Indonesia now faces governance issues caused by its own doing in the palm oil industry, particularly related to misguided policies in both the upstream and downstream sectors and market interventions. We are now reaping what the government has sown with a series of emotionally-driven policies. Mismanagement of resources and poor governance, especially corruption, have hindered the optimization of the benefits from palm oil development.
Despite its crucial role, the palm oil industry has suffered from a series of stringent anti-market policies such as export quotas, domestic market obligations, and fixed prices implemented since the beginning of 2022 to stabilize cooking oil prices at government-set levels after palm oil prices soared due to massive disruptions in the global vegetable oil supply.
The government is determined to fully implement the 35 percent biodiesel blending policy based on palm oil next month after the policy was introduced in February. Indonesia also intends to increase biodiesel blending to 40 percent as an effort to reduce fossil fuel imports.
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This commodity is also relatively inexpensive, versatile, and the largest used vegetable oil, meeting over 40 percent of global vegetable oil demand with less than 6 percent of the dedicated land for vegetable oil production. Therefore, food and fuel will continue to compete fiercely for crude palm oil (CPO).
Considering the complex structure of the palm oil industry and its significant role in the economy, employing over 17 million workers and involving more than two million small-scale farmers, the government needs to promptly reform the governance of the palm oil industry. There is no other way to sustain the benefits of palm oil for the overall economy than for the government to improve the regulatory framework and governance by reducing bureaucracy and minimizing policy change risks.
Without proper coordination, it is impossible for the government to design integrated development policies for such an important industry. There are three approaches that can be taken to transform the resource curse into a blessing and improve the management of natural resources for the benefit of the country and its people.
The first and most important approach is the need for the government to enhance institutional capacity and regulatory frameworks in managing palm oil to provide a coherent support system. The existing task force can be strengthened and consolidated into a strong central government institution with authority in policy-making, regulation, licensing management, development program implementation, research and development, and coordination of all activities related to palm oil and its derivative products.
This new institution will coordinate all government agencies related to palm oil at both the central and regional levels, by refining the existing Palm Oil Plantation Fund Management Agency (BPDP-KS), which manages all palm oil-related activities in one place.
Secondly, the government needs to launch a comprehensive standard for the production, trade, and use of palm oil by aligning sustainability principles and ethics throughout the palm oil supply chain. This standard should be based on globally accepted SDGs, good governance, and a balance between environmental conservation and responsible economic development.
The government is currently planning to revise Presidential Regulation No. 44/2020 on ISPO (Indonesia Sustainable Palm Oil) to address current and future challenges such as market acceptance, the European Union’s EUDR, and other LST issues. EUDR will make other sustainability standards less relevant, so now is the right time to adapt to this shifting balance.
Lastly, Indonesia must work hard to cleanse its tarnished image of corruption and create a conducive business environment for good corporate governance. Strong anti-corruption measures and improvements in public and corporate governance in the palm oil industry will further drive the economic growth engine to propel this country towards prosperity.
Edi Suhardi
The writer is a sustainability analyst.
This article has been published on Palmoilmagazine with the title © Palm OIi Magazine – Bold reform imperative after amnesty for shady palm oil plantations – Palmoilmagazine.com
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