The National Forest Estate – controlling stake in the game

“I’ve invested millions of dollars, prepared company documentation, secured a mining license, obtained all the pieces of paper and purple stamps under the Sun, developed an early works plan, even got a contract with the government … What now? Pinjam what? Ministry of Forestry? Another permit? [missing], I just want to start mining, not plant [missing] trees …”
If this resonates then you’re not alone. A recent survey of mining stakeholders conducted by Price Waterhouse Coopers Indonesia (PWC) and the Indonesian Mining Association cites conflicts between mining operations and forestry regulations as being the top challenge for coal mining companies in 2012 and the third most important issue for mineral mining companies. In fact seven (*) and arguably eight of the top ten problems reported in the PWC publication (Table 1) can be directly or indirectly linked to forests, Ministry of Forestry, or administration of the National Forest Estate (NFE).

Table 1. The top ten challenges for the Indonesian mining industry in 2012.

COAL MINING COMPANIES MINERAL MINING COMPANIES
Conflicts between mining operations and forestry regulations* 1 Lack of coordination between the central, provincial, and regional governments*
Lack of coordination between the central, provincial, and regional governments* 2 Confusion over the implementing regulations for the new Mining law
Confusion over the implementing regulations for the new Mining law 3 Conflicts between mining operations and forestry regulations*
Land acquisition* 4 Political risks*
Improving the competitiveness of the taxation and royalty system relative to other prospective countries 5 Local government relations*
Community relations* 6 Security assets, people and ownership rights, including mining licenses*
Local government relations* 7 Corruption, collusion and nepotism (KKN)*
Security assets, people and ownership rights, including mining licenses* 8 Difficulties in dealing with the downstream in-country processing requirements under the Mining Law
Interference from other government agencies, such as the tax authorities 9 Improving the competitiveness of the taxation and royalty system relative to other prospective countries
Corruption, collusion and nepotism (KKN)* 10 Community relations*

Like many other places in the world, the government of Indonesia is responsible for managing the country’s forests in the best interests of its People (Forestry Law No.41, 1999). It achieves this through administration of the the National Forest Estate (NFE), otherwise known as Kawasan Hutan, a vast area of land making up approximately 54% of the country’s landmass, roughly equivalent to 105 million hectares. The NFE is categorized in to three broad categories:

  1. Conservation Forest: land within the NFE with the primary function of preservation of plant and animal diversity including associated ecosystems. Conservation Forest is further subdivided in fully protected areas (i.e. Nature Reserves and Wildlife Refuges) and conservation areas where sustainable utilization is permitted (i.e. National Parks, Forest Parks, Tourism Parks, and Hunting Parks). The Ministry of Forestry manages all conservation forest, regardless of its location within the Archipelago.
  2. Protection Forest: land within the NFE with the primary function of the buffering life support systems that control water flow, prevent flooding, control erosion, prevent salt water intrusion and maintain soil fertility. It is its own category and is managed under the jurisdiction of local governments.
  3. Production Forest: land within the NFE with the primary function of generating forest products. Production Forest comprises three sub-categories: Permanent Production Forest (HP), Limited Production Forest (HPT), and Conversion Forest (HPK). Production forest is administered by the Ministry of Forestry.

The approximate area of land allocated to each forest function and the associated implications for mining are detailed in Table 2.

Table 2. Core forest functions within the National Forest Estate & the associated implications for mining

FUNCTION TOTAL AREA ha % MINING CONSIDERATIONS
Conservation Forest 18,146,400 17% No mining is possible inside conservation forest.
Protection Forest 29,037,400 28% Underground mining is permitted in Protection forest.
Production Forest 57,710,000 55% Mining is permitted in Production forest except in areas under license for ecosystem restoration (IUPHHK-RE). Only 10% of areas under existing forest licenses may be mined.
NFE: Total Area 104,893,000 100%

The extent of the NFE is defined during negotiations over boundaries between the NFE and Alternative Land Use (APL) during the cyclical national spatial planning process. While genuinely important for national development, the process represents the front lines of deforestation, where strokes of a pen define areas that will be maintained as forest and those that will be converted. This boundary also defines the relative political power of the Ministry of Forestry, and is where the battle for control over business licensing between Central, Provincial and Regency government is ultimately fought.

A hundred years ago Indonesia’s forests covered more than 159 million hectares but since the 1950s the area of forest has decreased to less than 105 million hectares. The rate of deforestation continues to accelerate and is currently believed to be in the order of 2 million hectares per year. This forest loss is due in large part to systemic mismanagement, overharvesting, forest fire, illegal logging, shifting agriculture, clear felling for plantation, agricultural development and mining, as well as expanding infrastructure and population centers but these are just symptoms of an underlying genetic disorder. If a doctor were conducting a medical examination on the NFE he might note the following. Diagnosis: Tragedy of the Commons with severe complications of de facto versus de jeure land tenure. Condition: Chronic. Prognosis: Curable where action is taken. Treatment: Amputation. Cue: Politics, the Ministry of Forestry and its 54% stake in the game.

The Ministry of Forestry is the master of reinvention, maintaining relevance and keeping its grip on power. It does this by being one of the most prolific issuers of regulations of all government departments. At one point in time there were over 600 laws, regulations, decrees, and instructions prescribing activities ranging from licensing through the export of forest products, which were used to full advantage. With the decline of both the natural forest logging and plywood industries over the past decade the Ministry has been exploring ways to tap in to the country’s growing economy, and in that respect the recent surge of interest in the mining sector could not be better timed. Mining companies and other pinjam pakai applicants represent high value, dependable, long-term forest users – a recipe guaranteed to make the licensing and renewal process a prime candidate for legal innovation. Indeed this process has already begun with new regulations issued in 2012 and 2013 that increase the burden on the pinjam pakai license holder, whilst introducing measures to improve their odds. Smaller license areas equals more applicants, more applicants equals more opportunities, and with elections on the horizon in 2014 the sentiment of the mining survey respondents echoes … it’s game on.