Photo by MPOC

JAKARTA (TheInsiderStories) – The official goal of the government’s policy to expand the mandate of its biodiesel policy is to bring imports down, helping the overall efforts to help reduce the external volatility which has adversely affected the rupiah. However, its impact will extend beyond than just a stable currency.

The policy started from a simple premise, mixing a certain amount of palm oil-based components into subsidized diesel fuel. In turn, this will reduce import of crude oil, a persistent pain in Indonesia’s international trade profile. When first introduced in 2013, that amount was only 10 per cent or simply known as B10 policy.

However, due to Indonesia’s standing as the world’s largest producer and exporter of crude palm oil, respectively at 38.2 million tons and 31.1 million tons in 2017, the policy creates a sudden demand for the commodity and helped to support price.

The policy then get more complicated when policy makers acknowledged that price support is as important goal as reducing import. In 2015, the government raised the mixture to 15 per cent (B15) and created a new body called Palm Oil Estate Fund.

The Fund essentially functions as a collector of levy from palm oil exporters under a certain price condition and uses that money for various purposes in supporting the industry, most important is to subsidize the production of biodiesel, which is economically unfeasible as crude oil was cheap.

The fund collected Rp11.7 trillion (US$806.90 million) in 2017, three quarter of which went to subsidize biodiesel production.

Starting this month, the government raised the mixture to 20 per cent (B20) and also extends the mandate to include non-subsidized diesel. The government’s desperation is apparent when it decided to go ahead with the expanded mandate despite an outright rejection from the public due to concerns on the impact of higher palm oil component on automobile’s engine, especially logistics vehicles and heavy machinery.

The government and industry expected big things from the policy. The government claimed that the policy will reduce oil imports to the tune of $5.9 billion, while the industry sees an increase in domestic consumption of crude palm oil by 2 million tons to 11 million tons.

Both agreed that the price of crude palm oil, currently at around $550 per ton, may soon reach $600 per ton or even $700 per ton.

However, higher price and lower import is only a part of the story. There are reasonable concerns that the biodiesel program is exploited by major corporations to enrich themselves. One blatant example come from the Wilmar Group, one of the world’s largest palm oil company.

In the first nine months of 2017, Wilmar received Rp4.2 trillion of biodiesel subsidy from the agency but contributed only Rp1.3 trillion through export levies to the fund. Thought this net gain was occurred through legal mechanism, it raises the concerns from the public, civil society and particularly the anti-graft body, which warned that the high amount of money circulated through the subsidy mechanism may lead to corrupt practices in the industry.

On the other hand, the Palm Oil Estate Fund only spent a smaller amount from its bank accounts for other important purpose with long-term consequence like research and development and replanting programme for smallholders, which manages around 40 percent of palm oil plantation in Indonesia but lack the efficiency of large-scale commercial entities.

In addition, there are also outstanding issues of poor environmental practices and the industry’s tendency to raise output through expanding its plantation rather than increasing the crop’s productivity. These problems could be addressed if the government sets its priorities right and view with a long-term lens and not treat the policy simply as a stop-gap measure to reduce imports and support price.

TIS Intelligence Team, Email: theinsiderstories@gmail.com

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