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Addicted to Rent: Corporate and Spatial Distribution of Forest Resources in Indonesia; Implications for Forest Sustainability and Government PolicyDavid W. Brown, DFID/ITFMP1I.Theoretical PrinciplesThe principle underlying this report is that the distribution of Indonesia’s timber resources, as well as the policies governing those resources, are shaped by the vast amounts of above-normal profit, or “economic rent,” that can be earned from the harvesting and exporting of timber. Any firm making above-normal profits is said to be earning economic rent. Economics distinguishes between two types of profit. The first is normal profit, defined as the opportunity cost of a business, the minimum amount necessary to attract a business to an activity, and to induce the business to remain in it. Normal profit is defined in this report as the level of profit which yields a 25 percent return on the total amount invested by timber concessionaires to extract wood from the forest. Any profit over that amount is defined as excess profit, or economic rent.According to economics, 100 percent of economic rent may be captured by a government through taxation without having a deleterious effect on the competitiveness of the companies paying taxes. But in Indonesia, the government has typically captured only a small portion of the economic rent in the timber sector through timber fees and corporate taxes. The remainder of the economic rentin the sector has been pocketed by integrated timber concession-plywood companies, or transferred by them, usually in an under-the-table fashion, to their political patrons.Economics holds that firms have the ability to earn above-normal profit, or rent, in the event that either of two conditions are met. First, rent can be presumed to exist in all situations of imperfect competition. Second, rent can be earned in conditions where there are barriers to entry. Both of these hold true for the Indonesiantimber industry.Conditions of imperfect competition exist in Indonesia’s timber industry because it is a producers’ oligopoly, combined, until recently, with a sellers’ monopoly. The industry has a producers’ oligopoly because five private firms control about thirty percent of the nation’s timber supply. The industry also had –until about a year ago -a sellers’ monopoly because the export and sale of plywood, the nation’s most important forest product, was controlled by the coercive Indonesia plywood producer’s association, called Apkindo.Barriers to entry also characterize the industry. Any firm that wishes to harvest timber needs a license from the government. However, such licenses are exceptionally difficult to come by. Those seeking licenses are far more numerous than those who receive licenses. The need to buy machinery is also a barrier to entry. Oligopolistic conditions within the industry, as well as barriers to entry, continue to ensure that rent is generated from the harvest of tropical timber in Indonesia. The timber industry has enjoyed particularly generous and sustained rent earnings. The ITFMP has researched this phenomenon for over half a decade. We estimate that the rent that can be earned by a timber company from exporting a cubic meter of tropical roundwood at current prices and export tariff levels is US$30. This finding is shown in the following table.
Addicted to Rent: Corporate and Spatial Distribution of Forest Resources in Indonesia; Implications for Forest Sustainability and Government PolicyDavid W. Brown, DFID/ITFMP2Table 1.1Rents available from the sale of a cubic meter of Indonesian roundwood at current world prices (all figuresin US$) Assumed Export Tariff on Roundwood (%)Cost to Producer of Extracting RoundwoodGovernment Share of RentRents Uncaptured by the Government3024502620234630102242350213840Notes related to above table:The above table assumes a world price of US$100 for a cubic meter of Indonesian timber. This price represents an average of the prices of red meranti (which sells for US$125/m3) and mixed hardwoods (which sell for US$75/m3). The table produces a series of calculations based upon what was until recently the roundwood export levy of 30%, the current levy of 20%, the projected year-end levy of 10%, and no export taxes at all. The numbers used for cost to producer include a profit rate of 25%, a discount rate of 25%, and aninterest rate of 25%. Government share of rent includes revenues not only from export tariffs, but also from corporate tax, forestry royalties and reforestation fees. All figures in the table were calculated using the ITFMP’s Forest Concession Model(Scotland and Whiteman 1997a).While the rents that could in theorybe earned from the sale of Indonesian roundwood are huge, it should be pointed out that in reality Indonesian log exports have been forbidden since 1985. Between 1985 and 1992, if timber companies wished to export forest products, they did so by primarily by selling rough sawn timber or plywood. Then, since 1992, the government rendered the export of rough sawn timber impossible through the erection of a more-than-100 percent sawn timber export tax. Throughout the 1990’s, plywood has been the main export option available to the Indonesian timber industry, although moldings and pulp exports have taken on a growing importance over time. However, before the onset of the monetary crisis, the economic rent that could be earned from the export of plywood did not all go to plywood manufacturers. Some was raked off by Apkindo, the Indonesia plywood producers association. The amount that did go to plywood manufacturers is shown at the bottom of the following table, while the amount that went to Apkindo is designated as “Association Fees” and “Marketing Fees.”