Forest Misuse Costs Indonesia $7 Billion in Revenue, Report Says

Forest Misuse Costs Indonesia $7 Billion in Revenue, Report Says

Illegal logging and mismanagement of Indonesia’s forestry industry may have prevented more than $7 billion flowing to state coffers from 2007 to 2011, costing the government more than its health budget, Human Rights Watch said. In contrast, the Indonesian government’s 2011 revenue from timber royalties and reforestation fees was $300 million, said Emily Harwell, the lead author of a report released by Human Rights Watch.“This is a very conservative estimate,” Harwell, a partner at Natural Capital Advisors LLC, said at a briefing in Jakarta on Nov. 8 of lost revenue. “The calculation doesn’t include any wood that’s smuggled.”

The report indicates weak governance is chipping away at revenues in the world’s fourth-most populous nation, as budget and current-account deficits this year hurt the rupiah. In 2011, revenue missed from forestry totaled more than $2 billion, exceeding the government’s health spending for that year, New York-based Human Rights Watch said in the report.

The report calculated how much wood was used by industries such as pulp, furniture and saw mills, and compared it with the available legal supply of timber, Harwell said. The supply of legal timber was “considerably smaller than what you need to produce that amount of products,” Harwell said, adding that from the missing supply she was able to calculate the lost fees.

Indonesia ranked 118 among 176 countries on Transparency International’s 2012 corruption perceptions index, undermining the investment appeal of Southeast Asia’s largest economy. Facing slowing growth, the government is trying to narrow budget and trade gaps by curbing state spending and easing restrictions on investment in some industries.

Most Corrupt

Out of 20 central government institutions, the Ministry of Forestry was the only one scoring below the minimum standard for integrity in providing public services, according to a 2012 survey by the Corruption Eradication Commission, or KPK. Johan Budi, a spokesman at the anti-graft agency, couldn’t be reached when called on his mobile phone, and two calls to his office weren’t answered.

“We do have an illegal logging problem,” Sumarto Suharno, a spokesman at the Ministry of Forestry, said by telephone on Nov. 8. “The case with the policeman in Papua is being investigated and we’re looking whether anyone in the forestry ministry is involved.”

A Papua-based policeman allegedly made almost $1 million in transfers to senior police officials to protect illegal logging and fuel smuggling businesses, an investigation by a Jakarta-based non-government organization Indonesia Police Watch found. The policeman has been named a suspect, according to a statement on the website of the Attorney General’s office. The police force is perceived as the most corrupt institution in Indonesia, according to Transparency International.

Plantation Pressure

State losses from illegal logging have narrowed to less than 1 trillion rupiah ($87.6 million) a year, from about 30.7 trillion rupiah in 2002, because of certification requirements for timber sold, Suharno said. He declined to comment on the Human Rights Watch report, saying he has yet to see it.

Expansion of oil palm and pulp plantations to support economic growth is occurring in existing natural forests and on land claimed by local communities, Human Rights Watch said. Indonesia has become the world’s largest producer of palm oil, used to make cooking oil, biscuits and other processed foods.

Palm oil output may increase to 26.7 million tons to 27 million tons this year from 25.7 million tons in 2012, according to Indonesia’s Palm Oil Board. The paper industry plans to nearly double its current mill capacity by 2015, Human Rights Watch said, citing a report by the Center for International Forestry Research.

Forest Dependence

“The impacts of this demand-led plantation expansion on communities and forests are profound and long lasting,” Human Rights Watch said, pointing to significant impact on local economies, subsistence patterns and forest biodiversity.

In 2010 more than 9,000 villages were located within state forests, with 71 percent depending on them for their livelihood, it said, citing government statistics. Twelve percent of people in Indonesia live in poverty, according to data compiled by the World Bank.

Human Rights Watch called for greater assessment of government and corporate compliance with laws protecting local land rights and compensation agreements. Forest and plantation businesses, including their supply chains, should engage with local non-government organizations to build transparent grievance procedures, it said in the report.

To contact the reporter on this story: Berni Moestafa in Jakarta at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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