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Shockwaves were sent through Indonesia’s investment community as news broke on a new draft bill to limit maximum foreign ownership of plantations to 30% - a substantial drop from the current 95%. Though still subject to revision following an ongoing back-and-forth between the parliament and relevant ministries; the draft bill raises real concerns about its immediate impact on industries previously identified as key drivers of economic growth.
Among those most likely to be affected are businesses with palm oil plantations, who in light of this proposed regulation will be reconsidering the feasibility of Indonesia raising production output to 40 million tonnes by 2020. Palm oil production in Indonesia in 2013 stood at 26 million tonnes (See An Overview of Indonesia’s Palm Oil Industry).
Early reports suggest that the parliament is pushing to get the draft bill on plantations finalized and approved prior to the inauguration of the new Joko Widodo administration on 20th October 2014.
According to a report from Reuters published upon obtaining a copy of the draft bill, the parliament’s reasons behind restricting foreign ownership of plantations are manifold. Foremost among them is opening up the sector to smaller, local players as well as better protecting the rights of indigenous people whose lands are being encroached upon by agribusiness activity. The draft bill also aims to put in place stricter environmental controls that would facilitate the straight-forward prosecution of companies found to have caused forest fires and excessive haze.
Other international media outlets have favored a more streamlined explanation, citing the draft bill on plantations as Indonesia’s latest step towards protectionist policies. Considering the context of a similar law being passed on the foreign ownership of horticultural companies (now limited to 30% from 95% previously, see Organic Growth – Horticulture in Indonesia), the impulse to come to this conclusion is understandable.
Investors, however, should keep in mind that while President-elect Joko Widodo has pledged support for local SMEs in agriculture, his economic platform was built upon a foundation of market-friendly policies and providing investors with room to broaden their investments (See New Government May Reinvigorate Indonesia’s Investment Appeal). Given that the draft bill would not be formally enacted until during or after Widodo’s term in office following a five year grace period for compliance; it is expected that the law that comes to pass in five years’ time will not be as restrictive as the current draft.
Reaction to the draft bill on plantations has been mixed, largely due to the aforementioned belief that it will not get passed in its current form. In addition to this, uncertainty over proposed deadlines for approval and a recent track-record of deadlock during discussion between the parliament, central government and industry on this subject (as was the case with proposed revisions to RUU No. 18 of 2004 on Plantations) has many companies adopting a wait and see approach. Furthering the confusion is the lack of clarity as to whether the draft bill’s regulations are retroactive - as suggested by members of the parliamentary committee putting the bill forward but refuted by the Ministry of Agriculture.
There is, however, consensus on the potential impact of the draft bill if passed as is. Among the most notable projected outcomes is a rush among foreign plantation firms to reduce stakes in Indonesian operations, despite the five year grace period. In their analysis on the draft bill, Affin Investment Bank predicts that this would lower Indonesian plantation values significantly and explains that a 30% cap will “lower growth prospects for affected companies”.
This sentiment is echoed by Maybank in their assertion that potential losers include not only Malaysia and Singapore listed companies with significant plantation operations in Indonesia (i.e. Sime Darby, Golden Agri-Resources, IOI Corp, Wilmar International and KL Kepong) but also IDX listed companies with substantial foreign ownership (i.e. Astra Agro Lestari and Salim Ivomas).
All told, the draft bill if implemented is expected to come at a substantial cost to new foreign investment at a time in which overseas capital could be used to revive struggling agricultural industries such as cocoa farming (See Indonesia’s Booming Cocoa Industry Puts Farmers to the Test). This is particularly true given the October 2013 enactment of regulations to limit new plantation sizes for private companies, which serves as an added disincentive to enter the market. Law Permentan No. 98/Permentan/OT.140/9/2013 limits land for new plantations for palm oil to 100,000 hectares while sugarcane, rubber and cocoa are to be limited to 150,000 ha, 20,000 ha and 10,000 ha respectively (Allen & Overy).
Widespread misgivings about the potential impact of a 30% cap on foreign ownership on plantations and its implications for Indonesia’s investment climate have most industry experts projecting that the law will not be passed in its current restrictive form. Several investment management firms have maintained a rating of overweight for Indonesia’s palm oil sector based on this very expectation.
Investors are still strongly advised to monitor the situation, considering that much remains to be seen as to whether a scaled-back version of the draft bill on plantations could be finalized and approved prior to the new government moving into power. Looking back at other recent laws imposed on plantations such as a land limit for private companies, it is apparent that the outgoing government is committed to encouraging public listings of Indonesian operations in agriculture, and may seek to pass this bill in some form before handing over the keys to the presidential office. Moreover, not enough is currently known about the Joko Widodo administration from a policy point of view to state with certainty whether it will chose to continue its predecessor’s approach to agribusiness.
On 29th September 2014, the House of Representatives passed the plantation bill (RUU Perkebunan) and as expected, the finalized regulation does not include the aforementioned provision to place a hard limit on foreign ownership at 30%. Instead, no specific percentage value has been put forward in the bill; leaving the cap on foreign direct investment in plantations to be set by the central government through government regulations (Peraturan Presiden, or PP). The new plantation bill has thus been described as putting in place a general framework on limits to foreign ownership of plantations, which will be elaborated upon in greater detail in a subsequent PP.
The cap set by the PP is to be determined by factors including type of crop, size of producing companies and a number of geographical conditions. In contrast to an all-encompassing 30% cap, this allows for greater flexibility in targeting the specific agricultural industries that require additional support for small local investors, while ensuring that other plantation industries still in dire need of foreign investment are not adversely affected.
The plantation bill also sets the stage for greater cooperation by encouraging foreign and local parties to work together in carrying out research and development for the agriculture sector.
Foreign companies with existing plantation operations are to be given a five year grace period to comply with requirements put forward in the new plantation bill, or once their period of licensing to cultivate land (Hak Guna Usaha, or HGU) has ended (Jakarta Post, 30/09).
Global Business Guide Indonesia - 25th August 2014
Contribution to GDP: 13.70% (2016 including Fisheries & Livestock)
Number Employed in the Sector: 46 million (2016)
Main Products: Palm Oil, Palm Kernel, Rubber, Cocoa, Coffee, Tea, Tobacco, Rice, Sugarcane, Maize, Cassava, Tropical Fruits, Spices, Poultry, Fisheries.
Main Export Markets: China, USA, Japan, India, Singapore, Malaysia, Pakistan, South Korea, Italy, Netherlands, Bangladesh, Egypt.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List imposes varying degrees of foreign ownership limitations in plantations depending on the crop type, and Government Regulation No. 98 of 2013 limits private plantations to 100,000 hectares.
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