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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
Regular capital
Financing mechanism for oil-palm estate in Indonesia at current situation is usually coming from regular capital, i.e. banking credit scheme with commercial rate +- 15 per annum. Commonly, small scale
farmers independent smallholders or plasma farmers are taken a credit scheme to the Bank for planting and operational costs of their oil-palm estates. Large scale companies, however, have various behaviors
in financing their oil-palm estates. Those differences are mostly due to the suitability of site for oil-palm estate. Usually demand of company to take commercial credit for oil-palm estate will increase when the
quality of site is poor. The better suitability of site, the lower the demand of oil-palm company to ask commercial credit scheme
21
.
Grants
Officially there are no grants applied in oil-palm sectors. Unofficially, some independent smallholders developed their oil-palm plantation in the state forest areas. In such cases, instead of spending IDR 2.5
million per hectare for acquisition of farmland, some smallholders did not need “acquisition costs” for their farm lands. It means those farmers get an unofficial “grant” of farmland, although they still need
additional costs for land clearing and land preparation. It might profit for some smallholders but doesn’t
fit for companies because they have to fulfill official letter of land use right HGU.
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Personal communication with KN, general manager of an oil-palm company.
CHAPTER 3
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Reducing agricultural expansion into forest: analysis of implementation financing gap Loans
Loans are usually given to the oil-palm estate holders through the following schemes:
1 Gestation period of four years
The oil-palm estate holders, either companies or farmers, commonly take a ten year-credit scheme with commercial rate but the Bank gives a gestation period of payment until four years.
The oil-palm holders start to pay their credit after their farm yielded, usually after four years old of the plants.
2 Lower interest rate
Lower in terest rate is applied only for farmers who participated in the “revitalization program” of
oil palm estate. This program is purposed to improve productivity of small scale oil-palm plantation by applying better quality of seeds, appropriate fertilizers, and better maintenance of
farmlands. To attract more farmers independent smallholders and plasma farmers to participate into this program, government asked to the Bank or other financial institutions to offer soft loan
scheme ca. 5.
Provision of inputs
Provision of inputs, e.g. high quality of seeds, fertilizers, and pesticides are given by a partner company to the farmers in the context of joint operation of “plasma-nucleus” estate scheme.
Provision of free extension service
Free extension services are given by government and companies to farmers. Usually local government, i.e. regency agricultural service, provides extension in agricultural productions to farmers in the villages.
The expertise of the government extension worker is usually not specific to certain commodity but for all agricultural products. The company extension workers have more specific expertise, based on
commodity, e.g. oil-palm. The company usually also provides extension worker to strengthening institutional capacity of farm
er’s groups through joint management of “plasma-nucleus” scheme, community development program or corporate social responsibility.
Risk guarantees
No official risk guarantees for oil-palm estate, however, factually risks for oil-palm estate operation is handed over by banking institution who giving credit to the estate holders. If the bank has agreed to
provide long-term credit ten years to estate holder with gestation period four years, it means the bank
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has guaranteed the risks of operation during the credit period. Some companies are also protected by business insurance to cover risks from diseases or fires. Some other company and small holder farmers
must hand over the risks by themselves, since they did not ask credit to bank nor be protected by
insurance. Guarantees of purchase
The guarantees of purchase are usually given by a company to his partner farmers through farmer group or cooperatives. No guarantees of purchase from company for independent farmers non-partner farmers.
Government, however, only gives a guarantee of purchase for staple foods such as rice but no purchasing guarantee for oil-palm product.
Differentiated pricing
Prices of oil-palm are mostly influenced by the quality of fruits size, age, etc.. The price is also different in the each stage of marketing channels.Theoreticallythe premium price will be given to certified
oil-palm products, however, in reality not many companies nor farmers in Indonesia have been enjoying the premium price.
Certification schemes
Nowadays many oil-palm estate companies in Indonesia have been preparing for RSPO certification. Some of them have been certified by third party for the compliance to the RSPO standard. Besides RSPO
standard, since 2011 the government of Indonesia has also released the national oil-palm business operation standard, namely Indonesian Sustainable Palm Oil ISPO standard. The ISPO certification is
an obligatory task for all oil-palm company in Indonesia.
Company commitments
More and more oil-palm companies committed to implement sustainable principles in their business operation. Many companies prepared for a voluntary certification of RSPO, the other
ones committed to practice sustainable principles under national standard of ISPO. Some of them applied both RSPO and ISPO standards to ensure the acceptance of their products both in
international and domestic market. ISPO is mandatory based on the regulation of ISPO is define in Minister of Agriculture
Regulation No. 19PermentanOT.14032011. It is targeted that it is targeted that all oil palm
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plantation companies will obtain the ISPO certificates by 2014. With this regulation, all palm oil plantation companies will be obliged to conserve High Conservation Values HCV areas in their
concession and to apply good practices in reducing GHG emissions and also obliged to develop plasma farmer with minimum area of 20 of the total area of the plantation.
Obligation for establishing plasma farmer may face dilemma, especially for the existing established plantation as all their plantation area already planted. To meet this obligation the
alternative ways is to find additional lands to be used for plasma.
B. Analysis of Land Availability for Establishment of Palm Oil Plantation
