3. Operationalisation of the FELGT-licensing system
On 15 November 2016, Indonesia became the first country in the world to start FLEGT- licensing. As stated in Annex V of the VPA, FLEGT licences are issued at the point at which the consignment is consolidated prior to export. From November 2016 to July 2019, Indonesia reported that a total of 104 719 FLEGT licences, worth USD 2.87 billion in value, were issued for exports to all 28 EU Member States. These licences left Indonesia from 697 points of discharge, involving 1 191 registered exporters.
Since the start of FLEGT licensing until August 2019, based on findings from the first periodic evaluation, the system has overall performed satisfactorily. There have been reported cases of issues with FLEGT licences, however these make up of less than 1 % of the total number of licences issued. The most commonly reported issues were mismatches between the HS codes contained in the FLEGT licence and the HS codes contained in the EU customs declaration, as well as discrepancies between information contained in the shipping documents (for example, invoice or bill of lading) and the FLEGT licence. Other issues concern mismatching information on species, weight/volume on the licence and invoice. Factors contributing to these mismatches are described below.
3.1 Systematic factors
FLEGT licensing in Indonesia is paper-based. As close to 40 000 licences are issued in Indonesia annually, the amount of paper and the complexity of the paper trail that needs to operate uninterrupted in several directions at once is a challenge. Experience thus far shows that paper-based systems are prone to errors, even if the system itself is well designed. Some of the reported issues include the modification of the PDF files containing the embedded e-signature of the LAs, or not printing on the embossed paper supplied by LAs. In cases where consignment specifications change and the FLEGT licence needs revision, the process requires the paper licence to be sent back to the relevant LA to be cancelled and a new licence to be issued.
Besides the time factor, there are additional costs involved in licence issuance and printing that makes exporters, in particular small and medium-sized enterprises (SMEs), reluctant to revise faulty FLEGT licences. This has resulted in situations where consignments departed Indonesia with incorrect shipment descriptions in the FLEGT licences. Also, Indonesia has opted for a decentralised licensing system, where the control and power to issue FLEGT licences is devolved to 25 independent private sector LAs working in different parts of a vast country.
3.2 Operational factors
Operational challenges often involved exporters that are SMEs, in particular small and micro entities working in the furniture sector. During the purchase order phase, SME exporters often shared draft documents late or shared documents without HS codes. With the late or incomplete documents shared by SMEs, importers rely on their understanding of applicable HS coding and file the entry summary declaration accordingly. While importers could address this inconsistency two weeks before the consignment’s arrival, entry summary declaration entries are often not revised. There are also differences between EU FLEGT CAs and Indonesia in their interpretation of the essential character of goods that stem from varying level of emphasis on the production process, dimensions or application. For example, the classification of a product as wooden or rattan furniture, and different opinions/ interpretation of World Customs Organization rules.
The process for application for the issuance of a FLEGT licence is also a source of difficulties because, particularly among SMEs, there is a tendency to apply for FLEGT licences using draft or pro forma documents before the consignment is consolidated. SMEs resort to pro forma documents because: they handle complex or unorthodox consignments (for example, multiple products with different HS codes); accept new products for which HS coding is not always clear; conduct business with very basic operational means; and need to complete consignments in time for container queues and loading schedules organised by agent shippers. Other key issues encountered during the FLEGT licence application process include incorrect HS code determination, incorrect species identification, or incorrect understanding of the specification of the volume, weight and unit numbers.
3.3 Capacity and communication factors
There is a mismatch between the human and technological capacities of the Licensing Information Unit (LIU) established in the MoEF that oversees the licensing process and the magnitude of tasks it is expected to perform. As FLEGT licence difficulties emerged and inquiries for clarification from CAs began, the LIU faced challenges with timely and coherent responses. LIU staff did not have a defined communication strategy nor instruments to communicate efficiently. Also, to communicate and clarify these issues with LAs, the LIU often exceeds the 21 calendar days stated in the VPA. The language barrier (all communication is in English) is also a contributing factor on both sides.