New round of pulp and paper expansion in Indonesia

BOGOR, Indonesia (30 May, 2011)_The recently signed Presidential Instruction to impose a 2-year moratorium on forest conversion in Indonesia is a positive and long awaited development that is expected to help preserve the country’s rich forest resources. At the same time, however, questions emerge as to how the government will reconcile its commitment to protect primary forests and peatlands with Indonesia’s growing demand for pulp fibre and plantation development.

Just prior to approving the moratorium, on 25 April 2011 Indonesia’s Ministry of Forestry (MoF) announced several large investments in the pulp and timber plantation sector. The new investment plan envisages the construction of 7 new pulp mills with the capacity of nearly 5 million tons and nearly 2 million hectares of new timber plantations (HTI) with the overall cost of  USD 14 billion (Table 1). The plan is to be implemented by 2017.

The new investment in timber plantations and pulp mills is presented by MoF as a policy step that will help to bring about the transformation of Indonesia’s wood-working sector from one that is currently in decline and suffers from shortages of timber to one that is a major contributor to the Indonesian economy and is based entirely on timber plantations. The expansion program is a key element in MoF’s long-term plan to revitalize forest industries, but it also is expected to reduce rural poverty, create jobs, and stimulate economic development.

While the timber plantation and pulp industry are broadly seen as an important part of the future of Indonesia’s forestry sector, the current expansion plans raise a number of concerns. The new expansion comes at the time when the wood industry in Indonesia still faces serious shortages of raw material.

According to CIFOR estimates, in 2008, Indonesia’s wood processing sector had a deficit of at least 5 million m3 of timber. This level of deficit already is a significant improvement in comparison to earlier years. More effective government measures to curb illegal logging have contributed to this success. Another main cause was a dramatic increase in the production of plantation timber in 2007 and 2008, as reported by MoF (Table 2).

The significant increase in the production of plantation timber is a remarkable achievement. However, there are concerns about the accuracy of the sudden increase of timber production in these years because of a decline in the plantation establishment rate 7-8 years prior (2000, 2001) when plantation timber coming online in 2007 and 2008 would have been planted.

It may be that plantation timber volume in these two years increased dramatically due to the cumulative effect of planting over a longer period of time. However, it is not clear how these estimates have been arrived at. Even if the plantation timber yield did grow as presented in official statistics, this growth was offset significantly by the raw material needs for the pulp industry, which reached 29.2 million m3 in 2010 and is expected to increase by additional 1.5 million m3 in 2011.

It is therefore likely that natural forest clear cuts continue to be an important source of timber for the pulp industry. Indeed, MoF statistics show that timber production from wood utilization permits (IPK), or clear cuts, has quadrupled from 1.6 million m3 in 2004 to 6.6 million m3 in 2009. Similarly, a recent report by the Indonesian Working Group on Forest Finance (IWGFF) shows that in 2010 more than half of the pulp and paper sector’s timber supplies in Riau came from natural forests.

Table 1. New timber plantation and pulp mill investments

Note: Except for Medco, the table is based on the information from “Konglomerat kembangkan investasi HTI di Kalimantan dan Papua” in Bisnis Indonesia, 24 April 2011. Estimates for Medco plantation size and mill capacity are from “Arifin Panigoro builds pulp factory” at www.asiaviews.org and PT Medco Papua Lestari AMDAL report.

If the newly proposed mills are developed as planned, totalling 4.95 million tons pulp in new production capacity by 2017, they will add 22.3 million m3 of new timber demand annually. The proposed plantation development, if successful, would no doubt fulfil some of this demand.

However, successful development of the proposed large new plantation area in relatively short period of time would be unprecedented and would require extraordinary measures.  For instance, if Djarum group is to develop an additional 700,000 ha of HTI plantations by 2014 as indicated inan April 24, 2011 article in Bisnis Indonesia (click here to read it), this would mean that one company would be developing more than 200,000 hectares of plantations annually. If true, it would be an outstanding plantation establishment rate for a single company, given that on average only 172,0000 hectares of timber plantations were planted annually between 2000 and 2008 in the entire country.

The Bisnis Indonesia article also shows the new expansion plans for timber plantations and pulp mills largely targets Kalimantan and Papua. This is a cause for concern as well. There are ample areas of degraded land (lahan kritis) that could be used for timber plantations in Kalimantan (East Kalimantan alone has 9.6 million ha of degraded land), which is consistent with the content  of the recently signed Presidential Instruction for 2-year moratorium on forest conversion in Indonesia.

Table 2. Timber plantation development until 2008

Source: Ministry of Forestry Statistics

But the fact that large plantation areas are aimed for Papua is worrisome because degraded land there is scarce. This implies that some natural forest may be cleared for timber plantations. As a result, because the capacity expansion of new pulp industries would prolong the timber supply-demand gap, and because there is uncertainty about whether or not new plantations can be developed soon enough, it would be prudent to close the existing supply-demand gap first before adding additional industrial capacity.

One of the main justifications for the expansion is that timber plantation development and pulp industry are considered pro-poor, pro-job, and pro-growth. There is no doubt that their economic contribution is significant as both sectors generate annually over USD 5 billion in export value.

The sectors can create significant number of jobs. APP reports that its operations alone in the province of Riau create 10,000 direct jobs and 26,000 indirect jobs through economic multipliers. However, employment at pulp mills is limited and for skilled workers only. The labour inputs for pulpwood plantations are much larger but highly cyclical. The numbers of workers employed peaks in Year 1, when land clearing, site preparation, and planting occur, and again when harvesting and replanting are carried out.

During the intervening years, employment drops sharply as relatively few workers are needed to manage the site. Even if available, recent information from Riau indicates that rural communities prefer to engage in oil palm cultivation rather than plant Acacia or Eucalyptus trees. Riau farmers say oil palm is up to 12 times more profitable per hectare. Limited economic incentives are one of the reasons why the smallholder timber plantation development program (HTR) launched in 2006 with the target of planting 1.9 million hectares by 2010 has so far managed to designate less than 700,000 hectares of land for HTR plantations, while actual planting is much lower still.

Another significant barrier is the reluctance by rural communities to commit their land to long-term plantation business without having the option to sell or inherit HTR licenses. When communities do engage in joint-venture partnerships with plantation developers, the benefits often turn out to be below what was promised.

Industrial timber plantations in Indonesia play an important economic and environmental role and their significance will grow in the future. They feed the pulp and other wood-working industries. They also help regenerate deforested areas. Likewise, the capital intensive and technologically advanced pulp and paper sector plays a major role in the future of Indonesia’s timber sector.

However, the size of the recently proposed expansion, the plan for its rapid implementation despite the fact that wood industries still suffer from timber deficit, not entirely clear contribution to policy objectives of reducing poverty, creating jobs, and stimulating economic growth, and potentially negative impacts on forest, call for additional time and care to be taken to study these aspects of the proposed investment program.

Care must be taken to ensure that new timber plantation investments are developed on degraded, non-forested land to ensure that the recently announced moratorium on the conversion of primary forests and peatlands is not undermined by the demand for industrial fibre. The Indonesian public needs to know more about plantation and mill investment plans as many people in rural areas will be affected by them.

Greater disclosure of information is also needed given the large size of this expansion and vast financial resources to be invested (USD 14 billion). The financing agencies that are expected to support this expansion program need to have a clear understanding not only of the potential economic returns but also of the costs, impacts, and trade-offs.

They need to know where and how the land will be acquired and what kind of arrangements will be made with local land users. Finally, more policy options are needed to create incentives for rural communities to make tree planting an economically feasible pursuit. This information is urgently needed to inform the current pulp and timber expansion plans so they do not aggravate the problems but contribute to a better future for Indonesian forestry.