Creating quality growth

Albertus Weldison Nonto

Tycoon Surya Darmadi is to invest heavily in the downstream palm oil business in order to create “quality growth.” GlobeAsia interviews a businessman prepared to tell what it’s really like in the plantation business.  

Surya Darmadi, 60, founder and chairman of integrated palm oil business Darmex Agro Group, is tired of having to field problems created by outside parties. Local and international NGOs, anonymous local pressure groups and local political pressure add up to a business climate that is just “too annoying.”

“(I) get tired pak! At the moment we just settle down, review all our expansion plans and push more quality growth,” he says. He does not want to relive the experience of the past three years, in which he has had to deal with problems often irrelevant to his business that have forced him to work hard. Some 50% of his time and attention to business is spent on non-core issues unrelated directly to the CPO business. 

Surya believes this situation has led to negative coverage about his group in the media. There have been allegations that he has not paid taxes and broken the law. Surya, the former owner of Bank Kesawan, says the allegations are untrue, brandishing the statement of settlement of tax payment. “It is not true that our group didn’t pay tax, it has already completed its obligation,” he insists.

After 25 years in the palm plantation business, Surya believes he has made a significant contribution to local development, building infrastructure, mosques, schools and other facilities needed by people living near his more than 155,000 planted hectares of palm plantation in Kalimantan and Sumatra. Much of what his companies have done was the responsibility of government, he notes.

An international NGO has closely monitored his businesses alleging misuse of peat land and the burning of forest for land clearing. Surya’s membership in the Roundtable on Sustainable Palm Oil (RSPO) — where entry requirements are tough — is a real indication that his group has obeyed all rules and requirements and operates to international standards, he argues.

“Not every palm plantation company can become a member of RSPO. If someone doesn’t believe this then just click to its website, to confirm if our company is still there or has been expelled,” states a testy Surya.

Operating in the plantation section has been made difficult by excessive regulations and because the industry has become the object of scrutiny over environmental and social and political conflict issues. “One day I asked one international NGO, is the palm business green or not green. They could not even answer my question,” he says with a laugh.

Another top executive in the pulp business agrees that the operations of international NGOs are unfair. “We always invite them to discuss and compare their findings with ours, but they never come,” she muses, adding that the conflict between the industry and the NGOs must be seen from the perspective of a trade war.

Sources close to Surya agree that, at the regional level, business operators have to be ready to face disturbances from local NGOs, politicians and community leaders. In an interview with GlobeAsia, Surya insists that recent allegations of misuse of protected forest for expansion in Indragiri Hulu, Riau are untrue. All legal aspects had been completed, he says. “I have been more than 25 years in the business and it means suicide to do business without legal permits.” 

Industry sources also confirm that regional autonomy can be misused by certain groups to seek rent from any business in the region. “They can be like mafioso and hard to detect, and they have different goals; there are those who want a cash payout and there are those who want to take over a plantation,” says one source.

They add that confusion occurs when local political elites misinterpret the rules and regulations and try to manipulate the situation. In the case of the partnership programs that provide plots of land for small farmers, “white-collar” farmers often take over the rights of small farmers and push themselves forward as partners of big planters. Surya agrees that local people and government are stakeholders in his business but muses that “everybody should be fair.”

Building blocks for the economy

Suryadi believes that businessmen everywhere in Indonesia aim not only to seek profit but also to help build the country. One palm oil businessman, Hery ‘Abun’ Susanto, believes that at a certain level, businessmen turn to think about employment and social welfare rather than a positive balance sheet from their business.

“I don’t much think only about running the company but how to contribute something, even it is very small, to this country,” says Surya, born and raised in Medan and who moved to Jakarta at the age of 18.

“Building plantations should have a social and economic impact, and it happens automatically,” he adds. Lower-level employees become his first priority for action. “If your manager is absent, production can still run, but not if it is an operator or lower-level worker,” he says, noting that it his job to respect his more than 35,000 employees.

The impact of the industry as a whole is huge. While he won’t talk about the financial position of his companies, he provides a brief picture that demonstrates how much wealth is generated. A person who owns more than 150,000 hectares of mature trees should make more than $1 billion in revenue, he said. “For this size of plantation, the processing, downstream business is already complete.”

Integrated operations

Surya’s group has everything that a modern palm plantation should have. It has refineries for cooking oil and bio-diesel, with capacity of 180,000 liters per year. “Now we are heading to build a fatty acid plant.”

The addition of downstream operations creates an integrated operation, even though margins are lower. It is a happy coincidence that the government is encouraging local business groups to develop the downstream sector. Surya agrees that as a plantation group expands, it must develop downstream business such as fatty acid or oleo-chemical plants.

Despite the clear direction for growth, Surya still wants to stop for a while and consolidate his position. “We want to make this existing plantation business more productive,” he says, adding that local social and political situations have helped force him to put on the brakes.

In the short term the group will open new land for plantation but more attention will be paid to social and local development. In Singkawang, the ‘little Amoy’ of West Kalimantan, he is helping to improve the local hospital. He has opened a new high school focusing on agriculture along with student dormitory in Bengkayang, donating 50 hectares of palm plantation to provide income in the future.

Plantations will continue to be the biggest contributor to profit, but Surya reminds that huge capital is required to maintain cash flow. Huge investment is also needed to build an integrated chain of operations for the downstream business, especially since the government has no capacity to provide infrastructure.

One fatty acid plant needs more than Rp2 trillion, and then there is additional investment in other plant, a power plant and a port. Despite the complexities, Surya still sees a bright future for downstream business.

Government and lawmakers should review incentives for bio-diesel in order to increase sales volumes, he believes. Better incentives will double demand and create more impact on CPO prices, with government benefiting from additional tax revenue.

Surya is currently building a second unit at the bio-diesel plant in Kalimantan to increase production from the current figure of 180,000 liters per year to supply state energy company Pertamina. Here too is opportunity for expansion: Pertamina recently increased its bio-diesel quota from 5% to 10%, providing further reason for planters to invest. GA