sustainability

Article
Optimization of Crude Palm Oil Fund to Support
Smallholder Oil Palm Replanting in Reducing
Deforestation in Indonesia
Fitri Nurfatriani 1, *, Ramawati 1 , Galih Kartika Sari 1 and Heru Komarudin 2
1 Research and Development Center of Social, Economic, Policy, and Climate Change, Ministry of
Environment and Forestry Indonesia, Bogor 16118, Indonesia
2 Center for International Forestry Research (CIFOR), Bogor 16680, Indonesia
* Correspondence: [email protected]




Received: 29 July 2019; Accepted: 22 August 2019; Published: 9 September 2019


Abstract: Smallholders play a significant role in the Indonesian palm oil industry. They cultivate
more than 40% of the total plantation area, and their production contributes to the national revenue.
However, despite their significant role, smallholders continue to face crop management, financial and
environmental challenges. The fact that some smallholder plantations are illegally located in state
forestland poses challenges for smallholders as regards getting access to finance, improving yields,
and obtaining sustainable certification. Government policy on the collection of levies from exported
crude palm oil (CPO fund) and its derivative products provides smallholders the opportunity to
replant and support their sustainable practices, thereby reducing deforestation. This paper discusses
how fiscal incentives of the CPO fund may have been optimized to prioritize these outcomes. We
should prioritize the use of the fund not only to support smallholder replanting, but also to clarify their
land tenure rights, so that they could get access to sustainable certification and financial institutions.
It is also recommended that funds be allocated to subsidize loan interest to the bank and build
productive capital during the grace period. These efforts have to be accompanied by building and
improving smallholder databases and strengthening local government.

Keywords: CPO fund; palm oil; deforestation; replanting; sustainable palm oil management

1. Introduction
Indonesia is currently the world’s largest producer of palm oil, and, together with Malaysia,
accounts for 85 to 90% of total global palm oil production [1]. In 2017, Indonesia produced around
37.8 million tons of palm oil, derived from around 14 million ha of plantation areas across different
regions in the country [2]. The palm oil industry contributes fiscal and foreign exchange earnings to the
country, employs large numbers of rural workers, and supports the livelihoods of a growing number
of smallholders, who increasingly embrace this crop as their main income source [1,3]. Further the
sustainable plantation management can accelerate economic development in the regions and reduce
the poverty [4] and oil palm play important role in livelihood strategies in rural areas [5]. In contrast,
oil palm expansion generates significant carbon emissions, particularly when planted in peatlands [6],
and contributes to biodiversity loss when production involves the conversion of primary forests [7,8].
It is argued that for a developing country such as Indonesia, it is inevitable that the natural resources
utilization through plantation development is aimed to prosper national and relevant stakeholders
particularly the community.
While 56% of oil palm plantations involve forest conversion [7], it is, however, claimed that the
proportion of plantations originating from the conversion of primary and secondary forests is very

Sustainability 2019, 11, 4914; doi:10.3390/su11184914 www.mdpi.com/journal/sustainability

Sustainability 2019, 11, 4914 2 of 16

small. Most plantations were planted on agricultural land, followed by secondary forest and marginal
land [9]. Despite large increases in the extent of plantations, there has been a decrease in the proportion
of plantations replacing forests, from 54% during 1995 to 2000 to 18% during 2010 to 2015 [10].
Demand for land for expansion of oil palm plantations from forest areas not only stems from
large-scale companies, but also from smallholders rate of smallholder plantation expansion exceeds
that of large companies [11,12]. Of the 2.5 million ha of oil palm plantations illegally located on state
forest areas, around 68% are smallholder plantation. Some studies indicate that the likely reduction in
forest areas is due to smallholder plantation expansion, and that the annual s [13]; this has been in the
spotlight in the last few years as one of the causes of deforestation.
The last five years have seen a growing recognition of the importance of minimizing deforestation
and work currently are underway to address negative impacts of deforestation and to improve the
governance of palm oil in the country. Moratorium policies have been put in place to postpone the
issuance of new licenses on primary and peat lands, and stricter criteria for permitted forest conversion
have also been set to guide the use of low carbon areas for plantation and to limit expansion. The
government further promoted sustainable palm oils by setting mandatory standards (Indonesian
Sustainable Palm Oil) for more sustainable and environmental friendly practices among oil palm
growers and industries. It also plans to oblige smallholders-which plays a significant role in the
country’s oil palm production-to adhere to these standards, ensuring that environmental and social
impacts are controlled.
To promote sustainable palm oil and to finance the sector, in 2015 the government through
Government Regulation No. 24/2015 and Presidential Regulation No. 61/2015 issued policies to levy
exported palm oil and its derivative products, and to collect, manage and distribute Crude Palm
Oil funds (hereinafter referred to as the crude palm oil (CPO) fund). Those policies is one of the
fiscal policies issued by the government to support sustainability in plantation development. Fiscal
instruments such as tax revenue can improve land management, which is needed in sustainable
business models [14]. The fund is aimed to develop human resources, research and development,
promote the country’s sustainable palm oil in international markets, support smallholder replanting
and develop infrastructure. There is a potential that CPO fund can be used to help finance smallholders
in replanting and improving their sustainability practices.
It is widely recognized that smallholders have limited access to finance and poor incentives [15–17],
limiting their capacity to improve their farming practices and use quality planting material and other
input such as fertilizer and pesticides. They are often associated with include inappropriate use of
fertilizers, illegal encroachment on forestlands, conversion of peatlands, and irresponsible clearing
practices [18]. Smallholders in particular often lack the investment capital and financial flexibility to
not only comply with higher standards of sustainability, but more importantly to reduce the risks of
their operations [19].
Earlier studies indicate relations between finance and sustainability among smallholders. Funding
smallholders could lead to increased productivity of oil palm lands, thereby obviating their need to
expand their plantations into forests [17,20,21]. Long-term finance and replanting offers opportunity
for farmers to improve their livelihood and sustainability practices and falling yields could lead
them to return to their previous ‘slash-and-burn’ practices [22]. However, replanting activity requires
substantial funds: IDR 29.54 million/ha [23]. A replanting program using plant material of good
quality would lead to higher production. Funding can incentivize smallholders to adopt good and
sustainable practices. Various financing schemes for smallholder farmers are already in place [24] and
they have the potential to lead to increased oil palm production. Having an increased productivity
level precludes the need to open up new land for oil palm plantations.
While there have been numerous studies focusing on the role of finance in promoting sustainability
among smallholders and of various innovative financing for smallholders to increase crop productivity,
less is still known about public finance such as CPO fund and its potential role in promoting
sustainability in the oil palm sector. It is still not clear how the CPO fund—which is currently managed
Sustainability 2019, 11, 4914 3 of 16

by the Palm Oil Fund Agency—can be used to the maximum to incentivize smallholders. This paper
aims to examine how the CPO fund can be optimized to incentivize smallholders to improve crop
productivity and thereby discourage them from encroaching on and degrading forests.

2. Materials and Methods

2.1. Research Framework

Despite its important role in enhancing people’s welfare and contributing to the national production
of palm oil, smallholders face some challenges in getting their plantations certified under sustainable
standards, particularly the Indonesian Sustainable Palm Oil (ISPO). There are some hurdles to be
overcome, which include clarifying legality issues, as most of their plantations are illegally located on
state forest lands. They also need to increase the productivity of their crops by using certified and
high-quality planting material, and to engage in groups that facilitate collective actions. Due to land
legality requirements set out by financial institutions and the government, many palm oil smallholders
have limited access to finance sources and subsidies, making it difficult for them to adopt sustainable
practices such as land clearing without burning, using good quality planting material, and replanting
their unproductive plantations. The low level of production, along with other reasons, often push
smallholders to expand their plantations, thus encroaching on state forest lands. Johnston [24] assume
that increasing productivity levels can increase oil palm production, without the need to open up new
land for oil palm plantations.
This paper, as depicted in Figure 1, has been based on the theoretical framework of sustainable
development [25], highlighting a need to balance social, economic and environmental interests while
realizing the goals of sustainable palm oil among smallholders, using policy incentives. The definition
of sustainable development refers to the United Nations General Assembly (1987) [25]: “Development
that meets the needs of the present without compromising the ability of future generations to meet
their own needs.” In the context of palm oil management, oil palm shall be cultivated in sustainable
practices to ensure triple aspects of sustainable development. This expected condition requires active
roles of all parties: growers, private sector, government, financial institutions, and others [26].
The role of government particularly in natural resources management such as palm oil management
should be played in determining the right combination of policies instruments that will be implemented
to encourage the achievement of sustainable palm oil management. Natural resources management
policies according to Stiglitz and Barde [27,28] are classified into command and control, incentive
system, and information delivery. Based on that theory, this paper uses the approach of incentive
system to achieve the sustainable palm oil management. To prevent further forest degradation
while improving access to resources, smallholders need to be incentivized. Incentives are what
motivate or stimulate people to act [29] and can take the form of policy instruments that influence
and cultivate the implementation of policy objectives [30,31]. Incentive mechanisms through which
the environment can be managed and controlled can take the form of economic incentives, including
fiscal incentives, funding incentives, and incentives for the development of environmental services
markets [32]. Fiscal incentives can be used as an instrument to determine the performance of natural
resource management [32,33].
The CPO fund, money for which has been collected by the Government of Indonesia since 2015
and managed by the Oil Palm Plantation Fund Management Agency (BPDPKS), serves as a fiscal
instrument that has the potential to incentivize smallholders to adopt good and sustainable practices
and increase crop productivity. These changes would ultimately lead to reduced pressures on forests.
While the narratives underpinning the palm oil fund policy are geared towards sustainable palm oil and
upgrading smallholder capacity, its implementation does seem to result in mixed outcomes. However,
CPO fund can also be used for other additional purposes such as the development of upstream
industries and food security, and to incentivize biodiesel production as regulated in Presidential
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study how to Facing

Regulation. optimize
the the CPO fund utilization
multidimensionality of CPO forfund
enhancing the it
utilization, capacity and the
is important welfare
to study ofto
how
smallholders.
optimize the CPO fund utilization for enhancing the capacity and the welfare of smallholders.
Therefore,
Therefore, inin
this paper,
this paper,various
variouspolicies
policiesrelated
related totooiloil
palm
palm funds
funds and
anddecisions
decisions onon
the fund’s
the fund’s
allocation were analyzed in terms of how they conform to or contradict the intended purposes.
allocation were analyzed in terms of how they conform to or contradict the intended purposes.
Procedures
Procedures forfor
fund
fundcollection,
collection,management
management and
and distribution
distribution ofof
funds
funds were
werereviewed.
reviewed. Progress onon
Progress
implementation
implementation toto
date and
date toto
and what extent
what thethe
extent oiloil
palm
palm fund
fund has
hasbeen
beeneffective according
effective accordingtoto
various
various
parties were assessed in this paper.
parties were assessed in this paper.

Figure 1. 1.
Figure Research framework.
Research framework.

2.2. Method
The research was conducted from February 2017 to May 2018. This research aims to understand
the gaps of the CPO fund policy and how it has been implemented by determining the difference
between the current actual and desired conditions in the future. Therefore, this research uses a
Sustainability 2019, 11, 4914 5 of 16

2.2. Method
The research was conducted from February 2017 to May 2018. This research aims to understand
the gaps of the CPO fund policy and how it has been implemented by determining the difference
between the current actual and desired conditions in the future. Therefore, this research uses a
qualitative approach with the case study method. Based on Creswell [34], qualitative research aims to
explore and understand the meaning of social problems based on a complete holistic picture. This
means that qualitative research focuses on the processes that take place in the research, and tries to
reveal the meaning behind the facts. Therefore researchers be able to explore in detail, intensive and
comprehensive on the social issues that is studied without being burdened by measuring instrument
as in quantitative research. This research use case study method as part of qualitative research. Based
on Creswell [34], case study approach focus on cases specification that encompass individual, or
community. Through this approach, researchers investigate the processes, activities, events, of groups
of individuals.
Information was collected using in-depth interviews with 101 key informants, representing
government, the private sector, nongovernmental organizations, smallholders, company associations,
and academia at the national level as well as at project sites in Kotawaringin Timur district in Central
Kalimantan and Landak district in West Kalimantan. In addition the data and information were
also collected through focus group discussions (FGDs) and literature studies. Data were analyzed
qualitatively descriptive using gap policy analysis as presented in Table 1.

Table 1. Objective, theory, and method of data analysis of the research.

Objectives Theory Used Data Analysis

To analyze the optimization of the CPO fund to support Public policy [35] Sustainable development [25,36]
Gap policy
sustainable oil palm management, particularly for Incentives [29,30] and incentive-based natural
analysis
strengthening smallholders in the palm oil industry resources management policy [27,28,32]

A gap policy analysis is used to identify the gaps of regulatory instruments through examining
the conformity of policies and legislation with its implementation [37]. In this research, this type of
analysis provided the current situation of the CPO fund policy and how it has been implemented, and
using this method, we determined the difference between the current actual and desired conditions in
the future, through the identification of current gaps in infrastructure planned to be achieved [38].

3. Results and Discussion

3.1. Smallholders Contribution to National Palm Oil Production: Importance and Challenges

3.1.1. Palm oil as Indonesia’s Strategic Commodity

Indonesia is the world’s largest producer of palm oil, currently producing around 37 million tons.
The total planted area is estimated as 14.03 million ha. As indicated in Figure 2, the oil palm plantation
area and production have continued to increase annually, reaching an average productivity of about
3.6 tons/ha/year. Smallholders account for 33.6% of the total production, and 40% of the plantation
area [2]. As a strategic commodity, in the last few years, palm oil has become the highest source of
foreign exchange. The export value of palm oil in 2017 reached its highest level, amounting to USD 23
billion or 15.9% of the total national exports [39].
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Production, area and export value of oil palm plantations

40.00

30.00

20.00

10.00

0.00
20 20 20 20 20 20
11 12 13 14 15 16
Production (Million Ton) 23.09 26.01 27.78 29.28 31.07 31.73
Area (Million ha) 8.99 9.57 10.46 10.75 11.26 11.20
Export Value (Billion USD) 19.75 19.09 17.14 19.00 16.94 16.27

Figure 2.
Figure 2. Production, area, and
Production, area, and export
export value
value of
of oil
oil palm
palm plantations
plantations during
during 2011
2011 to
to 2016
2016 [2].
[2].

The oil
The oilpalm
palmsector
sector contributes
contributes significantly
significantly to state
to state revenue revenue and encourages
and encourages nationalnational and
and regional
regional development.
development. The revenue Theconsists
revenueofconsists
non-taxof non-tax
state state such
revenues, revenues, such
as those as those
from the CPOfrom the taxes
fund; CPO
fund;as
such taxes
landsuch
and as land and
building, building, value-added,
value-added, and income and taxes;income taxes;duties
and export and export
[40]. duties [40].
The oil
The oil palm
palm plantation
plantation sector
sector provides
provides employment
employment both both onon the
the scale
scale of
of the
the farmer
farmer and
and on
on anan
industrial scale
industrial scale and
and improves
improves the the economy
economy sector.
sector. Of the total
Of the total oil
oil palm
palm plantations,
plantations, smallholder
smallholder
plantations account
plantations account forfor 41%,
41%, employing
employing around around 2.32.3 million
million farmers.
farmers. The The annual
annual growth
growth of of job
job
employment in
employment in palm
palm oiloil industries
industries reached
reached aa level
level of
of 10.8%,
10.8%, contributing
contributing directly
directly toto the
the development
development
of social
of social welfare.
welfare.
In 2017,
In 2017, the
the oil
oil palm
palm plantation sector was
plantation sector was able
able to
to offer
offer employment
employment of of 5.5
5.5 million
million directly related
directly related
jobs and
jobs and 1212 million
million indirectly
indirectly related
related jobs
jobs [39].
[39]. Oil
Oil palm
palm development
development is is claimed
claimed to to reduce
reduce poverty
poverty inin
rural areas,
rural areas, as
as can
can be
be seen
seen from
from thethe lower
lower number
number of of poor
poor people
people in in rural
rural communities
communities whosewhose main
main
source of
source ofincome
incomeisis from
from thethe
oil oil
palm palm
sectorsector
[41],[41], thereby
thereby improving
improving theeconomy
the rural rural economy
and the and the
welfare
welfare
and and education
education level communities
level of rural of rural communities[42]. The[42]. The oil
oil palm palm
sector hassector has also contributed
also contributed to nationalto
nationalsecurity
energy energy by security by substituting
substituting importedimported fossil
fossil fuels equalfuels
to 3equal to 3kilo
million million kilo literathrough
liter through biodiesela
biodieselin
program program in 2016,
2016, which ledwhich led to
to savings savings
totaling totaling
USD USD 1.1
1.1 billion billion [39].
[39].

3.1.2. Challenges
3.1.2. in the
Challenges in the Palm
Palm Oil
Oil Sector
Sector in
in Indonesia
Indonesia
Although the
Although the palm
palm oil
oil sector
sector hashas much
much potential,
potential, it
it also
also faces
faces various
various challenges
challenges and
and obstacles.
obstacles.
Development of the palm oil sector is often highlighted as a major driver of deforestation, and
Development of the palm oil sector is often highlighted as a major driver of deforestation, and
previous studies
previous studies have
have shown
shown thatthat 56%
56% ofof oil
oil palm
palm plantations
plantations inin Indonesia
Indonesia were
were developed
developed via via forest
forest
conversion [7,43].
conversion [7,43]. However,
However, the the deforestation
deforestation caused
caused by
by oil
oil palm
palm plantations
plantations that
that were
were developed
developed on on
primary and secondary forest land represents a minor percentage and most oil palms were planted
primary and secondary forest land represents a minor percentage and most oil palms were planted on
on farmland
farmland rather
rather thanthan secondary
secondary forest
forest andand marginal
marginal landland
[9]. [9].
Some studies
Some studies indicate
indicate that
that smallholder
smallholder oil oil palm
palm plantations
plantations havehave also
also caused
caused aa reduction
reduction in in
forest area and carbon content [11,12]. The annual rate of their plantation expansion exceeds the
forest area and carbon content [11,12]. The annual rate of their plantation expansion exceeds the
expansion rate
expansion rate of
of large
large companies
companies [11,12].
[11,12]. Data
Data from the Directorate
from the Directorate General
General ofof Plantation
Plantation [13]
[13] show
show
that, nationally, around 1.7 million ha of the 2.5 million ha of oil palm plantations located illegally
that, nationally, around 1.7 million ha of the 2.5 million ha of oil palm plantations located illegally
within forest
within forestareas
areasare
arecontrolled
controlledbyby smallholders.
smallholders. This
This means
means that
that smallholders
smallholders account
account for 68%
for 68% of
of the
the total
total troubled
troubled oil palm
oil palm plantations.
plantations.
The presence
The presence of of plantations
plantations in in forest
forest areas
areas has
has prevented
prevented smallholders
smallholders fromfrom obtaining
obtaining any
any land
land
legality certificates in order to secure their tenure of ownership. Smallholders often hold aa Land
legality certificates in order to secure their tenure of ownership. Smallholders often hold Land
Statement (Surat
Statement (Surat Keterangan
Keterangan Tanah)
Tanah) or or Letter
Letter of
of Compensation
Compensation (Surat
(Surat Keterangan
Keterangan Ganti
Ganti Rugi)
Rugi) issued
issued
by the village head or subdistrict head [40]. The absence of evidence of land legality makes it difficult
for them to access capital and obtain assistance from either financial institutions or government, and
Sustainability 2019, 11, 4914 7 of 16

by the village head or subdistrict head [40]. The absence of evidence of land legality makes it difficult
for them to access capital and obtain assistance from either financial institutions or government, and
makes them ineligible for ISPO certification. Thus, smallholders have limited capacity to adopt good
practices in managing their land and palm crops, and are inclined to use cheap methods of clearing
land (i.e., fire), and to obtain uncertified seeds and poor types of fertilizer.
In addition, around 2.4 million ha are estimated to be old plantations of more than 25 years, which
are not profitable to be maintained, but have not been replanted due to limited capital. Smallholder
plantations are also found to have a low level of production of only 2–3 tons CPO/ha/year. This is
because most smallholders use uncertified planting materials, which is indicated by their lack of
ownership of cultivation and registration letters (Surat Tanda Daftar Budidaya) [12].

3.2. CPO Fund Policy: Implementation Challenges

3.2.1. Legal Basis

As mandated by laws and regulations, the government issued a policy on collection of funds
from levied CPO and its derivatives exported in order to finance various programs relevant to oil
palm development. These include the development of human resources, research and development,
promotion, smallholder replanting and development of infrastructure. These are some of the efforts
to support sustainable palm oil in Indonesia. Over the course of its implementation, the fund was
also designed by law to support the development of upstream industries and food security, and to
incentivize biodiesel production. Table 2 presents the legal basis, content of the relevant policies, how
they have been implemented and the identified gaps in CPO fund policies and their implementation.
Regulations governing the use of plantation funds aimed to enhance the livelihood and capacity
of smallholder are in place. Funds can be made available for educating farmer family members,
increasing the capacity of smallholders through training, for providing quality seedlings, and building
roads, and improving agricultural means that would make it easier for smallholders to harvest and sell
their fresh fruit bunch (FFB) products, and to undertake replanting. However, as can be seen from
Table 2, gaps still exist between the stated stipulations and their implementation. A much greater
proportion (80–90%) of the fund has been allocated to incentivizing biofuel development, which limits
the financial capacity to fully support smallholders. This is despite the fact that biofuel is not mandated
in Plantation Law No. 39/2014, but is specified only in a lower level of regulation. This contradicts the
principles of the formulation of laws and regulations in terms of hierarchy, where lower regulations
have to refer to the higher regulation, as well as to policy content.
Presidential Regulation No. 61/2015 mandates the CPO Fund Agency to manage, collect and
distribute CPO funds. However, decisions on CPO fund allocation highly depend on a steering
committee that supervises the agency. This steering committee comprises eight ministries: the
Coordinating Ministry for Economic Affairs, Ministry of Agriculture, Ministry of Industry, Ministry
of Finance, Ministry of Energy and Mineral Resources, Ministry of Trade, Ministry of State-Owned
Companies, and Ministry of National Development Planning/Head of National Planning Agency.
Two of those ministries, the Coordinating Ministry for Economic Affairs and the Ministry of
Agriculture, play a significant role in setting a road map for smallholder replanting programs. The
Directorate of Plantations under the Ministry of Agriculture is tasked with the issuance of regulations
governing criteria on land and farmers who are eligible to receive CPO funds for the replanting
program. It also provides technical recommendations on whether particular groups of smallholders
are receiving funds. The Directorate of Plantations provides technical recommendations to the CPO
Fund Agency as a requirement before funds can be distributed. However, the process of disbursement
to support replanting is often hindered by a lack of performance in the selection of target smallholders.
Sustainability 2019, 11, 4914 8 of 16

Table 2. Legal basis of the crude palm oil (CPO) fund levy.

No. Legal Basis Content Implementation Gap

Financing plantation business
carried out by business actors, Funds collected take the
including companies and form of the CPO fund, which
smallholders, sourced from business has been used for designated Disharmony in
actors, financial institutions, public allocations. However, some regulations between
Law of The Republic of
funds, and other legitimate funds portions have also been Plantations Law No.
1. Indonesia No. 39/2014
(article 93 paragraph 3). Fund allocated for other uses such 39/2014 and
on Plantations
collected shall be used for as for food needs, Presidential Regulation
developing human resources, downstream industries and No. 61/2015
research and development, biodiesel, which are not
promotion, smallholder replanting, specified in this law.
and infrastructure development.
Republic of Indonesia
Funds collected from plantation
Government Thus far, funds that have The absence of dues
business actors comprise levies on
2 Regulation No. been collected are only from the plantation
exported CPO and dues (article 5
24/2015 on Plantation levies on exported CPO. business operator
paragraph 1).
Fundraising
Plantation fund source from levies
Presidential Regulation on CPO exported and/or its
Disharmony in
No. 61/2015 on derivatives and dues (article 3, Larger portion of funds is
regulations between
Collection and use of paragraph 1). This regulation allocated to biodiesel
Plantations Law No.
3 CPO fund (as revised governs the use of plantation funds, incentive (80–90%) than to
39/2014 and
by Presidential particularly levies on exported CPO, those allocated for financing
Presidential Regulation
Regulation No. for other uses such as food, smallholder replanting (1%).
No. 61/2015
24/2016) downstream industries, and
biodiesel.
Tariffs consist of levies and dues. Levies have been collected
CPO funds take the form of levies based on this regulation.
Minister of Finance
on exported CPO, and/or their However, dues have not
Regulation (PMK) No. Potential loss of state
derivative products (article 2). Dues been implemented. Based
133/PMK.05/2015 on revenues from export
4 are charged only to companies, not on Finance Minister’s
tariff charged on duties when CPO price
smallholders (article 8). The rate of regulation No. 13/2017,
services provided by is below USD 750
tariff ranges from USD 20 to USD 50 export duty will only be
CPO Fund Agency
per ton of CPO or its derivative charged if the CPO price is
products. above USD 750/ton.
The agency merely plays a
role in distributing and
CPO Fund Agency is an
disbursing fund. Distribution of funds
PMK No. organizational unit under the
Disbursement of funds for to support replanting
113/PMK.01/2015 on Directorate General of Treasury,
smallholder replanting is hindered by lack of
5. CPO Fund Agency Ministry of Finance, responsible for
highly depends on technical implementing
Organization and the collection, management and
recommendation from institution
Work Procedure distribution of the CPO fund
Directorate General of performance
(articles 1, 2 and 3).
Plantation, Ministry of
Agriculture.
Amending the above-mentioned
PMK No. 133/PMK.05/2015, the rate
of tariff changes to USD 0 per ton of Due to the decline in CPO
Minister of Finance
CPO if the CPO price is below USD prices, the government
Regulation (PMK) No.
570 per ton. The tariff will be issued this regulation in Potential loss of
152/PMK.05/2018 on
6 charged USD 25 per ton of CPO or December 2018. Since then, revenues from CPO
tariff charged on
its derivative products, if the CPO the CPO price was lower fund
services provided by
price ranges from USD 570 to USD than USD 570, and therefore
CPO Fund Agency
619. The rate of tariff charged is no tariff has been charged.
USD 50 per ton of CPO if the CPO
price is above USD 619.

3.2.2. How Easy Is It for Smallholders to Receive Financing from the CPO Fund?
Decree of the Director General of Plantations No. 29/2017 provides guidelines for financing
smallholder replanting and for developing human resources, facilities and infrastructure. It specifies
the eligibility criteria for farmers and mechanisms through which CPO funds for smallholder replanting
are distributed. In terms of replanting, smallholders are eligible to access the funds if the size of their
plantation is up to 4 ha per household, and their plantations are more than 25 years old and/or of
unproductive crop of 10 t/ha/year. They are required to hold a cultivation registration letter issued
by the district plantation office, and land legality documents issued by authority offices, confirming
Sustainability 2019, 11, x FOR PEER REVIEW 9 of 16

the eligibility criteria for farmers and mechanisms through which CPO funds for smallholder
replanting are distributed. In terms of replanting, smallholders are eligible to access the funds if the
size of their2019,
Sustainability plantation
11, 4914 is up to 4 ha per household, and their plantations are more than 25 years old
9 of 16
and/or of unproductive crop of 10 t/ha/year. They are required to hold a cultivation registration letter
issued by the district plantation office, and land legality documents issued by authority offices,
confirming that theirare
that their plantations plantations
not locatedare on not
statelocated on state
forest areas. forest
Eligible areas.are
farmers Eligible farmerstoare
also required also
engage
required to engage in farmer groups controlling plantations covering a minimum area of 50 ha. Their
in farmer groups controlling plantations covering a minimum area of 50 ha. Their plantations are
plantations
required to be areclose
required
to CPO to be close to CPO
processing mills.processing mills.
A maximum of IDR 25 million/ha (max
A maximum of IDR 25 million/ha (max 4 ha4 per
ha household)
per household) will
will be be granted
granted to smallholders
to smallholders whose
whose applications are accepted. Funding for replanting is not fully covered by financing fromCPO
applications are accepted. Funding for replanting is not fully covered by financing from the the
CPO
Fund Fund
Agency. Agency. Smallholders
Smallholders are required
are required to securetoother
secure other sources
financial financial sources
to fill to fill
the gaps the gaps
between the
between the granted CPO fund (i.e., IDR 25 million/ha) and the standard cost of replanting set by the
granted CPO fund (i.e., IDR 25 million/ha) and the standard cost of replanting set by the Ministry of
Ministry of (IDR
Agriculture Agriculture (IDR 50–60 Smallholders
50–60 million/ha). million/ha). Smallholders
are also requiredare to
also
openrequired
a bankto open awhich
account, bank
account,
allows forwhichfund allows
transfers forfrom
fundthetransfers from the CPO Agency.
CPO Agency.
Figure
Figure 33 depicts
depicts aa flowflow diagram
diagram showing
showing how how smallholders
smallholders or farmer cooperatives
or farmer cooperatives applyapply for
for
CPO
CPO funds.
funds. Farmer
Farmer groups
groups or or cooperatives
cooperatives present
present aa replanting
replanting proposal
proposal to the district
to the district plantation
plantation
service office, which is then submitted to the provincial plantation service office after verification
service office, which is then submitted to the provincial plantation service office after verification by
by the
the district plantation service office. Then, the provincial plantation service office will verify and
district plantation service office. Then, the provincial plantation service office will verify and review
review the proposal
the proposal before it before it is delivered
is delivered to the Directorate
to the Directorate General of General
Plantation of for
Plantation for further
further verification.
verification. Hereafter, the Directorate General of Plantation will send the proposal to the district
Hereafter, the Directorate General of Plantation will send the proposal to the district plantation service
plantation service
office to acquire theoffice
decree tofrom
acquire the decree
the head of the from theplantation
district head of the district
service plantation
office. The decree service office.
assigns the
The
CPOdecree assigns the
fund recipient andCPO fund recipient
the location and the location
of the plantation. of thebecomes
The decree plantation.theThe
basisdecree
for thebecomes
issuancethe of
basis for the issuance of a technical recommendation by the Directorate General of Plantation. The
a technical recommendation by the Directorate General of Plantation. The technical recommendation
technical
is submitted recommendation
to the CPO Fund is submitted
Agency asto the CPO Fund
a requirement Agency
before as a requirement
the fund distributes money beforedirectly
the fund to
distributes money directly to the smallholders.
the smallholders.

Figure
Figure 3.
3. The
The CPO
CPO fund
fund application
application process
process for
for replanting (Source: BPDPKS
replanting (Source: BPDPKS [44]).
[44]).

The process of CPO fund application for replanting as the explanation of the Figure 3 is as follows.
Sustainability 2019, 11, 4914 10 of 16

1. Farmer groups submit replanting proposals, once they are considered to meet administrative
requirements, to the district plantation office for verification.
2. The district plantation office verifies the proposals and recapitulates received proposals from
farmers across district, and submits them to the provincial plantation offices, copied to the Director
General of Plantations.
3. The provincial plantation office submits verification results to Director General of Plantations.
4. Director General of Plantations verifies all replanting proposals and resubmit verification results
to the district plantation office, copied to the provincial plantation office. Once proposals are
verified and considered to meet the requirements, the Head of district plantation office on behalf
of the regent issues a decree determining prospective farmers and potential lands (CPCL) that
are eligible for replanting funds. District plantation office delivers results of verification by the
Director General of Plantation to the farmer group/cooperative proposer.
5. District plantation office submits CPCL decrees to the provincial plantation office, copied to the
Director General of Plantations.
6. The provincial plantation office submits the verified CPCL decree to Director General of Plantations
who will re-verifies relevant documents and conducts ground checks, if necessary.
7. Based on the verification results, the Director General of Plantation provides BPDPKS with
technical recommendations, copied to both provincial and district plantation offices.
8. BPDPKS reviews technical recommendations and make decisions on those who are eligible to
receive replanting funds, and issues a letter of approval, facilitates and disburses funds directly
to targeted farmer groups through the Banks, according to stages of replanting activities.

Having received the technical recommendation, the CPO Fund agency reviews the availability of
funds for replanting and facilitators and other relevant documents. Once approved, the CPO Fund
Agency will then issue a letter of approval, enter into agreements with banks and farmer cooperatives,
and finally disburse the funds. The agency will then monitor and evaluate the use of granted funds.
The replanting program has not been smoothly implemented for several reasons. Most
smallholders are not able to meet land legality requirements as they have no proof of land ownership.
They are seldom engaged in any smallholder groups or cooperatives, making it difficult for them to
organize themselves; however, this is one criterion of eligibility for CPO funding. They tend to have
a low bargaining position in running their farming activities. Smallholders are constrained by the
lack of access to any other fund sources than the CPO fund to fill the gap in replanting financing. In
addition, the lack of a database on the number and distribution of smallholders makes it difficult for
the plantation officers to verify recipients of funds [45–47].

3.3. Policy Options to Optimize the CPO Fund to Support Smallholder Planting and Reduce Deforestation
While the CPO fund was originally designed as a fiscal instrument to support smallholder
replanting through increased crop productivity, there are opportunities to optimize its use, not only
to support replanting, but also to encourage oil palm smallholders to adopt good and sustainable
practices, which will discourage them from encroaching on forests and forest areas.
Hellin and Schrader [48] have classified direct and indirect incentives to attract participating
farmers in their context of a soil and water conservation program. While the program is designed to
reduce soil and water loss and increase productivity, they found there was a low rate of adoption of the
technology offered through such a program by farmers. The reason why farmers are less incentivized
to adopt it is due to the fact that direct incentives were withdrawn. Referring to this study, we argued
that the CPO fund could be categorized as a direct incentive, since it took the form of a cash payment
to support smallholders in oil palm replanting. However, the performance level of the smallholder
replanting program is still low due to various technical constraints such as the unreadiness of technical
regulations and institutional governing of smallholder oil palm replanting.
Sustainability 2019, 11, 4914 11 of 16

3.3.1. Strengthening the Implementation of Smallholder Oil Palm Replanting Policies

As clearly stipulated in relevant policies, the CPO fund can primarily be used to finance smallholder
replanting. It can also be allocated to support the development of relevant facilities and infrastructure
such as agricultural machines, postharvest and yield processing equipment, plantation roads, transport
equipment and market infrastructure, and to procure seeds, fertilizers, and pesticides. In 2017, the
Director General of Plantation issued a decree (No. 29/2017) on guidelines for oil palm smallholder
replanting, development of human resources, means and infrastructure, with support from the CPO
fund. It sets out criteria, indicators and technical directives on how to enable smallholders eligible
for accessing the fund for replanting and other purposes. They, for instance, must engage in famer
groups and have a minimum of 50 ha of legally certified lands, if they were to be eligible for the fund.
Smallholders whose plantation size is less than 25 ha must also secure a document called an Surat
Tanda Daftar Budidaya (STDB) based on a register issued by the head of local government attesting that
information on the owner, position and size of the plantations along with other relevant information
on types of crops, year of planting, origin of planting materials, etc., is valid.
To make the implementation of replanting policies as specified in the decree more effective, it is
required, first, that smallholders are facilitated from the early stages to prepare working and financing
plans for replanting and to realize the plans. Training in ISPO and certification need to be provided
to smallholders so that they are acquainted with criteria and indicators and how their practices can
be made more sustainable. Some guidance and training in managing finance are also necessary to
anticipate the use of the CPO fund if funding was finally granted. The facilitator has a key role in the
success of the replanting activities and therefore must be supported with an adequate budget from the
CPO fund.
Second, while it is often neglected and not specified in the guidelines, it is also important to
strengthen the role of provincial and district plantation offices, which play a very important role in
determining the location of smallholder groups that are eligible to receive CPO funds for the replanting
program. They are also key in the issuance of land certificates and STDBs, and verifying proposals
from the district office and providing recommendations to the Directorate General of Plantation related
to the proposed replanting activities, human resource development and facilities, and infrastructure
assistance. The necessary budget deriving from the regional budget (APBD) and CPO fund needs
therefore to be made available to support the effective function of the provincial and district offices.
Third, to accurately target the right smallholders, it is also fundamental to develop reliable tabular
and spatial databases that show the number, distribution and characteristics of smallholders, both
outside and inside forest areas. Such a database can also be used as a reference by the government and
other parties in carrying out the development and empowerment program of smallholders as well as
to solve problems related to tenure. The importance of the database of the number and distribution
of smallholders was also confirmed by Schoneveld et al. [12], who found that characteristics of oil
palm smallholders are very diverse; thus, this should be considered when determining prospective
smallholders and land in order to achieve the right target of the replanting program. An amount from
the CPO fund shall be allocated to finance the development of such a database.
To support the financing of the CPO fund, it is necessary to improve the role of financial institutions.
Before CPO funds are disbursed, an agreement was made between the BPDPKS, financial institutions
or banks, and smallholder groups. Financial institutions play an important role in the success of the
CPO fund program and encourage smallholder groups as creditors to adopt sustainable practices. The
banks need to adopt credit risk mitigation instruments to avoid negative impacts [49]. Before funds and
credit are disbursed, it is necessary to ensure that the smallholders groups implement environmentally
friendly methods and grow palms without clearing forests.

3.3.2. Financial Support to Legalize Smallholder Lands

One of the most challenging factors facing smallholders in becoming ISPO certified is the unclear
and illegal status of the lands where they grow the palms. As indicated earlier, most smallholder
Sustainability 2019, 11, 4914 12 of 16

plantations are located in state forests. Jelsma and Schoneveld [50] stated that the oil palm smallholders
have been discouraged from formalizing their ownership rights due to the perceived illegitimacy of
informal claims, high cost and difficulty of obtaining land certificates. Therefore, the CPO fund is
expected to overcome this situation by giving a priority use of the fund to help smallholders clarify
the particulars of their land and become ISPO certified. The CPO fund can be used to solve the land
legality problems of smallholder oil palm plantations through a supporting land certification process
that can be in the form of a formal certificate known as the Ownership Rights Certificate (SHM) and
other documents of land ownership that have less legal force such as a proof of land ownership letter
(SKT)/Sporadik/Girik (Letter D)/Sale and Purchase Certificate (AJB).

3.3.3. The Allocation of Oil Palm Funds in Relation to Grace Periods after Replanting
The requirements to disburse CPO funds for smallholders include the provision of a supplementary
budget for financing the advanced stages of replanting activity. The supplementary budget can come
from the smallholders’ own savings or as loans from financial institutions such as banks. Therefore,
before the CPO funds are disbursed, an agreement will be made between the BPDPKS, financial
institutions or banks, and smallholder groups as potential recipients of CPO funds. This is due to the
gap in the amount of CPO fund allocation, which is only IDR 25 million/ha, while the government
standard of replanting costs is IDR 50–60 million/ha. The standard of replanting costs should be
fulfilled to ensure that the results of the replanting program give high crop productivity, by using good
quality seeds, carrying out maintenance, and using good agriculture management practices.
To support the financing of smallholders, the government provides community business credit
facilities (Kredit Usaha Rakyat-KUR) with an interest rate of 7% per year with a grace period of five
years. There is special credit available for the community oil palm program (PSR), which is intended
to help finance the replanting of the smallholders’ oil palm plantations [39,51]. The requirements of
self-financing for the disbursement of CPO funds through the cooperation with banks has certainly
become a burden for the smallholders, particularly when they have to pay interest after the grace
period. During the grace period, their plantations have not yet produced anything; however, the
interest rate after the grace period will be charged accumulatively at the time when the plantation has
produced. In order to reduce the burden for the smallholders, CPO funds should also be allocated to
pay the interest that accumulates in the grace period. Thus, the CPO fund should be able to subsidize
the interest rate in the grace period.
In addition, the CPO fund was also proposed as capital assistance for smallholders to undertake
productive activities as an alternative livelihood during the grace period. It was expected to become
an alternative source of income for smallholders. This is in line with the findings of Sahara et al. and
Bronkhorst et al. [15,17], stating that there needs to be an alternative income given to independent palm
oil smallholders in a grace period. The use of CPO funds to create alternative income for smallholders in
the grace period can be synergized with village fund assistance programs from government, particularly
to determine the types of activities and livelihoods that are suitable for the grace period. Another thing
that is proposed as a policy option is that there is a need to consider the existence of a bank guarantee
from the CPO fund for smallholder oil palm replanting credit. Hence, banks that provide credit have a
guarantee and the credit disbursement is not hampered.
The period of financing or credit from a bank or financial institution must also be relatively long,
at least 25 years to cover the period of financing when the smallholders accomplish the next period of
replanting. By providing access to long-term financing, farmers will be encouraged to replant and
maintain their production levels and provide opportunities to increase their income. Thus, they tend
not to expand their plantation expansion by encroaching on forests [17].

3.3.4. Adjustment of Replanting Costs

In relation to the requirement of self-financing in undertaking advanced replanting, which becomes
a burden to smallholders, it was proposed that the CPO funding should be disbursed in accordance
Sustainability 2019, 11, 4914 13 of 16

with the general costs faced by smallholders in the field. Based on interviews carried out in several
regions, smallholders stated that replanting costs were generally in the range of IDR 30–40 million/ha,
slightly higher than the assistance offered by the CPO fund of IDR 25 million/ha or approximately 42%
of the standard cost of oil palm replanting according to the Director General of Plantation (IDR 60
million/ha). For this reason, replanting assistance from the CPO fund is recommended to be increased
to 60% of the government standard costs for replanting.
However, efforts are needed to ensure that replanting activities are in accordance with the
standards of the government, which requires the using of certified seeds, forming a smallholder group
and carrying out sustainable plantation practices according to the ISPO. If the portion of CPO funds
for replanting is increased, it will open up opportunities for farmers who will then not be bound by
loans from financial institutions.
The use of CPO fund as an incentive to finance replanting for oil palm smallholders is expected to
increase the productivity of independent smallholders, and ultimately will help increase the income of
independent smallholders. It is expected it will prevent the land expansion to the forest. The conditions
that are expected with the assistance of CPO funds are presented in Table 3.

Table 3. Expected condition before and after the CPO fund program disbursements.

Indicator Before After

Land Uncertified Certified
Fund Commercial interest Subsidized interest
Seeds Uncertified Certified and have a certain quality
Production 2–3 tons CPO/ha/year 5–6 tons CPO/ha/year
Land expansion Tend to expand land to forest Not expanding to the forest
Sustainability ISPO uncertified ISPO certified
Grace period assistance No source of income in grace period A source of income is available during the grace period
Source: Modified from innovative financing system [52].

4. Conclusions
There is the potential to use the CPO fund policy to incentivize smallholders to improve their
crop productivity, help improve sustainability practices and prevent them from encroaching on forests.
Gaps, however, were identified to occur between what is mandated in law and regulations concerning
the intended use of the fund and how it has actually been used for various purposes. These gaps
limit the effective achievement of the policy goals and particularly the intended use of the fund to
promote replanting and sustainability practices among smallholders. In order to tackle this limitation
and make the fund policy effective, it is recommended that rules governing the use of the CPO fund be
strengthened by providing smallholders with productive capital assistance, particularly assisting them
in going through grace periods after replanting. Costs for replanting assistance need to be adjusted to
60% of the replanting cost standards set by the government, which was originally set at 40%. The fund
policy needs to be expanded, not only to support the replanting programs, but also to assist in land
legalization and in facilitation of smallholders in becoming ISPO certified. To enable farmers to be
eligible for CPO funds and ISPO certification, there is a need to encourage them to engage in farmer
groups. It is also essential to strengthen the role of plantation services by enhancing the capacity of
personnel and allocating financial resources.
These require political and technical commitments by the key actors affecting sustainable oil
palm plantations of smallholders. Decision-makers allocating CPO funds must put a high priority on
smallholders, and should develop a reliable database on smallholders so that any decision on fund
allocation and intervention would be on target.
Sustainability 2019, 11, 4914 14 of 16

Author Contributions: Conceptualization, F.N.; Data curation, R. and G.K.S.; Formal analysis, F.N., G.K.S. and
H.K.; Investigation, F.N. and R.; Methodology, F.N.; Project administration, F.N. and R.; Supervision, H.K.;
Validation, F.N.; Writing—original draft, F.N., R., G.K.S. and H.K.; Writing—review & editing, F.N., R., G.K.S.
and H.K.
Funding: This research was funded by USAID (USAID ASSISTANCE AGREEMENT No. 497-AA-030).
Acknowledgments: This research was supported by USAID through the Governing Oil Palm Landscapes for
Sustainability (GOLS) project. The authors thank our colleagues from the Indonesian Ministry of Environment
and Forestry’s Research and Development Center for Social, Economics, Policy and Climate Change (P3SEKPI)
and the Center for International Forestry Research (CIFOR) who provided insight and expertise that greatly
assisted the research. They are also immensely grateful to all key informants affiliated with organizations and
institutions at national as well as at local levels in Central and West Kalimantan for sharing their thoughts and
ideas. Participants in focus group discussions and workshops that were organized as part of the research were also
greatly acknowledged for their contribution to strengthening the policy recommendation options and arguments
made in this paper.
Conflicts of Interest: The authors declare no conflict of interest.

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