A forest falls in Cambodia
By Keith Andrew Bettinger
The lucrative logging industry in Southeast Asia has always blurred the lines between legal and illegal, with huge payments greasing the wheels of easily corruptible bureaucrats and politicians. As a result, entire industries have learned to accept inputs gotten by hook or crook, causing profit-hungry firms to fall over each other to meet rising demand.
Asian Pulp and Paper (APP), founded in Indonesia in 1984, has drawn criticism for its logging activities, as well as for jilting investors. (The firm became the largest corporate defaulter in emerging market history when it stopped payments on US$14 billion in debt in March 2001.)
APP's most recent rebuke has been in Cambodia, where it has set up several firms - Green Rich and Green Elite - to log concessions, which have for a long time been a favorite target because the government has been less than scrupulous in handing them out. Recently, however, the Ministry of Environment has been sending signals that it will no longer tolerate any shenanigans, including the cutting of ancient forests in national parks.
Exploit then pull out
Huge logging companies, many based in Malaysia and Indonesia and with ties to powerful families and external sources of capital, have established a modus operandi in which they exploit irreplaceable, biodiversity-rich forests in remote locales where they can log for a few years and then pull up stakes before the protests of environmentalists and watchdog groups are heard.
In the 1990s, logging concessions were used as a foot-in-the-door tactic into countries with officials amenable to closed-door deals. These sorts of concessions required nothing in the way of planning, tendering, environmental assessments, or background checks on the firms to confirm their suitability and reputations. According to Global Witness's Cambodia campaigner, Mike Davis, pressure from environmental groups has put an end to this avenue in most countries in the region, though the logging conglomerates have designed a new strategy. "Now the vehicle of choice is economic land concessions nominally for the creation of plantations that happen to be situated on forests, which are then cut," Davis said.
The problems caused by illegal logging could fill a chapter in an environmental science textbook: fuel for civil wars (Cambodia), loss of biodiversity (Cambodia, Malaysia, Indonesia), disruption of agricultural production (Cambodia), and deadly landslides (Thailand, the Philippines, Cambodia), among others. All of the countries of Southeast Asia have suffered from at least some of these negative consequences. Many of the problems are regional. The falling levels of the Mekong River are an environmental catastrophe in the making, while the siltation and salinization caused by erosion from poorly planned clear cuts is affecting fish catches throughout the region and threatening the livelihoods of fishermen across Southeast Asia.
At the same time, destruction of rainforests from Indonesia to China affects rainfall levels, causing droughts like the one that has gripped several provinces in Cambodia. The new tactic of creating plantation forests destroys habitats and biodiversity by replacing what is in effect a botanical garden with the equivalent of a patch of cabbage. Animal habitats are destroyed, as well as potentially crucial genetic resources. Yet logging continues unabated as powerful transnationals establish shell companies and corporate facades in various countries to take advantage of weak institutions. With promises of jobs, foreign exchange and payoffs to officials, these firms are welcomed with open arms. Only much later is the extent of the damage understood, as ecological calamities manifest themselves. All too often those who bear the brunt of the damage are the least powerful, and those who benefit from the graft suffer no consequences, as corrupt judicial systems and family and political ties enable them to buy their way out of trouble. Meanwhile, the transnational logging firm sets up another corporate entity or establishes a new joint venture to begin the process anew down the road or up the river.
These logging companies are not bound by considerations that constrain traditional Asian conglomerates, such as long-term viability, because the very nature of their business creates perverse incentives to log as much as possible before the sun sets, so to speak. Furthermore, there is a whole sub-economy based on the extraction of hardwoods and other forest resources; stop-gap measures that are employed rarely address the true root of the problem - demand.
Asian Pulp and Paper
APP's business model is a tactically aggressive one: it turns huge profits by quickly stripping forests bare, exploiting age-old forests and indigenous peoples, and leaving town before the environmental consequences are felt. By the time communities and governments lodge complaints and lawsuits, APP has divested itself of local interests and assets.
Currently APP is restructuring its debt burden. On Sunday the Financial Times reported that the firm appeared to be moving toward a debt resolution that would pay creditors a tiny fraction of the more than US$4.5 billion it owes them: at the end of January, APP is expected to put a $5 billion restructuring system in place at three of its four main Indonesian subsidiaries.
Meanwhile, evidence that Cambodia's Ministry of Environment may be serious about cracking down on firms came from Minister Mok Maret. "[Green Rich] has always continued sneaking in [to] cut our thick forest ... The company has to face the legal procedure before the law," the minister told IFocus, a Cambodian publication.
While the charges seem startling, an international conglomerate boldly defying a national government to denude a precious jungle reserve, they are not new. Environmental groups in Cambodia and abroad have known about the clear-cutting for months. Furthermore, observers in Cambodia note that Mok Maret's threats to sue come only after months of criticism for his role in signing off on the illegal concession document in the first place. Cambodia has a long history of sacrificing its forest resources to line the pockets of those who have power.
Thus, the timing of the announcement is somewhat opportunistic. Cambodia, a nation dependent on foreign aid for an estimated 50% of its official expenditures, has recently endured its periodic consultation with donors, a biannual exercise in futility in which donor nations admonish Cambodia to work harder to reign in its epidemic problems in human and drug trafficking, official corruption and environmental piracy. Each time this meeting convenes the donors threaten to stop aid to the country, the term "donor fatigue" is bandied about quite frequently, and at each meeting the government, perpetually headed by Prime Minister Hun Sen, promises to get tough and crack down on the aforementioned problems.
The money continues to flow, in some cases exceeding the requests of the Cambodian authorities. But it is well known that the roots of each problem are so intertwined with the government that the government could not function without the revenue generated by illegal activities. Furthermore, there is a sense among government officials that such actions are rooted in hundreds of years of tradition and political practice, so that what falls under an official's purview includes the right to exploit, mine and chop; the essence of the idea is that the land is one's to do with what one will. So each conference is followed by statements of intent and promises that are rarely if ever followed through, while the donor community continues to treat Cambodia like a delinquent child that might change his ways if given enough opportunities to reform.
Thus, while the Environmental Ministry's recent actions gain the praise of environmental groups and international observers, congratulatory statements are tempered by conditional statements indicating a skepticism that has developed over years of interactions with Cambodia's ministries. Says Mike Davis of Global Witness: "If followed through, this would be a crucial first step towards terminating the recent rash of illegal economic concessions that threaten Cambodia's protected area system."
APP has a history of moving from country to country and ignoring laws, moratoriums and official proclamations. Despite the fact that then-Indonesian president Megawati Sukarnoputri declared illegal logging a capital offence punishable by firing squad last summer, it was not until the end of October that APP decided to stop logging in Indonesia. Still, according to a recent Greenpeace report, up to 90% of all industrial wood extraction in Indonesia is illegal. And despite the fact that the Ministry of Environment in Cambodia has threatened to sue, sources inside Cambodia say the trees continue to fall, and that even if APP loses its concession within the Botum Sakor National Park, they have other concessions in Cambodia that dwarf the maximum allowable by law.
A history of questionable activity
From its beginnings, APP's activities have always been legally questionable, but it has always had powerful friends. The firm has operated in various countries throughout Asia since 1984 and has been listed on the New York Stock Exchange. Before 2000, APP aggressively issued bonds and was seen as a good investment by many brokerage firms. The bullishness toward the firm came to an end in 2001 when it defaulted on $14 billion in debt. Although some banks have written off the debt and APP has been delisted from the New York Stock Exchange, the US Import-Export bank has pursued action against APP, as have some hedge funds. Of course, the firm is in the process of restructuring its debt burden, but observers note that APP has a history of manipulating arbitration processes and debt negotiations. And while "reputable" institutions in the West have abandoned APP, there are still powerful friends in China, Cambodia and Indonesia.
Although APP has left a sour taste in the mouths of many close to the devastation in Southeast Asia, the company and its subsidiaries have had great success in ingratiating themselves with Chinese banks and local officials, and thus China has become a larger variable in the APP profitability equation. APP has made tremendous investments in Yunnan province, including building the largest pulp mill in China, a country notorious for its low-level corruption and decentralized control in these matters, with local party chiefs functioning as plenipotentiaries and brokers of all deals.
Contributing to APP's penetration of China is a seemingly endless supply of credit. According to Greenpeace, Chinese banks are still willing to lend to APP despite the firm's pariah status among Western firms and Southeast Asian banks. And although several Japanese, European and American conglomerates have pledged to no longer do business with APP, the loose regulation and wild-west style of business in China creates short-term opportunities.
The firm has made the most of its Chinese connection; it has increased production capacity far beyond the ability of its eucalyptus plantations to supply. This leads observers to suspect that APP counts on access to illegal timber from Cambodia, China and Laos in its profitability forecasts. Greenpeace, Global Witness and the World Wildlife Fund have all observed that APP has a habit of opening mills without first securing a sustainable pulp wood supply, and sources familiar with the issues say APP has its sights set on Russia and Myanmar, two nations known for corruption.
APP and companies like it have succeeded in creating a new business model reliant on a regional lack of accountability.
Forests are especially attractive as nations try to improve macroeconomic figures to attract investment and dress up their economic performance. Thus, natural resources are unsustainably used to create short-term returns for multinationals and to artificially boost gross domestic product figures. Weak institutions and a little money changing hands also helps to facilitate the timber laundering industry, which has been active between Cambodia, Laos, Malaysia and Indonesia. Bribes facilitate nation-of-origin stamping and can purchase visas for seaman, truck drivers and others involved in transport. There is an entire timber economy functioning throughout the region.
As Asia cleans up in the aftermath of one of the worst natural disasters in history, many people are starting to pay attention to the warnings of environmentalists, examining how industrial expansion and non-sustainable extraction have exacerbated the damage. Experts suggest that over the past 50 years half of all the mangrove forests in Asia have been destroyed. While the long-term deleterious effects on reefs and coastal ecosystems has long been known, this slow death is down on the list of considerations in a region struggling to develop. It takes a cataclysm's pause for reflection; experts say that if mangrove stands still existed in places such as Thailand, the damage caused by the tsunamis would have been greatly reduced. The same could be said for the long-term damage caused by short-term profit-driven logging throughout Southeast Asia. While deadly landslides are tragic and have caused Thailand and the Philippines to ban logging, the damage caused by illegal logging will have much more profound effects on the region, both economically and socially.
Keith Andrew Bettinger is a researcher and journalist currently based in Kuala Lumpur. His interests include development and environmental issues, as well as US and international politics. He is a native of Shreveport, Louisiana, and has advanced degrees in international affairs and education. He can be contacted at firstname.lastname@example.org.