Indonesia's forests of corruption

As the public servants of Indonesia's Forestry Ministry stand waiting for the lifts, they are assailed by warnings against graft.

"Stop bribes, corruption," says a large sign on level three. "We officers of the Ministry of Forestry are anti-bribes," asserts another.

It would seem patronising if it were not so necessary.

"The forestry sector," said Chandra Hamzah, the deputy chairman of Indonesia's Corruption Eradication Commission, in 2010, "is a source of unlimited corruption."

The department earns $15 billion a year in revenue from selling forestry permits and the investors with the deepest pockets are those who want to log forests or turn them into plantations. The illegal trade in logging and forest concessions, fuelled by bribes, cronyism and corruption, is invisible but probably many times larger.

On climate change, Indonesia is being pulled in two directions. Politically it appears serious about the task of reducing its emissions, 60 to 80 per cent of which are due to deforestation. The President, Susilo Bambang Yudhoyono, has pledged to reduce emissions by 26 per cent without international help, and by 41 per cent if such help is forthcoming.

But economically, the drivers of deforestation have not changed. There is big foreign cash to be earned as a coal and timber producer and the world's largest exporter of palm oil.

Into this messy context five years ago walked an experienced environment project investor, the American Todd Lemons, wanting to establish a Reducing Emissions from Deforestation and Degradation (REDD) scheme to sell carbon credits to the world.

By July 2010, Lemons had jumped 11 of the 12 hurdles mandated by the Indonesian bureaucracy, spending $2 million in the process. He believed his 90,000-hectare Rimba Raya project on Kalimantan would be the first to sell carbon credits from Indonesia into the world market. Rimba Raya was intended to produce 100 million tonnes of credits over its 30-year life and he had forward contacts in place with the Russian gas company Gazprom to buy them. All he needed was the forestry minister's approval.

But on the verge of success, he was informed the ministry had halved the size of Rimba Raya, making it unviable. The rest of the land was signed over to a palm oil company, PT Best Group.

The project went into limbo, and, almost two years later, there it remains. Lemons and his business partners declined to comment.

It is understood in business circles in Indonesia that Rimba Raya fell foul of nationalist sentiment by announcing the deal with Gazprom too early.

Hadi Daryanto, the quixotic secretary-general of the forestry ministry, told The Sun-Herald that Rimba Raya was just "a big noise".

"They were here from Singapore, [asking], 'Why you kill the Rimba Raya?' I don't kill. They are stupid. They don't have the licence when they go to market."

Despite the government's support for REDD projects, private schemes in Indonesia have fallen by the wayside. Many of those surviving are run by the public sector, including Australia, but even these are foundering. The flagship program, the Kalimantan Forests and Climate Partnership, set up with money pledged in 2007 by John Howard, has been "quietly but drastically scaled back", according to a report from the Australian National University. The area now being worked on is just over 10 per cent of the original target and the Australian Department of Climate Change concedes that getting the support of local people has been difficult.

Norway has also come into Indonesia with $1 billion to try to fix its institutional problems. So far, those problems are so deep, the Nordic country has only been able to disburse $30 million of its money.

Money-makers such as Macquarie Bank and Merrill Lynch-Bank of America have not given up. Macquarie's Brer Adams is armed with a $25 million fund, "BioCarbon" and is hunting for REDD projects in Indonesia, and Merrill Lynch's Abyd Karmali said he was still keen to develop "instruments" to allow his clients to invest in REDD.

But the most prospective private REDD project is run by an Indonesian company, PT Rimba Makmur Utama. At the helm is Dharsono Hartono, an Indonesian who admits he is "crazy" to attempt it.

Born in Indonesia but educated at the US Ivy League university Cornell and a 10-year veteran of international banks in New York, Hartono has the credentials to navigate the tangle of bureaucracy, nationalism and corruption that is Indonesia. But even he has been trying for five years to get through the approvals process.

"To be successful in REDD you need time," he said. "At the moment the market [for REDD credits] is uncertain, the regulation is uncertain, the initial cost is high. You'd have to be crazy to do it."

Hartono's concession covers 200,000 hectares of forest in central Kalimantan, home to perhaps 4000 of the world's remaining 60,000 orang-utans. Just one hurdle remains - approval from the minister. It's the hurdle that tripped Rimba Raya and Todd Lemons. Hartono hopes to clear it, but he is not counting his chickens.

"I have to be realistic. I understand risk. If I'm not successful, I will have to cut my losses. The next 12 to 24 months will be a good test."

Whatever new climate change institutions have been set up in Indonesia, the real power still resides with the old, powerful economic ministries such as forestry.

Hadi Daryanto, the forestry department's secretary-general, says he is supportive of REDD.

In an interview with The Sun-Herald, he likens carbon to electricity - invisible, but a saleable commodity nonetheless. Daryanto also knows exactly how to calculate its economic value. Leaping to his feet and going to a nearby whiteboard, he sketches it out.

"If REDD is to happen, then the solution is about the payment for environmental services and the price of the carbon compared with the logs," he says.

"Logs are priced in the market at $US100 per cubic metre of log. It would have to be $US70 per tonne of carbon to compete.''

Australia's carbon tax will pay just one-third of this amount from July 1, and the European market is paying about one-seventh.

"Who will pay?" asks Daryanto. "If the price is below the [price of a] log, nobody wants to sell. They just cut the trees … It is a question of economics, not a question of conservation."

Sumber