Public finance

Posted: 28 May 2007 in


From the 1960s to the end of the 1980s, multilateral development banks were “significant catalysts in the funding of new pulp mills”, according to CIFOR. During the 1990s, the World Bank produced a new forest policy, which limited Bank-financing of commercial forestry projects. As a result, in the last decade, multilateral banks provided only US$ 1.9 billion to adopted a new forest policy which drops many of the old safeguards and paves the way for massive new investments in industrial forestry projects. As a result, the World Bank is financing large pulp mills again.

Development finance plays a key role in the expansion of the pulp industry. Multilateral and bilateral aid often finances the consulting firms which provide advice in favour of establishing plantations and building pulp mills. In Indonesia, for example, the World Bank has expressed support for the government’s plans to expand the area of pulp plantations by five million hectares. New pulp mills themselves are often aid financed and export credit agencies in the North back the manufacture and export of machinery.

CIFOR notes that the multilateral banks act as “arbiters of quality, in which role they are implicitly recognised by the private sector”. Often commercial banks will agree to finance a scheme once multilateral financing is in place. However, the fact that a multilateral bank has agreed to finance a project is no guarantee of quality as the number of aid-financed boondoggles littering the global South clearly indicates.

The multilateral banks most involved in pulp mill investment in the last two decades are the International Finance Corporation (IFC) and the European Investment Bank (EIB). Both have a mandate to lend to the private sector. In Asia, the Asian Development Bank has supported the expansion of the pulp industry through its loans to governments.

IFC: “Open for business”

According to its mission statement, IFC exists to “promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives.” IFC loans are supposed to be directed to developmentally beneficial projects which cannot raise sufficient capital on reasonable terms from commercial banks.

IFC often requires that it is engaged as a paid adviser on the structure and financing of a project before actually making an investment. IFC usually brings in a syndicate thus ensuring additional financing. Although IFC has standards which must, in theory at least, be met before the bank can approve a loan; in practice, if a project does not meet its standards, the IFC attaches conditions for improvements to the loan. As CIFOR points out, once the funds are disbursed, there is little that IFC can do when a company proves unwilling or incapable of improving its operations.

IFC has a Forest Product Sector team which is actively looking for potential forestry projects to finance. “We are open for business,” is how a senior investment officer with IFC, put it at a packaging industry conference in 2005.

IFC has financed several plantations and pulp projects in China, including Sino-Forest (Canada), Jiangxi Chenming Paper Company (a joint venture between South Africa’s Sappi, South Korea’s Shinmoorim and two Chinese companies, Chenming Group and Jiangxi Paper Industry Company) and Stora Enso (Sweden-Finland).

In November 2004, the IFC approved a US$ 50 million loan to Aracruz to finance the expansion of the company’s pulp and plantation operations in Brazil. The IFC gave the loan in spite of ongoing land disputes between the indigenous Tupinikim and Guarani people and the company. In response to an NGO letter protesting the loan, IFC claimed that “land dispute issues were fully reviewed during IFC’s appraisal”. IFC’s review was, however, based Peasants Movement (MST), which had occupied an area of Aracruz’s plantations in April 2004. In May 2005, Guarani and Tupinikim reclaimed part of their land from the company, cutting thousands of eucalyptus trees and rebuilding two villages. Aracruz repaid the IFC loan in full shortly after the company was involved in a violent eviction of the villagers in January 2006.

EIB: Destroying livelihoods in Brazil

The European Investment Bank provided financing for the Veracel project in Brazil. EIB’s process for approving the pulp mill loan was far from transparent. EIB declined requests from NGOs in Brazil to release the documents the Bank had produced during its evaluation of the Veracel project. The Bank also declined to release the date when the EIB Board would discuss the proposed loan to Veracel. The Veracel plantations and pulp mill have destroyed local livelihoods. An open letter from citizens in Bahia states: “Over the past years, Veracel has generated a track record of environmental degradation, concentration of land, eviction of thousands of workers from the rural areas to the outskirts of cities, causing significant social and environmental disruptions.” Journalist Jodenilton Bastos notes that since the Veracel project started, “What has most increased is criminality, child prostitution, poverty, hunger, the number of people imprisoned, robberies, murders.”

CIFOR points out that the Banks’ analysis of their investments focuses on the economic and looks at benefits but not impacts. “EIB [is] happy to focus on macro benefits such as balance of payments improvement, job creation and as yet do not work actively to mitigate any potential negative impacts that their investments might have.”

ADB: Increasing poverty

More than 80 per cent of the ADB’s loans to the forestry sector have been spent on plantation projects. In total, more than one million hectares of plantations have been established using ADB financing, including 775,000 hectares of commercial plantations. In addition to financing plantations, the ADB has funded research into the expansion of the industry in countries like Indonesia, where the pulp industry has had devastating effects.

In Laos, the ADB’s Industrial Tree Plantations Project created and increased poverty, according to the Bank’s own project completion report. Nevertheless, the Bank approved a second plantations project which would repeat the mistakes of the first. In its appraisal of the second project, the Bank ignored the findings of its own consultants, who reported that “discussions with farmers (women and men) in the 6 villages revealed that their priorities in livelihood improvement do not include tree plantations of the kind offered by the proposed project.” Yet as part of this second project, the ADB attempted to set up a Lao Plantation Authority, which would have been a “one-stop window for private investment in plantations”, according to Akmal Siddiq, an economist at the ADB. The Bank ended up cancelling its loan as a result of internal and external criticisms and when the Lao government declined to agree to the Bank’s loan conditions.

In 2000, the ADB started a forest policy review which was supposed to result in a new forest policy by the end of 2002. The Bank has still not produced its new forest policy and rumours have emerged that the Bank may pull out of financing forestry projects.

ECAs: Supporting profits in the North

Export Credit Agencies play an important role in financing machinery and equipment purchases by pulp mills. While ECAs allow the purchase of modern equipment which is less polluting, changes in pulping technology mean that the production capacity of new pulp mills has increased substantially, meaning more demands on raw material, water and energy supply as well as needing transport and logistical infrastructure around the mill. In many cases, smaller pulp mills would make more sense, but political and economic factors mean that the biggest mill possible is constructed.

The Export Import Bank of the US (US Ex-Im) was the first ECA to apply environmental screening to their projects, based on World Bank operating guidelines. However, this did not stop US Ex-Im from supporting APP’s incredibly destructive operations in Indonesia. Several other export credit agencies also supported APP, including Hermes (Germany), the Finnish Guarantee Board, Exportkreditnamnden (Sweden), Export Development Canada, CESCE (Spain) and Exportkreditfonden (Denmark).

“We in Indonesia want the taxpayers of the industrialized world to stop subsidizing the expropriation of our land, the destruction of our environment, and the ruination of public health through ECA projects”, says Titi Soentoro of Bioforum, a coalition of 70 Indonesian NGOs.

Urgewald is recommending that development banks should end all investments and subsidies to the pulp and paper sector – including support for the establishment of industrial tree plantations.


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