The size of tropical forests in Indonesia is the third largest in the world. Approximately 70 million people, or 28% of the population of Indonesia, rely on the Indonesian forests for their livelihood. The Indonesian forest has been a place to live as well as a means of livelihood to local people. It has also been a way to bolster the insufficient national finances of the government. Today the Indonesian forest is degrading at its fastest pace in history, exacerbated by conflict of interests between local communities and the government. The Indonesian government faces a range of alarming challenges including guaranteeing local communities the right to use forests, while also ensuring sustainable forest management. Based on these observations, this paper focuses on KPHs (Forest Management Units) and Kemitraan (Forest Partnership), which are expected to be integral to the new system of governance for forests in Indonesia. The Indonesian government initiated the KPH system to delineate areas of jurisdiction over forests by management units, and to manage forests by forest management plan submitted by KPH. In addition, the Indonesian government initiated the Kemitraan system to manage forests and redistribute profits between concession holders and local communities, through contractual arrangements. KPHs maintain an understanding with local communities: KPHs secure management funds via Kemitraan for local communities in special areas (wilayah tertentu) for which concessions have never been issued, while local communities undertake to live and work in forests in sustainable ways. The merits of the Kemitraan system lie in the simplicity of its permit issuance procedure and reduction of transaction costs, compared to other systems like HKm (Community Forest) or HD (Village Forest). To fully enact the Kemitraan system between KPHs and local communities, national legislation would need to be reformed, in order to expand the tracts of potentially usable forest for local communities, and also to expand KPH’s authority by including non-concession areas to the range of special areas. Alternative plans should also be prepared in anticipation of financial problems such as insufficient funding. REDD+ financial support from developed countries can be one source of such alternative funding.