CGI overlooks IBRA's forestry debt sales to Mandiri

Christopher Barr and Bambang Setiono, Policy Analysts, Center for International Forestry Research (CIFOR), Bogor

This past Monday, the International Monetary Fund and the World Bank, together with other members of the international donor community, met with the Indonesian government at the interim session of the Consultative Group on Indonesia (CGI).

The government reported on its progress in meeting outstanding CGI commitments, including reforms in the forestry sector. One important issue that was not discussed is, what has happened to the Rp 22 trillion (US$ 2.5 billion) in corporate debts associated with Indonesia's forestry conglomerates under the Indonesian Bank Restructuring Agency (IBRA)?

When the CGI met in February 2000, the government agreed to close heavily indebted forestry companies and wood industries under IBRA. The rationale for this commitment was two-fold: On the one hand, it was intended to facilitate downsizing of Indonesia's wood processing capacity to bring domestic log demand to a more sustainable level.

On the other hand, it was meant to prohibit the transfer of a huge capital subsidy to the country's forestry conglomerates, most of which were technically bankrupt. The concern was that IBRA would write off approximately $2 billion of the forestry debts, and simply allow these companies to carry on with business as usual.

Since then, IBRA and the Office of the State Minister of State Owned Enterprises have done nothing to meet this commitment. This inaction has been perhaps most frustrating for the Ministry of Forestry, which has sought to use the closure of mills under IBRA as a mechanism for restructuring the forestry sector industries.

At last January's CGI meeting, forestry minister M. Prakosa stated, "IBRA's policy to allow forest companies to remain in business has contributed to the overcapacity that demands more raw materials than Indonesia's forests can supply. We believe that companies lacking sustainable timber supply should be closed down."

Through the second half of 2002, IBRA began selling off debts from its portfolio at fire sale prices -- generally recovering only 20 cents on the dollar. Civil society groups and concerned international organizations met with the IMF and the World Bank to voice alarm that IBRA would effectively write-off its forestry debts by including them in these sales. The IMF and the World Bank said they were opposed to such an outcome and would become more involved in this issue. Yet neither took decisive action to halt this process.

The World Bank and other members of the Donor Forum on Forests did raise the issue of IBRA's forestry debt sales at the January 2003 meeting of the CGI. The official statement of the donor working group on forestry points out that IBRAs sale of forestry assets "places pressures on the nation's forests, and creates a climate of moral hazard."

Noting that most of the logs used by the indebted forestry conglomerates are harvested illegally, the donors point out that "Once sold, the new owners of these loans and of the mills will continue to use the same illegal sources of timber." Moreover, the donors noted, "In many cases, the new purchasers of the discounted loans are the nonperforming debtors themselves, who mysteriously claim not to have the money to pay back the loans, but who do have the money to buy the loans back."

What was apparently never mentioned at the CGI's January meeting is that IBRA had already sold most of its forestry assets the previous month. Indeed, information released by IBRA in recent weeks suggests that Rp 20 trillion, or $2.3 billion, in forestry debts had been sold by Dec. 31 of last year -- at least three weeks before the donors met with the government.

This included Rp 6.2 trillion in debts from the Mohammad (Bob) Hasan Group and Rp 2.6 trillion in debts from the Djajanti Group. The fact that IBRA was able to sell these debts without informing the Indonesian public or the IMF is a clear violation of all the agreements about transparency and accountability established when IBRA was first created.

It also raises serious questions about how much attention the IMF and World Bank are actually paying to this whole process.

More important still, is that fact that about $1.3 billion dollars of the forestry debt -- over half of what was sold in the final months of 2002 -- was sold to Bank Mandiri. Why is that significant? Because Bank Mandiri is a government-owned bank. Hence the additional revenue to the government of the sale was zero.

The government simply sold the debt to itself (for an undisclosed amount). In the process, the government presumably wrote off a large portion of the loans. Rather than officially "writing off" these debts from IBRA's accounts, the government wrote them off by making a "market sale" from itself to another of its own entities.

The donor working group on forestry noted its concerns about IBRA's debt sales to Bank Mandiri in its written report for this week's CGI meeting. However, the issue was not discussed on Monday. This should raise concerns among donor groups and Indonesian stakeholders who care about what happens to Indonesia's forests.

The companies owing these debts represent a sizable portion of Indonesia's timber and plywood industries. Yet it is unlikely that Bank Mandiri will ever be able to sell the debts to anyone except the owners of the indebted companies, many of whom have strong political connections.

In short, no private company is likely to buy debt that IBRA, with its far-reaching legal powers to nullify contracts and to seize assets, was not able to recover. More likely, Bank Mandiri will simply write off much or all of its forestry debts as part of the bank's privatization process, which is scheduled to begin next month.

If this occurs, the result will be that the government loses an additional $1 billion or so in potentially recoverable debt. Moreover, it achieves nothing in terms of reducing pressures on forests by downsizing the country's forestry sector industries.

So what should the government and members of the CGI do at this point? A good first step would be to require Bank Mandiri to call in the forestry sector debts on its books before it is allowed to sell shares as part of its initial public offering. Companies that fail to repay should be closed, as the Minister of Forestry suggests.

It is likely that a draconian policy of this sort would lead to a win-win situation: Bank Mandiri would recover a sizable portion of the forestry debts it is holding; and the overall capacity of Indonesia's wood processing industry would be substantially reduced.