CGI and Forest Debt

Sustainable forest management will be a key topic when donors and the Indonesian Government hold discussions at this month’s meeting of the Consultative Group on Indonesia (CGI). The Indonesian Government has promised the CGI it will implement sustainable forestry business practices in return for receiving new loans and grants.

Crucial to these discussions is the role of the Indonesian Bank Restructuring Agency (IBRA) in selling forest-related assets. While its current “fire-sale” policy may assist the Indonesian Government’s financial situation in the short-term, in the long-term it will prove costly to Indonesia’s environment, to its people and to the Government itself.

Many of the conglomerates with controlling interests in forestry companies borrowed enormous sums of money from banks during the 1990s and then proceeded to default on their loans during the Asian economic crisis. This left many private and public banks high-and-dry. To keep them from collapsing, the Indonesian government lent them billions of dollars in taxpayers’ funds. In return, the conglomerates offered to sell of all or part of their assets. That never happened. Now, instead of forcing the conglomerates to pay, IBRA wants to get rid of the loans for almost nothing and let someone else worry about them.

IBRA has no idea what to do with those loans. It was not set up to be a debt collection agency or to oversee the companies that owe money. It is merely an administrator trying to recover a few cents on the dollar for the government while it gets the financial sector back on its feet. Judging by its haste, IBRA wants to acquire as much short-term funds for the governments, regardless of any long-term cost.

Some 11 percent of the loans IBRA is selling are debts owed by forestry-related companies. If IBRA allows these companies or their friends to buy back their debt cheap, that will make it easier for them to get loans in the future to expand their forestry activities, since they will no longer have bad debts on their books. Such a move could only worsen the already huge over capacity in Indonesia’s forest industries. Pulp and plywood mills are currently devouring wood much faster than the forests can grow and the industry may run out of high-value timber within the next ten years.

There is no question Indonesia needs to maintain a strong forestry industry. But to sustain that industry over the long-term it has to reduce its overcapacity. If not, the jobs and incomes people have today will be gone tomorrow.

This is not the first time forestry companies have been given “free” loans or received taxpayer funded subsidies. The possibility of getting these sorts of handouts helped create the overcapacity problem in the first place.

One of the best and easiest ways to reduce overcapacity is to shut down forestry companies that do not pay their loans or engage in illegal activities. In fact, the Indonesian government has publicly committed itself to do just that. As a result, the Ministry of Forestry is now working with industry and the international community to determine which companies to shut down.

But if IBRA sells these companies’ non-performing loans it will be almost impossible to close them. The people purchasing the loans will argue the indebted company should stay in business so it can repay the debt owed. After all, it was the government who sold them the loans.

So what is the solution? First, IBRA should hold off on selling forestry loans. Next, the government should revoke the forestry concessions and licenses of companies that do not pay back their loans. When the companies see the government is serious, some will pay and some will get shut down. The result would be more revenue for the government, and less over capacity.

If this solution is so easy, why hasn’t it happened? Mainly because IBRA is so obsessed with selling off the loans as fast as it can, it has missed the bigger picture and failed to support the Ministry of Forestry’s efforts to reign in overcapacity. IBRA also argues that given Indonesian’s weak bankruptcy system it has no real way to force companies to pay. But it has never considered more innovative ways of pushing companies to pay – such as working with the Ministry of Forestry to revoke the concessions and licenses of companies that don’t pay and bar those companies from getting future concessions or licenses.

The Ministry of Forestry itself has proceeded cautiously in deciding which companies to close. It is obviously a delicate issue, and after all the problems it faced when it tried to keep mining out of protected areas, it is reluctant to act without support from other agencies.

Related to this is the justified concern about short-term job losses. The government needs time to assess potential job losses and job alternatives before shutting-down companies, so it cannot move too quick.

Accepting a few cents on the dollar and calling it quits may make IBRA’s life easier, but it won’t help taxpayers or the forests. IBRA’s soft approach of allowing companies to renege on their loans or to receive heavy discounts will cost the taxpayer billions of dollars. If it exerted a bit more muscle it could earn a lot more money, which the government could then use to provide jobs, education, and other services. And the money invested in these essential services won’t be used to prop up companies whose struggle to meet capacity indirectly encourages illegal logging and destruction of the forests.

The future of Indonesia’s forests rests with the Indonesian Government and, in particular, IBRA. The CGI should strongly encourage IBRA, through the Indonesian Government, to consider the long-term consequences of its policy of selling forestry-related assets.

For more information contact: