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August 2006

Current issues

Indonesia's forestry industry has been badly hit by the protracted crisis since 1997/1998  that the country  has lost its role as a major player in  timber trade in the world.

Many large forestry companies have been beset by heavy debt burden worsened by growing scarcity of raw material  from forests destroyed mainly by rampant illegal logging.  A large part of trees  illegally cut  is smuggled abroad. Extensive destruction of the forests  has resulted in  sharp decline in forest productivity.

In addition, the country's products of processed timber  are less competitive  as most of the factories are no longer efficient.

As a result many  companies operating in the forestry sector have stopped or nearly stopped operation.  Many concessionaire  have failed to repay their debt in reforestation fund  resulting in the revocation of their business licenses. And plywood companies laid off many workers as they could not continue normal operation with scarcity in raw material supply.

The government, concerned with the condition seeks to encourage development of plantation forests  (HTI) to reduce the pressure on natural forests. However,  many HTI projects could not be carried out because of financial difficulty.
The prospects, however, are still good for forestry industry. Many units of HTI are expected to start producing logs in the coming several years. HTI  is expected to be the main source of log raw material.

Meanwhile the country still has large natural forests. They are still highly potential provided that they well managed to be sustainable.
There are various  factors hampering  expansion of plantation forests such as protests over  losses of various living matters, forest fires, degradation of forest quality  and financial difficulty. However, development of HTI is the only viable concept to restore the condition of  the country's forestry industry.

In this report, we try to study various related  aspects of the forestry industry  to identify problems and see  any opportunities as well as risk of venture in forestry industry.


Forest management in  Indonesia

Earlier especially at the start of the Suharto regime in the 1970s, the forestry sector was a major contributor to the country's economic development, and  forest concession (HPH) was a dominant system of exploiting natural  forests.

HPH system was first introduced in 1967  under the  Forestry Law issued  that year. HPH holders  were required to preserve the forests by  observing a number of regulations such as  on method of selective cutting, method of using forests (TGHK)  and  provincial  area layout plan (RTRWP).

Sumatra and Kalimantan were the main targets of exploitation  as the two islands have large forests with valuable tree species. Many large companies were licensed to exploit forests under 20-year contract. In the 1970's logs became a major export earner   contributing substantially to economic development. 

However, only a few, which held the HPH license, enjoyed the natural wealth  from the Sumatra and Kalimantan forests.

Poor management system  marked by arbitrary felling of trees and corruption involving the HPH holders  resulted in extensive damage to the tropical forests especially in the middle of the 1980s'.

HPH Companies

In less than 15 years, there was a sharp decline in the size of the country's forests. Illegal logging was rampant especially  during and after the economic crisis that followed the monetary crisis in 1997/1998.  Illegal logging  was out of control amid the  political instability  that followed the crisis.

Politicians in Jakarta were too busy consolidating themselves to pay attention to handling illegal logging. As a result many HPH companies  could not continue operation. In 2005 only 257 units including integrated ones of 594 HPH companies remained active. The other 337 companies were no longer in operation.

The number of active HPH companies  declined  so was in the width of forest concession. In 2001, there were 375 HPH companies  with 46.2 million hectares of forest concession. In 2003, the number dropped to 267 companies with 27.8 million hectares of of concession.  In 2005, there only 257 active HPH with 24.8 million hectares of concession.

East Kalimantan has the largest number of HPH companies with 53 units followed by Papua with 48 companies,  and Central Kalimantan  43 companies. Papua, however, leads in width of HPH area totaling 8.1 million hectares, followed by East Kalimantan's  5.2 million hectares  and Central Kalimantan's  3 million hectares.

There are two categories of HPH namely one integrated with timber processing industry such as plywood factories and sawn timber factories; and one not integrated with timber processing industry. Among the 257 HPH companies only 68 having integrated HPH units  with 7.02 million hectares of concession. Most or 189 companies operate non integrated units totaling 17.76 million hectares.

Part of the integrated units are integrated with plywood factories, block board factories and particle board factories  and the rest with sawn timber, wood working and moulding factories.

HPH holders and  width  of areas

The following  table shows holders of integrated and non integrated units of HPH.
Among the holders of non-integrated units of HPH, 50 largest companies control 55.6% of the total areas of non-integrated HPH

Table - List of holders of integrated and non-integrated HPH, 2005
       50 largest holders of non-integrated units of HPH- 2005
No.        Name of company                Province                Width  of HPH (ha)
1        Anuraga                        West Kalimantan        691,700
2        Membramo Alaa Mandiri,PT        Papua                        691,700
3        ITCI, PT                                East Kalimantan                470,200
4        Hanurata Coy Ltd (Sorong)        Papua                        417,570
5        Essam Timber                        East Kalimantan                355,000
6        Intisixta,PT                        Southeast Sulawesi        296,000
7        Rimba Megahlestari                Papua                        250,000
8        Teluk Bintuni Mina Agro Karya        Papua                        239,000
9        ITCI Kayan Hutani (IKANI),PT        East Kalimantan                218,375
10        Daya Sakti Krida Unggul                Central Kalimantan        212,000

Slashing of HPH licenses
The government has started reducing the number of HPH holders  and their HPH areas since 2000. Production forests have been reduced in width that the number of trees ready for harvest has also declined. The government, therefore, decided to gradually reduced the number of HPH units and areas given to a company group.

In 2005 and 2006 the government launched anti illegal logging operations twice respectively called conservation forest operations I and II   (OHL I & OHL II) The government also adopted firmer measure against failure to observe forestry regulations such as in the payment of reforestation funds. Those having arrears are strongly warned and failure to heed the warning could face their licenses revoked.

Among large company groups having their HPH units reduced include the Barito Pacific Group, Kalimanis Group and  Kayu Lapis Group. The number of HPH units of the Barito Pacific group, was reduced from  29   with concessions totaling 3.02 million hectares  to 18  with areas totaling 1.61 million hectares.
HPH in Papua

As forests have dwindled in size in Sumatra  and  Kalimantan forestry companies move to Papua. Among large companies having HPH units in Papua include Barito Pacific Group, Djajanti and  Alas Kesuma.

Barito Pacific Group

This company is owned by tycoon Prayogo Pangestu. The company's daily operation is run by, Prayogo's son Agus Salim Pangestu. The group's logging subsidiaries in  West Papua are :

"        PT Mangole Timber Unit VI  having 150,000 hectares of HPH
"        PT Barito Cendrawasih  having 228,000 hectares of HPH

Djajanti Group

This company group is owned by tycoon Burhan Uray alias Wong Ming Kiong alias Bong Sung On alias Swan An Bong/Sun On Bong/Sun On Hwang etc.. The group has logging concession under  subsidiaries including PT Artika Optima Inti,

PT Sagindo Sari Lestari, PT Budi Nyata (owned by Soejono Varinata, son of Burhan Uray), etc..

Wapoga Group

The Malaysian-based company is controlled by Tan Eng Kwee and Fredy Tang. PT Wapoga Mutiara Timber has three timber concessions covering approximately 800,000 hectares located at the Gulf of Cendrawasih, Manokwari and at Jayapura, all of which are located in Papua (formerly known as Irian Jaya).  PT Wapoga Mutiara Industries has an integrated timber complex based in Biak, which operates downstream industry  producing  plywood, block-board, film face, sawn timber moulding products.

-        PT Wapoga II = 155,000 ha
-        PT Wapoga Mutiara Timber = 407,350 ha
-        PT Wapoga Mutiara Timber Unit I = 178,300 ha

Korindo Group

Korindo is the fourth largest forestry company group in Indonesia, owned by South Korean In Young Sun. The group has two logging companies with  concessions in West Papua as follows:

- PT Tunas Sawa Erma  244,850 ha, acquired in February 1993.
- PT Bade Makmur Orissa  462,600 ha, acquired in March 1993.

Alas Kusuma Group

The group is owned by PO Suwandi and Ibnu Hartomo, brother of deceased wife of  former President Soeharto. Prabu Alaska is an affiliate of  the  Alas Kusuma. Group PT Prabu Alaska  has HPH totaling   319,600 ha.

Hanurata Group:

Linked to Soeharto family and Indonesian military.
- PT Hanurata Coy Ltd  188,000 ha

PLANTATION FOREST (Hutan Tanaman Industri = (HTI)

In the middle of the 1980s'  the government launched  an ambitious program to build plantation forests (HTI) in a bid to preserve natural forests. HTI units were built especially in Sumatra and  Kalimantan.  The program is aimed at  reducing dependence on natural forest for wood raw material  needed by  timber processing industry.

HTI units were built on denuded forest lands. HTI companies were offered subsidy by the government  with  interest free loan  from Reforestation Fund, which was collected from HPH as fee to finance reforestation.

HTI concession was mainly to grow trees for pulp and wood works industries. HTI could be built in cooperation with HPH companies or independently. There were also HTI units called HTI-Trans built in transmigration areas built by migrant families. In Sumatra there were many transmigration centers with migrant families from Java and Bali. HTI-Trans grew mainly trees for woodwork industry.

Forest destruction rate, however, was faster than  HTI development. In addition, the program came too late  after large parts of forests had been destroyed.  As many timber processing factories, which relied on logs form legal sources, could not continue operation for shortage of the raw material.

HTI Development

Until April 2006,  the government issued licenses for 248 units of HTI  covering a total area of 10 million hectares  including 5,963 hectares for pulp HTI and 3,741 hectares for non pulp HTI.

Until the end of 2005, there were 229 licensed HTI companies but only 209 of them were operational  covering a total area of 8.04 million hectares. The other 20 companies  were no longer active  for financial problem.

Development of HTI in concession areas, however,  was too slow. Until 2005,  the government issued licenses for HTI covering 8.04 million hectares but development in the past 10 years  totaled only 3.41 million. Every year, only 100,000 - 200,000 hectares of HTI were built  by the HTI licensees.
After the monetary crisis, development of HTI units declined sharply. In 1997, development covered 300,000 hectares, but the completion shrank to only 100,000 hectares in the following year  and in 2001 it was only 67,000 hectares.

Government wants to speed up development of 5 million hectares of HTI 

Most HTI projects are joint ventures between state forestry company PT INHUTANI I-V  and private companies. Out of  4.26 million hectares of HTI areas to be built 3.26 million hectares are under  PT Inhutani  and its joint venture partners. Most of forest areas managed by PT Inhutani are formerly HPH areas left idle by HPH companies or left by HPH companies not having their license renewed. Inhutani later formed joint ventures with private investors to develop the forest areas.

PT. Barito Pasific Timber Tbk.
PT Barito Pasific Timber Tbk has submitted applications for license to build HTI in Samarinda or  Banjarmasin, but the answer is not forthcoming. The HTI project is expected to support its wood working industry  to be expanded in Kalimantan. The location is selected on he river side areas of Mahakam  and  Barito rivers as the rivers will facilitate transport  to HTI and factories.

Sinar Mas Forestry to build 1 million hectares of HTI
Sinar Mas Forestry (SMF) will build 1 million hectares of HTI until 2009 to guarantee feedstock for its pulp factories. Currently SMF has only 600,000 hectares land for HTI in five provinces -  Jambi, Riau, West Kalimantan and East Kalimantan.

In its early phase, the group will build 100,000 hectares  in South  Sumatra. It will set aside US$ 1,200 in fund to finance every  hectare of the project.  Currently the 612,000 hectares of HTI to be built in five provinces will be anough only to supply 50% of  raw material needed by its pulp factories. .....................

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