Assessing timber firms

Assessing timber firms

Minister of Forestry Djamaludin Suryohadikusumo has finally
ended what securities analysts saw as his tug of war with timber
companies intending to go public. He announced last week that
wood-based companies which want to make an initial public
offering (IPO) of shares are no longer required to obtain a
letter of recommendation from his office.

The easing of the requirement will not, however, make things
much easier for timber firms to list their shares on the stock
exchanges. Neither will the new policy relax Djamaludin's control
of the management of forest concessions.

The objective of the previously required recommendation -- to
ensure that the forest concessions are managed in a sustainable
manner to guarantee an adequate supply of wood -- is now the
responsibility of independent inspection companies.

Under the new system, timber companies planning IPOs will be
subject to two processes. First, their forest concessions will
have to be assessed by Geneva-based Societe Generale de
Surveillance Forestry and Certification (SGS Forestry) and the
results of the inspection submitted to the Capital Market
Supervisory Agency (Bapepam) and announced to the public. Then,
like all other companies intending to go public, the timber firms
also will have their business and financial performance assessed
by their underwriters, securities analysts and Bapepam.

The ministry's selection of SGS Forestry as the only
independent company now fully qualified to conduct the inspection
job implies that the World Bank-funded pilot project for forest-
concession inspection undertaken by the joint venture of Canada's
Reid Collins and Bimantara's subsidiary -- PT Citra Teknik
Nasional Sejati -- has failed.

It is regrettable that although the country holds the world's
second largest forest resources there is not a single local
company already qualified to conduct a professional inspection of
forest concessions.

But judging from the reputation the Swiss company has built up
in the process of transferring skills and technology to the
Indonesian customs and excise duty directorate general and PT
Surveyor Indonesia and PT Sucofindo, we are confident that SGS
Forestry, which has experience in certifying forest management in
more than 40 countries, will be able to do the inspection job in
a joint venture with a local partner.

The business opportunity created by the ministry's ruling
will hopefully attract private investors to develop professional
inspection and certification services for forest concessions. It
would be even better if the ruling would eventually be imposed
indiscriminately on all timber companies.

The compulsory inspection obviously will make the costs of
share listings for timber companies much higher than for other
companies, but since the objective is to ensure sustainable
management of forest resources the additional costs are
justified. That objective also is for the good of the investing
public because the business viability of a timber company depends
on the availability of wood input.

We think the new system is much better than the previous
ruling because the new assessment process is to be carried out by
an independent inspection company with a high-level international
reputation.

The more clear-cut ruling will expedite new IPOs by more
timber companies. There are now three timber companies planning
to launch IPOs, including PT Artika Optima Inti, whose IPO has
been held up since June due to the absence of a letter of
recommendation from the forestry minister.

We think that the more timber companies are listing shares on
the stock exchanges, the better will it be for the public
interests and for the supervision of forest concessions. Because
listed companies will have to fulfill the disclosure requirement
of Bapepam, thereby putting them under more stringent public
scrutiny.