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.