PTPs may not survive into the 2000s

PTPs may not survive into the 2000s

JAKARTA (JP): Some analysts here allege that the team in
charge of the second stage of the consolidation process of state
plantation companies (PTPs) wants to make the restructuring the
end, and not the means, to improve their overall efficiency,
productivity and accountability.

They see it as strange that those PTP directors who were
sacked during the grouping process in May, 1994, were included in
the consolidation team.

However, Agriculture Minister Sjarifudin Baharsjah denied the
notion that the restructuring was the only reform measure to
raise the efficiency of PTPs.

"You will see additional measures in the future aimed at
increasing productivity of plantations and processing mills," he
said.

Concerns with the inefficiency and low productivity at the
PTPs have increased since the late 1980s when they were no longer
granted special treatment and facilities from the government.

As a result, the PTPs have since had to compete on par with
private companies.

The problem, though, is that despite the phasing out of the
special treatment and facilities, the PTPs remain vulnerable to
excessive government intervention, an obvious deterrence to
business efficiency.

"The PTP managements should be given freedom to run the
business according to normal business principles," Hastjartjo
Soemardjan, a senior researcher at the Indonesian Planters
Association of Plantation Research and Development (AP3I)
suggested.

According to Hastjartjo, PTPs should be freed to develop their
own businesses. The government, as the owner, needs only to
assess their performance through their annual reports.

"I think there should not be any political considerations in
the assessment of the PTP managements. If they do not perform
according to the prescribed parameters, they should be replaced
immediately," Hastjartjo said.

But the parameters should be clear cut and make a lot of
business sense, he said.

Poor management

Poor management and low PTP productivity, for example, have
been reflected in a low oil palm yield, estimated to be 25
percent lower, and rubber yield 15 percent less than at the
estates managed by private plantation firms.

Their tree crop planting costs and the capital costs of
processing mills are 20 to 25 percent higher than at private
companies.

That does not mean, however, that all the PTPs are losing
money. In fact, as an official of the PTP Administration Bureau
at the ministry of agriculture claims, the majority of them have
always made some profit.

Nonetheless, the PTP returns on investment are quite low,
estimated at an average of only 5 percent.

"The PTP performance is even poorer if it is assessed in terms
of the opportunity cost of capital," the analyst noted.

The latest estimates put the PTPs total plantation area at 1.5
million hectares, 20 percent of which have planted sugarcanes
(mostly in Java) and the other 80 percent with tree crops, mainly
oil palm and rubber.

In 1993, the latest available figures, the 26 PTPs recorded
total sales of Rp 3.5 trillion, of which Rp 1.13 trillion (US$500
million) were derived from exports.

Even though their proportional role in the economy has
declined due to the rapid expansion of smallholdings, private
plantations and the manufacturing industry, the PTPs remain a
major employer with about one million workers.

Supervision

As several studies have concluded, PTP supervision has been
quite inadequate and ineffective despite the omnipresence of
several bureaucratic layers of internal and external supervision,
including those within the agriculture and finance ministries.

"The problem is that the PTP directors can always neutralize
all those supervisors," an agriculture official said.

Sjarifudin, however, promised that regular inspections would
be conducted at the plantations and processing plants but he did
not comment on the ineffective supervision.

The main elements of the consolidation program, as
recommended by the studies, are to include: The establishment of
independent, yet highly accountable managements with clear-cut
performance evaluations, incentive systems and independent
supervisors; the decentralization of the decision-making process
and the clarification of the roles of the government (notably the
finance and agriculture ministries) and boards of supervisors
(commissioners).

"One of the main weaknesses that has made the PTP management
inert, complacent and oblivious to changes is their closed
recruitment system," the official commented.

He noted that most of the directors who currently manage the
PTPs have been so inbred with the old system that they completely
lack new ideas.

"When our plantations were managed by Dutch companies until
the mid-1950s, even the smallest administration units within a
plantation company worked as innovators," he said.

He added, though, that it is not fair to blame all those
problems on the PTP managements. In fact, a great deal of the
problems have been caused by the government itself.

Conflicting tasks

The conflicting tasks of performing commercial and social
missions have also been partly responsible for the weaknesses.

Therefore, the restructuring program has also been designed to
reclarify their missions. Under this program, the development of
smallholder plantations will be restored to the directorate
general of plantations.

The PTPs, notably those in North Sumatra, have been greatly
credited with the fast expansion of oil palm smallholdings to a
total area of around 585,000 hectares in Riau, Kalimantan,
Sulawesi and Irian Jaya from a mere 5,000 ha. in the early 1980s.

However, responsibility for the development of smallholders
has overstretched PTP resources. The span of their control became
very weak since the estates under their management are spread out
and far away from their home bases.

Several North Sumatra-based PTPs, for example, manage oil palm
plantations as far away as Irian Jaya.

Analysts find it quite strange that the PTPs, which have
developed such tree crops as oil palm and rubber since the 1960s,
have not expanded their business into downstream products,
despite the high volatility of primary commodity prices.

Oil palm PTPs have always concentrated on producing crude palm
oil and rubber PTPs crumb rubber.

Constraints

"That shows the extreme lack of commercial sense on the part
of the PTP managements due to the external and internal
constraints they encounter," another agronomist noted.

Oil palm has become the most favored tree crop in the country
due to the numerous downstream products which can be derived from
palm oil.

"But none of the PTPs have even ventured into cooking oil, let
alone such higher value-added products as fatty acids, fatty
alcohol, fatty esters, fatty amines and glycerines," the analyst
noted.

Since the PTPs depend almost entirely on primary commodities
whose prices tend to be highly volatile their earnings also are
vulnerable to price gyrations.

The analyst blamed the lack of commerciality on the part of
PTPs and their complete ignorance of marketing.

As PTPs sell their commodities through joint marketing
offices, individual PTPs are kept in the dark about what the
market needs. Consequently, individual PTPs are oriented entirely
toward primary commodities.

Therefore, the abolishment of the joint marketing offices has
been included in the restructuring program. The marketing
responsibility will be restored to individual PTPs to enhance
their commercial sense.

"This, however, will be possible, only when the individual
PTPs have been strong enough with large economies of scale," said
Abdurrachman Rangkuti, an experienced plantation manager.

Rangkuti, who is also a member of the House Agricultural
Commission, therefore saw it as quite imperative for the PTPs to
merge.

"Merging not only will reduce their overhead costs but also
increase their economies of scale to make the PTPs commercially
strong to diversify into downstream products,"Rangkuti said.

Some analysts reckon that the government has apparently
restricted the PTPs from entering the downstream industry to
allow for greater business opportunities for the private sector.

This restriction, they say, is not only extremely unfair but
also discriminatory as private companies are fully free to
operate plantations and their downstream processing plants.

The latest study by the World Bank in June, 1993, concluded
that the PTPs are experiencing inertia at all levels. They have
been hit with what has become known as a guard duty mentality,
whereby directors feel it is preferable to take a "wait and see"
approach than to generate waves by organizational or productivity
improvements.

The consequence is that as the PTPs lag in management,
technology and productivity. Their financial condition has also
deteriorated.

Analysts contend that if all the elements of the restructuring
program designed to remove the weaknesses are not implemented,
most PTPs will not be able to sustain viable operations into the
next century.

Such a fate would be tragic because Indonesia actually enjoys
strong competitive advantages in such agrobusinesses as tree
crops. (hdj/vin)