* Agency to combat fires by "re-wetting" dry peatland
* But still waiting for govt to allocate budget
* This season's fires already blazing in some places
* Choking haze often wafts into neighbouring countries
By Bernadette Christina Munthe and Kanupriya Kapoor
JAKARTA, April 4 (Reuters) - As forest fires raged like never before across Indonesia last year, President Joko Widodo announced he was setting up a special agency to tackle the annual scourge that shrouds parts of Southeast Asia in choking haze.
But, with this season's fires already blazing, the Peatlands Restoration Agency has barely got off the ground and has a huge task ahead of it.
Nazir Foead, who was appointed to lead the body, told Reuters it needed at least $1 billion in funding over five years, but that the government was unlikely to allocate a budget for another two months.
Foead, an environmental expert who was formerly the World Wildlife Fund's conservation director in Indonesia, so far has just a handful of staff and concedes the agency won't have the clout to force plantation companies to toe the line in helping restore dried-out peatland.
The fires are often started by palm oil plantation and paper firms or by smallholders who use slash-and-burn practices to clear land cheaply. Peaty soil, found in many parts of Indonesia, is particularly flammable when dry, often causing fires to spread beyond their intended areas.
"The authority to issue or freeze licences lies with the environment ministry and local governments, not with this agency," Foead said, referring to permits needed to operate the plantations that dominate swathes of the nation's landscape.
Much of Southeast Asia was blanketed in acrid haze for several months last year and, as pollution levels spiked, thousands of people were afflicted by respiratory illnesses, while tourism, schools and flights were disrupted.
The agency's goal is to prevent fires by "re-wetting" 2 million hectares (5 million acres) of drained and damaged peatland - roughly the size of Israel - with at least 30 percent of that carried out this year. The process involves raising water levels using dams and irrigation channels.
Nearly half the fires during 2015's prolonged dry season were on peaty soil.
But the agency's budget has not been decided yet, and it has been operating since it started in January using money from around $80 million pledged by donors.
Presidential Chief of Staff Teten Masduki said the agency would also have access to funds already allocated to the environment ministry as a stopgap until its budget was finalised.
"The agency is just in the institution building and staffing stage," Masduki said, adding the government remained optimistic the body would achieve its targets this year.
STATE OF EMERGENCY
As the agency looks to find its feet, fires are already flaring in some areas. Riau province on Sumatra island last month declared a state of emergency, with over 1,000 people deployed to manage the crisis.
Chief Security Minister Luhut Pandjaitan said the government would declare emergencies in affected areas earlier this year to ensure firefighting resources were deployed quickly.
"Last year we didn't declare emergency until September, when the fires were already widely spread, that was our mistake," he said last month.
President Widodo, who last year cut short a visit to the United States because of the disaster, has threatened to sack officials if they fail to contain blazes.
Foead and his fledgling agency want plantation companies to restore peatlands within their concessions.
"There is no other choice for companies but to restore or they will risk huge penalties," he said. Although he added that the agency would have no legal authority to enforce this.
NGO sources said the agency would likely face challenges in convincing companies and communities, used to slash-and-burn clearing, to take responsibility for damaged land.
Even getting relevant government institutions to cooperate in mapping and fixing the problem could be hard, said one NGO worker.
"(The agency) is having to fight to get basic data about land use and which companies are given permits," said the worker, declining to be identified due to the sensitivity of the issue.
Foead said, however, that the whole of the government was on board with the idea of the agency and that "everyone is cooperating".
He said he remained hopeful the agency had a chance of succeeding in the long-run because the initiative was a top priority for Widodo's administration.
(Additional reporting by Fergus Jensen in Jakarta and Rozanna Latiff in Kuala Lumpur; Editing by John Chalmers and Joseph Radford)
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