How Indonesia crippled its own climate change project

SINGAPORE, (Reuters) – In July 2010, U.S. investor  Todd Lemons and Russian energy giant Gazprom believed they were  just weeks from winning final approval for a landmark forest  preservation project in Indonesia.

CEO of InfiniteEARTH Todd Lemons (C) and managing director Jim Procanik (L) pose with colleagues during a 2010 assessment of peat depth at the Rimba Raya Conservation project in the province of Central Kalimantan in this 2010 handout photo. REUTERS/InfiniteEARTH

A year later, the project is close to collapse, a casualty  of labyrinthine Indonesian bureaucracy, opaque laws and a  secretive palm oil company.

The Rimba Raya project, on the island of Borneo, is part of  a United Nations-backed scheme designed to reward poorer nations  that protect their carbon-rich jungles.

Deep peat in some of Indonesia’s rainforests stores billions  of tonnes of carbon so preserving those forests is regarded as  crucial in the fight against climate change.

By putting a value on the carbon, the 90,000-hectare  (225,000 acre) project would help prove that investors can turn  a profit from the world’s jungles in ways that do not involve  cutting them down.

After three years of work, more than $2 million in  development costs, and what seemed like the green light from  Jakarta, the project is proof that saving the world’s tropical  rainforests will be far more complicated than simply setting up  a framework to allow market forces to function.

A Reuters investigation into the case also shows  the forestry ministry is highly sceptical about a market for  forest carbon credits, placing it at odds with President Susilo  Bambang Yudhoyono, who supports pay-and-preserve investments to  fight climate change.

Hong Kong-based Lemons, 47, a veteran of  environmentally sustainable, and profitable, projects,  discovered just how frustrating the ministry can be to projects  such as his.

Success was literally two months around the corner,” he  said. “We went through — if there are 12 steps, we went through  the first 11 on time over a 2-year period. We had some glitches,  but by and large we went through the rather lengthy and  complicated process in the time expected.”

That’s when the forestry ministry decided to slash the  project’s area in half, making it unviable, and handing a large  chunk of forested deep peatland to a palm oil company for  development.

The case is a stark reminder to Norway’s government, the  world’s top donor to projects to protect tropical forests, on  just how tough it will be to preserve Indonesia’s rainforests  under its $1 billion climate deal with Jakarta.

UNLIMITED CORRUPTION
The dispute has turned a spotlight on Indonesia’s forestry  ministry, which earns $15 billion a year in land permit fees  from investors. Indonesia’s Corruption Eradication Commission  (KPK) said last month it will investigate the granting of forest  permits and plans to crack down on corruption in the resources  sector.
“It’s a source of unlimited corruption,” said Chandra M.  Hamzah, deputy chairman at the KPK.

Indonesia Corruption Watch, a private watchdog, says illegal  logging and violations in issuing forest use permits are  rampant. It estimates ill-gotten gains total about 20 trillion  rupiah ($2.3 billion) each year.

A forest ministry official connected with the U.N.-backed  forest carbon offset scheme was sentenced in April to three  years in prison for accepting a $10,000 bribe to ensure an  Indonesian company won a procurement tender.

Wandojo Siswanto was one of the negotiators for Indonesia’s  delegation at the 2009 U.N. climate talks in Copenhagen, despite  being a bribery suspect. His case has highlighted concerns about  the capacity of the forestry ministry to manage forest-carbon  projects.

The forestry sector has a long history of mismanagement and  graft. Former trade and industry minister Bob Hasan, a timber  czar during the Suharto years, was fined 50 billion rupiah ($7  million) for ordering the burning of forests in Sumatra and then  imprisoned in a separate case of forestry fraud after Suharto  was toppled from power in 1998.

In an interview in Jakarta, senior forestry ministry  officials denied any wrongdoing in the Rimba Raya case and  criticised the project’s backers for a deal they made with  Russia’s Gazprom, the world’s largest gas producer, to  market the project’s carbon credits.

Internal forestry ministry documents that Reuters  obtained show how the ministry reversed its support for the  project after a new minister came in, and a large chunk of the  project’s land was turned over to a palm oil firm.

The case illustrates how growing demand for land,  bureaucratic hurdles and powerful vested interests are major  obstacles to conservation projects in Indonesia and elsewhere in  the developing world.

That makes it hard for these projects to compete and  navigate through multiple layers of government with the  potential for interference and delay.

“We have systematically not been able to  demonstrate that we can complete the loop to turn projects into  dollar investments,” said Andrew Wardell, programme director,  forests and governance, at the Center for International Forestry  Research in Indonesia.

“Which is why the palm oil industry is winning hands down  every time.”

     SHOWCASE PROJECT

The Rimba Raya project was meant to save a large area of  carbon-rich peat swamp forest in Central Kalimantan province and  showcase Jakarta’s efforts to fight climate change.

Much of the area is dense forest that lies atop oozy black  peat flooded by tea-coloured water. Dozens of threatened or  endangered species such as orangutans, proboscis monkeys, otter  civets and Borneo bay cats live in the area, which is adjacent  to a national park.

Rimba Raya was designed to be part of the U.N’s Reducing  Emissions from Deforestation and Degradation (REDD) programme.  The idea is simple: every tonne of carbon locked away in the  peat and soaked up by the trees would earn a steady flow of  carbon credits.

Profit from the sale of those credits would go to  project  investors and partners, local communities and  the Indonesian government. That would allow the project to pay  its way and compete with palm oil farmers and loggers who might  otherwise destroy it.
Rich countries and big companies can buy the credits to  offset their emissions.

By preserving a large area of peat swamp forest, Rimba Raya  was projected to cut carbon emissions by nearly 100 million  tonnes over its 30-year life, which would translate into total  saleable credits of about $500 million, Gazprom says.

It would also be a sanctuary for orphaned or rehabilitated  orangutans from elsewhere in Borneo. Rimba Raya teamed up with  the founder of Orangutan Foundation International, Birute Mary  Galdikas, in which OFI would receive a steady income from annual  carbon credit sales.  It was the sort of project President Yudhoyono and Norway  have pledged to support. Yudhoyono has put forests — Indonesia  is home to the world’s third-largest forest lands — at the  centre of a pledge to reduce greenhouse gas emissions by at  least 26 percent by 2020.

He tasked a senior adviser to press for reforms to make REDD  projects easier and for greater transparency at the forestry  ministry.

       GOLD STANDARD     

Rimba Raya was poised for success. It got backing from the  Clinton Foundation’s Climate Initiative, which helped pay for  some of the early costs. Gazprom invested more than $1 million.

It was the first in the world to meet stringent REDD project  rules under the Washington-based Voluntary Carbon Standard, an  industry-respected body that issues carbon credits. Rimba Raya  was also the first to earn a triple-gold rating under the  Climate, Community and Biodiversity Alliance, a separate  verifier.
Companies including German insurer Allianz and  Japanese telecoms giant NTT pledged to buy credits from  the project if it gets its licence.

In December 2009, the forestry ministry tentatively named  the now Indonesian-registered company PT Rimba Raya Conservation  the licence holder for nearly 90,000 ha, contingent on it  passing an environmental impact assessment. It did so a few  months later.

The ownership of PT Rimba Raya Conservation is split 70  percent foreign and 30 percent Indonesian, with Lemons and  business partner Jim Procanik holding small stakes.

Lemons is CEO of Hong Kong-based firm InfiniteEARTH, which  is the developer and manager of the Rimba Raya project as well  as investment fund-raiser. Procanik, 44, is the managing  director.

In June last year, Forestry Minister Zulkifli Hasan asked  for a map that would set the final boundary of the project,  according to a copy of the instruction seen by Reuters. This  mandatory step normally takes a few weeks. Once the map is  issued, a project is eligible for a licence to operate.

But by September last year it was clear something was wrong,  according to Lemons. Despite repeated promises by ministry  officials, the final map had not been issued. No explanations  were given.

“No one has ever said, ‘No’. So that’s exhausting,” said  Lemons.

What followed instead was a series of steps by the forestry  ministry that have resulted in the project being undermined.

A ministry review focused on conflicting claims to the land  by several companies belonging to palm oil firm, PT Best Group.

PT Best, which is run by Indonesian brothers Winarto and  Winarno Tjajadi, had long coveted the peat land within the area  the forestry ministry set aside for the Rimba Raya project.

On December 31, 2010, PT Best was granted 6,500 ha of peat  swamp land for palm oil development, next to a smaller parcel of  deep peat land granted a year earlier — part of PT Best’s  broader plan to connect its palm oil plantations in the north  with a port on the coast nearby. The land granted last December  was part of the original area set aside for Rimba Raya.

The Tjajadi brothers declined several requests by Reuters to  comment.

The December allocation to PT Best came despite assurances  from Forestry Minister Hasan that he would not allow deep  peatlands to be converted for agriculture.

The allocation also came a day before a two-year moratorium  on issuing licences to clear primary forests and peat lands was  due to start on Jan. 1 this year. The moratorium is a key part  of the climate deal with Norway.

After months of delay, the forestry ministry finally ruled  that PT Rimba Raya was only eligible for 46,000 ha, a decision  that cut out much of the peatlands covering nearly half the  original project area.

    OMBUDSMAN    INVESTIGATES 

The case has now been brought before the office of the  Indonesian government’s Ombudsman. In an interview, senior  Ombudsman Dominikus Fernandes told Reuters he believed the  forestry ministry should issue the license to Rimba Raya.

“If Rimba Raya has already fulfilled the criteria, there  should not be a delay in issuing the licence,” he said.

“This is a model project in Indonesia that should be  prioritized. If we don’t give an example on the assurance of  investing in Indonesia, that’s not a good thing.”

Officials from the forestry ministry, in a lengthy interview  with Reuters, said the area was given legally for palm oil  development because PT Best had claims to the land dating back  to 2005.

Secretary-General of the ministry Hadi Daryanto stressed the  peatland areas originally granted to Rimba Raya were on a type  of forest called convertible production forest, which can be  used for agriculture but not REDD projects. Handing that nearly  40,000 ha to Rimba Raya would be against the law, he said.

Yet in 2009, the ministry was ordered to make the title  switch for this same area of peatland so it could be used for a  REDD project. The instruction to immediately make the switch, a  bureaucratic formality, was never acted on.

In the Oct 2009 decree seen by Reuters, former Forestry  Minister H.M.S. Kaban issued the order as part of a broader  instruction setting aside the nearly 90,000 ha for ecosystem  restoration projects. Kaban left office soon after.

Indonesian law also bans any clearing of peat lands more  than 3 metres deep. An assessment of the Rimba Raya area by a  peat expert hired by InfiniteEARTH showed the peat is 3 to 7  metres deep, so in theory was out of bounds for PT Best to clear  for agriculture.

For Lemons, 47, the mood has switched from  exhilaration to bitter disappointment. “We’ve been here every  day pushing like hell from every angle,” he said.

Procanik says the disappointment is personal. “Todd and I  have both invested what savings we had for our kids’ college  education in this project,” he said.

Gazprom is also upset.

In a letter dated June 16 to the Indonesian government, the  Russian firm criticised the ministry’s failure to issue the  licence for Rimba Raya and threatened to abandon clean-energy  projects in Indonesia estimated to be worth more than $100  million in foreign investment. The government has yet to  respond.

        CARBON DREAMS?

Secretary-General Daryanto and Iman Santoso,  Director-General for forestry business management, said another  major problem was InfiniteEARTH’s deal with Gazprom, which was  made in the absence of any licence.

“We didn’t know about the contract with Gazprom. They had no  legal right to make the contract,” Daryanto told Reuters.

Santoso described it as the project’s “fatal mistake”.

Daryanto also questioned whether REDD would ever work and  whether there was any global appetite for carbon credits the  programme generates, a view at odds with other parts of the  Indonesian government, which has been actively supporting REDD  projects.

“Who will pay for the dream of Rimba Raya? Who will pay?  Nobody, sir!” Daryanto told Reuters during an interview in the  heavily forested ministry compound near central Jakarta.

Lemons said the Gazprom deal was explained in person during  a presentation of a 300-page technical proposal submitted to the  ministry to prove the project would be financially viable.  Daryanto was among a ministry panel that approved the proposal.

“One of their biggest concerns was whether REDD could  deliver the same revenues to the state as other land-use permits  such as palm oil, logging, mining. We were required to show  contracts that demonstrated we could pay the fees and annual  royalties,” he said.

Gazprom, designated as the sole marketer of carbon credits  from Rimba Raya, said it had already agreed long-term sales  contracts with buyers at between 7 and 8 euros ($10 to $11.40)  per tonne — contingent on the licence being issued.

“We’ve sold to four or five companies around that price,”  said Dan Barry, Gazprom Marketing & Trading’s London-based  global director of clean energy.

Gazprom became involved, he said, because it was a project  that looked to have official support. The Russian company agreed  to a financing mechanism that ensured the project’s viability  for 30 years, regardless of the price level of carbon markets.

Those markets, centred on the European and U.N. carbon  trading programmes, were valued at $142 billion in 2010, the  World Bank says. National carbon trading schemes are planned for  Australia and South Korea, while California is planning a  state-based scheme from 2013. New Zealand’s carbon market  started in 2008.

“If you ever want a successful REDD scheme, you are going to  have to have a process that people believe in,” Barry said.

“The Ministry of Forestry ought to be doing everything it  can to support a programme that benefits forestry as opposed to  favour a programme that’s there to cut it down and turn it into  palm oil.”

 “AHEAD OF      ITS TIME”       

Kuntoro Mangkusubroto, the head of the REDD task force in  Indonesia who is also in charge of the president’s government  reforms unit, said the Rimba Raya case highlighted deep flaws in  the bureaucracy and the need for sweeping reforms to underpin  the 40 other REDD projects in Indonesia.

“The core concern is the trust in government statements of  readiness, and responsibility,” he told Reuters in an email.  “Even with the best of intentions, the unsynchronous action of  the central government’s ministry and the district government’s  action is not conducive for investment, especially in this new  kind of venture.
“I can surmise that the case of Rimba Raya is a case of a  business idea that is ahead of its time. The government  infrastructure is insufficiently ready for it.”
Legal action was one solution to this case, he added.

That is a path Lemons and Procanik may eventually take but  for now they have proposed a land swap deal with PT Best in  which the firm gives PT Rimba Raya 9,000 ha of peat land in  return for a similar sized piece of non-peat land held by PT  Rimba Raya in the north of the project near other PT Best  landholdings.

PT Best rejected an earlier offer by Rimba Raya of 9 percent  of the credits from the project, Lemons said.

Based on recent satellite images, PT Best has yet to develop  the disputed 9,000 ha area.

The delays mean it is too late for Rimba Raya to become the  world’s first project to issue REDD credits. That accolade has  since gone to a Kenyan project.

“Our whole point here is to show host countries that REDD  can pay its way,” said Lemons. “And if it can’t pay its way then  we haven’t proven anything.”

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