Senior Foreign Counsel Rick Beckmann and Senior Associate Aldi Rakhmatillah author an opinion piece about Indonesia's fight against foreign domination of the plantation industry.

The below article was published by foodnavigator-asia.com and has been reproduced with permission.

Indonesia's plantation war with foreign conglomerates continues

By Rick Beckmann, Senior Foreign Legal Counsel, and Aldi Rakhmatillah, Senior Associate, Susandarini & Partners in association with Norton Rose Fulbright Australia

Indonesia continues its fight against foreign domination of the plantation industry and, in particular, crude palm oil (CPO).

In July 2014, a draft law to be put before Parliament went into circulation, which proposed axing the permitted aggregate percentage foreign interests in an Indonesian plantation from 95% to 30%.

There was an immediate outcry from both the local palm oil industry and foreign investors. The local industry would suffer as a consequence, with potential CPO investors either evacuating to or focusing on countries with more friendly foreign investment rules.

The draft new law was on the "priority" list of legislation for the current Parliament, so there was considerable pressure to get it through by the end of September – in whatever form. As the foreign ownership question was a political hot potato, there was no way to immediately impose the 30% foreign shareholder limitation.

The law was passed at the last minute at the end of September – minus the limitation, which was considered premature. Rather, the law has put foreigner investment restrictions "on hold" and subject to further discussion.
In a two-part article on Indonesian plantations published on this website on 23 and 30 September 2013 ( http://www.foodnavigator-asia.com/Policy/Indonesian-plantation-monopolies-under-threat and http://www.foodnavigator-asia.com/Policy/Indonesia-s-plantation-war-with-foreign-conglomerates), we reported that the Indonesian Government was planning to crack down on further expansion of groups in Indonesia's powerful palm oil industry and, indirectly, foreign conglomerates.

It happened. In September 2013, a regulation was issued that restricts the plantation holdings of "groups of companies" to 100,000 ha across Indonesia. While limitations were set out under the previous system, these applied to individual companies rather than "groups of companies", and could therefore be easily circumvented by incorporating multiple subsidiary companies each holding separate plantation titles.

As a result, further expansion by the big players is no longer possible. This was at least partly directed at foreign domination of the CPO industry.

The Indonesian Parliament has now gone a step further.

The new law does not immediately set foreign shareholder limitations. Rather, it provides that the foreign shareholder limitations will be revealed in regulations that will be issued in the next two years. In other words, the law allows room for the debate to continue.

Outgoing President Susilo Bambang Yudhoyono stated publicly that he was against limiting foreign investment in plantations, as this would hurt the country's investment climate. New President Joko Widodo, who takes up office on 20 October, has indicated that while he is avowedly "pro-" foreign investment, he will also continue pursuing resource nationalism, as already seen in the mining sector.

So while the initial panic over a 30% limitation has now gone, uncertainty remains for foreign investors in CPO – at least in the short term.

The original draft of the plantations law had proposed that foreign investors exceeding the 30% threshold would be required to divest to 30% over a five-year period. This plan now appears to have been abandoned.

Rather, the new law implies that any sell-down (to whatever the ultimate foreign limitation may be set at) will not be required until the relevant plantation title ends. Assuming this interpretation is correct, and given that most CPO titles last 35 years, the difference will be substantial, depending on how old the CPO title is. That revision has brought relief to the major players in this sector.

What the regulations will say two years from now (or later, as is often the case where Indonesian laws contemplate further regulations) is anyone's guess.

We should not be mistaken – one of the stated purposes of the new law is to set limits on foreign investment in Indonesian plantations, in line with the "national" interest. The national interest will be determined by taking into account the type of plants and the scale and location of the plantation. Foreign investment restrictions in the plantations sector are therefore still very much on the cards. We will just have to wait to discover the extent of the restriction.

The plantations debate has now switched to a similar situation to that faced by mining companies after the 2009 mining law, which said there would be foreign shareholder divestment requirements in further regulations. In 2010, a divestment of 20% at the sixth year of commercial production was set, although this was later changed to a phased divestment of up to 51% from the sixth year to the tenth year of commercial production, and was ultimately changed in 2013 to a 49% foreign shareholder limitation for most Indonesian production mines. This could lead to the loss of a majority foreign interest acquired following capital expenditure during the exploration phase.

It is not yet clear whether the scenario for Indonesian plantations will follow the same path as that for mining in Indonesia.