PT Kiani Kertas is in the headlines again – and had been so for years. Formerly, it belonged to the empire of timber baron Bob Hasan, one of Suharto’s buddies. Using state funds for his Kiani Kertas was one of the crimes for which Bob Hasan was eventually brought behind bars. Other Kiani Kertas headlines concerned the horrendous debts that the factory had amassed and the violence that the local population has been subjected to. That the factory had to halt production when it had barely started operating came as a surprise only to those who did not know that Kalimantan, depleted of its rainforest, could no longer provide the necessary raw material to feed the hungry paper mill. Now Kiani Kertas has made it once more into the headlines, as it is amidst a process of restructuring its ownership relations.
Kiani Kertas is up for sale. The key bidders are Singaporean tycoon Lauw of United Fiber Systems (UFS) and the investment bank J.P. Morgan Chase & Co.. The offer is to take over the factory from PT Energi Nusantara for 200 million US Dollar and to pay the 210 million US Dollar that the factory owes to several banks, especially to Bank Mandiri. Kiani Kertas no longer belongs to the Suharto buddy Bob Hasan, but has changed hands to the former dictator’s son-in-law, Prabowo. After a forced end to his military career, the former commander of the notorious Special Forces Kopassus has turned into a successful business man: Prabowo now acts as director of Kiani Kertas and owns 79% of PT Energi Nusantara.
The pulp factory Kiani Kertas in East Kalimantan
Six of Indonesia’s seven largest pulp and paper factories are based in Sumatra, whereas home of the seventh is Kalimantan. Eight years ago, on March 31st, 1997, the latter, PT Kiani Kertas, started the production of pulp, paper and medium density fibreboard (MDR). The factory has a capacity of 525,000 tons per annum in pulp production and of 200,000 tons in MDF production (in comparison, the largest pulp factory on Sumatra Island, Riau Andalan Pulp and Paper (RAPP), has an output of 2 million tons of pulp per year). The factory is located two kilometres off the river Berau in the town of Mangkajang, in the district of Berau, with the town of Berau 40 km and the provincial capital Samarinda 290 km away.
Exploratory works for the factory started in 1990, and construction works that would last for three years began in 1994. Already in 1996, i.e. during the construction period, plans were made for an expansion of the factory. At that time, Machnan R. Kamaluddin was head of PT Kiani Kertas. To increase pulp production, new machines were needed which cost 930 million US Dollar. About half of these costs, 410 million US Dollar, were covered by a bank consortium to which also four state-owned enterprises (BUMN) as well as ten private banks belonged. Lead arranger was the Bank Negara Indonesia (BNI) while Bank Dagang Negara (BDN) and Bank Umum Nasional (BUN) acted as co-arrangeres. /Suara Pembaruan, 10 May 1996/
The remaining 410 million US Dollar Kiani Kertas was granted by the Indonesian government as a loan. To enable the loan in the first place, on December 10, 1996, Suharto released Presidential Decree No. 93/1996. This was by no means the only privilege; in 1997, like nine other companies, Kiani Kertas was granted a tax-holiday for a period of ten years. /D&R, 13 September 1997/
But obviously, the planners did not take into account that the raw material available did not match the factory’s capacity. Early on and continuously over the following years, Kiani Kertas had troubles obtaining enough timber to feed its mills. In 2003, the supplies ground to a halt altogether, and Kiani Kertas had to stop production for six months due to lack of raw material.
The solution for the problem came in the shape of two well known high-ranking military officers. In December 2003, General Luhut B. Panjaitan, former Minister for Industry under Suharto, and Prabowo Subianto, former Commander of the Special Forces KOPASSUS and former son-in-law of Suharto, took over the management. Which role the two former military men played during the take-over is not entirely clear. In the first few months, Luhut Panjaitan acted, according to his own account, as director of the company, whereas Prabowo was said not to have held any formal position. According to Luhut Panjaitan it was Prabowo’s task „to get the money together”, later it would be decided which position he was to take. /Walhi: Transisi 2003 ke 2004, Membagi Racun dan Bencana ke „Pulau Masa Depan”/ But from Prabowo one could hear in an interview with the TV-channel SCTV that he himself was the director of Kiani Kertas. /SCTV Liputan 6, 19 March 2004/.
Trouble concerning Kiani
Part I: Fraud and debts
There is a lot of money involved concerning Kiani Kertas. And not all of it has been obtained legally. For example, Bob Hasan has misappropriated reforestation funds and subsidies to cover both construction and production costs. Only after the fall of Suharto in 1998, these entrepreneurial improprieties were unveiled and the timber baron was brought to court: In 1999, Didi Dawis, a former business associate of Bob Hasan, levelled a charge against him. He alleged that Bob Hasan owed him 20 million US Dollar. The South Jakarta District Court ruled that Bob Hasan had to pay his debts within 30 days. Apparently, this was not an easy task for Bob Hasan who had amounted debts far greater than that. All in all, he owed a staggering 312.5 million US Dollar to various banks (BCA, BII, BNI, BTN, BankExim, Danamon, PDFCI) and Bapindo.
Apart from his 20% share in PT Kiani Kertas, Bob Hasan held shares of PT Kiani Lestari (70%) and PT Kalimanis Plywood Industries (10%). Like Kiani Kertas, also those two companies ended up in the hands of the bank trust BPPN (Badan Penyehatan Perbankan Nasional). The amount that Kiani Lestari alone owed to BPPN amounted to about 50 million US$. Kalimanis Plywood Industries debt burden totalled 300 million US$. This was topped by Kiani Kertas that had amassed a debt burden of 4 billion US$. /Kontan, 13 December 1999/
After a process of debt restructuring, Kiani Kertas’ main debtor is currently Bank Mandiri. On 15 November 2002, Bank Mandiri had taken over the loans granted to the Kiani group. Via another enterprise, PT Anugra Cipta Investa, Kiani Kertas was eventually taken over by PT Energi Nusantara, which, however, did not help to shoulder Kiani Kertas debts. In the investigation currently under way concerning the manner in which Bank Mandiri granted credits and the corresponding corruption charges the spot light is also focussed on the owners of Kiani Kertas. Prabowo has to comply with summons for questioning.
Trouble concerning Kiani
Part II: Timber shortages in East Kalimantan
In 2000, the entire timber industry in East Kalimantan, a region that not so long ago had been covered with tropical forests, ran into troubles. Dozens of enterprises were in dire need of supplies of raw material and, according to Himanudin Nasution, head of the East Kalimantan regional office of the Department of Industry and Trade (Kantor Wilayah Departemen Perindustrian dan Perdagangan, Kanwil Deperindang) many were forced to import timber in order to keep the business up and running.
Likewise Kiani Kertas that had only three years earlier been officially inaugurated by President Suharto: in 2000, Kiani Kertas timber supplies lagged far behind its production capacities and the corresponding daily demand of 5,000 cubic meters of timber. Due to this lack of supplies, representatives of the company motioned at that time, Kiani Kertas would have to import wood chips from Australia.
Kiani Kertas did supposedly not only import timber from Australia, but also from the Philippines and Malaysia. Our source considers this a bad joke. The Philippines have long since lost the largest part of their forests, and Malaysia has complained about timber shortages for years (while at the same time championing as the worlds biggest exporter of wood related products). Malaysia does not possess timber for the production of wood chips.
The Malaysian timber industry processes 7 million cubic meters of timber every year. The „forested” Malaysian part of the island of Borneo does not even provide one tenth the amount, 700,000 cubic meters, while processing 2 million cubic meters per year. Quite obviously, something is wrong here. The Malaysian industry needs smuggled timber which stems from – shall we guess – Kalimantan?
Obviously, Kiani Kertas wants to divert attention when stating that it imports wood chips from Malaysia. Even if in fact some of the wood chips came from Malaysia, this does not preclude an involvement of Kiani Kertas in illegal logging. Our reliable source tells us that since 2001, Kiani Kertas’ demand for timber has increased, whereas supplies have decreased. In 2001, PT Tanjung Redeb Hutani had been the main supplier of Kiani Kertas. Since then, other suppliers have been added to the list: PT Sumalindo Lestari Jaya, PT Karya Lestari and the state owned enterprise PT Inhutani. Especially of Inhutani it is known that it practices illegal logging, even in the primeval forests in the district of Berau.
Trouble concerning Kiani
Part III: unresolved inconsistencies
In 2004, not long after Prabowo Subianto had become director of Kiani Kertas, production had to be suspended again for six months. There would be no let-offs, Prabowo announced, and the annual output of 525,000 tons of pulp and 200,000 tons of MDF would be matched. Supplies were available, if only in the form of timber from plantations and timber of lesser quality. /SCTV Liputan 6, 19 March 2004/
However, statements by the East Kalimantan regional office of the Department of Industry, Trade and Cooperatives make for a rather different reading. The head of the regional office, Nusyirwan Ismael, told the daily Kompas in an interview that Kiani Kertas production output had been steadily on the decline during the last years: 266,880 tons of pulp production in 2000, 179,425 tons in 2001 and 148,397 tons in 2002. The reason: lack of supplies. /Kompas, 30 January 2004/
The statements leave readers confused - and in the dark about the problem of how wage payments are financed. How can Kiani Kertas continue to pay wages given the fact that production is declining year after year? Statements on the problem of supplies are also full of with contradictions: Whereas Prabowo claims that in principle raw material was available, official sources assume a lack of resources.
Kiani Kertas states that it only uses timber from plantations; any further demand is covered by imports. However, reliable sources tell us a different story: It has been observed that Kiani Kertas receives timber supplies from certain sources. In Samarinda, the capital of the province of East Kalimantan, timber dealers sell timber that has not been registered by the authorities. This timber stems from illegal logging. Up until the present day, the authorities have failed to intervene and stop this trade.
Trouble concerning Kiani
Part IV: environmental destruction
Prabowo emphasises that Kiani Kertas works according to the principle of sustainability, that it uses only timber from plantations and that it is concerned about the environment. In order to limit damage to air and environment, the company was equipped with the most modern technology. /SCTV Liputan 6, 19 March 2004/
On the spot, however, the situation looks different. Our reliable source, who works right on the spot, tells us that in the surrounding area of Kiani Kertas it smells like mercaptanes, a sulphur compound that is a by-product of pulp production. Another reliable source also working there reports that there are signs that Kiani Kertas releases its wastewater directly into the Sulawesi Sea.
Comprehensive examinations of solid, fluid and gaseous industrial waste as well as of smell, dust and noise, which have been carried out among others by the research institute at the University Mularwarman in Samarinda in 2001, have shown that environmental pollution in East Kalimantan stems most likely from timber processing companies, especially from enterprises that produce pulp, paper and MDF. /Prof. Dr. Ir. Sipon Muladi and Syarumsyah S.H., M.Si. Pemanfaatan Sumber Daya Alam Secara Efisien dan Berwawasan Linkungan/
As concerns the smell originating from PT Kiani Kertas, environmental protection activists say that given the results of the study it has to be assumed that the smelly substance might also pose a risk for the health of the people living in the surrounding villages. The waste released into the Sulawesi Sea might damage or kill maritime life, and it might have a toxic effect upon humans, as fish constitutes the basic food for the local population.
Trouble concerning Kiani
Part V: protection by the security forces
Kiani Kertas had manoeuvred itself into conflict with the local population even before the construction work for the company begun. This has hardly ever become news as the people concerned are too scared. Reliable local sources, which refuse to be named, report that PT Kiani Kertas has resettled two villages in order to build the factory. The company had refused to pay inhabitants compensation for the destruction of their houses and their resettlement costs. People who resisted the resettlement have been terrorized and intimidated by troops. Eventually, the inhabitants succumbed to the pressure and left their kampung (settlement) without receiving any compensation. Even today people are too scared to talk in public about these events - the area is „secured” by the military.
So far, none of the mentioned problems could be resolved in a peaceful manner. One reason is that problems are not discussed in public as people are afraid of the former Kopassus-General Prabowo Subianto and of the possibility that their opposition be crushed by the military. The production site is well-protected; Kopassus troops refuse entry to any unauthorized person. Therefore, it is not possible to get a picture about the real situation there.
Kiani Kertas has always had good relations with the military. This helps explain why today former military men own the company. What counts is not so much their access to capital and them being business-minded but their connections with institutions owned by the military. From sources that wish to remain unnamed we know that Prabowo gained access to the top echelons of the company through the Kopassus foundation KOBAME (Yayasan Korp Baret Merah) and with the support of people loyal to him since his days as Kopassus commander. A key role was also played by his former right-hand man who now holds a position in the State Intelligence Agency BIN (Badan Intelijen Negara).
Prabowo Subianto as saviour
„I feel responsible and I think there is a good solution” (for the financial and production problems), Prabowo is quoted as saying in the journal Gatra. State funds were at stake, should Kiani Kertas not run its production. Prabowo conveyed the impression that he was determined to save Kiani Kertas. After at the beginning of the year Prabowo had declared that he was willing to sell Kiani Kertas, a number of international enterprises showed interested. / Gatra, 5. July 2005/.
Eventually, Bapak Lauw, owner of the Singaporean enterprise United Fiber System (UFS), closed the deal without the brokerage by J.P. Morgan. The final hand-over will be conducted by Deutsche Bank, a new player in the game. UFS is no newcomer to Kalimantan: it is currently constructing the new pulp factory in South Kalimantan. The transaction, highly welcomed as an encouraging signal by political and business elites, is said to take place in September. Prabowo has played his cards well. He can present himself as a saviour for the enterprise: Kiani Kertas can resume its production as new capital is at hand. The bankruptcy of one of the biggest pulp factories has been prevented. Indonesia’s reputation as a country with a secure business environment has been boosted with the corresponding positive reaction from potential investors.
But how the other problems are going to be solved, where the forest should come from, how the timber demand shall be met, how production can be sustainable and environmental friendly, how the interest of the population is taken care of remain unanswered questions.
Berlin, August 2005
the data of an old Suharto-pal and ‘global player’:
Demand and supply of the wood-processing industry in East Kalimantan
Overall, the demand of raw material of the wood-processing companies
of East-Kalimantan amounts to four mio. cubic meters per year. As a comparison:
in the whole province, five mio. cubic meters of timber per year are logged,
of which the greater part is exported or sold to other Indonesian islands.
The export quantity of logs – of un-processed, legally or illegally taken
down tree trunks – has gone up drastically since 1998. This is because
according to the Letter of Intent negotiated between the Indonesian government
and the IMF many companies were under pressure to export logs or to trade
internally to earn foreign currency. As a result, many wood processing
companies had to shut down and sack employees. The injunction since the
year 2000 to only process wood certified by Ekolabel created an additional
problem for the industry. Therefore a vast gap opens between actual demand
and the available supply, and in fact according to the office of the Department
of Industry and Commerce of East-Kalimantan, the forest authorities should
fix new quotas for logging. But this is hardly possible as the necessary
forest is missing. On the other hand, the officially granted quotas are
still very high. Concessionaries dispose in total of licences for logging
five million cubic meters of timber in natural and „industrial forests”,
the technical term for plantations in Indonesian official language. On
top of that further licences exist for two mio. cubic meters of logs that
result from clearing for the establishment of plantations. The fact that
wood-processing companies have no more raw material in spite of these gigantic
quotas and are close to bankruptcy or already shut down, throws a clear
light on the state of the forests of Kalimantan.
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