III. Indonesia’s Missing Timber Revenue
In 2006 the Indonesian government lost over US$2 billion from untaxed illegal logging ($1.3 billion), artificially low forest royalties ($563 million), and illegal transfer pricing ($138 million). Overall, from 2003-2006 these practices resulted in government losses of over $5 billion, as shown in Figure 2 below.
Figure 2: Assessed forestry taxes, as compared to government revenues lost to transfer pricing, illegal logging and unacknowledged subsidies (using ITTO production data)
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As noted previously, this figure is conservative in that it does not include smuggling or other unreported activities, for which there are no reliable data but that would only add to the total. Further, even using the government’s own data for wood industry production (which report far lower values than ITTO),[34] the average annual losses to illegal logging are some $630 million and the losses to unacknowledged subsidy are $332 million, as reflected in Figure 3 below:
Figure 3: Assessed forestry taxes, as compared to government revenues lost to transfer pricing, illegal logging, and unacknowledged subsidies (using MoF production data)
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Increased field enforcement actions and increased yields from plantation forestry have resulted in decreases in the amount of revenue lost to illegal logging since 2003 when only about one-fifth of the wood consumed came from legal sources. However, as the figure above demonstrates, even with these improvements, the volume of illegal logging and losses due to mismanagement of the forestry sector remains immense.
The primary contributor to lost revenue is the loss in uncollected fees from wood that is illegally harvested. As explained in the preceding chapter, we estimate that at least half of all logging in Indonesia is illegal. In total, from 2003-2006, according to the government’s own accounts, over 130 million cubic meters of wood was stolen—an illicit harvest worth some $4 billion in lost government revenue.[35] Although government figures suggest a narrowing of the gap in legal supply in recent years, the loss to the government from this trade remains about $500 million each year,[36] again not including unrecorded smuggling and unlicensed sawmills. However, when using ITTO data for 2003-2006, this annual gap in legal wood supply was worth some $1 billion in government fees.
For reported exports, the bulk of which is from the plywood and pulp sectors, our analysis of trade figures suggests that there are also significant revenue losses to tax evasion through “transfer pricing.” “Transfer pricing” in this context is the illegal practice in which producing companies claim to sell wood for less than its true value to offshore subsidiaries, thereby reducing value-based export taxes in Indonesia. As an example, our comparison of 2006 Indonesian export figures against recipient country import figures reveals that importers reported receiving $725 million more in logs, sawnwood, plywood, and pulp from Indonesia than Indonesia reported exporting. Further, trade data also suggest significant smuggling; for example, importing countries reported 73 percent more volume in plywood than Indonesia reported exporting. This analysis suggests a loss to Indonesia of roughly $138 million in taxes in 2006 (see Figure 8, Appendix). Note, however, that this amount again is an underestimate as it does not take into account wood that is smuggled without being reported by either Indonesia or the importing country.
Another significant amount of revenue is lost through what amounts to a generous industry subsidy from the Ministry of Forestry. That is, in the calculation of forest taxes, the ministry allows companies to use a price for logs and an Indonesian rupiah/US dollar exchange rate that are both significantly lower than real market value. The forest products royalty fee (Pajak Sumber Daya Hutan, or PSDH), charged by the Ministry of Forestry in order to recoup some of the value lost through the harvest of national assets, is calculated at 10 percent of an index meant to represent the price of logs in the domestic market. Since 2002 the ministry has set this index at Rp500,000 ($53)/cubic meter for the dominant timber species (meranti), when real domestic market value reached more than Rp2 million (or $240/cubic meter) in 2006 (see Figure 1, Appendix).[37] Further, the ministry sets the reforestation fee (Dana Reboisasi, or DR) in US dollars[38] but allows companies to pay in rupiah using a fixed exchange rate of Rp5000/ $1, significantly lower than the actual exchange, currently ranging between Rp9000 and Rp10,000/ $1 (see Figure 7, Appendix).
For example, a single cubic meter of meranti harvested in West Kalimantan would be liable for a forest products royalty (PSDH) of Rp50,000 and a reforestation fee (DR) of Rp80,000, or less than $13 in total. If real market prices and exchange rates for 2006 had been used, this same amount of wood could have earned the government three times as much, or $40. We estimate that the influence of business interests on the ministry[39] to artificially set royalty and reforestation fees significantly lower than real market value results in losses of some $330 million each year, on average.
In total, we calculate that, at a minimum, the government assessed only about 20 percent of the revenue that it could have earned on timber harvested every year, due to artificially undervalued fees, illegal harvests, and transfer pricing. If this loss were not enough, there appears to be little attempt to recover the arrears, as the ministry reported in 2005 (the last year for which there is data available) having charged only some $8,000 in fines, less than the suburb of South Jakarta collected in parking lot taxes.[40]
There are other elements of lost revenue that we do not examine, but believe contribute significantly to Indonesia’s loss of revenue. These include corporate income taxes and export taxes not paid on illegal logs, as well as smuggled logs that go unreported by both importing and exporting countries. Further government expenditures are wasted due to corrupt activities (interest-free loans given for plantations that are never established, misappropriated bailout funds, and so forth), including by forestry industries that are owned by relatives and business associates of government officials. An audit in 1998 found the amount lost to misappropriated reforestation fees alone to be in excess of $5.5 billion for the preceding five years.[41] There also appear to be widespread irregularities in reporting both supply and industry production by the ministry, which some analysts have claimed suggests deliberate under-reporting to hide illegal harvests.[42] These factors drive the annual loss to state coffers from corrupt mismanagement far higher than even the figures in this report suggest.
West Kalimantan: A Forest-Rich, Revenue-Poor ProvinceUnlike Indonesia as a whole, which has a diversified manufacturing sector, the economy of the province of West Kalimantan still depends heavily on its forests for its locally generated revenue. In West Kalimantan, in 2005-2006 (the most recent years for which data are available) the forestry sector accounted for roughly 15 percent of the provincial domestic product, the largest single contributor. Estate crops, including the booming oil palm sector (largely established by logging natural forest), follow at around 10 percent. [43] In fact, the impact of the forestry sector is likely much larger, because West Kalimantan suffers from widespread illegal logging that is destroying local livelihoods and squandering its greatest natural asset. Although illegal logging seems to have declined since the boom years of the later 1990s, we estimate conservatively that in 2005-2006, the province continued to have at least two-thirds of its harvest illegally felled (some 3 million cubic meters a year),[44] at an average annual loss in government revenue of some Rp1.2 trillion ($130 million), or almost 20 times what the province spent on health and education combined. Furthermore, the actual loss is likely far higher for the same reasons that plague estimates of national losses: unrecorded sawmills and smuggling. For example, West Kalimantan is a major source of timber smuggled across the border to Sarawak, Malaysia, and data recording and availability are particularly spotty. Human Rights Watch researchers have observed, and local NGOs have documented through undercover investigations, the smuggling routes that carry wood from Ketapang, Sambas, Sintang, and Kapuas Hulu in West Kalimantan into Sarawak, Malaysia, by ship, truck, and even bicycle.[45] Additionally, small sawmills abound in West Kalimantan, which are not recorded in official production statistics. There is no estimate available of how many of these sawmills exist, but on a single boat journey from the provincial capital, Pontianak, to the timber-rich (and illegal logging prone) Ketapang district, we observed scores of sawmills lining the riverbanks. Figure 4: West Kalimantan’s assessed forestry taxes, as compared to government revenues lost to illegal logging and unacknowledged subsidies
On top of this loss, a draft of an audit conducted by the Monetary Auditing Board (Badan Pemeriksa Keuangan, or BPK) of West Kalimantan provincial forestry accounts in 2005 and 2006 indicates staggering deficiencies. The auditor found nearly Rp215 billion ($23 million) was lost in uncollected late fees and other penalties. Additionally, the BPK found Rp94 billion ($10 million) in “unaccounted for” income, collected in fees by districts but never deposited into the ministry accounts. The BPK’s documented total state loss in uncollected fees or misallocations for a single year was Rp309 billion ($33 million). [46] To put this loss in perspective, it is equal to nearly half the total provincial budget in 2005 (Rp737 billion) and nearly 10 times that year’s total provincial spending on health and education combined (Rp38 billion). Further, this loss is only from irregularities documented by the BPK in fees that should have been collected on licensed wood. It does not include any estimates of losses to illegal logging or undervaluation due to below market timber prices and exchange rates used by the ministry to set fees. In a struggling local economy, how did this magnitude of revenue loss occur? The BPK noted that the reason for these revenue losses was “bad faith” (itikad tidak baik) on the part of those responsible for paying” and “a lack of intensity in monitoring and supervision” on the part of the forestry authorities. [47] |
[34]In 2006, the Ministry of Forestry reported about 7 million cubic meters less in sawnwood and 3 million cubic meters less in plywood production in 2006 than did ITTO/FAO (together amounting to a difference in roundwood equivalent of some 20 million cubic meters), which, if accurate, would have been a one-year decline of 25 percent in production, as opposed to the 5 percent increase reported by ITTO/FAO.
[35] This assumes a price of US$230 per cubic meter for meranti, derived from ITTO, “Market Information Service,” April 16-30, 2009, http://www.itto.int/en/mis_detail/ (accessed April 27, 2009).
[36]Bintang Simangungsong, “The Economic Performance of Indonesia’s Forest Sector in the Period 1980-2002,” Indonesian Ministry of Forestry and GTZ-SMCP, Briefing Paper No. 4, Jakarta, 2004.
[37]ITTO, “Market Information Service Reports,” various years, http://www.itto.int/en/mis_back_issues/ (accessed April 12, 2009).
[38]US$16/cubic meter for Kalimantan.
[39]Human Rights Watch interview with expert advisors to the Ministry of Forestry, Jakarta, October 2008. See also, N. Kishor and R. Damania, “Crime and Justice in the Garden of Eden: Improving Governance and Reducing Corruption in the Forestry Sector,” in J. E. Campos and S. Pradhan, eds., TheMany Faces of Corruption: Tracking Vulnerabilities at the Sector Level (Washington, DC: The World Bank, 2007), pp. 89-114.
[40]Statistik Penerimaan Pajak Jakarta Selatan, 2006.
[41]Ernst & Young audit, 1999, cited in Barr, Banking on Sustainability.
[42]Bambang Setiono, “Corruption and Forest Revenues in Papua,” Chr. Michelsen Institute (CMI), June 2008; Stolle et al., Forest Revenue in Indonesia.
[43]Indonesian Statistics Bureau, 2006, http://kalbar.bps.go.id/tabel/Tabel%2012-1.htm (accessed January 2, 2008).
[44]We were not able to calculate precise trends of production and supply over several years because Human Rights Watch researchers were not given access to complete data, if it even exists. However, our calculation of the annual revenue loss in 2006 to illegal logging follows the same protocol as we used in the national calculation. Human Rights Watch researchers visited district and provincial forest offices and requested data on wood supply and industry production. The gap between legal supply and wood consumed is a minimum estimate of the annual illegal harvest. As with the national figures, we calculate lost revenue from the sum of the forest royalty fee (PSDH) and reforestation fee (DR), using real market value and actual exchange rate. We were not able to calculate losses due to transfer pricing because the necessary trade data were unavailable at the provincial level.
[45] K. Obidzinski, A. Andrianto, C. Wijaya, “Cross-Border Timber Trade in Indonesia: Critical or Overstated Problem? Forest Governance Lessons from Kalimantan,” International Forestry Review, vol. 9(1) 2007; see also Environmental Investigation Agency (EIA)/Telapak, “Timber Trafficking: Illegal Logging in Indonesia, South East Asia and International Consumption of Illegally Sourced Timber,” 2001.
[46] The Office of the National Monetary Auditor (Badan Pemeriksa Keuangan Republik Indonesia), “Draft audit results of the non-tax revenues from forest royalties and reforestation fees for 2005-2006 of the Provincial Forest Department, Ketapang district forest department, and the Kapuas Hulu, Sintang and Melawi district departments of forestry and plantations,” (“Konsep Hasil Pemeriksaan Atas Penerimaan Negara Bukan Pajak (PNBP), Provisi Sumber Daya Hutan (PSDH) Dan Dana Reboisasi (DR), Tahun 2005 Dan 2006 Pada Dinas Kehutanan Provinsi Kalimantan Barat, Dinas Kehutanan Kabupaten Ketapang, Dinas Kehutanan Dan Perkebunan Kabupaten Kapuas Hulu, Sintang Dan Melawi”), 2007. On file with Human Rights Watch.
[47]Ibid., p. 28.