CHAPTER FIVE ECONOMIC IMPACTS OF OIL PALM PLANTATIONS

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1 CHAPTER FIVE ECONOMIC IMPACTS OF OIL PALM PLANTATIONS According to the government, oil palm development has generated some positive impacts in Jambi Province in the form of increasing incomes and job opportunities. However, this opinion is not shared by some NGOs that work in the province. This chapter aims to weigh up the economic contribution of oil palm development. Three impacts discussed here are the value of oil palm production, the contribution of income to the people involved, and the contribution to reduced unemployment. In addition, other potential sources of income that are environmentally safe to be developed, such as ecotourism, are also discussed. This is acknowledged at the outset that it is difficult to determine to what extent oil palm development has improved the life of people as different groups have different perspectives. For example, the transmigrants probably are happy with the income they have generated from this crop since their life before resettlement may have been more difficult. However, for the local people who previously lived in prosperous conditions, the income from oil palm might mean very little Value of Production Oil palm products contribute significant revenue for Jambi Province. They contributed US$1,616,388 in 2002, down from a peak value of US$2,585,433 in As Figure 5.1 shows the total Crude Palm Oil (CPO) production rose significantly from 2000 to 2001 but remained at much the same level in However, the total export value dropped abruptly in 2001 because the price of CPO in the international market fell significantly, before recovering somewhat in

2 Figure 5.1 Crude Palm Oil Total Production, Export Production and Export Value from in Jambi Province 1000 TONNES ,000 2,500 2,000 1,500 1, MILLION US$ TOTAL PRODUCTION (TON) TOTAL EXPORT (TON) TOTAL VALUE (US$) YEAR 0 Source: Estate Crops Office of Jambi Province (2003) Compared to the other estate crops, the export value of CPO was ranked third in 2002 (Table 5.1). Rubber still generated by far the highest revenue among the estate commodities in Jambi, followed by coconut oil. Table 5.1 Export Values of Five Prime Estate Commodities in Jambi Province, Commodities Export Values (US$) Rubber 60,374,673 68,745,448 55,017,113 Raw Coconut Oil 6,568,889 5,054,000 5,256,800 Crude Palm Oil 2,585,433 1,150,000 1,616,388 Copra 33, , ,208 Areca/Pinang 284,538 5, ,354 Source: Industrial and Trade Office of Jambi Province (2003). The fluctuation in the price of CPO in the international market has been recognized by the Jambi Government. However, the presence of investors, especially from Malaysia, who were more interested in the oil palm sector than 42

3 the other sectors, has encouraged the government to continue expanding oil palm plantations. It is also realized that revenue from CPO sales received by the people involved or by the government in Jambi is limited by several factors. First, the CPO produced in Jambi has to be brought to seaports in other provinces because Jambi has no seaport. This has increased the cost of transportation. The government now is building a seaport in Muara Sabak that is expected to be operating in Second, the transportation of CPO has caused serious damage to roads and bridges in this province. The damage has caused a high repair cost as well as disturbing other social and economic activities (Thahar, 2004b). The cost of road damage is borne by government, which means that part of the income from the oil palm sector has to be spent to repair it Contribution to Income Oil palm plantations have been emerging as a new potential source of income for Jambi Province. However, there is still a question as to how much benefit accrues to ordinary people, especially smallholder households that are involved in planting this crop. The factors considered below are limiting the contribution of oil palm to the incomes of government and the farmers Fluctuation of FFB Price The fluctuation in the price of fresh fruit bunches (FFB) becomes a concern since it will directly affect the income of farmers. As an example, in April 2002, the price per kg of FFB from oil palm trees aged 7 years was Rp463 and from trees aged 10 years, Rp510. However, the prices touched their lowest point in July 1999 when the price per kg of FFB was only from Rp200 to Rp250. At that time, many farmers let the fruit decay on the tree (Thahar, 1999c). 43

4 High Cost of Production The other problem faced by the farmers is the high cost of production including some fees that have to be paid to the provincial and district governments (Table 5.2). When the price of fertilizer increased, most of the farmers did not do fertilizing, which in turn affected the production of FFB. The price of FFB from trees aged five years at that time was Rp464, which means that the farmers received an income of only Rp170 per kg of FFB, not counting the cost of their labour. Table 5.2 Cost of Production of Oil Palm Fresh Fruit Bunches in Jambi, 2000 Cost Components Cost (Rp/kg of FFB) Fertilizer Harvesting Dispatching Administration fee of Rural Cooperative 2.50 Contribution to Village 2.50 Fee paid to District Govt Fee paid to Provincial Govt Credit Payment (paid every month) TOTAL Source: WALHI (2001) The income of Rp170 per kg of FFB is very little. If a transmigrant has 2 hectares oil palm with a production of 13.5 tonnes FFB per year or 1,125 kilograms FFB per hectare per month, he only gets around Rp381,803 per month or Rp12,727 per day. The minimum wage in 2000 was Rp7, 208 per day so the farmer, after counting his labour, only receives a surplus of Rp5, 519 per day. The farmer could live modestly with that income since the family has a subsistence garden to supply some of their basic needs. In Table 5.2 there are two kinds of fee (retribusi) paid to the district and provincial government. Besides that, the farmers also make repayment to the 44

5 company that has provided agricultural supplies as required in the scheme contract (Florus and Petebang, 1999). The amount is more than a third of their monthly income. The farmers have continually asked for government intervention to postpone the payment until the price of FFB rises again (Thahar, 1999e) Other fees have to be paid by the company such as the fees to get the permit to establish the plantations and the CPO processing unit as well as to pass the provincial and district roads. According to Brodjonegoro (2001), some of the fees are not justified because the term retribusi relates to the payment for using a public service that has a direct benefit to the economic activity. He identified three kinds of fees that are not justified, namely, the company contribution, the harvest/production fee, and the dispatching fee. He argues that these fees seem to be a double tax since the central government also imposes a tax for such kinds of activities. The farmers also face problems relating to the location of CPO processing units that are far from their farms. In conditions such as flooding or road damage, they often sell FFB cheaper than the price set by the government; otherwise, the FFB will be decayed. Thahar (2001a) reports that in January 2001, 750 tonnes of FFB decayed because the farmers could not dispatch them to the CPO processing unit due to damage to provincial roads Failure to Collect Fees The other question about the economic benefit of oil palm plantations is the real contribution to provincial income. Based on Regulation No. 320/2002 released by the Governor of Jambi, oil palm estates owned by private companies have to contribute as much as Rp 5 per kg CPO and Rp 7.5 per kg of kernel to the province. In practice, there was no contribution at all (Thahar, 2003c). The government should have been receiving as much as Rp330 million 45

6 per month from CPO production and Rp495 million per month from kernel production (Thahar, 2002b). This contribution is included in the retribusi as mentioned above, that according to Brodjonegoro (2001) is not justified since the company also pays tax to the central government (i.e. Pajak Pertambahan Nilai (PPN)). In this case, the weak justification for the regulation may make it difficult to implement in the field Low Productivity The productivity of oil palm estates in Jambi Province is considered very low, averaging only 13.5 tonnes of fresh fruit bunch (FFB) per hectare per year, while it should be able to reach a productivity of more than 20 tonnes FFB per hectare per year (Kompas, 2001). From Table 4.1 the CPO production in Jambi province is lower that that of Aceh, even though the total area is larger in Jambi Province. One reason for the low productivity of oil palm plantations in this region is the weak position of farm households involved in the NES schemes. As shown by Table 4.3, the area planted by farmers in schemes is almost half of the total area of oil palm plantations in Jambi, so they have a great influence on the total FFB production in the province. According to Kompas (2001), the farmers in the schemes have no bargaining position to determine the price of FFB. The unfavourable price in turn will make it difficult to provide enough fertilizer for their oil palms. The condition became worse when bank credit with low interest rates was discontinued in Technically, one hectare of oil palm needs around 600 kg of fertilizers, consisting of urea, super phosphate 36 (SP 36), KCl and dolomite. The retail price is high at Rp55,000 per 50 kg urea, Rp85000 per 50 kg SP 36 and Rp83,000 per 50 kg KCl. Meanwhile there was no dolomite stock in the market (Kompas, 2001). 46

7 Another problem that has hampered development of oil palm plantations is that many companies with permits to plant oil palm on state land actually left the land idle and later on some of this land was acquired by farmers. In 2000, it was reported that 28 companies that had acquired around 499,554 ha of land had no planting activities at all. The reasons for leaving the land were the unclear status of the land and that is was not suitable for oil palm (Thahar, 2000b). However, some NGOs argued that the reason behind so many hectares being left was that the companies were only interested in extracting the timber, that is, the permit was only a mask behind which to undertake logging. The Estate Office of Jambi Province views the problem of low productivity as being caused by most of the oil palm plantations not having reached peak production age since they were first developed in the 1980s (Estate Office of Jambi Province, 2004). This argument may derive from Sargeant (2001) who in finding that average oil yield in Indonesia was only 3.5 tonnes per hectare compared to 5.0 tonnes per hectare in Malaysia, argued that this reflects more the young age of oil palm plantings in Indonesia rather than inherently lower productivity. Oil palm plantations could also contribute more income to farmers if the by-products of oil palm were processed in Jambi such as is done in Malaysia. Currently these oil palm by-products remain unused Employment and Wages In 2002, oil palm plantations absorbed as many as 226,615 workers in Jambi (Figure 5.2). This number is the second highest after rubber plantations, which absorbed 420,870 workers. However, the growth rate of employment in oil palm plantations was 11% compared to 1% for rubber over the period (Industrial and Trade Office of Jambi Province, 2003). 47

8 Figure 5.2 Comparison of Workers Absorbed by Five Main Plantation Crops in Jambi Province NUMBER of WORKER YEAR RUBBER OIL PALM CASSIAVERA COCOA SUGAR CANE Source: Industrial and Trading Office of Jambi Province (2003) Since rubber plantations have absorbed a relatively constant number of workers in the past decade, it is understandable that the provincial government relies much on the development of oil palm plantations to reduce unemployment. According to the Provincial Bureau of Statistics of Jambi Province (2002), the number of jobseekers registered in 2002 was 11,144. The real number of unemployed may be much greater than this since not all jobseekers register themselves. Sargeant (2001) found that 70% of workers employed in an area of oil palm plantations in Sumatra were from the village where the estate was located, while the other 30% were from surrounding villages. Some processes in oil palm development need many more workers than for rubber plantations. For a 10,000 ha plantation, the initial process, including land clearing and nursery watering that operates semi-manually, requires around 200 people. As the seedlings are field-planted and tended, another 1,000 workers are required. 48

9 When the plantation become harvestable, it needs approximately 800 harvesters plus 1,200 general maintenance workers. Despite the increased number of workers absorbed by oil palm plantations, some NGOs are still critical of the employment impacts. As Sargeant (2001, p.18) says, these groups contentiously argue that the oil palm industry has lowered, not improved, average incomes, as villagers who were able to make a living from small rubber plantations and other activities had no choice but to become labourers on the palm oil developments. However, it is difficult to measure the impact on wages. If we look at the data released by the Employment Office of Jambi Province (2004), the minimum wage in Jambi province (Upah Minimum Propinsi, UMP) increased substantially during However, despite the increased nominal wage received by the workers, the inflation due to the depreciation of the rupiah following the economic crisis of 1998 caused the real value of wages to decline. Table 5.3 Minimum Wage in Jambi Province from 1997 to 2003 Year Minimum Wage (Rp/month) (Rp/day) ,500 4, ,500 5, ,000 6, ,000 7, ,000 10, ,000 12, ,000 16,250 Source: Employment Office of Jambi Province, The real value of wages can be assessed by estimating how much rice could be bought by that wage. From Table 5.4 it is clear that the real value of wages received by labourers in Jambi province declined sharply during the economic crisis. Even though the provincial government has tried to increase 49

10 the minimum wage, it has not reached the 1997 level when wage earners could buy kg of rice with the wages they received. However, wage earners may have been even worse off without oil palm development. Thus, it is difficult to evaluate the NGO criticism on the basis of real wage data alone. Table 5.4 Comparison of Wage per Day and Retail Rice Price in Jambi Province Year Wage per Day Average Retail Price Daily Wage in (Rp) of Rice (Rp per Kg) Kg Rice IR-I* IR-II* IR-I IR-II ,979 1, ,729 2,409 1, ,250 3,314 2, ,208 2,479 2, ,208 2,712 2, * IR-I and IR-II are two types of rice. The quality of IR-I is better than IR-II as also can be seen by its higher price. Source: Employment Office of Jambi Province (2004) and BAPPEDA JAMBI (2004) Other Potential Source of Income Rubber Plantations Rubber has been the main source of income for decades in this province. Many people consider it more beneficial to develop rubber in areas of southern Sumatra (i.e. Jambi, Lampung and South Sumatra Provinces). The reasons are that rubber can be tapped manually and then processed by using modest tools and is able to be kept longer, unlike oil palm FFB that decays from eight hours after harvesting and has to be processed in a modern processing unit. In addition, the return from rubber has been higher and more stable than that of CPO. The fact that synthetic rubber cannot replace natural rubber is also an advantage (Sukarjaputra et al., 2001). According to Florus and 50

11 Petebang (1999), rubber plantations have a higher return than oil palm because their productive period is longer (Table 5.5). Table 5.5 Comparison of Productive Period between Rubber and Oil Palm Period Rubber Oil Palm Immature year 0-7 year 0-5 Enter productive period year 8 year 6 and 7 High Productivity year 8-19 year 8-13 Decreased Productivity year year Source: Florus and Petebang (1999) According to BAPPEDA (2004a), the number of rubber farmers in Jambi province in 2001 was 182,524 households. The production of rubber increased by 1% from 1997 to 2001, while the newly-planted area of rubber also increased by 1 3,000 ha per year, though not as much as in the period 1992 to 1995 (Table 5.6). Table 5.6 Rubber Production and New Planting Area in Jambi Province, 1997 to 2001 Year Production New-planting Area (ton) (ha) ,781 2, , ,875 1, ,884 2, ,806 1,050 Source: BAPPEDA Jambi (2004a) 51

12 Animal Husbandry Many believe that the animal husbandry sector has potential to develop since for a long time Jambi has been known as a region in Sumatra that supplies livestock to neighbouring provinces. The availability of land, human resources, and feed sources (grass and legumes) are the other factors in favour of development of the animal husbandry sector. Though in the past twenty years Jambi Province could meet the local demand for meat and export meat to other provinces, the increased population of livestock has not been significant, except for poultry (Table 5.7). Table 5.7 Population of Poultry and Livestock in Jambi Province Poultry 7,642,719 9,886,612 10,882,184 Cattle 150, , ,189 Buffalo 77,322 70,102 68,763 Horse Goat 120, , ,525 Sheep 48,220 45,701 46,487 Pig 11,246 13,446 12,452 Source: BAPPEDA Jambi (2004a) In order to increase the contribution of the animal husbandry sector to income in the province, currently the development of the sector is directed to establishing pockets of livestock in some high potential regions. It is expected that this strategy will ease extension and encourage the development of largescale livestock farms (Thahar, 2001b) Tourism The other sector that could be relied on in future is tourism, especially ecotourism since Jambi has four national parks to visit. In addition, there is Kerinci District, which has long been visited due to its scenic views and historical sites. Since 2003, there are two airports, seven flights Jambi-Jakarta in a day, and hotels to accommodate visitors to Jambi (Thahar, 2003a). 52

13 According to BAPPEDA Jambi (2004b), in 2001 there were 118 hotels and 1,135 workers in the tourism sector. The main problems in developing the tourism sector are inadequate road infrastructure while the tourism sites are spread over the province, lack of promotion, and lack of professionals (Thahar, 2003a) Conclusion The development of oil palm plantations has generated some positive economic impacts in Jambi. It has provided jobs for hundreds of mainly unskilled labourers. Even though NGOs argue that rubber plantations are much better in improving the life of locals in villages, in fact many farmers have converted to planting oil palm. The export value of CPO is also one factor that encourages Jambi Province to support this crop. However, it seems that the orientation solely focuses on extending the area of plantations, ignoring the importance of adequate infrastructure. The main problems perceived now are inadequate roads, unavailability of cheap fertilizers, and too many fees that burden the farmers. The Jambi Government still has other potential sectors to develop that are more environmentally safe and will not generate as much controversy such as rubber plantations, animal husbandry, and ecotourism; however it seems that there is not enough effort to develop them. Even though those sectors have existed in the province for some time, there is no significant progress. 53

CHAPTER FOUR DEVELOPMENT OF OIL PALM PLANTATIONS IN JAMBI PROVINCE

CHAPTER FOUR DEVELOPMENT OF OIL PALM PLANTATIONS IN JAMBI PROVINCE The development of oil palm plantations in Jambi province is fully supported by the local government because they believed it would increase