Sustaining RI forests needs strong measures

Sustaining RI forests needs strong measures

David Kaimowitz, Center for International Forestry Research (CIFOR) and
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.