Oil palm plantations and deforestation in Indonesia

Whatrole do Europe and Germany play

WWFGermany, December 2002

Writtenby Rob Glastra, Eric Wakker and Wolfgang Richert
AIDEnvironment, Amsterdam, The Netherlands 
Source: Indonesian Nature Conservation newsLetter (INCL)

This report is an update of an earlier study from 1998, “Lipsticks from theRainforest”, which analysed, for the first time, the role of the rapidlyexpanding oil palm sector in Indonesia’s devastating forest fires of 1997-98.Because of the international dimensions of this sector – its dependence oninternational capital flows and on the global market for palm oil products -,trade and capital relations with consumer countries were examined, withparticular emphasis on Germany. In the light of all the changes in Indonesia’spolitical, economic and social context in recent years, it was decided that anupdate on the issue would be timely. 
Forest cover in Indonesia has fallen from 162 million ha in 1950 to around 98million ha today. The country is experiencing one of the highest rates oftropical forest loss in the world and this is increasing, through legal andillegal logging, clearance for plantations and agricultural estates, and fires.Official statistics show that the forest destruction rate is now between 2million and 2.4 million hectares a year. At this rate, the lowland dipterocarpforests are predicted to disappear from Sumatra and Kalimantan by 2005 and 2010,respectively. For the past 30 years, timber has provided Indonesia with much ofits non-oil export earnings. Now timber resources from its biodiversity-richnatural forests are beginning to become exhausted. Nevertheless, the process ofoverlogging and clear-cutting of the remaining natural forests and of convertingthem into estate crop plantations continues.
The forest fires that have affected Indonesia since 1997 have been a trueman-made environmental disaster. The underlying causes are found in Indonesiabut are also rooted in the development of global markets. Donor countries didnot react adequately when the earlier fires occurred, limiting their officialassistance efforts to fighting symptoms and often following a purely technicalapproach. Instead of fighting the fires, more emphasis should be put on theirprevention, along the lines proposed by the WWF-IUCN Project FireFight SouthEast Asia (PFFSEA). Another form of assistance by donor countries should addressone of the root causes: effective mechanisms to regulate the activities of bigcorporations from those same donor countries, operating in international tradechains that depend on the unsustainable exploitation of natural resources indeveloping countries. In the case of Indonesia, this includes the timber, paperand pulp, and palm oil industries.
Of the estimated 5 million hectares of former forest lands in Indonesia’slowlands that have already been converted to estate crop plantations, 3 millionhectares are covered with oil palms. Plantations are usually established afternatural forests are logged and then burned to clear the land for planting. Insome cases, fires run out of control, either “accidentally” ordeliberately, and destroy extensive areas beyond the plantation concession area,as happened in Indonesia with most of the 1997/98 forest fires.

Achanging political and economic context
Since 1997, Indonesia has faced enormous economic and political challenges: anunprecedented economic crisis, building democratic institutions after threedecades of autocratic rule, and implementing a far-reaching decentralisationprogramme. When the financial crisis struck Asia in mid-1997, Indonesia washardest hit and slowest to recover. Under Suharto’s three successors since 1998,many institutional, legal and policy reforms have been announced and sometimesadopted. These reforms, with decentralisation of powers to provinces anddistricts among the most prominent, provide a unique opportunity to revert thedestructive trends in Indonesian forests. However, after more than four years ofreforms, the net results are mixed. The break-down of government control givesactors in the international trade chain – investors, traders and consumers- agreater responsibility and considerable leverage over what happens toIndonesia’s forests because of their links with companies that depend on rawmaterials from those same forest lands.

Forestfires since the 1997-98 crisis
Estimates of the total area in Indonesia damaged or destroyed by the 1997-98fires reach nearly 10 million ha, an area three times the size of theNetherlands. The Asian Development Bank (ADB) estimated the overall economiccost of the fire and haze in the region at US$ 9 billion. The massive fires havehad dramatic impacts on wildlife (including orangutans 
and elephants) and on several protected areas, among them Kutai and TanjungPuting National Parks. Drought caused by the ‘El Niño’ climatic phenomenon wasa major factor in creating the conditions for Indonesia’s devastating forestfires in 1997-98. In the next years, the annual round of burning, smoke and hazehas continued, although at a smaller scale and with less intensity than in theyears before. For 2002, climate experts see another ‘El Niño’ year, and in thepast few months fires and haze have indeed been worse than average, althoughsome reports say drought conditions will not be as severe as in 1997-98.
In September 2002, satellite information revealed that more than 75% of thehot-spots recorded in West and Central Kalimantan during August occurred in oilpalm plantations, timber plantations and forest concessions. This indicates thatthe pattern which became evident in previous years is repeating itself in 2002:logging and estate companies clear land by setting fire to natural forests ontheir concessions, after removing valuable timber and leaving fire-prone debris.This would mean that the reforms in Indonesia’s political system and in itsforestry policy over the last five years have had little effect in haltingconversion and deforestation. This was acknowledged in September by Indonesia’sEnvironment Minister who stated that the country’s weak judiciary and lawenforcement system were still a major constraint in controlling the fires.Sanctions against plantations that cause forest fires have been rare. Only in afew isolated cases, NGOs and local communities have successfully challengedplantation companies in court for environmental damage caused by deliberatelystarting fires that burnt out-of-control.

Widespread unsustainable logging and large-scale land clearance byagro-industrial companies with little regard for the land and resource userights of local communities have been identified as the more immediate causes offorest fires. The expansion of forest-based industries has resulted in socialconflicts over land ownership and natural resource use, with arson being used asa weapon by both companies and local communities. An international fireprevention project (FFPCP) concluded that the main permanent solution toIndonesia’s fire problem lies in improved local level land-use planning with theparticipation of local communities. Such land use planning should also focus onfire prevention. The breakdown of law enforcement and widespread corruptionfurther compound any attempt to address the root causes of forest fires and, ingeneral, to move towards more sustainable forest management.
Indonesia has come under mounting international criticism for not doing enoughto control forest fires. Several pledges and promises have been made, such asthe adoption of a ‘zero-burning policy’, the establishment of a „HazePrevention Group” by the forestry and plantation industry, and a bindinganti-haze treaty between Indonesia and fellow ASEAN countries. Although most ofthese commitments and initiatives seem well-intended, their effectiveness so farhas been doubtful and verification in the field is poor.

Oilpalm expansion in Indonesia continues
 Predictions are that about 50% of the new plantation land –3 out of 6million hectares- that is needed worldwide to supply the global palm oil marketby 2020 will be established in Indonesia. It is expected that Sumatra willabsorb most of this expansion (1.6 million ha), Kalimantan would account foranother 1 million and West Papua for 0.4 million ha.
For economic reasons and due to the lack of government control, the expansion ofoil palm estates continues to take place by converting natural forests insteadof using now widely available degraded lands. Between 1997 and 2001, Indonesianpalm oil and meal production has increased from 6.6 million to 9.5 milliontonnes and the planted area reached over 3 million ha in 2000, starting fromabout 600,000 ha in 1985.
By law, plantations can only be established on forest land that has beendesignated as Conversion Forest, not on Permanent Forest land. Since there aremany more applications for the release of forest land to plantation crops thanthe available Conversion Forest lands can accommodate, so-called ‘ConversionForest deficits’ are the result. The government responds by re-allocatingPermanent Forest land to Conversion Forest, after company pressure on thenational, and increasingly on provincial authorities. Indonesia’s oil palmindustry is dominated by some of the same domestic conglomerates that controlthe logging, wood-processing and pulp and paper industries. Examples are theSalim Group, the Raja Garuda Mas Group and the Sinar Mas Group. Other examplesare state-owned forestry companies such as Inhutani that are allowed, since1998, to convert up to 30% of their concession to estate crops.

Indonesiaand Germany in the international palm oil trade
The world demand for palm oil is forecast to increase from its present 22,5million tonnes a year to 40 million tonnes in 2020. Malaysia and Indonesia haveslightly increased their dominant position on the global production and exportmarket for palm oils and meal since the previous WWF report from 1998. In 2001,90% of global exports was accounted for by these two countries. Germany ranksseventh among the world’s palm oil importing countries. The country evenoccupies the global number one position in palm kernel oil (PKO) imports, whichis mainly used for industrial purposes.
The biggest importers of Indonesia’s crude palm oil (CPO) in 2001 are India (29%), China (11 %), Netherlands (8 %) and Germany (5%). As regards PKO, Germanyranks number one, importing 28% of Indonesia’s exports, and Indonesia supplies85% of all German PKO imports. Germany’s imports of all three palm oilcategories from Indonesia rose from 602,000 in 1997 to 655,000 tonnes in 2001(for 2001: 268 kT crude palm oil, 164 kT palm kernel oil, 223 kT palm kernelmeal). Germany’s crude palm oil imports directly from Indonesia doubled from1993 to 1997, dropped in 1998 and in 1999, and since then picked up to regainthe lead. Germany is the only country among the big importers which imports morecrude palm oil from Indonesia than from Malaysia.

Germany’sdomestic market
Germany’s consumption of vegetable oils has been rising steadily over the pastfive years, from 2,2 million tonnes in 1996 to 2,8 million tonnes in 2001.Almost one quarter refers to palm and palm kernel oil, making palm oils by farthe most imported vegetable oil in Germany. Inquiries among processing companiesin Germany indicate that only in exceptional cases, palm oil can be traced backto its port of origin, and tracing it to the original plantation is consideredimpossible. However, similar international initiatives in other sectors showthat chain-of-custody mechanisms can be developed provided there is a will amongall commercial actors. The Migros retail chain in Switzerland represents apioneer case of a company that has adopted sustainability criteria in its palmoil business practices.
A questionnaire survey was conducted among 32 companies operating on the Germanconsumer market for palm oil products. Purposes of the survey were to gatherinformation on volumes and origin of their raw materials, and to find out whatextent companies had changed their palm oil purchasing policies since the1997-98 fires in Indonesia.
Results of the survey show large discrepancies between imported and consumedvolumes. Several companies (Nestlé, Cognis, Unilever) claim to applyenvironmental guidelines in their purchasing and production policies. However,most guidelines and criteria have a general character, and usually refer toprocessing aspects at the end of the chain and much less to what happens in thecountry of origin. So far, WWF is only aware of Unilever, and then only on itsown plantations not yet in its purchasing policy, as a company that considersrainforest conversion in the plantation areas, as far as new establishment oftheir own plantations, in Malaysia and Ghana.
Unilever is one of the biggest global company players in the palm oil tradechain. Together with WWF, Unilever worked for the past two years on economic,social and environmental criteria for sustainable oil palm agriculture. Thiscase may serve as example to other companies, but also for Unilever there isstill a long way to go before the palm oil production and trade chain can reallybe considered sustainable. The survey also shows that no German company haschanged its supply policy as a result of Indonesia’s forest fires in 1997-98. Itcan be concluded that without public pressure, company policies will not change.As far as mobilising consumers is concerned, palm oil has the disadvantage ofbecoming “invisible” in the end product because it is mixed with otheringredients and a declaration on the product’s composition is not obligatory inGermany.

Germandevelopment co-operation
Indonesia is a priority country in German development co-operation. In view ofthe dramatic loss of Indonesia’s forests, the emphasis has been in recent yearson support to sustainable forestry. Because of inadequate reforms by successiveIndonesian governments and continuing corruption, the German Ministry BMZ nowfollows a restrictive policy in the Indonesian forest sector. New forest-relatedproposals are no longer stimulated. On the other hand, the German Investment andDevelopment Society (DEG) promotes the oil palm sector in southeast Asia and, inIndonesia, the DEG currently finances three oil palm projects. Ecologicalsustainability is an important criterium for DEG financing, committing projectbeneficiaries to adhere to social and ecological guidelines, including a’zero-burning’ policy.
Furthermore, since May 2002 new German development co-operation guidelines forthe forest sector prohibit conversion of any primary forests or HighConservation Value Forests (HCVF) by German development projects.

The fast expansion of the oil palm sector has been financed to a large extent byforeign financial institutions from Europe, North America and East Asia. Morerecently, the oil palm sector has lost popularity among foreign banks, as theloans extended in the mid-1990s have not generated the expected returns and manyIndonesian oil palm companies ran into painful debt trouble. At the same time,foreign banks were faced with NGO criticism on their role in converting theIndonesian forests into oil palm plantations. 
Yet, the financial links still exist. The influence which foreign financialinstitutions could exert on oil palm companies has increased because of thefinancial crisis of oil palm companies. This situation provides excellentopportunities for leverage in the social and environmental practices of thebanks’ clients. A case in point is the successful campaign by NGOs which ledfour Dutch banks in 2001 to adopt a more responsible policy in their financialservices to the Indonesian oil palm sector. Through their financial links withplantation companies, European institutions have considerable potentialinfluence on Indonesian oil palm plantations. Among them are several Germanfinancial institutions. Apart from banks, a major role is played by Indonesia’spublic creditors, led by the IMF. They have set a course for economic recoverywhich requires Indonesia to sell off state assets and generate revenues byexploiting natural resources.

In February 2002, WWF adopted a position paper with the key ingredients for asustainable oil palm industry. A key element in WWF’s oil palm strategy is totarget ‘levers of change’, i.e. mobilise those key actors that have an influencein international markets and investment flows. These include major Europeanbanks, international financial institutions (IMF, World Bank), the Europeanconsumer market, European companies that process palm oil products and produceconsumer goods, and institutions (EU, national governments) that determinedevelopment, trade and aid policies.
The 1998 report by WWF Germany and other publications fuelled campaigns by WWF,Greenpeace and Friends of the Earth directed at the general public, retailersand the financiers behind the plantation expansion. Apart from increased generalawareness of the oil palm issue, these campaigns have generated ‘early adopters’of more responsible trade and investment practices, both in the retail (Migrosin Switzerland) and in the financial sector (four banks in the Netherlands).
The report concludes with a series of recommendations for action and policychange, directed at the Indonesian government, financial institutions and donoragencies, companies in the trade chain and consumers. NGOs have assumed anactive role in catalysing a process to make the oil palm industry moresustainable, not only in plantation management but also by stopping theconversion of any more high conservation value forests.

Contentsof the full report

–                     Summary 

–                     Acknowledgements 

–                     Preface 

–                     Introduction 

–                     Masks, deathsand smog 

–                     The return ofEl Niño 

–                     What caused the2002 forest fires? 

–                     WWF’s earlywarnings

–                     Time for anupdate 

–                     Background onforest fires, reforms and the oil palm boom in Indonesia 

–                     Looking back atthe 1997-98 fires 

–                     Underlyingcauses of the fires 

–                     Reform anddecentralisation : opportunities for future fire control? 

–                     Pledges andpromises for future fire control 

–                     The oil palmboom continues 

–                     Forestconversion and the clearance for plantations 

–                     Oil palmplantations and the forest fires 

–                     Conclusions 

–                     Europe andGermany in the palm oil trade 

–                     The globalpicture 

–                     Germany’s sharein the palm oil trade 

–                     Germany’s palmoil consumption 

–                     Palm oil use byGerman industry 

–                     Germandevelopment projects in Indonesia 

–                     Europeanfinance and the Indonesian oil palm sector 

–                     Internationalaction 

–                     Some firstsuccesses – but much more is needed 

–                     WWF’s positionand strategy 

–                     The donorcommunity 

–                     WWF’srecommendations 

–                     Recommendationsto Governments 

–                     Recommendationsto the private sector 

–                     Literature 


–                     Schematicrepresentation of the forest conversion process 

–                     Summary of thecompany survey in Germany 

–                     Europeanfinancial institutions with links to Indonesian oil palm companies 

–                     Influenceassessment of German financial institutions in the oil palm sector 

–                     Recommendationsto foreign financial institutions and banks 

The fullreport [1 Mb] is available at:


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