ADB/OECD Anti-Corruption Initiative for Asia and the Pacific

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1 Political Economy in the Natural Resources Sector Pascal Fabie Director for Asia-Pacific Transparency International Secretariat Introduction I was asked to talk about TI s work in the forestry sector in Asia Pacific as a preamble to the case study exercise. TI has started its work in forest governance integrity last January through a multi project programme that currently include Indonesia, Papua New Guinea, Solomon Islands, Malaysia, and China. Before I outline the work planned by TI, let me set the scene by rapidly presenting the extent and complexity of the problem. Slide 2: Setting the scene Though the timber trade provides much needed revenues to the developing world, much of it is actually illegal. The scale of illegal logging is vast. According to the World Bank, illegal logging may cause losses of over 10billion US$ per year. What is clear is that illegal logging could not exist without corruption: Corruption is one of the primary driver of illegal logging and poor forest management. And reversely, illegal logging fuels the corruption system. 1

2 Slide 3: Corruption and Illegal Timber Approximately 1/3rd of the world s remaining tropical and primary forests are in Asia Pacific. Levels of deforestation over the past 20 years are unprecedented in the region: Since the 1960s, total forest cover has decreased between 30%-40%. Deforestation is one of the most significant global environmental and climate change problem. According to the FAO, countries including Cambodia, Indonesia, Nepal, Pakistan, the Philippines, and Sri Lanka are losing forests at rates exceeding 1.4 percent per year. These are among the highest rates of forest loss in the world. This slide shows the direct correlation between the level of illegal timber and the level of perceived corruption. The size of the bubble shows the volume levels of suspect round wood. Slide 4: The case of Indonesia One of the countries in the TI Forrest Governance Integrity programme is Indonesia. Let s look at the case of Indonesia and how the political economy of corruption has among other things led to the situation we now have. 2

3 Since the 80s, China and Japan have taken welcome stringent measures to stop their domestic deforestation, but the demand for wood products in their economies has not decreased. So, driven mostly by China's and Japan's new demand for logs and wood products, Indonesia's domestic timber processing capacity increased seven-fold after the 1980's, and plywood became the most important export good. Wood mills reached a record number of 1,600 units in Indonesia in The total raw material demand of these mills is approximately 73 million cubic meter per year. The rapid growth in wood processing capacity in Indonesia has gone well beyond the availability of wood supplies from plantations in Indosia. This has resulted in increased illegal logging of natural forests, which is now estimated to account for around 75% of all Indonesian logging activity. At this rate of depletion, Indonesia will have lost all its natural forests by 2020, possibly earlier. Slide 5: Indonesian forestry trade Let s look now at the Indonesian forestry trade directly relevant to our subject today. Export bans and prohibitive export taxes were imposed in the 80s by the Suharto regime to eliminate tropical hardwood exports. This was done in order to boost the production and export of value-added items such as plywood rather than just logs. So far this sounds like a good idea! Officially, a hardwood log export ban was put in place in 1985, and following this ban, Indonesia would have normally exported no logs since then. But obviously that did not quite work! Slide 6: A problem rooted in recent history The Suharto administration stipulated that concession holders needed to either own or have a corporate relationship with a processing facility. A perfect recipe for collusion! As a result, pulp and paper mills as well as plywood factories are today mainly held by large companies, which also dominate concession holdings. 3

4 Between 1988 and 1999: Indonesian pulp production capacity grew from 600,000 tons per year to 4.9 million tonnes per year. Indonesia suddenly moved into the ranks of the world s top 10 producers 4 large conglomerates dominate the pulp and paper industry in Indonesia. Two of them have their headquarters in Singapore and have established large-scale pulp processing plants in Indonesia. One of them is a joint venture between Indonesia's Barito Pacific Group, a consortium of Japanese investors, and a holding company owned by former President Suharto's eldest daughter. Slide 7: Supply-demand imbalance This massive growth in capacity was not matched by ensuring a sustainable supply of raw materials. The supply-demand imbalance goes on and has triggered huge scale illegal logging According to the Ministry of Forestry, in 2006 the supply shortage of about 40 million cubic meters was met with illegally harvested logs. Such large scale illegal logging is not possible without corruption. One of the point here is that the economic measures meant that there was a lot of international and national rapid investment in timber processing, without a similar investment in forest sustainability or plantations, or in establishing proper governance systems. Some of these measures were used to create fantastic opportunities for political corruption and rent seeking. Slide 8: Goals of TI Forest Governance Integrity Programme Generate the demand for good governance in forest sector Strengthen political will to deliver sustainable forest management and take action to tackle collusive corruption in the sector Improve accountability in the sector through mobilising strong multi stakeholder processes 4

5 Support producer and consumer countries collaboration at the regional and international levels, pushing for proper implementation of new international initiatives or regulations, such FLEGT in Europe, Lacey Act in the US, and FLEG ministerial processes in Asia Pacific). FLEG means Forest Law Enforcement Governance and Trade. Fighting corruption is essential to improving governance in all natural resources management. If unchecked, even petty corruption tends to escalate and become institutionalized. This aspect has not been taken up strongly enough by leading civil society environmental groups. The recent involvement of TI has been extremely welcome by them and by many stakeholders in all programme countries. As institutions will not impose reforms that undermine their financial self interest, anti corruption interventions need to be based around decreasing rents from unsustainable logging. TI work will push for 1. Reform of forest service to address corruption loop holes 2. Include transparency and accountability mechanisms (global monitoring of forest stock, global log-tracking, due diligence of financial institutions in the region, new climate change regime) 3. Improving the forest law enforcement and compliance system Slide 9: TI s Forest Governance Integrity Programme: Areas of Intervention Go quick! 1. Reducing political corruption: Improved transparency, accountability and anticorruption measures in public institutions and political parties in the exercise of their forest sector-related functions. 5

6 2. Reducing foreign bribery in supply countries: Improved transparency, accountability and anti-corruption measures by forest sector companies in their overseas operations and in their transactions with foreign public officials. 3. Reducing Corruption in licensing and concessions: Improved transparency, accountability and anti-corruption measures in the issuance and ownership of forestrelated licenses and concessions. 4. Reducing incidence of timber laundering: Improved transparency, accountability and anti-corruption measures put in place for public institutions and private enterprises responsible for the trans-national movement and certification of timber. 5. Reducing judicial corruption: Improved judicial integrity in the adjudication of forest sector-related prosecution and litigation. 6. Improving due diligence of financial institutions: Improved practices of financial institutions which service forest sector clients, decreased incidence of money laundering and reduction in loans to companies engaged in illegal forest activities. 7. Reducing unsustainable demand for timber and wood: Improved customs and procurement regulations in countries with sizeable imports. 8. Strengthening national/regional forest governance initiatives: More effective development and implementation of initiatives such as the EU FLEGT VPAs (Forest Law Enforcement Governance and Trade Voluntary Partnership Agreements). 9. Strengthening international governance initiatives: Increased transparency and effective implementation of global climate change mitigation mechanisms such as CDM and REDD. Slide 10: Anti-corruption tools The development of mapping tools to identify on one hand the corruption risks, hot spots, and actors in the forestry sector, and on the other hand identify the weaknesses of the national and international integrity system are currently under way in the 5 counties of the programme. This exercise is being done around coalitions build by TI at national and regional levels, and intends to help civil society organisations, private sector, reform agents in government and the donor community work together to tackle the problems. The analysis and recommendations from 6

7 TI will be completed by March 2010 and will be made available and used to start the advocacy phase of the programme. These tools will allow us to: Analyse and focus on the major risks in the corruption systems and flaws in the integrity system Develop new targeted and monitor existing anti-corruption measures in place to respond to these risks and flaws Advocate for necessary changes to curb corruption Contribute to the development of realistic solutions at both national and regional levels. Conclusion Corruption is systemic and embedded in criminal networks colluding with government institutions in the region. We are now at the research and national and regional coalition building stages of the programme. Finding ways to anti-corruption measures in political parties/campaigns, strengthening electoral legislations are critical to the success of our work. Dealing with the lack of due diligence from the banking sector in the leading financial centres of the region is also paramount. Tacking foreign bribery practices is also a major aspect of what needs to be done. But for the purpose of today s case study, discussing how to improve transparency, accountability and anti-corruption measures in the issuance and ownership of forest-related licenses and concessions will be very useful for all of us to hear. Thank you. 7

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