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
AIDEnvironment, Amsterdam, The Netherlands
Source: Indonesian Nature Conservation newsLetter (INCL)
SUMMARY
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 98
million 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
overlogging 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 decentralisation
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 decentralisation 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 1997-98
fires 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
hot-spots 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.
Underlying
causes
Widespread unsustainable logging and large-scale land clearance by
agro-industrial companies with little regard for the land and resource use
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 6
million 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, since
1998, 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 22,5
million 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 supplies
85% 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 from
1993 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 the
1997-98 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 of
the 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 criterium 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.
International
finance
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.
International
action
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. mobilise 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 fuelled 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 catalysing 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
- Summary
- Acknowledgements
- Preface
- Introduction
- Masks, deaths and smog
- The return of El Niño
- What caused the 2002 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 decentralisation : 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
- Conclusions
- 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
- International action
- Some first successes - but much more is needed
- WWF's position and strategy
- The donor community
- WWF's recommendations
- Recommendations to Governments
- Recommendations to the private sector
- Literature
Annex
- 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
The full
report [1 Mb] is available at:
http://www.panda.org/downloads/forests/oilpalmindonesia.pdf