Indonesia: "Plasma Obligation" For Oil Palm Plantation Business Established Prior To The Issuance Of Regulation Of The Indonesian Minister Of Agriculture No.26/2007

The oil palm plantation business is one of the flagship investments in the agriculture sector in Indonesia and attracts many foreign investors. As is well known, Indonesia is one of the biggest crude palm oil producers together with our neighbor Malaysia; this is the benefit of the strategic location of Indonesia supported by the tropical climate which is very suitable for this kind of business.

Situation in the Field

Oil palm plantations integrated with palm oil processing plants have a 95% (ninety five percent) limitation on foreign ownership, whether by a foreign citizen, a foreign entity, or a foreign investment company established under Indonesian law.

In practice, the situation is not that easy. In the case of acquisition, once a foreign investor has acquired an oil palm plantation company, some difficulties in realizing and implementing the investment plan become more apparent.

Investors have to deal with a long process to apply for and obtain the relevant operational licenses for the oil palm plantation business, which are mostly under the authority of and arranged by the local government (known as Pemerintah Daerah). The process of releasing land for the oil palm plantation from the local community can be tough and complicated, as the local community will frequently make use of the land release to obtain as high a profit as possible, which sometimes leads to irrational sale prices. Moreover, the investors have to comply with the "plasma obligation" for the oil palm plantation business by providing land for the local community with an area of at least 20% (twenty percent) of the total land given in the plantation business license (Izin Usaha Perkebunan or "IUP").

What is the "Plasma Obligation"?

The "plasma obligation" was first provided for in Regulation of the Indonesian Minister of Agriculture No. 26/Permentan/OT.140/2/2007 concerning Plantation Business License Guidelines, as replaced by Regulation of the Indonesian Minister of Agriculture No. 98/Permentan/OT.140/9/2013 concerning Plantation Business License Guidelines ("Permentan No. 98/2013"). Article 15 paragraph (1) of Permentan No.98/2013 states that a company applying for a plantation business license (Izin Usaha Perkebunan or "IUP") for an area of 250 hectares or more must facilitate the local community's development by providing the local community with a the plantation area of at least 20% (twenty percent) of the total area given to the company as stated in the IUP.

When the IUP was obtained by a company before the enactment of Permentan No.26/2007

The above provision raises the question of what happens if the IUP was obtained by a company before the enactment of Permentan No. 26/2007?

Article 60 of Permentan No. 98/2013 answers the question, that the provision contemplated in Article 15 paragraph (1) of Permentan No. 98/2013 does not apply to a plantation company which (a) had already obtained IUP before 28 February 2007, or (b) had followed plasma cooperation methods such as PIR-BUN, PIR-TRANS, or PRIKKPA.

Permentan No. 98/2013 also provides that a plantation company which has yet to follow PIR-BUN, PIR-TRANS, PRIKKPA, or other plasma cooperation method(s) must provide a productive business for the local community as acknowledged by the relevant governor or regent. Productive business means any activity which can be a source of livelihood for people in the local community.

In conclusion, a plantation company which obtained an IUP before 28 February 2007 is not required to implement the "plasma obligation", but it does have to provide productive business activities for the people in the local community. The benefit for an oil palm plantation company from such regulation is that Permentan No.98/2013 does not specifically say what kind of productive business activities can be substituted for the plasma obligation. Therefore, an oil palm plantation company can continue to explore all possibilities to fulfil the obligation to provide productive business activities rather than be bound to provide land for the "plasma obligation", which may involve higher costs. One note of caution, though, since the definition of "productive business activities" is not clearly defined, it is open for interpretation from the relevant authorities which could lead to uncertainties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.