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Research Report

Asia Pulp & Paper Indonesia:: The business rationale that led to forest degradation and financial collapse

Romain Pirard
Rofikoh Rokhim
Copyright Date: Jan. 1, 2006
Pages: 29
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Table of Contents

  1. (pp. 1-2)

    CIFOR has been involved in research on the Pulp and Paper (P&P) sector in Indonesia and China since the end of the 1990s. The Barr report, ‘Banking on Sustainability: structural adjustment and forestry reform in post-Suharto Indonesia’ (2001), was a major step because it stressed the overcapacity problems of the sector at a time when the major groups were facing debt repayment failures. Friends of the Earth has also published reports dating from 2001, that focused on the financial aspects of the sector, with case studies on two groups: Asia Pulp & Paper (APP, Matthew and Gelder 2001a) and Asia Pacific...

  2. (pp. 2-3)

    The Widjaja family is well known as a major player in the Indonesian economy through the Sinar Mas Group, which was founded by Eka Tjipta Widjaja (see the group’s history in Annex 1). This family is also considered as the ultimate owner of APP (Fallon 2003). We use the term ‘Widjaja family’ as we feel it is more correct and appropriate than Sinar Mas or APP. Indeed these groups are not strongly connected in legal terms, through cross-shareholdings, but they are all controlled by the same family.

    APP is the largest pulp and paper producer in Asia outside Japan, and...

  3. (pp. 3-4)

    As financial analysts were aware, before the great expansion of APP, the Widjaja family was very keen on using related parties for commercial transactions. This way of doing business is known for allowing and encouraging commercial contracts driven by the interests of the ultimate owners, rather than resulting from a normal market process.

    Hundreds of companies have been created within the Sinar Mas conglomerate, both to enhance efficiency and to control sales prices between related companies. As a consequence, the ultimate owners were and still are in position to prioritize their own interests and even capture profits for themselves². This...

  4. (pp. 4-5)

    History, Nehru famously observed, is written by the victors³. Financial history, it seems, is written by the creditors. When a financial crisis arises, it is the debtors who are called upon to take the blame. This is odd, since a loan agreement invariably has two parties. When a loan fails, it usually represents miscalculations on both sides of the transaction, or distortions in the lending process itself” (Radelet and Sachs 1998: 1).

    Since the beginning, companies related to the Widjaja family have used both banks and capital markets to finance their projects. Locally, the Widjaja family used credits from state-owned...

  5. (pp. 5-7)

    “Why did things turn out this way?”. That may have been the question on the minds of most of the investors when APP announced how severe its financial situation was. After years of significant benefits and continuous expansion, and the regular payment of debts, the group suddenly defaulted in 2001. In fact, signs were already there in 1999 when the government found negative features concerning the Sinar Mas-affiliated bank, Bank Internasional Indonesia (BII).

    This bank, part of the Sinar Mas Group, faced difficulties because of its non performing loans. BII issued credits for Sinar Mas companies in many sectors, and...

  6. (pp. 7-9)

    Access to early financial reports and bond prospectuses from the 1990s allowed us to verify some assumptions about the assumed Widjaja family’s real strategy: securing short-term profits with rapid and large expansion of capacity, and delaying costs with longer term debts (bank loans or bonds).

    It is striking to see that the shift from profits to losses happened very suddenly, after many years of high profits, as shown in Table 6. From 1993 to 1999, the profits generated by Indah Kiat, Tjiwi Kimia, Pindo Deli and Lontar Papyrus amounted to, respectively, $735,974,000, $487,838,000, $123,015,000 and $168,760, coming to a total...

  7. (pp. 9-11)

    Our understanding and description of the APP strategy needs to include legal issues for at least two reasons: the group has announced a debt standstill in 2001 but has been able to avoid any seizure of its assets or replacement of the group controllers; legal actions initiated by creditors have generally failed and the debt restructuring has been an out-of-court negotiation.

    APP is a multinational with a holding, subsidiaries, and financial companies located in numerous countries, in Singapore, Indonesia, China, Europe or countries known for their lax fiscal regulations, such as Cayman Islands. An efficient move by the creditors to...

  8. (pp. 11-13)

    Asia Pulp & Paper was studied in this paper as a main factor of deforestation in Indonesia during the two last decades, with an increase in 2004/05 as the group announced its plan to convert 180,000 hectares mainly on peatlands. Curiously, the group defaulted on its debts in 2001 for $13.9 billion, but no substantial change was observed in both the control of operations and the management. Thus we researched the factors leading to APP’s default, in an analysis that links the spheres of finance, governance, and forests.

    APP’s trajectory since the early 1990’s has been very impressive for several reasons....