Mandatory marketing boards were established to increase Indonesia's power within price setting 

processes, and to prevent unhealthy competition among Indonesian exporters. The emerging 

domestic industry concept was further supported by policies that forced all resource harvesters 

to invest in downstream processing. The forced vertical integration of production and processing 

functions discouraged forest concessions from maximizing output and profits. No incentives 

exist for production units to seek the highest use of their forest resources. 

Conversely, concessions focus on the supply dictated by mills that produce a narrow range of 

products.  The concessions' primary financial consideration is to reduce costs and maintain a 

steady supply to the mill.  There are no rewards for low impact logging. Wood of non export 

milling quality is discarded because it is technically illegal to market domestically. As wood 

becomes increasingly scarce, concessions face incentives to source wood from illegal sources 

to supply domestic demands. 

Restrictions on the local community timber trade is another issue pertaining to undervaluation of 

forest resources.  Trade restrictions have been applied to control exploitation, especially by sub 

contractors.  One impact of these restrictions is that villagers are typically only permitted to fell 

small quantities of timber for their own household use, preventing any opportunities to increase 

the value of the forest for local household incomes. 

The purpose of royalty payments is to prevent windfall profits, discourage wasteful use, and  

provide revenues for the reforestation fund. Volume based stumpages are applied for 

administrative ease. Because royalties are inappropriately assessed (e.g., not by relative values 

of different commercial species), the outcome is high grading and increased waste in the forest 

(NRMP Report No. 4).  This is further exaggerated by the AAC assessment, which understates 

the supply of economically extractable wood.  Although originally devised for reforestation of 

harvested production forests, the reforestation fund (Dana Reboisasi) is now targeted for 

investments to establish industrial pulp and paper plantations.  

The NRMP response to these constraints posed by forest undervaluation was to promote the 

creation of domestic competition. Competition encourages innovation and efficiency. 

Competition in the wood processing sector is not encouraged by existing forest policies or by 

the current forestry power base.  However, potential revenue gains are available from the 

relaxation of vertical integration requirements (NRMP Report No. 72).  These include increased 

efficiency as smaller production units concentrate on harvesting activities while larger 

operations are able to increase their raw material supply to increase processing efficiencies.  

The withdrawal of trade restrictions and mandatory export marketing board membership would 

assist by directing resources to the highest value use (NRMP Report No. 55).  Other strategies 

recommended reducing, if not removing, the sawn timber tax (NRMP Report Nos. 71 and 72) 

and the industrial concentration policies in the wood processing sector.  

2.6  Lessons Learned: Reducing Uncertainties of Resource 

Allocation Rights  

A body of secure, enforceable rights is one of the critical management requirements for 

property.  Without these conditions, the holder is not guaranteed continuous access to the 

benefit stream arising from their resources rights and investment. Under such uncertain 

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