Compliance of smallholder timber value chains in East Java with Indonesia's timber legality verification system

Forest Policy and Economics 102 (2019) 41–50

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Compliance of smallholder timber value chains in East Java with Indonesia's timber legality verification system

T

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Depi Susilawatia, , Peter Kanowskia, Abidah B. Setyowatib, Ida Aju Pradnja Resosudarmoc, Digby Racea a

Fenner School of Environment and Society, The Australian National University, Acton, ACT 2601, Australia School of Regulation and Global Governance, The Australian National University, Acton, ACT, 2601, Australia c Crawford School of Public Policy, The Australian National University, Acton, ACT 2601, Australia b

A R T I C LE I N FO

A B S T R A C T

Keywords: FLEGT Legality verification Smallholder tree grower SVLK Wood value chain

The Indonesian Timber Legality Verification System (SVLK) has been developed primarily to address illegal logging in Indonesia, and is licensed under the European Union's Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan. While SVLK was catalysed by concerns about the legality of wood originating from natural forests, it applies to all wood production in Indonesia, including smallholders harvesting planted trees. This study investigates SVLK implementation in value chains originating from smallholder forests planted on private land in East Java Province, where these forests are important assets for both farmers and the forest industries. It follows value chains for two manufactured wood products, blockboard and plywood. There are specific SVLK requirements for each value chain actor, other than the market brokers in these chains. Results reveal the limitations of SVLK architecture in relation to smallholder value chains, variation in compliance practices, and points of ‘illegalisation’ and legalization within the value chains. The blockboard and plywood products from each case study chain claimed SVLK compliance. However, only one of the two case study chains for each product was compliant up to the blockboard or plywood manufacturing stage; and no distinction was made at this stage between SVLK-compliant and non-compliant wood. Consequently, none of the final products from any case study chain are SVLK-compliant. These results illustrate the challenges of designing and implementing timber legality systems for smallholder value chains, and suggest areas of focus to improve SVLK for smallholder value chains.

1. Introduction The large scale and substantial costs of illegal logging and trade in illegally-harvested wood from Indonesia's forests have been recognized for decades (Brown et al., 2008). In 2001, illegal production was reported to be between 52 and 70% of total log production (ITTO, 2001), corresponding to a financial loss of US$3.7 billion annually (Smith et al., 2003). More recent estimates have been lower, but still substantial: Human Rights Watch (2009) estimated losses due to illegal logging, forest corruption and mismanagement of about US$2 billion annually for the period 2003–2006. In 2013, around half the estimated volume of illegal timber in international markets originated from Indonesia, with a value of US$8.5 billion (Hoare, 2015). Indonesian initiatives to address illegal logging have been summarised by, among others, Obidzinski and Kusters (2015). In 2009, the Government of Indonesia (GoI) introduced the Indonesian Timber

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Legality Verification System, known as SVLK (Sistem Verifikasi Legalitas Kayu). SVLK was established as a hybrid system drawing on both regulation and forest certification (Cashore and Stone, 2012; Wiersum and Elands, 2013). SVLK aims to ensure that all wood in Indonesian market chains is harvested, transported, processed, and traded in accordance with national laws. SVLK was also part of the GoI's preparation for entering a Voluntary Partnership Agreement (VPA) under the European Union Forest Law Enforcement, Governance and Trade (EU FLEGT) Action Plan (Cashore and Stone, 2012; Obidzinski and Kusters, 2015). After the GoI signed the VPA in 2013, SVLK was implemented progressively: initially for the large-scale forest concessionaires and timber processing industries, and subsequently for smallholders and smallscale timber enterprises (Fishman and Obidzinski, 2015; Obidzinski and Kusters, 2015). In 2016, Indonesia became the first country to issue EU FLEGT Licences for wood exports, certifying legal compliance as the basis for entry to the EU market (EFI, 2016; EU, 2017).

Corresponding author. E-mail address: [email protected] (D. Susilawati).

https://doi.org/10.1016/j.forpol.2019.02.005 Received 6 July 2018; Received in revised form 8 February 2019; Accepted 20 February 2019 1389-9341/ © 2019 Elsevier B.V. All rights reserved.

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3. SVLK exemptions for small-scale actors

Smallholder tree growers and small-scale forest industries are important in some parts of Indonesia, particularly the island of Java (Race and Wettenhall, 2016). Indonesia's President Jokowi has restated the government's support for programs that incorporate farmers and cooperatives in the forest-based economy (Subekti, 2016). In 2012, the extent of smallholder forests and of small-scale timber enterprises in Java were 2.7 million ha and 121,438 units, respectively (BPKH, 2012; Sudharto, 2012); these smallholder value chains employ some 750,000 people (Obidzinski et al., 2014). A number of studies have investigated SVLK implementation for smallholders and small-scale industries; these have concluded that small-scale operators face more challenges, and receive fewer benefits, than larger scale operators (Maryudi et al., 2015; Obidzinski et al., 2014; Susilawati, 2013). As has often been the case with certification elsewhere (Durst et al., 2006; Muhtaman and Prasetyo, 2006), factors such as high audit costs, little or no price premium, overlapping regulatory regimes, and lack of knowledge and capability to comply with new legal requirements constrain the adoption of SVLK by smallholders and small-scale industries. These previous studies of SVLK and smallholders and small-scale industries have focused on the challenges facing growers and/or industries. This study complements earlier research by focusing on SVLK compliance along two important export-oriented smallholder timber value chains, a topic that remains underexplored. Using case studies in East Java, we investigate the structures of these chains, and the actors and their roles; explore SVLK compliance for each actor and chain; and draw conclusions about the implementation and improvement of SVLK as it applies to smallholder timber value chains.

For small-scale actors, there are two general exceptions to SVLK implementation as outlined in Table 1, relating to self-declaration in lieu of a timber legality certificate, and to group verification. In 2014, a Supplier's Declaration of Conformity (Deklarasi Kesesuaian Pemasok – DKP), a conformity statement made by the supplier which states that the supplied timber is legal, was introduced as an alternative to SVLK verification for certain small-scale actors. These actors – farmer tree growers, registered wood depots,1 wood artisans, and small-scale industries – are allowed to use DKP for wood that is sourced from private forests. By doing so, these actors do not have to be verified under SVLK, and wood harvested from their private forests is legal. Up to December 2015, small and medium-sized furniture and handicraft enterprises could also issue an export declaration without a V-Legal document (JPIK, 2016; Setyowati and McDermott, 2017). However, this declaration was not accepted by the EU as an alternative to the V-Legal document, and so this option was revoked for export products prior to the EU granting the FLEGT Licence in 2016 (Setyowati and McDermott, 2017). Actors can still use DKP to access domestic markets (MoEF, 2016). Since 2012, farmers do not require a harvesting permit (Ministry of Forestry Regulation P.30/2012); but they are required to have a legal transport document. For transport of wood originating from a private forest, one of two Wood Transport documents (Nota Angkutan or Nota Angkutan Lanjutan) may substitute for a DKP (MoEF Regulation P.85/ 2016 Jo. P.48/2017). These documents provide information related to the wood origin and destination, modes of transport, transaction date and consignment details,2 for transport from private forests to a wood depot or wood industries. A Nota Angkutan is issued by a farmer tree grower, and a Nota Angkutan Lanjutan by a wood depot owner, each Nota Angkutan refers only to wood from that farm or in a particular consignment. As there is no regulation specifically governing the transport document for processed wood, the MoEF has indicated informally that a Nota Angkutan Lanjutan can also be used to transport sawn wood from a primary to a secondary wood industry. Group verification of SVLK compliance requires assessment of the compliance of all members of the group; there is scope in the SVLK regulations for any non-compliant members to be excluded from the group to allow the rest of the group to obtain timber legality certification. Certain actors – farmer tree growers, registered wood depots, wood artisans, small-scale industry, and community-based state forest units – may apply for verification as a group as long as they are all located in one district or city. Group members may share the verification cost and receive financial assistance with the application costs from MoEF, Provincial Forestry Services, and/or NGOs.

2. The architecture of SVLK The architecture of SVLK has evolved since it was initiated in 2009 (Luttrell et al., 2011; Maryudi, 2016). There are two primary standards under SVLK: the Sustainable Production Forest Management (Pengelolaan Hutan Produksi Lestari - PHPL) standard, and the Timber Legality Verification (Verifikasi Legalitas Kayu - VLK) standard. The standards are defined by multi-stakeholder processes facilitated by the Ministry of Environment and Forestry (MoEF), and are regulated by MoEF (most recently, under Regulation P.30/2016). Independent verification of compliance against these standards is provided by Conformity Assessment Bodies (CABs) accredited by the National Accreditation Body (KAN). CABs also serve as the Licensing Authorities assessed and appointed by MoEF to issue documents confirming timber legality for export: either a FLEGT Licence for export to the EU, or a ‘V-Legal’ document for all other export destinations. The system accommodates, under certain circumstances, appeals and complaints about the results of verification or accreditation. The system also allows NGOs and civil society actors to conduct independent monitoring of both forest operations and the value chain, and bring complaints to CABs, in the first instance, and further to KAN. The network of independent monitoring bodies is known as “Jaringan Pemantau Independen Kehutanan (JPIK)” (Luttrell et al., 2011; Maryudi, 2016). SVLK also interacts with other regulations governing the timber processing industry, which is generally classified as either primary of secondary timber industry. The former, which uses logs directly, is regulated by the MoEF; the latter, which uses wood that has already been processed by a primary industry, is regulated by Ministry of Industry. Under SVLK, timber is considered legal only when all stages in the value chain - harvesting, processing, transport, and trade - are verified as complying with all applicable Indonesian laws and regulations, including but not limited to those defined by SVLK. The compliance requirements and indicators for Indonesian timber legality verification (SVLK) for each regulated actor are summarised in Table 1.

4. Analytical frameworks The study draws from a number of analytical frameworks. SVLK is an example of ‘hybrid’ forest governance mechanisms (Arts and Buizer, 2009; Cashore and Stone, 2012; Wiersum and Elands, 2013), which in turn exemplify approaches to smart regulation and collaborative environmental governance (Gunningham and Sinclair, 2017). These are characterised by using multiple rather than single policy instruments, and by involving a broad range of regulatory actors (Gunningham and Sinclair, 2017). We assess the compliance behavior of chain actors in 1 Under SVLK regulations, a wood depot (Tempat Penampungan Terdaftar/ TPT) is a depot of logs and/or processed wood originating from one or more private forests or the state-forest company Perum Perhutani, and owned by businesses or individuals approved by Provincial Forestry Agency in accordance with MoEF Regulation P.85/2016 Jo. P.48/2017. 2 Consignment details include the species, number of pieces, and volume of wood.

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Procedures of WHS, safety equipment, and record of work accident Labor union and no employee under 18 years AMDAL/UKL-UPL

Procedures of WHS, safety equipment, and record of work accident No employee under 18 years

43 N/A N/A

Exemptions for small-scale actors Group verification Self-declaration as SVLK substitute

Definition of abbreviations: Letter B/C, Girik: formal letter of land title. IUPHHK-HA: Izin Usaha Pemanfaatan Hasil Hutan Kayu-Hutan Alam (Permit of Natural Forest Concession). RKU: Rencana Kerja Usaha (Ten Years Planning). RKT: Rencana Kerja Tahunan (Annual Planning). PSDH: Provisi Sumber Daya Hutan (Provision of Forest Resources). DR: Dana Reboisasi (Reforestation Funds). SKSHHK-KB: Surat Keterangan Sah Hasil Hutan Kayu-Kayu Bulat (Legal Transport Document for Round Wood). WHS: Work, Health and Safety. SPPL: Surat Pernyataan Pengelolaan Lingkungan Hidup (Statement of Environmental Management). AMDAL: Analisis Mengenai Dampak Lingkungan Hidup (Environmental Impact Analysis). UKL: Upaya Pengelolaan Lingkungan (Environmental Management Report). UPL: Upaya Pemantauan Lingkungan (Environmental Monitoring Report). DKP: Deklarasi Kesesuaian Pemasok (Supplier's Declaration of Conformity). N/A: Not Applicable.

Notarial deed Deklarasi Kesesuaian Pemasok (DKP) or Nota angkutan

Large-scale 3 years Every year

SPPL

Offline system Nota angkutan N/A Indonesian legal wood

IUPHHK-HA, including map of the forest concession and its borders RKU/RKT PSDH/DR Online system SKSHHK-KB N/A Indonesian legal wood

Land certificate/Letter B/C/Girik, including map/sketch of the forests and its borders N/A

Natural forest concessionaires

Validity period of certificate and surveillance Business scale Small-scale Validity period of timber legality certificate 10 years Surveillance Every 2 years

Environment management

Fulfillment of labor rights

Compliance requirements and indicators Forest ownership or valid licence or industry permit Timber harvesting and payment of timber royalty Wood traceability system Timber transport document in domestic market Timber export document V-Legal stamp on the logs or timber products or timber transport documents Work health and safety

Farmer tree growers

Table 1 Compliance requirements and indicators for Indonesian timber legality verification (SVLK) for each regulated actor.

Notarial deed DKP or Nota angkutan lanjutan

Small-scale 6 years Every 2 years

SPPL or AMDAL/UKL-UPL

N/A N/A

Large-scale 3 years Every year

Procedures of WHS, safety equipment, and record of work accident Labor union and no employee under 18 years

Offline and/or online system Nota angkutan lanjutan N/A Indonesian legal wood

N/A

Primary timber industry permit

Sawmill industries

Notarial deed DKP only for domestic market

Small-scale 6 years Every 2 years

SPPL or AMDAL/UKL-UPL

N/A N/A

Large-scale 3 years Every year

Procedures of WHS, safety equipment, and record of work accident Labor union and no employee under 18 years

Online system Company receipt FLEGT Licence or V-Legal document Indonesian legal wood

Primary and/or secondary timber industry permit N/A

Wood panel industries

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2017). Additionally, the entire supply chain can be followed in each district, which facilitated fieldwork, and there have been no previous studies of SVLK implementation in these districts.

the context of the holistic compliance framework outlined by Parker and Nielsen (2017), which considers actors' motivations as economic, social and normative. We also draw on the concept of a continuum between legal and illegal timber production proposed by Richards et al. (2003), who introduced the concept of ‘legalization’, through which illegal timber is incorporated into legal value chains. We also use a value chain framework (Collins et al., 2015; Faße et al., 2009) to map the case study timber value chains, identify the chain actors and their roles, and explore the impact of actor behavior and interactions on SVLK compliance. The value chain framework has been widely used across many sectors and disciplines. In the forest sector, value chain analysis has been used to examine market structure and power relations between actors in timber value chains (Aoudji et al., 2012; Gellert, 2003); and to investigate illegal forest harvesting in Vietnam and Cameroon (Sikor and To (2011) and Cerutti et al. (2013), respectively).

5.2. Data collection We used multiple data collection methods. Firstly, we reviewed the literature and regulations related to SVLK and wood value chains in Indonesia. Secondly, we investigated the case study value chains following methods outlined by Collins et al. (2015) to map the chains. We conducted semi-structured interviews with value chain actors and key stakeholders in Districts A (20) and B (15), and with key stakeholders (16) at the provincial and national levels (Annex 1, online). To identify value chain actors, we first used informal networks among actors to access the case study blockboard and plywood industries, then traced back along each chain to identify actors at each stage. We sought to interview multiple informants at each stage of each chain, for triangulation, and were successful in doing so for all but the case of market brokers; it proved difficult to locate and interview these actors, and we interviewed only one in each district. Key stakeholder interviewees were identified through snowball sampling; as above, we interviewed more than one of each actor group, other than where there were only single actors (Annex 1, online). The guide questions used in open-ended interviews are presented as supplementary online material. Lastly, we conducted on-site participant observation of wood harvesting from private forests, of wood trading and transport, and of primary wood processing. Fieldwork was undertaken by the primary author in December 2016 and January 2017. Notes were taken at each interview, and interviews were recorded with permission. Interview notes and transcriptions of recordings were summarised and validated using the field notes from participant observations, and then collated. Actors and districts are not identified to protect actors' identities.

5. Research methods 5.1. Case study location and characteristics The research focused on two case studies of smallholder wood value chains in East Java Province, Indonesia. This province is the largest in the island of Java, with an area of 47,799 km2; it is 43% forested, with large areas of both state and private forest (1,361,060 ha and 681,365 ha, respectively) (BPS, 2016). The forestry sector is one of the predominant sources of livelihoods for most people living in rural villages in the province (BPS, 2016). State forests are owned and managed by the GoI, and comprise each of production, conservation and protection forests (McDermott et al., 2010). In East Java, production forests are managed by the state-owned company Perum Perhutani; the most important species are teak (Tectona grandis), pine (Pinus merkusii), damar (Agathis dammara) and mahogany (Swietenia macrophylla) (Perum Perhutani, 2018). Private forests are owned and managed by smallholder farmers, as part of their livelihood portfolio (Race and Wettenhall, 2016). Commonly, farmers use agroforestry systems, with teak and sengon (Paraserianthes falcataria) as the dominant tree species (Race and Wettenhall, 2016). The establishment of farmer groups in East Java was facilitated by stateinitiated social forestry programmes (Kusumanto and Sirait, 2002; Siregar et al., 2007). These groups typically receive research and technical assistance from government, universities and NGOs (Kusumanto and Sirait, 2002). Participants in these groups are more likely to adopt governance initiatives such as forest certification and SVLK than are non-participants (Maryudi et al., 2015; Race and Wettenhall, 2016). Less than a quarter of farmer groups (49 of 238) in East Java Province had obtained a timber legality certificate by 2016; the area of SVLK-verified private forest in the Province was 39,747 ha, viz. c. 6% of the provincial private forest area (Dishut Jatim, 2016). The most recent estimates of annual wood volumes harvested from state and private forests in East Java are, respectively, 350,031 m3 (Perum Perhutani, 2018) and 1.7 million m3 (Sudharto, 2012). The wood processing industry is one of the most important economic sectors in the province (Aldianoveri, 2012), with 1022 primary and 5076 small-medium secondary registered processing unit (Dishut Jatim, 2015, 2017), and many more unregistered. We selected the two case study districts (hereafter, A and B) of the 29 in East Java. Each has a large area (> 50,000 ha) of private forest, a moderate or large number of forest grower groups and registered primary forest industries (between 50 and 100 of each in District A, and between 100 and 200 of each in District B). Therefore, smallholder wood value chains are important in each district, and sufficiently representative of those in the province more generally. The final products in the case study value chains were panel products: blockboard in District A, and plywood in District B; these are the two most common products from smallholder wood value chains in East Java (MoEF,

6. Results 6.1. Mapping the case study timber value chains The two end products that were the subject of our case studies are blockboard and plywood. Blockboard is a wood panel product which comprises both “face and back” (veneer) on “bare core” (sawn wood). The veneer is made from meranti (Shorea pinanga) logs sourced from natural forest concessionaires outside Java, usually in the islands of Kalimantan and Maluku. The bare core is made from sengon logs from farmer tree growers in and adjacent to District A, processed first into sawn wood which the blockboard industry located in District A then processes into bare core. Plywood is a sheet material manufactured from thin layers of wood veneer that are glued together. The plywood industry is located in District B, and the raw material used to produce veneer is sengon logs from farmer tree growers in and adjacent to District B. For each product, we studied two value chains, which are represented in Fig. 1. 6.2. Value chain actors and SVLK compliance The four case study value chains (Fig. 1) comprised two ‘shorter’ chains (VC1 and 3) in which wood panel industries sourced wood relatively directly from growers, and two ‘longer’ chains (VC2 and 4) in which market brokers were involved. The characteristics of, and similarities and differences between, these chains are evident in Fig. 1; we discuss them below. The value chain actors had different levels of knowledge of SVLK: some farmer groups, some sawmills, and both wood panel industries were familiar with it; but both the market brokers and all the individual farmers we interviewed claimed that they had never heard of SVLK. 44

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Value Chain (VC) Actors

Actor code

Blockboard Value Chain VC1 VC2 SVLK Actor SVLK compliance code compliance

Actor code

Plywood Value Chain VC3 VC4 SVLK Actor SVLK compliance code compliance

FB-1

FB-2 FB-1

Farmer tree growers - Unverified - Verified (group)

Natural forest concessionaires Market brokers Sawmill industries - Verified

FA-1 NFC

SA-1

FA-2 FA-1 NFC MB-1

Wood panel industry Buyers

BB

SA-2 SB-1 SA-3 SB-2 BB

- Domestic

DB FB

DB FB

- Unverified

- Foreign

MB-2

PW

PW

DB FB

DB FB

Key : Regulated by SVLK and compliant : Regulated by SVLK, but not compliant : Not regulated by SVLK : Require SVLK : Does not require SVLK

: Sengon logs : Meranti logs : Sawn wood : Wood panel products

Fig. 1. Case study value chains and SVLK compliance of value chain actors.

6.2.3. Market brokers Market brokers are common in Indonesian timber value chains (Purnomo et al., 2014; Race and Wettenhall, 2016). Brokers play an essential role for the smallholder tree growers, providing the knowledge, skills and financial resources to help them to harvest, sell, and transport their wood. The brokers' typical mode of operation – paying growers in cash immediately and purchasing all wood, without any quality grading – is very appealing to farmers; and is in contrast to the purchasing practices of the wood industries. Market brokers can be categorized into those who have or do not have a wood depot. In our case studies, both market brokers interviewed (MB-1 and MB-2) did not have a wood depot. To date, this category of broker has not been directly regulated by SVLK. The brokers bought sengon logs from individual farmers or farmer groups, whether verified or not. The brokers provided and completed a Nota Angkutan to accompany the logs being sold to the wood processing industries, both small and large-scale, whether verified or not. The two market brokers interviewed mixed the logs originating from SVLK-verified and -unverified private forests, or claimed to be the owner of those logs they had purchased from more than one farmer. These activities, which the informant brokers asserted were typical of those of other brokers, required them to falsify the Nota Angkutan.

6.2.1. Farmer tree growers In the case of VC2 and 4, individual farmers were not verified under SVLK. Farmers who were not members of a farmer group sold their wood to market brokers (MB-1 and MB2), to whom they delegated the completion of the Nota Angkutan. These farmers usually sell their wood when they have an immediate need for income (termed locally ‘slash for cash’), with little regard for the prevailing market conditions. We identified two farmer group verified under SVLK: FA-1 and FB-1 in VC1 and 3, respectively. These verified farmer groups bought and harvested standing sengon trees from their members, and sold and transported some of logs directly to verified timber processing industries (i.e. sawmill SA-1 and plywood industry PW), using a self-issued Nota Angkutan bearing a V-Legal stamp. However, these groups did not have enough capital to buy all their members' wood. Consequently, some of the members sold their wood and delegated the issuance of Nota Angkutan to market brokers MB-1 and MB-2 (see VC2 and 4). We also interviewed two unverified farmer groups FA-2 and FB-2 in VC2 and 4, respectively. These had a forest ownership document but did not meet other SVLK compliance requirements as specified in Table 1. Besides buying wood from their members, they also purchased wood from non-member farmers. They sold wood to the market brokers (MB-1 or MB-2), who issued a Nota Angkutan not bearing a V-Legal stamp.

6.2.4. Sawmill industries Sawmill industries only exist in blockboard value chains (VC1 and 2). In the case of VC1, we sampled one SVLK-verified sawmill SA-1, owned by a farmers' business cooperative. This sawmill has been assisted by the blockboard industry (BB), with which it has an agreement for timber processing and trading, to achieve SVLK verification. This sawmill only bought the logs from the SVLK-verified private forests that were members of the farmer cooperative FA-1. Sawmill SA-1 sold its sawn wood to the blockboard industry using a Nota Angkutan Lanjutan bearing a V-Legal stamp. In the case of VC2, we interviewed two verified sawmills SA-2 and SB-1. Sawmill SA-2 was assisted to become verified by the Multi-stakeholder Forestry Programme, but was unable to obtain sufficient SVLK-verified wood supply from verified private forests, and bought all its wood from brokers. The lack of verified wood supply in District A is because there is only one verified private forest group in the district,

6.2.2. Natural forest concessionaires Meranti logs for the blockboard industry originate mostly from natural forest concessions (‘NFC’) in Maluku and Kalimantan. Some twenty supplier companies have met PHPL and VLK standards. After harvesting, the company tags logs with an identity (ID) barcode and records the log data electronically through the national Administration of Forest Information System (SIPUHH). For each harvested tree, there are several logs with specific ID barcodes. Each carriage of logs is accompanied by the legal transport document for round wood (SKSHHKKB). This transport document is only valid for a one-time carriage to a single destination. The sampled log ID barcodes must match the barcode and information on the SKSHHK-KB to meet SVLK requirements.

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6.4. Modes of timber legalization in the case study chains

and it supplies all its wood to sawmill SA-1. Sawmill SB-1 operates as service provider for the same blockboard industry (BB) as District A. which bought sengon logs from both verified and unverified private forest groups in District B, and paid for the sawmill service provided by verified sawmill SB-1. This sawmill transported the sawn wood to the blockboard industry in District A using a Nota Angkutan Lanjutan bearing a V-Legal stamp. We also sampled two unverified sawmills (SA-3 and SB-2) in VC2. Sawmill SA-3 did not have a primary timber industry permit as it could not afford the verification cost. Sawmill SB-2 had a primary timber industry permit and met other SVLK requirements, but could not afford the SVLK audit cost. These unverified sawmills usually bought sengon logs from the market brokers, whether accompanied by a Nota Angkutan or not, and sold their sawn wood to the blockboard industry (BB) using a Nota Angkutan Lanjutan, bearing a V-Legal stamp. The Nota Angkutan Lanjutan was provided by the supply division of the blockboard industry.

Based on the interviews and participant observation, we identified two modes of informal trading which led to the process of timber legalization within the value chains (see Fig. 1). The first involved falsification by market brokers of the Nota Angkutan that they provided to the sawmills (SA-2 and SB-1) or plywood industry. The second involved falsification by the blockboard industry of the Nota Angkutan Lanjutan for all sawn wood that they purchased from sawmills SA-3 and SB-2. The first mode of timber legalization was found in VC2 and VC4 (Fig. 1). In these chains, the marker brokers purchased and mixed the logs from both SVLK-verified and unverified farmers. The brokers then sold these logs to the SVLK-verified and unverified sawmills in VC2, and to verified plywood industry in VC4, using a Nota Angkutan. The Nota Angkutan was provided and completed by the broker, who usually aggregated all harvested logs together under a single transport document, even though the logs originated from many growers. Consequently, the Nota Angkutan did not accurately record the origins of the logs that it verifies. The second form of timber legalization was found in VC2 (Fig. 1). Sawmills SA-3 and SB-2, neither of which is SVLK-verified, supplied sawn wood to the verified blockboard industry (BB). To do this, the two sawmills paid an additional fee to a staff member of the supply division of the blockboard industry; the industry's supply division then provided and falsified the information in the Nota Angkutan Lanjutan used to accompany this sawn wood. In both cases above, the blockboard or plywood products sold by these verified wood panel industries, either for export or domestic markets, were represented as meeting SVLK compliance requirements. However, in each case, the wood was non-compliant in at least one respect. Further, as noted in 6.3 above, wood that was fully SVLKcompliant (VC1 or 3) was mixed with non-compliant wood (VC2 or 4) by each wood panel industry, so that no wood products exported by either blockboard or plywood product industries were actually SVLKcompliant.

6.2.5. Wood panel industries The wood panel industry in each district has obtained SVLK verification, using their own financial resources. Both industries had a permit of primary timber industry with production capacity > 6000 m3/year, and a permit of secondary timber industry. These companies have fulfilled the compliance indicators of SVLK as presented in Table 1. SVLK verification requires that these industries must buy only SVLKverified wood, or sawn or privately-grown wood covered by a DKP or Nota Angkutan/Nota Angkutan Lanjutan (MoEF, 2016). The blockboard industry (BB) reported that it purchased sawn wood accompanied by Nota Angkutan Lanjutan from fifteen SVLK-verified sawmills; and meranti logs for veneer, accompanied by SKSHHK-KB, from twenty SVLKverified natural forest concessionaires (see VC1). Discussion with other actors revealed that BB industry also purchased sawn wood from unverified sawmill SA-3 and SB-2 (see VC2). The plywood industry (PW) bought sengon logs from market broker MB-2 who bought sengon logs from unverified individual farmers, both verified and/or unverified farmer groups (FB-1 and FB-2, respectively). Both blockboard and plywood industries sold their panel products to domestic and foreign buyers using a company receipt or V-Legal documents, respectively.

7. Discussion We focus our discussion on three elements of SVLK which our research identified as problematic: regulation of small-scale actors, the compliance behaviour of various actors in the value chain, and the phenomenon of wood ‘illegalization’.

6.3. Case study value chains' compliance with SVLK 7.1. Regulation of small-scale actors The compliance of actors at each stage of each of the case study value chains with SVLK requirements is illustrated in Fig. 1. Under current regulations, market brokers without wood depots are not directly regulated by SVLK; both case study market brokers are in this category. Two of the four value chains (VC1 and 3) could be fully compliant with SVLK indicators; but in the two others (VC2 and 4), some actor groups (farmer tree growers and sawmills) were not compliant. However, VC1 and 2, and VC3 and 4, respectively, converge at the wood panel industry stage; in neither case does the wood panel industry process separately the wood from those value chains. Consequently, the SVLK-compliant wood in VC1 or VC3 is mixed with the partially-compliant wood in VC2 or VC4, respectively, at the secondary wood industry stage. Thus, no blockboard or plywood products are actually SVLK-compliant. Wood panel industry informants reported that most domestic buyers do not require SVLK for the products they buy. The SVLK verification requirements of foreign buyers vary. About 30% of blockboard products from VC1 and VC2 are exported to Europe, and these must be SVLKverified. In contrast, the plywood industry (VC3 and VC4) does not export products to Europe, and its foreign buyers in countries that include Mexico, Singapore and Taiwan do not require SVLK.

The long-standing challenges of regulating small-scale actors – because of their numbers, the diversity and modes of their activities, and limited regulatory resources – were a significant part of the motivation for shifting from command-and-control regulation towards alternative policy instruments and smarter regulation (Gunningham and Sinclair, 2002; Gunningham and Sinclair, 2017). The self-declaration allowed small-scale actors producing for the domestic market, under which they report each wood harvesting and trading transaction and declare that their wood and wood based-products are legal through a DKP, is a particular form of self-reporting (Gunningham and Sinclair, 2002). They (ibid) point out that self-reporting is more favorable for smallscale actors than complying with a set of complex regulations. The third-party verification otherwise required by SVLK is of little relevance or value to farmer tree growers in Java, because their private forests are not a target for illegal logging or its regulation (Nurrochmat et al., 2016; Setyowati and McDermott, 2017). The DKP mechanism demonstrates the advantages for small-scale actors that are typical of self-reporting. It is more flexible, less complicated and much less costly compared to the verification mechanism. By using DKP, these actors do not have to prepare various documents required by SVLK (see Table 1), or pay the costs of verification and 46

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studies reported (Maryudi et al., 2015; Maryudi et al., 2017b; Setyowati and McDermott, 2017). In two chains (VC1 and 3, Fig. 1), this assistance was provided within the value chain: a wood panel industry paid the audit costs for two farmer groups and one sawmill, who in turn undertook to supply SVLK-verified wood to that industry. In other chains (VCs 2 and 4, Fig. 1), one sampled sawmill was assisted financially and through capacity-building by international donors and a local NGO; and one farmer group was assisted by national and local government financial and capacity-building programs to meet SVLK compliance requirements.

monitoring, which could be up to IDR 140 million (US$ 10,000) over the period of validity (Maryudi et al., 2015; MoEF, 2016). DKP is an affordable and cost-effective alternative to SVLK verification for actors who do not wish to participate in international value chains (Setyowati and McDermott, 2017). Our farmer and sawmill interviewees confirmed that the expense of verification, and the lack of a price premium for SVLK-verified wood, discouraged them from seeking SVLK verification. We also found that the DKP option is being abused by at least some market brokers and SVLK-verified large-scale timber industries. Obidzinski et al. (2014) also reported brokers providing a single transport document for timber they have bought from several smallholders, which means the origin of wood cannot be traced unambiguously. The blockboard industry's practice of facilitating falsification of the Nota Angkutan Lanjutan has a similar consequence. These results support the views of some of Setyowati and McDermott (2017:759)'s informants that self-declarations cannot be viewed as “credible proof of legality”, and suggest the EU was correct in not accepting self-declaration as FLEGT-compliant.

7.2.2. Large-scale actors – blockboard and plywood industries The two wood panel industries sampled have – typically for largerscale actors (Gunningham and Sinclair, 2002) - the characteristics and greater motivation, capacity, and exposure to deterrence mechanisms that foster compliance with SVLK. For the blockboard industry, their exposure to EU export markets, and their sourcing of face and back veneer from natural forest concessions, are central motivations. In contrast, the plywood industry does not have any market demand for SVLK-verified product, and sources wood only from private forests in East Java. Its primary motivation is therefore the legal requirement to comply with SVLK. However, neither wood panel industry actually fully complies with SVLK. This may be attributed to both industry norms and insufficient deterrence. The established practice in both industries has been to combine sengon wood from different supply sources without regard to its origin; in contrast to international forest certification systems (FSC, 2018; PEFC, 2018), SVLK regulations do not specifically require separation of verified and unverified wood, despite SVLK-verified products being represented as originating from only SVLK-verified wood. In conjunction with an apparent lack of regulatory oversight to identify this, the industries have continued this practice. Similarly, the falsification of documents by the blockboard industry supply division, and by market brokers or sawmills, had not been identified by regulatory agencies or mechanisms. For these reasons, the industries' assessment that deterrence risk is low appears justified.

7.2. Factors influencing actors' compliance with SVLK Although SVLK has been in effect since 2013, and is mandatory for all value chain actors in the terms described above, our results show that compliance is variable and partial (see Fig. 1). Parker and Nielsen's (2017) holistic compliance model is helpful in explaining these results. 7.2.1. Small-scale actors – farmers, market brokers and sawmills For small-scale actors, each of the economic, social and normative motivations identified by Parker and Nielsen (2017) were important. Firstly, as Maryudi et al. (2015) and Setyowati and McDermott (2017) reported, and as we discuss above (7.1), farmers and sawmills believed that the SVLK verification cost was too expensive and, in the absence of price premium, could see no advantage in complying with SVLK. Secondly, because the area of SVLK-verified private forests and number of SVLK-verified sawmills are so small (c. 5% of private forests and 15% of sawmills in East Java), there is little social or sector pressure for farmers or sawmills to comply with SVLK. Thirdly, farmers, brokers and sawmills were used to conducting informal timber harvesting and trading, and avoiding any form of formalization (Obidzinski et al., 2014), and so had little normative motivation. The characteristics of farmers, brokers and sawmills constrain their compliance with SVLK. As previously discussed, the purpose of SVLK is of little relevance to small-scale farmers in East Java, or the brokers who purchase or the sawmills that process their wood, because the legality of privately-grown wood is unambiguous (Nurrochmat et al., 2016; Setyowati and McDermott, 2017). Further, as others have reported (Maryudi et al., 2017a), most farmers, brokers and sawmills lacked knowledge of the requirements for SVLK compliance, or awareness of how to achieve compliance. Farmers and sawmills also lacked capacity to comply with SVLK requirements, even those intended to facilitate compliance by smallscale actors. They are not accustomed to recording the details of wood harvesting and trading (or those of any other crops), and those who are not members of cooperatives have no business systems to facilitate doing so. Market brokers, who may or could have this capacity, are not directly regulated by SVLK. These small-scale actors' lack of awareness of SVLK requirements also meant that they had no sense of risks associated with non-compliance. The apparent absence of regulatory oversight, either by government agencies or SVLK auditors, at the level of these small-scale actors meant that they also had no sense of deterrence. Conversely, from the regulator's perspective, the very large number of small-scale actors in these value chains presented significant practical challenges to enforcement. In our case studies, the compliance practices of farmer tree growers and sawmills are influenced primarily by external actors, as previous

7.3. Wood ‘illegalization’ under SVLK Richards et al. (2003) model of timber legalization was developed to explain processes by which illegal timber is introduced into legal value chains. Our case study value chains reveal both this and the converse phenomenon, in which wood that is harvested legally becomes ‘illegal’ through subsequent non-compliance with SVLK requirements. In our case studies, the market brokers falsified the information in DKP or Nota Angkutan for the logs they purchase from private forests, to attribute wood from many sources to a single recorded source; and a wood panel industry was forging Nota Angkutan Lanjutan documents, to attribute the source to a SVLK-verified sawmill. In the case study value chains, all sengon wood originates from private forests, which farmers are allowed to harvest as they wish: illegal logging, in the sense that SVLK seeks to address, is therefore not an issue. Rather, the practices observed in two of the value chains represent non SVLK-compliant wood as compliant, and so increase the volume of SVLK-compliant wood available to the wood industries. This is a novel case of wood that is legal at source becoming first illegal and then legalized through the actions of market brokers, who are unregulated by SVLK, and – in one case – through falsification of documents by a secondary wood industry. These findings suggest particular deficiencies in the architecture and implementation of SVLK that should be addressed, in East Java and elsewhere. They may also help to understand processes of timber legalization that could happen in other Indonesian timber value chains. For example, outside of Java, illegal wood originates mostly from forest conversion (TEREA et al., 2016); it could be legalized similarly through falsifying information in the requisite transport document where, for 47

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only sample a few log suppliers, and only checks the validity of the Nota Angkutan Lanjutan to the sawmill (MoEF, 2016). While more comprehensive auditing might be part of the solution, it will not necessarily address these issues, and is in any case difficult to achieve for the very large number of small-scale actors in these value chains (Gunningham and Sinclair, 2002). In relation to specific non-compliance practices, there is clearly a need to build awareness of the compliance requirements of SVLK for all actors involved in the value chains, perhaps complemented by exemplary sanctions of actors who persist in non-compliance. In general, actors are reluctant to comply with the existing regulations unless complemented by strong law enforcement and customer demands (Gunningham and Sinclair, 2002). A range of educational and awareness-raising campaigns by government, non-government and industry association entities will be necessary to reach the small-scale actors – farmers, brokers, transporters and processors – who are least informed, and often completely ignorant - of SVLK at present. Such programs might also encourage farmer tree growers to complete their own DKP/ Nota Angkutan, which would address one of the major points of noncompliance at present. Current levels of financial assistance are insufficient to support farmers who wish to become and remain SVLK-verified. Increasing the proportion of verified farmers would have a positive impact on the extent of SVLK knowledge and compliance, by progressively normalizing compliance. Capacity development to assist farmers to deepen their knowledge of timber value, and to build business networks with the wood processing industries, should likewise assist in facilitating a more virtuous circle of SVLK compliance. These investments should be complemented by instruments that compensate for the weaknesses of self-reporting mechanisms (Gunningham and Sinclair, 2002; Gunningham and Sinclair, 2017), which we will investigate in subsequent work. In conclusion, our results provide empirical evidence of many of the challenges identified by regulatory scholars (e.g. Gunningham and Sinclair (2002); Gunningham and Sinclair (2017)) of regulating smallscale actors effectively and efficiently. They also suggest that the Indonesian MoEF, as the agency responsible for SVLK, should strengthen its work with other stakeholders with interests in promoting timber legality in Indonesia, to address the system's limitations in relation to small-scale actors.

example, a large-scale processing industry receives wood from unregulated market brokers, or there is corruption in supply chain actors. 8. Conclusions Our research into smallholder grower value chains in East Java reveal both specific and systemic issues with the architecture and implementation of SVLK. Specific issues relate to particular forms of noncompliance by farmer tree growers, market brokers, sawmills, and wood panel industries. These can be expected to be indicative of practices more generally in smallholder wood value chains in East Java, where only a small proportion of growers and primary processors are SVLK-verified. Systemic issues are related to the architecture of SVLK as it applies to small-scale actors and to processing industries, the separation mechanism of supplied wood and to the adequacy of monitoring mechanisms of SVLK compliance. The consequence of these design and implementation issues is that, contrary to the claims made for them, none of the blockboard or plywood products originating from our case study value chains was SVLK-compliant. This is a particularly problematic outcome for one of the industries that exports to the EU under Indonesia's FLEGT Licence, which is predicated on SVLK compliance, and for the reputation of SVLK. In the context of both the regulatory literature and our operational experience, these results suggest several responses to address the problems identified. Given the central role of market brokers in both smallholder wood value chains and in facilitating non-compliance with SVLK, facilitating their compliance is an obvious strategy. Given their numbers and established mode of operation, this is not straightforward; a mix of capacity building, pressure and support from subsequent actors in the value chain, and more effective monitoring and enforcement, is likely to be necessary. A complementary approach could be to improve the access of small-scale actors to capital, and their connections to processes, so they could sell their wood directly to the industry. This may be feasible for farmer groups, but is unlikely to be for most individual farmers. This, in turn, suggests continuing emphasis on building the capacity and compliance of farmer groups. A second design issue is the lack of regulation specifying how wood processing industries should treat SVLK-compliant and non-compliant resource streams, and the attendant lack of accommodation for wood that is non-compliant in some respect. The case study blockboard and plywood industries were mixing SVLK-verified and non-verified wood, and representing all their production as compliant. They did so in part because no specific SVLK regulation precludes this. SVLK could adapt its certification of final products to emulate those adopted by the FSC or PEFC, which allow (variously) specification of the average proportion of certified wood in a product, or that the wood is from ‘Controlled’ sources, or that it is fully certified (see FSC, 2018; PEFC, 2018). Here, 100% SVLK-compliant would apply to wood products sourced fully from verified suppliers; SVLK Mix would apply to wood products sourced from verified and unverified suppliers; and SVLK Controlled Wood would apply to wood products sourced from unverified suppliers. In these cases, ‘unverified’ suppliers would be those who use DKP and/ or Nota Angkutan (Lanjutan). In the absence of price premium for fullyverified products, there would be no incentive for actors to counterfeit these documents. The third design issue is that associated with the limitations of SVLK compliance requirements and procedures. These are evident in a number of respects: failure to recognize that SVLK-verified and nonverified wood are not differentiated by secondary industries; in the verification of a wood industry business that was falsifying its supply documentation; and in the lack of recognition of non-compliant verification by market brokers, notwithstanding that they are not directly regulated. The form of verification required under SVLK, in which the verification process is based only on a checklist of SVLK compliance indicators (see Table 1), encourages a narrow procedural approach to verification. Further, under the SVLK standard, the auditor is required

Acknowledgements This research was funded by the Indonesia Endowment Fund for Education (LPDP) scholarship for the first author, and the Fenner School of Environment and Society, the Australian National University. We thank participants in the field research, and the first author thanks her family for their support. We also thank two reviewers and the editor of this journal whose comments and suggestions improved the quality and relevance of the paper. Ethics approval Research was undertaken under the Australian National University's Human Research Ethics Committee Protocol No. 2016/574, with confidentiality provisions to protect actors' identities. Appendix A. Supplementary data Supplementary data to this article can be found online at https:// doi.org/10.1016/j.forpol.2019.02.005. References Aldianoveri, I., 2012. The development direction of private forest as the supply of raw material for primary timber industry in East Java. Master Thesis In: Agriculture.

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