Botnia, Uruguay: Monocultures, pollution fears and an international dispute
(December 2008): The US$1.2 billion Botnia pulp mill is the largest single foreign investment in Uruguay’s history. Built on the Uruguay River at Fray Bentos, the plans for the pulp mill led to massive protests in Argentina and Uruguay. Spanish company ENCE also planned to build a pulp mill near Fray Bentos, but relocated its pulp mill to Colonia in the south-west of Uruguay, as a result of the protests.
The Argentinian government was so concerned about pollution from the mill that it took Uruguay to the International Court of Justice (ICJ) in the Hague. In July 2006, the ICJ ruled against Argentina. But this first ruling only stated that the court could not order a halt to construction of the pulp mills because there was no immediate danger. In other words, any pollution would happen once the pulp mill starts operations and the court cannot rule on something that has not yet happened. It will take the ICJ several years to reach a decision about whether the construction of the pulp mill violates the 1975 Uruguay River Treaty. Under the treaty, either country has to inform the other about any developments which might have an impact on the river, before the project starts. In the case of the Botnia pulp mill, Uruguay did not do so, claims Argentina.
The pollution from the pulp mill has received much attention internationally. Less discussed is the fact that the pulp mill sources its raw material from thousands of hectares of eucalyptus plantations, which are drying up streams and leaving communities without water supplies.
Botnia is a Finnish company, owned by the Metsäliitto Group (a cooperative of Finnish forest owners, 53 per cent) and UPM Kymmene (47 per cent). Despite the controversy, the pulp mill received a series of subsidies from European bilateral institutions as well as from the World Bank. In November 2006, the International Finance Corporation agreed to finance the project, giving a green light to other financiers to get involved.
Lavish international subsidies
Financing for Botnia’s pulp mill comes from the following sources of public money:
- US$170 million from the International Finance Corporation;
- US$350 million guarantee from the Multilateral Investment Guarantee Agency;
- US$100 million reinsurance from Finnvera of MIGA’s guarantee;
- USS$70 million from the Nordic Investment Bank;
- US$230 million buyer credit guarantee from Finnvera;
- US$7 million from Finnfund to Botnia’s plantation subsidiary Forestal Oriental.
When IFC announced its support for the pulp mill, Erkki Varis, Botnia’s CEO and President, wrote that
“the exhaustive studies have clearly endorsed the benefits the mill will bring. We hope that today’s decision can contribute to convincing the various stakeholders that the mill will comply with relevant environmental standards and not compromise the wellbeing of the inhabitants in the area.”
But research by World Rainforest Movement in the areas of Botnia’s industrial eucalyptus monocultures shows that IFC’s studies were far from “exhaustive”. Instead they played down the problems and most importantly, failed to take into account the views of local people living near the plantations.
One of the IFC’s own reports illustrates problems. In April 2006, IFC hired Hatfield Consultants, a Canadian firm, to review Botnia’s (and Ence’s) environmental impact assessments. Hatfield’s report, written by Wayne Dwernychuk and Neil McCubbin, was critical of the assessments (which had already been accepted by the Uruguayan government). For example, Dwernychuk and McCubbin point out that in the previous assessments, “The reference to dioxins/furans in mill discharges appears to be handled in a rather cavalier manner.” Dwernychuk and McCubbin noted that “These compounds are of significant concern to the general public, and should be discussed fully. Setting the issue aside by concluding that dioxins/furans will be at ‘undetectable levels’ is unacceptable.”
Nevertheless, the IFC reported on its website that “Studies by independent university and international research centers have shown that wastewater from ECF bleaching is virtually free of toxic chlorinated compounds such as dioxin.” IFC fails to explain what the phrase “virtually free” means in the context of dioxins, how this differs from “undetectable levels”, or even whether this poses a risk.
Botnia is well aware of the risks of pollution from pulp mills. In 2003, a UPM pulp mill in Finland spilled 7,500 litres of black liquor into Lake Saimaa. A town called Bay of Hauki (named after a fish) is now known as “Pulp” because of the smell from the nearby pulp mill.
Once the IFC loan was in place, other financiers jumped on board – without carrying out their own studies of the project. MIGA’s guarantee covers the investments for a period of up to 15 years, “against the risks of expropriation, war and civil disturbance, and breach of contract.”
In April 2007, the Nordic Investment Bank (NIB) signed an agreement with the government of Uruguay to allow NIB to grant a loan to Botnia for its pulp mill. The agreement includes tax exemption to NIB and its debtors in Uruguay. It also provides legal and administrative immunity for representatives of NIB.
Finnvera is Finland’s official export credit agency and is 100 per cent state-owned. In March 2007, Finnvera and Botnia signed a Buyer Credit Guarantee agreement of US$230 million. The guarantee is insurance for a 10-year export credit issued to Botnia – if the guarantee were to be called, the beneficiaries would be the commercial banks that financed the export credit. The export credit was used to buy equipment from Andritz Oy.
Finnfund describes itself as “a Finnish development finance company that provides long-term risk capital for private projects in developing countries.” Its majority shareholder is the Finnish state (79.9 per cent directly and 20 per cent through Finnvera; the remaining 0.1 per cent is owned by the Confederation of Finnish Industries). In 2004, Finnfund gave a loan of US$7 million to the Forestal Oriental (FOSA) plantation company whose majority shareholders are Botnia and UPM.
In addition to this public finance, two private banks, Nordea and Calyon, are involved in financing the Botnia project. Nordea Bank is the mandated lead arranger for the project – which means that it is organising syndicated loans from a series of private banks. Nordea is the largest financial group in the Nordic countries. Calyon is the corporate and investment banking arm of the French Crédit Agricole Group. The crucial role of the IFC in assessing this project can be seen from an article in the Financial Times quoting a source at Calyon as saying that Calyon would pull out of the project if the IFC’s EIA proved to be negative.
In April 2006, another private bank, the ING Bank, pulled out of the Botnia project. ING Bank was acting as advisor to Botnia and was working to arrange a US$480 million loan package. Before announcing the pull out, ING had been subject to sustained pressure from NGOs, who argued that supporting the mills was in conflict with the bank’s commitment to invest responsibly, although a letter from ING Bank to Argentinian NGO CEDHA said that the decision to pull out was “not based on the assessment of the project’s compliance with Equator Principles”.
“ING didn’t like the negative publicity around this project and nobody likes it,” Ville Jaakonsalo, Botnia’s finance director told the Financial Times. “It’s important for the banks that are involved that they know the industry and can differentiate facts from the nonsense and outright lies used by some of the opponents in this case. Perhaps ING weren’t able to do that.”
After ING Bank pulled out and Botnia hired Calyon, the protests moved to Calyon. In May 2006 nine NGOs complained to Calyon that its involvement in the Botnia pulp mill was in breach of the Equator Principles.
CEDHA has also filed complaints with the OECD against Finnvera and Nordea, claiming that the Finnish export credit agency and the bank failed to comply with the OECD Guidelines for Multinational Enterprises in its support of Botnia.
Decades of subsidies
The international support for the pulp industry in Uruguay is not a one-off case of helping to cover a private company’s risks with public money. For more than 50 years, plantation proponents have helped to build the political and physical infrastructure to enable the development of large scale industrial tree plantations in Uruguay.
In 1951, a joint FAO and World Bank mission made a series of recommendations for the development of forestry in Uruguay. Among the recommendations was the promotion of suitable species for the timber industry. In 1985, the Japanese International Cooperation Agency funded a study of the feasibility of building a chemical pulp mill in Uruguay. JICA produced a “Master plan study for the establishment of tree plantations and use of planted wood in the Oriental Republic of Uruguay”, which promoted the establishment of pine and eucalyptus plantations. The 1988 Uruguayan National Forestry Plan is based on the JICA master plan.
In 1989, the World Bank provided a forestry loan to Uruguay, which enabled a series of benefits to the industry, including: “tax exemptions, partial refund of plantation costs, long-term soft loans, duty cuts on the import of machinery and vehicles, construction of roads and bridges, equal benefits for foreign investors.”
By 2000, the Uruguayan government had provided more than US$400 million in subsidies to the plantations industry, through direct subsidies, tax breaks, cheap loans and investments in infrastructure.
Monocultures and water shortages
Botnia and its subsidiaries in Uruguay now own over 180,000 hectares of land, of which almost 100,000 hectares is to be planted with monoculture eucalyptus plantations. The plantations have caused serious problems for communities in rural Uruguay.
Botnia, of course, denies the impacts and issues statements such as this:
“All of Forestal Oriental’s plantations have received FSC certification
There are no rain forests in Uruguay
Only planted eucalyptus is used for pulp production”
What Botnia does not mention is that the consultants responsible for the IFC studies and the FSC assessment (carried out by SGS Qualifor) failed to listen to what rural people are saying about the plantations. In its EIA, Botnia didn’t even look at the plantations. IFC’s Cumulative Impact Study notes that: “The EIA Study prepared by Botnia did not address specific impacts relating to plantations.” While IFC noted this omission, it did nothing to remedy it.
IFC’s consultants point out that Forestal Oriental knows that its fast growing tree plantations have an impact on stream flows. In 2000, Forestal Oriental hired a South African consulting firm, CSIR Division of Water in South Africa, which found that Forestal Oriental’s eucalyptus plantations resulted in reduced stream flows by an average of around 25 per cent. Nevertheless, the study concluded that as long as the plantations did not cover too large an area in a given watershed the impact should not be a problem. Whether CSIR spoke to any local people about the problems is not documented in IFC’s Plantations Annex. IFC’s consultants make no mention of any discussions with local people.
While FSC certification should include taking local people’s problems into consideration, SGS failed to do so. Even when its assessors talked to local people SGS avoided dealing with what they told them. One villager told SGS that “the eucalyptus plantations consume a lot of water that in the long term can affect neighbouring populations.” SGS’s response was to explain that “The area is subject to prolonged droughts affecting the water table,” and that Forestal Oriental is carrying out a study into the impacts of plantations on water.
In April 2006, World Rainforest Movement published a study written by Ricardo Carrere. The study is based on a visit to the plantation areas by a team of WRM researchers and interviews with the people living there.
Residents of Algorta (Río Negro), told WRM’s researchers that “because of the eucalyptus trees the Arroyo Negro stream dried up, it used to be the town beach.” Forestal Oriental, Botnia’s plantations company, owns plantations in this area.
A farmer in Guichón whose land is now surrounded by plantations owned by Forestal Oriental, complained that as a result of the plantations the Boyado stream, which runs though his farm, has completely dried up.
SGS’s public summary of their assessment of Forestal Oriental’s plantations fails to deal with the impacts of converting grasslands to industrial tree plantations, stating instead that “Natural forests are not converted to plantations.” Carrere notes that “The certifiers appear to be totally uninterested in the fact that . . . grassland areas would lose their original characteristics.”
One of the problems associated with the plantations in Uruguay is an increase in wild boars, foxes and venomous snakes. For sheep farmers this is a serious problem. The snakes have also killed pigs, calves, cows and even horses.
WRM spoke to two ex-workers of Forestal Oriental who had developed allergic skin reactions to the chemicals they were employed to spray on the plantations. A current worker said that Forestal Oriental gave workers protective equipment, but most workers did not use it because it was uncomfortable. “With this heat, you try working with gloves on!” he said.
WRM’s report notes that Forestal Oriental is among the most highly regarded employers in the plantation sector in Uruguay. But this is a result of government legislation, not FSC certification. Several people pointed out that working conditions had improved because the Ministry of Labour was monitoring compliance with labour legislation much more closely under the new government that came into power in March 2005. They commented that since 2005 workers could form unions whereas “before they weren’t allowed to form unions”.
WRM’s researchers visited an area called Paraje Pence in the department of Soriano to investigate the impact of the plantations on water supply. “All the people here have been left with no water,” one of the local men told them. “I have a little bit but the well is dirty. Close to here where my father lives there’s no water at all.”
Another villager told WRM, “I’ve lived here my whole life, and we never had any problems with water until they established all these plantations around eight years ago. Now we depend on the local government to bring us water.”
A local nurse explained how the lack of water has serious health impacts:
“The thing is that here, aside from the fact that people have been left without water in their wells, all of the freshwater ponds have disappeared too. So sometimes, when people have no water to wash their kids before bringing them to see the doctor, they just don’t bring them. There’s a girl who’s had lots of operations, and is still really weak. Last week she was supposed to come and see the doctor, but because the local authorities hadn’t delivered water for two weeks, she didn’t even have enough to wash her hands, so she didn’t come.”
FSC responded to WRM’s report not by investigating these problems, but by asking for a response from the certifying organisation, SGS. Under the FSC system, SGS is paid by the company it is certifying, in this case Forestal Oriental. Clearly it is not in SGS’s interest to delve too deeply into any of these issues.
SGS’s response to FSC is not available to the public, but it was apparently enough to reassure FSC. “FSC guarantees peace of mind to consumers” was the headline of FSC’s press release. While this may or may not be enough for consumers, it is little consolation to the people living near the plantations in Uruguay.
The chairman of the town council of Guichón reflects the local perception of the way Forestal Oriental and other plantation companies address environmental problems. “To get this famous certification, the companies leave a pond and three ducks and then claim that they’re protecting the environment,” he said.
More subsidies through carbon trading
Botnia has received approval under the Kyoto Protocol’s Clean Development Mechanism to further subsidise its operations in Uruguay through carbon trading. The company argues that by generating electricity through burning black liquor from the pulping process it will be able to sell 32 MW of electricity to the state electricity utility, UTE. Botnia argues that this will replace electricity generated from fossil fuel and therefore “the release of greenhouse gases . . . will be reduced.” Botnia does not explain how it knows that UTE will not use wind or solar energy in the future. In addition, even assuming some greenhouse gas emissions would be saved, by trading the carbon credits, Botnia ensures that the emissions will be released somewhere else. Further, the company fails to take into account the greenhouse gas emissions associated with its operations: carbon loss from soils, building the pulp mill, fuel consumption by forest machinery, logging trucks, and shipping the pulp to China once it has been produced. Pöyry won the contract from Botnia to produce the CDM project documents, to carry out “stakeholder consultation” in Latin America and to make the arrangements for validation and registration of the project.
The millions of dollars of “aid” and subsidies to the Botnia pulp mill are benefiting a series of Finnish companies including Botnia, Andritz Oy, Pöyry and Kemira. The pulp produced at the mill will be exported, along with the profits. The pulp will be shipped to UPM’s Changshu paper mill in China. The impacts of the industrial tree plantations, like the pollution from the pulp mill, are left in Uruguay.
Botnia’s Managing Director in Uruguay, Ronald M. Beare, says that “Botnia is a great opportunity, both for Uruguay and for the wider region.” But many in Uruguay and Argentina disagree with this assessment. The Uruguayan writer, Eduardo Galeano, describes the development of the pulp industry in Uruguay as being “in the purest Colonial tradition: vast artificial plantations that they call forests, converted into pulp in an industrial process that dumps chemical waste into rivers and makes the air impossible to breathe.”
This profile was first published by World Rainforest Movement as part of the report “Plantations, poverty and power: Europe’s role in the expansion of the pulp industry in the South”, December 2008.
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