Hans Nicholas Jong, Jakarta – Indonesian conglomerate Sinar Mas, which has a long history of deforestation and conflicts with local Indigenous communities, secretly controls Canadian paper and packaging company Paper Excellence, which could soon become one of the biggest pulp and paper suppliers in North America, a new investigative report has alleged.
The report, Papering over Corporate Control, was published by four environmental watchdogs on the heels of Paper Excellence's acquisition of Resolute Forest Products, Canada's third-largest producer of sawn wood with more than 40 pulp, paper and lumber mills and processing centers in Canada's Ontario and Quebec and in the southeast U.S.
Paper Excellence has been on a buying spree in recent years, acquiring Eldorado Brasil Celulose S.A., Brazil's largest single pulp line, for a reported US$2.9 billion, as well as Domtar Corporation, one of North America's largest pulp and paper producers, for $3 billion.
In July, Paper Excellence announced its intention to acquire Resolute Forest Products for a reported $2.7 billion.
On Oct. 31, the majority of shareholders of Resolute Forest Products approved Paper Excellence's proposal to acquire the company. The acquisition is now pending regulatory approval, and if approved, the acquisition is expected to be completed in the first half of 2023.
Once Paper Excellence acquired Resolute Forest Products, it will become Canada's largest forestry company and one of the biggest pulp, paper and lumber suppliers in North America, with more than two dozen pulp, paper and packaging mills and 17 lumber mills in Canada and the U.S.
With the acquisition, Paper Excellence is poised to rival West Fraser Timber, which has a market cap of $8.6 billion, as North America's largest forestry company. It will also transform Paper Excellence from a pulp and paper company into more of an integrated forestry company as it will add sawmills and woodlands from Resolute Forest Products to its assets.
The growth of Paper Excellence, which started with a single pulp mill in Canada in 2007, is impressive given the speed and scale, according to Kevin Mason, managing director of ERA Forest Products Research, an independent financial research company focusing on paper and forest products sector.
"And there's been a bit of a pivot," Mason said as quoted by Canadian newspaper Times Colonist. "Traditionally, it was really pulp focused. But with Domtar, you're getting into being the biggest copy paper, white paper producer in North America. And then Resolute ... they're the biggest newsprint producer. Now you've got lumber operations, as well as pulp, and some other paper assets."
But the acquisition is not merely a simple business story of a company buying another company, as Paper Excellence has ties with Sinar Mas Group, an Indonesian-based conglomerate with a long history of deforestation and social conflict, according to the report.
"As Paper Excellence is now emerging as a major corporate actor in the pulp/paper and wood products industries of Canada, the United States and Brazil, it is increasingly important for stakeholders to ask: Who owns, controls, and benefits from Paper Excellence and its operating companies?" Joshua Martin, the director of the Environmental Paper Network, one of the NGOs that published the report, said.
Hidden tiesThe ties are hidden through a multilayered corporate structure with holding companies in numerous offshore jurisdictions that are characterized by high levels of corporate secrecy, such as the Netherlands, Labuan (Malaysia), the British Virgin Islands and Hong Kong, the report shows.
The report found these hidden ties after analysing hundreds of pages of corporate registry documents and other official filings about entities in various jurisdictions, including Canada, Indonesia, France, Brazil, Italy, Germany, the United Kingdom, the United States, Malaysia and the British Virgin Islands.
From these documents, the report found at least 12 significant linkages of Paper Excellence with Sinar Mas and its subsidiary, Asia Pulp and Paper (APP), including family ties, overlapping management and financial links.
According to the report, Sinar Mas and APP have been linked to Paper Excellence since the company was established in 2007.
When Paper Excellence acquired a pulp mill in the Canadian province of Saskatchewan called Meadow Lake – its first – in January 2007, various media reported that the deal was signed by APP and that the $38 million bill for the mill purchase was paid by APP.
Local media also reported that members of the Meadow Lake Tribal Council briefly met with a representative of Sinar Mas after the purchase was completed.
Responding to the various media reports, Paper Excellence corporate communication vice president Graham Kissack said they're merely speculating the ownership of Paper Excellence.
"As is so common these days, they are simply speculative and represent the social media echo chamber," he said in a response included in the report. "None of them present any verified facts other than the incorrect assertion that Paper Excellence is, in some undisclosed fashion, controlled by Sinar Mas based on family relationship assumption."
After Paper Excellence acquired the Meadow Lake mill in 2007, Meadow Lake Mechanical Pulp Inc., which operates the mill, wrote at least six letters to the Environmental Ministry of the Saskatchewan Government from May 2008 to September 2010.
All six letters have letterhead that stated the mill is "A Division of Sinarmas Group," complete with the group's logo.
It wasn't until October 2010 that Meadow Lake Mechanical Pulp Mill Inc. started using the Paper Excellence logo on its letterhead in correspondence with the Environmental Ministry of the Saskatchewan Government.
The most recent indication of ties between Paper Excellence and Sinar Mas is found in the registration that Canadian lobbyist Moe Sihota, who used to be the president of the New Democratic Party of British Columbia, submitted to British Columbian government in 2020.
In the registration documents, the Sinar Mas Group is listed as one of the six affiliates of Paper Excellence "with direct interest in the outcome" of Sihota's lobbying activities on behalf of Paper Excellence.
But the latest version of the document registered from Nov. 1 has omitted the Sinar Mas Group from the list of affiliates.
Family, financial and business ties
And then there are the well-known family ties between Paper Excellence and Sinar Mas.
Paper Excellence is owned by Jackson Wijaya Limantara, the grandson of Sinar Mas founder Eka Tjipta Widjaja, who died in 2019, as well as the son of APP's longtime chairman Teguh Ganda Widjaja.
Jackson's relatives, like his sister and uncles, also hold, or used to hold, leadership positions in Sinar Mas business entities.
Kissack said that all these family connections don't mean that Paper Excellence is controlled by Sinar Mas.
"Trusted advisers, former colleagues, even friends are sometimes asked to play a role. But this has nothing to do with the ultimate ownership and control of any company," Kissack said in his response to the report.
However, the report pointed out that Jackson's sister, Linda Wijaya Limantara, said in 2019 that Sinar Mas operates more like a family council with no clear lines of authority, even as only one family member is appointed to manage each company.
And in filings by Domtar Corporation to the U.S. Securities and Exchange Commission (SEC), Paper Excellence said that Jackson Wijaya means not only Jackson himself as an individual but also his family members.
This indicates that Jackson's ownership of Paper Excellence should be understood to potentially include other family members, the report said.
In response to this finding, Kissack, said that the definition of Jackson in Domtar Corporation's filings is a standard definition for any person in the context of the SEC.
"What it does not refer to is any implication suggesting that PE Group is controlled by APP/Sinar Mas, which again, is not correct," Kissack said. "Nobody else, except Jackson, has ever been or is the ultimate owner or controller of any of the companies in the PE Group. No member of APP/SMG has ever had any ownership interest in any of the PE Group entities.
Paper Excellence has also been financially linked to Sinar Mas, as the former received a 10-year loan in 2010 for $17.5 million from China's Bank International Ningbo, which is owned by Sinar Mas.
What stands the loan apart is the 0.1 percent interest from Ningbo, much lower than the average lending rate in Canada at that time, which was 2.6 percent. This 26-fold difference, the report said, is an indication of "transactions between related parties."
Some Sinar Mas and Paper Excellence business entities also have the same people as their directors, according to the report.
For instance, two former directors of Paper Excellence mills' holding company, Fortune Everrich Sdn Bhd, were also senior officers of APP and Sinar Mas at the same time, the report said.
And Danilo Benvenuti, a former director of Fibre Excellence SAS, which owns the two pulp mills that Paper Excellence acquired in France, from 2010 to 2018, has also served for more than two decades as an APP executive in Europe, the report added.
"Taken together, this nexus of family ties, overlapping management, and lobbyist filings indicate that Sinar Mas controls Paper Excellence," the report said. "Corporate control is the defining characteristic of belonging to a shared corporate group, and the indicators of corporate control presented in this section demonstrate that Paper Excellence is, in fact, part of the same corporate group as Sinar Mas and APP."
Kissack said the definition of corporate group and corporate control used in the report is not relevant because "even under the broadest definition of these terms – PE [Paper Excellence] is entirely independent of APP/SMG [Sinar Mas Group]. This is simply a fact and there is nothing in your letter/summary that shows otherwise."
APP has also denied any link between the company and Paper Excellence.
"Your suggestion that Paper Excellence is part of the same corporate group as Asia Pulp & Paper (APP) is not correct," APP said in a response provided to the authors of the report. "There is no such company within the Asia Pulp & Paper (APP) group."
While both Paper Excellence and APP have denied that Sinar Mas controls the former, the authors of the report pointed out that corporate control can be established not only through direct or indirect ownership interests.
Corporate control can also be established through a variety of factors, such as family and financial ties.
And this broader definition of corporate control has been adopted by Forest Stewardship Council (FSC), the world's leading forestry certification scheme, in its new Policy for the Association of Organizations.
Since 2007, Paper Excellence has been a member of FSC, with its products certified by the labeling scheme.
APP, however, has been disassociated from FSC since 2007 due to the company's association with deforestation, something which is in violation of FSC's criteria.
However, if Sinar Mas is proven to control Paper Excellence, and that APP is a sister company of Paper Excellence, then the Canadian firm might violate FSC's criteria due to its association with Sinar Mas and APP, according to the report.
This is because FSC's Policy for the Association of Organizations prohibits its members from being associated to companies "involved" with those that have been found to have violated the commitment to avoid unacceptable activities like deforestation.
Therefore, the report calls on FSC to launch its own investigation into the alleged links between Paper Excellence and APP.
"As our analysis conveys, additional due diligence is needed by banks, regulators, major consumers of wood pulp, paper, tissue, packaging products and voluntary standards bodies like the Forest Stewardship Council," Martin of the Environmental Paper Network said.
Sinar Mas history
Sinar Mas is one of the largest business empires in Indonesia, with businesses ranging from timber to palm oil, property and banking that span millions of hectares of concessions around the country.
But before it became a multibillion-dollar empire, Sinar Mas started with a humble beginning.
Its founder, Eka Tjipta, emigrated from China's Fujian province to the Indonesian island of Sulawesi in the 1930s, and he started his business by selling biscuits and sweets from a bicycle rickshaw.
And then Eka Tjipta opened a grocery store in 1949, selling copra, palm oil and paper.
These businesses eventually became the backbone of Sinar Mas and drove the group's growth. Eka Tjipta's family is the second richest in Indonesia, with a net worth of $9.7 billion in 2021.
This tremendous growth comes at the expense of large-scale clearance of natural forests and wildlife habitat as well as the displacement of Indigenous communities, according to various NGO and media reports.
A 2011 report by Eyes on the Forest (EoF), a coalition of NGOs based on the Indonesian island of Sumatra, estimated that Sinar Mas had deforested 2 million hectares (4.9 million acres) of natural forests in the Indonesian provinces of Riau and Jambi, including habitat for critically endangered orangutans, Sumatran tigers (Panthera tigris sumatrae) and Sumatran elephants (Elephas maximus sumatrensis), between 1984 and 2010.
In its response, APP said that its supply chain has been deforestation-free since the establishment of the company's Forest Conservation Policy in 2013. According to the policy, all natural forest clearance has been suspended since February 2013.
APP also noted that the authors of the report referred to deforestation reports that dated back to 2010, which was before the Forest Conservation Policy was put in place.
However, the authors also pointed out that APP and its suppliers had been found to be clearing natural forests and wildlife habitat during the years since the Forest Conservation Policy was enacted.
A 2018 analysis by Greenpeace found that nearly 8,000 hectares (19,770 acres) of forest and peatland were cleared in two concessions linked to APP and Sinar Mas Group from 2013 to 2018. These findings have led Greenpeace to end its engagement with Sinar Mas.
And between August 2018 and June 2020, approximately 3,500 hectares (8,650 acres) of peatland were destroyed in three concessions either owned by APP/Sinar Mas or that are major suppliers to APP's pulp mills, PT Arara Abadi (AA), PT Bumi Andalas Permai (BAP) and PT Bumi Mekar Hijau (BMH), another Greenpeace analysis showed.
Most recently, EoF found evidence of clearing of natural forest and plantation expansion by two of APP's own wood suppliers, PT Arara Abadi and PT Sekato Pratama Makmur.
The clearance occurred inside a UNESCO biosphere reserve in Riau province, Indonesia, a deep peatland area that's home to critically endangered Sumatran elephants.
In PT Arara Abadi's concession, EoF found 50 hectares (123.5 acres) of natural vegetation being cleared in early 2022, and in total, 4,399 hectares (10,870 acres) of natural forest had been lost since APP published its Forest Conservation Policy in 2013.
According to EoF, the cleared area was identified as having High Conservation Value (HCV) as it overlaps with the Sumatran elephant's range.
APP has denied the allegation, saying that EoF's analysis was based on dated, inaccurate and incomplete information.
APP said the area in question is designated for cultivation, not protection, and thus the company is legally allowed to clear the area, and that it didn't contain natural forest.
"Clearance of overgrowth on cultivation areas is not deforestation," APP said in a response posted on its website.
When EoF visited the area that was suspected to have been cleared based on satellite monitoring, it found a stack of fallen natural forest trees with more than a 15-centimeter (5.9-inch) diameter at breast height.
At the location, EoF also found footprints of Sumatran elephants. APP admitted that the cleared area was an HCV area home to Sumatran elephants.
But APP claimed that silviculture was permitted in HCV areas as long as the value and function of the area was not impaired.
APP said the company had been implementing measures to protect elephants, such as monitoring the distribution and protection of the species, training workers in avoiding conflict with wildlife and installing warning signs at elephant crossings.
Those efforts, APP said, have succeeded in maintaining a steady population of elephants, with nearly 300 elephants passing through plantations and conservation areas in 2021.
"This indicates that the value and function of this HCV area was maintained and improved, not despite plantation activity, but because the activity has made the landscape more favourable for elephants and other fauna," APP said.
EoF pointed out that multiple deaths of Sumatran elephants had been reported, with the latest incident occurring in May 2022, when a 25-year old pregnant elephant was found dead due to suspected poisoning.
In PT Sekato Pratama Makmur's concession, EoF found evidence of natural forest clearance as well as the planting of new acacia plantation in peatland with a 4-meter (13-foot) depth, which EoF said is against the law that requires the protection of deep peatland.
APP said that while the cleared area was peatland and borders protected forests, it was zoned as production area, and thus the company was legally allowed to clear and cultivate the peatland.
APP added that the cleared area was covered with shrub strands with scattered plots of open areas, not natural forests.
"Again, no protected natural forests were cleared or converted, and cultivation in the area is permitted," APP said.
Financial track record
Besides Sinar Mas' track record in environmental destruction, the report also highlighted the group's track record of meeting its financial and sustainability commitments after assuming large amounts of debt.
The report pointed out that APP defaulted on nearly $14 billion in bonds and loans in 2001, which is the largest corporate default in emerging markets history.
Since then, the group's creditors have alleged a number of behaviors on the part of APP that they deemed to be questionable. Those behaviours were related to how the group took on such large amounts of debt and how it handled the debt restructuring process following the default.
For instance, some bondholders who participated in a debt restructuring vote were alleged to be employees of APP.
In response to the 2001 financial default, APP said that the default took place under extraordinary circumstances brought about by the 1997-1998 Asian financial crisis.
"Since then, a restructuring has taken place with repayments to creditors accelerated," APP said. "There have been no credit incidences since."
The report said it didn't highlight Sinar Mas and APP's financial track record to insinuate that Paper Excellence's management of its financial obligations would replicate the experience of APP's financial default in 2001 and subsequent restructuring of its corporate debt.
"However, the extensive linkages of Paper Excellence with APP and Sinar Mas should provide prospective investors and creditors with a powerful incentive to carefully monitor the financial management practices of Paper Excellence and its affiliates," the report said.
Those prospective investors and creditors included banks that were looking to finance Paper Excellence's purchase of Resolute Forest Products.
The acquisition was planned to be financed through debt financing arrangements for $1.5 billion from a number of banks, including Barclays, Bank of Montreal, CoBank, Royal Bank of Canada, U.S. Bank and Wells Fargo.
"The expansion of the Sinar Mas Group's forestry empire across Indonesia was enabled by decades of easy money from major banks and sourcing of Asia Pulp and Paper products by well-known brands," Gemma Tillack, the forest policy director of Rainforest Action Network, said. "Now a new grouping of banks and brands are at risk of association with APP's ongoing social and environmental harms."
Environmental Paper Network, Greenpeace, Woods & Wayside International, & Rainforest Action Network. (2022). Papering over corporate control: Paper Excellence's relationship with Asia Pulp & Paper and the Sinar Mas Group. Retrieved from https://environmentalpaper.org/wp-content/uploads/2022/10/Papering-over-corporate-control-Oct.-24-2022.pdf