Indonesia: World Bank/WWF experts look for new ways to subsidise plantations

22 Sep

The World Bank/WWF Forestry Alliance is supporting the massively destructive pulp and paper industry in Indonesia, by looking for new financial mechanisms to subsidise industrial tree plantations.

By Chris Lang. Published in WRM Bulletin 110, September 2006.




Wherever industrial tree plantations are planted in the South, governments provide a range of subsidies to investors. In Indonesia, the government has handed out billions of dollars for plantation development. The plantation and pulp sectors have also received generous aid support. The World Bank and the Asian Development Bank funded studies in the 1980s. A range of export credit agencies helped finance the construction of pulp mills.

During the 1980s, while vast areas of Indonesia’s forests were being destroyed by logging companies, the Indonesian government set up a “Reforestation Fund” financed by royalties collected from logging companies. Once the logging companies had carried out their reforestation obligations they could reclaim the money from the Reforestation Fund. Of course most logging companies carried out no reforestation and simply wrote off the payments to the Reforestation Fund. As a result, the amount of money in the fund grew rapidly.

In the 1990s, the government changed the Reforestation Fund to allow direct financing of industrial tree plantations. But most of the money went to Suharto’s family and business cronies. The NGO Down To Earth notes that Suharto used money from the fund for the State Aircraft Company and the Southeast Asian Games. Between 1993 and 1998, more than US$5 billion was lost from the fund. Many Reforestation Fund loans that did go to industrial tree plantation companies became bad debts. Two years ago, the Forestry Department rescheduled Reforestation Fund loans. As a result, 14 plantations companies closed because they could not repay the debt.

Companies drew up proposals requesting funding for industrial tree plantations, but the areas planted were far smaller than claimed. Between 1990 and 1997 almost US$1 billion was distributed from the fund, which should have paid for five million hectares of plantations. Less than one-fifth of this area was actually planted.

Earlier this year, the World Bank/WWF Forest Alliance started a project with the Ministry of Forestry aimed at developing “financial mechanisms that can help to expand and accelerate plantation development”. In an “activity concept note” dated February 2006, the Alliance states that the area of plantations in Indonesia needs to be “at least doubled”, in order to secure the future of the country’s wood processing industry (which is dominated by the pulp and paper industry). The total capacity of Indonesia’s pulp mills is almost 6 million tons a year. According to the Centre for International Forestry Research, about 70 per cent of the wood consumed in these pulp mills is mixed tropical hardwood from what’s left of Indonesia’s forests.

Where plantations have been established, it has been at huge environmental and social cost. For example, in Riau province, 75 per cent of Asia Pulp and Paper’s land is peat swamp. The only way of establishing plantations is by clearing the forest and draining the land.

An obvious answer would be to address the structural problem of massive over capacity in the pulp sector in Indonesia. Plantations are not even profitable. According to the World Bank/WWF Alliance, “returns to plantations are believed insufficient to attract commercial investment.” But the World Bank/WWF Alliance is determined to rescue the pulp industry by finding new subsidies for more plantations.

The World Bank/WWF Alliance proposal is a bean-feast for consultants. According to the February 2006 “activity concept note”, the Alliance was to hire “expert consultants” and pay them an average of more than US$2,000 a week.

These experts were to develop a strategy and a plan. They were to look for financial institutions or mechanisms to create incentives for plantations. They were to develop interim results and hold workshops. They were to engage stakeholders. They were to develop criteria and indicators, identify opportunities and barriers and analyse future trends and likely market developments.

The experts were to determine “conditions and interventions that will help to improve plantation financing based on the principle of ‘The right tree in the right place for the right reasons, meaning the right end markets.'”

The experts were to “examine approaches for identifying beneficiaries and financial mechanisms that will enable resources to reach the right target groups, engaging in the right activities (environmental, social and financial viable) for the right reasons (informed and market responsive) with the right financing.”

The experts were to “focus on establishing institutional means to ensure the right funds going to the right projects based on the right information and right returns on investment in the right time frame.”

The experts were to be such experts that they could do all this without the inconvenience of talking to any communities affected by industrial tree plantations. The World Bank/WWF Alliance “activity concept note” states that “This feasibility study should draw on and synthesize previous studies and analyses, rather than primary data collection.”

With this project to subsidise the pulp industry the World Bank/WWF Alliance shows where its loyalties lie: with the pulp industry and against the people.

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