Policy Brief

Financing & Land Control of Palm Oil and Sustainable Finance in Indonesia

May 2015

Table of Contents

1. Background ........................................................................................ 1

2. Sustainable Finance di Indonesia ......................................................... 6

3. Reflecting on China's Green Finance Model ....................................... 8

4. Sustainability reporting as Implementation of

Sustainable Finance Services ............................................................ 11

5. Economic and Legal Analysis of Land Concession Restrictions .......... 14

Value of Economies .............................................................................. 14

Environmental and Social Impact ........................................................ 18

Expediency and Opportunities ............................................................. 20

Appendix 1: Reference .......................................................................... 26

1

1. Background

On Februari 12, 2015, TuK INDONESIA has launched the finding of its research on tycoons

controlling the biggest 25 palm oil group in Indonesia. The research was conducted at the

beginning to the third semester of 2014, which data covers the period of five (5) years, from

2009-2013 to examine the land concentration under control of the tycoons, with a slight update

on the latest ownership scheme of the group, just before the launch was convened.

The main findings of the research are:

1. Total land bank dan locations of oil palm concession1 own by the tycoons that comprise 25

biggest palm oil group in Indonesian, as described by the following figure

Figure 1: Oil palm areas planted by the 25 groups, end of 2013 (ha)

2

2. Tycoons who control these 25 biggest palm oil groups in Indonesia – and their total net

worth; as shown by the table below:

Table 1: Tycoons controlling the 25 oil palm groups

No Group Tycoon’s Name Origin

Networth by 2013

(million USD)

Jakarta

Globe Forbes

1 Anglo-Eastern Group Lim Siew Kim Malaysia

2 Austindo Group George Santosa Tahija Indonesia 585

3 Bakrie Group Aburizal Bakrie Indonesia 2,450

4 Batu Kawan Group Lee Oi Hian & Lee Hau Hian Malaysia 1,000

5 BW Plantation Group Budiono Widodo Indonesia

6 Darmex Agro Group Surya Darmadi Indonesia 1,400

7 DSN Group Theodore Rachmat Indonesia 2,000 1,900

Benny Subianto Indonesia 995 790

8 Genting Group Lim Kok Thay Malaysia 6,500

9 Gozco Group Tjandra Mindharta Gozali Indonesia 93

10 Harita Group Lim Hariyanto Wijaya Sarwono Indonesia 990 940

11 IOI Group Lee Shin Cheng Malaysia 4,500

12 Jardine Matheson Group Henry Keswick Scotland 4,000

13 Kencana Agri Group Henry Maknawi Indonesia

14 Musim Mas Group Bachtiar Karim Indonesia 575 2,000

15 Provident Agro Group Edwin Soeryadjaya Indonesia 1,700 1,200

Sandiaga Uno Indonesia 900 460

16 Raja Garuda Mas Group Sukanto Tanoto Indonesia 2,100 2,300

17 Salim Group Anthoni Salim Indonesia 10,100 6,300

18 Sampoerna Group Putera Sampoerna Indonesia 2,400 2,215

19 Sinar Mas Group Eka Tjipta Widjaja Indonesia 13,000 7,000

20 Sungai Budi Group Widarto & Santoso Winata Indonesia 205

21 Surya Dumai Group Martias & Ciliandra Fangiono Indonesia 1,050 1,700

22 Tanjung Lingga Group Abdul Rasyid Indonesia

23 Tiga Pilar Sejahtera Group

Priyo Hadi Sutanto &

Stefanus Joko Mogoginta &

Budhi Istanto

Indonesia

24 Triputra Group Theodore Rachmat Indonesia 2,000 1,900

Benny Subianto Indonesia 995 790

25 Wilmar Group

Robert Kuok Malaysia 11,600

Khoon Hong Kuok Malaysia 2,200

Martua Sitorus Indonesia 3,700 1,800

3

The total wealth of the 29 tycoon families included in the above table can be estimated at

US$ 69.1 billion, when taking the average of Forbes and Jakarta Globe figures and making a

conservative estimate for the tycoons not mentioned in these two sources. Even in

comparison to the Gross Domestic Product of Indonesia - US$ 868 billion in 2013 - it is clear

that these tycoons control a very considerable wealth; even further, their total networth is

equal to 45% Indonesia’s State Budget of year 2014.

3. Bank and financial institutions supporting the tycoon in building and expanding their palm oil

business by providing loan and underwriting their shares and bonds issuance.

a. Figure 2 shows banks providing loans to the tycoons with the total amount of USD

17.822 Million. From total 20 bank, there are 3 local banks: Bank Mandiri, BNI 46, and

BRI. These three banks have been financing the palm oil sector for quite some time in

Indonesia. If the research is expanded into looking at more than the biggest 25 groups,

there would be more local bank to be identified.

Figure 2: Banks providing loans to tycoon-controlled groups, 2009-2013

4

b. Figure 3 showed banks and financial institutions as underwriter of shares and bonds

issuance of the tycoons, with total value of USD 10.592 million.

Figure 3: Banks underwriting share and bond issuances of tycoon-controlled groups, 2009-2013

5

The main recommendations derived from the research are:

1. The importance of restriction of oil palm plantations concession

The Minister of Agriculture’s Regulation No. 98/2013, which limits the total land bank to

100,000 hectares of palm oil plantation per company, did not effectively limit corporate

control of over land in Indonesia. This is because the public company (listed on the stock

exchange) are excluded from this rule, while this study shows that 21 of the 25 business

groups controlled by tycoons have been operated through a holding company listed on the

stock exchange. The above Minister’s Regulation also excludes cooperatives and state of

pmebatasan this, then for the Papua region even given limit 2-fold; ie 200,000 hectares.

There is no clear argument why public companies, cooperatives and state-owned companies

as well as Papua region are excluded from this rule.

2. The importance of policies and practices of sustainable financing; in Indonesia, in particular,

require the Financial Services Authority for implementing effective and inclusive Indonesia

Sustainable Finance Services (ISFS). Being positioned to support the FSA to develop

guidelines for corporate credit due diligence for certain economic sectors; to exchange

information on a regular basis with Indonesian civil society; to strengthen the bank

reporting; and to develop good accountability mechanisms for financial institutions.

This document describes more in the second recommendation above, with a primary focus on

sustainable finance initiatives that are currently developed by OJK.

6

2. Sustainable Finance di Indonesia

The Indonesian Financial Services Authority – OJK - has launched its Roadmap of Sustainable

Finance on December 2014, with the purpose to2:

• Set forth the end goal relating to sustainable finance in Indonesia to be achieved by 2024

for financial institutions governed under OJK’s authority, namely: the banks, capital market

and Non Bank Financial Service Industry (IKNB) sectors.

• Determine and prepare the benchmark for improvements relating to sustainable finance up

to 2024. Specify the measures and recommendations that need to be adopted in the form

of an integrated work plan involving all financial service institutions.

OJK further stated that the work plan might be revised and adjusted periodically as deemed

necessary. This paper will serve as the basis of consideration for the OJK to revise the plan.

On February 13, 2015, TuK INDONESIA convened a group discussion with the main agenda to

discusss the Roadmap. The main point of the discussion3 suggests that the Roadmap requires

some improvements; and if summarised it will include the following elements:

Sustainable development in view of OJK adheres to a model of sustainable development

pillars, referring to the Framework for Construction of Sustainable Development

Indicators (2001). Indonesia Draft Development Plan 2015-2019 also using the same

model, with the mention of "... to develop environmental aspects as one of the main

pillars equivalent to the economic and social aspects"; while there has been an

evolutionary perspective on sustainability, which can be described in the following

schemes:

Figure 4: Evolution of Perspective on Sustainability

7

The whole document on sustainable development goals at the international level,

including the Sustainable Development Goals that will replace the MDGs started in 2016-

already refers to the model – in the far right.

Data of indicative emission reductions that are used by OJK were based on documents of

the Ministry of Finance (2012), Indonesia's First Fiscal Mitigation Framework, which

refers to GHG Abatement Cost Curve of 2009. In December 2014, JICA has quantifies

DNPI and repeated, with much different results.

In conjunction with the increased funding for priority sectors; in the Roadmap

Document, OJK stated that there are two ways to increase funding for priority sectors-it

includes the energy and agriculture; it stated: (1) the determination of a certain

percentage of the total financing portfolio of each bank, and (2) the assignment to

particular banks with set capabilities. The public should receive adequate information on

the two points above. In addition, OJK’s Roadmap document does not provide business

case for banks in Indonesia to enter into financing sustainable projects, when there is

growing evidence as shown by Serafeim (2014), as well as Sisodia, Wolfe and Sheth

(2014). Exposure of sustainable projects is important to attract more investment while at

the same time provide argument for reviewing the financing of projects that are not

sustainable. Reports of Better Growth, Better Climate (2014) concluded that countries at

all levels of income now have the opportunity to build sustainable economic growth

while reducing the risk of extraordinary of climate change. This is possible with the

structural and technological changes taking place in the global economy and the

opportunity for greater economic efficiency. Necessary capital for investment is

available, and the potential for innovation is very broad. What needed is a strong

political leadership and credible & consistent policies.

OJK roadmap includes a table of ongoing financial work plan covering the period of

2015-2024. Our inputs with regard to the work plan include: making the business case of

sustainability in general and in every sector, so that banks understand the risks and

opportunities better, consider the preparation of a study to stop the financing of sectors

which are not sustainable, harness-or-adapt the various standards international

investment as a means of filters (investment screening), as UNPRI, Equator Principles,

IFC Performance Standards; in addition to sustainability standards specific to each

industry (eg, RSPO, BetterCoal, ICMM, IPIECA), confirms an ongoing reporting obligations

by utilizing the GRI standard G4 and Financial Services Sector Disclosure (WSF), to be

easily attained international recognition, and with regard to Sustainable Finance Awards,

it should be granted after existing sustainability performance can actually be verified and

lastly, making a clear performance indicators for each activity.

8

3. Reflecting on China's Green Finance Model

One of the strongest and strategic points in the Sustainable Finance Roadmap document

published by OJK is an obligation to prepare sustainability reporting. On the other hand, TuK sees,

the discourse on sustainable finance or finance green itself has not been well understood by

relevant authorities and public - more broadly in Indonesia. Referring to the model of Green

Finance which is currently being developed by People's Bank of China (PBoC), green finance

within this version is based on the theoretical framework that is very philosophical; the point is

that natural resources are public assets, and therefore the State must present to ensure that

natural resources can be ascertained of its usefulness for the people and for future generations;

and should not be dominated by one individual or a few people. This is in line with the

aspirations of Article 33 UUD 1945, which in the document PBoC is stated as the Theory of Public

Environmental Trust4, which underlined "... the environment is shared resources and public

assets for all the people and can not be wilfully occupied, dominated or damaged by anyone. In

order to properly allocate and protect these 'common assets', the state should manage these

assets on behalf of common owners". This theory goes beyond the framework of conventional

legal theory and in particular property law and provide legitimacy for state intervention

proactively in environmental and ecology protection. In this way, state intervention can

effectively resolve the dilemma of whether the state has the power to intervene when the

landowner has tainted their own land; which can be done without violating the rights and

interests of others.

Furthermore, as the technical requirements for green finance5 is the ecological cost accounting

system, which because of its absence at the moment; the ecological costs can not be calculated

carefully so that the ecological cost component can not be taken into account in the decision-

making of commercial/public sectors. Another factor is the lack of environmental and ecological

control. If the ecological impact were not taken into account in economic value, the calculation

of 'green' in green banking would be difficult to achieve.

Eligibility for the green banking system must meet several requirements6, among others:

Consistent with the national strategy. In finance sustainable version of OJK, the national

strategy adopted is the Long Term Development Plan 2005-2025. OJK is following the

Government's target for its commitment to reducing greenhouse gas emissions by 26%

with its own financing or 41% with the support of international funds in 2020. It is clear

in this context, attention needs to be directed not only to provide incentives for low

carbon projects, but also disincentive for projects of high-carbon emittance and are

harmful to the environment and ecology.

9

Consistent with public expectations. Various problems due to investment and operation

of companies in almost every sector of natural resources has been remarkably shown

how massive environmental damage have occurred, and conflicts associated with

tenurial issues are not little to be resolved, there has been massive loss of economic and

cultural values, including the loss of many lives, and children; the latest news mentions,

10 children have lost their lives of drowning in an excavated coal mine that was left open

in Samarinda Ilir 7 . This situation escalates public expectations of change in the

governance of natural resources and the environment.

Supported with of strong fiscal and monetary foundation. In the context of China, its

national power and international reserves are adequate. Making the best use of capital

reserves and promoting the ecological development of the financial services sector are

the things that will be managed by a system of green finance. Second, China's banking

sector has grown rapidly over the years. The ratio of bad assets in the state-owned banks

is relatively low while the bank's policies have had a lot of experience on the

development and evaluation of projects related to the environment. Context in

Indonesia related to fiscal and monetary conditions certainly have differences, but in

essence, they will really play an important role to make effective implementation of

sustainable finance.

Supported by international experience reference. The experience of other countries that

have been implementing the green finance and green banking - such as the UK Green

Investment Bank and the German KfW Development Bank - can be used as a reference;

of course by taking into account the context of Indonesia.

Green Finance also needs reform legislation8, in this context, the narrative is adapted to the

Indonesia relevance - and will include:

The need to revise the Banking Law with a legal obligation to perform the review and

supervision by the commercial banks on the environmental and ecological impact of

their investment projects. Is the drafting process of Indonesian Banking Act currently

under National Legalization Program has included this element? Furthermore, ideally, in

revision of the Banking Law, commercial banks should assume the environmental and

ecological legal liability if it has given loan to the borrower that the project causes

environmental degradation or loss of community rights to land; or that the loan has

been playing the role of supporting environmental degradation or other ecological

damages.

Second, after the Banking Law was revised and became effective, the Central Bank and

OJK needs to promulgate regulations on operational procedures to ensure prudential

obligations to the environment and ecology by commercial banks in providing credit.

Third, the effective implementation environmental legal obligations to commercial banks

rely on the independence of the local environmental protection authorities. Therefore, it

is essential that the authorities responsible for the environment in the area be given the

10

right to file a lawsuit against the bank that proved detrimental to the public in the area

of her/his jurisprudence.

Finally, more publication of the need for environmental legal obligation for commercial

banks is needed to make them fully aware of the obligations in being prudent on the

environment and to create excellent procedure on environmental impact assessment of

projects to be funded - with the best standard - to meet environmental and ecological

compliance.

The application of green finance also requires good policy coordination between the various

authorities, the first one: the need to intensify the communication between fiscal and monetary

authorities, then the communication between the Ministry of Environment and OJK, in addition

to improving the relevant legislation, such as: Corporate Law (or which regulates the obligations

of the subsidiary's parent company), State Finance Law, the Law on Environment Protection and

Management, Banking Law, Bank Indonesia Law, OJK Law - together with all of its technical

regulations.

11

4. Sustainability reporting as Implementation of Sustainable

Finance Services

TuK sees, there are many lessons to be learned from the model of China's green finance; when

the attention is directed back to OJK's version of sustainable finance, the biggest opportunities

are at improving policies and practices of environmental and ecological management, especially

through the mandatory sustainability reporting for the business entities in Indonesia. This topic

is discussed further in a roundtable discussion on May 20, 2015.9

In Indonesia, the legal bases of the sustainability report are:

Decree of Bapepam, No. KEP-431 / BL / 2012 on the submission of annual reports of

listed companies or public companies, states the Annual Report must include Corporate

Social Responsibility, covering: policy, the type of program, and the costs incurred,

among other related aspects: environmental, labor practices, health and safety, social

and community development, product liability

OJK ROADMAP regarding preparation of the Sustainability Report for companies

engaged in Finance Banking Industry, Non Bank Financial Industry, and Industry in the

Capital Market in 2016.

Presidential Regulation No. 61 Year 2011 concerning National Action Plan, ie the

decrease of greenhouse gas emissions by 26% by the national effort and 41% with the

help of the International community.

Competition in welcoming MEA (Asian Economic Community) where for some countries

such as Singapore and Malaysia already requires obligatory Sustainability Reports for

companies that go public and engaged in the financial sector in 2015.

Draft of Bank's Law in Indonesia, that the Bank is required to pay attention to social and

environmental aspects such as Credit Risk Analysis indicator, 30% of total credit shall be

directed at green/sustainable industries.

With the above legal bases, companies are obliged to disclose all their actions and strategies

related to Sustainability Roadmap, and companies are also obliged to submit their approval for

intensification and anti-deforestation commitments. Calculation of Green House Gas emissions

(Scope 1, 2, and 3), energy efficiency, and environmental indicators must be submitted along

with supporting data. Mandatory reporting is assured by certification agency. The report shall be

uploaded on OJK website and corporate website. Harmonization with existing certification (ISPO,

RSPO and ISCC) is to be done, while also requiring standardized reporting of emissions by a

specified cut-off date.

12

Referring to the Global Reporting Initiative, G4 Framework for Financial Services can be

described as follows:

Figure 5: GRI G4 Framework

Sustainability reporting10 is a report on the economic, environmental and social aspects as the

impact of day-to-day activities of an organization. A sustainability report also presents the values

and the organization’s governance model, and shows the relationship between the strategy and

its commitment to a sustainable global economy. Systematic sustainability reporting helps

organizations to measure the impact they cause or experience, set goals, and manage change. A

sustainability report is the main platform to deliver sustainability performance and impacts -

both positive and negative.

The content of sustainability report will cover three key performance areas, namely:

Economic performance, including: economic value being generated and distributed, the

financial implications of climate change, infrastructure development and economic

impact

Environmental performance, including: materials being consumed; energy effluent,

emissions, and waste; energy and water management, calculation of GHG, biodiversity,

the impact of product and legal compliance

Social performance, including: employment, employee-employer relationship, health

and safety, training and education, diversity and equal opportunities and human rights.

13

Especially for the palm oil industry in Indonesia, the challenge in implementing the Sustainability

Reporting lays on obligation to use 15% to 50% biodiesel as raw materials, when at the moment,

the Indonesian biodiesel is still using fatty acid methyl esters (FAME) in the category of

generation 1, so that the resistance of the automotive industry related to its detrimental effects

on engine performance is quite high. In addition, public is still questioning traceability of raw

materials of fatty acid methyl ester (FAME) - public need to be convinced that FAME indeed can

reduce emissions. On top of that, production of palm oil shall not derived from forest conversion.

On the other hand, in the macro level, the majority of directors of commercial banks in Indonesia

and the highest ranks of Bank Indonesia officials - the monetary authority - still yet to possess

good understanding of green issues and sustainability.

Some solutions for the above problem are offered, among others: ensuring tracebility of raw

materials to be performed by all producers of CPO and it should become mandatory clause

within ISPO, it also should be made mandatory for the palm oil industry to include in the

delivery note the origin of their fruit fresh bunches (FFB), and then require the calculation of

emissions GHG gradually; e.g scope 1 and 2 in 2015-2016; scope 3 in 2017 and LUC-ILUC in 2018;

including GHG reduction targets should be used, eg 35% in 2016, 50% 2017, 60% in 2018, CPO or

other sources of oil as a raw material for biodiesel must meet the above-criteria in order to be

processed into further products.

Given the fact that the direction and bank's policy will be determined by top executives, the

board of directors of commercial banks and Bank Indonesia is obliged to follow the training on

sustainability. Risk management teams in banks should enroll in trainings on environmental and

social issues. Moreover, the solutions offered are the "sticks", such as the imposition of carbon

tax, as this has been discussed with the Ministry of Finance & OJK and other stakeholders, the

imposition of CPO Support Fund (CSF), the obligation to prepare Mandatory Comprehensive

Sustainability Report-method, the obligation for certified sustainable palm oil (ISPO, ISCC, RSPO,

etc.), re-checked by OJK as part of bank's due diligent. The solution in the form of "carrots" is the

provision of incentives, such as: prudential incentives, fiscal incentives and non-fiscal levies free

of CSO Supporting Fund (CSF); with a note that this incentive is given after criteria is clearly

define and is published.

The application of the principle of sustainable finance in Indonesia need to be soon

accomplished. The existing practice of relying the feasibility of investment based on EIA

documents and Proper Award are still very far from the ideals of sustainable finance. OJK should

adopt the due diligence for corporate lending to certain economic sectors in the roadmap of

sustainable finance and convening regular information exchange with Indonesian civil society in

order to develop better accountability mechanisms and improve the check- and balance system

for financial institutions.

14

5. Economic and Legal Analysis of Land Concession Restrictions

This economic and legal analysis and recommendations is prepared by Iman Prihandono, PhD;

lecturer at the Faculty of Law, University of Airlangga with areas of expertise of Public

International Law (International Trade and Business Transaction), Transnational Litigation,

Transnational Corporations, Business and Human Rights and the Law of the Sea (Law of the Sea).

Scope of study to prepare this document mainly criticize the existing concession limit of oil palm

plantations using three major approaches, namely:

1. Value of Economies. The extent of oil palm plantations limit should be established with

regard to the value of reasonable profit for a palm oil plantation business. It is also worth

taking into account the vulnerability of the industry to fluctuations in market demand.

2. Environmental and Social Impact. As mentioned above, the economic value of the palm

oil business must also take into account the cost of rehabilitation of environmental

damage and social impacts caused by the them. The bigger concession the greater the

social and environmental rehabilitation costs to be borne by the company.

3. Expediency and Opportunities. The available land area tends to be allocated to groups of

big companies. This will reduce the opportunity for farmers or farmer groups and local

communities with limited capital to also receive allocation of oil palm plantations.

Value of Economies

Restriction of oil palm plantations consession should be established with regard to the value

reasonable profit for a palm oil business group. Employers can argue that oil palm plantation

business requires large capital and high business risk. But the value of the benefits and risks of

this loss certainly can be anticipated by using a standard business calculation method, so that

the figures can be found in the hectarage for an oil palm plantation business to generate profits

or a reasonable profit, and at the same time also provide benefits for the surrounding

community. Based on this calculation, government sets a maximum area of land concession for

oil palm plantation group.

The reason to use fair profit value is because the oil palm plantation use and utilize limited

natural resources, namely land. Land, besides limited, is essentially to be controlled and

managed by the State for the greatest prosperity of the people. Thus, the use of land can be said

to have deviated from its primary purpose if it is allocated for the greatest profit of company or a

certain group of people. TuK's tyccon research proved this. Total landbank held by 25 business

15

groups controlled 31% of the total planted area of 10 million.This figure becomes greater when

including unplanted area: ie 51%.

When analyzed further, there is a correlation between landbank, the value of venture capital

and the increase/decrease in corporate profits. In the past three years, the value of the

increase/decrease in profit of business groups with the largest landbank indicated that bigger

land tenure produce relatively higher yields. Of the 25 business groups in the Tycoon Research,

there are 15 groups of companies listed on Indonesia Stock Exchange.

From these listed companies, there are 9 business groups owning more than 100,000 hectares of

landbank. Figure 6 shows a comparison between land area and the gross profit from these 9

public companies. Three public companies with the largest land area: Sinar Mas Group, Jardine

Matheson; and Salim Group showed a significant drop of profits in 2013.

Figure 6: Gross Profit of Listed Companies with landbank >100.000 ha

Source: Annual report of the companies – analysed further

The above picture shows a condition that when vast land is owned, not only will it generate huge

profits, it also possess the risk of significant loss. Significant earnings declines particularly are

evident in two business groups with the three largest landbank, namely: Sinar Mas Group and

the Salim Group. This differs from the value of gross profit in listed companies with landbank less

than 100,000 ha. Figure 7 below shows the rise and decline of more stable earnings by 6 oil

companies listed on the stock exchange. Increase and decrease in net income is relatively stable

at BW group; Tanjung Group; Gozco and Provident.

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

2011

2012

2013

16

Figure 7: Gross Profit of Listed Companies with Landbank < 100.000 ha

Source: Annual report of the companies – analysed further

By comparing the situation in Figure 6 and Figure 7, it shows that companies owning land bank

of more than 100,000 ha tend to have less stable increase and decrease in profits compared with

companies with smaller landbank. Several factors may contribute to this situation. Among them

is the dependence on loan to finance the working capital, the bigger area of land being managed

- the higher number of working capital (loan) is required. On the other hand, the increase in

working capital will also increase business risk. The greater the capital invested, the more

vulnerable it is to the risk of loss. The amount of working capital by the listed oil palm group with

an area of over 100,000 ha is shown in Figure 8 below.

Figure 8: Working Capital of Listed Companies with Landbank >100.000 ha

Source: Annual report of the companies – analysed further

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Grup 3Pilar 92

Grup BW88

GrupSungai 82

GrupTanjung

78

GrupGozco 67

Provident65

2011

2012

2013

(1,000,000)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2011

2012

2013

17

By comparing Figure 6 and Figure 8, the dependence on loan to finance its working capital is

apparent - especially in three groups with biggest landbank, namely Sinar Mas Group and the

Salim Group - data of Jardine Matheson's working capital is not available. The increase and

decrease in earnings was positively correlated with increases and decreases in capital.

Dependence on loan to finance working capital could indicate several things. First, not all

business groups have access to big capital. Without limiting the extents of land concession based

on reasonable profit, land acquisition and control by business groups who own big working

capital will continue to occur. Secondly, this condition is encouraging other palmoil group vying

capital increase with a view to expand its landbank, even if necessary, seek loans to foreign

financial institutions. If this condition is not immediately reviewed, the oil palm plantations in

Indonesia, either directly or indirectly, will be controlled in majority by the non-Indonesians.

Aside from the fact that the extent of total land concession being owned has positive correlation

with working capital capacity, another issue to consider for reviewing the maximum concession

of oil palm plantation area is the vulnerability/dependence of palm oil business on fluctuations

of prices. Decrease in gross profit oil business group with over 100,000 ha land bank in 2011-

2013, as Figure 6 shows a positive correlation with the results of palm oil export figures. This

correlation can be seen by comparing the figures in the table below.

Table 2: Export value of Indonesian palm oil

Palm oil

Year

Volume Growth Rate

in Tonage Value Growth Rate

in USD value (Tonnes) (%) (000 USD)

2003 6,386,409 2,454,626

2004 8,661,647 35.63 3,441,776 40.22

2005 10,375,792 19.79 3,756,557 9.15

2006 10,471,915 0.93 3,522,810 (6.22)

2007 11,875,418 13.40 7,868,640 123.36

2008 14,290,687 20.34 12,375,571 57.28

2009 16,829,205 17.76 10,367,621 (16.23)

2010 16,291,856 (3.19) 13,468,966 29.91

2011 16,436,202 0.89 17,261,247 28.16

2012 18,850,836 14.69 17,602,180 1.98

2013 20,577,976 9.16 15,838,850 (10.02)

Average 12.94 25.76 Source: DG Plantation at Min. of Agriculture - Indonesia (2014)

Figures in Table 2 shows an increase in the volume of palm oil production, but a decline in export

value in US dollars. Especially for exports, there have been some declines since 2011 (28.16%),

and then fell further in 2012 (1.98%), and even dropped to negative in 2013 (-10.02%). Decline in

18

this export value looks the same as the drop in gross profit companies with extensive land bank

of over 100,000 ha, as shown in Figure 6. This indicates weakness in the policy of allowing

maximum ownership of land concession for oil palm plantations. Again, the maximum land

concession for one group should be based on a reasonable profit, because when it is based on a

reasonable profit, the company will be better able to survive and organize its production

adapting to fluctuations in world prices.

Currently land area that has been allocated and managed by the biggest 25 palm oil groups has

amounted to 3.1 million ha. Environmental degradation and social conflict has been going on so

often. However, due to price fluctuations, the harvest of oil palm plantations cannot be sold at

the maximum price. Supposedly, this condition cannot only be seen as a loss to the company,

but should also be seen as ecological and social losses. Therefore, the limit of land concession

should be reviewed with attention to the vulnerability of the industry to price fluctuations.

Environmental and Social Impact

Economic value as discussed above must also take into account the costs of environmental and

social impacts arising from oil palm plantations. Aside from the value of 'reasonable profit', the

limit of oil palm plantation concession should take into account the entrepreneur's ability to

manage environmental and social risks, and recovery efforts. Calculating the restoration costs of

environmental and social impacts will not be easy. Each plantation area has its own

characteristics of ecosystems and social environment. Although it is not easy, it does not mean it

is impossible. The government can set a certain amount of deposit funds that should be

allocated by business group for the restoration of the environmental and social impacts, adapted

to the characteristics of ecosystems and conflict potentials in each region.

Nowadays, practically almost the entire group of companies listed on the Indonesian stock

exchange with over 100,000 ha of land bank are involved in social conflict and environmental

destruction. Greenpeace report (2010) of the Sinar Mas Group for example, showing the

company's involvement in deforestation, the destruction of protected wildlife habitat, and

conflicts with indigenous peoples. Concession area of Sinar Mas plantation has accupied some

National Parks in Sumatra, Kalimantan and Papua. Likewise, based on reports of Rainforest

Action Network, Jardine Matheson, through its subsidiary PT Astra Agro Lestari has illegally

cleared peatlands in Tripa Aceh region, and damage wildlife habitat. Furthermore, the EIA report

(2011) revealed that Salim Group, through its subsidiary PT London Sumatera Plantation has

opened a palm oil plantation in Muara Tae, Kutai and sparked conflicts with indigenous peoples

of Dayak Banuag.

If continued, there will be a long list of violations of the rights of indigenous peoples, destruction

of the environment and ecosystems of wildlife. But in general, it can be concluded that there is a

correlation between the increase in land concession with the level of social conflict and

environmental destruction of the ecosystem. Indeed, there is no data that directly support the

19

general idea of this, but studies on the palm oil concessions have been numerous, including a

study conducted by the Forest Peoples Programme, Sawit Watch, HuMa and TuK INDONESIA.

Sawit Watch report (2014) for example, states that conflicts involving oil companies with very big

concession - and not coincidentally this company are in the list of 25 biggest tyccons identified

by TuK - namely: PT Bakrie Plantation; PT Lonsum; Wilmar Group; Sinar Mas Group; Raja Garuda

Mas (now: Royal Golden Eagle); and Salim Group. Likewise, Sawit Watch notes per December

2014 showed an increase of conflict in Indonesian palmoil, from 514 conflicts (2007); 576 conflict

(2008); 604 conflict (2009); 608 conflict (2010); 668 conflict (2011); 679 conflict (2012); 680

conflict (2013); and continued to increase to 717 conflict (2014). Increased numbers are in line

with the growth of oil palm plantations throughout 2008-2013. TuK's tycoon research shows an

increase of 35% of oil palm plantations, from 7.4 million ha (2008) to 10 million ha (2013).

Similarly, a record of conflicts per province by Sawit Watch tends to have positive correlation

with oil palm hectarage per province. Sawit Watch's records throughout 2014, the highest

number of conflicts is in Central Kalimantan (250 cases); followed by North Sumatra (101 cases);

East Kalimantan (78 cases); West Kalimantan (77 cases); and South Kalimantan (34 cases). The

distribution of the number of conflicts is in line with oil palm plantations of palm hectarage per

province in Indonesia. This means that provinces with large oil palm plantation have higher

potential for land tenurial conflict. The distribution of oil palm plantation is shown in Table 3

below.

Table 3: Distribution of Oil Palm Plantation (planted) per Province

Nr Province Total Planted Areas

(ha) Total Production

(tonnes)

1 Riau 2,296,849 7,037,636

2 North Sumatera 1,392,532 4,753,488

3 Central Kalimantan 1,156,653 3,312,408

4 South Sumatera 1,111,050 2,852,988

5 West Kalimantan 959,226 1,898,871

6 East Kalimantan 856,091 1,599,895

7 Jambi 688,810 1,857,260

8 South Kalimantan 499,873 1,316,224

9 Aceh 413,873 853,855

10 West Sumatera 381,754 1,082,823

11 Bengkulu 304,339 833,410

12 Bangka Belitung Islands 211,237 538,724

13 Lampung 165,251 447,978

14 Central Sulawesi 147,757 259,361

15 West Sulawesi 101,001 300,396

Total 10,686,296 28,945,317 Source: DG Plantation at Min. of Agriculture - Indonesia (2014)

11

20

Other problems related to environmental and social impacts lays on the fact that provision of

permits for oil palm plantation is not accompanied by a direct obligation to have certification

standards for sustainable palm plantations. Certification is not placed as a requirement to 'get'

the allocation of land, but certification is associated with the ability of the company to 'sell' the

results of oil palm plantations. This mistaken policy is one of the causes of continued destruction

of the environment and conflict in oil palm plantations.

The existence of the Roundtable for Sustainable Palm Oil (RSPO) tends to be unable to reduce

the environmental impact and social conflicts in oil palm plantations. The level of participation of

oil palm plantation company to obtain RSPO certification is still very low. According to the claims

of RSPO Indonesia, up to December 2011, palm oil estates that possess RSPO certification covers

total area of 465.745 ha. This means, only approximately 1/6 of total area or 3.1 million hectares

of plantation land has been managed. Furher, in 2011 the Indonesian Palm Oil Association

(GAPKI) declared themselves out of the RSPO membership. The not-so-interesting RSPO

certification is caused by the fact that the main purpose of the export of Indonesian palm oil

does not actually require RSPO certification.

It is true that the Indonesian government has been encouraging oil palm plantations to have

ISPO certification, through the Minister of Agriculture No. 19/2011 on Guidelines for Sustainable

Palm Oil Indonesia, but ISPO is seen with less serious attention by palm oil plantation companies.

Based on data from ISPO, within 3 years of its effectiveness, only 63 companies have been

certified, covers an area of 559,670.85 hectares.

The weakness of certification mechanism as described above shows the urgency of reviewing the

limit of concession for a business group. Government proved unable to supervise around 2,400

plantations to be more responsible, and avoid the destruction of the environment and reduce

social conflicts.

Expediency and Opportunities

Aside from the problem of fair profit value and dependence on capital as discussed above,

allocation of land concession should consider the benefit and opportunity for the Indonesian

people to do business. Expediency is not merely measured by how many workers absorbed in

the oil industry, or the amount of foreign exchange earned from the export of oil palm

plantations; it also should consider the potential return of profits earned by oil companies to

stimulate national economy and the Indonesians.

There are at least three reasons of why the control over vast land by foreign companies will

reduce the benefits for the Indonesians. First, foreign companies tend to borrow capital from

foreign financial institutions, so the profit of the company is absorbed to pay the foreign debt.

Second, the structure of foreign companies are often layered either upwards or sideways. Such a

structure is often used as a way to avoid a large tax payment (tax evasion). Third, in addition to

21

avoiding the payment of taxes, the business group structure that obscures the relationship

between parent and subsidiary is also intended to avoid its responsibility to workers' rights, as

well as social and environmental obligations.

First, TuK's Tycoon research reveals there are 11 foreign invested companies in the list of 25

palm oil groups. When seen further, the capital structure are derived from loan, so it appears

that foreign invested companies tend to use loans from financial companies/banks abroad. This

trend is shown in Figure 9, below.

The Figure 9 shows almost all groups of foreign invested oil companies used loans from foreign

banks, even in some of the company structure; its foreign loans reached 100% of the total loan.

It is not wrong for foreign invested companies to rely on foreign funds in the structure of loans.

There are no legal rules that limit the origin of loan for companies, but it would be a problem if

the company's profits were absorbed only to repay loans to foreign financial institutions.

Figure 9: Foreign Loan Structure of Foreign Invested Companies

The tendency was seen from the profit in the financial year, the biggest portion would be given

priority for repaying the loan; this is to avoid interest and penalties that can increase the value of

the loan. As a result, a portion of the profits will be used for the operations of the company. The

other will be distributed to shareholders as dividends. In the case of foreign investment

companies, the company's profits will be enjoyed by foreign shareholders, thus FDI companies

-

2.000

4.000

6.000

8.000

10.000

12.000

PINJAMAN ASING: PERUSH. PMA

Total Asing

22

may not contribute significantly in supporting the real sector economy in Indonesia.

Unfortunately, borrowing from foreign financial institutions is not only done by foreign

companies, as some national companies also have foreign loans of significant numbers in their

loan structure. This is shown in Figure 10, below.

Figure 10: Foreign Loan Structure of National Companies

Transfer of funds abroad for various purposes is possible, even legally protected in several

international legal instruments in the field of investment. For example, as stipulated in the Asean

Comprehensive Investment Agreement. Article 13 of the Transfer, this instrument set that:

1. Each Member State shall allow all transfers relating to a covered investment to be made

freely and without delay into and out of its territory. Such transfers include:

(a) contributions to capital, including the initial contribution;

(b) profits, capital gains, dividends, royalties, license fees, technical assistance and

technical and management fees, interest and other current income accruing from any

covered investment;

(c) proceeds from the total or partial sale or liquidation of any covered investment;

(d) payments made under a contract, including a loan agreement;

The clause of free transfer of funds has become a standard clause which must be present in

every bilateral and plurilateral investment agreements. This clause exists in almost all-Bilateral

Investment Treaty signed by Indonesia, as well as in the ASEAN-China FTA and the Indonesia-

Japan EPA.

We therefore need a further research on limiting the amount of capital coming from foreign

loans in the capital structure of the national palm oil plantation companies. At the same time,

there should also a regulation that limit the extent of land concession controlled by foreign

-

100

200

300

400

500

600

700

800

PINJAMAN ASING: PERUSH. NASIONAL

Total Asing

23

investment companies group. This is to ensure that the land area granted to foreign investors

can provide maximum benefit to the national economy.

Second, the structure of ownership and control of companies by foreign companies tend to be

multi-layered. By splitting the company's operations into small units, then the tax payment

obligation of each of these subsidiaries will also be small. This can occur because the financial

transactions that occur on the lowest layer of the group of companies tend to be small.

Division or splitting of group into small parts also will increasingly blur the status of a subsidiary.

Is the lowest layer in the organizational structure of the group of companies can be regarded as

a subsidiary, so that its financial statements are consolidated with the parent company. The

tendency of splitting the company into small units makes profits obtained by the smallest

subsidiary becomes unnecessary to be consolidated with the parent company's profits. This

situation makes the Indonesian government increasingly lose the opportunity to get state

income from tax.

Third, a layered ownership structure resulted in the loss of legal liability patterns in a business

group. Legislation regarding limited liability company provides a condition that shareholders are

only liable limited to the value of their paid-up shares in the company. With the splitting of

shares in many smaller companies, the risk and responsibility of the parent company of the

business group owners can be 'spread'. Spread of risk of legal liability on smaller companies will

benefit the parent company. Each lawsuit, or disputes with local communities will never touch

the parent company. The parent company can wash its hands of the legal actions undertaken by

its subsidiary on the bottom layer. Worse yet, this condition would be more profitable for

foreign companies, namely because as it is located abroad, they are abide by different legal

corporate regime.

Since the locations of the parent company are abroad, each claim or dispute settlement effort

will also be increasingly difficult. Whereas until now, there has been no effective dispute

settlement mechanism on land rights, environmental rights and social rights in the palm oil

business at international level. Until now, the only redress mechanism is only at the RSPO. It is

true that the RSPO provides a complaint mechanism, but the number of palm oil companies in

Indonesia with the RSPO certification is limited. Therefore, the ownership over oil palm

plantation by foreign companied needs to be reviewed. When the dispute settlement

mechanisms both at national and international level are not yet capable to ensure effective

redress, the land ownership by foreign companied should be limited.

Other issue that needs to be considered is the gap between land area managed by companies

and the area of land managed by plasma farmers as happens in almost all 25 biggest palm oil

groups in Indonesia. This gap occurs in both foreign companies and national companies, but

plasma area owned by foreign invested companies appear to be smaller. This situation is

illustrated by TuK's tycoon research data in the following table:

24

Figure 11: Comparison of plasma plots and total landbank of foreign invested companies

D

The data above shows that area of plasma from foreign companies is still very low. The highest

plasma area is only about 15-17%, it only happens in three business groups. With regard to

national companies, the situation was no better. The percentage compared to the total area of

plasma landbank (planted and unplanted) is still very low. The comparison of plasma plot at

national companies is shown in the figure below:

Figure 12: Comparison of plasma plots and total landbank of national companies

The above figure shows only a few group develop plasma plots with an area of 20% or higher.

There are only three companies that have plasma at this range, namely: Royal Golden Eagle

25

(37%); Sampoerna Group (26%); and Salim Group (22%). Illustration of Figure 11 and Figure 12

shows that the benefit provided by 25 large companies is still very small. In addition, this

condition indicates that government's intention to provide the benefit of oil palm plantations in

the form of plasma plots are still far from the expectation

Thus, the regulation of developing plasma plots of at least 20% of land concession as stipulated

in the Regulation Nr. 98/Agriculture Minister/ OT.140 / 9/2013 seems to be difficult to realize.

This problem is compounded by the fact that unplanted areas are still very high. TuK's tycoon

research showed from the total area granted concession of the 25 palm oil groups, 40% are not

yet planted or a total of 2 million ha. This fact shows that plasma development has not yet fully

realised.

It also means there is a mistake in the policy regarding the maximum extent of oil palm

concession of 100,000 hectares or more. This policy would lead to the bigger concession of

business groups, without guarantee that will give benefit and opportunities for the surrounding

communities. Therefore, the regulation of land concession limit needs to be revisited; a review

of the concession limit with the above argument will contribute positively to the implementation

of sustainable finance in Indonesia.

26

Appendix 1: Reference

1 With various considerations, the data of complete consession under the control of these

tycoons, covering the name of the subsidiary companies, location and the extent of land

concession is not publicized. The information is kept at TuK INDONESIA’s database.

2 Roadmap of Sustainable Finance in Indonesia, 2015 – 2019, OJK

3 Jalal’s presentation at TuK’s discussion on formulating the advocacy strategy of forest and land

financing, Jakarta 13 February 2015

4 Establishing China’s Green Financial System: Detailed Recommendations 13: Establish the Legal

Liability of Financial Institutions

5 Establishing China’s Green Financial System: Detailed Recommendations 10: Develop Environmental Cost Analysis 6 Establishing China’s Green Financial System: Detailed Recommendations 1: Create a Green Banking System 7 Kaltim Post 25 Mei 2015 http://beritakaltim.com/?p=9267 8 Establishing China’s Green Financial System: Detailed Recommendations 13: Establish the Legal Liability of Financial Institutions 9 Narratives in these paragraphs refer to presentation of Martinus Nata, ST, CSRS “Sustainability

Reporting: the realization of the implementation of Indonesia Sustainable Finance Services (ISFS)

and as control of risk analysis of environment”

10 https://www.globalreporting.org/information/sustainability-reporting/Pages/default.aspx

11 We recounted the total land area and production capacity that was presented by the Director

General (DG) of Plantation. Data from the DG Plantation stated the total planted area at

10,956,231 hectares and the total production was 29,344,479 tons. We therefore present our

data instead, because after recalculation was done, the results showed that the total land area

was at 10,686,296 hectares and the total production was 28,945,317 tons.

27

This document is prepared by

Rahmawati Retno Winarni Program Director of TuK INDONESIA

She can be contacted at wiwin@tuk.or.id

Transformasi untuk Keadilan IndonesiaJl. Tebet Utara II. No. 10, Tebet

Jakarta Selatan, 12810 - IndonesiaTlp. +62 21 835 29 55

www.tuk.or.id

Table of Contents

1. Background ........................................................................................ 1

2. Sustainable Finance di Indonesia ......................................................... 6

3. Reflecting on China's Green Finance Model ....................................... 8

4. Sustainability reporting as Implementation of

Sustainable Finance Services ............................................................ 11

5. Economic and Legal Analysis of Land Concession Restrictions .......... 14

Value of Economies .............................................................................. 14

Environmental and Social Impact ........................................................ 18

Expediency and Opportunities ............................................................. 20

Appendix 1: Reference .......................................................................... 26

Transformasi untuk Keadilan IndonesiaJl. Tebet Utara II. No. 10, Tebet

Jakarta Selatan, 12810 - IndonesiaTlp. +62 21 835 29 55

www.tuk.or.id