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upported by favorable export taxation to attract investment, Indonesia, the world'€™s largest palm oil producer, has the potential to become the production base for several downstream palm oil products, stakeholders say.

The main potential lay in the surfactant industry, which could nearly triple added-value of crude palm oil (CPO), according to the Industry Ministry'€™s director general for agriculture and chemical industries, Panggah Susanto. Surfactant is a chemical compound used in detergents, soaps and cosmetics.

'€œWe have the potential to serve as the manufacturing base for surfactants, but we are not yet in an optimal position to develop the product, despite the huge potential,'€ Panggah said.

PT Unilever Oleochemical Indonesia (UOI), a subsidiary of consumer goods giant Unilever, has built a refinery to convert palm oil into oleochemical in Sei Mangke, North Sumatra, with investment totaling US$133 million.

Another consumer-goods giant, P&G, is building a similar facility in the special industrial zone, while Indian-based refiner VVF is finalizing its fatty acid refinery in Medan, North Sumatra.

These investments are part of the Rp 24 trillion ($2.06 billion) that has been channeled to the Southeast Asia'€™s largest economy since the new progressive export taxes, encouraging local processing and investment, were applied in late 2011.

The export taxes, which are lower for processed products, are now under review by the Industry Ministry and open for revision in a bid to further attract much-needed investment to expand the domestic palm oil industry.

Palm oil-based oleochemical, along with other products such as fatty acid and fatty alcohol, has increasingly been used to produce surfactants. However, those derivatives are primarily exported because the surfactant industry has not been well-developed, with only a small number of players operating the facilities, including Musim Mas and German-based Evonik.

Chairman of the Indonesian Oleochemical Manufacturers Association (Apolin), Togar Sitanggang, pointed to inconsistent policies as being one of the factors that continued to discourage investment.

'€œInvestors question whether the export taxes will remain the same as they are today, in addition to other investment-related regulations,'€ he said, adding that a huge market alone would not be sufficient to draw new investment into the downstream palm oil industry.

In a bid to cater to investment, the government has designated three special industrial zones '€” Sei Mangke in North Sumatra, Dumai in Riau and Maloi in East Kalimantan '€” to spur growth in the downstream palm oil industry but despite the entry of several firms, progress has been painfully slow, according to some critics.

Despite showing significant interest in the industrial zones, several interested parties were '€œwaiting to see'€, particularly due to the inadequate infrastructure to support processing facilities, said Derom Bangun, chairman of the Indonesian Palm Oil Board (DMSI).

'€œMost infrastructure is now either being built or still in planning. We expect the government'€™s attention to address this issue,'€ he said.

Derom also said that Indonesia lacked the research and development to allow it to catch up with Malaysia, which had succeeded in building its downstream industry. Malaysia applied special taxation for its palm oil producers at around $3 per ton which, among other things, was used to fund research and development.

'€œWe need research and development to diversify our products and also to find more efficient ways to generate palm oil derivatives,'€ Derom said.

The government has claimed that the variety of processed products has expanded considerably from 54 to 149 types as investment, supported by the current export tax regime, has risen.