Indonesia Allocates US$195 Million Subsidy on Palm Biodiesel Producers over Smallholders

by Hans Nicholas Jong (Mongabay/EcoBusiness) Campaigners have blasted the move, noting that the fund is meant to empower small oil palm farmers and not subsidise the giant multinationals that produce biodiesel. -- ... The social and travel restrictions imposed in response to the pandemic have hit Indonesia’s economy hard, and small oil palm farmers like Martamis have not been spared.

But while farmers like Martamis go into debt, skimp on fertiliser and take other measures to cut costs, the agribusiness giants that dominate the industry have just received a 2.78 trillion rupiah ($195 million) stimulus from the government for biodiesel production.

“Palm oil companies have always been spoiled by government subsidies,” said Mansuetus Darto, the secretary-general of the Oil Palm Smallholders Union (SPKS). “When [the biodiesel industry] takes a hit from Covid-19, they plead for subsidies from the government. Meanwhile, the ones whose situation is most concerning are oil palm farmers who should be the ones to be helped.”

Subsidising corporations

Indonesia’s palm oil industry is largely controlled by a few dozen wealthy families. A 2018 report by TuK Indonesia, an NGO that advocates for environmental justice, puts the estimated total wealth of the top 27 families in the industry at more than $88 billion, or 8 per cent of the country’s GDP the previous year.

“But the government still helps them,” Mansuetus said. “These are rich people. All of them have money.”

He rejects the rationale that the stimulus will trickle down to small farmers, noting that most biodiesel producers in Indonesia source palm oil from their own plantations and or those of affiliated suppliers, rather than from small farmers.

“Just check Wilmar International, which produces 2.3 million kiloliters [of biodiesel],” Mansuetus said. “Most of them come from their own plantations, and the rest is sourced from affiliated plantations. So how does it benefit farmers?”

Wilmar is the world’s biggest palm oil trader, and also the biggest recipient of Indonesian government subsidies to the palm oil industry. In 2017, Wilmar received 55 per cent of the total $530 million distributed by the government to five palm oil companies. The money came from a fund that the companies pay into in the form of export tariffs; Wilmar’s share was three times the amount it had paid into the fund.

The state palm oil fund, known by its Indonesian acronym BPDP-KS, is meant to reinvest in the industry for farmer training, research and development, replanting aging trees with newer and more productive ones, building infrastructure, and promoting palm oil.

But since its establishment in 2015, most of the money it has collected in mandatory export tariffs has gone toward biodiesel, both to subsidize producers like Wilmar and to artificially lower the price of biodiesel at the pump, to make it more competitive with regular diesel. Between 2015 and 2019, the fund collected 47.2 trillion rupiah ($3.3 billion) in revenue, and handed 71 per cent of it back to biodiesel producers — and less than 5 per cent to small farmers for a replanting programme.

The Indonesian government is pushing for greater domestic consumption of palm oil through its B30 programme — a biodiesel blend that contains 30 per cent palm oil biofuel. Its end goal is B100, removing the diesel altogether. The recently announced $195 million stimulus is aimed squarely at that programme. The money, allocated to the BPDP-KS from the state budget, will go toward subsidising biodiesel prices at the pump to stay competitive with regular diesel, following the crash in oil prices earlier this year.

Finance Minister Sri Mulyani Indrawati has declared the biodiesel subsidy a part of the government’s Covid-19 economic recovery plan, but also said the $195 million is only the start. She said the total needed to keep the biodiesel programme afloat is $250 million. The balance of about $55 million will come from biodiesel producers through an increase in export tariffs, effective May 1.

The government is, by law, not allowed to allocate funding from the state budget for biodiesel subsidies. But the $195 million injected into the BPDP-KS comes from the state budget courtesy of an executive order granting the government extra powers to deal with the Covid-19 pandemic.

Several associations of small oil palm farmers have launched an online petition demanding that the $195 million stimulus be diverted to small farmers instead of big producers.

“As the biggest palm oil producing country, the fate of our farmers should’ve been better and should’ve been paid serious attention to,” the petition says. “The presence of BPDP-KS should’ve improved the fate of farmers, but the fact is that farmers are still suffering. Not a single drop of palm oil-based biodiesel managed by companies [and] the state comes from farmers’ fruit bunches. Instead, the supply comes from plantations of big firms which control [the industry] from upstream to downstream.”

In 2018, oil palm farmers mounted a legal challenge against the BPDP-KS use of funds to subsidize biodiesel producers, but the lawsuit was rejected. The national anti-corruption agency, the KPK, has taken notice, however. In 2017, it warned of indications of corrupt practices in the management and disbursement of the funds collected by BPDP-KS, citing the disproportionately large amount going to subsidize biodiesel producers.

The BPDP-KS has long defended how it uses the fund, saying the large share to biodiesel producers is justified because they money comes from them in the first place in the form of export tariffs. But Mansuetus said the tariffs constitute a form of state revenue, and hence should be redistributed according to the law. In this case, the 2014 law that established the BPDP-KS states that the fund should be used specifically for oil palm estate development, replanting, research, and empowering smallholders — with no mention of biodiesel. READ MORE