Blog Update

21/12/2018

The Challenges of Indonesia’s Palm Oil Industry: An Overview

The global debate on the sustainability and legitimacy of palm oil production is one that continues to evolve and define the industry. As Indonesia and Malaysia are the two major palm oil producing nations, there is much discussion around the issues that palm oil plantations pose in the face of environmental sustainability, the local economy, and human rights. The Indonesian debate on palm oil is an international issue that continues to affect local, national and international frameworks through negative consequences to the flora and fauna and land disputes, while also providing benefits for local economies and the development of rural Indonesia.

Palm oil is a global commodity that is extracted from the oil palm tree, Elaeis guineensis. These plantations can be found throughout Southeast Asia, however largely concentrated in Indonesia’s Kalimantan and Sumatra. The oil palm is an attractive source of livelihood for farmers, due to the high yielding compared to soy and canola.

In 2010, Indonesia’s land-use for oil palm plantations was at 8.4 million hectares, this is juxtaposed with the 18 million hectares that the Indonesian Government has deemed suitable for plantations for current or future stakeholders in the industry. Through this booming industry, Indonesia has accumulated international attention through their rapidly increasing economy, and the mass deforestation of native rainforests as a result. Together, Indonesia and Malaysia provide 80.5% of the world’s palm oil. This is a major market for the two nation-states, with Indonesia alone producing 32.5 million tons of palm oil in 2014, with 80% exported to global consumer. The global community plays a major role in consumer products, as approximately half of the packaged supermarket products contain palm oil, with the industry expected to grow rapidly. Indonesia hopes to increase its production and exportation of the palm oil to 40 million tonnes annually by 2020.

Today, Indonesia is one of the largest palm oil producer in the world, with a rapidly increasing economic and trading market. The production of Palm oil and exportation contributes heavily towards to nation’s Gross National Product (GNP), thus provides  an obligation and responsibility for the nation, and stakeholders, to continue to provide this commodity for the global community to import and consume, in addition for the state to balance their national economy. However, in 2015 San Afri Awang, Indonesia’s Environment and Forestry Minister, stressed that the government’s “authority is being taken over by the private sector”, demonstrating the heavy influence and power these big corporations have over the governmental policy and economy, through lobbying and networks.

The environmental impacts of mass palm oil plantations are extensive within Indonesia. Deforestation is the major issue that continues to negatively impact the industry. Between 2008 and 2008, 3.1 million hectares of rainforests were lost due to new oil palm plantation, with approximately half a million hectares lost every subsequent year. In addition, the imbalances in the environment are found in the forms of disturbances in the soil, the loss of carbon from biomass, as well as the accumulation of organic matter due to peat swamps for oil palm establishment. The use of agrochemicals such as fertilizers, rodenticides, and pesticides also threaten the terrestrial and aquatic ecosystems within the region. Humans also become the subjects and experience the environmental damage of wildfires, as many have to suffer from respiratory, cardiovascular disease and death. Furthermore, 20% of wildfires across Indonesia are attributed directly to palm oil plantation practices between 1989-2008.

The majority of Indonesia’s rainforests grow on carbon-rich peatland, which causes major environmental and economic risks. The palm oil plantations create two issues when dealing with carbon mitigation, first is the emissions from deforestation, and second is the emissions created from the production of palm oil.  Through these two processes, carbon is released from the soil, and methane is released from the mill effluent. These elements are major influences in Indonesia’s rainforest loss and contribute heavily to its national pollution and emissions.

Major palm oil companies in Indonesia often resort to illegally expanding their plantations to neighboring forests, which in many cases results to deforestation of rainforests. This creates an unbalanced ecosystem through the disruption of biodiversity and food chains. Two critically endangered species, Orangutans and Sumatran tigers, which are only found in the region, are facing extinction, along with much other native flora and fauna. Orangutans are decreasing at alarming rates, there are approximately 50,000 orangutans left in the wild, compared to approximately 315,000 in 1990. Although the palm oil industry is not wholly responsible, they largely contribute to the destruction of their habitat, which is the leading cause of extinction.

Challenges are also created through local conflicts between local community and palm oil companies. In 2015 alone saw 776 conflicts between palm oil companies and local indigenous communities. Abram et al. (2017) state that these problems arise due to “boundary disputes, illegal operations by companies, perceived lack of consultation, compensation and broken promises by companies”. In addition, many small local or indigenous communities have not had the privilege of obtaining legal documents that certify ownership of land, thus creates major issues in proving land ownership. Many communities suffer livelihood damages and access to community resources, once they are in conflict with large palm oil companies. As a source of income, local members often are left with no options but working for the companies, and many experience inadequate labor standards and abuse.

The mushrooming local to national corruption in the sector of palm oil is an increasing concern for many national and international bodies. The lack of law enforcement and land allocation creates a messy and ambiguous working environment on a local level. Local government in regencies across the country are the most susceptible to bribery and corruption, due to the lobbying, or personal interests in the sector. In 2012, 13 regents were under investigation for providing illegal allocation and permits, while a third of all regents in Indonesia are under investigation for corruption. This led to the imprisonment of two governors for illegally providing permits to palm oil investors or companies in 2012 alone. In addition, some local governments have invested interests in the palm oil sector, and according to the EIA International, crimes in the palm oil industries happen largely due to the issuance of the Plantation Business Permit (IUP) prior to approval of Environmental Permit, or the Forest Clearance prior to Timber Utilisation Permit (IPK). Therefore, a major aspect of corruption occurs through the allowance of companies to skip or bypass certain laws which are in place to ensure the legality, sustainability, and validity of the plantation.

Despite the issues and challenges that the palm oil industry faces, one could also argue that it is indeed very difficult to find the alternative to this commodity. For Indonesia, the industry itself creates 17 million jobs for communities and smallholder farmers. Approximately, 4 million people in Indonesia are dependent on this industry to sustain their livelihoods and community. (These local economic benefits for communities have provided mechanisms to reduce poverty and increase social development through a rural economy and job opportunities. In addition, it provides major advantages in Indonesia’s national economy and exports, as in 2016 alone, Indonesia generates 13.9 billion USD for its exports on palm oil, with the biggest export destinations of India, China, and Pakistan.

Juxtaposed with this, is the 31 million tons of palm oil that were exported in 2017, bringing about 75 percent of Indonesia’s total output and 22.9 billion USD foreign exchange revenue. Overall, these are significant benefits for cultivating and producing sustainable palm oil. These benefits can be seen in a local community level, to a national economic level.

To better portray the issue on hand, two frameworks surrounding palm oil production in Indonesia, namely the Roundtable on Sustainable Palm Oil and Moratorium on the Issuance of New Permits for Palm Oil Plantations would be examined. The Roundtable on Sustainable Palm Oil (RSPO) comes as an international effort to establish and implement global standards with the focus to advance the production, procurement, finance and use of sustainable palm oil products. Actors involved in the RSPO include oil palm growers, retailers, banks and investors, environmental or nature conservation NGOs, social or development NGOs, as well as palm oil consumers. Indonesia’s certified area per 30 June 2018 holds 1,555,847 hectares share, including the smallholders certified under group certification. Noted in 2018, Indonesia holds the highest number of complaint submissions, whose number accounts up to 69% of the total case since 2009. In many countries in the Asian region, RSPO faces challenges as many stakeholders and consumers are reluctant to pay more on sustainable products (https://www.rspo.org/key-documents/impact-reports). If the trend continues, the RSPO would lose its significance in the global community, which would create negative effects in advocating against the clearance of primary forest, fires, disputed land ownership.

Nevertheless, the RSPO creates important pathways to combat this growing industry, such as through its newly adopted consensus-driven P&C 2018 scheme where deforestation is not encouraged, along with the implementation of the High Carbon Stock Approach. The RSPO’s role in creating a space for stakeholders to come together to implement strategies for sustainable palm oil production has created significant changes within the industry and continues to do so, however, there are still major challenges that they face in creating a fully sustainable industry.

The moratorium on the issuance of new permits for palm oil plantations instructed by President Joko Widodo in September 2018 to his ministers and regional administrations, is arguably deemed as a significant mechanism to mitigate the environmental and social consequences of the sector. Besides its objective to boost the productivity of palm oil plantations, this moratorium also aims to reduce conflict between smallholders and corporations inside natural forests. Nevertheless, Indonesia is still being scrutinized as to whether it could make some betterments to the law enforcement and practices on the palm oil industry. The complexity of the issue in Indonesia seems to be put together with the discussion of its Palm Oil Bill in the Parliament. This Bill, which is seen as part of the National Legislation Program in 2016 and 2017 by the House of Representative of the Republic of Indonesia (DPR-RI) seems to align only with the interests of the investors. If this Bill is passed, the battle of finding the best solutions to unsustainable palm oil production may become increasingly difficult.

The multidimensional aspects of solving sustainable practices within the palm oil industry indicate that there is a need to exert greater eagerness in discussing upon the matter with multiple respective actors. In order to bring about new impetus on resolving the issue, all stakeholders need to collaborate hand-in-hand in making dialogues as accommodative and constructive as possible. The Government’s role as a determining factor on the mitigation and production becomes more important than ever. Thus, they need to prompt themselves to always consider their responsibility towards their people in every action. Perhaps, by investing more on the Research and Development on finding the substitute of palm oil, collaborating with epistemic communities and partners in the advanced countries for its environmentalist agenda would be leverage in enhancing the sustainability aspect of the palm oil business.

To further argue, the efforts to nurture the environment would also be accentuated by raising the awareness and implementing a better coping mechanism of introducing smart plantation. The role of Civil Society Actors should also be encouraged, by giving them more opportunities to grow their resistance power against the palm oil industry.

There are major challenges and issues concerning the implementation, processes, and characteristics of the palm oil industry in Indonesia. The global push for change within the sector is a major driving force behind the move to a more sustainable industry. The palm oil industry continues to rapidly change and grow with the attention and support of the global community, affecting societies on a local, national and international level.

Written by Kevin Iskandar Putra & Mia Dunphy. Kevin is a research intern at the ASEAN Studies Center, Faculty of Social and Political Sciences, Universitas Gadjah Mada.

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