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Reforestation Fund - big bucks for cronies, but what about the environment?

DIGEST No.46 (Indonesian news with comment) - December 8, 1997

When established a decade ago, the Reforestation Fund promised to be medicine to heal the environmental wounds left by Indonesia's alarming rate of deforestation. Instead, the fund has become a convenient honey pot for anyone with the right connections, whether within the forest industry or outside it. The extent to which the fund would be at the mercy of crony capitalists, at the expense of the environment, was probably unforeseen. The fund desperately needs to be made accountable.

Parliamentarians such as Imam Churmen throughout 1997 quoted the Reforestation Fund (Dana Reboisasi, DR) as the prime example of the evils of extra-budgetary financing. They hoped the new law on State Non-tax Receipts (PNBP) would bring it under parliamentary scrutiny, but are not holding their breath waiting.

In February 1997 Forestry Minister Jamaludin Suryohadikusumo said the fund contained Rp 1.8 trillion (US$700 million at the prevailing exchange rate). His inferior said there was less. Observers were surprised. Simple calculations based on last year's figures showed there should have been well over twice that. No answers to their question 'where did it all go?' were forthcoming.

The Reforestation Fund is derived from a contribution averaging US$16 a cubic metre paid on raw timber by logging concession holders (HPH). Despite a reportedly high level of evasion abetted by corrupt officials at every level (official figures of about 10% may be conservative), the fund's income is large: at present Rp 800 billion (US$300 million) a year. Interest on capital brings in more.

While the Forestry Department likes to highlight the fund's cheap credit for small farmers to regreen logged-out forests, in reality over 60% of expenditure goes to help a small number of large companies engaged in the timber plantation and paper pulp industry.

The industrial forest scheme (Hutan Tanaman Industri, HTI) involves partnerships between private and government capital. The latter is often drawn from the Reforestation Fund, which in turn often comes from contributions paid by those same private companies in their capacity as loggers (HPH). The size and diversification of these companies has tended to make the Reforestation Fund a kitty at their beck and call, serving to improve Indonesia's leading global position in timber products rather than to restore the environment.

Ten of the thirteen big concerns that made their fortune felling virgin rain forest and are now making their mark turning commercial timber into pulp use Reforestation funds for their HTI ventures. Among them are Prayogo Pangestu's Barito Pacific, Bob Hasan's Kiani Lestari, his Astra and his ITCI, Probosutedjo's Mercu Buana, Rachman Halim's Gudang Garam, and Titiek Prabowo's Adindo.

It's a good deal. About half the DR money put into HTI projects are in the form of interest-free loans, and the other half carry less than commercial interest rates. The idea is to provide an incentive to move away from logging.

Problems abound. Cases are reported of HTI projects in virgin rain forest, or in viable people's plantation areas, rather than in logged-out forests. In June 1997 a journalist named Mohd. Sayuti died in suspicious circumstances in South Sulawesi: he was investigating alleged misuse of DR funds.

Reforestation, in short, has turned out to mean not rehabilitating the rain forest but replanting it with commercial timber. It may also turn out to mean paying for pulp factories making paper out of the timber. Probosutedjo, Suharto's half-brother, was in August 1997 under investigation for possibly diverting his DR loan to build a pulp factory rather than planting trees.

Timber tycoon and presidential golfing partner Bob Hasan was luckier: he had earlier won Suharto's approval for doing precisely that. He got a Rp 250 billion (US$100 million) loan from DR to help fund his giant pulp mill Kiani Kertas, near remote Tanjungredeb in East Kalimantan. Critics said the interest on the loan was 4% below commercial rates and would allow him to make a tidy profit just by putting it in the bank. Hasan said the money was merely a standby loan that he never touched. He also denied he had used it to fund his involvement in the Busang gold mining scam. In any case, the environmental group Walhi sued the president for issuing the loan to Kiani. As before, the suit failed in July 1997.

Another environmentally dubious scheme involving DR money is the 'one million hectare' project to convert peat swamps into irrigated rice fields in South Kalimantan. Rp 500 billion of DR funds were put into this scheme in 1995. Critics asked why money was being used to cut down forest rather than to restore it.

The political impotence of the Forestry Minister over against well-connected business, combined with inadequate transparency, has delivered the Reforestation Fund scandal after scandal.

In June 1994 the president ordered an interest-free loan of Rp 400 billion (US$185 million) from the fund for Habibie's state-owned aircraft manufacturer IPTN, to help it develop the N-2130, a commuter jet. When this initially secret loan was exposed in parliament, a consortium of environmental groups led by Walhi lodged a suit against the president. They said he had broken government regulations of 1990 that forbade using the DR for non-forestry purposes. The suit was thrown out in December 1994.

IPTN appears to be in deep financial trouble, and in January 1997 the government announced it had turned the loan into equity in IPTN. This meant the loan did not have to be repaid. Yet only eight months previously another Rp 35 billion had been taken out of DR to swell a big private fund led by Suharto himself to prop up the N- 2130 development project. The Reforestation Fund had become a convenient safety net for troubled state-owned corporations.

Other non-forestry interests have been drawn to the fund as well. Every year since 1994 the Forestry Minister has made standby funds available drawn from DR to cover national budget short falls (in Indonesia the budget must be balanced by law). The standby funds were used in 1994/95, but not in other years.

During the latest currency crisis in August 1997, Rp 400 billion of DR funds were temporarily turned into Bank of Indonesia Certificates (SBI) at lower than commercial interest rates, in a partially successful attempt to prop up the falling rupiah exchange rate.

In April 1996 Rp 100 billion of DR funds were donated to the family welfare scheme Takesra. In May 1997 the Forestry Minister denied DR money had gone into Tommy Suharto's 'national car' project, but added it could at any time if the president wished it.

Meanwhile the environmental crises occurring all over Indonesia are not getting the attention they deserve. For example, the director-general in charge of DR himself acknowledges Indonesia is not doing enough to deal with the loss of mangroves caused by rapidly expanding commercial prawn farms in coastal areas. Environmentalists lamented the failure to use DR funds to deal with the massive forest fires in October 1997.

The World Bank supports the Reforestation Fund and wants the average contribution rate more than doubled. If the Bank wants to put the environment first, it may need to rethink, and then act first to ensure the fund becomes more accountable.

[Gerry van Klinken, editor, Inside Indonesia magazine]