Indonesian Palm Plantations and Citigroup

The rainforests of Southeast Asia support an estimated 656 mammal species and 850 amphibian species—almost one-third of all those in the world. Some of the world’s rarest species are found in Southeast Asia, including the only great ape in Asia, the orangutan. Although orangutans once ranged throughout much of Southeast Asia, today they are found only on the Indonesian islands of Borneo and Sumatra.

The number and distribution of orangutans has been greatly affected by the destruction of the great ape’s forest habitat. In the last twelve years, Indonesia lost over forty-two million acres of tropical forest. During approximately the same time, the population of wild orangutans declined by an estimated thirty to fifty percent. Oil palm plantations are a primary cause of the conversion of Indonesia’s natural forests to non-forest uses. In the 1990s, nearly 500,000 acres were planted with oil palm each year.

Oil palms produce a vegetable oil that is used for a myriad of food and non-food products. Palm oil is set to replace soy oil as the world’s most consumed edible oil by 2012. Indonesia is expected to take the lead in global palm oil production a decade from now. With an estimated output of 6.2 million tons in 1999, Indonesia currently ranks second after Malaysia as the world’s largest palm oil producer.

Indonesia already has over eight million acres of oil palm plantations, mainly located in Sumatra. Investors are focusing on expanding the palm oil production base in Indonesia, the cheapest palm oil producer worldwide. In the last few years, over six hundred domestic and foreign investors applied for the release of nearly fifty million acres for oil palm development, one-tenth of Indonesia’s total land base.

Because of the present chaos in Indonesia’s financial sector, plantation companies are seeking to acquire debt and equity primarily from foreign financial institutions. American banks are already significant financiers of Indonesia’s oil palm sub-sector—including Citigroup, through its involvement with PT PP London Sumatra (LonSum). LonSum is currently in the process of clearing and planting 372,000 acres of new palm oil plantations. In 1997, LonSum cleared and planted 134,000 acres for palm plantations.

The financial relationship between Citicorp and LonSum started in 1994, when Citicorp arranged a syndicated loan of 183.5 million dollars to finance the acquisition of LonSum by the Indonesian company PT Pan London Sumatra Plantation (PLSP). In 1996, the loan was refinanced by a loan syndication of 132 million dollars, arranged by HSBC (Singapore) and UBS (Switzerland). Citicorp was also among the banks involved in this syndicate. Of this second loan until now only 10 million dollars has been repaid because LonSum ran into financial problems during 1998. LonSum currently owes 92 million dollars to Citicorp and two other banks on several derivative contracts: 122 million dollars plus 15.6 million dollars accrued interest to Citicorp and 21 other banks on its syndicated loan; and 40 million dollars on promissory notes to Citicorp (10 million dollars) and three other banks.

Meanwhile, oil palm plantations have become an increasing problem for the people, the wildlife, and the environment of Indonesia. In 1997 and 1998 fires scorched twenty-five million acres of land in Sumatra and Kalimantan. The Indonesian authorities acknowledge that plantation companies—who use fire as a cheap and quick means of land clearing—are in large part responsible for the fires. Between forty and eighty percent of all fire hot spots appeared in plantation areas. The smog affected the health of seventy million people in Southeast Asia. Despite Indonesia’s calls upon plantation companies to stop burning, several hundreds of fire hot spots reappeared in Sumatra and Kalimantan in 1999 and the first months of 2000. In March 2000, weather satellites observed 1,200 fire hot spots in Sumatra alone. LonSum has repeatedly been accused of causing forest fires in South Sumatra, North Sumatra, and East Kalimantan.

Oil palm plantations also require the use of large quantities of fertilizers and insecticides, which pollute local land and rivers. One report found that converting one million acres of land into oil palm plantations in West Kalimantan would result in the use of 145,000 liters of insecticides and 5,900 tons a year of other chemical substances each year. Other environmental impacts of oil palm plantations include land erosion and loss of soil nutrients.

Oil palm plantations also have a negative impact on local indigenous communities. Often, indigenous peoples’ livelihood is based on the extraction of local, renewable, non-timber resources such as rubber, fruit, honey, and medicinal plants. Throughout Indonesia, however, indigenous peoples are increasingly finding their land expropriated for conversion into oil palm plantations.

In Sumatra and Kalimantan, LonSum converted tropical forests and indigenous rubber gardens into oil palm plantations. In South Sumatra, the company cleared protected production forests. Apart from discontent about forest clearing, local communities claim that LonSum uses members of the armed forces or local government officials to intimidate local people. LonSum’s main office in South Sumatra is frequently closed as a result of protests staged by affected communities.

Because of LonSum’s financial difficulties, its assets are currently much smaller than the total of its liabilities, which puts the fate of the company in the hands of its creditors. Of these creditors, Citicorp is one of the most important. In February 2000 LonSum appointed Credit Suisse First Boston as its advisor in an ultimate attempt to restructure its debts. Its main creditors are now in a very strong position to demand policy change from the company, in exchange for its desperately needed debt restructuring. Such policy change must involve a radical change in the company’s environmental and social performance.

(C) Rainforest Action Network

Click Here to return to "World Bank and Citigroup"