Overcapacity in forestry sector<\/p>\n
By Agus Purnomo<\/p>\n
JAKARTA (JP): Representatives of the World Bank and bilateral
\ndonor countries met on Wednesday with Coordinating Minister of
\nthe Economy, Finance and Industry Kwik Kian Gie and Minister of
\nForestry and Plantations Nur Mahmudi Ismail to discuss the future
\nof the country's forests.<\/p>\n
The seminar, held in preparation for next week's full
\ngathering of the Consultative Group on Indonesia (CGI), was the
\nfirst meeting between the Indonesian government and the donor
\ncommunity to focus specifically on forestry since the collapse of
\nthe Soeharto regime.<\/p>\n
As such, it represents a unique and altogether unprecedented
\nopportunity for positive change in the country's forestry sector.
\nWhether the parties involved take concrete steps toward the
\nsustainable and equitable management of Indonesia's remaining
\nforest resources will depend on their ability to distinguish
\nbetween long-term social and environmental concerns, on the one
\nhand, and short-term economic gains on the other.<\/p>\n
Two critical issues that lie at the heart of our forestry
\ncrisis today are overcapacity in the nation's wood-processing
\nsector, and corporate debt held by forestry conglomerates.<\/p>\n
According to figures from the Indonesia-UK Tropical Forest
\nManagement Program, the combined log consumption capacity of the
\nplywood, sawn wood and pulp and paper industries is currently on
\nthe order of 75 million cubic meters (m3) per year.<\/p>\n
However, the ministry's figures show that the official harvest
\naveraged just under 25 million m3 per annum over the last few
\nyears. This indicates that these industries have obtained between
\none-half and two-thirds of the logs they consume from illegal and
\npresumably unsustainable sources.<\/p>\n
The problem of overcapacity is especially troublesome in the
\npulp and paper subsector. Following US$8 billion in investment
\nover the past 13 years, each of these industries has expanded by
\nover 750 percent since 1987.<\/p>\n
Indonesian pulp producers are currently capable of generating
\n4.6 million tons of pulp per year, which is equivalent to
\nprocessing 22.5 million m3 of roundwood annually.<\/p>\n
Pulp production capacity, however, has grown far more rapidly
\nthan development of sustainable pulpwood plantations (HTI). Of
\nthe 100 million m3 of wood consumed by pulp producers since 1987,
\nno more than 5 million m3 has come from the plantations.<\/p>\n
Most of the remaining 95 million m3 has been obtained through
\nthe legal and illegal clear-cutting of natural forests,
\naccounting for the deforestation of approximately 800,000
\nhectares. While Indonesia's largest producers are now working to
\nestablish pulpwood plantations, it is extremely doubtful that the
\nlimited areas being planted will yield the volumes of wood needed
\nto satisfy the industry's growing processing capacity at any
\npoint during the next decade.<\/p>\n
Until now, much of the policy dialog aimed at addressing the
\nproblems of illegal logging and unsustainable forest management
\nhas focused on improving the practices of companies holding
\ntimber concessions (HPH).<\/p>\n
Since late 1997, for instance, the World Bank and the
\nInternational Monetary Fund (IMF) have worked with the government
\nto raise timber royalties so that HPH-holders will manage their
\nareas more efficiently. They have also sought to deregulate log
\nexports so that concessionaires are able to obtain international
\nmarket prices for the logs they harvest, and to establish an
\nindependent monitoring system for HPHs.<\/p>\n
Whatever the merits of these policies, they do little to
\nrectify the fundamental imbalance between the demand for logs on
\nthe part of Indonesia's wood-processing industries and the
\nnation's legal and sustainable log supply. Ultimately, the
\nproblem of overcapacity requires nothing less than a substantial
\ndownsizing of the country's wood-based industries.<\/p>\n
To a significant degree, the size and structure of Indonesia's
\nwood-based industries over the coming years will be determined by
\nthe manner in which the nation's corporate debt crisis is
\nresolved. Through the end of 1999, private corporations have
\nheld Rp 345 trillion ($51.5 billion) in outstanding debt to the
\nIndonesian Bank Restructuring Agency (IBRA), of which Rp 230
\ntrillion ($34.3 trillion) is nonperforming.<\/p>\n
Forest and estate crop sector activities account for 8
\npercent, or Rp 28 trillion ($ 4.1 billion), of the amount that
\ncompanies owe to IBRA. Of this, Rp 18 trillion ($2.7 billion) is
\nestimated to be nonperforming.<\/p>\n
In addition, forest and estate crop conglomerates are carrying
\n$2.4 billion in domestic nonperforming loans related to
\ninvestments in other sectors, and at least $15 billion in
\noutstanding offshore loans to foreign creditors.<\/p>\n
The high level of nonperforming loans held by forest-linked
\nconglomerates can be attributed to the fact that they have often
\nbeen able to obtain finance for their investments with minimal
\ndue diligence.<\/p>\n
As in other sectors, state banks frequently made loans to
\nforest sector projects based on political instructions from
\nsenior government officials rather than prudential calculations
\nof risk.<\/p>\n
Most of the major groups active in the forest and estate crop
\nindustries also owned their own banks, which allowed them to
\naccess much larger sums of finance than they would have been able
\nto obtain had they been forced to borrow funds from unaffiliated
\nbanks at commercial rates. Many of these group-owned banks
\nregularly violated the government's legal lending limits for
\nloans to affiliated parties, and engaged in financial mark-up
\nschemes to discount the real costs of investment.<\/p>\n
Moreover, government subsidies -- including cheap raw
\nmaterials and allocations from the reforestation funds further
\nundermined companies' incentives to ensure that their investments
\nwould be profitable over the long-term.<\/p>\n
This has led many forest sector conglomerates to establish
\nprocessing operations that are dependent on illegal or
\nunsustainable raw material supplies, or that have generated
\nsocial conflicts with local communities. The closure of the $600
\nmillion Indorayon pulp mill in Porsea, North Sumatra, following
\ncommunity protests last year is clear evidence of the financial
\nrisks that investments in such projects can entail.<\/p>\n
Through the banking sector recapitalization process, IBRA has
\nemerged as the single most important holder or potential holder
\nof forest and estate crop assets in Indonesia. Two of the
\nlargest forest sector conglomerates -- the Bob Hasan Group and
\nthe Salim Group -- have been in receivership under IBRA since
\nearly last year.<\/p>\n
In addition, IBRA has far-reaching legal authority to call in
\nnonperforming loans and to seize corporate assets of most other
\nforest conglomerates if they do not pay their debts to banks
\nunder IBRA management. To date, however, IBRA has allowed these
\ngroups' previous owners to continue running their companies with
\nlittle direct supervision.<\/p>\n
More significantly, there are strong indications that IBRA
\nwill write off at least 70 percent of the nonperforming loans
\nheld by companies under its control. In the forest and estate
\ncrop sector, this would amount to a write-off of Rp 12.6 trillion
\n($1.9 billion) in bad debt.<\/p>\n
If anticipated write-offs of nonforest sector loans incurred
\nby forest conglomerates are also included, this figure would rise
\nto Rp 24.2 trillion ($3.6 billion). In effect, debt write-off or
\nmarkdown on this scale will amount to yet another heavy subsidy
\nto Indonesia's timber, wood-processing, pulp and paper and palm
\noil companies.<\/p>\n
In each of these industries, such a subsidy is likely to
\nencourage further capital investments in illegal, environmentally
\nunsustainable and socially damaging projects.<\/p>\n
To alleviate pressure on the country's remaining forest
\nresources, the World Bank, the IMF and the Indonesian government
\nshould work together immediately to hold forestry sector debtors
\naccountable for their outstanding financial obligations.<\/p>\n
Companies that are able to repay their loans should be
\nrequired to do so. To the extent that some companies' debts are
\nwritten off, this should be linked to the reduction of processing
\novercapacity at both the firm and industry levels.<\/p>\n
In the meantime, IBRA should incorporate a clear set of social
\nand environmental criteria into its due diligence process to
\nensure that forestry assets under its control are being managed
\nequitably and sustainably.<\/p>\n
The writer is the executive director of the World Wide Fund
\nfor Nature -- Indonesia.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/overcapacity-in-forestry-sector-1447893297",
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"sponsor": "Okusi Associates",
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