Indonesian plantation monopolies under threat

food-navigator | 23 September 2013

Part 1: 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

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.

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Part 2: Indonesia’s plantation war with foreign conglomerates

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

This has always been a touchy topic. Since Dutch colonial times, Indonesia has been in a tug-of-war with foreign investors over who should ultimately benefit from exploitation of Indonesian resources. 

The fall of the Soeharto regime in 1998—and the end of its so-called “crony capitalism”—triggered the beginning of a trend towards what was termed resource nationalism. 

Since 1999, this has been exacerbated by a well-meaning—but ultimately, slightly flawed—policy allowing for greater fiscal and legislative powers at the regional level, which should receive a bigger slice of the regional resources pie. 

The regencies have developed into their own law-making, and taxing, fiefdoms. And the plantation industry, together with the mining industry, have been hardest hit.

On the face of it, the current restriction on foreign investment in the plantation industry generally to 95% does not look too serious. However, reading between the lines of the existing regulations, there are actually many more hurdles involved. 

The Indonesian shareholder must have proven experience in the plantation industry. Nominee arrangements, while not criminal, have been unenforceable since 2008. In other words, in the context of resource nationalism, it is not possible to create an artificial partner to get around investment requirements. 

Most foreign investors accept this and, indeed, it does not seem unreasonable that 5% of the plantation should be reserved for local interests.

Aside from the 95% foreign investment limitation, there are two other issues currently facing foreign investors in the Indonesian plantation industry:

• the so-called “plasma” requirement. Under law, plantation owners—whether foreign or local—are required to give the benefit of 20% of the plantation to the local community. This comes in various forms, but will usually involve the foreign investor procuring bank credit, assisting in the development of plantation facilities for the local community, and buying fresh fruit bunches from the local community—the price of which will then be offset against any loan repayments by the foreign investor; and
• the corporate social responsibility requirement. Indonesia was at the forefront in legislating a CSR requirement in the new company law of 2007, but this has long been expected of plantation owners—whether foreign or local—and is sometimes included as a condition in the plantation business licence. Practically speaking, CSR may take various forms, but commonly involves providing schools, mosques and infrastructure to the local community, along with guaranteed electricity and water supplies.

The Ministry of Agriculture’s proposals take this one step further. Holders of plantation business licenses (IUPs) for processing only (that is, those not operating plantations) will be required to undertake phased divestment of shares to a plantation cooperative, commencing with 5% in the fifth year of commercial production and rising to 51% by the tenth year. 

In other words, if a plantation investment is limited to processing alone, a controlling interest in the plantation mill will need to be divested within 10 years—no doubt, after stumping up most of the capital to get the mill up and running.

For the most part, foreign investors invest in a plantation plus a mill, which appears to exempt them from the proposed divestment obligation. There are a few who invest only in mills, but for the most part this is an area in which Indonesian conglomerates invest. 

In this sense, the MOA’s proposals for the plantation industry far exceed what is facing the mining industry. In the mining industry, the government is specifically tackling foreign investment, but leaving Indonesian mining conglomerates alone. 

For plantations, the battle is on with both foreign investors, and local conglomerates.