Improving Agricultural Market Performance:
Creation and Development of Market Institutions
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continues to be a priority on Indonesia’s national agenda. BULOG, however, has not re-gained
its monopoly power, still challenging its role and impact on the effectiveness of the sugar
marketing system.
The efficiency of PTPN III seems to be impacted by a couple of interrelated challenges. In fact,
the strongest performance of PTPN III was realized up to 2011 and can be linked with a 10-
year cycle which typically characterize CPO world prices (i.e. peaks in 1998 and 2008).446
Challenges which impede PTPN’s efficiency include:
 Operational challenges
o Productivity is below expectation due to climatologic impact and inefficient
use of fertilizers.
o Composition of plant maturity is not optimal. The replacement ratio of palm oil
plantations is 25 years so 5% should be replaced every year, which is
currently not the case. This is further complicated by the sub-optimal
condition of factory and processing units.
o These operational challenges adversely impact PTPN’s productivity.
 Cost challenges
o Excess labor costs as a result of the duty to create jobs, which simultaneously
conflicts with the objective of making profits.
o High production costs due to outdated and inefficient technologies.
o High debt interest expenses for subsidiaries. In fact, a number of subsidiaries
is not even bankable.
o These cost challenges reduces the competitiveness of downstream and
upstream activities.
 External challenges
o Plantation area declines due to physical limits, particularly because of
urbanization and the proximity of many palm oil plantations to urban areas.
o Property right extension takes a considerable amount time due to
bureaucracy.
o Conflicts with local communities as they claim their right to land ownership.
o The EU Parliament Resolution on Palm Oil and Reforestation of Rainforests
and strong regulations on the content of MCPD organic chemical compound in
palm oil do not directly impact PTPN’s sales as most of its products are
consumed domestically. However, it may mislead perception and give a
negative image of Indonesia’s palm oil sector, which may lead to CPO prices to
drop, eventually resulting in a loss of income of palm oil smallholders, higher
unemployment rates, higher imports, and a lower tax revenue. In fact, the
Indonesia developed the Indonesian Sustainable Palm Oil Scheme (ISPO)
scheme to counterbalance this.447
446 Interview conducted with PT Perkebunan Nusantara III in Jakarta, July 12, 2017
447 Interview conducted with Ministry of Agriculture in Jakarta, July 13, 2017