Financing gap to go from BAU to Alternatives

31 | P a g e Reducing agricultural expansion into forest: analysis of implementation financing gap Normal 132,427,796,086 1.28 87,382,225,976 1.22 114,665,041,793 1.30 109,867,620,401 1.28 Decreasing Price 10 72,586,049,010 1.16 39,508,828,315 1.10 64,397,974,249 1.17 59,550,429,755 1.15 Increasing Cost 10 85,828,828,619 1.17 48,247,050,913 1.11 75,864,478,428 1.18 70,537,191,795 1.16 Price sensitivity 45 10 55 10 44 10 46 10 Cost sensitivity 35 9 45 9 34 9 36 9 This study confirmed that usually the price is much more important than cost factors, the improved plasma farmer is exception. At such situation, a strategy to spend capital for better inputs will be effectively implemented, if and only if the price is constant or higher. Thus, the fluctuation of price is very risky in the business of oil-palm plantation. A bit decreasing of palm-oil price will reduce significantly the amount of profit.

L. Financing gap to go from BAU to Alternatives

As was discussed, it is clearly shown that the alternatives of oil-palm operations, i.e. improvement of agricultural practices would create much more profit rather than the usual operation BAU. To implement those alternatives, additional amounts of capital are needed. This study indicates that to increase profit of the independent smallholder 5 ha by IDR 59 million, an additional capital of ca. IDR 39 million is needed. For plasma farmer 5 ha, additional inputs of IDR 27 million will increase the benefits of IDR 95 million Table 2.10. Table 2.10. Financing gap between BAU and Alternatives of oil-palm estate operations by independent smallholders and plasma farmers unit of 5 ha Components Indep. Smallholder BAU IDR Indep. Smallholder improved IDR GAP Plasma Farmer BAU IDR Plasma Farmer Improved IDR GAP COSTS df 15 183,725,579 215,645,152 31,919,573 318,076,824 345,288,685 27,211,861 BENEFITS df 15 237,265,109 296,581,387 59,316,277 382,987,181 478,733,977 95,746,795 A financial consideration has to be paid for applying certification. This study indicates that to the application of RSPO in a company 5,000 ha will reduce total costs of IDR 77 billion due to decreasing plantation and harvesting costs of HCV area ca. 20 of total area of plantation. However, the land allocation for HCV area ca. 1,000 ha will decrease plantation and production volume, which affected to the reduction of benefits by IDR 95 billion Table 2.11. 32 | P a g e Reducing agricultural expansion into forest: analysis of implementation financing gap Table 2.11. Financing gap between BAU and Alternatives of oil-palm estate operations by companies Components Company BAU IDR Certified Company Premium Price IDR GAP Certified Company Premium Price IDR Certified Company Premium Price+Carbon IDR GAP COSTS df 15 465,989,674,675 388,005,633,646 77,984,041,029 388,005,633,646 393,304,286,052 5,298,652,406 BENEFITS df 15 598,417,470,761 502,670,675,439 95,746,795,322 502,670,675,439 503,171,906,453 501,231,014 Serious efforts should be done to enhance the attractiveness of RSPO certification as well as HCV management environmentally based oil-palm plantation, among others by first, increasing premium price at a profitable level and second, making a simple mechanism and more reasonable price for carbon credit scheme for the HCV areas of oil-palm plantation. These situations show that oil-palm industries are “demand side dependent’. In the absence of these two demand signals, i.e. no companiescountries who buy palm oil pay premium and no carbon emitting countries set cap and create demand for carbon credits, then a “supply side” strategy has to be formulated by oil-palm producerscountries. The most effective strategy for the oil-palm producers is by controlling supply. Thus, a quota control has to be applied in oil- palm export policy. To make quota control work, a “joint marketing body” or JMB is needed. The JMB has to play as “Indonesia incorporated”, who control production and export quota of the entire oil-palm companies in Indonesia. The more numbers of the member, the more effective the JMB is. By controlling the production and export quota, then the international price of oil-palm will be less influenced by “derivative market”, but will be strongly determined by “real market” of supply and demand. To make strategy more effective, the JMB of Indonesia shall make coordination with other major oil-palm producers, such as Malaysia, then in the future oil- palm producers could become a “price maker”, not just a “price taker”. 33 | P a g e Reducing agricultural expansion into forest: analysis of implementation financing gap Delivery Mechanism For the implementation of the two proposals namely i improving palm oil productivity and ii using the degraded lands for establishment of new palm oil plantations, we conducted a number of analysis. First analysis was the assessment of financing mechanisms options which are available for supporting to implementation of the first proposal. Second analysis was the assessment of available land for the implementation of the two proposals. Third analysis was delivery mechanisms for the implementation of the two proposals. The following sections discussed the results of the analysis.

A. Financing mechanism options