UFS

By Chris Lang.

(March 2007): United Fiber System (UFS) has a series of pulp and paper projects on the Indonesian island of Kalimantan. A wood chip mill (700,000 t/yr) on Pulau Laut island was recently completed. UFS is in negotiations to buy the existing Kiani Kertas pulp mill (525,000 t/yr) in East Kalimantan and the company plans to build a new pulp mill (600,000 t/yr) in Satui, South Kalimantan.

Most of the financing for the proposed Satui pulp mill is to come from China National Machinery & Equipment Import & Export Corp (CMEC), a Chinese state-owned company. The project is CMEC's first investment in the pulp industry. [1] CMEC also built and part financed UFS’s US$48 million wood chip mill [2]. Raiffeisen Zentralbank Österreich AG (RZB-Austria) Singapore Branch provided a “facility agreement” of US$21 million and Andritz supplied machinery. [3]

UFS receives financial services from Merrill Lynch, Australia and New Zealand Banking Group (ANZ), Cornell Capital and Development Bank of Singapore (DBS). ANZ is the financial advisor for the acquisition of Kiani Kertas and DBS Bank as the arranger of the financing. [4]

UFS also owns a plantation concession of 259,000 hectares in South Kalimantan. [5]

UFS, which hopes to “become a major player in the international market pulp industry”, [6] is the result of a 2002 reverse takeover of Poh Lian Holdings, a Singapore-based construction company, by Anrof Singapore (Mauritius). After the deal, Poh Lian changed its name to United Fiber System. [7]

The UFS corporate structure involves a spider’s web of shell companies registered in the British Virgin Islands and Mauritius. The largest shareholder in Anrof Singapore is Tektronix Industries (British Virgin Islands). Tektronix is controlled by the major shareholders of CellMark (Sweden), one of the world’s largest pulp and paper traders. [8]

The two people behind the setting up of UFS were a Swede, Karl Anders Lindman, and an Indonesian, Wisanggeni Lauw. Lindman and Lauw were long-time business associates and family friends. [9] Lindman was a managing director of CellMark. He became UFS’s chairman and CEO. [10] Wisanggeni Lauw is the largest individual shareholder in UFS, controlling a total of 13.12% of shares in UFS. [11] Lauw is the estranged nephew of timber tycoon and Suharto crony Prayogo Pangestu. He was the director of what is now UFS’s plantation concession while it was owned by Probosutedjo, ex-president Suharto’s half-brother. Probosutedjo was convicted of fraud over misuse of government reforestation loans. [12] Wisanggeni Lauw is the owner of Shinning Spring Resources (British Virgin Islands) [13] and Kingsclere (British Virgin Islands).

UFS’s wood chip mill is owned by Pacificwood Investment (Mauritius), which is owned by Shinning Spring Resources (British Virgin Islands), which is owned by Anrof Singapore (Mauritius) which in turn is owned by UFS (incorporated in Singapore). [14]

A company called Kingsclere (British Virgin Islands) has entered into two agreements with the owners of the Kiani Kertas pulp mill. The first agreement is to buy Kiani Kertas from its current owners, and the second is to re-sell Kiani Kertas to UFS. [15]

    1. FINANCIAL RISK

UFS share price has gone through several spectacular gains and crashes, apparently the result of baseless rumours. [16]

In March 2005, an analyst at DBS Vickers announced that if UFS’s Satui pulp mill project goes ahead, shares in UFS could be worth 90 cents, [17] up from the 39.5 cents that UFS shares sold for at the time. DBS Vickers set a 12-month target price of 54 cents. Within five weeks shares had reached this value. [18] In mid-April 2005, UFS’s share price fell within a week from 53.5 cents to 25 cents, apparently as a result of rumours that UFS was under investigation by the Singapore Police’s Commercial Affairs Department and that UFS’s main financier was pulling out. [19]

In April 2005, Business Times asked Wisanggeni Lauw about UFS share prices. “I’m not trying to influence the stock. . . I have no idea, I’m not trading shares, I’m just an investor,” Lauw said. [20] But Lauw does buy and sell UFS shares – in large quantities. Between July and August 2003, for example, Lauw sold 30 million shares in UFS as a result of “financial obligations”, according to Business Times. [21] This sale came after shares in UFS had increased by 370% in the three months to June 2003. [22,23] In March 2004, Lauw sold 63 million UFS shares. [24]

On 11 April 2005, a court ordered Wisanggeni Lauw to transfer 10.6 million shares to Kang Hwi Wah, former managing director of Amcol, an electronics and property group. [25] Kang had earned the shares for helping Lauw buy Poh Lian Holdings in April 2002. [26] Lauw transferred the shares to Kang on Friday 15 April 2005. [27] The following Monday, the share price collapsed and continued to fall all week. [28] Five days after he transferred the shares to Kang, Lauw was buying again. On 20 April, Lauw increased his interest in UFS from 11.1% to 14.98%. [29]

UFS has a US$159 million equity line of credit agreement with Cornell Capital Partners Offshore under which Cornell is repaid in shares. According to Philip Ho, Cornell’s managing director for global capital markets, Cornell brokered its first deal of this type with UFS in 2004. To get the cash, UFS issues new shares to Cornell in tranches of not more than US$5 million over the next five years to a total value of US$165 million. UFS also has a US$50 million loan note agreement with Cornell. [30]

Since setting up the deal with Cornell, UFS has issued millions of new shares. In January 2006, for example, UFS issued 22.5 million new shares to Tektronix in January. UFS had previously borrowed the shares from Tektronix to repay part of a loan to Cornell. [31] In April 2006, UFS issued 48.99 million new shares at S$0.10 each to Tektronix in exchange for shares it borrowed earlier. [32] In September 2006, UFS issued another 61.49 million new shares in order to return shares that it borrowed from Tektronix, again to repay a loan from Cornell. [33]

In November 2006, UFS issued another 180 million new shares as part of an equity placement agreement with a group of investors including Stark Investments (Hong Kong) Ltd. As a result of the transaction Stark holds 5.6% of the shares in UFS. [34]

    2. POLITICAL RISK

In November 2006, more than 100 organisations and individuals signed on to a letter to Merrill Lynch, Australia and New Zealand Banking Group (ANZ), Cornell Capital, Development Bank of Singapore and Cellmark with “deep concern” about their involvement in UFS’ projects. Referring to the Financial Action Task Force Anti-Money Laundering rules, regulations and laws, the signatories urged the banks and companies involved to “cancel plans for your support of these ill-advised projects”. The letter highlighted the substantial involvement of “publicly exposed persons” and “publicly exposed companies” in these projects and the fact that the Indonesian government has identified illegal logging as an offence under the country's money laundering laws. [35]

   3. ENVIRONMENTAL AND SOCIAL RISK

The letter also referred to a 2006 World Bank report on the Bank’s strategy for Indonesia’s forests. The report points out that the Indonesian government is “considering several risky or ill-advised initiatives that will further threaten forest resources”, including “potential investments to further expand unsustainable industrial capacity.” [36] The report noted that “timber plantations are insufficient and performing poorly,” [37] and that “forest conversion – an unsustainable harvest method – has been the fastest growing source of timber supply in recent years and is a major source of supply for pulp mills.” [38] The Bank's report concluded that “forest loss and forest crime dominate the [Indonesian forestry] sector”. [39]

A series of independent studies has documented that UFS cannot demonstrate that it has sufficient raw material supplies in its plantations to keep its pulp operations running – without using timber from forests and illegally harvested timber. [40]

In May 2006, CIFOR’s then-director, David Kaimowitz said, “It is imperative that a detailed wood supply plan and social environmental impact assessment be fully conducted and publicly reviewed before any decision is taken to finance (any) expansion by Kiani Kertas.” UFS has never publicly released any such studies. In October 2006, in response to a request for copies of independent studies of raw material supplies to the various proposed projects, UFS director Wong Vun Khi stated that “All forestry studies prepared by independent consultants engaged by UFS are confidential documents which we use when evaluating a business and which should not be made available to competitors or other parties outside our company.” [41]

UFS is over-optimistic about the growth rates of the trees in its plantations. In October 2006, UFS’s Wong Vun Khi stated that the growth rate was 20 m3/ha/yr. [42] Forestry consultants Jaakko Pöyry assumed a growth rate of only 15 m3/ha/yr. [43]

The area of UFS’s plantations is also disputed. UFS's 2005 Annual Report states that “The independent review of the plantation areas shows a decline in the plantation area from 58,000 hectares to 46,000 hectares.” [44] In October 2006, Wong Vun Khi stated that “In total, HRB [UFS’s plantation company] has planted around 75,000 ha. Some plantations were lost mainly during the mid-90’s [sic] heat wave, but these areas will be replanted within short [sic].” [45] Field data from Indonesian NGO Wahli South Kalimantan indicates that an area of only 15,000 hectares of UFS’ plantations is in good condition. [46]

Much of the area that has been planted has been destroyed, or is at risk. Jaakko Pöyry notes in a 2004 report, “There is limited fire fighting capacity within PT HRB [UFS’s plantation company] and there was evidence of open cast coal mining, fire damage, stream degradation due to gold mining and small scale native forest clearance within the concession area.” [47] Pöyry’s report includes photographs of plantations encroached by coal mining operations. [48] Coal mining involves removing all vegetation and topsoil. The associated roads allow “access to land by gold miners, illegal loggers and shifting cultivators,” note Pöyry’s consultants. [49]

UFS claims that it will not use wood from forests and that it will not clear forests to make way for its plantations. But, as CIFOR points out, “UFS has not produced a detailed and accountable forest management plan that ensures protection of the natural forest areas that currently remain.” In 2003, UFS described these forest areas as “Waste Forest”. [50] In a January 2004 letter to CIFOR, Sven Edström, chairman of UFS, wrote: “UFS as a public company and as the rightful owner of this MTH [mixed tropical hardwood] forest, has to consider this as an asset with value.” [51] In fact, in its 2005 Annual Report, UFS reports the value of the area of mixed tropical hardwood in its plantation concession as more than S$150 million. Yet in October 2006, Wong Vun Khi stated “there is hardly any mixed tropical hardwood forest left in South Kalimantan”. [52]

    4. PULL-OUTS

Several companies have looked at Kiani Kertas and either decided not to risk getting involved, or the deal has fallen through. In February 2006, the Financial Times reported that Merrill Lynch had decided against funding UFS’s bid for Kiani Kertas. [53]

In 2005, JP Morgan pulled out of a consortium formed with Kingsclere. The consortium would have sold 80% to UFS and JP Morgan would have kept 20% of Kiani Kertas. [54] “According to people close to the deal at the time, environmental concerns raised by JP Morgan were partly responsible for the dispute,” the Financial Times reported. [55] In August 2005, JP Morgan started another bid for Kiani Kertas in competition with Kingsclere. JP Morgan set up a deal with PT Sampoerna Strategic (part of a giant Indonesian clove cigarette company). [56] In January 2006, Sampoerna pulled out and the deal fell apart. [57]

In 2003, Milieudefensie (Friends of the Earth Netherlands) campaigned against the involvement of Akzo Nobel in UFS’s proposed pulp mill at Satui. An Akzo Nobel subsidiary, EKA chemicals, was to build a plant producing bleaching agents. Akzo Nobel subsequently pulled out. [58]

In December 2005, Deutsche Bank pulled out of its involvement in UFS’s plans to take over Kiani Kertas after pressure from Robin Wood, Rettet den Regenwald, urgewald and Global 2000. [59]

In January 2005, at a meeting with representatives of NGOs Global 2000 and Environmental Defense, Andreas Ecker, Head of Communications at Raiffeisen Zentralbank said that he wished his bank had never got involved with UFS. “We would be glad if we had not invested in this project,” he said. “It’s a lot of trouble.”

In late 2003, UFS applied for political risk insurance through the World Bank’s Multilateral Investment Guarantee Agency (MIGA). [60] In 2003, Environmental Defense sent a letter to MIGA, signed by 65 NGOs from 19 countries, to persuade it to pull out from the project. UFS dropped its application to MIGA and subsequently approached OeKB, Austria’s ECA, for support. OeKB turned them down on environmental grounds. [61]

At a meeting with NGOs in September 2006, MIGA confirmed that it had re-entered into talks with UFS, but Philippe Valahu, MIGA’s Acting Director of Operations and Global Head of Infrastructure said, “MIGA is not considering this project. We no longer have interest in it.” The World Bank’s Indonesia Country Director explained, “We just don't think it's a good idea for the World Bank to support this project.” [62]

In October 2006, Moray McLeash, IFC’s representative in Jakarta confirmed that IFC has not provided any financing to UFS. “We have no plans to do so,” he wrote. “IFC has no relationship with UFS.” [63] The World Bank’s Indonesia Country Director was no less blunt: “The IFC would have to be crazy to support this project.” [64]