MP3EI - Sumatera

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Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia

Text of MP3EI - Sumatera

Masterplan P3EI Sumatra Economic Corridor

51

Sumatra Economic Corridor

Development Theme: Center for Production and Processing of Natural Resources As The Nations Energy Reserves

Consists of 11 Economic Centers: Banda Aceh Medan Pekanbaru Jambi Palembang Tanjungpinang Pangkal Pinang Padang Bandar Lampung Bengkulu Serang

Main Economic Activity: Palm Oil Rubber Coal Shipping Steel Sunda Straits National Strategic Area

Banda Aceh Alternative International Hub Kuala Tanjung Medan

Sibolga

Free Trade Zone Port Batam

Pekanbaru TanjungpinangTo Pontianak

Padang Pangkal Pinang

Palembang

Bandar Lampung

Jakarta Serang

Doc. Berau Coal

Capital City/Economic Center Rubber Plantation Node Palm Oil Plantation Node

Industrial Cluster Coal Mining Node Domestic Sailing Network

Railway Economic Center Connecting Lane Main Exit Corridor Lane

Existing Access Road Sea Port

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Masterplan P3EI Sumatra Economic Corridor

Overview of Sumatra Economic CorridorSumatra Economic Corridor is expected to become The Center for Production and Processing of Natural Resources As The Nations Energy Reserves. Sumatras strategic location can propel it to become,The Front Line of The National Economy into The European, African, South Asian, East Asian, and Australian Markets. The corridor thrives in the fields of economic and social development. Its main economic activities are palm oil, rubber and coal. Despite this, the corridor must address: A significant income disparity within the corridor, both between urban and rural areas and among the provinces;GRDP per Capita at Current Price And Real Growth Rate for Regency/City in Sumatra Economic Corridor (2008)IDR Mn 150 Siak Bengkalis 100 5 year GRDP real CAGR (2003 -2008) 15%

10%

Lhokseumawe 50 Rokan Hilir Musi Banyuasin Muara Enim Cilegon

5%

0%National GDP per capita IDR 21.7Mn

0Provincial city:

-5%

Medan (North)

Pekanbaru

Jambi Palembang B. Lampung SerangHigh income region Low income region

Figure 3.B.1: Value and Growth in GDP per Capita in Sumatra Economic Corridor

Province

Aceh

North Sumatra

Riau1

Jambi

South Sumatra

Lampung

Banten

Growth rate

Riau relatively higher GRDP per capita driven by oil and gas industry (44% of GRDP output) Source: Province and Regency in number; National Statistic Agency (NSA); Analysis Team 20091

Growth of the main economic activities for oil and gas (20 percent share of GDP corridor) is very low due to dwindling reserves; Investments have been declining in recent years; Current inadequate basic infrastructure for industrial development, such as narrow and damaged roads, out-dated and damaged railroad tracks, inefficient and the lack of sea ports and electricity to support industries.

The economic development strategy for the Corridor focuses on six main economic activities: Palm Oil, Rubber, Coal, Shipping, Steel and Sunda Straits National Strategic Area. These activities have great potential to become main economic drivers. Steel production which is concentrated in Banten is also expected to become one of the drivers of growth in this corridor, particularly after the completion of the Sunda Straits Bridge.

Masterplan P3EI Sumatra Economic Corridor

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Palm oilSumatra plays an important role in the supply of palm oil plantations in Indonesia and the world. Since 2007, Indonesia has been the largest palm oil producer in the world. Previously, Malaysia held the title.Palm Oil Production of Indonesia and Malaysia (Mn Tons)40 30 20 10 15.6 16.6 18.0 19.5 Indonesia 31.0 15.5 31.9 15.3 35.6 37.0 Malaysia

17.6

17.5

4.2%

7.8%

Figure 3.B.2: Palm Oil Production of Indonesia and Malaysia (Million Tons)

0 2007 2008 2009 2010

Source: FAOSTAT; Team Analysis

Palm oil is the largest source of vegetable oil used by many industries in the world. World demand for palm oil continues to experience growth of 5 percent per year. Indonesia produces approximately 43 percent of the total production of crude palm oil (CPO) in the world. The growth of palm oil production in Indonesia was 7.8 percent per year, compared to Malaysia with 4.2 percent per year. Palm oil activities provide a large economic contribution to Sumatra, where 70 percent of palm oil area in Indonesia is located. It provides a high number of jobs. Approximately 42 percent of palm oil land is owned by small holders.

Areas for Palm Oil in Indonesia (2009)Mn Ha 7.5 70% Sumatra 0.58 0.51 1.20 0.31 0.49 26% 0.33 0.38 0.24 4% 0.02 0.03 6.92

6.0

4.5 1.33

3.0 1.50

1.5

Figure 3.B.3: Areas for Palm Oil in Indonesia

0 Riau Other Region in Sumatra North Sumatra Aceh West West Central South East Sulawesi Sumatra Kalimantan Kalimantan Kalimantan Kalimantan Papua Java Total

Source: Indonesia Palm Oil Statistic, 2009

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Masterplan P3EI Sumatra Economic Corridor

The following figure illustrates the value chain from plantations, mills, refineries, and palm oil processing in downstream industries.

Plantation

Milling

Refinery

Downstream

Trading and LogisticsPalm Oil PlantationsFresh Fruit Bunches (FFB)

Milling of Palm OilCrude Palm Oil (CPO) Palm Kernels Palm Kernel Oil

Refining and FractionationRBD Palm Oil RBD Olein RBD Stearin PFAD1

Oilsand FatsCooking oil Margarine

Bio-fuelsBio-fuel Glycerine

Oleo-chemicalsFatty Acids Fatty Alcohol

Oleo-chemicals Approximately USD 5.25 Bn3 (98.0%) Approximately USD 0.08 Bn4 (1.4%) Approximately USD 0.03 Bn5 (0.6%)

Value add2 (USD Bn)

Source: BCG experience

Figure 3.B.4: Value Chain of Main Economic Activities of Palm Oil

Palm Fatty Acid Distillate; 2 Estimated based on typical profit margin and the estimated volume flowing through each value chain step; 15 Mn Tons of CPO with margin of ~USD 350/Ton at current price of ~USD 680/Ton; 4 Approximately 7.5 Mn Tons (50% of overall) at margin of USD 10/Ton; 5 Approximately 3 Mn Tons at margin of Approximately USD 10/Ton.1 3

Plantation: In 2009, Sumatra had approximately five million hectares of palm oil plantations, of which 75 percent were mature plantations. However, further expansion of palm oil plantations in Sumatra is limited due to environmental consideration. As a result, intensification approaches need to be applied to increase the production yields of the existing palm oil. Indonesias current palm oil productivity is 3.8 tons/Ha, which is still far below the productivity of Malaysia at 4.6 tons/Ha, and still much lower than the potential productivity that could be achieved at 7 tons/Ha.

CPO Yield (Ton/Ha), 2009

8

Potential Yield1

7.0

6Malaysia Average Yield 4.2 4.1 3.4 4.6 3.8

4Figure 3.B.5: Productivity of Some Categories of Plantation Owners and Other Benchmarks

Indonesia Average Yield

01

Government

Private

Small Holders

Based on yield of international benchmark companies.

Source: Industry Reports; Ministry of Agriculture; USDA Foreign Agriculture Service; Team Analysis

Masterplan P3EI Sumatra Economic Corridor

55

Estimated Profit Margins (USD/Ton)

The low productivity for small holders is primarily caused by: Use of low quality seeds. Research shows that the use of higher quality seeds can increase yields by up to 47 percent from current levels; Inadequate use of fertilizer due to high prices for fertilizers; Time between Fresh Fruit Bunches (FFB) to the old mill (above 48 hours) decreases the productivity of CPO produced. Milling: Improvements must be made to the value chain, beginning with better access from palm oil plantations to the mill. Inadequate access cause high transportation costs, long travel time, and low productivity. Better construction access to the mill will increase production. The lack of sea ports capacity is compounded by the lack of storage facilities, which causes a long waiting time and high transport costs. Refinery: The refinery process changes the CPO from the mill into a final product. In 2008, Indonesia was estimated to have a refining capacity of 18-22 million tons of CPO. This capacity was sufficient to process all CPO produced. With excess capacity available today (50 percent utilization), refining the value chain has a low margin (USD 10/tons) when compared to plantation value chain (about USD 350/tons). The low margins do not interest investors. Palm Oil Downstream: Primary downstream industries in the supply chain of palm oil includes palm oil distillation, oleo-chemical and bio fuel. Similar to the value chain of palm oil distillation, the downstream of palm oil industries has sufficient installed capacity. This results in the low profit margin of the value chain. In the long run, however, the continued development of palm oil downstream industries is a must in order to maintain the strategic positioning of Indonesia. Having full upstream and downstream capabilities would enable Indonesia to sell high quality produce at competitive price.

Plantation & Milling

Refinery

Oleo Chemicals Historically

Oleo Chemicals Now

Source: Team Analysis 2009

Figure 3.B.6: The Margins of Each Value Chain

Regulation and Policy To implement the development strategy of palm oil, the following must be

addressed: Increase spatial certainty for the development of upstream activities for palm oil (plantations and mills/ palm oil processing plants); Improvement of regulations, incentiv