Palm oil revenue sharing funds: A new source of infrastructure funding

This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

Bisnis Indonesia - Dana bagi hasil sawit: Sumber baru pendanaan infrastruktur

26 July 2023

By: Annasa R. Kamalina & Tegar Arief

The government has new ammunition to secure various infrastructure projects in the country. Most recently, policymakers at the central government have mandated local governments to use the Palm Oil Revenue Sharing Fund (DBH) specifically for the construction and maintenance of road infrastructure. 

This provision is set out in Government Regulation No. 38/2023 on Revenue Sharing Fund of Oil Palm Plantation which was promulgated and came into effect on 24 July 2023. 

Palm oil DBH is derived from the export duty imposed on palm oil, crude palm oil, and/or their derivative products based on the ministerial regulation regarding the determination of the export duty rate. 

In addition, it is also derived from the export levy imposed on palm oil, crude palm oil, and/or their derivative products based on the ministerial regulation regarding the determination of the export levy rate. 

Article 9 of the regulation states that the Palm Oil Revenue Sharing Fund (DBH) is used to finance activities that include the construction and maintenance of road infrastructure along with other activities determined by the minister. 

The substance of the regulation also refers to Law No. 1/2022 on Financial Relationship between the Central Government and Regional Governments (HKPD), which states that the use of DBH is determined by the central government. 

“According to the mandate, the use of palm oil DBH is directed primarily at infrastructure, especially roads,” stated Government Regulation No. 38/2023 as quoted by Bisnis on Tuesday (25/7). 

The government assumes that prioritising the use of palm oil DBH for road infrastructure can support the palm oil industry and increase countermeasures against negative external matters of the palm oil industry. 

In addition, it also helps realise better connectivity to support economic growth and public services. 

The Finance Ministry noted that the funds prepared by the government to be disbursed this year is not insignificant, reaching Rp3.4 trillion as stated in the 2023 State Budget (APBN), which is planned to be disbursed to 350 regions next month. 

The detailed formulation of palm oil DBH distribution to regions is 20% for provinces, 60% for producing regencies/cities, and 20% for other regencies/cities directly bordering producing regencies/cities. 

The Finance Ministry’s Director General of Fiscal Balance Luky Alfirman said that the funds received by the provincial government could reach around Rp1 billion–Rp82.1 billion, producing regencies/cities around Rp2.46 billion–Rp49.5 billion, and bordering regencies/cities Rp1 billion–Rp14.8 billion.

“Hopefully we can distribute it at the beginning of next month,” said Luky. 

Determining the use of palm oil DBH for infrastructure development certainly helps the central government with its fiscal limitations. 

Thus, part of infrastructure development is now borne by the regions even though the DBH comes from transfers from the central government. 

At a closer look, the HKPD Law and its derivative legal instruments are giving the central government full control over the expenditures spent by regional governments. 

The reason is to maintain the synchronisation of the national infrastructure programme and improve budget spending at the regional level.

Fiscal capacity

Nevertheless, this is quite challenging considering the different fiscal capacity of each region, so the obligation to allocate expenditure in specific sectors risks limiting the regional governments’ flexibility to manage their budget. 

The decision to focus the utilisation of palm oil DBH for road infrastructure is also contradictory to the spirit of fiscal authority which aims to increase DBH from other sources to strengthen regional fiscal capacity. 

This ‘coercion’ of expenditure allocation also risks hampering equitable development. The reason is that the regions are forced to use the palm oil DBH only for road infrastructure, whereas not all regions need road repairs. 

Regional governments still have the option to use these funds other than for road infrastructure. However, referring to Article 9 of Government Regulation No. 38/2023, the central government would still determine the allocation of oil palm DBH if the regions do not require road infrastructure construction and maintenance. 

Economists and observers of regional autonomy also suggested that the central government should be more flexible in determining the use of oil palm DBH. 

Moreover, the government regulation barely touches on the ecosystem of the palm oil industry, especially the development of human resources or workforce, to use the DBH fairly. 

“This must be noted. In addition, environmental preservation as a result of oil palm is also not discussed,” Executive Director of the Regional Autonomy Watch (KPPOD) Armand Suparman told Bisnis. 

In fact, the burden of infrastructure financing by regional governments concerns not only DBH. In the HKPD Law, the central government also applies a minimum infrastructure expenditure limit of 40% in the Regional Budget (APBD). 

Furthermore, the HKPD Law also expands access for regional governments to collect debt financing, including through the issuance of bonds and sukuk, which must be used to finance infrastructure development. 

On the correlation between central and regional infrastructure expenditure, the HKPD Law also regulates financing synergy, namely synchronising expenditure by ministries and institutions, Special Allocation Funds (DAK) expenditure, APBD expenditure, loans, and Public-Private Partnership (PPP). 

Economist at the Center of Reform on Economics (Core) Indonesia Yusuf Rendy Manilet assessed that this provision on infrastructure expenditure allocation is forcing regional governments to make changes from a fiscal perspective. 

“This is a challenge because the capacity of each region is different, so there are regions that need to work hard to fulfil this obligation,” he said. 

Considering the central government’s immense control over APBD, it seems necessary to negotiate with the central government so that the obligations under the HKPD Law can be implemented without hampering development in the regions. 

Otherwise, then the central government has full control over the management of regional budgets and risks undermining decentralisation as the result of Indonesia’s reform.