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Indonesia needs to bankrupt some international timber companies

By David Kaimowitz - posted Friday, 31 January 2003

Governments do not like to close down big businesses. But that is the most likely outcome of a meeting on Bali this week to discuss a new foreign-aid package.

The big businesses in question are the debt-ridden timber companies that borrowed billions of dollars in the twilight years of the Suharto regime. The loans fuelled massive growth in timber-processing industries, particularly pulp and paper. Indonesia lost millions of hectares of rain forest, and wood processing industries now need three to four times more wood than the forests can sustainably produce.

After the 1997 Asian financial crisis, most Indonesian conglomerates stopped servicing their loans. Some could not pay; others decided not to pay when they realized there was no functioning bankruptcy system that could force them to do so.


With frightened bank customers withdrawing their deposits and companies not paying loans, most banks were on the verge of collapse. The Indonesian government bailed them out with billions of dollars of taxpayer and aid funds.

In return, the banks handed over their bad loans to the government, which created the Indonesian Bank Restructuring Agency to get companies to pay off these loans. Meanwhile, most forestry (and non-forestry) companies kept on with business as usual.

Many donors felt that allowing timber conglomerates to continue destroying some of the world's most valuable rain forest while the donors picked up the tab for the companies' bad loans was adding insult to injury. They called on the government to shut down timber companies that would not pay up. In February 2000, the government promised to do just that.

Three years later it has yet to close any of the companies. After several half-hearted efforts to get the companies to pay their loans, the restructuring agency now wants to call it quits.

It plans to wash its hands of the matter and sell the loans for whatever price investors - mostly banks - are willing to pay. However, if the agency does that, it will recover only 15 to 20 cents for each dollar of debt.

The real losers will be Indonesian taxpayers and international donors, as well as the country's tropical forests. The former because they will be picking up the bill for most of the forest companies' original debt; the latter because the companies will continue to plunder the forests to provide timber, wood pulp and palm oil.


The restructuring agency claims that with no functioning bankruptcy system it has no choice but to sell the loans cheaply. But such a claim does not hold water. If the government revoked the licenses of some of the indebted timber companies as it promised it would, other companies would see the writing on the wall and pay.

There would be less forest destruction, and the government would have more money for pressing social needs.

If the solution is so easy, why hasn't it happened? Because the big timber conglomerates have been lobbying hard behind the scenes to avoid closure and the government wants to raise quick cash by selling the loans now, rather than wait for a better return in the future. The Bali meeting was a chance for the government to look beyond its short-term budget deficit and act to save the country's forests. Failure to do so will not only further endanger threatened species such as tigers and orang-utans, but also lead to the eventual collapse of the forestry industry.

Unless debt sales are postponed and unsound companies shut down, Indonesia will lose most of its high-value timber in the next 10 to 15 years. Instead of providing moderate levels of employment far into the future, the industry will employ people for a few more years but then virtually disappear.

That would be devastating for the country's foreign exchange earnings and tax revenues. It would also lead to major job losses and more social unrest.

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This article was first published in the International Herald Tribune on 21 January 2003.

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About the Author

David Kaimowitz is the Director General for the Center for International Forestry Research.

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