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JP/4

Plantation firms merged

The reorganization of the 32 state plantation companies into nine
groups, as announced by Minister of Agriculture Sjarifudin Baharsjah on
Monday, is part of the reform measures meant to improve the operational
and financial performances of state enterprises.

The reform, based on a 1988 presidential decree, can take one of the
following forms: merger, joint ventures with private companies,
management contracts, public share issues and outright liquidation of
commercially unviable firms.

The consolidation of the state plantation companies, which are
popularly known under their local acronym PTP, was made in preparation
for their merger to enhance optimum economies of scale, to better
integrate the plantations and their processing units and to better gear
them up for coping with commodity market fluctuations. The ultimate
objective obviously is to improve their operational and financial
performances.

The rationale of the consolidation is obvious. Though state companies
now account for only about 7.5 percent of the country's 12 million
hectares of tree and annual cash crops, their roles as employer and
earner of foreign exchange remain quite significant. Even more
significant is their role as what Minister Baharsjah terms as the agent
of development for the millions of smallholders who own more than 80
percent of the plantations.

However, the trends in the expansion of state plantations over the
past 15 years have weakened many companies, notably those based in the
northern part of Sumatra island where such tree crops as oil palms,
rubber and tobacco have been well developed since the Dutch colonial
era. Before the large entry by domestic private investors into the
plantation sector, it was the state plantation firms in the northern
part of Sumatra that were assigned to implement the government's massive
tree-crop expansion program throughout the country.

The consequence of such development is that those firms have tried to
do too much in too many areas across the vast archipelago. North
Sumatra-based state plantation companies, for example, have opened oil
palm estates in Irian Jaya, more than 4,500 kilometers away from their
base of operations. In fact, the bulk of state oil palm plantations in
Kalimantan, Sulawesi and Irian Jaya have been developed by state firms
from North Sumatra. No wonder, those companies have become weak in
several areas. Their overhead costs have been unusually high and their
span of control inadequate.

Hence, the geographical consolidation and the eventual merger of the
companies into nine firms is aimed at improving their efficiency. Also,
plantation projects currently being developed by North Sumatra-based
state firms in the provinces of Riau, Jambi and West Sumatra and in
Kalimantan will be put under the management of two state plantation
firms that have yet to be set up.

Efficiency is especially crucial for such labor-intensive
agribusiness ventures as plantations because of the seasonal nature of
their operations. The seasonal aspect often causes wide volatility in
their commodity market prices and seasonal fluctuations in their labor
needs. This consequently affects their cash flows and requirements. The
integration of plantations and processing units is also imperative in
view of the season-linked aspects of capacity utilization. All these
special characteristics require effective management control of
operations, especially because state companies also are assigned as the
agents of development for smallholders in their surrounding areas.