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The Chain: Mixed Messages from Jokowi Administration

April 20, 2016

Conflicting messages from Indonesian government confuse global corporates, increasing financial risk to shareholders

This past week, the Government of Indonesia issued two separate, contradictory statements: it wants to punish companies making zero-deforestation commitments and, at the same time, it wants to cease all new mining and palm oil concessions.

On the one hand:  Jokowi Administration Comes Out Swinging Against IPOP

The Government of Indonesia appears to be pressuring palm oil companies working in Indonesia to abandon their voluntary landmark “zero deforestation” commitments. The Agriculture Ministry is actively working to determine the legal basis to disband the voluntary 2014 Indonesia Palm Oil Pledge (IPOP), insisting that smallholders are being hurt because they cannot afford required forestry practices – which are often the same practices that are required by Indonesian law. On 13 April 2016, Agriculture Ministry plantations director-general Pak Gamal Nasir told the Jakarta Post, “The point is that we oppose the IPOP.”

IPOP is not a government program.  It is a voluntary pact by palm oil companies responding to market pressure that believes companies should commit to zero-deforestation and sustainable agriculture practices. With certified sustainable palm oil (CSPO) margins greater than crude palm oil (CPO), IPOP is an effort by some of the region’s leading palm oil producers to formalize efforts to legally sell a profitable, value-added service that their customers want.

IPOP’s signatories include large global corporations such as Asian Agri, Astra Agro Lestari, Cargill, Golden Agri-Resources, Musim Mas, and Wilmar. In fact, Astra Agro Lestari recently joined IPOP, furthering corporate commitments by Indonesian-owned companies. Likewise, IPOP has been roundly applauded and supported by many governments including the U.S. Department of State.

The Indonesian government’s efforts to oppose IPOP are pushing companies to take on greater financial risks, and present a serious possibility of removing value from Indonesia’s economy. Companies that are unable to execute upon their zero-deforestation commitments may face financially material market, credit and reputational risks.  For example:

  • Increasing market risk: IOI’s share prices fell based on their possible RSPO suspension.  The company was later suspended.
  • Increasing downgrade risk: Maybank downgraded IOI Corporation to a hold from buy because IOI did not achieve their zero-deforestation commitments on peatlands.
  • Increasing reputation riskBuyers suspend companies that deforest peatlands and institutional investors choose to no longer invest in Indonesian companies with significant risks.

On the other hand: Jokowi Administration Wants Expanded Moratorium for New Palm Oil and Mining

Also this week, The Wall Street Journal reported that “Indonesia will temporarily bar new palm oil and mining operations.” This builds on President Widodo’s announcement one year ago, when he extended a government moratorium on the clearing of primary forests and peatlands. For now, however, the length and details of the most recent proposed ban are unclear: there are no published details on which concessions will take part, how smallholders and corporate owners would be reimbursed for sunk costs, or how overlapping land and mining rights will be addressed.

As the Straight Times reported:

Mr Ekadharmajanto Kasih, president director of palm oil firm Sampoerna Agro, expressed concern over the lack of details in the planned moratorium. “It is not clear whether the moratorium is on the land where permits have already been issued for plantations,” he said.

Speaking with One Voice

With annual CSPO sales up 162% January 2016 compared to January 2015, and with growing demand signals from over 300 global corporations for zero-deforestation palm oil, the Indonesian palm oil sector is poised to capitalize if the Government of Indonesia signals support for initiatives such as IPOP.  Ongoing conflicting messages from the Jokowi administration can be seen as ineffective financial risk management undercutting further global investment in Indonesia.

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