PT Austindo Nusantara Jaya (Austindo, sponsor) is a conglomerate with interests in agribusiness, electric power generation, mining and financial services. Austindo is a 13.11% shareholder of PT Agro Muko a palm oil plantation, where IFC made $2.2 million equity investment for a 7% stake. Austindo is a solid group with virtually no debt ($128 million equity for $145 million assets in 2002).

Olympus Capital Holdings Asia (OCHA) is a direct investment firm dedicated to making long-term equity investments in Asia. Armed with some $600 million in committed capital under management, Olympus Capital targets investments in public and private companies operating in the region and has invested in the financial services, communications, and natural resources sectors. Ziff Brothers Investments, L.L.C. (ZBI) is the lead investor in the funds managed by Olympus Capital. ZBI, headquartered in New York, is the primary investment vehicle of the Ziff family and related entities, and has several billion dollars under management across a wide range of industries. In addition to funds from ZBI, its affiliates and other private investors, Olympus Capital Holdings Asia also manages Asia Development Partners, LP, a private equity fund supported by financing guaranteed by the Overseas Private Investment Corporation (OPIC).

JPMPA manages the $1.1 billion Asia Opportunity Fund L.P. (AOF), the largest pan-Asia direct equity investment fund. JPMPA has invested in the palm oil, semiconductor, auto parts, mobile telecom, food, internet and technology sectors. In 1999, IFC made a $100 million equity investment in AOF. AOF plays an active role in recapitalizing and restructuring Asian companies affected by the Asian crisis. The fund, which has a 10 year life, invests principally in Korea, Thailand, Philippines, Indonesia and Malaysia.

Total project cost is estimated at $200 million. The proposed IFC investment is a $40 million loan to Verdaine and/or its operating subsidiaries.

14.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	14.0
Equity

* These investment figures are indicative

In June 2000, Verdaine made its first investment in acquiring PT Eka Pendawa Sakti (EPS), a 9,100 hectare plantation located in Kabupaten Tapanuli Selatan, North Sumatra Province. The second investment to be acquired in March 2003 is PT Sahabat Mewah Dan Makmur (SMM), located in Kecamatan Dendang and Gantung, Kabupaten Belitung, in the Province of Bangka – Belitung. SMM has a 15,000 hectare concession with 8,800 hectare mature area out of 12,000 hectare planted.

The relevance of IFC’s involvement can be categorized in the following:

Direct Economic benefits
This project involves the acquisition and completion of the development of medium size palm oil plantations. The project has two main components: the acquisition, rehabilitation and expansion of palm oil plantations for a total of up to 50,000 hectares and, the construction of palm oil extraction plants to bring processing capacity in line with expected growth in fresh fruit bunches (FFB) production.

The previous owners of the acquired plantations did not have the financial capacity to complete the development of the plantation and to increase on-site processing capacity commensurate with the expected growth of production. Without the project, the plantations would have had to reduce costs (labor retrenchment, lower usage of inputs) and FFB harvesting would have been constrained by the capacity of the mills. With the project the following benefits will be achieved:
additional FFB production through higher productivity; and,
increased value-added to the company’s and other suppliers’ production from the processing component.

Employment and social stability
Palm oil plantations are labor intensive and their productive and financial health is important to social stability in rural areas. They provide multiple economic opportunities for local SMEs involved in services (transportation, retailing, foodservice, etc). The project is not expected to have a significant impact on direct employment as the focus will be on improving labor productivity.

Outgrower linkages
Without the additional processing capacity, the EPS plantation would not buy any FFB from outgrowers and would market part of its production on the FFB market, which would put pressure on the local price of FFB, resulting in a loss of producer surplus. With the project at steady state, the plantation will buy locally 150,000 mt of FFB per year. Farmers located near the new mill will benefit from the increased local demand, reduced cost of delivering to the nearest mill and generally from a secured access to the international market. The stronger finances of Verdaine will provide additional comfort to smallholders.

IFC’s Role
Mobilization of funds: IFC''s role in mobilizing funds is seen as crucial since long-term financing remains scarce in Indonesia, especially for agribusiness projects which are perceived as particularly risky. This is particularly relevant in the palm oil industry where large and medium size plantations developed in the early 1990s are currently unable to source end-financing to complete their investments, rehabilitation programs and more specifically their processing facilities. IFC will contribute to restructure financing for palm plantation and provide long-term financing for expansion programs.

Demonstration Effect: Recent investment in the palm oil industry has been negligible. Most palm oil processing companies are delaying expansion plans and waiting for further improvement in the domestic, political and economic situation. IFC''s involvement will be perceived as a strong endorsement of Indonesian palm oil industry potential and will highlight the importance for IFC to support reliable sponsors in a socially sensitive sector.

Environmental and Social Policies: IFC involvement will ensure that social and environmental policies in the plantations abide by World Bank guidelines and best practice.

This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result that can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria.

Verdaine’s plantation and crude palm oil (CPO) mill acquisition procedure includes environmental and social due diligence and the identification of issues that require correction subsequent to purchase of the acquisition target. Rectification of identified issues for existing and future acquisitions is required to bring environmental and social performance into compliance with Indonesian regulatory requirements and IFC policies and guidelines. Several aspects of the due diligence model, which will be carried out as part of this investment, need to be strengthened to ensure adequate coverage of the issues typically associated with this industry.

Verdaine has made progress to correct the environmental and social issues identified in external consultant’s reports for the first acquisition in Northern Sumatra. Selected issues such as terminating empty fruit branches (EFB) incineration and reuse of whole EFBs as fertilizer in the plantations will be resolved in accordance with a corrective action plan. Similarly, occupational health and safety, employee retrenchment compensation, and hazardous waste management issues that were identified during due diligence and at the time of IFC’s appraisal have not been fully resolved in the plantations and in the CPO mill. The sponsor will be tasked with resolution of these as well as an overall improvement in occupational health and safety practices and achievement of internationally recognized certification of the occupational health and safety system.

A number of environmental and social issues were identified during due diligence of Verdaine’s second acquisition target on Belitung Island. Requirements to rectify the shortcomings for the plantations and CPO mill are captured in the corrective action plan for the project. IFC will collaborate with the sponsor to ensure that appropriate compliance shortcomings identification and amelioration steps are taken for acquisitions in the offing to ensure compliance with Indonesian regulatory and IFC policy and guideline requirements.

Verdaine’s annual environmental and social monitoring reports will provide IFC with updates on completion of required ameliorative measures for each specific purchase as well on achievement of global requirements such as institutionalization of occupational health and safety programs within each plantation and CPO mill and with certification of the system for the company as a whole.
Location of environmental documents In locally affected community
Location of environmental documents in locally affected community
The environmental documents are available in the following locations:

- P.T. Eka Pendawa Sakti, Wisma Bil, 7th Floor, JL. Diponegoro No. 18, MEDAN 20152,
- on the company bulletin board of P.T. Eka Pendawa Sakti, located in Kabupaten Tapanuli Selatan, North Sumatra Province and;
- on the company bulletin board of PT Sahabat Mewah Dan Makmur located in Kecamatan Dendang and Gantung, Kabupaten Belitung, after the acquisition by Verdaine.