Indonesia’s Permit Revocation highlights risks to financiers

On 6th January 2021, Indonesia’s President Joko Widodo (Jokowi) revoked over 2,000 permits for plantations, forestry, metals, minerals and coal mining across the archipelago. In his statement, Jokowi declared that “we have revoked licences that are unused, unproductive, already transferred to another party, used for unsuitable activities, and against regulations”. 

This looks like a positive step forward by the Indonesian government in addressing the pervasive illegality in its natural resource sector, including forest-risk commodities like palm oil, timber and pulp & paper. The Ministry of Environment and Forestry is writing to the affected companies, providing them with time to justify why their permits shouldn’t be revoked, and so the published list is not yet conclusive. 

However, it comes on the back of numerous reviews by government agencies including Audit Office (BPK) and Anti-Corruption Commission (KPK) that found widespread illegality and non-compliance. In 2018 for instance, BPK found that an astonishing 81% of palm oil plantations were flouting regulations. This was accompanied by a moratorium on new palm oil permits, and a pledge to review existing permits. Provincial governments in West Papua expedited this process, teaming up with local civil society to review the legality of permits. In 2021, the West Papua Provincial government revoked oil palm permits controlled by 12 companies constituting a quarter of a million hectares- a decision upheld in the courts when challenged by three affected companies.

Systemic Financial Risk to Indonesia’s banks

For the errant companies, the permit revocation will likely have a serious negative impact on their financial position, and increase the risk of default and credit losses for banks with exposure to them. Dr Sofyan Djalil, Minister of Agrarian and Spatial Planning noted that some timber permits were in fact being acquired simply to be misused as security for bank loans, taken out for different purposes. Given the scale of sectors like palm oil, and the pervasive illegality, this represents a systemic risk to Indonesia’s financial system. 

This high-risk environment was in part allowed to flourish because of the poor due diligence and weak sector policies that typify Indonesia’s financial sector. Strong sector-specific policies, and proactive due diligence would for instance, flag companies that have plantation permits illegally issued within forest estate, or projects that have widespread social conflicts, or are clearly inactive and being misused as financial collateral. Unfortunately, Indonesia’s banks perform poorly on an assessment of lending and due diligence policies, undertaken by Forests & Finance. The four largest banks – Bank Rakyat Indonesia, Bank Mandiri, Bank Central Asia and Bank Negara Indonesia received a weighted average score of 2.5, 2,8, 2.7 and 2.0  out of 10 respectively. This is especially concerning given their enormous exposure to forest-risk commodities writ large. 

Who’s on the list?  

Forests & Finance, and other organisations are analyzing the full published list to identify the corporate groups most affected. However, one corporate group, Korindo, stands out as having a considerable licence area revoked. Over 65,000 ha of forest utilization permits: PT Papua Agro Lestari (32,348 ha), PT Tunas Sawa Erma (19,001 ha) and PT Berkat Cipta Abadi II (14,435 ha). These are areas that were largely undeveloped by the group and contain large areas of primary rainforest. 

This comes following a string of disturbing allegations published by Al Jazeera and Gecko Project that the group made suspicious offshore payments totalling $22 million soon after PT Papua Agro Lestari acquired its forest licence, misidentifying these payments as consultancy fees, in violation of Singapore law. Korindo denied that these payments were linked to bribery. Korindo was later stripped of its FSC certification after an independent investigation found a litany of social and environmental abuses across its Papua and North Maluku concessions.

Jokowi’s permit revocation is a further blow to the group, equating to over 40% of Korindo’s total concession area, and will almost certainly impact the group’s financial position. Korindo isn’t a listed company and its finances are opaque. However, Bank Negara Indonesia (BNI) has consistently reported them as a top 10 client for agriculture, reporting outstanding loans of $191 million in 2018. As such, BNI should be extremely concerned about their exposure to a high-risk group, which may now have substantially reduced assets.

Who’s not on the list?

The revocation announcement cites a wide range of issues, from simply being inactive or unproductive, to being in breach of regulations. The precise reasons for each permit are not disclosed. Were Korindo’s Papua concessions referenced above revoked for simply being inactive, or for the widespread violations and highly suspicious payments linked to its permit acquisition? 

TuK-INDONESIA, a Forests & Finance Coalition member, has raised concerns that the revocation process hasn’t been transparent, leading to concerning inconsistencies. In North Maluku Province, an active Korindo concession – PT Gelora Mandiri Membangun – has retained its permit, despite strong evidence that it broke many regulations and violated community rights to their land. In fact, local community groups are concerned that the cancellation of a neighbouring logging concession could in fact open the door for Korindo to expand its plantation area. 

TuK also highlighted the many permits in Central Sulawesi controlled by major corporate groups that, despite being uncultivated, have not been revoked. 

What’s next?

Determining the precise reason is an important next step to restoring rights and reforming Indonesia’s permitting system. This was a key demand of WALHI, which cautiously welcomed Jokowi’s decision but emphasized the need for the revocation to support the conflict revolution on the ground: “the government must disclose information about which companies have had their licenses revoked and reveal which have been in dispute with local communities. This will allow these lands to be returned to communities and restore people’s rights that the state has taken away through this licensing scheme”.

Indonesian group Pusaka, which works with Indigenous communities in Papua, including those affected by Korindo, are calling on the government to restore the rights of Indigenous groups to customary land and forest. Communities contest that their rights were violated through the issuance of the permits. 

What is clear is that the permit revocations from both the Provincial and National government should be a wake up call for banks with high levels of exposure to risky sectors like palm oil, where there is pervasive non-compliance and illegality. The need for decisive action to identify and mitigate these risks is becoming increasingly urgent.