Rebuilding Sugar Industry In Indonesia

Rebuilding Sugar Industry in Indonesia: A Personal Reflection Agus Pakpahan1 What does economic theory tell us about policy choice that we have to take to underline economic development in developing countries? It is almost certain that we have to use the framework of competitive advantage of our position within the global economic situation. When we use this framework we will find that Indonesia has not fulfilled the requirement of competitive advantage criterion. In fact, this answer was the recommendation of the IMF to Indonesian government in the 1998, namely, it was recommended that inefficient sugar industry in Java should be closed or moved to outer islands. Most of policy makers and the management of State Owned (SO) sugar industries at that date believed such a recommendation was a right recommendation should be followed by immediate action2. We conducted an analysis of performance of State Owned sugar industries in Java in 1999. We found that according to the following criteria: (i) the sugar productivity at least 6 ton/ha, and (ii) cost of sugar production did not exceed Rp 3200/kg. We found that there were 20 % out of SO sugar industries were still efficient. We realized that it is true that out of 80 % of sugar industries in Indonesia were either technically or economically or both not efficient. The main question that was raised at that time was whether sugar industries should be closed to follow IMF recommendation or not. We realized that Indonesia is a small sugar producer in the global context and Indonesia 3 was a second largest sugar importing country in the world in 2000. However, Indonesia as the fourth largest populous country is endowed by natural resources, people and culture that had been associated with sugar for a long period of history. In fact, Indonesia experienced as a 1

Deputy Minister for Agroindustry, Forestry, Paper, Printing and Publishing, Ministry of State Owned Enterprise, Republic of Indonesia and Chairman of Indonesia Sugar Community Forum (Forum Masyarakat Gula Indonesia); and, Director General of Estate Crops, Ministry of Agriculture (1998-2002). 2 Actually, the IMF recommendation was shortly followed by the closing of 5 sugar mills in Java. 3 USDA showed that the world produced 138.8 million ton of sugar in 2002/2003 and Indonesia’s sugar import at this date was about 1.5 to 2.0 million ton, as a second largest sugar importing country.

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second largest exporting countries in the world in 1931. Indonesia has limited option to give her people jobs and income in the near future, except from agriculture such as sugarcane. There had been pros and cons policy proposals regarding the above IMF recommendation.

However, the proposals to close sugar industries had been much

stronger than the opposite option, especially the proposals that came from economists. The main argument was that importing sugar was cheaper than producing domestic sugar. It could be true for a short period of time, but we would like to learn what has been experienced by Brazil or Thailand, for example. The emergence of high fossil fuel price and food price in recently showed that we have to make a second thought for too much rely on our basic needs to international market. Furthermore, creating a new job is one of the most difficult tasks and sugarcane industries in Indonesia provide a significant jobs and income opportunities especially for rural families. Therefore, the strong opponent to the close option mainly came from sugarcane farmers. This paper will shortly describe the evolutionary process of the interplay between pros and cons groups to close sugar industry in Java. Up to now, in some respect the cons have won the battle4. Even though sugar revitalization policy has been enacted by government, we should note that the road to rebuild domestic sugar industries has not been smooth and still facing hard challenges up to now. Sugarcane Farmers Association as New Source of Power in Development Political reform in 1998 opened new opportunities and challenge for Indonesian. One of the most important changes for Indonesian was the opportunities for sugarcane farmer to send their voices to government. When BULOG’s monopoly right on sugar was abolished in 1998, farmers took their own sugar and they sold their sugar by themselves. At this time, sugar price was quite good. However, price of sugar in 1999 started to decline even though domestic sugar production in Indonesia at this time was only 1.49 4

A simple indicator to support this view is that there are proposal to build two new sugar mills in East Java and one closed sugar mill in Central Java in 1998 has been restarted to operate now.

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million ton, the lowest production of sugar in our history. The decline of sugar price was due to huge import of sugar including raw sugar that was directly sold to consumer market. In addition, sugar smuggling was also almost uncontrolled. The result was a situation that gave very difficult time for sugar industries and sugarcane farmers in Indonesia. Sugarcane farmers sent their voices through varieties of form, one of them are they made frequent demonstrations to policy makers. To respond to farmers’ voices, government enacted farmers’ sugar price subsidy, namely government provided the difference between market price and a government determined sugar price if market price was lower than that of a government determined sugar price. In 1999 a government determined sugar price was Rp 2500/kg and it was increased to Rp 2600/kg in 2000. Luckily sugar market prices at those years were higher than the government determined sugar price. So, the available subsidy fund had not been used. I made a closed relationship with sugarcane farmers since at the beginning they made moves. I considered their roles were not only important but also it was their right should be supported by government, especially by Ministry of Agriculture where I was a Director General of Estate Crops at that time. Since beginning of farmer movement I suggested to sugarcane farmers leaders that they need to form their organization. In 2000 sugarcane farmers association was established in Boyolali, Central Java. Mr. Abdurachman Wahid as President of Republic of Indonesia at that time witnessed the proclamation of sugarcane farmers association which was named Asosiasi Petani Tebu Rakyat Indonesia (APTRI). Influence of Sugarcane Farmers Association in Policy Change and Innovation Sugarcane farmers association became a strong pressure group for policy changes in sugar policy in Indonesia. Two leaders of this association, namely Mr. Arum Sabil and Mr. Abdul Wachid, became a member of Dewan Gula Indonesia (Indonesia Sugar

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Committee) which is chaired by Minister of Agriculture. Therefore, sugarcane farmers do not only involve in mass movement but also in sugar policy formulations. Sugarcane farmers association played an active role in business innovation. One of the most influential innovations was that they have successfully made transformation of a government sugar price subsidy scheme, namely from subsidy that was financed by government, to price support scheme that was financed by private sector. In this scheme, government earned income from import tariff and tax due to domestic production increase. Given unfriendly international sugar market, and given lack of financing capacity of government, it was very important to control and stabilize domestic sugar price that give fair sugar price to both farmers and consumers. In addition, Indonesia still needs to import sugar for filling the gap between domestic sugar consumption and domestic sugar production. In order to control sugar import in one hand and to make sugar import as incentive to induce domestic sugar production on the other hand, government changed sugar import policy from a liberal market scheme to a controlled sugar import scheme. The main policy is that treating sugar as a special commodity and giving right to import white sugar to sugar industries that process at least 75 % out of cane that has been produced by sugarcane farmers. So, there is a directly link between sugar import and sugar domestic production. Given this scheme government calculate the amount of imported sugar every year and make a yearly target of sugar production increase. This policy change has been strongly influenced by sugarcane farmers’ movement. At micro level, sugarcane farmers association invented a new cooperation scheme with major sugar traders. The main objective of this cooperation was that to determine who partners of farmers are and how much price support received by farmers from their private traders. I, as a government official, took a part as a facilitator of the above process. We conducted a series of meeting to discuss what actions to be taken and what targets to be

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achieved. Farmers proposed a term of reference for cooperation to parties that have interest to cooperate with sugarcane farmers. The period of this stage of process was undertaken between 2000 and 2002. It was fortunate that Sugarcane Farmers Association, who worked in cooperation with PTPN XI, was able to create a partnership system with traders which were applied in 2001, as a result of hard work in 2000. With a leadership of Mr. Arum Sabil, APTRIPTPN XI established a partnership with PTPN XI and with PT. AGS ( Artha Guna Sentosa) that had passed a long and transparent process of selection. They invented a formula of cooperation as follow: Price formula. All parties involved made forecast for one-year sugar price a head. International sugar price movement was considered as a major external shock that parties should be able to control it. A minimum and assured predetermined sugar price received by sugarcane farmers was determined and agreed. This price level was a break-event price level point for average farmers’ productivity that was estimated by a team composed of experts from Bogor Agricultural University, Gajah Mada University and Brawijaya University. The formula was as follow: FP = α + β (AP – α), ………………………………… (1) FP is price received by sugarcane farmer (Rp/kg) which is determined by α, namely an agreed minimum price level that is assured to be received by sugarcane farmers; and β is a share of margin between auction price (AP) and α. For example, the value of α and β in 2002 were Rp 3410/kg and 60%, respectively. So, in 2003, based upon the agreement established in 2002, the minimum price of sugar that would be received by farmers was Rp 3410/kg and the minimum sugar price in 2008 is Rp 5000/kg. A shared margin, β, reflects a very important implication. If we denote ɵ a share of the margin received by traders, then:

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ɵ = 1 – β …………………………….(2) Let us take an illustration. If value of margin between a predetermined price and auction price is Rp 200/kg, and β = 0.6, so ɵ = 0.4. Therefore, Rp 80 out of Rp 200 per kg of sugar transacted (40 % out of total margin) went to traders. The benefit received by farmers was Rp 120/kg. So, farmers spent Rp 80/kg in order to get Rp 120/kg above their predetermined agreed sugar price. Within this framework, farmers spent about Rp 160 billion for 2 million sugar production. This number can be viewed as an implicit direct contribution of farmers to sugar price stabilization a year. Converting the role of Sugar Traders to Sugar Traders and Investors As I mentioned above, major sugar traders have transformed their roles from trading only sugar into combining trading and investment. First of all they established a quasi “future trading” where farmers received a minimum price level that assured by the traders who establish a partnership with farmers. The result is price of sugar relatively stable in a given year. Within one year sugar price stabilization, where milling season in Java is started in May and ended in October (6 months), and off season between October-April, farmers spent about 40 % of price margin between farmer minimum price and auction price. This 40 % of that margin is a source of fund for the traders to keep price of sugar stable across the seasons. This model has been successful. State Owned Corporate Culture Change Sugar production in Indonesia is still dominated by SOEs. In line with reformation era and the emergence of sugarcane farmer movement, there have been cultural shifting in SOE sugar companies. The main cultural shift is that SOEs see farmers as their partners instead of sugarcane suppliers such as main view of them in the

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past. This cultural shift is important for making synergy environment among farmers, sugar mills and traders that creating better cooperation in handling problems. One of the most important implications of cultural shift in the mind of SOEs is their roles in making the mills give better services to farmers, play as a bank avalist (guarantor) for farmers’ loan, and provide better technical assistance to farmers. We can identify that the more intense the shifting corporate culture toward partnership with farmers, the better sugarcane supply will be. A simple indicator to prove this argument is that there will be excess supply of sugarcane that goes to a better SOEs sugar mill. We have to note that the main issue in the early 2000s was that there was lack of sugarcane supplies went to sugar mills. But, now especially in East Java, there is too much sugarcane already than the capacity of SOEs sugar mills to process. Major work of SOEs sugar companies now is how to revitalize their capacity and to improve their productivity and efficiency. Farmers Leader as a Member of Indonesia Sugar Committee Since 2002, sugar cane farmers association leader, namely 2 persons, became member of Indonesia Sugar Committee (Dewan Gula Indonesia). Therefore, farmers have a room for communicating and making decision in national sugar policies. The Chairperson of Indonesia Sugar Committee is President of Republic of Indonesia and daily operation of Indonesia Sugar Committee (ISC) is chaired by Minister of Agriculture. This is a key for successful sugar reform in Indonesia. The inclusion of sugarcane farmers in ISC membership has changed a pattern of sugar policy decision in Indonesia. This model has inspired the inclusion of farmers’ interest in other commodities such as tea farmers. The Emerging Indonesia Sugar Community Forum

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The establishment of Indonesia Sugar Community Forum (Forum Masyarakat Gula Indonesia, FMGI) can be seen as a starting point of the improvement of communication process across sugar communities in Indonesia. This Forum was established by almost all groups of sugar communities in Indonesia. The main roles of the Forum are to create a better environment for making creative and productive communication among all parties. One of routine activity of the Forum, besides conducting meeting and discussion or making lobby, conducts a yearly award forum for the best sugar mills in Indonesia. We learned that this forum has significant impact in stimulating positive competition among sugar mills in Indonesia. Changing the Trend One of the most important variables that influence economy is price. The world has been experiencing the declining sugar price for a long period of time. This is due to huge subsidy that has been given to farmers in the developed countries. The impact to sugar industry in developing countries such as Indonesia has been tremendous, namely declining of national sugar production. The lowest production level in Indonesia was 1.49 million ton that happened in 1999. Political reform in 1998 has induced sugarcane farmers movement that created a new frame of sugar policy in Indonesia. Free trade policy that was taken in 1998 has been replaced by protection policy. However, the protection policy at this time was very different from the previous protection policy, namely the new protection policy has tighten sugar import policy with domestic sugar production directly, namely sugar import license only given to sugar companies that at least process 75% of sugarcane produced by farmers. Therefore, sugar import and sugar smuggling that have flooded Indonesian market relatively have been controlled. Managed sugar import has provided a situation that produced incentives for investment in sugar domestic production.

It was started by increasing farmers

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participation in increasing intensity of better farming practices or rebuilding their sugarcane plantation. Government also applied a new tariff scheme. We observed that we have been able to make a turning point, namely from downturn to up-turn trend. We see production of sugar has increased from 1.5 million ton in 2000 to 2.7 million ton in 2008 (prediction). (See Fig.1). In term of world’s production sugar, Indonesia’s sugar production is very small. However, in term of regional economies, especially for Java, sugar is one of the most important commodities. Sugar is important sector for farmers’ income, employment creation and its multiplier impact for the economy as a whole. Therefore, 5 year success in increasing sugar production has induced the establishment of new confidence, especially for achieving sugar self- suffiency in 2009. The new situation has also provided a new trust from banking institution to support investment in sugar industries. The plan of investment in revitalizing sugar industry in state owned enterprise group reached Rp 9.4 trillion for 3 years of investment. This revitalization is designed to improve the quality of product and to increase sugar productivity and system efficiency. One of the basic ideas here is how we can create total value from sugarcane: food, fiber, fuel and feed. This is the trend we would like to create in the near future. Emerging Challenges Good domestic sugar price has induced incentives for establishing new sugar refineries that depends their inputs from imported raw sugar. The established capacity that approximately reached almost 2 million ton could be viewed as a new threat for domestic sugar industries that depends their input from sugarcane planted by farmers. This threat is real at a present time such as indicated by the spreading of refined sugar in

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traditional sugar market even though government’s regulation is prohibiting the case to take place. Now, we are working hard to work out for solution from the above problem. In addition to reinforce the existing law and regulation, one of possibilities is to convert the present state owned sugar mills production, plantation white sugar, to raw sugar. The raw sugar produced by state owned enterprise will be used as a part of input for sugar refining industries.

Furthermore, we also would like to have materialization the idea of

revitalization of sugar industry such as mentioned above: how we can create total value from sugarcane: food, fiber, fuel and feed. Concluding Remarks Sugar is a very delicate commodity. The emerging ethanol as a new source of sustainable energy as a result of increasing price of fossil fuel has not been yet to influence significant improvement in sugar price in the world market. Incentives that can be gained from import, due to high subsidized sugar production systems in the developed countries, is still a significant threat for sugar producing countries such as Indonesia. We see that the role of farmers’ movement is one of the most significant factors in rebuilding sugar industry in Indonesia. Farmers can take initiatives and innovations of a new system hand in hand with private sectors in rebuilding sugar industries. Shifting SOEs corporate culture has also taken place and produced positive impact. A new self confidence is also growing and increasing sugar production has also been taking place. In fact, the basic issue that had been believed in the past, namely farmers could not produce a good quality and sufficient quantity of sugar has been rejected by the evidences that have been growing at least since 2002. It is not impossible or even feasible to rebuild sugar industry as long as right and consistent policy supports from government are assured in existence. Rebuilding sugar industry in Indonesia is one example.

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Sugar Policy and Sugar Performance 3,500,000

Fu In 3,000,000

2,500,000

( ton)

Ne pla

2,000,000

Sugar reform policy: tariff and production

Declining sugar price

1,500,000

Sugar price assurance

Free trade policy

Intensification sugarcane farmers

Ac on

Tahun

Produksi

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1,000,000

Konsumsi Rumah

Fig. 2. Evolution of sugar production in Indonesia in relation with major policy changes. Sugar reform policy has improved production performance, farmers’ incentive and has induced sugar industry growth.

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