Special report: Part I

Indonesian plantation monopolies under threat

By Rick Beckmann, senior foreign legal counsel and Aldi Rakhmatillah, associate, of Susandarini & Partners in association with Norton Rose Fulbright Australia

- Last updated on GMT

The Indonesian President's Office confirmed the "haze" crisis was down to palm oil companies
The Indonesian President's Office confirmed the "haze" crisis was down to palm oil companies

Related tags: Indonesia, Corporation

The Indonesian Government is planning to crack down on further expansion of groups in the powerful palm oil plantation industry and, indirectly, foreign conglomerates.

Under law, the government cannot just break up existing monopolies. But it can stop them from becoming bigger—which is its goal. 

The Ministry of Agriculture (MOA) has proposed fundamental changes to the operation of the Indonesian plantation industry. There are two key aspects:

  •  the size of plantations held by a “group of companies​” will be limited to 100,000 hectares, in the case of palm oil; and
  •  investors in the plantation processing industry must give the local community a controlling interest to processing mills by their tenth year of operation.

Monopolies in the plantation industry, which in some regencies are concentrated in particular corporate groups—and, in some cases, families—have been a concern of the Indonesian government for some time. And many of these are in the hands of foreign interests.

In the June 2013 “haze​” crisis, Singapore and Malaysia were enveloped in smog from forest fires in Kalimantan. As the Pollution Standards Index hit 401 (which, under Singapore government guidelines, may be life-threatening) and Indonesia marshalled helicopters and cloud-seeding equipment, the Indonesian President’s Office confirmed that the haze was caused by palm oil companies—some of which happen to be controlled by Singaporean and Malaysian interests.

This is not the first time Indonesia has proposed a crackdown on plantation monopolies. 

Holdings of individual companies, but not group companies, were previously regulated, resulting in parent companies incorporating numerous subsidiaries to hold individual plantation concessions. A 2002 regulation did try to restrict plantation holdings for a “corporate group”—with a much narrower definition than under the current MOA proposal—although this was abandoned five years later. This directly led to the trend to establish multiple subsidiaries for individual plantation holdings under one corporate tree. Now, for the first time in six years, the Indonesian government is again trying to prune the corporate tree’s branches.

For some years, foreign investment in the Indonesian plantation industry has been restricted to a maximum of 95% of the shares in a plantation company.

The current MOA proposal is consistent with the direction of resource nationalism in the Indonesian mining industry, although it may go one step further. The mining industry has been hit by a crackdown on foreign investment and court decisions favouring the regencies and small business, pointing the way towards legislation to protect Indonesian interests. The Constitutional Court has taken this a step further, increasingly siding with local indigenous communities against the big mining players. In the plantation space, the proposed new regulation combines both these strands, by both being against foreign investment and focusing on the benefits to a local community of plantation development.

Under Indonesian law, a regulation cannot be retroactive. So it cannot work backwards to require divestment where a multinational already has over 100,000 hectares of plantations. Rather, the aim is prevent big players becoming even bigger.

The MOA proposal is that listed companies will be exempt from the anti-monopoly provisions, provided that a majority of their shares are publicly owned. There are at least 15 plantation companies currently listed on the Indonesia Stock Exchange (IDX).

Local interest groups have claimed that the proposed exemption is absurd because listed IDX companies rank as the worst offenders in terms of plantation monopolies. They also claim that consultation on the proposal has been limited to the “big players​”, with no input from the plantation industry generally.

The MOA first announced its proposed crackdown early in April, indicating that the regulation would come into effect by the end of the month. Not a lot more was heard about this until June, when the MOA called a meeting of industry participants to discuss its proposals. A draft of the proposed new regulation is now in general circulation.

Next week: How does Indonesia and—more to the point—the local community benefit from foreign investment in plantations?

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