2 November 2014: Sime Darby Indonesia plantation listing / spin off?

It will not be surprising under Indonesia regulatory and economic nationalistic climate to see several foreign-owned plantations interested in domestic listings / spin offs.

Sime Darby may spin off Indonesian plantation assets Posted on 27 October 2014 - 05:39am; PETALING JAYA: "Sime Darby Bhd, which in the midst of talking to investment bankers to list its motor division in Malaysia, is considering listing or spinning off its Indonesian plantation assets in Indonesia next.... "This move could come in the form of an initial public offering (IPO) or a reverse takeover (RTO)," said RHB Research analyst Hoe Lee Leng...  Sime Darby told investors at Invest Malaysia Hong Kong (IMHK) recently that it is the group's strategy to continue to contemplate various options, including spinning off/listing its core divisions.... How said the listing or spin off of the Indonesian plantation division could potentially be in the form of a tie-up with an Indonesian partner which has a sizeable plantation landbank, which would be injected into a listed entity.... "This would help the company, as the Indonesian government has limited ownership by foreign companies to no more than 100,000ha of plantation landbank per company, as this ruling is not applicable to listed entities (presumably listed in Indonesia).... "A listing on the Indonesian exchange would also bode well for Sime should the Indonesian Government tighten regulations with regards to the foreign ownership of land," Hoe said...". http://www.thesundaily.my/node/278331


6 October 2014. Likely facing pressure for future Indonesia-listings, plantation interests point to problem of domestic funding - higher capital costs
Businesses breathe sigh of relief on new law by The Jakarta Post, Jakarta | Business | Fri, October 03 2014, 8:31 AM; "Plantation industry players breathed a sigh of relief as the House of Representatives canceled a plan to cap foreign ownership in local plantation firms at 30 percent.,,, Indonesian Palm Oil Producers Association (Gapki) executive director Fadhil Hasan also welcomed the new law as it handed over the determination of the cap level to the government.“We expect the government regulations to also [limit foreign ownership based on] the type of commodities or crops,” he told The Jakarta Post....... Understanding the government and the House’s intention to protect local and smaller companies, Togar Sitanggang, chairman of the Indonesian Oleochemical Manufacturers Association (Apolin), said most domestic plantation firms were either owned by foreign-listed companies or controlled by one or more foreign shareholders. Expensive financing from domestic banks was the main reason that forced local plantation firms to be listed abroad or to find foreign suitors, said Togar, who is also a senior manager at biofuel maker PT Musim Mas, citing Golden Agri-Resources Ltd., which owned Sinar Mas Agro Resources and Technology (SMART) and Bumitama Gunajaya Agro of the Singaporean-listed Bumijaya Agri Ltd. as examples...." http://www.thejakartapost.com/news/2014/10/03/businesses-breathe-sigh-relief-new-law.html


30 September 2014. Foreign limit will be set by regulations.

New plantation law limits foreign ownership by The Jakarta Post, Jakarta | Business | Tue, September 30 2014, 12:01 PM; http://www.thejakartapost.com/news/2014/09/30/new-plantation-law-limits-foreign-ownership.html; "The House of Representatives on Monday passed the plantation bill, which sets stricter rules on foreign ownership in the plantation sector so as to prioritize smaller local investors.... The limitation is to have no specific percentage value, although the House’s Commission IV has previously demanded a 30 percent foreign ownership cap. Instead, the law allows the central government to limit direct foreign investment in Indonesia’s growing plantation sector.... through government regulations (PPs). The limits, according to the new law, are to be based on the type of crop, the size of the producing company and certain geographical conditions.... A strict foreign ownership cap would discourage foreign investment in the upstream plantation sector, but a less stringent one, made general by the new law and specified by a PP, would be acceptable, according to the Agriculture Ministry’s director general for plantations, Gamal Nasir... The existing foreign plantation companies will be required to comply with the new law after their period of licensing of rights to cultivate land (HGU) has ended, the law stipulates....  The new law also regulates the scope of plantation areas and land concessions according to a number of variables, such as the type of crop grown, the company’s factory capacity, the area’s population density and certain geographical conditions. These points too will be detailed in PPs.... The central government will also have the right to turn over state-owned forests and abandoned plots of land to plantation owners. But the law also requires plantation owners to conduct discussions with indigenous residents over plots of lands to be acquired.... In order to develop the sector, the law also encourages cooperation in research and development between foreign and domestic individuals, businesses and universities, as well as between central and regional administrations.... Firms have been given five years to comply with the new law....  While praising some points of the law, such as the foreign ownership restriction, Indonesian Rubber Association (Gapkindo) chairman Daud Husni Bastari said the law did not properly support smallholders and criticized the lack of measures to mainstream the smallholder basis of plantation management...."

"Indonesia passes plantation bill but..." by CIMB September 30, 2014 says that "We are slightly surprised that the bill went through despite the tight deadline. However, we are not too surprised that the 30% foreign limit rule was omitted given that it could significantly hurt future foreign investment in Indonesia. Overall, we view the latest news to be slightly positive for Malaysian- and Singapore-listed plantation companies as they will be able to maintain their existing stakes in plantation assets in Indonesia. However, we expect Malaysian planters to be more cautious about future expansion in Indonesia in view of the foreign ownership risk...."


29 September afternoon. It's the day for the Indonesian Parliament to vote on the new Plantation Bill. As expected, Jakarta sources confirm that the worrying 30% foreign ownership limit article is dropped. We'll have to check out the final version in detail for all the regulatory shifts to come.

16 September afternoon. More reader feedback on Plantation Bill, SGD 1.95 million fines for role in Riau fire, forest boundary 5-year limit for complaints?

Feedback from another senior industry manager in Jakarta on the strike off of the foreign ownership clause from the upcoming Plantation Bill: "Thanks for the (Kontan) newslink. The discussion is on going and not yet decided...."

Malaysia reader points out: Is it off? I am not sure. My sources tell me the only thing changed is that the figure of 30% has been removed and will not be legislated. So, is it then open ended? Who then will have the power to decide the level? This is even worse than before if it stays open ended.

Another Jakarta reader highlights this news link: Pembatasan Kepemilikan Asing Dicoret; Kontan  | Selasa, 16 September 2014; Hasil rapat dengan pemerintah dan DPR memutuskan mengeluarkan aturan maksimum batas kepemilikan asing di RUU Perkebunan; which talks about Minister of Agriculture Suswono seeking a delay to the Plantation Bill, and noting that policy for palm oil should be distinguished and separate from other crops....

Plus an alert from a reader based in Singapore: On the issue of fire, have you seen this, http://news.asiaone.com/news/asia/malaysian-firm-fined-executives-get-prison-role-forest-fires; "...The Pelalawan District Court in Riau sentenced ADEI general manager Danesuvaran KR Singam to a year in prison and the option of paying Rp 2 billion (S$210,000) or serving an additional two months in jail for violating Article 99 (1) of the 2009 Environmental Protection and Management Law. "The defendant was negligent in his supervisory role of the estate. He should have actively prevented irresponsible parties from slipping into the estate and setting the fires," presiding judge Donovan Pendapotan said. Danesuvaran, however, was not sent directly to prison after the hearing. "We need to wait for a final and binding verdict from the Supreme Court before sending the defendant to prison," said prosecutor Banu Laksmana, adding that the prosecutors would appeal the sentence. The court found ADEI guilty of violating the same article in the 2009 law and handed down a Rp 1.5 billion fine or see its director, Tan Kei Yoong, serve five months in jail. The court also ordered ADEI to pay an additional Rp 15.1 billion to repair the environmental damage caused by the forest fires...." **Total fines and repair charges for the fire = Rp 2 + 1.5 + 15.1 billion = Rp 18.6 billion or about SG$1.95 million?

Other regulatory news:

•  TATA BATAS HUTAN - Kuntoro: Jangan Berubah Terus; Kompas | Selasa, 16 September 2014; the process of affirming Indonesia's forest areas is now said to have reached 68% but under current regulations, the boundaries can still be adjusted for complaints without time limitation. Thus, UKP4 (Presidential Working Unit for Supervision and Management of Development) has suggested a time limit for five years to reduce this uncertainty for the public, government and development interests.

16 September morning. Troublesome foreign limit clause cut amidst heavy contestation? The Plantation Bill's worrying foreign ownership clause was strongly opposed by plantation business groups (several very large ones are foreign-listed in Malaysia and Singapore). However, Jakarta news report that others such as rubber producers (dominated by smallholders) point out insufficient smallholder support in the Bill and suggest the need for land reform to favour this group. The divergence between big business and domestic sentiment is increasingly apparent. Interestingly, I had a chat yesterday with an analyst familiar with the Jakarta banking sector; and he also noted the strong support for foreign ownership limits and selldowns among professionals in that sector. This is akin to the sentiment held by domestic Indonesia professionals within the plantations sector too.

Just earlier this morning, I received via a senior Malaysia plantation manager a news alert that reads positively for Indonesia plantation FDI i.e. the removal of the contentious clause: "Parliament and government have agreed on the withdrawal of foreign ownership limitation. In the final discussion of Agriculture law revision No. 18/2014 that was held yesterday, Parliament and government have agreed on the withdrawal of 30% foreign ownership limitation...." (attributed to Kontan, which I could not find online earlier - but since updated for 12 noon by reader (thanks Ibu Y) its location here: http://industri.kontan.co.id/news/pelaku-usaha-perkebunan-kini-bisa-bernafas-lega/2014/09/15; "Plantation business players are now able to breathe - Commission IV decides to eliminate the foreign ownership limit points of at least 30 %.. and quotes Vice Chairman of Commission IV Herman Khoiron on Monday 15 September on worries on foreign exchange, investment and ability of domestic business to replace foreign capital). However, on checking with a Jakarta source closely linked with the Indonesia Parliament this morning, the reply was that the clause has not been removed yet. Thus, the status of this clause has been quite contested?

Obviously, the Bill is an increasingly heated topic as Parliament is reported to have set 29 September 2014 as the date for its ratification at its plenary meeting. There are many clauses that adjust current business regulations - including the wide definition of "group" of companies for the ownership ceiling. Experts also point to a little known land ceiling adjustment in the Land Bill, and also new policies within the Native Customary Rights Bill.


Earlier news headlines:

Business groups oppose plantation bill by Linda Yulisman, The Jakarta Post, Jakarta | Business | Fri, September 12 2014, 7:39 AM, JAKARTA. "Plantation business groups have voiced their criticism toward the plantation bill, which is now in final deliberations at the House of Representatives, saying that it will hurt the business climate for plantation firms as well as growers. The bill, a revision to the 2004 Plantation Law, comprises restrictions on foreign ownership and the scope of plantation areas, stipulates punishment for land burning and encourages more local engagement. The House expects to pass the bill later this month... Indonesian Palm Oil Producers Association (Gapki) executive director Fadhil Hasan said on Thursday that the group strongly opposed the 30 percent foreign ownership cap as it would erode Indonesia’s competitiveness as an investment destination in the sector... Apart from capping foreign ownership shares, the bill also restricts land ownership by a plantation group to a maximum 100,000 ha. It also requires plantation firms to cooperate with growers by allowing them to hold a 20 percent share... The bill also requires local processing industrial firms relying heavily on imported raw material to open plantations to support their operation. For instance, a sugar refiner sourcing raw sugar overseas will have to build its own sugar cane plantations within three years of its operation... It also gets tougher on plantation owners or growers that commit land burning by imposing legal punishment on them... While appreciating some key points of the bill, such as the foreign ownership restriction, Indonesian Rubber Producers Association (Gapkindo) chairman Daud Husni Bastari also raised his objections, particularly with regard to the bill’s weak support for small holders and lack of measures to mainstream the smallholder-based perspective in plantation management. “What we need is land reform, which the bill still lacks. We also don’t see that the bill sufficiently sides with smallholders who should play a dominant role in managing plantations,” he said. Daud further said that the bill should have provided a specific land arrangement for smallholders the way Malaysia did with its authority for smallholders, the Rubber Industry Smallholders Development Authority (RISDA)..." http://www.thejakartapost.com/news/2014/09/12/business-groups-oppose-plantation-bill.html

Plantation, property firms oppose land bill over expansion plans by The Jakarta Post, Jakarta | Business | Wed, February 26 2014, 12:03 PM; "House Commission II member Budiman Sudjatmiko said that the capping was necessary to help prevent unjust land distribution. “This bill is a breakthrough as it would end land conflicts, which are mostly caused by unjust land distribution.”  Budiman quoted data from the National Land Agency (BPN) showing around 56 percent of national assets — 80 percent of which was land — was controlled by only 0.2 percent of the population." http://www.thejakartapost.com/news/2014/02/26/plantation-property-firms-oppose-land-bill-over-expansion-plans.html


9 September. SBY wants to crush proposed foreign ownership clause? His view was not known earlier (Jokowi did a slightly discouraging side stepping) and it was highly likely that there would be lobbying on this multi billion dollar matter.
19 August 2014 afternoon. Thanks to several readers for discussing this new proposed bill.

An Indonesia policy analyst notes that the Indonesia media has not ran with this story since Reuters broke it on Friday. This may be regarded as maneuvering by the outgoing legislators as the draft bill (RUU) is apparently not in a format ready to be passed. The RUU corroborates the Reuters report, but conditions for foreign investment appears unrefined and includes a clause allowing foreign investment in the sector only if it involves new technology (Article 70).

There are doubts this can be enacted in the short-term, especially in its current draft. Bloomberg reports that Parliament has not tabled it yet as it hasn’t received a letter from the President. However, there is a rush to table this before the next administration comes in. If not, the new parliament will have to redraft the bill (newslink: Aug. 19 (Bloomberg) -- Bloomberg’s Alia Karenina reports on a draft bill by Indonesia’s government that would limit overseas land investment in the nation to protect small business. She speaks on “On The Move.” http://www.bloomberg.com/video/indonesian-palm-oil-plantations-may-face-ownership-limits-0F8VyMUmSJWXJu6X~w6q2Q.html).

Indonesia business consultants note that Jokowi is generally pro-business and pro-investment, and that his key priority is to lower fuel subsidies and to boost state income with tax reforms. Thus, as economic and fiscal status is the priority, some think that foreign investments limits would not be a priority at this point. A bigger concern for natural resource concessionaires (plantation, forestry and mining) will be stricter environmental regulations, tax compliance and such.


19 August 2014 morning

Khor Reports comment: This has been percolating for a while. I last spoke to friends in Indonesia palm oil about this back in March. We'll have to look into the details, including the schedule for the Indonesia Parliament vote on this bill and understand what discretion the incoming Presidential administration will have if it happens to be passed before the new President is installed (assuming Jokowi-JK have a differing view on this, which remains to be determined). If this is found to be the political consensus*, then as always, implementation and the details are everything. The 2009 changes to the mining bill were fundamental but were only strongly rolled out for implementation in 2013 (much to the surprise of the mining sector!). There are already retrospective foreign ownership limits with 4-year sell downs in place for the Indonesia horticultural sector. Also, many will recall Malaysia's own history and policies on such limits which may prove awkward in counterarguments. Analysts note that many Malaysian plantations** will be badly affected if this policy is put in place.

*We may want to note the wide readership that Thomas Piketty's "Capital" is getting among political economists and policy makers; http://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century . While it is generally pooh-poohed among international capitalists and mainstream financial media, it offers much grist for the mill of nationalistic policy makers on the fallacies of foreign ownership.
**For a breakdown of foreign plantation group exposure in Indonesia, check out AmBank's 14 August 2014 report.

Our other postings on this topic with some contextual information and recent Malaysia investor sanguine views:

• At the sidelines of POC 2014: (1) on new Indonesia regulations (update), /khorreports-palmoil/2014/03/at-sidelines-of-poc-2014-1-on-new.html: "The number one producer of palm oil in the world has been making some speedy and decisive changes in policy in the last few years. A key example was the deployment of the new biodiesel policy.... The advancing proposal for a 30% foreign equity ownership limit (revision of Law No. 18 Year 2004 on Plantations) in Indonesia was talked about. Could this happen before the end of the current Presidential term this year?...
•  Interview #2 Presidential race heats up, foreigners worry? /khorreports-palmoil/2014/07/interview-2-presidential-race-heats-up.html; "...some Malaysia investors seem relatively sanguine about business regulatory changes. They note that while the candidates may sound more nationalistic in campaigning and new regulations may seem tough, the implementation usually ends up more practical and business-friendly...."  

Newslinks:

New Indonesian plan to limit foreign ownership will hurt Malaysian firms by yvonne tan, updated: Tuesday August 19, 2014 MYT 7:18:05 AM; "Malaysian planters will be the biggest losers if Indonesia decides to restrict foreign ownership of plantation companies there to not more than 30% from the current 95%... “The proposal will have the biggest impact on Malaysian-listed companies, as most of them have gone into Indonesia in a big way and are highly dependent on Indonesian operations for future growth,” UOB KayHian Research told clients in a report... Some of the local companies with Indonesian operations include Sime Darby Bhd, Kuala Lumpur Kepong Bhd (KLK), Felda Global Ventures Holdings Bhd, IJM Plantations Bhd and Genting Plantations Bhd... Nevertheless, analysts pointed out that it was still early days for the policy, with Indonesian lawmakers still studying the possibility of limiting foreign ownership in the plantation sector.


Indonesia lawmakers draft bill to slash foreign ownership of plantations By Michael Taylor and Yayat Supriatna; JAKARTA  Fri Aug 15, 2014 3:04am EDT; Aug 15 (Reuters); "Indonesian lawmakers are looking to restrict foreign ownership of plantations to no more than 30 percent, as the top palm oil producer tries to maximise land usage, protect indigenous people and tighten environmental controls in the sector....Indonesia's parliament is looking to finish discussions on the draft bill with the government soon and expects it to be approved before the new administration is in place, Gamal Nasir, director general of plantations at the agriculture ministry told Reuters....
If the draft bill becomes law, it would be retroactive for companies that already own plantations, said Herman Khaeron, an influential lawmaker and vice chairman of the parliamentary committee for agriculture, forestry, fisheries and maritime... This interpretation was rejected by agriculture ministry and industry officials. Firms would be given five years to comply with the new bill, according to a copy of the draft seen by Reuters, and those that refused to comply may face fines, temporary suspensions or the revoking of licenses...." http://www.reuters.com/article/2014/08/15/indonesia-plantations-law-idUSL4N0QL1X620140815