Oil Palm Plantations and Deforestation in Indonesia
What Role do Europe and Germany play
WWF Germany, December 2002
Written by Rob Glastra, Eric Wakker and Wolfgang Richert
AID Environment, Amsterdam, The Netherlands
Source: Indonesian Nature Conservation news Letter (INCL)
This report is an update of an earlier study from 1998, “Lipsticks from the Rainforest”, which analysed, for the first time, the role of the rapidly expanding oil palm sector in Indonesia’s devastating forest fires of 1997-98.Because of the international dimensions of this sector – its dependence on international capital flows and on the global market for palm oil products -,trade and capital relations with consumer countries were examined, with particular emphasis on Germany. In the light of all the changes in Indonesia’s political, economic and social context in recent years, it was decided that an update 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 of tropical forest loss in the world and this is increasing, through legal and illegal logging, clearance for plantations and agricultural estates, and fires. Official statistics show that the forest destruction rate is now between 2 million and 2.4 million hectares a year. At this rate, the lowland dipterocarp forests are predicted to disappear from Sumatra and Kalimantan by 2005 and 2010, respectively. For the past 30 years, timber has provided Indonesia with much of its non-oil export earnings. Now timber resources from its biodiversity-rich natural forests are beginning to become exhausted. Nevertheless, the process of over logging and clear-cutting of the remaining natural forests and of converting them into estate crop plantations continues.
The forest fires that have affected Indonesia since 1997 have been a true man-made environmental disaster. The underlying causes are found in Indonesia but are also rooted in the development of global markets. Donor countries did not react adequately when the earlier fires occurred, limiting their official assistance efforts to fighting symptoms and often following a purely technical approach. Instead of fighting the fires, more emphasis should be put on their prevention, along the lines proposed by the WWF-IUCN Project FireFight South East Asia (PFFSEA). Another form of assistance by donor countries should address one of the root causes: effective mechanisms to regulate the activities of big corporations from those same donor countries, operating in international trade chains that depend on the unsustainable exploitation of natural resources in developing countries. In the case of Indonesia, this includes the timber, paper and pulp, and palm oil industries.
Of the estimated 5 million hectares of former forest lands in Indonesia’s lowlands that have already been converted to estate crop plantations, 3 million hectares are covered with oil palms. Plantations are usually established after natural forests are logged and then burned to clear the land for planting. In some cases, fires run out of control, either “accidentally” or deliberately, and destroy extensive areas beyond the plantation concession area, as happened in Indonesia with most of the 1997/98 forest fires.
A changing political and economic context
Since 1997, Indonesia has faced enormous economic and political challenges: an unprecedented economic crisis, building democratic institutions after three decades of autocratic rule, and implementing a far-reaching decentralization programme. When the financial crisis struck Asia in mid-1997, Indonesia was hardest hit and slowest to recover. Under Suharto’s three successors since 1998, many institutional, legal and policy reforms have been announced and sometimes adopted. These reforms, with decentralization of powers to provinces and districts among the most prominent, provide a unique opportunity to revert the destructive trends in Indonesian forests. However, after more than four years of reforms, the net results are mixed. The break-down of government control gives actors in the international trade chain – investors, traders and consumers- a greater responsibility and considerable leverage over what happens to Indonesia’s forests because of their links with companies that depend on raw materials from those same forest lands.
Forest fires 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 the Netherlands. The Asian Development Bank (ADB) estimated the overall economic cost of the fire and haze in the region at US$ 9 billion. The massive fires have had dramatic impacts on wildlife (including orangutans
and elephants) and on several protected areas, among them Kutai and Tanjung Puting National Parks. Drought caused by the ‘El Niño’ climatic phenomenon was a major factor in creating the conditions for Indonesia’s devastating forest fires in 1997-98. In the next years, the annual round of burning, smoke and haze has continued, although at a smaller scale and with less intensity than in the years before. For 2002, climate experts see another ‘El Niño’ year, and in the past few months fires and haze have indeed been worse than average, although some reports say drought conditions will not be as severe as in 1997-98.
In September 2002, satellite information revealed that more than 75% of the hotspots recorded in West and Central Kalimantan during August occurred in oil palm plantations, timber plantations and forest concessions. This indicates that the pattern which became evident in previous years is repeating itself in 2002: logging and estate companies clear land by setting fire to natural forests on their concessions, after removing valuable timber and leaving fire-prone debris. This would mean that the reforms in Indonesia’s political system and in its forestry policy over the last five years have had little effect in halting conversion and deforestation. This was acknowledged in September by Indonesia’s Environment Minister who stated that the country’s weak judiciary and law enforcement system were still a major constraint in controlling the fires. Sanctions against plantations that cause forest fires have been rare. Only in a few isolated cases, NGOs and local communities have successfully challenged plantation companies in court for environmental damage caused by deliberately starting fires that burnt out-of-control.
Widespread unsustainable logging and large-scale land clearance by agro-industrial companies with little regard for the land and resource user rights of local communities have been identified as the more immediate causes of forest fires. The expansion of forest-based industries has resulted in social conflicts over land ownership and natural resource use, with arson being used as a weapon by both companies and local communities. An international fire prevention project (FFPCP) concluded that the main permanent solution to Indonesia’s fire problem lies in improved local level land-use planning with the participation of local communities. Such land use planning should also focus on fire prevention. The breakdown of law enforcement and widespread corruption further compound any attempt to address the root causes of forest fires and, in general, to move towards more sustainable forest management.
Indonesia has come under mounting international criticism for not doing enough to control forest fires. Several pledges and promises have been made, such as the adoption of a ‘zero-burning policy’, the establishment of a “Haze Prevention Group” by the forestry and plantation industry, and a binding anti-haze treaty between Indonesia and fellow ASEAN countries. Although most of these commitments and initiatives seem well-intended, their effectiveness so far has been doubtful and verification in the field is poor.
Oil palm 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 market by 2020 will be established in Indonesia. It is expected that Sumatra will absorb most of this expansion (1.6 million ha), Kalimantan would account for another 1 million and West Papua for 0.4 million ha.
For economic reasons and due to the lack of government control, the expansion of oil palm estates continues to take place by converting natural forests instead of using now widely available degraded lands. Between 1997 and 2001, Indonesian palm oil and meal production has increased from 6.6 million to 9.5 million tonnes and the planted area reached over 3 million ha in 2000, starting from about 600,000 ha in 1985.
By law, plantations can only be established on forest land that has been designated as Conversion Forest, not on Permanent Forest land. Since there are many more applications for the release of forest land to plantation crops than the available Conversion Forest lands can accommodate, so-called ‘Conversion Forest deficits’ are the result. The government responds by re-allocating Permanent Forest land to Conversion Forest, after company pressure on the national, and increasingly on provincial authorities. Indonesia’s oil palm industry is dominated by some of the same domestic conglomerates that control the logging, wood-processing and pulp and paper industries. Examples are the Salim Group, the Raja Garuda Mas Group and the Sinar Mas Group. Other examples are state-owned forestry companies such as Inhutani that are allowed, since1998, to convert up to 30% of their concession to estate crops.
Indonesia and 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 have slightly increased their dominant position on the global production and export market 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 ranks seventh among the world’s palm oil importing countries. The country even occupies the global number one position in palm kernel oil (PKO) imports, which is 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, Germany ranks number one, importing 28% of Indonesia’s exports, and Indonesia supplies85% of all German PKO imports. Germany’s imports of all three palm oil categories 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 kernel meal). 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 regain the lead. Germany is the only country among the big importers which imports more crude palm oil from Indonesia than from Malaysia.
Germany’s domestic market
Germany’s consumption of vegetable oils has been rising steadily over the past five 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 far the most imported vegetable oil in Germany. Inquiries among processing companies in Germany indicate that only in exceptional cases, palm oil can be traced back to its port of origin, and tracing it to the original plantation is considered impossible. However, similar international initiatives in other sectors show that chain-of-custody mechanisms can be developed provided there is a will among all commercial actors. The Migros retail chain in Switzerland represents a pioneer case of a company that has adopted sustainability criteria in its palm oil business practices.
A questionnaire survey was conducted among 32 companies operating on the German consumer market for palm oil products. Purposes of the survey were to gather information on volumes and origin of their raw materials, and to find out what extent companies had changed their palm oil purchasing policies since the1997-98 fires in Indonesia.
Results of the survey show large discrepancies between imported and consumed volumes. Several companies (Nestlé, Cognis, Unilever) claim to apply environmental guidelines in their purchasing and production policies. However, most guidelines and criteria have a general character, and usually refer to processing aspects at the end of the chain and much less to what happens in the country of origin. So far, WWF is only aware of Unilever, and then only on its own plantations not yet in its purchasing policy, as a company that considers rainforest conversion in the plantation areas, as far as new establishment of their own plantations, in Malaysia and Ghana.
Unilever is one of the biggest global company players in the palm oil trade chain. Together with WWF, Unilever worked for the past two years on economic, social and environmental criteria for sustainable oil palm agriculture. This case may serve as example to other companies, but also for Unilever there is still a long way to go before the palm oil production and trade chain can really be considered sustainable. The survey also shows that no German company has changed its supply policy as a result of Indonesia’s forest fires in 1997-98. It can be concluded that without public pressure, company policies will not change. As far as mobilising consumers is concerned, palm oil has the disadvantage of becoming “invisible” in the end product because it is mixed with other ingredients and a declaration on the product’s composition is not obligatory in Germany.
German development 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 years on support to sustainable forestry. Because of inadequate reforms by successive Indonesian governments and continuing corruption, the German Ministry BMZ now follows a restrictive policy in the Indonesian forest sector. New forest-related proposals are no longer stimulated. On the other hand, the German Investment and Development Society (DEG) promotes the oil palm sector in Southeast Asia and, in Indonesia, the DEG currently finances three oil palm projects. Ecological sustainability is an important criterion for DEG financing, committing project beneficiaries to adhere to social and ecological guidelines, including a ’zero-burning’ policy.
Furthermore, since May 2002 new German development co-operation guidelines for the forest sector prohibit conversion of any primary forests or High Conservation Value Forests (HCVF) by German development projects.
The fast expansion of the oil palm sector has been financed to a large extent by foreign financial institutions from Europe, North America and East Asia. More recently, the oil palm sector has lost popularity among foreign banks, as the loans extended in the mid-1990s have not generated the expected returns and many Indonesian oil palm companies ran into painful debt trouble. At the same time, foreign banks were faced with NGO criticism on their role in converting the Indonesian forests into oil palm plantations.
Yet, the financial links still exist. The influence which foreign financial institutions could exert on oil palm companies has increased because of the financial crisis of oil palm companies. This situation provides excellent opportunities for leverage in the social and environmental practices of the banks’ clients. A case in point is the successful campaign by NGOs which led four Dutch banks in 2001 to adopt a more responsible policy in their financial services to the Indonesian oil palm sector. Through their financial links with plantation companies, European institutions have considerable potential influence on Indonesian oil palm plantations. Among them are several German financial institutions. Apart from banks, a major role is played by Indonesia’s public creditors, led by the IMF. They have set a course for economic recovery, which requires Indonesia to sell off state assets and generate revenues by exploiting natural resources.
In February 2002, WWF adopted a position paper with the key ingredients for a sustainable oil palm industry. A key element in WWF’s oil palm strategy is to target ‘levers of change’, i.e. mobilize those key actors that have an influence in international markets and investment flows. These include major European banks, international financial institutions (IMF, World Bank), the European consumer market, European companies that process palm oil products and produce consumer goods, and institutions (EU, national governments) that determine development, trade and aid policies.
The 1998 report by WWF Germany and other publications fueled campaigns by WWF, Greenpeace and Friends of the Earth directed at the general public, retailers and the financiers behind the plantation expansion. Apart from increased general awareness of the oil palm issue, these campaigns have generated ‘early adopters’ of more responsible trade and investment practices, both in the retail (Migros in Switzerland) and in the financial sector (four banks in the Netherlands).
The report concludes with a series of recommendations for action and policy change, directed at the Indonesian government, financial institutions and donor agencies, companies in the trade chain and consumers. NGOs have assumed an active role in catalyzing a process to make the oil palm industry more sustainable, not only in plantation management but also by stopping the conversion of any more high conservation value forests.
Contents of the full report
Masks, deaths and smog
The return of El Niño
What caused the2002 forest fires?
WWF’s early warnings
Time for an update
Background on forest fires, reforms and the oil palm boom in Indonesia
Looking back at the 1997-98 fires
Underlying causes of the fires
Reform and decentralization: Opportunities for future fire control?
Pledges and promises for future fire control
The oil palm boom continues
Forest conversion and the clearance for plantations
Oil palm plantations and the forest fires
Europe and Germany in the palm oil trade
The global picture
Germany’s share in the palm oil trade
Germany’s palm oil consumption
Palm oil use by German industry
German development projects in Indonesia
European finance and the Indonesian oil palm sector
Some first successes – but much more is needed
WWF’s position and strategy
The donor community
Recommendations to Governments
Recommendations to the private sector
Schematic representation of the forest conversion process
Summary of the company survey in Germany
European financial institutions with links to Indonesian oil palm companies
Influence assessment of German financial institutions in the oil palm sector
Recommendations to foreign financial institutions and banks