Indonesia Oil Palm Plantation

Oil palm, with the highest per hectare yield of all edible oils to date, is bound to become the most important vegetable oil in the world. In 2002, approximately 23% of world production and 51% of global edible oil trade was based on palm oil and palm kernel oil. In 2002, Malaysia and Indonesia accounted for 84% of global palm oil production. In 2004, the European Union was noted as the largest importer of palm oil products in the world and the Netherlands was the main importer within the EU. Crude Palm Oil consumpti[1]on grew by 90% from 1.7 million tons (Mt) in 1995 to 3.2 Mt in 2002. With a total import of 2.3 Mt, the Netherlands is the world's largest importer of palm oil products after India (3.5 Mt) and China (2.8 Mt).

Oil palm tree is a tropical plant belonging to the Palmae family. The plant was brought in to the country from West Africa. The first oil plantation was built in North Sumatra in 1911. The first large-scale Indonesian oil palm plantation was set up by Dutch traders in 1911, using the seed of these Deli-palms. Soon afterwards, British traders set up oil palm plantations in Malaysia as well. Until the 1940s palm oil production developed at a moderate pace in both Malaysia and Indonesia, as it was restricted mainly to use as a lubricant. A more rapid phase of expansion began in Malaysia in the 1950s and 1960s, which turned Malaysia into the dominant oil palm producer in the world.

From 1968, President Suharto started to invest again in the Indonesian oil palm sector by making direct investment via state run companies called Perseroan Terbatas Perkebunan (PTPs). During this period, the area planted with oil palm on government estates grew from 65,573 hectares in 1967 to 176,408 hectares in 1979. Most of these plantations were found in Sumatra, primarily North Sumatra.

In 1980s, the Indonesian oil palm plantations expanded rapidly notably smallholder plantations following the launching of the Nucleus Smallholder Estate (PIR) scheme. Under the scheme the nucleus company provided seedlings and prepared land for plasma plantations, and the plasma plantations were to sell their production to the nucleus company with a pre set price. The smallholder plantations expanded faster again with the launching of PIR scheme in the transmigration program in 1986. Private plantation companies have the largest oil palm plantations. In 1990s, many private companies built oil palm plantations with facility from Bank Indonesia (Indonesia Central Bank). State owned plantations under PT Perkebunan Negara (PT PN) were relatively unchanged in size.

In 1996, Indonesian government lifted ban on new foreign investment in the palm oil sector. The new policy attracted investors especially from Malaysia. In 1996, the government allocated 9.13 million hectares of land for oil palm plantation to boost development of the plantations that was expected to relegate Malaysia as the world's largest producer of palm oil. Papua accounted for 5.56 million hectares of the land. Sumatra had limited space for new plantations as it is also crowded with HTI projects and other plantation and farm projects. Investors, however, still preferred Sumatra as it had much better infrastructure compared with Kalimantan and Papua.

In 1997, the Indonesian government also banned new investment in oil palm plantation in Sumatra due to environment degradation. As a result investors built new plantations in West Kalimantan where lands were easily available and the infrastructure was relatively more adequate than in eastern part of the country. West Kalimantan had the third largest oil plantations. The government provided 5.5 million hectares of land for oil plantations all over the country. So far more than 2.1 million hectares of the lands have offered to investors but only half of which have been used. In 1997, National Investment Coordinator Board reported 105 new investment projects in the sector. Implementation of the projects, however, was hampered by the crisis. In 1998, there were only 21 new projects following the financial crisis.

In 1998, the government imposed a 40% export tax on CPO and derivatives resulting in a decline in exports--leading to a decline in production. In 1999 and 2000, production rose after the government cut the export tax to 10%. From June, 1999 to May, 2002, the price of CPO dropped to around US$ 400 per ton before rising to US$ 460 in January, 2003. The production rose from 5-6 tons of fresh fruit bunches per hectares in 1997--up to 10-11 tons of fresh fruit bunches per hectares in 2003.

The Indonesian exports of crude palm oil (CPO) leapfrogged while the export tax was slashed to 3% in Feb. 2001. In 1999, exports totaled only 1.46 million tons. The export volume rose to 5.48 million tons in 2001 and to 7.07 million tons in 2002 and to 8 million tons in 2003. With 411,261 hectares relegating South Sumatra, Jambi and Aceh, the export value of CPO was recorded at US$ 2.35 billion in 2002 up to US$ 3 billion in 2003 placing it among the top export earners outside oil and gas. Non-oil/gas commodities after electronics US$ 9.16 billion and textiles and garments US$ 7.05 billion and timber US$ 3.18 billion in 2003.

For 2010, Indonesia's production of palm oil is expected to overshoot international prediction of 12 million tons as projected by Oil World. On the other hand, Malaysia's CPO production rose from 8,386 tons in 1996 to 13,354 tons in 2003 or 49% of the world's production making that country the world's largest producer. Indonesia came second with production rising from 4.54 million tons in 1996 to 9.75 million tons in 2003. It climbed 25% to 9.16 million tons from 7.4 million tons in the previous year. In 2004, the production was predicted to reach 11.5 million tons. In 2004, it reached an estimated 11.5 million tons. Indonesia, therefore, is expected to relegate Malaysia in a few years to come. [2]

Malaysia, however, has long developed oleo chemical industry and it has become a major supplier of oleo-chemicals to the world market. In Malaysia, the government gives strong support or incentives to boost development of oleo-chemical industry, but in Indonesia there is no such incentive. The government gives the initiative to the palm oil producers or the private sector to develop oleo-chemical industry. They are left alone to face external and internal pressures in the form of demand for better quality, looting in plantations, conflicts with plasma farmers and extortion by hoodlums. Illegal levies and extortion forced CPO producers to seek a short cut to earn money by directly exporting CPO. They do want to take a long way which will mean facing more illegal levies and extortions. CPO exports could also face big hurdles with the government regulation issued by the previous government making it possible for the government to impose export tax of up to 60%.

The government, however, has no fund to build more plantations. It relies on the private sector. Investment in oil palm plantations has good prospects as palm oil is still high in demand in the world market and demand for it has continued to increase. In the period of 2000-2002, productive plantations expanded from 2.45 million hectares to 2.64 million hectares. In the same period new and non productive plantations grew from 1.31 million hectares to 1.47 million hectares. In 2008, oil palm production expanded to 6.9 million hectares in which 39 percent belonged to small farmers, while CPO production reached into 19.2 million ton.

Foreign-exchange earning could still be raised from the palm oil sector if CPO is processed further into derivatives such as oleo-chemicals. Indonesian CPO producers, however, choose to exports CPO rather than processing it before being exported in the form of oleo chemicals with higher value. It is easier to sell CPO, which is still high in demand in the world market.

Despite a volume growth of 60% since 1995, the European Union lost its position as the most important export market for Indonesian palm oil to India. The share of the EU declined from 50% to 23%, while India accounts for 28% of Indonesian palm oil exports in 2004. Some other Asian markets, especially China, Malaysia, Pakistan, Bangladesh and Hong Kong were also quickly expanding their palm oil imports from Indonesia. On a lower level, the same applies to some African countries (Egypt, Tanzania, Nigeria and South Africa) as well as to Jordan and Russia. Between 1998 and 2004, Indonesia diversified its export markets. Indonesian palm oil exported to Malaysia – as the largest palm oil exporter in the world – was worth remarking on. This palm oil was re-exported from Malaysia, but classified as Malaysian palm oil.[3]

The fast expansion of plantations of private companies followed regulation by the government requiring palm oil processing companies to have own oil palm plantation to guarantee supply of feedstock. All cooking oil producers were required at that time to have their own oil palm plantations. In addition, the government offered incentives such as in the form of simpler procedure, land conversion and lower loan interest rate. The facilities had been used by large company groups such as PT Sinar Mas Group, Raja Garuda Mas Group and Salim Group, the plantations of which were later taken over by Malaysia's Guthrie Berhad, through an open tender in 2001. The plantations were bought from the Indonesian Banking Rescue Agency (IBRA), which previously took them over from the Salim Group in compensation for its debt to the government. The Salim group handed over 25 oil palm plantations valued around Rp3.65 trillion to IBRA under four holding companies PT Salim Sawitindo, PT Bhaskara Multipermata, PT Minamas Gemilang and PT Anugerah Source Makmur.

The three palm oil kings, Salim Group, (Guthrie Bhd), Sinar Mas, and Raja Garuda Mas (RGM), dominated palm oil business in the country. Sinar Mas and Salim Groups built cooking oil factories PT Bimoli and PT Sayang Heulang. The two large company groups also cooperated in building oil palm plantations and new cooking oil factories under PT Inti Indosawit Sejati, PT Inti Indosawit Subur and PT Gunung Melayu. RGM has own cooking oil producing subsidiary PT Asianagro Agung Jaya with 300,000 hectares of oil palm plantations in North Sumatra, Jambi, Riau and Central Kalimantan. SMG also had oleochemical plant under Sinar Oleo-Chemical International (SOCI).

Another large company group operating in the palm oil sector was Ciliandra Perkasa Group (CPG), which has 60,992 hectares of oil palm plantations. The Peknabaru-based company also operates in other business areas including animal husbandry, transport and mining sectors. The company has three factories processing palm oil with a total processing capacity of 2110 tons of fresh fruit bunches an hour. The company disposes of most of its production on the domestic market.

[1] The average monthly price of coconut oil (crude) in 2005 fell –14.7% to 32.44 cents per pound, up from the 15-year low of 21.94 cents posted in 2002. The record high of 60.21 cents per pound was posted in 1984. Vegetable oils are much more dominant than animal fats as the feedstock for cooking oil. The world's production of vegetable oils surged from 76.4 million tons in 1976 to 101.4 million tons in 2003, or 81.1% of the world's production of edible oils and fats which totaled 123.9 million tons in 2003. CPO production in 2003 totaled 27.2 million tons or the second only to soybean production of 31.3 million tons.
[2] Goliath, Indonesia to put Malaysia behind in palm oil industry, Indonesian Commercial Newsletter,
[3] Jan Willem van Gelder, 2004, Greasy Palms: European buyers of Indonesian palm oil, Friend of the Earth

Indonesia Telecommunication Industry

As the fourth most populous country in the world with approximately 245 million people, Indonesia would be a great potential market for telecommunication industry. Before 1999, domestic services were monopolized by TELKOM, while INDOSAT control international service. Through Law No 36 1999[1], government abolished the exclusive rights for both operators, and has been trying to promote fair competition. Although operators were granted full service and network provider rights, it seemed to be a priority shift in telecommunication development from fixed to mobile.

During the golden age of economic growth in 1990s, Indonesian telecommunication industry was growing remarkably. Along with monopoly rights, PT Telkom was increasing its revenues due to the high usage growth. In 1995, the monopolist successfully floated 25 percent of its shares on the Jakarta Stock Exchange, where they rapidly became one of the exchange's blue-chip stocks which covered more than 50 percent of stock exchange capitalization. The Indonesian government (GOI) maintained its ownership of the remaining 75 percent of the shares.[2] In order to respond the huge demand, the company needed expand the fixed-line network to recruit foreign technical expertise and capital. The company established the joint operation scheme in 1994. The number of phone users jumped exponentially, a host of domestic companies was established, and dozens of foreign companies entered Indonesia to supply the country with equipment, technology, and services.

In the early of 1990s, the first Indonesian liberalization steps came into a partial privatization of the sector's two main state-owned enterprises (SOEs)—PT Telkom and PT INDOSAT. Between 2001 and 2002, the Government sold additional shares of PT Telkom to private investors, although strong resistance from their employees who request the state ownership at 51.2 percent. Conversely, the government sold a strategic 41.9 percent share of PT INDOSAT to Singapore Technologies Telemedia (STT) through an open competitive process, increasing INDOSAT's private ownership to a majority 76.9 percent share.[3]

The economic crisis 1998 hit the sector hardly, however. Many users found themselves unable to pay their phone bills. The telecommunication expansions in the 1990s were caught with un-hedged dollar-denominated loans that made their revenue streams fell in dollar terms when the Rupiah plummeted. The subscriber base dropped by approximately 15 percent, while uncollectible bills climbed by one-third or more. Since early 1998, most cellular companies had concentrated on maintaining the condition of their networks and trying to clean out and rebuild their customer bases.

Successive Indonesian administrations in 1998 had taken a common view that privatization was necessary, not only as part of revenue-generating efforts to bridge the state budget deficit but also to attract new portfolio investment, along with additional capital investment, management skills and corporate-governance practices to improve the poor performance of state companies. Private investors can turn these assets into profitable enterprises that create more jobs and pay more taxes to the state.

IBRA was set up to manage assets and loans it took over from the collapsed banking system after a $60 billion financial sector bailout following the 1997-1998 Asian financial crises.[4] In 2002, the government sold its majority stakes in two banks and in the international telecommunications company--INDOSAT. The sale of state-owned enterprises and assets aggravated the domestic debt burden. The privatization program targeted of Rp6.5 trillion, collecting Rp7.7 trillion. Conversely, according to INFID (2003), this divestment gained fewer revenues compared to the high costs of servicing the government bonds that had been issued to recapitalize those banks.

Following the privatization policy as generic subscription of IMF[5], government approved for investment proposals reached $14.6 billion in 2003, $9.8 billion in 2002, an adjusted $9 billion in 2001, and $16 billion in 2000. While the traditional large investor, such as Asia, North American and Europe declined, groups of investors from Tanzania and Mauritius was taking advantage of special bilateral tax treaties with Indonesia proposed a third of the $14.6 billion in approved investments purchasing mostly state-owned companies, which was INDOSAT became one of them. In fact, most of this investment was never realized.

In 2006, eight years after the financial crisis, the telecommunication industry was getting revived. Fixed line subscribed was growing to 30%, while mobile subscribed was dramatically increasing to 87.2%. There were new 45 Internet service providers (ISPs) came to Indonesia, which dominated by five providers with 10,000 subscribers of total 200,000 Internet subscribers and 670,000 total users in Indonesia. Approximately 75 percent of the telecommunication users were in Jakarta, 15 percent were in Surabaya, and 5 percent were in other Javanese cities, leaving roughly 5 percent in other provinces. Among the five telecommunication operators, 90% of the markets belonged to the big three, i.e. INDOSAT, Telkomsel, and Excel. Telkomsel admitted having 60 million customers. INDOSAT’s customers were around 24 million, while Excel’s customers were around 12 millions. At fixed line telecommunication, Telkom was the only one operator, with 100 million customers. With an average of only 4,500 dial-up subscribers per service provider, and the need to pay for bandwidth in US dollars while subscribers pay in rupiah, it was difficult for most of these ISPs to make money.[6]
[1] typeapproval.or.id/appforms/Law36.1999 _DGPT_.pdf
[2] en.wikipedia.org/wiki/Telkom_Indonesia see also
Susan Eick, A History of Indonesian Telecommunication Reform 1999-2006, Hawaii International Conference on System Science – 2007, csdl2.computer.org/comp/proceedings/hicss/2007/2755/00/27550067c.pdf
[3] “Telecommunications in Indonesia and Its commitment in WTO, Ministry of Industry and Trade and DG for Telecommunication RI in collaboration with ESCAP/ITU/WTO.
[4] Indonesia Bank Recovery Agency. One of the last remaining tasks for the Indonesian Bank Restructuring Agency (IBRA) before it is wound up at the end of next month is selling Bank Permata, the country's 10th-largest bank. For further discussion on IBRA, see faculty.insead.edu/lasserre/emdc/IBRA.pdf
[5] Trade Policy Review, 7 December 1998, www.wto.org/english/tratop_e/tpr_e/tp96_e.htm
[6] The Indonesian Telecom Industry at a Crossroad, www.usembassyjakarta.org/econ/Indo-Telecom.htm

Indonesia Oil Policy

As one of the oldest in the world, Indonesian oil in commercial quantities was discovered in northern Sumatra in 1883, leading to the establishment of the Koninklijke Nederlandsche Maatschappij tot Exploitatie van Petroleum-bronnen in NederlandschIndië (Royal Dutch Company for Exploration of Petroleum sources in the Netherlands Indies) in 1890. It was merged in 1907 with the Shell Transport and Trading Company, a British concern that had been drilling in Kalimantan since 1891, to form Royal Dutch Shell. Royal Dutch Shell dominated colonial oil exploration for more than thirty years. By 1911 Royal Dutch Shell operated concessions in Sumatra, Java, and Borneo (then called Kalimantan), and Indonesian oil which almost reached into 4 percent of total world production.

In 1950s, the post-independence government increased its control over the oil sector through increasing operations of several government-owned oil companies and stiffening the terms of contracts with foreign oil firms. As the most important oil fields in Indonesia, the Duri and Minas fields in the central Sumatran Basin, were discovered just prior to World War II by Caltex, a joint venture between the American companies Chevron and Texaco, although production did not begin until the 1950s. By 1963 the Duri and Minas oil fields, located in Riau Province near the town of Dumai, accounted for 50 percent of oil production.

In 1968 the government companies--Indonesian Oil Mining company (Pertamin), National Oil Mining Company (Permina), and the National Oil and Gas Company (Permigan)--were consolidated into a single operation, the National Oil and Natural Gas Mining Company (Pertamina). It was the time that a new form of contract--the production-sharing contract--was introduced. A production-sharing contract split total oil production between the contractor and the government, represented by Pertamina, and allowed the government to assume ownership of structures and equipment used for exploration and production within Indonesia. Indonesia's contract terms were considered among the toughest in the world in which the government in most cases receiving 85 percent of oil produced once the foreign company recovered costs.

In 1977, annual oil production in Indonesia peaked at over 600 million barrels. The official price of Minas crude was then about US$14 per barrel, a substantial rise from the 1973 price of about US$4 per barrel as a result of OPEC's successful market manipulations. Prices continued to soar in 1981, reaching US$35 per barrel, and oil exports peaked at US$15 billion, or about 70 percent of total export earnings. In 1982, however, production declined, reaching a low of 460 million barrels and the oil market began to weaken that same year, when Indonesia's Minas crude was priced at US$29. The market collapsed in 1986, bringing the Minas price to below US$10 per barrel. Recovery of oil prices began slowly and by 1989 Minas was priced at about US$18 per barrel. Total production in 1989 was almost 500 million barrels, and oil exports were valued at US$6 billion.

Indonesia's oil production was formally governed by a quota allocation from OPEC. For instance, at the March 1991 OPEC ministerial meeting, Indonesia's quota was set at 1.445 million barrels per day, below the estimation of country’s production capacity of 1.7 million barrels per day. Indonesia's quota represented about 6 percent of total OPEC production. About 70 percent of Indonesia's annual oil production was exported on average during the late 1980s, but domestic consumption was increasing steadily and reached half of annual oil production by 1990.

In 1989 and 1990, the government loosened some provisions for new contracts to stimulate exploration, particularly in frontier areas. Improved oil market conditions in the late 1980s also contributed to a surge in production-sharing contracts. Fifty-seven of the 100 contracts active in 1992 were signed from 1987 to 1991. The newer contracts committed US$2.8 billion in exploration during the 1990s. Production from existing oil fields was still dominated by Caltex's operations in Sumatra, which accounted for 47 percent of Indonesian oil production in 1990. Twenty foreign oil companies, primarily United States-based, were active producers in 1990.

In 1990, Indonesia had proven oil reserves equal to 5.14 billion barrels, with probable reserves of an additional 5.79 billion barrels. Throughout the archipelago there were sixty known basins with oil potential; only thirty-six basins had been explored and only fourteen were producing. The majority of unexplored areas were more than 200 meters beneath the surface of the sea. Indonesia's oil reserves were usually found in medium- and small-sized fields, so that continued exploration was vital to maintain production and known reserves.

During the financial crisis in 1998, prices of many commodities spiraled upward, while the government hiked the price of fuel in May 1998, by between 25 and 70 percent, on the recommendation of the IMF. The measure led to massive riots that forced the government to scale back the increases. The damage, however, was done, and the unrest helped force then president Soeharto to resign on May 21.[1] Annual inflation was estimated by the Central Statistical Bureau to be about 80% for 1998. Subsidies were removed on several goods -- most notably rice, oil and fuel. Food prices, especially staples, rose by about 20% more than the general price index, notifying that (net) food consumers were likely to be severely impacted by the crisis whereas food producers had some protection.

For the IMF’s perspective, the biggest concern was the fiscal burden of the subsidy due to oil price fluctuation. In the year 2000 the fuel subsidy amounted to 40.9 trillion rupiah, or almost a third of total central government spending. Following reform package, the government also raised fuel retail prices 126% on 1 October 2005 to reduce subsidy costs, despite public protests. The state subsidized diesel, low-octane gasoline and kerosene for household use, accounting for 80% of total demand. Fuels for industrial use were pegged to international prices. The price rose cut demand in late 2004 and in 2005. But oil demand rose again to 1.2m b/d in 2007. The state had managed to keep oil demand limited to about 1.2m b/d.


While it produces significant amounts of oil, Indonesia became a net importer. State subsidies had kept the price of fuel low—currently petrol is 24 US cents a liter. Cutback in subsidies directly increased the price of transportation and kerosene, which was widely used by the poor for cooking. Over 40 million people in Indonesia lived on less than $US2 a day and over 17 percent of the workforce lack full-time jobs. The rapid increase in global oil prices worsened the government’s financial problems. The cost of state fuel subsidies was expected to rise from $US6.31 billion in 2004 to $US14 billion in 2005, or one third of all government expenditures. As a result, the budget deficit was rising to around $US4.3 billion, double the estimate in mid August. The added cost of buying imported oil had also contributed to the fall of the rupiah as state oil companies, including Pertamina, which had to purchase extra US dollars. Oil imports cost $US1.6 billion in July 2005, up from $US1.1 billion in January 2005.

In September 2008, Indonesia decided to resign from OPEC, because declining production had caused it to become a net importer. The decision was not unexpected, since Indonesia's production - largely concentrated in northern Sumatra - had stagnated and it has precious few sources of proven new reserves. In 2008, Indonesia was producing about 860,000 barrels of oil a day. For the coming years, the government aimed to reduce oil share in the national energy mix from 52% to about 20% in 2025. It needs to increase the percentage of gas, coal, and renewable energy for domestic consumption. The share for gas was projected to reach 30%, coal 33%, and renewable energy 17% by 2025. Bio-fuels will account for 5% of renewable energy share, while geo-thermals will share 5%, liquefied coal 2%, and other renewable energies up to 5%.

On October 5, 2005, widespread but relatively small demonstrations followed the announcement last Friday by the government of Indonesian President Susilo Bambang Yudhoyono of sharp rose in the price of petrol, diesel and kerosene. It was just a year after former general Susilo Bambang Yudhoyono won the Indonesian presidential election, skyrocketing global oil prices are compounding the country’s economic difficulties and placing his administration under serious political strain. The price of petrol rose 87.5 percent to 4,500 rupiah (44 US cents) a liter, diesel fuel 105 percent to 4,300 rupiah and kerosene, on which the poor depend for cooking, a huge 186 percent to 2,000 rupiah.

The price hike flows from the government’s recent decision to cap the country’s oil price subsidy at $US8.68 billion for 2005. A combination of high international oil prices, growing domestic demand, increasing oil imports and declining domestic oil production, due to low levels of investment, threatened to blow the subsidy out to $US14 billion. This would have more than doubled the 2004 figure and swallowed a third of government spending, creating a fiscal crisis.
In mid-2008 a surge in oil prices to records above $145/b forced the government to raise fuel costs to prevent ballooning subsidy bills from blowing up their budgets. That unleashed a wave of protests from Seoul to Jakarta and enflamed opposition parties throughout the region.[2] So when oil markets retreated to a four-year low of the $40s in early of 2009, governments seized the opportunity to pass on the cuts.

[1] Jakarta Post, 12/11/1999.
[2] Elections in Indonesia (as well as in India the year of 2009 and pending leadership change in Malaysia will make Asian leaders reluctant to risk fundamental moves to bring higher efficiency, but could be hard to reverse.