Summary

Indonesia has one of the world’s largest areas of remaining forest but also one of the world’s highest deforestation rates. Reported exports from its lucrative timber sector were worth $US6.6 billion in 2007, second only to Brazil and worth some $2 billion more than all African and Central American nations combined. But in recent years almost half of all Indonesian timber has been logged illegally at a staggering cost to the Indonesian economy and public welfare.

In this report Human Rights Watch details these costs and their human rights impacts. Using industry-standard methodology, we estimate that the Indonesian government lost $2 billion in 2006 due to illegal logging, corruption, and mismanagement. The total includes: forest taxes and royalties never collected on illegally harvested timber; shortfalls due to massive unacknowledged subsidies to the forestry industry (including basing taxes on artificially low market price and exchange rates); and losses from tax evasion by exporters practicing a scam known as “transfer pricing.” Our findings are summarized in the figure below:

As staggering as this loss is, our calculation does not include losses from smuggling, evasion of other taxes such as income tax, nor from taxes that were assessed on legal wood but never actually collected. Further, the calculation of losses from illegal logging also does not include a significant portion of the country’s sawmill industry, as mills with processing capacities of less than 6000 cubic meters per year are not required to report their wood consumption to the ministry.

The domestic consequences of lost government revenue and forestry sector mismanagement are far-reaching. The devastating impact of corruption and mismanagement on precious natural forests and the livelihoods of the country’s rural poor who depend on these forests have been well documented. In this report, we document an often-overlooked toll of this destruction, the widespread spillover effects of corruption on governance and human rights. The individuals responsible for these losses are rarely held accountable, in part because some officials in both law enforcement and the judiciary are also deeply corrupted by illegal logging interests. This impunity undermines respect for human rights. In addition, the ability of citizens to hold the government accountable is curtailed by a lack of access to public information. 

Further, the opportunity costs of the lost revenue are huge: funds desperately needed for essential services that could help Indonesia meet its human rights obligations in areas such as health care go instead into the pockets of timber executives and corrupt officials. Corruption and untransparent, unaccountable revenue flows in Indonesia are so widespread that a new expression has come into common usage in the Indonesian language for such uncontrolled funds, “wild money” (dana liar).

To give one stark illustration: between 2003 and 2006, the annual revenue lost to corruption and mismanagement in the timber sector was equal to the entire health spending at national, provincial, and district levels combined. The $2 billion annual loss is also equal to the amount that World Bank health experts estimate would be sufficient to provide a package of basic health care benefits to 100 million of the nation’s poorest citizens for almost two years.

Indonesian citizens living closest to the forests have borne the brunt of unbridled forest destruction, yet these communities remain locked in poverty without basic services. Text boxes throughout this report illustrate those consequences through a detailed look at conditions in once heavily forested West Kalimantan (Indonesian Borneo). In 2006 the loss of government revenue to illegal logging exceeded the total provincial budget and dwarfs the amount the province spent on health and education combined.

The failures in the timber sector also have important international ramifications. Pressure to address climate change has created a booming interest among international financial institutions, bilateral donors, and private sector traders in markets to offset carbon emissions through direct payments to countries like Indonesia, whose extensive but endangered forests act as global carbon sinks. Without dramatic improvements in the governance of Indonesia’s timber sector, including improvements to transparency and enforcement of forestry and anti-corruption laws, investors can have no confidence that the offset payments will in fact go to the preservation of forests as a means to avoid carbon emissions rather than to further fund a deeply mismanaged and corrupt system.

There have been improvements in forestry management under the administration of President Susilo Bambang Yudhoyono, and significant successes in anti-corruption efforts have resulted in gains in Indonesia’s score on World Bank measures of control of corruption (Indonesia’s score nearly doubled from 2003 to 2007). The passing of a Freedom of Information Act and the establishment of an independent financial intelligence unit, the Center for Financial Transactions Reporting and Analysis (Pusat Pelaporan dan Analisa Transaksi Keuangan, or PPATK), along with recent anti-money laundering legislation and bank regulations for identifying high-risk customers and suspicious-transaction reporting are also positive developments. Yet these tools remain under-utilized to address the rampant theft and corruption in the country’s forestry sector. The Ministry recently shelved the three-year data collection project, by its own Forest Monitoring and Assessment System (FOMAS), intended to be a major pillar of the forestry minister’s commitment to transparency. More systematically, hard-won progress against kleptocracy is under real threat from officials who have come under scrutiny. Further reforms are urgently needed.

Threats to the independence and authority of the government’s Anti-Corruption Commission (Komisi Pemberantasan Korupsi, or KPK) and Anti-Corruption Court, as well as to citizen monitors, also undermine anti-corruption efforts. For example, two KPK commissioners have been removed from their posts after they were charged with criminal “abuse of authority” for alleged internal procedural infractions in issuing travel bans on high profile corruption suspects (who have since fled the country). In another such example, the Attorney General’s Office (AGO) charged activists with defamation for their monitoring and critique of the AGO’s claims of asset recovery in corruption cases.

This report recommends steps the government and donors should take to improve governance and curb corruption in this vitally important sector.

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Addendum: As this report was being finalized, new data appeared on the Ministry of Forestry website suggesting a massive increase in legal wood production and a sharp drop in wood consumption in 2007. If the new data is accurate, it would represent a dramatic and commendable advance against illegal logging and toward sustainable management of the nation’s forests. Unfortunately, there are many unanswered questions and serious reasons to question the reliability of the data.

The new figures indicate that wood production from private plantations doubled in a single year, between 2006 and 2007, a particularly unlikely outcome for several reasons, including that there was no sharp uptick in planting in the relevant prior years. Indeed the reported plantation harvest volume for 2007 exceeds by one hundred percent, or some 10 million cubic meters, the most optimistic projection of a 2005 joint study by the ministry and international donors.

We are not alone in our lack of confidence in the reliability of Ministry of Forestry data. A ministry-commissioned and approved report published in 2005 acknowledged “wide agreement on key findings ... [including that] [f]orestry data are poor so that it is difficult to make sound forest management and policy decisions.”[1] The World Bank has likewise noted that lack of reliable data is a key hindrance to forest management and law enforcement.[2]Additionally, the International Tropical Timber Organization (ITTO) noted in its 2006 and 2007 reports that “Indonesia ... has never supplied reliable official production figures”[3] and in 2008, reported that Indonesia has provided no plywood data (one of its largest forestry sectors, after pulp & paper) since 2006.[4] The ITTO further noted in its 2008 report that “trade figures continue to show major discrepancies”[5]and “In 2007, large discrepancies continued to exist between Indonesia’s official reports of exports to Malaysia and China.”[6]

Regardless of whether the new data are accurate, it is incontrovertible that Indonesia continues to lose significant sums to illegal logging and is not effectively tracking what is happening to its remaining forests and where the money is going. The upshot is that no one—not the ITTO, not the Ministry of Forestry, not the citizens of Indonesia—knows with certainty what is happening to the nation’s forests and the revenue they generate. This is a central finding of this report, one that we believe must be urgently addressed by government agencies and forestry advisors as it has substantial impacts on governance and social spending.