Closure concerns for paper groups.

Financial Times (UK)
August 20, 2007

Closure concerns for paper groups.

By JOHN AGLIONBY and TAUFAN HIDAYAT

Two of Asia's biggest pulp and paper companies have warned they
could close within two months with the loss of up to 1m jobs
unless Indonesia's police and forestry department resolve a
dispute over alleged illegal logging.

Indah Kiat Pulp & Paper, a subsidiary of Asia Pulp and Paper,
and Riau Andalan Pulp & Paper, part of the Raja Garuda Mas
group, have been caught up in an eight-month police operation to
stamp out illegal logging in Riau province in Sumatra, where
they are both based.

The forestry department has accused the police of enforcing
out-of-date laws and punishing people operating legally.

More than 1m people could lose their jobs if the companies
close, and analysts warn the dispute is having a chilling effect
on Indonesia's cool investment climate.

Indah Kiat, which exported pulp and paper products worth about
Dollars 3bn last year, and Riau Andalan, almost Dollars 2bn,
employ 540,000 workers directly.

Brigadier Suciptadi, Riau's police chief, said licensed
companies were free to operate. "The ban has only been imposed
on companies which are violating environmental regulations, such
as cutting trees in natural forests or conservation areas," he
said. "Based on our investigations, there is a network operating
that is committing corporate crimes."

He declined to say if Indah Kiat or Riau Andalan were involved
in illegal activities. Both companies insist they obtain all
their wood from legal sources.

Joice Budikusuma, an executive of Sinar Mas, which owns APP,
said Indah Kiat's supply rate was down by almost three-quarters
because the law enforcement operation was so harsh that even
contractors with all the correct licences were afraid to cut and
transport logs. "We only have one month's stock left," she said.

Rudy Fajar, chief executive of Riau Andalan, said his company's
supplies would probably last until October.

Sofyan Wanandi, the head of the country's employers'
association, said he was not surprised by the dispute. "This
fight between the police and the forestry ministry is creating
all sorts of problems and there's no end to the dispute in
sight."

He warned it could well hit inward investment. "How can you ask
for investment from overseas when you can't even settle disputes
with local companies?"