An economic case for tenure reform in Indonesia’s forests

1. Introduction

Countrieswithlargeforestareas,especially

tropicalforests,havebeenunderincreasing

pressuretoreformthewaytheygovernthe

management,exploitationandconservationof

theirestate.Theroleofforestsinregulating

climate(aswellastheircontributiontomany

ecosystemservices)hasbeenidentifiedasa

pressingreasonforrapidlyimprovinggovernance,

oftenincountrieswheretheprocessof

institutionalchangewouldusuallyhavebeen

expectedtotakesometime.Programssuchas

REDD1andFLEGT2mayhavehadsomeinfluencein

bringingchangestoforestpolicyandgovernancein

keycountriessuchasIndonesia,butinmostcases

thefundamentalchallengestoreformremain

daunting.Somecountries,suchasMexico,China,

NepalandVietNamhavebeenquitesuccessfulin

reformingforesttenureandinvariousways

handingtherightstomanageforestsbacktothe

people,alongwithaccompanyingobligationsto

ensureforestsremainhealthyandviable.The

outcomeofthesechanges,inthemain,hasbeena

morerobustforestsector,botheconomicallyand

environmentally.However,Indonesiahasmade

onlytentativestepsonthepathtowardstenure

reform,andthefuturedirectionisuncertain.

Thisbriefsetsoutsomefactsandanalysis

aboutthestateofforestmanagementin

Indonesia.3Itdoesnotaimtorecapitulatethe

manyexistingstudiesoftheextentof

deforestation.Thehardfactsofthediminishing

JULY | 2011 Dominic Elsoni

stateoftheforestarewidelyknown,andthekey

driversofdeforestation(suchasweakgovernance,

corruption,illegallogging,economicdevelopment)

havebeendiscussedatlength.Instead,thispaper

willattempttoexplorethedeeperissuesthatmay

explainthecurrentstateofthelandusesectorby

viewingitinthecontextofthecountry’seconomic

trajectory.Thepoorstateofthecountry’sforest,

therelativedeclineoftheforestindustryandthe

inefficiencyoftheagriculturesectorare

consequencesofapoliticalandeconomicsystem

thatisinformedbycertainattitudestowardsland,

peopleandcommunities.Thisattitudeprevents

realchangeinthesector,andeventhoughsome

progresshasbeenmadeinpolicytermsinthe

recentpast(mostnotablytherecentmoratorium

onprimaryforestconversion),thelikelyeffectof

thesechangesontheoverallsystemislikelytobe

limitedbecausetheunderlyingissuesarenot

beingaddressed.Thisbriefwillattemptto

introducesomeoftheseissues,byexplaininghow

theforestrysectorgotintothecurrentparlous

state,howthistrajectoryspellsbadnewsfor

Indonesia,andhowanalternativescenariocould

beenvisionedandachieved.

2. The current situation

Indonesiastillhasasignificantforestestate,

butithasbeentransformedradicallyoverthepast

thirtyyearsorso.Largeareashavebeencleared,

someconvertedtootheruses-suchasagriculture

orurbandevelopment-buttherearealsolarge

areasoflandinvariousstatesofdegradationthat

i. Dominic Elson is an independent consultant for Trevaylor Consulting (www.trevaylor.org) and can be contacted at dominicelson@me.com

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JULY | 11

notyieldedeconomicgains.Between2000-2006the

amountofforestinpeatlanddeclinedby2.2million

hectares,ofwhichlessthan10%becamecropland.6

Itappearsthatpeatforestsareconvertedwiththe

statedintentionofdevelopingapalmoil

plantation,butoncethetimberisextractedthe

plantationnevermaterializes,asitdoesnotmake

economicsensetodevelopitatthatlocation.

Afurthercauseofdeforestationisthe

continuedexploitationofnaturalforestfor

industrialprocessing(suchaspulpandplywood).

Forinstance,in2005upto65%ofthetimber

feedingthelargestpulpmillsinSumatracamefrom

clear-cuttingofnaturalforest.7Thisconvertshigh

valuemixedtropicalhardwoodintolowvalue

feedstockforprocessingmills,whichisnot

economicallyrational.Variousattemptshavebeen

madebytheforestministryinthepastdecadeto

imposeamoratoriumontheclear-cuttingof

naturalforestforindustry,butineachcasethe

proposedmoratoriumhasbeendelayed,intheface

ofindustrywarningsthatanyreductioninsupply

willcausejoblossesandeconomicshrinkage.

Degradation

Amorewidespread(andpoorlyrecorded)

problemintheforestestateisthegradual

degradationoftheforestthroughmechanised

logging,andworseover-logging,fires,orother

formsofdisturbance.Itisreckonedthat40million

hectaresarefullyorpartiallydegraded.8Muchof

thisisinprotectedareas,butalsowithinthe

productionforestthereare16.4millionhectaresof

‘openaccess’land.Degradationispartofthe

processofadministrativetransition,whereby

productionforestispoorlymanaged(usuallybya

concessionholder)andwhennolongerviableitis

re-zonedforconversiontoanindustrialtimberor

oilpalmplantation.

inmanycasesarenotcontributingtoeitherthe

localornationaleconomy.Theproblemsintheland

usesectorseemtocompriseofdeforestation,

degradationandpooragriculturalperformance;all

ofwhichhaveeconomicconsequences:

Deforestation

Pastdeforestationhasremovedlowland

forestsfrommuchofSumatraandlargeareasof

Kalimantan.Basedoncurrenttrends,takinginto

accountpredictedpopulationgrowthandplanned

expansionoftheoilpalmestate,afurther28

millionhectaresofforestwillbeclearedby2030.4If

this‘businessasusual’scenarioweretocometo

pass,thenIndonesiawillhaveverylittlenatural

primaryforestremainingoutsidetheconservation

andprotectedareas.

Insomerespectstheeffectofoilpalm

plantationexpansionhasbeenexaggerated,andin

anycasepastrapidgrowthtrendsmaynot

continue.Whilstmuchdeforestationhasoccurred

inthenameofoilpalm,notalloftheclearedland

actuallydevelopedintoplantations,thusthe

impactofoilpalmontheforestestatehasbeen

disproportionate.Forinstance,locationpermits

covering5.3millionhectaresoflandforoilpalm

developmentshavebeenissuedinWest

Kalimantan,whilelessthan1millionhectaresof

landhaveactuallybeenplantedwithoilpalm.5

Thustheproblemseemstobetheallocationof

permitsratherthanthepalmoilindustry’s

relentlesshungerforland.

ItcouldbepointedoutthatEuropeandthe

UnitedStatesclearedtheirforestslongago,and

thusdeforestationisunavoidablepriceofprogress.

ButinIndonesiaitdoesnotseemtobeworkingout

thatway.Forinstance,thedeforestationand

drainageofpeatland,whichreleaseslargeamounts

ofcarbondioxideandthuscontributesto

Indonesia’sdisproportionatelyhighemissions,has

Poor agriculture sector performance

Intheperiod1995-2005,allcountriesinthe

Asiaregionexperiencedsignificantincreasesin

agriculturalproductivity-by42%onaverage-

exceptforIndonesiawhereproductivitygrewby

only3%.9Asaresultofthesemeagerproductivity

gains,morearablelandhasbeenneededeachyear

inordertofeedthegrowingpopulation,putting

morepressureonforests.Thiscorrelationbetween

populationgrowthandneedformorecroplandis

lessmarkedinotherAsiancountries,whereinmost

casesthegrowthrateinpopulationisnotmetbya

correspondinggrowthincropland,butinstead

seemstoleadtohigheryields.

Evenintherelativelyadvancedpalmoil

industry,wherevertically-integratedcompanies

exertahighdegreeofcontroloverlandand

smallholdersthroughthe‘inti-plasma’system,10

productivityislowcomparedtoothercountries,for

instanceaverageyieldsare25%lowerthanin

Malaysia.11

Lowagriculturalproductivityisconnectedto

deforestationintwoways-itillustrateshowweak

tenureandlimitedaccesstocapitalandtechnology

isinhibitingruraldevelopment,andalsoincreases

pressureonforestforclearanceforoftenlowvalue

activities.

Economy is over-reliant on natural resources

AreportfromHarvardUniversity12notedthat

forsometimeIndonesiahasbeenstuckinan

economicmodelthat‘relies too heavily on

over-exploitation of natural resources, does not

invest sufficiently in people and fails to make the

most of the opportunities presented by

globalisation.’Theflawsandvulnerabilityinherent

inthisunsustainablegrowthpatternhavebeen

disguisedbyhighcommoditypricesandtheone-off

boostthatisprovidedatthepointwherethe

naturalcapitalofforestsisconvertedintofinancial

capital.

Therealizationthatthereisalinkbetween

over-relianceonnaturalresourcesandunder-

developmenthasledeconomiststoseekamore

accuratemeasureofthestateofacountry’scapital

stockthanmerelyassumingthattheannual

increaseinGDPisautomaticallyaddedtonational

wealth.Thismeasureiscalled‘AdjustedNetSaving’

(ANS).13NegativeANSindicatesthecountryis

runningdownassets,andwillthushavelessassets

forfuturegenerationsandadecliningcapacityto

generateeconomicgrowth.Overthepasttwo

decades,Indonesia’sAdjustedNetSavingsratehas

droppedfromplus18%tominus2%.14Thismeans

thatdespiteheadlineGDPgrowth,inrealtermsthe

countryisgettingpoorereachyear.Eventually,this

failuretomaintaintherealvalueofthenation’s

assetswillleadtoeconomicshrinkage.

Thisnegativetrendisalsoreflectedinother

statisticsthatshowthatmostpeoplearetrapped

inlow-incomejobsintheagriculturalsectors.There

isnosignificanttransferfromthesesectorsto

manufacturing,asIndonesia’seconomylargely

sellsrawmaterials,notproducts.Hence,other

countriescapturethejobsandthevalue-added

activities.Asglobalizationhasbecomemore

widespread,Indonesia’seconomicoptionshave

narrowed.Inrelativetermsitisfallingbehind,for

instanceIndonesia’sshareofglobalexportswas

lowerin2007thanin1977.15

Ofcoursethedayofreckoningmaybesome

wayoffasIndonesiahasarichendowmentofland

andnaturalresources.However,italsohasalarge

population,andthusthepercapitaresource

wealthislowerthanMalaysia.Itisrightthatsome

ofthesenaturalresourcesshouldbereallocatedin

thenameoffuturedevelopment,andinsomecases

thatwillmeananeconomicallyefficientlevelof

deforestation.ButinIndonesiathereisanunhappy

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althougheconomicvaluefalls,thevolumeof

extractionfromtheforestactuallyrises.Thisseems

tobethecaseinPapuaprovince,wherethelocal

industryhasdwindledyetexportsofvaluable

merbautimbertoChinafortheflooringindustry

haveremainedhigh.Further,loggedoverforest

thenattractssmallerplayers,supplyingdomestic

needswhilefurtherconvertingtheforest.

3. How did we get here?

ThereareanumberofreasonswhyIndonesia’s

landusesectorisnotmanagedaswellasitcould

be.Someofthemainissuesareasfollows:

Unclear tenure

Weakanduncertaintenure,incomplete

cadastralsystemsandlegalcontradictions

regardingcustomarylandrightscombinetokeep

landpriceslowinIndonesia.Timberconcessions

andplantationcompaniesaregrantedleasesat

valuesthatmayfailtoreflectthetruevalueofthe

land.Theamountspaidincompensationtolocal

peoplebycompaniesdevelopingoilpalm

combinationofindiscriminatedeforestation,low

genuinesavings,lackofinvestmentinpeopleand

grassrootsenterprisesandthusanunsustainable

economictrajectory.

Declining importance of the land use sector

Theforestandagriculturalsectorhas

enormousimportanceaspartofthesocio-political

system,andthelandusesectorrepresentsaround

afifthoftheeconomy,includingdownstream

industrialprocessing.However,somesub-sectors

havebeenthriving(e.g.palmoil)whilstothershave

beeninlong-termdecline(e.g.forestry).Thechart

belowshowshowalllandusesectorshave

declinedasashareoftheeconomysince2004,and

onlythefoodanddrinkindustryhasremained

stable.

Itispossiblethatadecliningforestindustry

willdemandlessoftheforestandthusslowthe

rateofdeforestation.Ontheotherhand,the

declineoftheprocessingsectormayindicatethata

lackofcompetitivenessisleadingtomoreraw

timberbeingexported(forinstancetoChina),so

Source: based on data from BPS (2011)

FIGURE 1: CHANGE IN RELATIVE IMPORTANCE OF CERTAIN ECONOMIC SECTORS, 2004 - 2009

anindicationofhowpoliticianspaybacksponsors

oftheircampaignwithforestclearancepermits.

Thespatialplanningprocessusuallyfailsto

coincidewiththelanduseproblemsbecauseitis

itselfapartofthesamepoliticalprocessthat

createtheproblems.Forinstance,landtype

definitionsdonotreflectphysicalorsocialreality,

withillogicaleffects:

• 40millionpeoplearelivinginareaswithno

treesyetofficiallydesignatedasforest.This

limitstheirlivelihoodoptionsastheland

cannotbeusedforagriculture,yetinmost

casestheyalsocannotgetapermitfor

reforestation,anddonothavepoliticalpower

togetaclearancepermitforestatecropssuch

asoilpalmorcocoa.

• Whilsttreelesslandscapeswithintheforest

estatecanbetermed‘non-forestforestestate’,

itsmirrorimageoutsidetheforestzoneis

‘forestnon-forest’,wheresmallholdersand

communitiesmanageforestareasand

agroforestry.LargepartsofJavaislandfalls

intothiscategory.Yetwhenfarmersattempt

tofelltheirowntreesthattheythemselves

haveplanted,theyfacecomplexand

demandingregulationsthatservetodepress

netpricesatthestump.20This,ironically,

createsadisincentiveforfarmerstoplant

trees,yetitisknownthatincorporatingtrees

intofarmsystemsisthemosteffectivewayto

managetropicallandscapesforimproved

yields,resilienceandfinancialreturns.21

• Forestzonestendtobedescribedintermsof

theirofficialdesignation,suchasproduction

orconservationforest.Actuallandscapetypes,

suchasprimaryforest,‘virginforest’,peatland

etc.,arenotdefinedinIndonesianlaw(though

tobefairthesedefinitionsarewidely

contestedglobally).Thiscreatesproblems

plantationshasingeneralbeenverylow-around

oneortwodollarsperhectareinmanycases.16

Despitepastfailures(suchasthenotorious

Kalimantan‘megariceproject’)andlackof

evidencethatlarge-scaleagricultural

developmentshaveanylong-termeconomicor

socialbenefit,17thereseemstobeacontinued

preferenceformegaprojectsamongstpoliticians,

suchasthevastproposedMeraukeIntegratedFood

andEnergyEstate(MIFEE).Thissuggeststhatpolicy

makersseecheaplandandlabourasopportunities

fortheprivatesectortowidenprofitsratherthana

causeforconcern.Thepresenceofalargeamount

ofdegradedland(estimatesvaryfrom7Mhatoover

30Mha)isasignthattheforestfrontieris

undervalued.18Itmeansforestlandiseithervery

cheaporopen-access,soeconomicallyitmakes

moresensetocontinuetoplunderthefrontier

ratherthandevelopexistingopenland.

Poor governance

Rapidpoliticaldecentralizationsince1999has

setdistrictsinoppositiontoprovinces,inhibiting

sensibleplanning.Ithasalsocreatedafree-rider

problem.Districtheads(Bupati)arenotrequiredto

considertheeffectsoflandchangesonthewider

community.Considerablestatepower(the

assumptionofstateownershipofallforestsand

controlofanyunregisteredland)isthushandedto

thedistrictswithoutanycorrespondingobligations

toeitherlocalpeopleorthenationatlarge.

Long-termsustainabilityisthusnotlikelytobe

considered,andstrategiclandscapeplanningis

muchmoredifficult.

Landallocationandconversionisapartofthe

socio-politicalprocess.Arecentstudyfoundthat

issuanceofpermitstoconvertnaturalforestis

correlatedwiththeelectioncycle,inwhichillegal

loggingincreasesdramaticallyintheyearsleading

uptolocalelections,andconversionratesrise

immediatelyafterelections.19Thispatternmaybe

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JULY | 11

concessions,butthestatehasbeenanegligent

landlord.Thenumberofactivenaturalforest

concessionshasdeclinedoverthepastdecade:

therearecurrentlyaround300concessionsin

Indonesia,ofwhich248arelistedasactive,

covering22millionhectares.23Thishasfallen

sharplyfrom2001,whentherewereover400

concessionscovering42millionhectares.‘Inactive’

concessionsmayincludethosethathaveonly

recentlyreceivedpermits,aswellasthosethat

havehadpermitswithdrawn,orwherethebusiness

hasbeenliquidated.AccordingtotheITTO,only

halfoftheconcessions(13.7millionhectares)have

validmanagementplans,24indicatingthatthereare

manyconcessionsregardedas‘active’thatarefor

allpracticalpurposesdormant.Forinstancethe

MinistryofForestrydatarecognises21concessions

inPapuaasofficially‘active’,butlocalofficials

regardonly6astrulyoperational.25

Companiesthatdonotsubmitvalid

managementplansorprovideevidenceofactive

managementarenotheldtoaccount.Concessions

thereforetakeonthecharacteristicsofprivate

freehold,withownersinvitingoffersforpurchase

oftheleasebutnotbeingobligedtosurrender

theirpermitsuponbreachofcontract.Thisraises

theprivatepriceofeventhemostdormant

concessions,makingitevenharderforthestateto

cancelorreallocateunder-performingpermits,

especiallyiftheholderoftheleaseispolitically

wellconnected.Theneteffectofthisiseconomic

lossesforthestate(throughlowertaxesandfees),

privatecaptureofthevalueofpublicassetsanda

perverseincentivetoconvertforestratherthan

whenofficialpronouncements,suchasthe

recentmoratorium,usethesetermswithout

definingthem,thusleadingtoconfusionover

theofficialpositiontowardssecondaryforest,

whichisnowIndonesia’slargestecosystem

type.

• Thereisalackofcoordinationandpolicy

leadershipamongstvariousgovernment

departments.Thevariousplansforconversion

toplantations,miningandotherpurposes

seemtoindicateatotalof63millionhectares

allocatedfordevelopment,60%ofitinvolving

primaryforestconversion.Manyoftheseplans

overlapandperhapswillnotcometopass,but

theyrevealcontradictionsinthewaythe

countryformulateslanduseplans.

Confusingly,thesamepatchofforestcanbe

awardedtomultiplecompaniesbymultiple

layersofthesamegovernment.22

• Thecombinationofpoormanagementof

forestareasandweaktenureoutsidethe

forestestateleadstoasituationwherelandis

treatedasatemporarysiteforactivityrather

thanalongtermassetdeservingof

investment.Thisismanifestedbyslashand

burnagriculture,wherefiresareusedasa

cheapandquickclearancemethodby

impoverishedlandlessfarmers.

Poor asset management

Largeareasofthecountry’sforesthavebeen

parceledouttoprivatecompaniesintheformof

Total assessed (mha) Sustainably managed (mha)

Evaluation (number of concessions)

Total number of concessionsgood fair bad

very

bad

13.73 3.16 13 63 65 12 152

Source: ITTO, 2011.

TABLE 1: EVALUATION OF QUALITY AND SUSTAINABILITY OF NATURAL FOREST CONCESSIONS

JULY | 11

Theprocessingindustrygrewrapidly,boosted

bycheaprawmaterials,andusingvertical

integration(controlofallaspectsofthesupply

chain,fromforesttofactory)managedtoraise

largeamountsofcapitaltobuildhugemills.This

combinationofover-capitalizationandweak

governancecreatedstructuralover-capacity,

inhibitingthepricesignalsthatwouldnormally

occurintheeventofrawmaterialscarcity.Itwas

asiftheforestwouldalwaysyieldupitsbounty,

andnodayofreckoningwouldeverarrive.Until

recently,publicpolicyhasbeenadaptedtosuit

privateinterestsbyensuringthatnaturalforest

hascontinuallybeenmadeavailableforindustryat

farbelowitssocialofeconomicvalue.Thismay

haveappearedtobeapragmaticpolicythat

ensuredcontinuedeconomicgrowthand

employment,butitisinherentlyunsustainableand

ultimatelycounter-productive,asitundermines

investmentinlong-termforestmanagement.

Failure of reforestation schemes

Whenin2006itwaseventuallyacknowledged

thatarawmaterialsupplygapwaslooming,an

effortwasmadetorevitalizethetimberindustry

andsolvethesupplyproblembyencouraging

plantationdevelopment.26Thissetoutaroadmap

toincreaseplantationdevelopmentandthus

relievethepressureonnaturalforests,withno

furthermixedtropicalhardwoodsgoingto

particleboardorpulp.Thiswasfollowedbya

Ministerialdecreethatwarnedpulpcompanies

thatclearfellingofnaturalforestintheir

concessionswouldbeillegalafter2009.27

However,theconsequenceofanaddictionto

cheaprawmaterialislowinvestmentinindustrial

plantations.PlantationdevelopmentinIndonesia

hashistoricallybeenbesetwithdifficulties.Inthe

period1989-2006,permitsforover10million

hectaresofplantationswereissued,butonly3

millionhectareswereactuallyrealised.Inthecase

manageit,asconversionlicensesareinthegiftof

thedistrictheadandthuseasiertoobtainthana

neworexistingnaturalforestconcession.

Eveninconcessionsthatareoperating

normally,thereisofteninefficientforest

management,wasteful,over-extractioninsome

areaswhileotherareasareabandoned.Rulesexist

forselectivecuttingandenrichmentplanting,but

exceptinafewnotablecases(forinstancewhere

themoreresponsiblefirmshaveobtainedFSC

certification),mostoftherulesareignored.Recent

assessmentsofconcessions’performanceshows

thathalfarerated‘bad’or‘verybad’,andlessthan

aquarteraremanagedsustainably(seeTable1).

Reputablecompaniesfacedifficultiesgetting

accesstolandinIndonesia,eitherforoilpalm

plantationsortimberconcessions.Suchcompanies

needtomeetinternationalstandardsof

transparencyandeithercannotlegallyengagein

the‘game’ofobtainingpermitsfromdistrict

governments,ordonotknowhowtonavigatethe

obstaclesofbureaucratichurdles,unofficial

paymentsandbrokers.Thiskeepsgoodcompanies

outofIndonesia,shieldingdomesticcompanies

fromcompetitionforcapital,landandlabour,and

thusperpetuatinganinefficientforestryandpalm

oilindustry.

Subsidizing deforestation

Thewaytheforestestateismanaged,in

particularinrespectofconcessionleasesand

conversionpermits,representsanimplicitsubsidy

ofthetimberandplantationindustry.Publicassets

intheformofstandingforestvalues,future

ecosystemvalueandlong-termlandrentare

capturedbyprivateactorswithlittleorno

compensationtothestate.Likemostsubsidies

andmarketdistortions,thissituationhasledto

inefficientoutcomes.

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However,thisdatawasprovidedbytheMinistryof

Forestryandwasnotverifiedorwasperhaps

misconstrued.33InFAO’sownreportitshowedthat

theplantedestatehadactuallyfallenby2010to

3.5mhafrom3.7min2005,soclearlythepreviously

reportedexpansionwasinaccurate,unlessexisting

plantationswerebeingretiredatafasterratethan

newoneswereestablished.Thisperformance

bucksthetrendseeninalmosteveryothercountry

monitoredbyFAO.Acrosstheworldplantations

andreforestationschemeshavebeenexpanding,

mostnotablyinChina(seeFigure2).Intheperiod

2000-2010,65countriesintheworldwithtropical

andsub-tropicalforestssawanincreaseinplanted

forests,whereasjust11countriessawadecrease,

includingIndonesia,Zimbabwe,Bangladeshand

theSolomonIslands.Theshrinkageinplanted

forestsinIndonesia(123,000hectares)almost

exceededalltheotherlossescombined.Thiscould

haveseriousconsequencesforthecompetitiveness

ofIndonesia’sforestindustryinyearstocome,as

theliveliestlocalcompetitors(especiallyChinaand

VietNam)begintoenjoyreliablesuppliesofraw

materialfromtheirownplantations.Forthefirst

timesincetheIndonesianarchipelagostarted

oftheremaining70%,naturalforestswerecleared

tomakewayfortheplantations,oftenfueledby

subsidiesintheformofsoftloansfromthe

ReforestationFund,butnoproductiveinvestment

tookplace,ortheplantationssufferedfromvarious

calamitiessuchasforestfires.28

Evenwhereplantationshavebeenestablished

successfully,theyarenotnecessarilyperformingto

bestpracticestandards.TheWorldBankcalculates

that‘lessthanhalfoftheselandsareperforming

wellinproducingtimber’.29Forinstance,inEast

Kalimantan800,000hectareswasclearedfor

industrialplantation(HTI),butonly165,000

hectareswasactuallyplanted,andtheyieldsfrom

thisestateareverylow,atjust0.7millioncubic

metresperannum,comparedtothepotential

productionof23millionm3ifthewholeareawere

properlymanaged.30

Reliabledataonplantationsarehardtocome

by.31TheITTOrecordstheplantedestateas

standingatonly2.5mhectares,32buttheFAO

reportsthatIndonesiaexpandedtheplantedforest

estateby404,000haperannumfrom2003-2007.

Source: FAO (2010)

FIGURE 2: CHANGE IN PLANTED FORESTS, 2000-2010

JULY | 11

from2015onwards.However,byDecember2010

lessthan45,000hectaresofHTRplantationshad

actuallybeenapproved,althoughlocaldistrict

governmentshaveidentifiedalmost640,000

hectaresofsuitableplotsofland.36

Atthisrateofprogresstheschemewill

achieveonly120,000hectaresofcommunity-

managedplantationby2016,acumulativeshortfall

ofoverfivemillionhectares(seeFigure3).This

under-performancewillhaveseriousimplications

forfuturetimbersupplyandthusforestusageand

tenure.TheForestryMinistryhasbeenworking

fromprojections(inthe2007RoadMap)that

assumetheHTRplantationswillbemeeting30-40%

ofthetotallumberdemandfrom2016.Ifsucha

significantportionofexpectedsupplydoesnot

materializethensomethinghastogive:either

supplymustbefoundelsewhereorindustrial

outputmustdecrease.Thismayleadtomore

pressuretoover-extractorconvertnaturalforest.

The Paradigm problem

Thereisampleevidencethatcommunitiesand

smallholdersarereliablemanagersofnatural

tradingsuchproductswithothernationshundreds

ofyearsago,thecountrycouldloseitscomparative

advantageinprocessedtimber.Thiswouldbea

directconsequenceofpoorgovernance,myopic

policiesandopportunisticbehaviorbytheprivate

sector.

Experiments in community forestry

Afterafewfalsestartsinfacilitating

communityforestry,the2007roadmapfor

revitalizingtheforestsectorproposedthe‘people’s

plantation’scheme(HTR),34wherebyindividuals

andcooperativeswouldbeencouragedtoinvestin

plantingtimberondegradedforestland.Thiswas

animportantpartofthetargetofestablishingan

additional9millionhectaresofplantationsby2016,

5.4mhafromHTRand3.6mfromindustrial

plantations.Thefinancingwouldcomefroma

revolvingfundusingcapitalfromtheReforestation

Fund.35

Todatetheprojecthasbeenfarfrom

successful.Thetargetwastohavealmost2million

hectaresestablishedbytheendof2010,which

wouldthenbeproducingpulpwoodforindustry

Source: Based on data from Ministry of Forestry, 2010

FIGURE 3: PROGRESS OF HTR COMMUNITY PLANTATION SCHEME, 2007 - 2016

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mixedareaofforesttocommunities,including

somestandingstockthatcouldbeexploitedinthe

earlyyearstogeneratecashflow.Butinpractice

theHTRpermitshavebeengrantedondenuded

land.Inonecase,acommunityhasbeengiven14

separatesmallparcelsofscrublandspreadoveran

largearea(60kmbetweenthefurthestblocks),

whichwillmakeittoughtomanageasaviable

business.Onecouldbeforgivenforspeculating

thattheHTRschemewasactuallydesignedtofail.

ForaslongasIndonesiaistrappedinthis

paradigm,itwillbehardtomakemorethantoken

progressonthepressingissuesfacingthelanduse

sector,suchasweaktenure,thegrowingsupply

gapandmisdirectedinvestment.Thiswillnotonly

havepooroutcomesfortheforests,biodiversity

andclimatechange.Itwillalsohaveprofound

implicationsfortheeconomyandlong-termsocial

development.

4. An improved situation

OutsideIndonesia,therehaslongbeena

recognitionthatlocallycontrolledforestrybrings

benefitsfortheeconomy,environmentandsociety.

Inmanydevelopedcountrieswithpowerfulforest

industries(suchasGermany,SwedenandFinland),

itisthepredominantformofforestmanagement.

Fromapro-poordevelopmentperspective,

communityforestrydoeshaveclearattractions:it

implieslocalparticipation,decentralisationand

equity.39Italsoclaimssomelogicalrationaleas

thoseclosesttotheforestaremorelikelytohave

culturalandpracticalknowledgeofthelocal

landscape,andhaveavestedinterestinthe

long-termconservationofitsecologicalservices

andincome-generatingfeatures.Insummary,the

caseforlocallycontrolledforestry(orwhatisalso

termed‘communityforestry’)canbeviewedin

termsofeconomic,socialandenvironmental

impact:

resourcesandforests,andthattheyalreadyarein

anumberoflandscapesinIndonesiaeffective

managersofforestry,agricultureandagroforestry.

YetforsomereasonIndonesia,wherethestatehas

suchapoortrackrecordinforestmanagement,has

yettoembracetheconceptoflocallycontrolled

forestrywithanyseriousness.Althoughforest

tenurereformhasbeenslowinAsia(comparedto

LatinAmerica),aboutaquarteroftheforestis

owned,designatedormanagedbycommunities

andindigenouspeople.37YetinIndonesialessthan

atenthofonepercenthasbeenformallydevolved

tolocalcommunities,whichismarkedlyoutofstep

withtheregionandothermiddle-incomecountries.

Oneexplanationmaybethattheeconomic

structureofIndonesia,especiallyintheforestry

sector,isalegacyoftheNewOrderregime.Itis

characterizedbyverylargecompaniesbenefiting

fromfavorablepoliticaltreatmentandexclusive

accesstonaturalresources,whilstbeneaththema

multitudeofinformalmicroenterprisesattemptto

keepafloat.Therearefewformalenterprisesin

betweenthesetwoextremes,creatingtheso-called

‘missingmiddle’problem.

Eventhoughthereformasierahasbrought

democracytothepoliticalprocess,itisyetto

liberalizetheeconomyoflanduse.Itappearsthat

thestatestillprivilegeslargebusinessesatthe

expenseofsmallerenterprisesandcommunity

organizations,asexemplifiedbythefactthatthere

isnoexemptionforcommunitystewardshipof

forestsinthePresident’smoratorium,38butspecific

exemptionsforlargebusinessesandplantations.

Thisparadigmproblemisinsomerespects

illustratedbythedesignandimplementationofthe

HTRscheme,whichcouldbeseenasawayto

recruitcommunitiestoinvesttheirownresources

intorepairingdamagedonebycompaniesand

state-ownedenterprises.Initsoriginaldesignthis

wouldbeamelioratedsomewhatbyallocatinga

JULY | 11

Environmental

Itisacommongeneralizationthatforest

dwellingpeoplearenaturallydisposedtobe

carefulstewardsoftheenvironment,andwhere

theydocolludeinthedegradationofforeststhey

dosoforunderstandableeconomicreasons(the

‘povertycausesdeforestation’argument).Thismay

notbeentirelyaccurateforallpeopleinallplaces

(justasgeneralizationsaboutlargecorporations

mayoverlookthebetterexamples),butwidespread

evidencefromaroundtheworlddemonstratesthat

privateproperty

holders,including

thosewith

communally-held

propertyrights,can

anddoprotectpublic

goodsifthe

appropriateincentive

structureisinplace.In

fact,rural

communitiesown,or

administrateunder

license,atleastone

quarterofforestsin

developingcountries;

andtheyinvest$2.6

billioninspecific

conservationactivities

intheirmanaged

forest,exceedingstate

fundingandallforms

ofinternational

conservation

expenditure

combined.43

Low carbon growth

Akeycomponentforbalanced,sustainable

economicgrowthistheshifttoalowcarbon

economy,whichrequiresIndonesiatoreduceits

Economic

Inbothdevelopinganddevelopedcountries,

smallandmediumsizedenterprises(SMEs),suchas

thosesetupandmanagedbyforestrights-holders,

canbetheengineofeconomicdevelopment.

Unliketheverticallyintegratedindustrialmodelof

forestresourcemanagementthathasbeenthe

dominantparadigmforsomanyyears,small-scale

industryhasspecificmicro-economic

characteristicsthatgeneratea‘multipliereffect’in

ruraleconomies.Thistranslatesintomoreskilled

jobs,higherincomes,higherconsumptionand

improvedtermsoftrade.TheLivelihoodsand

ForestryProgramprograminNepal40indicatesthis

effecttobeapproximately10:1,butsomestudies41

calculatethismultipliereffecttobeashighas20:1.

Theeconomicbenefitsareassociatedwiththe

releaseofprivateenterprisethataccompanies

effectivelandreform.Ananalysisofgrowthin73

countriesintheperiod1960–2000foundthat

countrieswithrelativelyequitableinitialland

distributionachievedgrowthrates2–3times

greaterthanthoseinwhichlanddistributionwas

lessequitable.42

Social

Localeconomicdevelopment,whereit

involvestheactiveparticipationoflocalpeople,

haspurportedsocialbenefits.Specializinginsmall

enterprises(e.g.timberprocessing)allows

householdstomakeasmoothtransitionfrom

subsistencelivingtothemarketeconomy.Time

gainedthroughbuyingfoodinthemarketinstead

ofhuntingorgatheringcanbespentparticipating

inlocalinstitutions.Surplusincomeisoften

investedinhealthandeducation,improvingthe

welfareofthenextgenerationthroughbetter

nutritionandbroaderhorizonsforfulfillment.

Communitieswithamosaicoflocally-owned

businessestendtohavemoreself-confidence,

politicalinfluenceandautonomy.

Tenure Shapes Everything

‘Tenure shapes a country’s forest industry

and economy. There is ample evidence in

some developed forested countries—e.g.

the United States, Sweden, and Finland—

and developing countries—such as

Mexico and China—that the recognition

of local rights has a profound effect on

the structure of industry and increases

the potential for forestry to generate jobs

and economic growth and contribute to

good governance. Small-scale and

community initiatives around forests can

also provide invaluable ecosystem

services, including climate change

mitigation—given the necessary tenure

reform.’ (RRI 2011)

‘...There is rarely a better way [than

community forest management] to

balance the interests of poor people and

forests. But to do a good job, communities

need strong property rights...’

(TheEconomist2010)

11

JULY | 11

carbonemissions.Thelandusesectorcurrently

generates85%ofIndonesia’scarbonemissions.To

enablethecountrytoachieveitsambitious

emissionreductiontarget,44thecurrentplans

assumeforestrywillplayamajorpart,forinstance

throughreforestationschemes,improved

sustainableforestrymanagementpracticesandthe

eliminationofmanmadefiresandpeatland

decomposition.Recentexperiencehasshownthat

thesetargetsaresimplynotachievablewithoutthe

activeeconomicparticipationofsmallholders,

communitiesandsmallenterprises.Statistical

evidencefrom80CFEsin10countriesshowsthat‘…

greaterrule-makingautonomyatthelocallevel[is]

associatedwithhighcarbonstorageandlivelihood

benefits.45Toattracttherequiredinvestmentinto

theseareas,afundamentalreformoftenure,

governanceandinstitutionsisrequired.

5. Steps to improved forest

management

Tenurereformleadingtolocalcontrolof

naturalresourceswillnotsolvealltheproblems

outlinedinthispaper,butitwillgosomewayto

correctingthecurrentunsustainabletrajectoryand

avoidingthechancesofaboom-bustscenario.

Shiftingtheeconomyawayfromanover-reliance

onnaturalresourceextractioncanbeachievedby

buildinganSMEsector,whichinturnisfounded

uponareliableassetbase.Experiencefromother

countries(e.g.JapanandSouthKorea)hasshown

thatthenecessaryconditionforabroadlybased

economyislandreformaccompaniedbygood

qualityinstitutions.Simplyhandingoutland

certificatesisnotsufficient;neitherisallocating

forestpermits(suchasHTR)withoutconsidering

howgovernance,investmentandinfrastructure

willplayapartinfacilitatingeconomic

development.Thecallfortenurereformtherefore

needstobenuancedbyplacingitinthecontextof

broaderinstitutionalreform.

Thereisnodoubtthattacklinginstitutional

reformisachallengingpropositioninIndonesia.

Thisispartlybecausethecurrentstateof

governanceisanartifactoftheover-relianceon

naturalresources.Theevidenceshowsthat

‘institutionalqualityispositivelycorrelatedwith

economicgrowthandnegativelycorrelatedwith

countriesdependentonnaturalresourcerevenue...

becauseitinhibitsnetpositivesaving’.46

Sotenurereform,institutionalquality,andthe

compositionoftheeconomyareinter-related.As

deforestationworsens,institutionsdegradeand

theeconomybecomeshollowedoutbytheabsence

ofasmallandmediumsizedenterprise(SME)

sector.Conversely,iftenurereformleadstobetter

forestmanagement,lessrelianceonextractionand

anemergentSMEsector,thenonemayexpect

institutionstoimprove.Thefirststep,however,is

tochangetheattitudetowardslocalcontrolof

forestassets.

Creating the conditions for sustainable

investment

Evenwithtenurereformanddecent

institutions,locallycontrolledforestrywillrequire

investment.Attractingappropriatemeansof

fundingatthislevelisachallenge.TheG3,a

consortiumorrights-holders47isworkingwiththe

GrowingForestsPartnershipstotacklethisissue,

usingexamplesofbestpracticefromaroundthe

world.Thiswillcreatesomesolidguidancethatcan

bedeployedinIndonesia.

Howeverrightsaredefinedanddelineated,

andconnectedtospecificobligations,theevidence

showsthatafunctioningsystemofrights

protectedbyruleoflaw,particularlyintheland

sector,hasbeenthepre-conditionandcornerstone

forafunctioningfinancesector,thedevelopment

ofmanufacturingindustries,thereductionof

povertyandsocialprogress.Theremaybea

JULY | 11

temptationtocircumscribeoralienaterightsin

ordertospeedupprogress,butthisisamistake.

Strengtheningrightsdoesnotonlysecurejustice

forthemostvulnerable,italsohasimmediate

socialandeconomicbenefits(seeTable2).

ItisencouragingthataspartoftheREDDplan,

Indonesiaplanstofacilitateaprocesswhereby

communitiesreforest500,000hectaresperannum

andtakeonmanagement(throughthecommunity

forest(HKmandvillageforest(HD)schemes)ofa

further500,000.Butthisneedsaneconomic

rationaleorelseitbecomesjustanothersubsidy

withunpredictableconsequences.Treeplanting,in

mostcases,doeshaveastrongbusinesscase.

Domesticdemandfortimberisgrowing,but

demandvariesacrossdistrictsdependingona

rangeoffactors.Itwouldbehardforcentral

plannerstodeterminethemostappropriateform

offorestry.TheexperienceoftheHTRscheme

bearsthisout-originallyconceivedasameansto

growfastgrowingspeciesdemandedbythepulp

industry,thepermitsissuedareusuallyto

communitiesfarfromthemills,andinmanycases

theyareplanningtoplanthighervaluehardwoods

suchasteakandmahogany.Theprovinceswiththe

largestmillshaverelativelyfewpermitsissuedfor

HTR,whichmayreflectlocalgovernment

reluctancetoissuepermits,butanecdotallyit

seemsthepriceofferedforpulpwoodissolowthat

thebusinesscaseforHTRplantationcannotbe

made.

Itispossiblethatthisisaconsequenceofthe

centralplanningofreforestationschemes.Abetter

solutionmaybetoallowinvestmenttofinditsway

tothemostpromisingpropositions.Inmostforest

areas(outsideconservationareasand

unencumberedbyactiveleases),thepresumption

shouldbethatlocalpeoplehaveaninherentright

tomanagethelocalforestprovidingtheycomply

withgeneralaimsofforestcover,biodiversityand

watershedprotection.Thiswouldbeanoutcome-

basedsystemratherthanaprescriptive

micromanagedinput-basedsystem.Itispossibly

theonlywayinwhichreforestationplans(either

forecosystemrestoration,carbonsequestrationor

rawmaterialsupply)haveanychanceofbeing

successful.Governmentordonorprojectsthat

claimambitiousreforestationtargets,without

addressingtheevidentfailingsofthecurrent

structureandparadigmoflandrights,shouldthus

betreatedwithskepticism.

6. Conclusion

ThestateofforestsinIndonesiaisthelegacy

ofanowoutmodeddevelopmentmodelthatin

manyforestedcountriesledtothecaptureof

nationalwealthbyaprivilegedfew.Indonesia

neednolongerbetrappedbyanoutdated

paradigmmandatingthatallforestsbeownedby

thestate.Asacomplex,diverseemergingeconomy

Indonesiahasmanychallengesthatneedtobe

addressedtoensurethatsocialdevelopmentkeeps

upwitheconomicdevelopment,whilstalso

Rights Benefits

Propertyrights(e.g.communityland)Assetsinhandsofpeoplearemorevaluabletotheeconomythan

‘zombie’assetsmanagedbythestate

Free,PriorandInformedConsent

Willingconsentofpeoplemeanslessconflictandexpense,morelocal

investment,localexpertise,betterlanduseefficiency,higherproduc-

tivity,cheapermoney(lowerriskforbanksandinvestors)

Oversight,arbitrationandadvocacyMarkettransparencyleadstomorerealisticlandvalues,whichdi-

rectscapitaltomostefficientusage

TABLE 2: THE BENEFITS OF RIGHTS

13

JULY | 11

keepinganeyeonenvironmentalsustainability.

However,tenurereformneednotbeseenasan

unwelcomedistractionfromthejobinhand,for

arguablyitistheonlymeansbywhichIndonesia

canamelioratetheratherdisorderedeffectsof

rapidprogress.Tenurereform,aspartofwider

institutionalstrengthening,couldreleasethe

energyandimaginationoflocalpeoplethroughout

thecountry.Thiswouldattractanewkindof

investmenttotheforestrysector,acombinationof

national,internationalandlocalresourcesthat

wouldrevitalizetheforestindustry,restore

landscapes,reducevulnerabilitytobotheconomic

andnaturaldisastersandsetinmotionthekindof

broad-baseddemocraticeconomicdevelopment

thatwillseeIndonesiacomeclosertoachievingits

enormouspotential.

Endnotes

1ReducedEmissionsfromDeforestationandforest

Degradation2ForestLawEnforcement,GovernanceandTrade

–aEuropeanUnionProgram–www.euflegt.efi.int3Thepaperdrawssubstantiallyonareportwritten

bythesameauthorfortheUKClimateChangeUnit

inMarch2011,referencedbelowasElson2011.4DNPI,20105Cassonetal.,20076BAPPENAS,20097PirardandIrland(2006).Theindustryclaimsthat

thisproportionhasfallenoverthepastfiveyears,

andsomefirmshavebeenmakingplanstoimprove

sustainability,butingeneralalargeproportionof

feedstockisstillderivedfromthenaturalforest.

(Greenomics,2010)8JakartaPost,2010(SpeechbyForestryMinister

ZulkifliHasan).9FAOSTAT,2010.10“Inti-plasma”isaplantationarrangementin

whichaprivatecompanyacquiresaplantation

areaincorporatingthepreviousfarmersas

laborers,assigninganucleus‘inti’areatocompany

plantationand‘plasma’areaassmallholdingsto

thefarmer-laborers.11Molenaretal,201012Harvard,2010,p.4

13Alsoknownas‘genuinesaving’or‘netpositive

saving’14WorldBank(2010).Itappearsthatthiscalculation

excludesforestloss,inwhichcasethetrueANS

figureisevenworsethanthefigurequoted15Harvard,201016EIA,200917DeSchutter,201018Mcleish&Hanson,201119Burgessetal,201120IFC,200721Placeetal,201122Purnomo,201023MinistryofForestry2009reportrecords298units,

andthemorerecent2010datashows303units,but

doesnotrevealhowmanyareactive.24ITTO,201125FieldresearchbyauthorinJayapura,201026WorldBank,200727Thisdecreewaslaterrevoked,givingpulp

companiesmoretimetoaccessnaturalforests.Itis

notyetclearhowthelatestpresidential

moratoriumwilleffectthisposition.28Barretal,201029WorldBank,200730DNPIKaltim,201031FAOdatahasbeencriticizedasunreliable

becauseofchangesinmethodologyreflectingthe

problemsofcomparingdefinitionsfromdifferent

countries.Also,Indonesiatendstorecordthe

extentofplantationpermitsratherthantheextent

ofplantedforests,leadingtofurtherconfusion.32Blaseretal.201133FAO,201034HutanTanamanRakyat35DanaReboisasi(DR)36MinistryofForestry,201137RRI,201038INPRES10/201139Brownetal200240LFP,200941GEF,200942Deininger&Byerlee,201143Scherr,20034426%ofbusinessasusualprojectedemissionsby

2020,or41%ifinternationalfundingisforthcoming45Chhatre&Agrawal(2009)46Dietzetal,2007473Grepresentsthethreerightsholders’alliances:

TheInternationalAllianceofIndigenousandTribal

JULY | 11

PeoplesoftheTropicalForests(IAITPTF),TheGlobal

AllianceofCommunityForestry(GACF)andthe

InternationalFamilyForestryAlliance(IFFA)

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15

The Rights and Resources Initiative (RRI) is a strategic coalition comprised of international, regional, and

community organizations engaged in development, research and conservation to advance forest tenure, policy

and market reforms globally.

The mission of the Rights and Resources Initiative is to support local communities’ and indigenous peoples’

struggles against poverty and marginalization by promoting greater global commitment and action towards

policy, market and legal reforms that secure their rights to own, control, and benefit from natural resources,

especially land and forests. RRI is coordinated by the Rights and Resources Group, a non-profit organization based

in Washington, D.C. For more information, please visit www.rightsandresources.org.

This publication was made possible with the support of the Ford Foundation, Ministry of Foreign Affairs of Finland,

Norwegian Agency for Development Cooperation, Swedish International Development Cooperation Agency, Swiss

Agency for Development and Cooperation, and UK Department for International.Development. The views

presented here are those of the authors and are not necessarily shared by the agencies that have generously

supported this work, nor by all the Partners of the RRI coalition.

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