorsium Pendukung Sistem Hutan KemasyarakatanKSKP LahatKSPPMLBH Palembang IndonesiaLembaga Advokasi RakyatLembaga Bela Benua TalinoLembaga GemawanLembaga Konsumen HijauLembaga Olah HidupLembaga Pemetaan Aset Produksi RakyatLembaga Pendukung dan Pemberdayaan Sosial Ekonomi Petani KaretLeskapLORIESNADINational Development FundNGO'S CAFÉNRMOman Women's CommitteePalembang Legal Aid InstitutionPERBBUNIPersatuan Perempuan Sama/The Women's Union For EqualityPIAR/NTTPijar IndonesiaPLASMAPPSDAK/Yayasan pancur KasihPusat Informasi dan Komunikasi Perempuan (PIKP)Puti JajiRMI - Institute for Forest and EnvironmentSahabat Persada AlamSarekat Nelayan Sumatra UtaraSEN/LPISTSerikat Demokrasi SosialSolidamorSolidaritas PerempuanTelapakUrban Poor ConsortiumWadah Pengembangan Alternatif Pesisir (WPAP)

1324

Four Company Case Studies: Paper/Pulp and Power Sectors

Paper and Pulp in Indonesia

The government of Indonesia has been supporting the expansion of the paper andpulp industry which, before the economic crisis, was expected to grow from its current2 million ton annual production capacity to a 10 million ton capacity by 2010 with theaddition of 16 new paper and pulp mills. The mills currently operating in Indonesia rely,for the most part -- despite their public statements -- on the clearcutting of natural orcommunity managed forests, often on indigenous lands. In a few cases, they have uti-lized pine plantations planted under Dutch colonial authority. The Indonesian govern-ment’s campaign to rapidly expand the country’s paper and pulp production has beenhaunted by concerns that, given the lack of sufficient pulpwood plantations, industryexpansion would lead to the wholesale clearcutting of hundreds of thousands ofhectares of the nation’s remaining forests, often inhabited by indigenous and other for-est farming peoples.18 Indeed, this has often been the case, sparking unrest , litigation,the continual harassment of local communities by security forces, and, in the post-Suharto era, massive public protests against the forced seizures and clearcutting ofcommunity forests, air pollution, and the pollution of major waterways by paper andpulp mills and factories.

1. PT. Tanjung Enim Lestari

The Barito Pacific Group, Indonesia’s largest logging conglomerate, is the majorityshareholder in PT. Tanjung Enim Lestari, (PT.TEL) – slated to become Indonesia’slargest paper and pulp mill -- and its sister company, PT. Musi Hutan Persada , wasdesignated to prepare massive pulp plantations to feed the mill. From the beginning ofthe establishment of the financing package for the mill, General Suharto’s eldestdaughter, Siti Hardiyanti Rukmana ("Tutut"), was sought as a significant shareholder.In 1994, Germany’s Hermes, Japan’s JEXIM, Finnish Export Credit, Sweden’sExportkreditnamnden, and the Export Development Corporation approved a $1.5 billionfinance package19 for the mill. In 1997, Hermes, the Export Development Corporation,Exportkreditnamnden, the Finnish Guarantee Board, and Japan’s OECF approved a$1.3 billion finance package for the mill. The signing of this finance package corre-sponded with the signing of a pulp supply agreement with PT. Musi Hutan Persada toguarantee pulp for the mill. The entire output of the mill is destined for export.

This company, from its pre-construction preparation phase on -- including mill con-struction and plantation preparation -- has generated substantial conflicts with the sur-rounding communities. In the 1990 and 1992, the Barito Pacific Group – alreadyembroiled in conflicts with local communities in and near its logging concessionsthroughout Indonesia – began clearing concession land in the Benakat region.20 In1992, the company moved transmigrants from Java and elsewhere into the area to pro-vide the labor force for its operations. In 1992, despite protests from local inhabitants,

18 See, for example, Jakarta Post editorial, "Pulping the forests", 4/11/96; WALHI, YLBHI, "Mistaking Plantations for Indonesia’sTropical Forest," Jakarta, 1992. 69 pages.19 Please note that, to date, it has not been possible to ascertain whether both or only one of these finance packages actuallycame to fruition. This underscores the need for transparency in the provision of data by ECAs.20 The ensuing chronology is paraphrased from "Pulping the People: Barito Pacific’s Paper Pulp Factory and Plantations in SouthSumatra: PT. Tanjung Enim Lestari and PT Musi Hutan Persada", Down to Earth, June, 1997, p.8.

Riforma mondiale della SACEService Civil International/Branca ItalianaUn Ponte per...Xaverian Missionaries (Italy and many other countries)Fausto Bertinotti (Dep. and Member of the European Parliament) PRCUgo Boghetta (Dep.), PRCFranco Bonato (Dep.) PRCLuca Cangemi (Dep.) PRCAurelio Crippa (Sen.) PRC Fausto Co' (Sen.) PRCWalter De Cesaris (Dep.) PRCGiuseppe Di Lello Finuoli, Member of European Parliament PRCFranco Giordano (Dep.) PRCMaria Lenti (Dep.) PRCGiorgio Melentacchi (Dep.) PRCRamon Mantovani (Dep.) PRC Luisa Morgantini, Member of European Parliament, PRCMaria Celeste Nardini (Dep.) PRCEdo Rossi (Dep.) PRCGiovanni Russo Spena (Sen.) PRCTiziana Valpiana (Dep.) PRCNicola Vendola (Dep.) PRCLuigi Vinci (Capogruppo), Member of European Parliament, PRC

JAPAN:A SEED JAPAN Campaign for Future of Filipino Children (CFFC)Friends of the Earth JapanGreen Energy "Law" NetworkJapan Center for a Sustainable Environment and Society (JACSES)Japan NGO Network on IndonesiaJapan Tropical Action Network (JATAN)Mekong WatchPeople's Forum 2001Society for Creation of Future of Yoshino River

KENYA:Forest Action NetworkRelief and Environmental Care Africa (RECA)

KYRGYZSTAN:Bureau on Human Rights and Rule of Law

MALAYASIA:Centre for Orang Asli Concerns (COAC).Partners of Community Organisations (PACOS).

1126

Musi Hutan Persada (MHP) began illegal logging of the forested lands of the Benekatvillagers. The inhabitants of Benakat were threatened by local authorities and securityforces who insisted that they give up 1,250 hectares of their productive rubber gardens(see photo), upon which their livelihoods depended, or risk being officially branded withthe serious charge of "hindering development", a subversion charge.21

The farmers were repeatedly summoned for interrogations and threatened withprison. Those who openly resisted the efforts at intimidation were accused of involve-ment with Indonesia’s banned Communist Party, an accusation with serious ramifica-tions. Those who did finally agree, under great pressure, to give up their landsreceived negligible compensation.

In 1995, 500 villagers in the Muara Niru and Kuripan areas signed a letter to theVice President of Indonesia rejecting the development of the pulp mill in their area.Over the next few years, local villagers whose lands had been seized without warningor compensation by MHP to provide plantations for the paper and pulp mill, repeatedlypetitioned local, district, provincial, and national government officials stating that theydid not want the PT. TEL plantations on their lands. In June, 1997, representatives oflocal communities went to the Department of Trade and Industry to protest the compa-ny’s presentation of its internal environmental impact assessment. Citing environmen-tal and social concerns, Indonesia’s leading environmental organization, WALHI, calledfor the cancellation of the project. The National Legal Aid Foundation protested to sen-ior government ministers that the local people’s rights as well as environmental lawshad been violated. In the aftermath of Suharto’s ouster, feeling the winds of "reformasi",local villagers in the area surrounding PT.TEL have once again requested a halt to theconstruction of the mill and are demanding the return of their lands.

In May, 2000, the authors of this study and over 40 representatives ofIndonesian, Japanese, European, Middle Eastern, Australian, and American NGOsmade a site visit to the PT. TEL region. At a village located on a portion of the rivernear the company’s wastewater disposal site, the group heard from representatives ofa range of neighboring riverside communities and saw direct evidence of skin ulcera-tions on adults and children who had bathed in the village river after PT. TEL had start-ed its operations. They were also shown containers of black liquid which had been col-lected by villagers from the river – which provides their water supply -- near the com-pany’s outfall pipes. The villagers described the manner in which they had beenexcluded from any meaningful consultation during the process of the siting of the plant.They described the forced land seizures carried out by the company under militaryguard and the heavy-handed way in which the security forces had terrorized themwhen they had dared to voice their opinions.

2. APRIL: Riau Andalan Paper and Pulp

Riau Andalan’s parent conglomerate, Raja Garuda Mas, under its international enti-ty, Asia Pacific Resources International Holdings (APRIL) financed the expansion of itsRiau Andalan mill, through a $750 million investment package supported by theFinnish Guarantee Board and the Swedish Exportkreditnamnden. Riau Andalan isIndonesia’s second largest pulp producer.22 This expansion allows the mill to convertfour million cubic meters of wood into 750,000 tones of pulp each year. The company

WaldaWalhi AcehWalhi Jawa BaratWalhi Jawa TimurWalhi Kalimantan TengahWalhi Sulawesi SelatanWalhi Sulawesi TengahWalhi Sulawesi UtaraWalhi SultraWalhi Sumatera SelatanWalhi Sumatra UtaraWALHI/National SecretariatWWF SahulYappikaYascitaYasintaYayasan AsriYayasan BantayaYayasan Bina Potensi DesaYayasan Gemi NastitiYayasan HAPSARI PerbaunganYayasan IMPALMYayasan KAPPALA IndonesiaYayasan Kelola MenadoYayasan Lembaga Bantuan Hukum IndonesiaYayasan Pelangi IndonesiaYayasan pengembangan Masyarakat Desa (Papua)Yayasan PeranYayasan tahanjungan Tarung PalangkarayaYLK-SulselYPBB

ISRAEL:GreenAction - for Social Ecological ChangeIsraeli Association for Earthday Events

ITALY:Amici della TerraAssociazione Nuova Solidarieta/Bottega del Mondo di Finale LigureCampagna per la Riforma della Banca MondialeCentro Internazionale CroceviaCircolo di San Salvo del Partito della Rifondazione ComunistaCOCISCoordinamento Lombardo Nord/Sud del MondoGEVAM/ONLUSOperatore nella cooperazione InternazionalePartito della Rifondazione Comunista (PRC)Rete Italiana botcottaggio NestleRete Romana sul Consumo Critico

21 Subversion is a capital crime in Indonesia.22 Barr, C. "Profits on Paper: The Political Economy of Fiber, Finance, and Debt in Indonesia’s Pulp and Paper Industries", CIFOR,Bogor, Indonesia, November 2000.

12 25

Figure 10. Top ten ECA-supported Indonesia projects, 1994-1997 sorted by sectorand ECA

The top ten projects in Indonesia were awarded to seven companies, with threecompanies – PT.TEL, Paiton Power, and Pertamina, Indonesia’s notoriously corruptnational petroleum company -- receiving two of the top ten projects each. The remain-ing projects provided support for companies involved in environmentally and sociallyproblematic paper and pulp operations in Sumatra – the Sinar Mas conglomerate’sIndah Kiat mill and the APRIL conglomerate’s Riau Andalan mill -- and a new mine sitefor Newmont, a company already facing environmental complaints for its existing oper-ations elsewhere in Indonesia.

Figure 11. Indonesian recipients of top ten ECA-supported finance packages, 33project survey, 1994-1997 ($US billions)

MEXICO:Grupo Mesófilo A.C.Red Mexicana de Accion frente al Libre Comercio (RMALC)Trasparencia, S.C.

NETHERLANDS:Both ENDSCampagne tegen WapenhandelCorporate Europe ObservatoryFriends of the Earth InternationalGreenpeace InternationalKomitee IndonesiaThe Northern Alliance for SustainabilityThe Transnational InstituteWorld Information Service on Energy (WISE)

NEW ZEALAND:The Pacific Institute of Resource Management

NIGERIA:African Network for Environmental and Economic JusticeEcowas Network on Debt and Development (ECONDAD)The Flood and Erosion Victims Association(FEVA)

NORWAY:FIVAS, Association for International Water and Forest StudiesForum for Environment and DevelopmentRegnskogsfondet/Rainforest Foundation Norway

PAKISTAN:Pakistan Network of Rivers, Dams, and People

PAPUA NEW GUINEA:NGO Environmental Watch Group

PHILIPPINES:Cordillera Peoples AllianceNUCLEAR FREE PHILIPPINES COALITION

RUSSIA:Agency for Public Ecological ReviewsAltai State University EcoclubAngara-Yenisei Rescue AssociationASMO-Press Association of Young Journalists of Tomsk RegionBaltic Resource and Information CenterBayangol Ethno-Ecological CenterBureau for Public Regional CampaigningBuryat Regional Union for BaikalECODEFENSE! Int'lFund for 21st Century AltaiGreen Light Environmental Center

Power Paper & Pulp Mining Refinery0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

$US

bill

ions

Power Paper & Pulp Mining Refinery

EKN

EDC

FGB

US EXIM

Hermes

JEXIM

Pa

iton

Po

we

r

PT

. T.E

.L

Ba

tu H

ijau

cop

pe

r/g

old

Pe

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min

a

AP

RIL

, Ria

uA

nd

ala

n K

ert

as

PT

. IN

CO

nic

kel

min

e

Inda

h K

iat

Pul

p9

, P

era

wa

ng

0

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$US

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ions

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. T.E

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as

PT

. IN

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nic

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Inda

h K

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ng

10 27

Figure 8.Tranche Leverage Ratios for JEXIM: Four Indonesian projects 1994-1997

Top 10 ECA-Supported Projects in Sample of 33 Projects

The ten largest ECA-supported projects in our sample of 33 projects have a com-bined value of $12.4 billion, equivalent to 83% of the value of all projects analysed.

Figure 9. The value of the top ten ECA-supported Indonesia projects: $12.4 bil-lion (total $15.1 billion), or 82% of total value of the 33 projects surveyed.

Again, in these top ten projects, the power and paper/pulp sectors take up the largestamount of finance, $4.2 billion and $4 billion, respectively.

ISAR-SiberiaKamchatka League of Endependent ExpertsKrasnoyarsk Regional Public Fund for Forest ProtectionMagadan Center for the EnvironmentPublic Ecological Center "Dauria"Public Ecological Charitable Fund "Baikal"Republic of Sakha (Yakutia) Center for Ecological EducationRepublic of Sakha (Yakutia) Public Ecological CenterRepublic Public Environmental Fund "Baikal"Sakhalin Environment WatchSiberian Association for NTFP UseSiberian Environmental CenterSocio-Ecological Union/Antinuclear CampaignSt. Petersburg Society of NaturalistsTaiga RangersTaiga Research and Protection AgencyTele-radio Company "Katun"Tomsk Ecological Student InspectionToyeon Ecological CenterTransbaikal Center for Biodiversity ConservationWorld Information Service on Energy Russia

SLOVAKIA:Center for Environmental Public Advocacy/Friends of the Earth Slovakia

SOUTH AFRICA:Alternative Information & Development Centre (AIDC)Timberwatch Coalition

SWEDEN:FältbiologernaMiljoefoerbundet Jordens Vaenner/Friends of the Earth SwedenSwedish Society for Nature ConservationPeter Söderbaum, Professor i ekonomi med inriktning på ekologisk ekonomiMälardalens högskola, Sweden

SWITZERLAND:Aktion Finanzplatz SchweizArbeitskreis Tourismus & EntwicklungBasel MissionBerne DeclarationBruecke-Cecotret/Development Agency of Swiss Confederation of Christian Trade UnionsCaritas SwitzerlandGreen Party SwitzerlandHonduras Group SwitzerlandNetzwerk für sozial verantwortliche Wirtschaft NSW/RSESolifondsSwiss Coalition of Development OrganizationsSwiss Energy Foundation

Pertamina:

LNG

Paiton

Pow er

Indo-

KodecoCement

J2-PT. TEL

Paper/Pulp

0

0.5

1

1.5

2

2.5

3

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Tra

nche

Rat

io

Pertamina:

LNG

Paiton

Pow er

Indo-

KodecoCement

J2-PT. TEL

Paper/Pulp

Top 10 Projects

23 Remaining Projects

928

the amount of JEXIM exposure was not available for all of the 10 projects surveyed, itwas necessary, in addition, to come up with a proxy for JEXIM exposure. Data wereavailable on the size of the tranche involving JEXIM for a given project. From anexamination of the data, however, it was impossible to ascertain what percent of agiven tranche had JEXIM coverage. If we take the most conservative estimate, andassume that JEXIM exposure was equivalent to the entire tranche (in many cases, itwould likely be less than that), we can come up with a comparison of JEXIM tranchesize to total project value. JEXIM tranche size is represented in the middle row of thegraph in Figure 6. The back row represents the total project value leveraged by ECAfinance.

Another way to explore the leverage per JEXIM dollar of exposure is to examineleverage ratios. For projects where data exists on the dollar amount of JEXIM expo-sure, the leverage ratio is the amount of JEXIM exposure divided by the total projectvalue:

Total Project ValueJEXIM Exposure

A value of one indicates that the value of the project was equivalent to the amountof coverage provided by JEXIM – i.e. a $100 million JEXIM guarantee supported a$100 million investment. Values higher than one indicate that JEXIM dollars of expo-sure are leveraging more finance than is covered by JEXIM.

Figure 7. Leverage Ratios for Six JEXIM-Supported Projects Indonesia: 1994-1997

Figure 7 indicates that, for the six projects for which JEXIM exposure data are avail-able, one dollar of JEXIM coverage can leverage as much as six dollars of privatefinance. The average amount of dollars leveraged for the six JEXIM projects was $4for every dollar covered by JEXIM. For the remaining four projects for which no JEXIMexposure data was available, Figure 8 shows the leverage ratio for tranches of loans inwhich JEXIM was involved, averaging $2.6 for the four projects analyzed. Given theconservative nature of the tranche estimates, one would expect ratios calculated usingtranch figures would be lower than those calculated using JEXIM exposure data.

Swiss Labour AssistanceSwissaid

TAIWAN:Taiwan Environmental Protection Union

THAILAND:EarthRights InternationalMangrove Action ProjectNorthern Development FoundationTowards Ecological Recovery & Regional Alliance (TERRA)Yadfon Association

UGANDA:Uganda Debt Network

UNITED KINGDOM:Campaign Against Arms TradeCentre For Alternative Technology (Wales)Christian AidDown to EarthFern/WRM Northern OfficeForest Peoples ProgrammeForests MonitorFriends of the Earth (England, Wales and Northern Ireland)GLOBE UK All Party Parliamentary GroupGreen Party of England & WalesIlisu Dam CampaignIndonesian Human Rights Campaign (TAPOL)Jubilee 2000UKKurdish Human Rights ProjectMinewatchPartizans (People Against Rio Tinto and Subsidiaires)Rights and Accountability in Development (University of Oxford)The Corner HouseWales Green Party/Plaid Werdd CymruWorld Development MovementJean Lambert MEP, Green Party Member of the European Parliament (London Region)

UNITED STATES:50 Years Is Enough: U.S. Network for Global EconomicAmazon WatchCenter for International Environmental LawEnvironmental DefenseFirst Peoples WorldwideFriends of the EarthGlobal ResponseInstitute for Policy StudiesInternational Primate Protection League

Batu HijauMine

PertaminaRefinery

Jkt.&W.JavaPow er

J2-PT.INCO Mine

Indocement TambakLorok

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6

7

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Batu HijauMine

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J2-PT.INCO Mine

Indocement TambakLorok

Power

8 29

lead funding in the refinery and cement sectors.16 As a secondary financer, JEXIM par-ticipated in a $750 million tranche of a $1.5 billion investment in the PT. TEL paper andpulp project and in the troubled $580 million INCO mine, which has been the site ofhuman rights abuses, land seizures, and environmental destruction.

Figure 5. The Value of Ten JEXIM-Supported Projects in Indonesia 1994-1997,Sorted by Sector.

Looking at this another way, we can examine the amount of leverage, in terms ofadditional project finance, that each dollar of JEXIM exposure – in its role as lead ECA-- provided in the 10 projects in our study.

Figure 6. Comparison of JEXIM Exposure, Tranche Size, Total Project Value forten projects, 1994-1997

One way to calculate leverage is to compare the amount of JEXIM exposure –guarantee or loan – to the total value of the project supported by JEXIM. The front rowin the chart in Table 6 represents actual JEXIM exposure17 for a given project. Since

16 Value of power projects where JEXIM was lead financer appears to be $2.7 billion; mining, $1.88 billion; refinery:$1,28 billion;cement: 662 million.17 The data do not clearly differentiate between loans and guarantees in all cases, therefore exposure comprises both loans andguarantees.

CementMining

PowerRefinery

Paper &Pulp

Lead ECA

Secondary ECA

0

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1.5

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2.5

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4

Project Dollars (billions) Leveraged by JEXIM

JEXIM Role

Figure 5. The Value of Ten JEXIM-Supported Projects in Indonesia, 1994-1997 Sorted by Sector

Lead ECA

Secondary ECA

Pai

ton

Pow

er

Bat

u H

ijau

Min

e

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ina:

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-Kod

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ent

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iner

y

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ent

Jkt.

&W

.Jav

a P

ower

Tam

bak

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k P

ower

J2-P

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ulp

J2-P

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NC

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ine

JEXIM Exposure JEXIM TrancheProject Value

0

500

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$ U

S (m

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730

International Rivers NetworkLeavenworth Audubon Adopt-a-ForestMangrove Action ProjectNative Forest CouncilNatural Resources Defense CouncilOxfam AmericaPacific Environmental Resource CenterPreamble CenterProject UndergroundRainforest Action NetworkRainforest Foundation USARainforest ReliefRockefeller Brothers FundWorldview, Ltd.Dennis V. Brutus, Professor Emeritus, University of PittsburghTerence Turner, Professor, Cornell University

URUGUAY:Instituto del Tercer MundoWorld Rainforest Movement

ZIMBABWE:African Forum and Network on Debt and Development

Appendix B: Indonesian Newspaper articles on export credit agencies.

“NGO’s: ECA Bankrupt the Country”

Figure 3. Thirty-three ECA-supported projects in Indonesia. Sorted by Lead ECA,1994-1997. (Only Lead ECAs shown.)

In addition to lead roles, ECAs may play secondary roles in project finance and areable to leverage significant additional project value in a supporting role – i.e. by provid-ing additional guarantees or loans for a tranche led by another ECA, as in the aboveexample of Canadian, Finnish, and Swedish support for the Hermes-led tranche for the$1.3 billion finance package for PT. TEL. The table below demonstrates the totalfinance leveraged by ECAs acting as lead financers and that leveraged by ECAs intheir capacity as secondary financers in the 33 Indonesia projects.

Figure 4. Project finance leveraged by ECAs providing lead and secondary cover-age for 33 projects, 1994-1997

The Export-Import Bank of Japan (JEXIM)

JEXIM, as the most significant ECA in our sample of Indonesia projects, merits clos-er study. An analysis of the 10 JEXIM-supported projects in our sample indicates that, asa lead ECA, JEXIM focussed on projects in the power and mining sectors with additional

JEX

IM

US

EX

IM

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mes

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ue (

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Sw

itze

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-E

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Net

herla

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NC

M

Satellite

Cement

Military

Telecom

Refinery

Mining

Paper & Pulp

Pow er

6 31

Project Finance Packages

The finance packages for the larger ECA-supported projects typically involve a num-ber of tranches (or parts), including long term commercial loans (some covered by pri-vate or public guarantees or insurance), equity, revolving credit, and often an "ECAtranche" which may be a commercially syndicated loan covered by ECA guarantees.ECAs also provide some direct loans. A 1997 $1.3 billion loan to PT. TEL for the con-struction of a controversial pulp mill in South Sumatra, for example, involved 6 tranches:

1. A $200 million, 10 year term commercial loan financed by 19 banks in 6 countries;2. $350 million in equity provided by two Indonesian companies (one under General

Suharto’s eldest daughter, Siti Hardiyanta Rukmana , or "Tutut"), two Japanesecompanies, and Japan’s OECF;

3. A $650 million, 12 year Export Credit tranche involving the Finnish GuaranteeBoard, the Swedish Exporkreditnamden, Germany’s Hermes, and Canada’s ExportDevelopment Corporation, funded by Germany’s KfW, two German commercialbanks, a Finnish bank, Canada’s EDC and Finland’s FGB, and apparently guaran-teed by FGB, EKN, Hermes, and EDC;

4. A $41 million loan from Germany’s KfW;5. A $50 million, 5-year revolving credit line financed by 19 banks from 6 countries;6. A $50 million, 10 year loan arranged by Japanese, German, Korean, and Finnish

Banks and AT&T.

The provision of the ECA guarantees in one tranche of the loan -- $267.7 millionfrom Hermes (the lead ECA),$205.3 million from EDC, $129 million from FGB, and$52.6 million from EKN – leveraged total project finance of over $1.3 billion.

The Top 10 ECAs in the Indonesia Projects

In the 33 projects examined in this study, ten ECAs took lead roles in projectfinance. Lead ECAs are those which contribute the largest amount of coverage orloans in a given project. They also may act to coordinate other banks or as arrangersfor commercial loan syndication on a given project. The top three lead ECAs active inthe Indonesia projects in our sample were JEXIM, US EXIM, and Hermes. TheScandinavian ECAs -- FGB and EKN – as well as the Canadian Export DevelopmentCorporation also played a significant role in the finance of these projects. The SwissECA, Export Risk Guarantee also played a role, especially in the financing of powerand refinery investments. (See Figures 3 and 4.)

532

“Export Credit Projects are Generally Full of Corruption, Collision, and Nepotism”

Figure 1b. Value of 33 Export Credit Agency-financed projects in Indonesia, 1994-1997. (Only lead ECAs are shown.)

Of the 33 projects surveyed, the most significant amount of ECA-leveraged financewas concentrated in four sectors, the largest being the power and paper and pulp sec-tors. ECA-backed investments included support for a number of controversial mega-projects such as the giant Tanjung Enim Lestari (PT. TEL), Indah Kiat, and RiauAndalan paper and pulp mill projects in Sumatra and the notorious $4 billion corruption-plagued Paiton coal plants in Java.

In our sample, the third and fourth largest sectors with ECA involvment were miningand state-owned refineries14 with projects valued at $2.5 billion and $2.1 billion, respec-tively, followed by cement, satellite technology, technology, and military transport.

Figure 2. Thirty-three ECA-supported projects in Indonesia. Sorted by sector,15

1994-1997. (Only lead ECAs are shown.)14 These refineries are controlled by Pertamina, Indonesia’s astonishingly corrupt national petroleum company.15 Please note that there are significant questions about the finance package for PT. TEL in the paper and pulp sector. Publiclyavailable records state that two finance packages were signed for the mill – one in 1994 for $1.5 billion, and one in 1997 for $1.3billion. Further research is needed to determine whether both of those packages were actually disbursed -- i.e. for a total projectvalue of $2.8 billion or whether only one of the packages were disbursed. Figure 2 assumes that both finance packages were dis-bursed. If only one package was disbursed, the level of ECA support for the paper and pulp sector in our sample would be closeto the level of ECA support provided for the mining sector. (See Figure 2.)

1994 1995 1996 19970.0

1.0

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Figure 2. Thirty-three ECA-Supported Projects in Indonesia, 1994-1997 Sorted by Sector (Only lead ECAs are shown.)

Netherlands-NCMSwitzerland-ERG Sweden-EKN

Canada-EDCFinland-FGB

Germany-HermesUS EximJapan-JEXIM

4 33

“ECAs In Indonesia Destroy theEnvironment”

ECAs to adopt and upwardly harmonize their environmental and social policies in orderto put a halt environmentally destructive investments supported by these agencies.Governments have begun to acknowledge the problem but are slow in taking decisiveaction. At present, an international grassroots movement is working to hold the world’sindustrial leaders to their commitments and ensure that they enact common environ-mental and social standards for ECAs.

The Role of Export Credit Agencies in Indonesia

In 1996, officially supported export credits accounted for more than 24% of the totalindebtedness of developing countries.7 The years 1990-1995 saw export credit expo-sure to developing countries increase at an average growth rate of 11%.8 In 1996, thetop four recipients, Russia, China, Indonesia, and Nigeria, accounted for 40% of theexport credit agencies’ total exposure.9 For the top four recipients, export creditsaccounted for between 24% to 71% of total external debt.10

1996 1996 1996Total External Debt ECA Exposure ECA Exposure Billions Billions As % ofTotalDebt

Russia 129 52.9 41%China 128 44.8 35%Indonesia 120.2 28.2 24%Nigeria 34.9 24.8 71%

Figure 1a. Export Credit Agency Exposure and Debt11

Between 1992 and 1996, export credit agencies’ exposure in Indonesia grew by 25%.By 1996, the level of ECA exposure in Indonesia – largely in support of foreign invest-ment in mega-projects closely linked to the Suharto regime – was equivalent to 24% ofIndonesia’s total external debt, approximately $28 billion.12 In this analysis, we will pro-vide an overview of thirty-three projects in Indonesia supported by export credit agen-cies between 1994 and 1997, valued at total of $15 billion dollars.13 We will examinethe relative contributions of the ten ECAs most active in Indonesia, looking in greaterdetail at the Export-Import Bank of Japan, and provide a brief overview of the tenlargest ECA-supported projects which account for $12.4 billion or 83% of the value ofthe thirty-three projects surveyed. Figure 1b indicates the distribution of project financeover time for the 33 projects.

7 Boote, A., D. Ross, et al. "Official Financing for Developing Countries," IMF, February, 1998, p.118 ibid, p119 ibid, p1210 ibid, based on data from pp. 12, 1411 ibid, based on data from pp.12, 1412 Given the climate of secrecy under which ECAs operate and the ensuing lack of data, the extent to which ECA exposure islinked to an increase in external debt of a host country is not easily determined. In quite a few cases, host governments of coun-tries where ECA-supported projects have been financed were and are required to post callable counter-guarantees which exposethe host country to a significant debt burden should the counter-guarantees be called. Data on the level of this type of exposure isnot readily available.13 It has been very difficult to obtain information on ECA financed projects. The 33 sample projects analyzed in this report by nomeans represent an exhaustive list of ECA-financed projects in Indonesia from 1994-1997. The US Export-Import Bank aloneapproved 37 projects for finance during this period, of which only 17 are included in the above analysis. The value of the projectslisted is the total value of the finance package, of which ECA coverage may only make up a small part.

The Jakarta PostDecember 12, 2000

Forests under threat from debt-laden firms: Report

BOGOR, West Java (JP): A new study sponsored by two international organizations shows that Indonesia's forests -widely regarded as among the most biologically important tropical forests in the world - are under dire threat as heavily debt-laden companies struggle to obtain sufficient wood for continuous production.

A sevenfold rise in mill capacity over the past decade, financed by multibillion dollar investments, has enabled Indonesia to become one of the world's top 10 pulp and paper producers.

According to the report by the Center for International Forestry Research (CIFOR) and the World Wide Fund for Nature (WWF)'s Macroeconomic Program Office, which has been made available to The Jakarta Post, Indonesia's pulp and paper industries have grown by 700 percent since the late 1980s, backed by US$12 billion credit and investments

CIFOR researcher Christopher Barr, who conducted the study from mid-1999 until the end of this year, reports that the combined production capacity of Indonesia's pulp and paper industries has grown since 1988 from 1.8 million tonnes a year to more than 13 million tonnes a year.

The report notes that the country's pulp and paper producers, dominated by four conglomerates, secured backing for major growth, in part, by pledging to obtain their raw material from sustainably managed tree plantations. Yet so far, only 8 percent of the wood the industries consume (100 million cubic meters since 1988) has come from plantations. The rest is mixed hardwood timber from natural forests - much of it thought to be harvested illegally.

"The fact that companies have made investments on this scale without first securing a legal and sustainable supply of raw material suggests that many pulp and paper projects in Indonesia are at considerable financial risk," Barr writes in the CIFOR-WWF report, Profits on Paper: The Political Economy of Fiber, Finance, and Debt in Indonesia's Pulp and Paper Industries.

Barr calculated that more than 800,000 hectares of natural forest have been cleared since 1988 to supply the rapidly expanding mills. The government of Indonesia has allowed the country's pulp and paper companies, which are concentrated in Sumatra's Riau province, to exploit large areas of natural forest at low cost. But the CIFOR-WWF study concludes that as much as 40 percent of the wood that mills now obtain from natural forests comes from undocumented and probably illegal sources.

The nation's rapidly diminishing forests will continue to face heavy pressure for at least the next seven years, the report warns, as plantation yields

334

In the case of significant ECA-guaranteed investments like the notorious Paitonpower plants, foreign ECA officials attempted to intervene in Indonesia’s national poli-cy-making process in order to reduce their own exposure. For example, the industrial-ized countries making up the Consultative Group on Indonesia (CGI), had scheduledtheir international donor meeting for July 28, 1999. At this meeting, the CGI was tofinalize the details of various aid and loan packages which were to be made availableto Indonesia during the economic crisis. Two weeks before the July 28th meetings, anECA "SWAT team" consisting of government officials who were representatives ofJapan’s Export Import Bank, Germany’s Hermes Agency, the Swiss Export RiskGuarantee Agency, the U.S. Export Import Bank and OPIC – all from CGI countries --descended upon Indonesia’s new government in an attempt to force it to honor theSuharto-era power sector contracts which had been written under conditions ofextreme corruption. These contracts -- backed by ECA insurance and guarantees –had been made by companies which – as the Wall Street Journal reported -- "cut over-priced politically influenced deals that undermined the Indonesian economy."4

Two weeks before Indonesia’s July, 1999, CGI donor meeting, the team of interna-tional ECA representatives warned the new government that a failure to honor con-tracts such as the massively corrupt Paiton power contract would "harm new foreigninvestment and delay Indonesia's economic recovery."5

A later investigation into power contracts by Indonesian Corruption Watch identifiedpossible markups totaling US$400 million in the country's foreign-funded power trans-mission projects. In October, 2000, the President of Indonesia’s National PowerAgency, Kuntoro Mangkusubroto, stated that most power transmission projectsfinanced by foreign export credit agencies, Kredit Expor or KE, in Bahasa Indonesia,"smacked of markup practices. All KE [ECA] projects are problem sources ... we foundthat on average they cost 37 percent more compared to projects that underwent inter-national tenders," Kuntoro said during a meeting with Indonesian House ofRepresentatives Commission for Energy Affairs.6

It is clear that under the current conditions of democratization in Indonesia, exportcredit agencies -- whether through their links to corrupt Suharto-era business venturesor because of the secrecy with which they conduct their transactions -- remain athrowback to the politics and economic practices of the Suharto dictatorship.

Export Credit Agencies

Export Credit Agencies (ECAs) are governmental or quasi-governmental entitiesthat subsidize and promote a country’s exports and investment abroad. The amount ofinvestment that ECAs support globally is large and growing—significantly greater thanthe total amount of lending from the World Bank, IMF, and all other multilateral institu-tions combined.i Most ECAs are not required to consider the social and environmentalimpacts of the projects they support. As a result, many projects funded by ECAsseverely degrade the natural environment and lead to the impoverishment of directlyaffected local communities. Many of these projects would not go forward without theinsurance against commercial and political risk, loan guarantees, and direct loans thatECAs provide.

In recent years, environmental and development NGOs have begun to call on all4 "Power Deals With Cuts for First Family In Indonesia are Coming Under Attack," Wall Street Journal, 12/23/98.5 "Credit Agencies Pressure Indonesia On Power Contracts," Dow Jones Newswires, 7/13/99.6 "Foreign-funded power projects marked up: PLN", Jakarta Post, 10/17/00.

fall far short of meeting the volumes of wood the country's mills need to operate at projected processing capacities. Barr speculates that the quest for additional sources of wood could hasten deforestation in Kalimantan and Papua (formerly Irian Jaya), as pulp and paper companies seek raw materials from beyond their current base in Sumatra.

Growing Risk

The study looks particularly at the performance and economic conditions of two of Indonesia's largest pulp and paper companies, owned by Asia Pulp & Paper (APP) and Asia Pacific Resources International Ltd. (APRIL). Both have made considerable headway since the 1990s in establishing industrial pulpwood plantations. Fast-growing acacia and other species favored for plantations can generally be harvested in seven to eight years.

But the CIFOR-WWF report shows that large capital investments in pulp and paper processing facilities have rapidly outpaced plantation development efforts, with companies expected to face growing shortages of raw material over the next five to seven years.

"Besides putting added pressures on Indonesia's remaining natural forests, debt-driven expansion will raise the financial risks if these companies are not able to secure low-cost fiber over the long term," Barr observes. Conflicts between companies and communities over forest access and environmental issues further raise the financial stakes, as illustrated by the ongoing suspension of operations at the $600 million Indorayon pulp mill in North Sumatra.

The study shows that Indonesian pulp and paper producers have been willing to invest enormous sums in the expansion of mill capacity because the financial risk to their owners has been diminished by government subsidies (such as access to pulpwood at costs well below its stumpage value), weak regulation of Indonesia's financial sector and inadequate risk assessment by international financial institutions involved in the investments.

The economic crisis in Indonesia has magnified the problems. Some of the nation's largest mills and pulpwood plantations have been placed in receivership under the Indonesian Bank Restructuring Agency (IBRA) because of theirheavy debt loads.

"IBRA has allowed the companies to continue operating under their precrisis management teams, and there are strong reasons to believe the agency may write off a substantial portion of their outstanding debts, thereby providing yet another capital subsidy," says Barr.

Furthermore, agreements between major pulp producers APP and APRIL and their foreign investors to resolve outstanding debts have been linked to further expansion of the companies' processing operations.

2 35

Export Credit Agency Finance in Indonesia1

Stephanie Fried2 and Titi Soentoro3

Introduction

After thirty two years under the Suharto regime, Indonesia is now trapped in aneconomic crisis with no clear signs of resolution in the near term. In the Suharto era,export credit agencies (ECAs) played a major role in financing environmentally andsocially unsustainable investments that have depleted Indonesia’s extraordinary naturalwealth. Forest degradation reached a rate of close to two million hectares per year.Investment projects such as factories, plantations, and mines not only destroyed natu-ral resources, but also gave rise to other significant environmental and social impactsincluding the destruction of the livelihoods of the local peoples who owned, managed,and utilized these resources. Security forces were routinely used to prevent forest-dwelling, rural, and river-side peoples from protecting and managing the naturalresources upon which their livelihoods and communities depended. In resource-richregions, the violation of human rights was a routine occurrence.ECAs played a key roleby assisting foreign investors in supporting General Suharto’s system of economic andpolitical monopolies. The regime's military security approach assured low costs for landappropriation and a relatively docile and inexpensive labor force. Major foreigninvestors, supported by ECA finance, competed to align themselves with powerful busi-ness interests close to the Suharto family, often by offering cost-free investment sharesto Suharto’s children, other relatives, and business associates. In return, investors wereassured of access to lucrative sectors of the Indonesian economy and were able toreceive "assistance" from Indonesia’s armed forces when it came to clearing people offof land for their projects, stifling labor unrest, or preventing mobs from storming theirpolluting factories.

After Suharto’s fall, export credit agencies with heavy exposure in Indonesiafound that the web of business contracts that they had underwritten -- most of whichwere directly dependent on links to various Suharto relatives -- were endangered. Asa newly independent Indonesian press brought to light evidence of the massive corrup-tion, malfeasance, improper contracting procedures, environmental devastation, andhuman rights violations linked to ECA-backed investments, the likelihood of substantialclaims against ECA political risk insurance and guarantees increased dramatically.

1 A draft of this report was presented at the Third Annual NGO Workshop on Export Credit Agencies, Jakarta, Indonesia, May,2000.2 Senior Scientist, International Program, Environmental Defense, P.O. Box 520, Waimanalo, HI, 96795 USA. Email:stephf@edf.org. Adjunct Fellow, Environmental Studies, East West Center, Honolulu, HI, USA.3 Coordinator, BIOFORUM, Bogor, Indonesia.

Recommendations

The report suggests a number of policy options that government agencies and financial institutions could adopt to put Indonesia's pulp and paper industries on a more sustainable track.

The recommendations are best read in the context of the full report and they relate to corrective action on: further expansion of pulp and paper processing capacity; wood supply subsidies to Indonesia's pulp industry; allocation of new forest conversion licenses; independent monitoring of plantation development; stricter application of due diligence by financial institutions on major investments in major pulp and paper projects in the face of financial risks; and potential reliance on illegally obtained raw material.

136

Table of Contents

Page Number

Introduction 1

The Role of Export Credit Agencies in Indonesia 3

Project Finance Packages 5

The Top 10 ECAs in the Survey of 33 Indonesia Projects 5

The Export-Import Bank of Japan 6

The Top 10 Projects in the Survey of 33 Indonesia Projects 9

Four Project Case Studies: The Paper and Pulp and Power Sectors 11

PT. Tanjung Enim Lestari 11

P.T. Riau Andalan Paper and Pulp (APRIL) 12

Sinar Mas Group: Indah Kiat 13

Indonesian Power Projects: The Paiton Debacle 14

Conclusion 16

Appendix A: The Jakarta Declaration 18

Appendix B: Newspaper articles 31

A productive rubber garden in a village affected by the PT. TanjungEnim Lestari paper and pulp mill.

37

Appendix C:

Export Credit Agency Finance in Indonesia

Stephanie Fried and Titi SoentoroSenior Scientist CoordinatorInternational Program BioforumEnvironmental Defense

A bottle of black water taken from portion of the river where the PT. TanjungEnim Lestari paper and pulp mill has its outflow pipe. This black waste waterwas dumped from the PT. TEL outflow directly into the river water which is usedfor bathing and washing by villagers that inhabit the shoreline. Villagers report-ed skin lesions and sores after bathing in the river after PT. TEL had starteddumping operations.

38

Stephanie FriedEnvironmental Defense

"Export Credit Projects are Generally

Full of Corruption, Collusion, and Nepotism"

"ECAs in Indonesia Destroy the Environment"

"NGOs: ECAs Bankrupt the Country"

Export Credit Agency Finance in Indonesia

andTito SoentoroBioforum

December, 2000

Environmental Defense 1875 Connecticut Avenue NW, Suite 1016

Washington D.C. 20009Tel. 202-387-3500 Fax 202-234-6049

www.environmentaldefense.org

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