Photo by Setara Institute.


The recent collapse in oil palm prices to some of the lowest levels ever seen has hit smallholder farmers hard. In April, President Joko “Jokowi” Widodo announced a ban on the export of crude palm oil (CPO) and its derivatives, in an attempt to address rapidly escalating cooking oil prices in the domestic market. The policy, which was quickly reversed in May, resulted in a drastic fall in the price of palm fruit, but had little impact on cooking oil prices.

The saga is illustrative of the poor governance that characterises the national palm oil industry, especially so-called “upstream” activities relating to plantations. The sector is the largest contributor to Indonesia’s foreign exchange earnings, but policy formulation often appears reactive, without any clear roadmap or efforts to prevent these kinds of problems from occurring. In the end, smallholders – and Indonesian consumers – lose out.

If the government wants to avoid another crisis in the future, it has a lot of work to do. Most of the pressing problems in the sector can be broadly grouped under the field of business and human rights, and relate to inequality of land tenure, poor welfare of smallholders and workers, and conflicts with local communities.

For example, according to data from the Business Competition Supervisory Commission (KPPU), smallholders comprise 99.92% of all oil palm growers but control just 41.35% of plantations. Meanwhile, private companies make up just 0.07% of growers, but control 54.42% of plantations. Since 2007, Indonesian law has required companies to dedicate 20% of any new plantation to local communities. But recent reports have suggested that of the 5 million hectares of plantations established from 2007 to 2021, only 635,000 (about 13%) have been designated for communities. This land inequality is a serious problem because it allows major corporations to dictate the terms of the market, while smallholders struggle.

Further, nongovernmental organisation Sawit Watch has estimated that 70% of the 10.4 million people who work on oil palm plantations are daily contract workers who work without guarantees of job security. The sector also faces major challenges with unequal treatment of women workers and child labour. In January, Indonesia was stunned by a shocking case of modern slavery in Langkat, North Sumatra, where more than 40 people were forced to work on an oil palm plantation without pay.

Conflict between palm oil corporations and smallholders and local communities is also widespread. The “Palm Oil Conflict and Access to Justice in Indonesia” (POCAJI) collaborative research project examined 150 cases of conflict between local communities (many of whom are also smallholders and farmers) and palm oil companies in Central Kalimantan, West Kalimantan, Riau and West Sumatra. It found that 63 of these cases (42%) involved arrests of members of the community. A total 789 community members were arrested, 243 people were injured, and 19 people died.

Few cases of conflict between smallholders and community members and corporations make it to the courtroom. Companies often attempt to establish plantations on land that communities have managed for years. But when smallholders and community members sue corporations to claim their land, they often lose because they lack strong legal evidence of ownership.

The Roundtable on Sustainable Palm Oil (RSPO) prepared a standard on Principles and Criteria for Production of Sustainable Palm Oil in 2018, in line with the UN Guiding Principles on Business and Human Rights. The RSPO is an international nongovernmental organisation of palm oil producers, retailers and civil society organisations that certifies palm oil producers and products for sustainability.

The RSPO principles clearly describe the state’s obligation to protect human rights, companies’ obligation to respect human rights, and efforts to expand access to remedies for victims, whether violations are caused by the state or companies. The 2018 standard calls on companies to apply due diligence and develop action plans to avoid human rights violations. The RSPO has developed a complaint handling system, intended to address violations by major corporations. But the complexity of the system, the costs involved, mistrust, and general lack of awareness mean that few smallholders access it.

In any case, the RSPO has shown that it has not been effective in resolving conflicts between companies and communities. The POCAJI research identified at least 64 cases of conflict involving RSPO member companies, but only 17 were reported to the RSPO – and just three of those were successfully resolved.

Existing laws and regulations have clearly not been able to protect the rights of smallholders and local communities when they deal with large oil palm companies.

The government has launched its own sustainability certification scheme, called Indonesia Sustainable Palm Oil (ISPO). It is now mandatory for companies to seek certification with the scheme, which claims to have the goal of developing economically viable, socially and culturally appropriate, and environmentally friendly palm oil. But there have been serious problems with the system. Its standards have been criticised for being insufficient to protect customary land, monitoring reports have been weak, and there is widespread evidence of non-compliance.

Jokowi has also issued Presidential Instruction No. 8 of 2018, which involved a moratorium on granting new permits for oil palm plantations. This policy was important not only for limiting deforestation, but also because it offered much-needed time to further strengthen land tenure governance and increase the productivity of smallholders. But the moratorium expired on 19 September 2021, and there is still no clarity about whether it will be renewed.

In terms of support for smallholders, the government has established the Indonesian Palm Oil Plantation Funds Management Agency (BPDPKS). One of its programs involves replanting smallholders’ plantations. But the budget dedicated to these activities is miniscule – most of the agency’s budget goes toward the development of biofuel. The major recipients of its funds are therefore large oil palm corporations, who are, of course, the source of most of the problems the sector faces.

Weak implementation of regulations in the palm oil sector is another major issue, and it often results in serious human rights violations, especially against smallholder oil palm farmers. Improving the situation for smallholders will require a cross-sectoral regulation based on the UN Guiding Principles on Business and Human Rights.

Fortunately, the Ministry of Law and Human Rights is aware of these problems and has begun preparing a National Strategy for Business and Human Rights based on the UN Guiding Principles, and has involved government, business and civil society stakeholders in discussions. It is urging Jokowi to issue a presidential regulation that will promote harmonisation of regulations and policies on business and human rights, and encourage access to remedies for those who have suffered rights violations as a result of business activities.

The regulation is late coming, and is not as progressive as other regulations elsewhere, such as the EU’s recently issued Directive on corporate sustainability due diligence. Even so, it offers hope local communities and smallholder farmers might one day be on a more even playing field with large oil palm companies.

Human rights and environmental activists have long highlighted serious problems with Indonesia’s palm oil sector. Recent government attention to business and human rights principles is promising. The government’s decision to ban palm oil exports hurt smallholder farmers and was a serious policy fumble. But let’s hope it will promote more serious efforts to improve the situation for smallholders and workers who have been victims of this troubled industry for too long.

, ,

We acknowledge and pay respect to the Traditional Owners of the lands upon which our campuses are situated.

Phone:13 MELB (13 6352) | International: +(61 3) 9035 5511
The University of Melbourne ABN:84 002 705 224
CRICOS Provider Code:00116K (visa information)