VI. Policy in the reformasi era: Creating new systems of patronage vs. getting prices and incentives right

In the aftermath of thirty years of unofficial draining of rents from the forest products sector, and with both illegal and non-sustainable logging on the rise, the Department of Forestry has responded with two sets of reforms. The two could not be more different from one another.

The first set of policies – justified in terms of taking away timber resources from the politically-connected conglomerates and returning those resources to the people – nevertheless amounts to little more than a new, hastily-erected system of timber patronage. The Department of Forestry has either issued, or will shortly issue, new regulations for a redistribution of shares in all newly-extended timber concessions, with 20 percent going to cooperatives (and another 10 percent to provincial government forestry corporations), as well as the distribution of concessions under 10,000 hectares to cooperatives at the discretion of governors. (See Appendix 1 on page 86 for a complete list of reassigned timber concessions.) At the same time, the government says it will issue limitations on all newly issued individual timber concessions of 50,000 hectares, on the overall concession holdings of timber groups of 100,000 hectares per province, and of 400,000 hectares nationwide.

A second set of market-oriented policies are also being implemented by the government. These policies focus on introducing prices and incentives which will encourage the sustainable management of Indonesia's timber industry, and arose from more than of a decade of collaboration between academics, NGOs, international institutions, and the donor community. With the advent of the monetary crisis, the government agreed to go along with this second set of reforms. The cornerstone of this set of policies is bringing the depressed prices of Indonesian logs and rough sawn timber into line with higher world prices. The prices of these two commodities have been artificially low for more than a decade because the government used high tariffs to discourage their export. Last year the government agreed to remove these tariff barriers.

This chapter explores the Department's divergent reform-era agenda, characterized on one hand characterized by a new system of patronage, and on the other by an apparent willingness to re-introduce market discipline.

A. The patronage agenda

1. Extending forest resources to cooperatives

The governments' plan to redistribute timber resources to cooperatives has two components, the redistribution of minority shareholdings in existing HPHs, and the granting of full control of new concessions. With respect to the former, no existing timber concession will be extended, nor any new concession assigned, unless 20 percent of the shares in that particular concession are sold to cooperatives "at relaxed terms" (Jakarta Post 1999l). In addition, timber companies will be required to give at least 10 percent of their shares to provincial administration-owned timber companies for those concessions to be extended (Jakarta Post 1999p).
With respect to the outright granting of HPHs, one million hectares of former concessions will be reassigned nationwide by governors to cooperatives, in parcels of up to 10,000 hectares each. The government has already begun to grant timber concessions to cooperatives. The first publicly-reported turning-over of concessions to cooperatives took place in West Irian in April, where five concessions of 10,000 hectares each were given to cooperatives. Three of those were taken from a single HPH identified only by its initials "YS" (in all likelihood a reference to Yotefa Sarana, a 182,000 hectare HPH located in the Bird's Head, and licensed to the Kayu Lapis Indonesia group). In addition, nearly 3 million hectares of concessions are being reassigned to institutions of higher learning (see Appendix 1 on page 86 of this report for a complete list).

On its face, the practice of giving timber resources to cooperatives appears to be an excellent way to achieve a modest redistribution of Indonesia's forest wealth to segments of society that have hereto been denied such benefits. As this study has shown, Indonesia's timber concessions have been, and continue to be, held primarily by a select group of timber conglomerates. This was true both prior to the closing down of approximately a fifth of the country's timber concessions (when the top five private timber conglomerates controlled 30 percent of the nation's timber lands), as well as after (when the share of the top five timber conglomerates rose slightly to 31 percent of the nation's timber lands). Given this skewed distribution of a national resource said to be held by the government on the behalf of the people, any redistribution is attractive.

Furthermore, anyone who has experience with properly-functioning cooperatives can hardly fail to be encouraged by the notion of giving such groups a share in the nation's timber resources. Cooperatives have traditionally been an avenue for consumers and producers of modest means to pool their resources in order to achieve together what they could not achieve separately. For more than a century in the United States, small family farmers have used cooperatives to pool their resources to purchase production inputs at reduced prices (such as fertilizers and farm machinery, which farmers would otherwise have to purchase at retail prices), and to build storage facilities (so that agricultural products could be sold during market peaks, rather than market troughs).

The Department of Forestry has begun the process of granting 10,000 hectare concessions to cooperatives, and submitted a bill to the House of Representatives (DPR) requiring all newly extended concessions to give shares in those companies to cooperatives. The chair of the DPR's commission for forestry and plantations is optimistic the bill can be passed into law before the end of the August legislative session (Jakarta Post 1999r). Given the exemplary functions served by cooperatives elsewhere in the world (of which American farm cooperatives are only one example), those unschooled in the intricacies of Indonesian patronage politics might find grounds for encouragement in the fact that the current Department is putting cooperatives at the center of its new forestry policy.

However, up to this point in time, cooperatives in Indonesia have not so much been independent producers' organizations as they have been an arm of the state. Located under the Ministry of Cooperatives, and known as Koperasi Umum Daerah (KUD), their profile was raised dramatically under the New Order government (Schwarz 1994: 98-101), during which time cooperatives were used to channel state resources to village level Golkar cadres during elections (Van Zorge 1999c).

KUDs re-emerged under the current transitional government as the centerpiece of its "people's economy" concept. KUDs and their resurrection under the people's economy banner in part a tool of political rhetoric designed to appeal to Indonesia's disenfranchised majority. No one deploys this rhetoric more skillfully than the Minister of Cooperatives and Small Enterprises, Adi Sasono. While officiating at a ceremony turning over five West Irian timber concessions to cooperatives, Sasono told those assembled, "Incredible. Forest dwelling people are supposed to own the forest. But it is people from Jakarta who enjoy the profits from millions of hectares. This situation must change" (Kompas 1999a).

Umar Juoro, an advisor to Minister Sasono and President Habibie, explained that the people's economy concept was one designed to build political support, "Adi is running an unconventional campaign at the grassroots level. It's very clear he wants to develop a constituency" (Pura 1998). The President, as well, is politically invested in the cooperative movement. He extended a sign of solidarity to 70,000 cooperative members at a recent rally, proclaiming, "Cooperatives' goals are identical with national economic developmental objectives" (Jakarta Post 1999).

Some observers believe that cooperatives could outlast a Habibie government, and that in this sense they actually embody of the political ambitions of Adi Sasono himself. According to the head of an Indonesian-Chinese conglomerate: "Adi thinks that when Habibie is elbowed out, he has a shot at being President on the basis that he has grassroots support and is not tainted by the Suharto era" (Pura 1998).

Taking from the rich and giving the poor is a politically appealing idea. But for Indonesians who need more than ideological inducements to lend their political support, cooperatives are also a patronage mechanism. Under the transitional government, cooperatives are operating cooking oil distribution, and subsidized credit schemes, which in and of themselves serves as a cautionary tale about what, it may be hoped, forest cooperatives do not become.

Cooking Oil Distribution: During the Suharto years, state palm oil plantations produced crude palm oil (CPO), which was then sold to the state logistics agency (Bulog) in either its raw or refined form at rock bottom prices. Bulog was able to make a significant mark-up and profit on its subsequent sales of cooking oil (Van Zorge 1998a,b). The difference was reportedly pocketed by key state officials, including the man who headed Bulog for many years, Bustanil Arifin, an archetypal Suharto era pribumi (native Indonesian) businessman who profited enormously from a variety of food rent havens run in cooperation with both the Salim and Mutiara groups (incidentally, now Indonesia's 11th and 18th largest timber concession holders).

The current government has removed Bulog from its old role as middleman in cooking oil distribution and replaced it with Koperasi Distributor Indonesia (KDI). KDI is a new association of cooperatives under the KUD. KDI is charged with coordinating distribution activities, and includes Inkoppas, a cooperative designated as the primary distributor of cooking oil for Jakarta and West Java (Van Zorge 1998a,b).

The similarities between the new role of KDI and the old role of Bulog are striking. First, KDI has been given Bulog's old 40 percent share of the CPO market, amounting to Rp10 trillion in annual sales. Second, KDI, like Bulog, has access to a substantial portion of the low cost production of the state oil palm plantations (called PTPN I-VII). Finally, KDI has inherited Bulog's financial and physical assets, worth Rp600 billion (Van Zorge 1998a,b).

However, the differences between the new KDI and the old Bulog are just as striking. Most notable, under the KDI, the rate of rent-extraction is higher. For a time, a government CPO export tax of 60 percent provided KDI with a steady revenue stream of Rp25 billion to Rp35 billion a month, a benefit that never accrued to Bulog. (The CPO export tax has, however, been lowered progressively over the course of 1999 to 10 percent, and will soon reportedly be scrapped altogether.) In addition, KDI sells cooking oil at higher prices than Bulog ever did. Under the old system, Bulog sold cooking oil at subsidized rates. KDI now sells it at world prices, albeit within Indonesia. Rents are accruing to a new set of political elites, those who occupy the top of the KDI power structure instead of those who occupied the top of Bulog (Van Zorge 1998a,b).

Readers may experience a sense of dιjΰ vu in seeing a quasi-state enterprise using prohibitively high export tariffs to drive down the price of a basic commodity, obtaining a cut of those export tariffs or fees, and profiting further from the spread between the artificially depressed domestic price of the commodity, and the far higher world price of the same commodity, refined and exported. Apkindo did this with raw logs and plywood. Until world CPO prices fell, KDI was doing it with CPO and cooking oil.

Subsidized credit: The potential of using cooperatives as rent-channeling patronage devices is also demonstrated through their role in providing subsidized credit. Making subsidized loans to small and medium sized businesses has historically been an important channel for distributing political patronage in Indonesia. Subsidized credit can be used to reward current supporters, or to bring new ones on board.

Subsidized credit amounts to putting cash in people's pockets for two reasons. First, subsidized credit is offered at below-market interest rates. The government's current scheme earlier this year made loans available to recipients at between 6 and 16 percent interest a year, compared with the 40 percent interest rate that normal Indonesians paid if they wished to borrow money (Jakarta Post 1999d). Second, because of the political grounds on which they are made available, and the political connections of their recipients, subsidized loans are frequently forgiven, and thus amount to little more than outright grants in many cases.

During the Suharto era, the majority of subsidized loans to small and medium sized businesses were made by state banks, and through KUDs. Bad debts to KUDs are said to make up a substantial portion of Indonesian state banks' non-performing loans. Under the transition government, funds available for subsidized credit total between Rp10-20 trillion (between US$800 million and US$1.6 billion) this year. The program is administered by the Ministry of Cooperatives. Priority is being given to loans to village level cooperatives. According to an official at the Department of Cooperatives, loans have already been channeled to 2.98 million farmers through 5,472 cooperatives (Jakarta Post 1999d, Van Zorge 1998b).
During the weeks leading up to the June 1999 election, reports emerged of farmers who, in exchange for receiving loans from cooperatives, were required to register as members of the Partai Daulat Rakyat (PDR), the political party nominating Adi Sasono as its prospective candidate for President of Indonesia (Jakarta Post 1999m). Sasono has denied formal links with the PDR, and says charges against him are politically motivated.

Whether or not the PDR had a vote-buying strategy, and whether or not Adi Sasono is linked to the party, the PDR did poorly in the June election, picking up only two seats in the DPR, the House of Representatives (Jakarta Post 1999q). Nevertheless, cooperatives anachronistically remain on the main policy agenda of the Department of Forestry.

It remains to be seen whether - like their counterparts in cooking oil distribution and subsidized credit – the granting of timber resources to cooperatives will more characterized by a new egalitarianism, or political patronage.

One piece of evidence suggesting that the nation's cooperative movement may be guided by more egalitarian aims is a proposed regulation that top priority for 20 percent shares in extended timber concessions will be given to "adat law communities" (communities of indigenous peoples) who re-constitute themselves as cooperatives. But even if this were to come to pass, it is not clear whether a majority of adat law communities could sustainably manage the country's forests, or would wish to. Although such assertions are hard to prove, field reports from KPHP social development advisors suggest that nearly all forest communities now tend to see the forest as a source of quick money, and traditional concepts of managing the resource have been all but lost.

Irrespective of whether or not adat law communities will sustainably manage the forests, it is not clear why the primary avenue for them to get back a share of the land taken away from them over the last thirty years is to change into cooperatives. This suggests that adat communities who do not turn themselves into cooperatives will be out of luck. In any case, adat communities will be hard-pressed to compete effectively with seasoned players in the patronage game, such as Apkindo. A current Apkindo official confirmed that the association is reinventing itself as a cooperative called Kopkapindo, in order to "improve relations with the Department." Interestingly, a former Apkindo official revealed that Kopkapindo was initially created to protect the personal shares held by the former head of Apkindo, Bob Hasan, in Banks Bukopin and Muamalat.

In comparison with obtaining shares in old timber concessions, obtaining outright ownership of new concessions, although less well codified under law at this time, is much further along in practice, and potentially more subject to being used as a tool for political patronage.

Concessions of fewer than 10,000 hectares set aside for cooperatives are meant to be given through governors (Jakarta Post 1999p). In addition, it has been reported the governor of one province, East Kalimantan, has given out concessions of up to 20,000 hectares (Media Indonesia 1999). What explains this new policy? One possible answer is that many current governors are loyalists of the former government who, for the moment, are not supporting the transitional government, due in part to the fact that it is not functioning as effectively as the old government to secure their material interests.

But if new streams of patronage in the form of 10,000-20,000 hectare timber concessions are made available to them – as is now demonstrably the case - then governors might be persuaded to stay on board with the transitional government. A similar observation applies with respect to the regulation that timber companies give at least 10 percent of their shares to provincial administration-owned timber companies for those concessions to be extended.

An additional development of interest is a press account which suggests the involvement of the Minister of Forestry's relatives in the redistribution of new timber concessions. After Bob Hasan's 330,000 hectare Alas Helau (East Kalimantan) concession was rescinded in late June 1999, it was redivided into five smaller parcels ranging in size from about 40,000 to 50,000 hectares. The recipient of these five parcels, Rachmat Timotius, was reportedly able to do so based on the intervention of a son and sister of the Minister of Forestry Muslimin Nasution (Media Indonesia 1999).

Again, the problem inherent in such discretionary granting of timber resources to cooperatives and other politically-favored recipients appears to place a primary emphasis on using the country's forest resources to achieve personal power and wealth for selected individuals, rather than using the sector for the benefit of society as a whole.

Another dimension to consider is that the granting of small timber concessions to cooperatives could, unless managed with extreme caution, have serious consequences for the forests that fall within their boundaries, if the experience of the Malaysian state of Sabah is any guide. Sabah also serves as a parable for the perils of decentralization.

By way of background, Sabah is a Malaysian state in the northern part of the island of Borneo, immediately north of the Indonesian province of East Kalimantan. Because of a special deal Sabah struck at the time it entered into the Malaysian federation, Sabah (and its neighbor Sarawak) were given autonomy over their timber resources. During the late 1960's and early 1970's, Sabah was the world's leading exporter of tropical timber

Politics in Sabah have always been particularly volatile, not unlike the phase Indonesia is about to enter. No Chief Minister in Sabah has ever stayed in office for longer than 9 years (and in recent years, not unlike the period of Indonesian parliamentary democracy between 1951-1957, power has changed hands every 18 months).

In Sabah, like Indonesia, politics and timber have always gone hand in hand. When Harris Salleh assumed the Chief Ministership in Sabah in 1976, he adopted a strategy of handing out small timber concessions to cement his political support. As with today's leaders in Indonesia who couch the redistribution of the nation's timber concessions in terms of economic equity, Harris Salleh to this day defends his former administration's system of taking away concessions licensed to conglomerates affiliated with his predecessor Tun Mustapha and handing them over to 2,000 to 3,000 of his political supporters. Harris called the system the "ABC" scheme. Those in the "A" category were awarded 3,000 hectare timber concessions; the "B" category, 500 hectares; the "C" category, outright cash grants to be used at the recipient's discretion.

In Sabah the division of the forest into mini-concessions resulted in the rapid destruction of the state's timber resource. Mini-concessions in Sabah were granted for only one to two years. This short tenure virtually ensured that the recipients of the licenses would log or sell the concession as quickly as they could, with no intention of maintaining forest cover on the land. While a long tenure is no guarantee of sustainability, a short tenure is a virtual guarantee of non-sustainability. Indonesian planners should avoid short tenures at all costs if they decide to go ahead with mini-concessions.

The toll taken by the mini-concession during the tenure of Harris Salleh is demonstrated by the loss of forest cover in Sabah during that time. The following table shows the rate of loss of primary forests, the growth of "disturbed" forest and the total loss in forest cover overall in Sabah during Harris's 1976-1984 term, and beyond.

Table 6.1 Loss of forest cover in Sabah (in millions of hectares)

Category of Forest

1972

1980

1990

Primary Forest

4.5

1.9

0.5

Secondary Forest

1.3

2.1

2.7

Total

5.8

4.0

3.2

Source: WWF Malaysia, 1997 interview.

Sabah will shortly reach the position where its timber resource has degraded to such an extent that mini-concessions will be the only kind of concession left to award. Nearly all licensees in Sabah are mini-concession holders. As of 1996, 92 percent of the state's concessions were under 10,000 hectares, and 84 percent under 5,000 hectares. Concessions of only a few hundred hectares were common (Sabah Department of Forestry 1996). With the exception of the one million hectares held by the Sabah Foundation, of which only 200,000 hectares is virgin forest, the state has no more large concessions to give out.

Indonesia, which during the last two to three years was still giving out concessions hundreds of thousands of hectares in size, may find it unimaginable that it will ever end up with depleted forests like Sabah. And yet, with the appearance of the mini-concession, Indonesia is now taking the first steps down the same road.

It is, however, important to keep this matter in perspective. While they can easily increase the amount later, and probably will, the Department is currently planning to grant only one million hectares of HPHs to cooperatives, or 2 percent of all HPHs nationwide. In addition, given the less-than-salutary record of concession management by large timber groups, there is little to be lost by giving cooperatives a try. Although the government has no intention of imposing such a restriction, if areas under management by cooperatives were restricted to non-mechanized logging, it is almost certain cooperatives would log in a more sustainable fashion than the timber groups who dominate the industry today. The bottom line, however, is that if the experience of Sabah is any guide, Indonesia should be prepared to say goodbye to forests turned over to cooperatives.

2. Limiting the HPH holdings of timber groups

A new law limits the size of any new or extended timber concession to 50,000 hectares, and the overall concession holdings of any timber group to 100,000 hectares within a given province, and 400,000 hectares in the entire country. The only exception to the law is West Irian, where individual concessions are limited to 100,000 hectares, and group holdings to 200,000 hectares.

What this new law means for timber companies is this. From now on, no timber company in Indonesia may obtain a new timber concession larger than 50,000 hectares, except in West Irian where the limit will be 100,000 hectares. If a company already has a concession larger than 50,000 hectares, when that concession's license is extended (which ordinarily occurs after 20 years), then the concession will be reduced in size to 50,000 hectares (or 100,000 hectares in the case of West Irian).

If a company already has timber holdings in excess of 100,000 hectares in a given province, then that company may not obtain a new concession, nor extend any of its existing concessions in that province, until such time as its provincial holdings fall below 100,000 hectares (except in West Irian, where the limit is 200,000 hectares). Finally, if a timber company has national holdings that exceed 400,000 hectares, then it may not obtain any new concessions, nor extend any of its existing concessions anywhere in the country, until such time as its national holdings fall below 400,000 hectares.

This report asks two questions about the limits on the size of concessions and on overall concession holdings. First, what are the implications of these limitations on the ability of timber companies to turn a profit? Second, how easily can these regulations be circumvented?

How concession limitations will affect the ability of companies to turn a profit is explored in Scotland 1998. That report concludes that limits on the size of single concessions to 50,000 hectares would be a disaster. In the current economic environment, assuming prices remain stable, assuming that concessions contain, on average, 30 percent non-forested lands, and assuming a discount rate of 25 percent, it would be impossible over the long run for a typical fully mechanized concession under 70,000 hectares to remain profitable, give current levels of technology.

This is because up-front costs for machines and roads are so large that it is only possible to recoup those losses in concessions of 70,000 hectares or more. The more the total hectarage of a HPH exceeds 70,000 hectares, the larger will be its profits, until the concession reaches about 100-150,000 hectares, after which its profit rate flattens out. Given that HPHs under 70,000 cannot operate both sustainably and profitably in the current economic environment, it is difficult to endorse the proposed 50,000 hectare limit. Such limits will, in the long run, not only bankrupt a large segment of the industry, but also dry up a crucial source of revenue for the government. Again, these findings apply to fully mechanized operations, not small-scale and less capital-intensive operations. With respect to limitations on concession holdings to 100,000 hectares within a given province, it is again quite difficult to be optimistic about such an idea, so long as it remains coupled with limitations on the size of timber concessions to 50,000 hectares.
However, if the 100,000-hectares-limit was to remain in place - but the 50,000-hectares-per-HPH limit were dropped – the result would not be harmful. As mentioned above, concessions over 70,000 hectares can, on average, turn a profit in the current environment. Profits climb as the size of concessions increase, until a size of 100,000 to 150,000 hectares is reached. Thus, in and of itself, the per-province limitation of 100,000 hectares would not be disastrous, unless coupled with a 50,000 per-concession limitation.

Turning, finally, to the limitation of 400,000 hectares on country-wide holdings of timber groups, such a provision by itself would not be harmful, but again, only it were decoupled from the 50,000 hectare per HPH limit. Given that the optimal size of a timber concession is between 100,00 and 150,000 hectares, any company can enjoy the profits of two to three such concessions while still continuing to operate under the proposed 400,000 hectare limit.

We now turn to the issue of whether concession size limits can be circumvented. Any timber group can employ a number of strategies to circumvent the 400,000 per conglomerate limit. One such strategy, for example, would be for a timber company which has already acquired timber concessions to spin them off to one or more family members, who then run these concessions under a different company name. This is a strategy that has been underway for some years in Burhan Uray's Djajanti Group. Sujono Varinata, Burhan's son, initially worked inside Djajanti to run the company's eastern Indonesian operations, but now runs his own substantial timber company, the Budhi Nusa group from Djajanti headquarters.

Another way that large timber companies might be able to circumvent the proposed 400,000 hectare limit is to purchase logs from concessions owned by other companies. This is an arrangement for which there is a long-standing precedent in Indonesia. To give a current example, the Barito Pacific company purchases part or all of the logs from six timber concessions to which it does not hold licenses. The total hectarage of those concessions is estimated to be 452,100, an area in excess of the total hectarage that Barito Pacific will be allowed to control under the new regulation.

Table 6.2 Timber Concessions not owned by Barito Pacific which supply Barito Pacific mills

Name of non-Barito Pacific (BP) HPH which supplies BP mill

Group(s) to which the HPH is licensed ( if known)

Total hectares of the HPH

Total ha’s assumed dedicated solely to BP

Name of Barito Pacific mill supplied by the HPH

Braha Ternate

  

30,000

30,000

Tunggal Agathis

ITCI

Army/
Bimantara

570,200

235,100

Sangkulirang Bhakti

Poleko Trading Co.

Poleko

56,500

28,500

Yurina Wood Ind.

Ratah Timber Co.

Roda Mas

125,000

62,500

Sangkulirang Bhakti

Green Delta

Air Force

74,000

74,000

Yurina Wood Ind.

Yubarson Trading

Poleko

45,000

22,500

Yurina Wood Ind.

It may be that the architects of the proposed regulation limiting total concession ownership to 400,000 hectares have already anticipated that timber companies will employ the strategies outlined above, and other means, to circumvent the size limits. Perhaps 400,000 hectares was decided upon in the first place as a deliberately low threshold which it was anticipated that timber companies would use various mechanisms to exceed.

It will be a while before the regulation limiting concession size begins to bite, as it applies only to concessions whose licenses are now in the process of being extended, or will be in the next few years. The problem is, no one seems to be exactly sure how many concessions that is. The following table shows the wide variation in estimates of Department of Forestry and other officials on the number of concessions that will be available in the next few years for reassignment or auctioning.

Table 6.3 Variations in official statements on the amount of timber concessions that will expire and be available for reassignment or auctioning during the next one to three years

Person making the statement, and the position they hold

# of HPHs available for distribution

HPH hectarage said to be available for distribution

Time frame over which distribution will occur

Date on which the statement was made

Sofyan Simbiaton, former head of MPI Reformasi

105

5 million

1999-2002

3 September 1998

Muslimin Nasution, Minister of Forestry

149

  

1999

15 September 1998

Harnanto Martosiswojo, former Director General of Forest Utilization

  

9 million, including 2.74 million revoked or expired HPHs

1999

28 September 1998

Waskito Soerjodibroto, Director General of Forest Utilization

  

9 million, but only 6 million of which are operable

2000

15 January 1999

Sjahrani Sjahrin, vice chairman of DPR Commission III

  

3 million

1999

12 April 1999

Muslimin Nasution, Minister of Forestry

  

11 million

1999

19 April 1999

To summarize, Indonesia is proposing a variety of new plans which collectively amount to a new policy on the re-distribution of timber concessions. While we applaud the 400,000 hectare national limit, we are concerned that the limits of 100,000 hectares per province may, and the limits of 50,000 hectares per concession almost certainly will, erode what efficiency there is in Indonesian timber operations.

We also have concerns that the requirements that 20 percent of shares in new and extended timber concessions be sold to cooperatives, and mini-concessions of under 10,000 hectares be awarded to cooperatives, amount to little more than a new system of political patronage. Moreover, if the new mini-concessions have short tenures, the implications for the forests they contain will be grave. We turn now to reforms designed to raise the depressed prices of Indonesian logs and rough sawn timber and bring them in line with higher world prices.

B. The market agenda

At the heart of most proposals made during the last decade for reform of the Indonesian timber industry is the idea that as much economic rent or above-normal profit as possible should be captured in a regular, transparent and accountable fashion by the government - through timber fees and corporate tax - rather than in an irregular fashion by politically-connected timber companies and their political patrons.

However, the government cannot extract full resource rent from Indonesian forest products unless the prices for those goods are at normal world levels. Domestic prices for Indonesian logs and rough sawn timber are currently low. An effort to bring Indonesian domestic prices in line with world prices was an indispensable part of a package of reforms agreed to between the IMF, the World Bank, and the government.

The provision held that the 200 percent tariffs – in effect, bans - on the export of roundwood and rough sawn timber would be lowered to 30 percent by April 1998 (which has happened), 20 percent by the end of 1998 (which happened three months late), and 10 percent by the end of 1999. This provision, if implemented as intended, will result in all timber concessions having the possibility of exporting logs at a higher world price, instead of continuing to sell logs to plywood mills at the low Indonesian price.

Similarly, it will allow sawmills to export rough sawn timber at higher world prices, instead of selling that commodity on the depressed Indonesian market. In short, the new regulations will mean that plywood mills no longer have exclusive access to Indonesia's timber rent "pie." For the first time in a decade, plywood mills will be required to divide the spoils with non-plywood-linked timber concessions and sawmills.

Undermining the reduction in log and rough sawn timber export taxes.
However, as it turns out, the reduction of log and rough sawn timber export tariffs was implemented neither in letter (for the first two months of 1999), nor in spirit (up until now). In terms of violations of the letter of the agreement, raw log and rough sawn timber export tariffs were to have been lowered from 30 percent to 20 percent at the end of 1998. However, the Department of Trade and Industry did not actually implement this tariff reduction until late-March. The delay appears to have been brought about in part by the Minister of Forestry's asking IMF approval to postpone the plan (Jakarta Post 1999b).

When it became evident to the World Bank that there was active resistance to the tariff cut, they sent a letter to the Minister of Industry and Trade, asking him to go ahead and implement the rate cut. As a result of the letter, the Minister of Industry and Trade agreed to lower the raw log and sawn timber export tariff from 30 percent to 20 percent on March 24 (Jakarta Post 1999i).

While the government is now in compliance with the letter of the tariff reductions, it is far from clear whether they are in compliance with the spirit. The government has created a new requirement that no company may export logs or rough sawn timber unless they first obtain letters of permission from three sources: (1) Kanwil Kehutanan; (2) Dinas Kehutanan; (3) Department of Forestry headquarters in Jakarta. Obtaining the necessary letters is not a straightforward process.

Thus, in spite of the government's stated intention to export 5 million cubic meters of raw timber in 1998, they granted letters of permission for the export of only 862,000 cubic meters in 1998, and only 13 percent of that amount was actually exported (Jakarta Post 1999f).

In terms of the export of rough sawn timber, one sawmiller interviewed claimed to have been granted letters of permission for the export of that commodity, but a representative of the Indonesian Sawmillers' Association (ISA) was not aware that any such letters had been granted to any of ISA's membership. The Ministry of Trade and Industry subsequently stated that no company had successfully applied for permission to export rough sawn timber (Jakarta Post 1999i).

In short, the need for exporters to obtain letters of permission from the Department of Forestry is a new non-tariff trade barrier. As a result, raw log exports have only trickled out, and rough sawn timber exports are at a standstill. Whether the plywood industry has applied pressure on the government to raise these various barriers against the export of logs and rough sawn timber, or whether the government has taken this task upon itself, the fact remains that such a barrier is now in place, and the main beneficiary is the plywood industry.

The enormous rent available to plywood exporters provides the industry with a substantial incentive to oppose any regulatory changes that would interrupt that flow. Perhaps the most notable development in the timber industry in the last few years is that rent flowing to plywood producers soared from its pre-monetary crisis levels of US$25/m3 to US$80/m3 late last year, and again to $US172/m3 during the first few months of 1999. This increase in rent is due to two main factors. First, plywood manufacturers no longer have to pay exorbitant fees to the Apkindo marketing monopoly. Second, in spite of lower plywood prices, rent accruing to plywood manufacturers rose three times in rupiah terms due to the falling value of Indonesia's currency. These developments are detailed in the table on the next page.

Table 6.4 Rents available to plywood exporters before and after the monetary crisis

 

Pre-Monetary Crisis

Post-Monetary Crisis

1996

December, 1998

March, 1999

Factory Costs

Labor

Salary

Glue

Energy

Additional Materials

Buildings

Machines and Tools

Overheads

Association Fees

Total

8,060

11,844

54,144

10,551

89,770

775

21,972

32,571

11,562

241,251

9,296

13,620

216,576

15,300

125,678

775

87,888

32,571

0.00

501,704

9,296

13,620

216,576

15,300

125,678

775

87,888

32,571

0.00

501,704

Office Costs

General Costs

Marketing Fees

Overheads

Total

7,144

42,981

282

50,407

7,144

19,481

282

26,907

7,144

19,481

282

26,907

Roundwood Costs (2 m3 rwe)

540,500

615,000

800,000

Total Costs

832,158

1,143,611

1,328,611

FOB Price of 1 m3 Plywood

989,937

2,120,000

3,040,000

Depreciation

51,888

176,640

176,640

Interest

46,706

159,000

159,000

Remaining potential resource rent (total costs minus FOB price) per m3 of plywood (in Rp)

59,185

976,389

1,375,749

Remaining potential resource rent (total costs minus FOB price) per m3 of plywood (in US$)

25.18

80.10

171.97

Remaining potential resource rent per m3 of roundwood (in US$)

12.59

40.05

85.98

Roundwood Cost: Department of Forestry data from late 1998 showed that the average nationwide price for a cubic meter of red meranti – the primary wood used to make plywood - was Rp315,000 (US$39)/m3 (Scotland 1998:14). By March 1999, ITFMP's Pekanbaru pilot KPHP project reported that the price of red meranti had risen slightly to Rp400,000(US$50)/m3. While the price for illegal red meranti is far lower, for the purposes of the calculations in this table, we have conservatively decided to use US$50/m3 as our 1999 domestic roundwood price.

Plywood Prices for 1998 is derived from Jakarta Post 1999a, which stated that plywood exports were selling for an average CIF price of US$305/m3. Assuming freight and insurance cost US$40/m3, then the FOB price of plywood was US$265/m3. Plywood Price for 1999 is derived from the Indonesian Forestry Society (MPI), which estimated that CIF plywood prices were US$420/m3 (Jakarta Post 1999h). Assuming freight and insurance cost US$40/m3, this suggests that the FOB price of plywood right now is US$380.

Depreciation and Interest costs are assumed to be the same after the monetary crisis. However, because these costs are dollar-denominated, they are higher in rupiah terms.

Exchange Rate is assumed to be Rp8,000/US$1.

The table on the previous page shows that under current market conditions, plywood companies are able to earn a pre-corporate tax rent of US$86/m3 for each cubic meter of red meranti they buy from their own timber concessions. In short, the plywood rent haven is alive and well, although the spoils no longer appear to flow to Bob Hasan and his political patron. Rather, they appear to be divided amongst a few dozen forest products companies with substantial timber concession and plywood mill holdings. Whether forest products companies are sharing these rents with new political patrons is not known.

Unprecedentedly high levels of uncaptured rent from plywood exports provides the industry with a substantial incentive to oppose any increases in their raw material costs. Assuming that plywood groups have succeeded in placing political pressure on the Department of Forestry, this may explain the Department's unwillingness to allow the unfettered resumption of log and rough sawn timber exports.

A piece of evidence which corroborates that the industry associations and the Department of Forestry have worked to prevent the free export of logs and rough sawn timber is their well-coordinated campaign to convince observers that (1) there is a domestic log shortage in Indonesia, and (2) domestic log prices are nearly as high as world prices. If these two points were true, there would be a rationale – although not a particularly good one - for not allowing the export of logs and rough sawn timber. For example, if there was a domestic shortage of logs, this would suggest that Indonesian plywood factories were being denied a steady supply of raw logs, while their competitors overseas were poised to enjoy a free flow of raw logs once the lifting of the log and rough sawn timber export taxes went into full effect.

Similarly, if domestic log prices were nearly as high as world prices, this would suggest that Indonesian concessionaires could make as much money selling logs at home as exporting them, thus removing an important justification for allowing them to export. It is thus worth examining the twin claims that there is a log shortage in Indonesia, and that Indonesian log prices are comparable to world prices.

Is there a log shortage? Claims of a log shortage in Indonesia came as a surprise. During most of 1998, the Department of Forestry said there was a log glut in Indonesia. The figure commonly circulated by the Department of Forestry most of last year was that 5 million cubic meters of Indonesian logs were lying unused due to depressed demand at home and abroad.

Then, inexplicably, starting late in 1998, the executive director of the Indonesian Forestry Society (MPI) told reporters that Indonesia was not experiencing a log glut, but rather a log shortage, which he claimed was due to "the La Nina weather pattern" (Jakarta Post 1998). This claim was then taken up by the Department of Forestry's former Direktur PPHH, who told reporters of a "sharp drop in timber supplies, primarily due to heavy rains which have disrupted logging activities and the transportation of timber to mills," and even by the Minister of Forestry, who "asked the International Monetary Fund's approval to postpone the plan to reduce the export tax on timber in order to prevent the domestic log supply from growing even scarcer" (Jakarta Post 1999b).

In the end, the Minister of Industry and Trade stepped in and clarified the situation, telling reporters in the plainest possible language that there is no log shortage. "There are currently a lot of unsold logs in Kalimantan's rivers and it's better to export them rather than leave them to rot there. Imagine how much loss we will suffer if we ban the export of logs again." The Minister said, continuing, "Many timber firms have felled trees for export but…the logs remain unsold. So it is not true that there is a scarcity of logs on the domestic market" (Jakarta Post 1999f). Exactly one week after making this statement, the Minister of Industry and Trade went ahead and implemented the government's agreement with the IMF to reduce raw log and rough sawn timber export tariffs to 20 percent (Jakarta Post 1999i).

Are domestic log prices high? In late November, 1998 the executive director of the Indonesia Forestry Society (MPI) told reporters that "logs were currently priced at around US$85 per cubic meter (in the) local market, while the price on the international market was currently US$110 per cubic meter" (Jakarta Post 1998). This claim was then taken up by the (now former) Department of Forestry's Director of Utilization and Distribution of Forest Products, who told reporters that Indonesian companies "were still reluctant to export their timber because local sales were now more profitable (emphasis added)" (Jakarta Post 1999b).

While it is true that international prices for tropical roundwood remain high, research shows that Indonesian domestic roundwood prices are at about half that level. The Ministry of Forestry's own data from September, 1998 showed that the average nationwide price for a cubic meter of red meranti – the main species used to make plywood - was Rp315,000(US$40)/m3 (Scotland 1998: 14). There is no evidence to confirm the claim of the head of the MPI that log prices rose to twice that level in the space of two months.

In fact, subsequent research by one of the ITFMP's pilot sustainable forestry management unit (KPHP) projects in Sumatra suggested that wood prices are now lower than levels on which the Ministry of Trade is now calculating forestry revenues. From Pekanbaru it was reported in March, 1999 that a mid-size plywood group was buying red meranti logs from its own HPHs at Rp400,000(US$50)/m3.

Meanwhile, in the illegal market, plywood quality logs are selling for even less. In March, 1999 a medium-sized plywood company in Central Kalimantan admitted to supplying 100 percent of its roundwood intake from the illegal market. For full length (2.5 meter) plywood quality red meranti logs, the company is paying the rock bottom price of Rp170,000(US$21), which is comprised of Rp135,000(US$17)/m3 for transport, and Rp35,000(US$4)/m3 for felling and extraction. The emergence of an illegal market in plywood-quality logs suggests that legal supplies of this type of roundwood may be difficult to obtain in some areas. In this narrow sense, the Department may be correct when it says there is a log shortage.

Again, while Indonesian industry officials are correct when they say that world prices for red meranti logs are in excess of US$100/cubic meter, it is likely that they are being less than candid in claiming that domestic log prices are approaching those levels.

In actuality, plywood companies are buying logs from themselves at somewhere between the prevailing black market rate (US$15-35) and the price on which the Ministry of Trade and Industry calculates timber revenues (US$80), and certainly not more. This report proceeds conservatively, and for its calculations uses the highest price verified in the field, namely, US$50/m3 for red meranti.

The basis on which the Department of Industry and Trade currently calculates timber revenue levels for red meranti is Rp640,000(US$80)/m3 (Jakarta Post 1999b). However, basing revenue calculations on a log price does not mean this is the log price. The revenue basis price of logs is not a meaningful guide to the real price of logs.

Why have industry and even some government officials taken to maintaining there is a domestic log shortage, and that domestic log prices are high, in the face of so much evidence to the contrary? The most likely explanation is that the Indonesian plywood industry and (some) government officials wish to obscure the magnitude of the above-normal profits that are now flowing to timber groups as a result of being able to buy Indonesian logs from their own concessions at low domestic prices and export them from their mills in the form of plywood at high world prices.

Why would Indonesian timber groups wish to obscure the size of the rent they earn? Because if there was widespread recognition that plywood exports are earning substantial excess profits, this would result in that rent being taken away through either higher corporate taxes or more vigorous enforcement of corporate taxes at their current levels. As things stand now, if timber companies can continue to claim – in a way that is not overly-specific – that the prices they are paying for raw logs from their concessions are high, then they can also continue to claim that the profits of their plywood mills are low, and hence those mills will pay lower corporate taxes.

But what difference does it make whether timber companies pay higher taxes at their concessions (which is what is happening now), or higher taxes at their mills (which is what would happen if the companies were reporting domestic log prices truthfully)? The difference is substantial – and the implications of this fact go far beyond an arcane point of revenue policy.

Given the way that stumpage fees (i.e., revenues paid on raw logs by timber concessionaires) are structured in Indonesia, it is more advantageous for integrated forest companies to have most of their taxes collected at their concessions, rather than at their plymills. Why? Because stumpage fees collected from timber concessions cover only a small part of the trees actually used by the plymill downstream. As has shown in tables 3.8 and 5.6, only a fraction of the timber consumed by most Indonesian plywood mills is purchased from their own or others' timber concessions. Most is either obtained through untaxed black market timber, or low-tax land-clearing (where, for plywood quality red meranti, 40 percent or US$8 less is paid than is the case for the same species harvested selectively from HPHs). As a result, it is not particularly onerous for Indonesian timber companies to pay full timber royalties, and full corporate taxes, on what is after all only a portion of the overall timber they use.

In contrast, if timber groups were to admit that they were feeding their mills with low cost logs, they would also have to declare higher profits in the tax returns from their plywood mills, and that would mean paying corporate taxes of 35 percent on the profits based upon the full volume of logs they use. Therefore, it is in the interest of integrated timber companies to create the myth of a domestic log shortage and resulting high domestic prices, as this then allows them to pay stumpage fees and corporate taxes only on the fraction of the wood they obtain from their concessions, while avoiding corporate taxes on the actual profit they earn from the full complement of logs consumed in their plywood mills.

In closing, this section has not been intended to be a thorough analysis of all reforms pursued by the Department. Rather, it has been an attempt to highlight the two divergent types of reform being pursued by the Department. The first constitutes an effort to resurrect a new system of timber patronage, among whom the beneficiaries are those elements in the current government wishing to organize economic activity and political patronage through cooperatives. In order to achieve this, the Department of Forestry has issued, or will issue, new regulations calling for: (1) a redistribution of 20 percent of the shares in individual timber concessions to cooperatives, and another 10 percent to timber companies controlled by provincial governments, as well as the distribution of concessions as large as 10,000 hectares to cooperatives at the discretion of governors; (2) limitations on the size of individual timber concessions to 50,000 hectares, and on the overall concession holdings of timber companies to 100,000 hectares per province, and 400,000 hectares nationwide.

The second type of reforms focus on introducing prices and incentives for sustainable management in Indonesia's timber industry. When the Indonesian economy came crashing down a year and a half ago - due to three decades of mismanagement and corruption under the New Order, and the resulting mass flight out of Indonesia by investors who had initially hoped to share in the spoils of such a system, IMF and World Bank officials responded quickly, convincing the government to enact a series of far-reaching, substantive forestry reforms. An important piece of this complex but highly consistent program of reforms was designed to bring the depressed prices of Indonesian logs and rough sawn timber in line with higher world prices. The government, however, appears to have undermined this reform, resulting in plywood producers enjoying ever-more-rapidly-expanding levels of profit.

What caused the Department to, on the one hand, to create its own set of ad hoc policies for the re-distribution of timber concessions, but on the one hand, remove the capstone to an edifice of policies a decade in the making? The first set of policies appears to represent an effort by the new government to create a new set of rent havens. The avoidance of the second policy appears to represent an effort by the government to re-tool an old rent haven where the ultimate beneficiaries are plywood exporters, and whoever their new patrons are.

Top of Page

September 7, 1999