Palm oil investment

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.