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Making Responsible Indonesian Natural Forest Managers Financially Sustainable: East Kalimantan Prototype

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TERMS OF REFERENCE (TOR)

The Nature Conservancy (TNC) seeks a consultant to assist with four separate but related workstreams that are designed to improve the financial sustainability of responsible natural forest managers in the Indonesian province of East Kalimantan (Kaltim). These are as follows: 1. Feasibility study on the concept of using waste wood to produce biomass products:

a. If feasible, development of a business and investment plan for the concept; b. If feasible, analysis of potential local Forest Management Unit (KPH) involvement; and

2. Mapping of East Kalimantan forest product value chain and analysis of independent log prices.

The background and details of these workstreams and the proposal process can be found in this document. More details are available to interested parties upon request. Background TNC has been working in Indonesia for 25 years and currently has three major programs: the Indonesia Coastal Program (ICOP), the Indonesia Fisheries Program (IFP), and the Indonesia Terrestrial Program (ITP). Within the ITP, there are 5 main strategies being implemented: • Corporate Sustainable Practices (CSP): Promoting sustainable practices in resource-based industries

with particular focus on natural forest logging concessions, forest plantations, and oil palm plantations.

• Community-based Natural Resources Management (CBNRM): Strengthening community engagement in sustainable natural resource management while improving the community’s well-being.

• Conservation Land Management (CLM): Developing models and approaches for managing protected areas, particularly protection forests (hutan lindung) and essential ecosystems.

• Endangered Species Habitat Conservation (ESC): Supporting endangered species habitat conservation, particularly orang utan, through science, policy, and best management practices.

• Jurisdictional Forest & Climate Initiative (JFCI): Demonstrating jurisdictional approaches in green development at the provincial/district level.

For much of the past decade, the ITP has focused on implementing these strategies in the Indonesian province of East Kalimantan. Significant progress has been made on all fronts, including the natural forest logging concession component of the CSP where, together with partners, TNC has helped 27 natural forest concessions with the total of 2,772,860 hectares achieve mandatory and FSC certification. This represents 60% of the total natural forest concession area certified in Indonesia. Unfortunately, it has become apparent that these same concessions who have chosen to operate responsibly are facing serious financial challenges and are in danger of going out of business. There is substantial evidence throughout Indonesia that when concessions stop operating, the forests become highly susceptible to conversion to plantations or illegal logging due to abandonment. TNC has taken on


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the task of trying to identify solutions that will 1) keep these responsible East Kalimantan concessions in business and 2) potentially deliver a replicable model in other regions of Indonesia and the world. The first step in this effort was a DFAT-funded study which occurred during the last six months of 2017 and involved a detailed analysis of the revenues and costs of six concessions and the testing of three specific hypotheses selected by a group of key stakeholders in East Kalimantan. The overall conclusions of this study were as follows: 1. Revenues, rather than costs, appear to be the primary problem for the concessions, and 2. One of the three hypotheses (better utilization of forest waste, potentially to produce pellets for

export) has unique qualities that warrant further analysis. The conclusions of this study were also relevant to other TNC programs that will be contributing to the funding of the work contracted under this TOR. These are as follows: • ITP and TNC’s Global Forestry and Wood Products (GFWP) team have programs to empower local

communities and equitably resolve conflicts over natural resources. This initiative focused on forests with a large local community presence which could benefit from its success.

• GFWP has a program designed to develop new business and investment models that establish and/or expand sustainable supply chains that reduce pressure on forests. This initiative could serve as the basis for the creation of a sustainable wood supply chain from an area currently under intense deforestation pressure.

• ITP has a program to support the eight KPHs that have been established in East Kalimantan (see Annex 1). Due to a shortage of funding, the KPHs have been instructed to pursue opportunities to become self-funding and their involvement in this initiative could provide such an opportunity.

The purpose of this TOR is to detail the workstreams that will be contracted as a result of this study and its relevance to each of these programs. Workstream 1: Feasibility Study (FS) – Wood Waste Processor

The 2017 study concluded that the concept of better utilizing forest waste, which was one of the three hypotheses, could be impactful, feasible, scalable, and replicable. The study went on to suggest that the best way to do this would be to establish a regional aggregator and processor of the wood waste in one of the major river basins of East Kalimantan that would convert the biomass into a marketable end product, mostly likely FSC-certified wood pellets for export. This new revenue stream could go the concessions to make them more profitable and/or to the local communities as a solution to on-going conflicts. This could also serve as an incentive to other concessions in the region to become certified. The purpose of this workstream is to perform a detailed analysis of this concept to determine if and how it could be operationally and financially feasible in the river basins where FSC-certified concessions are located. The analysis will be both strategic and financial and consider the following factors: • Quantity and quality of available wood waste, • Complexity and cost of collection and transport, • Capital cost including design, construction and/or acquisition of facility, equipment, and other

necessary assets,


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• Access to and cost of operations including management skill, labor, power, fuel, and other necessary inputs,

• Downstream processing capacity, if necessary, • Complexity and cost of logistics to access markets, • Pricing and demand for end product(s), • Legal and regulatory barriers to implementation, • Support of state and local government and regulators, • Potential to incorporate local communities into the operation, and • Any other relevant strategic matters that arise.

This analysis will be conducted through research and interviews with key actors arranged by the consultant and/or ITP. Deliverable: A narrative report and financial model with findings and conclusions Deadline: 29 June 2018 Workstream 1(a): Business and Investment Plan If the concept in Workstream 1 is proven feasible, the purpose of this workstream will be to help the GFWP team to transform the feasibility study into a business and investment plan which will be used by TNC to raise support and funding. The particular areas that will need to be enhanced include: • Commercial: Describe the effort necessary to access target markets and identify any new products

and/or markets that could be accessed in the future. • Logistical: Identify specific options for transporting wood waste in and end product out of the

operation. • Operational: Identify the sources of all operational necessities including management, labor, utilities,

fuel, and inventory. • Partners: Identify key potential partners in the operation possibly including suppliers, technical firms,

buyers, buyers, government agencies, and local communities. • Financial: Identify potential sources of funding, conceptualize the optimal capital structure for the

business, and add returns analysis to financial model. • Risks and Mitigants: Identify all material risks and potential mitigants for each. • Implementation Plan: Develop preliminary timetable envisaged for preparation and completion. • Any other important strategic matters that potential investors would require to be addressed that

were not fully vetted during FS. This analysis will be conducted through research and interviews with key actors arranged by the consultant and/or ITP. This plan will be used by TNC to raise support and funding for the business model. Deliverable: Business and Investment Plan Deadline: 31 July 2018 Workstream 1(b): KPH Participation Assessment If the concept in Workstream 1 is proven feasible, the purpose of this workstream will be to evaluate the options for KPHs in East Kalimantan to participate in the supply chain and the capability of each KPH to fill these roles. For illustration purposes, one option for participation would be for a KPH to collaborate with


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logging concessions in utilizing logging waste or/and establish forest plantation within its area that could produce biomass for the regional aggregator. This scoping study will assess the KPHs based on the following criteria: 1. Proximity: Work with TNC GIS Specialists in Samarinda to assess which KPHs have a reasonable river

or road transportation distance and access to the aggregator. 2. Land Availability: Work with TNC GIS specialists in Samarinda to rank the remaining KPHs based on

the area of land within their boundaries that is available for the plantation forest establishment either directly managed by KPH or in partnership with community.

3. Interest Level: Meet with the leadership of the highest ranked KPH(s) to assess whether they are interested in supplying raw materials to the aggregator, and

4. Capability: Assess the capability of qualified and interested KPH(s) to: a) Write a good business plan on a timely basis, b) Demonstrate the availability of human resources (number, skills, etc.) needed by the interested

KPHs to be the business partner, c) Partnership with logging concessions and /or establish plantation forest, d) Dependably supply raw materials to the aggregator, e) Achieve PHPL status, and f) Achieve BLU status.

Deliverable: KPH assessment and recommendations Deadline: 31 July 2018 Workstream 2: East Kalimantan Log Value Chain Analysis During the initial study, it was observed that the log prices being paid to independent FSC-certified natural forest concessions are well below global market prices. The purpose of this workstream will be to try to identify (1) reasons for this pricing anomaly through value chain mapping and (2) solutions that could address it. This will involve: 1. East Kalimantan Wood and Wood Products Sector Map: Plot the locations of all known natural forest

concessions in East Kalimantan (map already exists), transportation nodes, downstream processors, and export points within the province and in all domestic regions that receive logs from East Kalimantan,

2. Downstream Capacity Assessment: Determine and/or estimate installed and utilized capacity of downstream processors,

3. Wood Flow Map: Apply known and estimated volumes between concessions and all plotted points to arrive at a wood flow by volume,

4. Value Chain Map: Convert volumes to values based on actual or estimated prices and evaluate where the value of logs is captured or lost throughout the value chain, and

5. Analysis: Identify potential options to bring log prices for independent certified concessions to global standards.

This analysis will be conducted through research, interviews with key actors arranged by the consultant and/or TNC, and inference/estimation. The latter will likely be necessary due to gaps in publicly- and privately-available information.


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Deliverable: Value chain analysis and recommendations Deadline: 28 September 2018 Summary of Deliverables The deliverables and deadlines specified in the workstream descriptions above are as follows:

Workstream Description Due Date 1 Feasibility Study for Regional Waste Wood

Processor 29 June 2018

1(a) Business and Investment Plan 31 July 2018 1 (b) KPH Participation Assessment 31 July 2018

2 East Kalimantan Value Chain Analysis 28 September 2018 Workstream Synergies It is important to note that, while these are listed as separate, there is significant overlap in the work that could be done more effectively. Qualifications Interested parties should have some combination of the following qualifications to conduct this work: • Insights and experience regarding natural forest management in Indonesia, • Experience developing business strategies for supply chain actors, • Capability to conduct research and analysis and provide strategic recommendations in English and

Bahasa Indonesia, and • Experienced and highly-qualified staff who are available to complete the workstreams within the

deadlines specified above. Proposal Elements Interested parties should submit a written proposal in English by March 26, 2018 which includes the following elements:

1. Detailed approach for each individual workstream. 2. Proposed cost for each individual workstream on a fixed cost basis, including expenses (maximum

one page). 3. Basic information on the proposing organization, including organization’s name, contact

information, and any past business relationships with TNC. 4. Description of the staff and team that will conduct the work described above (maximum two pages),

including sub-contractors, if applicable. Any subcontractors must be identified along with the work they will perform and a description of the rationale for using a sub-contractor.

5. Relevant experience and qualifications of the organization (maximum two pages; more detailed information may be included as an attachment to the proposal).

Questions regarding this process and proposal submission should be directed to Ruslandi at [email protected].


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Annex 1 - ‘Realized’ KPH in East Kalimantan, 2016

Source: TNC Indonesia, 2017

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