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Report from
Europe
A milestone for Indonesia＊s tropical timber in Europe
The Indonesian government and European Commission
(EC) have announced that the first FLEGT licenses will be
issued in November 2016. After 13 years of effort to
develop a framework to license the legality of all wood
exported from Indonesia to the EU, this is a major
achievement.
The following is based on an analysis of commentary from
the EFFT Newsletter and the EU FLEGT Facility.
For more see: www.flegtlicence.org and
www.ettf.info
The key issue now is whether the licensing system will
deliver in terms of improved export market access, sales
and profitability. The jury is still out on that and there are
downside risks in the short term, but long-term prospects
are good.
In the last step of the FLEGT licensing process, on 18
August the EC amended the FLEGT Regulation to include
Indonesia and its Licensing Information Unit under the list
of ※Partner countries and their designated licensing
authorities§. The regulation was also amended to include
Indonesian products in the list of ※Timber products to
which the FLEGT licensing scheme applies.§
The FLEGT regulation will enter into application on 15
November, making this the earliest date that Indonesia
may issue FLEGT licences. The actual date for issue of the
first licenses 每 whether on or shortly after 15 November -
will be agreed at a meeting of the FLEGT Joint
Implementation Committee on 15 September 2016. After
the agreed date, the EU will only accept FLEGT licensed
imports of regulated products from Indonesia.
The V-legal documents, issued since 2013 through
Indonesia＊s SVLK national certification system, will be
recognised and accepted as FLEGT Licenses for exports to
the EU from that date.
Indonesian products requiring FLEGT licenses in the EU
are essentially all those wood-based products that can be
legally exported from Indonesia in Chapters 44 (wood), 47
(pulp), 48 (paper) and 94 (furniture) of the Harmonised
System (HS) for international product nomenclature.
There are some exclusions, mainly products that cannot be
legally exported from Indonesia, such as logs and large
dimension sawn timber which cannot be FLEGT licensed.
The list of products requiring licenses differs in some
ways from the list of products covered by the EU Timber
Regulation (EUTR), for example wood seating from
Indonesia will require a license despite not being regulated
under EUTR.
Products made from rattan, bamboo and other non-wooden
materials, and paper made from recycled material, will
also be excluded and won＊t need a FLEGT-license.
However, paper products originating from non-wooden or
recycled material must be accompanied by a formal letter
from the Indonesian Ministry of Industry validating the
use of non-wooden or recycled materials.
FLEGT licensing follows concerted effort to rollout
SVLK
The announcement follows a concerted effort to rollout the
SVLK system throughout Indonesia＊s forest products
sector. The latest report by the EU-Indonesia VPA Joint
Implementation Committee (JIC) in May shows the SVLK
system had certified 23 million hectares of forest. and that
all large-scale primary and 82% of secondary processors
had been audited.
Exporter SVLK certification was at 95%, with the
remainder in process. Consequently, since V-Legal
documents' introduction under the SVLK in 2013, they
had been issued for 194 product types. Sales of these 每 to
200 countries, including all EU member states 每 totalled
US$23bn.
An update on sales value is not available, but it has clearly
risen significantly since, as the number of V-Legal
licenses issued rose from 354,000 to end May 2016 to
462,000 to end August 2016. The SVLK＊s underlying
structures have developed too, with 15,000 central and
local government, forestry personnel and community
leaders and 700 auditors now trained.
The independent forest monitoring network (JPIK), which
brings together civil society organisations to regularly
assess the system, has also grown to 407 individuals and
51 organisations.
With the vast majority of Indonesia＊s timber product
export categories to the EU covered by the FLEGT VPA
and the scale of the SVLK structure and licensing
operation, FLEGT national policing bodies in the EU, or
Competent Authorities (CAs), expect to be processing
significant volumes of FLEGT licensed shipments soon
after the first arrive before the end of the year.
High expectations of market advantage
The Indonesian government and industry are looking to
the FLEGT licenses to deliver significant market
advantages. Expectations are high as the license gives
Indonesian suppliers a green lane through the due
diligence procedures of the EU Timber Regulation so
there will be no risk of any EU importer being prosecuted
under the regulation when buying from Indonesia.
Minimising such risks is increasingly important to the
private sector in the EU, not only to avoid direct EUTR
sanctions - confiscation of timber, fines and possible
prison terms - but also for brand protection and to reassure
shareholders and lenders. Some governments in the EU
also explicitly recognise FLEGT Licenses as sufficient to
satisfy minimum criteria for public sector procurement of
forest products.
The EU private sector is clearly enthusiastic, and rather
relieved, at the imminent arrival of the first licensed
timber. Since the EUTR was introduced in March 2013,
EU importers have reported significant challenges in
gathering together the necessary evidence of low legality
risk in many tropical countries. The license means this will
no longer be an issue for Indonesian timber.
According to Andreas von Möller, President of the
European Timber Trade Federation (ETTF), "the lack of
results [on FLEGT licensing] after so much time and
energy spent by the EU was disappointing for many and
I＊d almost lost hope it could work out. But now
enthusiasm for the arrival of the first licensed timber is
growing the closer it gets. It's big news and will spread
quickly, once it＊s here, going far beyond trade insiders.
It＊s one of the best adverts for the EU timber import trade
generally and their commitment to legality and the tropical
trade in particular. It has potential to open new trading
value and volumes and impact on timber production§.
Andre de Boer, ETTF Secretary General, observed that the
FLEGT license ※should save time and costs, simplify
logistics and reduce corporate risk§. However, Mr de Boer
also stressed that Indonesia＊s success was just the "start of
the FLEGT licensing journey§ and the onus was now on
the EU trade to communicate its benefits to the market,
adding that ETTF's member federations are already doing
this increasingly vigorously.
※We must also maintain pressure for strict, uniform
enforcement of the EUTR EU-wide. Any weakness here is
a disincentive to supply and buy FLEGT-licensed timber,§
he said. ※We need a virtuous trading circle with rigorous
EUTR enforcement driving demand for FLEGT-licensed
timber."
FLEGT licensing challenges for SMEs
So there are challenges remaining to ensure full market
recognition of FLEGT licensing within the EU. There are
also challenges on the supply side. A key issue is to ensure
that any extra red tape and cost resulting from licensing in
Indonesia does not overwhelm market advantages.
This is particularly critical in a sector with very high
dependence on small and medium sized enterprises. Like
all certification systems, the unit costs of implementing
FLEGT licensing tend to fall more heavily on smaller
operators. These operators are also difficult to reach in
terms of communication and education and certification
bodies often lack capacity to provide adequate coverage.
Local press reports in Indonesia have highlighted these
challenges in recent months. In August, the Jakarta Post
reported that the costs of SVLK certification to individual
operators ranged from Rp 48 million (US$3,600) to Rp
200 million depending on business category.
Tempo, the Indonesia Weekly magazine reported
comments by Suryanto Sadiyo, deputy director of nongovernmental
organization Java Learning Center (Javlec
Indonesia), that many smaller furniture companies still do
not understand the SVLK system and are very reluctant to
pursue certification.
Suryanto added, that constant changes made to the SVLK
standard 每 which has been revised three times in 2009,
2014 and 2015 - had confused business owners when
applying for a certificate.
More positively, there are also reports that the Indonesian
central and regional governments are working together to
overcome obstacles for smaller enterprises. In a report in
the Jakarta Post in August, the DG of Foreign Trade at the
Trade Ministry, Dody Edward, is quoted to say that he met
with the Bali regional trade head to discuss provision of
subsidies for SVLK certification of SMEs.
He also recommended that regional governments work
with SMEs to develop cooperatives for group certification
so that the Rp 48 million cost burden of certification can
be shared.
Positive implications of FLEGT licensing
These reports, combined with the data on the extent and
pace of SVLK uptake in recent months provide
reassurance that FLEGT licensing will not be a significant
obstacle to smaller Indonesian operators selling into the
EU market.
Longer term, there are reasons to believe that licensing
may actually play an important role to facilitate trade for
smaller operators. Participation by communities and small
business groups has been an important feature of the
FLEGT VPA process from the start, and this is reflected in
strong support for the licensing process by industry groups
like ASMINDO, the largest furniture trade association in
Indonesia.
There are also likely to be economic advantages resulting
from implementing a single unified Licensing System
across all suppliers, rather than relying a range of different
private sector initiatives not necessarily well aligned to
national forestry regulations and practices and which don＊t
mutually recognise procedures and standards. Having a
single framework directly linked to national legislation
may be simpler and reduce costs in the long run.
And of course the system is not only about export
competitiveness, but also about increasing participation in
regulatory processes and preventing illegal logging.
This in itself has important business benefits, such as
increased supply continuity and reduced price volatility,
greater direct industry engagement in regulatory reform,
and potential for enhanced industry communication and
co-operation to improve marketing and encourage
investment and innovation.
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