Asia Sentinel

Your Forest Could Be Next

Without doubt Indonesia possesses enormous potential to become a leading player or even to become the Brazil of Southeast Asia. So why does Indonesia find itself in 2009 with so little actually being achieved? Let’s be honest and admit that almost every segment of this industry has fallen well short of expectations despite the government and media hype. The answer is both simple and at the same time quite complex.

The simple answer is that there is little profit for institutional investors. At the end of the day the mighty dollar – or in this case the mighty rupiah – will always have the last say. Without profit you will not see private companies making the required investment into feedstock and processing facilities, especially in the difficult climate world wide.

If there was good money to be made then we would have seen a much greater level of production than we see now. Of the more than 50 projects approved for development in 2006, virtually none have made any really significant progress.

So why have the profit levels not been there? To an outsider the extremely high oil prices of 2008 should have generated a rush for biofuel development. But this did not happen. First the price of CPO, which is by far the largest current and potential biofuel feedstock in Indonesia, also rose to record prices. This meant that no economic benefit was created for biodiesel and companies continued to sell to traditional markets.

Secondly, until very recently the government has never spoken about creating a level playing field for biofuels versus the subsidized fossil fuels. It must be hoped that the recent talk of subsidizing biofuels to an equivalent level goes ahead.

This also leads to the requirement for a price setting structure so that investors know what they are going to receive for their product. It is somewhat difficult to conduct a full feasibility study without knowing the probable income flows!

Next we move onto the distribution systems. How will the biofuels be transported and stored? How and where will they be distributed? Until now biofuel is only available commercially in Jakarta, Surabaya and Bali. This is inadequate to meet the government’s mandates for biofuel mix, so this must be addressed with some urgency.

Comments (1)

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Is only big investment the way forward?
written by Ross Jaax, March 02, 2009

Tony, I agree with the lack of leadership and policy directives that is paralyzing the Indonesian biofuels industry. Actual investment is far below that which has been agreed. I don't think that large investment alone is the solution. The paper and pulp industry drives towards large economies of scale. This also requires large tracts of land. Having access to and rights over large tracks of land is problematic. Indonesia also needs to look at a start small and grow strategy. Let's get biofuel development and production progessing from smaller plants, needing smaller amounts of feedstock. This will take more support and coordination from the government, donor agencies, and local investors, but it will encourage Indonesia's abundant number of entrepreneurs to get involved and start building from there.

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