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Many analysts believe that failures of governance were an important reason that Indonesia was one of the countries worst hit by the 1997 Asian economic crisis.81 As a result of the crisis, the Indonesian rupiah lost 70 percent of its value in just five months, inflation rose to 80 percent, and the number of people living below the poverty line rose to over 60 percent. 82 Coupled with these events, public perception that the Soeharto government was rife with "corruption, cronyism, and nepotism"--as a popular protest slogan put it--was an important source of pressure that eventually forced Soeharto's resignation in May 1998. Despite high expectations for reform following Soeharto's departure, however, the root causes of the crisis, including failures of law enforcement and governance that facilitate rights abuses, have not been addressed. In important respects, the response of post-Soeharto administrations has only tightened the vise on communities in Riau.

This chapter looks first at how the process of bank restructuring after the economic crisis continued to create strong incentives for over-expansion of forest industries. It then examines post-Soeharto reforms, with special attention to the effects of the massive project of fiscal and administrative decentralization on forests and forest communities. While post-Soeharto administrations have taken many promising steps toward reform, the translation of these opportunities into meaningful change has thus far remained elusive due to flagging political will and lack of attention to rights protections. Little has been done to address community anger rooted in the economic injustices bequeathed by Soeharto.

The collapse of the Indonesian economy in 1997 and 98 was closely watched by investors throughout the world, but its impact on the well-being of the nation's rural communities was not as carefully monitored. Forest companies that became deeply indebted due to poor governance and weak financial due diligence leveraged their borrowing on expanding production capacity. The more indebted they became, the more these companies needed to maintain high-volume, low cost operations to stave off financial collapse. This financial pressure led to rapidly expanded operations that, in the absence of government oversight and adequate law enforcement, contributed to continuing environmental degradation and abuses of the rights of local populations.

After the "Miracle": Bank Restructuring and Forests

A major lesson of the East Asian economic crisis of 1997-98 is that high growth without good governance, at both the government and corporate levels, can lead directly to a national crisis. New Order Indonesia did not lack for growth, but as a patrimonial state, it lacked an institutional framework capable of ensuring that private ends would not compromise the interests of the larger society.

      -The World Bank (emphasis added), 200183

During the 1980s and `90s, Indonesia's economy grew at a rate of 7-10 percent a year, making it one the celebrated Asian "Tiger" economies. That all changed in August of 1997. Following the collapse of the Thai baht, there was a flight of foreign investment from the region and a flurry of currency speculation. The "contagion" of investor panic and currency decline spread to Indonesia and the value of the Indonesian rupiah began its freefall and the economy contracted by 14 percent. Unemployment rose to almost 20 percent. For those lucky enough to still be working, real wages declined by 35 percent while food prices increased by 115 percent.84

In response to the economic crisis and the collapsed banking system, in early 1998 the IMF helped establish the Indonesian Bank Restructuring Agency (IBRA) with the aim of liquidating, merging or recapitalizing failing banks and selling off assets of debtor corporations worth Rp600 trillion in order to recover liquidity loaned to failing banks in 1997 and reduce domestic debt. IBRA, whose mandate is due to expire in 2004, has been plagued with controversy and leadership changes85 due to the slow progress on asset sales, the low recovery rate (10-20 percent), and charges of collusion with influential debtors, many of them holding major forestry operations, to allow them extended repayment schedules, debt reductions, or to re-acquire assets at discounted prices.86

Many analysts have compellingly demonstrated that bad debts, mismanagement, and poor corporate governance were and continue to be rampant in the forestry sector.87 Of the U.S.$51.5 billion in private debt owed to IBRA in 2000, some U.S.$3.1 billion was in loans to the forestry industry, more than half of which was non-performing.88 In addition to domestic debts, Indonesian pulp and paper producers owe U.S.$17 billion in foreign debt. Of that debt, 85 percent is owed by Sinar Mas (U.S.$12 billion) and Raja Garuda Mas (U.S.$1.6 billion), which operate the nation's two largest pulp and paper operations, both located in Riau.89

This bad debt accumulated since 1998 is largely the result of inadequate due diligence on the costs and risks of the projects. As a rule, this view of risk was due to banks' assumption that the government would cover any losses. Since 1998, the government has been required by the IMF to issue blanket guarantees to all banks to maintain public confidence in the banking system in order to prevent a run on bank deposits, although even before 1998 there was an implicit understanding that the government would cover bad loans, since the debtors had influence in the government and banking sectors. This understanding was a clear case of "moral hazard" in which risks were not assumed by the debtors, thereby encouraging risky behavior rather than punishing it.90

The lack of due diligence is reflected in the repeated government recapitalization of seven domestic banks controlled or created by conglomerates.91 Of these recapitalized banks, six were conglomerate-owned banks with links to major forestry companies. A prime example of this dynamic is Bank International Indonesia (BII), controlled by the conglomerate Sinar Mas, which also controls APP. BII has been recapitalized through "rights issues," in which the bank issues more shares in order to raise capital. These shares, in the absence of other interested buyers, were mainly bought by the Indonesian government for Rp21 trillion, or U.S.$2 billion, even though the bank held U.S.$1.2 billion in non-performing loans to Sinar Mas' own subsidiaries, U.S.$1 billion of which is owed by APP.92 In effect, the bank was lending to its own indebted affiliates (who then defaulted on these loans) while the government, as the principal purchaser of its new debt, was effectively guaranteeing these loans.

IBRA and the IMF recently approved a new "rights issue" for BII at U.S.$535 million, although the government admitted the likelihood was high that it will again be the sole buyer of these shares, as it was in the last rights issue in 2001 worth U.S.$1.5 billion. The government, with the IMF's help, is covering loans that Sinar Mas loaned to itself and then failed to repay. In absence of IBRA or IMF oversight that will ensure change of ownership,93 banks may be recapitalized and corporate assets sold at a discount price of 10-30 percent of their value, allowing old owners to then buy them back and liquidate 70-90 percent of their debt for free.94

As the primary buyer in BII rights issues, the government now holds 80 percent of the shares in the bank, and remains reluctant to shut it down. The government has consistently argued that to let BII bank fail would cost more money than recapitalization because the government would have to reimburse depositors for their lost savings. But the facts suggest otherwise. Indonesian financial analyst Drajat Wibowo, who opposes the new rights issue, criticizes this view. Drajat points out that in 1999, when the first recapitalization took place, the deposits were then worth only Rp13 trillion; by 2001 the government spent Rp21 trillion and spent another Rp5.4 trillion in the new rights issue in July 2002.95 Since the government repeatedly recapitalizes BII, the costs continue to increase.

Meanwhile, funds to recapitalize failing banks totaled some U.S.$64 billion of public debt (borrowed from IMF and domestic bond issues), the largest amount spent for bank bailouts by any country in the world.96 CLSA (a unit of the Credit Lyonnais financial services group) estimated that Indonesia's public debt amounted to 109.1 percent of its GDP last year, up from 23 percent in 1996, before the financial crisis struck.97 It is estimated that in 1999/2000 approximately 44 percent of the state budget was spent on servicing these debts, and that in 2004 this percentage would rise to over 55 percent.98 In addition to draining the state budget that could be spent on public services, looming maturity of a large proportion of these debts in 2003-2004 threatens further economic crisis. The World Bank warned in a 200 report to foreign governments providing loans to Indonesia that the country's high level of state debt and debt service was "not just a product of the instability that Indonesia has experienced over the last four years - it is now a potential cause of economic instability as well."

APP's Over-production and Debt
The expansion of production capacity of Indonesia's pulp and paper sector during the last decade was funded by debt. Some U.S.$12 billion was raised through direct capital loans or bond offerings on the North American and European markets-- investments that in many cases proved to be a bad gamble.99

Burdened with a debt of some U.S.$13.9 billion, APP is a prominent example of such reckless speculation. To finance its expanding operations and to continue servicing interest payments on previous debts, APP began accumulating large amounts of foreign debt during the 1990s from a wide array of North American, European, and Asian financial institutions, a strategy that continued to prove successful even after the economic crisis. However, APP's strategy of incurring more debt to service previous debt unraveled in the late 1990s when maturing loans came due and global paper prices plummeted.100 In addition, APP's debt was largely from offshore sources, and dollar-denominated loans became very expensive to service after the crash of the rupiah. APP needed almost U.S.$1 billion just to pay the interest on its obligations-an amount equal to half of the annual interest on Indonesia's total national debt in 1997.

Investor enthusiasm soured in March 2001 when APP suspended payments on its debt.101 On July 5, 2001 APP shares were delisted from the New York Stock Exchange (NYSE).102 Stock value declined from U.S.$16.25 a share in September 1997 to just 8 U.S. cents by the close of 2001. Headlines on APP in financial magazines that in October 2000 trumpeted APP's investment potential as "Junk to Gold" shifted to "Asia's Worst Deal" in August 2001.103

APP's spectacular implosion demonstrates that significant financial risks were overlooked and continue to be neglected by all involved-by APP, their investors and insurers, the Indonesian regulators, by international donors. Like other embattled pulp and paper operations in Indonesia, these risks include the high potential for social conflict around the mills operations. APP and the other forestry sector conglomerates have overlooked this risk because they had no motivation to do otherwise, assured that they would avoid bearing the majority of that financial and legal responsibility.

"Reform" and The Forest Sector
The fall of Soeharto in May 1998 heralded across-the-board governmental reform (reformasi) and the end of "collusion, corruption and nepotism." This sudden and dramatic change in prevailing political rhetoric brought encouraging shifts toward more democratic resource management. Multilateral lending institutions publicly acknowledged the unacceptable burdens that corruption placed on the nation's economy, and indeed blamed the `crony capitalism' of the Soeharto government for the crisis. Further, some of Indonesia's leading international donors also finally admitted that the Soeharto-era corruption had impoverished forest resources with little return to the communities or the local governments where the forests were felled, and publicly drew attention to the risk to future economic growth this reckless use of forests posed.104

With the change of government came public demand for reform and more equal distribution of control over riches produced by resource extraction. Riau was one of the most egregious examples of the imbalance in revenues. The province is one the country's highest contributors to GDP and supplies 60 percent of the nation's oil production, yet has over 40 percent of its population living below the poverty line105-- a facts that have fueled a small but vocal secession movement.106 This pressure for reform, especially following East Timor's referendum,107 at last forced some changes in the highly centralized state bureaucracy. Transition President B.J. Habibie signed into law administrative and fiscal decentralization (Laws No.22/1999 and 25/1999),108 which in theory makes the districts essentially self-governing in all but a few key areas.109 The new laws also empowered districts to issue resource use permits previously issued by central ministries and to receive 15 percent of oil, 30 percent of natural gas, and 80 percent of mining, fishing, and forestry net after-tax revenues from natural resource enterprises within their territories.110

But democracy in management to date has been spottily implemented, and some policy changes have actually exacerbated pressure on forests. Intended to provide equity and sustainability, decentralization and "reform" have instead produced a complicated scramble for resources, between not only the central and district administrations, but also among those claiming to represent "local" interests. In addition, new administrative provinces and district have rapidly multiplied, with the total number of provinces growing from 26 to 33, and the number of districts to 390 since decentralization was implemented in January 2001. Riau alone increased its number of districts from six to fifteen. Control over valuable natural resources frequently plays a central role in the redrawing of new administrative boundaries, as officials try to narrow control over resource use and income, for example in South Sulawesi around the INCO nickel mine, in Northern Maluku around a gold mine, the islands off Riau around lucrative industry development on the free trade zone of Batam and sand exports to Singapore.111 This scenario, set in the context of dysfunctional and corrupt law enforcement and judicial systems, has increased violent struggle to control resources in the countryside.

The decentralization laws were formally implemented beginning January 1, 2001, offering great democratic promise as the first chance since independence (and for some regions since the colonial period) for local administrations to have a say in governing their own affairs. But there was little planning for the ambitious administrative changes that were promised. After 56 years of a centralized state, the massive task of building district administrative infrastructure, developing capacity of civil servants and bureaucracies to manage new resources, and transferring over two million civil servants from central offices to the districts left many local administrations floundering in their new-found authority and responsibility. There is no oversight of local regulations or budgets and many local governments took the opportunity to pass laws that allowed them to levy large taxes on investments, to convert illegal products (including timber harvested from indigenous lands or national parks) into "legal" simply by paying a district tax.112 National level regulations, such as those for conservation of forest resources were locally dismissed as no longer binding under district autonomy.

The incomplete implementation of reforms has led to much uncertainty and confusion over jurisdictions and has led many in the central government to call for recentralization. In fact, as this report was being prepared, legislation was passed that would re-centralize many aspects of forestry permitting and conservation planning113 and bills were introduced that would grant the President the power to dissolve local parliaments and repeal local legislation.114 The reasons for this retrenchment are diverse. Fervent nationalists in government, President Megawati among them, have voiced concern over decentralization as a potential engine of "too much ethnic pride" and a disintegration of national unity.115 Industry supporters voice concern that the increased taxation and legal uncertainty under decentralization is bad for investment, while environmentalists worry the lack of law enforcement and the need to generate local income will lead to rapid depletion of natural resources. Such critiques stem from the fact that decentralization as implemented often seems to have replaced an opaque and unaccountable central administration in Jakarta with many smaller ones closer to home. To date, decentralization has failed to provide solutions to lack of meaningful political participation (at both the local and national levels) and the persistent absence of meaningful rule of law.

Riau province is a case in point. With its relatively small population (5 million) and its wealth of natural resources, Riau generally is seen as a one of the big "winners" under decentralization. Although some provinces without natural resources have suffered under the new financial responsibilities for their administrations and reduced income from the center, Riau-- now able to access 15 percent of oil and 80 percent of forest revenues, causing annual provincial income in the first year to jump from Rp185 billion (U.S.$19.9 million) to Rp3.98 trillion--is portrayed by some analysts as "another Brunei."116 Indeed, IMF and World Bank data showed "Per Capita Total Revenue Capacity" for Riau as the second highest in the country (behind only East Kalimantan).117

But evidence of this new income is hard to come by in Riau's countryside. The increased income has not yet noticeably improved services or the capacity of local administrations. Decentralization has not yet improved the province's ruined roads, under-funded schools and hospitals. While investment in natural resource extraction is booming, Human Rights Watch investigators observed simple wood shacks, without electricity or running water, dotting the edges of vast plantations of oil palm and acacia, and line the network of oil pipelines that run throughout the province, sometimes through people's front yards.

On the other hand, decentralization has had a rapid and significant impact on local forests-and not for the good.118 Administrative incapacity, a desperate need for funds, and local corruption have led to a sharp increase in issuance of new permits to clear forests. The authority to issue timber extraction licenses and plantation permits has been delegated to regional district heads (Bupati), but some confusion remains regarding how large an area the district may license. As a result, many districts are simply permitting all areas, and sometimes giving permits to more than one party. Forestry experts charge that confused jurisdictions and lack of adequate surveying frequently results in overlapping permits and conflicts over who will have control over the forests.119 In fact, Forest Department data show that the number of licenses approved for forest clearing far exceeds the amount of forest actually designated for conversion, by 2.5 million hectares in Sumatra alone.120

In addition, in 2000 the Ministry of Forestry issued a moratorium on "forest conversion" (clear cutting for conversion to plantation) to fulfill requirements to the IMF121 and as a commitment to other donors at the CGI.122 However, implementation of the moratorium has been complicated by contention between district and central governments over the division of authority over forests. District local officials claim that the moratorium is technically no longer applicable under decentralization as the districts now have regulatory authority over forests, while the Ministry still maintains that the moratorium should be enforced.123 As a result, the moratorium remains in force but has had little effect on the pace of clear-cutting.

As currently implemented, therefore, decentralization has actually worked against the rhetoric of improved participation and sustainability of resource use. As noted above, many in the central government as well as industry supporters are calling for repeal of many local promulgated laws, the revision of autonomy laws and the re-centralization of many aspects of government, particularly forestry.124 Those in the provinces tend to portray these moves as "New Order tactics" to repeal decentralization altogether and regain control of valuable resources and economic benefits. 125 How these forces will play out is unclear, but forestry researchers have argued that whether or not Riau's forests have a future depends in no small extent on the activities of APP and RAPP, whose huge wood demands are seemingly beyond the control of any regional administration, especially one that is new and inexperienced.126

In the post-Soeharto period, companies operating in Indonesia have promoted various forms of "community forestry"-including local participation through "outgrower schemes" or "joint ventures"-as the answer for conflict-ridden logging operations. These new reforms offer communities the opportunity to participate in forest enterprise by forming village co-operatives (see Chapter V). These ventures offer the potential for more equitable forest management and in fact have allowed a few segments of the community to receive some benefits from forest extraction. However, the practice has not involved the full recognition of local land rights and has not resolved overlapping claims to forests.127 In the absence of rights protections and meaningful forms of representation, "community" forestry projects have not necessarily resulted in more equitable participation in forest management or recognition of community land rights. Village headmen and opportunistic middlemen have frequently quietly negotiated private deals with entrepreneurs to sell community land and keep the profits.128

In addition, there has been little oversight of the joint projects, as the arrangement seems to rest on the faulty assumption that involvement with (imprecisely defined) "local" people will somehow inherently guarantee environmental sustainability and social equity. However, many of these projects have simply repeated the mistakes of decentralization by devolving some opportunity to elites without ensuring any protections, participation, or equity. Without such safeguards, "joint ventures" ultimately may become a convenient means for company and state officials to sidestep responsibility for both sustainable management of forests and social conflicts by claiming it is not their problem. This "decentralization of responsibility" is similar to the wider trend in law enforcement to use "civilian security," which has led to discipline problems, violence, and an attempt to avoid responsibility for abuses.129

An Epidemic of Community Protest
Since the fall of the New Order, local communities that lost their land and have felt excluded from employment opportunities have begun to protest. It is difficult to systematically quantify the cases on a national scale, but estimates from both industry and community activists indicate the scope of the problem. The Indonesian Forest Industry Association (APHI) estimated that 53 logging concessions in Papua, Sulawesi, Sumatra and Kalimantan were forced to stop operations in 2000 due to conflicts with local people.130 Global Forest Watch surveyed Indonesian newspapers from 1997-98 to estimate that there were some 4000 cases of conflicts between communities and forest industry at that time, concentrated in the areas of logging and conversion to plantation (See Map 4), particularly in the provinces of Riau and Central Kalimantan where this activity is most concentrated.

In another study, activists from The Agrarian Reform Consortium (KPA) compiled reports on attacks on local farmers or activists from nineteen provincial field offices in 1998-1999 to estimate that agrarian conflicts with companies or the state had resulted in 18 deaths, beatings of 190 people, 44 shootings, 12 kidnappings, 775 arrests, 275 houses burnt, 307,109 hectares of local gardens and rice fields burnt, 2578 people terrorized or intimidated, 14 "disappearances", and one rape. KPA activists used these reports to further estimate that during this period the plantation sector (both forest plantations and estate crops such as oil palm) produce by far the most social conflict with local communities, and have the most frequent involvement of the military or police in intimidation or violence.131 This assertion is borne out by a separate study, in which the Indonesian environmental organization LATIN compiled reports of conflicts between local communities and forest companies in Kalimantan alone to estimate that during 1990- 1999 there were 8741 cases of violence and intimidation of community members in relation to logging concessions, 5757 in relation to pulpwood and timber plantations, 3907 in relation to state-owned plantations, and 405 on oil palm or other estate plantations.132

The specific data from these studies cannot be corroborated by Human Rights Watch, but are cited here as an indication that the conflict around forest industry and rural communities is serious, frequent, and geographically widespread.

Protests are particularly common around the pulp and paper industry, and center on very similar complaints throughout the country. Local communities complain that they have suffered from:

    · Loss of land under intimidation from state security, with no recourse or state response to complaints, while compensation (if any) is paid to corrupt village or district leaders;
    · Environmental degradation, including deforestation and pollution or depletion of local water supply;
    · Lack of access to employment opportunities, low wages and insecure employment terms;
    · Bad faith bargaining during dispute resolution, lack of transparency;
    · No access to benefits from resource extraction activities, community development programs undertaken without proper community consultation;
    · Violations of rights to freedom of expression, assembly, and association when protests are suppressed, frequently with violence.

As an indication of the scope of community resistance to massive pulp industry in Riau alone, a sample of local newspapers in the last few years illustrates how widespread such actions are throughout the province (see also the following chapter for national examples):

    · May 1999: Dispute over timber rights led to a community blockade of Arara Abadi road in Beringin, Siak District. (Utusan May 1, 1999). Human Rights Watch interviews with community leaders in Beringin (February 3, 2002) reported that this blockade also resulted in an attack by some 300 club-wielding Arara Abadi security guards:

They chased people who were at the blockade point and threatened to kill everyone. They smashed windows of houses. They beat several people at the post with wooden clubs--One person was beaten in the head until he was bloody, and someone in the crowds of the company employees gave him some first aid. The Pam Swakarsa [company militia] were not wearing uniforms, but everyone knew them because they had seen them at the company before. What's more, one of the senior field managers from the camp in Perawang was there directing the action.133

    · April 1999: Land dispute led to a community blockade of Riau Andalan Pulp and Paper (RAPP) trucks, District Kampar, Langgam. (Riau Pos, April 19, 1999).
    · August 1999: Land dispute and broken company promises to provide community development led to community blockade of Arara Abadi's road in Kampar District, Palangkalan Kuras.(Riau Pos, August 27, 1999).
    · June 2000: Land dispute led to community members' illegal harvest of acacia trees planted by Arara Abadi on contested land in Cemerlang, Minas district. (Riau Pos, June 3, 2000).
    · October 2000: Land dispute led to a community blockade of RAPP logging trucks, in District Kuansing, sector Cerenti (Pekanbaru Pos, October 15, 2000).
    · July 2001: Land dispute led to community blockade of twenty RAPP trucks in Kuantan Tengah subdistrict, sector Cerenti. (Riau Pos July 27, 2001)
    · February 2001: Land dispute led Pantiacermin village cooperative to cut timber on land claimed by Arara Abadi. Several hundred of Arara Abadi's company security arrested 60 loggers, who were later released as they were reported to have valid permits. The loggers claim to have been beaten by the security guards. Arara Abadi denied the attack. (Riau Pos February 26, 2001).

Such conflicts appear to have increased in frequency with increasing economic pressures, but are by no means new. The same combination of intimidation, military economic intrigue, absence of effective law enforcement, impunity for rights violators, and unchecked industrial expansion that have produced such a volatile mix in Riau have long been present in other regions home to major pulp and paper operations. One infamous example is that of Indorayon (PT Inti Indorayon Utama), a pulp, paper, and rayon mill owned by another giant family conglomerate, Raja Garuda Mas.134 In 1984, Indorayon received the initial license for its Porsea mill in North Sumatra. Community discontent began, as in other contexts, following seizure of community land for the plantation without compensation. The agricultural livelihoods of women were especially affected. On February 1, 1990, ten elderly local women in the village of Sugapa, North Sumatra were arrested and sentenced to six months in prison for destroying plantation eucalyptus trees in order to plant food crops on what they considered to be their ancestral land. Locals claimed that Indorayon had illegally appropriated their land by colluding with local sub-district and village heads, who illegally sold 62 families' land.135

Protests arose around further complaints about air and water pollution from the mill, and became increasingly exacerbated until local people began blockading roads to the plant in May 1998. In March 1999, local activists from environmental NGO WALHI who were following the protests closely, reported that the police were called in to quell the protests--seven people were shot by police, one died instantly; 90 were allegedly abducted and tortured or otherwise mistreated, one of whom later died in hospital from injuries, 2 "disappeared" and are presumed dead, five remain blinded or crippled from injuries; 7 had their homes or shops vandalized.136 Four employees were subsequently kidnapped, 3 of whom were killed.137 Finally public outcry forced transition President Habibie to close the mill until a transparent audit of its operations and relations with local communities could be conducted.138

Although the audit was never completed, the large corporate debt of the conglomerate Raja Garuda Mas has created pressure to reopen the plant. Regional activists have complained, and community protests and Human Rights Watch interviews with private security analysts confirm, that the company has done little to address community complaints, and that more conflict is therefore highly likely.139 In the past, local communities vowed that if the state forced the reopening of the mill, "Any truck passing will be stoned and maybe burned. This is war."140 At this writing, Indonesian human rights lawyers reported that Brimob and military had arrested 21 protestors against the plant's reopening and 500 had fled the area, fearing violence.141

These brief sketches are intended not to provide a detailed analysis of these specific conflicts but rather to illustrate the national scope and striking similarity in the way these plantations have operated in relation to local communities, the complaints they have engendered in the community, and the protests and violence that has inevitably resulted. This lawlessness lends itself to the intervention of protection rackets and provocateurs, who allegedly incite people to protest or commit vandalism and then demand money from the company (see Chapter VI below).142 These developments affect not only the general state of law and order and the expanding cycles of violence in Indonesia, but also contribute to crackdowns on activists as "provocateurs" and the suppression of legitimate forms of protest.

There have been many positive changes since the end of Soeharto's rule that have brought new opportunities for respect for indigenous land rights and equity in participation in forest management, as well as more sound management. However, to date these opportunities have yet to be adequately capitalized upon to bring about meaningful reform. Indeed, the situation in many ways is more dangerous for forest dependent people than ever before.

Arara Abadi's Private Security Arrangements
Increasing social conflict and failures of law enforcement have made company private security forces a crucial part of maintaining control over operations. Arara Abadi's private security forces are called Pam Swakarsa (Pasukan Pengamanan Swakarsa, literally "Voluntary Security Troops"-- although they are paid, not volunteers)143 or PamHut (Pengamanan Hutan, literally, "Forest Security"). They are paid company employees, but have close ties to local police. Arara Abadi representatives themselves told Human Rights Watch that Pam Swakarsa received training from police. APP has also provided significant in-kind benefits to local police. APP staff told Human Rights Watch that APP had funded the new police station in Perawang (the largest town in the newly established district of Siak, where the Indah Kiat mill is located),144 and officials from Brimob special mobile police force145 reported that APP had paid for new Brimob barracks and other facilities in the provincial capital of Pekanbaru.146 Local police and Brimob periodically patrol together with Pam Swakarsa and provide back up.147

In the cases in the following chapter, witnesses reported that police were present and did not intervene to stop the attacks. In some cases, police even encouraged the actions of the Pam Swakarsa; in one instance, an officer held a gun to one of the protesters' heads. Arara Abadi Security and Risk Management directors told Human Rights Watch that the Pam Swakarsa have no guidelines for the use of force or accountability procedures.148 This lack of accountability makes the security guards little more than paid thugs. Without accountability or state regulation, it is unsurprising that these company security forces have been used to attack communities with disputes against the company, and have done so with almost complete impunity.

APP/Sinar Mas Group and Arara Abadi are not unique, however, in these private security arrangements and their association with the police, in their means of seizing local lands, nor in the rising unrest around their operations. Rather, APP is representative of what has been common practice and its effects in the sector as a whole for some time. However, the focus of this report on APP and Arara Abadi is due to the string of organized attacks on communities by persons hired by Arara Abadi, which Human Rights Watch believes is the likely outcome if these practices are left unchecked by the government. Concern is also raised by the inattention to the problem by the company even after widespread public and media attention to the attacks, and the potential for more conflict as APP increases its wood demand and area for plantation.

Neither are the villages investigated for this report exceptional-they come from different areas of Arara Abadi's concession and are of two different indigenous ethnic groups, Sakai and Petalangan Malay. Like many of the villages who found themselves and their gardens enclosed within Arara Abadi's concession, they were intimidated into giving up their land with little or no compensation. When they protested, they were ignored by both the company and the government until they took measures to blockade roads or fell concession trees and were subsequently attacked by company Pam Swakarsa security forces. Similar conflicts have occurred not only throughout Riau, but throughout Indonesia. This report illustrates the high costs of misguided national and international polices on forests and the rights of local people.

81 While the immediate cause that led to the collapse of regional currencies and economies in 1997 was the rapid flight of foreign capital, financial analysts widely concur that among the primary roots of Indonesia's economic collapse were fundamental structural vulnerabilities created by speculative excesses, poor financial risk management, heavy reliance on foreign lending that were all enabled and indeed encouraged by corruption, weak governance and inadequate regulation of the banking system. Among these analysts are Indonesian economist and now state minister for national development planning, Kwik Kian Gie, American economist Paul Krugman, the International Monetary Funds (IMF) and World Bank's own economists, and former Coordinating Minister of Finance Rizal Ramli. See "The Doomsayers whose voices went unheeded," Straits Times, March 23, 1998; Mari Pangestu and Maggir Habir, "Boom, Bust and Restructuring of Indonesian Banks," IMF Working WP02/66, Washington, D.C., April 2002; "IMF Factsheet: IMF Response to the Asian Crisis," International Monetary Fund, January 17, 1999, (retrieved on October 3, 2002); "Combating Corruption is Key to Indonesia's Economic Recovery, World Bank Advises," World Bank Press Release No. 99/1947/EAP, September 19, 1998, (retrieved November 4, 2002); "Recovery from the Asian Crisis: The IMF Role," IMF staff, June 23, 2000, (retrieved October 3, 2002); and Jonathan Pincus and Rizal Ramli, "Indonesia: From Showcase to Basketcase," Cambridge Journal of Economics 22 (6): 723-34, 1998.

82 Figures cited by James Wolfensohn, in his address to the 1998 World Bank/IMF annual meetings. He cites the estimate before 1997 as 11 percent, but this figure has been quite controversial. Dr. Jeffrey Winters, a professor of political science at Northwestern University, was a USAID consultant during the early 1990s and reports that the earlier official poverty estimates were a pure government fabrication and that the real figures were substantially higher. He further alleges that the international donor institutions had full knowledge of this but repeated the government's stimates nonetheless. See Marcus Brauchli and Jay Solomon, "Speak No Evil: Was the World Bank Part of Indonesia's Problem?" Asian Wall Street Journal, June 15, 1998. In his 1998 speech, even Wolfensohn admitted that the 11 percent estimate was based on a poverty line defined at those who earned U.S.$1 a day, which obscured those who earned just $1.25 a day.

83 World Bank, Indonesia: Environment and Natural Resources in a Time of Transition (Washington, D.C.: The World Bank Group, 2001).

84 World Bank, Indonesia in Crisis: A Macro-Economic Update (Washington, D.C.: The World Bank Group, 1998).

85 There have been seven chairmen in four years.

86 M. Taufiqurohman, Ronny Fibri, Agus Hidayat, and Iwan Setiawan, "The Big Fish Never Lose," Tempo, January 28, 2002. Press reports allege that former President Abdurahman Wahid even instructed Attorney General Marzuki Darusman to delay prosecution of prominent tycoon debtors Texmaco Group chairman Marimutu Sinivasan, Barito Pacific Group chairman Prajogo Pangestu, and the chairman of the Gadjah Tunggal Group, Syamsul Nursalim, on the grounds that these businesses employed thousands of workers and were needed to aid economic recovery. "Inequality before the Law," Jakarta Post, October 21, 2001.

87 Christopher Barr, David Brown, Anne Casson, and David Kaimowitz, "Corporate Debt and Indonesian Forestry Sector," in Which Way Forward? People, Forests and Policymaking in Indonesia, Carol J. Pierce Colfer, and Ida Aju Pradnja Resosudarmo, eds., (Washington, D.C: Resources for the Future Press, 2002); Barr, "Profits on Paper" in Banking on Sustainability; Brown, "Addicted to Rent" and "Forgive Us Our Debts"; Scotland, Frasier and Jewel, "Roundwood Supply and Demand"; Casson, "The Hesitant Boom: Indonesia's Oil Palm Sub-Sector in an Era of Economic Crisis and Political Change," occasional paper No. 29 (Bogor, Indonesia: Center for International Forestry Research, June 2000); Stephanie Fried and Titi Soentoro, "ECA Finance in Indonesia: Ecological Destruction and Corruption" Environmental Defense and Bioforum, Occasional Paper 2, Washington, D.C., December 1, 2000; and Haike Mainhardt, "IMF Intervention in Indonesia: Undermining Macroeconomic Stability and Sustainable Development by Perpetuating Deforestation," WWF Macroeconomics Program Office, Washington, D.C., August 2001.

88 Brown, "Addicted to Rent"; and Barr, Brown, Casson and Kaimowitz, "Corporate Debt" estimate that 70 percent of this debt is held by only ten large conglomerates. These same conglomerates were further calculated to be responsible for U.S.$2.4 billion in domestic non-performing loans and U.S.$15 billion in foreign debt.

89 Barr, Brown, Casson and Kaimowitz "Corporate Debt"; Barr, Banking on Sustainability.

90 Marzuki Usman, former head of the Capital Market Supervisory Board (Bapepam), "RI Banking System: Rewarding the Bad Guys," Jakarta Post, July 24, 2002. See also Mari Pangestu and Manggi Habir, "Boom, Bust, and Restructuring of Indonesian Banks," IMF Working Paper, Jakarta, April 2002. The government has announced a plan to lift the guarantee by February 2004, in what news magazine Tempo termed "Finance Minister Boediono's most valuable present to the Indonesian people," and replace it with a savings guarantee scheme modeled on the U.S. Federal Deposit Insurance Corporation (FDIC) for accounts less than Rp100 million. "Changing the Bedclothes," Tempo, August 5, 2002.

91 Indonesian Bank Restructuring Agency (IBRA), Monthly Report no 11, February 2001. (retrieved October 3, 2002).

92 Tom Wright and I Made Senatana, "Foreign Creditors Call for Independent APP Management," Dow Jones Newswire, June 24, 2002.

93 Official regulations do prohibit old owners from buying back their non-performing loans at a discount, but most analysts agree that there is little that would prevent such sales if a third party is used. "Sharkbait?" Tempo, July 30, 2002.

94 See also, M. Taufiqurohman, Leanika Tanjung and Rian Suryalibrata, "Party Time for the Rich," Tempo, July 23, 2002; Dadan Wijaksana, "Bad Debtors May Benefit from IBRA Loan Auction," Jakarta Post, July 15, 2002; Timothy Mapes, "IBRA Unit Halts Sales On Fine From Regulator --- Decision Crimps Indonesia's Reform Plans," Asia Wall Street Journal, June 5, 2002.

95 Dadan Wijaksana, "Experts Criticize IBRA's Plan on BII's Rights Issue," Jakarta Post, May 15, 2002; and M. Taufiqurohman, Agus S. Riyanto and Rian Suryalibrata, "Red Carpet for Lousy Performers," Tempo, May 4, 2002..

96 U.S.$13 billion of this liquidity was misallocated by banks for expansion or speculation on the rupiah.

97 "In Asia, Indonesia Looks Most Vulnerable to Argentine-Style Crisis," International Herald Tribune, January 15, 2002.

98 Bert Hoffmann, Senior Economist at the World Bank Indonesia, "Issues in Indonesia's Budget Management," DFID workshop for the Indonesian Department of Defense, Jakarta, February 26-27, 2000,$File/BH-022702.pdf (retrieved November 4, 2002).

99 Barr, Banking on Sustainability.

100 Ibid. Industry analysts say that the 40 percent price dip in 2000/200 was in part (together with U.S. economic downturn) due to the "aggressive" overcapacity of competing pulp companies APP and APRIL (Ausnewz Pulp & Paper Yearbook 2001, Hobart, Tasmania: Ausnews Intelligence Service). See also Prime Sarmiento, "Aggressive Sales Of APP Pulp Drag Market Lower - Sources," Dow Jones Newswires, May 4, 2001.

101 APP never officially filed for bankruptcy, but it stopped all payment on dollar denominated debt and declared a debt moratorium. In April 2001, Standard & Poor gave it a "D" rating, signifying default. See "Asia's Worst Deal," Business Week, August 13, 2001.

102 A company is "delisted," or has its stocks removed from trading on the NYSE, when it falls below a threshold stock price of U.S.$1 per share. See "NYSE Suspends Trading in Asia Pulp & Paper Company Ltd. and Moves to Remove from the List," (retrieved November 21, 2002) and "NYSE 2001 Fact book," (retrieved November 21, 2002).

103 Abe De Ramos, "From Junk to Gold," Corporate Finance, October 2000; and Michael Shari, "Asia's Worst Deal," Business Week, August 31, 2001.

104 See Consultative Group on Indonesia (CGI) meetings 2000- 2002, including the January 2000 Post-CGI meeting hosted by the World Bank entitled "Removing the Constraints," which was specifically devoted to forestry reform; Letter of Intent from Indonesian government to the IMF, January 1999; Ministry of Forestry statement to the CGI, February 1, 2000. Much of the initial impetus for forestry reform following the fall of Soeharto can be attributed to engagement of the IMF and CGI in the forest sector through conditionalities for the U.S.$43 billion emergency loan and subsequent multilateral and bilateral lending. In addition, the World Bank hosted a Post-CGI seminar on January 26, 2000 entitled "Removing the Constraints," which brought together a broad range of stakeholders from government (including representatives of the ministries of forestry, finance, trade, and planning) as well as representatives from civil society organizations, academic institutions and the bilateral and multilateral donor communities to discuss forest sector reforms. Following the seminar the Indonesian government agreed to create an Inter-Departmental Committee on Forest (IDCF) to formulate a national forest policy and address eight of the most pressing issues discussed at the seminar, including coordinated action against illegal loggers, especially within national parks; downsizing the forest industry to balance demand with legally available wood supply; closure of heavily indebted wood industries under the control of the Indonesian Bank Restructuring Agency (IBRA); and linking debt write-off with capacity reduction. But progress to date on these commitments has been very slow.

105 "Riau Termiskin di Indonesia," Riau Pos, March 10, 1999; and "Pembangunan SDM," Riau Pos, April 9, 1999.

106 "Kedaulatan Riau Dideklarasikian: Riau Merdeka Menyusul," Riau Pos, March 16, 1999; and Governor H.E. Saleh Djasit, "A View from the Provinces: Riau," presentation to the U.S.-Indonesian Society, Washington, D.C., September 18, 2001.

107 A U.N. sponsored referendum on independence from Indonesia was held in August 199 in which the East Timorese voted overwhelmingly for independence. When the results were announced, loyalist militias, suspected to have been organized and armed by the Indonesian military, began massacring the local population and razing the capital city of Dili. U.N. Peacekeepers finally arrived on September 20, 1999.

108 First mandated by parliament in 1998 (Tap MPR No XV/MPR/1998 of Fiscal and Administrative Decentralization) following Soeharto's resignation.

109 Policies still controlled by the central government are foreign policy, national security, judiciary, fiscal policy, and religion.

110 Some areas receiving special autonomy packages, such as Papua and Aceh, which will receive a higher percentage (70 percent of oil and gas revenue) in an attempt to quell separatist movements.

111 Christopher Duncan, "The Aftermath of Civil War," Inside Indonesia, January 2002; and "Menyalip Pesta di Tikungan," Gatra, July 27, 2002.

112 McCarthy, "Wild Logging." Another form of laundering illegal wood is for the logging bosses to bribe the police or forestry department to "confiscate" illegal wood, which is then "auctioned off" through a unfair bidding process, allowing the owners to receive all the necessary permits and papers for their illegally harvested wood at a low price. Global Forest Watch, Indonesia: State of the Forest.

113 Governmental Decree PP 34/ 2002 on Forest Planning and Utilization

114 "Tokoh Riau Tolak Revisi UU Otda," Riau Mandiri, February 5, 2002; "Revisi UU Otda No 22 th 99 Bahayakan Daerah," Riau Mandiri, February 5, 2002,

115 "Unity in danger, Mega warns," Jakarta Post, October 30, 2001. Indeed, this was the reason that administrative powers under autonomy were given to the district, rather than the provinces, which might be powerful enough and with enough regional ethnic identity to attempt to secede.

116 Sadanand Dhume, "A Windfall for Riau," Far Eastern Economic Review, February 21, 2002.

117 "Ehtishad Ahmad and Bert Hofman, "Indonesia: Decentralization-Opportunities and Risks," IMF and World Bank, Jakarta, March 2000.

118 Lesley Potter and Simon Badcock, "The Effect of Indonesia's Decentralization on Forests and Estate Crops: Case Study of Riau Province, the Original Districts of Kampar and Indragiri Hulu," CIFOR, Bogor, Indonesia, September 18, 2001, percent206-7.pdf (retrieved November 4, 2002).

119 Derek Holmes, "Deforestation in Indonesia: A Review of the Situation in 1999," Jakarta, World Bank, January 2000; H. Kartodihardjo and A. Supriono, "The Impact of Sectoral Development on Natural Forest Conversion and Degradation: The case of Timber and Tree Crop Plantations in Indonesia," CIFOR Occasional Paper No. 26 (E).; Global Forest Watch, Indonesia: The State of the Forest.

120 Global Forest Watch, Indonesia: State of the Forest.

121 Memorandum of Financial Policies (MEFP), January 15, 1998, paragraph 50. "To strengthen overall environmental sustainability, the government will draft and establish implementation rules for the new environmental law by March 1998. In addition, government will review and raise stumpage fees, auction concessions, lengthen the concession period, and allow transferability by June 1998, and will implement performance bonds and reduce land conversion targets to environmentally sustainable levels by the end of 1998."

122 The Consultative Group on Indonesia (CGI) as the name suggests, is a consultative body and does not place conditions on the government. However, each individual donor identifies its own conditions for loans. The IMF is a member of the CGI but does not pledge at the CGI as it loans money to the Bank of Indonesia, not to the government.

123 The districts' claims have been countered by the recently promulgated Government Decree 34/2002 on Forest Planning and Utilization, which recentralized much of the permitting process and the authority for designation of lands for conservation and protection. However, without effective law enforcement, there will be little way for the central Ministry to reassert its control

124 Legislation that would grant Presidential powers to dissolve local parliaments was proposed but defeated due to outcry in the provinces. Santi W.E. Soekanto, "Regional autonomy-a double standard set in motion?" Jakarta Post, December 27, 2001; and "Autonomy-what Jakarta giveth, Jakarta taketh away," Jakarta Post, December 31, 2001.

125 Tiarma Siboro and A'an Suryanan, "Councilors reject autonomy revision," Jakarta Post, January 31, 2002; "Daerah Tidak Ingin UU Otda Direvisisi," Riau Mandiri, February 6, 2002; "Pemerintah Pusat Ingin Kembalikan Sistem Sentralisasi," Riau Mandiri, February 7, 2002. The stakes are obviously high, especially in resource-rich provinces, as illustrated by the fistfight that broke out on the national parliament floor during a debate over the role of regional representatives. Bambang Nurbianto, "Brawl brings spotlight on regional representatives faction," Jakarta Post, November 3, 2001.

126 Potter and Badcock. "The Effect of Indonesia's Decentralization."

127 CIEL and ELSAM, Whose Resources?

128 Reed Wadley, "Community Co-operatives, Illegal Logging, and Regional Autonomy: Empowerment and Impoverishment in the Borderlands of West Kalimantan, Indonesia," presentation (copy on file at Human Rights Watch) at the conference on Resource Tenure, Forest Management, and Conflict Resolution, Australian National University, Canberra, April 9-11, 2001; McCarthy, "Wild Logging"; "Forests and Regional Autonomy: All in the Hands of the Regents," Tempo, July 24, 2001; and "Land disputes disruptive, confusing in Irian Jaya," Jakarta Post, November 10, 2001.

129 Police-organized militia clashed with student protestors during the 1998 special session of the parliament. "Civilian guards pose threat in Indonesia says rights group," Human Rights Watch press release, November 10, 1998. These militia have frequently have been accused of violence and extortion against Jakarta street vendors, pedicab drivers, residents of squatter settlements, and recent immigrants from outlying areas who have no Jakarta ID card. "Public furious at Tramtib's violence, demand changes," Jakarta Post, January 26, 2002. In addition, gangs of thugs attacked communities protesting oil palm plantations in Riau. "Meningkat, Pengungsi dari Tembusai," Media Indonesia, October 28, 1999; and Muhammed Saleh, "Awas Konflik Etnis di Tanah Melayu," Forum Keadilan, Edition 15, July 28, 2002.

130 Indonesian Forest Industry Association (APHI), "Darurat: Konflik Sosial," Majalah Hutan Indonesia (7): March 2001

131 Dianto Bachriadi, "Kekerasan dalam Persoalan Agraria dan Relevansi Tututan Dijalankannya Pembaruan Agraria di Indonesia Pasca Orde Baru," unpublished manuscript (on file at Human Rights Watch), Jakarta, Konsorisum Pembaruan Agraria (KPA), 2000.

132 "Community Forest System Managements (SHK) in Indonesia," Voices from the Forest, August 2000, (accessed July 8, 2002).

133 Human Rights Watch interview with village leader and several other witnesses, Beringin, February 3, 2002.

134 Indorayon was formerly majority owned by Singapore-based holding company Asia Pacific Resources International Limited (APRIL), but in 1999 APRIL divested its shares in the troubled mill to its parent conglomerate Raja Garuda Mas. See APRIL's website (retrieved November 25, 2002). Like APP, APRIL is also heavily indebted and also owns a mill in Riau (RAPP) that has been the object of community protests, though not to the degree of APP or Indorayon. Land disputes in Delik village, Riau in 1997, led to clash in which police opened fire on a peaceful demonstration, killing one local farmer. One activist was arrested in the confrontation and jailed for five years for incitement against the government. Marganti Manaloe, Penjaraku: Ironi Penegakan Hak Asasi (Pekanbaru, Riau: Opsi, 2001).

135 "The IIU Case: Pulp and Paper versus the People," Ekonesia 4: 2, August 1990.

136 Wahana Lingkungan Lestari Indonesia (WALHI), "Daftar Korban Kekerasan Aparat Militer Damalm Aksi Menutnut Ditututpnya PT IIU, July - November 1998," unpublished document (copy on file at Human Rights Watch), Medan, 1998.

137 Richard Borsuk, "Toba Pulp to Dismantle Rayon Plant," Asian Wall Street Journal, July 5, 2002.

138 "Government Suspends Indorayon operation," Jakarta Post, March 20, 1999.

139 Human Rights Watch interviews with Northern Sumatra environmental activist, Jakarta, February 19, 2002; with private security expert, Jakarta, February 11, 2002.

140 Tom Bannikoff, "Old Troubles, New Rules," AsiaWeek, November 13, 1998; Apriadi Gunawan, "Indonesian decision to permit Indorayon to reopen sparks protests," Jakarta Post, May 29, 2002; and "Over 5000 protest the reopening of Indorayon," Jakarta Post, June 11, 2002.

141 "16 protesters held, 500 flee over Indonesian plan to reopen pulp plant," Agence France Presse, November 24, 2002.

142 Human Rights Watch interviews with private security firms in Jakarta, January 28, 2002, February 11, 2002; in Pekanbaru Riau, February 7, 2002; in Pangkalan Kerinici Riau, February 15, 2002.

143 Pam Swakarsa is a term that came into wide circulation as the name for civilian security units formed by the police to protect special parliamentary sessions in Jakarta, but is now often used generically for civilian security.

144 Human Rights Watch interviews with Indah Kiat and Arara Abadi field staff, Perawang mill site, February 15, 2002.

145 Brimob, the Mobile Police Brigade, is the elite police special force trained to mobilize quickly to deal with emergencies and especially mass demonstrations and riots. Although the police were administratively separated from the armed forces in 1999 in an attempt to civilianize the police force, since that time, Brimob has become the military arm of the police and has earned itself a reputation, particularly in Papua and Aceh, as the most brutal security force in the country. Brimob has been implicated in extra-judicial executions, torture, disappearances, and collective punishment in addition to violent suppression of freedoms of expression, assembly and association. See Human Rights Watch, "The War in Aceh," A Human Rights Watch Report, vol. 13 no. 4 (C), August 2001; and "Violence and Political Impasse in Papua," A Human Rights Watch Report, vol. 13 no. 2 (C), July 2001.

146 Human Rights Watch interview with Brimob Assistant to the Commissioner, Pekanbaru, February 19, 2002.

147 However, APP officials complained to Human Rights Watch that the police were frequently unresponsive to their requests for assistance. Human Rights Watch interviews with APP and Arara Abadi central staff, Tanggerang, February 13, 2002; with APP/Indah Kiat and Arara Abadi field staff, Indah Kiat mill site, Perawang, Riau, February 14, 2002.

148 Human Rights Watch interviews with Tumpal S. and Rasyim N.A. (Director and Deputy Director of Arara Abadi Security and Risk Management Division), Perawang, Riau, February 14, 2002. Mark Werren (leader of the APP/SMG Sustainability Task Force, and the representative who most often meets with foreign NGOs and journalists) first told Human Rights Watch that the Pam Swakarsa were not armed, but when pressed further replied, "Well, maybe they have makeshift batons of some sort." Rasyim N.A. also initially denied that the Pam Swakarsa were armed in any way but when pressed admitted that they carried "only rattan canes for self-defense." Press photos of Arara Abadi Pam Swakarsa (Riau Pos, February 6, 2002, p. 17, on file at Human Rights Watch) verify the large clubs that villagers had described.

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