LESTARI PAPER NO. 03 THE ROLE OF TIMBER CONCESSION COMPANIES IN PROMOTING SUSTAINABLE FORESTRY. Nana Suparna

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1 LESTARI PAPER NO. 03 THE ROLE OF TIMBER CONCESSION COMPANIES IN PROMOTING SUSTAINABLE FORESTRY Nana Suparna

2 Content: 1. Introduction 2. The Prospect of Production Forest 3. Business Development of IUPH HK-HA 4. Conclusion This publication is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this publication are the sole responsibility of Tetra Tech ARD and do not necessarily reflect the views of USAID or the United States Government.

3 1. Introduction 2. The Prospect of the Production Forest The forests of Indonesia currently cover an area of million hectares or approximately 63% of the Indonesia s land surface area. This includes conservation forests (21.90 million hectares), protection forests (29.64 million hectares) and production forests (68.99 million hectares). The tropical forest of Indonesia is one of the largest in the world after Brazil and the Republic of Congo (Tolo, 2012). It is a valuable natural resource with a high conservation value, having been exploited for various social purposes since the era of the early kingdoms of Indonesia. The intensity of the forest exploitation increased during the era of the VOC (Veerenigde Oost-Indische Companagnie), a Dutch East Indies Trading Company. Meanwhile under the Soekarno administration, forest management applied a decentralized approach as stipulated in Government Regulation Number 64 of 1957, which designated full authority to the provincial government to manage the forest. However, the peak of forest exploitation occurred under the Soeharto New Order Era. Forest-based natural resources were the main source used to generate foreign exchange to support the development of the country. Up until the Year 2000, the number of timber concessions companies reached 600 and covered 64 million hectares of forests. The foreign exchange derived from forest products was quite significant, ranking second after fossil fuels. In the 1980s, the value of forest products reached USD 200 million per year while in the 1990s, the contribution from the forestry sector was second after earnings from oil and gas (Nurrochmat, 2005). The productive forest that covers 57% of the total forest area in Indonesia has a significant role in the economic development of the country as well as in ensuring the sustainability of forest ecosystems and ecosystem services. However, in recent years the contribution from the forestry sector has declined. The reasons for this decline include increasing transaction costs and business risks, non-conducive regulations, and the uncertain legal status of forestland. Another reason is the low market price of wood in the domestic market. Therefore, among the 269 timber concessions companies, approximately 30% are inactive. 1 1 Sugiono, Munas Asosiasi Pengusaha Hutan Indonesia (APHI), Jakarta, 19 Oktober For the roadmap to develop an optimal area for production forest, it is necessary to increase the productivity of natural forests and expand cultivated forests. The target area required for developing the production forest is around million hectares of forest, which is predicted to produce logwood amounting to 572 million m3/year. Meanwhile, the optimal area for natural forests is targeted at 20 million hectares to produce 28 million m3/year. 2 In practice, the natural production forest is dependent on the sustainability of the timber companies holding Licenses to Utilize the Forest for Production (IUPHHK-HA) and their professionalism in managing the forest for production. In other words, managing the natural production forests in a sustainable manner (PHPL) is the key to successful protection of the natural production forest, which also indirectly safeguards the conservation forests and the protected forests. Therefore, the professionalism of the Management Unit (UM) will determine the success in managing the production forest. Accordingly, failure in managing the natural production forests will lead to forest degradation or deforestation. In the Indonesian context, forest management not only requires professionalism of the Management Unit that contributes to the sustainability of the forest, but it also requires a responsible on-site institution that plays a significant role in maintaining the sustainability of the forest. In the absence of a responsible institution at the forest site, it is almost certain that it will eventually become no man s land in which access to the forest would be open to any party that might induce illegal occupation of the forest. This would pose a risk of deforestation due to the conversion of the forest area into farmland or plantation plots. Therefore, the presence of the IUPHHK-HA that manages the forest in a sustainable manner is essential. 3. Business Development of IUPHHK-HA Having no formal assurance or commitment to managing the forest sustainably, the timber concession licen- 2 Roadmap Pembangunan Hutan Produksi Indonesia

4 se holders can become a liability to the future development of the Indonesian forest. The business volume of the IUPHHK-HA in terms of timber production has been declining from year to year. In 1992, there were 580 UMs that managed million hectares while in 2015, there were only 269 UMs (178 active UMs) that managed million hectares. This means that there has been a 66% decline of the production forest area within 23 years. Furthermore, this also indicates that the production forest area that was formerly managed by the timber concession companies (de facto no man s land ) has been abandoned, causing it to potentially become an open access area that leads to massive and most probably permanent destruction of the forest. The decline of the production forest area is not only in the forest areas managed by timber concession holders (HPH), but also in the forest areas managed by companies for industrial plantation forests (HTI). HTI companies manage million hectares, but 35% of this area is unattended. Moreover, the production forest area that has been converted into plantation areas (mostly for oil palm) is around 10 million hectares. 3 The development of the forest concession business during a span of 23 years is presented in Table 1 below: Table 1. Business Development of the Natural Forest Concession Year Number of Concession Holders Area of Concession (million ha) Based on Decree Production (million m3) Production Quota Realization Productivity Natural Forest (m3/ha/year) (6/4) (32%) (57%) (67%) (52%) (79%) (61%) (67%) (52%) (60%) (63%) (69%) (58%) (42%) (51%) , (53%) 0.40 Note : Of the 269 concession holders in 2015, only 178 concession holders (66%) were active The above table shows that the area of the natural production forest that has become open access forest is directly proportional to the number of concession holders (UM) that have ceased operating. 3 APHI,

5 Therefore, to prevent further degradation and to restore its productivity, some parts of the natural forest that used to be under the forest concession area should be converted into Industrial Plant Forest (HTI), Community Plantation (HTR), Community- based Forest, Village Forest HD, Ecosystem Restoration (RE), Environmental Services (JasLing), Non- Wood Forest Products (HHBK), License for Area Utilization (IUPK), and other plantation businesses. Table 2. Development of Production Forest Area Note: : Total area of natural production forest formerly managed under the timber concession companies Condition in 2015:: Converted into plantations: around 10 million ha Allocated for HTI, HTR, HKm, HD, RE, JasLing, HHBK and IUPK: million ha Still remaining as abandoned forests that are open access : million ha (including 7.72 million ha in moratorium) : Total area of the licensed natural forest in 2015: million Ha 3

6 The natural forest is one of the last resorts for protecting the function of the ecosystem and conservation of the tropical forests in Indonesia. The destruction of the natural vegetation forest worsens community livelihoods, particularly those that are dependent on the forest as their source of earning. There are at least four main factors that determine the sustainability in managing the forest: 1. The Legal Certainty of the Area The legal rights of utilizing the production forests is one of the determining factors to ensure successful management of the forest. However, this is not an easy task, as the issues in managing the forest area are quite complex. The overlapping traditional customary rights that intersect with the state s rights on the forest have not been resolved. As a result, the state forest, including the work area of the natural concession forests, continues to shrink and has evolved and shifted to become the the rights of only certain people. The issue of legal certainty and the assurance of the forest area cannot be handed over to the business units since the UMs do not have the ownership of the forestland nor do they have the authority to resolve land-related legal issues. The forestland remains as the state asset, while the IUPHHK only have the right to utilize the timber/forest within the designated area with certain restrictions. To provide legal certainty of the forest area, the government has prepared the spatial plan of the area, the limited participatory plan, One Map policy, designated the area of the forest, legalization of the land rights, and law enforcement. However, these measures should be accelerated and elaborated upon to ensure effective implementation and to achieve their intended objectives. 2. Possessing Economic Value Although there were 269 timber concession holders in 2015, only around 60 % of them are operating. Meanwhile, 40% have ceased their operations as the business is not economically profitable. The factors influencing the loss are: the rising production costs, the relatively stagnant price of timber, issues related to the forest work area, and the declining production volume. The increasing production cost for timber is inevitable. Given the economic and political situation over the past three years, the causes of the hike are related to the yearly increase of the regional minimum wage (UMR), the increasing price of spare parts, the increasing price of supporting goods as result of inflation, and the increased retribution fee for administrative purposes. Consequently, the forestry sector has become a costly business that further leads to issues such as the low market price of timber, conflicts with other companies (particularly mining companies) in the area, disputes involving land rights with the local people, and deforestation and forest degradation that result in carbon emissions and contribute to climate change on a global scale. Over the last 15 years, the growth of the forest has shown a declining trend. Hence the quota for cutting down trees has also declined, bringing a negative effect towards production costs. The investments from forestry businesses to plant prime commodities have not been effective or were not implemented due to the lack of capital. The Reforestation Funds (DR) that were supposed to function as the Reforestation Security Fund (DJR) should be reendorsed so that the funds could be applied for the development of natural production forests. On the other hand, the price of timber has been under pressure due to the efficiency and tight competition of the domestic wood craftsmen industry, as they could not afford to buy international standard timber. There was a 100% disparity between the price of international standard timber and the price of the local standard timber. The market price of the international standard timber was twice as much as the market price for domestic standard timber. However, the government banned the export of non-processed timber. Ironically, illegal timber continues to be found in the market. Therefore, a government policy to support a better price range for timber is necessary to promote the production of the natural forests that will ultimately help the concession companies to manage the forests based on the principles of sustainable forest management. 3. Protecting the Environment The system and practice in managing the natural production forest should adopt the principles of sustainable forestry that upholds the function of 4

7 the forest for the environment to support the hydrology, climate, and biodiversity of the forests. To restore the function of the natural production forest, Reduced Impact Logging (RIL) should be promoted with clear targets for the forest areas that have High Conservation Value. However, currently only 12.3% of the management units of the forest timber concession companies fully apply the RIL system. The number of UM that manage the High Conservation Value areas are almost the same as the number of UM that have practiced the RIL system, which is indicated by achieving the standard set by the Forest Stewardship Council (FSC), but they were only able to reach 11.8% of the standard. With policies and incentives in place and the serious efforts from the government to promote the RIL in High Conservation Value forests, the objectives to manage the production forests in a sustainable manner could be achieved. Without the support from the government, it would be difficult to ensure environmentally friendly logging. Similarly, without clear legal status of the work area and weak law enforcement, managing High Conservation Value areas would not be sustainable. 4. Socially and Culturally Accepted by the Local People The concession companies would be endorsed by the local people only if these companies meet the following criteria: 1. The issuing process of the Concession License The concession maps provided by the government to the concession companies are often not respected by the local people. In many cases, the disputes are settled by giving compensation of production per unit volume to the local people. Nevertheless, this does not guarantee that the work area of the concession is safe from illegal intrusion from the local people that use the area for farming. The concession holders are helpless in preventing this. Therefore, it is necessary to have the consent from the local people before the license is issued so that the local people will acknowledge the concession areas by de jure and respect it by de facto that the concession holders have the rights to manage the forests accordingly. 2. Participatory Approach The disharmony in point 1 above would become even worse if the local people do not receive any economic benefit from the forest concessions and are only considered as bystanders. The forest concession companies actually intend to involve the local people as workers as long as the local people meet the job qualifications. However, most of the local people are considered unproductive with poor work ethic and low skills. Therefore, it is necessary to enhance the capacity of the local people to minimize the tension between the concession companies and the people living around the area. 3. The benefits for the local people from the retribution fees The official retribution fee paid by the concession companies to the government include: Fees for Concession License, Land and Building Taxes (PBB), Provisions for Forest Resources (PSDH), Reforestation Funds (DR), and Timber Replacement Fees (PNT). The Fees for the Concession License and the PBB taxes are based on the coverage area of the land, with the PBB paid annually. Meanwhile, the PSDH, DR, and PNT are paid based on production volume. In addition to these fees, there is also compensation paid to the local people that has no legal basis, except for the compensation for the local people in Papua and West Papua as stipulated under the Governor s Regulation. Therefore, to encourage ownership of the forest, the government should allocate a budget for development and empowerment costs for the local people derived from the five different fees imposed on the concession companies. 4. Conclusion Despite their weaknesses in managing forests, the Management Units (UM) that hold concessions play an important and positive role in conserving and managing the natural forests to generate economic, socio-cultural, and environmental benefits for the people, provided that they adopt conservation principles. It is crucial for the companies to apply these principles. Therefore the policies and regulations that should be developed to strengthen the practice of sustainable forest management should include the following measures: 5

8 1. Before the license is issued, there should be a mechanism to allow for the people to give consent on the operations of the concession companies so that the local people will acknowledge as well as respect the de facto activities of the concession holders. In this process, it is the government s authority to step in and facilitate by issuing the relevant policies and regulations. 2. The government should develop a policy that ensures a profitable market price for timber products that would encourage sustainable management of the forests. 3. The Reforestation Funds (DR) that used to be applied as Reforestation Insurance Funds should be re-utilized for forest development programs to improve the growth increment of the forest and help reduce the production costs of timber. 4. Establish a conducive role of the government in issuing policies that promote sustainable management of the forest by: a. Implementing RIL b. Managing HCV areas c. Ensuring legal status of the work area d. Applying Law Enforcement 5. Improve the performance assessment on the UM in managing the concessions and enhance the competence of the assessment institution to ensure that the UM complies with the prevailing provisions and fulfills its responsibilities. 6. A continuous and effective effort to improve the skills and productivity of the local workers should be carried out to prevent disharmony between the local people and the workers from the concession company or from outside the region. 7. The funds or fees collected from the concession holders should be partially utilized specifically for the development and empowerment of the local people. 6

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