Forests, IBRA and donors

David Kaimowitz Center for International Forestry Research (CIFOR)

Mubariq Ahmad World Wide Fund (WWF) Bogor

Sustainable forest management is one of the key items to be discussed by international donors and the Indonesian Government during this week's meeting of the Consultative Group on Indonesia (CGI). At previous meetings the Indonesian Government promised to take strong measures to make companies manage forests more sustainably, in return for receiving new loans and grants.

One of the most important of these was closing down heavily indebted forestry companies that have so far failed to pay back money owed to Indonesian banks and, ultimately, to the Government and people of Indonesia. Such a move would reduce the great overcapacity of saw mills, pulp and paper mills and plywood factories that plague the forestry sector.

Let's hope this time the government keeps its promise. After five years of trying to resolve the forest industry's multi- billion dollar debt problem, the crisis remains as great as ever. If the government is to fulfill its promises to the CGI, more needs to be achieved in restructuring both this debt and the industry itself, and in implementing good forest governance.

Everyone agrees logging without proper documentation, planning and supervision is rampant. Well-connected business-people and politicians involved in illegal logging go unpunished despite having been clearly identified by the Ministry of Forestry and respected NGOs. And earlier this month the Indonesian Military (TNI) acknowledged some of its own forces are often involved in these activities.

The timber industry still has an operating capacity beyond the sustainable level of legal wood supply, as defined by the Ministry of Forestry. It has been suggested that to keep operating at their full capacity, many companies both knowingly and unknowingly purchase illegally logged timber.

One of the key issues donors need to raise at the CGI meeting is how the Indonesian Bank Restructuring Agency (IBRA) is exacerbating this problem of overcapacity. What many people do not realize is that through its mandate to restructure the banking system, IBRA now has a major role in the long-term survival of Indonesia's forests.

This all came about because, under Soeharto's regime, major Indonesian conglomerates borrowed trillions of rupiahs from Indonesia's banks to expand their businesses, including their forestry operations.

When the Asian economic crisis reached its peak, these companies were unable or unwilling to repay their bank loans. Consequently the Indonesian Government stepped in to protect depositors' money by providing support funds to the banks -- funds that came from Indonesia's taxpayers and the international donor community. IBRA was then established to help the banking industry restructure itself and to get the conglomerates to pay back their loans.

IBRA worked with the banks and the indebted companies to formulate viable repayment packages. But despite IBRA's intervention, very few companies paid back the money they owe.

IBRA argues it can do very little because of Indonesia's weak bankruptcy laws. Some media commentators suggest IBRA itself is too close to the companies and easily manipulated.

IBRA now wants to wash its hands of the whole business and cut the government's losses. It is doing this by no longer trying to recover 100 percent of the debt owed, but as little as 15 or 20 percent through the sale of the debts to banks.

One might well ask why a bank would purchase a bad loan in a country where creditors have no way to force debtors to pay? The answer is that the banks are counting on indebted companies being willing to repay the reduced debt plus interest if that allows them to wipe the rest of the debt off their books, because then they could go out and borrow again.

Ultimately, IBRA's policy is allowing forest companies to remain in business and contribute to the over capacity that is demanding more raw materials than Indonesia's forests can sustainably supply. Also of concern is that many of these companies, once off the hook, will feel encouraged to not only resume their legally-dubious business practices but to borrow more funds and invest in more equipment. This would intensify the industry's overcapacity problems.

Some people might argue this is crying over spilt milk -- the debts are old and it is too late to do anything. But at this very moment there is a company seeking government export credit agency and investor support to build pulp and paper mill in South Kalimantan. The last thing Indonesia's forests need is another pulp and paper mill. The solution is to reduce industry capacity, not add to it.

Many organizations, including the Indonesian Ministry of Forestry, WWF, CIFOR, the IMF and the World Bank, believe the government should be closing down companies that lack sustainable timber supplies or are financially untenable. IBRA argues the Ministry of Forestry should handle the problem. In fact, the ministry is doing this as part of the government's commitment to the CGI to put the forest industry on a sustainable basis.

But IBRA has decided to act independently of other government agencies. Since its inception, IBRA has ignored the offers of assistance from the Ministry of Forestry, research institutions, and civil society organizations to conduct proper business assessments of the forestry companies it controls.

Current IBRA wisdom seems to be that because it is obliged to wind up its operations in the very near future and the government needs funding to reduce the fiscal deficit, selling forestry debts at any price is better than not selling them at all.

But if the government closed down some of the worst offending companies, rather than allowed the discounted sale of their debts, it might find that other companies are suddenly more willing to pay the money they owe. This would reduce overcapacity, make companies more accountable and return much needed funds to the government's coffers.

If the government does not close down forest companies unable to pay their debts it will be politically difficult to ever close them down. The people purchasing the loans will argue the indebted company should stay in business so it can repay the debt owed. After all, it was the government who sold them the loans.

Unless strong action is taken, the forestry industry will practically cease to exist within 10 to 15 years. Indonesia will have lost its natural forests and the jobs they provide. Those companies that do survive will depend on importing timber. Surely no one wants to see that happen?

Current IBRA policy is assisting the government reduce its budget deficit in the short-term. But it will cost the government dearly in the long term. The loss of forests and a forestry industry will mean severe environmental damage, increased social unrest due to unemployment, and increased welfare costs.

The World Bank and the IMF support placing IBRA-controlled forestry assets under proper supervision. In conversations with the Center for International Forestry Research, representatives of the World Bank in Indonesia said IBRA should postpone the sale of forestry assets until the Ministry of Forestry implements a proper assessment of forestry business practices.

This must happen soon. At its current rate of sale, IBRA will have disposed all of the forest debts it holds by the middle of the year.

Let's hope the members of the CGI are able to see the long- term forests from the short-term finances.