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The Chain: Indonesian Government Aspirations Moving to Actions

May 25, 2016

Indonesian Government Aspirations Moving to Actions

Indonesian President Joko Widodo took office at the end of 2014 with a mandate to improve the country’s governance and increase its economic growth via infrastructure spending. In the past weeks, his administration took action on both, addressing governance issues in forest concessions and pursuing development of a sovereign wealth fund to support financing for infrastructure projects.

Forest Concessions Clarity

In response to governance challenges, in a first round of reviews, President Widodo in April 2016 declared a moratorium on new palm oil and coal mining permits.

“We have rejected and terminated the licensing process for all new palm oil plantations submitted by 61 companies for an area of more than 851 thousand hectares. This is the result of the first round of the review we are conducting,” San Afri Awang, the Director-General of Environmental and Forestry Spatial Planning, Environment and Forestry Ministry, told on Thursday May 19, 2016.

The areas for which the licensing process had been terminated were production forests in the provinces of Papua, West Papua, and Central Kalimantan. As reported by Mongabay, some local communities have been unaware that rights to their traditional community property has been granted, through in-principle permits which precede a concession, to distant corporations without their consent – a situation that introduces significant reputational risk to the companies if the situation becomes public, and operational risk if local opposition slows or stops planned activities.

For example, as reported on Mongabay, firms such as PT Cipta Papua Plantation (CPP) and PT Mega Mustika Plantation (MMP) acquired concessions in West Papau. But the Moi Indigenous Peoples Community only learned one year after the granting of these two concessions to PT CPP and PT MPP that their traditional community property was taken from them. Further complicating the situation is that it is unknown who owns CCP and MPP. Both are registered at the same address in Jakarta.

A second round of reviews is ongoing with the expectation that hundreds of thousands of hectares of additional concessions would also be rescinded.

New Sovereign Wealth Fund

Indonesia is also looking to develop an investment holding company for stated-owned entities. Similar to Singapore’s Temasek Holdings, the proposed sovereign wealth fund would finance Indonesia’ growth beyond a commodity-based economy. According to a Bloomberg interview of Finance Minister Bambang Brodjonegoro:

“In one or two years we need to come out with a real alternative to growth other than commodities.”

Indonesia’s proposed sovereign wealth fund could further support Indonesia growing from a natural resource extractives based economy linked to deforestation to an economy based more on goods and services.

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