Agriculture, Forestry and Fisheries 2014; 3(3): 181-188 Published online June 30, 2014 (http://www.sciencepublishinggroup.com/j/aff) doi: 10.11648/j.aff.20140303.17 Principal-agent relationship in policy implementation of the use of forest area for mining activity, Indonesia Manifas Zubayr 1 , Dudung Darusman 2 , Bramasto Nugroho 2 , Dodik Ridho Nurrochmat 2 1 Forestry Ministry of Indonesia, Jakarta, Indonesia 2 Department of Forest Management, Bogor Agricultural University, Bogor, Indonesia Email address: manifas_zaf@yahoo.co.id (M. Zubayr) To cite this article: Manifas Zubayr, Dudung Darusman, Bramasto Nugroho, Dodik Ridho Nurrochmat. Principal-Agent Relationship in Policy Implementation of the Use of Forest Area for Mining activity, Indonesia. Agriculture, Forestry and Fisheries. Vol. 3, No. 3, pp. 181-188. doi: 10.11648/j.aff.20140303.17 Abstract: The use of forest area (UFA) is defined as utilization of a portion of forest land for any development purposes outside forestry without changing its function and designation. This study is aimed to explore the relationship of principal and agent in the UFA implementation. Based on the agency theory and using descriptive-qualitative methods, this study identified specific relationship characteristics, i.e. the lack of authority in agent selection, the domination of principal on information, the moral hazard behavior of both principal and agent, the higher risk assumed by the principal, and the poor implementation of incentive structure. The relationship patterns did not occur only between principal and agent, but also among different principals and between one agent and another especially in cooperation and conflict relationship. This study confirmed that better implementations of UFA are strongly influenced by the efficiency of contractual agreement, the principal control on the process of UFA implementation, the agent commitment on the agreed contract and the amount of transaction costs. Keywords: The Use of Forest Area, Agency Theory, Principal, Agent 1. Introduction Forest management and mining in forest resource management perspective and mine resources, has undergone a paradigm struggle due to strong demands of all parties to fulfill the needs of both the raw material resources of the community both local, national and international. Those fulfillment is related to environmental and economic issues which then leads to a difference in opinions when states allow some licenses/concessions of mining operations in forest areas [19]. The most obvious problem is deforestation and degradation due to activities of forest concessions, encroachment and conversion of land, while mining generally revolve around the issue of land and environmental degradation. Reference [13] state that deforestation in various simulation models which conducted by that the dominant stimultant of deforestation are logging activities and mining (large scale), and also potentially illegal activities. To accommodate conflict interests of the management of natural resources, in particular between the interests of management and utilization of forest resources from mining, the government has devised UFA policies. UFA is defined as the use of a portion of forest land for development purposes outside forestry without changing its function and designation (Regulation of the Minister of Forestry No. P.16/Menhut-II/2014). UFA policies are set forth in the legislation, in the form of laws, regulations, President’s instructions until ministerial regulations as implementation of technical regulations. In essence, those laws and regulations set operation of activities outside the forestry sector in the forest area in the mechanism of leasehold of the forest area license (LFAL). Up to now, the Ministry has issued a license to use forest land for mining activities as many as 1,025 units, with an area of 3,392,898.87 hectares 1 . Basically, LFAL is a principal-agent (PA) relationship as a form of authority (contract) forest management from the government as the principal (P) to the mining company as 1 General Directorate of Planology, Ministry of Forestry. 2014. Progress of leasehold of the forest area license for mining activity until January 2014. Accessed at http://www.dephut.go.id/index.php/news/details/9468 on March 15 th 2014