Coordinating Minister for Economy Hatta Radjasa said on Wednesday that a government regulation was being prepared to provide the basis whereby the government could provide incentives to investors financing the downstream sector of the palm oil industry.

“Our palm oil industry has been growing steadily in the upstream sector, now making us the world’s number one palm oil producer,” Hatta Radjasa said, while opening the 5th Indonesian Palm Oil Conference in Nusa Dua on Wednesday.

“But we need to deepen the growth of the industry into the downstream sector to provide more employment. With the development into the downstream sector, we would be a giant not only in the upstream sector but also in the downstream sector,” he said.

Hatta identified three locations that would serve as industrial estates for the development of the palm oil downstream industry. They are Kuala Enok in Indragiri Hilir regency in Riau, Maloy in East Kutai regency in East Kalimantan and Sei Mangke in Simalungun regency, North Sumatra.

“The incentives would be given to industries operating in designated economic zones. We cannot yet reveal what they would be. We are still in discussion,” Hatta said.

He added a number of foreign investors had expressed interest in investing in the palm oil downstream industry. They include potential investors from Japan.

Palm oil is one of Indonesia’s boom sectors. The country, with 7.9 million hectares of oil palm plantations, produces 19.2 million tons of palm oil per year, much of which is exported to many countries, generating total revenue of US$12.4 billion in foreign exchange.

State-owned Bank Mandiri Corporate Banking Director Riswinandi said that palm oil was indeed an attractive sector for banks to finance, and deepening the sector into the downstream was a good idea considering the many challenges in the export markets, especially in Europe which is imposing stricter environmental standards on imports.

Bank Mandiri, the country’s biggest bank by assets, allocates 15 percent of its total credit to the palm oil sector. As of last October, the bank had disbursed Rp 35 trillion (US$3.7 billion) to the sector, or 16 percent  more than the year before.

“This business is in a good shape this year and it is not [negatively]influenced by the global economic crisis,” Riswinandi said.

Meanwhile, Joko Supriyono, secretary-general of the Indonesian Palm Oil Association (GAPKI), cautioned the government over its decision to deepen the sector into the downstream, saying this could create more problems for the upstream sector.

Joko pointed to the domestic cooking oil industry, which eventually could burden the upstream sector with export tax. “As long as it would not burden the upstream sector, it should be welcomed,” he said.

To be successful in developing the downstream sector, Joko noted that there must be enough demand for the downstream products, enough infrastructure to support the industry and enough capacity and competence from business players.

The downstream products from palm oil include cooking oil, fatty acids as well as materials used for soap products, lubricants and more recently biofuels for internal combustion engines.

Joko warned that some downstream product markets are very much controlled by multinational companies, and it would be difficult to break into them.

On supporting infrastructure, Joko said that government had better prepare infrastructure properly first before inviting investors.

Joko pointed out for example that out of an initial 11 biofuel producers, only two now survived because there had not been enough infrastructure in place, including the required regulatory frameworks, to support the biofuel industry.

“To be frank, our competence for now is still in the upstream sector,” he said.

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