More subsidies for forestry conglomerates?

More subsidies for forestry conglomerates?

Bambang Setiono, Researcher, Center for International
Forestry Research (CIFOR), Bogor, West Java and E.G. Togu
Manurung, Director, Forest Watch Indonesia (FWI), Jakarta

Within less than a month, the government issued two policies
that favor forestry conglomerates. First, based on a proposal by
the Ministry of Industry and Trade, the Financial Sector Policy
Committee (FSPC) requested IBRA to restructure the debts owed by
forestry sector companies in the lightest mode, or on the most
generous terms.

Second, based on an IBRA proposal, the FSPC issued a
controversial policy to extend the debt repayment schedule of ex-
shareholders of troubled banks under IBRA.

Under much pressure this second policy was canceled by the
FSPC. The first policy was fully implemented under an IBRA "fire
sale" program, the Asset Credit Sales Program (PPAK).

Under the "lightest mode" policy, IBRA would not try to sell
restructured debt or declare companies bankrupt and unable to
settle their debts. Instead, former owners will be given the
chance to continue controlling already heavily indebted
companies. This policy provides a debt settlement subsidy to
conglomerates in the forestry sector.

Thus, the government continues the New Order tradition of
providing various sweet deals to forestry conglomerates.

The FSPC policy to perform debt restructuring on these
generous terms would benefit all large forestry companies in
Indonesia. Prajogo Pangestu has a private debt linked to Chandra
Asri amounting to US$432.1 million, or about Rp 4.3 trillion.

Prajogo gave his forestry companies under the Barito Group,
such as Barito Pacific Timber, Tanjung Enim Lestari and Musi
Hutan Persada, to IBRA as collateral. Forestry conglomerates such
as Kalimanis, Barito, Raja Garuda Mas, Djajanti, Sinar Mas,
Indhasana and Surya Dumai Group have a principal debt of Rp 21.5
trillion.

The conglomerates have already benefited from the debt
resolution policies and the weak debt restructuring applied by
IBRA. From the debt restructuring side, no single forestry asset
(forestry company share) as collateral under IBRA could be sold
to settle the conglomerates' debts.

Bob Hasan has handed over 30 percent to 100 percent of share
ownership in 19 companies, including Kiani Kertas, to IBRA. These
are his most important assets, expected to be able to reduce his
debt to IBRA, which has however not sold any of the shares.

Eka Tjipta Widjaja of the Sinar Mas Group (SMG), got even more
advantages. First, IBRA has no control over his private wealth,
which could be used to settle his private debts as the
shareholder of Bank International Indonesia (BII). IBRA cannot
sell SMG's collateral assets, which are also the collateral for
the non-performing loans of Asia Pulp & Paper (APP), a holding
company under SMG.

Second, the government didn't require Eka Tjipta to resolve
issues related to violations of the stipulated maximum limit of
credit by BII. BII has channeled more than 50 percent of this
loan to SMG subsidiaries. Third, SMG still maintains 18 percent
of BII shares, even though the government has released funds
amounting to Rp 6.6 trillion to recapitalize BII and Rp 14.4
trillion to secure BII.

Again, the FSPC or IBRA policy demonstrates how easily the
government becomes entangled in short-term schemes, ignoring
industry structural issues. These policies will only encourage
forestry entrepreneurs to further degrade the forest. Without any
change in forestry asset management under IBRA, the Asset Credit
Sales Program will only generate funds for the conglomerates to
run their wood processing industries, which will speed up
deforestation.

Management of forestry assets under IBRA faces two basic
obstacles. First, FSPC and IBRA have a fundamental problem: They
have ignored the role of the Ministry of Forestry and other
forestry stakeholders in any economic policy.

One difficulty in selling forestry company shares is a
conflict between IBRA and the Ministry. So far the Ministry does
not allow forestry company (HPH and HTI) shares to be transferred
or used as collateral to obtain loans. FSPC and IBRA have also
ignored recommendations by the Minister of Forestry to close down
some of the heavily indebted forestry companies under IBRA.

FSPC and IBRA do not have the capability to oversee forestry
company operations and lack an understanding of the high
financial risks in the forestry sector -- where it is becoming
difficult to obtain legal and sustainable supplies of raw
material.

The World Bank reported the lowland forests of Sumatra and
Kalimantan will likely be gone by 2005 and 2010, respectively.
Demand is now three times higher than the sustainable supply.
There is a strong indication that forestry companies are involved
in illegal logging to fulfill the shortfall. Pulp and paper
businesses also face difficulties in obtaining raw material,
increased social conflicts with local communities and a
moratorium on natural forest conversion imposed by the government
since 2000.

Second, the subsidies are not connected to the conglomerate's
responsibilities. Will subsidies with no proper accountability
make the prosperous conglomerates able to pay their debts to the
government and prevent forest destruction? So far, the subsidies
provided by IBRA have encouraged the government to issue this
controversial FSPC policy. Didn't facilities provided to
conglomerates during the New Order lead to the economic crisis?

The Asset Credit Sales Program is a new financial subsidy for
forestry companies. Debts of Bob Hasan's group have reportedly
been sold only for 28 percent of the debt principal to Bank
Mandiri and a financial company related to Hasan's group.

That means IBRA provided subsidies to Bob Hasan's group for 72
percent of the debt principal, plus a write-off of unpaid
interest and penalties. Since the state banks that merged into
Bank Mandiri were the same banks that extended the original non-
performing loans to these forestry companies, the policy results
in a debt laundry mechanism for state banks.

In cases where the restructuring arrangement converts non-
performing debt into shares owned by IBRA, Indonesians become
shareholders in forestry companies with negative equity value.
What a deal.

FSPC and IBRA policies contradict our sense of justice. Small-
scale enterprises who need capital cannot expect to get loans for
more than 80 percent of their collateral, or even loans of only
10 percent of their collateral value, as enjoyed by conglomerates
through the Bank Indonesia Liquidity Credit Assistance (BLBI).

The Supreme Audit Agency (BPK) reported that the troubled
banks received this liquidity credit assistance with collateral
worth only 10 percent of the assistance received. Thus, to
satisfy public sense of justice, all policies to provide
subsidies to conglomerates must be followed by strict rules to
protect the nation's interests. The government should give
subsidies only to forestry conglomerates or companies willing to:

o Apply a log audit by an independent third party, to ensure
that reliable, legal sources of timber are used by forestry
companies under IBRA;

o Have industrial capacity supported by legal and sustainable
supplies or imported raw material;

o Have a transparent dialog with forestry stakeholders,
including the Ministry of Forestry, with respect to debt and
business restructuring.

Forestry conglomerates willing to meet these conditions could
be given subsidies such as:

o Debt write-off related to forest sustainability programs and
reduced industrial capacity;

o Debt restructuring to a level where the debt can be paid
based on the capacity supplied from legal and sustainable sources
of timber.

However, any wood processing mills found to have consumed
illegal timber in accordance with a log audit must be closed down
by the government. This is crucial to reduce excess capacity in
the wood processing industry, which requires raw materials far
exceeding the sustainable supply of timber.

If forestry conglomerates or companies fail to meet the above
requirements, shouldn't the companies be closed and brought to
trial? An ideal solution would be difficult to find amid the
difficult options.

A firm political will is required to admit that debts owed by
conglomerates are resolved through debt write-offs. Debt write-
offs should no longer be hidden in a debt-to-equity swap
solution, which is of little value.

Debt write-off is a new subsidy given to conglomerates. We
must seek to prevent these subsidies from becoming a new source
of collusion, corruption and nepotism, and instead make the
subsidies beneficial to the economy and natural sustainability.