Despite its huge potential in helping turn Indonesia’s oil palm smallholders sustainable, the government’s Village Fund has remained largely untapped and efforts were needed to mobilize this financial resource, an industry finance expert said.
For Agnes Safford, a project and corporate finance expert with long exposure to the Indonesian palm oil sector, financing, along with land tenure, have been among the main hurdle in getting oil palm smallholders on board the sustainability train.
“The biggest issue with smallholders is how do you get the financing,” Safford told The Palm Scribe in a recent interview. The lack of knowledge about financing, as well as the lack of guarantees needed to get bank loans, such as land titles and ownership, were hindering access to financing.
She cited an example, the need to boost farmers’ output but not at the expense of physical expansion. For many smallholders, their crops were already over the productive period and needed to be replaced, but replanting is costly and would also mean a total loss of income for some three years the crop would need before it could start producing fruits.
Safford, member of the Credit Committee of “&Green”, a fund to promote sustainability through the financing of inclusive, sustainable and deforestation-free commodity production, pointed out that Indonesia might actually have the means to potentially address those hurdles — an annual fund allotted to every single village in the country to help them realize their rural development objectives, such as poverty alleviation, and the improvement of village community welfare and quality of human life.
Finance ministry figures show that a total of Rp178.5 trillion are being earmarked for the fund, known as the Dana Desa, or the Village Fund, for this year. Village governments are free to decide on what the fund would be used for.
Official data, however, also have shown that more than 84 percent of the Village Fund have been allocated for physical infrastructure and facilities development which in most cases did not add much to improving local welfare. Another 6.5 percent is allocated for economic empowerment, and the rest is used for government activities and social affairs.
“If you have things like the Dana Desa fund that you can use, you have got ways to guarantee (loans),” she said, citing for example that with some fund from the Dana Desa, villages could create their own little guarantee funds and guarantee loans for a group of about 50 local farmers who would otherwise have no access to bank loans because of the lack in collaterals.
“Well, if they are all part of the desa, why can’t the desa guarantee it?… it is a pool of money and you are only going to get to use a small percentage of it,” Safford asked. The thing that needed to be found, however, was a model where all those farmers could really be bound to respect whatever arrangement was agreed for them to get the guarantee.
But fund availability was not all. “You have got to have guys in the village who can understand how to use this fund productively and that is where it has got to start, from the village up…. you’ve got to get this fund mobilized and involved, and also you need a champion who understands that,” she said.
These champions, she said, were critical to any story of success but finding them was the difficult part.
“I think the difference between a success and a failure is going to be the champion and how dedicated the champion is to making it, to see it all the way through, and if anything happened to the champion, who picks up the ball and runs with it,” she said.
Champions were also needed in helping banks scale down into smaller transaction. Although technology can help banks make their work easier in dealing with clusters of farmers, champions were still needed to lead the foray into those smaller transactions. Safford said that knowing how businesses operate in Indonesia, once there is a success story in smallholder financing, other banks would quickly follow suit.
The Dana Desa could also help to address one problem in the sustainability supply chain in the palm oil sector, namely taking over the role played by middlemen, brokers who are bridging between mills and the farmers, bagging huge profits by charging usury rates for their services.
Middlemen are ubiquitous in Indonesia’s palm oil sector as mills usually need a few days to a few weeks to pay their purchase of farmers’ fresh fruit bunch while the middlemen can pay cash, although at much lower buying prices, making cash strapped smallholders usually opt for immediate cash. These middlemen can also help farmers with seedlings and other plantation necessities, again charging high prices or interest rates. Fund from the Village Fund could potentially be used to take over the financial role of these middlemen.
Or, the industry could also choose to co-opt them to join the system and help farmers, instead of exploiting them.
“Somehow you have to break the cycle, and to break the cycle you are going to have to give the middlemen an incentive to be part of your system. In other words, you are going to have somehow to teach him that he can have a bigger piece of the pie,” Safford said. There had to be ways to give them a cut, an incentive, where they make more by cooperating and helping farmers rather than charging the exorbitant fees, she added.
Drawing smallholders into sustainable practices were now crucial if Indonesia wanted to fully achieve a sustainable palm oil industry.
“I think in Indonesia, all the figures are now showing that the big players, the conglomerates, have stopped cutting…. So that is why, the focus should be on the little guys, the smallholders, who now make up about 40 percent of the palm oil production in this country,” Safford said.
The conglomerates, she said, already have their development from years past, so they did not need to be up there deforesting and satellite imaging technology has now also basically put all of them under a close watch.