Market-based instrument curbs deforestation
Wednesday, November 19, 2003 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta
The devastating flash floods at Bahorok, North Sumatra, early this month that killed more than 150 people, are another strong reminder of how the traditional approach to protecting forests through a regulatory system has failed miserably due to a corrupt system of governance and inadequate institutional capacity.
Yet deforestation continues. Interisland trade and export of illegally felled timber have been going on. The Central Bureau of Statistics has officially recorded exports of logs, even though this commodity is banned from export.
As only incremental improvement can, at best, be made in the system of governance and institutional capacity, it seems more urgent now to expand forest product certification as a market-based instrument to supplement the regulatory system for curbing illegal logging.
The concept of forest certification is designed to use market forces to control illegal logging through demand-side and supply-side approaches, mobilizing consumers and traders to shun forest products that are not certified according to internationally recognized standards of sustainable forest management.
This virtual boycott forces forest-based companies (producers) to have their operations and products certified by accredited, independent forest-certifying bodies.
The demand for forest product certification has escalated since the early 1990s as a result of the campaign for green products by consumers, traders and conservation groups in North America and West Europe, who have been concerned about high rates of deforestation, especially in developing countries.
The green consumer movement became more organized and better coordinated after the establishment in 1993 of an international, independent and nonprofit organization called the Forest Stewardship Council (FSC), with its headquarters in Bonn.
FSC gets full support from the Global Forest and Trade Network (GFTN), a group of organizations around the world also committed to promoting trade in certified forest products as a means of improving forest management practices.
Latest data shows that GFTN now has more than 18 regional and national organizations, called forest and trade networks, under the coordination of the Worldwide Fund for Nature (WWF), with around 800 members consisting of large timber companies and retailers (producers and buyers) spread out in more than 30 countries.
Therefore, even though the government does not require forest certification, more than two dozen Indonesian companies, mostly furniture, door, panel and frame producers in Java, have voluntarily sought forest certification for their products from accredited certifiers to gain access to the American and European markets.
The term "voluntary" here is not entirely correct because the companies have effectively been forced to obtain green certificates; not through regulation, but by the market.
Likewise, two of Indonesia's largest pulp and paper producers, Asia Pulp and Paper Co. Ltd. (APP), with annual capacities of 2.3 million metric tons of pulp and 3.6 million tons of paper, and PT Riau Andalan Pulp and Paper (RAPP), with two million tons of pulp and 350,000 tons of paper, are now geared up to comply with the criteria and standards required for certification.
The companies will not explicitly acknowledge it, but pressure from their buyers overseas has been responsible partly for their commitment to having their operations and products certified according to the principles of sustainable forest management.
APP signed in August an agreement with the WWF for preparing programs on the sustainability of its forest concessions, the legality of its pulp materials and the resolution of land conflicts with communities.
As RAPP environmental general manager Canesio P. Munoz observes, "even though we have always seen to it that all pulp inputs entering our mills are legal, we will remain under suspicion of using illegal wood unless we have our operations and products independently certified."
RAPP has obtained an ISO 14001 certificate for environmental management system standards from SGS Yarsley International Certification Services and is geared up to gain forest certification next year or 2005.
Without sustainable forest management, these two companies, which require around 20 million cubic meters of wood fiber inputs a year, could indeed be a major threat to Indonesian forests.
They have often been accused by non-governmental organizations (NGOs) of using illegally cut wood, though none of these charges has ever been proven in court.
The problem is that more than 95 percent of forest-based companies in Indonesia, especially pulp and paper and plywood producers, have yet to realize the vital role of certification in maintaining the principles of good forest management.
Traders and general consumers in Indonesia, like those in other Asia-Pacific, African and Latin American countries, have yet to be converted into full supporters of the green product campaign. This task is quite daunting, not only because of the need to change attitudes but also because forest certification is costly and initially time consuming.
Forest certification is based not only on the principles of sustainable management of forests and wildlife reserves but also on the maintenance of the legal and customary rights of local communities and indigenous peoples and long-term social and economic welfare of forest workers.
Indonesia began to develop standards and criteria for forest-product certification only in 1999 after the establishment of the Indonesian Ecolabelling Institute (LEI), an independent organization, with funding support from the WWF, the U.S. government and many NGOs in Europe and North America.
LEI is now developing, in cooperation with FSC, standards and criteria for certification systems for the management of sustainable natural forest and industrial timber plantations, community-based forests and a chain of custody (a system of tracking the source of wood) as well as an accreditation scheme for certifiers.
According to LEI executive Daru Ascarya, LEI and FSC have thus far accredited four forest-certifying bodies, namely PT SGS ICS Indonesia, PT TUV International Indonesia, PT Sucofindo and PT Mutuagung Lestari.
Indonesia, like most other developing countries, has still a long way to go before the bulk of its forest-based companies are capable of complying with the principles of sustainable management, but expanding forest certification across the timber industry could speed up the process.
The Nature Conservancy and WWF, in cooperation with many other NGOs and foreign governments, are sponsoring projects in East Kalimantan, Java and Riau to develop a cost-effective method of certifying the legal origins of wood right through the supply chain, from forest to customers.
The projects are being implemented by Geneva-based SGS, the world's largest inspection, testing and verification organization, and URS Forestry environmental services company.
But other major donors affiliated with the Consultative Group on Indonesia (CGI), who have often expressed grave concern about extensive damage to the world's second-largest tropical forests in Indonesia, should contribute more to building up a higher national capacity for forest certification.
The market for tropical forest products could be damaged if the global demand for certified products generated by the green-consumer campaign far outpaced the capacity of forest certification in Indonesia.
However, the development of the certification system will not run smoothly unless the Indonesian government itself streamlines the system of its regulatory procedures in land-use planning, land rights, forest harvesting permits and wood transport documentation, which have often left forest-based companies in a catch-22 situation.
Forest certification, as a market-based instrument, will also be less effective in saving forests if banks and financial and securities analysts do not use sustainable forest management as an investment-screening tool.
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Time to defuse Semen Gresik's 'time bomb'
Wednesday, October 08, 2003 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta
Publicly listed PT Semen Gresik (SG) is sitting on a "time bomb" that could explode into messy international arbitration or litigation proceedings before the end of the year if the government does not act to resolve once and for all the corporate, political and social problems that the SG West Sumatra unit, PT Semen Padang (SP), has faced since 2000.
State Minister of State Enterprises Laksamana Sukardi did set up a joint team in mid-August to resolve the SP issues in response to an urgent request from Mexico's Cemex S.A. de C.V, the owner of 25.50 percent of SG, for a mediation process to resolve the four-year fiasco at the "renegade" subsidiary.
However, more than six weeks after its establishment, the team has not made any progress. Neither does it have any viable propositions for Cemex to assess.
The government owns 51 percent and the investing public the remaining 23.50 percent of SG, the country's largest cement group with a total capacity of 17.2 million metric tons per annum. SG itself owns 99.99 percent of SP, which has an annual capacity of 5.5 million tons or 32 percent of the SG total capacity.
Cemex warned in a letter to Laksamana on Aug. 13 that it might, as a last resort, have to submit the issues for international arbitration or litigation proceedings if the mediation process fails to produce a satisfactory solution to the SP problems, which have been adversely affecting SG's financial performance and growth prospect.
Analysts familiar with the SG predicament with SP say the joint team is anything but a real task force fully authorized to tackle the problems in a holistic manner.
That initiative was only another cosmetic offer to push the problems aside and buy time, something the government has been doing since 2000, when vested interest groups in West Sumatra, backed by the SP management, launched a campaign to have SP spun off from SG.
The SP problems center around the all-out efforts by vested interest groups of politicians and officials in West Sumatra, with the full support of the SP management, to maintain the cement company as their cash cow by wrestling SP from SG's control.
After more than 15 months of court battles against the old SP management, SG was finally able to appoint a new board of directors for SP in May, but then had to spend a further four months legally fighting the old board, who stubbornly refused to quit, before the new management could enter SP on Sept. 8.
But the attempt to install this new management is only one of a host of serious corporate, legal, political and social problems that have been besetting both SP and SG over the last four years.
Cemex and the investing public have been roiled by the acute lack of political will on the part of the government to address the SP issue right from the outset when vested-interest groups in West Sumatra first challenged the legality and political validity of SG's acquisition of SP in 1995 in their deceptive bid to hold the cement unit as their cash cow.
Both companies were state-owned firms in 1995.
Laksamana and his deputy Roes Ariawidjaya have been skirting around the issues, often flirting with the vested-interest groups in West Sumatra simply to silence their noisy protests.
But these protracted problems have caused severe damage to both SP and the whole SG group.
While Heidelberger-controlled PT Indocement and Holcim-controlled PT Semen Cibinong, respectively the second and third largest cement companies, have consolidated their operations, SG has been beleaguered by its SP subsidiary.
Just look at some of the damage done by the renegade SP:
- Both SP and SG have been embroiled in endless, costly court battles, thereby affecting the corporate image of SG as a publicly traded company. The series of litigation has also diverted a lot of resources away from their operational consolidation to tap the expanding market demand amid the country's economic recovery.
- SG's and SP's credit ratings have deteriorated and their higher premium risks have sharply increased the cost of their borrowing.
- SG could not issue an audited consolidated financial report for 2002 and was consequently penalized by the market watchdog (Bapepam) because SP failed to complete its audited reports.
- The refusal by the old SP management in late 2002 to accept a due diligence team assigned by SG to investigate the company generated an even more worrisome question as to what had taken place at, or what further damage had been done to, SP especially between January 2002 and September 2003.
SG's failure to publish its audited report for 2002 has also caused serious problems for Cemex because the Mexican company could not complete its reports (disclosure requirement) for the New York Stock Exchange.
The failure of the government, as the SG majority shareholder, to control the "rebellious" management of SP since 2000 also caused a violation in the Conditional Sale and Purchase Agreement between the government and Cemex in October 1998, when the Mexican company bought a portion of the government shares in SG.
Laksamana has often acknowledged that the government has failed to honor many conditions in the contract with Cemex, conceding that Indonesia would probably lose in an arbitration proceeding.
Yet the acute lack of government initiative to resolve the SG-SP debacle once and for all has been mind boggling.
Cemex executives in Jakarta won't comment on the protracted controversy, except to reaffirm that Cemex is in Indonesia for the long term and is therefore open to viable alternative propositions.
However, the seemingly endless imbroglio Cemex has been facing over the past five years after it invested hundreds of millions of dollars in SG could be too much for the Mexican company.
The next few weeks appear quite crucial for addressing the SG-SP debacle because next year the government, preoccupied with general and presidential elections, will simply have no energy left to cope with this problem.
Analysts suggest that the government revisit the proposition it made in late November 2001, whereby the three SG cement units (Semen Gresik in East Java, Semen Padang and Semen Tonasa in South Sulawesi) would be split into stand-alone, state-controlled companies.
However, this proposition should be sweetened to make it attractive to the SG minority shareholders, notably Cemex.
Given Cemex's long-term interests in Indonesia's cement industry and the domestic cement deficit that will likely emerge in 2007, analysts suggest that SG expand its capacity by establishing a new subsidiary where Cemex can be offered a majority shareholding.
This alternative could resolve the SP problem and at the same time bring in new capital to increase cement capacity, thereby avoiding a national cement shortage that most analysts predict will take place in 2007 if the present total capacity of 42 million tons is not increased.
Whatever solution is finally chosen, the government should act decisively and shortly to resolve the SP problems and deactivate the time bomb at SG.
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Semen Gresik entangled in a myriad of problems
Monday, April 28, 2003 Vincent Lingga, The Jakarta Post, Jakarta
What a mess Indonesia's largest cement group, government-controlled and publicly-traded PT Semen Gresik, is now mired in.
While Heidelberger-controlled PT Indocement and Holcim-controlled PT Semen Cibinong, respectively the second and third-largest cement companies, have consolidated their operations, Semen Gresik has been beleaguered by its subsidiary, PT Semen Padang, since 1999.
Semen Gresik's predicament deteriorated sharply after a letter from State Minister for State Enterprises Laksamana Sukardi to West Sumatra Governor Zainal Bakar on April 16 endorsed the local people's wishes to split Semen Padang from holding company Semen Gresik and become a stand-alone state enterprise.
The letter actually does not have any legal significance because the authority to approve Semen Padang's split from Semen Gresik lies entirely in the hands of Semen Gresik's minority shareholders, namely Mexico's Cemex with 25.50 percent and 1,138 individual and institutional investors with 23.50 percent.
Unfortunately, the official announcement came at a time when public support for the proposal seems to be tapering off.
An increasing number of people in West Sumatra have realized that the vested interests of local and government politicians and Semen Padang management itself, rather than what is in the best interests of local people, has been the main factor behind the campaign since 1999.
The latest government stance is actually more ambiguous than the position Laksamana took in late November, 2001, whereby the government would restore the status of Semen Padang to that of a stand-alone state company by acquiring the majority of its shares from Semen Gresik.
This policy never materialized due to the complex process of valuing the shares of Semen Gresik's three units and because the cash-strapped government simply does not have enough money.
Laksamana never revealed what really transpired when he met West Sumatra government leaders in Jakarta on April 14. Coordinating Minister for Social Welfare Jusuf Kalla acted as mediator.
But it was the meeting that prompted Laksamana to write the controversial letter, which analysts now term as a "meaningless political goody", to the West Sumatra government and people.
Whatever legal and financial avenues the government pursues to implement the split, the process will be costly and will take at least one year to complete.
Before the government orders Semen Gresik management to convene an extraordinary shareholders meeting to decide on the spin off, Semen Gresik's three cement units will first have to undergo legal and financial due diligence to determine their share values.
But even this step will face strong opposition from Semen Padang management, which has previously turned down a request from Semen Gresik to go through Semen Padang's books.
Only after the due diligence and share valuation will the government be able to package several alternative deals for consideration by the minority shareholders.
Analysts cite several alternative solutions:
Firstly, the government buys out Cemex's and the investing public's shares (totaling 49 percent) in both Semen Padang and Semen Tonasa. This route will cost the government hundreds of millions of dollars. The question is where the government will get so much money?
Secondly, the government sells the bulk of its 51 percent holding in Semen Gresik to buy Cemex's and the investing public's shares in the two cement units. But would Cemex still be interested in increasing its stake in Semen Gresik with a much smaller capacity (only 8.2 million metric tons as against 17.2 million tons now)?
Yet a more complex issue is that creditors of Semen Gresik's Rp 1.8 trillion (US$202 million) in medium-term notes may call on their loans because these debt instruments are tied to the government's ownership of 51 percent of Semen Gresik.
But whatever alternative deals are presented, the process of gaining approval from minority shareholders will not be easy as the investing public includes investors overseas. The minority shareholders will predictably demand hefty compensation for their investments.
But then, even if the spin off process complies with the Companies Act of 1985 and the capital market law, it will set a bad precedence that could set off similar separatist sentiment in other provinces, not to mention the devastating impact on investor confidence in the country.
Certain groups in West Sumatra, for example, might demand the spin off the Ombilin coal unit in that province from its holding company, publicly-listed, government-controlled PT Bukit Asam coal company that is based in South Sumatra.
Along this line of regional sentiment, other state-owned holding companies, which own and manage airports, seaports and mining units in various provinces, might also face similar political entanglements.
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