Graft threatens Indonesia's carbon offset billions: report

JAKARTA Tue Jan 12, 2010 11:48am GMT

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JAKARTA (Reuters) - Billions of dollars set to flood into Indonesia under a U.N.-backed forest protection scheme are at risk because of graft unless the country puts strong oversight mechanisms in place, a report released on Tuesday warned.

Indonesia has the world's third largest area of tropical forest and stands to gain billions of dollars every year from a proposed greenhouse gas offset scheme called reduced emissions from deforestation and degradation (REDD) that was formalized at recent global climate talks in Copenhagen.

REDD allows polluters to earn tradeable carbon credits by paying developing nations not to chop down their trees.

However, a two-year study by the West Java-based Center for International Forestry Research (CIFOR) warned that past and recent cases of corruption and financial mismanagement in Indonesia's forestry sector revealed systemic weaknesses that could scuttle REDD.

"Investors should be looking very carefully at the financial governance conditions in the countries where they will be investing their funds. Like Indonesia, many tropical forest countries have long track records of mismanaging public financial resources, particularly in the forestry sector," said the report's co-author, Christopher Barr.

A spokesman from the Forestry Department said the government was committed to transparency.

"Everything is now transparent, measured and monitored. Not just in the REDD sector but in all our financial management, it's now very tight," said spokesman Masyhud.

"It's not possible to play around. Every institution has an inspector general and we also now have the Supreme Audit Agency and the Corruption Eradication Commission," two agencies which are involved in the fight against corruption.

PAST PROBLEMS COULD RETURN

Indonesia last year set up a legal framework for REDD. Several pilot projects are under way and the governments of Norway, Australia, Germany and the U.S. have promised millions of dollars in funding for REDD demonstration activities.

The CIFOR report recommended Indonesia set up new mechanisms to monitor the money flowing into the country for REDD projects and to strengthen existing oversight bodies such as the Corruption Eradication Commission, known as the KPK.

The report exposed details of mismanagement of the Reforestation Fund, which was established in 1989 under former president Suharto and which collected billions of dollars in levies from timber concessionaires to pay for reforestation.

The CIFOR study was partly based on a previously unpublished 1999 audit by Ernst and Young, seen by Reuters, which found $5.252 billion was lost from the fund through systemic financial mismanagement and fraud between 1993/94 and 1997/98.

Control of the Reforestation Fund has now been transferred to the Ministry of Finance and institutions such as the KPK and Supreme Audit Agency have helped improve the situation since the fall of Suharto in 1998, said Barr.

"But significant problems have continued through the post-Suharto period, many of which raise fundamental questions about how future REDD payment schemes will be managed," he said.

KPK spokesman Johan Budi said the agency is now investigating senior forestry ministry officials and lawmakers suspected of taking bribes for a radio communications system contract.

"The problems that have plagued the Reforestation Fund over the last 20 years are likely to reoccur" without further strengthening of oversight systems, Barr said.

Indonesia last week revealed an ambitious plan to create an extra 21.15 million hectares (52.26 acres) of forest by 2020.

(Editing by Sara Webb and Sanjeev Miglani)

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