Indonesia's agrofuels programme hit by high oil palm prices

Down to Earth No.76-77, May 2008

Indonesian agrofuel,¹ producers are putting operations on hold as high demand drives up prices.

Since the Indonesian government issued its agrofuels policy in 2006, 22 companies have been set up to produce these alternative fuels. However, by the beginning of 2008, seventeen of these projects had been suspended due to a lack of raw materials.

According to the Association of Indonesian Biofuel Producers (APROBI), the seventeen suspended agrofuel projects are owned by Musim Mas, Dharma Group, AGB Bio Industry, Anugerah Kurnia Abadi Asian Agri Inti Nusantara, Bakrie Group, Elnusa Indobio Energy, EN3 Green Energy, Medco Energy, Pelita Agung, Platinum Resin, RNI, Sampoerna Group, Sinar Mas Group, Sumi Asih, Eterino (Gresik) and Ganesha Energy. The five plants that are still running are operated by Wilmar (see separate article), Indo Biofuel Energy (one plant), Multi Kimia, and Molindo.² Initially, the government planned to substitute 5%-10% of domestic fossil fuel use with agrofuels, but high demand for palm oil has caused prices to soar - from Rp3.8 million (US$422) per tonne at the beginning of 2007 to three times that amount today.³

The increasing price of agrofuels, most of which are made from oil palm, has had a knock-on impact on the state-owned oil company, Pertamina, as government-appointed buyer of agrofuels: the production price is now much higher than the selling price.¹

The agrofuels programme was announced by the government as a measure to create employment, reduce poverty, strengthen the economy and improve the environment ('pro-job, pro-poor, pro-growth and pro-planet').

The environmental credentials of oil palm-derived agrofuels have been widely discredited. Rather than a green fuel, as the industry claims, they are produced from a plantation crop that is replacing ancient rainforests, destroying carbon-rich peatlands and displacing local communities (see, for example, DTE 75 and DTE 74 for more background).

Now, since the Indonesia's palm oil production is being prioritised for lucrative export markets (and driving up the price of cooking oil at home), the programme is also failing to fulfil its pro-job promise. Two short years since the policy was announced, thousands of people are again unemployed.⁵

Agrofuels and the Investment Law - Judicial Review on land use rights

To support the agrofuels programme, a 2006 Presidential Decree was issued on a packet of investment measures, which mandated the replacement of the investment laws of 1967 and 1968.

On March 29, 2007 Indonesia's parliament passed a new investment law, which civil society groups criticised for failing to prioritise the interests of the majority of Indonesians. The concern was that the law would create conflict by making it easier for investors to acquire land and to extend in advance their land use rights (HGU) up to 95 years in total. Building rights (HGB) were extendable up to 80 years and use rights (HP) up to 70 years. (See DTE 73 for more background).

On July 5 last year, a group of Indonesian civil society organisations including the legal aid group, PBHI, the peasants union federation, FSPI, and environmental group WALHI, requested a judicial review of several points in the law. They argued that there remained an imbalance between the system of control, ownership, benefit and use of land, due to the continuous rapid growth in population. As a result of development, a lot of fertile land had been converted for industrial use, with negative impacts for local communities. Land was becoming a scarce resource, which was nevertheless a basic need for all people.

The Constitutional Court's decision, issued on March 25 this year, was that awarding rights over land with advance extension did indeed go against the 1945 Constitution. As a result, this point on land use rights (Article 22) was declared unconstitutional, and must be cancelled.⁶

The ruling represents a small gain for the majority of people who rely on natural resources such as forest and land, for their livelihoods.

Notes:

1. The term 'agrofuel' is preferred over the frequently used 'biofuel' - see also note at end of EU article
2. 'Investasi Biofuel US$300 Juta Tertunda', Media Indonesia. 25/Jan/08. 
3. 'Setengah Mati Minyak Nabati', Tempo 21-27/Apr/08.
4. 'Mewaspadai subsidi bank untuk BBN'. Bisnis Indonesia 1/May/07.
5. '17 Perusahaan Biofuel Tutup Ribuan Karyawan Dirumahkan', Media Indonesia 27/Jan/08.
6. Constitutional Court Ruling on Investment Law, issued on March 25, 2008. http://www.mahkamahkonstitusi.go.id/download/putusan_sidang_Putusan%2021-22%20PUU%20V%202007%20Baca%2025%20Maret%202008_ASLI2.pdf; http://www.mahkamahkonstitusi.go.id/berita.php?newscode=606.