Banking on sustainability: structural adjustment and forestry reform in post-Suharto Indonesia

142 Pages·2002·0.97 MB·English

by  Barr, C.

by Christopher Barr
Christopher Barris a forest policy scientist with Banking on Sustainability:
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the Center for International Forestry Research nk
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(CIFOR), based in Bogor, Indonesia. As a member g o
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of CIFOR’s program on the Underlying Causes of S
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Deforestation, hiswork has largely focused on the ta
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changing structure of Indonesia’s wood-based indus- ab Reform in Post-Suharto Indonesia.
tries, the role of financial institutions in funding ility
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© 1986 Panda symbol WWF–World Wide Fund for C
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Photographers N
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Bruce Bunting/WWF
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Banta D. Manullay E
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Howard Buffett
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Peter Rodman C
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Banking on Sustainability:
Structural Adjustment and Forestry
Reform in Post-Suharto Indonesia.
by Christopher Barr
1
Acknowledgements
I would like to express my gratitude to the Center for Adi Resanata Somadi Halim, Trenggono Purwosuprodjo,
International Forestry Research (CIFOR) and WWF- Canecio Munoz, Akie Setiawan, Mohamad ‘Bob’ Hasan,
International’s Macroeconomics Program Office, which and other forest industry officials who graciously
jointly sponsored the study presented in this book. responded to my requests for interviews and information
In particular, I extend my sincere thanks to David about the activities of their companies.
Kaimowitz for the conceptual guidance and enthusiastic
support he has given to this project. His many insights I owe a debt of gratitude to Nabiha Muhamad who
have broadened my understanding of the forestry reform has devoted countless hours to circulating clippings on
process currently underway in Indonesia; and his forestry and finance issues from the Indonesian and
commitment to supporting policy processes with well- English-language news media, which have proven to be
documented research have strengthened my own extremely useful to my research. My comprehension of
purpose in carrying out this study. I thank David Reed the activities of investment banks and pulp producers has
for his patience and for guiding the publication and been strengthened considerably by insights from Peter
dissemination of this study’s findings. Cain, one of the very few financial analysts to look
seriously at the risks associated with fiber shortfalls at
The research conducted for this study was funded, in Indonesia’s largest pulp mills. I also offer my sincere
part, by WWF-Austria, WWF-Switzerland, and the United thanks to Nick Laird for generously sharing his expertise
Kingdom’s Department for International Development. in international finance during the initial phase of
WWF-Indonesia has also assisted in the dissemination this project.
of some of the study’s preliminary findings. I gratefully
acknowledge the support of each of these organizations. It has been my good fortune to spend much of the past
Any opinions presented in the following chapters, three years based at CIFOR in Bogor, Indonesia. Several
however, are those of the author and do not necessarily colleagues deserve special mention. I offer my heartfelt
represent the official policy of any of these organizations. thanks to Jeff Sayer for providing the opportunity to be
involved with the fine institution that he built during his
During the course of my research, I was assisted by tenure as director general. William Sunderlin has my
numerous friends, colleagues, and informants in both the enduring gratitude for his unflagging friendship and
forestry and financial sectors who helped me to better clear-minded inputs at each stage of this project. My
understand the processes I have sought to document. understanding of Indonesia’s pulp and plantations sector
While it is not possible to mention each of these individ- has benefited greatly from the generous insights shared
uals by name, I am grateful to all who shared their time by Grahame Applegate and Christian Cossalter. Similarly,
and expertise with me. My understanding of the financial I have learned a great deal about the Indonesian Bank
institutions involved in funding forestry sector invest- Restructuring Agency’s corporate debt resolution efforts
ments has benefited enormously from conversations with from Bambang Setiono, who coauthored Chapter Five.
Masya Spek, and I extend my deep appreciation for the I thank Lini Wollenberg for the buoyancy she offered
generosity with which she has responded to my many at difficult turns in the writing process. I also greatly
queries over the last two years. I thank Charles appreciate Patricia Shanley’s steady reminders to stay
Joesriemerst for explaining the nuances of conglomerate focused on the people and trees for whom this study is
financing in Indonesia and for sharing numerous insights ultimately dedicated. Finally, I am grateful to Ambar Liano
acquired during his two decades of involvement with for handling many of the logistical details associated with
timber and pulp producers. I thank Messrs. Soedibyo, this project.
2
Several of the chapters in this book have benefited from I thank Brent Nordstrom, Heike Mainhardt, and others
critical feedback offered by both internal and external at the WWF Macroeconomics Program Office who have
reviewers. In particular, I wish to thank David Kaimowitz, overseen the technical aspects of bringing this book into
William Sunderlin, Neil Scotland, and three anonymous print. I am grateful to Sherri Alms for her fine job
external reviewers for providing comments on drafts of editing the manuscript.
Chapter Three, which focuses on reform of Indonesia’s
HPH timber concession system, and portions of Chapter Finally, I offer my deepest appreciation to my family
Five’s discussion of forestry sector debt. I thank Reed and close friends for their unwavering support for my
Merrill, Arnoldo Contreras-Hermosilla, Bill Magrath, work. Whatever positive impact this study may ultimately
Grahame Applegate, Christian Cossalter, and Ken have is due, in no small part, to the love, patience, and
MacDicken for providing detailed comments on early encouragement that each has extended since the project
versions of Chapter Four’s analysis of Indonesia’s pulp was initiated. I only hope that I am able to respond in
and paper industry and portions of Chapter Five. I, alone, kind.
however am responsible for any errors in fact or
interpretation that this study contains. C.B.
Bogor, Indonesia
In addition to the substantive inputs provided by those September 15, 2001
mentioned above, a number of individuals provided
critical assistance with the process of writing the chapters
that follow. I express my profound thanks to Lucy
Aghadjian and Richard Ryan, each of whom helped me Disclaimer: The opinions expressed in this report are the views of the author and
do not necessarily represent the official policy of either CIFOR or WWF-International’s
keep this process in motion when it often seemed
Macroeconomics Program Office,the study’s joint sponsors.These opinions,likewise,do
insurmountable. I am also indebted to Sarah Laird and
not represent the official policy of WWF-Austria,WWF-Switzerland,WWF-Indonesia,the
Janet Feigelstein for their assistance in regaining focus
United Kingdom’s Department for International Development,or any other organization
at critical junctures when the writing had stopped. involved in funding or disseminating this study.
3
Contents
Chapter 1 Introduction: Financial Crisis and Forestry Sector Adjustment
9
Sustainability as a Policy Goal 10
Restarting the Forest Sector Adjustment 11
Broadening the Reform Agenda 12
Constraints on Forest Sector Adjustment 14
Scope of this Book 16
Organization of the Book 17
Chapter 2 The Development of Indonesia’s Forest-Based Industries Under
Suharto’s New Order Regime 1966-1998
19
The Legal-Regulatory Basis of New Order Forestry Policy 20
The Rise of Indonesia’s Export-Oriented Logging Industry 21
Downstream Investment in Plywood Production 24
Diversification into Pulp and Paper Production 28
Will HPH Reform Lead to Sustainable Forest Management?:
Chapter 3
Questioning the Assumptions of the “Sustainable Logging” Paradigm
37
Assumption #1: Controlling Log Supply, Without Taking Any Steps to Reduce
demand for Industrial Timber, is an Effective Strategy for Sustaining the Natural Forest Resource Base 39
Assumption #2: The Most Effective Means of Restricting Indonesia’s Log
harvests to a Sustainable Level is by Reforming the HPH System 41
Assumption #3: Increased Efficiency Will Promote the Conservation of Natural Forests 45
Assumption #4: Sustainable Concession Management is Profitable 49
Assumption #5: The Indonesian Government has the Institutional Capacity
to Enforce the Proposed Changes in the HPH System and the Forest Products Trade 53
Conclusion: Reorienting Timber Sector Reform 55
4
Chapter 4 The Political Economy of Fiber and Finance
in Indonesia’s Pulp and Paper Industries
70
Fiber Deficits at the Mill Level 71
Large Capital Investments and High Levels of Financial Risk 77
Government Subsidies and Weak Financial Regulations 79
Access to International Finance 88
Impact of Financial Crisis and Reformasi 92
Conclusion and Policy Options 95
Chapter 5 Corporate Debt and Moral Hazard
in Indonesia’s Forestry Sector Industries
100
IBRA and Bank Recapitalization 101
Forestry Assets Pledged to IBRA 106
Capital Subsidy Through Debt Write-Off 108
Perpetuation of High Risk and Illegal Practices 111
Growing Risks for Forestry Investments 113
Debt-Driven Expansion and Moral Hazard 115
Debt Strategies of Forestry Conglomerates: Three Case Studies 117
Conclusions and Policy Options 124
Chapter 6 Revitalizing Indonesia’s Forestry Reform Agenda1
130
Acronym List 140
5
Foreword
In 1997, a major financial crisis struck Asia. In the The Center for International Forestry Research (CIFOR)
wake of that crisis, the International Monetary Fund and WWF’s Macroeconomics Program Office (MPO)
and the World Bank provided large loans to the commissioned this book by Chris Barr to tell that story.
Indonesian government in return for their commitment Our intention was not—and is not—to attack either the
to implement policy reforms intended to stabilize the IMF or the World Bank. Rather we hope this book will
economy and rekindle growth. Those reforms included encourage those institutions, as well as others, to re-
various measures explicitly designed to improve forest think their policies in specific ways. For example, we
management, most of which focused on forest want them to pay more attention to how non-forest
concessions run by large Indonesian conglomerates. policies such as monetary, financial, investment and tax
policies affect forests and the rural poor. We also want
The strategy those two agencies adopted had three to raise doubts about whether forest policy reforms
major flaws regarding forests. First, at the same time designed to increase forest industries’ efficiency would
that the two agencies were supporting forest policies necessarily lead to companies managing the forests
intended to limit unsustainable logging, they also more sustainably. Finally, we want to highlight some
encouraged several non-forest policies that actually specific issues, such as the rapid growth of Indonesia’s
stimulated deforestation and more widespread logging. pulp and paper sector and the write-off of large amounts
Second, by the late 1990s large forest concessions were of bad debts held by Indonesian forestry conglomerates,
responsible for an increasingly small portion of forest which previously had not received sufficient attention.
clearing and unsustainable logging. Logging outside
concessions and land clearing for agriculture had One can read this book on two complementary levels.
become the main sources of forest destruction. Hence, First, it tells the story of concrete events in a specific
focusing on concessions dealt with only a limited piece country involving particular international agencies.
of the problem. Third, a number of the specific forest This story is directly relevant for any one interested
concession reforms endorsed by the IMF and the in Indonesian forest problems, the recent dramatic
World Bank may have actually increased pressure economic and political changes that have taken place
on Indonesia's forests. in Indonesia, or the social and environmental impacts
of World Bank and IMF policies.
At the same time, this book presents much broader
lessons that have strong relevance for anyone concerned
about forests and the environment in other parts of the
world. These lessons are not necessarily rooted in any
one particular time, location, or set of actors. One such
message is that forests and natural resources more
generally, are not simply economic sectors and they
cannot be addressed solely through sectoral policies.
What happens to these resources mirrors the broader
economic, social, and political priorities and trends in
society. Unless one addresses these broader trends, the
underlying causes of the problems, such as market and
6
institutional failures, it is virtually impossible to David Kaimowitz
control the symptoms such as deforestation and Director General
resource degradation. Second, we also want to Center for International
highlight that societies and policy makers face many Forestry Research
difficult trade-offs. Not everything in life is ‘win-win’.
It would be nice if pro-market reforms that encourage David Reed
greater productive efficiency would also lead to better Director
environmental conditions and greater social equity, but WWF-Macroeconomics
many times they do not. Society has to acknowledge Program Office
those trade-offs and make difficult decisions among
competing priorities and desired outcomes.
CIFOR and WWF share a common objective of making
policymakers, opinion leaders, and the general public
more aware of how the broad patterns of development
affect tropical forests and the people whose lives
depend on them. Our message to the macroeconomists
and bankers of the world is pay attention to how your
actions affect tropical forests and forest dwellers. Our
message to the conservationists and the foresters is pay
attention to the banks, both public and private. If this
book leads its readers in those directions it will have
served its purpose.
7

Introduction: Financial Crisis and Forestry Sector Adjustment
Chapter 1 In January 1998, the International Monetary Fund The IMF’s 50-point structural adjustment packet
(IMF) signed a letter of intent with the Government of also included a number of policy reforms aimed specif-
Indonesia (GOI) to provide US$43 billion in emergency ically at restructuring Indonesia’ s forestry sector (IMF
loans to bail out that nation's collapsing economy (IMF 1998). The text of the loan agreement explains that
1998). At that point, Indonesia had been caught in its these forestry sector conditionalities were designed to
current financial crisis for six months, and the Suharto raise efficiency levels in Indonesia’s timber and wood
government was moving rapidly towards defaulting on processing industries and, in doing so, to promote the
its balance-of-payments. Indonesia's external debt then sustainable management of the nation’ s remaining
stood at US$140 billion, or approximately two-thirds of natural forests.
the nation’s pre-crisis GDP (IMF 1998). The rupiah The prominent insertion of forestry conditionalities
had lost 70 percent of its value since mid-July 1997, in the 1998 IMF bail-out loan agreement marked the
when the Asian monetary crisis first spread to the start of an extended reform process in Indonesia’ s
world’s fourth most populous country, and inflation forestry sector. Initially coordinated by the World
was soaring. The nation’ s financial institutions were Bank, this process soon came to involve other mem-
facing systemic insolvency, and new bank lending from bers of the international donor community through the
both domestic and offshore sources had virtually Consultative Group on Indonesia (CGI). The reform
ceased. agenda has been super-imposed on a process of deep
In signing the IMF’ s bail-out loan agreement, the structural change in the forestry sector, the origins of
Indonesian government committed itself to adopting a which pre-date the economic crisis. These changes,
far-reaching set of policy reforms aimed at refloating all of which are inter-linked, include:
the nation’ s failing monetary system and restoring ______________________________________________
long-term economic growth. Drafted by the IMF with (cid:2) decline in the volumes and quality of commercial
input from the World Bank, this structural adjustment timber in areas allocated to forest
program was designed to reorient vast segments of concession-holders;
______________________________________________
Indonesia’ s economy. Key components of the
(cid:2) growing reliance by Indonesia’ s wood processing
adjustment program included:
industries on timber harvested through forest
______________________________________________ conversion;
(cid:2) fiscal austerity measures; ______________________________________________
______________________________________________ (cid:2) decline in the productivity of Indonesia’s
(cid:2) a tight monetary policy; plywood sector;
______________________________________________ ______________________________________________
(cid:2) deregulation of major trade and investment (cid:2) meteoric expansion of the country’s pulp
restrictions; and paper industry;
______________________________________________ ______________________________________________
(cid:2) privatization of state-owned enterprises; (cid:2) decentralization and devolution of administrative
______________________________________________ authority in the forestry sector from the national
(cid:2) reform and recapitalization of the nation’ s government to the provincial and
collapsed banking system. district governments.
______________________________________________ ______________________________________________
9