February 13, 2017
Indonesia’s proposed palm oil moratorium combined with buyers’ No Deforestation, No Peat, No Exploitation (NDPE) policies impacts industry growth potential. Within current concession areas, the moratorium adds regulatory risks to market access risks for companies that proceed with developing forests or peatland. Outside these existing concession areas, there is a material loophole in the proposed moratorium for land classified as ‘convertible production forest’ (HPK). However, this loophole is essentially closed by stranded land risks caused by NDPE policies.
- West Kalimantan has 2.2 million ha of land suitable land for palm oil development outside of its current licensed palm oil concessions. But, because of the moratorium and NDPE policies, at most 2.6 percent of this land is available for future viable oil palm concessions.
- Likely responses to NDPE market innovations and the moratorium are an increase in smallholder investments, industry consolidation and vertical integration.
- Productivity improvements and international expansion are less likely to materialize in the short term.
After 25 years of aggressive palm oil development, which saw concession areas grow from 1 million ha to 21 million ha, the Government of Indonesia is now taking steps to limit further landbank expansion. These measures come at the same time that compliance with No Deforestation, No Peat, No Exploitation (NDPE) is increasingly becoming a condition for market access and that public monitoring capacities are rapidly improving. These trends increase pressures within the Indonesian palm oil industry to seek other growth strategies.
- Stranded land is a type of stranded asset. Stranded assets are “assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.”
- Currently, 6.1 million ha of forests and peatland are “stranded assets” on the balance sheet of Indonesian palm oil companies. This equals the size of ten million football fields.
- 365 companies globally have zero-deforestation or NDPE supply chain commitments driving market innovation in the Indonesian palm oil sector, leading to risk mitigation.
On April 14, 2016, Indonesian President Joko Widodo declared his intention to impose a moratorium on new palm oil concessions. This moratorium follows a series of measures taken since 2009 to curb the environmental impacts of the sector. This includes a 2-year forest moratorium last extended in 2015. Recently, the Government of Indonesia also amended the peatland moratorium and the Indonesian Sustainable Palm Oil (ISPO) certification system. The final text of the palm oil moratorium remains under development. A draft version has been circulated.
Buyers’ NDPE palm oil demands have led to material stranded land. Stranded forest and peat lands exist within concessions that cannot be developed without violating NDPE policies and Government of Indonesia regulations. The proposed palm oil moratorium further limits landbank growth outside land for which concessions have already been granted.
President Jokowi’s announcements should be seen in the context of Indonesia’s efforts to address their multi-decade fire and haze crises and to implement the objectives of the Paris Agreement, which it ratified in October 2016.
The draft palm oil moratorium lists the following objectives:
- Development of the downstream palm oil industry
- Development of smallholder palm oil farmers
- Environmental protection
- Reducing Emissions from Deforestation and forest Degradation (REDD+)
President Jokowi aims to increase productivity on existing plantations through replanting and through smallholder capacity building. He wants to simultaneously reduce further geographical expansion of the palm oil industry. President Jokowi stated:
“Current plantations are enough, as long as the seeds are proper, it is possible to double productivity.”
These policies are expected to prompt companies to boost their refining capacity within Indonesia.