Oil palm: Wonder crop but most controversial commodity

Vincent Lingga The Jakarta Post 

Jakarta   /   Tue, November 12, 2019   /   09:13 am 

A worker moves bunches of oil palm fruit at a plantation in Pangkalan Bun, Central Kalimantan.

Sustainability standards for oil palm, a wonder crop that has lifted tens of millions of people in Indonesia, Malaysia and Thailand out of poverty but has become the most controversial vegetable oil, dominated a big conference held immediately after the ASEAN Summit in Bangkok last week.
But the timing of the conference was only a coincidence. The occasion was the three-day 17th annual meeting of the Roundtable on Sustainable Palm Oil (RSPO), a multistakeholder body of almost 4,400 plantation companies, refiners, lenders, consumers and green groups from 90 countries that promotes the development of socially and environmentally sustainable palm oil.

Oil palm trees yield five to 10 times more than all other vegetable oil crops, which grow in temperate-zone countries, thereby making it easier and cheaper to manage and enabling more efficient use of land. Yet more wonderful, its fruits are processed for ingredients in thousands of food, cosmetics and other consumer products and have even increasingly been used for biofuel. The effluents of palm oil refineries also have been used to generate electricity in rural areas.

However, massive campaigns by environmentalists in Europe and the United States since the early 2000s have succeeded in influencing a big segment of the public opinion to associate palm oil development with deforestation and forest fires, which cause huge carbon emissions.

In March, the European Union restricted the volume of biofuels made of palm oil that may be counted toward the bloc’s renewable-energy goals. By 2030, the EU aims to stop all imports of palm oil. Then, on Aug. 14, the EU reintroduced tariffs, ranging from 8 to 18 percent, on palm oil imports.
The tariff and nontariff barriers certainly hurt Indonesia as the world’s largest palm oil producer with a total output of more than 40 million tons last year. The upstream and downstream palm oil sector, according to the Indonesian Palm Oil Association (GAPKI), employed more than 15 million people, involved about 4 million smallholders and generated US$20 billion in exports.

“About 70 percent of the population in the United Kingdom and other European countries still have bad opinion about palm oil,” said RSPO chief executive officer Darrel Webber.
Carl Bek Nielsen, chief executive director of Malaysia’s United Plantations Berhad, concurred that it would take some time to convince consumers in Europe about the sustainability of palm oil.
“But I assure you there are now no other farm commodities that have been subjected to the same level of positive scrutiny as palm oil”, Nielsen added.
The problem is that less than 25 percent of the total area of oil palm plantations in the three-biggest producers have been certified sustainable according to RSPO standards. Whereas, RSPO certification is virtually the only sustainability standard recognized by the international market.
However, many in Asia do not believe the scrutiny of palm oil in Europe and the US are entirely positive.
Harry Brock of Britain, who is a general manager of Thailand’s Univanich Palm Oil Public Company Ltd, noted “I often found many people, even conscientious consumers in the UK, did not understand what they meant by sustainability when they referred to palm oil”.

Indonesian former agriculture minister Bungaran Saragih, who is now an adviser to RSPO, questioned the motives behind the campaign against palm oil. “I think a good portion of the international scrutiny is quite negative and in a bad faith, motivated by business interests because vegetable oils in the developed countries will never be able to compete with palm oil,” he argued.
According to data discussed at the conference in Bangkok, palm oil now accounts for more than 73 million tons or about 40 percent of the estimated global vegetable oil consumption of 175 million tons last year with the rest supplied by soybean, rapeseeds, sunflower, peanut, coconut, cotton and olive.

Bungaran added that there would never be a good global solution to the palm oil controversy as long as Europe and the US insisted on asking for absolute sustainability.
“The process should be gradual because palm oil development not only involves big plantation firms that have the resources to meet the legal, environmental and social standards but also tens of millions of poor smallholders in Asia and Africa,” Bungaran argued.

However, the massive wave of forest fires between August and October in Sumatra and Kalimantan, and the different data at government institutions on the total area of oil palm plantations have weakened Indonesia’s position in defending its palm oil sustainability.
On the opening day of the RSPO conference, Greenpeace International alleged in a press release that major consumer goods companies and top palm oil traders still bought palm oil from producers linked to thousands of fire hot spots in Indonesia over the past three months.

The questionable credibility of the basic facts Indonesia put up to defend the sustainability of its palm oil industry has caused distrust among industries and consumers in Europe.
On the other hand, the perpetual European harsh attacks on the palm oil industry, despite the improvements already made in implementing sustainability standards have caused many in Indonesia and even in Europe itself to suspect that the negative campaign is partly motivated by the business interests of vegetable oil producers

As long as this mutual distrust is not removed, there will never be a meaningful understanding about the need for palm oil sustainability and the palm oil issue will remain a “thorn in the flesh” in relations between Indonesia and Europe.

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China's leaders unite to boost confidence

Vincent Lingga

Senior editor at The Jakarta Post

Hong Kong   /   Mon, September 16, 2019   /  02:45 pm  

The opening of 4 th Belt-and-Road Initiative (BRI) summit in Hong Kong. (Hong Kong Trade Development Council/File)

Senior officials of the Hong Kong Special Administrative Region and China used the 4th Belt and Road Initiative (BRI) Summit held here on Sept. 11 to 12 as an opportunity to reinvigorate international confidence in the city’s status and role as a global financial, logistics and business hub and as the gateway to the world’s second-largest economy.

Hong Kong’s reputation has taken a beating from more than 14 weekends of antigovernment demonstrations, which were ignited by an extradition bill viewed as Beijing’s interference in the territory’s autonomy under its “one country, two systems” principle. The bill was finally withdrawn early this month.

The leaders in Hong Kong and Beijing both seemed to increasingly realize the deep interdependence between the semiautonomous territory and mainland China, as Hong Kong Chief Executive Carrie Lam reiterated during the summit and which was confirmed by data from the Hong Kong Trade Development Council (HKTDC).

“By steadfastly upholding the ‘One Country, Two Systems’ principle and the Basic Law, we can find our way back to reasoned discussion, to the social stability essential to the long-term stability and prosperity and well-being of us all,” Lam told the over 5,000 summit participants from nearly 70 countries.

Meanwhile, vice chairman Ning Jizhe of China’s National Development and Reform Commission said more than a quarter of mainland China’s imports and exports were transported through Hong Kong.

Xie Feng, the Chinese Foreign Ministry’s commissioner in Hong Kong, and Chinese Commerce Vice Minister Wang Bingnan assured business leaders from Asia, the Middle East and Europe that Beijing fully supported the “one country, two systems” principle.

The Hong Kong Basic Law guarantees the “one country, two systems” of governance principle whereby the territory is guaranteed that its democratic and capitalist system “shall remain unchanged for 50 years” from July 1, 1997. Under the law, the city’s residents have freedoms that Chinese mainlanders do not.

Hong Kong Financial Secretary Paul Chan also assured business leaders and government delegations that the recent turmoil had not affected Hong Kong’s core competitiveness, including the rule of law, free movement of capital, goods, information and people, freedom of expression, its sound regulatory system and independent judiciary.

But several business giants, including Alibaba, have postponed planned initial public offerings through the Hong Kong stock exchange. Hotels and retailers have cried out over steep falls in turnover. The tourism industry, which accounts for almost 5 percent of Hong Kong’s gross domestic product, is hurting.

The South China Morning Post cited the Hong Kong Monetary Authority that the territory’s foreign exchange reserves fell from a record high of US$448.4 billion in July to $432.8 billion in August. But the newspaper also quoted analysts who said that the cause of capital flight out of Hong Kong could be attributed to not only the prolonged protests, but also China’s cooling economy and its trade war with the United States.

HKTDC chairman Peter Lam reiterated that Hong Kong’s strong rule of law, good governance practices, credible regulatory system, first-class infrastructure, full integration into the global supply chain and strategic location in Asia had made the territory one of the region’s biggest financial, trade and logistics hubs.

These factors, he added, also make Hong Kong a very important link and conduit in the development and success of BRI infrastructure development. Hong Kong’s trove of professional services talents enables the territory to act as an integrator of infrastructure and real estate projects in the region.
The BRI scheme was launched in late 2013 by Chinese President Xi Jinping to build a network of overland road and rail routes, oil and natural gas pipelines and other infrastructure that will stretch from central China through Central Asia to Europe and Africa.

HKTDC data show that over 60 percent of China’s foreign direct investment was channeled through Hong Kong and that 70 percent of the capital raised on the Hong Kong stock exchange — most recently estimated at a cumulative total of $2 trillion — was for Chinese companies. Moreover, more than 1,500 multinational companies have set up their regional headquarters in Hong Kong.

In turn, China supplies more than 25 percent of Hong Kong’s electricity, most of its drinking water and more than 75 percent of its tourists, who totaled 65.1 million last year. Most business leaders from Europe, the Middle East and Asia were optimistic that even though the financial centers in Shenzen and Shanghai had grown, Beijing would continue to need Hong Kong as the most international Chinese territory to support China’s policies on global integration and opening up to foreign investment.

Business panelists Mochtar Riyadi, founder and chairman of Indonesia’s Lippo Group, Dhanin Chearavanont, chairman of Thai Charoen Pokphand, and Victor Chu, chairman of the First Eastern Investment Group, agreed that the social unrest in Hong Kong for the last three months would not prevent the city from playing a significant role in China’s development and its plans to grow global trade links.

However, in the face of the prolonged political turmoil and waves of street protests, there remained a risk that Hong Kong could lose the fundamental advantages that had made it a highly dynamic financial and logistics hub in Asia.
“No other place can replicate Hong Kong. But its role as a super-connector could be in jeopardy if the social unrest continues,” cautioned Richard Shirreff, cofounder and managing partner of Strategia Worldwide, a United Kingdom risk management and consulting company.

Several other analysts privately raised concerns that a prolonged turmoil might provoke Beijing into forceful intervention to quell the protests and to pressure Hong Kong businesses to fully toe its stance, like Cathay Pacific Airways experienced amid the heightened demonstrations last month.
The dilemma, though, is that Beijing’s heavy-handed measures in Hong Kong could affect BRI projects, with Chinese companies facing suspicion from the projects’ host countries. If the demonstrations in Hong Kong continue to persist, Chinese overseas investments will suffer. The perceived influence of Beijing on the territory’s businesses in the current antigovernment climate may also stymie Chinese companies’ overseas interests.
***

Senior editor of The Jakarta Post, who attended the Belt and Road Initiative Summit on the invitation of the Hong Kong Trade Development Council. The article first appeared on thejakartapost.com.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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Auditors’ findings weaken Indonesia’s defense of palm oil industry

Vincent Lingga / The Jakarta Post

Jakarta   /   Wed, August 28, 2019   /   09:23 am 

 

 

The Supreme Audit Agency’s (BPK) findings that millions of hectares of oil palm estates in Sumatra and Kalimantan are currently managed under problematic permits will weaken Indonesia’s bid to defend the sustainability of the industry in the international market.

Unless this controversial revelation is clarified in a credible manner, it will be futile for the government to send missions overseas to confront the global campaign against palm oil.
It is therefore most imperative for the government to act firmly and quickly to resolve this issue in view of the crucially important role of the palm oil industry in the country’s economy.

Senior BPK auditor Rizal Djalil did not elaborate on the discovery when talking to the media last Friday but revealed that almost all big plantation companies in Sumatra and Kalimantan were implicated in permits that were problematic with regard to the right to cultivation (HGU), overlapping concessions, concessions on protected forests or peatland and companies’ obligations to empower smallholders.

Unlike the Development Finance Comptroller (BPKP), which is an internal auditor of the government, the BPK is a politically independent agency whose executive board members are selected by the House of Representatives.

Hence, a BPK audit report is often seen as more credible, especially because the findings follow an investigative, not general, audit, focusing on the legal compliance of palm oil companies with all laws, regulations and the principles of economic, social and environmental sustainability of palm oil management.

The BPK recommendation to President Joko “Jokowi” Widodo to involve the National Police and the Attorney General’s Office to follow up on its auditors’ findings shows the urgency and magnitude of the problems.
The issues of overall sustainability have been at the center of the international campaign against Indonesian palm oil since the 2000s. Most international green NGOs have alleged that the astronomical expansion of oil palm estates in the country has caused massive deforestation.

In March, the European Union restricted the volume of biofuels made of palm oil that may be counted toward the bloc’s renewable-energy goals. By 2020, member states must ensure at least 10 percent of their fuel consumption comes from renewable fuels, but palm oil-based products will not count. By 2030, the EU aims to stop all imports of palm oil.

Then, on Aug. 14, the EU escalated the antipalm oil campaign when the group reintroduced tariffs, ranging from 8 to 18 percent, on subsidized palm oil imports from Indonesia, following a probe which, the group said, found subsidies given to domestic producers

Unfortunately, Indonesia, as the world’s largest producer with an annual output of over 40 million tons of crude palm oil, seems tempted to resort to more traditional trading weapons: duties, tariffs and blockades. Protectionism does no one any good.

Moreover, World Trade Organization rules allow countries to try to influence other nations’ environmental policies through trade terms, as long as they are not discriminatory measures for protectionist purposes.

We previously accepted the main arguments made by the Indonesia Oil Palm Association (GAPKI) and the government itself that the allegations of deforestation are mostly a subterfuge to protect EU producers of vegetable oils such as soybean, rapeseed and sunflower, which have become increasingly uncompetitive as the palm oil yield is nine times higher than those of other vegetable oils.

The government has often seemed frustrated by the NGOs’ endless criticisms because their arguments presented in the debates over palm oil have not always been based on straight facts. Worse still, the governments of EU members and the United States often act in favor of noisy environmentalists.

But the basic question remains unaddressed. How can the government and the industry expect international fora to accept their claims with regard to the sustainability of the industry, when the issue of transparency, which has from the outset become a key battleground in the fight to clean up the palm oil industry, has never been resolved?

President Jokowi has even defied the Supreme Court’s decision in 2017 that the government should make information on palm oil concessions available to the public. Cabinet members related to the industry argued that data on palm oil concessions should temporarily be closed to the public as the government was reviewing all the concessions.

Over the past decade the government has subjected the industry to tougher rules designed to make the commodity sustainable economically, socially and environmentally. But the progress seems to have been much slower than expected given the complexity of the problems, especially in regard to overlapping regulations, changes in spatial planning and the tendency among many local leaders to use the issuance of land concessions as their “cash cows”.

The central government has since 2011 required oil palm growers to fulfill the principles and criteria of sustainability under the Indonesia Sustainable Palm Oil (ISPO) scheme as certified by accredited certifying agencies. But as of July, only 4.1 million ha, or about 30 percent of the estimated total plantation area of 14 million ha, had been certified.
 

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Executive column: Infrastructure: Clearly defining roles of public, private sector

The Jakarta Post 

Mon, August 12 2019   /  02:26 am

Infrastructure development will remain one of President Joko “Jokowi” Widodo’s priority programs in his second term. However, with government debt rising to a new all time high, it has become most imperative to source the bulk of investment financing for the next five years from private investors. The International Monetary Fund, World Bank and even Finance Minister Sri Mulyani Indrawati have all cautioned the government and state-owned enterprises (SOEs) against having too dominant a role in infrastructure development.

The question is, how should the government go about attracting more private financing for the estimated US$450 billion in infrastructure development needed for the next five years? The Jakarta Post’s Vincent Lingga raised this issue in a recent interview with Shadik Wahono, a corporate restructuring expert and toll-road investor in three Asian countries. The following are excerpts from the interview: 

Question: With both the government and SOEs already heavily leveraged, what should the government do to woo more private investment in the infrastructure sector?
Answer: Our infrastructure development has yet to align with financial metrics that can minimize risk and optimize performance so as to attract more long-term investments. We need to pay more attention to cash-flow projection, the ability to achieve stable operating expenditure and overall financial viability.
These are the calculations that investors are looking for — they want to assess the ability to service an infrastructure loan. History suggests Indonesia’s track record has fallen short in this regard. After the 1998 economic crisis, many projects had to be bailed out by the government, either directly or via SOEs. The rest were deemed to be financially insolvent. There is also a need to support and incentivize experienced operators with proven track records.

There are two kinds of financiers in infrastructure: investors and lenders. Could you talk about debt-financing alternatives suitable for infrastructure in view of special characteristics of infrastructure?
The infrastructure financing model for Indonesia has not changed much since the 1990s. Essentially, a project is awarded with a fixed payment period, using discounted cash flow with a risk premium. The entire project is seen as a monolithic entity for which risk is calibrated and priced once and for all. There are two major problems. First, all the risks are thrown in and factored to the rating. Because we have bundled all the risks, investors take the lowest denominator — which means the highest possible interest rate — to justify the sum of the risks.
Second, it assumes lenders are themselves monolithic. In that sense, we have not caught up with major changes in international infrastructure financing. Globally, this space has become more sophisticated and there are new players — not just traditional project financiers but also private equity and insurance companies. We need to consider variations to the funding model to tailor to the specific expectations and parameters of different types of financial institutions.

Since project financing is different from corporate financing in that the former depends solely on the projected stream of revenues, how should the government manage the tariff regime for public infrastructure?
There is a need for the government to resist the pressure to lower, change or lift tariffs at will. The concession is a legal agreement with stakeholders who expect it to be honored. But Indonesia, as history suggests, has a habit of bowing to political pressure at various levels such that the tariffs are not fully honored.

As much as possible, maintain consistency. If there are situations in which tariffs are suspended or lowered, there should be ample mechanisms for tariff recovery. We must find ways to protect the interests of investors and maintain confidence. In short, we need to be disciplined in our contractual agreements with infrastructure investors. All parties need to build up a culture of trust.
Indonesia still performs poorly in attracting investors under the public-private partnership (PPP) scheme launched in 2005, while countries such as India, Brazil and Mexico have succeeded in developing almost 35 percent of their infrastructure under the scheme. What are the main barriers?
We need to clearly define the roles of the private sector and the public sector. In Indonesia, there is always a tendency to mix up the two. Keep politics out of the PPP. Indonesia tends to chop up and offer projects, or segments of a project, based on “connections” or to an SOE instead of decisions based on merit. This trend not only poses problems of coordination and lack of economies of scale, it sends a bad signal to investors. Even if projects look good, they may want to stay on the sidelines.
We should deliberately look out for operators who have completed projects on time and even at lower costs — seek out and incentivize them with new projects. This can be a deliberate effort to keep the overall costs of infrastructure down by sending a strong signal that Indonesia rewards success.

Back to financial instruments for infrastructure, how do you assess the prospects of issuing infrastructure bonds and other infrastructure-based securities backed with future revenues? What additional market and regulatory infrastructure is needed to facilitate these securities?
In fact, such infrastructure financing has already been started by several SOEs. One hurdle […] is red tape. Issuers face a host of challenges which include government policy, regulatory clearance and taxation issues. Overall, our financial and legal frameworks are often seen as not conducive to encouraging the issuance of such instruments. We need to review our financial legislation and capital market regulation to encourage more such instruments, especially when we consider the urgent need to ramp up infrastructure as outlined by the President.

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Taking lessons from 2015 forest fire disaster

Vincent Lingga The Jakarta Post

Jakarta   /   Mon, July 29, 2019   /   03:00 pm

 

Burning peatland is seen in Palangkaraya, Central Kalimantan. Uncontrolled peat fires can spread for kilometers underground and by air, causing a deadly smog. In 2015, this resulted in one of the greatest environmental disasters of the 21st century. (JP/Björn Vaughn)

 

The ghost of the 2015 forest and land fires, which raged through 2.6 million hectares in Sumatra and Kalimantan and cost the country more than US$16 billion, is haunting us now that the Meteorology, Climatology and Geophysics Agency (BMKG) has forecast a severe drought within the next few months.

The devastating forest fires four years ago, the worst in two decades, still loom over the conscience of the government after the Supreme Court on July 16 rejected an appeal filed by President Joko “Jokowi” Widodo against a lower court ruling that found his government guilty of failing to prevent the forest fires. The citizen lawsuit was brought against the government in 2016.
The court also ordered the government to review the permits of companies of which plantation concessions burned, create a road map for forest fire mitigation and emergency handling and make a compensation plan for fire victims.

Although meteorologists do not foresee this year’s El Niño to be as severe as the one in 2015, prolonged drought could still dry out vegetation, providing highly combustible fuel for fires, allowing them to spread faster and farther.

Fortunately, the specter of the man-made disaster in 2015 seemed to have led the central government, local administrations, big plantation companies and local people to a steely determination to cooperate in fire prevention, detection and mitigation.

The government on its part has enacted key policy changes to avoid another emergency of the magnitude of the 2015 fires. Tougher rules have been enforced, such as requiring plantation firms to restore degraded peatland.

The President slapped a three-year moratorium on new oil palm development and mandated the review of existing licenses to minimize further expansion of palm plantations.
How about Asia Pulp and Paper (APP), the country’s largest producer, and Riau Andalan Pulp and Paper (RAPP), the second-largest, which were alleged to have been among the main culprits behind the 2015 fire disaster?

The two companies, which together with their suppliers manage millions of hectares of pulpwood estates, notably those in fire-prone peatland areas in Riau and South Sumatra, seem to have taken great lessons from the disaster.

They started developing integrated fire management systems immediately after the massive fires in 2015, involving the procurement of equipment and technology and the training of fire-fighting personnel and cooperation with local governments and the communities.
Riau and South Sumatra were the hardest hit in the 2015 fires.

The awareness and alertness, besides friendly weather, contributed to the fact that there have been no major forest and land fires over the past three years, especially during the most crucial time last August when Jakarta and South Sumatra cohosted the Asian Games. About 15,000 athletes from 45 countries and hundreds of thousands of spectators from across the continent visited the two cities for the Games.

“We took great lessons from the 2015 fire disaster and have since invested more than $100 million in developing our fire-management system,” said Suhendra Wiriadinata, director of APP, a subsidiary of the Sinar Mas group, which holds millions of hectares of land concessions for pulpwood and oil palm plantations in Sumatra and Kalimantan.

Wiriadinata said APP had set up a remote sensing system, trained 3,000 fire-fighting personnel, set up 506 fire monitoring posts, 100 fire towers, procured 138 fire engines, 608 ground patrol vehicles, 10 water bombing helicopters and installed more than 1,000 water pumps.
RAPP has also steadily strengthened its fire management system since late 2015, spending millions of dollars on procuring equipment and technology and establishing fire detection, monitoring camps, cameras and weather stations.

RAPP forest protection and conservation manager Sailal Arimi says the company uses advanced satellite hot spot monitoring from two NASA-based systems and MODIS satellites, has installed more than 140 monitoring and lookout towers and operates helicopters, airboats, almost 500 water pumps and employs a rapid response team with almost 1,000 well-trained fire-fighters.
RAPP is a subsidiary of the Asia Pacific Resources International Holding (APRIL), which holds or manages millions of hectares of land concessions for oil palm and pulpwood estates in Sumatra and Kalimantan.

APP and RAPP together account for more than 80 percent of Indonesia annual pulp and paper output of 8.5 million tons and 12.5 million tons, respectively.
Certainly, the huge expenditures for fire management simply makes sense to ensure their own business survival because they depend mainly on fast-growing trees for their pulp materials. However, both Wiriadinata and Arimi have acknowledged they cannot simply erect “walls” around their concessions by installing fire monitoring, detecting and extinguishing equipment and maintaining their own fire-fighting-response teams.

Both plantation groups are aware that their fire prevention programs will never be entirely effective without good cooperation with local administrations and people. It’s because historically, forest fires during the dry season are usually caused by a combination of several factors: the slash-and-burn method for subsistence farming, land clearing for plantations, underground peat fires and accidental fires related to daily habits of the people, such as throwing away live cigarette butts and untended cooking stoves.

The companies’ fire management systems therefore have from the outset included the education and empowerment of the communities living around their concession areas.
APP's Fire-Aware Village Community empowerment program and RAPP's Fire Free Village program help local people cultivate horticulture and food crops by providing them with seeds, farming tools, extension services and marketing their produce and nurture their awareness of the damage of forest and land fires.

“Keeping a close eye on fire and deforestation alerts in the 2019 season will be a good indicator of the effectiveness of policies enacted since 2015, but it’s not the only one,” Andika Putraditama, World Resources Institute (WRI) Indonesia sustainable commodities and business manager, notes.
Since higher palm oil prices tend to drive agricultural expansion, the true test of government and industry commitment to forest protection will come when the palm oil price bounces back and economic pressures coincide with another hot, dry El Niño year, Putraditama says.

Arie Rompas, Greenpeace Indonesia forest campaigner team leader, concurs that the country is now in a climate emergency, so ”we need to see them making maximum effort. If APP and RAPP, along with cooperation and coordination with local government, were rewetting and rehabilitating the peatland this would greatly reduce the risk of the hugely damaging peatland fires.”

“But we will look to see what the companies are doing together with other people in the landscape to improve their prevention activities. We consider that APP and APRIL's fire prevention efforts have not been thoroughly tested since 2015 because there is no significant dry period and high fire risk,” Arie adds.
***
The writer is senior editor at The Jakarta Post 

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Plastic waste: The blame is on us, convenience-minded consumers

Vincent Lingga / The Jakarta Post

Jakarta   /   Mon, July 22, 2019   /   09:06 am 

A 3-year-old boy is helping his parents sorting the waste. (JP/Sigit Pamungkas)

 

Indonesia’s problem of plastic waste pollution is not the result of the occasional rogue foreign shipment. It is caused mainly by each one of us, the hundreds of millions of convenience-minded consumers who have become so used to buying cosmetics, household detergents, water, eggs in boxes and packaged food in single-use packaging.

When buying such products we don’t give a thought to what will happen to the plastic after we discard it. Unless sorted and collected such packaging will end up in a landfill where it will degrade only after 450 years, experts say, or, worse, find its way to the sea.

Recently, a few Asian governments intercepted imported shipments of allegedly hazardous waste comprising household garbage, municipal waste, hospital waste and electronic scrap. Indonesia itself has shipped five containers of plastic wastes back from Tanjung Perak Port in Surabaya, East Java, to the exporters in the countries of origin, mostly Western industrialized nations.

Some of this waste had been misleadingly declared recyclable plastic scrap and there is a likely connection between the sudden increase of such shipments and the notification given by China to the World Trade Organization in July 2017 that it would no longer import various kinds of recyclable scrap. Since the early 1990’s China eagerly consumed 60 percent of the world’s recyclable scrap to fuel its manufacturing boom and this sudden decision left scrap exporters scrambling to look for new markets.

According to research by the United Kingdom-based Financial Times, the countries that immediately stepped in to fill the gap left by China were, in order of size, Malaysia, Vietnam, Thailand, Hong Kong, India, Taiwan, the Netherlands, Turkey and Indonesia.

Politicians have found it fashionable to describe Asia as having become the “dumping ground” for the waste of Western countries. However, every shipment of recyclable plastic involves a buyer and seller.

No reputable recycling company wants to import scrap that has been contaminated and no foreign government wants the embarrassment of being forced to take back its own garbage.

However, in international trade there will always be rogue elements all too ready to make a quick profit through fraudulent declarations. Until recently the export of plastic scrap was not even covered by the Basel Convention, so such exporters could not be prosecuted by their own governments.

The main reason that China gave to the WTO for its decision to stop importing scrap was because many shipments had been mixed with “dirty waste” that could not be used as raw material and contaminated the environment.

Fortunately this problem was recently addressed by the Basel Action Network and in May 2019 the Basel Convention was amended to include mixed and contaminated plastic scrap as “hazardous waste”. Indonesia also signed the amendment that will come into force in January 2021.

Unfortunately the isolated cases of waste imports have resulted in an unfair backlash against the import of plastic and other scrap needed as raw material for the legitimate local recycling industry. The call for a total ban on transboundary plastic scrap is a throwaway phrase that does not acknowledge this important local industry.

In Indonesia a well-established reputable recycling industry employs thousands of people. T

he Industry Ministry estimates Indonesia needs 600,000 tons of imported scrap a year and can potentially enjoy a healthy trade surplus by exporting back recycled plastic pellets, flakes, plastic chips and geotextiles for road construction.

Reputable foreign investors have entered this sector such as the recent bottle-to-bottle recycling plant in East Java. At least one of Indonesia’s largest producers of bottled water can now claim to use bottles made out of 100 percent recycled local plastic.

However, the local recycling industry presently has no choice but to continue to import plastic scrap because it is simply not able to utilize the plastic waste produced by Indonesian consumers, owing to the absence of efficient municipal waste collection, sorting and cleaning systems.

Unless there is a demand from the consumer for biodegradable containers, or for a reuse model in which all bottled liquids have to be sold together with refills, the amount of single use packaging will not decrease in the short-term. Indonesia should instead immediately implement less challenging strategies.

We cannot expect consumers to sort their household waste or desist from throwing it into the river for love of the environment. Even Singapore, a model of urban cleanliness, has yet to convince residents to sort their household waste. However, if householders are paid to sort their waste as in the commendable Indonesian bank sampah (app-based garbage collection bank) scheme, already comprising over 7,000 banks, then they will do so.

Similarly, we cannot expect municipalities to find the funds for recycling facilities. However, such funds would be readily available if there was a regulation on a national program of extended producer responsibility (EPR) in which the producer who delivers a product in a single-use container must take responsibility for its end of life, and make a small contribution to an ecofund for recycling infrastructure. Such a program could also be extended to the less visible but more serious problem of electric and electronic waste.

The EPR regulation could be part of a wider effort under Law No. 18/2008 on waste management to cut Indonesia’s waste output; it would oblige producers and retailers to redesign their product packaging to have a higher proportion of recyclable material. It will also require that they take greater responsibility for the waste management of their products.

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Jokowi, Prabowo challenged to reveal income tax returns

Vincent Lingga

• The Jakarta Post
• Jakarta   /   Wed, February 27, 2019   /   09:05 am

Presidential candidate Prabowo Subianto, who has been campaigning vigorously for social justice and more equality in income distribution and asset ownership, turns out to legally hold cultivation rights for more than 350,000 hectares of land for 35 years in Aceh and East Kalimantan.

This finding, which was revealed in the second round of presidential debates recently, has prompted Indonesian Corruption Watch and several other civil society organizations to challenge incumbent President Joko “Jokowi” Widodo, Prabowo and their running mates to publicly reveal their annual tax returns to show their honesty.

Next month happens to be the deadline for individual taxpayers to file their 2018 personal income tax returns (SPT) and both candidates also must file their 2018 SPT before March 31.

The General Elections Commission has for the past five years required that all candidates running for presidential and regional head elections to submit copies of their SPT. However, the commission is not authorized to make the SPT documents public.

Strange, though, such tax clearance is not required for the estimated 300,000 candidates running for the legislative elections in April.

Certainly, like legally protected bank secrecy, tax laws do not allow for the publication of individual tax returns. But not a single law prohibits the two candidate pairs from reaching out to voters by voluntarily revealing their tax returns to ascertain their integrity.

As Indonesia is still perceived as one of the most corrupt countries in the world, such an unprecedented gesture of honesty and transparency could go a long way in winning the respect of voters.

Income tax returns are evidence of a citizen’s commitment to fulfilling their civic duties to the state and can serve as a good measure of integrity because the SPT documents must stipulate not only tax payment records but also all the fixed and financial assets of taxpayers.

The government does have the requirement that senior government officials and legislators annually submit the records on their liquid and fixed assets to the Corruption Eradication Commission (KPK).

But regrettably this bureaucratic requirement is rather meaningless, perfunctory at best, and not legally binding. Most officials, directors of state companies and politicians simply ignore it. Moreover, the KPK does not have the resources to audit and examine the asset reports.

SPT documents, however, are legally binding and whenever necessary can be audited by tax officials even though the taxation system uses the self-assessment principle.

The revelation in April 2016 that thousands of Indonesian businesspeople used the services of Panama-based law firm Mossack Fonseca to set up special purpose vehicles (SPV) or shell companies overseas makes it imperative for politicians and officials to now voluntarily reach out to the public to show their integrity.

True, shell or SPV corporations are not in themselves illegal and they often have legitimate business purposes. However, they were also notoriously known as the main players in the underground economy, tax evasion and money laundering, especially those based in tax havens such as Panama.

But still the lingering question is if those businessmen did not have anything to hide, why had they set up SPVs through Mossack Fonseca, whose clients were notoriously known either as big corrupters, money launderers or tax evaders.

Many of those who formerly owned SPVs in Panama are now legislative candidates.

Only 65.4 percent of the 16.3 million registered individual taxpayers filed their 2017 income tax returns by March 31, 2018 deadline, reflecting persistently low tax compliance even after the generous tax amnesty that ended in March 2017.

Yet more disappointing is that only 992,000 of the 10.6 million who filed their tax returns were self-employed professionals such as doctors, consultants, lawyers and businesspeople. The other 9.6 million were salaried employees whose income taxes were withheld by their employers.

This simply reflected the high incidence of tax evasion and was confirmed by the World Bank estimate that the government had been able to collect only half of the tax potential.

The low personal income tax return filings also reflect a low compliance tax culture, especially among highly-paid professionals and high net-worth individuals. This trend is worrisome because collecting more personal income taxes could actually help bridge widening income inequality.

No wonder, therefore, that personal income taxes contribute only around 10 percent to tax revenue and the tax ratio (revenue against gross domestic product) is only about 11 percent, the lowest in the ASEAN region.

The bizarre fact that over the past four years hundreds of legislators, senior officials and heads of regional governments have been convicted, or are being tried or investigated, on corruption charges makes it imperative for public officials to disclose their assets and prove their tax compliance.

As the public now see integrity and transparency as the most important character public officials must have, there is nothing wrong or strange for politicians to make public their annual tax returns to demonstrate their integrity.

We realize this is a sensitive matter. But as corruption will remain one of our biggest problems for the next decade, we need to build up pressure through public opinion to encourage senior officials and politicians to demonstrate their honesty by revealing to the public their annual tax returns and all their assets.

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Second round of presidential debates short of great ideas

Vincent Lingga

The Jakarta Post

Jakarta   /   Tue, February 19, 2019   /   08:47 am

Warm ending: Presidential candidate Joko “Jokowi” Widodo (left) embraces his contender, Prabowo Subianto, after the 2019 presidential candidate debate at Hotel Sultan in Jakarta on Sunday. The debate was focused on energy and food, natural resources and environment as well as infrastructure. (JP/Donny Fernando)

The second round of presidential debates on Sunday evening was livelier than the first one last month, with the exchanges of views flowing smoothly. But the debates miserably failed to generate a battle for great ideas because of the inadequate time allotted for discussing five important topics and the poorly designed structure of the debates.

Yet more unfortunate, many of the questions prepared by the eight panelists, especially on energy and food, were not relevant to Indonesia’s most pressing problems within the next five to 10 years.

The panelists miserably failed to force the candidates to state their visions and missions, views, stances and commitments in regard to the five topics of discussion: food, energy, natural resources, the environment and infrastructure.

But then again, given that the candidates were each only given a three-minute introduction, how could they adequately explain their visions and missions in such important sectors?

Certainly, Joko “Jokowi” Widodo, who has the benefits of incumbency, immediately moved to show off his achievements over the past four years. As the challenger, Prabowo Subianto could only state his dream: to achieve self-sufficiency in energy and food and lower their prices and improve the terms of trade for farmers.

So important are energy and food to a nation that they could make or break the political and economic stability of a country like Indonesia, which has a population of 270 million spread out in the world’s largest archipelago.

Yet the first question raised by the panelists on these two issues was: “How can the fourth industrial revolution [Industry 4.0] impact energy and food development?”

Even though Industry 4.0 has reached Indonesia, the issue is not the most urgent problem for the country’s energy policy now and for the next 10 years.

They should have asked the candidates about their commitment to cutting the huge amount of wasteful spending on fuel subsidies and developing renewable energy: geothermal, solar, wind, biomass, biofuel and hydropower.

Citing only the increased use of palm oil-based biodiesel as an example of successful renewable development is simplifying the whole spectrum of renewable energy development.

The general public eagerly wanted to know the stance of each candidate on the fuel subsidy, which had held hostage all previous presidents as they had always been torn between their wish to embrace market pricing for fuels and their desire to remain in power.

Jokowi made a nationally and internationally commended bold move to slash fuel subsidies at the outset of his administration in late 2014, only because international prices had collapsed to below US$40 per barrel.

He pledged to float domestic fuel prices on international oil prices as Indonesia is already dependent on imports for almost 60 percent of its needs. The managed fuel price-floating system Jokowi introduced in 2015 was still tied to fixed price floors and ceilings, whereby the government could still intervene in retail fuel prices if fuels overshot the price ceiling.

As the range of the price floors and ceilings set for the managed floating was designed to be close to the fuel economic costs, the policy also was effective at least to prevent subsidies from ballooning out of control.

Such a system would also allow a gradual incremental rise in fuel prices and would free the government from being held hostage by a wildly volatile international oil market.

But Jokowi is no different from his predecessors. Last year, he reneged on this commitment when oil prices rose to between $70 and $80, a policy he defended as most imperative to prevent inflationary pressures and to protect the purchasing power of the people.

But the blunt fact is that the drawbacks of fuel subsidies and government-regulated fuel prices have been well-documented: They are known to benefit the rich disproportionately, as they consume much more energy and they lead to wasteful consumption and environmental degradation by disincentivizing energy efficiency, conservation and the development of renewable energy.

Subsidies also distort the price signals that normally balance the supply and demand in a market, foster smuggling of cheaper fuel to higher-paying markets and tie up government funds that could be better used in areas such as infrastructure, education and health care.

Energy subsidies increased from Rp 93 trillion ($6.8 billion) in 2016 to Rp 98 trillion in 2017 and totaled Rp 165 trillion in 2018 as the oil price rose to as high as $70 from $48 as set in the budget. For this year, they are targeted at Rp 158 trillion with an average oil price of $70.

Likewise, one of the basic questions that should have been raised on the food issue is: How do the candidates define the meaning of food security or food self-sufficiency, set against the gradual shifts in the patterns of food consumption? And what is their strategy for increasing the production of such staple food as rice, corn, potato, soybean and horticulture, whose imports tend to increase annually during the Ramadan fasting month and Idul Fitri festivities?

Past experiences have shown that food self-sufficiency does not fully address the core elements of food security because of the vulnerability of crops to weather anomalies and pest attacks.

Moreover, income growth, demographic and other lifestyle changes have been causing structural shifts in the patterns of domestic food consumption and expenditure, especially in urban areas that now account for around 50 percent of the population.

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Reinvigorate manufacturing or remain trapped in 5 percent growth

Vincent Lingga
Senior editor at The Jakarta Post

Jakarta   /   Wed, February 13, 2019   /   09:06 am

Illustration of economic growth (Shutterstock/Number1411)

Even under the most optimistic projections, Indonesia’s economic growth in the next five years is unlikely to exceed 6 percent. In fact, potential growth will most probably be at 5.68 percent, according to a joint study by the Asian Development Bank and the National Development Planning Ministry.

Hence, we can simply ignore it as an empty promise if any of the presidential candidates claim they can boost growth to 7 percent or more from an average of 5 percent over the past four years.

Without a broader manufacturing base to produce high-value exports, balance of payments disparities will continue to hinder high economic growth.

The study, conducted to design comprehensive policies for the 2020-2024 period to reinvigorate manufacturing, cited continued dependence on commodities, premature deindustrialization, utterly low labor productivity and a shrinking demographic dividend as the main barriers to higher growth.

The conclusion and policy recommendations of the study for reviving the manufacturing sector are stipulated in a 310-page book entitled Policies to Support the Development of Indonesia’s Manufacturing Sector During 2020-2024, which was released by National Development Planning Minister Bambang Brodjonegoro last week.

The report essentially warned that Indonesia would never rise from a lower-middle to high income country if it failed to increase growth to at least 7 percent.

High growth can be achieved only with a stronger manufacturing base that utilizes more complex technology, which produces widely diversified high-value goods with high income elasticities of demand.

Indonesia’s manufacturing sector indeed has declined steadily after the 1998 economic crisis. The sector’s growth has always been lower than national growth and its contribution to gross domestic product consequently fell from 27 percent in 1997 to about 20 percent in 2018, according to Statistics Indonesia.

High-tech manufactured exports such as office, computer and communications equipment have declined sharply while commodities such as coal, rubber and low-tech and medium-tech products such as palm oil, tires and automotive components and cars with very low income elasticities of demand have now become the bulk of exports. No wonder, more than 65 percent of the country’s exports are commodities or commodity-related.

One of the main factors behind the decline in manufacturing was the commodity boom for almost 10 years between 2003 and 2012 that lulled the government into complacency.

Most of the other barriers to manufacturing cited by the report have by and large been diagnosed by earlier reports on Indonesia’s manufacturing sector by the World Bank and Organization for Economic Cooperation and Development research development center. But the analysis and evidence-based policy recommendations provided by the book seem to be the most comprehensive so far.

We have been too familiar with such problems as inadequate and poor infrastructure, regulatory and bureaucratic barriers, excessively high logistics costs and acutely low labor productivity. Most of these problems have been and are being addressed by the government through accelerated infrastructure development and 16 reform packages on expediting business licensing and deregulation to cut red tape.

But the progress has been way below expectations because of the acute lack of finance, difficulties in getting reforms implemented in the era of regional autonomy and poor inter-ministerial coordination and low institutional capacity.

Other policy recommendations in the report that have been implemented by the government, but unfortunately at a very slow pace, are the development of industrial estates and special economic zones outside Java that focus on particular industries with a promising future.

The government is recommended to follow the business models of such successful manufacturing countries as China, Taiwan and South Korea, whereby the governments heavily intervened in selecting the kinds of industries to be developed as the champions.

During the iron-fist Soeharto administration, Indonesia had partly implemented such a strategy but it failed miserably because the selection process was neither transparent nor based on clearly defined performance criteria and favored particular vested interest groups.

The process of selecting industries to be developed as the champions should involve the private sector and focus on the country’s strengths and comparative advantages. The strongest candidates could be the few promising product segments such as fabricated metals, electrical equipment, machinery and equipment, chemicals and synthetic fibers.

One of the boldest recommendations is to attract large foreign manufacturers to make Indonesia their production base but with strong, clear cut rules requiring them to transfer technology and expertise in product design, engineering and development within a fixed period of time.

Indonesia’s rules on local content for foreign companies and joint ventures have never been as strong and consistent as China. In fact it has been the strong regulations on the transfer of technology that turned China into the world’s manufacturing powerhouse.

True, China has been able to enforce such strong transfer of technology requirements because of its strong bargaining power given its huge domestic market. With a population of over 260 million and rich in natural resources, Indonesia can follow suit though at a smaller scale.

But to bear fruit, the industrial development strategy should be supported with a consistent and long-term policy, longer than the five-year political cycle.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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Replanting, downstream plants key to rubber industry

Vincent Lingga

Senior Editor at The Jakarta Post

Jakarta   /   Wed, January 23, 2019   /  10:08 am

A man collects raw rubber on the banks of the Subayang River in Riau in this file photo. Rubber is currently selling for Rp 6,500 (44 US cents) per kilogram down from a high of Rp 20,000 per kg. (The Jakarta Post/Tarko Sudiarno)

The liberalization of foreign investment in the crumb rubber industry is an example of misguided policy-making, which instead of achieving the objective of attracting investment could adversely affect the whole industry.

As natural rubber is Indonesia’s seventh-largest export commodity with an annual income of about US$5.5 billion, it was included in the latest economic reform package last November that focused on wooing more foreign direct investment. 

But the Indonesian Rubber Producers Association (Gapkindo) has strongly opposed the new policy, arguing that the crumb rubber industry has been suffering from acute raw material shortages and most plants have been operating mostly at 60 percent of their installed capacity as a result of a lack of raw materials. 

“The crumb rubber industry has a capacity of 5.6 million tons while the upstream sector [plantations] is able to supply only about 3.6 million tons of raw rubber,” noted Widyantoko Sumarlin, a senior executive of Gapkindo and chief sustainability officer of Kirana Megatara, one of the country’s largest crumb rubber producers.

Widyantoko said most crumb rubber plants had been operating far below their installed capacity because of the acute lack of raw materials and low rubber prices overseas.

Indonesia is the second-biggest natural rubber producer and exporter in the world, with a total area of around 3.5 million hectares but with an average yield of only 1 ton per ha, compared to 1.6 tons in Thailand, the second-largest producer, and Malaysia as the third-largest.

Different from oil palm plantations and the industry, which is dominated by big business groups, most (85 percent) rubber plantation areas belong to smallholders, private companies (9 percent) and state firms (6 percent). 

The government apparently thought that increasing the number of crumb rubber factories would automatically make the competition for latex much keener and this would help raise producer (smallholder) prices.

But this premise seems to be wrong. Gapkindo has said that because crumb rubber producers export more than 80 percent of their production, they use international prices that are quoted at the futures commodity exchanges in Singapore, Tokyo and Shanghai, as their main references for the domestic procurement of latex. 

True, the price of rubber, like most other commodities, has been very low over the past six years, falling from as high as $5 per kilogram in 2011 to as low as $1.20 in 2017 and $1.70 early this month. 

But this price decline was caused mainly by the sharp fall in demand in China, which accounts for more than 40 percent of global demand. 

The price will not likely rise this year because of the cascading effect of the slowdown in global growth, especially in China, and the downward trend in the price of crude oil, the basic material for synthetic rubber. 

What is badly needed instead, according to Widyantoko, is more farm extension services to help smallholders increase the yield of their plantations through the best farming practices and planting high-yield seedlings to replace their old trees.

However, smallholders simply cannot afford the replanting costs, which could reach as high as Rp 3.5 million ($240) per ha for clearing land and uprooting old trees and high yield seedlings, while the government’s budget is severely limited.

According to data at the Agriculture Ministry, 400,000 ha of smallholder rubber plantations require replanting, while the 
local production of certified seedlings is way smaller than the demand. 

Partnerships between rubber processing companies and smallholders under government oversight, as widely implemented between big oil palm plantations and smallholders, could be a highly effective collaborative model to solve the problems of low yields and poor quality because they depend on each other for their survival. 

But different from the oil palm estates and palm oil industry, which are controlled by big plantation companies, rubber plantations are dominated by smallholders who are not only poorly organized but also financially weak and lack competence in best farming practices.

“We in Kirana Megatara have been expanding our partnership programs to empower smallholders, but only on the basis of good faith. We need a better designed regulatory framework for NES [nucleus estate-smallholder] programs,” Widyantoko noted.

Even though the 2014 Plantation Law specifically requires all big plantation companies to implement NES partnerships, there is no government regulation on the technical details on how the NES scheme should be implemented. Moreover, the NES program is compulsory only for new plantations. 

Without comprehensive regulations on technical details, there seems to be legal uncertainty as to the identification of the smallholder target, standard NES contract and other issues related to land titles and permits from local administrations.

Additional investment is truly needed in the rubber industry, but not specifically in crumb rubber, an intermediate (mid-stream) material with low added value. 

The government should instead stimulate new investment in downstream plants to manufacture higher added-value products as components of automobiles and electronic goods, medical gloves, carpets, footwear and asphalt.

Thus far the biggest industrial user of natural rubber has been tire manufacturers, which have to compete fiercely with synthetic rubber producers.

Thailand’s and Malaysia’s rubber industries also depend mainly on the international market. 

But their domestic raw rubber prices have always been much higher than Indonesia’s because of the high demand from their downstream rubber factories, which manufacture a wide variety of rubber goods, besides tires and medical gloves.

***

The writer is a senior editor at The Jakarta Post.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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