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Indonesian palm oil audit a chance to clean up ‘very dirty’ industry

Oil palm nursery and processing facility, Indonesia.

Oil palm nursery and processing facility, Indonesia. “The reality is the greenhouse gases emissions, which are causing global warming, are at their highest levels in human history.” Image by Rhett A. Butler/Mongabay.

  • The Indonesian government plans to audit all palm oil companies operating in the country, in a bid to tackle an ongoing shortage and high prices of cooking oil.
  • Experts attribute the crisis to the fact that the country’s palm oil industry is dominated by a small number of big companies.
  • These companies have large concessions, in excess of the limit imposed by the government, allowing them to wield outsized power to dictate prices, policies and supplies.
  • Analysts say the audit should address this land ownership issue, as well as other problems that plague the industry, such as lack of clear data and transparency.

JAKARTA — Activists have welcomed the Indonesian government’s announcement to carry out a nationwide audit of all palm oil companies operating here, in response to a shortage of cooking oil that has wracked the world’s top producer of palm oil.

“What’s happening in the cooking oil industry is very dirty, because it’s filled with many oligarchs,” Greenpeace Indonesia forest campaigner Sekar Banjaran Aji told local media.

She added that a slew of policies to boost supply and bring down prices amount to stopgap measures that failed to address the underlying problems behind the shortage that has persisted since October last year.

These measures included mandating companies to allocate 20% of their crude palm oil (CPO) for domestic use; capping the selling price of CPO; and — the most extreme — banning the export of CPO.

But this ban, which was eventually lifted, failed to bring down the CPO price and ease supply, pointing to cartel practices within the industry, said Ridho Pamungkas, head of the government’s business competition watchdog, the KPPU, in Medan, North Sumatra.

“In the field, [we] found that the price of cooking oil was still [unchanged],” he said during a recent online press conference. “[And] the withdrawal of the export ban [should have] resulted in a price increase for fresh palm fruit bunches and CPO. But [both prices] haven’t returned to their prices before the export ban.”

According to data from the country’s statistics agency, the BPS, the price of bulk cooking oil only declined to 18,220 rupiah ($1.26) per kilogram in May, from 18,980 rupiah ($1.31) per kg in April.

Instead, the export ban hurt small farmers, as it resulted in a 58% decrease in the price of fresh palm fruit bunches, from 3,814 to 1,569 rupiah (26 to 11 U.S. cents) per kilo.

Oil palm harvest in Indonesia

Palm oil point man

To address these issues, President Joko Widodo recently assigned Luhut Pandjaitan, the chief minister in charge of investments, to get to the core of the problem.

“When the president asked me to manage [the issue of] cooking oil, people think it’s only [about] cooking oil,” he said during an event on May 25. “No, I will directly go to the upstream level [which is palm oil]. All palm oil [companies] have to be audited by us.”

Luhut said the audit will be the first of its kind, and that it will scrutinize all aspects of palm oil companies, including their permits, production, and concession size.

Eddy Martono Rustamadji, secretary-general of the country’s main palm oil business association, GAPKI, said the association supported the government’s audit plan.

“That way, the palm oil industry can have clearer data from the upstream level to the downstream level,” he told local media. “All this is so that more effective policies can be made based on more accurate data.”

The country’s consumer protection agency, the BPKN, also welcomed the government’s plan to audit all palm oil companies.

“A comprehensive audit on the palm oil industry will uncover the [foul] play in the national palm oil industry, which has been harming the people, the nation and the country for decades,” BPKN chief Rizal E. Halim told local media.

Edi Sutrisno, executive director of TuK Indonesia, an NGO that advocates for social justice in the agribusiness sector, said the audit should be comprehensive because the plantation industry in Indonesia is rife with irregularities that go beyond the cooking oil fiasco. The audit must look at each company’s operations holistically rather than check for piecemeal

“There needs to be a comprehensive audit, both quantitatively and qualitatively,” Edi said. “In our experience in advocacy and study, even if companies fulfill all administrative requirements, that doesn’t mean they pay tax, it doesn’t mean they don’t have conflicts with locals, it doesn’t mean they don’t have environmental impacts. So we can’t just audit their permits; it needs to be comprehensive.”

 

Land inequality

One aspect of the palm oil industry that the government needs to address in the audit is land ownership, given that a small number of plantation groups have been able to acquire large tracts of land through acquisitions and asset purchases, according to KPPU chairman Ukay Karyadi.

This allows them to have dominant control over the industry and dictate policies, he said.

“Smallholders’ plantations are bought by middle-sized companies, for instance. And then these are bought by the large ones,” he said during a recent press conference.

Ukay cited data from the KPPU showing there were 10 acquisitions by palm oil companies in 2021 alone. Six of these were by Malaysian companies, the rest by Indonesian firms.

“So in terms of ownerships [of land], it’s increasingly concentrated [with just a few companies],” he said, adding this stifles competition in the industry.

“This dominance is prone to be abused,” Ukay said. “If this dominance is achieved by technological advancement, which makes [the company] better and more efficient so that they could control the market, then that’s fine. But the problem here is that they’re [becoming] dominant because they control the permits.”

A 2013 ministerial regulation limits the total land bank of palm oil concessions to 100,000 hectares (247,100 acres) per company. However, observers say the regulation has consistently failed to limit corporate control over land in Indonesia, as publicly listed companies are excluded from this rule.

GAPKI has criticized the regulation, saying it has made it difficult for big companies to expand their concessions. The palm oil association says land expansion is the only way to meet the country’s ever-increasing palm oil production targets, and thus the limit should be scrapped.

Data from TuK Indonesia show that 21 of the 25 biggest palm oil groups in Indonesia operate through holding companies listed on the stock exchange. As a result, these companies can get around the limit.

Marcellina Nuring Ardyarini, policy director at the KPPU, said the five biggest producers of cooking oil in Indonesia also have the largest oil palm concessions, well in excess of the 100,000-hectare limit.

She declined to name the companies, but a 2016 study by the country’s anticorruption agency, the KPK, identified several palm oil company groups that control large concessions in Indonesia.

According to the KPK study, 19 groups have total concessions larger than 100,000 hectares in size.

The top three groups are Salim Ivomas Pratama, Sime Darby (Minamas) and Astra Agro Lestari. They control a combined 946,000 hectares (2.34 million acres) of concessions in Indonesia, according to the KPK — an area six times the size of London.

Both Salim Ivomas Pratama, which is the palm oil arm of the Salim Group, and Astra Agro Lestari are  listed on the Indonesia Stock Exchange, while Sime Darby is listed on the Malaysian bourse.

Indonesian government data from 2019 show that non-state companies make up only 0.07% of all palm oil growers in Indonesia, yet control 54.42% of plantations in the country. On average, each company owns 4,247 hectares (10,495 acres) of plantations.

Smallholders, by contrast, make up 99.92% of all growers, but control just 41.35% of plantations. The average smallholder farmer in Indonesia owns an average of 2.21 hectares (5.46 acres) of plantation, or 0.05% of the average plantation company in the country.

That makes it important for the government to address this huge gap in land ownership, according to Nuring of the KPPU.

She called for stronger regulation that limits land ownership for not only companies, but also groups. That’s because while an individual company’s concession might not exceed the 100,000-hectare limit, the group of which it’s a part likely has other palm oil subsidiaries, effectively giving the group control of concessions far bigger than the limit allows.

“Without a structural limit on the ownership of natural resources, including lands, there will be inequality because of the difference in access to natural resources between the strong and those who have weak bargaining power,” Nuring said.

The competition watchdog also called for redistribution of land to the people.

“If business groups are deemed to exceed the limit [on land ownership], the concessions have to be redistributed so that they’re not dominating the upstream [level of the plantation industry],” Ukay said. “This is in line with the vision of the president, which is land redistribution.”

Oil palm plantation in Riau, Sumatra, Indonesia. Image by Rhett A. Butler/Mongabay.

Local plantations, foreign revenue

Another aspect that the government will focus on in its audit is where palm oil companies are headquartered.

Luhut said some companies that have concessions in Indonesia are headquartered in other countries, causing the state to miss out on potential tax revenue.

“I told the president, ‘Sir, the headquarters [of palm oil companies] have to be moved here,’” he said. “Imagine, they [companies] have 300,000 or 600,000 hectares [of concessions], [and yet] their headquarters are overseas. They pay taxes overseas. [In the future, this is] not going to happen. You have to move your own headquarters to Indonesia.”

By forcing palm oil companies operating in Indonesia to be headquartered here, Luhut said, the country will be able to reap additional tax income.

Putu Juli Ardika, director-general of agribusiness at the Ministry of Industry, said the country collected more than 100 trillion rupiah (nearly $7 billion) in levy and export tax from palm oil companies in 2021.

“If the headquarters of the mills [operating here] are overseas, they pay [tax] where they’re located,” he told local media. “If all [headquarters] are in Indonesia, we will get additional value and also tax from the economy of palm oil.”

Statistics agency data shows there are 332 palm oil companies operating in Indonesia that have foreign investors.

Some major plantation groups, like Wilmar and Musim Mas, are known to be headquartered in other countries like Singapore.

Eddy of GAPKI said that even though some companies are headquartered overseas, they still have Indonesian subsidiaries, because local business regulations require foreign companies to set up legal entities in Indonesia in order to do business here.

“This means that all tax rules have to follow Indonesia’s regulations,” he said.

Habitats of endangered endemic animals like the proboscis monkey are being destroyed to make way for oil palm plantations in Borneo. Image by Rhett A. Butler/Mongabay.

Greater transparency

Analysts say a key factor contributing to land ownership being concentrated in the hands of a small number of companies is lack of transparency.

The nation’s highest court ruled in 2017 that all plantation data and maps in the country must be made publicly available in the interests of transparency. Five years on, however, the government continues to refuse to make its detailed maps and related documents on plantation companies, including right-to-plant permits, known as HGUs, available to the public.

Each HGU permit includes details such as land boundaries, coordinates and the area of the concession, as well as the leaseholder’s name. The HGU documents are vital because withholding them enables land grabbing, with companies often laying claim to community lands without showing their concession maps.

Oil palm companies also routinely clear land outside of their licensed areas, destroying forests and community lands with little oversight from local officials, further widening the gap of land ownership between companies and local and Indigenous peoples.

Withholding the HGU maps also means that the public is in the dark about the size of concessions that each palm oil group operating in the country controls.

That means the government’s first order of business in the audit is to make the HGU maps and data publicly available, said Achmad Surambo, executive director of palm oil industry watchdog group Sawit Watch.

“First, what’s needed to be done is transparency on HGU, so the government has to open up the HGU data to the public,” he told local media.

This will also prevent companies from laying claim to community lands, according to the nonprofit Consortium for Agrarian Reform (KPA), which documents and records land conflicts and injustices in underreported regions of Indonesia. Roni Septian Maulana, head of policy advocacy at the KPA, said the ball is now in the court of the Ministry of Agrarian and Spatial Planning, the institution with authority over HGU permits.

“The one responsible for giving valid data is the Ministry of Agrarian and Spatial Planning, but the ministry refuses to open up the HGU data so that crimes in the palm oil sector have never been prosecuted,” Roni told local media.

Sofyan Djalil, who was the agrarian minister until being replaced in a cabinet reshuffle in mid-June, was dogged in his fight against efforts to bring transparency to the plantation industry. He insisted that the HGU documents are the private property of the respective plantation companies, and that sometimes it’s better for companies rather than communities to manage the land because of their higher productivity.

“Don’t think distributing land to the people is always a good thing. That’s not necessarily true. If [the lands] aren’t productive in the hands of the people, then we will take away the lands,” he said in 2019. “The fact is that the fastest machine to generate wealth is corporate.”

It’s not just civil society groups that have had difficulty prying the HGU data away from the ministry’s hands. Other government agencies have also found it hard, if not impossible, to get the information from the agrarian ministry and its various regional offices that issue plantation licenses.

Even the Ministry of Environment and Forestry has been stonewalled, having to fall back on satellite imagery to monitor any irregularities in plantation activity.

KPPU chairman Ukay said the competition watchdog has also had difficulty investigating palm oil producers at the upstream level due to the unavailability of the HGU data.

“We don’t have the authority to open up the data,” he said.

A truck with oil palm fruits is entering Fajar Harapan Palm Oil Mill in Indonesia.

Law enforcement

The end result of the audit should see companies found to violating the laws face legal consequences, said Wiko Saputra, an economic policy researcher at environmental NGO Auriga Nusantara. Short of this, the audit will be in vain because there will be no deterrent effect on lawbreakers, he said.

Mansuetus Darto, secretary-general of the Oil Palm Smallholders Union (SPKS), said he doubted that any law enforcement action would result from the audit. He pointed out that the state audit agency, known as the BPK, had already conducted an audit into the palm oil industry back in 2019.

That audit found that 81% of oil palm plantations in Indonesia are operating in violation of numerous regulations, including excess size, noncompliance with the Indonesian Sustainable Palm Oil (ISPO) standard, failure to allocate sufficient land for smallholder farmers, and lack of HGU permits to operate.

Darto said there’s been no clear follow-up on the BPK’s findings since then.

Edi of TuK Indonesia said he also had his doubts about the new audit leading to action. He noted that even when palm oil companies are found guilty in court of fires on their concessions, they can still evade their responsibilities of paying for the environmental damage.

As of the end of 2021, the environment ministry had filed lawsuits against 28 companies and won judgments from the courts totaling 19.8 trillion rupiah ($1.37 billion). However, the companies have only paid out 2.5% of that amount to date.

“Even when there are already court verdicts on land and forest fire cases, they haven’t been executed,” Edi said. “So that makes us worried on what the audit will become.”

To ensure the audit will lead to law enforcement, the government must make its findings public, he added.

“The result of this audit has to be published so that there’s public monitoring and so that financial institutions are aware that there are risks of funding [the violating companies],” Edi said.

Nevertheless, with Luhut, known for his political prowess, at helm of the audit, Edi said he’s sure the government will have no trouble obtaining the data for the audit, including the identities of the true, or “beneficial,” owners of palm oil companies.

In March 2018, President Widodo signed a landmark regulation giving companies one year to disclose their beneficial owners to the state. But by the deadline of March 2019, only 7,000 companies, out of more than 1 million registered in Indonesia, had filed the necessary information.

“Luhut used to be in a political party, so of course he knows a lot of people,” Edi said. “Not to mention that he’s now the chief minister in charge of investments. He should know the beneficial owners [of palm oil companies]. And he could ask other ministries under his authority to disclose the identities of the beneficial owners. If the identities [of some of the companies] are not known yet, this audit can speed up [the process].”

 

Banner image: Oil palm nursery and processing facility, Indonesia. Image by Rhett A. Butler/Mongabay.

 

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