26/05/2009 (The Jakarta Post) - Despite Indonesia being the world’s largest producer of crude palm oil (CPO), its competitiveness in overseas markets is being eroded due in part to burdensome levies – both by central and local governments – and to poor infrastructure.
Indonesia exports around 70 percent of its annual CPO production, but the commodity’s exports could be hit by weakening competitiveness, according to the Indonesian Palm Oil Association (Gapki).
Gapki chairman Susanto said last Friday that many local administrations imposed levies which
overlapped with other levies and taxes laid down by central government.
“We do not mind extra levies from regions. Some of them are in fact reasonable, but many others simply do not make sense. In addition to poor infrastructure, in particular the ports to handle CPO shipments, the burdensome levies are eroding our competitiveness,” Susanto said in a discussion with The Jakarta Post.
The levies are additional to other taxes, such as income tax, which are also applied more generally to other non-palm oil firms by the central government.
Susanto pointed to one example of local governments requiring companies in the sector to pay a non-PLN (state utility company) electricity fee, although CPO firms normally generate their own electricity from their own power stations and distribute excess power to neighboring communities.
There are also regencies requiring the palm oil companies to be responsible of the use of public roads by paying “special road tax” or requiring them alternatively to build their own roads and not to use existing public roads. Some also apply taxes based on the size of the palm oil plantations, to optimize local government revenue from larger plantations.
On infrastructure, Indonesia has too few port facilities designed to handle large CPO shipments, sometimes resulting in overcapacity and congestion in existing ones. Susanto gave the example that in Belawan and Dumai ports, two of the largest ports for the commodity, the congestion is such that this often leads to delays of up to four days to secure shipping clearance.
Joko Supriyono, GAPKI general-secretary, echoed these sentiments.
“This is not to mention the overlapping of concessions between the palm oil plantations and mining projects in the same areas, although the palm oil concessions had already been approved previously,” he said.
Joko said other factors potentially weakening the competitiveness of Indonesian palm oil included low productivity per hectare, as Indonesia was only able to produce an average of 2.5 tons of CPO per hectare, only about a third of the average Malaysian output.
In addition unfair campaigns against the industry by international environmental activists had a negative impact, alongside the fact that many Indonesian companies did not yet have RSPO (Roundtable on Sustainable Palm Oil) certificates required for exports, which were the result of joint action internationally by some (mostly) larger producers, NGOs and other stakeholders.
Moreover, the government may now re-impose a 3 percent tax on palm oil exports next month, as the price of CPO, which had previously bottomed out after a major decline, has now significantly risen again.
Susanto pointed out that the increasing price of palm oil on the international market has not necessarily raised the margins of the palm oil firms as they are subject to a variable export tax, which depended on the movement of international base prices.
As the prices on the international market have averaged US$773.1 a ton during the last 20 days this month, the government will likely increase the base price for taxing exports to $700 a ton from $560 a ton.
The government tries to adapt its base base price for tax purposes according to international market trends, but the industry felt this mechanism was clumsy and could lead to negative impacts of volatile price fluctuations on company sales and prices.
The central government export tax regulation is aimed at securing the supply of palm oil for cooking oil industries and at keeping cooking oil prices stable. This is an important social priority for government, illustrating the problem, experienced also in other export industries, of how to balance domestic demand with export demand, especially for a food product with major social policy ramifications.
“I think to secure the stability of the cooking oil price on the local market, the government should do it by providing a form of subsidy and not by slapping on export taxes every time prices increase on the international market,” Susanto said.