IX. THE ROLE AND RESPONSIBILITY OF THE INTERNATIONAL FINANCIAL COMMUNITY

Rural violence and environmental destruction in Riau are not unique within Indonesia and Indonesia is not unique in the developing world. In a number of other countries, international financial institutions have been involved in destructive commercial extraction of valuable resources, which has been associated with comparable problems of rights abuse and violent conflict, including Cambodia, the Democratic Republic of Congo, Liberia, Angola, Nigeria. In response, the international donor community has begun to pay explicit attention to social conflict and environmental issues around resource extraction and its importance to overall political and economic stability, and has accordingly taken steps to push reform in these areas. Human Rights Watch believes that the international community should act to address such issues in Riau as well: it has the responsibility as well as the opportunity to unequivocally press for the kind of on-the-ground progress in governance and accountability in the Indonesian forest sector that are necessary if further human rights abuses are to be avoided.

Multi- and Bilateral Donor Institutions
Indonesia currently holds U.S.$133 billion in external debt, U.S.$79 billion of that in public debt, making it one of the world's forty-four "severely indebted" countries.³⁶ As noted above, much of this money went to recapitalize mismanaged banks and forest corporations that were complicit in human rights violations. While the donor community has voiced concern over governance and rule of law in the economically important forest sector, they have failed to send a clear signal that protection of human rights-including a framework for enforcement of indigenous land rights and an end to impunity for perpetrators of violence against forest dependent communities-should be a priority for the Indonesian government.

Multilateral institutions, including multilateral donors such as the World Bank and International Monetary Fund (IMF), have recognized that lack of rule of law and destructive resource extraction are problems that fall within their mandates.³⁷ The IMF in particular, has publicly recognized the importance of the forest sector to international trade and lending as well as the domestic economic outlook, and has noted the particular governance problems associated with the sector. In other countries including Cambodia, Bolivia, Solomon Islands, Surinam, Liberia, Cameroon, Cote d'Ivoire, Equatorial Guinea, and the Democratic Republic of Congo, circumstances in the forest sector similar to those described in this report have motivated the IMF, World Bank, and bilateral lenders to use their considerable influence to press for audits of timber companies, independent monitoring, freezing of new concessions, and governance changes in natural resource use in general, and the forestry sector specifically.³⁸ Indeed, in Liberia and the Democratic Republic of Congo, the role of illicit "conflict timber" in funding and perpetuating violence and instability motivated the U.N. Security Council to draft resolutions to restrict export of timber from those countries until it can be demonstrated that such exports do not fund or otherwise contribute to the continuation of conflict.³⁹

In the case of Cambodia, the IMF and the Consultative Group donors took a strong position on governance in the forestry sector by tying non-humanitarian aid to benchmarks and commitments in forestry reform. Following the conditioning of non-humanitarian aid on such reforms, the Cambodian government established an independent timber monitoring body (including the non-governmental group Global Witness), agreed to a review of existing concessions, and issued a moratorium on new concession licenses and log exports. IMF support was renewed in early 1999, subject to authorities' compliance with prior commitments on forestry reforms.⁴⁰ The Asian Development Bank, however, described the Cambodian forestry sector as a "total system failure," and demanded the termination of concessions unless they produced social and environmental impact assessments and long-term forest management plans by September 30, 2001. None of the concessionaires achieved this deadline or achieved the required standards, and Cambodian Prime Minister Hun Sen declared a total suspension of logging beginning in January 2002.⁴¹

The circumstances in Indonesia are even more severe than those in Cambodia that motivated the multi and bi-lateral donors to take strong steps to press for action on forest reforms. At U.S.$5.6 billion in legal exports annually, the importance of the forestry sector to Indonesia's economy is clear, as is the widespread problem of government revenues lost to illegal logging. The World Bank has estimated that government income lost to illegal logging through uncollected taxes and fees amounts to some U.S.$3.5 billion.⁴² In addition, like Cambodia, Indonesian military involvement in illicit timber sectors has compromised the rule of law and increased violence and instability.

In Indonesia, however, reforms have been ineffective and there has been little progress in ending illegal logging and abuse of indigenous rights. A moratorium on converting natural forests to plantations remains in effect, yet donors have been silent on public announcements by APP and RAPP that they intend to double the size of their acacia plantations, which will require logging of natural forests. There has been no mention of how still unresolved land tenure disputes will be addressed or how the accountability of private security forces will be improved to avoid repeating the rights abuses of the past. Heavily indebted and over-producing forest industries continue to put pressure on forest resources and drive illegal logging, which continues unchecked even in national parks.

While many of Indonesia's lenders have voiced concern over the lack of progress on forest reforms, the European Union perhaps the most vocal among them, they have not insisted on compliance with social and environmental benchmarks, sending the unfortunate message that governance is not a priority. Aid from the E.U. makes up some 60 percent of all foreign aid to Indonesia's forestry sector,⁴³ and as such the EU bears particular responsibility to press for reforms. The EU has made strong statements to the CGI criticizing the Ministry of Forestry's lack of progress on reforms,⁴⁴ including the E.U.'s 2001 Pre-CGI statement:

In terms of results in the forests, which is the ultimate measure of achievements, there have been no tangible improvements. The rate of forest loss has not abated. The situation in the forests remains grave by any measure, and the donors remain seriously concerned.⁴⁵

Such serious concern notwithstanding, lending to the forestry sector from CGI members is undiminished, draining the impact from any critical public statements. In fact, just days before the meeting took place in which they would deliver this stern reprimand, the EU itself announced a U.S.$2 million loan to the forestry sector.

The World Bank has also taken a step in the wrong direction. At a time when social and environmental problems associated with the forestry sector seem to be increasing in Indonesia and a number of the heavily forested countries of the developing world, the World Bank has announced its intention to re-establish lending to the forest sector worldwide. The World Bank discontinued lending to commercial operations in moist tropical forests in 1991 following its own internal review, which revealed that its assistance projects had poor oversight and funds did not reduce deforestation.⁴⁶ Although the Bank admits few changes have been made since that time, it nevertheless asserts that restored lending is appropriate.⁴⁷

A further mixed message from donors comes from the sectoral nature of reforms proposed by the IMF. Steps taken to reform forestry operations are not coordinated with the restructuring of banks and corporations overseen by Indonesian Bank Restructuring Agency (IBRA) and the Ministry of Finance, and different government bodies frequently work at cross-purposes. For example, as part of IMF and CGI-led reforms, the Ministry of Forestry committed to downsize the capacity of forest industries and shut down insolvent companies, while at the same time the Finance Ministry was working on recapitalizing indebted forest companies, clearing the way for further expansion. The IMF has a responsibility to send a clear message that they insist on meaningful outcomes and integrated targets across the ministries.

Given the existing precedents, the severity of the problems, and the significant amount of international lending to the Indonesian government and central bank, Human Rights Watch believes that the international donor community has a special responsibility as well as the opportunity to press for changes in governance in Indonesia's forestry sector and to build on existing precedents that they have set in other parts of the world.

36 World Bank, 2002 Data and Statistics, http://www.worldbank.org/data/countryclass/classgroups.htm (retrieved October 3, 2002).

37 Paulo Mauro, Why worry about corruption? (Washington, D.C.: The International Monetary Fund, 1997); Ved P. Ghandi, The IMF and the Environment (Washington, D.C.: IMF, 1998); and "Factsheet on the IMF and the Environment," IMF, August 2, 2002, http://www.imf.org/external/np/exr/facts/enviro.htm (retrieved October 3, 2002). Rampant illegal activity in the forest sector is an economic drain on state resources. Over-exploitation of forests could compromise the viability of Indonesia's forestry industry and balance of foreign trade, in the next five to ten years according to World Bank estimates of forest availability. At the same time, it will necessitate greater social expenditures as populations become more impoverished, and less self-sufficient in food and fuel production. These circumstances make a strong economic argument for IMF to use its influence to improve sustainability in the forest sector.

38 "Factsheet: IMF and the Environment"; "Review of the Fund's Experience in Governance Issues," IMF Policy Development and Review Department, March 28, 2001, http://www.imf.org/external/np/gov/2001/eng/report.htm (retrieved October 3, 2002).

39 On the D.R. of Congo, see U.N. Security Council Addendum to the Panel of Experts on the Illegal Exploitation of Natural Resources and Other Forms of Wealth in the Democratic Republic of Congo, November 1, 2001, which called for a review and renegotiation of concessions for extraction of timber, gold, diamonds, coltan, cobalt, and oil, and a moratorium on the trade and importing of these commodities originating in areas under control of foreign troops or rebel forces, and introduced the idea of sanctions should there be no progress in the exploitation of these resource sectors. On Liberia, UN Security Council Resolution No.1408, paragraph 10, adopted on May 6, 2002. In passing this resolution, the Security Council built on success in the Kimberley Process in tracking trade of so-called "conflict diamonds" to control the flow of this money to arms trade, and in bringing to international attention the role of illicit trade in directly contributing to violent conflict in the region and highlighted the responsibility of private sector actors to judiciously avoid supporting these abuses through their business operations. U.N. General Assembly Resolution A/RES/55/56 on conflict diamonds, http://www.un.org/peace/africa/Diamond.html (retrieved October 3, 2002).

40 IMF Policy Development and Review Department, "A Review of the Fund's Experience in Governance Issues," http://www.imf.org/external/np/gov/2001/eng/report.htm (retrieved November 4, 2002). The IMF and Consultative Group based their view that firm action on reform was needed only due to the economic losses from uncollected taxes and fees from illegal logging, but overall effects of the illicit activities. The Policy review document states, "The logging activities undermined the implementation of environmentally sound and sustainable forest management. Notwithstanding generally good economic performance, the absence of good forestry policy was considered to put in doubt the medium term sustainability of the fiscal and external position...The incidents of corruption, in addition to threatening the successful implementation of the program, also put in doubt the purpose of the use of the Fund resources. Given the seriousness of the incidents, continued support would have damaged the credibility of the Fund." Well-placed observers told Human Rights Watch that while donor support was initially crucial in getting Cambodia's forestry reform program off the ground, in recent years flagging donor support for meaningful reforms has meant that the audits and monitoring have been largely cosmetic. See also, Michael Richardson, "Illegal logging topples Cambodia's Forests," International Herald Tribune, June 21, 2002. Global Witness has been contracted by the U.N. to undertake a scoping study in Cameroon to determine if a similar model for independent monitoring of forests would be applicable.

41 Global Witness, "At long last Cambodia suspends all logging operations," press release, December 12, 2001.

42 World Commission on Forests and Sustainable Development, Our Forests Our Future (Cambridge, U.K.: Cambridge University Press, 1999). Arnoldo Contreras-Hermosilla, "Law Compliance in the Forest Sector: An Overview," Working Paper 37205, World Bank Institute, Washington, D.C., 2002.

43 John Keating, Director of The E.U.-Indonesia Liaison Bureau in Jakarta, "New Hope for Indonesia's Forests," Jakarta Post, February 2, 2000.

44 E.U. statements to the Paris Club in July 1999; to the tenth CGI in Tokyo, October 17, 2000; to the Interim CGI in Jakarta, April 23, 2001 (all on file at Human Rights Watch).

45 E.U. Commission for the Interim CGI, "Policy Dialog for the Creation of a Conducive Environment for Sustainable Management of all Types of Forest in Indonesia," position paper presented the Interim CGI meeting in Jakarta, April 23, 2001 (on file at Human Rights Watch).

46 World Bank Operations Evaluation Division, "Forestry: The World Bank's Experience," Washington, D.C., 1991. The World Bank's own assessment of its Country Assistance Programs found that from 1992-1999, 100 percent had unsatisfactory monitoring and evaluation. In stakeholder participation, 70 percent of the projects were found to be unsatisfactory. "A Revised Forest Strategy for the World Bank Group," draft for Public Comment May 14, 2002, Appendix 9.13, http://lnweb18.worldbank.org/ESSD/essdext.nsf/ 14DocByUnid/403A34FDD7B9E84A85256BD00077D91B/$FILE/ ForestSectorStrategyEntireDocument.pdf (retrieved October 3, 2002).

47 World Bank, "A Revised Forest Strategy for the World Bank Group."