Center for International Forestry Research CIFOR and DEPHUT: Transparent and Sustainable Pulp and Paper Sector Vital for Indonesia’s Development

(Jakarta May 31, 2006) CIFOR is pleased to have the opportunity to meet with His Excellency, Bapak H. MS Kaban SE, MSI, to discuss the pulp and paper industry and its contribution to national development.

CIFOR recently released a report that looks at pulp and paper investments in a number of countries around the world, including Uruguay, Brazil, China, Indonesia and the USA.

Based on several years of research, “Financing Pulp Mills – An Appraisal of Risk Assessment and Safeguard Procedures”, analyzes the type of information institutions such as banks and export credit agencies examine when they decide whether or not to finance pulp mill projects.

It specifically examines current and past cases where assessments of the environmental and social risks and impacts associated with pulp and plantation projects have been poorly carried out by financial decision-makers.

CIFOR’s study found that financial institutions and investors often have very limited information about a pulp mill’s wood supply before making investment decisions. Detailed data on wood supply often is not reported in sufficient detail by project sponsors, or is not publicly available. As a result. This often means that financial institutions and investors do not have sufficient information to properly assess the socio-enviro impacts and sustainability of planned pulp mill projects.

CIFOR believes the report will encourage responsible investment by promoting a legal, transparent, and sustainable pulp and paper industry that provides income for business, tax revenues for governments, and benefits and jobs for local communities. A critical step in this process is for financial institutions to better assess whether proposed pulp mill projects have a secure and sustainable supply of wood fiber. The report provides a number of specific recommendations that will enable them to do so.

In Indonesia, the pulp and paper industry provides much needed-foreign exchange and tax revenues. Clearly, it has an important role to play in Indonesia’s economy. This role will be considerably strengthened if the industry has a secure and sustainable plantation base to provide raw materials.

The Indonesian government is very much aware of this, as evidenced by the steps it is taking towards promoting commercial plantation development. Such measures by the government provide increasingly good reasons for foreign and domestic investors to increase their investment in plantations.

The pulp and paper sector has the potential to significantly improve the lives and welfare of many Indonesians. A critical step towards fulfilling this potential is to actively include small farmers and communities in efforts to develop commercial timber plantations, and to ensure that these stakeholders share equitably in the benefits generated by such projects.

There are a number of positive signs in terms of partnerships between small farmers, local communities and pulp and paper companies, and both the Ministry of Forestry and CIFOR have been working actively to encourage such partnerships.

Greater industry sustainability can be further encouraged by the Ministry and CIFOR working together to support companies that set an example for others. One such company is Musi Hutan Persada, where acacia plantations were developed prior to the construction of the PT Tanjung Enim Lestari pulp mill.

Other pulp and paper companies are also showing progress, especially in areas such as preventing or reducing the purchase of illegal timber, consulting with communities to reduce conflicts, and controlling forest fires. Nevertheless, if we wish to see greater investment in the sector, companies also need to increase their efforts to develop a secure, sustainable, and equitable plantation resource base.

Investment will also be enhanced by ensuring greater transparency and accountability in wood supply, financial transactions, and corporate debt. Greater efforts to safeguard creditors’ interests will also encourage investment.

Transparency and accountability are also important for the government and the people of Indonesia. Enhancing these will be an essential step if Indonesia is to never again loose hundreds of millions of dollars in non-performing loans to pulp and paper companies.

In conclusion, CIFOR supports the Minister’s aim of developing a sustainable and equitable pulp and paper sector in Indonesia. CIFOR’s report supports this aim and is in no way intended to discourage investment in the pulp and paper sector, but rather to serve as a strong reminder about the need for careful and wise investment. A dynamic and strong pulp and paper industry that has minimal negative environmental and social impacts is our common goal. Through mutual respect and transparent dialogue, we will work together towards achieving that goal.

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