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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Commentary: Bold reform within customs and excise administration

Vincent Lingga

The Jakarta Post

Jakarta   /   Mon, January 7 2019   /  12:33 am

Customs and excise offices are not popular institutions in many countries as they are deemed to be notoriously corrupt. Even the Bible negatively perceives customs collectors as sinners, as in the story of Zacchaeus, who later was happily reformed and gave half of his possessions to the poor.

Authoritarian president Soeharto was so fed up with the then corrupt and inefficient customs office that he stripped it of its import inspection and clearance authority in 1985 and transferred that mandate to the Geneva-based Societe General de Surveillance (SGS), the world’s leader in surveyor and inspection services. 

Soon after the Customs and Excise Directorate General regained its import and export inspection authority in 1997, it pledged to minimize corruption by introducing an electronic data interchange (EDI) system that would facilitate all communication between officials, importers and banks in the determination and receipt of customs duties and tax. 

But reform within the directorate was sporadic over the past 20 years and the customs service, like the tax office, continues to be perceived as a corrupt and inefficient public institution even though its governance is now much better than before 1998. The directorate launched the EDI system through the internet in 2016, but the online filing of trade documents was not at that time made compulsory for importers and exporters.

Then the directorate announced on Dec. 21, through an advertisement in this newspaper, that it would fully implement the EDI system for all importers and exporters starting in January, 2019. What a bold move.

EDI, an electronic trade documentation system, will provide an online, real time electronic interface and enable exchanges of data among all players in the import and export process (customs and other relevant government offices involved in seaport and airport handling, banks, shipping lines and freight forwarders). 

Businesses (users) can transfer data (documents) at anytime and from any place with an internet connection across the world’s largest archipelagic country. Many other countries that have fully implemented the EDI have been able to slash the time it takes to complete customs clearance and the whole port handling process from a few days to a few hours, or even a few minutes as in Singapore. 

EDI implementation should certainly be supported by a comprehensive reform program that includes improving the customs code, implementing controls based on risk assessment, adopting performance standards and effective internal audit, maximizing information and digital technology, and establishing a consultation process with the private sector. 

It should also be remembered that customs clearance is only one of the many aspects influencing the dwell time of freight — the length of time cargo sits in a seaport terminal’s in-transit storage — which in Indonesia remains very long and has contributed the most to logistics costs, which are among the highest in the ASEAN region. 

Why then is a clean, efficient and technically competent customs service so vital to the economy and a key to connecting Indonesia to the global value chain?

To a certain extent, the Customs and Excise Directorate General plays a more important role than the Taxation Directorate General. The most damaging effect of corruption within the tax authority is state revenue losses, as the government receives much less than what is due from taxpayers. But malfeasance within the customs service causes far-reaching damage to the economy, especially international trade. 

Violations of customs rules, besides resulting in state losses, create distortions on the domestic market because foreign goods, on which much lower duties and taxes are paid than what is mandated by law, create unfair competition with domestic products. Outright physical smuggling, which is believed to be rampant given the vast and porous coastal lines across the archipelago, also has a similarly devastating impact. 

Even after most import tariffs have now been slashed mostly to less than 10 percent under free trade agreements, the 10 percent value-added tax (VAT) is still payable on imported finished products, and this tax is based on the landed costs of the goods, the main component of which is the declared customs value. 

If general importers can collude with customs officers and get away with declaring an invoice price at a fraction of the true value of the goods, the importer pays less VAT. A grossly corrupt customs service could cause an influx of grossly undervalued finished goods on the domestic market and cause unfair competition with local manufacturers.

In fact, no trade policy instruments will be effective, however well designed they may be, if the customs service that is responsible for guarding the gateways (airports and seaports) remains venal and technically incompetent. There will never be fair trade without an efficient, fairly clean customs service.

An efficient customs service contributes greatly to facilitating the smooth flow of imports, which is vital for the domestic manufacturing industry because of its heavy dependence on imported materials and components. Even foreign tourist arrivals, which are so important in bringing in foreign exchange, could be discouraged by an inefficient customs service. 

The launching of the EDI system will certainly face startup problems and resistance from vested interests who will lose a cash cow. But then all bold reforms are never easy because they have to deal with the rent-seeking mentality that had developed within the old system. But this is the challenge for the chief economics minister, Darmin Nasution, to see to it that all government offices involved in port handling fully cooperate to make the EDI a success.

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