Indonesia allocates US$195 million subsidy on palm biodiesel producers over smallholders

Campaigners have blasted the move, noting that the fund is meant to empower small oil palm farmers and not subsidise the giant multinationals that produce biodiesel.

smallholder farmer indonesia
A farmer puts palm oil in a truck to be taken to a processing factory in East Kalimantan, Indonesia. Image: CIFOR, CC BY-SA 2.0

Martamis says he’s worried about how he’ll pay for his daughter’s education once schools reopen. He’s an oil palm farmer from the village of Lubuk Mandarsah in Indonesia’s Jambi province, and before the Covid-19 pandemic he could expect to sell his palm fruit for 1,200 rupiah per kilogram, or about 9 U.S. cents.

Now, he says, he can only get 700 rupiah (5 cents) a kilo.

“Usually it’s above 1,000 rupiah, even 1,200 rupiah, but now the price has dropped to 700 rupiah ever since Jambi was declared as a ‘red zone’ [for Covid-19],” he tells Mongabay. “So our incomes have been drastically reduced.”

At this rate, he’ll make a total income of just 1.85 million rupiah ($130) for the whole year. That’s just 5 per cent of the annual minimum wage in Jambi.

“I’m still able to put food on the table for now, but when my daughter starts junior high school next year, I don’t think it’s going to be enough,” Martamis says. “We farmers don’t have savings. Our only way out is to work at our neighbors’ plantations as laborers. That’s what’s happening in our village.”

The social and travel restrictions imposed in response to the pandemic have hit Indonesia’s economy hard, and small oil palm farmers like Martamis have not been spared. Indonesia is the world’s top producer and exporter of palm oil, a commodity found in products ranging from toothpaste to snack foods to biodiesel.

When [the biodiesel industry] takes a hit from Covid-19, they plead for subsidies from the government. Meanwhile, the ones whose situation is most concerning are oil palm farmers who should be the ones to be helped.

Mansuetus Darto, secretary-general, Oil Palm Smallholders Union

But while farmers like Martamis go into debt, skimp on fertiliser and take other measures to cut costs, the agribusiness giants that dominate the industry have just received a 2.78 trillion rupiah ($195 million) stimulus from the government for biodiesel production.

“Palm oil companies have always been spoiled by government subsidies,” said Mansuetus Darto, the secretary-general of the Oil Palm Smallholders Union (SPKS). “When [the biodiesel industry] takes a hit from Covid-19, they plead for subsidies from the government. Meanwhile, the ones whose situation is most concerning are oil palm farmers who should be the ones to be helped.”

Subsidising corporations

Indonesia’s palm oil industry is largely controlled by a few dozen wealthy families. A 2018 report by TuK Indonesia, an NGO that advocates for environmental justice, puts the estimated total wealth of the top 27 families in the industry at more than $88 billion, or 8 per cent of the country’s GDP the previous year.

“But the government still helps them,” Mansuetus  said. “These are rich people. All of them have money.”

He rejects the rationale that the stimulus will trickle down to small farmers, noting that most biodiesel producers in Indonesia source palm oil from their own plantations and or those of affiliated suppliers, rather than from small farmers.

“Just check Wilmar International, which produces 2.3 million kiloliters [of biodiesel],” Mansuetus said. “Most of them come from their own plantations, and the rest is sourced from affiliated plantations. So how does it benefit farmers?”

Wilmar is the world’s biggest palm oil trader, and also the biggest recipient of Indonesian government subsidies to the palm oil industry. In 2017, Wilmar received 55 per cent of the total $530 million distributed by the government to five palm oil companies. The money came from a fund that the companies pay into in the form of export tariffs; Wilmar’s share was three times the amount it had paid into the fund.

“Who benefits the most?” said Faisal Basri, a senior economist at the University of Indonesia. “His name is Martua Sitorus,” he said, referring to the billionaire co-founder of Wilmar. “The people of Indonesia are donating to Martua Sitorus.”

In 2018, Martua resigned from the company after he was found to be running a second firm, Gama, with his brother that had cleared an area of rainforest twice the size of Paris since 2013. Wilmar promised to stop deforesting that same year.

“[The funds] are enjoyed by only a few people and they still keep asking [for subsidies],” Faisal said.

Mansuetus said companies like Wilmar don’t need handouts in the form of subsidies or stimulus packages. He said Wilmar announced in April that it would hand out $1 million worth of food and medical aid packages to help pandemic-affected communities in 13 provinces where it operates.

“It means they’re not having a problem. They have money,” Mansuetus said. “And if they give the government money and then the government gives them [back] money in the form of subsidy, it means they didn’t actually donate [toward Covid-19 relief], right?”

GAPKI, the national association of palm oil companies, says it welcomes the government’s decision, calling it a “good for the industry.”

Wilmar said that smallholders also benefitted from the biodiesel programme as it ensured long term domestic demand for palm oil.

This in turn helps to stabilise the price of palm oil while ensuring that smallholders continue to receive a secure source of income, the company added.

“In summary, the programme is intended to benefit the Indonesian palm oil industry as a whole and is strictly not meant to benefit individual companies like Wilmar, as alleged,” a spokesperson at Wilmar told Mongabay.

Biodiesel priority

The state palm oil fund, known by its Indonesian acronym BPDP-KS, is meant to reinvest in the industry for farmer training, research and development, replanting aging trees with newer and more productive ones, building infrastructure, and promoting palm oil.

But since its establishment in 2015, most of the money it has collected in mandatory export tariffs has gone toward biodiesel, both to subsidize producers like Wilmar and to artificially lower the price of biodiesel at the pump, to make it more competitive with regular diesel. Between 2015 and 2019, the fund collected 47.2 trillion rupiah ($3.3 billion) in revenue, and handed 71 per cent of it back to biodiesel producers — and less than 5 per cent to small farmers for a replanting programme.

The Indonesian government is pushing for greater domestic consumption of palm oil through its B30 programme — a biodiesel blend that contains 30 per cent palm oil biofuel. Its end goal is B100, removing the diesel altogether. The recently announced $195 million stimulus is aimed squarely at that programme. The money, allocated to the BPDP-KS from the state budget, will go toward subsidising biodiesel prices at the pump to stay competitive with regular diesel, following the crash in oil prices earlier this year.

Finance Minister Sri Mulyani Indrawati has declared the biodiesel subsidy a part of the government’s Covid-19 economic recovery plan, but also said the $195 million is only the start. She said the total needed to keep the biodiesel programme afloat is $250 million. The balance of about $55 million will come from biodiesel producers through an increase in export tariffs, effective May 1.

The government is, by law, not allowed to allocate funding from the state budget for biodiesel subsidies. But the $195 million injected into the BPDP-KS comes from the state budget courtesy of an executive order granting the government extra powers to deal with the Covid-19 pandemic.

“This [government] subsidy is temporary and in place for 2020 only,” Sri Mulyani said.

But observers say there’s nothing to stop the government continuing to subsidize biodiesel producers, given that the executive order will remain in place through 2022.

“With the executive order, [the government] finally got what they’ve been wishing for,” said Wiko Saputra, an economic policy researcher at the environmental NGO Auriga Nusantara. “This is the first time in the history of BPDK-KS” that the fund is getting money directly from the state budget.

He said there’s a possibility that the government will keep subsidizing biodiesel producers this way. “That’s why I was very disappointed [by the decision],” Wiko said.

Small farmers left out

Several associations of small oil palm farmers have launched an online petition demanding that the $195 million stimulus be diverted to small farmers instead of big producers.

“As the biggest palm oil producing country, the fate of our farmers should’ve been better and should’ve been paid serious attention to,” the petition says. “The presence of BPDP-KS should’ve improved the fate of farmers, but the fact is that farmers are still suffering. Not a single drop of palm oil-based biodiesel managed by companies [and] the state comes from farmers’ fruit bunches. Instead, the supply comes from plantations of big firms which control [the industry] from upstream to downstream.”

In 2018, oil palm farmers mounted a legal challenge against the BPDP-KS use of funds to subsidize biodiesel producers, but the lawsuit was rejected. The national anti-corruption agency, the KPK, has taken notice, however. In 2017, it warned of indications of corrupt practices in the management and disbursement of the funds collected by BPDP-KS, citing the disproportionately large amount going to subsidize biodiesel producers.

The BPDP-KS has long defended how it uses the fund, saying the large share to biodiesel producers is justified because they money comes from them in the first place in the form of export tariffs. But Mansuetus said the tariffs constitute a form of state revenue, and hence should be redistributed according to the law. In this case, the 2014 law that established the BPDP-KS states that the fund should be used specifically for oil palm estate development, replanting, research, and empowering smallholders — with no mention of biodiesel.

Wiko questions the BPDP-KS’s most recent argument, which is that the subsidy is part of efforts to promote the palm oil industry.

“Just check the definition of promotion in the 2014 law. There’s no mention of biodiesel subsidy,” he said. “So the point is that BPDP-KS was established to subsidize biodiesel producers, that’s it. So they’re going to look for any reasons they can find” to justify the subsidy.

Eddy Abdurrachman, who was appointed the BPDP-KS head in March, said the option to use the state budget to prop up the industry was a “last resort.” He said initially other parties were expected to help pony up the sum, including state-owned oil and gas firm PT Pertamina, which sells the biodiesel across Indonesia. But Pertamina didn’t have the money, Eddy said as quoted by investigative magazine Tempo, and biodiesel producers refused to bear the full cost. The producers said they would rather stop production because the proposal would throw a wrench into their financial plans, he said. That then pushed the government to its final option of taking the money from the state budget.

Eddy said the $195 million allocation from the state budget would be prioritized to help small farmers get quality seeds, fertilizers, pesticides and equipment, as well as to train them. He said the biodiesel subsidy would come from the export tariffs, including the $850 million in funds left over from the BPDP-KS’s previous financial year.

But Mansuetus questioned the claim, pointing out that the finance minister has already said the $195 million will be used for the B30 programme. Wiko said he’s also skeptical the money will go to help small farmers.

“How come the government has different statements? This creates confusion,” he said. “I’m sure the state budget will be used to subsidise biodiesel producers, because the fact is that the funds from BPDP-KS have largely gone toward them.

“The government should have prioritized small farmers, instead of biodiesel, because the prices at the farmers’ level have declined [more than for the exporters],” he added. “At the same time, many farmers face difficulties in getting fertiliser because the distribution of fertiliser is monopolised by companies.”

Wiko said the government should also use the money to improve the management and sustainability of the palm oil industry, which has long been associated with deforestation and conflicts over land.

“We can use the funds to guarantee that our palm oil is clean and clear,” he said. “Who can guarantee our biodiesel don’t come from peatlands and forest areas? No one. And our efforts to improve the management haven’t been optimal because of lack of funds. I’m sure that if we focus on using the funds for the upstream palm oil industry, we can fix the problems in three years.”

Biofuel isn’t ecofuel

The environmental damage inherent in the production of palm oil means the biodiesel derived from it isn’t the ecofuel alternative that proponents make it out to be. One European study has found that biodiesel from food crops emits on average 1.8 times more carbon dioxide than burning fossil fuels, when the clearing of forests for farmland is taken into account. For biodiesel from palm oil, emissions are three times higher than for fossil fuels.

new report by the Rainforest Foundation Norway says current targets for boosting biofuel production is likely to lead to a massive increase in demand for palm and soy oil by 2030. Under a high-demand scenario, total demand for palm oil may increase to 61 million tonnes, or 90 per cent of current global production, and demand for soy oil to 41 million tonnes, or 75 per cent of current production.

This increase would cause an estimated 7 million hectares (17 million acres) of deforestation, including up to 3.6 million hectares (8.9 million acres) of peat drainage for oil palms. Global CO2 emissions from this additional deforestation are estimated to be 11.5 billion tonnes — more than China’s current annual emissions from burning fossil fuels.

“Biofuels were supposed to reduce greenhouse gas emissions, but this is not what’s happening in reality,” said Laura Buffet, the energy director of Transport & Environment, a group that campaigns for clean transportation. “If decision-makers don’t avoid crop biofuels and especially high-risk feedstock like palm oil and soy, biofuel policies risk adding fuel to the current forest fires around the world.”

Wilmar argued that banning palm oil is more detrimental to the environment.

“The focus should instead be on supporting the sustainable production of palm oil,” the company said. “Further efforts should be channeled towards identifying and transforming players that continue with unsustainable practices instead of targeting the entire palm oil industry, which is in fact counter-productive and threatens livelihoods, both direct and indirect, of millions in Indonesia.”

If the Indonesian government persists with ramping up its palm biodiesel programme, it risks derailing its own emission reduction commitments, said Greenpeace Indonesia forest campaigner Arkian Suryadarma.

“[Multinational palm oil companies] have failed to pay fines for land and forest fires, for the destruction of tropical forests, and for putting millions of children at risk due to haze,” he said. “So how can the government justify spending money on an industry that destroys our country while disbursing funds to recover the economy from the pandemic?”

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