CSIS WORKING PAPER SERIES WPE 080

Decentralization and the Forestry Sector:

Opportunities and Challenges

Linda Christanty
Raymond Atje
Kurnya Roesad

February 2004

Economics Working Paper Series

http://www.csis.or.id/papers/wpe080

Part of the policy paper series on “The Impact Of the Economic Crisis On The
Forestry Sector In Indonesia”, a CSIS-John D. and Catherine T. MacArthur
Foundation Project. The authors thank the support of the MacArthur Foundation
Grant# 98-55536 for this research.

The CSIS Working Paper Series is a means by which members of the Centre for Strategic and
International Studies (CSIS) research community can quickly disseminate their research findings and
encourage exchanges of ideas. The author(s) welcome comments on the present form of this Working
Paper. The views expressed here are those of the author(s) and should not be attributed to CSIS Jakarta.
© 2004 Centre for Strategic and International Studies, Jakarta
Decentralization and the Forestry Sector: Opportunities and Challenges
Linda Christanty, Raymond Atje and Kurnya Roesad
CSIS Working Paper Series
WPE 080
February 2004

ABSTRACT

This paper looks into Indonesia’s recent experience with the decentralization process and
assesses opportunities and challenges for the forestry sector. Despite its brief existence since
only 2001 and the limited data available, decentralization in the forestry sector has shown
some significant trends. The paper finds that co-ordination between different levels of
government is still lacking, lacking a clear division of tasks between central, provincial and
district governments. Indonesia’s move to a more market – based forestry governance system
is currently impeded by the lack of a sound and secure property and tenure rights system,
exacerbated by legal uncertainties, and weak monitoring and enforcement capacities on the
local level. Overall, when compared to other forest-rich countries, decentralization has not
sufficiently empowered regional and local governments in the forestry sector, as the central
government retains most of the power to manage the country’s forests.

Keywords: Indonesia, decentralisation, forestry sector.

Linda Christanty Raymond Atje

cfuture@attglobal.net raymond_atje@csis.or.id
Environmental Management & Development Department of Economics
CFG Jakarta CSIS Jakarta

Kurnya Roesad
Department of Economics
CSIS Jakarta
 DECENTRALIZATION AND THE FORESTRY SECTOR:
OPPORTUNITIES AND CHALLENGES
Linda Christanty, Raymond Atje, and Kurnya Roesad

1. Introduction

In January 2001, Indonesia began the implementation of a decentralization program

aiming at transferring some authorities that were hitherto vested with the central
government to provincial, but primarily to district (kabupaten) and municipality
(kota) governments. Decentralization arose as one of the consequences of the severe
economic and political crisis, starting back in July 1997, which eventually led to the
downfall of President Suharto’s regime after 32 years in power. Political and
economic reforms resulted a decision to decentralize the government system. In 1999
the Parliament passed Law No.22 on Regional Governance and Law No.25 on Fiscal
Balance between the Central and Regional Governments. These laws were
implemented on January 1, 2001.

Forest management is one of the most important issues in the face of the
implementation of the regional autonomy in January 2001. In many resource-rich area
like East Kalimantan and Riau, forests are a source of regional revenue. However, in
many instances there seems to be a misperception/ misunderstanding on the essence
of decentralization, even among the elite in East Kalimantan and Riau.
Decentralization has not been perceived as an opportunity for the local people to
govern themselves. Rather, it has been given a narrow interpretation, i.e., opportunity
for the region to earn as much revenues as possible regardless of how these revenues
will be raised.

Until recently, the centralized system under the rule of Jakarta has been
regarded in some provinces as the main factor in exploiting their natural resources at
the expense of the local people. As a result, there is a tendency among local
governments to limit the central government’s role in the formulation of local
policies, including those related to natural resource management.

This could have dire consequences, especially to the management of natural

resources and may lead to the further over-exploitation of natural resources, including

1
forestry resources. It could ignite conflicts between different communities, between
community and business establishments operating to exploit natural resources,
between community and local government, as well as between different districts.

It has been argued somewhere else (Atje and Roesad, 2002, and Christanty
and Atje, 2001) that the command-and-control system applied to the forestry sector
during the Soeharto government had failed to ensure a sustainable forestry
development. One of the reasons was the inability of the government to monitor and
enforce its forestry policy. The inability was in turn caused by, among other things,
rampant corruption, inadequate institutional capacity in the department of forestry,
etc. It should be noted that monitoring and enforcement activities to ensure that a
policy is properly implemented are essential parts of a command-and control system.

In addition, it seems that the government was willing to sacrifice its long-term
objectives, including a sustainable forestry development, in exchange for short-term
gains, such higher export revenues from forestry sector. In pursuing its short-term
objectives the government had turned to large companies (concessionaires).
Concessionaires were coerced to build wood processing industries such sawmill,
plywood industry and, pulp and paper. This let to a rapid proliferation of forestry-
based industries in the late 1970s and in 1980s. Scotland et al., (1998) argue that the
total existing capacity of forestry- based industries during 1990s was well above the
capacity the country’s forests to provide timber in a sustainable way. It was one of the
reasons for a rapid rate of deforestation, which, according their estimate is around
1.6.million ha per annum.

During the height of the crisis, there had been a debate on how the Indonesia’s
economy should be managed. There were at least two views emerged from the debate.
One was to follow an orthodox solution prescribed by the International Monetary
Funds (IMF). The other is a more populist view that would like to give cooperative,
and small and medium enterprises bigger roles in the economy, but without a really
coherent program to follow. As will be discussed further later, these two views have,
in one way or another, influenced policy formulation in the forestry sector.

This paper attempts to make a preliminary assessment of the impact or impacts

of the decentralization program on the forestry sector. First, it is preliminary because
it is premature to make a meaningful assessment on the impacts of a program which is

2
only more than two years old. The assessment will be based primarily on secondary
information based on studies done prior to or after the program was launched. Second,
it is also preliminary in the sense that the current stage may be regarded as a
transitional stage to a decentralized government system as is envisioned in the two
decentralization laws. It should also be noted that reliable data, especially forestry
data, are not always readily available. This study will primarily try to assess
opportunities and challenges in the forestry sector in relation to the decentralization
program.

2. Decentralizing Indonesia

2.1 The rationale of decentralizing Indonesia

Attempts to decentralize Indonesia were already initiated during the Dutch

colonization through the issuance of the 1903 Decentralization Act, in which an
elected council was created to balance the de-concentration principle adopted at
the time (Suwandi, 2001).

The first municipalities were created in 1905, followed by the first districts
(gewesten) in 1910, and the first provinces on Java in the 1920’s (Hofman & Kaiser,
2002). More autonomy to local government was given through the issuance of the
1922 Act (Suwandi, 2001).

After the proclamation of independence, Indonesia’s first law, Law 1/1945,

dealt with regional autonomy (decentralization), which was also specified in article 18
of the 1945 Constitution that established the Republic of Indonesia as a unitary state.
In the meantime, the Dutch started setting up several Indonesian republics on the
islands outside Java, all united under the Dutch crown. This was basically a political
move, an argument that Republic Indonesia was only one part of Indonesia seeking
independence from the Dutch. This move resulted in the handing over of sovereignty
to the United Republics of Indonesia, a federal state within the commonwealth with
the Netherlands. The United Republics lasted for less than a year, and the 1950
Constitution reverted to a unitary state.

Law No. 1 of 1957 tried to revitalize regional autonomy, but these attempts
were called off after the outbreak of regional unrests on Sumatra, Sulawesi, and in

3
West Java. Presidential Decree No. 6 of 1959 brought back the 1945 Constitution, and
effectively abolished the 1957 autonomy law. In 1965, Law No. 18, dealt specifically
with local government matters, was passed reflecting the domination of political
parties in the national power.

Law 5/1974 raised the issue of regional autonomy again, but it was never fully
implemented. Its implementing regulations were disseminated starting only in 1992.
A trial implementation in 26 districts took off in 1996, encountering many difficulties
due largely to the fact that the devolved tasks did not have the corresponding
resources and facilities. The experiment was taken over by events, when, in the
aftermath of the 1997 economic crisis and the fall of Suharto’s New Order, two new
laws were passed: Law 22 and Law 25 of May 1999, outlining the new policy on
decentralization (Esden, B. 2002).

In Latin America and Africa, decentralization is motivated by political

concerns. In East Asia it is driven by the needs to improve service delivery to large
populations and the recognition of the limitations of central administration. The 1997
economic crisis and democratic reforms are the prime movers behind decentralization
in Indonesia. Bahl (2001) described the decentralization in Indonesia as “one of the
largest decentralization program that has been seen, it was done quickly, and there
still is not a detailed transition plan.”

Decentralization, defined as the transfer of authority and responsibility for

public functions from the central government to intermediate and local governments
or quasi-independent government organizations and/or the private sector, is a
multifaceted concept. Different types of decentralization, i.e. political, administrative,
fiscal, and market decentralization should be considered because they have different
characteristics, policy implications, and conditions for success, and can emerge in
different forms and combinations across countries, within countries and even within
sectors (The World Bank, 1999).

Litvak & Seddon (1999) classify decentralization into four categories: political
decentralization, fiscal decentralization, economic or market decentralization, and
administrative decentralization.

Political decentralization aims to give citizens and their elected

representatives more power in public decision making.

4
 Fiscal decentralization focuses on giving more power to local government
and private organizations in financial responsibility.

Economic or market decentralization refers to the shift responsibility for

functions from the public to the private sector through privatization and
deregulation.

Administrative decentralization focuses more on redistribution of

authority, responsibility for planning, financing, and managing public
services among different levels of government.

Several fiscal, political, and administrative instruments underpin the shift of

responsibility between different levels of government. These define the extent to
which intergovernmental relations are de-concentrated, delegated, or devolved.

Described by the Asia Foundation as one of the most important reforms that
the Indonesian government has undertaken since the democratic elections in June
1999, Law No. 22, 1999 concerning “Local Government,” and Law No. 25, 1999
concerning “The Fiscal Balance between the Central Government and the Regions,”
outline the new policy on decentralization (Esden, 2002). The two new
decentralization laws cover all major aspects of fiscal and administrative
decentralization (Ma & Hofman, 2000).

Hofman and Kaiser (2002) described Indonesia’s decentralization policy

implementation in 2001 as a “Big Bang,” saying it is rapidly moving the country from
one of the most centralized systems in the world to one of the most decentralized. The
year 2001 saw much of the government apparatus being transferred to the regions, the
regional share in government spending jumping steeply, and a completely new
intergovernmental fiscal system being put in place.

2.2 Administrative and governance decentralization

There are three major forms of administrative decentralization:

1. De-concentration: the redistribution of decision making authority and

financial and management responsibilities among different levels of the
central government. This is the mildest form of decentralization since it
does not involve any transfer of authority to local governments. For

5
 example: Kanwil Kehutanan/ Forestry Regional Office during the new era
Hutabarat, 2001).

2. Delegation: the transfer of responsibilities for decision making and

administration of public functions from the central government to local
governments or semi-autonomous organizations that are not fully
controlled by the central government but are accountable to it (i.e.
principal-agent relationship).

3. Devolution: the transfers of authority for decision making, finance and

management to quasi autonomous units of local government with
corporate status (Litvack & Seddon, 1999).

Under Laws 22 and 25 of 1999, which provide the framework for

administrative and fiscal devolution, districts (local governments in rural areas) and
municipalities (local governments in urban areas) assumed new functions and powers
previously assigned to the central government. Law 22 has devolved all areas to local
government with the exception of national defense, international relations, justice,
police, monetary, development planning, religion, and finance.

Usman (2001) states that Law 22 and Law 25 are based on five principles:
democracy; community participation; equity and justice; recognition of the potential
and the diversity within regions; the need to strengthen local legislatures. These five
principles support Indonesia’s push for reformation, which aims to eradicate the
practice of corruption, collusion, and nepotism (known as KKN), within the
government bureaucracy.

Law 22 of 1999 devolves most functions of government to Indonesia’s

regions, currently 32 provinces and over 348 districts and municipalities. The power
of districts and municipalities cover all sectors of administrative authority, except
national defense, international relations, justice, police, monetary, development
planning, religion, and finance.

The 32 provinces have a dual status—as autonomous regions and as

representatives of the central government in the regions. Usman (2001) explained that
as autonomous regions, provinces have the authority to manage certain inter-district
and inter-municipal matters. As representatives of the central government, the

6
provinces carry out certain administration tasks delegated by the president to the
governors. However, there is no hierarchical relationship between the province as an
autonomous region and the district (Hofman & Kaiser, 2002).

Despite the explicit provision in Law 22/1999 that there is no hierarchical

relation between the provinces and the local governments (districts and
municipalities), the provinces nevertheless exploited their authorities to perform tasks
on behalf of the districts or on matters that transcend district boundaries. As a result,
tasks with large externalities and significant economies of scale—such as watershed
management, sea management, communicable disease control—are likely to be left
unperformed or under-provided (Esden, 2002).

Esden (2002) also pointed out that scale of economies is in peril due to the
varying sizes of regions and the tendency to create new regions. The number of local
governments since Law 22 was passed has increased from less than 300 to 348 in
2002, with 20 -plus more expected in 2003. The number of provinces has also
increased from 26 to 32 (including the apparently defunct new provinces on Irian
Jaya). Population sizes also greatly vary: from less than 800,000 inhabitants in
Gorontalo province to over 35 millions in East Java province. Local governments
vary from 24,000 to 4.1 million.

Governance and accountability issues include the vaguely defined authorities

and functions of the regions which undermine accountability. Another is Indonesia’s
strong party system that limits the interest that local councilors take in their
constituents. Government regulations on the accountability of the head of regions
have strengthened the position of the head such that it has become very difficult for
regional parliaments to fire him. Another issue is the lack of formal mechanisms that
can monitor the accountability of local leaders, such as external audit of regional
governments.

Under the decentralization program implemented in January 2001, the central

government should transfer some of the government authorities to district and
municipal governments (hereafter will also be referred to as local governments).
However, a study done by CSIS prior to the implementation of the program (CSIS,
2001) questions the capabilities and the readiness of local governments, most
particularly local legislatives, to implement the program. This finding seems to have

7
been confirmed by another study by KPPOD, an independent ‘autonomy watch’
organization. As will be elaborated further later, the study by KPPOD finds that most
of local regulations issued after the decentralization are, in one-way or another,
defective.

Meanwhile, the Government Regulation No. 25/2000, the implementing

regulation of Law No. 22/1999, requires innovative local governments. The regulation
provides sector-by-sector account of authorities that will be retained by the central
and provincial governments. The rest of the authorities will be transferred to local
governments. However, the regulation does not define what the rest of the authorities
are, and district/municipal governments have to define for themselves the roles that
they would like to play in each sector. For districts and municipalities where policy
entrepreneurs play important roles, this freedom would provide them with
opportunities to introduce policy innovations. Policy entrepreneurs are people who
seek to initiate dynamic policy change. They do this through attempting to win
support for ideas for policy innovation (Mintrom, 1997). However, as hinted above,
the prevailing concern both before and after the implementation of the
decentralization program has been about the lack of capabilities of district and
municipal governments, at least in the short run, to fully exercise the authorities
transferred to them under the program.

According to the Regulation No.25/2000, the central government retains some

of the most important roles in setting policy in the forestry sector. For instance, the
central government retains the right to determine territorial boundaries of the
country’s forests, as well as changes in their status and functions. In addition it retains
the right to set the criteria and rates of reforestation fund, tariff for business permits,
and forestry resource rent. Initially, the central government retains only the right to
issue permits for cross-province concession areas (concession areas which cover more
than one province), whereas the provincial governments have the right to issue permit
for cross-district concession areas.4 Meanwhile, local governments have to decide for
themselves what other aspects of forestry management that they may undertake.

4
As will be discuss further below, a more recent government regulation (Government Regulation
no.34/2002) has change this specific stipulation. Under the new regulation only the central government
can issue logging concessions.

8
 One immediate task of local governments (executives as well legislatives) is to
produce local government regulations (peraturan pemerintah daerah, PERDA). The
KPPOD study mentioned earlier examines some 340 PERDA issued since January
2001 in 28 provinces (KPPOD, 2002). The result shows that only 103 PERDA or
about 31 percent are without any significant defects, leaving some 237 PERDA with
defects, ranging from less serious to very serious problems. Domestic trade barriers,
double taxation, and validity of the PERDA in question to achieve the stated
objective, are considered as very serious problems. Serious problems include
bureaucratic constraint, excessive rates of local tax and retribution, etc., whereas less
serious problem is concerning PERDA with irrelevant legal basis. Base on this
division, the study finds that out of the 340 PERDA, 35 (10 %) are with very serious
problems, 144 (42 %) are with serious problems and 58 (17 %) are with a less serious
problem. Of the 35 PERDA with very serious problems, 4 are concerning tax, 26 are
concerning levies, and 5 are concerning other things (Table 1). The central
government has the power to revoke PERDA it deems as invalid. It is likely therefore
that it will revoke some or all of PERDA with very serious problems and ask local
governments to revise the ones with serious or less serious problems.

Table1: Local Regulations with Shortcomings

Degree of Problem Tax Levies Others Total PERDA

Less serious 9 47 2 58
Serious 19 88 37 144
Very serious 4 26 5 35
Without Problem 19 72 12 103
Total Number of PERDA 51 233 56 340
Source: KPPOD (2002), “Kajian Peraturan Daerah”, a paper presented at a KPPOD-
PEG USAID seminar on Regional Autonomy and Business Climates, Jakarta,
March 19, 2002.

The fact that less than one third of the PERDA examined by KPPOD are
considered as without any significant problem clearly indicate inadequate capabilities
on the part of the local governments to produce good polices. This is either because
local governments suffer from human capital shortages or the lack of understanding
among local officials about what constitutes a good policy, or both.

In January 2003, donors in the CGI meeting expressed their concerns over the
shortcomings in the supervision of regional regulations (PERDA), which might
jeopardize the sustainable management of natural resources and environmental

9
protection. The Government Regulation 20/2001 refers to facilitation and supervision.
As of April 2003, a total number of 2,147 regional regulations (PERDA) have been
verified by the central government, and 173 of which have been cancelled.

2.3 Fiscal decentralization

Law 25 of 1999 is the regulatory framework for intergovernmental transfers, together

with Government Regulation 104, which was passed in 2000. It covers revenue
sharing, general-purpose grants, and specific-purpose grants, according to the
Minister of Home Affairs.

The central government will share revenue from natural resources with
subnational governments. Sub-national governments will receive 15% of onshore oil
revenue, 30% of onshore gas revenue (including offshore gas within 12 miles of the
coast), 70% of forestry revenue, and 100% of fisheries revenue—all shared on an
origin basis. In addition, Ma and Hofman (2001) indicate that the central government
must transfer at least 25% of its revenue after sharing to subnational governments
through a general purpose allocation: 10% of this will go to provinces and 90% to
districts and municipalities. This becomes the foundation of the new
intergovernmental fiscal system, which is called the Dana Alokasi Umum (DAU).

Table 2. DAU Dominates Regional revenue 2001-2002 ( Rp Trillion)

FY 2001 FY 2001 FY 2002
adjusted
DAU 60.5 60.5 69.1
DAU Contingency 6.5 3.1 2
Shared Taxes 20.3 21.2 24.6
Special Autonomy - - 1.3
Special Allocation 0.9 0.7 0.8
Fund (reforestation)
87.7 85.4 97.8
Total Transfers
Regional Own
7.0 7.0 7.6
Revenues (PAD)
Source: Hofman & Kaiser, 2002, The Making of the Big Bang and its Aftermath – A Political Economy
Perspective.

Ahmad and Hofman (2000) already pointed out the risks associated with the
decentralization policy due to the proposed implementation of the revenue devolution
provisions before there has been an effective decentralization of expenditures,

10
including the administrative staff. They view this as threats to macroeconomic
stability, as well as the continued provision of services at the local level during a
potentially volatile period of political and economic transition.

Table 3. Shares of revenues to central, provincial and regional governments

Item Central Provincial Originating Other Local Govt All Local Govt
Govt Govt Local Govt in the same in Indonesia
province (Equal Share)

Oil (non tax, offshore) 85 3 6 6 -

LNG (non tax, onshore) 70 6 12 6 -
Mining: Land-rent 20 16 64 - -
Mining: Royalty 20 16 32 32 -
Forestry: Land-rent 20 16 64 - -
Forestry: Resource rent 20 16 32 32 -
Fishery 20 - - - 80
Property Tax 9 16.2 64.8 - 10
Land Transfer Fee - 16 64 - 20
Personal Income Tax 80 8 12 - -

Source: Hofman & Kaiser (2002): The Making of the Big Bang and its Aftermath: A Political Economy
Perspective.

Ahmad and Hofman (2000) raised several issues on Indonesia’s

decentralization, for example expenditure responsibilities which are vaguely defined
and transfers and revenue-sharing which have been overly-specified. The floor on
transfers to general allocation fund of 25 percent of domestic revenues was predicted
to cause macroeconomic imbalances and the sharing of fluctuating oil and gas
revenues would pose a number of budgeting difficulties. They also underlined the
problem of enhancement of regional disparities resulted in the implementation of the
oil and gas sharing if not offset by the equalization transfers. Furthermore, sharing of
the land and property tax on urban and rural assets might undercut the potential for
local accountability and there was a lack of transparency that might make misuse of
public funds possible.

However, after one year of implementation of the decentralization policy,

Hofman and Kaiser (2000) found that only little went wrong in the logistics of this
radical, hastily prepared move born amidst the political turmoil in the aftermath of the
New Order Government.

Several issues related to the intergovernmental fiscal system were brought up,
i.e. the regions’ high dependence on central transfers, which might undermine

11
accountability, and the possibility that the inadequate legal provisions for local taxes
might encourage local units to resort to inappropriate taxation and unhealthy tax
exporting, coupled with the central government’s limited means to finance national
priorities at the local level (Esden, 2002).

The Minister of Home Affairs (2001 in Esden 2002) identified some critical
issues regarding fiscal decentralization, which surfaced during the first year of
decentralization:

transparency in defining the mechanism for equalization fund allocation;

transparency in the utilization of equalization funds in each region;

fairness in the allocation of the DAU;

sufficiency of the DAU allocation for each region, consisting of:

¾ sufficiency measured by the need of the routine budget for the transfer
of personnel;

¾ sufficiency measured by the need of additional funds for salary

increases.

a limited Special Allocation Grant (DAK) allocation, in total amount or

breadth, which so far has been limited only to reforestation. Law 25/1999
directs DAK towards supporting special needs in the regions. However,
there is still considerable debate among institutions regarding the
definition of “special needs.”

Ma and Hofman (2000) illustrate some lessons learned from the first year
implementation of decentralization in Indonesia as follows:

Simultaneous political, administrative, and fiscal decentralization is

difficult, if not impossible to manage.

Even if rapid fiscal decentralization is politically imperative, it may still be

feasible to avoid a disruption in service delivery, by taking a phased
approach to decentralization.

Every effort should be made to avoid delays in establishing detailed

regulations on the responsibilities of various levels of government.

12
 Local governments should be assigned one or a few substantive taxes over
which they have some rate autonomy, to ensure local accountability and
fiscal discipline.

In an economically and ethnically diverse country like Indonesia, the

central government has to maintain sufficient fiscal resources to ensure
reasonable equalization and minimum service standards across regions.

Given the reasonable data availability and technical sophistication of

Indonesia’s Ministry of Finance staff and involved academics, it is feasible
and desirable to establish a general transfer system, that takes into account
both local revenue capacities and spending needs.

3. Decentralization in the Forestry Sector

3.1 General issues in the forestry sector

Before 1967, Indonesia’s timber industry relied primarily on teak plantation, mostly
in Java, for round wood supply. Starting in 1967, the focus shifted to wood from
natural forests. Hence, in 1967 the government issued the Basic Forestry Law (Law
no. 7/1967), which provided the basis for forestry policy for the next 32 years. In
1970 the government introduced a concessionary system in timber industry. Under the
system timber companies were given concessions to extract timber from certain forest
areas. Since then the number of concessionaires multiplied rapidly. Concessionaires
were also encouraged to venture into the downstream industries. Many of them
established sawmills, plywood plants, pulp and paper industry, etc. At the same time
the government began to restrict log export and eventually banned log exports. Wood-
based industries proliferated rapidly. By the early 1990s, for example, Indonesia had
become a dominant exporter of tropical plywood.

The above development came about at the expense of the sustainable forest
management. A number of factors contributed to this. First, during the New Order
period, forestry policy was heavily centralized and based a command-and-control
system. All the decisions concerning forest exploitation, from issuing licences to
concessionaires to enforcement of the existing law and regulations were done in
Jakarta. Local governments did not have a say on how to manage forests in their

13
respective regions. Meanwhile, the central government did not have the monitoring
and enforcement capabilities to ensure that concessionaires would follow all the rules
and regulations concerning timber extraction. For instance, in 1972 the government
had introduced a selective cutting system (Tebang Pilih Indonesia – TPI), which was
prescribed for almost all natural forests. The TPI provides for, among other things, the
length of the cutting system and the minimum allowable size to be logged, i.e., 35
years and 50 cm, respectively. The system did not require concessionaires to replant
their concession areas and was perceived as its weakness. Hence, in 1989 the
government introduced a new system, selective cutting and replanting system (Tebang
Pilih dan Tanam Indonesia, TPTI), which also required concessionaires to replant
their areas. The new system retains the important characteristics of TPI, such as the
length of the cutting period and the minimum allowable cut. Nevertheless, for the
reason stated above, logging companies, in general, had failed to minimize damages
to forests when undertaking log extraction, as well as replanted the logged areas.

Second, the reforestation program had not had much success either. During the
period under consideration the government introduced a reforestation fund scheme.
The scheme has some serious drawbacks, however. Initially, the fund was introduced
as a reforestation guarantee deposit fund introduced in 1980, to be paid by the
concessionaire for the quantity of logs produced. Paid up front, the fee was refundable
to the concession holder who actually undertook reforestation. It seems, however, that
many concession holders simply considered the paid up fees as forgone costs and
would not even try to recover them back. At the same time they would not undertake
reforestation either, and simply let the government to do the job in their stead. This is
especially so after it was converted to a non-refundable reforestation fee under
Presidential Decree No. 31 / 1989.

In 1990 the government introduced Industrial Plantation Forest (Hutan

Tanaman Industri, HTI) program as a variant form of forest concession. The main
purpose of the program was to transform degraded land into productive forest
resource area. The government allowed the undertakers to use of reforestation fund to
finance industrial timber estate development. Many companies involved in the
industrial timber estate development have applied for the fund. Due to weak
monitoring on the government part, some of the fund might have been used for other
purposes than planting trees.

14
 Finally, there was no assurance the company would get extension on its
concession permit. Moreover, the length of the concession was considered as too
short. It is generally understood that it would take about 35 years for a tree before it
could be harvested. It should also be stated that companies did not have property
rights over replanted trees. Hence, concessionaires did have a strong incentive to take
good care of their concession areas.

One would hope that, under the regional autonomy program, local
governments would be in a better position to perform tasks that the central
government had hitherto failed to do, enforcing and monitoring the implementation of
sustainable forestry policy among others. Unfortunately, early indications suggest that
that this did not happen. Law no 41/1999, which was introduced to replace the Basic
Forestry Law, and with a decentralized government decision-making in mind, does
not resolve the above issues. Instead, it introduces new problems. On the contrary, it
seems that local governments are more interested in pursuing short-term objectives of
increasing local revenues. In 1999 the Minister of Forestry and Estate Crops issued a
decree allowing district governments to issue permits for small-scale concessions (up
to 100 hectares). The idea was to increase local income by giving local communities a
stake in forest exploitation and hence, reduce illegal logging and resource conflicts.
One unintended consequence of decree was the rapid proliferation small concessions.
For instance, it was reported that in Kutai Barat District, East Kalimantan, around 600
concession rights have been issued by mid 2001. other districts also began to issue a
large number of licenses. Acknowledging this problem, the minister of forestry
attempted to reverse the decision in the following year. He was widely ignored (DTE
Special Report).

Moreover, the government has granted new forestry concessions to at least 24

pesantren (Islamic Boarding Schools). The pesantren would be able to exploit over
one million hectares of forest in Kalimantan and Sumatra in cooperation with private
firms. The arrangement would enable the former to share the profits from the
concessions without having to invest. In addition to the pesantren, the government has
also made a similar arrangement with at least 33 universities to obtain shares in the
same number of forest concessions that cover even larger forest areas, close to 3
million hectares together. These “partnerships” invite some serious questions because
it seems that the selection process to determine which pesantren or universities that

15
would be granted concession rights was very arbitrary. But a more fundamental
question is the one associated with the nature of this particular arrangement itself.
Why should any institution be granted a concession right without it having to invest or
actively participate in the management of the concession? Since there is a serious
doubt about the ability of those institutions to actively participate in managing their
respective concession areas, the partnership may be regarded as just another form of
rent seeking activity.

During the government of Abdurrahman Wahid, the ministry of forestry

issued a number of policy decisions, which left most observers amazed and confused.
Initially, the minister announced that the government would stop issuing new logging
concessions and the existing ones would be gradually phased out. In addition,
operation outside Java would be put under the control of new state companies.
However, in late 2000 the minister contradicted his earlier promise by issuing a
number of logging concession rights to private companies, 21 of which were new
concessions (DTE Special Report, June 2002).

3.2 Economic crisis and democratic reforms as the prime movers behind
decentralization in the forestry sector

The recent economic crisis has affected Indonesia’s forestry sector in several ways.
First, it affected the livelihood of people who lived in or near natural forests. It is
estimated that there are around 20 million people in this category. There was a broad
tendency during the crisis for those people to compensate for lost agricultural income
with income from forests, timber as well as non-timber products (Sunderlin et al.,
2000). This may partly explain the recent upsurge in illegal logging.

Second, it affected large timber companies. Many of the companies expanded

rapidly before the crisis through debt financing. Because of the crisis, many of the
highly indebted companies were unable to service their debts. This subsequently led
to the collapse of many banks, which in turn resulted in the highly indebted
companies coming under the control of the Indonesian Bank Restructuring Agency
(IBRA). IBRA has allowed most of these companies to continue operating under their
pre crisis management teams. There is a danger that because of their uncertain future,
they may try to engage in reckless practices in the field, e.g., by trying to extract as

16
much timber as possible from the concession areas, or by allowing illegal loggers to
operate in those areas.

Third, it further reduced the government’s capability to monitor and enforce

the implementation of sustainable forestry policy. It should be noted that in the past
the government never really had sufficient capability to monitor and enforce its policy
in the forestry sector. At the same time, the breakdown of law and order has resulted
in illegal logging activities as well as smuggling activities to neighboring countries.
On the latter, a study by Alqadrie et al (2002) indicates that some of the logs
produced, legally or illegally, in West Kalimantan were smuggled to Serawak,
Malaysia.

Finally, the resent economic crisis has affected the forestry sector in a more
subtle way. As stated earlier, it led to the emergence of two different views on how to
bring the economy out of the crisis and how it should be managed to ensure a sustain
economic growth into the future. The supporters of the IMF-led economic reform,
hereafter referred to the mainstream group, argue that the best way forward is to
consistently follow the reform package agreed upon between the government of
Indonesia and the IMF. The details of the package were given in a number of letters
of intent (LoI) from the government to IMF. In brief, as usually the case of IMF
prescribed reforms, the proposed reform was essentially a pro market reform. The aim
is to give the market bigger role and at the same time reduce the role of the
government in the economy.

In the forestry sector, there were several problems and issues that received
special attentions of IMF as well as of countries and other international organizations
that were included in the Consultative Group for Indonesia (CGI). As stated earlier,
Indonesia has been losing its forest at an alarming speed. The reasons varied from
excessive logging, under valuation of forest, the absence of rule of law, the absence of
well-defined and secure property rights, especially within forest areas, etc. Examples
of such problems are ample (see, e.g., Walton, 2001). For instance, according to one
estimate, Indonesia’s plywood and pulp industries together, at full capacity, require up
to 46 million cubic meters of logs every year. If one adds domestic timber demand to
this number, then annual log demand exceeds annual supply by more than twice. In
addition, there are a large number of unlicensed sawmills operating in Indonesia, and
many of them are obtaining timber illegally. As an example, around 60 percent of the

17
183 sawmills found around Kerinci Seblat National Park in Jambi was without
license.

Recurrent forest fires resulted from land clearing also received a lot of
attention from the international communities, not only because smokes from such
fires affect the neighboring countries, but also because usually a large fraction of the
land cleared are forest areas. According to one estimate, the total economic loss to
Indonesia of the 1997/98 forest fires was around US$7.8 billion, with an additional
cost of $1.5 billion in damage to global environment (Walton, 2001).

Indonesia has been under pressure from CGI to address the above issues as
well as other forestry-related issues. As a result, in 2000, the government issued a 12-
point forestry action plan, in which it committed itself to the following actions
(Hutabarat, 2001, and Walton, 2001):

1. To invite the cooperation and coordination of other ministries to impose

strong measures against illegal loggers, especially those operating within
national parks, and to closedown illegal sawmills;

2. To speed up forest resource assessment as a basis for formulation of the

National Forest Program (NFP);

3. To evaluate government policy on forest conversion and impose a

temporary moratorium on all natural forest conversion until NFP is
established;

4. To downsize and restructure wood-based industry so as to establish

balance between supply of and demand for raw material, and most
importantly, to increase competitiveness of Indonesia’s wood-based
industry;

5. To closedown heavily-indebted wood industries under the control of the

Indonesian Banking Restructuring Agency (IBRA) and link the proposed
debt write-off to capacity reduction;

6. To establish a link between reforestation program with the existing forest-

based industries, including those under construction;

7. To calculate the real market value of logs;

18
 8. To take advantage of the decentralization processes as a tool to enhance
sustainable forest management;

9. To address the problem of the recurrent forest fires;

10. To design and implement a consulted National Forest Program;

11. To address the problem of land tenure; and

12. To revive and improve the forest management system.

Although the mainstream view seems to have prevailed, the populist view has
nevertheless filtered into some the policies, including the forestry law, issued since
the crisis. The Government Regulation No. 6/1999, for instance, includes provisions
concerning small-scale concession rights (hak pemungutan hasil hutan, HPHH), given
to individuals or cooperatives to collect timber and other forest products from forest
areas of up to 100 ha in size. The permit for HPHH is given for one year and issued
by a bupati (district head). As will be elaborated further later, the issue of HPHH has
created a lot of problems before and after the implementation of decentralization
program.

The populist view has also filtered into the new Forestry Law (Law No.
41/1999). This includes a requirement that concessionaires should include local
cooperatives in their activities. At a glance, it seems that the main reasoning behind
the populist idea was to provide local people with greater access to forestry resources.
They argued that the past arrangement, whereby concessions were given only to large
establishments did not benefit local communities. Furthermore, it was the large
companies who were responsible to many problems in the forestry sector, including
rapid deforestation. Small companies and cooperatives would not be as irresponsible
as large concessionaires.

However, a careful examination of the above laws and regulations as well as

other related ministerial decrees, clearly indicates their main objective is more
ideological in tone. For instance, the idea of requiring concessionaires to include
cooperatives in their activities did not get significant responses, if at all, from local
communities outside Java. One possible explanation is that the cooperative idea is
alien to them and the government officials were well aware about it. The inclusion of

19
such a provision in the law was mainly because the insistence by the proponents of
the cooperative idea, i.e., the populist group. One unintended consequence of the
provision is that many of the cooperatives established in response to Law No. 41,
were actually set up in Jakarta. In addition, it should also be noted, as some recent
studies show, that small concessionaires are as capable to create damages to forests as
large ones.

The working group statement on Forestry in the CGI Meeting in Bali, January
21-22, 2003 indicates that:

Unclear distribution of roles and responsibilities between the central,

provincial, and local government as stated in the Decentralization Law has
limited the capacity of the Ministry of Forestry to address non sustainable
legal and illegal harvesting of forest resources in Indonesia.

The newly introduced district level rules and regulations designed to

increase revenue to local government are often issued without considering
the principle of local government’s revenue are often issued to obtain
retribution fees, which led to legalizing illegal timber.

District–granted licenses, such as IPPK, IPHH, IPKTM, HPHKM, etc.

have been ruled out by the enactment of the new government regulation,
PP 34, in June 2002. Although the ban in issuing such licenses is
retroactive for any licenses issued after January 1, 2002, there is no
compliance on the new regulations by the APKASI (the associations of
Bupatis), as they consider that such actions were done for the benefit of
their people, and they do not have to comply with the new government
regulation.

3.3 International comparisons

When compared to other countries, Indonesia’s forestry policies are still fairly
centralized. A brief look at Table 4 reveals that the decentralization process in many
countries has brought about a clear reduction of the central government’s role in
managing forests. In most countries, the government provides the overall forestry
policy framework and technical guidance to the regions. Federal governments usually
focus on general policies, international relations, trade and research. State and
provincial governments have considerable powers in determining the use and

20
exploitation of forests within their boundaries. For instance, state governments control
most of Malaysia’s forests, while in India state forest departments manage 80% of the
forests. An extreme case is Nigeria, which does not have a federal forestry legislation,
with each state completely autonomous in determining the classification and use of
forestland (CIFOR 2002).

Indonesia’s Ministry of Forestry still exerts two main control functions over
the regions. First, it determines the status and functions of forest areas and second, it
still controls the management of conservation and protected forestland. Moreover,
districts cannot enact legislative environmental standards that are deemed below
national standards. Clearly, most forest-rich countries discussed in Table 4 have
moved away from such a centralized forest authority.

Table 4: A Comparative Perspective on Federal Forestry Systems

Country Role of central government Role of state and municipal

Australia Guidance role in form of
agreements with states and
territories on land use and
timber production.
Brazil Ministry of Environment gives
responsibilities to regulate
forestry activities to states with
proven capabilities.
Canada Coordinating role in
formulating national strategy
Centralized role in sponsoring
research
Germany Federal forest laws provide
framework for most specific
state laws
governments
Decide and regulate use of forestland and
logging.
Each state has own laws and codes of
practice.
Receive 20% of taxes from forest
activities.
Sales taxes from forest activities go to
state governments
25% of sales tax revenues passed on to
municipal governments
Many states have own forestry laws
Provincial governments own two-thirds of
forest
Allocate concessions
Receive royalties from timber production
Each province has own forest laws and
policy
Indigenous groups manage some forest
States own and manage one third of forest
area
State governments provide all technical
assistance and many subsidies
Designate protected areas

United States Federal government owns 35% States own around 5% of forests
of America of forest land States regulate forest use on 60% of
Must pay up to 50% of privately owned forests
revenues from timber sale to Each state has own legislation determining
counties logging practices for companies
Federal and state governments Some forest directly controlled by tribal
each manage own protected authorities
areas

21
Table 4: A Comparative Perspective on Federal Forestry Systems (continued…)

Malaysia Provides guidance, advice, Constitution defines forest as state matter

technical assistance and training
Formulates National Forest
Policy
There are both state and federal
protected areas
State empowered to enact forestry laws
and implement them
Formulate own independent policies
Designate what forests used for
production, protection or conversion
States allocate concessions
States receive taxes and royalties
Each state has its own conservation plans

Nigeria There is no federal forest Constitution assigns responsibility to state

legislation
Russia Formally, federal government
controls most forest land and
decision functions
Source: Compiled from CIFOR (2002)
governments
Each state has own policy, legislation and
forest service
Classification of forestland
Allocate concessions
Receive royalties and taxes
Most revenues go to state government,
sometimes shared with local government
or traditional rulers
In practice, regional governments exercise
great influence over most forest-related
policies and enterprises operating within
regional borders
Regional and local governments receive
60% of taxes and royalties

4. Policy issues and evaluation of first two years of decentralization

4.1 The need for coherent forestry policy

One pressing issue that needs to be resolved by the central, provincial, and local
governments together is how to harmonize their policies, especially in the forestry
sector. It has been mentioned somewhere else (Atje and Roesad, 2002) that one of the
problems confronted the government in the past was its inability to pursue a
consistent forestry policy. This had let to excessive investment in the forest-based
industry, which had created massive demand for logs, and eventually led to rapid
deforestation. By the early 1990s the demand for logs by the industry had exceeded
the capability of the existing concessionaires to supply logs legally. The problem had
been aggravated by the lack of government capability to enforce and monitor the
implementation of its forestry policy. As a result, rampant illegal logging also took
place to fill in the gap between demand and the legal supply of logs.

One would hope that with the decentralization program many of the problems
in the forestry sector could be addressed as well. That seems to be the hope of the CGI

22
members as well. For instance, the central government could delegate the task of
monitoring and enforcement to local governments. Unfortunately, this has not been
the case. The main constraint is an institutional one. There has not been any real
attempt to harmonize the central, provincial and local governments’ forestry policies.
As stated earlier the lack of institutional capacities on the part of local governments
might have worsen the problem. In addition, the earlier decentralization attempt in the
forestry sector has also exacerbated the problem. The latter refers to the issuance of
HPHH permits in many places. It should be noted that the introduction of HPHH
preceded the decentralization program. Based on the Government Regulation
No.6/1999, the Minister of Forestry and Estate issued a Ministerial Decree
No.310/1999 in 1999 that provided a bupati with the right to issue HPHH permits for
the local community. The holder of a permit has an exclusive right to harvest timber
and non-timber products from a small-scale concession area (up to one hundred
hectares).

Government Regulation No.6/1999 clearly states that the provision of an

HPHH permit is primarily to meet local demand. However, in some districts, the
number of people who receive HPPH permits have proliferated rapidly that it would
be hard to argue that the logs are only for local use. In some districts several hundred
permits have been issued within one year. As a result some districts, especially in
Kalimantan, are experiencing rapid deforestation. It should be noted that the decree
has inherent weakness. In addition, although the decree requires the holder of a permit
to undertake environmental impact assessments before beginning logging operations,
in practice this requirement has been violated with impunity. Similarly, the
requirement that the logger may not use mechanical equipment has generally been
ignored.

Realizing the destructive consequences of HPHH, the Minister of Forestry

issued a new decree (Decree No.084/ 2000) in 2000, canceling the implementation of
the previous Decree (No. 310/1999), and prohibiting bupati from issuing new permits.
Yet, some bupatis refused to comply with the new decree, arguing that HPHH were
meant to improve the welfare of the local communities who were marginalized during
the former regime. As the boundary of each small concession is not too clear, there
are discrepancies between the location stated in the permit and the location logged by
the operator. Without proper monitoring, over-logging activities may occur in various

23
areas. The condition is also worsened by the fact that the allocation of small
concessions is not determined using a good management plan, nor a good silviculture
management system. As a result, the small concessions are often completely
deforested, resulting in a loss of several thousand hectares of forest land within
merely one year.

Externality issue is another problem that often requires cooperation among

different government institutions to resolve it. Forestry Law 1999 states that forest
area covering more than one district within a province should be managed by the
province, while forest stretching over more than one province, i.e. national park, is
managed by the central government. In reality, however, the implementation of this
regulation is not that easy. Local governments (bupatis and governors) often have
different perception on how to manage the area, and this may result in conflicting
policies. For example, part of Bukit Tigapuluh forest is located in West Sumatra and
is classified as a production forest area. Another part is located in Riau and is declared
as a protection forest. It is very difficult to maintain the sustainability of the protection
forest, as illegal loggers and other forest intruders move in from the West Sumatra
side.

Another example is the different treatment for forests in the upstream and
downstream districts. A district located upstream and only covering protected forest
areas may not benefit financially compared to a downstream district receiving
financial benefit from the exploitation of its production forest areas. As the
downstream district receives the ecological benefit from the upstream forest
conservation, there should be a mechanism on how the downstream district should
compensate or share the financial benefit with the upstream district.

As noted, the central government has been trying to reclaim back some of the
authorities given to local governments under the decentralization program. In the
forestry sector, the government issued a new regulation in 2002, i.e., Government
Regulation no 34/2002 concerning Forestry Plan and Formulation of Forest
Management Plan, Forest Use and Utilization of Forest Areas (Tata Hutan dan
Penyusunan Rencana Pengelolaan Hutan, Pemanfaatan Hutan dan Penggunaan
Kawasan Hutan). The regulation specifically mentions that the right to issue logging
licenses rests with the central government (the ministry of forestry) upon
recommendations from district heads, mayors, or provincial governors. In addition,

24
the central government retains the right to formulate forestry strategy, forest
management, forest use and utilization of forest areas. It remains to be seen whether
with this new regulation the government will be able to stop all activities associated
with small-scale concessions.

4.2 The need to take pressure off forests

The recent crisis has increased the pressure on the country’s forests. People who lived
in and around natural forests became even more dependent on forests for their
livelihood (Sunderlin et al., 2000). To reduce that dependency, local governments
need to promote faster economic growth since it will improve the wellbeing of the
people in general. A recent study by Dollar and Kraay (2000) shows that income of
the poor rises one-for-one with the overall growth. That is, as overall income
increases, on average incomes of the poor, i.e., the bottom 20 percent of the
population, increase by exactly the same amount. The result is important because it
goes contrary to a popular belief that economic growth only benefits the upper
fraction of the society. A similar effect also observed in Indonesia. During the period
of rapid economic growth, the number of Indonesians living under the poverty line
dropped significantly, from 60 percent of the population in 1970 to 11 percent at onset
of the financial crisis in 1997.

It is quite logical to assume that, as people have more stakes in the sustained
economic growth they will, in general, be less like to get involved in activities that
will undermine the process itself. This includes people refraining from activities that
may cause damage to forests, such as over logging, illegal logging, etc. Moreover,
faster economic growth also provides local governments with more revenues. To
achieve faster economic growth local governments need to adopt policies that are
conducive to local investment. These include lower local tax rates, good governance,
well defined and secure property rights, etc. Unfortunately, as the KPPOD study
suggests (KPPOD, 2002), it seems that many local governments are more interested in
securing higher local government revenues through higher tax and retribution rates,
including from forestry-related activities. The latter are likely to be detrimental to
sustainable forestry management and development in their own regions.

It has been suggested that building up entrepreneurial capabilities is

particularly important for developing countries. Experience from other countries

25
illustrates the enormous role of entrepreneurship in the development process,
especially in small and medium size companies (Lindbeck, 1991). It has been argued
that small and medium enterprises (SMEs) play an important role in Indonesia’s
economic development (Atje, 2003). It may therefore be argued that the way forward
for most local economies is for local governments to stimulate entrepreneurial
activities. However, there are reasons to believe that quite often government policies,
including the ones associated with SME development, have been hindering the very
activities they are supposed to promote. Hill (2001) provides a number of examples of
government policies that, in one way or another, have harmed SME development in
the past. First, trade policies have been biased against SMEs in that major recipients
of trade protection have been predominantly large corporations. Second, the
regulatory framework has often harmed SMEs. For instance, incentives for investors
may benefit larger establishments because of the minimum investment size
requirement. Finally, when it comes to SME development, government officials tend
to favor a paternalistic approach and are suspicious of markets and economic
liberalism.

To be successful, local governments should avoid making similar mistakes.

Indonesia’s own experience during the last two decades suggests that both macro and
micro components of the economy respond favorably to economic rewards, including
relative prices and wages as well as profitability prospects. What is needed to
stimulate entrepreneurial initiatives, therefore, is for local governments to allow for
decentralized decision making by way of markets, price signals and economic
incentives. It needs to be recognized that quite often the provision of economic
incentive simply means removal of a distortion previously introduced, or the
avoidance in introducing new ones. By doing so, the government in question allows
relative prices to reflect opportunity costs and preferences. On the other hand, local
governments need to avoid subsidizing or protecting dying firms or industries.

Local governments may also want to contribute to the development of market-

oriented institutions that respond satisfactorily to market signals in the field of
finance. Private saving and private supply of capital have been instrumental for the
entry and growth of new firms, for entrepreneurship and for innovation in the West.
Although the availability of rural credits in Indonesia has increased in recent years5,

5
For further discussion concerning rural credit in Indonesia, see Robinson (2002)

26
there is still a need to build credit market institutions in many parts of the country that
could reach a larger fraction of the population, especially in rural areas. It has been
suggested that Indonesia’s entrepreneurs perceive lack of access to credit as a greater
problem than the higher interest rates that they have to pay for formal credit (Sandee
and others, 1994). This assertion has been corroborated by Goeltom’s (1995) finding.
According to her, although facing the highest interest rates, small firms have
experienced the greatest relative increase in their rate of investment, their leverage
ratio, and the productivity of their capital.

4.3 The need for secure property and contractual rights

There is also a need for the introduction of a sound and secure property right system.
The importance of sound and secure property rights is yet to be promoted in
Indonesia. Property may be regarded as a bundle of rights specifying what a person
can do with a resource. These rights are constrained by various statutes, law and
details of contracts that have been established. From an economic point of view, there
are three important characters of the rights attached to private property. They are:
private property rights are saleable; the owner is free to exercise rights or neglect
them; and, the interference of others is forbidden.

In light of the above, establishing well-defined property rights in Indonesia is

important for the following reason. A lot of assets or resources in the country,
especially in the form of land, are dormant because their titles have not been properly
imputed to anyone. Although hard data are not readily available, it is quite reasonable
to assume that a large number of Indonesians do not have proper titles over plots of
land that they claim as theirs. As a result, those assets become unproductive and
undervalued. One way to improve their productivity that will, in turn, increase their
value is by attributing the derived benefits from those assets to someone. This is one
way to set free entrepreneurial initiatives, since secure property rights enable would
be entrepreneurs to use their assets as collaterals to secure loans.

In addition, the root of many land-related problems in Indonesia is the lack of

well defined and secure property rights concerning a large fraction of the country’s
land area, especially its forest areas. The 1960 Agrarian Law that becomes the basis
for determining tenurial rights does not apply to state forests. By law, the state has the
control rights over all forests areas, including the privately owned forests also known

27
as people’s forests (hutan rakyat). As a result, many stakeholders have only limited
control rights over forest areas upon which their livelihoods depend and, hence, as we
shall see later, limit their ability to improve the efficiency of their control rights
through market mechanism.

Recently, many traditional communities, such as the Dayaks in Kalimantan,

have challenged the validity of the government’s claim, arguing that they have
effective control over certain forest areas for generations. Some recent conflicts, e.g.,
between the Dayaks and Madurese in West and Central Kalimantan, might be
attributed to the lack of well-defined and secure land tenure rights in those regions.
This has resulted in, among other things, multiple claims over rights to utilize some
land areas, which triggered resentments and open conflicts.

Another unintended negative consequence of the absence of well-defined

property rights is the multiple-claim phenomenon, whereby a certain asset, usually
land, is claimed by a number of claimants. Such a problem is quite often made worse
by an unsecured contract right as one claimant may challenge the validity of a
contract between another claimant and a third party. Finally, with well-defined
property rights and well-protected contractual rights, any inefficiency resulted from
weak institution or market failure may be resolved through direct negotiations
between the parties involved (Coase, 1960). The relevance of this last point cannot be
overstated given the country’s inefficient and corrupt court system.

4.4 The need for empowerment of the poor

To be able to extract the maximum benefits from the decentralization program, local
governments should embark on programs for empowerment of the poor. It should be
recognized that the poor usually face multitude constraints in their economic pursuits.
There are economic constraints such as credit constraint where people are unable to
borrow, or lack of access to market, or lack of access to resources, etc. There are
political constraints, e.g., people cannot participate in certain activities because they
are not members of a certain party. There are institutional constraints, e.g., people
cannot participate in a certain economic activities because they do not belong to the
related association, etc. The empowerment may then be defined as attempts to
loosening up those constraints so as to allow people more freedom to engage in
activities of their own choice. Put it differently, the empowerment means a right to

28
economic initiative where individuals are given maximum latitude to make choice for
themselves, and should be held accountable for the consequences of their choices.

By its nature, an empowerment program is always local in that it deals with

local communities at their localities. There are various types of empowerment
programs and may be done in many different ways. However, it is not difficult to
identify empowerment programs that have been used only as pretexts to justify their
implementations but they actually have rather different objectives. In the forestry
sector, some district governments have introduced small-scale (up to 100 ha) logging
concessionaires, arguing that such a program would empower the poor. It may be
argued, however, that many of the district governments who have issued a large
number of permits for small concessionaires - e.g., Kutai Barat district in East
Kalimantan that is reported to have issued around 600 permits by mid 2001 - were
more interested in increasing their revenues than empowering the poor. Moreover,
evidence is mounting that the effects of huge numbers of small-scale loggers is as
damaging as the old-style large concessionaires (DTE Special Report, June 2002).
Ironically, one of the priorities in Indonesia’s 12-point Forestry Action Plan released
in 2000 is to decentralize in a manner that will enhance the sustainability of forest
management.

4.5 The need to resolve legal uncertainty, inadequate control and weak enforcement

There have been continuing problems arising from shortcomings in the legal
framework of decentralization and regional autonomy, and from inconsistencies
between sectoral and decentralization laws and related regulations. The central
government recognizes that both Law 22/1999 on decentralization and Law 25/1999
on fiscal balance between the center and the region have shortcomings that give rise
to serious constraints to their implementation. The Working Group Statement on
Decentralization presented at the Mid-Year Review CGI meeting in June 2003,
suggests that the government is preparing a revision to Law 22/1999, which is to be
signed in January 2004. In the attachment to the government’s statement on progress
of decentralization in Indonesia presented at the 12th meeting of the CGI, January
2003, the government stated its intention to have resulted in their implementation; the
new law is to be introduced in early 2004.

29
 Illegal logging, failure in fulfilling contract obligations, disputes over land
titles, and forest fire are reflections of the absence of legal certainty, coupled with
inadequate control and weak enforcement in all parts of the country. Therefore, it
needs concerted actions by government at all levels.

5. Conclusion

This paper has looked into Indonesia’s recent experience with decentralization and
how it affected forestry policies. Due to its young age of two years, an assessment of
the Indonesian decentralization reforms is necessarily a preliminary exercise.
Nevertheless, some significant trends can be detected and future policy strategies
should take them into account.

First, co-ordination between different levels of government is a must and has

to be improved. This should be based on a clear division of tasks between central,
provincial and district governments and an agreement on who should issue what
policy. Moreover, there should be a mechanism that would ensure that all policies are
coherent, i.e. they are consistent with one another and compatible with sustainable
forestry management.

Second, decentralization has thus far not improved monitoring and

enforcement capacities in the forestry sector. The central government has not fully
delegated monitoring and enforcement tasks to local governments. The central
government retains most of the power to manage the country’s forests. Indonesia’s
Ministry of Forestry still exerts two main control functions over the regions. First, it
determines the status and functions of forest areas and second, it still controls the
management of conservation and protected forestland. Compared to other forest-rich
countries, decentralization has not empowered regional and local governments in the
forestry sector. Understandably, without transferring most of the authority of forest
management to the local governments, they will be very reluctant to accept the
responsibility to do monitoring and enforcement. This, in turn, only strengthens short-
term logging activities, as evidenced by the continued policies of several districts to
issue small logging concessions to boost local revenues.

Lastly, the basic governance question is one of replacing the old, centralized
command and control regime with a market-based system. Currently, Indonesia’s

30
forestry governance system is in the process of experimenting with market-based
incentive mechanisms to influence the behavior of forest stakeholders. The idea is that
people will pursue objectives of sustainable forest management, if they have enough
incentives to do so. In this regard, the introduction of a sound and secure property
rights system is a priority issue, specifically tackling land tenure issues. However,
designing such a regime is not always easy to implement, especially when it involves
mitigating the adverse impacts of some negative externalities. Forest exploitation
necessarily involves some externalities, and it is imperative that any market-based
mechanism would minimize their negative impacts. Eco-labeling, for instance,
although not exactly a market-based mechanism, is likely to force concessionaires to
internalize the negative costs of logging and wood processing industries. An eco-
labeling certificate is essentially a statement that a product has been produced in an
environmentally sound process. Some countries, especially in Europe, have required
that all wood products exported to them have received such certificates. As more and
more countries apply the same rule, wood-based companies, especially
concessionaires, will have no other choice but apply for eco-labeling certification.
Companies that fail to do so will loss their business. Similarly, it will be the interest of
a kabupaten (district) government to require companies operating in their regions to
be certified, since it is liable to lose a part of its income caused by its inaction.

The challenge for policymakers is to steer the decentralization process towards

balancing the need for long-term objectives of sustainable forest management,
increasingly a concern at the national level, with short–term revenue maximization
goals of district and province governments. It is not clear yet whether the
decentralization process in Indonesia is heading towards this direction.

31
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