Richard Borsuk, Porsea – When Suharto was president of Indonesia, corporate big shots visiting their factories in the provinces were routinely welcomed by festive banners strung above the highway.

In post-Suharto Indonesia, such banners are still hoisted. But today the greetings can be rather rude, as Palgunadi Setyawan, the new chairman of PT Inti Indorayon Utama, has discovered.

To visit his huge but idle $600 million pulp mill here on the island of Sumatra, Mr. Palgunadi must run a gantlet of hostile messages. "The Voice of the People, the Voice of God: Close Indorayon!" reads one. Another calls Indorayon supporters traitors. A third says local residents are prepared to burn down the plant.

Mr. Palgunadi has a delicate, potentially explosive task: carrying out a government-sanctioned reopening of the Indorayon mill, closed in 1998 by opponents who claimed the company was poisoning the environment and was in league with Mr. Suharto. The job is tougher than just patching up public relations. It means doing what the Indonesian government can no longer do: persuading local communities to bend to the will of central authority.

The Indorayon imbroglio illustrates the dilemma businesses and the government face as Indonesia copes with the anger of communities whose complaints were ignored or smothered during Mr. Suharto's 32-year rule.

'Many time bombs'

Indorayon – which denies it had any links to the Suharto family – is a particularly thorny case, because the mill was controversial even before it was opened in 1989. Its location near Lake Toba – Southeast Asia's largest lake and Sumatra's biggest tourist attraction – was criticized by the ethnic Batak people who live nearby, and by Indonesian environmentalists.

Opposition to the plant sparked occasional violence that was suppressed by force when Mr. Suharto was in power. For example, after a pipe exploded in 1993, releasing gas the company said was harmless, word spread that poison would engulf the area. Villagers rioted and burned more than 100 workers' houses before soldiers restored order.

Now, Jakarta's pledge to give more political power to local governments, combined with the military's diminished status and a woeful legal system, is emboldening disgruntled communities like Porsea. It amounts to another way Indonesia's chaotic post-Suharto democratization is testing longtime investors and scaring away new ones.

"This case is one of so many time bombs left by the [Suharto] government," says Industry and Trade Minister Luhut Pandjaitan, who was born near Lake Toba. "Whatever decision there is, it's going to be messy," he says, adding wistfully that the situation "maybe can't be defused."

Costly shutdown

Company executives say the plant, which critics say polluted rice fields and fish ponds near Lake Toba, can't be moved. But neither can it remain closed without pushing Indorayon into insolvency. The shutdown already has been costly. Jakarta-listed Indorayon's market capitalization has skidded to about $25 million; in the mid-1990s analysts valued the company at as much as $1.5 billion.

Indorayon's founder, Indonesian-Chinese businessman Sukanto Tanoto, stands to lose his majority shareholding under a plan to restructure Indorayon's $400 million in borrowings, mainly from US, European and Japanese creditors, including Credit Lyonnais and Credit Suisse First Boston.

Indorayon says it wants to reopen the mill "soon." It is lobbying for community support to carry out a decision by President Abdurrahman Wahid's government in May permitting the pulp mill to reopen for one year, so an environmental audit can be done.

But the standoff remains tense and fraught with political risk. On June 21, an incident near Porsea involving a truck used by Indorayon resulted in one death. Police later killed a teenage demonstrator when they fired on angry villagers protesting the detention of 13 men in connection with the stoning of the truck.

If Indorayon tries to restart production, some villagers and organizations promise more trouble. "We couldn't avoid a clash," says Abadi Hanawa of the Medan branch of Walhi, an Indonesian environmental group. "There will probably be a lot dead, not just a few." But if the plant can't reopen, an Indorayon executive says, a different kind of chaos could be the result: 7,000 people still on the payroll will be dismissed.

An unenforceable directive

Trouble began at Indorayon soon after Mr. Suharto resigned in May 1998. Demonstrators blocked the road used by the company's trucks, forcing the first in a series of plant shutdowns. Protestors demanded permanent closure, charging that the mill's emissions were harming crops and residents. (A US concern, in a 1994 company-funded study, found shortcomings in environmental practices, but no danger to neighbors.) After police used force to lift a blockade in March 1999, four Indorayon employees were kidnapped. Three were killed; the kidnappers haven't been found. The president at the time, B.J. Habibie, ordered the plant closed for two weeks while an environmental audit was done.

More than 15 months later, there has been no audit and the mill remains closed. The Wahid cabinet's decision to reopen the pulp portion of the plant in order to conduct the audit has been unenforceable. North Sumatra province officials in Medan, 170 kilometers north of the mill, and the central government appear to lack the will and ability to carry out the decision. To use military force – as happened at Indorayon and elsewhere while Mr. Suharto was in power – is a "terrible option or no option," a member of Indonesia's Parliament from Sumatra says.

"We don't have the institutional infrastructure to solve this kind of inherited problem," says former investment minister Laksamana Sukardi. On one hand, the central government's decisions should be respected, "or there's no credibility," he says. On the other hand, "People hate the central government so much, they feel they've been exploited." Indorayon's chairman, Mr. Palgunadi, a 61-year-old former manager at Indonesia's state ammunition factory, was brought in by the company's founder, Mr. Sukanto, to change the plant's bad image. A retired army lieutenant colonel trained in precision mechanics, Mr. Palgunadi is tapping management skills learned during a second, 20-year career at auto maker PT Astra International to persuade Indorayon's neighbors, anxious government officials and unpaid creditors that the mill can be safely reopened. The company is "committed to changing the way we do business, but not to going out of business," Mr. Palgunadi says.

'The world changes'

Indorayon's opponents show little sign of backing down. Musa Gurning, a 74-year-old father of 14 whose house and rice mill in tiny Porsea are at an intersection used by Indorayon trucks, speaks at length of Indorayon's "evils." He blames the company for destroying rice fields, killing fish and causing genetic damage to residents with toxic pollutants. He contends that Porsea people "don't accept any dialogue with Indorayon," as a dozen villagers gathered at his home nod agreement.

Mr. Gurning shows ponds where, he says, fish flourish again after the mill's closure. Indorayon executives, blaming earlier poisoning of ponds on "provocateurs," say a proper audit would prove or disprove Mr. Gurning's charges.

The animosity of people like Mr. Gurning doesn't discourage Mr. Palgunadi, who became Indorayon chairman in January. Several acquaintances say that if anybody can repair Indorayon's image, it is the soft-spoken, articulate Mr. Palgunadi, who is trying to cajole foes instead of confronting them. Indorayon "is lucky to have Palgunadi," says Jakarta lawyer Mulya Lubis, who represents most of the company's foreign creditors. "He's very open, very compassionate and he doesn't see things in black and white." On his first Porsea trip after becoming chairman, Mr. Palgunadi made it a point to introduce himself to Mr. Gurning. On a subsequent visit, accompanied by a reporter, the chairman drops in again. In a dimly lit, windowless room adorned with portraits of Vice President Megawati Sukarnoputri, the two exchange smiles, sugar-saturated tea and pleasantries. But they avoid substantive discussion of the topic at hand.

"At least he doesn't see me as a menace," Mr. Palgunadi says afterward. Mr. Gurning later describes the chairman as "a very nice man" who is welcome in Porsea – provided he isn't there to open the mill.

But that is precisely why Mr. Palgunadi keeps visiting. He wants to win the "consent of the community" for an audit. If an audit proves environmental damage, he says, "then I'll quit Indorayon to fight against it." Three hundred meters from Mr. Gurning's place, 10 middle-age men drinking coffee in a roadside shop say there will be no audit, and no community acceptance. "Everything that company says is bull-- ," says farmer Oloan Manurung. "If government tries to force it open, it will be total war." Still, Mr. Palgunadi contends that a "silent majority" in favor of restarting the mill is being intimidated by the people – he won't name names – who oppose Indorayon. He thinks the opposition can be watered down. "The world changes; the Berlin Wall fell. So why can't things change here?" he says.

Impatient creditors

Change must come quickly, say foreign creditors, who contend the impasse at Indorayon is hurting Indonesia's overall investment climate. "Everyone at the (Paris) head office is looking very closely at settlement of this case," says Pierre-Alexandre Muyl, Indonesia country manager for Credit Lyonnais, a major creditor.

But a Medan newspaper editor says enmity toward Indorayon is deep. "The company never tried to persuade people to support the mill, they only depended on powerful backing" from Jakarta rather than nurturing local support, he says. Many of the thousands of workers were hired from Medan and elsewhere, and almost all supplies, including food, came from cities far away.

Today, Mr. Palgunadi and his colleagues are trying to win hearts and minds by sponsoring community development programs. Indorayon has begun hiring teachers for the Porsea area's understaffed, underfunded primary schools. Indorayon and creditors also are promoting a plan through which a small percentage of future revenues will be channeled to the community.

Mr. Abadi of Walhi, the environmental group, asserts that only 10% of the local population will buy the program. "It's simply too late," he says, warning that the plan could cause conflict between different clans of ethnic Bataks, who might fight over who gets the funds. Indorayon "didn't understand Batak culture, and now it's too late to try," Mr. Abadi contends.

A member of Indonesia's Parliament who hails from Lake Toba disagrees. "It will be very hard, because some people really hate this company, but if Indorayon helps fund enough of the big figures, the mill can reopen," he says. "I think this [dispute] is more about money than the environment."