DTE Special Report / June 2002: Forests, People and Rights

But the economic crisis has also created new imperatives which are driving yet more forest destruction. Indonesia's creditors, led by the IMF, have set a course for economic recovery which requires Indonesia to sell off state assets and generate revenues by exploiting natural resources. Although these creditors were partly to blame for the economic crisis - by pouring investment funds into a corrupt and brutal regime - they are unwilling to share the costs. Instead, the burden is being transferred to ordinary Indonesians and their already depleted natural resources.

This is one of the reasons why, despite all the talk of reform, policies promoting relentless resource extraction have continued until today.

The post-Suharto reform process and its impacts on the forests have been shaped both by the economic crisis itself and the subsequent interventions of Indonesia's creditors; by the demands of civil society and Indonesia's ambitious and chaotic process of decentralisation. Reforms have been constrained by the financial priorities of the international lending institutions as well as by the interests of influential members of the political and business elite, and the ever-present military. A break-down in centralised state authority, aided by rampant corruption and almost non-existent law enforcement has led to a dramatic increase in the uncontrolled exploitation of forests.

The end result in May 2002 is a renewed confrontation between vested interests seeking to maximise profits from the forests and communities seeking secure livelihoods.

Part II of Forests, People and Rights, starts by describing the political and economic context for post-Suharto reforms affecting forests and forest peoples. It then outlines some of the key policy changes under forestry ministers Muslimin Nasution, Nur Mahmudi, Marzuki Usman and Mohammad Prakosa. The main drivers of and constraints to the reform process - the IFIs, the demands of civil society, decentralisation and the vested political, business and military interests are also described. The section ends with an overview of the continued pressure on the forests from industry overcapacity, illegal logging, oil palm and forest fires.

The political and economic context

Indonesia currently faces enormous challenges: an unprecedented economic crisis; building democratic institutions after three decades of autocratic rule; and implementing a far-reaching decentralisation programme. At the same time, the over-exploitation of Indonesia's forests threatens the livelihoods of millions[1].

For many years Indonesia had been widely praised as an economic miracle and a development success story. International financial institutions, multinational companies and foreign investors had fallen over themselves to do business in Indonesia, turning a blind eye to its shocking human rights and environmental record.

World Bank reports had described Indonesia in glowing terms as one of the fastest growing economies in the world, with "a strong emphasis on macroeconomic stability and diversification (and)…far reaching reforms in trade, investment, taxation and finance"[2]. The economy grew at an average growth rate of 7% per year throughout the 1980s and until 1997. Official indicators of the average Indonesian's standard of living improved substantially. In 1967 Indonesian per capita income was $US50; by 1991, it was $US610 and the number of people below the official poverty line fell from over 70 million to about 27 million in the same period[3]. Life expectancy increased from just 46 years in 1970 to 63 years by 1995 and infant mortality had dropped from 145 to 53 per 1,000 live births[4].

However, these figures did not tell the whole story. The statistics compiled by the Suharto regime were self-serving and, particularly on the social front, grossly inaccurate. The majority of Indonesians were still very poor and deprived of rights or security. Widespread corruption throughout Suharto's administration had created a hidden private and public debt problem, compounded by lack of financial controls. When the financial crisis struck Asia in mid-1997, Indonesia was hardest hit and - unlike its ASEAN neighbours - has yet to recover. The poor, without land or security, have suffered most.

While Indonesia experienced its worst ever forest fires in 1997/8 the financial crisis (commonly called krismon in Indonesia) brought severe economic, social and political impacts to the whole country. The Indonesian rupiah lost over half its value against the US dollar between July 1997 and February 1998. The economy contracted by 15% in 1998. In the same year, Indonesia's state banks suffered massive losses of Rp200 trillion (around US$30bn), equivalent to one-fifth of the country's GDP. The richest Indonesians salvaged as much as they could by sending capital overseas, but ordinary people lost their life savings as banks closed and food prices sky-rocketed. Unemployment figures rose from 2.5 million in 1997 to 8.7 million in February 1998[6]. The crisis brought a four-fold increase in poverty, with half the population now below the poverty line.

The IMF stepped in with a massive bail-out package of US$43 billion dollars in October 1997. Even this failed to stop the rot and a 'rescue package for the rescue' was agreed in February 1998. Indonesia was required by the IMF to adhere to a tight monetarist policy, with high interest rates and spending controls. As conditions of the loan, the Jakarta government had to stamp out corruption, dismantle monopolistic practices, reduce trade and investment restrictions for foreign investors and privatise state companies. The structural adjustment programme and its conditionalities also had important effects on natural resource use.

These measures suited the interests of international capital, but made the burden for ordinary Indonesians more severe, as fuel and food subsidies were withdrawn and public spending on health and education was sacrificed to make debt repayments. As the economic crisis deepened and the social impacts worsened, government critics began to see the IMF as part of the problem, not the solution for economic recovery.

The economic crisis fuelled political pressures mounting against the ageing dictator. The reform movement - opposition parliamentarians, students, activists and academics - was fast gathering momentum, demanding an end to KKN - corruption, collusion and nepotism - and calling for 'reformasi total' in Indonesia. As student protesters filled the streets of Jakarta and other cities, public outrage grew at the military's brutal response. Food riots and violence, often directed at Chinese shopkeepers, became a daily occurrence in cities and even small towns

The farce of the March 1998 elections was the final straw. Suharto, as the only candidate, was reinstalled for a fifth presidential term. His cabinet was packed with loyal supporters, including his friend and business advisor, the forest tycoon 'Bob' Hasan as Trade and Industry Minister and his eldest daughter 'Tutut' as Social Affairs Minister. The pressure on Suharto mounted from within Indonesia and from abroad as creditor nations finally lost faith. On May 21st, 1998 Suharto was finally forced to resign the presidency. He handed over to his vice-president and erstwhile protégé, B.J. Habibie. Like most members of Suharto's last cabinet, Forestry Minister Sumahadi only held his post for two months.

A tidal wave of political euphoria and much talk of reforms followed. Habibie promised democratic elections, relaxed censorship, lifted some of the restrictions on the political opposition and released some political prisoners of the Suharto regime. Once the elections were announced, new political parties sprang up like mushrooms after rain.

As the press become more open, revelations of human rights violations by the Armed Forces, including the kidnapping of activists, the shooting of student protestors and massacres in West Papua, East Timor and Aceh, greatly increased public resentment of the military's role in Indonesian politics. Ordinary Indonesians, whose demands for justice had been silenced for so long, started to voice their grievances and call their oppressors to account. The cry went up for Suharto, his family and cronies to be put on trial for robbing the Indonesian people. They demanded that the army get out of politics. NGOs started using the new political openness to organise meetings, press publicly for reform and draw up their own agendas for the future.

However, the transfer of power from Suharto to his deputy, Habibie, marked a new phase of the power struggle rather than its end. The Indonesian Armed Forces, one of the main supporters of the New Order regime, was now on the defensive but its powers were not significantly curbed. Although Suharto had stepped down and some of his supporters in the government were replaced, much of his regime remained intact.

In the months following Suharto's resignation, the reform movement lost some of its momentum and the disparate nature of the political opposition became apparent. Three decades of oppression had left Indonesia ill-prepared for change. There was no coherent opposition but an ad hoc alliance of groups of activists, students, trades unionists, NGOs and workers which had gradually coalesced around the banned PRD party, Megawati's branch of the Indonesian Democratic Party (PDI-P) and Islamic movements. The reform movement was predominantly an urban and middle class movement and the agenda for reform reflected this. No attention was paid to the interests and needs of peasant farmers and peoples of the 'outer islands'. Indigenous forest peoples were ignored.

Indonesia's first democratic elections in 44 years took place in June 1999, one year after the resignation of Suharto. Abdurrahman Wahid (known popularly as Gus Dur) and Megawati Sukarnoputri (daughter of Indonesia's first president) were appointed as president and vice-president. Indonesia had changed: East Timor had voted against integration with Indonesia and was under UN administration in preparation for independence; the police force had been separated from the Indonesian armed forces; new regional autonomy laws had been passed by parliament; the media were freed from censorship; labour unions had been liberalised.

However, for all Habibie's promises of reform, there had been no radical economic or political change. Revelations about the corruption which pervaded the Suharto family's US$15 billion business empire shook investor confidence and the Indonesian economy remained in a parlous state. New laws on the criminal code and states of emergency restricted human rights and democracy instead of promoting them. The World Bank-funded social safety net programme, intended to alleviate the worst effects of the economic crisis on the poor, proved to be ineffective and riddled with corruption. Demands for self-determination in West Papua and justice in Aceh had been ignored. Moreover, the values of the powerful Javanese elite and the business community remained unchallenged throughout the transitional regime and remained at the heart of the new government.

As the former leader of Indonesia's largest Islamic group and a prominent opposition figure, Gus Dur was known for his deep commitment to democracy and a pluralist civil society. So hopes were high that his government would implement a genuine programme of reform. Instead, Wahid's presidency brought reformasi to an end. During the Suharto and Habibie regimes, the opposition movement had an obvious enemy. Now the political map had become far more complex. Wahid only became president due to a compromise between military leaders, a coalition of Islamic parties and various New Order figures. Megawati's PDI-P party had won most votes, whereas Wahid's PKB party was one of several minority groups. Throughout his period of office, Wahid was preoccupied by a difficult balancing act to appease the political interests of rival factions. The continuing economic problems concealed the developing constitutional crisis.

The initial signs were promising. Wahid appointed some prominent reformers to his cabinet and took steps to reduce the political power of the military. Prominent NGO figures were invited to advise his ministers. Political exiles were allowed to return to Indonesia and the president gave public support to dialogue over demands for self-determination in Aceh and West Papua. However, Wahid's many overseas trips to improve international relations and mobilise more financial support for the country's beleaguered economy left him vulnerable. The military and the old regime's Golkar party regrouped and formed alliances with other political parties and business figures.

These forces gradually rallied against Wahid, undermining reforms in parliament and Indonesia's supreme legislative assembly, the MPR. Wahid became embroiled in two highly public corruption cases which became the excuse for his opponents to instigate impeachment proceedings against him. In April 2000 and then again in December that year, the IMF further contributed to his difficulties by withholding a US$400 million tranche of its US$5 billion loan programme on the grounds of failure to implement economic reform. Without IMF support, it became impossible for Indonesia to reschedule billions of dollars of debt to foreign creditors.

Long before the end of his 21 month rule, most reformists had become disillusioned as Wahid behaved like any other politician desperate to maintain power. He reshuffled the cabinet several times in a vain attempt to bolster his political position as well as threatening to dissolve parliament and vilifying the press. As Wahid's influence weakened, the military gained ground and the president was cornered into ordering intensified military operations in Aceh. Indonesia seemed on the brink of anarchy as Wahid's supporters from his East Java homeland threatened to invade Jakarta. Wahid was finally ousted on July 24th 2001, when a Special Session of the MPR revoked his mandate as president, installing his deputy, Megawati as the fifth president of the Republic of Indonesia.

"The fear is after two years of messy, often volatile political transition, the pendulum has swung back in favour of conservative forces and that Megawati is beholden to them".

The failure of Wahid to bring greater democracy and reform to Indonesia is not surprising. Many other countries which endured long, authoritarian regimes have undergone protracted periods of political instability. In Indonesia, the situation is made worse by the nation's grave economic problems and a world teetering on the edge of recession. Indonesia's total foreign debt, including the public and private sectors, is estimated at over US$140 billion - an amount comparable with the country's annual GDP[8]. The omens are that Megawati will not be any more successful. She came to power with the backing of the military and her multi-millionaire husband's business and political connections are suspect. Her record as vice-president was unimpressive: she remained silent on all important issues and completely failed to fulfil her remit to resolve the political conflict in the Moluccas and West Papua and the ethnic conflict in Central Kalimantan.

Megawati is determined to uphold 'the unity' of Indonesia which means little hope for independence movements in West Papua and Aceh. She is also committed to revising the regional autonomy laws which she regards as handing over too much control to local governments.

There were fears that Megawati's close relationship with the military would bring a return to authoritarian rule and they have been proven right in West Papua and Aceh where there has been an escalation in military violence. There have been signs of progress at central government level - a new decree was passed in November 2001, which brings Indonesia's agrarian and natural resources together under one piece of legislation for the first time - but civil society groups are increasingly looking to the regions as the window of opportunity for change.

In contrast, Megawati's appointment was hailed by world leaders and the IMF as heralding a return to stability. Her 'honeymoon period' as president saw a new agreement with the IMF and a deal with the US president for more loans and support for the military.

The early enthusiasm was cut short by the events of September 11th and the US-led 'war on terrorism' that resulted. For a time, Megawati's presidency looked doomed as she wavered between support for the USA's war in Afghanistan and appeasing anti-US feeling at home. The economic downturn following September 11th did not help Indonesia's troubles.

But Megawati did survive into 2002 and her close alliance with the military has been consolidated during recent months. Her failure to respond to demands for an independent enquiry into the assassination of Papuan independence leader Theys Eluay, and the creation of a new military command in Aceh are evidence of this.

Megawati made few public statements about forests in her first six months of office. Opening the Third National Forestry Congress in October 2001, she blamed forest destruction on mismanagement, corruption and the lack of proper planning. This had resulted in the loss of state revenues and loss of livelihoods for a great number of people, she said. In December, she announced a new direction on sustainable logging certification for logging companies. In January this year the president told environmentalists she was angry about forest destruction, the lack of progress with reforestation and corruption in the Reforestation Fund. It remains to be seen what she will do about this.

Megawati has not, however, paid specific attention to the fate of forest peoples or their maltreatment under government policy over the past decades. Some see signs of hope: she is believed to back her Forestry Minister, Muhammad Prakosa, in his attempts to do something about illegal logging. But her military backers may apply pressure if this get-tough policy bites too deeply into their financial interests.

The increased role of the IFIs

Since Indonesia's economic crisis, international financial institutions (IFIs) have enjoyed hugely increased leverage over government decision-making and have played a fundamental role in forcing the pace and direction of reforms affecting forests and forest peoples. Led by the International Monetary Fund and the World Bank, these creditors are using their position to try to force Indonesia to make economic reforms to suit the global free-market economy, whilst ensuring that debt repayments continue. They refuse to admit their share of responsibility for Indonesia's huge debt burden, inherited from the Suharto era, when a large proportion of this was embezzled. Some 30% of World Bank loans, amounting to $30bn, were corrupted[9].

At the same time, the World Bank in particular has been forced to pay attention to the concerns of civil society groups both inside Indonesia and abroad, who are calling for an end to debt-dependency, greater accountability among lenders to corrupt regimes and an end to loans and loan conditions which have negative impacts on forests and communities. As a result, the loan conditions imposed on Indonesia by the IMF, World Bank and other lenders have contained mixed messages. They call for increased forest protection whilst at the same time introducing measures which encourage further destruction.

The first major set of reforms affecting forests were contained in the IMF's October 1997 and January 1998 Letters of Intent (LoI) with the Indonesian Government - the documents which spelled out the loan conditions Indonesia had to agree to secure a $11bn loan as part of a US$43bn bail-out package (see box, below for details of this and subsequent LoIs). The contradictions were apparent from this first of seventeen LoIs signed over the next four years. Although improvements in governance and transparency (for example calls for reform of concession regulations, introduction of performance bonds and for the dismantling of cartels) could clearly benefit both forests and government revenues, other objectives such as reducing export taxes on timber were just as likely to offset those gains. A requirement for forest land conversion targets to be reduced to 'environmentally sustainable levels' was inconsistent with the removal of restrictions on the export of palm oil and on foreign investment in the sector - a move that was likely to accelerate the rate of forest conversion to plantations.

The measures did nothing to address the underlying structural causes of deforestation and degradation. Indigenous peoples and other forest communities would continue to be marginalised as their rights to control forest lands and resources were ignored.

Ironically, while the LoIs called for greater transparency and consultation with civil society, the process of drafting the agreements themselves was anything but transparent. The contents of the LoIs still are not made available for public scrutiny before signing. There is no participation by those most affected.

Some of the contradictions in the forest conditionalities may be due to the way the IMF called in the Bank at a very late stage to approve the initial deal. Bank forestry experts in Washington called in Indonesia specialists and worked overnight to draft the conditions. There are also important differences between the approaches of the two organisations. The IMF has no permanent office in Jakarta and no understanding of forestry, other than as a sector for generating revenues. On the other hand, the Bank has considerable Indonesian experience - with transmigration and plantations for example - for which it had been severely criticised.

"The aim of the program stated in the Bank's Forestry Policy (1991) to reduce the rate of deforestation and meet the needs of the forestry industry - have not been fulfilled."

The World Bank had tried, in 1993, to make a $120 million loan conditional on forestry reform, but this failed because it threatened business interests close to Suharto. It first initiated a forestry programme in 1989 (with the FAO). A second project was designed to provide policy advice, but this was terminated in 1995[10]. From then on, there was indirect involvement in forestry through such projects as the controversial Land Administration Project (LAP) (1995 to present) - see DTE Special Report on Transmigration, 2001. The Bank's own review team concluded that the World Bank forestry policies and practices had been a miserable failure[11].

Following the economic crash, the World Bank refined and included the IMF's loan conditions in two structural adjustment loans - PRSL I (April 1998) and PRSL II (May 1999). Wider stakeholder consultation took place and a paper prepared for the consultation aimed to respond to social concerns by explicitly calling for community-based conservation and concession management. The PRSL II was accompanied by a specification that draft forest legislation needed to accommodate "rights and responsibilities for adat (customary) areas which include forest areas" and required a "community forest participation regulation". The Bank also called for greater transparency (making new maps of forest areas publicly available) and a "multi-stakeholder consultative process" during the drafting of legislation and regulations.

The Bank went ahead with PRSL II despite the lack of progress on conditions set on the first loan. It ignored warnings about the Forestry Department's lack of commitment to genuine consultation in drafting the new Forest Law passed in 1999 (see below). Moreover, the same fundamental flaws remained at the heart of the package. Inconsistent requirements (such as those relating to land conversion and oil palm) were coupled with problems of feasibility and effectiveness (could the objectives stipulated actually be achieved?). Above all they focused on the conventional wisdom of the World Bank - that of improving efficiency within the existing forest management paradigm.

Initially the Habibie government committed itself to greater environmental and social objectives promising to replace export taxes with resource royalties and stating that Bob Hasan's plywood cartel had been dismantled. It also agreed to a June 1998 deadline for changing regulations on the award of logging concessions to be followed by a sweeping reform programme for concession management by year end, including "provisions to encourage participation by local communities and protection of forest dwellers".

In some areas, reforms were minimal - for example, just 15% of forest concessions known to have been allocated illegally were revoked and despite increases in stumpage fees, rent capture declined because payment in rupiah was allowed at favourable exchange rates. The lack of progress led the World Bank to suspend the disbursement of monies in late 1998. It was clear that the reforms were fundamentally flawed with the government apparently seeking to comply with the letter rather than the spirit of the reform packages sought by the IFIs.

At first NGOs were keen to use opportunities for consultation opened up by the new political climate and by the conditions on stakeholder involvement in policy-making required by the World Bank. But disillusionment soon set in when the government failed to act on input from NGOs during a series of consultations on the new forest law.

These and other policy reform negotiations were a very new way of proceeding for the Forestry Department and civil society for which both parties were ill prepared. The large number and frequency of meetings to discuss forestry policy reform put a great strain on the finances and personnel of NGOs in particular. After the failure to secure positive change through the Forestry Act consultations, NGOs were largely left out of the drafting of the National Forestry Plan which has dragged on until now.

Since then, NGOs have become more skilled in making use of opportunities to engage with donors and use them as levers for change. They have pushed for changes in forestry policy through the CGI-initiated Inter-Departmental Committee on Forests (see box on CGI, below) and through big, donor-sponsored meetings such as the 2001 'FLEG' meeting on illegal logging. But they have also continued to press Indonesia's creditors and the IFIs to take responsibility for failures. They have staged anti-debt demonstrations against the CGI, slammed the World Bank's record on forestry and used the media to get their message across.

While there have been several studies of the impact of the economic crisis on health, nutrition and education, very little attention has been paid to the effects on the environment and forest communities. Any analysis is complicated by the 'triple whammy': the interaction between the political and economic crises plus the forest fires and drought of 1997/8. The effects vary widely between different parts of the country and different social groups. For example, people who owned their own land and produced export crops like coffee, pepper and palm oil generally benefited at the expense of the landless and workers on nucleus-estate schemes. One of the first studies, on the effects of the economic crisis on farmers' livelihoods and forest use, was by the international forestry research institution, CIFOR[12]. Preliminary results from fieldwork in Riau, West and East Kalimantan and Central Sulawesi showed that the situation was highly variable both geographically and with time. The report concluded that the crisis had a larger negative impact on farmers than originally expected. Unsurprisingly, poor farmers were hardest hit, but the short term impact on forests was possibly less than some feared. The main threat to the forests was from better-off farmers, immigrants and urban entrepreneurs who are more likely to convert forests to grow the most profitable cash crops. The researchers also pointed out that observers may be underestimating the impacts of the political vacuum on forests since the lack of law enforcement was making illegal logging and encroachment on protected areas more likely.

This prediction was to prove all too accurate as the negative impacts of regional autonomy combined with the emergence of a new level of forest entrepreneur acting in collusion with officials in local governments and the security forces to speed up the rates of destruction.

IMF Letters of Intent - conditions on forestry since 1997

Altogether there have been 17 agreements contained in Letters of Intent or similar Memoranda between the IMF and the Indonesian government between October 1997 and January 2002.

Date	Conditions
Oct 1997	Review the administration and allocation of forestry concessions, with a view to significantly raising stumpage fees in 1998/99, and use the proceeds of the Reforestation Fund solely for sustainable management of forestry resources.
Jan 1998	Lift restrictions on foreign investment in oil palm plantations (implemented early 1998) lift export ban on oil palm products (done); reduce forest conversion targets to sustainable levels (later replaced with conversion moratorium), implement performance bonds for forest concessions (not yet), reduce export taxes on logs and rattan to 10% by end of December 2000 (was eventually implemented but the log export ban of Oct 2001 acted against this); introduce measures to reform the logging industry including: phase in new resource rent taxes on timber resources (done) increase stumpage fees, implement auctions for new concessions and lengthen concession periods; allow concession transferability and de-link concession ownership from processing for new concessions. (All eventually implemented - but no auctions have taken place); eliminate APKINDO's monopoly over plywood exports (implemented March 98) Incorporate Reforestation Fund into national budget (implemented early 1998)
July 1998	Complete audit of Reforestation Fund by end December 1998. (The deadline was extended many times and the audit was not finally completed until the end of 1999.)
Mar 1999	This LoI noted that the moratorium on the award of new permits for forest land conversions was being observed "while new land allocation procedures and conversion targets are being developed". (In fact, the forest conversion moratorium, on applications for permits submitted after May 2000,was not announced until August 2000 and had many loopholes.)
Jul 1999	(Note: from here on the objectives generally become more vague.) Implement "broad-based consultation process, seeking assistance from the World Bank, the ADB, and other stakeholders prior to implementing major forest policy reform".
May 2000	Starting June 2000, publication of quarterly reports on the implementation of corrective actions following Reforestation Fund audit is required.
Jan 2000	Greater stakeholder consultation and participation in decisions affecting natural resources; expand and improve environmental monitoring; move towards price structuring of natural resources that reflects true value; special attention to forest management to ensure sustainable production of goods and services; review of forestry sector taxation in Jan 2000; continue moratorium on new forest conversion licences until "transparent, rules-based procedures are developed to minimize further conversion of the remaining natural forest"; transparent criteria and budgeting procedures to upgrade Reforestation Fund to be developed in consultation with the World Bank, to be implemented beginning April 1, 2000.
Aug 2001	BPKP (Development Finance Comptroller) audit of Reforestation Fund to be completed by end of 2001.

Reforms in the Habibie period

As the first forestry minister of the post-Suharto period, Muslimin made a stream of announcements - some contradictory - about forestry reform. The new minister was caught between the demands of reformers, the conditionalities of international financial institutions and the still-powerful forestry lobby.

In 1998 Muslimin established a Reform Committee which was charged with constructing a new framework of forest management; restructuring the Department of Forestry and Estate Crops; and drawing up a new forestry law to replace the 1967 Basic Forestry Act.

Forestry reforms were very necessary. The Indonesian forestry industry had to be more economically efficient and more environmentally responsible. Large companies which managed vast concession areas were seen as corrupt, financially inefficient and responsible for bad forest management practices. They were now blamed as the main cause of forest degradation, soil erosion and forest fires.

Progress was slow due partly to the fundamental difference in attitudes to forestry reforms between the international finance institutions and Jakarta-based politicians. In the IMF's eyes, the right to exploit natural resources should be allocated purely on economic grounds. In Indonesia, the allocation of forest concessions has always been a highly political issue. The Habibie government was still reluctant to break the link between political and economic interests. In the 'reform era', the allocation of logging rights was to fulfil a different political agenda: promoting the ideal of co-operatives and the business interests of the middle classes.

Muslimin issued new rules for logging concessionaires. Logging licences due to expire in 1999/2000, he announced, would not be renewed or extended. All new logging concessions must be linked with co-operatives (see box). Logging companies would have to give 20% of their shares to local co-operatives; 10% to state-timber companies and 10% to companies owned by the provincial administration in order to get an extension of their concession licences.[13]

The size of concessions would be limited to 100,000ha with a maximum total of 400,000ha anywhere in Indonesia for each concessionaire - be it company, co-operative or individual (Decree 6/1999). Companies which exceeded the concession limits would have to pay a higher rate of taxes. All timber logged would also be subject to a new social tax to be returned to the local community[14].

Some of the 'excess' land from companies with greater concession areas than allowed would be handed over to small companies or co-operatives, higher education institutions and Muslim schools to manage as ''Land Grant Colleges' - an initiative that continued to violate rights[15].

The humiliation of BobHasan, the most influential timber tycoon of the Suharto era who had been the government's trade and industry minister just months before, suited the public mood. Hasan was expelled from the country's highest legislative body, the MPR, by Habibie in June 1998. The following month he was questioned for three hours by the Attorney General over the handling of APKINDO funds[16]. This was the start of a lengthy process which eventually saw him jailed for corruption in one of Indonesia's most notorious prisons, Nusakambang.

The forestry minister was forced to introduce new measures to satisfy the IMF and World Bank, including auctioning logging concessions; performance bonds; allowing the sale of concessions and relinquishing control of the Reforestation Fund to the Treasury.

Many indigenous communities had hoped that, when the 20-year timber concessions granted in the 1970s and 80s ran out, the forests would revert to them. But this was not to be. As part of the IMF's 1997 economic 'rescue package', concession rights were to be auctioned instead. Most of the logging rights on offer were for concessions which had expired or had their licenses withdrawn due to gross mismanagement. Many were owned by timber tycoons close to Suharto and his children, including Prayogo Pangestu's Barito Pacific Group and Bob Hasan's Kalimanis Group.

The wilder dreams of some international conservation NGOs or foreign timber companies that they might - for quite different purposes - be able to get their hands on Indonesian logging concessions were dashed in the announcement of the conditions for the first auctions. Only Indonesian state-owned companies, private companies with local offices and co-operatives would be allowed to take part[17].

The new system was open to corruption since parties eligible to take part in the auction would be pre-selected. The new regulations were also unclear about the methods of valuing concessions and how they should be managed, although Forestry Department officials said they would use financial, social and ecological criteria. New concession holders would be required to pay a Performance Bond - refundable only if they stuck to forestry regulations[18]. While this may look like a good idea, the insistence on performance bonds presented problems. Firstly, performance bonds would require a major change in culture. Indonesian timber companies have been 'mining' the forests for years, with little or no control from the Forestry Department over what they did on their concessions. Secondly, performance bonds would not ensure that timber companies did not continue to over-exploit the forests. Indonesia's notoriously weak bankruptcy laws and regulations on capital repatriation make it all too possible for companies and their profits to 'disappear' leaving behind devastated tracts of forest. Thirdly, performance bonds favoured large timber companies rather than the co-operatives and small businesses which the Indonesian government wanted to promote, since only they had the funds to guarantee the bonds.

While the IMF and World Bank were keen to press forward with the auction of all forest concessions, the Indonesian government dragged its feet. Plans for auctions were first announced in September 1998 but, month after month, the date was pushed forward and the auctions never took place.

Alongside an attack on the timber barons, there were promises of improvements for forest-dependent communities in the immediate post-Suharto period. These came as a result of demands from NGOs, indigenous groups and academics as well as reform-minded officials within the Forestry Department. There was also pressure from Indonesia's creditors for consultations with stakeholders including forest peoples.

New regulations about 'community forests' would ostensibly allow local people to use the forests where they live in traditional ways (SK677/1998). The catch was that - in practice - communities had first to form a co-operative then, with a recommendation from the local authorities, get the approval of the Minister for Forestry and Plantations. If their application was successful, the co-operative would be granted a 30-year concession to manage their own forest in accordance with a community forest management plan drawn up with guidance from forestry staff aided by NGOs or university experts. They would be responsible for the demarcation of the area; its rehabilitation; its conservation; and forestry levies[19]. In addition, the government hoped to establish 'mini industrial forests' of 5-10ha through the participation of communities living near forests[20].

This community forestry initiative has been a topic of hot debate within and between government, academic and NGO circles. At best, it offered some forest communities a legal option to use their resources. At worst, it has become yet another local government tool to exercise patronage, generate revenues and achieve reforestation of damaged forests on the cheap.

Once Habibie's interim government took over, the race was on to get new forestry legislation in place. This was only partly to satisfy the community groups, NGOs and academics who had been lobbying for change; forestry policy reform was included in the conditionalities of the IMF and World Bank loans.

The opportunity presented a dilemma for reformists in the government. The 1967 Basic Forestry Act had been the source of conflict between the government and forest communities for over three decades. It had been identified as one of the underlying causes of deforestation in Indonesia at meetings of the CSD's International Panel on Forestry[21]. All subsequent forestry legal instruments depended on it. Fundamental change could only come through a new Forestry Act.

On the other hand, a new Forestry Act would be politically contentious. There were many different vested interests at stake and the process of negotiation was time consuming. The window of opportunity for policy reform might be very limited and a new Forestry Act had already been several years in the making by the time Suharto stepped down.

The solution was to 'put the cart before the horse'. Instead of following the usual legal process of laying down the main law first then introducing supplementary legislation, the new government continued to reform the subsidiary legislation around which a new Forestry Act could be constructed. This had the advantage of the appearance of reform without tackling the fundamental issue of land rights. A sense of foreboding grew amongst forest campaigners that, for all the talk of reform, the new Forestry Act would be shaped around these conservative regulations instead of providing a framework for fundamental change. And so it transpired.

It gradually became evident that the interim government and civil society groups had very different views of forest management. Government officials apparently welcomed proposals from NGOs and community forestry experts, but had no intention of radically changing the framework of Indonesia's forestry system. Basic principles agreed at one meeting would undergo fundamental changes or disappear when the next policy draft prepared by Forestry Department staff appeared. Revised drafts for the Forestry Act were produced with such rapidity that the versions presented to outside experts for discussion and modification had already been superseded by more recent ones agreed within the Department.

Habibie did not succeed in rushing the new Forestry Act through parliament before the June 1999 elections. Ironically, given the World Bank's avowed commitment to supporting democracy and civil society, it was the Bank's conditionalities which indirectly forced the Act to be passed two months later - before the new president and his democratically elected government were in place and in the face of fierce opposition from forest reformers. The Bank had withheld disbursement of a US$400 million tranche of funding in late 1998 and the government was desperate to secure new IMF loans as the economic crisis deepened.

The new Forestry Act only recognises two categories of forest tenure: state forest and private property. Adat forest is specifically defined as "state forest where communities with customary laws are" (41/1999 Clause 1, sub-clause 6). This classification continues to deprive forest peoples of their rights and their livelihoods. (For more information about the Forestry Act see DTE 43:2-4.)

At the time of writing, many of the all-important operating regulations which spell out how the principles of the 1999 Forestry Act will be applied in practice have yet to be finalised. These include regulations on customary forests (hutan adat). Progress has been slow because NGO, forestry academics and donor agencies are using this opportunity to press for greater recognition of indigenous rights, while the Forestry Department has been doing its utmost to maintain the status quo.

The 1999 Forestry Law prohibits open-pit mining in Protection Forests. This had a major impact on the mining industry, since many exploration concessions handed out by Jakarta prior to 1999 included this category of forest. The new measure put around 150 mining projects covering 11.4 million ha of forest on the wrong side of the law. Ever since, mining companies and local governments seeking to raise income from the mining projects have lobbied to change the law to enable them to operate in the forests. NGOs, led by the mining advocacy network, JATAM, have mounted a campaign to prevent them[22].

One of the suspended projects is a joint venture between Australia's BHP-Billiton (75% share) and state-owned mining company, PT Aneka Tambang (25%)to develop a nickel mine on Gag Island, off West Papua. PT Gag Nikel's contract of work was signed with the Indonesian government in February 1998. The company was forced to suspend activities on the island when the Forestry Law was passed, following an announcement by the Forestry Department that the contract area was protected. Prior to suspending the project, Gag Nikel had spent US$50 million on exploration activities and had found 240 million tonnes of high-grade nickel and cobalt resources.

Early this year, after Canada's Falconbridge pulled out a partnership agreed in 2000, BHP hinted it might pull out if the forest status question could not be cleared up. West Papua's governor J. Solossa is pressing central government to allow the mining to proceed and says the classification of forest on the island as protected is a mistake. He has the Mines and Energy Minister Purnomo Yusgiantoro on his side. In March this year his ministry announced it had reached agreement with the forestry minister on changing the forest status to Production Forest and allowing the project to go ahead[23]. At the time of writing, there had been no separate confirmation from Forestry Minister Prakosa.

Gag island (only 56 square kilometres) is one of the hundreds of islets of the Raja Empat archipelago off the Bird's Head region of West Papua. The biological diversity in Gag's waters is among the richest in the world. This marine environment is under threat from plans to dump the proposed mine's tailings in the sea[24].

There has been almost no public discussion about the potential negative impacts of the proposed mine on the island's forests or Gag's indigenous population.

Other mining projects affected by the law are PT Newcrest in Halmahera, North Maluku province, and PT Citra Palu Mineral in Central Sulawesi (in which Rio Tinto has a majority interest).

The CGI focus on forests

Indonesia's multilateral and bilateral creditor grouping, the Consultative Group on Indonesia (CGI), meets annually to set levels of financial assistance. It is chaired by the World Bank and includes the IMF, the Asian Development Bank, the European Commission and UNagencies as well as bilateral lenders like the USA, Britain and Japan.

During the Suharto era, this group largely ignored human rights and the environment in its discussions but, post-Suharto, it started to broaden its demands to include progress on 'governance' and forest management. Whereas before it was seen as political meddling, 'good governance' is now at the top of the donor agendas. This change of perspective has had a knock-on effect on the forest policy debate. The emphasis on 'law enforcement, anti-corruption measures and stakeholder participation reflects this change.

In July 1999's CGI meeting, forest management was considered for the first time. It was at this meeting that the World Bank presented its first evidence that deforestation rates were probably double previous estimates. The following January, the CGI held its first meeting specifically on forestry issues and came up with eight action points for the Indonesian government to implement. Illegal logging has been the main focus of concern within the international lending community since then. The eight points were:

a crack-down on illegal logging;
speeding up an assessment of forests as a basis for a National Forest Program (NFP);
a moratorium on all conversion of natural forests until agreement on NFP is reached;
down-sizing the wood-based industry to balance timber supply and demand and increase competitiveness;
closure of heavily-indebted companies under the control of the Indonesian Bank Restructuring Agency (IBRA);
connect reforestation with existing forest industries and those under construction;
a recalculation of the 'real value' of timber;
the use of decentralisation processes as a tool to enhance sustainable forest management.

In October that year, the only real progress to report was the setting up of an Inter-Departmental Committee on Forests (IDCF) to implement the action points. This included key NGO members as well as ministry staff and, significantly, was chaired by Co-ordinating Minister for Economic Affairs Rizal Ramli. The Committee promised to come up with an Action Plan at the October meeting. This plan, made public in December 2000, expanded the 8 action points to 12 and included points on land rights and a review of the HPH system. Working groups were set up to look at areas of concern including tenure for adat communities. However, Ramli argued that only four commitments should be prioritised: illegal logging, forest fires, restructuring indebted wood based industries and forest inventory and mapping. Once again, the fundamental issue of land rights was pushed aside. IDCF member, WALHI, walked out in protest at the lack of progress and the dominance of the Forestry Department in the Committee.

When the CGI met to review progress on the action points in April 2001, the Wahid government - paralysed by political wrangling in Jakarta - had just managed to rush through a couple of measures, most notably a ban on sales of the endangered ramin wood, and a presidential decision instructing a clamp-down on illegal logging. CGImembers said they wanted "tangible results" soon. Before the meeting Forestry Minister Marzuki Usman had tried to pre-empt criticism by calling the eight action points agreed by his predecessor unrealistic.

There was no separate meeting on forests at November 2001's annual meeting in Jakarta, but the lack of progress in implementing reforms was criticised. Forestry Minister Prakosa presented a draft of the National Forestry Statement - the first step towards the long-awaited National Forestry Programme, required as part of World Bank lending conditionality, but this was not the result that creditors had wanted. It was agreed that the IDCF should be revitalised in a further attempt to get some action.

NGO reactions

NGOs in Indonesia and overseas have been highly critical of the CGI agencies for failing to take a share of the responsibility for Indonesia's economic crisis. They have consistently called for debt reduction and cancellation of corrupt debt amassed during the Suharto era.

At the November 2001 meeting in Jakarta, Indonesian NGOs in the Coalition for Forests and Debt called on the CGI to stop financing deforestation in Indonesia. They also raised concerns that the Indonesian government had reduced the Forestry Action Plan from twelve to five points, without any consultation with stakeholders. The NGOs' demands presented to the CGI included a call for a moratorium on large-scale commercial logging in natural forests, and a stop to the involvement of the Indonesian security forces in forest exploitation.

See DTE 52:11. The full NGO statements are at www.gn.apc.org/dte/CCGI4.htm.

See also www.infid.be/ and www.gn.apc.org/dte/Af19.htm for more on NGO position on the role of the CGI.

Reforms during the Wahid period

Nur Mahmudi Ismail was appointed first forestry minister in the Wahid presidency. Forest reforms continued to be driven by economic imperatives and the new president's focus on prioritising the interests of foreign investors over local communities' needs.

Like his predecessor, Nur Mahmudi made a string of policy decisions which left most observers amazed and confused. These were, in part, a response to IMF LoI conditions and the eight point action plan agreed with the CGI in February 2000 (see CGI box above).

In August 2000, he announced that no more logging concessions (HPHs) would be issued by central government after the end of 2000 and existing HPHs would be gradually phased out[25]. In May that year the minister declared that all forestry operations outside Java would be put under the control of new state companies. These companies would share profits with the provincial authorities (30%), districts (30%) and local people (10%). (How much profit there might be was debatable since the priority was to restore forests for 'sustainable logging'.)

Forests on the 'outer islands' damaged by over-logging would be restored by 'enrichment' - selective replanting with commercially valuable species. Initially, 26 million ha of forest would be in the hands of these new companies. Restoring this area would require Rp130 trillion (approx US$13 billion), which Nur Mahmudi wanted to take from the Reforestation Fund. Eventually, the forests would be managed by small and medium-sized community enterprises[26].

The minister also submitted a proposal for a US$500 million loan from the Miyazawa Plan - Japan's economic rescue plan for Asia - for the reforestation and the development of industrial timber estates on 1 million ha by Inhutani I, II and III[27]. He hoped to raise funds for replanting forests from taxes from the water sector, a carbon tax, income from forest parks and debt for nature swaps[28].

Governors, local governments, district heads, parliament, private sector associations, the World Bank and forestry academics denounced the plans for new state forestry companies as out of step with regional autonomy legislation and inappropriate for tackling the crisis in Indonesia's forests .

These plans were eclipsed in August 2000 by a new initiative: a national forestry agency (Badan Pengelola Kehutanan BPK) - a state-owned commercial enterprise to oversee the management of 'state forest'. The concept, which was widely regarded as nationalisation by the back door, came in for more criticism - especially from the regions who saw it as Jakarta's means to by-pass local autonomy and maintain control over its forest empire. Nur Mahmudi's response to the frosty reception to his plans was to send a team to the regions to whip up support.

How the minister planned to address the problems of continued clear felling of forests and forest fires while all this replanting went ahead was one of many unanswered questions. The plans were also thrown into doubt by regional autonomy legislation, due to be implemented in January 2001, and by local governments' expectations that they would have much more say in forest management.

In late 2000 Nur Mahmudi appalled NGOs by issuing a fresh batch of logging concessions to private companies, just before the deadline, reneging on earlier promises to phase out concessions. These included 21 new HPH concessions[29]. This move was decried as being against the spirit of decentralisation, due to start only weeks later.

Regional autonomy and forests

Indonesia's regional autonomy laws (22 & 25/1999) were passed in May 1999 and implemented from January 2001. They have been a major force for change in forest management. The programme has had seriously negative impacts and is believed to have sped up deforestation in some areas. It has also had some positive effects in areas where strong civil society action has made regional governments more responsive to local peoples' interests.

The regional autonomy policy arose out of the perceived need, immediately following the downfall of Suharto, to head off national disintegration and offer resource rich regions more control over and financial gain from their natural resources. West Papua and Aceh, which had the strongest independence movements, were offered 'special autonomy' packages, passed into law in late 2001ⁱ.

Forests, as one of Indonesia's most valuable natural resources, have been the object of an undignified power struggle between central and regional governments. While local governments have asserted their new authority with a vengeance, the central government has attempted to retain a high degree of control.

Since Megawati replaced Wahid as president, the whole decentralisation programme has been under revision, with conservative elements - including the military and Megawati herself - known to be against a system they regard as too near federalism.

There is also pressure from Indonesia's creditors who recognise the political necessity of decentralisation, but still regard it as a potential threat to Indonesia's ability to service its debts.

Points of contention

The Department of Forestry and Plantations has been extremely resistant to any erosion of its power base through regional autonomy. It was not until November 2000, just weeks before the deadline, that Mahmudi finally announced some measures which set out how control over forests would be transferred to the regions.

The struggle for power between centre and regions has been focussed on the following:

Logging revenues: under the 1999 law on fiscal decentralisation, revenues from forestry should be divided 80% for the regions and 15% for central government. In 2000 Forestry Minister Nur Mahmudi proposed a 70% - 30% split which angered the regional heads.

Reforestation Fund revenues: central government proposals initially split Reforestation Fund revenues at 40% for the regions and 60% for central government. This was later changed to 90:10 in favour of the regions.

Decision-making over concessions: a November 2000 decree (SK05.1/2000) permitted local governments to issue logging permits. The minister attempted to reverse the decision the following year, as some district heads (Bupatis) were issuing hundreds of logging licences in their areas, but was widely ignored. In February this year the Bupatis pressed Megawati to hand over full control of the forests.

Then, later that month the current forestry minister, Muhammad Prakosa, moved to recentralise forest management by cancelling Mahmudi's 2000 decree, thereby banning provincial governors and Bupatis from issuing any further logging licencesⁱⁱ. The minister argued in an April 2002 interview that decentralisation would be selective and gradualⁱⁱⁱ. It is not clear what, if any, authority the Bupatis have left to make decisions over the forests The situation is further confused by the fact that the implementing regulations for the 1999 forestry law - which outlined the division of administrative authority - have not yet been finalised. It remains to be seen whether the Bupatis will pay any attention to Prakosa's ban.

Hierarchy of authority: Bupatis feel they can ignore directives from central government because there is no hierarchy of authority between centre, provincial and district levels. They argue that local regulations (Perda) carry the same weight as central government decrees so they can follow edicts which contradict those coming from Jakarta.

Negative impacts

One of the main drawbacks of regional autonomy is its tendency to strengthen the position of powerful local political and business elites. Entrepreneurs, government officials and members of the security forces are colluding to extract as much profit from the forests as they can, in as short a time as possible, through local timber concession licensing powers.

In Central Kalimantan, for example, investigations by the Indonesian NGO Telapak assisted by the UK-based EIA, have documented rampant illegal logging within Tanjung Puting National Park. This is known to be controlled by Abdul Rasyid, a member of Indonesia's highest legislative body the MPR. His company, Tanjung Lingga has been identified as the transit point for all stolen timber in Central Kalimantan and most recently, linked to illegal exports of timber on to China. Although Rasyid has been investigated by the Attorney General's office, no arrest has ever resulted. For more details, see EIA/Telapak reports on illegal logging in Indonesia at www.eia-international.org/. In some areas, the state forestry companies (Perhutani and Inhutani) have been accused of colluding with local officials and timber entrepreneurs to fell illegally. Civil society groups have pressed local governments to take control away from these corruption-riddled companies.

Positive effects

The struggles for more local democracy and financial control of forestry in the regions are only just beginning. Civil society organisations, local officials and Jakarta's politicians and bureaucrats are starting to wrestle with the complexities and contradictions within the regional autonomy legislation, pronouncements from the forestry minister and between the two. In East and West Kalimantan the NGOs and indigenous peoples organisations were the first to use regional autonomy to lobby local governments to implement more equitable forest management^iv.

Recent district level legislation passed in Wonosobo, Central Java, is providing for community management of forests formerly controlled by state company Perhutani (see Part III).

i. See DTE 51
ii. Bisnis Indonesia 1/Mar/02
iii. DPA 9/Apr/02
iv. See DTE 46
For more information on regional autonomy see DTE 46 plus articles in DTE 48 and 51.

CIFOR's studies on decentralisation and forests are at http://www.cifor.cgiar.org/highlights/Decentralisation.htm

HPH Kecil - locally issued logging permits

A new threat to Indonesia's forests and forest communities is the so-called 'small logging concessions' (HPH kecil) - issued by local authorities. The term properly applies to the '100ha' concessions (HPHH), created by Ministerial Decree (KepMenHutBun 310/1999) in order to reduce illegal logging and resource conflictsⁱ. The idea was to increase local incomes by giving communities a stake in forest exploitation. Forest villages could form a co-operative or a company and then log in Conversion Forest areas for a year. The district administrator, not Jakarta, grants these permits.

In some provinces hundreds of these small operators have been allocated '100ha' concessions and literally thousands of applicants are queuing up. East and West Kalimantan are the best documented cases. In Kutai Barat district, Bupati Rama Asia had issued over 600 HPH kecil by mid 2001ⁱⁱ. The Bupatis of Bulongan and Kutai Tengah have also issued hundredsⁱⁱⁱ , but East Kalimantan provincial forestry authorities have no overall idea of how many or where these are^iv. The West Kalimantan Forestry service has complained that too many '100ha' concessions have been issued in districts like Sintang^v.

Evidence is mounting that the effect of huge numbers of small-scale loggers is as damaging as the old-style large HPHs. There are no checks on exactly where logging is taking place so the area cleared may 'accidentally' exceed 100ha. Moreover, these concessions are now being handed out for some areas of Production Forest where plenty of commercially valuable timber remains. In at least one district, contractors for Malaysian companies are taking over these annual permits, moving from location to location as they expire^vi .

There are further problems. Far from reducing conflict, '100ha' concessions are generating disputes within and between villages and with companies. 250 cases of conflict in 15 sub-districts of Kutai Barat have been attributed to disputes with companies where small concessions overlap with existing HPHs; with neighbouring families or villages over boundaries between 100ha concessions; and over who gave permission for the forest to be logged^vii.

Confusingly, the term HPH kecil is often used for permits for much larger concessions. A later ministerial decree (SK 5.1/2000) allowed districts to issue concessions up to 50,000ha and provinces up to 100,000ha to local companies^viii. These logging permits were originally intended for areas of Production Forest where licences for concessions had expired or been withdrawn by Jakarta. Since regional autonomy, several local authorities have seized the opportunity to pass regulations or issue decrees permitting them to grant their own forest concessions. These are known locally by a bewildering array of acronyms such as IPH (in Batang Hari district); IUPHHK (Kutai Barat) and IPKHPA (Merangin).

These locally issued forest concessions share many negative features, despite their different origins and extents:

All the permits can only be allocated to legally registered bodies: in practice, co-operatives or companies. So communities cannot apply through adat institutions;
The companies and co-operatives are frequently controlled by urban entrepreneurs, government officials and local assembly members rather than forest communities;
There is widespread corruption. Permits are issued by Bupatis to reward their supporters and may be sold on to other companies;
Forest planning at provincial and national levels is virtually impossible;
Deforestation through illegal logging is likely to increase, due to lax controls.

Prakosa has attempted to withdraw local authorities' rights to issue forest concessions. But regional governors and administrators claim that, since autonomy, local decisions and regulations carry more weight than ministerial decrees and show every sign of continuing 'business as usual'.

i. Pontianak Pos 29/May/01
ii. Kompas 26/Sept/01
iii. Suara Pembaruan 2/Oct/00
iv. Jawa Pos 10/Jan/01
v. Pontianak Pos 29/May/01
vi. GTZ staff pers com 11/Dec/01
vii. SHK Kaltim letter to authorities 16/Jun/01
viii. Email via FKKM 19/Nov/01

In the second half of Nur Mahmudi's time as minister, the Forestry Department was more concerned with its internal organisation. For four months following a cabinet reshuffle in August 2000, the Department of Forestry and Plantations was amalgamated with the Department of Agriculture and Nur Mahmudi was demoted to junior minister. The 'super ministry' proved short lived: by November 2000 the institutional arrangement had reverted to its previous form. The reasons probably had more to do with President Wahid's need for political support from the Justice Party, formerly headed by Nur Mahmudi, than considerations of forests or forest peoples.

A drive to wipe out corruption had dominated the Department's agenda since May 1999, but a complete turn-over of all echelons of forestry officials in Jakarta failed to eliminate the deep-rooted culture of corruption. Suripto, (appointed December 1999) the forestry minister's second-in-command, tried to tackle illegal logging and timber smuggling but since warnings of raids were spread in advance most of these were little more than publicity stunts. At the same time, former high ranking officials, including ex-minister Harahap, were revealing their own malpractice as they were called as witnesses in the trial of Mohammad 'Bob' Hasan, accused of fraudulent use of Reforestation Funds through his aerial mapping company PT Mapindo (see Part I).

In March 2001, Nur Mahmudi was sacked, officially for his "lack of clear vision" on forestry, although the minister claimed it was because he had refused to bow to pressure to sack Suripto.

Suripto had prepared the reports that put former forestry king 'Bob' Hasan in jail. He then pressed for court action against Prayogo Pangestu, forest tycoon and close business associate of Suharto's daughter 'Tutut', for embezzlement of around US$35 million from the Reforestation Fund[30]. The main case related to PT Musi Hutan Persada, the feeder plantation for the controversial PT TEL pulp plant in South Sumatra, but there are many more[31]. Suripto had also submitted documents to the Attorney General's office six months before on the involvement of members of the Suharto family and their charmed circle in forestry corruption cases, including Hutomo Mandala Putra, Bambang Trihatmodjo, Anthony Salim, Probosutedjo, Ibrahim Risjad, Sudwikatmono and Hasjim Djojohadikusumo[32]. These accusations impinged on the business interests of New Order elements still within the government and Wahid himself was rumoured to be close to Prayogo. Suripto was alleged to be plotting Wahid's downfall and was 'retired' less than 2 weeks after Nur Mahmudi's dismissal[33]. Since then he has sued for unfair dismissal[34] and tried to clear his name.

Debt and the forestry industry

Since the economic collapse, Indonesia's powerful and politically well-connected forestry industry bosses have been fighting hard to resist reforms demanded by the international lending community and by civil society, which harm their interests.

An intimate connection had developed between the timber conglomerates and the banking sector under the Suharto regime. During the years when the economy was awash with oil and timber revenues, any company with connections to the Suharto family had no difficulty obtaining low cost loans from Indonesian state-owned banks - regardless of official credit limits. These were used to raise more finance, including from overseas. When the government liberalised the commercial banking sector in the late 1980s, some forestry tycoons bought substantial shareholdings in commercial banks (see table). Their conglomerates could then borrow from their own banks to fund pulp and paper mills and petrochemical plants.

In short, the forestry tycoons were heavily involved in illegal practices in financial activities as well as in their logging concessions. Both aspects of malpractice were ignored due to corruption and lack of monitoring. This meant that the export credit agencies, investment banks, stock exchanges, brokerage houses and pension funds which bought into these conglomerates were (and still are) effectively financing illegal activities.

It became apparent how rotten the system was when the Asian financial crisis triggered a collapse in Indonesia's banking sector in mid-1997. Dozens of state-owned and private banks went bankrupt and the business empires set up by forestry tycoons also faced financial ruin. The government closed down many smaller banks and took over others, but the magnitude of the problem was far greater than anyone had foreseen. Indonesia's foreign and national debt was eventually estimated at US$200 billion.

To avoid total financial meltdown, a bank restructuring agency (IBRA) was set up with IMF and World Bank funding. IBRA is now responsible for recovering all the loans of closed banks, and the non-performing loans of state banks and banks taken over by the government. It has also guaranteed some companies' billion dollar foreign debts to prevent the collapse of other banks - including the Indonesian central bank.

The forest-based industry -particularly the pulp and paper sector - is one of its major debtors. The economic crisis forced wood processing companies to sharply reduce their activities due to collapsing markets in the rest of Asia, particularly South Korea and Japan - major importers of Indonesian plywood and pulp. Hasan's group was identified as IBRA's third-largest debtor, after the Barito group, owned by timber tycoon Prayogo Pangestu, and the group of companies owned by Suharto's son Hutomo 'Tommy' Mandala Putraⁱ.

Hasan's group of companies owes in excess of US$500 million to IBRA. His East Kalimantan pulp mill, PT Kiani Kertas, owes IBRA US$370 million, the ninth largest of more than 4,000 corporate debtorsⁱⁱ. The mill is still allowed to operate, even though it is technically insolvent and regardless of the fact that overcapacity in the pulp and paper industry is a major factor driving deforestation and illegal logging in Indonesia.

Corrupt connections

Expectations that efforts to reform the country's bankrupt banking sector would fully expose the corruption of the Suharto family and their cronies have slowly faded. IBRA has found it hard to reveal the relationships between companies and the true extent of their debts. Indonesia's conglomerates comprise a myriad of holding companies, subsidiaries and affiliates whose structures and finances are enmeshed in complex ways. The conglomerates are making the whole investigation process as slow and difficult as they can, in the expectation that IBRA will eventually write off their debts rather than force them into liquidation.

IBRA is unwilling to close down companies: it sees that as the government's role. IBRA has not helped itself by keeping most negotiations private, giving rise to rumours that payoffs and patronage are still rife. Legal action against certain companies has been mysteriously delayed. It is possible that political support has been the determining factor in whether companies and individuals are prosecuted, especially during the precarious later days of Wahid's presidency. Four examples illustrate how the forest-related conglomerates have striven to keep their assets out of the hands of government and foreign creditors.

Prayogo Pangestu, the Indonesian business tycoon, is the major shareholder of the controversial South Sumatra pulp plant, PT Tanjung Enim Lestari (PT TEL). Prayogo misled the Indonesian government, IBRA and international creditors over several of his bankrupt businesses which include Bank Andromeda and Indonesia's largest petrochemical company PT Chandra Asri. In late 2000, he was ordered to hand over shares in PT TEL and his logging conglomerate PT Barito Pacific Timber as a guarantee in IBRA's US$738 million rescue package of Chandra Asri. A deal was negotiated for IBRA to take a 31% stake in the petrochemical company with the remainder split between Prayogo (49%) and Japan's Marubeni Corp (20%). Marubeni is the largest overseas creditor of Chandra Asri and is also a major stakeholder in PT TEL. However, the Chandra Asri deal failed when Indonesia's powerful Financial Services Policy Committee discovered that Prayogo had already surrendered PT TEL and its feeder timber company, PT Musi Hutan Persada, to two private creditors in other bailout deals. It was not revealed when or to whom PT TEL and PT MHP had been signed over. Suharto's daughter 'Tutut' (Siti Hardiyanti Rukmana), who was a close business associate of Prayogo, was a nominal shareholder in both companiesⁱⁱⁱ. According to a joint report by researchers from CIFORand the Indonesian NGO, Telapak, the Indonesian government, under the guise of 'restructuring' the loans of the Chandra Asri factory, has now effectively forgiven all but US$100 million of the original US$1.1 billion that the company borrowed from the state banks. The government has also given back control of Chandra Asri to the original owner, Prayogo Pangestu, chairman of the Barito Pacific group^iv.

The Djajanti Group has Rp 3.3 trillion (US$ 330 million) outstanding loans under IBRA and its true debts may be much higher. Yet, at the same time, this Indonesian conglomerate was looking at investing in forestry operations in the Russian Far East. Headed by Burhan Uray, this conglomerate controlled the largest area of forests in Indonesia. Starting from logging operations in Kalimantan, it grew into a business empire in plywood, plantations and fisheries mainly in eastern Indonesia. Like the other timber tycoons, Burhan Uray also diversified his businesses into the finance and property sectors. However, unlike Hasan, Salim and Pangestu, he did not get heavily involved in the banking sector, did not borrow heavily overseas and was not as close to the Suharto family. Instead, Djajanti was connected with a number of lower level military and officials and borrowed heavily from state-owned banks, such as the now defunct Bank Dagang Negara. In contrast to the case of 'Bob' Hasan, there is almost no recent press coverage of Djajanti and its debt problem.

Raja Garuda Mas controlled two pulp factories, Indorayon and Riau Andalan Pulp & Paper (RAPP), through its Singapore-based holding company, APRIL (Asia Pacific Resources International Limited). Both companies were problematic: Indorayon for its dreadful pollution record; RAPP for land rights disputes and illegal logging. RGM listed APRIL on the New York Stock Exchange in 1994 to generate equity capital and facilitate loans. The group borrowed over US$2 billion in offshore financing through APRIL (compared with total assets of US$3 billion in 1998). The plan was to expand RAPP's pulp production capacity to 2 million tonnes per year (despite the over capacity of Indonesia's pulp industry). APRIL spun off Indorayon in order to make itself more attractive. The economic crisis struck just as some of APRIL's longer-term dollar loans were coming due. Nevertheless, creditors agreed to reschedule US$ 800 million of RAPP's debts so the expansion could go ahead, partly in the hope that a larger mill would help to pay off the debts faster^v. Oddly, IBRA did not insist that APRIL sell its assets in a pulp mill in Changsu, China to repay the group's debts. Instead, it allowed APRIL to delay payments on US$1.3 billion in outstanding loans, effectively giving the group a US$165 million capital subsidy. At the same time, APRIL sold off its shares in the Changsu mill and used the proceeds to pay off short-term debts to foreign creditors. In this way, as with other companies, APRIL's private debt has become Indonesia's public debt^vi.

The most spectacular case is the US$13 billion debt of Sinar Mas, Indonesia's third largest conglomerate. Sinar Mas is Indonesia's largest pulp and paper producer through its Singapore-based holding company Asia Pulp and Paper. APP owns PT Indah Kiat, which has mills in Riau and West Java with a capacity of 1.7 million tonnes of pulp per year. Indah Kiat's pulp mill in Perawang, Riau is now supplied from plantations owned by subsidiaries of the Sinar Mas group (although these timber estates were created by clear felling rainforest). Sinar Mas diversified into oil palm as well as chemicals, real estate and financial services and owns factories in Indonesia, India and China. It was also a major shareholder in Bank Internasional Indonesia (BII). APP was floated on the New York Stock exchange in 1994 and issued 30 year bonds. The trouble came when the rupiah collapsed and investors lost confidence in Indonesian companies. The dollar loans had to be paid in rupiah, but BII could not cover all the debts. Foreign creditors clamoured for their money and several groups took out lawsuits in the USA. There were allegations of double pledging of assets and dubious accounting. The consequences to the fragile Indonesian economy of APP reneging on its international debts were so alarming that IBRA is acting as a guarantor for BII credits to Sinar Mas^vii. (For further details see DTE 52:14.)

Resistance to closure

Steps to shut the timber industry down are crucial to reduce an unsustainable level of demand for wood from Indonesia's depleted forests. Forestry Minister Marzuki Usman was known to be keen to proceed with closure. In March 2001, the economics minister, Rizal Ramli, announced that the government had decided to shut down half of the total 128 forestry companies under IBRA control and would use the closures to secure debt cancellation through 'debt for nature' deals with foreign banks.

But the Ministry of Industry and Trade had other views. They argued that closure would significantly reduce foreign exchange revenues from the forestry sector.

Needless to say, the forestry industry was and remains strongly opposed to any moves to check its activities too. It has not come to terms with the need for a new paradigm of forest management in Indonesia. In August 2000, head of the timber manufacturers' association, MPI, Sudrajat claimed that it was unreasonable to shut down wood processing factories "just because companies are inefficient and debt-ridden". He blamed the industry's problems on an international conspiracy led by NGOs and said his industry was supporting government efforts to control illegal logging^viii.

Subsidy for timber tycoons

One way or the other, it is highly likely that millions of ordinary Indonesians public will bear the long-term costs of bailing out these conglomerates - through repayment of the IMF/World Bank loans which fund IBRA and the nationalisation of private debt. Despite the enormous debt load they carried when the financial crisis struck, none of Indonesia's major pulp and paper producers has been forced to halt its operations due to bankruptcy. On the contrary, international creditors are keen for pulp mills to continue operating at maximum production so that their investment can be paid off. Meanwhile, the companies' hidden reserves of capital remain intact.

IBRA is likely to use public funds to write off at least 70% of the pulp and paper industry's debts^ix. In the long run, IBRA may - in effect - subsidise Bob Hasan, Salim and Sinar Mas to the tune of US$4.4bn - $6.5bn of public funds. This provides an incentive for further high-risk and socially/environmentally hazardous investments, and in doing so, lays the foundations for future financial collapse.

Forest peoples, illegal logging

The government's failure to tackle the indebted forestry industries has a direct impact on the lives of forest peoples. By allowing these companies to continue to operate, Jakarta is sanctioning the continued theft of timber from adat lands. It also means that nothing is being done to reduce overcapacity in the processing industries - which far outstrips the sustainable supply from natural forests and the very limited amounts of wood coming from plantations. This is driving the boom in illegal wood supplies from Protection Forests and parks.

Indonesian NGOs and the indigenous peoples organisation, AMAN, are calling for the immediate closure of highly-indebted companies and those with shortages of raw materials. This should be done "through strict due diligence studies against ecological, social and economic standards developed through multi-stakeholder participation."^x

i. Dow Jones Newswires 7/Dec/99
ii. Barr C, 2000
iii. Dow Jones 9/Dec/00; 4/Jan/01; 13/Feb/01
iv. Brown et al, 2002
v. Jakarta Post 30/Sep/99
vi. Adapted from DTE article for Inside Indonesia Jan-Mar 2001
vii. Asia Times 4/Oct/01; Barr, 2000
viii. Media Indonesia 10/Aug/00
ix. Barr, 2002
x. Indonesian NGO/AMAN statement on Indonesian-UK MoU, April 2002

"The forestry department's slogan is not that money is a problem, but how to make money out of problems."

Marzuki Usman was only forestry minister for the last four months of Gus Dur's presidency. His appointment reflected Wahid's increasingly precarious balancing act: allocating important and lucrative posts to competing political factions in order to maintain their support. Mahmudi's dismissal was widely believed to result from the shift of the Justice Party, which he used to lead, from supporting Wahid to calling for his impeachment.

Marzuki's appointment surprised many. His name was not on the heavily leaked list of candidates, which included Indro Cahyono, director of the formerly radical forest NGO SKEPHI. He had made little impression as an investment minister during Habibie's interim regime or as Minister for Tourism, Arts and Culture in the early days of Wahid's government. Marzuki had no background in forestry, although he owned significant interests in timber and oil palm plantations in his native province of Jambi. On the other hand, he was an economist by training and, as the president made clear at Marzuki's swearing in ceremony, the importance of Indonesia's forests to the national economy - rather than to forest communities - was the key issue[35].

Marzuki Usman inherited all the problems his predecessors had faced, such as forest fires, rapid deforestation rates and overcapacity in the wood processing industry. But by this stage the situation in the forestry sector was even worse than when Wahid was elected. The prolonged effects of the economic crisis were biting harder, increasing pressure on the government to increase revenues from natural resources. At the same time, the huge implications of the regional autonomy legislation became evident as local authorities started to flex their muscles and defy Jakarta. Co-ordinating Minister for the Economy, Rizal Ramli, as head of the Inter-Departmental Committee on Forests, was under considerable pressure from international donors for forest policy reform as a condition of further loans and possible debt relief.

Log smuggling had become rampant since the IMF had forced the removal of tariffs on log exports. Measures to control it were now high on the donors' agenda. Illegal exports of at least 10 million m3 of timber were costing the country over US$360 million per year in lost taxes[36]. Thousands of cubic metres of timber a day were being illegally transported across the Kalimantan border to Malaysia[37]. China had become another favoured destination for legal and illegal timber exports since it imposed a logging ban in 1998[38]. Marzuki made a lightning visit to Tanjung Puting National Park (C. Kalimantan), announced tougher measures to stop illegal exports and a complete ban on the rare hardwood ramin just before a crucial CGI meeting in April 200, but otherwise there was little sense of commitment to forestry reform.

The forest fires were a case in point. Marzuki had said stopping the fires was one of his first priorities[39]. By July, as the annual outbreak of forest burning in Sumatra and Kalimantan was causing the usual pollution problems for Indonesia's neighbours, the minister was forced to admit there was no plan to tackle the fires, blaming a lack of human resources and funds[40]. It was left to Environment Minister Sonny Keraf to take legal action against five companies for illegally burning forest the previous year[41].

Reforesting damaged forests[42], reduction of the size of logging concessions[43], protection of National Parks[44] and the closure of 128 heavily indebted forestry related companies were all mentioned in ministerial speeches as targets for forthcoming measures, but Marzuki did not deliver.

The week before Wahid was forced to resign the presidency in late July 2001, he made a rare reference to forest policy calling on people "to have a sense of 'forest belonging' in an effort to conserve them"[45]. Marzuki was on the brink of introducing measures to force logging companies to pay all Reforestation Fund contributions and other levies three years in advance. In addition, loggers would be required to pay a performance bond to guarantee against over-extraction of timber. The industry's body, MPI, lobbied strongly against this on the grounds that they would bankrupt those of its members who were not already bankrupt. The forestry minister had already introduced measures to distribute 90% of reforestation fund payments (equivalent to over US$4 million) direct to the provincial authorities to rehabilitate degraded forests in their areas[46].

Even more controversially, Marzuki planned to devolve completely the authority to issue or extend logging concession permits to regents or district heads[47] (see HPH kecil box). NGOs led by WALHI responded by reiterating their call for a total ban on all logging in Indonesia to prevent further deforestation and allow time to agree on a new paradigm of forest management[48].

The military and police post-Suharto

The separation of the military's political and security roles was one of the main demands of protestors in the last days of the Suharto regime. Habibie's interim government separated the police from the armed forces, and his successor Wahid dealt several blows to military control in the first months of his administration. But the military has strongly resisted efforts to reduce its political and commercial interests and regrouped to help oust Wahid in 2001. Levels of brutality in West Papua and Aceh have been increasing since Megawati became president.

Part of the problem is structural: the military permeates the whole system of governance in Indonesia, right down to the tripartite councils (Muspika - civil, police and military authorities) which operate at village level. Furthermore, Indonesia's soldiers are massively underpaid and so rely on outside commercial interests - like logging - to supplement incomes. This has led to military-run ventures like logging companies PT ITCI and Yamaker in the past, but more recently it has prompted military/police involvement in the explosion of illegal logging and mining which is devastating the forests and destroying sustainable livelihoods in many regions. Given the high levels of corruption between security forces, government officials and local entrepreneurs, there appears to be little chance of success for efforts to stop illegal logging using the police, military and navy. The latest of these was an agreement to control log smuggling, signed with the police and the navy in December 2001ⁱ.

Although no longer under military control, the reputation of the police mobile brigades (Brimob) has not improved. Brimob units are routinely paid to guard timber, mining and plantation operations from actions by local people trying to defend their livelihoods. This is a situation that leads to more human rights abuse and conflict - as was witnessed last year in the Wasior area of West Papua. Here, when a timber company ignored demands for justice from local people, five Brimob officers ended up dead. A massive police and military response caused an estimated 10,000 villagers to flee their homes. Incidents of torture, killings and disappearances have been reported by Papuan human rights group, ELS-HAM.

Another recent case in Ladongi, Southeast Sulawesi, concerned an indigenous community leader who was also a peasant union activist. He was shot by police at close range when several hundred people peacefully occupied a plantation in order to reclaim their customary land rightsⁱⁱ.

These kind of abuses are set to continue, unless the Indonesian government makes a concerted effort to rein in the military and end the climate of impunity which means that it is almost impossible for forest peoples and other victims of abuse to seek justice through the courts.

For more information on military involvement in illegal logging and mining operations see: Indonesia: Natural Resources and Law Enforcement, ICG December 2001 www.crisisweb.org.)

i. Jakarta Post 31/Dec/01
ii. Yayasan Suluh, email, 17/Apr/02

Reforms under Megawati

Megawati Sukarnoputri became Indonesia's fourth president in three years in July 2001, after Wahid was forced to step down. Her new forestry minister, Mohammad Prakosa, gained an MSc and PhD in forestry economics in the USA. He was a junior agriculture minister early in Wahid's presidency and had taught at the prestigious Bogor agricultural university, although his membership of the ruling PDI-P party may have been a more significant factor in his selection.

Prakosa's initial pronouncements provided some reassurance for the forestry industry which had not been able to keep pace with the plethora of new directives and regulations announced previous forestry ministers, but dashed the hopes of forest NGOs, academics and community groups advocating radical reform of forest policies. In the hand-over ceremony from Marzuki Usman, Prakosa announced that he would not introduce new programmes but build on the foundations laid down by his predecessors[49].

Further disappointment for the community forestry lobby came with Megawati's instruction for Prakosa to focus on only five forestry priorities for the next 5-7 years: illegal logging; forest fires; reforestation; decentralisation; and restructuring the forestry industry[50]. At a stroke, the 12 point Action Plan agreed with the CGI had been reduced to five. Furthermore, tenure was not one of these. Donors were not impressed by Prakosa's poor performance at the November 2001 CGI meeting where he showed little sign of having grasped the main issues or of having an overall vision for the future of the forestry sector. NGOs complained that the new forestry minister was not accessible to them and feared that forestry policy would remain the domain of a closed circle within a corrupt, bureaucratic Forestry Department.

Relations between Prakosa and civil society groups were not improved when members of the indigenous peoples' alliance, AMAN, forced him to return to the podium and face an hour of questions and criticism from participants at the third Indonesian Forestry Congress the previous month. That meeting - which is only held every 10 years and has formerly been a mouthpiece for government and the forestry industry - was remarkable in several other ways. Its recommendations, including support for a logging moratorium and the recognition of adat rights, showed how the wind of change had even reached 'the establishment' of the forestry sector[51].

Prakosa supporters argued that the new forestry minister is a dark horse who prefers to listen and learn before speaking out or acting and, more recently, signs of a new direction in forest policy have indeed begun to emerge. His appointment of two respected pro-reform foresters to key positions within the department reassured some critics: Untung Iskandar (Director-General, Forest Production) and Boen Mochtar Purnama (Head of Forest Planning)[52]. Prakosa has surprised many by his strong stance against the Department of Mining and Energy over the issue of mining in Protection Forests. The mining industry has lobbied fiercely for changes in the 1999 Forestry Act to allow open-pit mining concessions within these forests and have the mining minister's support[53].

More commitment to action came in the form of a total ban on log exports from October 2001[54]. The moratorium, initially for 6 months, flouts IMF measures intended to generate foreign exchange through increased exports. The move met with approval from the forestry industry which had complained for months about the shortage of raw materials for the domestic wood processing industry and that log smuggling was flooding international markets with cheap timber[55]. The announcement of a crack-down on illegal logging was also welcomed by international donors.

Prakosa's emphasis so far has been to create a more efficient Indonesian forestry industry[56]. Department officials have made a number of statements about the need for forest rehabilitation, acknowledging the massive scale of destruction and degradation of the forest estate over the last 3 decades[57] All existing HPH permits will be reviewed and logging operations will have to obtain a government-approved certificate of sustainable forest management by 2003[58]. Details of this scheme have not been officially announced, but an 'ecolabelling' system similar to that initially run by LEI is under consideration. Prakosa considers Indonesian plywood to be a sunset industry[59]. He has shifted his initial position that factories will not be closed down[60], to threatening that wood processing industries with difficulty obtaining legal supplies would face automatic closure[61]. Most surprisingly, Prakosa recently stated that the future of Indonesian forestry must be based on small-scale community-based operations, not large-scale commercial logging[62].

An agreement between the Forestry Department, the Indonesian police and the navy to control log smuggling has, at best, been a limited success[63]. Illegal log shipments continue to stream out of West Papua and Kalimantan[64]. The temporary log export ban is due to end soon. In May 2002, Megawati announced that there would be a logging moratorium but this turns out to be no more than proposed restrictions on logging in the most degraded forests.

Prakosa certainly speaks a language which the international donor community understands and approves. But the forestry minister does not appear to understand, let alone give priority to, indigenous communities' demands to address tenurial issues. The crucial question is whether Prakosa's 'more efficient' forestry industry will also be a more just, equitable and sustainable one.

Continued pressure on the forests: overcapacity, illegal logging, oil palm and fires

Indonesia's plywood industry has been forced into decline in the post-Suharto period by the combined effects of reduced log supply, the economic crisis, the illegal logging boom and the resumption of log exports. As a result, many plywood companies are in serious financial difficulties and some have been forced to close. Nevertheless the industry is still consuming large volumes of natural forest timber. The development of timber plantations to supply the plymills, though on the drawing board for years, has been almost non-existent. The basic problem of overcapacity has yet to be addressed. There are still 101 plymills in operation (down from 112 in 1998, just over half of them in East Kalimantan[65].

The plywood tycoons, led by Bob Hasan, have suffered some setbacks. The plywood cartel run by 'Bob' Hasan through the plywood producers' association, APKINDO, was dismantled by IMF demand. Debt and corruption scandals followed, though none of the top players have been forced out of business. Only Hasan has been prosecuted for corruption and none have been held to account for devastating huge swathes of Indonesia's forests and destroying the livelihoods of forest-dwellers.

By the late 1990s Indonesia's plywood industry was already cutting production as the log supply from unsustainably managed natural forest concessions began to run out. Then, from 1997, the Asia-wide economic crash reduced demand in major markets like Japan and South Korea as well as cutting domestic demand. When the IMF insisted that prohibitively high export taxes on logs were phased out starting 1998, the plywood industry lost out again. Millions of cubic metres of logs from both legal and illegal supplies flooded out of the country. A lot of them ended up in China, Malaysia, Singapore and Japan, feeding a boom in the plywood industries of Indonesia's competitors. According to APKINDO, these competitors - especially China and Malaysia - have been able to undercut Indonesian plywood and force down international prices because they use cheap logs, illegally felled and smuggled out of Indonesia. The industry has backed calls for a clamp-down on illegal logging and supported the log export moratorium introduced in October 2001.

In figures the industry's decline is fairly steep: Indonesia's export volumes and earnings fell from 8.5 million m³ in 1997, earning US$3.4 billion, to an estimated 6.6 million m³ in 2001, earning US$1.9 billion. International plywood prices have fallen sharply from $400/m³ in 1997 to US$230 in 2001[66].

At the same time, log exports have rocketed. Official figures put log exports at just under 300,000m3 in 1999 earning US$37.85 million then jumping to almost 450,000m³ in 2000, earning $66.67 million. But the official figures do not reflect the real story since so much of the Indonesia's log production is smuggled out of the country: one estimate puts the amount of wood smuggled to Malaysia alone at 10 million m³ per year[67]. Last October's log export moratorium has yet to make its impact on this huge illegal trade.

"Indonesia's largest pulp producers - the Sinar Mas Group and the Raja Garuda Mas Group - rely heavily on unsustainable sources of fiber, much of which is obtained through the clear-cutting of natural forests."

Despite massive debts, corrupt practices and huge social and environmental problems the Indonesian pulp & paper industry continues to expand (see box for example).

Pulp companies were among those worst hit by the economic crisis. World pulp and paper prices had slumped in 1996 and investors had started becoming concerned about Indonesia's political stability during the last years of the Suharto regime. Many of Indonesia's plants were new and still had to repay start-up loans when the 1997 financial crisis hit Southeast Asia[68].

At first, the sharp depreciation of the Rupiah seemed to act in industry's favour. The major costs (wood and labour) were paid in local currency, while all income from export orders was in US dollars. But parent companies had borrowed heavily to finance pulp and paper manufacture and their debts also increased. Pulp developments funded by high interest offshore loans faced massively increased debt burdens. Many pulp and paper mill projects approved by the government were never built.

According to Ministry of Industry and Trade data, pulp and paper production capacity now stands at 6.28 million tonnes per year, 5.9 million tonnes of which derives from the seven top pulp and paper companies. There are 25 companies operating pulp and paper plants with licences covering over 5.53 million ha to develop pulpwood plantations[69]. Exports of pulp and paper products continued to increase too, fetching US$3 billion in 2000 up from US$2.44bn in 1999, even though companies were only operating at around 50% capacity.

The industry has continued to refuse to address the raw materials supply crisis. As pulp processing capacity has expanded so much faster than feeder plantations, Indonesia's pulp plants face supply problems for many years to come. In 2000, mills run by the country's biggest pulp and paper producers APP and APRIL consumed 15 million m³ of timber from natural forests in Sumatra. These companies are now pressing the government to allow more forest to be cleared in Riau, ostensibly for outgrower schemes where local communities are contracted to supply timber from plantations for the pulp mills[70].

Recent research by the NGO Forest Watch Indonesia shows that pulp and paper companies' total pulpwood capacity is 25 million m³ whereas timber estates can still only supply 3 million m³ per year. FWI says that of the nearly 5 million ha allocated to HTI for pulp, just over a million ha was planted[71].

Only 10% of the estimated 120 million m³ of wood estimated to have been consumed by the pulp industry during 1998-2000 was harvested from HTI plantations[72]. Indonesia's biggest pulp conglomerates, Sinar Mas and Raja Garuda Mas, claim that by 2008 their wood will be sourced from sustainably managed plantations, but the study throws doubt on this, predicting that by then no more than 50% of the required wood will be supplied from plantations. Both these companies are also in severe financial difficulties.

Overcapacity has fuelled the explosion of illegal logging in Indonesia. Weak law enforcement and unprecedented levels of corruption have resulted in a 'free-for-all' in the forests in which local businessmen have teamed up with military, police and government officials to exploit local labour and make a quick profit. UK-funded research suggest that as much as 70% of all wood products exported by Indonesia are produced from illegal sources. Indonesia's Environment Ministry statistics show that that Indonesia is losing 56 million cubic metres of timber per year worth US$8.4 billion due to illegal logging[73].

Since 1999, alarm over the increasing rates of forest destruction has led Indonesia's creditors to prioritise illegal logging as the most pressing task in the forestry sector (see CGI box, above). The focus has prompted Indonesia to take some action against illegal loggers and timber smugglers - most recently the impounding of three Chinese-owned ships. The ships, carrying timber 31,800 m3 of logs valued at US$4.7 million without papers from Central Kalimantan, were held for five months pending prosecution in three highly publicised cases, but were then released after a major diplomatic row[74]. None of the politically powerful businessmen involved have been brought to trial.

Heightened concern from creditor countries has also produced an international commitment to tackling illegal logging - FLEG[75]. The conference on forest law enforcement and governance was supported by international donors: USAID, DFID and the World Bank. The September 2001 meeting resulted in a 13-point ministerial declaration signed by leaders of East Asian nations, including Japan, China, Korea and (eventually) Malaysia. Most recently, a joint Memorandum of Understanding on illegal logging between the British and Indonesian governments, signed in April 2002[76].

While such agreements are welcome in that they address some of the symptoms of the forestry crisis, they do not tackle the underlying need for total reform in forest management.

There are also problems associated with the term 'illegal'. As Indonesian law now stands, any logging by indigenous peoples can be termed illegal, but only because those peoples' rights to own and manage their customary forests have not been legally recognised. Furthermore, many HPHs may technically be illegal since the Forestry Department has never gazetted all the land it claims as 'state forest'. More important still, sustainability is a more meaningful criterion than legal or illegal logging.

There is concern too that a narrowly focussed campaign to tackle illegal logging will divert attention away from the need for a total overhaul of forest policy and management in Indonesia. However, Indonesian and international NGOs involved in pushing for agreements on illegal logging are hoping that the new MoU and any subsequent agreements will open up this debate and help raise awareness of the need to address the more fundamental issues of forest peoples' land and resource rights versus state control.

Oil palm plantation development remains a major cause of conflict over land and resources. While adat rights continue to be sidelined by politics and laws, this situation looks set to continue.

Indonesia's economic crisis caused a boom in the palm oil industry followed by a period of stagnation. An 80% slump in the value of the rupiah in late 1997 created a huge difference between domestic and international prices for crude palm oil and its refined product olein. In a move that was criticised by environmental NGOs, the IMF then gave Indonesian palm oil exports another boost, insisting on the removal of "export quotas and punitive taxes" as a condition of its economic 'rescue package' (see LoI box, above). All formal and informal barriers to investment in palm oil plantation had to be removed within 3 months. The Indonesian government was forced to lift a temporary ban on palm oil exports designed to stabilise prices and dollar-hungry producers exported as much of their output as possible triggering a domestic shortage. Raising export taxes of crude palm oil (CPO) from 40 to 60% did little to slow down exports and flew in the face of the IMF's 20% target for export taxes.

Illegal palm oil exporters also profited. Hundreds of thousands of tonnes of palm oil are thought to have been smuggled from Sumatra across the Malacca Strait[77].

However, conglomerates like the Astra and Salim groups lost some of their political clout after Suharto fell and were soon struggling to pay their banking debts. Many companies were taken under the control of IBRA and forced to sell their assets.

Regional autonomy, introduced in 2001, provided a further stimulus for oil palm expansion with local authorities desperate to increase their revenues from export revenues and taxes on plantation companies. Applications for plantation permits cover a huge area - as high as 32 million ha[78]. In 2001 the governor of Jambi in Sumatra announced that one million ha would be developed in the province by 2005[79].

Investors are now lobbying hard to streamline the system for licensing plantations - a measure which will also speed up deforestation. Under the existing system, potential investors have to get a document from the Forestry Department to prove the change of status from forest to agricultural land use; a land use rights permit from the National Land Agency; planning permission from the local government; and investment approval from the Investment Co-ordinating Board. The whole process can take up to two years unless 'facilitating fees' are paid to the relevant officials. The Investment Co-ordinating Board wants to set up a 'one-step service' to cut down the bureaucracy faced by the palm oil industry.

Low international palm oil prices and massive debts owed by Indonesian plantation companies slowed the initial oil palm boom of the late 1990s. But development is expected to take off again once prices pick up and investors overcome doubts about security and political instability in Indonesia. Production has rocketed from 5.4 million tonnes in 1997 to 8.3 million tonnes in 2001[80]. The target for 2002 is over 9 million tonnes. However, as Indonesia rushes to rival Malaysian palm oil production, there is a real risk of overproduction and a collapse of world prices.

By the year 2000, oil palm plantations already covered an estimated 3 million ha of land in Indonesia[81]. Around 60% were located in Sumatra and Kalimantan, but the islands of Eastern Indonesia (primarily Sulawesi and West Papua) were slated to be the new growth centres targeted by the government[82].

Much of the land allocated to companies has not yet even been developed. 8.7 million ha of land had been allocated for oil palm plantations by 2000, but just over a third - 3 million ha had been planted. In some cases this has been due to the lengthy bureaucratic procedure required to change the status of the land from forest to agricultural land[83]. In others, companies were under-capitalised or hard hit by the economic crisis. But there is little doubt that many investors hold onto plantation permits purely for speculation or to get access to valuable timber on forest lands.

Indonesia and Malaysia now produce over 80% of the world's palm oil, with Indonesia's share standing at 30%[84]. Production in Indonesia is set to double as the government seeks to overtake Malaysia as the top producer and to increase much needed foreign revenues. Global consumption of palm oil increased sharply during the 1990s and demand was expected to increase in the long term.

China, India and Pakistan are the world's largest importers of palm oil. Following those countries, Netherlands, United Kingdom and Germany are Europe's main palm oil importers. Germany is the fourth largest importer of Indonesian palm oil and the largest inside the EU[85].

Indonesia is itself one of the world's largest markets for palm oil, with use at 20% of total global consumption.

"While neighbouring countries have been complaining about the choking haze caused by Indonesia's forest fires and have called on Indonesia to take action to deal with the problem, the Ministry of Forestry said on Tuesday it had yet to formulate a program to swiftly remedy the situation. "So far, we don't have a clear blueprint of how to cope with the problem. We will start to prepare it," minister Marzuki Usman told reporters, following a meeting of all the ministry's senior officials from across the country."

Forest fires remain the most dramatic and visible symptom of the crisis affecting Indonesia's forests and forest peoples. It is also these forest communities that will bear the long term costs of the fires, which include loss of livelihood and health impacts. The fires are a direct effect of Indonesia's political ecology: the allocation of logging and plantation concessions to a powerful elite; the corruption which prevents effective forest monitoring in the field; and, most recently, the power vacuum left after Suharto's rule. The fires are also directly and indirectly influenced by international and bilateral aid and loans.

While the devastating fires of 1997-1998 fires have not yet returned to Indonesia, the annual round of burning, smoke and occasional haze has continued. These do not grab international headlines but they continue to do substantial amounts of damage - both in terms of forest cover as well as costs to health and livelihoods.

Nowadays, most fires are started for private financial gain. The figures vary, but all sources agree that big oil palm and pulp timber plantations are mostly to blame. The companies and their contractors are not afraid to flout the law in the current unsettled political climate. A recent World Bank study shows that large-scale land clearing contributes to 34% of cases of forest fires, slash-and-burn farming 25%, permanent farming 17%, conflict between locals and concessionaires 14% and transmigration 8%[86].

Other researchers estimate that large-scale operations like oil palm and logging concerns start about two-thirds of the fires[87]. A study by the EU-funded Forest Fire Prevention and Control Project, based in Palembang, states that all important fires in Sumatra in non-El Niño years are caused by plantations[88].

The forest fires are also a symptom of social conflict in Indonesia, in particular the conflict over land ownership and use. Arson is a weapon used by both sides. Plantation companies stake their claims to indigenous communities' lands by burning it and embittered local people take their revenge by destroying plantations established without their consent in their ancestral domains. It is impossible to tell how widespread such incidents are. Some of the fires that were put out in 1997/98 were immediately re-lit[89]. The picture is complicated by transmigrants and opportunists from urban areas who also burn to clear land for farming or for land speculation. Unlike indigenous forest communities, these people are not governed by traditional practices which limit burning to specific areas and conditions. They are also inexperienced and so fires easily get out of control in dry, windy conditions.

Since the 1997/8 fires little in practice has changed. Successive forestry ministers have used Indonesia's parlous economic condition as an excuse for their lack of effective action over the last five years. Each year Jakarta called for more money and technology - such as planes capable of water bombing the fires. Previous governments have failed to recognise that fundamental change in the logging and plantation system is necessary. Malaysia is restrained in its official protests about smoke pollution from neighbouring Sumatra and Kalimantan knowing that Malaysian investors and oil palm companies have invested heavily in the plantations which are illegally using fire to clear land. International financial institutions are pressurising Indonesia to increase exports, including timber, paper pulp and palm oil. These are the very industries which fuel Indonesia's forest fires.

Law enforcement could make a much more significant contribution to the prevention and control of forest fires. The use of burning to clear land for plantations has been illegal in Indonesia since 1995. This ban was strengthened under the 1999 Forestry Act. Company staff found guilty of clearing land with fire can be now sentenced to a maximum 15-year jail term and a fine of up to five billion Rupiah (approx US$500,000). If fires are found on concession land, regardless of how they started, company officials can be fined for negligence up to Rp1.5bn or imprisoned for five years.

Successive forestry ministers have threatened to impose severe penalties on companies which burn to clear land, but there have been few prosecutions. Even where the satellite data has been supported by field reports, some companies have been let off with a warning instead of being stripped of their concession licences. For example, no action has been taken against the oil palm plantation company PT Bumi Pratama Katulistiwa for clearing half its 12,000ha concession in West Kalimantan by burning in 2000. The company is apparently headed by the governor's son[90].

Internationally-funded fire monitoring projects cover the island of Borneo and, until recently, Sumatra. They make public information available through their websites. Fires monitoring, including air pollution levels is also carried out by the CRISP programme in Singapore. No similar data collection exists for other forested areas of Indonesia such as Sulawesi, the Moluccas, the drier islands of the Lesser Sundas and West Papua.

Indonesia has come under mounting international criticism for not doing enough to control forest fires. Efforts to address the issue by the Association of South East Asian Nations (ASEAN), the region's main diplomatic grouping, have so far proved ineffective. For Indonesia's ASEAN neighbours, the problem is the smoke rather than the fires themselves. Regional governments and environmental from Indonesia, Malaysia, Singapore, Thailand and Brunei have been discussing common ways of dealing with the 'haze problem' since the early 1990s. There has been a series of international conferences, seminars and workshops on transboundary pollution since 1997 partly funded by ADB loans. The major outcome has been a book titled Fire, Smoke, and Haze - the ASEAN Response Strategy, which outlines the global and regional context of forest fires, ASEAN's response to the problem and guidelines on fire and haze management in the region, plus a Regional Haze Action Plan. There have been protracted negotiations on an ASEAN agreement on the haze.

Current efforts are focussing on public awareness programmes and the development of guidelines and techniques for controlled burning methods. In the absence of any effective action at government level, ASEAN members have recently focused their attention on local initiatives to fight the fires. For example, a conference on community-based fire management in Balikpapan, East Kalimantan, in Indonesia took place in late July 2001 with 200 participants from 25 countries.

Fundamental reforms still needed

Despite the forces stacked up against them, forest peoples and the NGOs in Indonesia who support them are determined to continue pushing for fundamental reform. Part III considers this process in greater detail and highlights cases where communities have acted to protect and develop more sustainable forest management systems which provide alternatives to timber-mining.

Founder	Conglomerate	Major Forestry Asset	Bank	Total IBRA Debt $US
Eka Tjipta Widjaya	Sinar Mas	Asia Pulp & Paper	Bank Internasional Indonesia	42 million
Sukanto Tanoto	Rajah Garuda Mas/APRIL	Riau Andalan Pulp & Paper; Toba Pulp Lestari (formerly Indorayon)	Unibank	92 million
Prajogo Pangestu	Barito Pacific	Tanjung Enim Lestari	Bank Andromeda	640 million
'Bob' Hasan	Kalimanis	Kiani Kertas	Bank Umum Nasional	450 million
	(APKINDO)		Bank Bukopin
	Suraya Hutani Jaya		Bank Universal

Part II: Forest reforms in the post-Suharto era

Introduction