CONTRIBUTION OF OIL PALM INDUSTRY ON ECONOMIC GROWTH AND POVERTY ALLEVIATION IN INDONESIA

CONTRIBUTION OF OIL PALM INDUSTRY ON ECONOMIC GROWTH ANDPOVERTY ALLEVIATION IN INDONESIA

Wayan R. Susila

Abstract

Key sectors or commodities are urgently required as leadingsectors/commodities to speed up the economic growth duringIndonesia in economic recovery stages. In line with this need,this paper try to assess the contribution of oil palm basedindustry on economic growth, poverty alleviation, and equityimprovement. Empirical studies show that the crop does have animportant contribution on those aspects. The crop has a positiveeconomic growth contribution as indicated by its growth in term ofinvestment, output, and foreign exchange earning. The oil palmrelated industries have had a significant contribution tohousehold welfare in term of income and asset. Around Rp 5-11millions or more than 63% of household income of smallholder comesfrom the oil palm based activities. The share of oil palm relatedasset to total household asset is also very significant, estimatedto attain 63%-72%. The small proportion (less than 10%) of poorpeople in oil palm communities can also be use as an indicator ofthe contribution of the crop in poverty alleviation. Moreover,income distribution in oil palm central area is good (fairlyegalitarian) with gini coefficient around 0.36. In maintaining andimproving the role of oil palm smallholder in economy growth,poverty alleviation, and better income distribution, there aresome factors that could undermine or depress the role of thecommodity. To overcome these inhibiting factors, some policyissues are also discussed within this paper.

Keywords: oil palm, economic growth, income equity, poverty,Indonesia

Abstrak

Sektor/komoditi unggulan sangat dibutuhkan sebagaisektor/komoditi yang mampu mempercepat pemulihan ekonomiIndonesia. Sejalan dengan hal ini, paper ini akan mencoba menilaikontribusi dari industri berbasis kelapa sawit dalam pertumbuhan,pengentasan kemiskinan, dan perbaikan distribusi pendapatan.

Hasil studi secara empiris menunjukan bahwa industri tersebutmemang mempunyai peran penting dalam ketiga aspek tersebut.Pengembangan komoditi kelapa sawit mempunyai dampak positifterhadap pertumbuhan ekonomi yang ditunjukkan dalam halpertumbuhan investasi, output, devisa negara. Industri berbasiskelapa sawit mempunyai kontribusi signifikan terhadapkesejahteraan rumah tangga dalam hal pendapatan dan aset. SekitarRp 5-11 juta atau lebih dari 63% pendapatan rumah tangga berasaldari usaha kelapa sawit. Kontribusi usaha kelapa sawit terhadapaset juga sangat signifikan dengan kontribusi sekitar 63%-72%.Peran untuk mengentaskan kemiskinan tercermin dari penduduk miskinyang jumlahnya sedikit (kurang dari10%) pada masyarakat yangmengusahakan kelapa sawit. Selanjutnya, distribusi pendapatanpada sentra produksi kelapa sawit cukup baik (fairly egalitarian) dengankoefisien gini sekitar 0.36. Ada beberapa faktor penghambat dalammempertahankan dan meningkatkan peran industri kelapa sawit dalampertumbuhan, pengentasan kemiskinan, dan perbaikan distribusipendapatan. Untuk mengatasi hal tersebut, beberapa isu kebijakanjuga didiskusikan dalam tulisan ini.

Keywords : kelapa sawit, pertumbuhan ekonomi, pemerataan pendapatan, kemiskinan, Indonesia

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INTRODUCTION

Economic crisis hitting Indonesia since July 1997 has

paralyzed most economic sector in Indonesia. The rate of

inflation jumped to 77.63% in 1998 and the number of

unemployed went up substantially. Most economic sectors have

been severely hit by the crisis such that the Indonesia Gross

National Product (GNP) decreased to -13.2% in 1998. As a

result, the number of poor people increased followed by a

worse income distribution (Badan Pusat Statistik, 2001).

Unlike most sector and sub-sector, estate crop sub-

sector, dominated by smallholder, has demonstrated its

strength and resilience during the economic crisis. The

lesson that can be derived from this phenomenon is that the

sub-sector can be used as one of leading sub-sectors, not

only when the economy in booming situation, but also in the

crisis. In addition, various studies also indicate that the

sub-sector has played an important role in Indonesian economy

as source of economic growth as well as improvement of income

distribution. This implies that the sub-sector could be

treated as one of sub-sectors that can be used as a leading

sub-sector to speed up Indonesian economic recovery, either

in term of economic growth or equity.

Among estate crops developed in Indonesia, oil palm is

one of commodities that are perceived to have a potential in

economic development and poverty alleviation. The important

role of the commodity in the economic recovery can be seen on

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its impressive performance in the last to decades, even in

the economic crisis period. For example, the area of oil

palm plantation has experienced an 11% annual growth rate

while export volume around a 13% annual growth rate

(Direktorat Bina Produksi Perkebunan 2002). Study by Girsang

(1985) in North Sumatra and Riau, states that oil palm

development projects, especially nucleus estate crop

projects, have a significant contribution to growth,

indicated by output multiplier that is higher than 2. More

over, this study also indicated that oil palm development

project has a positive impact on farmers’ income. The similar

results were found by Winoto, et al., (1997) for some oil

palm nucleus Estate smallholder (NES) in West Sumatra, Riau,

South Sumatra, and West Kalimantan.

The general objective of this paper is to discuss the

contribution of the crop in economic development, poverty

alleviation, and income distribution. Results of a survey

conducted in Kampar and Musi Banyuasin are used to

empirically demonstrate the contribution of the crops. If the

crop has had a significant role on these aspects, then the

development of the crop should be given a higher priority in

order to speed up economic recovery program.

The selection of Kampar and Musi Banyuasin as case

studies is based on their representative ness. Using some

criteria, such as total area, the number of development

scheme, the role of the crop to rural household, employment

4

and output contribution, the regions are considered as the

most appropriate to represent oil palm smallholder.

CONTRIBUTION OF CPO INDUSTRY IN THE ECONOMIC RECOVERY

Contribution on Economic Growth

The economic crisis has hit almost all industry such

that Indonesian GNP experienced a negative growth (-13.2%) in

1998. This implies that total added value of most industries

decreased around 13.2% in 1998. Under this economic

condition, crude palm oil (CPO) industry has shown its

strength and resilience against the economic crisis. For

example, total investment; especially in term of oil palm

plantation area has been increasing. Since economic crisis

begun, Indonesian oil palm area has increased with around a

6.8 annual growth rate, from 2.3 million ha in the year 1996

to 3.584 million ha in the year 2001. Moreover, this growth

was contributed by all type of oil palm management, namely,

smallholder, government-owned state, and private estates. In

2001, around 53.1% of the area are under management of

private estate (PBS). The share of smallholder (PR) and

government - owned estate (PBN) is 31.9% and 14.9%,

respectively (Direktorat Jenderal Perkebunan 2002).

As seen in the Table 1, all indicators related to growth

indicate that oil palm industry has shown a significant

growth rate in the economic crisis. The average area before

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crisis was around 1.832 million ha, while that of after

crisis was around 3.051 million ha. CPO production (output)

has also increased at 5.8% annual growth rate in the crisis

period. Before crisis, the average CPO production was around

4.015 million tones, while after crisis was around 5.966

million tones.

Table 1. Contribution of CPO Industry on Some

Indicators of Economic Growth

Economic Indicator AverageBefore

Crisis

During

CrisisArea (million ha) 1.832 3.051Production /output (million

tones)

4.015 5.966

Export Volume (million tones) 1.781 2.700Export Value (US$ million) 646 1074Domestic Consumption (million

tones)

2.043 3.051

Note: Before Crisis: 1992-1996After Crisis: 1997- 2001

Another important economic contribution of CPO industry

during the economic crisis is in term of export or foreign

exchange earning. The average total export volume before

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crisis was around 1.781 ton CPO, while those in during crisis

was 2.700 ton CPO. In term of value, total export value

(foreign exchange earning) before crisis was around US$ 646

million, while that during the crisis was around US$ 1074

million. This implies that during the crisis, the volume and

value of CPO industry has been increasing. The realized

growth would have been higher if the government did not

stipulate a new policy to ban CPO export for several months

in 1998.

The output of CPO downstream industries has also

increased during the crisis. . This can be seen from the

increase in CPO domestic consumption with around a 6% annual

growth rate during the crisis. While the consumption in 1996

was around 1.26 million tones, it increased to 3.46 million

tones in 2001. The main use of CPO in domestic market is as

raw material for cocking oil as one of the strategic

commodity in Indonesia (Ditjen IPHK Depperindag 1996).

The future contribution of CPO industry in term of

economic growth is considered to be prospective. This is

related to the competitiveness of the product, especially

compared to other edible oils, such as soybean oil, sunflower

oil, and rapeseed oil. The first argument for these

phenomena is that CPO is considered as the most efficient

land use, leading to the lowest production cost. Land

productivity to cultivate CPO, soybean oil, rapeseed oil, and

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coconut oil is 3200, 332, 521, 395 kg per ha oil equivalent

(Ong 1992).

Another factor supporting this argument is that more

that 80% of world population, mainly in developing countries,

tends to increase their oil consumption. They tend to

increase the consumption of edible oil whose price is

relatively low due to relatively low income per capita

(Susila 1997).

The implementation of trade liberalization, especially

Uruguay Round (UR), has also strengthened the competitiveness

oil CPO in international market (Pasquali 1995). This is due

to the fact that most edible oils produced in developed

countries, such as soybean oil in the US and sunflower oil in

West Europe, have enjoyed a protection and government

subsidies. Susila (1998) in Pasquali (1995) estimated that

around 82% of total market expansion due to Uruguay Round

will be enjoyed by developing countries that producing CPO.

Using the efficiency of domestic resource use as

criteria, Indonesia is an efficient resource use country in

producing CPO. Susila (1998) estimated that the value of

private cost ratio (PCR) and domestic resource cost ratio

(DRCR) of Indonesian CPO which are lower than one indicate

the resource use efficiency of Indonesian CPO Industry. The

value of PCR and DRCR are 0.53 and 0.48, respectively. This

means that Indonesian CPO industry requires around US$ 0.5 of

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domestic resource to gain US$ 1 of foreign exchange. The

substantial depreciation of Rupiah has strengthened the

competitiveness of Indonesian CPO producers.

In capturing this market opportunity, Indonesia has

faced and will face a tough competition from Malaysia. In

general, Malaysia has a higher productivity of 3.66 ton CPO

per ha per annum, while Indonesia around 3.11 ton.

Moreover, Malaysia has more advanced CPO down-stream

industries compared to Indonesia. For example , Malaysia has

17 oleo chemical plants with capacity 1.3 million ton per

year, while Indonesia has only 8 plants with capacity of

around 0.8 million ton year. Moreover, while Malaysia

government strongly support CPO industries, Indonesia has

imposed an export tax that inhibits the development of

Indonesia CPO export.

Contribution to Smallholder Income

The importance of tree crops as a source of income,

especially in rural areas, has been well known. In general,

tree crop has a great contribution to the household total

income. Several studies, such as conducted by Winoto et al,

(1997), indicated that the share of tree crop income to

household total income is more than 65%.

A survey conducted in Kampar and Musi Banyuasin supports

these results of the previous studies (Table 2). As seen in

the table, the average total income of oil palm smallholder

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in Kampar and Musi Banyuasin is around Rp 18.91 million per

annum and Rp 11.08 million per annum, respectively. In

Kampar, the contribution of oil palm based activity to total

income is more than 60% or around Rp 11.5 million per annum.

Similar feature is also recorded in Musi Banyuasin with

contribution around 60% of total income. This implies that

oil palm has an important role in providing income in rural

areas.

Table 2. The income structure of Oil palm household in

Kampar

And Musi Banyuasin  Kampar Musi Banyuasin

Source of Income ValueContributio

n ValueContributio

n

 (Rp peryear) (%)

(Rp peryear) (%)

Owned Farming11,780,516.

56 62.276,595,300.0

5 59.48

1. Oil-palm-based farming11,491,379.

30 60.746,640,616.9

2 59.892. Food crops 296,372.55 1.57 28,366.46 0.263. Livestock/fishery -7,235.29 -0.04 -73,683.33 -0.66

Non-owned Farming 7,139,259.8

0 37.734,493,637.6

1 40.52Agricultural Sector 1,592,740.20 8.42 1,032,509.40 9.31Non-agricultural sector 3,353,382 17.72 2,102,017 18.96Special Income 422,058.82 2.23 461,247.86 4.16Other income 1,771,078.43 9.36 897,863.25 8.10

Total18,919,776.

36 100.0011,088,937.

66 100.00

Source: Susila (2002)

Contribution on Smallholder Asset

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Oil palm based activities is also an important

contributor to the total smallholder asset, an important

indicator of smallholder welfare. For example, the

contribution of oil palm related asset to total asset in

Kampar household is around 63% (Table 3). With total asset of

Rp 91.5 million/household, the contribution of oil palm

related asset is around Rp 58.4 million. In Musi Banyuasin,

the contribution is around 72.1% of total asset attaining to

Rp 63.1 million per household. These results of the survey

indicate that oil palm has an important role in household

asset. Considering that most household is transmigrant

participants who have no a significant asset, it can be

concluded that oil palm asset contribute significantly to

household current asset.

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Table 3. Asset Structure of Palm Oil Farmer in Kampar andMusi Banyuasin Regency

  Kampar Musi BanyuasinType of Assets Value Contribution Value Contribution

  (Rp) (%) (Rp) (%)

Field59,908,039.2

2 65.3246,905,555.5

7 74.28

1. Estate 58,391,421.5

7 63.6745,558,974.3

6 72.152. Rice field 245,098.04 0.27 85,470.09 0.143. Home yard 539,215.69 0.59 0.00 0.004. Fisheries 515,686.27 0.56 0.02 0.005. Livestock 69,558.82 0.08 38,888.89 0.066. Other 147,058.82 0.161,222,222.22 1.94

Non Field31,802,102.9

4 34.6816,240,314.9

6 25.72

1. House21,558,823.5

3 23.5111,248,717.9

5 17.812. Livestock 411,500.00 0.45 458,521.37 0.733. Agriculture equipment 349,877.45 0.38 352,269.23 0.564. Motor Vehicle 6,286,656.86 6.852,784,538.46 4.415. Household furniture 1,991,764.71 2.17 774,483.76 1.236. Saving 429,754.90 0.47 504,914.53 0.807. Jewelry 773,725.49 0.84 116,869.66 0.19

Total91,710,142.1

6 100.0063,145,870.5

3 100.00Source: Susila (2002)

Contribution to Better Income Distribution

Development of oil palm through various development

projects/schemes has an important contribution in improving

equity. This can be seen from a relatively better income

distribution of oil palm smallholder in Kampar and Musi

Banyuasin. Although the income distribution of smallholder in

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Kampar shows three groups, the income distribution is fairly

egalitarian with gini coefficient of 0.36. The similar

conclusion is also found in the case of income distribution

in Musi Banyuasin. Kampar as an example, the first group is

the poorest smallholders whose income is less or equal to Rp

10 million per annum. This group is relatively small,

accounting for around 8% of total population. The second

group is the majority whose income lies between Rp 10 – Rp 25

million per year. This group can be considered as the common

feature of smallholder income in Kampar, accounting for more

than 75% of total population. The third group is the richest

group whose income is more than Rp 25 million per annum.

This group contributes to around 13% of total population. The

income distribution is better compared to that in rubber NES

and cocoa development projects with gini coefficient more

than 0.4 (Anwar 2002).

Figure 1. Distribution of Household Income in

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KamparSource : Susila, W. R. (2002)

The variation of income is closely related to some

factors, such as asset ownership and saving investment

activities. The higher their productive asset is, the higher

their income is. Saving and investment activities are

perceived to have a great impact on asset and income. The

higher their saving and investment activities, the higher

their income.

Contribution to Poverty Alleviation

The development of oil palm is also considered as an

effective instrument to reduce or alleviate poverty in the

rural area. In Kampar, the proportion of poor people in oil

palm community is less than 5%. Similar feature is also

found in Musi Banyuasin with the number of poor people is

less than 10%. The small number of poor people can be

explained by the major role of oil palm as the main source of

income. Most NES participants have income more than Rp 10

millions per annum as each ha of their oil palm contribute to

Rp 5 million per annum. This figure is higher than poverty

line in Kampar and Musi Banyuasin, which is around Rp 7.1

million and Rp 5.0 million, respectively.

Other arguments that can be used to support this

condition are credit repayment and capital accumulation for

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replanting program. In general, oil palm smallholders have

been able to repay their loan faster than they planned (Table

4). With 30 NES project and total area of 151624 ha and

involving around 77096 household, the average credit

repayment has attained to around 84.81% of total credit.

Moreover, participants in 18 NES projects can be considered

to complete their loan repayment as their loan repayments are

exceeding 90%. All oil palm NES, except NES Kertajaya, is

predicted to be able to repay their credit.

Compared to repayment of other crops, such as coconut

and rubber, the credit repayment of oil palm NES is much

higher. For example, credit repayment of coconut and rubber

NES is 11.88% and 36.86%, respectively. This could be used

as an indicator that represents the ability of oil palm

smallholder to maintain their business. In other words, oil

palm smallholders have demonstrated their capability to

continue their business (Winoto et all., 1997 and Herman et all.,

2000).

Table 4. Credit Repayment of Tree Crop NES Participants

CommodityNES

Numberof NESProjec

t

Area(ha)

Number ofHousehold

Rate ofCredit

Repayment(%)

Number ofNES

ProjectCompletingCredit

Repayment*)

Oil PalmNES

30 151624 77096 84.81 18

15

RubberNES

30 151244 74370 36.86 0

CoconutNES

5 13288 6952 12.88 0

Tea NES 3 8233 22727 23.92 0Source: Direktorat Jenderal Bina Produksi Perkebunan (2001) and TimLembaga Peneltian IPB (2000)

Some studies shows that oil palm smallholders have

accumulated their capital as a preparation for replanting. A

study by Winoto et al. (1997) in Perusahaan Inti Rakyat (PIR)

Ophir states that oil palm smallholders have developed a

program as a part of replanting program. This program is

basically a saving program in which the participants have had

to save part of their income from oil palm that can be used

as capital to replant their oil palm plantation in the

future. This program calls Iuran Untuk Peremajaan Tanaman

Perkebunan (IDAPERTABUN). Under this program, the participants

have to save their income around Rp 40000 –75000 per moth,

based on their oil palm productivity or the age of their oil

palm plantation. A similar program has also implemented in

NES Sei Galuh, Riau by which the farmer has to save Rp 30000

per month.

INHIBITING FACTORS AND CONSTRAINTS OF OIL PALM DEVELOPMENT

Having a significant economic role, CPO industry has

faced and will face some inhibiting factors and constraints.

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This will force the industry to adjust those problems in

order to optimize the benefit gained from the changing

situation. Susila and Supriono (2001) identified some

inhibiting factors and constraints faced the industry in the

future, namely, increase in production cost, trade policy,

regional autonomy, environment issues, and social conflicts.

Implementation of Regional Autonomy

The implementation of the laws of regional autonomysince 2001 has had a substantial impact on the industry.Among the relevant laws, law No. 25/199 regulating therevenue share between central and local government has beenperceived to have a greatest impacts on the development oftree crops in the region (Poernomo 2002). The main ideabehind this law is fiscal decentralization that gives a wideauthority to local governments to manage and to allocate itsbudget and to collect their revenue.

The positive impacts of this law in term of policyefficiency have not been materialized. Most investors haveperceived that the implementation of the laws has increasedbusiness uncertainty. For example, there are no clearregulations related to land acquisition procedure and taxing.Moreover, wider authority of local government to collectrevenue has been implemented in term increases of retributionand local tax leading to an increase in production cost. Thissituation has created a pressure either to existingplantations or planned investments. In other word, positiveimpacts of regional autonomy such as efficiency increase and

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better allocation of resources have been not materialized,while the negative impacts have been immanent. This could beconsidered as some side effects of inappropriateimplementation of regional autonomy.

Processing Plant

The development of CPO plants cannot keep pace with the

development of fresh fruit bunch (FFB) production. For

example, total capacity of CPO plants in South Sumatra is

around 501 tones FFB/hour or all plant can process FFB

produced by around 231000 ha (Table 5). On the other hand,

total oil palm plantation in the province is around 368036

ha, implying that this province must increase CPO plant

capacity by around 685 tones FFB/hour or around 11 CPO plants

with the capacity of 60 ton FFB/hour. The capacity of

existing CPO plats cannot meet the FFB produced in the 16

province CPO producers. This situation has caused a serous

problem in Riau and West Sumatra in the year 2001, causing

some FFB produced by smallholders can not processed leading

to a decrease in FFB price.

Table 5 The Distribution and Capacity of CPO Plants inIndonesia

No Province Numberof

Plant(unit)

Capacity (ToneFFB/hou

r)

FFBProduction

Potency(ToneFFB/hou

Over/Under

Capacity(Tone

FFB/hour)

18

r)1. D.I Aceh 14 410 1067 -6572. North Sumatra 84 2879 3181 -2023. West Sumatra 6 240 880 -6404. Riau 44 2062 3388 -13265. Jambi 13 600 1423 -8236. South Sumatra 20 1155 1840 -6857. Bengkulu 6 230 390 -1608. Lampung 4 125 523 -3989. West Java 2 60 107 -4710. West Kalimantan 12 430 2058 -140311. Central

Kalimantan3 90

825 -70512. South

Kalimanatan3 110

707 -59713 East Kalimantan 3 130 775 -64514. Central Sulawesi 1 30 213 -18315. South Sulawesi 4 150 370 -22016. Irian Jaya 2 80 174 -94

Total 221 9136 17923 -8787Note: 1 tone plant capacity is an approximate to 200 ha plantationSource Direktorat Jenderal Bina Produksi Perkebunan (2001)

Trade Policies and Market Mechanism

A trade policy that is relevant to oil palm is CPO

export tax. The key issue of the policy is inconsistency of

the policy. The government policy to frequently change

export tax rate raises the risk of CPO industry.

Inconsistent trade policy will cause difficulties in

formulating long run development program (Susila and Supriono

2001).

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Market mechanism could be another important factor that

can significantly influence the development of tree crops in

the region. For non-NES market mechanism, the existing

problem has been low bargaining position of the smallholders.

This indicates by the facts that traders mostly determine the

quality and price of the products.

Under the NES marketing system, determination of product

quality and price are also the main problems. Determination

CPO rendement for oil palm has been a permanent problem in

NES. The causes of the problems are as follows:

The farmers have no enough knowledge to appreciate the

technique of measurement since they involves chemical

processes;

The farmer’s products generally are heterogeneous so

that there are always complaint from the farmers whose

products relatively having better quality.

Inefficiency of CPO plant causing the rendement to be

lower than the otherwise.

The determination of farm gate price has also been a

persistent problem. This stems from the fact that the

formula used to determine the price is based on 2-week

average prices. On the other hand, the prices have been daily

fluctuated causing a gap between the current market price and

price received by the farmers. This could be a result of

lack of socialization of the price formula. This problem has

been exaggerated by the fact that the prices offered by

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traders surrounding NES tend to be higher. This occurs

especially in the region where the plant capacity in the

region is much higher than the availability of the raw

material

3.4.8. Environmental degradation issues

Another business environment that could have significantimpacts on tree crops development in Kampar is environmentaldegradation issue. This issue has especially hit thedevelopment of oil palm that is the most potential area, suchas in Kampar. Some experts have claimed that the expansion ofoil palm has caused deforestation and monoculture practicesthat lead to environmental deterioration. Finally, they havealso claimed that the presence of oil palm enterprises hascaused land conflicts and local people have lost theiropportunity to improve their welfare. This has induced localpeople to plunder, either in term of oil palm plantation orproduction.

If this issue cannot be handled properly, thedevelopment of oil palm will be stagnant. The localgovernment should have well justified policies related to thedevelopment of tree crops, especially oil palm. The policiesshould be able to promote the development of tree crops inthe region, while the negative impacts of the developmentcould be minimized.

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SOME ALTERNATIVE POLICY ISSUES

Based on the in the previous, there are a great numberof policies and recommendation needed to increase thecontribution of CPO industry in economic recovery. However,only two categories of policy issues that are likely torealize are presented in this section (Table 6). The firstcategory is growth-related policies that are dedicated toaddress various policies to promote the role of oil palmsmallholder in regional economic development and to alleviatepoverty. The second is equity-related policies that arededicated to address various policies to improve welfaredistribution. The general features of the policies and theirlikely impacts on growth and equity are presented in thefollowing table.

Table 6. Some Policy Alternatives and Their Likely Impact onGrowth and Equity

Policy/Recommendation Likely impact onGrowth Equity

Formulation of a coordinatednational-regional productionpolicy

* *

Development of CPO plants in nonNES projects

** *

Development of super-mini CPOplant for remote oil palmplantation

** **

Reformulation of farm gate priceformula in NES marketing system

** **

Modification of CPO Export Tax *** *Comprehensive assessment onenvironmental impacts of oil palm

* *

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developmentNote:

***: Highly significant**: Significant*: Moderate

Formulation of a coordinated national-regional production

policy

In the near future, a relatively sharp development of

oil palm plantation in some provinces tends to be inevitable.

Local government policies such that in Some East Kalimantan,

Riau, Jambi, West Sumatra have set up a conducive business

environments to expand oil palm plantation. On the other

hand, the market expansion is limited to not more than 6% per

annum (Sultoni and Susila 1998). Therefore, a coordinated

national-regional production policy is essential to be set

up. This policy is aimed at coordinating oil palm plantation

in each regional in order to minimize the possibility of over

supply that can weaken the bargaining position of Indonesia

in international market. Moreover, this policy is also

proposed to minimize unnecessary and costly competition among

regions developing oil palm. This policy issue is very

crucial under the era of regional autonomy where some regions

plans to expand their oil plantations without accurately

considering market opportunity and competitive advantages.

Moreover, various local regulations that can inhibit the

development of oil palm industries (local tax and

24

retributions) should be adjusted to be consistent with the

national regulations and laws.

Development of CPO plants in non-NES project.

Development of CPO plants, either small or medium scale

is crucial, especially in the next few years. As discussed

before, the total capacity of CPO plants has been smaller

that the potential production of FFB. Moreover, the

development of self-supporting plantation in the last five

years, especially for palm oil, has increased rapidly.

Unless more CPO plants developed in the next few years, some

FFB produced by non-NES oil palm farmers will not be able to

be processed. This will depress FFB farm gate price, leading

to a lower farm income and welfare.

Development of super-mini CPO plant for remote oil palm plantation far from CPO plants

Development of self-supporting oil palm plantation has

caused a sharp increase in FFB production. Some FFB

production cannot be processed due to lack of CPO plants or

the plantation is remote from the plants. To overcome this

problems, development of super-mini CPO plants, managed by

farmer group, could be an alternative. Otherwise, the cost of

processing will be very expensive, CPO rendement will be low,

and the quality of the CPO will also be low.

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Reformulation of farm gate price formula in NES marketing system.

The current price formula has been caused some problems.

The first problem is that the price determination, in some

cases, has caused a significant difference between the market

price and the formulated price. The main cause of this is

the formulated price is based on the average last two-week

prices. To reduce this problem, the price formula should use

a closer reference price, such as the average of the last

week prices.

Another improvement that should be considered is the

formulation of CPO rendement. Following the existing

formulation, CPO rendement of smallholder in some regions, is

determined by using a rendement table, not on the basis of

regular laboratory analysis. Following the table, rendement

is fixed on the basis of the age of oil palm plantation and

the assumption that the FFB is harvested following

harvesting- standard criteria. In the field, the criteria are

not fully obeyed. As results of this situation, the use of

rendement table tends to be irrelevant. Therefore, the use of

regular laboratory analysis could be an alternative to

improve this situation.

Modification of CPO Export Tax

As discussed, CPO export tax has a significant impact on

various aspects of the CPO industries. To minimize the

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negative impacts of this policy, reformulation of the tax is

an important to discuss. Firstly, the tax must be fix, at

least for a certain period of time (for example for five

years). This is important to increase business environment,

especially on stability aspect. Secondly, considering

various aspects of the business, the tax should be

implemented when the price of CPO (FOB) at least US$ 300/ton.

Moreover, since variable levy is inconsistent with the trade

liberalization commitment, the fix rate will be preferable.

Based on CPO price distribution, the recommended export tax

rate is around 5.7 %.

Comprehensive assessment on environmental impact of oil palm development

In order to avoid unintended polemic of environment

impacts of oil palm plantation, the government together with

other stakeholders has to conduct a study to comprehensively

assess the impacts of oil palm development. The results of

this study are expected to be used as a guideline in

developing and managing oil palm plantation.

CONCLUSIONS AND POLICY IMPLICATIONS

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Key sectors or commodities are urgently required as

leading sectors/commodities to speed up the economic growth

during Indonesia in economic recovery stages. In line with

this need, oil palm based industry is perceived to be one of

the industries that can play this role. Its relatively fast

growth rate and resilience during the economic crisis are

indicators that support this argument. Oil palm is perceived

as one commodity that has a significant contribution to

economic growth, poverty alleviation, and equity improvement.

Empirical studies show that the crop does have an

important contribution on those aspects during the economic

crisis and recovery. The crop has a positive economic growth

contribution as indicated by its growth in term of

investment, output, and foreign exchange earning. The oil

palm related industries have had a significant contribution

to household welfare in term of income and asset. Around Rp

5-11 millions or more than 63% of household income of

smallholder in Kampar and Musi Banyuasin, for examples, comes

from the oil palm based activities. The share of oil palm

related asset to total household asset is also very

significant, estimated to attain 63%-72%.

The small proportion (less than 10%) of poor people in

oil palm communities can also be use as an indicator of the

contribution of the crop in poverty alleviation. In addition,

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the ability of oil palm smallholder to repay their loan and

to save part of their income for replanting program are also

indicators of a relatively high welfare of oil palm

smallholder. For example, the rate of credit repayment of oil

palm smallholder is more than 84%, much higher that those

attain by other estate crop smallholders. Moreover, income

distribution in oil palm central area is good (fairly

egalitarian) with gini coefficient around 0.36.

In maintaining and improving the role of oil palm

smallholder in economy growth, poverty alleviation, and

better income distribution, there are some factors that could

undermine or depress the role of the commodity. These factors

are (i) lack of coordination between national and regional

planning related to implementation of regional autonomy; (ii)

insufficient CPO plant; (iii) inconsistent national trade

policy (iv) less appropriate price determination in NES

project; (v) l environmental degradation issue.

To overcome these inhibiting factors, some policy issues

should be comprehensively formulated. Those policies are (i)

formulation of a coordinated national-regional production

policy; (ii) development of CPO plants, (iii) development of

super-mini CPO plant for remote oil palm plantation; (iv)

reformulation of farm gate price formula; (v) modification of

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CPO export tax; (vi) comprehensive assessment on

environmental impact of oil palm development.

30

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