Indonesia's Developing Forest Industry

RICHARD C. ALLEN ABSTRACT/Indonesia is a major exporter of tropical hard-

Retired Mississippi State Forester woods. The country's goal is to establish integrated wood in-
Retired Regional Vice President, Weyerhaeuser Company dustries by reducing the export of unprocessed sawtogs. The
524 Poplar Avenue value of hardwood sawlog exports has decreased by two-
Philadelphia, Mississippi 39350, USA thirds in 1986 dollars since 1978, while the value of hard-
THOMAS J. STRAKA wood sawnwood and plywood exports has increased sixfold.
WILLIAM F, WATSON Sawlog exports are now banned. This article contrasts the
Department of Forestry official governmental policy on forest industry development
PC Drawer FR with the operational realities of doing business in Indonesia.
Mississippi State University
Mississippi State, Mississippi 39762, USA

Indonesia is an archipelago covering an area of al- The Forest

most 2 million km ~ (Figure 1) and is one of the richest
Geographically, Indonesia lies between two conti-
Southeast Asian nations in terms of forest resources.
nents, Asia and Australia; however, the influence of
Indonesia has nearly 10% of the world's total broad-
Asian flora is more pronounced. The forest is highly
leaved tropical forest by area and its forest resources
diverse, with over 3000 tree species belonging to about
are the largest in Asia. Almost 60% of the nation is
450 genera. About 68% of Indonesia's forest area is
forested (1,135,750 out of 1,903,650 km2). The for-
primary tropical rain forest, 15% moist secondary
ested area includes 389,150 km 2 of undisturbed forest,
forest, and 14% swampy forest.
346,600 km 2 of logged/managed forest, and 400,000
A convenient classification system of Indonesia's
km 2 of unproductive forest (FAG 1981).
rain forest is based on elevation (which is associated
Indonesia emerged as the most important log pro-
with changes in precipitation and temperature). The
ducer in the tropical world in the late 1970s (RaG and
tropical rain forest type is found in wet and semiwet
Chandrasekharan 1983), and forest products have
climates at elevations up to 1300 m. It is a mixed ever-
played an increasingly important role in Indonesia's
green, multistoried hardwood forest with the main
overall economic development in recent years. Timber
canopy extending up to 50 m. Most of the important
production grew by 9% annually from 1969 to 1980.
commercial timber species are members of the family
When timber exports peaked in 1978, Indonesia ac-
Dipterocarpaceae. This forest type exists throughout
counted for over half of world trade in tropical hard-
Sumatra, Kalimantan (Borneo), Celebes, Moluccas,
woods. Exports have dropped since 1981, when for-
and Irian Jaya.
eign logging firms were required to invest in domestic
Mountain rain forest is located at elevations be-
plywood plants in order to obtain export quotas
tween 1300 and 2300 m. It is similar to the tropical
(Bunge 1983), and because Indonesia has tightened
rain forest, but with fewer tree species; common fami-
log export quotas. On 1 January 1985, Indonesia im-
lies are Lauraceae and Fragaceae. The subalpine rain
posed a total ban on log exports. Exports of sawlogs
forest is found from elevations of 2300 up to 3500 m,
and veneer logs from Indonesia in 1981 were about
and is principally located in Irian Jaya. Common
40% of 1980 levels, in both volume and value. Because
timber genera are Araucaria, Dacrydium, Podocarpus,
of a recession worldwide, 1981 sawlog and veneer log
and Quercus.
exports were about 80% in volume (70% in value) of
Several interesting associations of tropical rain
1980 levels (FAG 1985). An increased emphasis on
forests occur. Heath forests occur in the climatic zones
processed wood exports is expected to help the
of constant wet conditions, mainly on Kalimantan, Ce-
country reap a larger value-added from its timber re-
lebes, and Irian Jaya. Main timber species are in the
sources and to increase employment in the forestry
family Myrtaceae. The heath forest has a 1- to 2-m
sector.
humus layer which temporarily is saturated after a
heavy rain. T h e tree species composition is similar to
KEY WORDS: Indonesia;Forestindustrydevelopment;Forestpolicy dryland rain forest, but with thinner stems.

EnvironmentalManagementVol. 10, No. 6, pp. 753-759 9 1986Springer-VerlagNew Yorkinc.

754 R.C. Allen and others
' ~ ~L~Y$ PACIFIC OCEAN
INDIAN OCEAN ~ ' J ~ * ~ ""' ~
Figure 1. Location o f Indonesia.
Monsoon forest is located up to an elevation of
1000 m. It consists of mixed deciduous stands of
simpler structure than the remainder of the rain
forest, with canopies 2 5 - 3 0 m high. Typical timber
genera are Acacia and Albizzia. The monsoon forest
ranges from northwestern Java through Irian Jaya.
Peat forest is found on alluvial soil with a peat layer
0.5-2 m thick. The soil tends to be highly acid and
almost sterile. Tree species tend to grow at the center
of a peat dome. The timber is usually poor-quality
scattered trees. T h e major timber genus is Cratoxylon.
Swamp forest exists mostly on the eastern coast of
Sumatra, the western coast of Kalimantan, and in the
basin of Irian Jaya. Common genera are Eugenia and
Xylopia
Mangroves are mainly located along the eastern
shores of Sumatra, the western and eastern shores of
Kalimantan, and the southern shores of Irian Jaya.
The forest is under tidal influence and the stand
structure is simple, consisting mostly of the genera
Rhizophora and Avicennia (Directorate General of For-
estry 1976). Indonesia contains over 40% of the total
mangrove area of Asia and the Pacific. Mangroves
provide an essential link between terrestrial and ma-
rine ecosystems, and they represent an important con-
servation problem. Mangrove is used locally for poles,
posts, and firewood. Exploitation varies, but popula-
tion pressure in Java and large-scale exploitation for
paper production in Kalimantan and Sulawesi have
put pressure on the resource. Transmigration pro-
grams have relocated people from Java and neigh-
boring islands to coastal areas on other islands that are
suitable for rice cultivation; these areas often include
mangroves (Myers 1980). T h e government does have
a reforestation program for mangrove land, using the
"prosperity approach" to create employment opportu-
nities (FAO 1982).
Human Resources and Area Changes
Indonesia had a population of 147.5 million people
in 1980, with an annual growth rate of 2.4%. The pop-
ulation is unevenly distributed; about 63% of the pop-
ulation live on Java, Madura, and Bali, which have less
than 10% of the total land area. The Department of
Manpower and Transmigration is responsible for
human resource development and for resettlement of
people from the more densely populated areas.
Transmigration occurs from Java mainly to Sumatra,
Kalimantan, Celebes, and West Irian (Guppy 1984).
The goal is to translocate over 10 million people
(Myers 1980).
Traditional patterns of land use and increasing
population pressure have resulted in a considerable
loss of primary forest (Sebire 1980a). As many as 1
million ha annually of primary forest are cleared for
agricultural production annually. Another 500,000 to
800,000 ha are logged annually, and shifting cultiva-
tion affects 200,000 ha/year (Sebire 1980b).
Reforestation is a top priority of the government,
and a major tree planting program is operational. The
long-range goal is to reforest 30 million ha, ultimately
at an annual rate of 1.5 million ha (Sebire 1980b).
Logged forest areas are required to be reforested, but
this requirement often is not met. When logged areas
are regenerated, they are often planted to pine. In re-
sponse to the lack of progress in regenerating logged
areas, the Indonesian government imposed a refund-
able deposit of US $4.00/m ~ of log exports in April of
1980. The deposit is refunded when a satisfactory re-
planting program has been established. Gillis (1980)
concluded that the deposit "does not appear to pro-
vide any new incentives for replanting"; firms would
be better off economically to forfeit the deposit.
Shifting cultivation is a major forest management
problem in Kalimantan, Sumatra, Celebes, and the
Moluccas. Shifting cultivators often follow behind log-
ging operations (Guppy 1984). Increasing population
pressure and long-term overuse of croplands have re-
sulted in much land that is capable of maintaining only
two rotations of a cycle (Myers 1980). Most of the af-
fected areas have either been reduced to poor quality
secondary forest or converted to grasslands, or exist as
bare land. Slash-and-burn practices do not necessarily
destroy the forest. Under managed systems (that is, on
sites that have not been totally drained of soil fertility,
where controlled burning is practiced, and where an
adequate fallow period is maintained), productive
forests can be sustained. Increasing population pres-
sure has meant shrinking fallow periods on forest land
and losses of soil fertility. The government's transmi-

gration program has been resettling some shifting cul-
tivators (Rao and Chandrasekharan 1983).
Education and Research
Professional forestry education is provided by the
Ministry of Education by eight public universities. The
yearly output of these universities is approximately
200 (BS) graduate foresters; total enrollment is about
600 students. All of these universities require a min-
imum four-year curriculum, and some require up to
six years for the BS degree. All students, including un-
dergraduates, are required to complete a thesis, and
graduates are granted the title of Forest Engineer.
Graduate programs are offered at Bogor Agricultural
University and Gajahmada University, but many In-
donesians pursue graduate education at foreign uni-
versities, especially in the United States, Japan, and
Canada. A master's degree program in Indonesia
usually requires an additional two years of study, and a
program leading to the PhD lasts 3 - 4 years (Lantican
and del Castillo 1982).
Short vocational programs are available at several
training centers organized by the State Forest Enter-
prise. At the technical level a three-year program is
offered by the Academy of Forestry at Bandung, West
Java. In addition, two international centers contribute
to forest manpower development: the Regional Center
for Tropical Biology (BIOTROP) and the Southeast
Asian Regional Center for Agriculture (SEARCA).
The three government forest research institutes are
located in Bogor, West Java. Research is carried out by
the Forest Research Institute, the Forest Products Re-
search Institite, and the Forest Engineering Research
Institute. Most of the forestry research is directed at
developing management and silvicultural systems.
Current research is in the areas of watershed manage-
ment, forest plantings in logged-over areas, utilization
of waste timber, and forest operations.
Wildlife management in Indonesia is the responsi-
bility of the Directorate of Natural and Wildlife Con-
servation. About 3.4 million ha of natural reserves, 4.2
million ha of wildlife areas, and 400,000 ha of recre-
ational areas were established by 1980. Natural re-
serves are fully protected from exploitation; however,
wildlife areas may be logged (Myers 1980).
Ownership and Administration
All forests in Indonesia are nationally owned and
managed at the provincial level (Sebire 1980b). Several
government agencies share the administration of the
public forest. On the national level, forest administra-
Indonesia's Developing Forest Industry 755
tion is the responsibility of the State Forest Enterprise.
In Java, provincial forest management is under the su-
pervision of the State Forest Enterprise. On'the other
islands, forest management is carried out by private or
joint-venture companies through government con-
tracts and concessions.
All forest organizations in Indonesia are under the
control of the Directorate General of Forestry. Man-
agement activities are carried out by the Directorate of
Forest Inventory and Planning, the Directorate of
Forest Management, the Directorate of Marketing and
Distribution of Forest Products, and the State Forest
Enterprise.
Indonesian forest management is based on the In-
donesian selective cutting system. This cutting system
specifies a minimum felling limit of 50 cm DBH, re-
tention of at least 25 trees of 3 0 - 3 5 cm DBH/ha
yielding future commercial value, and enrichment
plantings in logged-over areas. Despite the policy es-
tablished by the selective cutting system, some 200,000
ha of forest are still being destroyed annually by addi-
tional tree felling that occurs with shifting cultivation
(Djarwo 1983.
Forest mangement shows a great diversity in Indo-
nesia; Java and Madura are intensely managed for
forest production, forest management is moderately
intense on Sumatra and Celebes, and it is just devel-
oping on the other islands. T h e harvesting and mar-
keting of teak (Tectona grandis) is carried out by the
State Forest Enterprise. Utilization of the teak forest is
well regulated, and most teak harvesting is accom-
plished manually, owing to the abundance of labor on
Java. The harvesting and planting of nonteak species,
especially outside of Java, is carried out by private con-
tractors, who are mostly concession holders using
large-scale, mechanized logging. Waterways are the
most important means of log transportation outside
Java.
Intensity of forest management is evident from the
amount of existing forest road network used to trans-
port logs and other forest products. Java and Madura
have the closest network, with road spacing 30 times
closer than on the other islands.
Forest Production and Industries
Indonesian forest product industries are still devel-
oping. With over 2700 million m 3 of standing com-
mercial timber, Indonesia could biologically sustain a
potential annual yield of 50 million m 3. The main
product of the forest is logs, either for domestic use or
for conversion into processed wood products for ex-
port. Indonesia's forest industry i s primarily con-
756 R.C. Allen and others
5O
og & Veneer Log Production
~ 20
Xi/Log Export '~\~
~ ~o
._g
i i i i i i i I
1972 1974 1976 1978 1980 1982
YEAR
Figure 2l Sawlog and veneer log production and log exports,
Indonesia, 1972-1983. From FAO (1985).
cerned with increasing plywood production, but also
includes sawmilling, particle board, furniture parts,
and pulp and paper. T h e local people also collect
minor forest products, such as rattan, resin, and naval
stores.
The Indonesian policy on the utilization of the
forest has two major thrusts. First, log exports were
deliberately phased out (ended completely on 1 Jan-
uary 1985), with the maximum domestic processing of
logs being encouraged. The overall objective is to en-
sure that 60% of all log production will be processed
domestically (Djarwo 1983). Figure 2 illustrates the
sharp decline in both log production and export since
1978. Government policy favors increased supplies of
domestically processed timber to meet needs for devel-
oping procured products markets. Second, a massive
reforestation and conservation program is in effect.
Logged forest areas and areas deforested by shifting
cultivation are being planted, and forest areas repre-
senting various natural ecosystems are being pre-
served. The goal is to maximize biological forest pro-
ductivity while considering the social impact of the
forest, especially the development of rural communi-
ties adjacent to the forest (Djarwo 1983).
As of January 1981, Indonesian timber concessions
had been granted for 47 million ha of forest land.
About 90% of the total forest area authorized for com-
mercial timber production has been opened up for
logging operations through direct forest concessions.
The remainder has been exploited via a system of gov-
ernment levies on forest production.
The severe decline in production, starting in 1978,
was mainly due to new government regulations aimed
at reducing the volume of log exports. Industrial
roundwood production was in the 2 5 - 3 0 million m 3
range during the late 1970s. By 1983, it was down to
just over 8 million m 3 (FAO 1985). The intent of the
new regulations is to encourage the development of
domestic wood-processing industries, obtain a higher
and more stable price for timber exports, and aid the
~_ 6 Sow
4
P~ywood
i i i
-~ 2 ~ Production/
= "-----.-/- sownwood /" I~'~
= Export,~..~_Z.~xZ~_._~---
t---1---t"--~_--~-----d v'" , expl~ ,
1972 1974 1976 1978 1980 t982
YEAR
Figure 3. Production and export of sawnwood and plywood,
Indonesia, 1972-1983. From FAO (1985).
domestic wood-processing industries by ensuring a
constant supply of essential raw materials. Figure 3
shows the dramatic impact of the new policy on sawn-
wood and plywood exports.
In 1984, the new government regulations decreed a
dramatic cutback in log exports (limited to 6 million
ma/yr), and in 1985 log exports were banned. The
volume of sawn timber exports increased over 25%
annually from 1975 to 1979. In 1980 sawn timber ex-
ports declined 7% to only 1200 thousand m 3 (FAO
1985). This decline was caused by a sharp reduction in
demand from Italy and Singapore. The most signifi-
cant markets for Indonesian sawn timber are Italy,
Singapore, Malaysia, Japan, and Taiwan (during
1975-1980 they accounted for over three-quarters of
sawn timber exports).
The Indonesian plywood industry began in 1973.
Plywood production increased from 9000 m 3 in 1973
to 3.1 million m 3 in 1983 (FAO 1985). Despite devel-
opment problems, particularly in regard to infrastruc-
ture, the plywood industry has been steadily growing
since it began exporting in mid-1975. About 70% of
plywood production in the mid-1970s was consumed
domestically, but by 1982 plywood exports accounted
for over half of production. The plywood exports now
exceed national consumption, and a constant effort is
being exerted to utilize a greater amount of less well-
known species available in the Indonesian forest. The
industry expects a gradual expansion in the variety of
products introduced into the market.
Indonesia produces about 57% of the paper
needed for domestic consumption, so there is ample
opportunity for foreign capital investment in devel-
oping Indonesia's pulp and paper industry. Indo-
nesia currently imports substantial amounts of pulp,
and the establishment of large-scale pulp and paper
mills has been given a high priority by the central

government. In 1983 paper and paperboard produc-
tion was 374,000 t, paper and paperboard imports
were 277,000 t, and 157,000 t of wood pulp was im-
ported (FAO 1985).
Some pulp and paper capacity is in place in the
country. Lontar Papyrus Paper Industry was estab-
lished in 1974 in the Aceh province. It is staffed by
Indonesian and Taiwanese technicians, with equip-
ment from Taiwan and West Germany. Raw material,
in the form of boxed pulp, is imported from Scandi-
navia, Canada, and the United States. Integrated
wood-processing projects are planned for East Kali-
mantan. These projects include pulp and paper mills.
Indonesia had 34 pulp and paper mills in 1978, and
this number increased to 51 in 1983. From 1978 to
1983, paper and paperboard capacity increased from
284 to 877 t, and pulp capacity increased from 148 to
300 t.
Forest Industry Investment Policy
The Indonesian government offers a wide range of
incentives and guarantees to investors in priority areas.
Priority is given to labor-intensive industries, indus-
tries that generate significant foreign exchange
earnings from exports, and industries that will locate
in underdeveloped areas. Investments in pulp and
paper mills have the highest investment priority in the
forestry sector. The types of products envisaged in-
clude pulp, paper, and Kraft paperboard. The gov-
ernment has specified the locations of potential raw
materials: Aceh, North Sumatra, Palembang, South
Sumatra, Sungai Kayan, East Kalimantan, Central Ka-
limantan, South Kalimantan, Cilacap, Central Java,
and West Java.
These raw materials include pine (Pin~s merhusii),
mixed tropical hardwoods, mangrove, and other vari-
eties. Investment allowances are provided for expan-
sion or product diversification of ordinary paper, spe-
cialty paper, building paper, and roofing paper plants.
All foreign investments must be undertaken
through joint ventures with an Indonesian partner.
The choice of the investor's Indonesian partner will
have a major effect on the success of the venture. A
joint-venture company engaged in an integrated
project may conduct logging operations as a contractor
of the concessionnaire. This policy was adopted to en-
sure a continuous supply of raw material for the in-
dustry. The holder of the forest concession must be
the Indonesian participant.
T h e r e are four main benefits granted by the central
government available to priority projects. First, there
are tax advantages. Tax holidays from corporate taxa-
Indonesia's Developing Forest Industry 757
tion range from two to six years for priority projects.
Investments in pulp and paper mills qualify for the
maximum tax holiday of six years. Exemptions from
dividend taxes and stamp duty, investment allowances,
and accelerated depreciation are also available.
Second, the entry of all fixed assets, such as machinery
and equipment for operation of the enterprise, is ex-
empt from import duties. Third, profits can be trans-
ferred abroad in foreign currency at the current ex-
change rate in proportion to the shareholding of the
foreign participant, allowances for depreciation, and
proceeds from the sale of shares of Indonesian partici-
pants. Fourth, the investor is required to train Indon-
esian personnel gradually to take over the manage-
ment, but has full authority to determine his own
management and to use foreign managerial and tech-
nical employees not available in Indonesia.
Djarwo (1983) describes the four phases to the ap-
plication procedure: preapplication, application-eval-
uation, project licensing, and project implementation.
Preapplication calls for potential investors to deter-
mine which industrial sectors are open for investment
and which attract incentives. Applications to Indo-
nesia' Investment Coordinating Board are evaluated
for compliance with government investment policy
and priority, and if they are in compliance with policy,
they are granted provisional approval. After the re-
quired information is furnished to the board, and
after presidential approval is obtained, a "permanent
letter of approval" is issued by the board. The letter of
approval allows the investor to procure the required
licenses (import and purchasing licenses, a letter of
credit from Bank Indonesia, an import clearance
permit, permanent operating license, and regional li-
censes). Once the project is implemented, a project re-
port is required every six months and the Investment
Coordinating Board must approve all project changes
and modifications.
Operational Realities
The brief description of Indonesian investment
policy above summarized official central government
policy, but ignored several "real life" impediments to
profitable investment. The operational realities of any
government policy often differ from official pro-
nouncements.
The central government control over provincial
and local government policies, regulations, and restric-
tions is loose. This is especially true in the provinces
remote from the island of Java, where most of the
available timber is located. Local customs officials can
impose constant roadblocks, slowing the import of
758 R.C. Allen and others
needed tools, machinery, operational supplies, and the
personal effects of employees. In many instances,
much needed equipment, the personal effects of man-
agers, and the supplies necessary to keep an operation
productive are held for months in customs yards or
warehouses awaiting assessment of duties, paperwork,
and payment of "expediting fees" for release.
Local immigration officials, provincial governors,
city mayors, army officials, and village chiefs can
hinder an effective operation. At the provincial or
local level one can expect red tape, paperwork, extra
local taxes and duties, expediting payments to local
customs personnel, and travel restrictions. Besides the
numerous licenses and permits required at the na-
tional level, five main regional licenses are required: a
location approval license, a right to buy or lease the
land, a building permit, an industrial permit, and a
land certificate.
Tax and customs duty holidays only pertain to cen-
tral government levies. Local taxes and customs duties
far exceed central government aid. All forests in Indo-
nesia are publicly owned, and are managed by the pro-
vincial governments, and this presents a major impedi-
ment to forest resource development.
The "freedom to manage" guaranteed by the cen-
tral government can be diminished by restrictions and
regulations that delay or make this authority costly.
The investor, Indonesian partner, and the govern-
ment may differ on the qualifications and training
schedule of Indonesian personnel. Also, joint-venture
companies must market their product through a local
distributor, which results in a major markup if there is
competition from a domestic company. The loose re-
lationship between the central and local governments
often makes the application procedure more lengthy
and costly.
A prospective investor should carefully investigate
employment policies dealing with work permits,
training, labor agreements, and employer responsi-
bility. In practice, the employer assumes full responsi-
bility for health, food, shelter, transportation, and
well-being of his employees.
The forests of Indonesia are extensive, but the most
accessible and desirable concessions are made to local
and national officials (particularly army generals).
Construction and maintenance of road systems will be
a major cost requirement for pulp and paper invest-
ment. Roads are nonexistent and heavy rainfall often
makes rock roads necessary for log transport. Suitable
rock quarries are difficult to find and develop, and
usually are located several miles from main-line log-
ging road locations. Fifteen to twenty thousand dollars
per mile is not an unusual cost for main-line, all-rock,
all-weather logging road construction.
Theft of timber near rivers and streams has de-
pleted the cheapest logging sites. Costly constant sur-
veillance is necessary. Helicopter patrol is usually the
only effective means to patrol a large concession with
numerous waterways.
Investors in Indonesian forest industry are ex-
pected to develop and finance programs of reforesta-
tion through plantings of logged forest areas, usually
to pine. Brush or hardwood competition is usually
controlled immediately around the planted seedling by
hand labor using machetes. However, shifting cultiva-
tion often moves into logged areas and makes planta-
tions difficult to establish or maintain as forest.
Lastly, while the central government insists on pro-
cessing plants, many obstacles can be expected to im-
pede this requirement. T h e same local government re-
straints and regulations apply to processing plant
operations as to logging operations--plus the added
problem of training Indonesian labor to safely operate
dangerous and complicated converting equipment.
These demands have resulted in many concession-
aires' terminating operations in Indonesia. The gap
caused by the exodus of concessionaires is being filled
by Chinese investors (Guppy 1984).
Summary
Indonesia continues to be a large exporter of trop-
ical hardwood. T h e country's goal to establish inte-
grated wood industries, utilizing millions of cubic
meters of raw material and wood wastes, has produced
a major change in its forest products exports, indo-
nesia has eliminated sawlog exports. In 1978, Indo-
nesia accounted for one-half of Asia's hardwood
sawlog exports. By 1983, Indonesia accounted for 13%
of Asian hardwood sawlog exports. However, over the
same period, hardwood sawnwood exports (as a per-
centage of Asia's total), increased from 13% to 21%,
and plywood exports increased from 6% to 38%.
From 1978 to 1983, domestic paper and paperboard
production more than doubled. Indonesia's invest-
ment policies have increased the domestic processing
of forest products. While high-priority investments
enjoy many benefits, there are operational problems in
implementing central government incentive policies.
Certainly, Indonesia's abundant tropical forests should
guarantee long-term opportunities to develop a forest
industry base.

Acknowledgment
This article is p a p e r 6032 o f the Mississippi Agricul-
tural and Forestry Experiment Station, Mississippi
State, Mississippi, USA.
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