Palm oil investment

The arguments used by the Indonesian government to defend its restrictive ruling on foreign investments in the palm oil industry seem very weak. We don't see any benefit of the measure vis a vis the development of domestic small and medium enterprises. Fears of a market glut also seem groundless because Indonesia still consumes the bulk of its crude palm oil output of around 4.7 million tons a year. Moreover, most international analysts of edible oils have foreseen a steady increase in world demand for palm oil. Another factor which makes this commodity promising for investors is the wide variety of products that can be manufactured from crude palm oil.

No wonder, therefore, that even the Indonesian Chamber of Commerce and Industry, whose membership includes large, medium and small-scale businessmen, has alleged that the freeze on new foreign investment in the palm oil industry smacks of strong lobbying of the government by powerful business groups, notably the Salim and Sinar Mas conglomerates, who have been dominating the palm oil industry recently.

The freeze also looks strange because foreign investment in the plantation sector has just started to rebound after the controversial nationalization of foreign estates in the late 1950s. And then, since the 1970s, the country was frustrated by the overseas investors' unfavorable reaction to the incentive package offered in the agrobusiness industry.

When the restrictive ruling was first disclosed by Malaysian Primary Industries Minister Lim Keng Yaik in Penang after his visit to Indonesia late last month, we got the impression that the measure was aimed specifically at Malaysian investors who had signed joint venture agreements for the development of 1.5 million hectares of oil palm estates, mainly in Sumatra.

Lim was quoted by the Bernama news agency as saying that the Indonesian government had imposed a temporary freeze on new Malaysian investments in oil palm estates in Indonesia. Lim said he was notified by Indonesian officials that the measure was introduced to allow the palm oil sector to consolidate following an influx of foreign investments.

But after the measure received extensive media coverage and was criticized by most analysts and even Indonesian businessmen, the government explained that the freeze on new foreign investment in the palm oil industry was on all foreign investors in a bid to protect domestic companies and to prevent excessive land acquisition by foreigners. However as most of the private oil palm estates in the country are owned by only a few big business groups, we cannot escape the impression that the move was designed to protect the domination of the conglomerates.

Latest data from the directorate general of plantations puts Indonesia's oil palm estates at more than 2.1 million hectares as of last year, of which 1.02 million were owned by big private companies, 441,000 by state companies and 750,000 by smallholders. If the plantation expansion by several big groups such as Salim, Sinar Mas, Astra continue at its current pace, these groups will certainly strengthen their grip on the industry. This is not healthy for the long-term development of the sector, especially because two of the groups -- Salim and Sinar Mas -- also dominate the downstream palm oil industry. State companies were allowed to build downstream industries, notably olein, only a few years ago and so far they have set up only one plant on Batam island.

We don't see any reason to fear the influx of Malaysian investors. Plantation development is long-term investment, labor intensive, entirely based on local resources and must be implemented in joint ventures with local enterprises as foreign investors cannot own land in the country.

The Malaysian investors should instead be welcomed as they will improve the market competition. Plantation firms in Indonesia, the world's second largest producer after Malaysia, can benefit greatly from the synergy with Malaysian planters who have developed high research and development capabilities both in high-yield seedlings and downstream products and international marketing networks. They have been expanding to Indonesia due to an acute labor and land shortage at home and so would be committed to making a success of their investments here.