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Learning Lessons to Promote Certification and

Combat Illegal Logging in Indonesia

September 2003 to June 2006

Emile Jurgens

Learning Lessons to Promote Certification and

Combat Illegal Logging in Indonesia

September 2003 to June 2006

Emile Jurgens

July 2006

National Library of Indonesia Cataloging-in-Publication Data

Learning lessons to promote certification and combat illegal logging in Indonesia: September 2003 to June 2006/by Emile Jurgens. Bogor, Indonesia: Center for International Forestry Research, 2006.

ISBN 979-24-4662-148p.

CABI thesaurus: 1. certification 2. timbers 3. forest products 4. supply balance 5. markets 6. linkage 7. 8. timber trade 9. logging 10. Indonesia I. Title

© 2006 by Center for International Forestry ResearchAll rights reservedPrinted by Intiprima, Jakarta

Design and layout by Gideon SuharyantoPhotos by Agung Prasetyo

Published byCenter for International Forestry ResearchMailing address: P.O. Box 6596 JKPWB, Jakarta 10065, IndonesiaOffice address: Jl. CIFOR, Situ Gede, Sindang Barang, Bogor Barat 16680, IndonesiaTel.: +62 (251) 622622; Fax: +62 (251) 622100E-mail: [email protected] Web site: http://www.cifor.cgiar.org

Contents

List of Acronyms and Abbreviations iv

1. Introduction 1

2. An Overview of the Alliance’s Progress from September 2003 to April 2006 5

2.1 Strengthening Market Signals to Produce Certified & Verified Legal Timber 5 2.1.1 Continuing to Engage Timber Buyers 5 2.1.2 Engaging the Public Sector in Asian Markets 7

2.2 Increasing the Supply of Certified Indonesian Wood Products 9 2.2.1 Launching an Indonesian Forest and Trade Network 9 2.2.2 Supporting Certification in Indonesia 9 2.2.3 Promoting the understanding of forest certification and illegal logging issues 10

2.3 Demonstrate Practical Solutions to Achieve Certification and Differentiate Legal and Illegal Wood Supplies 11 2.3.1 Defining “Legal” 11 2.3.2 Developing an Independent Legality Verification and Timber Tracking System 12 2.3.3 Supporting the Protection of High Conservation Value Forests 13 2.3.4 Supporting Collaborative Management in SLJ IV 14

2.4 Reducing Financing and Investment in Companies Engaged in Destructive or Illegal Logging in Indonesia 14 2.4.1 Working with banks to improve environmental and social risk assessment 14 2.4.2 Influencing Asia Pulp and Paper’s creditors 15

3. Lessons on Linking Demand for Sustainable Timber Products to Supply from Indonesia 16

3.1 Demand for Sustainable Timber Products in Markets Where the Alliance is Active 16 3.1.1 The European Union 17 3.1.2 The USA 20 3.1.3 Japan 21 3.1.4 China 22 3.2 Lessons on the Nature of Demand for Sustainable Timber Products from Indonesia 24

3.3 Linking Demand to Supply 25 3.3.1 Transmission of Market Signals to Forest Management Enterprises 25 3.3.2 Incentives for Indonesian Manufacturers 27

3.4 Lessons on the Supply of Sustainable Timber Products from Indonesia 30

4. Lessons on Promoting Verifiably Legal Timber 33 4.1 Defining “Legal Wood” 33 4.1.1 The UK-RI MoU Legality Standard 34 4.1.2 WWF’s “Keep it Legal” Manual 36 4.2 Lessons on Defining “Legal” Timber 38

5. Broad Lessons Learned 40

6. Recommendations 47

Bibliography 49

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List of Acronyms and Abbreviations

APKINDO Asosiasi Panel Kayu Indonesia or Indonesian Plywood Association

BRIK BadanRevitalisasiIndustriKehutananorForest Industry Revitalization Body

BSW PTBangunSaranaWreksaCAR CorrectiveActionRequestCIFOR CenterforInternationalForestryResearchCITES Convention on International Trade in Endangered

SpeciesCoC ChainofcustodyDRT PTDiamondRayaTimberFLEG ForestLawEnforcementandGovernanceFM ForestManagementFMU ForestManagementUnitFPIC FreepriorandinformedconsentFSC ForestStewardshipCouncilFTN ForestandTradeNetworkGFTN GlobalForestandTradeNetworkGoI GovernmentofIndonesiaHCVF HighConservationValueForestLEI Lembaga Ekolabel Indonesia or Indonesian Ecolabelling

InstituteLKS Lesser-knownspeciesMoF MinistryofForestryMoU MemorandumofUnderstandingMTH MixedtropicalhardwoodNGO Non-GovernmentalOrganizationRKT RencanaKaryaTahunanorAnnual Work PlanRST RoughsawntimberRWE RoundwoodequivalentSFM SustainableForestManagement

�i

SPWP SecondaryProcessedWoodProductsSLJ PTSumalindoLestariJayaTFT TropicalForestTrustTNC TheNatureConservancyTPTI TebangPilihdanTanamIndonesiaorIndonesian Selective

Cutting and Planting systemTTF UKTimberTradeFederationVPA VoluntaryPartnershipAgreementVVNH TheDutchTimberTradingAssociationWALHI WahanaAlamdanLingkunganHiduporThe Indonesian

Forum for the EnvironmentWWF WorldWideFundforNature

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1. Introduction

TheGlobalDevelopmentAlliancetoPromoteCertificationandCombatIllegalLogginginIndonesia(theAlliance)hasmadesubstantialprogresssinceCIFORreleased the first Learning Lessons report on the Alliance in 2003. MajormilestonesbetweenSeptember2003andMarch2006include:

• ThedesignofalegalitystandardforIndonesianwoodproducts;• Thesuccessfultestingofanindependentlegalityverificationandtimber

trackingmechanism;• Creatingawarenessoftheneedforaregionalapproachtocombatillegal

loggingamongstcustomsagencies;• TheestablishmentofForestandTradeNetworksinIndonesiaandChina

andrecruitmentofforestandtradeparticipants;• The creation of a model of collaborative management between local

communitiesandatimberconcessioninEastKalimantan;• Integration of High Conservation Value Forest areas into the East

Kalimantanlanduseplan;• Agreementoncriteriaforsustainablepalmoilproduction;• FSCcertificationofa270,000hectare(ha)concessioninEastKalimantan,

representingthelargestforestmanagementunitcertifiedundertheFSCschemeinthewholeofSouthEast(SE)Asia;

• ThefirstLEIcertificationofacommunityforestinIndonesia;and• TheacceptanceofprocurementpoliciesbymajorpaperusersinJapan.

ProgresshasbeenachievedunderdifficultconditionsandtheAlliance’sactivitiesarebringingtolightvaluablelessonsabouttheIndonesianforestsectorandtheopportunitiesandchallengesforintervention.Thesectorischaracterizedbyweakgovernance,political transformation,andfinancial insolvency.Thismessy stateposesasubstantialbarriertopositivechangebutalsopresentsfertilegroundforlearninglessons.TheAlliancepartnershavecontinuedtolearnandinseveralcaseshaveadaptedtheirapproachaccordingly.

� | Learning Lessons to Promote Certification and Combat Illegal Logging in Indonesia

TheAlliance’sexperiencehasshownthatlinkingpotentialbuyersofsustainabletimbertoIndonesianproducers,byitself,isnotenoughtobringaboutthelargeand quick changes that were envisioned at the Alliance’s inception. Duringthefirstthreeyearsof itsactivities,theAlliancehasadapteditsapproachfromfocusing exclusively on market linkages to undertaking initiatives to improveenabling conditions and promote public policy incentives for sustainableforest management. Increased national stability following the 2004 change ofgovernmenthasledtoimprovementinthepoliticalandbusinessclimate,whichpresentsincreasingopportunitiesfortheAlliancetocombatillegalloggingandimproveforestmanagement.

Lessons learnedaboutthenatureofdemandfor,andsupplyof,sustainableandlegalverifiedtimberfromIndonesiainclude:

• Marketdemandforcertifiedandlegalforestproductsisdrivenbymultiplefactors including purchasing policies of corporations and regulatorypoliciesofimportinggovernments.

• Buyerslookingfortimberthatcanbeproventobelegalorsustainablecaneitherswitchtotimbersuppliersthatareperceivedasbeinglessrisky,orplacepressureontheircurrentsupplierstopursuecertificationorlegalityverification.

• CompaniesinIndonesiaarelesslikelytorespondtodemandfrombuyersthattheyarenottradingwithsincetherearesignificantcostsandrisksrelatedtoswitchingmarketsandthebenefitsarenotalwaysclear.

• Buyer preferences for legal and sustainable timber are often “lostin translation” from the consumer end of the supply chain throughintermediariestothesourceFME.

• WeakforestgovernanceactsasadeterrenttoinvestmentsinsustainableforestmanagementinIndonesia.

• The role of Government in verifying “legal” timber is essential as thegovernmentistheultimatelegalauthority.Yet,itisalsoproblematicasthose seeking verification have usually lost confidence in governmentsystems.

• Legality should be addressed as one strand of the broader concept ofresponsibleforestryandtimberpurchasing.

• Somegovernmentpolicieshaveactedasseriousdeterrentsordisincentivesfor companies to engage in a program to achieve sustainable forestmanagement.

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• Demandforsustainableforestproductsdoesnotnecessarilytranslatetoawillingnesstopayfortheadditionalcostsofsustainableproduction.

• For certification to have a major impact on natural tropical forestmanagement there needs to be greater acceptance of a stepwiseapproach.

• Environmentally sensitive buyers are mainly concerned about theircorporateimage,andneedassurancethattheproductstheypurchaseareapprovedbyactivistNGOsintheirhomemarkets.

• Multilateral cooperation, market approaches, and good governance allhaveanimportantroletoplayincombatingthetradeinillegalwood.

• Marketbasedmechanismsrequireconcertedactionacrossallmarketstosucceed.

• Inaneverimprovingpoliticalandbusinessenvironment,market-basedeffortsarebeginningtohelpimproveforestmanagementinIndonesia.

TheAlliancehasrespondedtothecomplexityandchallengesthathaveemergedbyfocusingonimprovingtheenablingconditionssothatthefullbenefitofmarketlinkagescanberealized.Whilecompany-to-companylinkagescontinuetobeanimportantcomponentoftheprogram,theAllianceisworkingmorecloselyatthepolicy level inIndonesiaand importmarkets tocreatean improvedregulatoryandenablingframeworkforsustainable forestmanagement.This framework ischangingforthebetteranditislikelythatthiswillcreateanenvironmentwheremarketlinkswillplayanincreasinglyimportantrole.

While there are many examples of institutional learning that could be drawnfromtheAllianceactivitiesduringtheperiodcovered,thisreportfocusesontwobroadtopics:i)facilitatingmarketlinkstocreateincentivesforIndonesiantimberproducers to invest in sustainable forest management; and ii) defining “legaltimber”intheIndonesiancontext.ThisreportisbasedoninformationprovidedbyAllianceparticipantsandstakeholdersthroughinterviewsandwrittencommentsfromSeptember2005toApril2006,aswellasareviewofliteratureonmarketlinks,certification,legalityverification,timbertrade,andtimbertracking.

Section2ofthereportprovidesabriefoverviewoftheAlliance’sactivitiesintheperiodbetweenSeptember2003andApril2006.ThissectionisdividedintofourheadingsthatcorrespondtofourofthefiveactivityareasinwhichtheAllianceisactive:


i) Strengthening Market Signals to Produce Certified and Verified LegalTimber;

ii) IncreasingSupplyofCertifiedIndonesianWoodProducts;iii) Demonstrating Practical Solutions to Achieve Certification and

DifferentiateLegalandIllegalWoodSupplies;andiv) ReducingFinancingandInvestmentinCompaniesEngagedinDestructive

orIllegalLogginginIndonesia.�

Sections 3 and 4 of the report respectively deal with facilitating market linksanddefininglegality.ThesetopicsareexploredinsomedetailbasedonAllianceactivitiesaswellasbackgroundmaterial.Section3hastwoparts.ThefirstdetailsthenatureofdemandforcertifiedandlegalverifiedtimberproductsintheimportmarketswheretheAlliancehasbeenactive(Europe,USA,ChinaandJapan).ThesecondpartlooksattheimpactofthisdemandontheIndonesianforestsectoranddetailsthebarriersthatpreventmarketsignalsfromleadingtogreatersupplyofcertifiedandlegalverifiedtimberproductsfromIndonesia.LessonsthathaveemergedfromAllianceactivitiesrelatedtofacilitatingmarketlinksanddefininglegalityaredetailedwithintherespectivesections.

Section5providesthebroaderlessonsthatAllianceactivitieshavehelpedbringtolight.ThereportconcludeswithaseriesofrecommendationsthatareaimedatinformingtheactivitiesoftheAllianceaswellasthoseofotheractorsthatwishtoimproveforestmanagementpracticesinIndonesia.

�TheAlliance’sfifthactivityareais‘SharingLessonsLearned’.Thisreportisoneofanumberofcontributionstothatactivityarea.

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2. An Overview of the Alliance’s Progress from September 2003 to April 2006

2.1 Strengthening Market Signals to Produce Certified & Verified Legal Timber

2.1.1 Continuing to Engage Timber BuyersFromSeptember2003toApril2006,theAllianceexpandeditsengagementwithcompaniesthathavethepotentialforincreasingthelevelofdemandforcertifiedandverified legal timber fromIndonesia.BothWWFandTNCcontinued tocultivaterelationshipswithtimberbuyersinAsia,Europe,andNorthAmerica.TheAlliancepartnersengagedseveralstrategicJapanesecompanieswithstronglinkstotheIndonesiantimbersector,includingItochuandSumitomoForestry.These companies have expressed strong support for the concept of Allianceactivities,andhaveindicatedthattheyexpectedtobeabletogiveapreferenceintheirtradingwithIndonesia,forproductsfromwell-managedandlegalforestryoperations.WWFmaintaineditscloseengagementwiththeglobalbuyersandcreditors of the two biggest Indonesian pulp and paper companies, APP andAPRIL,toassisttheminevaluatingtheirrespectivepractices.TheAlliancemadethemostsignificantprogressinengagingtheprivatesectorthroughtheexpansionofWWF’sGlobalForestandTradeNetwork(GFTN),andthroughthesuccessfulpromotionofsustainablepaperpurchasingpoliciesinJapan.

Expanding WWF’s Global Forest and Trade NetworkWWF’sGFTNhasexpandedandForestandTradeNetworks(FTNs)nowexistinallcountriesthataremajorimportersofIndonesiantimber,includingChina,Japan,Germany,theUKandtheUSA.

• WWFestablishedtheNorth America FTNin2005,andhasenlistedfourparticipantswithcommitmentstoresponsiblewoodsourcing-BlueLinx(the largest distributor of building products in the U.S.), Johnson &Johnson,TBMHardwoods(oneofthelargestU.S.importersoftropicalhardwoods)andWoodFlooringInternational.


Overthelastfewyears,WWF’sGFTNhasestablishedastrongpresenceinAsiaPacific.AsofJune2006,progresshadbeenachievedasfollows:

• TherecentlyestablishedChina FTNhadtwoforestparticipants(forestmanagers)andsixtradeparticipants(processors,manufacturers,tradersorend-users).Anadditionalsixmanufacturershadappliedtojoinandarecurrentlydevelopingresponsibleprocurementactionplanstoqualifyformembership.

• The Indonesia FTN had four forest participants and eight tradeparticipants. It alsohadapipelineof applicants including seven forestmanagers,sixcommunityforestsandeightprocessorsandmanufacturers.InFebruary2006,SLJIIbecamethefirstconcessioncompanytojoinNusaHijau.PTPerhutani,thestateforestrycompany,signedaParticipationAgreementwithNusaHijauforfiveofits52ForestManagementUnits(FMUs).ThefiveFMUscoveranareaofover�67,000hectares,allofwhicharelocatedinEastJava.

• InJapan,WWF Sanshoukai,had27members.• The Malaysia FTN had three trade participants and nine applicants

(seventradersandtwoforestmanagers).• The Vietnam FTN was launched on 4 October 2005, and has since

recruited four manufacturers as full participants and four others haveappliedtojoin.

TheGTFNcontinuedtotracksignalsfromitsbuyermembers.AsofJune2006,GFTNhasgeneratedover270marketenquiries (potentialorders for specifiedproductsusingwoodsourcedfromFTNforestmembersorcertifiedforests)fromFTNTrademembersdirectedat�8producercountries.Globally,theseenquiriesareworthover277millionUSDtoproducers.Approximately25percentoftheseenquiriesweredirectedspecificallyatIndonesianproducersortowardsproductswhich Indonesian producers can supply. Indonesia has received 49 enquiriesfrom8 countries (spanningEurope andNorthAmericaplusVietnam)with atotalestimatedvalueofmorethan73millionUSD.Oftheseenquiries,20havedeveloped into market links (trading relationships) between buyers in France,Germany, Netherlands, Sweden, Switzerland, UK and USA with IndonesianproducerFTNparticipants.

TheWWFGFTNalsopublishedguidelines fortheResponsiblePurchasingofForestProducts.Theguideoutlinesthevariouswaysinwhichcompanies,includingprimarymills, secondaryprocessors, importers,manufacturers,wholesalersand

Emile Jurgens | �

retailers, can demonstrate compliance with best practices and ultimately withtheirownpurchasingpolicies.2WWFhastranslatedtheguideintoIndonesian,Chinese and Japanese. A seminar to present the guide in Japan attracted �00companyrepresentatives.

Promoting Responsible Paper Purchasing in JapanWWFhashelpedtwomajorJapanesecompanies,RicohandASKUL,toadoptresponsiblepaperRicoh(oneofthebiggestofficeproductsandproducers)andASKUL(a leading supplierof stationery andoffice supplies in Japan) todraftthepolicy. Ricohstoppedpurchasingcopypaper fromIndonesiabasedon itsresponsiblepurchasingpolicy.OthermajorJapanesewhichsuchpoliciesinclude-CanonSalesCo.,Inc,FujiXeroxCo,Ltd,FujiXeroxofficeSupply,OjiPaper,NipponPaperandMitsubishiPaperMillsLtd.

WWFJapan,FriendsoftheEarthJapan,GreenpeaceJapan,JapanTropicalForestActionNetwork(JATAN),andGlobalEnvironmentalForumlaunchedaprojectaimedat“PromotingResponsiblePaperPurchasinginJapan”.ThisprojectaimstocreateaninformalcorporatestudygrouponresponsiblepurchasingpolicyinJapan.

2.1.2 Engaging the Public Sector in Asian MarketsAs theAlliancebecamemore engaged in creatingmarket linkages therewas agrowingrecognitionthatgovernmentpoliciesplayacritical role insupportingand creating the demand for sustainable timber products. For this reason theAllianceincreasinglyworkedwiththegovernmentsofbuyingmarketstopromotefavorablepolicies.SignificantworkinthisareaoccurredinChina,Japan,andattheregionallevel.

WWFChinahelpedfacilitateafact-findingdelegationtoEuropeofseniorofficialsintheChinaStateForestAdministrationandtheCertificationandAccreditationAdministration.Theofficialsvisitedtheheadquartersoftwoforestcertificationsystems- theForestStewardshipCouncil inGermanyandtheProgrammeforEndorsementofForestCertificationSchemesinLuxemburg,aswellasretailersandgovernmentofficialsintheUK.Asaresultofthetrip,theofficialsagreedonaprocessforpromotingforestcertificationinChina.WWFisnowworkingwiththerelevantgovernmentagenciesandkeystakeholderstodesignadetailedworkplanforimplementingthisprocess.

2Seewww.panda.orgforalinktotheguidelines.


TNCandWWFwereleadorganizersoftheBusinessDialogueonCombatingIllegalLoggingwhichwasheldunder the auspicesofTheForestsDialogue inHongKonginMarch2005.Theeventbroughttogetherover�20leadersfrombusiness,civilsocietyandgovernmentandtherewasagreementthatcompaniesand governments must take responsibility to ensure that the wood and paperproducts they purchase are legal.3 During the event there was a successful,informalsidemeetingbetweenIndonesianandChineseofficialswho,forthefirsttimesincethetwogovernmentssignedanMoUtwoyearsearlier,progressedtothepointofagreeingonnextsteps.

ThenewlyappointedDirectorofTNC’sAsia-PacificForestProgrammetwithofficials of the State Forest Authority (SFA) in Beijing in January 2006 anddiscussedarangeofareasforpossibleTNC/SFAcooperation.AgreedpointsofcooperationincludeaSFAvisittoIndonesiainthelatterhalfof2006todevelopacommonunderstandingoftheissueswithIndonesianofficials,inadditiontojointlysponsoringamajorinternationaldialogueonillegalloggingandtradeinBeijinginthefirsthalfof2007.

WWF Japan provided input to the Japanese Forestry Agency’s Illegal LoggingWorkingGroup.WWFJapanhelpedpromotetheviewsoftheNGOcommunityon the role of theWorkingGroup, and twomembers of theWorkingGroupattendedtherecentForestDialoguemeetinginHongKong.Atthelocalauthoritylevel,WWFJapanandtheMiePrefectureinsouthwestJapanheldacertificationseminarandpaneldiscussiontogetherwithanexhibitionofFSCproducts.

TNC andWWF continued to assist with the development of the Asia ForestPartnership(AFP).TNC,undertheauspicesoftheAFP,isconductingananalysisof legalopportunitiesandconstraintstocombatthe illegalwoodtradearoundAsia.WWFleadsanAFP-affiliatedinitiativeinvolvingTropenbosInternational-Indonesia, CIFOR, and the Ministry for Development Cooperation of theDutch Government, which aims to promote sustainable forest managementin Kalimantan. Due in significant part to the Alliance’s efforts, promotion ofcooperationbetween forest agencies andcustomsagencieswas establishedas acoreconcernofboththeAFPandtheAsia-FLEGProcessandwillbeafocalareaforinputtotheforthcomingFLEGMinisterialmeetingin2007.

3www.theforestsdialogue.org

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2.2 Increasing the Supply of Certified Indonesian Wood Products

2.2.1 Launching an Indonesian Forest and Trade NetworkAnimportantaccomplishmentoftheWWF/TNCAllianceistheestablishmentofanIndonesianproduction-orientedFTN,NusaHijau,whichwaslaunchedinOctober2003.NusaHijaucurrentlyhas four forestparticipants.Respectively,theymanageacertifiednaturalforest,anuncertifiednaturalforest,anuncertifiedacacia plantation and five district-level teak plantation management units. Afurthersevenindustrial-scaleforestmanagersandsixcommunityforestmanagershave applied to join and are in theprocess of preparing actionplans.On themanufacturingside,theIndonesiaFTNcurrentlyhaseighttradeparticipantsandanadditionaleightapplicants.

Forseveralyears,WWFdelayedacceptanceofanyforestmanagersasparticipantsintotheIndonesiaFTNduetouncertaintyoverwhatconstitutedlegalcompliancein Indonesia, and to allow time to develop eligibility criteria that would beconsistentwiththeevolvingMoULegalityStandard.2.2.2 Supporting Certification in IndonesiaAllianceactivitiescontributedtothecertificationofamajortimberconcessioninKalimantan,aswellastothefirstIndonesiancommunity-basedcertification.PT. Sumalindo Lestari Jaya IIPT.SumalindoLestariJayaII,a270,000hanaturalforestconcessionlocatedinEastKalimantan,receivedFSCandLEIcertificatesinearly2006.SLJIIisnowthelargesttractofFSCcertifiedforestinthewholeofSEAsia,andrepresentsIndonesia’sthirdnaturalforestconcessiontoachieveFSCcertification.

TNC’sroleintheprocessincludedprovidingtrainingandsupporttoSLJIItoidentify and develop management prescriptions for High Conservation ValueForest,developabiodiversitymonitoringplan,trainstaffinbiodiversitymonitoringtechniques,highlightthecompany’sstrengthsandweaknessesagainsttheUK-RIMoUlegalitystandard,andstrengthenthecompany’schainofcustodysystem.TNCremainsengagedwithSLJtosupportadditionalbiodiversitymonitoringasthisisanongoingrequirementforFSCcertification.

�0 | Learning Lessons to Promote Certification and Combat Illegal Logging in Indonesia

On achieving certification, SLJ II became the first forest participant in theIndonesia FTN. WWF is now supporting the company to establish tradingrelationshipswithbuyerswishingtosourcecertifiedwoodproducts.

Supporting Indonesia’s First LEI Community Forest CertificationOn October �8th, 2004, the Indonesian Ecolabelling Institute (LEI) grantedits first sustainable community-based forest management certificates to twocommunitygroupsmanagingteakforestsinWonogiri,JavawiththesupportofWWFandlocalNGOs.ThesefirstcertificationshaveallowedLEItofieldtestandrefineitsnewcommunityforestmanagementstandard.Thecertificationcoversanareaofapproximately800hectaresofvaluableteakandmahoganyforest.SinceJuly2004,WWFhasbeencollaboratingwithlocalNGOs,includingARuPAandPersepsi,topromotesustainableforestmanagementandimprovemarketaccessinWonogiri throughLEI’s community-based forest certification system.Thesepioneeringcertificationsdemonstratethatcommunitiescanachievecertification,andthechallengegoingforwardistodemonstratethatcertificationcanhelpthecommunitiesachieveeconomicgains.

WWFinitiatedasecondpilotprojectfortestingcommunityforestmanagementcertificationinGunungKidul.Aworkinggroupwasformedtopursuetheprocessofcertification.WWF’sNGOpartner,ARUPA,planstocontinuesupportingtheWorkingGroupwiththeaimofachievingforestcertificationfortwosub-villages(BlimbingandMendak)withinoneyear.

2.2.3 Promoting the understanding of forest certification and illegal logging issues

Public awareness activities of the Alliance included TV spots, talk shows,advertisements, posters, workshops, exhibits, handbooks, newsletters, twodocumentary films, and the promotion of investigative reports in nationalmagazines andnewspapers.Articles on theAlliance and its activities appearedinBusinessWeek,FarEasternEconomicReview,TheWallStreetJournal,TheJakartaPost,TempoandTheEconomist.WWFcontinuedtoimproveandupdatewww.forestandtradeasia.org,amulti-lingual(English,Chinese,Japanese,VietnameseandIndonesian)websitethatactsasaninformationclearinghouseoncertificationandresponsibleforestryintheAsiaPacificregion.In2006,thesitehasaveragedover50,000hitspermonth.

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2.3 Demonstrate Practical Solutions to Achieve Certification and Differentiate Legal and Illegal Wood Supplies

There are many barriers to certification in Indonesia including, weak NGOsupport,weakgovernmentsupport,difficultyintrackingtimberfromsourcetomarket,andalackofconsensusonwhatitmeanstobelegal.TheAlliancehasbeguntoaddresstheseissueshead-onandinyearstwoandthreeofitsprogramhasmadeimportantcontributionstodefininglegalityanddevelopingtechnologytoreliablytracktimber.Duringthiswork,theAlliancehasmadeseveralimportantshiftsinitsapproachinlargepartduetoincreasedawarenessoftheissuesandthedevelopmentofpoliticalwill to address them. For the legalitydefinition,it became clear that therewas aneed to constructively engage stakeholders intheprocesstoenhancetheirsenseofownership.Thus,afterdevelopingadraftlegalitystandard,TNChandedtheprocessofrefinementtoasteeringcommitteecomprisingrepresentativesofkeystakeholdergroupsincluding:TheDepartmentofForestry,forestbusiness,Industryassociations,environmentalandsocialNGOs.Intheworkontimbertracking,agradualincreaseinpoliticalwillhasledTNCtopromotetheadoptionofanationalizedlogtrackingsystem-thebenefitsofwhichwouldfaroutweighthemoremarket-basedsystempreviouslypromoted.

OtherpracticalsolutionstoachievecertificationthattheAlliancedevelopedinthisperiodincludetoolstoidentifyanddelineateHighConservationValueForests(HCVF)andthedevelopmentofacollaborativemanagementmodeltoensuremutuallybeneficialmanagementofforestresourcesbetweenlocalcommunitiesandtimberconcessions.

2.3.1 Defining “Legal”OneofthefirststepsintheAlliance’sstepwiseapproachisfortheforestmanagertoestablishithasa“legalrighttoharvest”.InIndonesia,erraticlawenforcement,opaque administrative procedures, and ambiguities in statutory provisions,makeitdifficulttoverifywhetheracompanyisoperatinglegally.Thusverifyinglegalitymaybealmostasdifficult foraconcessioncompanyas it is toachieveforestmanagementcertification.Alegalitystandardcanhelpresolvetheseissuesby proposing clear and auditable criteria that can be verified by independentauditorswhenauditinglegalityorthelegalrequirementcomponentofvoluntarycertificationstandards(e.g.FSCPrinciple�).

�� | Learning Lessons to Promote Certification and Combat Illegal Logging in Indonesia

AdraftdefinitionoflegalitywasdevelopedinconjunctionwiththeUK-IndonesiaMoU process through a participative multistakeholder process involvingDistrict, Provincial and Jakarta level stakeholders. Once a draft standard hadbeendeveloped,TNCdecidedthatthelegalitystandardprocesswouldbebettermanaged by a local organization, and the Indonesian Ecolabelling Institute(LEI) was nominated as the body to take the standard forward in the future.TNCtransferredmanagementofthestandardtoLEIinlate2005.LEIhassinceformedatechnicalworkinggroup,onwhichTNCsits,thataimstofinalizethestandard.Asteeringcommittee,chairedbytheSecretaryGeneraloftheMinistryofForestry,wasalsoestablishedtooverseethedevelopmentofthestandardinthefirsthalfof2006.

WWFcompletedanadvanceddraftof“KeepitLegal”–apracticalguidetotheforestproductstradeonhowtoensurelegalcompliancewithinthesupplychain.Themanualdescribesthenatureandmagnitudeoftheillegal loggingproblemandthethreatitposestoforestsandthepeopleandbusinessesthatdependonthem.Itdetailsasystematicapproachtoidentifyingandeliminatingtheriskofillegalwoodenteringagivensupplychain,andexplainsthechallengesinvolvedindevelopingaclear,fairandrealisticpolicyonlegalcompliance.WWFisdevelopinganIndonesiaCountryGuidetocomplementthegeneric“KeepitLegal”manual.TheCountryGuidewillincludeanexplanatorynoteonthelegalitystandardandguidanceonhowitcanbeusedtosupportresponsiblepurchasing.

2.3.2 Developing an Independent Legality Verification and Timber Tracking System

TNCconsultantsSGS/URScompletedatimbertrackingsystemtocomplementthelegalitystandard.ThesystemwassuccessfullypilottestedatSLJII’sconcession.Thepilotbeganwithanauditofthesevenprinciplesof legalitysetoutbytheMoULegalityStandardandthiswasfollowedbytrackingtimberfromstumptomillgate.

Sincetheinitialtestingofthelogtrackingsystem,theDepartmentofForestryhascompleteddevelopmentofitsowntrackingsystem.DiscussionsinitiatedbyTNChaveresultedinaLetterofAgreementbetweenMoF,TNCandTFTtofieldtestahybrid“logadministrationsystem”comprisingtheMoFandTNCsystems,inadditiontothetestingofastandalonecommercialtraceabilitysystemcalledTracElite. Once the systemshavebeenpiloted, theMoFplans to rollout logtrackingsystemstoallforestconcessionsnation-wide.TheMinisterofForestrywantsthesystemtobefullyoperationalacrossthecountrybytheendof2007.


2.3.3 Supporting the Protection of High Conservation Value ForestsInRiauProvince,WWFworkedwiththeJikalaharinetworktoassistlocalgroupsin providing information on social and environmental values to APRIL (oneof the two largepulpcompanies inRiau) for its analysisofhighconservationvaluesintheKamparPeninsularandTessoNiloPark.WWFisalsoinanongoingdialoguewithseveraloilpalmconcessionsinRiauoverthecreationofwildlifecorridorsandthemaintenanceofHCVFswithinandaroundtheirplantations.WWF,incollaborationwiththeIndonesianPalmOilCommission(IPOC),hasworked intensively with a palm oil company to prevent further conversion ofHCVFinthecorridor.

In Papua, WWF continued to identify high conservation values upstream intheBian-Kumbe-Marocatchments.WWFalsosupportedlocalstakeholderstoestablisha forumintendedtoencouragecommunicationamongststakeholdersonissuesrelatedtoland-useandspatialplanning.

InEastKalimantan,TNCcontinueditsefforttoprotectareasofHighConservationValueForestinBerauandEastKutaiDistricts,andfollowingnegotiationswithlocalgovernment,90percentoftheHCVFareawithinBerauDistrictwasincorporatedintothedistrictgovernment’sproposedlanduseplan.TNC’secoregionalplanforEastKalimantanwhichidentifiesmacrolevelareasofHCVFhasalsosincebeenintegratedintotheEastKalimantanprovincialplan,andusedbytheDepartmentof Forestry’s spatial planning unit (Badan Planologi) for verification purposesTNC is alsoworkingwithcommunitieswithcustomary ties to the forest andtheEastKutaigovernmenttodevelopacollaborativemanagementapproachtomaintain HCVF in a former timber concession containing a large orangutanpopulation.TNCsuccessfullylobbiedtheDepartmentofForestry,andthelocalandregionalgovernmentstoexcisetheexforestconcessionfromtheproductionforestestate.Theareaoflandisnowalocallyprotectedareaundercollaborativemanagementtopreventillegalloggingandhuntingactivities.

Gaining Acceptance of Criteria for Sustainable Oil Palm ProductionIn2003,WWFincooperationwithbusinesspartnersinitiatedtheRoundtableforSustainablePalmOil.TheRSPOisanindependentnon-profitorganizationfocusedonpromotingsustainablepalmoilandachievingacommondefinitionofresponsiblepalmoilproduction.Membersincludeproducers,buyers,retailers,financialinstitutionsandNGOs.WWFparticipatedactivelyindevelopingasetofcriteriaknownasthe“RSPOPrinciplesandCriteriaforSustainablePalmOilProduction”. The criteria, which were overwhelmingly accepted by the RSPO


in 2005, give companies much-needed guidelines to produce palm oil in anenvironmentallyfriendlyandsociallyresponsibleway.ThecriteriarecognizetheimportanceofHCVF.Specificallycriterion7.3statesthat“PrimaryforestandanyareacontainingoneormoreHighConservationValuesmustnotbeconvertedtoplantation”.

2.3.4 Supporting Collaborative Management in SLJ IVTNCworkedwithfivevillagessurroundingtheSLJIVconcessionareainEastKalimantantosupportcollaborativemanagement.InOctober2003,TNCsetupamanagementbody,consistingofrepresentativesfromthefivevillages,Beraudistrictgovernment,SLJIV,theChiefoftheBerauDayakGroup,andTNC.ThemanagementbodyreceivedtrainingfromTNCinvillagemappingtechniques,communication, proposal writing, integrated farming, and community forestmanagement.OnJune�,2004,anMoUwassignedtodevelopacollaborativecommunityforestmanagementmodelbetweenSLJIV,TNCandthecommunitiesof the five villages. The agreement will increase community participation inplanning, implementing, andmonitoring forestmanagement so that both thecompanyandcommunitiescanderivebenefitsfromtheforest.

2.4 Reducing Financing and Investment in Companies Engaged in Destructive or Illegal Logging in Indonesia

2.4.1 Working with banks to improve environmental and social risk assessment

In April 2005, WWF convened a meeting in Jakarta with various banks andother stakeholders to explore their interest indeveloping aworkable approachtobankriskassessmentinthetimberandplantationsectorsinIndonesia.WWFand participating banks agreed to share information to identify target banksandstrategiesforgettingtheminvolvedinsuchaninitiative.WWFiscurrentlyworkingwithseveralbankstodevelopa“handbook”toassistcreditriskofficerstoscreenforenvironmentalandsocialriskinoilpalmprojectsinIndonesia.

WWF also conducted meetings with Bank Indonesia, the Ministry of theEnvironmentandrelevantconservationandenvironmentalNGOswiththeaimofencouragingBankIndonesiatostrengthentherequirementsforIndonesianbankstoscreeninvestmentsforenvironmentalriskandimpact.Inarelatedinitiative,


WWFsupported theeffortsof theMinistryof theEnvironmentandKFW(aGermanaidagency)tobuildthecapacityofsmalltomediumsizedenterprisestoeffectivelyaddresssocialandenvironmentalissuesinloanproposals,andtocreatesoftloanincentivesforthemtodoso.InJanuary2005,BankIndonesiaissuedanewregulationonhowIndonesianbanksshouldratethequalityoftheirloans.Theregulationlists“measurestakenbythedebtortoconservetheenvironment”asoneofthefactorsthatneedtobetakenintoaccountbythebank.TheregulationisacrucialfirststepinencouragingIndonesianfinancialinstitutionstoactinasustainableandsociallyresponsibleway.

2.4.2 Influencing Asia Pulp and Paper’s creditorsInAugust2003,WWF,APP(AsiaPulpandPaperCompanyLtd)andtheSinarMasGroup(SMG)signedaLetterofIntent(LoI)underwhichAPPandSMGagreed,amongotherthings,that,beforeforestsareconvertedtoAcaciaplantations,HCVFassessmentsshouldtakeplaceto:

• IdentifyandconserveHCVFs• Fullycomplywithnationallaws,and• Resolvelanddisputeswithcommunities.

InFebruary2004,APP completed aSustainabilityActionPlan (SAP),which,accordingtoWWF,fellshortofwhatwasagreedintheLoIonseveralcounts.Asaresultoftheseshortfallsintheplanandotherconcerns,WWFdidnotrenewtheLoI,whichexpiredonFebruary�9th2004.However,WWFremainsincontactwithAPP’scustomersandcreditorswhocontinuetomaintainpressureonAPPtoproduceastrongerSustainabilityActionPlan.

In June 2004, WWF Indonesia published two reports on APP’s involvementin illegal logging.These reportsweredesigned to informAPP’s customers andinvestors about the nature of its operations and to put pressure on APP tomake fundamental changes in its purchasing decisions. Major creditors ofAPPnegotiatedaconfidentialagreementonenvironmentalcovenantsthatwillbecomeanintegralpartoftheMasterRestructuringAgreementsbetweenAPPanditscreditors.Thecreditorsalsorecognizedtheneedfora furtherroundofconservationassessmentof the areas supplyingfiber toAPP. As a result,APPengaged SmartWood, an independent, nonprofit, forestry certifier, to identifyhighconservationvalueforestsinareassupplyingitspulpwoodandtorecommendappropriateconservationmanagementsystems.

��

3. Lessons on Linking Demand for Sustainable Timber Products to Supply from Indonesia

3.1 Demand for Sustainable Timber Products in Markets Where the Alliance is Active

Tradeinitiativesrelatingtoenvironmentalconcernsarereceivinganewimpetuswith growing global interest in governance issues. Over the past decade,internationaldevelopmentagencieshaveincreasinglyrecognizedtheimportanceofgoodgovernance in targetcountries, and this interest is reflected invariousinitiatives thathaveadirectbearingonthe tropical timber trade.Therelevantforestry issues include illegal logging and the trade in illegally sourced woodproducts.ThesetopicsaregenerallydiscussedundertheheadingofForestLawEnforcementandGovernance(FLEG),andtodayinformtheagendasofmajorenvironmentalNGOs,ofnationalandsub-nationalgovernments,andofforestindustryparticipants.Theseactorsarepromotingmechanismstocurbthetradeinillegallysourcedtimberproducts,andsuchmechanismsincludelegalprocurementprogramsbypublicandprivatebuyers,andtraderegulations.

ThefollowingsectionslookatthedemandforsustainabletimberproductsfromIndonesiainthemarketswheretheAlliancehasbeenmainlyactive.ThesemarketsaretheEuropeanUnion,theUSA,JapanandChina.TheEuropeanandNorthAmericanmarketsaregenerallyviewedasbeing ‘environmentallysensitive’butremainsubstantial importersofIndonesiantimberproducts,andmuchof thistrade is likely tocome fromunsustainable sources.Ongoingpolicychanges inthesemarketsarelikelytocurtailthistradesignificantlyinthefuture.TheJapaneseandChinesemarketsaregenerallyviewedaslessconcernedaboutsustainabilityoftheirtimberimports,butpromisingdevelopments,whichareinpartassistedbyAllianceefforts,arebeginningtotakeshapeinthesemarketsaswell.


3.1.1 The European UnionTheEU is generally considered tobe amarketwhere concerns relating to theenvironment runhigh. Inmajor consuming countrieswithin theEU, such asthe UK, Germany, and the Netherlands, large environmental NGOs such asWWFandGreenpeaceinfluencecorporatebehavior.Inaddition,environmentalissues command substantial political space, at the national and sub-nationalgovernmentlevelsofindividualmembercountriesandattheEUregionallevel.These factors have manifested themselves in various trade related initiativesthat seek to limit theuseof illegallyorunsustainably sourcedwoodproducts.Various governmental institutions and private sector buyers in the EU regionarepromotingprocurementpoliciesthatseektopreventthepurchaseofwoodproducts from suspicious sources. These national and sub-national efforts arebeingcomplementedbyvariousEUwide initiativesundertheumbrellaof theECActionPlanonForestLawEnforcementandTrade(FLEGT).

ManyinfluentialcommercialbuyersofIndonesianwoodproductsintheEUhaveputinplaceprocessesthataimtoreduceoreliminatetheuseoftimberfromillegalor unsustainable sources. Largely in response to pressure from environmentalNGOs, buyers are reassessing their timber supply chains and implementingprocurementpoliciestoreducetheriskofdamagingtheircorporateimage.

For some companies this has led to a termination of trade in timber comingfromhigh-riskcountriessuchasIndonesia.Forexample,followingaGreenpeacecampaignin2004,fourlargebuyersofIndonesiantimberproductsintheUKstoppedsourcingtimberfromIndonesia.4B&Q,thelargeUKDIYretailer,nowbuysmostofitsplywoodfromFSCcertifiedsourcesinBrazil,5andTravisPerkins,amajorUKbuyeroftropicaltimber,switchedfromIndonesiantimbertoverifiedlegaltimberfromGhana.OthercompaniesbasedintheEUareworkingcloselywith NGOs such as WWF to find legal or sustainable sources of Indonesiantimber.

WWF-sponsored“buyergroups”,orForest andTradeNetworks (FTNs), existthroughout the EU and include DIY stores, supermarkets, home furnishingoutlets, wood product manufacturers, timber importers and traders, house

4RIIA2004.5SteveCrewe,personalcommunication.


builders,andconstructionandcivilengineeringconcernsthatarecommittedtopurchasingandsellingtimberproductsmadefromsustainablyproducedtimber.InJune2006WWF’sEuropeanFTNscomprisedapproximately�80members.SomemembershavestoppedimportingIndonesianwoodproducts,6whileothersareactivelyseekinglegalsuppliesofIndonesiantimberwiththesupportoftheIndonesianFTN.

TNC, as part of its Alliance activities, visited several European private sectororganizationsinvolvedinthetropicaltimbertrade.TheseincludedimportersofIndonesiantimberintheUKandtheNetherlandsandthetimbertradefederationsof theUK,FranceandBelgium.These federations, alongwith theDutch, areinvolvedinafive-yearprojecttoidentifylegaltimberfromIndonesia,Malaysia,Cameroon and Gabon and track it to market in their countries. CompanieswhichwerevisitedincludedFinnforestUK(whichhassuspendedallpurchasesfromIndonesia,pendingacrediblesystemtoverifylegality)andFETIM,DekkerHoutandJongeneelintheNetherlands.IntheUKtheAlliancealsomaintainscontactwithKingfisher,thesuppliertotheB&QDIYchain.

Severalnational,municipal,andprovincialgovernmentsintheEUareinvariousstages of developing procurement policies that could have an impact on theimportofIndonesiantimberproducts.Thepublicsectorisamajortimbermarketsegment intheEU,andapproximately20percentofthetotaltimberdemandinEuropegoes throughgovernmental institutions.National levelprocurementpolicies that aim to ensure that only legal and sustainable timber is used, arebeingdevelopedintheUK,theNetherlands,France,Germany,andDenmark.7Forexample,inAugust2005,GermanypresentedadraftlawthatwouldobligeGerman timber companies to certify that the timber they import was legallysourced.Thelawwouldoutlawimportormarketingofwoodsourcedillegallyinnon-EUcountries.

InOctober2002,theUKgovernmentlaunchedaFLEGprogram–knownalsoastheIllegalLoggingProgram.Thisisaimedatfacilitatingreformsbynational,regionalandinternationalinstitutionstoaddresstheproblemofillegalloggingandinternationaltradeinillegallyharvestedtimber.Theprogramaimstocontributetoabetterunderstandingofthecausesofillegalloggingandtosecurecooperationbetweenawiderangeofactorsindevelopingandimplementingsolutions.Aspart6SteveCrewe,personalcommunication.7RIIA2004.


oftheUKFLEGprogram,theUKandtheGoIsignedanMoUonillegalloggingwhichcommittedtheGovernmentsoftheUKandIndonesiato:Work together to reduce, and eventually eliminate, illegal logging and the international trade in illegally logged timber and wood products between [Indonesia and the UK], by rapid development and implementation of the necessary regulatory and policy reforms.

TheUKFLEGprogramhasworkedcloselywithTheNatureConservancyandtheGoItodevelopadefinitionoflegalwoodforIndonesia(seeSection4).EU Action Plan on Forest Law Enforcement, Governance and TradeInMay2003,theEuropeanCommissionlaunchedtheEUActionPlanonForestLawEnforcement,GovernanceandTrade(FLEGT).ThismarkedthebeginningofalongprocessbywhichtheEUaimstodevelopandimplementmeasurestoaddress illegal loggingandrelatedtrade. ThemeasuressetoutbytheFLEGTActionplaninclude:

• supportforimprovedgovernanceandcapacitybuildingintimber-producingcountries;

• developmentofVoluntaryPartnershipAgreementswithtimber-producingcountriestopreventillegallyproducedtimberfromenteringtheEU;

• effortstoreducetheEU’sconsumptionofillegallyharvestedtimberanddiscourageinvestmentsbyEUinstitutionsthatmayencourageillegallogging.8

Themostprominentofthesemeasures isaproposed licensingsystemfor legaltimberthatisbasedonVoluntaryPartnershipAgreements(VPAs)withproducercountries.Undertheseagreements,timberexportedtotheEUfromparticipatingproducercountrieswouldbeidentifiedaslegalbymeansoflicensesissuedbytheexportingcountries.The schemewould initially cover sawnwood, roundwood,plywoodandveneer,withmorevalue-addedwoodproductstobeincludedatalaterstage.Theschemewouldbeimplementedonavoluntary(butbinding)basis,withtimberexportingcountriesthathaveenteredintoaVPAwiththeEU.

In addition to the proposed licensing scheme, a review of existing nationallegislationandadditional legislativeoptions for thenationalandEUlevelsarebeingconsideredundertheFLEGTinitiative.Theseoptionsincludeanti-money

8FLEGTBriefingNotes,http://europa.eu.int


launderinglegislation,criminallegislationsuchaslawsaddressingthetransportandsaleof stolengoods,andthepossibilityofaprohibitiononthe importofillegallyproducedtimberintotheEU.9

3.1.2 The USATheUSAhasvariousprivateandpublicsectorinitiativesrelatingtoconcernsaboutdeforestationthatcouldhaveanimpactonimportsofIndonesianwoodproducts.Ontheprivatesectorside,severallargeimportersofIndonesianwoodproductsare responding to pressure from environmental NGOs and are reevaluatingtheir timber supply chains.For example, InternationalPaper, the global forestproductsleader,endorsesamoratoriumonpurchasingIndonesiantimber“untiltheIndonesiangovernment…andthosecompanieswhoharvestwoodtheretakethestepsrequiredtoprotecttheforestsandreturntosustainableforestpractices.”Home Depot, the world’s largest home improvement retailer recently reducedpurchasesofIndonesianplywoodby70percentfrom�999levels.CentexHomes,amajorUShomebuilderhasstoppedusingIndonesianhardwoods.�0Severalstateandmunicipalprocurementinitiativesplacerestrictionsontheuseof tropical wood products in public projects. Several US municipalities haveenactedbillsorordinancesthatbanorrestrictthemunicipalpurchaseoftropicaltimber.��

A US President’s Initiative against Illegal Logging aims to assist developingcountriescombatillegallogginganditsassociatedtradeandtoreducecorruptionin the forest sector. The President’s Initiative facilitates partnerships underUSAID’sSustainableForestProductsGlobalAlliancetodeveloplegallysourcedforestproducts.OneofthesepartnershipsistheWWF/TNCAlliancetoPromoteCertificationandCombatIllegalLogginginIndonesia.FurtheractionsrelevanttoIndonesiawillinclude:

• Community-basedforestmanagementandprotection;• Promotinggovernance,transparencyandaccountabilityintheforest

sector;• Addressingillegalloggingthreateningorangutanhabitat;

9FLEGTBriefingNotes,http://europa.eu.int�0http://www.ran.org/ran_campaigns/old_growth/indonesia/��ITTO�999.


• Follow-uptotheEastAsiaMinisterialConferenceonForestLawEnforcementandGovernance.�2

3.1.3 JapanEnvironmentalawareness inJapan is reportedly lower than inWesternEuropeandtheUSA,butseveralprocessesindicatethattheJapanesemarketisbecomingmoresensitizedtoissuesofsustainability.AccordingtotheITTOthereisanascent“Green Movement” of local level NGOs, which has been spawned by mediacoverageofthedepletionoftropicalforestresources.�3Importantly,afterthefirstJapanesecompanyreceivedanFSCForestManagement(FM)certificatein2000,certificationhasmaderapidprogressinJapan.Atthebeginningof2006,therewere24companieswithFSCFMCertificatesandthenumberofFSCChainofCustodyCertificatesinJapanhadreached288,thefifthhighestintheworld.�4SeveralmajorcompaniesinJapanincludingCanonGroup,NipponPaperGroup,FujiXerox,Ricoh,ASKUL,OjiPaper,andMitsubishiPaperMillhaveestablishedresponsiblepurchasingpoliciesforpaper.WWFassistedRicoh,ASKUL(aleadingsupplierofstationeryandofficesuppliesinJapan)indraftingtheirresponsiblepaperpurchasingpolicies.RicohstoppedbuyingfromtheirIndonesiansupplierbecauseitdidnotmeetRicoh’sstandards.ASKULisamajorbuyerfromAPPandhasshiftedtoplantationgrownfiber.MitsubishiPaperMillandFujiXeroxaremembersofWWF’sJapanFTN.

In2003,thegovernmentsofJapanandIndonesiamadeaJointAnnouncementontheCooperationinCombatingIllegalLoggingandtheTradeinIllegallyLoggedTimber and Wood Products. The accompanying Action Plan details ways todevelop,test,andimplementsystemsforverificationoflegalcompliance,andtheeffectivecollaborationofenforcementagenciesandnetworkswhichwillaffectthelegalityofproductsproducedandtraded.However,implementationofactionsrelatedtotheagreementhasreportedlybeenslow.�5

JapanispreparingawoodproductsprocurementpolicyfordomesticandimportedmaterialsbasedonanamendmentoftheBasicPlanoftheLawConcerningthePromotionofProcurementofEco-FriendlyGoodsandServicesbytheStateandOtherEntities (LawonPromotingGreenPurchasing).Aspartof thisprocess,

�2http://www.whitehouse.gov/infocus/illegal-logging/piail.html�3ITTO�999.�4http://www.certified-forests.org/data/coc3.htm�5RIIA2004.


Japan's Forest Agency has published a "Guideline for Verification on LegalityandSustainabilityofWoodandWoodProducts."�6TheBasicPlanproposesthatwoodsourcedfromnatural forestsshouldbe"legallyharvestedorproducedinforests under sustainable forest management," and applies to the use of woodinpaper,officeandhomefurniture,andconstructionmaterials.TheGuidelineproposesthatproofoflegalityandsustainabilitycanbeprovidedbyoneofthreetypesofinstitutions:

• Aforestmanagementcertificationbody,• Aninstitutionaccreditedbyaforestryortimberindustryassociation,or• Companiesthemselves(selfdeclaration).�7

3.1.4 ChinaImportsofwood toChinahavebeenrising sharplyandare likely tocontinuetogrowasdomestictimberproductionisoutpacedbydemandfordomesticuseandforexport.Over-exploitationofnaturalforestsinmanyregionshasdepletedstandingtimbervolumes,andloggingbansandrestrictionslimitproductioninregionsthatarestillrichintimberresources.Bycontrast,domesticconsumptionisincreasinginlinewithChina’seconomicgrowthandrisinglivingstandards.�8Also,exportsofvalue-addedtimberproductshavebeengrowingsignificantly.TheChinesemarketplaysamajorroleinthepotentialofmarket-basedinitiativestoimproveforestmanagementinIndonesia.However,Chinesebuyershavebeenslow to implement responsible purchasing programs, and China is probably amajor destination for illegally traded wood from Indonesia. As European andNorthAmericanmarketsbecomemoreselective,thereisadangerthatIndonesianproducersthatnowsupplythesemarketswillshifttheirsalestoChina,therebyavoiding having to comply with more stringent environmental requirements.However,severalfactorsprovidehopethattheChinesemarketmaybecomemoreenvironmentallysensitiveinthefuture.

Market links to Europe and the USA are gradually driving forward forestcertification in China. Government agencies, academics and forestry expertsin China are working to develop national certification standards and systemsthatwillsatisfythedemandoftheinternationalmarket.ThisprocessisactivelysupportedbyseveralinternationalorganizationssuchastheWorldBank/WWF

�6http://www.rinya.maff.go.jp/policy2/ihou/eiyaku.pdf�7http://www.forestandtradeasia.org/posting/japan/english/498/�8Chunquanetal.2004.


AlliancewhichhasworkedtostrengthenChinese forestcertificationcapabilitythroughtrainingsandseminars.

As of June 2006, four forest management units held FSC forest managementcertificatesand�50companiesheldFSCCoCcertificates.WWF’sChinaFTNwhichwaslaunchedinMarch2005alreadyhasfivecompaniesfrommainlandChina and three companies from Hong Kong that have qualified as its firstofficialmembers.ThecompaniesincludetwoofChina’slargeststate-ownedforestbureaus,threemajorprivatemanufacturingcompaniesbasedinmainlandChina,andthreetradingcompanieslocatedinHongKong.

SofarthedriveforcertificationinChinahascomefromdemandforsustainabletimberinChina’sexportmarkets.In2002allthecompaniesinChinawithFSCCoCcertificationwerefurnitureexporters.�9Also,alltheChinaFTNmemberswithlinkstoIndonesiahaveexposuretoEuropeanandNorthAmericanmarkets.Kingfisher for example is a trader that purchases timber products for B&QUK.Yingbin,which isworkingwithWWFto identify legal timbersources inIndonesia,alsohasmarketlinkstoNorthAmericaandEurope.

InDecember2002,ChinaandIndonesiasignedanMoUonillegallogging.TheMoU recognizes the significant roles and responsibilities of both countries incombatingillegalloggingandthetradeofillegallyharvestedforestproducts.SofarprogressrelatedtotheMoUhasbeenslowpredominantlybecausetheMoUwasmadewiththeChineseStateForestAdministrationresponsiblefordomesticforestryissues,ratherthanwiththeChinaCustomsAgency,responsibleforthescreeningofimportedgoods.NeverthelessduringtherecentBusinessLeadershipMeetingonIllegalLogginginHongKong,IndonesianandChineseofficialsheldaninformalsidemeetingwherethey,forthefirsttime,progressedtothepointof agreeingonnext joint steps. TNChas subsequently taken the initiative tofacilitateaninformalvisitbytheSFAtoIndonesiainlate2006,whichwillbefollowedupwithajointconferenceonillegalloggingduetobehostedinBeijingin2007.

China’simpactonIndonesia’sforestmaydependtoalargeextentonthesizeoftheportionofChina’simportsofIndonesiantimberthatisre-exportedtomarketswith more stringent environmental requirements. The USA, Japan and HongKong are the dominant importers of Chinese timber based products with the�9Wenmingetal2002.


EUplayinganincreasinglyimportantrole.ExportstotheUSAandEUmembercountrieshaveincreasedsubstantiallysince�997.20SincethemostprofitableuseofIndonesianmerantilogsinChinaisprobablyforproductsthatareslatedforinternationalmarkets,itislikelythatasubstantialportionofIndonesiantimberthatreachesChina,bothlegallyandillegally,isre-exported.

3.2 Lessons on the Nature of Demand for Sustainable Timber Products from Indonesia

Market demand for certified and legal forest products is driven by multiple factors including purchasing policies of corporations and regulatory policies of importing governments. OverthecourseoftheAlliance’sactivitiesgovernmentalprocesseshavetakenanincreasinglyimportantroleinshapingthedemandforsustainable forest products from Indonesia and the Alliance has responded byworkingcloselywithgovernmentsinvariousimportingcountries.Theseprocesseshavethepotentialtoimpactdemandbothdirectlyandindirectly:

• Direct impacts are through public procurement policies which affecttimber used in public construction projects. For many countries thisrepresents a large portion of imports of Indonesian timber products.Public procurement policies requiring the use of legal or sustainablewoodinpublicconstructioncontractsarecausingcontractingcompaniesto source legal and sustainable wood materials. The governments oftheUK,NetherlandsandBelgiumhavestrictlegalityandsustainabilityrequirementsfortimberproductsusedinalltheircontracts.Suchpublicprocurement initiativesalreadyaffecta largeportionof themarket forIndonesiantimberandarelikelytoexpand.

• Indirect impacts are through regulations that restrict trade in illegallysourced timber products. Such regulations affect private and publicbuyersequally.

Buyers looking for timber that can be proven to be legal or sustainable can either switch to timber suppliers that are perceived as being less risky, or place pressure on their current suppliers to pursue certification or legality verification. Several European and North American companies have chosentoswitchawayfromIndonesianwoodaltogetherasaresultofdomesticNGOpressure.SincemostIndonesianwoodproductscaneasilybereplacedbytimberfromothercountries,manycompaniesareabletomaintaintheirenvironmental

20Whiteetal2006.


reputationsbysimplyswitchingtosuppliersinlesscontroversialcountries.Forexample,followingPerhutani’sFSCsuspension,severalGermanretailersswitchedtofurnituremadefromFSCcertifiedEucalyptusfromLatinAmerica.Also,afteraGreenpeacecampaignin2004,fourlargebuyersofIndonesiantimberproductsintheUKstoppedsourcingtimberfromIndonesia.2�B&QnowbuysmostofitsplywoodfromFSCcertifiedsourcesinBrazil,andTravisPerkins,amajorUKbuyeroftropicaltimber,switchedfromIndonesiantimbertoverifiedlegaltimberfromGhana.22

Some companies however choose to engage Indonesian suppliers. WWF andTheTropicalForestTrust(TFT)havebeenhelpingcompanieswithmarketlinkstoIndonesianmanufacturerstoencouragetheirrawmaterialsourcestoachieveFSCcertification. For example,WWFhasworkedcloselywithBlueLinxandLowe’sCompaniesintheUSAtoidentifyconcessionairesinIndonesiathatarewellpositionedtoprogresstowardsFSCcertification,whileTFTactivelylinksitsIndonesiansupplyingmemberswithitsproducingmembers.

3.3 Linking Demand to Supply

3.3.1 Transmission of Market Signals to Forest Management Enterprises

One of the greatest impediments to the transmission of market signals to theforestmanagercanbeattributedtothenatureofthewoodtradeitselfwhichistypicallyopaqueandinvolvesalargenumberofmiddlemenandintermediaries.The layered structure of the timber trade makes it difficult for companies toknowwhethertheirsuppliesarecomingfromlegalsources,andthishasobviousimplicationsforretailersthatareconcernedaboutthelegalityandsustainabilityoftheirsources.

Businesses,whetherlogtraders,sawmills,secondaryindustries,agentsorfinishedproducttraders,allaggressivelyguardtheirupstreamsupplychaininformationout of fear of being cut out of themarket. Thismakes it difficult for buyersto transmit their market requirements directly to source Forest ManagementEnterprises(FMEs)andasadirectresultthegreatmajorityofmarketsignalsareplacedonthemanufacturer.Manufacturersarethereforethecriticallinkinthe2�RIIA2004.22SteveCrewe,personalcommunication.


supplychainastheyareabletocontroltheuseofwoodintheirproductsanddelivermarketsignalsfrombuyerstotheirrawmaterialsuppliers.

Given that many Indonesian FMEs operate independently from downstreammanufacturers there is often insufficient incentive for FMEs to comply withmarketdemand.Evenwheremanufacturersareverticallyintegrated,theFMEwilloftenseekoutthehighestbidderratherthansellexclusivelytoitsassociatedindustry.FMEsareunlikelytoinvestincertificationunlessmanufacturersgivethemdirectincentivesfordoingso.

Furthermorethereareoftennumerouslinksinthewoodsupplychainseparatingthemanufacturerfromthefinalretailer.Forexample,themostcommontradechannelsfortheinternationalplywoodtradeare:

• directcontractsalestooverseascustomers,oftenthroughsalesofficesoragents:thisisthecommonformoftradeforsalestocontinentalEurope;

• salestotraders,predominantlybasedinSingaporeandHongKong;and• salestorepresentativesofoverseascompanieswhoarebuyingdirectlyat

origin.23

In theUK,unlike the restofEurope, timber agentsplay a central role in thetimber import trade. The agents take orders from manufacturers and retailersandseekouttimbersuppliersthatcanprovidetimberattherightspecifications.Untilthe�980s,agentsimportedmostoftheUK’stropicaltimber,butthenanumberoflargemanufacturersbegantoimportdirectlyfromtheirownoverseassources.24

In Japan, tradinghousesorSogoSoshasplayacentral role in thedistributionoftropicaltimber.TheSogoSoshasbuyapproximately70percentofdomesticandimportedpanels.Theytendtohaveaglobalreachanddominatetheentireexportandimportindustry.SeveralSogoSoshasareverticallyintegratedintoallaspectsofthetropicaltimbertrade.25SubsidiariesofMarbeni,Itochu,SumitomoCorporation, Sumitomo Forestry, and Sojitzu are involved in the import ofIndonesianplywood.26Theybuyplywoodforon-saletowholesalerswhoresell

23ITTO2003.24Gale�998.25Cashoreetal2004.26MutaiHashimoto,personalcommunication.


approximately95percentof this tootherwholesalers for secondaryprocessingandredistribution.27

FollowingthedissolutionoftheIndonesianPlywoodAssociation’s(APKINDO)marketingnetworkin�998,plywoodmillshavehadtofindtheirownmarketoutletsandtheimportanceofdirectmarketingandoftradershasgrownsubstantially.Sales to tradersprobably account for at least aquarter of Indonesia’splywoodexports.SalestotheMiddleEastmostlygothroughtradersinSingapore,salestoChinasometimesgothroughtradersbasedinHongKong,andsalestotheUSAsometimes go through Japanese trading houses. Some end-users, such as largeconstructionfirmsand large furnituremanufacturers inJapanandEurope,areincreasinglymakinganefforttocreatemoredirectmarketlinkagestoproducersandtobypassthetraditionalimportingfirms.28

Asaresultofnon-transparentsupplychainmanyimportersarereassessingtheirsources of timber and are attempting to bridge the information gap betweenthemselves and the forest. In Indonesia, this has meant that companies haveworkedwithorganizationsincludingWWF’sForestandTradeNetwork(FTN),theTropicalForestFoundation(TFF),andtheTropicalForestTrust (TFT) toidentifysourcesoflegalandsustainabletimber.

3.3.2 Incentives for Indonesian ManufacturersDuetothepresenceofcheapsubstitutesforthebulkofIndonesianwoodproducts,it is likely that most of the additional costs of legal and sustainable timbermanagementwillhavetobebornebyFMEsoftensupportedbymanufacturersandotherdownstreambusinessesinthesupplychain.AccordingtotheITTO,“themarketwheretropicalhardwoodisirreplaceableanduniqueisexceedinglysmall, and therefore product prices have to be set at levels appropriate to thecompetition from other products, not just other tropical producers.”29 Withsubstitutes,suchasengineeredwoodproductsandnonwoodproductssuchasplastics andmetals,becoming increasinglyprevalent, themarket isunlikely toabsorbanysignificantpriceincrease.

An incentive for Indonesian manufacturers to invest in sustainable forestmanagementisthatthismayallowthemtosecureormaintainaccesstohigh-

27ITTO2005.28ITTO2003.29ITTO�999.


margin stable markets that offer good terms of trade. There is evidence thatEuropeanandJapanesemarketsareimportanttosomeIndonesiantimberproductsexporters.InApril2004,theEuropeanUnionputintoeffectarequirementforallstructuralplywoodtoadheretoEUstrengthandsafetyrules(“CEmarking”),andaccordingtoAPKINDO,asignificantnumberoftheIndonesianplywoodmillswerewillingtobecomecompliantwiththenewrequirementsinordertomaintainmarketaccesstotheEU.30Alsothefactthatsomeofthemajorconcessionshavebeenmakingeffortstobecomecertifiedindicatesthatthereareperceivedbenefitstocontinuedmarketaccess.ThereisalsosomeanecdotalevidencethatChinaisnotseenasanattractivemarket,duetolowerpricesandlesscongenialbusinesspracticesthanEuropeorJapan.

Continued access to European and North American markets is important forIndonesianproducersbecausefindingnewmarketscaninvolvesignificantcosts.Indonesian producers tend to value long term business relationships for tworeasons.Firstly,Indonesianbusinesstransactionstendtorelyheavilyonpersonalrelationshipswhichtaketimetodevelop.Secondly,thevalueofsuchrelationshipsislikelytoincreaseovertimeasmanufacturersadapttheirprocessingtechnologiesto meet the specific needs of buyers, allowing them to produce higher value-addedproducts.

Anotherpotentialfinancialbenefitforproducersofcomplyingwithenvironmentalmarketrequirementsisthatthismayshortenthesupplychainthatleadstoendmarkets.WorkbyWWF’sGFTNhasdemonstratedthatEuropeanandNorthAmerican buyers of Indonesian wood products often face extremely complexsupplychainsandareoftenunawareofthesourceofthewoodthattheypurchase.Environmentally sensitivebuyers are increasingly recognizing theneed to takechargeovertheirsupplychainsinordertoavoidtheriskofillegalwoodorwoodofdubiousoriginfromenteringtheirsupplychain.Inmanyinstances,buyersaretryingtoestablishdirectcontactwithFMEsinIndonesiathathavethepotentialtoproduce legalverifiedorFSCcertifiedwood.Formanufacturers thismeanspotentially greaterprofits, as they are able to capture revenue that is currentlyabsorbedbytransactioncostsandbyintermediariesinthesupplychain.ThisisofparticularrelevancetosmallscaleFMEsthatotherwisedonothavedirectaccesstoforeignmarkets.

30APKINDO,personalcommunication.


The Incentive of Direct Market Links: Community Teak PlantationsForsmallscaleteakproducers,thepossibilityofdirectmarketaccessisprobablythelargestincentiveforcertification.Smallscaleproducerstendtomanageteakplots that are usually between one and ten hectares giving them little marketpoweronanindividualbasisandplacingthematthemercyofmiddlemenwhotendtoabsorbmostoftheprofit.WWFanditspartnersaredevelopingmarketlinks between the communities at Wonogiri, that produce certified teak, andaDutchbuyer,whichhasexpressed strong interest ina long termpartnershipwiththetwocommunities.ReportedlyWonogirishouldbeabletoattainapricethatismorethandoublethepricetheyreceivedbeforetheywereawardedforestmanagementcertificates.

UnderasimilarschemesupportedbyTFTinSouthSulawesi,teakwoodfromFSCcertifiedforestsmanagedbyacommunitycooperativewillbesolddirectlytoTFTmanufacturingmembersinIndonesiawhohelpedfinancetheproject.3�

Incentives for PT Sumalindo Lestari Jaya to Pursue CertificationPT Sumalindo Lestari Jaya (SLJ) is an integrated plywood and mixed densityfiberboard(MDF)producerbasedinEastKalimantan.SLJ’sUnitIIconcession(SLJII)becameFSC-LEIcertifiedinJanuary2006.Theconcessionislocatedin theWestKutai andMalinaudistricts ofEastKalimantan and encompasses269,660ha. InFebruary2006,SLJIIbecamethefirstconcessioncompanytojoinWWF’sIndonesiaFTN,NusaHijau.

According to Sumalindo, the company had several reasons for pursuingcertification. AsapubliccompanySumalindoisrequiredtooperateatahighleveloftransparencyandaccesstoglobalfinancialmarketsincreasinglyrequirestransparentandlegalbusinesspractices.Also,SLJ’sstockvalueandborrowingcapacity depends on its future ability to turn a profit, which largely dependsonhaving a sustainable supplyof timberwhichSFMcanprovide.Sumalindocompetes with four other public companies involved in the forestry sector inIndonesiaanditsstrategyistobecomeaglobalcompanywithbrandrecognition.Thispartly explainswhySumalindo is trying to take the lead in sustainabilityinitiatives.AnunexpectedpotentialbenefitofcertificationforSumalindocouldbethepossibilityofsellingcertifiedtimbertofurniturecompanies.Sumalindo

3�FSCPressRelease,Geneva,May24th2005.http://www.tropicalforesttrust.com


hasbeenapproachedbyfurniturecompaniesthatareexploringthepossibilityofusinglesserknownspeciesasalternativestocertifiedteak.

Sumalindo’s certification has raised significant interest from several major UKplywoodimportersthatseethisasvalidationforstayingengagedintheIndonesiantimbersector.ThesecompanieshaveexpressedadesiretokeeppurchasingfromSumalindointhefuture.32

3.4 Lessons on the Supply of Sustainable Timber Products from Indonesia

Companies in Indonesia are less likely to respond to demand from buyers that they are not trading with since there are significant costs and risks related to switching markets and the benefits are not always clear. Evenifbuyerswereofferingsignificantlyhigherprices,manufacturerswouldnotbeabletorespondeasily. WWF andTNC have learnt that most plywood producers, includingSumalindo,haveexistinglong-termrelationshipswithbuyerswhichtheydonotwanttojeopardize.Thus,thecostofcreatingnewmarketlinksgivesbuyerswithexistingbusiness relationships leverageover their suppliers. This suggests thatmarketbasedapproachestoconservationaremorelikelytobesuccessfulifbuyerscontinuetoengageratherthanboycottIndonesianwoodproducts.

SeveralmembersofWWF’sGFTNhavesuspendedtheirpurchasesofIndonesiantimber and it is likely that this impedes Nusa Hijau’s ability to promotecertification.TheAlliancehasrespondedbyencouragingcompanieswithexistingbusinessrelationshipsinIndonesiatostayengaged.Forexample,WWF,throughtheGFTN,has supported companies likeBlueLinxandLowe’sCompanies inworkingwithexistingsuppliers.Inaddition,TNChasworkedcloselywithtimbertradefederationsinEuropetoencouragethemtostayengagedinIndonesia.TheAlliance’sstepwiseapproachtocertification,whichincludeslegalityverification,isakeycomponentofastrategythatseekstoovercomethecurrentchallengesofcertificationinIndonesia,whileallowingenvironmentallysensitivebuyerstosupportprogress.

Anotherattribute,apartfrompriceandtime-framethatmanufacturersarelikelyto look for in amarket link is theproduct range that the relationship covers.Sincemillsoftenoperatebelowcapacityduetorawmaterialshortages,theyneed

32GeorgeWhite,personalcommunication.


tomaximizetheprofitoneachcubicmeteroflog.Thismeansthatmillsneedamarketforsecondandthirdqualityproducts,andwillpreferbuyersthatarelessspecificintheirdemands.ThusafactorthathasprobablylimitedtheresponsetomarketenquiriesprovidedbyWWF’sGFTNisthatthesetendtobeforanarrowrangeofspecifications.WhilesuchenquiriesareappropriateforthewholesalersandtimberbrokersthatEuropeanandNorthAmericanbuyerstraditionallydealwith,theymaynotbeappropriateforaplywoodmillthatisseekingtounloadallofitsproduction.

Buyer preferences for legal and sustainable timber are often “lost in translation” from the consumer end of the supply chain through intermediaries to the source FME. AsdiscussedaboveinSection3.2,and3.�.�thelayeredstructureofthetimbertrademakesitdifficultforcompaniestoknowwhethertheirrawmaterialsarecomingfromlegalandsustainablesources.

WWF recommends that buyers ask their suppliers to provide verifiableinformationonthesourceofthetimberintheirproducts.Ifthesupplierswanttoavoidmisinformingtheirbuyerstheythenneedtoenquirefurtherintotheirownsupplychains.Intheory,thisshouldresultintraceabilityofproductsbacktotheirforestsourcesaseachsuccessivelinkinthesupplychainaskssimilarquestionsaboutthesourceofthewood,andwhetheritcomesfromawell-managedorlegalforestsource.However,inpractice,intermediarytradersofteninhibittheflowofinformationforfearofdisclosingsourcestotheircompetitors,orofgivingtoomuchinformationtotheircustomersattheriskofbeingcutoutofthesupplychain.Theresultisthatspecificationrelatedtoresponsiblesourcingattheendofasupplychain,areoftennotaccuratelycommunicatedtothoseatthestartofthechain.

Companies wanting genuine transparency in their supply chains thus tend toseek greater vertical integration to reduce the number of links through whichtheirwoodsourcequeriesmustpass.Ifthistrendcontinues,timberagentsfacetheriskofbeingsqueezedout,orperhapsreinventingthemselvesas“responsiblewoodsourcing”agents.

Weak forest governance acts as a deterrent to investments in sustainable forest management in Indonesia. Inmostconcessions there is a largegapbetweencurrentforestrypracticesandthosethatwouldbeacceptableundertheLEIorFSCcertificationscheme.UnlikeforestryinEuropeandNorthAmericawhere


SFMcertification iscloser to the industrynorm,commonIndonesian forestrypracticesarerarelysustainableandoftenillegal.Therefore,significantchangeinoperationalpracticeisrequiredtoachievecertificationinIndonesiawhichinturnrequiressignificanttimeandcapitalinvestments.

Widespreadillegalloggingalsohasotherimportantimplicationsforthesuccessof certification. The availability of timber which was logged without paymentof theappropriate royalties and taxesdrivesdown themarketpricesof timberand this discourages long term investments in forests and forestmanagement.Also uncontrollable illegal logging on a timber concession can preclude thatconcessionfrombecomingcertified.Thiscanbeaproblemwhenoutsideloggers,orcommunitiesareinvolvedinillegallogging.

Anothergovernanceissuethatimpedestheprogressofcertificationisanuncertainbusinessclimateintheforestrysector.AfterSoeharto’sfallfrompower,forestsectorgovernancewasmarkedbydramaticshiftsfromcentralizedtodecentralizedandbacktocentralizedcontrol.Thesectorisstilladjusting,andtimbercompaniescomplain about a lack of transparency and predictability of current forestrypolicies. Forexample, in the ‘soft landingpolicy’ theMoFdecreedanannualallowable cut for Indonesia which was so low that it exacerbated the existingshortageoflegalrawmaterial.CompaniesthatTNCworkedwithfacedproblemshavingtheircuttingpermitsrenewedforreasonsthatwerereportedlynotclear.ForexamplePTDaisyTimberhadtowithdrawfromthetimbertrackingsystempilottestbecauseofthedelayinapprovalofitsannualmanagementplanbytheProvincialForestService.

ThusmajorincentivesforpursuingcertificationinIndonesiamaybetheeasementof logging quotas and other assistance provided by the MoF for companiespursuing certification. TheAlliance recognizes the importanceof governmentsupport for certification and WWF’s Nusa Hijau hopes to facilitate lobbyingforgovernmentincentivesforitsmembers.InthisregardTNC,WWFandtheInternationalFinanceCorporation recently supporteda studyon the role thatgovernmentincentivescanplayinpromotingcertification.ThestudyidentifiedarangeofpossibleincentiveswhichtheAllianceispromotingtotheMoF.

��

4. Lessons on Promoting Verifiably Legal Timber

4.1 Defining “Legal Wood”SomeimportersofIndonesiantimberareinsistingonlegalitybecausetheyseethisasasteptowardssustainablysourcedtimber,ratherthanasanendtoitself.Forseverallargeprivatesectormarketparticipants,themotivationforseekinglegalsuppliesoftimberstemslargelyfromtheprospectoftargetedNGOcampaignsagainst them and/or their clients. These companies are therefore principallyconcerned about broad NGO consensus on the legality standards that theyadopt.AmajorefforttodesignastandardthathastheconsensusofIndonesianstakeholders was undertaken byTNC in coordination with the UK-RI MoUprocesstocombatingillegallogging.

According to community activist stakeholders, legal wood from Indonesiahardlyexists. This isbecausethe lawsthatweredesignedtoprotecttherightsofforestdwellingcommunitiesweredisregardedwhenconcessionsweregrantedto timber companies. Most of Indonesia’s forestland is populated, and mosttimberconcessionsenclosecommunitieswhichhavetraditional,oradat,claimstotheforest.ICRAFandWALHIhaveshownthatfew,ifany,concessionswereestablishedaccordingtotherequirementssetoutbyexistinglaws.Specifically,provisionsthatrelatetothedelineationoftheforestestateandconcessions,andwhichinvolvecommunityconsultationwererarelyfollowedtotheletter.Infact,it is estimated that only�0percent of the state forest zonehas beenproperlydelineatedbytheMoF,makingloggingontheother90percenttechnicallyillegal.ThepercentageofproperlygazettedconcessionswithintheStateForestZoneisevenlower.

According to others, a focus on the legality of timber from Indonesia iscounterproductive. They are concerned that verified legal timber would bebroadlyacceptedastheequivalentofsustainabletimber.TheyciteresearchthatshowstheIndonesianselectivecuttingsystem(TPTI)isinadequateforprotectingthe environmental services of the forest. They also argue that from a social


standpoint,acceptingthe legalityoftimberthat is loggedaccordingtocurrentrulesandregulations,meansendorsingalegalframeworkthathasmarginalizedforest-dwellingcommunities,andthatmayhavecontributedtoabusesofhumanrights.FurthermorethelawsareundergoingareformprocessthatbeganafterthefallofSoeharto.Fortunatelytheprovisionsmadewithinthegovernancestructureof the legality standard support a dynamicprocess and actively encourage thestandardtobemaintainedinlinewithlegalreforms.

4.1.1 The UK-RI MoU Legality StandardForestcertification,aspromotedbyFSCandothers,seekstoprovideconsumerswith information principally about sustainability, but also regarding the legalcomplianceoftheforestmanagemententerprise.Overthepastyearstherehasbeen a considerable effort byTNC, in collaboration with DfID, to design aconsensuallegalitystandardforIndonesia,aswellasaworkabletimbertrackingandverificationsystem.

The UK-RI MoU to combat illegal logging, signed in April 2002, wascomplementedbyanActionPlanwhichplacedthetaskofdefiningillegalloggingatthetopoftheMoU’sagenda.Thefirstandthirditems(A�andA3)ontheMoUActionPlanrelatedirectlytothedefinitionofillegallogging:

• Adopt working definition of legal logging.• Review of forest and forest-related legislation, including decentralization

regulations; customary laws; constitution; forest law, rules, regulations, decrees; trade and transport regulations.

Asaresult,UKDfIDhiredateamofconsultantstocarryoutareviewofapplicablelawsinIndonesia,andlaterworkedcloselywithTNCtodevelopalegalitystandardandlogtrackingsystemforIndonesia.TNCwithateamofURS/SGSconsultantscarriedoutmulti-stakeholderconsultationsinvolvinginterviews,questionnairesandaseriesofworkshopsatdistrict,provincial,andnationallevels.Participantsattheseconsultationsincludedrepresentativesofdistrict,provincialandnationallevelgovernments,forestconcessionaires,andlocalcommunitieslivingwithinorclosetoforestareas,aswellasNGOrepresentatives,communityorganizations,academics and forest observers, and international agencies. Following theseconsultations,theURS/SGSteamdeliveredadraftreportonthelegalitydefinitiontoTNCinNovember2003. Thelegalitydefinitionwaslaterrewordedinto7principleseachcomprisingcriteriaandindicatorsasdetailedinBox�.


Box �. Principles of Legality for Forestry Operations and Timber Processing in Indonesia

“Timber is legal when the validity of its origin, logging permit, logging system and procedures, administration and transport documentation, processing, and trade or transfer are verified as meeting all applicable legal requirements.”

Principle 1. Land Tenure and Use RightsThe legal status of, and tenure rights to the Forest Management Unit are clearly defined and its boundaries have been properly gazetted. The Company has documented, legally established rights to harvest timber within those boundaries, and harvests timber only within those boundaries.

Principle 2. Physical and Social Environmental ImpactThe Company has an Environmental Impact Assessment (AMDAL) covering the Forest Management Unit that was prepared in the prescribed manner, and can demonstrate that it complies with all legal, physical, social and environmental requirements stated in the AMDAL, as well as all legal requirements for monitoring and reporting on implementation of the AMDAL.

Principle 3. Community Relations and Workers RightsThe Company complies with all its legal responsibilities in ensuring the well-being of communities affected by its activities in the Forest Management Unit, its provision of services to local communities, and the well-being and safety of its workers and contractors employed in the Forest Management Unit.

Principle 4. Timber Harvesting Laws and RegulationsThe Company conducts all forest planning, harvesting and other activities within the Forest Management Unit in compliance with relevant government regulations.

Principle 5. Forest TaxesThe Company pays all relevant legally prescribed fees, royalties, taxes and other legal charges related to its use of the Forest Management Unit and the timber extracted from it.

Principle 6. Log Identification, Transfer and DeliveryThe Company ensures that all logs transported from the Forest Management Unit are properly identified, have correct associated documentation and are transported in accordance with government regulations.

Principle 7. Timber Processing and ShippingTimber processing facilities and shipping companies have valid licenses and operate in accordance with applicable government regulations.


Followingthepublicationofthedraftofthelegalitystandard,itbecameapparentthatthestandardrequiredgreaterIndonesianownershipandsoTNCdecidedtoadoptalessprominentroleintheprocess.ThestandardwashandedovertoLEIwhichfacilitatedtheformationofasteeringcommitteeandatechnicalworkinggrouptooverseethefuturedevelopmentofthestandard.

4.1.2 WWF’s “Keep it Legal” ManualIn developing the “Keep it Legal” manual, WWF recognized that companieswould need to balance the range of legal compliance issues of concern tostakeholderswiththeneedtocontainauditingcosts.Acomprehensiveapproachtodetermining the legalityof forestproducts couldcovermany issuesbeyondforestry(forexample,adherencetolawsrelatingtotaxes,labor,health,corporations,transport, customs,pollutionormoney laundering);many ingredientsbesideswood (finishes, other materials, packaging), and many phases of production(harvesting, hauling, milling, shipping, manufacturing, trading, and end use).Inaddition,adeeperapproachcouldaddresstheprocedures leadinguptothegrantofaforestconcessionlicense,includingadherencetoplanninglaws,impactassessmentrequirements,tenderingprocedures,contractual“fairness”provisions,andabsenceofanysuspicionofcorruptionorcollusion.

Foracompanytodirectitspurchasingawayfromtheproductsofillegalloggingand in favor of legal operators, it needs to know what is meant by “legal” oracceptablesources.WWFGFTNdevelopedatwo-tieredapproachtodefiningandverifyinglegalcompliance(seeTable�).Thisapproachisdesignedtoensurethatacompany’sinvestmentinlegalitycheckingisproportionatetotheriskofa given product containing illegally-sourced timber. WWF recommends thatsuppliersthatfallintoalow-riskcategory(basedonarisk-ratingassessment)areverifiedusingthebasiclegalcompliancecheck.High-risksourcesrequireamuchgreater levelof scrutiny,asdefinedunder the full legalcompliancecheck.Theapproachassumesthatlegalitycheckingisprimarilyaresponsetotheproblemofillegallogging,andthusfocusesonsupplychainactivitiesthatrelatetoillegallogging.

Indefiningthelegalityofatimbersource,thebasiccategoryis“knownlicensedsource”. Verifying that the timber inaproduct is fromaknown licensed sourceinvolvescheckingthatthetimberoriginatedfromaforestmanagementunitinwhichtheharvestingentityhadalegalrighttoharvest.Itrequiresthepurchaserto(a)knowthegeographicsourceofthetimber,and(b)confirmthattheharvesting


entityhadalegalrighttoharvest.Itdoesnotinvolveverifyingthatthetimberinaproductwasactuallyharvestedandtradedlegally.Forexample,thetimbermayhavebeencut inbreachof thepermitconditions, royaltiesmaynothavebeenpaid,orthetimbermayhavebeenexportedillegally.Italsodoesnotinvolvethird-partyverificationofthechainofcustody.

Thesecondcategory,requiringahigherlevelofscrutiny,isdescribedas“verifiedlegal”timber.Thecategoryrequiresthepurchasertoobtainproofthat,inadditiontohavinga legal right toharvest, theharvestingentitycompliedwith the lawwhenharvestingthetimberandthatthetimberwaslegallyexportedorimported.Thecategoryalsorequiresahigherdegreeofscrutinyoverthechainofcustody.WWF recommends that purchasers undertake this higher level of compliancecheckingwherethereisahighriskofillegaltimberenteringtheirsupplychain.Forest management certification systems that require independent chain-of-custodyauditscanalsoprovidethislevelofassuranceonlegalcompliance.

Table 1 – Known Licensed Source and Verified Legal Timber

Basic legal compliance check

Known licensed source

• The purchaser knows where the timber was grown and can identify the harvesting entity.

• The harvesting entity has a legal right to harvest (has a harvesting permit and authorization from the forest owner).

• The chain of custody is unbroken. Full legal compliance check

Verified legal timber

• Timber was legally harvested.

• Charges were paid.

• Timber was legally traded (including compliance with CITES laws).

• Third-party audit of legal compliance was conducted and chain of custody verified.

• Equates to compliance with FSC Principles 1.1 and 1.2 plus checking the legality of importing and exporting.


4.2 Lessons on Defining “Legal” TimberThe role of Government in verifying “legal” timber is essential as the government is the ultimate legal authority. Yet, it is also problematic as those seeking verification have usually lost confidence in government systems.TheGoIcreates the lawsandregulationsthatgoverntheuseofIndonesianforests,andtheselawsareappliedandinterpretedbygovernmentcourtsandenforcementagencies.Furthermore,forestrylawscanonlybereformedbythelegislaturewithinputsfromtheMoFandothergovernmentalinstitutionswithjurisdictionoverforestareas.

Regulatory,ornon-voluntary,approachesbypublicinstitutionssuchastheEUFLEGTActionPlan,whilealsomotivatedprimarilybyconcernsoversustainableforest management, are likely to be constrained by WTO regulations relatingto non-tariff barriers. Due to these constraints, the EU and individual WTOmemberstatesmaybeforcedtoacceptalegalitystandardpromotedbytheGoI.For example, the legality licensing scheme proposed under the EU FLEGTActionPlanisdesignedtoworkwithlegalitylicensesprovidedbygovernmentsofexportingcountries.

While there is a role to play for third-party auditors and voluntary legalityverification, compliance with governmental agreements will require a systemthat isadministeredbythegovernment. Forthisreasonit isessentialthattheLegalityStandard,orasimilarframeworkfordefininglegality,isadoptedbythegovernment.

Agreement on legality criteria raises difficult questions over the relationshipbetween government administration and audits against the standard. Is thestandardtobeusedpurelytoassessthelegalcomplianceofforestindustryactors,or is it also to beused to assesswhether the lawwas correctly appliedby therelevantgovernmentadministrators?Ineithercase,what is theconsequenceoffindingthataforestmanagementoperationisflawedbyanadministrativedefectintheapplicationofthelaw?Ifsuchadefectisduetoactionsbeyondthecontroloftheforestmanager,doesitmeanthemanagerhastoceaseoperationand/orwillbeunabletosupply legal timber,until theadministrationremedies thedefect?Whatstatusshouldgovernmentgranttofindingsbyindependentauditorsthatadministratorshavefailedtocorrectlyapplythelawingrantingrelevantpermitsorcuttingapprovals?Thesearedifficultquestionsthatwillneedtobeansweredasthelegalitystandardprocessisconcluded.


Legality should be addressed as one strand of the broader concept of responsible forestry and timber purchasing. Not all forest laws are good;somearebad,unfair,orcorruptlyadministered.Thus,purchaserscannotsimplyfocusonlegalitytobeseenexternallyascredible.ProbablynoneoftheexistingIndonesianconcessionsarefullycompliantwiththesevenprinciplesofthedraftlegalitystandard,andthestandard’sinsistenceonpropergazettalwouldexcludemost concessions from becoming compliant in the medium-term even if theyweremakingeffortsto improvetheirforestmanagementpractices.Discussionsarecurrentlyunderwayonhowbesttoapplythestandard,withsomestakeholdersproposingastepwiseapproachtoachievinglegality.

�0

5. Broad Lessons Learned

Some government policies have acted as serious deterrents or disincentives for companies to engage in a program to achieve sustainable forest management. Itiswidelyrecognizedthatvoluntarymechanisms,suchascertificationandthirdpartylegalityverification,canonlyplayapartofthesolutiontodeforestationandthatgovernmentinterventionplaysanimportantcomplementaryrole.However,experiencesoftheAlliancesuggestthatinIndonesiathegovernmentandmorebroadly, governance- is also a critical factor that can determine the success orfailureofthevoluntarymechanismsthemselves.

RegulationsforharvestingandtransportingtreesinIndonesiaarecurrentlyverycumbersome,favorlargescaleproducers,andcreateopportunitiesforcorruption.The process of arranging all the necessary permits for forest operations canbe lengthy and too costly for well intentioned producers. The complicatedbureaucracycreatesopportunitiesforcollectinginformalpayments,whichraisesthecostofproductionsignificantly,andleadstoalackoftransparencyandweakgovernance.Thedecentralizationprocesshasprobably increased the regulatoryburdenastheprocessofreformhastemporarilyledtoconflictinglawsandlackofclearresponsibilitiesoverforestsectoractivities.

A promising development with regards to market linkages is the existence ofbilateralMoUsrelatedtoFLEGthatIndonesiahaswiththegovernmentsoftheUK,ChinaandJapan,aswellas the legality licensingschemeproposedundertheEUFLEGTinitiative.Theimpactof theseagreementswilldependonthewillingnessandcapacityoftheGoItoimplementthem.AkeycomponentoftheGoI’seffortswillbe the logadministrationsystemthat ituses to identify legallogging.ThecurrentsystemhasthusfarnotachievedcredibilityinthemarketbuttheMoFisdevelopinganimprovedsystemwhichitplanstobeoperationalin2007.


Governments in countries that import Indonesian timberproducts alsoplay acriticalsupportingroleforforestcertificationandlegalityverificationinitiativesinIndonesia.Thepublicsectorisamajortimber-marketsegment,andapproximately20 percent of the total timber demand in Europe goes through governmentalinstitutions.Publicinstitutionsgenerallyrequirewoodproductsthatareusedforpublicconstructionprojects,anditislikelythatasubstantialproportionoftheIndonesianplywoodand inexpensive furniture reaching theEUmarketwouldbeaffectedbypublicprocurementpolicies.Governmentsofimportingcountriesalso implementbilateralFLEGagreementsandotherbilateralandmultilateralagreementsthatimpactthetimbertrade.

Demand for sustainable forest products does not necessarily translate to a willingness to pay for the additional costs of sustainable production. TheAlliance’s experiences suggest that some buyers are willing to pay “premiumprices”,butthatthesealonearenothighenoughtoconvincesupplierstopursuecertification. Nusa Hijau’s experience with PT Irma Sulindo, a concessionaireinPapuaProvinceisanillustrativecase.Thecompanyholdstherighttoanewconcessionthatproducesmerbauwhichsuppliesthecompany’soutdoorfurnituremanufacturingfacilitiesinSulawesi.PTIrmaSulindoindicatedawillingnesstopursuecertificationconditionalonWWFfindingbuyerswillingtopayaroundUSD�,250/m3foritscertifiedproducts.Sincethiswasmorethantwicethemarketprice,suchbuyerscouldnotbefound.ItisnotclearhowrepresentativePTIrmaSulindo’schallengeisofthepricepremiumrequiredtocompensateIndonesianproducersforinvestingincertification,butitislikelythattherequiredpremiumissubstantial.Anecdotalevidencedoeshoweversuggestthatapremiumofupto�5%hasbeenpaidbybuyersbehindcloseddoorsforFSCcertifiednaturalforestwood.

Thepresenceof large amountsof cheap illegal timber in themarket currentlymakesitverydifficultforlegallysourcedandFSCcertifiedtimbertocompete.However,it is likelythatasrestrictionsonthetradeofillegallysourcedtimberareputinplace,theplayingfieldwillbecomemorelevel.AccordingtoastudycommissionedbytheAmericanForestandPaperAssociation(AF&PA)in2004illegal logging constitutes around 7 percent, or USD 5 billion of the globalprimarywoodproductstrade.ThestudycalculatedthattheremovalofillegallysourcedroundwoodfromglobaltradewouldleadtoapriceincreaseofbetweentwotofourpercentofUSdomesticwoodprices.


For certification to have a major impact on natural tropical forest management there needs to be greater acceptance of a stepwise approach. Companiesthatdemandcertifiedproductsareriskaverseandabletosourcethemfromregionsthatareperceivedas lessriskyfortheircorporateimage.SeveralEuropeanandNorthAmericancompanieshavechosentoswitchawayfromIndonesiantimberaltogether followingpressure fromNGOs in theirhomemarkets. Sincemostwood products manufactured in Indonesia are also manufactured in othercountries,manyriskaversecompaniesmaintaintheirenvironmentalreputationsbysimplyswitchingtheirprocurementtolesscontroversialcountries.

Theswitchaway fromuncertifiedIndonesian sources isnotnecessarilyagoodthing. Themovedoes send a signal tomanufacturers, but as long as there issufficientdemandforuncertifiedtimberfromlessdiscerningmarketsthissignaldoesnottranslatetopressureforcompaniestopursuecertification.Inaddition,WWF’sexperiencehasshownthatcompaniesinIndonesiaoftenlackthetechnicalandfinancialcapacitytopursuecertificationontheirown,eveniftheywishtodoso.Thus,atleastintheshort-term,theimpactofboycottingthevastmajorityofIndonesiantimber,onthegroundsthatitisnotcertifiedmaynothavemuchpositiveimpactonthewayIndonesia’sforestsaremanaged.Ultimately,itcouldunderminenaturalforestmanagementasaviableland-use,creatingpressurefornaturalforeststobeconvertedtootherusessuchasagricultureormonoculturetimberplantations,thusdrivingfurtherforestlossinIndonesia.

When buyers switch away from uncertified Indonesian timber, the positiveimpactsofcertificationarenotnecessarilytransferredtootherregions.Insomecases the switch is likely tobe tonon-timber substitutes.This is especially thecase for plywood which has been losing global market share to plastics, andmetals.Inmanycasessincelittlecertifiedtropicalhardwoodfromnaturalforestsis available globally, buyers switch either to certified plantation grown timberfromotherregionsortotemperatehardwoods.Inbothcasesthedirectbenefitsofcertificationareconsiderablylessthaninnaturaltropicalforests.Theshifttoregionsandforesttypesforwhichcertificationiseasierandlesscostlyreducestheimpactofcertificationasthereislittledifferenceinthesecasesbetween“businessasusual”forestmanagementandthatprescribedbyforestcertification.Intheendlittleissavedexceptforthereputationofthecompanymakingtheswitch.Thus,companieswishingtomakeapositiveimpactontheenvironmentthroughtheirpurchasingbehaviorshouldengageIndonesianproducersandpressurethem


toimprovetheirforestmanagementpractices.WWFandTNChavetriedwithsomesuccesstohelpexistingbuyersofIndonesiantimberproductstoworkwithIndonesiansupplierstohelpthemproducemoresustainably.However,formanybuyers,engagingtheirIndonesiansuppliersmayrequiremore investmentthantheyareableorwillingtomake,giventhatmarketorproductsubstitutionisoftenmorefinanciallyviable.InmanycasesthelargestdisincentiveforcompaniestoengagewithcompaniesthatarenotcertifiedisthatsucheffortsmaynotleadtobetterrelationswithNGOsintheirhomemarketssincetheseNGOsoftenhavea‘certificationornothing’policy.WWFplanstoincreaseitseffortstoexplaintotheseNGOsthepotentialbenefitsofastepwiseapproachtocertification.

Environmentally sensitive companies are mainly concerned about their corporate image, and need assurance that the products they purchase are approved by activist NGOs in their home markets.TheAlliance’sexperienceis revealing the importance of broad based NGO support for market basedinitiatives. Demand for sustainable wood products from Indonesia is largelygenerated by pressure that NGOs exert on companies in Europe and NorthAmerica.Similarly,shorttermsupplyinIndonesiaisaffectedbythedegreetowhichcertificationandlegalityverificationareembracedbythenationalNGOcommunity.AlackofuniversalNGOsupportforthesemechanismsinIndonesiaisonefactorthathasdiscouragedcompaniesfromrespondingtomarketdemand.Inresponse,buildingsuchsupporthasbeenacriticalAllianceactivity.

EnvironmentalactivistNGOsplayakeyroleincreatingthedemandforsustainableand legal timber in European and North American markets. NGOs in thesemarkets have substantial influence over timber buyers and government policymakers. Visiblefirms, suchas those in theDo-It-Yourself (DIY)constructionindustry,wanttocreateandmaintainreputationsforenvironmentallyresponsiblebusinesspractices. ActivistNGOsapplypressure to thesefirms through theirabilitytostagemediacampaignsthatlinkaparticularcompanytounsustainableorillegallogging.

TheNGOsthatputpressureoncompaniestobuyonlysustainablysourcedtimber,also effectivelydecidewhich timberqualifies andwhichdoesn’t. In Indonesiathismakescreatingmarketlinkagesdifficult,becauseinfluentialnationalNGOsthathavelinkagestoNGOsintimbermarkets,advocateaboycottofIndonesiantimberuntilfarreachingreformsoftheforestrysectorhavetakenplace.SeveralIndonesianNGOsbelievethatunderthecurrentconcessionsystem,sustainable


forestmanagementisnotpossibleandthatmarketbasedeffortstointroduceforestcertificationor legalityverificationcould impedewider scale forestgovernancereforms. NGOs such as WALHI and AMAN are particularly concerned withredressingthetraditionallanduserightsofforestbasedcommunities.

AnillustrativeexampleoftheinfluenceofNGOsonmarketlinksispresentedbyTNC’sexperiencewithSumalindo.Eventhoughthecompanywaswellalongthepathtocertification,itbecamethetargetofaGreenpeacecampaigninJune2003.Based on information provided by a coalition of Indonesian NGOs, the EastKalimantanWorkingGroup(EKWG),GreenpeacehadidentifiedSumalindoasoneofseveralplywoodsupplierstoaUKgovernmentconstructionsite,andraisedconcernsaboutthecompany’spractices.TheEKWGalsostatedthatSumalindowasownedindirectlybytheIndonesianmilitary.33Theseclaimsweredisputed,but this did not prevent them from damaging Sumalindo’s reputation in theEuropeanmarket.

AnimplicationoftheAlliance’sstrategyofengagingIndonesiantimbercompaniesis that the Alliance has in some cases positioned itself as a cushion betweencompanies pursuing certification and NGOs that are opposed to such efforts.AccordingtoPerhutani,themainbenefitofworkingwithWWF’sNusaHijauisthatWWFcanshieldthecompanyfromNGOattacks.PerhutanimanagementisundertheimpressionthatthereasonsforSmartwoodtosuspendPerhutani’sFSCcertificatesin2002wererelatedtopressurefromnationalNGOs.ByworkingwithWWF,Perhutanihopestoavoidsuchasituationinthefuture.34

WWFandTNCdonotclaimitistheirroletoprotectcompaniesfromNGOcampaignsandinmanycasesperceivepressurefromactivistNGOsasapositiveforce for change in the forest sector. Nor do they question the right of anyorganizationtocriticizeanother,ortovigorouslydefendagainstsuchcriticisms.However, toolsdevelopedbytheAlliancecanprovideuserswithcredible linesofdefenseagainstNGOcritiques.Forexample,membershipofGFTNrequiresacompanytomakeclearcommitmentstoresponsibleforestry,includingtime-boundtargetsforachievingstepstowardcertification,oreliminatingunknownand unwanted wood sources. Similarly, use of timber tracking systems, suchasthosepilotedbyTNC,canprovidecompanieswitharobustdefenseagainstclaimsthattheyareacceptingillegaltimber.

33EKWG2003.34Perhutanistaff,personalcommunication.


Market based mechanisms require concerted action across all major markets to succeed. The market for Indonesian timber products is global, and thepurchasing preferences of European and North American markets will have alimitedimpactonIndonesianproducers,aslongasthesehaveaccesstomarketswithlessstringentenvironmentalrequirements.Thus,thereisaneedtocontinueengagingtheAsianmarketsforIndonesiantimberproducts,inparticularChina,Japan,Malaysia, and theRepublic ofKorea. Also, efforts to promote marketbasedmechanismsneedtotakeintoaccountthecomplex,andofteninternational,natureoftimbersupplychains.Forexample,muchoftheIndonesiantimberthatentersChinaislikelytobere-exportedashighervalueprocessedwoodproductstoEuropeandNorthAmerica.

In an ever improving political and business environment, market-based efforts are beginning to help improve forest management in Indonesia. When theAlliancefirstsetouttopromotecertificationinIndonesia,theapproachassumedthatputtingpotential buyers of certified timber in touchwith concessionaireswouldprovidesufficientincentivesforthoseconcessionairestopursuecertification.The reality turnedout tobemorecomplexas there are significantbarriers forproducerstopursuecertificationinIndonesia.Manyofthesebarriersarerelatedtoalackofenablingconditionswhichtaketimetochange,andareoutofthedirectcontroloftimberbuyersandproducers.However,changeisoccurringandthereispotentialthatmarketmechanismssuchascertificationwillplayamuchmoresignificantroleforIndonesia’sforestsinyearstocome.

A key barrier to the adoption of certification is Indonesia’s uncertain businessclimatewhichdiscourageslongterminvestment.TheAlliancebeganitsactivitiesatatimewhenIndonesiahadonlyjustbegunpullingoutofafinancialandpoliticalcrisiswithmajorimplicationsfortheforestrysector.Thismacro-economiccrisiswascoupledwiththerecognitionthatunsustainableloggingpracticeshadseverelydepletedtherawmaterialofmuchoftheforestryindustry.Indonesiaisstillinaprocessofrecoveryandeffortsarebeingmadetorestructuretheforestryindustry.Astheseprocessescontinue,itislikelythatremainingconcessioncompaniesandtimberprocessorswillhavegreatercapacitytoinvestinsustainability.

Theunevenplayingfieldwhichraisestheopportunitycostforconcessionairestogetcertifiedmaybeflattening.TheMoFhasmadeclearcommitmentstoreduceillegalloggingandhasstatedthatitwilleliminatetheuseoftimberfromnaturalforest(MTH)forpulpproductionby2009.WithinputsfromTNC,theMoFis


developingalogtrackingsystemwhichcouldbeupandrunningwithinthenextfewyears.Thesegovernancereformsareinlargepartbeingdrivenbypressurefrombuyersandarelikelytostronglyreducetheamountof‘cutandrun’timberonthemarket.InthemediumtermsuchreformswilldecreasethegapbetweenstandardforestmanagementpracticesandthoserequiredunderFSCcertification.

SomecompaniesthatarebarredfromFSCcertificationbecauseofpastevents(e.g.the�994cut-offdateonconversionofnaturalforesttoplantation)areinvestingina“nextbest”approachofverifyinglegalitycombinedwithHCVFdelineationandprotection.APPandAPRIL, thedominantpapercompanies inIndonesiaareunder increasingpressure frombuyers inEurope,Australia, theUSA, andJapan to invest in sustainability. While thesecompanies arebarred fromFSCcertificationbecausetheycontinuetoconvertnaturalforestareas,theyhavemadesomeefforttoworkwithNGOs,includingWWF,toreducetheamountofillegaltimbertheyuseandtoidentifyHCVFforestsforpreservation.

��

6. Recommendations

�. Keeping environmentally sensitivebuyers engagedwith Indonesian timberproducers is an important activity that TNC and WWF might considerexpanding.ThismayentailidentifyingmoreexistingbuyersofIndonesiantimber products and working closely with them to put pressure on theirsupplierstoinvestinSFM,ortopursueforestcertification.

2. ForbuyerenquiriestocreatenewmarketlinksthatpromoteinvestmentsinSFM,theyshouldmeetthefollowingcriteria:

• Prices and quantities that are high enough to compensate for theinvestmentcosts

• Purchasingagreementsthatarelong-term• Agreements that are backed up by personal relationships or other

guaranteesacceptabletoIndonesianproducers.• Agreementsthatprovideanoutletforthewholeproductline

3. A strategy that the Alliance could consider for creating more meaningfulmarketenquiries,wouldbetoworkmorecloselywithmanufacturerstofindoutwhattypesofagreementswouldmotivatethemtoinvestinSFM.Also,inordertocreatemorecomprehensivemarketenquiries,theAlliancecouldconsider working with a large timber broker or wholesaler that can poolorders.

4. AttemptsatdefiningapracticallegalitystandardneedtotakeintoaccountthecomplexitiesoftheIndonesianforestrylegalframeworktoallowconscientiouscompaniestoparticipateinastepwiseapproachtolegalityandcertification.Improper licensingproceduresbygovernmentauthorities in thepast leavemanyforestconcessionsinalegallimbowhichtheyarepowerlesstochange.


5. TheAllianceshouldcontinuetoworkonthepolicyleveltoencouragelawsandregulationsthatsupportFLEGinitiatives.Inparticular,effortsshouldbesteppedupinJapanandtheUSA.

6. FormarketdemandtoinfluenceforestmanagementinIndonesiatheremustbeacriticalmass. Forthisreasonthere isaneedtocontinuefocusingonthemajorAsianmarkets for Indonesian timberproducts includingChina,Malaysia,theRepublicofKorea,andJapan.Aspartofthis,moreanalysisof the re-export of Indonesian wood from China to European and NorthAmericanmarketsisneeded.

��

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The Center for International Forestry Research (CIFOR) is a leading international forestry

research organisation established in 1993 in response to global concerns about the social,

environmental, and economic consequences of forest loss and degradation. CIFOR is

dedicated to developing policies and technologies for sustainable use and management

of forests, and for enhancing the well-being of people in developing countries who rely

on tropical forests for their livelihoods. CIFOR is one of the 15 centres supported by the

Consultative Group on International Agricultural Research (CGIAR). With headquarters

in Bogor, Indonesia, CIFOR has regional offices in Brazil, Burkina Faso, Cameroon and

Zimbabwe, and it works in over 30 other countries around the world.

Donors

CIFOR receives its major funding from governments, international development

organizations, private foundations and regional organizations. In 2005, CIFOR received

financial support from Australia, Asian Development Bank (ADB), Belgium, Brazil,

Canada, China, Centre de coopération internationale en recherche agronomique pour

le développement (CIRAD), Cordaid, Conservation International Foundation (CIF),

European Commission, Finland, Food and Agriculture Organization of the United

Nations (FAO), Ford Foundation, France, German Agency for Technical Cooperation (GTZ),

German Federal Ministry for Economic Cooperation and Development (BMZ), Indonesia,

International Development Research Centre (IDRC), International Fund for Agricultural

Development (IFAD), International Tropical Timber Organization (ITTO), Israel, Italy, The

World Conservation Union (IUCN), Japan, Korea, Netherlands, Norway, Netherlands

Development Organization, Overseas Development Institute (ODI), Peruvian Secretariat

for International Cooperation (RSCI), Philippines, Spain, Sweden, Swedish University of

Agricultural Sciences (SLU), Switzerland, Swiss Agency for the Environment, Forests and

Landscape, The Overbrook Foundation, The Nature Conservancy (TNC), Tropical Forest

Foundation, Tropenbos International, United States, United Kingdom, United Nations

Environment Programme (UNEP), World Bank, World Resources Institute (WRI) and World

Wide Fund for Nature (WWF).

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