Indonesia’s Palm Oil Landbank Expansion Limited By Proposed Moratorium And NDPE Policies

Summary

Published by Chain Reaction Research, and written by Gerard Rijk, Profundo; Tim Steinweg, Aidenvironment; and Gabriel Thoumi, CFA, FRM, Climate Advisers.

Key Findings

• 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.
• 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. 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.”
• 365 companies globally have zero-deforestation or NDPE supply chain commitments driving market innovation in the Indonesian palm oil sector, leading to risk mitigation.

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.

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.

Draft Palm Oil Moratorium’s Details

The palm oil draft moratorium is a Presidential Decree addressed to relevant ministries. Relevant ministries include: the Ministry of Environment and Forestry, the Ministry of Agriculture, the Ministry of Home Affairs and others. Draft text calls for:

• A suspension of the issuing of any new palm oil licenses and forest release permits. An evaluation of existing palm oil licenses and forest release permits.
• The Ministry of Environment and Forestry is ordered to halt the issuing of new forest release permits, and postpone all outstanding permit requests. The Ministry is furthermore ordered to evaluate all forest release permits that have already been granted for 1) areas not yet cleared; 2) permits that have transferred to new owners; and 3) permits that are not used in accordance to the prevailing regulations.
• The Ministry of Agriculture is ordered to conduct capacity building for smallholders and to collect data on, map and evaluate existing palm oil concessions. It will also encourage plantations to adopt ISPO standards and assist in the rejuvenation and replanting of existing plantations using improved seeds.
• Among other things, the National Land Agency is ordered to evaluate the land use on concessions every six months for a period of two years, to accelerate the issuance of formal land rights to communities and to revoke concession licenses for productive forestland that is not being used.
• Governors, district heads and mayors are ordered to postpone the issuing of principal location permits and clearing permits for new palm oil plantations.

After the presidential moratorium is issued, it will go into effect for a period of five years. Because the moratorium is an Inpres – Presidential Decree, moratorium violations are subject to administrative sanctions as opposed to criminal penalties.

On May 1, 2016, shortly after the moratorium was announced, the Minister of Environment and Forestry Siti Nurbaya indicated she had already ceased the entire process for the issuance of new palm oil licenses. Reportedly, these applications covered a total of 851,000 ha. Permits that had already been approved in principle were also revoked. This covered an additional 600,000 ha.

Draft Palm Oil Moratorium’s Limitations

A major limitation to this moratorium is that it excludes Convertible Production Forests (HPK). This concerns forested land designated for non-forestry purposes. The exception might create a material loophole as licenses could still be legally issued for these areas once the moratorium comes into effect.

Large tracts of land in Kalimantan and Papua are designated as convertible production forests. West Kalimantan has a total of 142,026 ha designated as convertible production forests. The Minister of Environment and Forestry Siti Nurbaya stated that millions of hectares of forest in Papua and West Papua are outside of moratorium’s scope and they could be developed into palm oil plantations without violating the moratorium. The Minister indicated she had ceased the entire new palm oil license issuance process. She also stated she had given the order to stop issuing new permits for palm oil in convertible production forests.

Furthermore, the 5-year palm oil moratorium might create an incentive not to extend the current forest and peatland moratorium once they expire in 2017. This could not only open up forests to

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