Six steps to tackle exploitation in Indonesia’s palm oil smallholder scheme (commentary)

When the palm oil industry began growing rapidly in Indonesia in the 1980s, the government developed a scheme aimed at ensuring communities would benefit. To gain subsidized funding, companies routinely promised communities as much as 80% of their plantations, in plots known as “plasma.” By 2007, the principle was baked into law, with companies required to provide a fifth of any new plantation as plasma.

But many villagers never saw the benefits of this system. An investigation by Mongabay, the BBC and The Gecko Project  found that companies failed to provide potentially hundreds of thousands of hectares of legally required plasma to communities. In one province alone, we estimated, rural Indonesians could be losing more than $90 million a year.

We also found when companies did apparently provide plasma, some villagers never received the profits they had been promised and were instead trapped in vast debts. A decade or more after giving up their land, communities we visited were still repaying loans worth millions of dollars.

Our investigation exposes a systemic problem: Companies are failing to provide plasma, or the profits from plasma, to potentially hundreds of villages and many thousands of people across Indonesia. This commentary sets out a series of steps that could help to tackle the problem, according to the activists, researchers and communities we spoke to, as well as our own analysis.

Increase transparency over the area of plasma

We set out to find out the area of plasma provided by palm oil companies in each of their individual plantations. Data at this level are essential to understanding whether companies are complying with the law. But we repeatedly hit a wall.

This is partly because government agencies are not systematically gathering and checking this data, but also because companies aren’t publishing it.

Some companies publish the area of plasma they provide across their plantation land banks, often claiming they provide a total of 20% or more. But none of the annual reports we reviewed broke these figures down to plantation level, making it difficult to verify these claims.

We asked 18 of Indonesia’s largest palm oil producers for a detailed breakdown of the plasma they provided, but only two shared the data. All the others declined, either failing to provide a reason or describing the information as confidential, “sensitive” or impossible to share without plasma smallholders’ consent.

It is possible to determine whether a plantation company is complying with the law using three data points: the date the plantation obtained its plantation business license (IUP), the total area of plasma it has planted and the years in which it planted that plasma. The first data point shows whether the plantation company is legally obligated to develop plasma. The second and third show whether the company has planted plasma for communities concurrently with establishing its own plantations, as regulations require.

If these data are made available, the government, palm oil buyers and local communities may still need to scrutinize it to ensure that it reflects reality. But openly publishing it would be an important first step toward accountability.

If palm oil producers choose not to disclose this information, there are ways of compelling them to do so. Pressure from commodity buyers and the Roundtable on Sustainable Palm Oil (RSPO) has already pushed companies to improve transparency in other areas of their operation, and the Indonesian government could also require companies to publish this information. Ensuring disclosure of basic data relating to plasma would be a step toward showing compliance with a key area of Indonesian law.

Ensure communities can access data on their plasma’s revenues and costs

Since the mid-2000s, plasma has typically been provided through a “partnership” model in which companies manage an entire plantation and pay communities the profits from their portion of the land. The industry claims this arrangement generates substantial, regular profits for communities. But communities in 10 partnership schemes we visited said they were earning, on average, six times less than oil palm smallholders who work their own land.

Despite companies’ claims that they act transparently, many villagers we spoke to had no way of finding out why their profits were so low. They lacked access to basic information ranging from the costs companies were deducting to the size of their debts. This was the case even among members of the RSPO, which requires companies to deal fairly and transparently with plasma smallholders.

Experts on responsible investment said that giving communities access to data about partnership schemes’ revenues and costs could help prevent companies from manipulating plantation finances in their favor. According to research by government agencies, communities are often at a disadvantage because of companies’ greater legal expertise and technical knowledge of plantation management. The experts we spoke to said as well as access to data, communities may need training on how to use that data effectively.

“One of the critical things I would want [to see] is an independent NGO delivering training on the right sort of questions to ask companies,” said Peter Batt, an agribusiness consultant who has analyzed similar schemes for the U.N.’s Food and Agriculture Organization. “If you’re not empowering smallholders as active partners in these schemes, you’re providing companies with every opportunity to exploit them.”

Others suggested a third party could play a role. Lawyer and responsible investment consultant Darryl Vhugen said that amending contracts to include regular reviews of plantation finances by an independent auditor could increase transparency without adversely affecting a plantation’s operations.

“If they [the company] are saying, ‘Look, we’re doing this thing straight,’ … great,” he said. “Let’s bring in an independent auditor and look at the books. … And if they’re telling the truth: wonderful.”

Publish contracts between agribusinesses and communities

Our investigation found that the contracts setting the terms of partnership schemes were often impossible to obtain, even for the communities that had signed up to them. None of the 18 companies we contacted shared examples of these contracts, even in standardized form. We were only able to obtain contracts in three of the partnership schemes we investigated.

Ahmad Surambo, executive director of the NGO Sawit Watch, has argued that partnership contracts should be made available to all members of plasma schemes, while the researcher Piers Gillespie has written that they “should be a widely available public document” to allow for “effective plantation oversight.”

Multiple guidelines on best practices in investment, such as the U.N. Principles for Responsible Contracts, recommend making contractual terms publicly available. Typically, these guidelines suggest that doing so increases accountability while reducing the risk of conflicts between communities and companies.

Publishing contracts can help communities ensure companies are delivering on the deals they sign. In one case we investigated, in West Kalimantan, five villagers successfully sued a company on the grounds that it had defaulted on the terms of their contract.

In other cases, the contracts themselves may be illegal because they violate a 2008 law that prohibits large businesses from “controlling” smaller partners. The Indonesia Competition Commission, known as the KPPU, has spent the last four years pushing companies to reform their practices on these grounds. Making contracts public could allow potential violations to be identified and addressed.

“Contract transparency makes the government’s job much easier,” one expert on responsible investment told us. “Regulators need to be aware of contracts, human rights bodies need to know if citizens are at risk of exploitation, and corruption authorities can use contracts to identify trends.”

Investigate exploitative plasma schemes

The KPPU has been investigating plasma problems since 2019, examining cases in which companies have allegedly either failed to provide legally required plasma or mismanaged partnership schemes. The agency conducts its own investigations and then issues written warnings encouraging companies to rectify problems.

If a company does not respond to these warnings and a council of KPPU commissioners decides it is breaking the law, the KPPU can issue a fine of up to 10 billion rupiah (around $650,000) or order other government agencies to revoke its license.

However, the KPPU told us it lacks resources to investigate plasma problems comprehensively. The agency’s deputy head, Guntur Saragih, said that it would need double its current budget to do so. Our investigation’s findings also suggest that problems with plasma are widespread. With more resources to investigate the allegations emerging across the country every week, the KPPU could offer recourse to many more people.

The KPPU’s approach to investigating plasma issues also offers a model for buyers of palm oil who want to tackle issues with plasma. The agency has documented its approach to investigating plasma cases, and publishes detailed reports of its investigation findings. Buyers could examine how the KPPU collects and analyzes evidence and press companies to bring exploitative schemes in line with the law.

Use the courts to challenge companies failing to provide plasma, or the profits from plasma

In August 2021, five people from the village of Teluk Bakung, in West Kalimantan province, won a major victory in Indonesia’s Supreme Court. They successfully argued that a plantation company, PT Palmdale Agroasia Lestari Makmur, had defaulted on its contract by failing to pay out profits after they had handed over their land for plasma. The court ruled the contract null and void.

“Until then, the company always won. Now, in our village, it seems that the people are winning,” said Laurensius Asia, a resident of Teluk Bakung, who was not one of the plaintiffs.

The potential scale of problems with plasma is vast. Companies’ failure to comply with their legal obligations, or to share the profits from plasma could be affecting thousands of Indonesian families.

But for many, access to the legal system remains out of reach. Despite the five villagers’ legal victory in Teluk Bakung, Laurensius, along with more than 900 others, remains locked into the partnership with Palmdale. “We don’t understand the law, and we don’t have the money,” he said. “It’s impossible for us to take the company to court.”

With funding and legal support, more communities might be able to challenge exploitative schemes through the courts.

Use market pressure to tackle persistent problems with plasma

The market has played a key role in transforming the ways in which palm oil is produced. Almost every major palm oil producer has committed to No Deforestation, No Peat and No Exploitation (NDPE) policies, which may have played a role in the significant reductions in deforestation linked to palm oil in recent years.

Major issues, however, remain unresolved. Social conflicts and plasma are key among them. Our investigation found limited evidence that major buyers of palm oil are pushing producers to tackle the systemic problems we identified.

However, some have said they intend to do so. In response to our findings, three of the buyers named in our investigation said they were taking steps to identify and deal with problems across their operations.

Palm oil buyers could play a role in many of the solutions listed above, from pressing palm oil producers for transparency on plasma provision to funding training on plantation management for plasma smallholders.

By doing so, they can help communities across Indonesia deprived of the prosperity they were promised before they gave up their land for plasma.