As the world’s largest producer and consumer of palm oil, Indonesia relies on this commodity in major economic and social ways. In recent years, crude palm oil (CPO) exports have become Indonesia’s largest source of foreign trade, reaching $23 billion (IDR 310 trillion) in 2017 – the highest value ever – contributing 15.9% of the country’s total national export value. The sector also provides upstream jobs for 5 million on-farm laborers, and 16-20 million off-farm.
Yet it comes as no surprise that the magnitude of oil palm’s role as an economic driver also comes with undeniable environmental issues, both domestically and internationally. Many of these issues can be traced back to plantations in forest areas managed by smallholders, and a lack of enough support for the sustainability – and profitability – of these landscapes. In some cases, oil palm landscapes are not as productive enough, and come at the cost of surrounding forests.
This can result in smallholders missing out on potential income from oil palm production, as well as environmental services in instances where forests are involved: timber, non-timber forest products such as honey and medicinal plants, payment for environmental services from the government and other parties (CSO, bilateral funds etc.), and possibilities for private enterprise.
This is not to say the government has not made efforts. Namely, in 2015 the government imposed the CPO levy, mandating that palm oil exporters pay up to $20 to $50 for each ton of CPO. A portion of this money, managed by the Palm Oil Fund Management Agency, goes toward developing the sustainability of the palm oil industry, through efforts such as human resource development, research and development, promoting the industry domestically and abroad, plantation infrastructure and replanting. The other portion goes toward developing the biodiesel industry.
Since 2017, we – the authors of this article – have been part of collaborative efforts between the Centre for Research and Development on Social, Economics, Policy and Climate Change (CRDSEPCC) at the Indonesian Ministry of Environment and Forestry and the Center for International Forestry Research (CIFOR). We collaboratively analyze policies and decision-making processes on the collection and allocation of the CPO levy, examining how different actors at the national and the Central and West Kalimantan provincial level perceive its best use. We also examine how the levy can be harnessed as a fiscal incentive for sustainable palm oil management. Among the many allocations of the levy fund, we found that fiscal and capacity support for smallholder replanting is crucial to such efforts and to reduce pressure on forests.
Approximately every 25 years, oil palm plants cease being productive and need to be replanted. In Indonesia, there is currently an area of 2.4 million hectares of smallholder oil palm plantations that have reached replanting age. However, at the end of 2017, only about 2,942 hectares were replanted in South and North Sumatra – the replanting target for 2018, for comparison, is 185,000 hectares. In 2018 so far, replanting has only occurred in Riau.
This results in a much lower production of CPO than the country should be capable of producing. Forty-one percent of oil palm plantation land is managed by smallholders, who produce on average 2–3 tons of CPO per hectare per year – a rate that is approximately half that of large private estates. This is partially due to lack of funds for replanting, and due to lack of capacity to replant well, with certified seeds, proper fertilization and land-clearing practices that don’t involve burning. This hampers the productivity of plantations, keeping incomes low. In turn, this causes smallholders to expand their palm oil plantations into forest areas as a way of increasing income.
But to get to the root of the problem, the government established a replanting program using money from the CPO levy fund to help smallholders replant. Smallholders receive IDR 25 million per hectare that needs to be replanted – e.g., plants are beyond 25 years of age, or productivity is less than or equal to 10 tons of fresh fruit bunches per hectare per year. To cover the rest of the cost (which on average comes in at around IDR 50–60 million per hectare), smallholders can receive a special business credit with a five-year grace period on interest. A decree from the Ministry of Agriculture’s Directorate General of Plantations regulates all principles and criteria of palm oil replanting.
Yet, our research found that smallholders are still finding proper replanting to be very difficult, namely because in some places plantations are found in forest areas, while the fund’s main requirement for aid is that plantations not be in forest areas. Other barriers include incompletion of smallholders’ legal documents, lack of a proper database and data on smallholder plantations, farmers’ reluctance to replant due to a lack of other sources of income during the grace period and a limited operational budget for replanting.
Further, smallholders have difficulty accessing capital from banks when needed because the banks have no third-party guarantor smallholder replanting cannot meet the standard cost of replanting.
To overcome these obstacles and optimize the use of CPO funds, CRDSEPCC and CIFOR research teams have proposed several policy options.
First, to assist smallholders in replanting, a few things are needed on the ground: structured and qualified assistance, strengthened regional plantation offices with a CPO levy fund budget for replanting, allocation of budget to subsidize the loan interest for farmers and provide capital assistance during the grace period, and a 60% increase in allocation for replanting within the CPO levy fund budget.
Meanwhile, the government also needs to regulate the supply side of CPO following a drop in CPO prices through means such as President Joko Widodo’s moratorium on granting licenses to oil palm . In addition, there should be public transparency on the allocation of CPO levy funds, and a way to ensure that biodiesel producers receiving CPO levy funds meet sustainability principles. Certain conditions must also be applied to companies receiving a large portion of biofuel incentive from the CPO fund encouraging them to include smallholders in their sustainable palm oil supply and helping the latter improve practices. Lastly, the Palm Oil Fund Management Agency supervisory board should consist of a broader range of stakeholders.
Optimizing the use of CPO funds for smallholder palm oil replanting requires commitment from various stakeholders, synergies from several sectors, and considerable resources and willpower to overcome inevitable challenges along the way. But ultimately, with the right policy and support, the CPO levy fund can help smallholders increase the production of their plantations and protect forests too.
Watch video of workshop: Optimizing the CPO fund in supporting a sustainable palm oil industry and preventing deforestation
This research forms part of the Governing Oil Palm Landscapes for Sustainability (GOLS) project, which is supported by the United States Agency for International Development (USAID).
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