Case study PT Case study PT Gunung Gunung Mas Mas RayaRaya

Assessment of investment risks associated withenvironmental and social issues relatedto an Indofood Sukses Makmur subsidiaryin Rokan Hilir, Riau (Indonesia)

Report prepared for WWF Asia Pacific Forest Program & WWF Indonesia

July 2003

A I D E nvironment

Case study PT Case study PT Gunung Gunung Mas Mas RayaRayaAssessment of investment risks associated with environmental andsocial issues of an Indofood Sukses Makmur subsidiary in Rokan Hilir,Riau (Indonesia)

Report prepared for WWF Asia Pacific Forest Program & WWF Indonesia

This report was made possible with the aide of an USAID grant

Eric Wakker (AIDEnvironment)Jan Willem van Gelder (Profundo)

July 2003

A I D E nvironment

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Email: info@aidenvironment.org Email: info@profundo.nl

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Summary and conclusions

In the coming years the area planted with oil palm plantations in Indonesia will expandto at least 9 million hectares compared to around 3.5 million hectares at present andfurther expansion is very likely to occur. This development is driven by forecasteddramatic growth in demand for oil palm products globally and would not be possiblewithout the substantial financial support of Indonesian and international financialinstitutions. We expect that in the coming years, financial institutions will continue tofacilitate significant capital input in the sector.

Up to date, financial services to the oil palm sector have primarily been reviewed againststandard risk assessment parameters. However, in the past five years it is increasinglyrecognised that these do not prevent debtors from contributing to extensive tropicaldeforestation, forest fires and disruption of local community livelihoods. Most financialinstitutions have yet to take such externalities into account in their credit riskassessments.

This report forms part of a larger research project co-ordinated by WWF Asia & PacificForest Program which aims to show that the various types of financial institutionsproviding services to oil palm companies need to adopt effective investment screens thatguarantee socially and environmentally responsible practises. In 2001, the four biggestDutch banks (ABN AMRO Bank, Rabobank, Fortis and ING Group) were the first totake into account new risk assessment parameters for their investments in theIndonesian oil palm sector. This case study evaluates the effectiveness of the investmentscreen of a Dutch bank in relation to a loan arranged to an Indonesian company after ithad committed to introduce new risk assessment standards.

The case refers to a syndicated two-year US$ 100 million loan for Indofood SuksesMakmur arranged by ING Bank (The Netherlands) in April 2002. The deal wasdescribed as the largest offshore loan financing for an Indonesian corporate since thestart of the Asian financial crisis in 1997. ING Group has stated that this transaction wassubject to its adjusted risk assessment policy and that its credit committee wasconvinced that Indofood had complied. The case gained even greater relevance when itwas announced that ING Bank would co-manage the issuance of five-year bonds worthUS 125 million for Indofood in the first week of June 2003.

ING’s forest policy states the bank will not finance companies and projects that areguilty of illegal deforestation and / or burning of tropical rainforests (HCVF) for thedevelopment of palm oil plantations. Nor will the bank finance companies that do notsufficiently respect the rights of local communities while also social, labour and otherlaws need to be complied to by the client. The policy is not applicable to financing ofholding companies, as long as these are not involved in deforestation / or burning oftropical rainforest. Specifically to the Indofood transaction, ING specified that the loancould not be used for the acquisition of new plantation land or take over of existingplantations.

For the purpose of evaluation, the research focused on the management and expansionactivities of one of several ultimate daughter companies of the Indofood Sukses Makmur,PT Gunung Mas Raya. This plantation subsidiary operates 12,000 hectares of oil palmestates in the North of Riau province, Sumatra. Most of its estates were developed in the1980s, but since 1998-1999 PT Gunung Mas Raya recommenced developing plantationblocks in a peat swamp forest adjacent to previously planted estates. This development

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was ongoing at the time that ING Bank arranged its loan under its new investmentpolicy.

PT Gunung Mas Raya, together with most other Indofood subsidiaries have introduceda number of “Better Management Practises” in its existing estates. For example, allorganic waste materials produced in the plantation and Crude Palm Oil mill are recycledin the estates. Also, the company has an Integrated Pest Management program and isone of the few Indonesian companies that use barn owls for rat control in all of itsestates. Hence, the company is clearly able to address a number of risks associated withenvironmental management. However, this study has also found that the company’sactivities also expose Indofood as well as ING Bank to risks:

Type of risk toIndofood

Type of risk toING Bank

Comments

Potentialexpansion outsideconcessionboundaries

Legal liabilityriskReputation risk

Reputation risk • According to (government) concession mapsoverlaid with satellite images, the companyappears to operate outside its concession area.

• Government maps may not be accurate.Deforestation ofpotential HighConservationValue (HCV)Forest

Reputation risk Reputation risk • The forest provides tiger (endangered, legallyprotected) habitat; watershed functions andthe area is subject to land disputes.

• The forest block cleared is limited in size (1,000ha).

Peat swampconversion

Operational risk Reputation riskCredit risk

• Risk of flooding; higher cost of plantationdevelopment; dehydration of swamp forest;contribution to carbon emissions.

• Company appears to address basic operationalrisks.

Illegal logging Possibly legalliability risk

Reputation risk • Company benefits from this activity.• Company may not be able to stop these

activities.Burning Legal liability

riskOperational risk

Reputation riskCredit risk

• Company denies using fire for land clearing.• Company clearly benefits from 'accidental' fires• Company makes no serious effort to extinguish

fires.Human-mammalconflict

Operational risk Reputation risk • Viability of remaining tiger population is inquestion

Land disputes Operational risk Reputation riskCredit risk

• Local communities are frustrated with lack ofinterest shown by government and company tosatisfactorily address their land claims.

• Indigenous peoples' traditional land claims arenot recognised by Indonesian law.

The extent to which PT Gunung Mas Raya’s activities are in conflict to Indonesian law,and thereby ING’s policy, could be subject to much debate. There is a lack of hardevidence on some accounts and, equally important, a far more detailed review ofIndonesian law would be required to come to further conclusions. Even then, it isexpected that in clarity in laws and regulations would still leave open much space forinterpretation. However, regardless of this, even when all of the company’s operationswould be legal then still none of the key concerns regarding oil palm development thatled ING to adopt its investment screen are addressed. We identified the followingweaknesses in ING’s investment screen:

1. ING’s investment screen did not stop the client from expanding its estates in asensitive forest area, which is potential High Conservation Value Forest(HCVF); it did not stop the client from putting out, most likely illegal, fires in

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its estates and it did not address the wishes of local communities. One key reasonfor failing to address these issues is that ING ultimately only requires legalcompliance. Questions on the legality of the company’s operations remain.

2. It appears that the bank was not aware of PT Gunung Mas Raya’s expansionactivities and this implies that its risk assessment procedure was not wellconducted. However, if ING Group was aware of Indofood's expansion activities,it may have withheld this information from Friends of the Earth (who requestedinformation about the Indofood transaction) based on the principle ofconfidentiality between banks and clients. But then it could also be argued thatING breached this agreement by communicating that it believed its clientadhered to the policy.

3. The conditions tied to ING's loan to Indofood are ineffective because:

a. First, holding companies are never involved in actual field leveloperations (and, thus, deforestation or burning);

b. Second, ING's condition that its loan could not be used for thepurchasing of new plantations or plantation land ignores the fact thatIndofood is still in the process of land clearing in concessions previouslyobtained and faces land disputes with local communities.

c. Third, financing at the holding company level allows for internal re-budgeting by the client. PT Gunung Mas Raya has not attracted newloans since 1996 and most likely depends on group capital to implementits expansion program. The investment required for the expansionactivities (including purchasing or renting of land clearing equipment)could easily have been released through internal re-budgeting.

One of the key problems that ING's risk assessors and its credit committee face is thelack of reference cadre. Indofood does not have a comprehensive plantation managementand development plan that addresses both agricultural risks and potential ecological andsocial externalities. Provided that a good policy is also implemented, it would reducerisk and, in theory, enable Indofood to attract foreign capital and access certain marketsmore easily. Its investors would also be in a better position to reliably communicateexternally about their client’s performance while both parties would be moreaccountable to nature conservation interests and local peoples' needs, rights and wishes.

While it is recognised that this case study reviewed only one of Indofood’s varioussubsidiaries and that the area affected so far is relatively limited in size, notwithstandingthe impacts, the findings are particularly relevant also in view of Indofood's plans tosignificantly expand its plantation area in the near future.

The following overall lessons are drawn from this case study:

1. Investments in the oil palm sector pose reputation and credit risks to investors, notonly because companies may not meet all standard risk parameters but also becausethe externalities created by plantation development cause considerable tension withthe interests of external stakeholders.

2. Criteria and procedures to value and address risks related to investments in the oilpalm industry require thorough implementation and monitoring by the investor.

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As regards to the performance level required from clients, of course much dependson the risk that an investor is willing to take. It should be stressed, however, thatrequiring compliance to Indonesian national and/or regional laws does notsufficiently protect investors from many of the risks identified in this report. Thevacuum in Indonesia's regulatory system and international law requires financialinstitutions to define specific performance standards that adequately avertunnecessary risk and avoid the creation of ecological, social and economicexternalities.

3. Loan conditions should be formulated precisely, especially when financial servicesare provided at the group level.

4. After contracts have been sealed, monitoring of compliance is required. Managementplans and work plans, which take the investors' criteria into account, will make iteasier to do this.

5. Transparent reporting is hindered by confidentiality agreements between companiesand investors. Such agreements draw heavily on outsiders' trust especially whenpublic statements are made which can not be verified by third parties.

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Acronyms

BCA Bank Central AsiaBMPs Better Management PracticesBPMDN Badan Penanaman Modal Dalam Negeri /

Investment Co-ordination BoardCGI Consultative Group on IndonesiaCIFOR Centre for International Forestry ResearchCITES Convention on International Trade in Endangered

SpeciesCPO Crude Palm OilUNEP FI United Nations Environment Program Financial

InitiativeFCI Forest Conversion InitiativeGMR Gunung Mas RayaHCVF High Conservation Value ForestHa HectaresIBRA Indonesian Bank Restructuring AgencyIFC International Finance CorporationIOPRI Indonesian Palm Oil Research InstituteIPC Integrated Pest ControlKKN Korrupsi, Kolusi & Nepotism / Corruption,

Collusion and NepotismKSDA Konservasi Sumber Daya Alam /

Conservation and Natural Resource ManagementDepartment

NES Nucleus Estate and Smallholder schemePT Perseroan Terbatas / Limited companyRp RupiahSAKO Surat Angutan Kayu Olahan (Letter of Sawntimber

Transport)WWF World Wide Fund for NatureYLBHI Yayasan Lembaga Bantuan Hukum Indonesia /

Indonesian Legal Aid Foundation

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CONTENTSSummary iAcronyms v

CHAPTER 1 BACKGROUND 31.1 EXPANSION OF INDONESIA'S OIL PALM SUB-SECTOR 31.2 THE ROLE OF FINANCIAL INSTITUTIONS 31.3 EXTERNALITIES 4

1.3.1 Deforestation 4 1.3.2 Forest fires and haze 5 1.3.3 Conflicts with local communities 6 1.3.4 Legal issues 6

1.4 NEW RISK ASSESSMENT POLICIES 71.5 RENEWED MARKET ACTIVITY 81.6 WWF'S INITIATIVES ON OIL PALM AND FOREST CONVERSION 81.7 OBJECTIVES OF THIS CASE STUDY 91.8 SELECTION OF THE CASE STUDY 91.9 METHODOLOGY 101.10 THE CONTENT OF THIS REPORT 101.11 ACKNOWLEDGEMENTS 10

CHAPTER 2 SALIM GROUP AND INDOFOOD SUKSES MAKMUR PROFILE 132.1 ADDRESS 132.2 THE SALIM GROUP 132.3 THE RISE AND FALL OF SALIM GROUP'S OIL PALM INTERESTS 142.4 INDOFOOD SUKSES MAKMUR 152.5 INDOFOOD'S OIL PALM PLANTATION OPERATIONS 162.6 INDOFOOD'S EXPANSION PLANS 17

CHAPTER 3 FIELD LEVEL OPERATIONS OF PT GUNUNG MAS RAYA 193.1 THE CONCESSION AREAS 193.2 MANAGEMENT OF EXISTING PLANTATIONS 19

3.2.1 Biodiversity 19 3.2.2 Integrated Pest Control (IPC) 20 3.2.3 Recycling nutrients 20 3.2.4 Labour 21

3.3 EXPANSION ACTIVITIES 21 3.3.1 Recent land clearings 21 3.3.2 Expansion in or outside the concession boundaries? 23 3.3.3 Illegal logging 24 3.3.4 Floods and drainage of peat swamp forest 26 3.3.5 Fires and burning 27 3.3.6 Human-wildlife conflicts 29

3.4 COMPANY - COMMUNITY CONFLICTS 32

CHAPTER 4 ANALYSIS AND DISCUSSION 354.1 RISKS IDENTIFIED 35

4.1.1 The existing plantation area 35 4.1.2 The expansion area 35

4.2 WEAKNESSESS IN ING'S POLICY AND LOAN CONDITIONS 364.3 EVENT OF DEFAULT? 374.4 INDOFOOD'S PLANNED EXPANSION 374.5 THE NEED FOR A COMPREHENSIVE MANAGEMENT PLAN 384.6 GENERAL LESSONS LEARNED 39

ENDNOTES 41

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APPENDIX 1: MAPS OF ROKAN HILIR, RIAU PROVINCE, SUMATRA 47APPENDIX 2: ING POLICY ON SUSTAINABLE DEFORESTATION / LOGGING 51APPENDIX 3: INDOFOOD'S STAKEHOLDERS 57APPENDIX 4: ANSWERS ON AN EMAIL OF MR. PIETER KROON WITH QUESTIONS

FOR CLARIFICATION 65

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Chapter 1 Background

1.1 Expansion of Indonesia's oil palm sub-sector

In the past 15 years, the area planted with oil palm plantations in Indonesia grew five times to itspresent area of 3.5 million hectares. In 1996, the central government had already reserved in total9 million hectares (ha) for oil palm development and this area is by now probably fully clearedand partially planted.

The expansion may not stop there. The Indonesian Palm Oil Research Institute (IOPRI)estimates that Indonesia has 18 million ha of land that is suitable for oil palm development.1 Theinterest from the private sector to develop plantation estates grew to unprecedented heights: in aletter dated 22 May 2000, the Indonesian Ministry of Forestry and Estates stated that no lessthan 1,896 investors had applied for permits to develop plantations in an aggregate area of30,167,594 ha.2

In January 2001, the Indonesian central government officially pledged a moratorium on furtherforest conversion to the donor community (CGI). However this ban is not implementablebecause decentralisation policies have put great powers in the hands of local governments onland use matters.3 As a result, further commitments to oil palm development by localgovernments are likely to be pushed through. According to estimates from Sawit Watch, theaggregate area that provincial and district governments aim to develop for oil palm plantationsamounts to 22,5 million ha.4

1.2 The role of financial institutions

Palm oil is set to become the internationally most traded and consumed edible oil in the worldby 2012.5 Even though the expansion of Indonesia's oil palm plantation area is ultimately drivenby forecasted growth in demand, this development would not be possible without the financialsupport of a large number financial institutions. Especially from the early 1990s onwards, a largenumber of Indonesian financial institutions as well as foreign financial institutions from Europe,North America and East Asia have been financing the expansion of the oil palm sector inIndonesia with loans, trade financing, stock issuances and other means. It is estimated that thetotal investment in Indonesia's oil palm sub-sector amounts US$ 10 billion up to date. Afinancial analysis of 27 plantation groups revealed that commercial banks take account for over80% of all investment provided.6

Table 1-1 Financial institutions financing the Indonesian oil palm sector Financial institutions financing the Indonesian oil palm sector

Type of institution Number ofFI’s

Number ofcountries

Totalinvestment

(US$ mln)%

Commercial & investment banks 108 22 3,100 83.3Development banks 8 7 188 5.1Export credit agencies 3 3 12 0.3Asset managers, insurance companies and pension funds 20 8 381 10.2Other financial institutions 17 8 40 1.1Total 156 24 3,721 100

Between 1998 and 2002, investment activity in the oil palm sub-sector slackened significantlyand lack of capital input drastically slowed down planting rates. The Business IntelligenceReport (BIRO) estimated that the oil palm sub-sector needed US$ 3 billion up to 2005 to regainthe pre-crisis rate of expansion.7 However, to fully develop the 6 million ha of additional oil palm

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plantations, a substantially larger investment is required, approximately in the order of US$ 18billion.8

1.3 Externalities

Up to date, financial services to the oil palm sub-sector in Indonesia have primarily beenreviewed against standard risk assessment parameters (such availability of greenfields, labourforce, expected yield, pests & diseases, price developments, legality of operations and nationallevel political and economic risk assessments).

In the past five years, however, it has become increasingly recognised that the commonly appliedparameters and procedures did not suffice to prevent debtors from causing negative impacts ontropical forest ecosystems and local communities. For investors, this need not necessarily poserisk when externalities created are within the boundaries of Indonesia's laws. However, the scaleand pace of plantation development has created such intense conflict of interest with of otherstakeholder groups that new types of risk have emerged. Most financial institutions have yet totake the risks associated with externalities into account in their risk assessments.

1.3.1 Deforestation

From the agribusiness point of view, lowland tropical mineral soils are the preferred sites for oilpalm plantations. The natural vegetation in most of these lands are various types of lowlandtropical moist forests, which are represent the richest terrestrial ecosystems on Earth in terms ofspecies richness (biodiversity). Indonesia’s forests are especially of high conservation value:whereas Indonesia's land surface represents only 1.3% of the globe, it harbours 10% of all plantspecies of the world, 12% of mammals, 16% of reptiles and amphibians and 17% of birds.9 Mostof these species depend on the lowland rainforests, which are also home to the key stone speciessuch as orang-utan, proboscis monkey, Sumatran rhinoceros, tiger and elephant, rhinoceroshornbill, clouded leopard, sunbear, and several species of crocodile.

Despite their high conservation value, Indonesia's forests are disappearing at an increasing pace.According to most recent estimates, Indonesia's forest loss (deforestation) amounts to 2.1 millionhectares per year and another 1 million hectares is selectively logged annually. With this rate offorest degradation it is expected that Indonesia's primary forest is expected to be fully logged-over this decade whereas by 2005, no lowland tropical rainforests will remain in Sumatra andKalimantan will have lost these forests by 2010.10

This loss of the Indonesia's High Conservation Value Forests (HCVF) 11 is of grave concern tomany conservationists, environmentalists, scientists, local communities, western consumers andaccount holders and the tropical timber trade. Tropical forest loss has been subject to intensemedia campaigns and public and policy debates in Indonesia and western countries for manyyears now. The need to preserve and sustainably manage tropical forests has been acknowledgedby many governments in national and international policy contexts. The reputation riskassociated with deforestation is also widely acknowledged in the private sector:

"Any company or industry associated with, or considered to be associated with, the destruction of the rainforestshas a PR disaster on its hands" (David Crabtree from London Express Newspapers).

The extent to which tropical forests are cleared for oil palm plantations is presently under debatein the sector. The Indonesian Palm Oil Research Institute (IOPRI) estimates that 63% of all oilpalm plantations are established in secondary forests and scrub, 3% in primary forests and theremainder 34% in other vegetation and land use types.12 According to WWF Indonesia, 60percent of the conversion of tropical forests in Indonesia is due to the development of oil palmplantations. This represents a much bigger area than the annual area actually planted because the

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areas that have already been opened, 60 to 70 percent have not been utilised as oil palmplantations.13

Investors who are also financing timber industries both in Indonesia and export markets areincreasingly exposed to business risks because Indonesia's tropical timber resources aredwindling fast. But, even when forest conversion is legally sanctioned, investors are especiallyexposed to reputation risk in their home markets when their name is, through their clients,linked to deforestation by NGOs or others.

1.3.2 Forest fires and haze

For most plantation developers especially those in peat swamp areas mechanical land clearingwith heavy equipment is not cost-effective in Indonesia when compared to the use of openburning.14 Open burning has therefore for many years been considered the most practical,quickest and cheapest land clearing technique even though its use has been incrementallyprohibited by the Indonesian government.15

Indonesia's forestlands are subject to fires each year, but during the exceptional draught (El Niñoyears) of 1997 and 1998 fires ran out of control in many areas. The smog created blanketed largeparts of rural Indonesia, Singapore and parts of Malaysia for months and over 11.7 millionhectares of forestland, half of which was forest covered, burnt. The environmental and socialcosts of these fires were vast. A recent report by CIFOR tags the cost of the 1997/98 fires andhaze at US$ 2.3-3.5 billion, not including the costs of carbon release which may have amountedto as much as US$ 2.8 billion.16

Photo 1 Forest fires caused by oil palm development (Dumai March 2003)

Assessments showed that 46%-80% of all bigger fires occurred in plantation companyconcessions, most of these were lit for land clearing purposes, while some resulted from arson inconnection to conflicts between communities and the companies or other causes.17 TheIndonesian government has banned burning practises by law since 1997 but forest fires inplantation concessions are still a common phenomenon. Although few companies have beensued and ultimately prosecuted, plantation companies that apply burning techniques for landclearing expose themselves and their investors to legal/liability risks as well as reputation risk.

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1.3.3 Conflicts with local communities

Oil palm plantations need a minimum size of approximately 4,000-5,000 ha to economicallyoperate a Crude Palm Oil (CPO) mill. However, Indonesian oil palm companies are typicallylarger than 100,000 ha whilst the biggest companies may control as much as 300,000 ha or more.With especially fast growth of privately owned plantations in the past decade, currently around45% of the oil palm plantation is owned by private companies, 32% by government and 23% bysmallholders.18 Labour (around 0.2 workers per ha) is usually brought in from other regions.

Indonesia's forestlands provide livelihoods to 40 million indigenous people and other ruralcommunities. Because these communities rarely have formal rights, licensed palm oil companieshave taken over large tracts of, what communities perceive as, customary rights lands. TheIndonesian Legal Aid Foundation (YLBHI) has stated that in 1998 alone, in 14 provinces,people lost 827,351 hectares to private companies and investors. In the process, 214,356households lost their sources of income. Such developments nurture numerous, persistent andoften violent conflicts. Some conflicts have prevented many companies from operatingaltogether and in response, many have mobilised and paid the police, army or governmentofficials to suppress unrest, which often translate in gross human rights violations.19

Some companies have encountered so much social unrest that they are inclined to return part oftheir estates to local communities and there are a few cases in Indonesia where an informalarrangement has been made. Companies are, however, very reluctant to see any form of formalrecognition of traditional land claims being recognised as this would set a precedent that couldaffect many plantation companies throughout the country.

Smallholder schemes are usually promoted as an alternative, which guarantees rights to 2 ha ofland per family head. But such schemes are not acceptable to all communities and Potter andLee (1998) found in West Kalimantan that, with some exceptions, oil palm does not appear toprovide smallholders with sustainable livelihoods. Moreover, the credit schemes associated withsmallholder programmes make smallholders highly dependent on the Nucleus company andthey often end up with bad debt.20

Apart from dispossession of their customary rights land, community resistance to oil palm is alsobased on the lack of economic benefits. Local communities are the primary producers ofagroforestry and agricultural commodities (such as rattan, coffee, tea, rubber, cacao and rice) inIndonesia. Unlike some alternative land uses such as oil palm, Lafranchi (2000) found that suchproduction systems are relatively resistant to market shocks, and does not require long timehorizons or large initial investments to realise returns. From the local perspective, customaryforest management ultimately provides a greater return to labour than oil palm.21

Although the Indonesian government does not recognise indigenous peoples' ownership of(state-owned) forestland, the cause of marginalised communities is recognised by severalinternational conventions and covenants.22 Their plight is also subject to NGO campaigns in keymarkets, often in connection to forest issues. Plantation companies that are associated withhuman rights violations and marginalisation of local communities face business risks, andexpose themselves and their investors to reputation risk. The failure of the Indonesiangovernment to adequately recognise traditional land claims and settle community-companyconflicts poses a business risk for the companies in the present situation (prolonged conflict) aswell as in the possible future (potential loss of developed plantation land).

1.3.4 Legal issues

Even though compliance with legal requirements is part of any standard risk assessmentprocedure, this issue is highlighted here because of Indonesia's fantastically complex and oftencontradicting legal system. In addition, multinational investors and palm oil buyers are

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increasingly facing the need to adhere to a variety of internationally agreed conventions (such asILO-standards) and voluntary codes-of-conduct (e.g. OECD Guidelines).

Some documented illegal activities in the Indonesian oil palm sub-sector include, for example,land clearing without securing all required permits and illegal burning (see above). However,because law enforcement in Indonesia is slack and thrives on "KKN" (Corruption, Collusion andNepotism) few cases result in prosecution and verdicts with significant impact on businessperformance.

For investors, it is extremely difficult to oversee their clients' compliance to the web of laws,decrees and other regulations. In the Indonesian regulatory context, anything illegal could alsoeasily be legalised through corruption. Government data may in some cases be so inconsistentand unreliable that ultimately it is impossible to determine the legality or illegality of a certainactivity. Although inconsistency provides some level of protection to investors as well (chargesmay be reversed), there is obviously a reputation risk involved. There is a continuous flow ofcharges being announced which may not be followed up but which do tend to sink in, forexample, on the internet.

1.4 New risk assessment policies

The previous sections outlined some of the key environmental and social externalities created byoil palm development and the types of risk they can represent to investors. Although mostfinancial institutions and their clients have yet to take these issues into account, the financialsector is increasingly aware of the risks associated with their investments in environmentally andsocially sensitive sectors.

Specifically for the oil palm sub-sector, the four biggest Dutch banks (ABN AMRO Bank,Rabobank, Fortis and ING Bank) were the first to take into account new risk assessmentparameters for their new investments in the Indonesian oil palm sub-sector. This commitmentfollowed a joint campaign of Friends of the Earth and Greenpeace in the Netherlands in 2001and consultations by the banks with their Indonesian clients and some corporate clients in theNetherlands.23 The NGOs had requested the banks that when new credits are extended or othersignificant financial services are offered to palm oil companies, they would assure that theirclients should:

• Not be clearing tropical rainforest (High Conservation Value Forest);• Not be involved in burning forestland;• Respect the rights and wishes of local communities;• Respect Indonesia's law and relevant international conventions.

This dialogue between NGOs and the banks had particular relevance because Dutch banks playan important role in financing the Indonesian oil palm sector, as will be outlined in the nextchapter. As a group, the Dutch banks rank second behind the Malaysian banks and provide17.1% of foreign financing of the Indonesian oil palm plantation sector. Three Dutch banks rankamong the top-10 of foreign financial institutions and Rabobank and ING Bank are among thebanks involved in recent new lending activity.

Although all four banks use the language as proposed in the four basic investment criteria, thereis considerable variation in the precise wording, the scope and implementation proceduresadopted by each bank and, thereby, their effectiveness.24

The sector specific initiative of the Dutch banks has not yet been followed up by other financialinstitutions but discussions are ongoing and in general increasing number of financialinstitutions are beginning to review current approaches to risk, sustainability and

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multistakeholder issues.25 And buyers of agricultural goods such as Migros (Switzerland),Unilever (Netherlands-UK), Nestlé (Switzerland) and others have begun to develop, adopt andimplement sustainability guidelines for their (palm oil) suppliers.26

1.5 Renewed market activity

The new Dutch investment screens were developed when virtually no fresh capital flowed into the oilpalm sub-sector. But the resurgence of the CPO price on the world market during the past year hasimproved profitability of most plantation groups and has renewed the interest of domestic and foreignfinancial institutions in the oil palm sector. The market activity has not yet returned to the level of themid-1990s, but the number of new loans and stock issuances to oil palm plantation companies clearly isrising again since the first quarter of 2002:27

v Since the beginning of 2002, Kumpulan Guthrie has been planning to issue additional internationalIslamic bonds worth US$ 245 million, to repay the rest of its December 2000 loan. The issuance nowis scheduled for somewhere in 2003.28

v In March 2002, Kuala Lumpur Kepong Bhd. started trading of American Depository Receipts (ADRs)of its shares in the United States. Under the ADR programme a maximum of 3% of KLK’s currentissued and paid-up share capital will be traded in ADRs in the USA in the ratio of one ADR to tenKLK shares. J.P. Morgan Chase & Co. (United States) is the sponsor of the programme. 29

v Rabobank issued a working capital facility with a maximum value of US$ 15.0 million to PT AstraAgro Lestari in 2002.

v In 2002 LonSum obtained a Rp 90.0 billion (US$ 10.1 million) long-term bank loan from BankMandiri (Indonesia) to finance its plasma programme. 30

v In April 2002, ING Bank (The Netherlands) arranged a syndicated two-year US$ 100 million loan forIndofood, which was described as “the largest offshore loan financing for an Indonesian corporatesince the start of the Asian financial crisis in 1997”. The loan will be used for working capital and willmature in April 2004. We estimate ING Bank’s own participation at US$ 20 million.31

v In June 2002, PT Indofood Sukses Makmur issued five-year bonds worth US$ 280 million oninternational capital markets. This was the largest offshore bond issue since the 1997-98 Asianfinancial crisis. 72% was distributed in Asia as a whole, 8% in Europe and 10% with offshore USaccounts. The bonds were used to repay the US$ 250 million syndicated loan of June 1997. The bondissuance was managed by Crédit Suisse First Boston (Switzerland). 32

v Rabobank appointed by PT Astra Agro Lestari in February 2003 to help it sell stakes in 10 non-oilpalm plantation subsidiaries to potential investors.

v In April 2003, PT Indofood Sukses Makmur announced it will issue five year bonds worth Rp 1,000billion (US$ 125 million) in the first week of June 2003. The bond issuance is to be managed byBahana Securities, Danareksa Sekuritas, ING Bank and Mandiri Sekuritas (which is part of BankMandiri).33

We expect that in the coming years, financial institutions will facilitate a much larger capitalinput in the palm oil sub-sector in Indonesia. It is also expected that these transfers will beintensively scrutinised by external stakeholders who wish to ensure that their interests (natureconservation, local communities needs and wishes and legal compliance) are not harmed.

1.6 WWF's initiatives on oil palm and forest conversion

This report forms part of a larger research project co-ordinated by WWF Asia & Pacific ForestProgram and the WWF Forest Conversion Initiative which aim to show that financial

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institutions providing services to oil palm companies need to adopt effective investment screensthat guarantee socially and environmentally responsible practises.

The outputs of the project are envisaged to be presented at several high level meetings with thefinancial sector and other stakeholders organised by WWF and/or its partners (CIFOR, ForestTrends, IFC, World Bank). Case studies will serve as campaigning tools for relevant WWFNational Offices in Europe and the USA.

1.7 Objectives of this case study

This case study aims to draw lessons from one particular financial transaction by a Dutch bankthat was arranged after it had committed to introduce and implemented new risk assessmentstandards and procedures for investments in Indonesia's oil palm industry. As such this casestudy does not only review the need for investment screens in general, it also evaluates theeffectiveness of an existing screen.

1.8 Selection of the case study

Indofood is a subsidiary of First Pacific Company in Hong Kong. Both companies belong to theIndonesian Salim Group. Indofood is the biggest consumer of Crude Palm Oil in Indonesia and,via its subsidiary PT Salim Ivomas Pratama, the company operates some 60,000 hectares (ha) ofoil palm plantations in Riau, Sumatra. ING Bank has a “long-lasting close relationship” withFirst Pacific.34

In April 2002, it was announced that ING Bank (The Netherlands) had arranged a syndicatedtwo-year US$ 100 million loan for Indofood Sukses Makmur, which was described as “the largestoffshore loan financing for an Indonesian corporate since the start of the Asian financial crisis in 1997”.35

The deal was closed after ING had adjusted its risk assessment procedure guidebook,communicated these to the group and assigned the credit committee to review cases that weresubject to the new policy.36

Profundo brought the deal to the attention of the Dutch NGOs and in October 2002, Friends ofthe Earth Netherlands requested ING Bank to confirm that the agreed investment criteria wereindeed applied in this land mark deal.37 The bank responded on November 28, 2003 stating thatthe transaction at hand was "indeed tested against its strengthened investment policy eventhough at that time, the policy was not yet officially implemented (March 2002)." With regard tothe Indofood loan, ING stated that the bank was convinced that the transaction took placewithin the norms of the new policy. The bank stipulated that the working capital facility couldby no means by used for the purchase of new plantations or for purchasing new land forcultivation. ING could call an 'event of default' if Indofood failed to meet these conditions.38

A few months later, in January 2003, WWF Riau was informed that a tiger was seen in the PTGunung Mas Raya an oil palm estate in Rokan Hilir, in the north of Riau province. The estatearea where the tiger showed up is a full subsidiary of PT Indofood Sukses Makmur. WWF Riaufirst visited the estate in February 2003.

The case was also brought to the attention of WWF Asia Pacific Forest Program and WWFIndonesia who are, just as WWF Riau, partners in the WWF Network Forest ConversionInitiative. WWF had just allocated a research grant to AIDEnvironment and Profundo toconduct a case study as outlined above.

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In March 2003, WWF Riau and the AIDEnvironment consultant visited the Indofood ResearchOffice in Teluk Siak. The Head of Research, Mr Sugih Wanasuria, reconfirmed that a tiger wasobserved in the Sungai Rumbia estate and suggested that WWF and the consultant would visitthe estate.

1.9 Methodology

This report is based on the information gathered during field visits in Indofood's Sungai Rumbiaestate in February and March 2003. The WWF representative and the consultant surveyed theestate and adjacent forest area in order to determine the reason why the tiger had been begun toenter the estate. It was clear that this required a broader inventory of the company's activitiesand related environmental and social issues. Therefore a number of stakeholders in and aroundthe plantation area, including people from the Orang Sungai Kubu community, wereinterviewed and a boat trip inside the swamp was made to check the condition of the forest.WWF furthermore collected and prepared the maps presented in this report. The report issupplemented with a profile on Indofood's financial and market stakeholders, compiled by JanWillem van Gelder (Profundo, the Netherlands).

In this report three types of risk are used. Reputation risk refers to the risk that banks andplantation companies may suffer from declining trust and credibility as a result of publiccriticism on their policies and practises based on perceived performance. Business risk refers to agroup of risk factors that may affect the company's productivity, profitability and thus viability.When this risk affects the company's ability to service debt, this poses credit risk to the investor.Legal infractions represent legal or liability risks to the plantation company and in potentiallyalso to the investor.

1.10 The content of this report

Chapter 2 provides background to the corporate structure of PT Indofood and its plantationcompanies followed by a description and analysis of the field level practises in one of Indofood'splantation subsidiaries, PT Gunung Mas Raya. The findings of the case study are analysed in thebroader context of the risks to which Indofood and its major financial and market stakeholdersmay be exposed to (Chapter 4).

1.11 Acknowledgements

This report was compiled in close collaboration with Purwo Susanto of WWF Riau. He hascontributed to significant portions of the text. During field trips, the Indofood staff in theResearch Station in Teluk Siak and the PT Gunung Mas Raya plantation estates providedhelpful guidance and assistance to the WWF representative and the consultant. Severalrepresentatives of the Sungai Kubu community in Rokan Hilir provided valuable insights in theissues that they are facing.

In addition, the following people have provided valuable contributions to this report: RodTaylor (WWF Asia Pacific Forest Program), Fitrian Ardiansyah, Ningrum Widyastuty andAnwar (WWF Indonesia), Duncan Pollard (WWF International), Tom Vellacott and BellaRoscher (WWF Switzerand), Andrew Ng (WWF Malaysia), Masya Spek (consultant to CIFOR),Chris Lafranchi and Bellinda Morris (Narual Equity), Paul de Clerck, Monique de Lede andHilde Stroot (Friends of the Earth Netherlands), Ed Matthew (Friends of the Earth England,Wales and Northern Ireland), Ruddy Lumuru and Abet Nego (Sawit Watch), Teoh Cheng Hai

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(independent consultant), Zul Fahmi (Jikalahari), Gerard Persoon (University of Leiden) andEd Colijn (INCL).

This case study was made possible through a grant from the WWF Asia Pacific Forest Programand was ultimately funded by USAID.

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Chapter 2 Salim Group and Indofood Sukses Makmur profile

2.1 Address

PT Indofood Sukses Makmur Tbk.Head OfficeAriobimo Sentral Lt. 10,Jl. HR Rasuna Said Kav. 5 X-2,Jakarta 12950, Indonesia

Phone : (021) 522-8822Fax : (021) 522-6014

Contact Person in Jakarta:Mrs. Eva Riyanti HutapeaPresident Director PT Indofood Sukses Makmur

Mr. Rudyan KopotCEO PT Indofood Sukses Makmur

Contact person in Pekanbaru, Riau:Mr. Chong Kiew ChaiVice President Operations Indofood Sukses Makmur

2.2 The Salim Group

Until the economic crisis of 1998, the Salim Group was the largest business group in Indonesia.The group generated US$ 20 billion in annual sales, and comprised 500 companies with 200,000employees. The Salim Group accounted for 5 percent of Indonesia 's economic output, and wasactive in the food industry, agribusiness, the car industry, building materials, property,telecommunications, banking and trading. The Salim Group was founded by the Chinese immigrant Liem Sioe Liong, who later changedhis name to Sudono Salim. Liem was one of the closest friends and business partners of formerpresident Suharto. Presently, the group is still controlled by the Salim family, and is headed bySudono’s son Anthony.39

Other important stakeholders in parts of the Salim Group are the family of ex-president Suhartoand the Pribadi family.40 The Salim Group had various business links to Soeharto’s children,through Bank Central Asia (Siti Hardijanti Rukmana and Sigit Harjojudanto), a power project inEast Java with US power company Enron (with Bambang Trihadmodjo) and Indofood (withSoeharto’s cousin Sudwikatmono).41 Together with the Suharto family and its close friends BobHasan and Prajogo Pangestu, the Salim Group for a long time also controlled the Astra Group.42

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During the financial and political crisis of 1998, PT Bank Central Asia - the main bank in theSalim Group and the largest private bank in the country - ran into serious trouble. Firstly, manycompanies in the Salim Group were not able to repay the loans supplied to them by BCA. Thenfollowed the resignation of President Suharto in May 1998, whose family owned 30% of BCA.Riots left the Jakarta home of Salim-patriarch Liem Sioe Liong in ruins. These events triggereda run on the bank, with many of its 8 million depositors trying to withdraw their money withinone week. The government feared BCA's collapse would destroy what remained of the bankingsystem. By large government loans, the Indonesian Bank Restructuring Agency (IBRA) tried tokeep BCA alive. As a consequence, IBRA was left with a claim of Rp 53,000 billion (US$ 5.9billion) on the Salim Group. To pay off this debt, the Salim Group at the end of 1998 turned overshareholdings in 108 companies to the IBRA, including its shareholding in BCA. The IBRAparked these Salim holdings under the umbrella of PT Holdiko Perkasa, which at this momenthas sold more than half of these companies to third parties. As the proceeds of these sales werenot sufficient to pay off all of Salim’s debts, the Salim Group was forced later to hand overadditional shareholdings to IBRA. In November 2002 IBRA finally announced that all debts ofthe Salim group had been settled.43

Clearly, the Salim Group has survived the financial crisis only by downgrading. Nevertheless, itremains one of the largest business groups in Indonesia, with extensive holdings in the rest ofSoutheast Asia. Its most important holding company is First Pacific Company Ltd. in HongKong.

2.3 The rise and fall of Salim Group's oil palm interests

The Salim Group used to be a major owner of oil palm plantations in Indonesia. Since 1983, theSalim Group intensively co-operated with the Raja Garuda Mas Group in developing oil palmplantations in North Sumatra, Jambi and Riau.44 Between 1984 and 1990, Salim also participatedin the holding company PT Sadang Mas, a joint venture with the Sinar Mas group in Riau, thatdeveloped the PT Ivo Mas Tunggal estates.

Throughout the 1980s and 1990s, the Salim Group expanded its land bank for the developmentof, mostly, oil palm plantations in South Kalimantan, Aceh, North Sumatra, Jambi, SouthSumatra and East Kalimantan. Around 1998 the total concession area of the oil palm plantationsof the Salim Group reportedly totalled 1,155,745 hectares, of which 95,310 hectares were alreadyplanted.45 However, the Group's stronghold on its land bank began to slip in conjunction withthe onset of the Indonesian monetary crisis and the fall of the New Order regime:

• In mid-1998, the Salim Group first lost the rights to develop some 100,000 ha of land foroil palm in the forest-rich Subuku-Sembakung region in East Kalimantan because thesewere allegedly obtained through corruption "KKN-practises".46

• In June 1999, the Samihim Dayak in South Kalimantan won a lawsuit against seven oilpalm subsidiaries of the Salim Group over large-scale forest fires in 1997. The plantationcompanies PT Laguna Manidiri I to III, PT Langgeng Muara Makmur II and III, PTParipurna Sawkarsa PT Swadaya Andika II and I were found guilty of burning farmingareas owned by local people. The court ordered the seven firms to pay Rp 150 million incompensation to the landowners.47

• At the end of 1998, the Salim Group had to transfer shareholdings in 25 oil palmplantations in Sumatra, Kalimantan and Sulawesi to the IBRA. The total area of theseplantations is 260,000 hectare. In November 2000, Holdiko sold these plantations to theMalaysian company Kumpulan Guthrie Berhad for Rp 3,400 billion (US$ 368 million).48

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• Also in November 2000, Holdiko sold a majority stake in Salim Oleochemicals, a group of

seven marketing- and production companies in Indonesia, Singapore, Germany and theUnited States. Salim Oleochemicals produces intermediary products for the detergent andpersonal care industries, based upon palm oil. The Indonesian investment group PTBhakti Investama paid US$ 131 million for Salim Oleochemicals.49

• In April 2003, it was announced that IBRA will sell off a 20% interest in Salim Group'scooking oil company PT Bitung Menado Oil, and another 20% in the group's retail armPT Indomarco Prima.50

2.4 Indofood Sukses Makmur

Salim Group's recent disposals do not mean that the group has left the oil palm businesscompletely. Through the Indonesian company PT Indofood Sukses Makmur Tbk. - a subsidiaryof First Pacific - the group still owns several oil palm plantations and palm oil processing andtrading companies. PT Indofood Sukses Makmur is one of the largest Indonesian food companies with a turnover ofUS$ 1.8 billion in 2002. Its products account for approximately 90% of Indonesia's instantnoodles market, 80% of its wheat flour market, and more than 60% of the domestic market forbranded cooking oils, shortenings and margarine, baby foods, and snack foods. The company hasfactories in Java, Sumatra, Sulawesi and Kalimantan as well as in other countries. Around 12percent of total sales are exported, to a total of 36 countries. Indofood has the following relevant palm oil related interests:

• With an annual sales volume of some 9 billion packs, Indofood is one of the world's largest

instant noodles manufacturers. CPO accounts for some 13 percent of the ingredients usedfor manufacturing instant noodles. Combined with its large production volumes ofcooking oil and margarine, PT Indofood Sukses Makmur without doubt is the largestIndonesian consumer of CPO.51

• PT Indofood Sukses Makmur owns 80% of the shares of PT Intiboga Sejahtera, which isthe largest producer of cooking oil, margarine and shortening in Indonesia.52

• PT Indofood Sukses Makmur owns 80% of the trading company PT Salim Oil Grains (PTSOG), the sixth largest exporter of CPO from Dumai in 2002.

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Figure 1Organigram Indofood53

• In addition to its Indonesian processing facilities, Indofood operates several palm oil

refineries in Russia, China and elsewhere. Its total CPO usage amounts to 1 million tonnesper year.54

• PT Indofood Sukses Makmur owns 80% of the shares of PT Salim Ivomas Pratama, whichin turn owns a majority share in four other plantation companies in Riau.

2.5 Indofood's oil palm plantation operations

Indofood's five oil palm plantation companies operate a total area of 59,094 hectares, of which53,973 hectares were planted at the end of 2001. In addition to its own plantation, PT SalimIvomas owns four plantation companies in Riau: PT Cibaliung Tunggal, PT Gunung Mas Raya,PT Indriplant (Napal estate) and PT Serikat Putra I.55 Its six CPO mills produced 275,651 tonsof CPO in 2001. The Kumpulan Guthrie Group did own minority shareholdings in these fiveplantation companies since December 2000, but sold these to Harvest Holders Harmony Ltd.(Mauritius) and PT Amantara Kalyana (Indonesia) in November 2002. We think thesecompanies are subsidiaries of Indofood, which would give Indofood full ownership over the fiveplantation companies.56

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Apart from PT Indofood Sukses Makmur, the Salim Group also is a co-owner of the oil palmplantation holding company PT Inti Indosawit Subur (PT IIS), together with the Raja GarudaMas Group. In 1997, PT IIS operated 108,000 hectares of oil palm plantations and 13 CPO-millsin Sumatra, with a combined annual production of 500,000 tonnes CPO. PT IIS planned todouble its CPO output by the year 2000, and began opening up 92,000 hectares of oil palm estatesin Central Kalimantan.57

The following table provides an overview of the oil palm plantation companies that at presentbelong to the Salim Group.58

Table 2-1 Plantation companies within the Salim Group Plantation companies within the Salim Group

Majority shareholdings

Plantation companies andestates

% owned OtherOwners

Start ofoperations

Area(ha) Location

Salim Ivomas Pratama

- Sungai Bangko - Sungai Rumbia 1- Sungai Rumbia 2

100.0% 1994 21,656 Bengkalis, Riau

Gunung Mas Raya - Bukit Raja - Lubuk Raja - Balam - Sungai Dua - Kahyangan - Kencana - Cibaliung

100.0% 1992 12,807 Rokan Hilir, Riau

Cibaliung Tunggal Plantation 100.0% 1989 4,816 Rokan Hilir, RiauIndriplant (Napal estate) 100.0% 1989 6,360 Pernanap, Indragiri Hulu,

RiauSerikat Putra I 100.0% 1990 11,911 Pelalawan, RiauCemerlang Abadi59 n.a. n.a. 7,412 South AcehBumi Permai Lestari Persada n.a. 1992 25,806 Indragiri Hilir, Riau

Minority shareholdings

Gunung Melayu n.a. Raja Garuda Mas 1983 10,375 Asahan, North SumatraInti Indosawit Subur n.a. Raja Garuda Mas n.a. 10,565 Indragiri Hulu and

Bengkalis, RiauInti Indosawit Subur n.a. Raja Garuda Mas n.a. 29,300 JambiInti Indosawit Subur n.a. Raja Garuda Mas n.a. 3,062 North SumatraInti Indosawit Subur n.a. Raja Garuda Mas >2000 92,000 Central KalimantanSaudara Sedjati Luhur n.a. Raja Garuda Mas 1970s 2,319 Asahan, North Sumatra

2.6 Indofood's expansion plans

Since the Salim Group lost its control over some 260,000 ha of oil palm plantations andgreenfields in 1998, Indofood's food processing and trading subsidiaries had to buy 55-70% oftheir CPO requirements from third parties such as Astra Agro, Sinar Mas and others. With atotal consumption of 1 million tonnes CPO per year, it is estimated that the group would requireat least another 160,000-210,000 ha to fully cover the group's total CPO demand. Within the licensed area, the Indofood's subsidiaries have very little space left to expand. As of2000, the five main Indofood subsidiaries in Riau had planted 52,805 to 53,530 ha which means

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that Indofood had around 4,750 ha to 5,564 ha left unplanted (8-9% of the total area).60 Thisexplains why Indofood has the intention to expand its oil palm plantation holdings: • In May 2001, PT Indofood Sukses Makmur agreed to acquire a 30% shareholding in Golden

Agri-Resources for US$ 97.6 million from its majority shareholder Asia Food & Properties,belonging to the Sinar Mas Group. Subsequently, PT Indofood Sukses Makmur wouldincrease its shareholding in Golden Agri-Resources to over 50%. ING Barings (UnitedKingdom / The Netherlands) advised on this deal. But in August 2001, PT Indofood SuksesMakmur announced that it had called off the deal, since the financial troubles of the SinarMas Group made a due diligence procedure impossible.

• PT Indofood Sukses Makmur at the same time announced that the company was looking atPT Astra Agro Lestari, PT PP London Sumatra Indonesia Tbk., PT Bakrie SumateraPlantations Tbk., and PT Socfin Indonesia as possible acquisition targets. PT IndofoodSukses Makmur aims to achieve greater control of the supply of crude palm oil used to makenoodles and produce edible oils. Analysts believe that PT Astra Agro Lestari is PT IndofoodSukses Makmur's main target.61

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Chapter 3 Field level operations of PT Gunung Mas Raya

3.1 The concession areas

PT Gunung Mas Raya commenced commercial operations in 1992.62 In February 4, 1993 theInvestment Coordination Board (BPMDN) in Jakarta issued a plantations operation permit toPT Gunung Mas Raya through the Letter of Establishment (SP) No. 36/I/PMDN/1993/:04-02-1993.63 PT Gunung Mas Raya appears to own several separate concession blocks in Rokan Hilir.Two blocks are located north of overpass road from Bagan Batu to Pekanbaru (see map below).

Map 1 Oil palm concessions in Rokan Hilir, Riau (source: WWF Riau)

3.2 Management of existing plantations

In this paragraph, we will discuss some features of the environmental aspects of the managementin the existing plantations in the Indofood oil palm plantations.

3.2.1 Biodiversity

Numerous tree stumps in the 10-15 year old PT Gunung Mas Raya estates were observed, whichsuggests that the company converted tropical lowland rainforest at the time when the first estateswere developed. Since much of the plantation area was established some time ago, a number ofcommon species such as kingfisher, ayam ayamah (wild chicken) and wild boar can be observedin the estate area. Although these species are quite common in oil palm estates, they probablyalso thrive because the natural forest is not too far away and possibly also because pesticide usagein the estates is minimised (see below). Fishing (notably gabus, a kind of catfish) and hunting isa popular activity among workers and does not seem to be restricted by the estate management.

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3.2.2 Integrated Pest Control (IPC)

According to director of the Research Station, Indofood introduced barn owls (burung hantu) asa means of pest (rat) control in all its estates. Starting off with 21 individuals in 1997, acommitment to introduce the owls in all estates and to phase out rhodenticides, the populationincreased to almost 12,000 in 2002. Indofood argues it is one of the few companies which hasintroduced the barn owl in all of its estates, unlike many other companies who primarilycontinue to apply rhodenticides. Indofood is proud of its experiences in this area and may makea video on the practise.64

Photo 2 Indofood's barn owls (picture P.Susanto)

In addition to barn owls, Indofood uses the commonly applied viruses to counter grasshopperand locust attacks. 65 No information was gathered about the company's application of herbicides.

3.2.3 Recycling nutrients

In some of Indofood's estates waste materials are fully re-used since 1995. The older palm leavesare typically stacked in rows for decomposition by the workers in the estate. Furthermore,Indofood recycles the Empty Fruit Bunches (EFB), wet-solid (WDS) and effluent of the CPOmills waste in its estates.

Photo 3 Solid waste and EFB recycling in Indofood estates

The EFB and WDS are applied directly in onto the soil as organic fertiliser. The optimumvolume applied is 75 tonnes/ha/year. Alternatively, a mixture of 37.5 tonnes of EFB and 27.2tonnes of WDS can applied annually. It is found that with 75 tonnes/ha/year, Fresh Fruit Bunch(FFB) production can be boosted with up to 20%.

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The liquid effluent from the CPO mills is also recycled in the plantations through a groundapplication system of connected open basins in the ground. The effluent gradually penetrates thesoil and fertilises the surrounding oil palms. This system is not commonly applied in Indonesianoil palm estates and may significantly reduce Biological Oxygen Demand (BOD) in rivers andstreams where effluent is normally released. This is, however, provided that the effluent basinsand canals are properly laid out. In the PT Gunung Mas Raya estate, some canals were in veryclose proximity of small streams that may result in nutrient leakage and eutrophication ofsurface water. No information is available on the possible impacts of the system of ground waterquality.

Photo 4 Liquid waste recycling in Indofood estates (pictures: P. Susanto)

Although there are many factors in play that determine productivity, the waste recyclingprogram in the oil palm plantations in the Indofood estates is believed to contribute to thecompany's fairly high average yield of 24 T/ha.

The economic benefits of waste recycling in the Indofood estates are impressive. First, the use ofliquid waste (effluent) as fertiliser allows a cost cutback on inorganic fertiliser of Rp.1,686,400/ha /year. Income from additional yield can be as high as Rp. 1,920,000/ha/year.66

Second, the profit of EFB and WDS recycling was equal to Rp. 383,000/ha in 1999. Such figuresoffset investments in equipment and infrastructure within 2 years.

However, waste recycling can not fully replace inorganic fertiliser. In the Teluk Siak estate (ex-Indofood), the volume of EFB produced in a 10,000 ha estate with a 50T/hr CPO mill suffices tofertilise 500 hectares whereas the effluent can be applied only in 150 hectares. In other words,inorganic fertiliser application will still be required in 93% of the plantation area.

3.2.4 Labour

Much of Indofood's plantation work force is not indigenous to the area, a substantial share of theworkers are from (North) Sumatra. Working conditions appear to be similar to those in otherconsolidated plantation areas in Riau. A typical workers house is provided for free by thecompany and has 2 bedrooms, 1 kitchen and 1 bathroom. Salaries are also at average level inRiau: Rp 400,000 (US$ 45) basic salary and Rp. 100,000 (US$ 12) for overwork. Workers haveone day off every week.

3.3 Expansion activities

3.3.1 Recent land clearings

The northern end of the present PT Gunung Mas Raya concession area has a typical arch-shapedform that is easily recognised on satellite images and maps. The forestland was cleared andplanted by PT Sadang Mas between 1984 and 1992 when most plantation blocks were established

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on mineral soils. In line with the overall shape of the concession area, the company stoppedexpanding into the peat swamp in the north in 1989 and for most part of the 1990s, the northernborder between the plantations and the forest remained stable. Satellite images showfurthermore that a major expansion in the early 1990s took place in the eastern part of theconcession and between 1995 and 2000, the Gunung Mas Raya estates expanded further to thewest, neighbouring what appear to be clearings made by local farmers.

Since 1998/99, PT Gunung Mas Raya has been expanding the Sungai Rumbia and Sungai Balaiestates to the Northeast and north of the plantations established in the late 1980s. The recentland clearings show up on 2000 and 2002 satellite images as pink:

Map 2 The PT Gunung Mas Raya concession and land use cover in April 2000

Red line: plantation area according to PT Gunung Mas Raya; black line: concession areaaccording to the Riau Department of Forestry and Agriculture.67

Map 3 The PT Gunung Mas Raya concession and land use cover in July 2002

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PT Gunung Mas Raya cleared approximately 500 ha between 2000 and 2002, mostly in theSungai Balam estates on the Northeast. From early 2003 onwards, PT Gunung Mas Raya wasclearing the forests in the northern Sungai Rumbia estate. Company maps suggest that a full rowof 300x800m blocks will be added to the plantation area (approximately 1,000 ha). The recentexpansions involve the conversion of peat swamp forests which, in view of its definition, couldbe considered High Conservation Value Forest (HCVF).68

3.3.2 Expansion in or outside the concession boundaries?

According to one of the estate managers, the recently cleared areas are within the boundaries ofthe company's concession. Statistics on the total area held and developed by PT Gunung MasRaya seem to confirm that until 2000, the company had indeed not fully developed its concessionarea. According to Capricorn Indonesia Consult (CIC) the total area allocated to PT Gunung MasRaya is 12,807 hectares of which, according to Holdiko, 9,317 ha (73%) was planted in 2000. Thisleft 3,490 ha undeveloped.69

However, it could be that the remaining area in 2000 represented the one or two separate PTGunung Mas Raya concession blocks Southeast of the PT Ivomas Tunggal concessions northrespectively south of the overpass road. Furthermore there is a lack of clarity with regard to thetotal concession area under PT Gunung Mas Raya. According to the Holdiko website, PTGunung Mas Raya holds 12,803 ha, whereas a map as of 2000 from the Department of Forestryin Pekanbaru shows that the PT Gunung Mas Raya concession area is only 8,569.5 ha.

Moreover, concrete indications that the company may be working outside its legally allocatedconcession area are derived from an overlay of satellite maps with the concession map issued bythe Riau Department of Agriculture (see maps 2 and 3 above). This overlay clearly shows thatthe plantation area developed by the company does not match with both size and shape of theconcession boundaries.

If the company operates outside its concession boundaries then it would be in violation with theIndonesian Forest Act, article 50 paragraph 3. The responsible company staff could then be heldliable to punishment by imprisonment up to a maximum of 15 (fifteen) years and a fine up to amaximum of Rp. 5 billion.70

However, it would at present be premature to conclude that PT Gunung Mas Raya is operatingoutside its concession boundaries because no other maps for confirmation could be obtained(such as the compulsory map in the company's Environmental Impact Statement, AMDAL).71

Moreover, as PT Gunung Mas Raya's clearings as of 2000-2002 mostly fall within the former PTEssa Indah Timber logging concession, the latter company may have requested the relevantforest conversion permits, possibly on PT Gunung Mas Raya's behalf. This has not beenresearched.72 Last, concession maps issued by various government authorities show majordifferences in the location of the PT Gunung Mas Raya concession blocks. Maps from theMinistry of Forestry consistently show three different blocks with the northern-most arch-shaped block being mapped out about 5 kilometres east of the actual location of the presentplantation area. 73

The lack of reliable government maps, data about the company's full estate area and permitsissued is a serious problem for the company and its direct stakeholders and for externalstakeholders such as local communities and NGOs. Even the government can not rely on its owninformation. This means that the company may be falsely alleged of illegal land clearingresulting in reputation damage that is not easily restored; it may also mean that an investor basesits decision on wrong information that suggests that the company works within legal limits.

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3.3.3 Illegal logging

To the north and east, the logging rights for the peat swamp production forest were untilrecently held by PT Essa Indah Timber (100,000 ha, Uni Seraya group), whose concession forselective logging overlapped with the eastern half of the PT Gunung Mas Raya oil palmconcessions (see appendix I). In April 2003, the Ministry of Forestry withdrew the logginglicense because of poor management practises.74

The limited production forest area directly north of the PT Gunung Mas Raya plantation isprobably not under logging concession anymore. According to a map produced by Forest WatchIndonesia which was based on the 2001 Ministry of Forestry data, this area and the eastern partof the PT Gunung Mas Raya concession is under a logging concession held by PT Cipta JayaAndalas Timber Industry (PT CAYANTRI).75 It is probable that this license has since long beenwithdrawn as more than 80% of the area is deforested. North of the CAYANTRI area, PTSumatra Sinar Plywood Industri (Raja Garuda Mas) is converting a former logging concession ofthe Sumalindo group (PT Inti Prona) into a timber plantation.

So, presently, the forest area north and east of the PT Gunung Mas Raya concession is officiallyunder the ownership and management of the Riau Forest Department and effectively, there is nomanagement at all. As a result, the whole forest block north of PT Gunung Mas Raya is underpressure from illegal logging activities and forest clearing (see map 2 and 3). Members of thelocal Orang Kubu communities, indigenous to the area, have also begun to extract logs because,as one of those interviewed stated: "if we don't take the logs, outsiders will come and take themall the same".

Photo 5 Logging activity near the PT Gunung Mas Raya oil palm plantation

In the area slated for clearing by PT Gunung Mas Raya, logging is also taking place. This is notcompletely independent from the plantation company's activities.There are at least 5 couples of "illegal loggers" active in the forest directly adjacent to the oil palmplantation. Some of these men reported they are from East Java and arrived in the area as

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recently as January 2003. They said they were contacted and told by an unknown individual that"they could earn money from logging in Riau". Using chainsaws, one logging team produces 1m3/day/per person, which is sold for approximately Rp. 140,000/m3 to middlemen. Together,they could make around Rp 3,5 million (US$ 400) per person or more per month. The loggersare not only paid for the timber produced, but also Rp. 75,000 per m3 of wood used to constructpaths inside the forest using planks and flinches. Logs are sawn with chainsaws inside the forestand planks are subsequently transported out by use of bicycles and the drainage canals inside thePT Gunung Mas Raya plantation. There, the wood is loaded on pick up trucks that use PTGunung Mas Raya access roads. The logging activity is currently organised by a middlemanfrom Ujung Batu, who is said to on-sell the wood to a local sawmill.

The loggers stated there is no collaboration between PT Gunung Mas Raya and them. In thiscase, their operations are illegal and the company must stop them from logging in the concessionarea. 76

But PT Gunung Mas Raya does not hinder the loggers access to the forest area and neither doesit stop the middlemen's pickup trucks access via the plantation gates to the forest fringe to haulthe timber from the forest adjacent to the plantation to the main road. Unless the middleman hasobtained, in any way, a Sawntimber Transportation Permit (Surat Angutan Kayu Olahan,SAKO), the company should also stop the middleman from illegal pickup of illegal timber.77

Even if there is no formal collaboration between the loggers and the company, the latter directlybenefits from the logging because the larger trees in the peat forest are removed which is difficultwithout heavy equipment or burning. Furthermore, some estate workers reported that themiddlemen have repeatedly threatened to fight back if the company would prohibit them to usethe plantation roads. The middlemen are allegedly people living around the plantation area, whoalso control the company's access to the highway. If the company would not allow them to use itsaccess roads to the forest, they could in turn block PT Gunung Mas Raya's trucks from enteringor leaving the plantation.

Photo 6 Timber transport activity in the PT Gunung Mas Raya oil palm plantation

It is not without reason that plantation companies are not allowed to remove logs fromconversion forests themselves: it could provide an incentive to apply for a permit, sell the

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remaining timber stand and abandon the area.78 The concept is thus that licensed sub-contractors would only take the logs from within the allocation concession, but the illegalloggers in the PT Gunung Mas Raya area do not know where the company's concessionboundaries are and would understandably be tempted to take logs deeper inside the forest. Thiscould ultimately reduce the standing timber volume in the forest below the 20m³/ha limit. Thisis not necessarily opposed to PT Gunung Mas Raya's interests as it could then inform theDistrict government that the forest is in a critical condition and thus can not be rehabilitated.The company could subsequently recommend the government to lift the limited productionforest status and change it to conversion forest status. If the Ministry of Forestry approves thechange in land status, this could ultimately provide the company the legal right to clear theremaining forest. This step-wise approach to circumvent the spirit of the law is common practisethroughout Riau and, indeed, the rest of Indonesia.

The key threat to the forests surrounding the PT Gunung Mas Raya concession is the lack ofclearly delineated and responsible ownership. Logging activities and forest conversion for oilpalm development are intimately connected to mutual benefit of the loggers and the plantationcompany. Illegal logging is a sensitive issue in the international policy and market debate onforests that investors would not want to be associated with this. The fantastically complex systemof licensing makes it very difficult for investors to judge the legality of its clients' operations.

3.3.4 Floods and drainage of peat swamp forest

PT Gunung Mas Raya's recent expansion activities are taking place in flood prone swamp.Probably already a few years ago, the company connected its plantations to the natural streamsand drainage canals constructed by PT Essa Indah Timber deeper into the forest via a singledrainage canal inside the forest. On either side of this channel, which was estimated to be 300-500 meters long, the forest has been degraded and is partly burned. Along the channel, severaltemporary houses/shacks and stacks of lumber were seen, indicating that the PT Gumung MasRaya drainage canals provide loggers access deeper into the forest.

The existing drainage system was unable to avoid the flooding of the recently planted row ofblocks adjacent to the forest between October 2002 up to February 2003. Surprisingly, the floodlevel did not kill many of the oil palm seedlings although growth appears to be hampered. Theselands appear to be flooding regularly and affect growth. Immature oil palms were observed inblocks that were planted as long ago as 1998. In normal seasons, the drainage canals are alsobelieved to affect the hydrological conditions in the swamp area. A member of the Orang SungaiKubu who lives and works in the forest area for longer periods of time reported that, overall, thewater level in the swamp forest rivers had been dropping and that water quality had declined inthe past four to five years. He held the expansion activities of PT Gunung Mas Raya responsiblefor this trend.

The company realises that the plantation blocks in the expansion area require the developmentof a more extensive drainage system. In January 2003, PT Gunung Mas Raya had purchased (orpossibly rented) an excavator which was working round the clock to build drainage canals andadjacent roads around each new plantation block. Indofood works with a consultant to improveits drainage systems and fertiliser application practises.

The development of the peat swamp forest poses higher costs for PT Gunung Mas Raya and thisis probably why the company did not significantly expand into the northern swamp until 1998.At that time, studies of the initial costs of setting up an estate on peat soil suggested that it is54% more expensive than on mineral soil.79 More recent estimates put this figure at 40% greaterthan on 'ideal' dry, undulating land but the additional costs arise primarily from the necessity todig drainage / transport canals instead of making roads, and from the need to compact the peat.80

Assuming that PT Gunung Mas Raya establishes its undeveloped concession area in the swampforest, Indofood faces a total additional cost of around US$ 2,000,000 (at 2001 exchange rates).

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Table 3-1 Typical establishment costs (rupiah) for oil palm including capital and infrastructure(excluding factory) from the start of land clearing to the end of Year 3 in Sumatra in 1999 by landtype.81

Land type Cost (Rp/ha)Secondary forest – undulating 13,100,000Sandy areas 14,100,000Secondary forest – hilly (50 percent terraced) 15,100,000Secondary forest - peat soils 18,400,000

Despite the higher cost of development, nevertheless, with careful water management and theapplication of trace elements, fruit yields in peat soils are found to be excellent.82 In fact, becauseof the ample ground water and nitrogen stock in peat soils, FFB yields per hectare in peat swamptend to exceed those on mineral soils, thereby leveraging longer-term comparative cost-benefitratios.

The other side of the coin are the ecological externalities of peat swamp development, which arenot or only partially incorporated in the economic cost-benefit analysis. Drained peat swampslose their ecological functions:

• Soaking and storing water to mitigate floods and as a water catchment;• Buffering coastal lands from the intrusion of salty marine water;• Filtering pollutants which will otherwise degrade lakes, rivers and groundwater;• Providing timber and non-timber products;• Providing critical wildlife habitat;• Serving as a key store of the greenhouse gas carbon dioxide;83

• Drainage canals provide loggers access deeper into the forest;• Regeneration and rehabilitation of a damaged peat swamp is virtually impossible. 84

Whereas Indofood seems to address the medium-term business risks associated with peat swampconversion, overall doubt remains about the sustainability of developing the oil palm plantationsin such habitat if ecological externalities are considered in the equation.

3.3.5 Fires and burning

There is little doubt that most of the PT Gunung Mas Raya and PT Ivomas Tunggal estatesplanted from 1984 onwards were cleared through open burning. Even after more than 15 yearsafter land clearing, black burn marks on old tree stumps can still be observed inside the nowmature plantations.

Government Regulation No. 28 of 1985 on Forest Protection prohibited forest burning practiceswith exception for special cases approved by the legal authority (Article 10, Paragraph 1). 85 It isunknown if the Salim Group's plantations had obtained such approval but clearly this regulationhas been ineffective in stopping open burning practises.

In the past five years, various laws, governmental decrees and guidelines on burning have beenreleased. The 1997 Environment Management Act No.23 first recognised corporate liability forenvironmental crime, including the crime causing forest and land fires. Thus, that everyconcession or plantation company is responsible for fire outbreaks in its concession area.86

As of February 2001, Government Decree No. 4/2001 Act on Environmental Pollution related toForest Fires and/or Land Burning explicitly prohibits all persons and their businesses to causeforest fires and use fire for land clearing in their locations. They are obliged to extinguish allfires and take fire prevention measures including monitoring of fire outbreak and reporting

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(based on satellite images) on a half-yearly basis to the Governor's Office, District Head, themayor and other relevant technical institutions (Art. 13-15).87

Violations are subject to sanctions specified in the Environment Management Act. Article 41states that offenders found guilty of causing haze and damaging the environment can besentenced to a maximum of 10-year jail sentence and a fine up to 500 million rupiah (approx.US$ 58,000), or more depending on the impact of the pollution caused.88 Alternatively, theIndonesian Forest Act could be applied. Article 50d prohibits the use of fire for land clearing.Article 78 (ad. 4) specifies that offenders may be penalised Rp. 1.5 billion and imprisonment fora maximum period of five (5) years.89

In the past five years, PT Gunung Mas Raya has repeatedly been alleged of causing fires:

• In September 1997, PT Gunung Mas Raya was listed as one of the 176 companies suspectedof burning by the Ministry of Forestry.90

• In 2000, PT Gunung Mas Raya was again accused of burning in its estates.91

Neither has been followed up with charges.

During the visit to the PT Gunung Mas Raya estates in March 2003, it was evident that severalrecently cleared and yet unplanted blocks had been, and still were, burning. In the eastern end ofthe newly cleared area, fires had affected at least 10 hectares spread out over 3-5 blocks. The fireshad partly burned trees and vegetation at the forest fringe and the debris and peat were stillsmouldering. At night, several fires could be observed flaring up while at daytime, smokeemerged from those areas that had been burning.

Photo 7 Burning in the Sungai Rumbia estate

Typically, it is not possible to establish with 100% certainty who set these fires and why. It is forthis very reason that the Indonesian government introduced legislation that holds the companyresponsible for fires within its areas.

Prior to the field observations, the Indofood Head of Research vehemently denied that thecompany used or uses fire to clear land. PT Gunung Mas Raya has also put up signs warning thatthe area in front of the forest fringe is prone to fires. An estate manager explained that the firesresulted from "careless fishermen who had dropped cigarette butts". A guard stressed that thecompany had not lit the fire and that he was making sure that the fire would not spread in theplanted area. However, at the time of the field visit, the company did not seem to be concernedwith putting out these fires and in a few places, there was evidence that the forest fringe hadbeen burning.

Overall, a strong impression emerged that the company has at all levels well-rehearsed itsresponse to questions about burning practises while there are many arguments in support of the

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view that the company continues to proactively burn debris, branches and logs for land clearingpurposes:

1. In Indonesia, burning is cheaper and faster than zero-burning techniques;2. Recently cleared areas were covered with a large volume of branches and logs which would

significantly slow down planting if they were not removed (by fire);3. There was no heavy equipment in the area that could be used for zero-burning land clearing

techniques (i.e. wood chippers). The peat soil does not allow bulldozers to work there andstacking debris by excavator is a slow process. There was no evidence of stacking in recentlyestablished plantations;

4. The fires were burning in the area that was recently cleared;5. The soils in the burning plots were still quite wet;6. Several fires were burning at the same time in different locations in the estate. Although all

people working in the area smoke heavily, it is unlikely that cigarette butts would causespontaneous fires in three areas at the same time;

7. While the authorities monitor fire hot spots, few offenders face virtually legal charges.

The environmental impacts of the fires are threefold: first, they contribute to the degradation ofthe swamp forest that is already under heavy pressure from illegal logging. During a prolongeddry period, larger parts of this forest could catch fire. Second, burning peat land contributesheavily to haze and third, as much as 600 tonnes of carbon dioxide per metre depth burned perhectare is released into the atmosphere.92

Drawing lessons from many different cases in Sumatra, the EU-Forest Fire Prevention project(FFPCP) in Palembang concluded:

Agro-industrial scale burning on peat soils is proving a disaster. As well as burning off the surface vegetation, thesefires enter the organic soil particularly where surface drains have been dug either to facilitate log extraction or aspart of the proposed estate drainage system. Once the peat is alight it is extremely difficult to suppress andseemingly minor fires produce an enormous amount of smoke. Experience shows that suppression occurs only afterheavy rain. Fire hazard is zero under nature's swamp forest but an international problem when the forest is cleared;the lesson is obvious.93

Even when the burning observed was unintentional and some measures are taken to avoid spreadof fire in the plantation estate, Indofood is legally required to put out any fires in the PT GunungMas Raya area and its failure to do so violates Indonesia's Environmental Management Act No.23. The fires pose legal liability risk and reputation risk to the company and its investors.

Indofood also faces possible court action by the Riau Provincial Environment Department(Bapedalda) who successfully filed a case against a Malaysian company, PT Adei Plantation,which was held responsible for burning in its plantations. The case concluded in April 2003 withthe announcement that both parties had settled the case with US$1.1 million in compensation tobe paid by the company. Bapedalda has been reported to sue five other companies for illegalburning, including the PT Ivo Mas Tunggul (and ultimately Indofood) subsidiary PT CibaliungTunggul Plantation in Rokan Hilir.94

3.3.6 Human-wildlife conflicts

In the past decade, deforestation in Riau has been rampant. As a result, the province is currentlya “hot-bed” of human-wildlife conflict. At a human-wildlife conflict meeting held in Pekanbaru,September 26-27, 2002, it was stated that between 1997-2002 there were 57 elephant and 51 tigerconflicts in Riau. With the devastating rate of deforestation, it is likely that this problem willonly worsen.95

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The forests in and around Sungai Kubu used to be a vibrant habitat for a great variety of species,many of which are now considered critically endangered. Among them are the SumatranRhinoceros, Sumatran Elephant, Sumatran Tiger and Arwana, all species which are classified asendangered and which are listed on Appendix I of the Convention on International Trade inEndangered Species (CITES).96

Photo 8 Sungai Kubu swampforest

Sumatran Rhinoceros (Dicerorhinus sumatrensis)In 1984, the Forest Department and Howlet (UK) conducted a survey to determine thedistribution of the Sumatran Rhinoceros in Riau. They found several rhinoceros in theforestlands of northern Riau, which were slated for conversion into oil palm plantations. In 1986,11 Sumatran Rhinoceros were captured in the forestlands close to Kubu River and the ProtectedForests of Mahato. Four of the captured rhinos were sent to one of the zoos in England while theother 7 were sent to Ragunan Jakarta, a safari park, and the zoo in Surabaya. Ever since, no morerhinos have been reported to exist in Riau. The species is now considered extinct in Riau as aresult of forest conversion for oil palm plantations.

Sumatran elephant (Elephas maximus sumatranus)Riau Province has the biggest elephant population of entire Sumatra. According to a WWFreport in 1985, there were about 1,100-1,700 wild elephants amongst Riau forests. By 1999, theConservation and Resource Management Department (KSDA) estimated the population at 700-800 elephants. Human-elephant conflict is a direct consequence of habitat destruction. In the1980s, the extent of human-elephant conflicts in Sumatra worsened due to the TransmigrationProgram however in the 1990s, competition for land between both elephants and plantationscompanies emerged as the main cause of conflicts. The core problem is generally unwiseplanning in forestland use and the unfriendly treatment of wild elephants by humans.

Indofood has encountered human-elephant conflicts in its Kandis estate in the period 1986-1989. Indofood's Head of Research explained that the elephants entered the estate to eat theyoung oil palm shoots, which led to the destruction of 2,000 to 5,000 hectares. In addition, anelephant was killed during a road accident that was believed to lead the group members of thekilled elephant to ravage the estates in retaliation. The company responded first by diggingditches and, when this did not stop the elephants, electric fencing was introduced as well whichthen stopped the elephants from entering the estate.

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Human-elephant conflicts in oil palm estates can be costly to the plantation companies. A WWFsurvey of 2000 found that the estates in Riau suffer financial losses up to Rp. 600,000 (US$70)/ha/year as a result of elephants damage.97

The staff in the PT Gunung Mas Raya estates does not recall seeing elephants in the estates.However, surveys by WWF' and KSDA show that the forestland around the Kubu River isdefinitely the natural habitat of Sumatran elephants. In this region, a few groups of elephants areknown to survive in the increasingly fragmented parcels of forestland while some elephantsresort to encroaching on young oil palm plantations. The possible explanations to the questionwhy these elephants have not been seen in the PT Gunung Mas Raya estates is first that theymay have died since the population in this area, overall, has decreased heavily in the past decade.The second possibility is that the elephant population decreased due to relocations to elephanttraining centres.

Tigers (Panthera tigris sumatrae)Sumatran tigers are one of the few species protected under Indonesian conservation laws. Thetiger population nevertheless continues to decline rapidly. According to the KSDA, there werestill around 400 Sumatran tigers remaining scattered throughout Riau in 1992. However,between 1998 and 2001 alone, 65 tigers were killed, 60 of which were hunted down and possiblymore deaths have been left unreported.98

According to estate personnel, tigers were heard back in 1984-1989 in the PT Sadang Mas estateswhen the forest was first cleared. The PT Gunung Mas Raya staff did not recall any encounterswith tigers since the 1980s, but in January 2003 an adult female tiger suddenly appeared in theSungai Rumba estate.99 The tiger entered the workers' settlement where it killed a number ofgoats. When the tiger was hiding in a small shed, a worker who had climbed on top of the shed,and fell off. The tiger attacked the man and severely injured his legs.

The incident shook up the estate personnel and ever since the tiger has repeatedly shown up inthe estates. A security officer faced the tiger in an effort to shoot it, but froze upon sight of thefully-grown animal. Even, a "paranormal" was mobilised to ward off the tiger, but to no avail.During the field trip in March 2003, the tiger appeared at night and positioned itself under theexcavator at the forest fringe. Currently, the company staff does not intend to kill the tiger but iffurther conflicts occur, this may still be the final result.

According to Mr. Adi, a member of the Kubu community who lives and works inside the swampforest, there may have been as many as 5 to 10 tigers in the Sungai Kubu area. For sure, thispopulation is rapidly declining due to habitat loss and human-tiger conflicts. Mr. Adi said thatin 2001, a tiger killed three community members working for PT Essa Indah Timber. This tigerwhich was subsequently killed by the logging company staff. In the end of 2002, a truck killedanother young tiger in the area.

The recent confrontations between the tigers and humans are the result of a variety of factors.The most likely immediate explanation for the appearance of the tiger in the Sungai Rumbiaestate are the heavy floods in the swamp forest between October 2002 and February 2003.Another probable immediate cause is the extensive illegal logging operations inside the forestand at the PT Gunung Mas Raya border. The constant unrest in the forest may have driven thetiger out in search of a more peaceful habitat.

Ultimately, however, the tiger is likely to encounter shortage of pray as its habitat is beingheavily degraded and destroyed. Considering that a lowland forest habitat of 10,000 ha cansustain a density of no more than 1-3 tigers, habitat loss resulting from illegal logging and landclearing for oil palm estates is the most likely reason why the tiger enters the plantation estate. 100

Whether or not the tigers will be able to survive depends first on the likelihood of hunting and

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the prospect of forest conservation. However, where hunting is prevented tigers are thought toadapt well to mixed landscapes of forest and oil palm.101

Human-mammal conflicts can pose significant problems to estate managers, be it in the form ofeconomic damage to recently planted oil palms (elephants) or unsafe working conditions toestate personnel (tigers). The conversion of tiger habitat by PT Gunung Mas Raya poses asignificant reputation risk to Indofood and its investors.

3.4 Company - Community conflicts

The forestlands in which Indofood's oil palm plantations are found today were heavily forestedup to some 15-20 years ago. This does not mean, however, that the Sungai Kubu area was emptyland. For over 200 years the area is used and its ownership claimed under customary rights law(adat) by the indigenous Orang Sungai Kubu people.

Among themselves and under the auspices of the Dutch colonial government, the village heads("soekoe") came to an agreement in 1819 through an official document ("Regeling voor deKoeboe") in which the customary land rights to the forestland ("hoetan tanah"), usufruct rightsand various cultural practises were settled:

We Padoeka Sri Sultan Saidi Sjarif Hasim abdoel Djalim Saifoeddin jang Dipertoean Besar, the almighty, seated onthe throne of the land Siak Sri Indrapura and populace, after deliberations with the karapatan of Datoeqsder of thefour soekoe in the land of Siak Sri Indrapura, in the presence of the Tanah Putih, Bangka and Koeboe, establishedthe adat between them with all indoeks and tongkats in the area to avoid conflicts or dispute. Therefore, we believeit is good to consider and distinguish each one's dignities and "hoetan tanah" (…).

This all is clarified below, because we believe that if we do not establish this now, dispute will certainly arise in thefuture.102

Despite the leaders' foresight, the agreement would render powerless when logging companiesfrom Jakarta entered the Kubu territory with permits from the central government some 150years later. Another 20 years later, plantation companies began to replace the logging operations,bringing about the final dispossession of the Orang Sungai Kubu customary rights land.Representatives of the Sungai Kubu communities indicated that many community members arebitter and frustrated with the big plantation companies' unwillingness to recognise in some formtheir traditional claims to the land.

Few Sungai Kubu people are appear to be employed by the plantation companies and theytherefore continue to rely on a much smaller area of land for their subsistence and cash income.According to Mr. Haji Usman, one of the Kubu community leaders in the area, the plantationsby the Salim group (including PT Gunung Mas Raya), PTPN V and PT Tunggal Mitra overlapwith approximately half of the Kubu customary rights land. Of these company only PTPN Vdeveloped a Nucleus Estate and-Smallholder (NES) scheme but none of the other plantationcompanies have developed such scheme. Mr. Usman estimates that as much as 388,000 ha hasbeen taken over, a figure that corresponds with maps published by a mapping investigation teamwhich included the Local District Government and Forest Planning Board. The land take-overhas been a source of conflict between the Sungai Kubu people and the companies for many yearsnow.

When the plantation companies began to clear land privately owned by the Sungai Kubucommunity members in 1993, this activity sparked the first demonstration staged by thecommunity. “We had been working so hard to peacefully defend the land that we inherited fromour ancestors. But we faced many threats and we suffered much oppression. When PT LahanTani Sakti (one of the oil palm companies under Salim Group, south of the overpass road)cleared 1,500 ha of privately owned oil palm and rubber gardens, we organised a demonstration

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to utter our discontent." The demonstration ended in violence. Mr Usman still has a scar on hishead where he claims a guard's rifle butt hit him during the demonstration. According to him,the companies never compensated the communities, not even for crops lost. Today, he said, “weget to eat the flying dust of their vehicles that all the time pass by this road “, pointing to the dirtroad beside his house where many heavy trucks loaded with acacia logs pass by every day.

Photo 9 Communities living in the PT Kura oil palm plantation

The land rights situation in Sungai Kubu was further complicated in 1999 when the companyPT Armapindo and several local public figures lured thousands of families to the area, promisingthem 2 hectares of ready to harvest plantations at a price of Rp 3 - 4 million (US$ 350-470). Theselands were supposedly be those operated by Indofood, as Dr. Mahludin Sali, a public figure ofRiau Malay Community, apparently expected that the company's land rights would to be revokedin the Reformation period (1998 onward). Some 3,000 families, from South Sumatra and Javaespecially, as well as local community members took on the offer.

According to Ir. CH.WH. Siregar, a local journalist lives around the area, the total fund could begathered from the outsiders amounted to around Rp 3 billion (US$ 350,000). This has beenconfirmed by Maiden E. Purba, the director of Legal Aid Society and Indonesian Advocates ofForestry Society, a local non-governmental organisation in Rokan Hilir.

But the PT Gunung Mas Raya concession remained under the Indofood group and no land wastransferred to the local communities and the new arrivals. Hundreds of people lost a substantialamount of money and most families returned in frustration to their home villages. Yet today,around 600 families still remain in the area. They now live besides the overpass road from BaganBatu to Pekanbaru, south of the PT Ivo Mas and PT Gunung Mas Raya concessions. They havebuilt houses under the oil palm trees in the 1,500 ha plantation owned by PT Kurnia Rahman(PT Kura), a company whose management also has relations with PT Armapindo. Some of thesepeople are now believed to resort to illegal logging in the swamp forest north of the PT GunungMas Raya concession.The leaders of the Sungai Kubu community and some of the newcomers to the area joined in thestruggle for land. They have established no less than 77 co-operatives representing some 60,000people. They have actively lobbied provincial and national authorities in the past years toachieve a satisfactory settlement on the land rights issue, for example in the form of asmallholder credit scheme. "Until recently, these lobby actions have resulted in little more thanempty promises", Mr. Usman stated.

"Nevertheless, during several recent meetings with the local, provincial and central governmentoffices, the cause of the local communities was acknowledged by some officials and the topic ofcompensation for oil palm trees growing on community lands has been discussed." According toMr. Usman, a settlement was agreed in principle and he expected that during a meeting in

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Pekanbaru on March 15. At this meeting the details would be rounded up to put into practise therecommendation of a multi-stakeholder BPBN team to transfer 2 hectares per family for the6,000 Orang Sungai Kubu. Although the outcome of this meeting is not known there appears tobe scope for change also laid down in the draft Riau spatial land use plan for 2015. The maps inthis draft plan indicate that the status of the PT Ivomas Tunggal oil palm plantation south of thePT Gunung Mas Raya estates is to be converted from private company to a smallholder estate.

The present status of the dialogue between the government and the communities was not furtherassessed in detail. Nor is it known to what extent the companies are involved. Considering thatsome commitments now appear to have been made by some government offices to address theland ownership and usufruct rights, it is critical that these are realised in a manner that issatisfactory to the affected communities. Otherwise, the long-lasting smouldering conflict couldnurture further frustration and potentially lead to violent protests and/or land reclaiming.Naturally, this would pose the companies and their investors to significant business andreputation risk.

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Chapter 4 Analysis and discussion

4.1 Risks identified

4.1.1 The existing plantation area

The management of the previously developed oil palm plantation area does not appear to besubject to extraordinary risks with the notable exception of local peoples' claims over (part of)the plantation area. In environmental terms, the company has introduced a number of BestManagement Practises (BMPs) in its established plantations that bring about bothenvironmental and economic benefits. Labour conditions were not fully assessed but appeared toupkeep provincial standards.

4.1.2 The expansion area

The expansion of the PT Gunung Mas Raya estates exposes the Indofood and ING to a range ofrisks:

1. The lack of reliable government data on the company's estate area and permits issuedcould result in the company being falsely alleged of illegal land clearing, resulting inreputation damage. It may also mean that an investor bases its decision on wronginformation that suggests that the company is working within legal limits. However, ifthe company expanded outside its concession area, this poses legal liability risk andreputation risk to Indofood and reputation risk to ING.

2. Although a full stakeholder consultation process would be required, it is probable thatthe peat swamp forest should be classified as High Conservation Value Forest (HCVF)mainly because:

• The forest contains globally, regionally or nationally significant concentrations ofbiodiversity values (e.g. endemism, endangered species, refugia).

• The forest provides basic services of nature in critical situations (e.g. watershedprotection, erosion control).

• The forest is critical to local communities’ traditional cultural identity (areas ofcultural, ecological, economic or religious significance identified in co-operation withsuch local communities).

Conversion of HCV forests poses reputation risk to both Indofood and ING.

3. Whereas Indofood appears to address the medium-term business risks associated withpeat swamp conversion, overall doubt remains about the sustainability of developing theoil palm plantations in such habitat if ecological externalities are considered in theequation. Peat swamp conversion represents operational risks to Indofood and reputationrisk and credit risk to ING.

4. Logging activities and forest conversion for oil palm development are intimatelyconnected to mutual benefit of the loggers and the plantation company. Illegal logging isa sensitive issue in the international policy and market debate on forests that investorswould not want to be associated with this. The fantastically complex system of licensingmakes it very difficult for ING to judge the legality of its clients' operations but the bankfaces reputation risk wheras Indofood is exposed to potential legal liability.

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5. Even when the burning observed was unintentional (which appears unlikely) and somemeasures are taken to avoid spread of fire in the plantation estate, the company is legallyrequired to put out any fires in the area and its failure to do so violates Indonesia'sEnvironmental Management Act No. 23, thus representing legal liability risk which mayaffect the company’s ability to pay back its debt (credit risk). Furthermore, there is apossibility that the fires would destroy the readily planted areas which poses operationalrisk. The fires also expose Indofood and ING to considerable reputation risk.

6. Human-mammal conflicts can pose significant problems to estate managers, be it in theform of economic damage to recently planted oil palms (elephants) or lack of safeworking conditions to estate personnel (tigers). This represents operational risk toIndofood. The conversion of tiger habitat furthermore poses a significant reputation riskto Indofood and ING.

7. It appears that commitments have been made by some government officials to addressthe land ownership and usufruct rights conflicts in the area. If this issue is not addressed,the smoldering conflict could potentially lead to violent protests and/or land reclaiming,posing operational risk to Indofood. This poses significant credit and reputation risk tothe company and its investors.

4.2 Weaknessess in ING's policy and loan conditions

In response to an inquiry of Friends of the Earth Netherlands on the Indofood loan, ING Bankstated it had strengthened its investment policy on oil palm plantations (see Appendix II fordetails). New guidelines for the credit commission had been incorporated in the creditconditions and guidebook. ING Bank said it had thereby well adhered to the demand toimplement the investment policy.103

ING publicly stated that its risk assessment procedures are "good and carefully conducted", butalso admitted that it is also a "learning process".104 In this section, we will review the weaknessesin ING's procedures on the basis of the PT Gunung Mas Raya case.

ING Bank has stated that its April 2002 working capital facility to Indofood was indeed testedagainst the policy even though at that time, the policy was not yet officially implemented (March2002). ING Bank was convinced the transaction took place in line with the policy. It hadspecified that the facility and could "absolutely not be used for the purchase of plantations orland for cultivation". In case Indofood would not adhere to this condition, this could beconsidered an 'event of default' which could then lead ING to prematurely call the loan.105

The PT Gunung Mas Raya case reveals the following weaknesses in the investment screendeveloped and applied by ING Bank:

1. ING’s investment screen did not stop the client from expanding its estates in a sensitiveforest area, which is potential High Conservation Value Forest (HCVF); it did not stopthe client from putting out, most likely illegal, fires in its estates and it did not addressthe wishes of local communities. One key reason for failing to address these issues is thatING ultimately only requires legal compliance.

2. It appears that the bank was not aware of PT Gunung Mas Raya’s expansion activitiesand this implies that its risk assessment procedure was not well conducted. However, ifING Bank was aware of Indofood's expansion activities, it may have withheld thisinformation from Friends of the Earth (who requested information about the Indofoodtransaction) based on the principle of confidentiality between banks and clients. Butthen it could also be argued that ING breached this agreement by communicating that itbelieved its client adhered to the policy.

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3. The conditions tied to ING's loan to Indofood are ineffective because:

a. First, holding companies are never involved in actual field level operations (and,thus, deforestation or burning);

b. Second, ING's condition that its loan could not be used for the purchasing of newplantations or plantation land ignores the fact that Indofood is still in the processof land clearing in concessions previously obtained and faces land disputes withlocal communities.

c. Third, financing at the holding company level allows for internal re-budgetingby the client. PT Gunung Mas Raya has not attracted new loans since 1996 andmost likely depends on group capital to implement its expansion program. Theinvestment required for the expansion activities (including purchasing or rentingof land clearing equipment) could easily have been released through internal re-budgeting.

d. A similar situation was identified in another case study involving an ING loan toPT SMART and it therefore seems that the new investment policy has not beenstrengthened on this key issue.106

4.3 Event of default?

Because ING’s policy ultimately requires nothing more than legal compliance, the bank wouldconsider the key question: did Indofood or did it not operate outside the law? While there areclearly indications that laws (e.g. Environment Management Act No. 23) may have been broken,the extent to which PT Gunung Mas Raya’s activities are in conflict to Indonesian law, andthereby ING’s policy, could be subject to long debate. There is a lack of hard evidence on someaccounts and, equally important, a far more detailed review of Indonesian law would be requiredto come to further conclusions. Even then, it is expected that in clarity in laws and regulationswould still leave open much space for interpretation. It is therefore hard to say if Indofood is indefault with the ING policy.

However, regardless of this it is much more important to realise that, even when all of thecompany’s operations would be legal on the basis of some law then still, none of the key concernsregarding oil palm development that led ING to adopt its investment screen have beensatisfactorily addressed.

4.4 Indofood's planned expansion

Relative to the overall size and scope of Indofood's operations, the PT Gunung Mas Raya case isof fairly limited scale. Yet, the PT Gunung Mas Raya case is only one in the group's estates,which are scattered all over Riau. Although some Best Management Practises appear to beimplemented in these estates, there are also indications that other Indofood subsidiaries are alsoentangled in land disputes with local communities and illegal burning.

Moreover, the PT Gunung Mas Raya case provides lessons that are relevant in view of Indofood'sfuture expansion. It is estimated that the company group may require an additional 160,000-210,000 ha to supply the group's total CPO demand. If the group manages to acquire newplantations or concessions (which may be illegal if the group’s area under non-listed holdingcompanies exceeds 100,000 ha in Indonesia in total), it will thereby face the challenge ofaddressing the various issues and related risks in a much bigger area. The company will have toprovide detailed information about its management and development policies and practises toaddress, not only the risks directly associated with oil palm agriculture but also the ecologicaland social externalities of these operations.

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4.5 The need for a comprehensive management plan

One of the key problems that ING's risk assessors and its credit committee face is the lack ofreference cadre. Neither Indofood nor First Pacific has publicly available plantationdevelopment and management policy that addresses all relevant environmental and socialimpacts of their operations.107 Mr. Sugih Wanasuria, Indofood's Head of Research in Teluk Siak,verbally stated that the company has had an environmental policy in place for the estates andCPO mills since 15 years. Furthermore, Mr. Sugih pointed out that Indofood:

1. Applies Integrated Pest Control in all its estates;2. Recycles all nutrients derived from waste materials in some estates;3. Indofood has not expanded since 1995 "apart from some little areas here and there";4. Does not clear forest for oil palm development;5. Does not burn for land clearing.108

This study found that this (informal) policy is not fully implemented by the company. Nor doesthis policy fully reflect the scope of the investment criteria that ING adopted.

The lack of an explicit policy hinders the company's investors and its buyers to fully assess andvalue the risks involved when providing financial services to the company. To enable suchassessment, Indofood would require a comprehensive plantation management and developmentplan that addresses both agricultural risks and potential ecological and social externalities.

Such a plan could be particularly credible if the company took the initiative to engage itsinternal and external stakeholders in the process of design and implementation. Relevantstakeholders (see also Appendix III) would include:

• Indofood's key investors, notably those which have developed some form of investmentscreens on environment and social issues (ING Bank, Crédit Suisse First Boston);

• Indofood's main buyers, notably those with some purchasing policy on environment andsocial issues (Unilever);

• Government bodies, notably those in charge of land use matters (BPN), forest conservation(KDSA) and smallholders (Department of Forestry and Agriculture);

• Non-governmental organisations, especially those working on forest conservation (WWF)and community concerns (representative co-operatives).

With such policy in place, Indofood would be able to significantly increase its understanding ofits impact on other stakeholder interests and seek, where possible, win-win solutions. Suchpolicy would, at least in theory, make it easier for Indofood to attract foreign capital and accesscertain markets and it would be better prepared to face the issues that would arise from thepossible acquisition of new plantation areas. Investors and buyers would be in a better positionto reliably communicate externally about their client/supplier's performance while natureconservation interests and local peoples' needs, rights and wishes could be better accommodated.

A crucial prerequisite for such process is, apart from a true commitment to address the issuesidentified in this report, the willingness on all parts to be transparent while taking into accountthat a process like that described would not or very rarely require insight in commerciallysensitive information.

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4.6 General lessons learned

The following general lessons are drawn from this case study:

1. Investments in the oil palm sector pose reputation and credit risks to investors, not onlybecause companies may not meet all standard risk parameters but also because theexternalities created by plantation development cause considerable tension with the interestsof external stakeholders.

2. Criteria and procedures to value and address risks related to investments in the oil palmindustry require thorough implementation and monitoring by the investor.

As regards to the performance level required from clients, of course much depends on the riskthat an investor is willing to take. It should be stressed, however, that requiring compliance toIndonesian national and/or regional laws does not sufficiently protect investors from many of therisks identified in this report. The vacuum in Indonesia's regulatory system and international lawrequires financial institutions to define specific performance standards that adequately avertunnecessary risk and avoid the creation of ecological, social and economic externalities.

3. Loan conditions should be formulated precisely, especially when financial services areprovided at the group level.

4. After contracts have been sealed, monitoring of compliance is required. Management plansand work plans, which take the investors' criteria into account, will make it easier to do this.

5. Transparent reporting is hindered by confidentiality agreements between companies andinvestors. Such agreements draw heavily on outsiders' trust especially when publicstatements are made which can not be verified by third parties.

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Endnotes

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1 Indonesian PalmOil Research Institute website (www.iopri.go.id).2 Menteri Kehutanan dan Perkebunan Republik Indonesia. Penghatian/penangguhan pelepasan kawasan hutan.Nor.603/Menhutbun-VIII/2000.3 Spek, M. and I. Ng, 2002. “Plantations: A leveraged play on stability.” GK Goh Ometraco Research,Singapore.4 Sawit Watch personal communication, June 2003.5 Oil World 2020 (1999) and Oil World Annual 1999. ISTA Mielke GmbH.6 Van Gelder, J.W. 2003. Financing of the Indonesian Palm Oil Sector. A Research Paper for WWFInternational. Profundo.7 Palm Oil Industry Needs Rp 20 Trillion Investment. Antara, 25 November 1999.8 On average each plantation company borrows about 77% of the total establishment of their plantations (ICBS1997, in: Potter, L. and J. Lee 1999. Oil Palm in Indonesia: Its Role in Forest Conversion and the Fires of1997/98. Report for WWF Indonesia).9 Collins, N.M., J.A.Sayer and T.C.Whitmore 1991. The Conservation Atlas of Tropical Forests: Asia and thePacific. IUCN.10 Scotland, N., A.Fraser en N. Newell 1999. Roundwood demand and supply in the forest sector in Indonesia.UK-Indonesia Tropical Forest Management Program.11 High conservation value forests (HCVFs) are defined as forests that need special protection because:

1. They contain globally, regionally or nationally significant concentrations of biodiversity values (e.g.endemism, endangered species, refugia).

2. They contain globally, regionally or nationally significant large landscape level forests, contained within, or3. containing the management unit, where viable populations of most if not all naturally occurring species exist

in natural patterns of distribution and abundance.4. They contain rare, threatened or endangered ecosystems.5. They provide basic services of nature in critical situations (e.g. watershed protection, erosion control).6. They are fundamental to meeting basic needs of local communities (e.g. subsistence, health).7. They are critical to local communities’ traditional cultural identity (areas of cultural, ecological, economic

or religious significance identified in cooperation with such local communities).12 IOPRI information board, Medan.13 Fitrian, A. and I. Adriansyah. Green and wealthy: An Indonesian oxymoron? The Jakarta Post, June 07, 200314 Wakker, E. 1998. Introducing Zero-burning techniques in Indonesia. Report prepared for WWF Indonesia.AIDEnvironment; Wakker, E. and J.W. van Gelder 2000. Funding Forest Destruction: the Involvement of DutchBanks in the Financing of Oil Palm Plantations in Indonesia. AIDEnvironment, Contrast Advies and Telapak(Indonesia).15 See e.g.. Simorangkir, D. and Sumantri 2002. A Review of Legal, Regulatory and Institutional Aspects ofForest and Land Fires in Indonesia. Project Fire Fight Southeast Asia, WWF and IUCN.16 Tacconi, L. 2003. Fires in Indonesia: Causes, Costs and Policy Implications. CIFOR Occasional Paper No. 38.17 See Wakker, E. 1998. Introducing Zero-burning Techniques in Indonesia’s Oil Palm Plantations. Report forWWF Indonesia.Forest and Vayda, A.P. 1998. Finding Causes of the 1997-98 Indonesian Forest Fires: Problemsand Possibilities. Report for WWF Indonesia for further discussion on fire causes in plantation areas. See also:Fires in Kalimantan Bring Famine and Dispossession. Down to Earth. 6 November 1998; Schweithelm, J. 1999.The Fire This Time: An Overview of Indonesia’s Forest Fire in 1997/98. WWF Indonesia.18 Indonesian Palm Oil Research Instititute (IOPRI) website (http://www.iopri.co.id/).19 See: Carrere, R. 2001. The Bitter Fruits of Palm Oil . World Rainforest Movement; Sawit Watch website(www.sawitwatch.or.id).

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20 Potter, L. and J. Lee 1999. Oil Palm in Indonesia: Its Role in Forest Conversion and the Fires of 1997/98.Report for WWF Indonesia); Potter, L.M. and J.L. Lee, 1998. Tree Planting in Indonesia: Trends, Impacts andDirections. CIFOR; Sawit Watch personal communication June 2003 and other sources.21 Lafranchi, Chr. 2000. Valuation of a Dayak Benuaq Customary Forest Management System (CFMS) in EastKalimantan. The benefits of CFMS compared to alternatives. NRM/EPIQ Program/SHK Kalimantan Timur.22 See for one overview e.g. The Convention on Biological Diversity, State Sovereignty and Indigenous Peoples’Rights. Legal Briefing. World Rainforest Movement website (http://www.wrm.org.uy/actors/BDC/legal1.pdf)23 The Nederlandse Investerings Bank (NIB), Financierings Maatschappij Ontwikkelingslanden (FMO) enAegon also took measures following this discussion.

See Wakker, E. and Gelder, J.W. van, (forthcoming), Fighting Forest Fires through Financial Institutions.UNEP-FI Newsletter (www.unepfi.net).24 Those banks with exposure in the pulp and paper sector (ING Bank, ABN Amro Bank and Fortis) have statedthat similar criteria are now also applicable to this industry.25 See e.g. UNEP Financial Initiative website (www.unepfi.net); IFC website (equatorprinciples.ifc.org/)26 See e.g. Sustainable Agriculture Platform (http://www.saiplatform.org/) and Sustainable Palm Oil website(http://www.sustainable-palmoil.org/).27 Van Gelder, J.W. 2003. Financing of the Indonesian Palm Oil Sector. A Research Paper for WWFInternational. Profundo.28 Guthrie's US$245m issue awaits right time, Business Times, Kuala Lumpur, 10 December 2002; Guthrie BondIssue Set To Raise $245 Million, Carolyn Lim, Asian Wall Street Journal, Singapore, 17 February 2003.29 Annual Report 2002, Kuala Lumpur Kepong Berhad, Ipoh, December 2002.30 Annual Report 2002, PT PP London Sumatra Indonesia Tbk., Jakarta, April 2003.31 Indofood gets $100 million loan, Jakarta Post, Jakarta, 10 April 2002; ING closes $100 million loan forIndofood, Rob Davies, FinanceAsia.com, 12 April 2002.32 Indofood to issue US$200m bond to refinance debt, The Jakarta Post, Jakarta, 29 May 2002; Indofood US$280 million bond wins warm reception at competitive pricing, Press release PT Indofood Sukses Makmur,Jakarta, 12 June 2002; Indofood heats up Indonesian bond issuance, Asiamoney, July 2002; FinanceAsiaAchievement Awards 2002 - Deals of the year, FinanceAsia.com, 17 December 2002.33 Announcement to the Surabaya Stock Exchange, PT Indofood Sukses Makmur, Jakarta, 26 March 2003.34 Hagemeyer Nu in Rol Van Reddende Engel, B. van Kalles, Het Financieele Dagblad, Amsterdam, January1998; Meerderheid Hagemeyer in Nederland, Het Financieele Dagblad, Amsterdam, 10 March 1998; HagemeyerPlaatst Belang Pacific Tegen Koers Hfl. 89, Het Financieele Dagblad, Amsterdam, 20 March 1998.35 Indofood gets $100 million loan, Jakarta Post, Jakarta, 10 April 2002; ING closes $100 million loan forIndofood, Rob Davies, FinanceAsia.com, 12 April 2002.36 Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002.37 Letter from Monique de Lede (Milieudefensie) to Pieter Kroon (ING Bank) on the implementation of policieson oil palm and pulp&paper in Indonesia. October 3, 2002.38 Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002.39 Indofood to sell Bogasari mill to strategic buyers, The Jakarta Post, Jakarta, 7 October 1999; Year of LivingDangerously For a Tycoon in Indonesia, by Mark Landler, The New York Times, New York, 16 May 1999.40 Indonesia: A Tycoon Under Siege - Business Week, New York, 28 September 1998; Anthony Salim'sComeback May Be Coming Apart, Business Week, New York, 3 May 1999; Year of Living Dangerously For aTycoon in Indonesia, by Mark Landler, The New York Times, New York, 16 May 1999; Indofood to sellBogasari mill to strategic buyers, The Jakarta Post, Jakarta, 7 October 1999; The myth of Chinese domination,George J. Aditjondro, The Jakarta Post, Jakarta, 13 August 1998.41 Head, M. 1998. The Suharto Financial Dynasty. World Socialist Website(www.wsws.org/news/1998/jun1998)42 The challenges of growth smoothing the bumpy road, Euromoney Magazine, London, April 1997; UncleWilliam is back at ASTRA, Dwi Sandi Merwanto, Ahmad Suhijriah and Beta Ramses, Kapital, Jakarta, 19

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October 1999; U S Grp Is Preferred Bidder For Indonesia Astra, Jay Solomon, Dow Jones, Jakarta, 9 December1999.43 Indonesia: Crony Bank, Anyone? - BCA's high-profile IPO may go begging, Michael Shari, Business Week,Los Angeles, 22 May 2000; Indonesia's Plan to Sell Salim Holdings Causes Concern at World Bank, IMF, JaySolomon, Wall Street Journal, New York, 1 August 2000; Born Sly, Indonesian Business, Jakarta, September2000; BCA's Mysterious Suitors, Sadanand Dhume, Far Eastern Economic Review, Hong Kong, 12 July 2001;Holdiko on target, Maggie Ford, Asiamoney, Hong Kong, May 2001; Salim may avoid criminal charges, TheJakarta Post, Jakarta, 27 November 2002.44 Liquid carrier project, The Jakarta Post, Jakarta, 23 April 1997; The Sinar Mas Group, J. Tanja, Paribas AsiaEquity, Singapore, 27 April 1998.45 Casson, A. 2000. The Hesitant Boom: Indonesia’s oil palm sub-sector in an era of economic crisis andpolitical change, CIFOR Occasional Paper No. 29, Centre for International Forestry Research.46 KKN stands for corruption, collusion and nepotism. Source: Wakker, E. and J.W. van Gelder 2000. FundingForest Destruction: the Involvement of Dutch Banks in the Financing of Oil Palm Plantations in Indonesia.AIDEnvironment, Contrast Advies and Telapak (Indonesia).47 Dayak People Win Lawsuit Against Salim Group. Jakarta Post, 1 June 1999.48IBRA And Holdiko Sell Shares In Palm Plantation Companies For USD 350 Million, Press Release Holdiko,Jakarta, 27 November 2000; Indonesian Government Closes US$368 Million Sale of Oil Palm Assets, PressRelease Ministry of Economic Affairs, Jakarta, 13 March 2001.49Holdiko Sells Salim Oleochemicals Group For USD131 Million To a Local Consortium, Press release PTHoldiko Perkasa, Jakarta, 21 November 2000; IBRA Sells a Controlling Stake In Salim's Oleochemicals Group,Jay Solomon, Wall Street Journal, New York, 22 November 2000.50 IBRA to start off selling stakes in 61 companies, Jakarta Post 24 April 2003.51 Annual Report 2000, PT Indofood Sukses Makmur Tbk., Jakarta, May 2001; AFP Enters Into StrategicPartnership with Indofood for its Palm Oil Businesses in Indonesia, Press Release Golden Agri-Resources Ltd.,Singapore, 10 May 2001; Indofood 2002 Financial Results, Press Release PT Indofood Sukses Makmur, Jakarta,24 March 2003.52 Indofood to boost food business with expansion, The Jakarta Post, Jakarta, 3 March 1997; Shareholders'meeting okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Annual Report 1999,First Pacific Company Ltd., Hong Kong, April 2000; Annual Report 2000, PT Indofood Sukses Makmur Tbk.,Jakarta, May 2001; First Pacific's Indofood Unit to Acquire A Controlling Stake in Golden Agri-Resources,Press Release First Pacific Company Ltd., Hong Kong, 10 May 2001; Website PT Indofood Sukses MakmurTbk. (www.indofood.co.id), August 2001.53 Website PT Indofood Sukses Makmur Tbk. (www.indofood.co.id), August 2001.54 Mr. Sugih Wanasuria (Head of Research Indofood), 6 March 2003.55 The four estates developed under the Sinar Mas-Salim group joint venture PT. Sadang Mas are also divided asPT Salim Ivo Mas Tunggal I A, I B, II A, II B. PT. Salim Ivomas I A consists of Balam Estate and Sungai DuaEstate. PT Salim Ivo Mas I B consists of Kahyangan Estate, Kencana Estate and Cibaliung Estate. When thejoint venture was dissolved in 1990, PT Salim Ivo Mas 1A and 1B were brought under PT. Salim IvomasPratama in the Indofood group whereas PT. Salim Ivomas II A and II B were brought under the Sinar Masgroup.56 Indofood to boost food business with expansion, The Jakarta Post, Jakarta, 3 March 1997; Shareholders'meeting okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Annual Report 2001, PTIndofood Sukses Makmur Tbk., Jakarta, May 2002; Sale Of Shares Held In PT Salim Sawitindo And PTBhaskaramulti Permata, Announcement to the Kuala Lumpur Stock Exchange, Kumpulan Guthrie Berhad, KualaLumpur, 20 November 2002.57 Liquid carrier project, The Jakarta Post, Jakarta, 23 April 1997; Indosawit boosts output, The Jakarta Post,Jakarta, 15 August 1997; Profile and Directory of Indonesian Plantation 1997/1998, PT Capricorn IndonesiaConsult (CIC), Jakarta, 1998; Annual Report 1997, PT Indofood Sukses Makmur Tbk., Jakarta, March 1998;The Raja Garuda Mas Group: Hampered By the P.T. Inti Indorayon Case, Indonesian Commercial Newsletter,Jakarta, 16 February 1999.

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58 Indofood to boost food business with expansion, The Jakarta Post, Jakarta, 3 March 1997; Shareholders'meeting okays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Profile and Directory ofIndonesian Plantation 1997/1998, PT Capricorn Indonesia Consult (CIC), Jakarta, 1998; Prospect of thePlantation & CPO Industry in Indonesia 2000-2010, Business Intelligence Report (BIRO), Jakarta, 1999; Profile- PT Indofood Sukses Makmur Tbk., Asia Pulse, Jakarta, 14 December 1999; Website Kantor PemasaranBersama (www.geocities.com/kpbjakarta/), Viewed in March 2003.59 Not transferred to IBRA, linked to Indofood/Salim by BIRO. Investigated by Laporan Tim InvestigasiKomite Aliansi Untuk Masyarakat Pantee Rakyat (KAMPARA) Kecamatan Kuala Batee Aceh Selatan.60 Website PT Holdiko Perkasa, viewed 20 february 2001; Profile and Directory of Indonesian Plantation1997/1998, PT Capricorn Indonesia Consult (CIC), Jakarta, 1998; Prospect of the Plantation & CPO Industry inIndonesia 2000-2010, Business Intelligence Report (BIRO), Jakarta, 1999.61 First Pacific's Indofood Unit to Acquire A Controlling Stake in Golden Agri-Resources, Press Release FirstPacific Company Ltd., Hong Kong, 10 May 2001; AFP Enters Into Strategic Partnership with Indofood for itsPalm Oil Businesses in Indonesia, Press Release Golden Agri-Resources Ltd., Singapore, 10 May 2001;INGBarings is advising on a deal between two of Indonesia’s most high profile families, Steven Irvine, FinanceAsia,Singapore, 10 May 2001; Sinar Mas woes stall acquisition deal, The Jakarta Post, Jakarta, 6 July 2001; Astrasees profit if rupiah stays below 9,500 to dollar, The Jakarta Post, Jakarta, 2 August 2001; Indofood'sConditional Put and Call Option Agreement on Golden Agri Resources Ltd. ("GAR"), Press Release PTIndofood Sukses Makmur Tbk., Jakarta, 11 August 2001; Indofood mulling purchase of oil palm plantations'stakes, The Jakarta Post, Jakarta, 14 August 2001; Indofood Expansion Plans Threaten Stk, Leigh Murray, DowJones Newswires, Jakarta, 16 August 2001.62 PT Holdiko Perkasa website. Viewed 20 February 2001.63 It is normal for the BPN to issue operation permits up to three years after operations have commenced. R.Lumuru (Sawit Watch), personal communication, July 2003.64 Personal communication, Mr Sugih Wanasuria (Head of Research Indofood), 6 March 2003.65 Mr. Sugih Wanasuria (Head of Research Indofood), 6 March 2003.66 Based on an average production of 24 tonnes/ha * 20% increase in production * Rp. 400,000,-/ton of FFB.67 Dinas Kehutanan dan Perkebunan 2002. Map processed by WWF Riau.68 See footnote 11.69 Profile and Directory of Indonesian Plantation 1997/1998, PT Capricorn Indonesia Consult (CIC), Jakarta,1998; Website PT Holdiko Perkasa, viewed 20 february 2001.70 The Law of the Republic of Indonesia No. 41 on Forestry (1999), unofficial translation.71 Also, it should be noted that the coordinates from from the Riau Department of Agriculture estate concessionsmap were derived from a rather large-scale map and this may have created a bias in the exact scale and positionof the concession boundary.72 However, the company's recent clearings in Limited Production Forests would require a much more complexand lengthy process, especially with the January 2001 ban on release of forest conversion.73 According to maps issued by the Ministry of Forestry and Estates, the arch-shaped concession is located north-east of the actual plantation's site, in the middle of a presently forested area. There is also some unclarity withregard to the total concession area under PT Gunung Mas Raya. According to the Holdiko website, PT GunungMas Raya holds 12,803 ha, whereas a map as of 2000 from the Department of Forestry in Pekanbaru shows thatthe PT Gunung Mas Raya concession area is only 8.569,5 ha.

Adding to the confusion is that SGS Malaysia reported there is another PT Gunung Mas Raya concession to thenortheast of Dumai and southwest on the peninsular where the PT Diamond Raya Timber (HPH) concession islocated. This oil palm concession is said to be part of an economic development zone on the western end of the(certified) logging concession. SGS first noted PT Gunung Mas Raya's name, in the context of an FSC-certification reassessment report on PT Diamond Raya. SGS wrote: "In November 2001, the assessment teamfound "there were concerns of illegal logging on the south-western portion of the PT Diamond Raya concessionarea. The team visited 2 of the sawmills suspected of felling and processing material illegally from PT DiamondRaya. Both sawmills were located within the Gunung Mas Raya oil palm plantation that is adjacent to the south-western portion of the PT DR concession. (..) There are thought to be up to 5 small sawmills of similar sizeoperating in the area of Gunung Mas Raya Oil Palm Plantation on the south-western border of PTDR forest.

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Following up on the earlier assessment, SGS wrote: "the police from Dumai station made an inspection of thesawmills in the PT Gunung Mas Raya area on the border of PT Diamond Raya concession on Saturday 9 March2002. The police found 4 sawmills not operating but one sawmill still operating ­ enforcement action was takento cease its activities and the owner arrested. The police found none of the sawmills had permits for operation inthe area." Souce: SGS Qualifor, PT Diamond Raya Surveillance Report 6489-ID / SGS (M) F104_026, 27-30November 2001.

The reference to PT Gunung Mas Raya in this particular area is remarkable, because it has not been shown onany maps issued by the Ministry of Forestry or the Ministry of Agriculture. Nor has Indofood ever mentionedthis estate. In April 2003, SGS reconfirmed the presence of a PT Gunung Mas Raya area (6,000 to 8,000 ha) atborders the southeast of the PT DRT concession. Source: Personal communication Kevin Grace, SGS Malaysia.74 Ministry of Forestry Indonesia website (www.dephut.go.id).75 Peta Sebaran HPH Provinsi Riau, Forest Watch Indonesia 2001.76 If they do collaborate with the company, they or the middleman should be the party subcontracted under thecompany's Izin Pemanfaatan Kayu (IPK), the wood utilization permit. Plantation companies are required tosubcontract logging operations (Mr. G. Brown [PT London Sumatra], personal communication January 1998;Vidal, J. 1997. When the Earth caught Fire. The Guardian. November 8).77 Other than through bribing officials, a SAKO permit can only be obtained based on a Izin Pemanfaatan Kayu(IPK),which at the time of field research should have been held by PT GMR, which would imply that theplantation company is collaborating with the middleman and the loggers who supply the middleman.78 This has happened in many places, especially in Kalimantan where hundreds of oil palm permits werewithdrawn after the investors took the timber but left the land unplanted.79 Daswir et al. 1989 quoted by CIFOR.80 Sargeant, H.J. 2001. Vegetation Fires In Sumatra, Indonesia. Oil Palm Agriculture in the Wetlands ofSumatra: Destruction or Development? Forest Fire Prevention and Control Project. European Union & DinasKehutanan Sumatra Selatan.81 Source: PT. SMART Tbk in: Sargeant, H.J. 2001. Vegetation Fires In Sumatra, Indonesia. Oil PalmAgriculture in the Wetlands of Sumatra: Destruction or Development? Forest Fire Prevention and ControlProject. European Union & Dinas Kehutanan Sumatra Selatan.82 Sargeant, 2001.83 WRM's bulletin Nº 65, December 2002.84 Tan Cheng Li. Vital to save peat swamps; The peat fires of Southeast Asia. (11 November 1997).85 Simorangkir, D. and Sumantri 2002. A Review of Legal, Regulatory and Institutional Aspects of Forest andLand Fires in Indonesia. Project Fire Fight Southeast Asia, WWF and IUCN.86 Simorangkir & Sumatri op cit.87 Peraturan Pemerintah Republik Indonesia Nomor 4 Tahun 2001 tentang Pengedalian Kerusakan dan atauPencemaran Lingkungan Hidup yang Berkaitan dengan Kebakaran Hutan dan atau Lahan. Presiden RepublikIndonesia.88 Environment Act No. 27, 1997. Republic of Indonesia.89 Lumuru, R. (Sawit Watch), Personal communication, April 20, 2003. It is not entirely clear if the Forest Actcould be applied in this case as burning occurs within forestland that had already been released for conversionpurposes.90 http://www.tempo.co.id/ang/min/02/30/nas8.htm91 Vegetation fires and haze in Sumatra, Sony 'powerless' to cope with forest fires Source: Jakarta Post, July 31,2000.92 Sargeant, 2001.93 http://www.mdp.co.id/ffpcp/fire_central.htm94 Companies warned over forest fires, The Jakarta Post 4 June 2003; Ketika Asap Ganggu Negara Tetangga -Minggu, Kompas, 29 Juni 2003.

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95 Sumatra Project Update November 2002, Susan K. Mikota and Hank Hammatt, Elephant Care International.http://www.aazv.org/sumatraelephprojectnov2002.htm96 Arwana (Scleropages formosus). The peatswamp forests in which the company is encroaching is also believedto be the habitat of the Indonesian Arwana, locally better known as the `ikan silok' or 'dragon fish' which isbelieved to bring luck to its owners. Due to its popularity and great demand, red arwanas have been fiercelyhunted at its native habitat. According to local people, only small arwana can these days be found in the streamsand rivers in the peatswamp forests north of the Indofood estates.97 WWF Indonesia, 2001. Human-Elephant Conflict Loss Survey, Tesso Nilo.98 Sumatran Tiger faces extinction, The Jakarta Post, June 07, 2002.99 Tigers were also entering the Serikat Putra estate (now Kumpulan Guthrie) in 2001 via an acacia estate.100 Santiapillai and Widodo 1997, http://www.5tigers.org/Indonesia/PHVA/widodo.htm CHECK FIGURE101 Palm oil, forests and sustainability: Discussion paper for the Round Table on Sustainable Oil Palm. First draftfor review by the WorkING Bank, Proforest, 17 June 2003.102 "Peta Rekonstruksi, Regeling voor Kubu, Adatrechtsbundels XIII, Gemend 1819" (Translated from Dutch).The village leaders whom came to this agreement represented the villages of Hamba Raja, Haroe, Rawa, BebasIndra Bangsawan and Panglima Moeda Setia Raja.103 Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002104 Ham, M. 2003. Driegesprek: Bankgeheim belemmert verantwoord ondernemen. Milieudefensie tijdschrift.105 Letter from Pieter Kroon (ING Bank) to Monique de Lede (Milieudefensie), November 28, 2002.106 See: Wakker, E. and R. Ranaq 2002. PT Matrasawit: relations between ING, Rabobank and ABN-Amro andforest destruction and poverty in East Kalimantan, Indonesia. A PT SMART Corporation case study.AIDEnvironment and Puti Jaji.107 It its 2001 Interim Report, Indofood states it continues "to implement corporate governance initiatives to alignIndofood’s practices with international best practice" (www.indofood.co.id). However, no reference is madewith regard to environmental or social best practise.108 Mr. Sugih Wanasuria (Head of Research Indofood), 6 March 2003.

Appendix I: Maps of Rokan Hilir, Riau

47

Upper: Gunung Mas Raya in 1992 (source: Indonesianforest.com)

Below: Gunung Mas Raya in 1995 (source: Indofood)

Appendix I: Maps of Rokan Hilir, Riau

48

Gunung Mas Raya in 2000 (Source: Indonesianforest.com)

Gunung Mas Raya in 2002 (Source: WWF Riau, processed)

Appendix I: Maps of Rokan Hilir, Riau

49

Upper: Gunung Mas Raya concession area (Riau Department of Agriculture and Forestry)

Below: concession areas in the vicinity of Gunung Mas Raya (pink names: oil palm plantations,black names logging companies, blue names: pulpwood plantation companies; green andyellow: forest)

Appendix I: Maps of Rokan Hilir, Riau

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Appendix II: ING Policy

51

Subject:Policy on sustainable deforestation / logging

Letter to Milieudefensie21 December 2001

Unofficial translation

In reference to recent discussions regarding the financing of oil palm plantations inIndonesia we are pleased to provide an addendum to the ING policy on the financing ofpalmoil plantations in Indonesia as laid out in our letter dated 27 February 2001.

ING in SocietyING's position in society is based on mutual respect and active collaboration betweenING and that society. ING furthermore highly values sustainability in business. Caringfor the environment is an important component of this care. ING therefore shares theconcerns of Greenpeace and Milieudefensie with regard to the destruction of the tropicalrainforest in Indonesia.

Like we have previously stated, ING's involvement is of relatively limited size. Inaddition, it must be considered that most of current financing refers to re-financing.This means that the companies involved can not or only partially service their debt. It isour goal to finalise these refinancing deals in a responsible manner as quickly aspossible.

As discussed with you, future financing of activities that lead to the destruction oftropical forest will be subject to the criteria included below. We believe that thesecriteria, which ING will apply to its best cunning, affluently guarantee that thesetransactions will not lead to the destruction of tropical rainforest.

For new financing in the sector, ING will take into account legal requirements, the"Forest Policy" of the World Bank and the ING Business Principles. This means that forfuture financing requests ING will base its decision whether or not to extend financingon the following:

1. ING will not finance companies and projects that are guilty of illegal1 deforestationand / or burning of tropical rainforests (HCVF) for the development of palmoilplantations. In addition, ING will not finance companies that are guilty of illegaldeforestation and/or burning of tropical rainforest for any other objective, such assales and/or wood processing.

2. ING will consider the financing of new oil palm plantation development or treeplantations of any other kind, which are planted on readily deforested soils, onlywhen the following conditions are met:

• A period of at least three years should be taken into account between thedeforestation and the moment when planting of oil palm or tree plantations ofanother kind commences. There should be no relationship between thedeforestation and the plantation development.

• Relevant social- and / or labour and other relevant laws and regulations ondeforestation and environment, as determined by the local government shouldbe met. ING will confirm that the relevant laws and regulations are met by thecompany at hand.

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• In addition, screening will be done on the basis of the World Bank "ForestPolicy".

• The ING Business Principles apply to the ultimate decision whether or not acompany is eligible for financing.

3. ING will not finance companies and projects that insufficiently respect the rights ofthe local communities.3 For the financing request ING will conduct specific research(as part of the Due Diligence4 research). If in the past social conflicts have occurred,and the company or project involved has not adjusted its policy or activities, INGwill refrain from financing.

4. All financing in Indonesia with impacts on the environment are treated on a case tocase basis at the Credit Management level. Only after a Due Diligence study hastaken place, if necessary by an external consultant, and the above has been addressed,ING will decide whether or not financing will be provided. ING will do this researchto the best of its cunning accurately and carefully. ING wishes to emphasise thatwhatever decisions are made, these are also based on information supplied by thirdparties and ING assumes this to be correct and complete.

5. ING will adopt a standard operational procedure with the client to agree on a legaldocument for the purpose of credit or financing. If during the currency of the creditor financial transaction practise illegal activities take place or if the funds are used inanother manner than agreed, ING reserves the right to declare an event of default.During the annual review of the credit or financial transaction the use of thefinancing is checked. If the client is in default, the credit can, in principle, be called.

6. The aforementioned policy is not applicable to financing of holding companies, aslong as these are not involved in deforestation / or burning of tropical rainforest.

In conclusion, we feel that these conditions contain adequate guarantees to prevent theavoidance of involvement of ING in the destruction of tropical rainforest. This policy isapplicable to the whole ING Group and will be actively communicated and applied.

Appendix 1

1. Illegal logging5

ING defines the following as illegal logging:• Outside permitted areas• Within a protected area (with or without permit)• Beyond allowable cut• Without required permits• Protected species

Appendix II: ING Policy

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• In disregard of legal tendering• Without business plan• When trees are sickened unconventionally such that these can be "legally" logged• When environmentally damaging substances are used• Via bribes• For the use of production processes for which the required permits are not

obtained or where national or social laws are not respected• For private use

2. High Conservation Value Forest

In defining "High Conservation Value Forests" ING will conform to the definition givenby the Forest Stewardship Council.

3. Local communities

"Local community" is defined as a broad group of people living in or nearby the tropicalrainforest and plantations and who largely depend on these.

4. Due Diligence

The following points are researched (on the basis of a checklist) and juridical laid downwith the company, prior to the decision regarding financing, logging and environmentrelated transactions:

• History of the company• Ownership structure• Assessment of legally required permits• Compliance to local laws, the ING Business Principles and World Bank

guidelines regarding land clearing and environment• Production facilities• Age• State of maintenance• Planned investments, including replacements and expansion• Quality and background of suppliers• Quality and type of clients• Financial structure of the company.

5. Source:

Forest Policy World Bank; Illegal Felling Activities in Russia, Greenpeace.

Comments of the consultants to the ING Policy on "Sustainable Deforestation /Logging":Overall assessmentING Group's "Policy on sustainable deforestation / logging" does not require that itsclients go beyond legal compliance. This approach is consistent with ING's BusinessPrinciple 4.1

Chapter 1

1 ING website (http://www.ing.nl).

Appendix II: ING Policy

54

Assuming that ING oversees all relevant local laws, ING's policy still does not "affluentlyguarantee that (ING's) transactions will not lead to the destruction of tropical rainforest".It allows for legal conversion of High Conservation Value Forests (HCVF) and it poorlydefines rights of local communities. In terms of scope, the policy is much too vague withregards to financing of company holdings and allows for loopholes.

Main specific comments

"ING's involvement is of relatively limited size."

• Profundo's review of the international and national banks and other investorsbehind a group of 27 major companies revealed that ING Group is the fifthbiggest investor in the Indonesian oil palm sub-sector.2

"For new financing in the sector, ING will take into account legal requirements, the "ForestPolicy" of the World Bank and the ING Business Principles."

• The World Bank's 1991 "Forest Policy" referred to focused primarily on reducingdeforestation, forest resource creation and conservation.3 This policy did nottranslate into practical criteria that could have applied to ING's oil palminvestments.

• The International Finance Corporation (IFC)'s Plantations criteria were in place inApril 2002 and state that "the development or conversion of land for plantation cropsshould conform to the environmental objectives of preserving regional bio-diversity,ecologically sensitive areas, unique habitats, forests, endangered species and sites ofcultural significance." 4

"ING will not finance companies and projects that are guilty of illegal deforestation and / orburning of tropical rainforests (HCVF) for the development of palmoil plantations."

• This means that ING will allow legal deforestation of HCVF.• All burning for oil palm plantation development is illegal in Indonesia since

1997.

"Relevant social- and / or labour and other relevant laws and regulations on deforestation andenvironment, as determined by the local government should be met"

• In February 2000, the Government of Indonesia committed to theConsultative Group on Indonesia to halt forest conversion until a NationalForest Programme is in place.5

• "Local government" should be defined more precisely considering thatnational, provincial and district governments in Indonesia may havecontradictionary laws.

Chapter 1

2 Van Gelder, J.W. 2003. Financing of the Indonesian Palm Oil Sector. A Research Paper for WWFInternational. Profundo.3 World Bank website (http://web.worldbank.org). The Revised World Bank Forest Strategy policy(October 2002) was not in place when ING extended its April 2002 loan to Indofood.4 Environment, Health and Safety Guidelines for Plantations. International FinanceCorporation, 1 July 1998. Furthermore, the World Bank Strategy may “not apply in itsentirety to IFC”(World Bank Forest Strategy).5 Agro Indonesia website (http://www.agroindonesia.com).

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"ING will not finance companies and projects that insufficiently respect the rights of the localcommunities."

• ING does not specify what is 'insufficient' and for whom.• ING may not have the capacity to determine this.

“The aforementioned policy is not applicable to financing of holding companies, as long asthese are not involved in deforestation / or burning of tropical rainforest.”

• Holding companies are never involved in field level practises, its subsidiariesare.

"If during the currency of the credit or financial transaction practise illegal activities or if thefunds are used in another manner than agreed, ING reserves the right to declare an event ofdefault."

• This condition does not prevent the client from internal rebudgeting.

"The aforementioned policy is not applicable to financing of holding companies, as long as theseare not involved in deforestation / or burning of tropical rainforest."

• This condition suggests that all other (legal, social etc.) conditions aredropped.

"ING defines the following as illegal logging:"

• The list looks nice but provides a random set of possible illegal practises thatis also irrelevant, as any activity that does not adhere to the (Indonesian) lawis illegal.

• The list is partially based on illegal logging practises in Russia, which maynot be applicable in Indonesia.

"In defining "High Conservation Value Forests" ING will conform to the definition given by theForest Stewardship Council."

• This looks nice but renders useless as ING allows all legal conversion ofHCVF.

• Indonesian law does not recognise HCVF or FSC.

"Within the bounds of commercial confidentiality, ING places the greatest importance on openand transparent communications with its customers, employees and shareholders, as well associety at large." (ING Business Principle No. 5)."

• It is unclear which are the boundaries of commercial confidentiality.

Appendix II: ING Policy

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Appendix III: Analysis of Indofood's stakeholders

57

11 financial stakeholdersfinancial stakeholders 1.11.1 Capital structureCapital structureAt the end of 2002, PT Indofood Sukses Makmur and its subsidiaries owned total assets worthRp 15,252 billion (US$ 1,706 million). These assets were being financed by the followingstakeholders:6

• Shareholders Rp 3,663 billion 24.0%• Subsidiary shareholders Rp 876 billion 5.7%• Banks Rp 4,524 billion 29.7%• Bondholders Rp 3,682 billion 24.1%• Others Rp 2,507 billion 16.4%

Of the total assets of PT Indofood Sukses Makmur in 2001 only 20.5% was attributable to itsEdible Oil and Fats division. As palm oil is also an important ingredient for its Noodles, SnackFoods and Baby Foods divisions, we estimate that 35% of Indofood’s total assets are related tothe production and processing of palm oil. 7

1.21.2 Key financial stakeholdersKey financial stakeholdersOur financial analysis (which concentrated on general funding and specific oil palm relatedfunding) leads to the following assessment of the most important financial stakeholders of PTIndofood Sukses Makmur:

1. First Pacific / Salim family Indonesia Dominant shareholder2. Crédit Suisse Switzerland Various loans, bond issuance, currency swap

agreement3. ING Bank Netherlands Various loans, corporate advice, bond issuance4. JP Morgan Chase & Co. USA Largest outside shareholder5. Bank Central Asia (BCA) Indonesia Loan, currency swap6. Capital Group USA Largest outside shareholder of First Pacific

1.31.3 Investment policiesInvestment policiesBelow, we briefly describe each of Indofood's most important (external) financial stakeholders.

Crédit Suisse GroupCrédit Suisse is a Swiss banking group. Its US division, Crédit Suisse First Boston, has provideda range of financial services to Indofood Sukses Makmur in the past years.

In its sustainability report 2001 Crédit Suisse states: “We do not enter into any business withundesirable borrowers. The description ‘undesirable’ applies, in particular, to borrowers who donot comply with the law or violate ethical principles.” It also indicates that lending transactionswith ‘excessive risks’ or those ‘which are unjustifiable for legal, ethical or environmentalreasons’ will be refused.8

Chapter 1

6 Indofood 2002 Financial Results, Press Release PT Indofood Sukses Makmur, Jakarta, 24 March 2003.7 Annual Report 2001, PT Indofood Sukses Makmur Tbk., Jakarta, May 2002.8 Worm, J., J.M. Dros and J.W. van Gelder. 2003. The financing of large dams; A research paper prepared forWWF International - Living Waters Programme. AIDEnvironment/Profundo.

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ING GroupING Group is a Dutch insurance and banking group. It has a “long-lasting close relationship”with members in the Salim group.9 ING formulated a corporate environmental policy in 1995.ING is in the process of developing a set of Corporate Social Responsibility (CSR) statements fordealing with environmental, social and reputation risk. Natural resources and electricitygeneration are mentioned as industry sectors that will be subject to such CSR statements. 10

JP Morgan Chase & Co.JP Morgan Chase & Co. is an American commercial and investment banking group. JP MorganChase's corporate responsibility report mentions that its foundation, trust and bank jointlydonated US$ 74 million to charity, mostly in the US. The report does not mention any otheractivities relevant to corporate responsibility.No information is available on JP Morgan Chase's environmental and risk assessment policy forthe oil palm sub-sector.

Bank Central Asia (BCA)Since March 2002, Indonesia's largest retail bank, BCA, is 51% majority owned by FarallonCapital, a private equity firm from the US.No information is available on BCA's environmental and risk assessment policy for the oil palmsub-sector.

Capital GroupCapital Group is an American investment fund manager.No information is available on Capital Group's environmental and risk assessment policy for theoil palm sub-sector.

2.2. Market stakehoMarket stakeholderslders

2.12.1 Key buyersKey buyersVia PT Salim Oil Grains (PG SOG), Salim Group ranked among the sixth largest exporters ofpalmoil products in Riau. In 2002, PT SOG exported 148,000 tonnes of CPO whereas PTGunung Mas Raya sold 2,000 tonnes of CPO. The main markets supplied by PT SOG areMalaysia, India and Africa. The main foreign buyers of PT SOG in 2002 were:

Buyer Related company (country)CPO volume

(Tonne) ShareRuchi Ruchi Soya (India) 44.720 30%Summerwind Summerwind-Seas (Philppines) 27.500 19%Avanti Feeds Avanti Feeds (India) 16.640 11%Safic Alcan Safic Alcan (USA) 10.100 7%Agritrade Agritrade International (Australia) 6.800 5%Sogescol Socfinasia SA (Luxembourg) 6.500 4%Gardner Smith Gardner Smith (Singapore) 6.000 4%Cargill Cargill (USA) 3.250 2%Other 26.185 18%

Chapter 1

9 Hagemeyer Nu in Rol Van Reddende Engel, B. van Kalles, Het Financieele Dagblad, Amsterdam, 13 January1998; Meerderheid Hagemeyer in Nederland, Het Financieele Dagblad, Amsterdam, 10 March 1998;Hagemeyer Plaatst Belang Pacific Tegen Koers Hfl. 89, Het Financieele Dagblad, Amsterdam, 20 March 1998.10 Worm, J., J.M. Dros and J.W. van Gelder. 2003. The financing of large dams; A research paper prepared forWWF International - Living Waters Programme. AIDEnvironment/Profundo.

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Total 147.695 100%

Figure 1 Palm oil buyers of PT Salim Oil Grains from Riau (2002)

Figure 2 Main markets for palm oil from PT Salim Oil Grains in Riau (2002)

Agritrade5%

Safic Alcan7%

Sogescol4%

Summerwind19%

Other18%

Avanti11%

Gardner4% Cargill

2%Ruchi30%

India41%

Malaysia29%

Africa13%

Rotterdam2%

Mexico1%

Other14%

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Furthermore, PT Intiboga Sejahtera in Java, supplies companies like Unilever and Nabisco.Intiboga uses CPO partially from the Indofood plantations, part is bought from third parties.11

2.22.2 PurchaPurchasing policiessing policies

Ruchi Soy IndustriesWith sales totalling 45,000 tonnes, Ruchi Soy was the main client of the Salim group companiesin Riau in 2002. All products were exported to India. Ruchi Soya Industries Limited is an agri-business company, the flagship company of the Ruchi Group of Industries based in Indore,India. Ruchi Group has manufacturing and trading facilities of soyabean products, agri-business, oils and fats, flat steel, galvanized steel & cold rolled steel.12 Apart from its range of soyproducts, the company sells Ruchi Gold Refined Palmolein oil as a "health consciencious"product.No information was found on Ruchi's environmental purchasing policies.

Summerwind-Seas Co.With 28,000 tonnes of CPO, Summerwind-Seas Corporation in the Philippines was the secondlargest buyer of CPO from the Salim group companies in Riau in 2002. All exports from Dumaiare cleared in Malaysia, most probably for further processing and/or re-export.Summerwind-Seas Co. is a distributor/agent and supplier of high-precision tools, i.e.,carbide/HSS cutting tools. Summerwind-Seas' UK client, RS Clare, specialises in specialtygreases such as bearing greases, wire rope lubricants, open gear greases, damping greases andfood lubricants.13

No information was found on Summerwind-Seas Co.'s environmental purchasing policies.

Avanti Feeds Ltd.With 17,000 tonnes of CPO, Avanti was the third biggest client of Salim group companies inRiau in 2002. All products were exported to India. Avanti Feeds Ltd. is a shrimp feedmanufacturing company based in Hyderabad, India.14

No information was found on Avanti Feeds' environmental purchasing policies.

Safic Alcan SAWith 10,000 tonnes of CPO, Safic Alcan was the fourth biggest client of the Salim Groupcompanies in Riau in 2002. The Safic-Alcan Group in France is active in adhesives, glues, foodindustry, animal feed industry, elastomers, soap, oil, paper, plastics, coatings and watertreatment. The end users of the various products come from the rubber, automotive, cable andconstruction industries. Raw materials are also supplied for the life science areas of cosmeticsand pharmaceuticals. Safic Alcan Group is 100% owned by Solvadis, a major chemicals groupbased in Germany.15

No information was found on Safic Alcan's or Solvadis' environmental purchasing policies.

Chapter 1

11Indofood to boost food business with expansion, Jakarta Post, Jakarta, 3 March 1997; Shareholders' meetingokays Indofood's Rp1.55t acquisition, The Jakarta Post, Jakarta, 4 April 1997; Annual Report 1999, First PacificCompany Ltd., Hong Kong, April 2000; First Pacific's Indofood Unit to Acquire A Controlling Stake in GoldenAgri_Resources, Press Release First Pacific Company Ltd., Hong Kong, 10 May 2001; Website PT IndofoodSukses Makmur Tbk. (http://www.indofood.co.id), August 2001.12 http://www.ruchigroup.com/13 Summerwind-Seas Co website (http://www.angelfire.com/on4/ssc/mainpage; http://www.ddl.at/summerco/);RS Clare website (http://www.rsclare.com)14 http://moneycontrol.co.in/stocks/cptmarket/cobackgrd.php?sc_did=W0415 Safic Alcan website (http://www.safic-alcan.fr); Solvadis website (http://www.solvadis.com)

Appendix III: Analysis of Indofood's stakeholders

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Agritrade International Pte. Ltd.With 6,800 tonnes of CPO, Agritrade International is the fifth biggest buyer of Salim Groupcompanies in Riau in 2002. All products were shipped to India. Agritrade is involved in tradingand manufacturing in palm oil and related products, cocoa and related produts and other edibleoils. Agritrade has offices in, among other, London, Toronto, Jakarta, Kuala Lumpur, HongKong, Karachi etc. The company has a joint venture factory in Wuxi, Jiangsu province, Chinaprocessing cocoa beans into cocoa butter for exports to USA and Europe.16

No information was found on Agritrade's environmental purchasing policies.

SogescolWith 6,500 tonnes in 2002, Sogescol was Salim Group's sixth' biggest buyer in Riau. All productswere exported to Cameroon. Sogescol is based in Belgium. It is one of the companies underSocfinal (Societe Financiere Luxembourgeoise) SA, a financial holding company with divisionsinvolved in palm oil, rubber, coffee and flower production,17 In Indonesia, Socfinal is wellknown for its Socfindo plantations in North Sumatra and Aceh. Socfinal is ultimately controlledby the French Bolloré conglomerate. Sogescol has certifications approved by some of the largestindustrial conglomerates in their individual fields, including Unilever, Cargill, Michelin,Goodyear, Bridgestone and others.18

No information was found on Sogescol's environmental purchasing policies.

Gardner SmithWith 6,000 tonnes, Gardner Smith is the sevenths largest buyer of Salim group companies inRiau in 2002. All products were destined for Africa. Gardner Smith has its roots in Australia.Today, it has a global network of offices spanning Australia, New Zealand, Singapore, China,the USA, South Africa and the UK. Gardner Smith (S.E. Asia) Pte Ltd in Singapore wasestablished in 1980 when the Group's vegetable oil trading was centralised in Singapore, due toits proximity to the source of a variety of oils from Malaysia, Indonesia & Philippines. GardnerSmith SEA also trades Argentine, American and Brazilian products thus enabling it to supply awide range of commodities including palm oils, laurics (coconut oil, palm kernel oil) & soft oils(soybean oil, canola oil, sunflower oil). Gardners Smith's markets are spread through Asia, theIndian sub-continent, Europe, North, Central and South America as well as the Pacific region. Itservices the European market through a representative office in London. 19

No information was found on Gardner Smith' environmental purchasing policies.

CargillWith 3,250 tonnes in 2002, Cargill was one of the smaller buyers of CPO from the Salim groupcompanies in Riau. All products were exported to Rotterdam.Cargill is involved in agriculture, commodity trading, food processing, industrial manufacturingand finance. Cargill is based in the US and has operations in 59 countries today. It also has itsown plantations in Sumatra, but largely it purchases palm oil from third party suppliers. Cargillalso had a joint venture with Golden Agri Resources (Sinar Mas), which is now dissolved.Cargill published Environment, Health and Safety (EHS) report which states:

Chapter 1

16 Agritrade website (http://www.agritrade.com.sg/); also: http://aeup.brel.com/visiting/food-process/v1259.html17 Business.com website Socfinal profile(http://www.business.com/directory/financial_services/asset_management/investment_management_firms/europe/socfinalste_financiere_luxembourgeoise/18 Socfin website (http://www.socfinal.be/socfinal.html)19 Gardner Smith website (www.gardnersmith.com)

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"One way we fulfill Cargill's mission to be responsible neighbors in our communities is by protecting andconserving resources such as air and water quality, participating in land preservation and by protecting thehealth and safety of our employees and neighbors. We believe that public responsibility extends beyondrunning a safe and environmentally sound plant. It also extends to helping build stronger communitieswhere we live and work (...). We want to protect the environment for future generations, and recognize ourresponsibility to manage natural resources. We are working to transform the concepts of eco-efficiency andsustainable development into tangible goals and results.20

UnileverUnilever is one of the buyers of PT Inti Boga Sejahtera. Unilever has its basis in theNetherlands and United Kingdom, but its operations span over more than 90 countries. Itsproducts are divided in two main categories: foods, and home and personal care. The Unileverportfolio includes food brands such as Rama, Lipton, Magnum, Iglo, Ragú, Bertolli, Annapurna,Birds Eye. Unilever trades around 6% of the world's palmoil produced on an annual basis.Recently, Unilever has begun a process to dispose of its direct interests in oil palm plantationcompanies and as such will rely ever more on its suppliers to take on the same responsibilities asUnilever has. Unilever explicitely accepts the responsibility for assuring that its products aresubject to environmental guidelines:

Our consumers trust in us to supply them with high-quality goods that are produced in an environmentallyand socially responsible way. We therefore have a responsibility to act as agents for our consumers,ensuring their expectations are understood along the supply chain (...). We are major buyers of these itemson world markets and are also involved in agriculture, either directly or with contract growers. This givesus some influence on how the materials are produced and considerable social responsibility to use ourinfluence wisely (…).Ultimately, we want the market to work for sustainable development and toencourage fully sustainable agricultural systems. We want to contribute to their development and benefitfrom them.21

Unilever's palm oil Good Agricultural Practise (GAP) guidelines are arranged under 10indicators of sustainability. Within each good practices are defined and potential areas forimprovement outlined. Requirements of specific relevance include:

• Legal compliance is specifically mentioned in the guidelines for workers’conditions and transactions.

• Extension of plantations into areas of ‘primary’ forest is never acceptable.Extension into degraded lands or land previously under other crops is preferredover extension into (partially degraded) forests or wetlands.

• Before extension into new areas a full environmental impacts assessment must becarried out and results followed.

• During clearing burning should be avoided unless serious pest and diseaseproblems require it. Periods of no ground cover should be minimised.

• Practices to maintain soil fertility and soil nutrients, and to minimise soil loss,are described in detail.

Chapter 1

20 Cargill website (http://www.cargill.com/about/envir.htm); Cargill, 2001. Environment, Health and Safety(EHS) report.21 Unilever 2002. Growing for the Future: Unilever and Sustainable Agriculture.

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• Use of pesticides should be minimised though use of integrated pestmanagement; workers applying pesticides must be properly trained andequipped.

• Biodiversity within the plantation should be conserved by providing appropriatehabitat and adopting appropriate cultural practices.

• Efficient use of renewable energy resources (including the use of shell and fibreas fuel) should be targeted, while greenhouse gas and polluting gas emissions areminimised.

• The volume of water used in irrigation and extraction from sustainable sourcesneed to be considered. Water use in the factory should be minimised. Outputfrom effluent ponds should be monitored and contamination ofstreams/groundwater avoided.

• Competitive local goods and services should be used where practical; maximumemployment opportunities should be provided for local people.

• Legislation on employment benefits and conditions, child labout and socialsecurity should be complied with. Where there is no legislation in-housestandards should be developed.

• Contracts with suppliers should be fair; payments and supplies should be on timeand at the agreed price.22

Unilever presently plays a lead role in the Sustainable Agriculture Initiative Platform (SAIPlatform) which is concerned about the potential impacts of palm oil plantations on tropicalforests. SAI supports agricultural practices and production systems that preserve the futureavailability of the current resources and enhance their efficiency. This increases agriculture’scontribution to the optimal satisfaction of society’s environmental, economic and socialrequirements. The SAI Platform has been founded by Groupe Danone, Nestlé and Unilever.Other member companies are Campina, Coberco, Danisco, Dole, Findus, Kraft, McCainEurope, McDonald’s and Neumann Kaffee Gruppe. Within the SAI Platform structure, themember companies are developing action plans for their key raw materials. Through one of itsmember companies (Unilever) , SAI Platform is actively contributing to the organisation of aRoundtable on sustainable palm oil which will be held in August 2003.23

NabiscoNabisco is one of the buyers of PT Inti Boga Sejahtera. Nabisco is a cookie and crackersmanufacturer. It is part of the Philip Morris group of companies in the US. Nabisco's cookiesand crackers are presumably marketed through Kraft Foods, also part of Philip Morris whosemain products are, among other, Kraft, Jacobs, Toblerone and Milka. Kraft is also member ofthe Sustainable Agriculture Initiative (SAI).

Chapter 1

22 Jennings et al., 2003. Defining sustainability in oil palm production: an analysis of existing sustainableagriculture and oil palm initiatives, ProForest.23 SEI Platform, Position on Palm Oil. (www.saiplatform.org).

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In 2001, Nabisco declined to participate in Corporate Responsibility Rating (environmental orsocial) Assessment by OEKOM Research.24 No further information was found on Nabisco'senvironmental purchasing policies.

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24 Werner, F. 2001. Corporate Responsibility Industry Report, Food and Consumer Goods. A corporateresponsibility survey of 28 companies from the industry. OEKOM Research Aktien Gesellschaft.

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In reply to a number of questions for clarification in an email to Mr. Pieter Kroon (INGGroup) on 18 July 2003, the following answers were sent by ING Manager Public Affairs Ms.Miriam de Wolff on September 10, 2003:

1. The ING Policy on "Sustainable deforestation" suggests that ING allows all legal conversionof High Conservation Value Forests as well as all legal burning (in Indonesia). Is that right?

It is not so that by definition ING never requires compliance beyond local laws. (Local) laws andregulations are not the only guideline for ING, the ING Business Principles also apply.

2. What are 'local laws and regulations'? National and/or district level law? What if both are notconsistent?

In case of inconsistency, ING will (have to) act according to its own judgement.

3. The policy suggests that ING itself determines what 'insufficient' respect for the rights oflocal communities entails. What does ING consider 'insufficient'?

No reply

4. The policy does not apply to holdings companies as long as these are not involved in illegaldeforestation and burning. Should this guideline not read: "as long as the plantationcompanies are not involved…"? If not, does that mean that all other legal and socialrequirements are not applicable?

Although the policy does not apply as long as the financed company is not involved in deforestationand/or burning of HCVF and as long as the financing does not aim at deforestation and/or burning ofHCVF, still the ING Business Principles apply.

5. Why does ING use a definition for illegal logging that (mostly) appears to be based on illegalforestry practises in Russia?

After consultation with the Structured Finance department that is concerned with the sector at hand itis not quite clear to us to which definition of illegal practises in Russia you refer. We wish toemphasise that the ING Policy is written for a broader area than Indonesia. ING uses the WorldBank Forest Policy as stated in the Policy.

6. Which World Bank Policies does ING apply? IFC policies or or the more generic WorldBank Forest policy (that dealt with commercial logging)?

ING uses the World Bank Forest Policy as stated in the Policy.

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7. Has the April 2002 working capital facility for Indofood already been reviewed and can we,considering the recent support by ING for Indofood's bond issuance, assume that ING stillhas full confidence in the company (in relation to the Policy)?

With regard to the Indfood financing and the Policy and ING Business Principles we wish to informyou that this is approved based on the fact that the company financed is not involved in deforestationand/or burning of palmoil plantations25 as well as due to the fact that the financing is meant asworking capital and not for the financing of deforestation/burning; this is (again) included in thedescription of the goal of the financing.

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25 Instead of palmoil plantations, this should read: High Conservation Value Forest.