~~d~!!,~!g~~£~Wa~r~i~l~ed~Compromised on Day One and Norway Will Profit

Introduction

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PT Menteng is only the tip of the iceberg.Information released by the Indonesianauthorities show that hundreds of plantationcompanies are operating beyond the law inCentral Kalimantan alone, where illegalplantations now substantially outnumber legalplantations.

in the sector, any investment may be aninvestment in crime and is irreconcilable withNorway's position as a global leader onREDD+.

Research by EIA/Telapak suggests that theregulatory chaos and culture of impunity inIndonesia's plantation sector poses a seriousthreat to the moratorium and to anymeaningful attempt to protect the nation'sforests and reduce carbon emissions.

The case of PT Menteng is a timely reminderthat effective action to reduce deforestation inIndonesia must include robust lawenforcement, good governance and aclampdown on corruption. Further, that effortsto resolve the chaos in the forestry sector arefundamentally undermined when majM''-''--­REDD+ donors invest in forest cril

While the moratorium's significant loopholesexclude huge swaths of Indonesia's primaryand secondary forests, it is a positive step ofsorts. However, evidence in this briefingdemonstrates that while it might delay andreduce legal deforestation, it alone cannot stopillegal deforestation.

Palm oil firm PT Menteng Jaya Sawit Perdana(PT Menteng), a subsidiary of Kuala LumpurKepong Berhad (KLK), was caught destroyingthe very peat forests Indonesia needs to protectto meet its ambitious carbon emissionreduction targets.

Just as the President of Indonesia wasdeclaring an area of peat swamp forest in theREDD+ Pilot Province out of bounds tologgers, EIA and Telapak were documenting aplantation company illegally clearing it.

The Norwegian government will bedisappointed to learn that the moratorium, acornerstone of its US$1 billion climate dealwith Indonesia, was breached on day one. Yetconversely, through its US$41.5 millionshareholding in KLK, Norway stands to profitfrom the illegal clearance.'

As the signing of Indonesia's moratorium onforest conversion captured the attention of theinternational media on May 19t1

" it wasbusiness as usual in Central Kalimantan. Withthe spotlight on bureaucrats in Jakarta,Indonesia's climate crooks continued to plytheir trade in the forest.

Through the Government Pension Fund Global(GPFG), Norway has invested in scores ofplantation and logging companies in Indonesiawith scant regard for social, environmental orlegal safeguards. With the level of criminality

••••

PT Menteng Jaya SawitPerdana

In 2005 PT Menteng obtained an oil palmLocation Permit for a concession of just under7,400 hectares of forest. The land is located inKotawaringin Timur (Kotim) regency, some25km south of Sarnpit in the peatlands ofCentral Kalimantan. In 2007 PT Menteng wastaken over by the Malaysian multinationalKLK for US$ 2,072,000.2

As PT Menteng only had a Location Permit forthe concession - its principal asset - KLK onlypaid US$ 1,184,000 for its 80% stake in thecompany. The remaining US$ 888,000 wouldbe paid when it had obtained the remainder ofthe range of permits required to convert forestland to a plantation.

In its 2010 annual report, KLK reported that

PT Menteng still only had a Location Permit,and under the date of expiry recorded merely adash. In 2011 EIA/Telapak obtainedgovernment records confirming that thecompany still did not have a PlantationBusiness Permit (lUP), as required under the2007 plantations law,3 or a permi t from theMoF releasing the 7,400 ha concession fromthe designated forest area.

On 19th May this year EIA/Telapakinvestigators visited the concession to establishhow far PT Menteng had developed itsoperations, and found that large areas havealready been cleared of forest and planted.

EIA/Telapak also documented areas that hadmore recently been cleared, wherecommercially valuable tree species were beingharvested. As the area is peat, canals have beendug to drain the land.

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ABOVE LEFT:Young oil palms inPT Menteng area,May 2011

ABOVE:Log in land clearedBy PT Menteng, May2011

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LEFT:Cleared land in PTMenteng area, withcanals to drain peat,May 2011

PREVIOUS PAGE:Excavator clearing forestin PT Menteng area, May2011

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Further into the plantation, EIA/Telapak foundseveral excavators in the process of clearingforest. As this land has not been released fromthe forest estate, all of this activity is in breachof Forestry Act 4111999.4

Beyond the area currently being cleared,EIA/Telapak investigators travelled alongroads that had been carved into the forest priorto further clearance. The tree species left in theforest included rarnin, which provides thehabitat for orangutan. Cutting ramin has beenbanned in Indonesia since 2001 and it isglobally protected under the Convention onInternational Trade in Endangered Species(CITES).

From EIA/Telapak' s fieldwork it appearslikely that just under half of the concession hasnow been cleared.

Central Kalimantan, the Government ofIndonesia (Gol) released a map indicating forthe first time the areas of land that were to beincluded in its moratorium on new permits.S Acomparison between this map, concessionmaps and GPS locations in the plantationclearly indicate that PT Menteng is operatingwithin the moratorium zone.

However, as the moratorium includes aloophole that may exempt concessions withprinciple permission, and the map is to beupdated every six months, there remains theworrying possibility that PT Menteng' sconcession might shortly be excised from themoratorium area. This puts the Indonesiangovernment at a crossroads, at which it caneither enforce the law and preserve themoratorium peatlands, or remove theprotection and allow crime to go unpunished.

ABOVE:ExcavatorclearingForest in PTMentengarea, May2011

While EIA/Telapak were on the ground in

Source: Presidential Instruction No. 1012011

Map 2: Central Kalimantan moratorium areasKotim in box

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Peat lands in moratorium

Primary forest in moratorium

ILLUSTRATIVE MAPS:Map 1: Moratorium mapCentral Kalimantan in box

Map 3: Detail of KotimPT Menteng's area is located in the box

KEY:

Kotim Chaos

While PT Menteng is notable for its clearing ofthe moratorium zone, it is only one ofhundreds of plantations operating illegally inCentral Kalimantan. In April this year theMinistry of Forestry (MoF) released thefindings of an investigation that painted astriking picture of the extent to whichcriminality still pervades Indonesia'splantations sector.

Of an estimated 325 plantation companies inCentral Kalimantan, 282 were suspected of

, 61'1.. d'non-procedural forest use. Imng anplantation firms that had violated spatial plansand failed to obtain permits were reported tohave cost the state Rp 158.5 trillion (US$ 18.6billion)?

The report cited 13 cases, covering 107,276 haof forest, of companies clearing forest inKotim without it being released from thedesignated forest area - more than in any otherregency.

But there is evidence to suggest that the truepicture in Kotim is even worse. According todata submitted by the provincial to the centralgovernment, plantation companies are active in405,717 ha, but only 140,389 ha of land hasbeen released by the MoF. Factoring incompanies the provincial government believesto be inactive, but identified as being active byEIA/Telapak, the area of illegal plantationsmay be in excess of 300,000 ha.

Of the 53 companies registered at theprovincial level, only seven have PlantationBusiness Permits (lUP). There are, further, atleast 24 more plantations that have beenregistered by regency authorities but not yet atthe provincial government level.8

On 28 March this year Hanif Budi Nugroho,head of the Department of Forestry in Kotim,was reported as saying that illegal loggingwithout timber utilization permits (lPK) hasbeen carried out by "almost all" palm oil

9 G· thocompanies in the regency. Iven ISevidence, it is pertinent to ask if the MoF hasunderestimated the scale of the problem in thisregency.

The moratorium was intended to provide theGoI breathing space during which time theregulatory chaos that pervades the sector couldbe resolved. Two of the key issues are areconciliation of overlapping spatial plans and,latterly, a diversion of new plantations todegraded land. These are vitally importantsteps, but Kotim demonstrates that they mustbe accompanied by robust law enforcement.

Regulatory reform without enforcement willcreate a situation in which it is harder to workwithin the law than outside it; while companiescannot legally secure new concessions withinthe moratorium zone, it appears they can do soillegally with impunity.

There is evidence to suggest that beyondcreating an institutional environment in whichthe aims of the Letter of Intent can be bettermet, enforcement alone could deliversubstantial gains in reducing deforestation.

A study into forest loss in Kalimantan andSumatra between 2000 and 2008, published inFebruary this year, found that 20.1 % tookplace in areas in which clearing is eitherprohibited or restricted~OThe rate ofdeforestation in this period was markedly highin Central Kalimantan, which, along withRiau, accounted for nearly half of the totalforest cover loss in the study area.

The authors concluded: "The high observedfraction of forest cover loss in zones whereclearing should be restricted, or where clearingis prohibited, points towards a significantpotential for reducing forest cover loss inIndonesia via the effective enforcement ofexisting forest land use designations."

Norwegian Investments inDeforestation

That Norway is set to profit financially fromillegal land clearance inside Indonesia'smoratorium zone in the REDD+ Pilot Province- as detailed in this briefing - is of no surpriseto EIA/Telapak.

In fact, EIA/Telapak can reveal that Norwayhas made rougWy five times more money fromplantations and logging in Indonesia andneighboring countries over the past year ­including in illegal operations - than it hasgranted to Indonesia thus far under the US$ 1billion Letter of Intent on REDD+.

In July 2010 EIA wrote to the Norwegiangovernment about US$ 437 millionGovernment Pension Fund Global (GPFG)shareholdings in 30 groups with plantationsand logging related operations covering ninemillion hectares of land, largely focused inIndonesia. EIA argued that such investmentswere in clear danger of breaching the fund'sEthical Guidelines, and undermined thecountry's REDD+ goals in Indonesia.

The Norwegian Government claimed EIA' sconcerns had been duly noted and would beaddressed by the Ethical Council to the Fund.

4

However, in March 2011, following the releaseof the GPFG 2010 annual report:'ElA feltcompelled to write to the Norwegiangovernment again to restate our concerns.

The letter explained how the value ofNorway's investments in these samecompanies had increased by a staggering US$241 million, or 55% in a year - from US$ 437million to US$ 678 million.

RougWy US$ 145 million of this is profit forNorway from increased company share values- nearly five times Norway's US$ 30 millionREDD+ grant to Indonesia.

Incredibly, about US$ 95 million of theincrease is new funds invested during 2010­more than three times Norway's contributionto REDD+ in Indonesia during the period.

EIA also higWighted that Norway held

significant stakes in four major groupsoperating 24 plantations subsidiaries withoutrelevant permits in the REDD+ Pilot Province,Central Kalimantan.

ElA recommended that Norway demonstrateleadership in responding to these issues byincreasing cross-departmental policycoherence in Norway in support of REDD+,and by tabling international discussions onhow investment markets and sovereign wealthfunds can become REDD Ready.

The Norwegian government has declined torespond to ElA.

Norway's stake in KLK alone - which isillegally clearing moratorium land - increasedby US$ 30 million during 2010 - the samesum provided to Indonesia to prevent forestcrime and deforestation over the period.

Norway's Investments in Indonesia's Forestry Sector(US$ millions)

1,000

800

600

400

200

o

o Norway's Total REDD+ LolFunds

• Total Grants in REDD+ LolFunds

02010 Grant to Indonesia

o Norwegian 2009 ForestryRelated Holdings

• Norwegian 2010 ForestryRelated Holdings

Norway's proms from ForestryHoldings - 2010

TOP:Young oil palms in anotherconcession Norway has investedin through KLK, May 2011

5

Conclusions

Crime and con'uption in Indonesia's forestryand plantations sectors has resulted inPresident Yudhoyono's forest conversionmoratOlium being broken on day one.

Systemic governance and law enforcementfailing~ are to blame, and remain the mostserious threat to the country's forests and thesuccess of REDD+.

Repeated promises of improved lawenforcement and anti-corruption drives havethus far failed to deliver, providing noincentives for reform.

That Indonesia's main REDD+ donor partner,Norway, stands to profit from the breach of themoratorium is symptomatic of the perverseincentives available to international investorsill Indonesia's crime riddled, though booming,resource economy,

Recommendations

The Government of President Yudhoyonoshould:• Immediately cease the activities of Pf,Menteng Jaya Sawjt Perdana and Lnvestigatehow the company was clearing peat forest inthe moratorium area with impunity,

References

• Significantly improve law enforcement Ln tileplantation sector, ill cooperation with tbeComlption Eradication Cotmnission (KPK) inline with its pledges.

• Employ the Sistem Verifikasi Legalitas Kayu(SVLK) to audit for forest clearance withoutrelevant pelmits,

• Ensure the moratorillm map is strengthenedrather than further weakened in futurerevisions,

The Government of Norway should:• Empower the Ethical Council to the PensionFlllld Global to immecliately investigate theplantations operations of the KLK group, andthree other groups \"i III operations in CetltralKalimantan, in which the country boldssignificant shares.

• Institute fonnal policy and inveSlmentcoordination between the Ministry of Financeand the Ministry of Env ironmenl , to ensurePension Fund investments adhere to the goalsof REDD+ in Indonesia and worldwide.

• Use its plivileged financial position andpositive climate change reputation to engenderfrank and open debate at the intemalioLlalleve1on bow (0 make investment and commoclitymarkets crime and deforestation free.

I As of 31~ Decemocr 20102 Bursa Malay,<Ia announcement ny K1.K, 2'" FebruaI)' 2007

hnp: Ilannollilcemcnl~ bursamalaysla.comiEDMSO/05CA nnwebnsfILsvAl1 Byl DI482568A D00295D0748257276003 19C25?OpenDocllment

3 Minister of Agriculture Regulallon No,26IPermenlanJOT, 140/2120074 The penalty (or clearing (orest or occupying forest land is a maximum sentence of 10 year'; or a maXJmum fine

ot Rp 5 bll hon For legal bUSIness entiti~s, the sancnons should l:>c imposed on the board of managementhnp: Ilwww,dephul.go.,d/JNFORMASfilJNDANG2/uulL1w 4199,hun

5 PrcsldenlJal InslruCl]On regarding moralonum on pllma!)' forest and peal landhnp I/www redd-momlor orglwordpre"s/wP=conlent'uploadsI201 Jl051INPRES-OJO·2011 pdf

6 Minist!)' of Forewy pre'" release, 27" Apri I 20 II7 Rp 311 Irillion 'lost to fores! misu,e' in K.!limantan: GOYI. The Jakarla Po~l, 3'" May 2011

lll!I1:I/wwlV lbciakanaLNst com/ncw,12011/Q5i03/[Jl-31 I-bjllion.' lost-forest.misuse' -kaljmantan-gOYl html8 Dozens of pJObiematic oil palm plantalion permils in Kotim, MediaJndonesia,com, 18'" January 2011

hl1n; ilwwW.Olpdjajndonesia.comlread/2Q1 I /011181\96671 I1271101 iPulnbao·!lIn·Perkeblloan·Sawlt·dj·KOL1waringin-Timur-Bennasalah

9 Challenge to police, Harian Umum Tabengan, 29" March 2011hnp' I/med, a hari anlabengan coml indcxfde l3.i Inas lonal befll apholC)/i d19665

10 Remotely sCll<ed rorest coyer loss shows high spallal and temporal variallon acros< Sumatera and Kalimantan,IndoneSia 2000 - 2008, EnYlronmcnt.>1 Re~earch Leiters, M BrOich e/ ai, 2..1" February 20\ Ihnp' I/iopsclcnce Loporgl I74S-932616f J10140J O/fulilexl

J I Govcrnment Pension Fund Global, Holding of EqUI1Ie.' al31 D~ember2010hup I/www renieringen no/UpJoadfFINISl3.tens%20pensionsfond/2011Iaksier 20lD pdf

ENVIRONMENTAL INVESTIGATION AGENCY (EIA)~ Upper Street; London N1 ONY; UK

T: +44 (0)2073547960 E: ukinfo@eia·internationaLorgwww,ela-Intemat:lonal,org

TELAPAKGedung Alumni IPB; JI. Pajajaran No, 54;

Bogor 16143; INDONESIAT: +62 251 8393 245

www.telepak,org

Acknowledgement: EIArrelapalc would like to thank NORAD for its generous support 6