Green Economy 2.0: Asia’s palm oil plantation opportunities

Can 100 innovations really create 100 million jobs? According to Professor Gunter Pauli author of the book “The Blue Economy” it can. In his view the future needs to merge the Green Economy, Sustainability and CSR as a holistic innovation, creating the Green Economy 2.0. This triggered me to start reading the book in an attempt to find where this “hidden” business is in Asia and who would be interested to invest in this opportunity.

Asia has the world largest palm oil plantations. They are often criticized for the destruction of the prime forests in Malaysia and Indonesia and social unrest over land rights issues. Pressure groups like Greenpeace successfully created a demand for Certified Sustainable Palm Oil. The Round Table of Sustainable Palm Oil (2004) with more than a 1,000 members set the standard for sustainable palm oil and certifies the companies.

Large FMCG as Unilever are now buying Certified Palm Oil resulting in that large enlisted palm oil producers start to set course towards more sustainable practices. Still the market is not large enough for the smaller palm oil producers to follow the same course as there is no incentive yet.

Another problem that a large palm oil producer faces when they decide to change their way of production, is that many of the raw materials are bought from middlemen who then buy from small holders. These middlemen have no incentive to be transparent as opening up their contacts will be equal to suicide as they lose their value in the supply chain.

So how can we reach these small holders? What kind of incentives can be created for the middlemen to get on the sustainability wagon, while improving the lives of the small holders without damaging the middlemen’s profit margin?

Using waste to grow mushrooms

In “The Blue Economy” Pauli highlights mushroom growing on used coffee grounds as an extra source of protein and income for the local people. In oil plantations the empty fruit bunches could be used as alternative substrate for mushroom production. Sudirman et al. researched on how this can be done and published their results in 2011 “the potency of oil palm plantation wastes for mushroom production. Based on this research it was suggested to build a mushroom industry located near the palm oil factory where the main substrates are abundantly available. The liquid as well as solid wastes from palm oil mill effluent stimulated the growth of mushrooms. In addition spent mushroom substrates can be then used as soil fertilizers in the oil palm plantation.

An alternative usage for oil palm waste is fuel

In 2010 UNEP published the report “converting waste oil palm trees into a resource”.  The report forecasts that due to the economic lifespan of palm oil trees of 25-30 years, yearly several million of palm oil trees will be felled every year creating a large quantity of biomass waste in Indonesia and Malaysia contributing to climate change through the release of carbon emissions of the rotting plant materials.

Currently, the resource is under-utilized. The felled trees are not used productively with any consistency, and are often shredded, filled in trenches and left to decompose naturally. In order to explore potential uses for this biomass, this UNEP study was carried out in Malaysia to determine the feasibility of converting waste oil palm trees (WPT) into a resource, either as raw material for various industrial applications or for utilization in energy generation.

It was concluded that a combination of bio-ethanol and fuel pellets produced from WPT, when used as a replacement for fossil fuel, gave the best carbon offsets, at a total of 39.87%. Therefore, the most environmentally sound technologies (ESTs) for converting WPT into an energy resource were found to be:

  • fermentation to produce bio-ethanol from oil palm trunk sap
  • briquetting to produce fuel pellets from the sap squeezed residues

The business case

A techno-economic feasibility study was carried out to provide a cash flow analysis and determine the financial viability of setting up an integrated bio-ethanol and fuel pellet plant. The plant was projected to operate at a production capacity of 100 tons of bio-ethanol and 700 tons of fuel pellets per day. The required fixed investment was estimated to be RM79 million (USD26 million), with an estimated annual operating cost of RM1,473 million (USD486 million). The financial analysis projected a net present value (NPV) obtained of RM211 million (USD 70.3 million), with a 39% internal rate of return (IRR), a cost benefit ratio (BCR) of 1.28 and a payback period of four years.

A break-even analysis showed that the plant needed to produce 95,984 tons of bio-ethanol and 936,210 tons of fuel pellets, which would generate revenues of RM266 million (USD89 million) for bio-ethanol and RM300 million (USD100 million) for fuel pellets. Any production over and above these levels could be expected to begin generating net profits.

The financial analysis demonstrates that combining the production of bio-ethanol with fuel pellets in a single production facility is a sound business investment. Applying the principles outlined in the study can result in substantial benefits, both in terms of boosting the economy and preserving the environment of Malaysia and Indonesia for generations to come.

Traceability, CSR and making profits

For the sustainable oil palm producer it is important that sustainability guarantees given by the company are based on reliable traceable data. Involving the small holders in these new business opportunities will increase their income and food resources (mushrooms). The agent will receive more income through these new businesses giving him an incentive to cooperate and invest in training of the small holders leveraging on his existing infrastructure while the producer invest in sustainable measures to increase the income of the local community and their own profitability while contributing to sustainable practices. The producer and middlemen relationship will evolve from transactional to a value added partnership tying the middlemen to the producer as this new business differentiates the producer from the other plantations and will deepen the relationship with the agent resulting in disclosure of data that is needed to guarantee that the palm oil fruit bunches they deliver are from a sustainable source.

Who will invest?

UNEP recommended in the report that the business proposal for converting WPT into renewable energy looks promising, given the demand for green products globally. The ideal potential business partners would be plantation owners who own the raw material source (WPT), and organizations such as the POIC (Palm Oil Industry Cluster) which can provide the infrastructure needed for the production line. Though, still hard cash is needed to invest in such venture that has not been a proven business case yet with hard figures.

For Indonesian palm oil producers there is an opportunity. In September 2012 the Indonesian government and the Millennium Challenge Corporationsigned a five year agreement to invest up to half billion dollar into measurements that will support Indonesia reaching their Millennium Development Goals. Over 300 million USD will be invested in “Green Prosperity” measurements that will contribute to combating climate change through green energy initiatives while increasing the income of the local people with ten percent.

In my opinion there is a business case and money in the market for the palm oil industry to tap into. We can only create sustainable business through evolving from the transactional model to a model of value added partnership throughout our value chain (including backward and forward integration ) to implement new sustainable measurements for new business models without losing sight of making and increasing a companies’ profit. All we need now is a visionary who is leading such palm plantation company in Indonesia to take on the challenge.

 

Resources

  1. UNEP Division of Technology, Industry and Economics , International Environmental Technology Centre  Osaka, Japan, converting waste oil palm trees into a resource, UNEP  2010
  2. LISDAR I. SUDIRMAN, ADITYA SUTRISNA, SRI LISTIYOWATI, LUKMAN FADLI, BALAMAN TARIGAN, the potency of oil palm plantation wastes for mushroom production, 2011
  3. Gunter Pauli, The Blue Economy: 10 years - 100 innovations - 100 million jobs, 2010
  4. Millennium Challenge Corporation, Green Prosperity, http://www.mcc.gov/pages/countries/program/indonesia-compact
  5. Wilmar, Sustainability report, 2011
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