PPPs for Value Chain Development

Indonesia Case

Case description Subsector/ Value Chain PPP Purpose Palm oil Empowering village unit cooperatives Increasing farmer income Creating new economic growth centres in remote rural areas Investment US$16.7 million 37% public (subsidized loans) 63% private Extend oil palm cultivation in conflict affected areas

Partners Public Private National and local: Oversight by MOA’s Directorate General of plantations; Ministry of Co-operatives State owned bank Local government authority Private Processing company Establish nucleus estate Provide technical support Purchase all palm fruit Define ‘public good’ element in accordance with SEDPs Enabling environment: Regulations to protect land rights & land lease, concessions, rural infrastructure, support for rural institutions What did they not do? Consider other alternatives to PPP, be guided by balance of costs and benefits, compared with other alternatives – transaction costs and risk of failure

Roles of Public Partners Create a supportive regulatory environment with appropriate incentives for private sector investment and inclusion of smallholders Indonesia Estate laws and MOA regulations: …any oil palm plantation company willing to form partnerships with smallholder farmers will gain access to a minimum land area of 20 percent of the total plantation area and will have a business license extended for 35 years; …under MOA decree, any plantation company wishing to expand must involve farmer partnerships and each farmer must have a minimum of two hectares of land each.

Roles of Public Partners Promote the incorporation of risk-sharing/risk mitigation in the design process: Ensure risks are allocated in a way that transfers some of the risk away from smallholders and shares these risks between the public and lead private partner. Mechanisms: Subsidized interest on loans and bank guarantees Secure purchasing contracts Business management training for FOs Contingency funds – 10% of farmer income saved to prevent default during heavy rainy season

Roles of Public Partners Ensure regulatory compliance including the enforcement of land rights Contracts at all levels must meet legal requirements proof of land ownership for companies and smallholders formalized cooperative/FO status as legal entity ensuring that private parties are only providing nationally registered inputs Ensure implementation of environmental standards (RSPO) Monitoring of partnerships by local government supervise the partnership between cooperatives and companies monitor prices for raw materials attend annual meetings of cooperatives to share information on new regulations or policies

Impacts 2500 oil palm farmers in 5 cooperatives Gross annual income US$ 2 800/ha IPM implemented with reduction in chemical pollution Social benefits: increased education enrolments, permanent houses constructed and reduced crime Diversification into other activities: rubber plantations, bird raising. For co-ops: management skills and accounting improved; new local business opportunities including grocery stores and loan funds Estate RSPO certified, secure supply of raw materials.