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					                 Improving the Livelihoods of
                 Palm Oil Smallholders: the Role of the
                 Private Sector
                 Prepared by FSG Social Impact Advisors
                 (commissioned by the World Bank Group)




THE WORLD BANK
Disclaimer
The opinions expressed in this document do not necessarily represent the views of the
World Bank Group or its member governments. The World Bank Group does not guarantee
the accuracy of the data included in this draft and accepts no responsibility whatsoever for
any consequence of their use. The boundaries, colors, denominations, and other information
shown on any map in this draft do not imply on the part of the World Bank Group any
judgment on the legal status of any territory or the endorsement or acceptance of such
boundaries.
                                                            Table of Contents

Executive Summary ...............................................................................................................................................2
1. Introduction.......................................................................................................................................... 5
            Context ........................................................................................................................................... 5
            Purpose and Methodology .......................................................................................................... 5
2. Characterizing the Palm Oil Smallholder ....................................................................................... 7
            Smallholder Overview.................................................................................................................. 7
            Structure of Smallholder Relationships ................................................................................... 7
            Geographic Differences ............................................................................................................... 8
            Smallholder Productivity and Income ...................................................................................... 8
            Smallholder Role in Certification ............................................................................................... 9
3. Smallholder Development Challenges and Successes .............................................................. 10
            Major Factors Affecting Smallholders..................................................................................... 10
            Agronomy ..................................................................................................................................... 11
            Supply Chain ............................................................................................................................... 14
            Enabling Environment ............................................................................................................... 17
4. Implications for Further Smallholder Development Efforts ..................................................... 22
            Trends in Private Sector Efforts .............................................................................................. 22
            Opportunities for Further Engagement .................................................................................. 22
            Recommendations for Prioritizing Opportunities ................................................................. 25
            Additional Implications for the Field ....................................................................................... 26
5. Conclusions ........................................................................................................................................ 27
Appendices ................................................................................................................................................ 28
            Appendix A: References ............................................................................................................ 28
            Appendix B: Sources in Figures .............................................................................................. 28
            Appendix C: List of Interviewees ............................................................................................ 28




                                                                                1
Executive Summary

Purpose of This Report                                     Factors Affecting Smallholder Livelihoods
This report provides an assessment of the                  While smallholder conditions and structures
private sector’s efforts to improve the                    vary significantly across and even within
livelihoods of smallholder farmers engaged in              regions, three major categories of factors
oil palm production. Palm oil is the world’s               affect smallholder livelihoods: agronomy,
most traded vegetable oil and the industry                 supply chain, and the enabling environment.
employs millions around the developing world.              Within each of these factors, there are
At the same time, palm oil production has also             significant needs to improve smallholder
resulted in significant controversy due to its             livelihoods.
potential effects on the environment, as well as
various social challenges. The challenges faced            Profiles of Private Sector Efforts
by smallholder farmers – those controlling 50
                                                           Palm oil producing companies have substantial
hectares or less of cultivated land – are
                                                           business interest in improving smallholder
especially acute.
                                                           productivity and livelihoods, and our research
                                                           identified several examples of private sector-
Addressing      these    challenges     requires
                                                           led efforts. In many cases, companies focus on
participation from the entire sector, including
                                                           providing support on agronomy issues via
donors, civil society, governments, and
                                                           technical assistance. For example, New Britain
corporations. We believe that corporations in
                                                           Palm Oil supports the provision of extension
the palm oil supply chain can play a crucial role
                                                           services to smallholders in Papua New Guinea
in improving smallholder livelihoods, given the
                                                           in order to improve productivity. Other
resources and expertise they bring. These
                                                           companies, such as Siat Group are involved in
efforts can both impact smallholder livelihoods
                                                           strengthening supply chain conditions by
and also benefit companies through greater
                                                           improving the mechanisms for smallholders to
yields and improved quality – a significant
                                                           access credit from oil palm mills. A few
opportunity to create shared value for the
                                                           companies are attempting to address elements
private sector.
                                                           of the enabling environment for smallholder
                                                           livelihoods: in Uganda, Bidco partnered with
This report was created to inform development
                                                           IFAD and the Ugandan government to develop
of the World Bank Group’s (WBG) strategic
                                                           a pricing policy that ensures a transparent and
framework for palm oil. Given the emphasis of
                                                           fair pricing mechanism for smallholders.
the WBG framework on addressing smallholder
needs, the findings of this report can serve as
                                                           This   paper profiles    several   smallholder
important guidelines for implementing future
                                                           development efforts, as depicted in the figure
activities. Our research consisted of 28
                                                           below.
interviews with a range of stakeholders,
including representatives from companies, civil
society organizations, industry associations,
and multilateral agencies, as well as secondary
research.


                    Agronomy                                            Supply Chain

                                                           Access to           Infra-
  Knowledge        Land Quality        Input Quality                                            Mill Access
                                                            Credit           structure

                                         Enabling Environment

   Organizing Structures          Legal Structures         Market Dynamics               Social Dynamics




                                                       2
                                            7
                                                Uganda and Ghana:
               2                                Ensuring Fair Prices
                   Brazil:                      (Multiple)                 1                 8
                   Comprehensive TA                                            PNG:              PNG: Gender
                   (Agropalma)                                                 Technical         Dynamics
                                                                               Assistance        (OPRA/NBPOL)
                                                                               (NBPOL)




    6
        Colombia:
                                                                           3
        Smallholder
                            5                     4                            Indonesia:
        Associations
                                Ghana: Inputs         Ghana, Gabon:            Hands-on
        (Fedepalma)
                                on Credit             Infrastructure           Management
                                (GOPDC/Siat)          (Siat Group)             (Musim Mas)



                       Agronomy                 Supply Chain           Enabling Environment

Trends in Private Sector Efforts                               •   Systems Matter: Few companies are
                                                                   working on enabling environment issues
Beyond the specific case examples of existing
                                                                   that can have large scale impact beyond
projects, our research identified several
                                                                   their own smallholders. Several companies
themes regarding the role of the private sector
                                                                   work on enabling environment factors in a
in promoting smallholder development:
                                                                   more limited way, for example, by
                                                                   strengthening associations among their
•   More Is Needed: Despite important efforts
                                                                   smallholders, or by addressing social issues
    by some companies, there is a need for
                                                                   in affected communities. However, few are
    significantly more engagement by the
                                                                   working on broad enabling environment
    private sector in order to address
                                                                   conditions, such as developing national
    smallholder livelihood challenges. There is
                                                                   institutional capacity related to extension
    a continued substantial gap between the
                                                                   and research. This theme stands in
    yields of smallholder farms and that of
                                                                   contrast to some other crops such as cocoa
    plantations, highlighting the need for a
                                                                   and rubber, where several initiatives are
    sustained focus on the development of
                                                                   under way that take systemic approaches
    smallholder farmers.
                                                                   to development.
•   Leadership Vacuum: Stakeholders could
                                                               •   Power of Partnering: Collaboration across
    not identify specific companies that are
                                                                   sectors is a critical component of many
    leaders     in     improving   smallholder
                                                                   existing efforts. While companies can play
    livelihoods in palm oil. In some other
                                                                   an important role in directly improving
    corporate      sectors,   such   as    the
                                                                   livelihoods of their associated smallholders,
    pharmaceutical industry, multiple leading
                                                                   there is significant potential for more
    companies model best practice approaches
                                                                   systemic challenges to be addressed
    to corporate social responsibility efforts.
                                                                   through multi-sectoral collaboration.
    The palm oil sector does not have widely
    accepted leaders in CSR related to
    smallholders.


                                                          3
Recommendations for Private Sector                          with large-scale benefits that can serve as
Engagement                                                  models for replication.
Significant opportunities exist for corporations        6. Measure      the   results   of   smallholder
to     commit     to   smallholder     livelihood          development efforts in order to learn
development in ways that link efforts more                 effectively to inform future projects.
closely with their business expertise and
priorities. As companies engage in future               Strategic Opportunities for the Private
investments      in   improving      smallholder        Sector
livelihoods, they should consider the following
                                                        Stakeholders suggest several        areas for
recommendations:
                                                        corporations     to     improve     smallholder
                                                        livelihoods. These include:
1. Identify opportunities for shared value
   creation that enhance the competitiveness
                                                        •   Creating new incentive structures that
   of a company while simultaneously
                                                            reward farmers for utilizing agronomy best
   advancing the economic and social
                                                            practices (e.g., paying farmers based on
   conditions in the communities in which it
                                                            appropriate fertilizer use).
   operates.
                                                        •   Working with financial institutions to
2. Prioritize   issues   that    leverage    the
                                                            develop appropriately-designed financial
   company’s core capabilities (e.g., providing
                                                            products for farmers (e.g., access to loans
   technical assistance in improving yields is a
                                                            with deferred repayment which do not
   core      competency      for     agricultural
                                                            require land titles as collateral).
   companies, while investing in road
   construction does not use companies’ core            •   Incorporating productivity improvements
   strengths).                                              into   steps   taken    toward   certifying
                                                            smallholders (e.g., incorporating stronger
3. Partner with other actors to achieve
                                                            technical assistance into the monitoring
   collective  impact,   working     with
                                                            required by RSPO standards).
   governments, NGOs, donors, or other
   companies to develop shared strategies
                                                        Donors and development agencies, such as
   rather than only pursuing individual
                                                        IFC, can provide incentives for the private
   projects.
                                                        sector to invest in innovative models and fund
4. Take advantage of the existing momentum              research efforts that encourage additional
   in the field on certain issues (e.g.,                investments.
   certification) so as to increase chances of
   success.                                             We hope that the opportunities presented here
                                                        will catalyze the field to take action on the
5. Consider the scale of impact of the
                                                        challenges faced by smallholders, leading to
   intervention, and focus on opportunities
                                                        improved smallholder livelihoods in the oil
                                                        palm sector.




                                                    4
1. Introduction

Context                                                  smallholders, share these examples with the
Palm oil is the world’s most traded vegetable            field, and identify opportunities for further
oil. It is produced more efficiently in terms of         engagement across the sector (by companies
land use than any other oil crop and has seen            as well as the IFC and other donors) in
global production double in each of the last             smallholder development.
three decades. Production is fairly vertically
integrated. The palm oil sector provides                 The research for this paper consisted of 28
income and employment for a significant                  interviews with a range of stakeholders,
number of individuals in developing countries.           including companies across the palm supply
Indonesia and Malaysia produce the bulk of the           chain, civil society representatives, industry
world’s palm oil, with Colombia, Thailand,               associations,   and    multilateral   agencies.
Nigeria, and Cote d'Ivoire also producing                Additionally, we reviewed key documents in
significant amounts.                                     the secondary literature pertaining to oil palm
                                                         smallholders.
At the same time, the production of palm oil
has also resulted in significant controversy due         Given the breadth and complexity of
to its effects on the environment as well as             addressing the palm oil industry as a whole,
social structures. The challenges faced by               this report focuses primarily on the private
smallholder farmers in this industry can be              sector-smallholder intersection in order to
especially acute, given limited land, lack of            provide examples and implications that are
access to technology and appropriate inputs,             practical and feasible. We acknowledge that
and some examples of questionable corporate              this represents only one portion of the sector,
practices in acquiring land.                             as the challenges faced by plantation workers
                                                         and mid-sized producers are also critical to
Several efforts are underway to improve the              address; the private sector is also only one of
sustainability of oil palm cultivation. The              several   essential   pieces   of   smallholder
Roundtable on Sustainable Palm Oil (RSPO)                development, as donors and civil society play
was     formed     as     a    multi-stakeholder         roles as well.
collaboration to establish principles and criteria
for certifying palm oil as sustainable. The              A significant amount of research already exists
production of certified sustainable palm oil             documenting the challenges faced by the
continues to increase and the process of                 sector as well as the nuanced range of
adapting the standards to country-specific               smallholder types. We have thus provided a
interpretations and to different types of                brief overview of smallholder characteristics in
smallholders is ongoing, albeit slowly.                  this report, but have concentrated the majority
                                                         of our research on documenting good practice
However, certification has not been a panacea            interventions attempting to address some of
for the industry. In 2009, the World Bank                those challenges. It is important to note,
Group (WBG), including IFC, halted all of its            therefore, that the report does not represent
investments in the sector, in recognition of             an exhaustive review of smallholder challenges
some continued environmental and social                  or of the nuances by region. Additionally, the
challenges with prior investments. The WBG is            paper does not fully address the environmental
presently undertaking a process of research              practices associated with oil palm smallholder
and consultation leading to the development of           cultivation, focusing primarily on the economic
a new strategic framework. This paper                    and social conditions of smallholder farmers.
provides a complementary perspective on a
key strategic issue in the oil palm sector.              Palm oil producing companies have substantial
                                                         business interest in improving smallholder
                                                         productivity and livelihoods, and our research
Purpose and Methodology                                  identified several examples of private sector-
This report explores efforts by private sector           led efforts. In many cases, companies focus on
companies in the industry to improve the                 providing support on agronomy issues via
livelihoods of smallholder farmers engaged in            technical assistance. However, despite these
oil palm production. The goal of our research            important efforts by some companies, there is
was to identify examples of private sector               a need for significantly more engagement by
interventions to improve the lives of                    the private sector in order to address
                                                     5
smallholder livelihood challenges. Stakeholders       by linking development efforts more closely to
are unable to point to specific companies that        their business expertise and priorities, and by
are taking leadership in improving smallholder        working in collaboration with others. We have
livelihoods. Also, few companies are working          posed in this paper several strategic
on enabling environment issues that can have          opportunities for improved engagement by
large    scale  impact    beyond    their own         companies, as well as the recommendations
smallholders.                                         that companies might use to select where they
                                                      are best suited to play a smallholder
There    are   significant  opportunities  for        development role.
corporations to improve their commitment to
smallholder livelihood development, especially




                                                  6
2. Characterizing the Palm Oil Smallholder


Smallholder Overview                                   Structure of Smallholder Relationships
Oil palm is a tree crop grown in tropical              The structure of the relationship between
regions. Key features of its cultivation include       smallholders and the plantation companies
a long lead time between planting and                  and/or mills that buy their fruits is a major
productive harvest (at least 2-4 years),               determinant of smallholder conditions. There
followed by a long productive period (up to 25         are several main types of structures, though
years).   Another      consideration    is   the       there is significant variability even within these
importance of processing the fresh fruit               types.
bunches at a mill within 24 hours after
harvesting. Oil palm is grown by a mix of large        Independent smallholders are free to sell to
plantation companies (either privately or              any mill and thus may be able to pursue higher
government-owned) who own estates, and                 prices. However, their market access is not
smallholder farmers.                                   assured, and in any case there may be not be
                                                       enough of a diverse buyer base if mills are
Most sources (including the Roundtable on              scattered. Independent smallholders are often
Sustainable Palm Oil) define oil palm                  less productive; studies have identified
smallholders as farmers controlling 50 hectares        elements     of   inefficiency  that   include
or less of cultivated land. This paper adopts          maintaining old oil palms too long, using
that definition and focuses on smallholders            smallholders’ own (low-quality) seedlings,
while acknowledging that there is significant          applying insufficient amounts of fertilizer,
variation in the livelihoods of farmers within         harvesting unripe fresh fruits bunches (FFBs),
this range of landholdings, and that most              and not having strong data management
smallholders control much less than 50                 systems (Ayat Rahman et al 2008).
hectares. While there also may be significant
development opportunities associated with              Simon Siburat of Wilmar noted the differences
mid-sized cultivators as well as workers on            in how independent smallholders access
plantations who do not own land, these groups          agricultural inputs and other support: “With
are outside the scope of this paper.                   independent smallholders, they’re nobody’s
                                                       child; they’ve basically on their own.
Smallholders represent a significant portion of        Companies cannot be sure that if we sell inputs
oil palm cultivation worldwide. Globally, three        on credit, he’ll sell his crop back to us and
million smallholder heads of family are                actually repay.”
involved in the oil palm sector (Teoh 2010).
While data collection on cultivated area is not        In contrast, supported smallholders are
consistently available everywhere, there is            generally tied to specific mills. The exact
significant variation in key regions (see Figure       mechanism for this tie varies: it can include
1).                                                    formal links in land titles or contractual
                                                       relationships associated with loans. Generally,
 Figure 1: Smallholder Production in                   supported smallholders have access to some
 Major Producer Countries 1                            degree of support from plantation companies –
                                                       through access to credit, technical assistance,
                Percentage      Percentage of          or other means. However, their productivity is
                  of Area        Production            typically lower than that of plantation estates.
   Country
                   under            under              The specifics of these structures vary
               Smallholders     Smallholders           significantly across and even within countries;
  Indonesia        44%               33%
   Malaysia        41%                –
   Nigeria           –               80%
     PNG           42%               35%               1
                                                        Smallholder production data from Teoh 2010 and
   Thailand        76%                –
                                                       Vermeulen and Goad 2006. Comprehensive data on
                                                       smallholder cultivation (by area and by total
                                                       production) is not consistently available across
                                                       countries; this table highlights the available data
                                                       points in key producer countries
                                                   7
these   variations    have      been       described              to better support from more             active
extensively in other studies 2.                                   government institutions like FELDA.
                                                              •   In both Indonesia and Malaysia, recent
While there are benefits to this relationship,                    increases in the number of available mills
there are potential pitfalls at multiple steps.                   has led to a growth in the independent
Marcus Colchester of the Forest Peoples                           smallholder sector (Vermeulen and Goad
Programme described the following series of                       2006).
concerns:                                                     •   Thailand’s palm oil sector is dominated by
                                                                  smallholders rather than large plantation
    “First, there’s the problem of land acquisition               companies; low oil extraction rates in
    and customary rights. Second, do you get a                    Thailand’s mills is a productivity concern.
    smallholding if you were promised one?
                                                              •   Papua New Guinea faces significant
    Third, where do they get the smallholding –
                                                                  challenges     with   local     infrastructure,
    sites can be poor quality and very distant.
                                                                  including limited access to transportation
    Then, when do they get the smallholding?
                                                                  and    electricity.  Traditional     economic
    Even after they’ve repaid that debt, do they
                                                                  systems also may prevent smallholders
    actually get the title to the land”
                                                                  from investing sufficiently in land upkeep.
Finally, there are other arrangements such as                 •   In many sub-Saharan African countries,
collective landowner schemes that involve                         soil quality and rainfall conditions are
leasing    communal     land    to   plantation                   major factors in productivity. Limited
companies in return for a dividend (Vermeulen                     infrastructure is a significant barrier here
and Goad 2006).                                                   as well.
                                                              •   Latin America is perceived as being a less
                                                                  challenging setting than in places like
Geographic Differences
                                                                  Indonesia (IFC 2009); however, countries
There are significant differences across regions                  such as Colombia have some particular
in many of the smallholder factors. A few                         challenges around community relationships
examples of the country-specific dynamics in                      and political risks associated with a long-
key producer areas include:                                       term crop. There are also challenges with
•   Indonesia has seen particular challenges                      endemic diseases such as lethal bud rot.
    with smallholder land titling (Teoh 2010),
    as well as with troubling environmental
    practices such as burning for land clearing.              Smallholder Productivity and Income
•     Malaysia faces similar challenges to                    Smallholder     productivity   is  on    average
      Indonesia in some respects (some degree                 significantly lower than plantations. As Figure 2
      of land title issues, concern about                     depicts, in 2008 smallholders in Indonesia
      environmental     impacts);     however,                averaged a yield 35% lower than private
      interviews   suggested   that  Malaysian                plantations, and 40% below government
      smallholders see greater productivity due               plantation production (cited in Teoh 2010).
                                                              Production is also highly variable across
                                                              smallholders within an area. Research in
2
   As an illustration, many studies (Teoh 2010;               Indonesia looking at productivity of supported
Vermeulen and Goad 2006) have concluded that                  smallholders across a plantation’s plasma
Indonesia’s nucleus-estate schemes (NES) have not             holdings found up to 50% variability around
been very effective at promoting smallholder                  the mean production level (Zen et. al. 2005).
development, and in particular that land tenure
concerns are a continued problem. More recent                 Oil palm smallholder income is highly variable
related programs such as KKPA have attempted to               over the life cycle of the crop. Smallholders
improve      smallholder     autonomy     through     a
                                                              generally must take out sizeable loans at high
microfinance approach, but challenges include delays
in receiving loans and poor infrastructure, and the           interest rates to finance initial planting, and
overall results have been functionally similar to NES         the payment of these loans is very back-
(Colchester and Jiwan, 2006). Programs in Malaysia            weighted. During the first 5-7 years after
such as FELDA’s resettlement programs and the                 planting, smallholders do not receive income
more recent Konsep Baru leasing arrangements have             from their crop, though they may work as
faced significant social challenges due to unclear land       plantation laborers during this period. Then, in
rights and other concerns (Vermeulen and Goad                 the crop’s productive years, smallholders will
2006).
                                                              earn enough to begin paying back the loan

                                                          8
(Chaichee 2007). While oil palm is generally              will this do for me? We’re hoping they’ll get a
seen as being a profitable crop for                       premium out of this, but we can’t answer
smallholders, some studies have found that                how much – because the market can’t assure
income from subsistence-type activities is                us.”
comparatively higher (Vermeulen and Goad
2006).
                                                                       Figure 2: Palm Oil Productivity in
Smallholder Role in Certification                                      Indonesia
Another       important       characteristic     of                                5
smallholders in the context of the overall palm
oil industry is the role of smallholders in                                                                                4.20
certification. Several companies have become                                                              3.88
RSPO certified in recent years: either achieving                                   4
certification on a specific (segregated) portion




                                                            Tons oil per hectare
                                                                                                                                         3.51
of their supply, or by producing a given
amount of sustainable palm oil and receiving                                                                                          Indonesia
corresponding certificates (“book and claim”).                                     3                                                   National
Achieving full certification that includes all                                             2.52                                        Average
smallholders,     however,     poses    significant
challenges for companies in terms of ongoing
                                                                                   2
compliance – especially with independent
smallholders. These challenges include the cost
of monitoring compliance and the difficulty of
ensuring traceability in a shifting supply base.
                                                                                   1
Companies have also reported difficulties
convincing smallholders of the benefits of
certification, especially in the absence of clear
estimates of any potential price premium.                                          0
Simon Siburat of Wilmar summarizes the
communication challenges:                                                              Smallholders      Private        Government
                                                                                                       Plantations      Plantations
  “Certification is a new thing for them, so
  there’s a variable reception. Some are very                                                     Type of Cultivation
  conducive and see the benefit. Others don’t.
  They’ll see these costs eating into their
  profits, and ask, at the end of the day, what




                                                      9
3. Smallholder Development Challenges and Successes

Major Factors Affecting Smallholders                             areas, there are specific factors that represent
The factors that drive smallholder productivity,                 both    challenges     and    opportunities  for
income, and livelihoods fall into three main                     smallholder development. Figure 3 depicts
categories: Agronomy, Supply Chain, and                          these categories of smallholder challenges and
Enabling Environment. Within each of these                       the specific factors that constitute each.

Figure 3: Factors Affecting Smallholder Development


                       Agronomy                                                Supply Chain

                                                                 Access to           Infra-
  Knowledge            Land Quality        Input Quality                                                Mill Access
                                                                  Credit           structure

                                             Enabling Environment

   Organizing Structures              Legal Structures           Market Dynamics               Social Dynamics


Within each of these factors, there are existing                 sections that follow share additional detail on
examples of private sector involvement in                        each of the factors affecting smallholder
smallholder development. These examples                          development, as well as case examples of
include the efforts depicted in Figure 4. The                    these existing programs.


Figure 4: Summary of Examples of Private Sector Interventions




                                                7
                                                    Uganda and Ghana:
               2                                    Ensuring Fair Prices
                   Brazil:                          (Multiple)                1                    8
                   Comprehensive TA                                               PNG:                 PNG: Gender
                   (Agropalma)                                                    Technical            Dynamics
                                                                                  Assistance           (OPRA/NBPOL)
                                                                                  (NBPOL)




    6
        Colombia:
                                                                              3
        Smallholder
                             5                       4                            Indonesia:
        Associations
                                 Ghana: Inputs           Ghana, Gabon:            Hands-on
        (Fedepalma)
                                 on Credit               Infrastructure           Management
                                 (GOPDC/Siat)            (Siat Group)             (Musim Mas)




                                                            10
Agronomy                                                  Input Quality
                                                          •       Quality seed stock available , ideally grown
Several types of agronomic factors are                            by a nursery or seed bank.
essential to smallholder development, in terms            •       Appropriate level of fertilizer used,
of the need to increase productivity as well as                   avoiding under- and over-application.
the importance of environmental sustainability.           •       Efficiency of farm labor, whether hired or
These include technical knowledge as well as                      family-based.
quality of land and inputs.                               •       Safe use of pesticides, with training on
                                                                  appropriate use and adequate safety
Knowledge                                                         precautions.
•   Sufficient technical knowledge regarding oil
                                                          Gert Vandermissen of Siat explains the
    palm as a crop and best management
                                                          importance of initial seed stock: “We know that
    practices for its cultivation.
                                                          we need to provide our farmers with the best
•   Access to ongoing extension, in order to
                                                          seed available. If you use cheap material, you
    receive agronomic information and training
                                                          lose for 25 years.”
    on best practices.
•   Ability to follow sustainable production
                                                          While smallholders face challenges associated
    guidelines,     in     terms   of   avoiding
                                                          with each of these agronomic factors, there are
    environmental damage (e.g., incorporating
                                                          significant    opportunities    to     promote
    suitable buffer zones), as well as in terms
                                                          smallholder        development         through
    of compliance with certification schemes.
                                                          improvements     in   these   areas.    Several
                                                          companies, including New Britain Palm Oil
Billy Ghansah, an expert on oil palm in sub-
                                                          Limited and Agropalma Group, have projects
Saharan     Africa,   notes,    “In     terms   of
                                                          underway that intend to improve these
productivity, it comes down to the level of
                                                          conditions.
knowledge: if you don’t have the knowledge,
you’ll select poor soil, misuse fertilizer, misuse
pesticides, use slash and burn, and your
                                                                    Agronomy Example: Supporting
productivity is going to drop.”
                                                              1     Availability of Extension and
                                                                    Technical Assistance
Land Use
                                                                    New Britain Palm Oil Limited (Papua New
•   Soil quality, in terms of site selection as                     Guinea)
    well as practices that promote ongoing soil
    management.                                           Access to quality technical assistance and
•   Size of plots that are large enough to                extension services is a critical factor for
    provide     economies      of     scale    and        successful smallholder production. Extension
    economically sustainable livelihoods.                 allows for better agricultural practices to be
•   Diversification of crops in order to diversify        disseminated to smallholders who may not
    income and promote environmentally                    have technical agronomic knowledge and/or
    sound       practices      (e.g.,      through        specific experience with oil palm. Technical
    undercropping and to allow integrated pest            assistance in areas like fertilizer application
    management).                                          ensures good practice on an ongoing basis.
                                                          Crucially, certification requires the same types
Garry Smith of FAO emphasizes the role of soil            of site visits and touchpoints with farmers that
quality, particularly in Africa: “One of the              are associated with extension – successful
biggest constraints to development in Africa is           extension, therefore, sets the ground for a
soil management. We’re dealing with heavily               certified crop.
depleted soils, so you need to use farming
systems that enhance soil organic matter                  Challenges
content and structure: undercropping of
                                                          New Britain Palm Oil Limited faced several
legumes, use of green manures, and so on.”
                                                          factors that made improving the quality of
                                                          extension in PNG a business imperative. As
                                                          NBPOL is by far PNG’s largest oil palm
                                                          company, processing 82% of the country’s



                                                     11
total production, it has a significant interest in            of PNG (PNGOPRA) explains, “OPIC does
strengthening the sector in the country overall.              not     have     adequate     capacity or
The company is mutually dependent with local                  competencies to bring smallholders to the
smallholder outgrowers: NBPOL sources 30%                     RSPO standards within the required
of its FFBs from smallholder outgrowers, and in               timeframe. This creates pressure on the
each area of operations the company is the                    private sector to provide supplementary
only available mill. NBPOL is also a leading                  extension services to smallholders and
player in the RSPO and has set ambitious                      provide capacity building to the public
targets regarding achieving full certification:               sector in order achieve these goals.”
Simon Lord, NBPOL's Director of Sustainability,
                                                          Activities
recalls: “While going through this, we realized
that if we were going to achieve certification,           NBPOL set out to complete a connected set of
we needed to bring our smallholders with us.              activities around improving the capacity to
They’re 30% of our industry, we couldn’t leave            provide smallholders with extension. First, they
them behind.”                                             planned a survey of smallholders that would
                                                          create GPS maps of each smallholding that
Against this backdrop of a commitment to                  could be layered with localized data on
development, NBPOL faced several challenges.              productivity and sustainability factors. Lord
•  Scale: NBPOL’s outgrowers are numerous                 explained the goal: “We’ve developed precision
   and geographically scattered; they sourced             approaches to map agronomic data to
   from 7,500 smallholders. Additionally, the             geographic location. I can color code fields
   company had recently acquired several                  based on yield, or by fertilizer application
   plantations from Cargill, which meant                  timeliness, or evidence of erosion. That lets me
   another 8,000 smallholders were being                  look at the whole picture: where are my
   added to their supply base. As Lord puts it,           trouble spots, where do we target?”.
   “I keep thinking, how on earth do we get
   around to this many smallholders? The                  The    company      had     created    its  own
   sheer logistics of it!”                                questionnaire based on the criteria of the
                                                          RSPO, but actually conducting the survey
•   Productivity: A related challenge was                 would require significant labor. This created an
    productivity:   while    NBPOL’s    estates           opportunity for NBPOL to play a more hands-
    produced around 26 tons per hectare, and              on role building OPIC’s capacity. They began
    their existing smallholders were producing            by training the 53 local OPIC extension officers
    19 tons per hectare, the newly incoming               to conduct the survey. The company identified
    ones yielded five tons per hectare.                   and addressed a few problems among its
    Smallholders were in dire need of technical           smallholders, such as pesticide use. The survey
    support.                                              is now in its second round, and the most
•   Government: A final challenge was related             recent results found that over 99% of their
    to     government       limitations.   PNG’s          roughly 7,500 smallholders in their West New
    government plays a very limited role in               Britain holdings met or exceed RSPO
    areas of oil palm cultivation, with limited           requirements.
    support for infrastructure – especially
    lacking are support for public health and             But there were other opportunities to build the
    education services, and for transportation            public     sector’s   extension    capacity.    In
    infrastructure. While there is a public-              partnership with the Dutch NGO Solidaridad, as
    sector smallholder extension service called           well as the World Bank’s Smallholder
    the Oil Palm Industry Corporation (OPIC),             Agriculture     Development     Project,   NBPOL
    it is woefully underfunded and low-                   supported the Palm Oil Producer Support
    functioning. Although initially funded by             Initiative     (POPSI).    This     public-private
    the PNG Government, today OPIC relies                 partnership is training extension officers
    entirely on levies paid by smallholders and           around the RSPO principles and criteria, as well
    a voluntary matching payment by the                   as ways of communicating sustainability to
    private sector milling companies. This lack           smallholders and monitoring compliance. While
    of    resources     has     combined     with         the project is still evolving, so far it has
    governance and management weaknesses                  produced several tools for OPIC officer use,
    to limit OPIC’s capacity to provide effective         including a revised form for planting approval.
    extension services to smallholders. Ian
    Orrell of the Oil Palm Research Association
                                                     12
Impact                                                   own plantations and smallholder farmers for its
While many of these projects are still                   production, the latter account for a small
underway, NBPOL’s activities appear to be                portion of the company’s processed palm
achieving significant impact on smallholder              bunches. “We are somewhat unique in that we
livelihoods and on public sector extension               only    work    with   a    small  number     of
capacity. The company achieved RSPO                      smallholders,” comments Dias. The company
certification in 2008, and even with the 8,000           currently    works   with    185   families   of
newly-added smallholders, they aim to have all           smallholder farmers, with an average holding
smallholder production certified by 2011-12.             of six to ten hectares for each farmer, which is
Additionally, the company founded a consulting           also higher than the average smallholder
firm (Global Sustainability Associates) to               holding.
disseminate the lessons of their efforts to
others in the oil palm supply chain. On its              Activities
website, NBPOL expresses optimism for future             “Our goal with the smallholder farmers we
progress and replication: “There are many                work with is to not only provide them with a
areas for further improvement and a further              means for subsistence farming, but to provide
50% increase in smallholder yields and                   them with a middle class income,” explains
incomes is not beyond reach. The combined                Dias. In addition to technical assistance on
efforts of OPIC and the company have made                agronomy issues, the company provides its
the smallholder scheme in West New Britain a             smallholder farmers “motivational assistance”
model which many other rural industries want             to help with agricultural practices. “There are
to use as a template for success.”                       six steps to oil palm production, and most of
                                                         our smallholder farmers know the agronomy
         Agronomy Example: Moving from                   best practices,” explains Dias. “What they
 2       Technical Assistance to                         often lack is a long-term vision and planning
         Comprehensive Support                           abilities, and that’s what we help them with.”
         Agropalma (Brazil)                              Agropalma employs a full-time agronomy
                                                         engineer, two technicians, and supporting staff
Challenges                                               who are exclusively focused on working with
Smallholder farmers often lack specific                  smallholders. Every week, a member of the
technical knowledge for increasing productivity          Agropalma staff visits each of its smallholder
of their crops. But even with the knowledge,             farmers to provide motivational and technical
they may not possess the long-term planning              assistance (TA). To complement the TA, the
skills necessary to ensure the proper utilization        company also provides fertilizer to its
of that knowledge. Often lacking formal                  smallholder farmers at cost, which is about half
education or financial skills, smallholder               the local market price, the same rate that it
farmers also struggle to manage the additional           receives from wholesalers for its own
income generated from their farming. “Without            plantations.
formal education and money management
skills, smallholder farmers often are not                Impact
equipped to deal with the additional cash and            Agropalma has also supported specific research
determine how to best invest for the long                projects to understand smallholder livelihood
term,” comments Tulio Dias, Corporate Social             challenges. The company is working with a
and Environmental Responsibility (CSER)                  Brazilian nonprofit to conduct a study on
Manager for Agropalma. “As a result, we often            defining    sustainable    livelihoods     through
see farmers spending the additional cash on              developing    a    set  of     indicators.    Once
consumption rather than saving for health or             preliminary results are available, Agropalma
education of family members. Increased                   will work with the nonprofit and smallholders
income is not necessarily always used in the             to determine what role the Smallholders
optimal way to lead to a better livelihood.”             Association, the smallholders as individuals
                                                         and the company might play in contributing to
Agropalma Group has invested in palm oil and             better livelihoods for the farmers. The
palm kernel oil production since 1982 in Brazil.         company is also supporting research by Sao
The company maintains 39,000 hectares of                 Paolo University to identify the most important
plantation and accounts for about 70% of                 social and economic factors for palm oil
Brazil’s total palm oil production. While                productivity, by studying two sets of the most
Agropalma utilizes a combination of both its             and least productive smallholders. While the

                                                    13
number of smallholders the company is                   Impact
working with is relatively small, results from          The advantages of the approach include more
Agropalma’s studies could have a broader                consistent application of agronomic techniques,
impact for others working with smallholders.            and thus higher yields. Sang noted, “Initially,
                                                        to convince them to hand over management of
        Agronomy Example: Taking a                      land to a cooperative approach was a big task:
  3     Hands-on Role in Management                     they had seen other smallholder projects fail,
        Musim Mas (Indonesia)                           and they were worried. But they were very
                                                        happy when they saw the results.”
Challenges
While most companies engage in agronomic                However, detailed benefits in terms of
improvements      by    providing     technical         smallholder productivity or income have not
assistance and inputs to their smallholders,            been evaluated. Some experts strike a
some see limitations in the results of these            cautionary note regarding company-managed
efforts. Simon Siburat of Wilmar commented,             approaches. Professor John McCarthy of
“Often, we find ourselves trying to instruct            Australian National University notes:
farmers on how to manage their own
smallholdings. We recommend that they apply                 “Companies may prefer a benefits-sharing
a certain amount of fertilizer, but they worry              agreement rather than having smallholder
about the cost, and under apply. It leads to a              farming per se. The plantations want to
lower yield.”                                               manage the land themselves so they can
                                                            boost productivity and avoid the problems
Activities                                                  associated    with   managing     smallholder
Musim Mas takes a different approach: they                  plasma. Unless effective, transparent and
manage smallholder plots in a more hands-on                 accountable systems with third party
way. In their two smallholder projects, the                 monitoring are in place, there’s no assurance
smallholders maintain ownership of their plots              the smallholders will get the benefits that
of land, but agree that the company will                    they thought were promised. They can enter
manage     the    cultivation  centrally.    The            into agreements without having obtained a
smallholders initially work as plantation                   clear understanding of the arrangement and
workers during the planting period, and then                feel bitter when they don’t see the benefits
ultimately harvest their own land once fruit                they expected being delivered.”
production begins. They take this approach
because it enables the company to follow                Supply Chain
consistent practices across both its core
plantation and the smallholdings. Tian Sang             Smallholders face several supply chain
Tan of the company described, “Once the                 challenges in the production and sale of oil
agreement is reached, they have to follow               palm fruits. To be able to sustain operations
what we plan regarding fertilization, etc. – and        and sell their product, they need access to
in the process, we train them. They can come            credit, timely and consistent access to mills,
in as contract workers and plant and harvest            and reliable infrastructure.
according to our standards.”
                                                        Access to Credit
One critical success factor in this approach is         •    Access to credit for initial investment is
the presence of strong cooperatives that are                 needed for planting, as the process of land
able to negotiate with the company and ensure                acquisition, clearing, and planting can be a
smallholder interests. The cooperatives serve                massive       upfront      investment    for
to coordinate the administration of the plots.               smallholders, and these farmers often lack
Musim Mas provides management advice in the                  collateral. The delay in the productive
form of a dedicated advisor. The cooperatives                lifecycle of oil palm also means that these
are funded by a trust set up with the                        initial loans must be structured to allow
company’s share of the proceeds of a                         deferred repayment.
particular period in the plantings’ productive          •    Access to working capital for ongoing
life.                                                        inputs is needed to allow smallholders to
                                                             consistently use fertilizer and other inputs
                                                             over the life of the crop.


                                                   14
FAO’s Garry Smith highlights the importance of                         Supply Chain Example:
access to credit: “Access to credit is a cross-                        Developing Infrastructure as a
cutting issue that’s critical. Farmers don’t have             4        Long Term Investor
registered assets against which they can                               Siat Group (Nigeria, Ghana, Gabon,
borrow, and the financial system will only lend                        Cote d'Ivoire)
against unreasonable collateral requirements,
not on cash flow. It hamstrings smallholder
                                                          Challenges
farmers.”
                                                          Lack of adequate infrastructure has been a
Access to Mills                                           major impediment to the agriculture sector
                                                          broadly. Due to the time-sensitive nature of oil
•   Consistency of market access is crucial in
                                                          palm harvesting, this is a particularly critical
    oil palm, especially if mills are not
                                                          challenge for this crop. Functioning palm oil
    contractually     obliged    to    buy    from
                                                          supply chains require roads, ferries, bridges,
    smallholders (such as with independents).
                                                          and    access    to    water     and electricity.
•   Ability to access multiple competing mills
                                                          Smallholder farmers often located in remote,
    to allow farmers to seek the highest price,
                                                          rural areas suffer from being able to transport
    while recognizing that systems must be in
                                                          their FFBs in time to local mills.
    place to ensure this does not mean
    defaulting on loans from mills.
                                                          The lack of proper infrastructure in remote
•   Negotiating     power     and    transparency
                                                          areas has been a major challenge for Siat, one
    regarding mill pricing, taxes, and fees is
                                                          that the company has proactively tried to
    important particularly among independent
                                                          address. Siat is a Belgian company that owns
    smallholders. Negotiating power when
                                                          oil palm and other tree crop plantations in
    restructuring       relationships       during
                                                          Nigeria, Gabon, Ghana, and Ivory Coast. The
    replanting is cited as particularly pertinent.
                                                          company employs in Ghana about 7,000
                                                          smallholder farmers, who produce 75% of its
One stakeholder sees the ability to access
                                                          oil palm, while the remaining 25% is produced
multiple mills as critical: “You don’t want
                                                          by its nucleus plantations.
smallholders to be captive to a monopsonistic
situation. You want to encourage competition
                                                          While Asian countries also face this challenge,
in the supply chain so that smallholders are not
                                                          access to critical infrastructure, such as roads,
too dependent on one buyer.”
                                                          water, and electricity is an even greater
                                                          problem in many African countries. “A big issue
Infrastructure
                                                          for us is getting the oil palm fruit from
•   Sufficiency of transportation infrastructure          smallholder farms to points where we can
    is particularly important in oil palm (even           process them,” explains Gert Vandersmissen of
    as compared to other crops) due to the                Siat. “In Gabon, for example, where we
    need for processing soon after fruits are             operate, there are only two major highways in
    harvested.                                            the country. During the rainy season, traveling
                                                          becomes even more difficult.” Due to the
Gert    Vandermissen      of   Siat   described,          proliferation       of      cellular     phones,
“Especially in Africa, there are major problems           communications has now become easier even
with infrastructure and roads. Our biggest                in remote farms, but physical infrastructure
challenge is bringing fruits from the farm to             still remains underinvested.
the point where we process it.”
                                                          Activities
Several companies, including Siat Group, have
                                                          To address this challenge, Siat has taken over
projects underway to improve supply chain
                                                          the role of developing and maintaining
factors.
                                                          infrastructure in many of the regions where it
                                                          operates – a role traditionally reserved for
                                                          national or local governments. In Ghana, Siat
                                                          has developed about 500 kilometers of roads
                                                          in order to connect smallholder farms to
                                                          collection points, some of which are up to 30
                                                          kilometers away. The company also updates
                                                          and maintains these roads on a regular basis.

                                                     15
As a service to its farmers, Siat has built about         instances where the company has a vested
650 housing units for its smallholder families            interest  in  the   productivity of their
and several schools to provide education for              smallholders.
the children. The schools provide education up
to the secondary level catering to children up            In the course of research and discussions with
to age 16. In Gabon, Siat has also built several          experts, no companies stood out in terms of
hundred housing units for smallholders. In                having a single best model for providing credit
Nigeria, where roads are more prevalent, Siat             to smallholders. GOPDC, though, provides an
provides     electricity  to    villages   where          example of how a company can explore
smallholder farmers reside to compensate for              different structures for smallholder credit,
unreliability of the national electricity service,        learning and adapting based on experience.
which often fluctuates.
                                                          Activities
Impact
                                                          GOPDC sources 75% of its crop from
Siat sees its investments in local infrastructure
                                                          smallholder farmers. The company has used
as having vital impact on both its business
                                                          several mechanisms to provide quality seed
operations, and on the communities in which
                                                          stock to these growers. Gert Vandermissen
they operate. Comments Vandersmissen, “We
                                                          describes the overall objectives of their credit
view ourselves as long term investors in these
                                                          system: “We want our smallholders to get the
countries. Profitable palm oil production starts
                                                          best inputs on the market, so we sell them one
only after about seven years being planted,
                                                          year    old,   germinated,    disease-resistant
and we know we need to be aware of this
                                                          seedlings.”
timeline that the farmers face.” Across the four
countries where Siat operates, the company
                                                          Initially, GOPDC would enter into contractual
invests about 12 million Euros per year in
                                                          agreements with smallholders who wanted
community development projects and affects
                                                          access to credit. Vandermissen explains, “They
about 50,000 lives, estimates Vandersmissen.
                                                          sign a contract agreeing that for seven years,
“We are partners in these communities for the
                                                          they don’t have to pay anything back. Then, in
long haul, and we go through both good and
                                                          the repayment period, it’s a very spread out
bad times together with the farmers,” he
                                                          loan, since we know that yields build slowly
concludes. While the impact of these efforts in
                                                          and that we don’t want to deflect too much
terms of improved business operations or
                                                          from     wage   initially.” Like  with   many
community development have not been fully
                                                          companies, GOPDC collected repayment comes
assessed, anecdotal results include catalyzing
                                                          through a deduction on delivery: “After year
new local business development (for example,
                                                          seven, each time the smallholder delivers
attracting banks to open locally due to
                                                          fruits, we deduct for example 10 %; once the
improved business climate), as well as
                                                          annuity has been paid, the farmer gets the full
improving housing conditions and access to
                                                          value of his crop. This percentage can be
education. While infrastructure is ultimately a
                                                          flexible depending on the farmer’s budget, and
governmental responsibility, Siat has invested
                                                          linked with low or high world market prices for
in ways that fill this gap and benefits both its
                                                          palm oil.”
business and society.
                                                          However, GOPDC faced significant challenges
         Supply Chain Example: Providing
                                                          with defaulting on the loans. “They have an
   5     Inputs on Credit to Smallholders
                                                          obligation to sell to us based on the contract.
         GOPDC (Ghana)
                                                          But when the world price is low, it’s harder to
                                                          get them a good price, and they’ll try to seek
Challenges
                                                          out a better one.”
Generally, smallholder farmers need to be able
to purchase inputs on credit – for initial                Because of these challenges, which many
planting materials, and for ongoing inputs like           companies report sharing, GOPDC recently
fertilizer. Almost all plantation companies that          shifted to a different credit model. Instead of
have formalized relationships with smallholders           providing seedlings on credit, their strategy is
provide some kind of credit or input support to           now “cash and carry”: farmers can buy the
their source farmers. Whether the relationship            seedlings at a subsidized price, without a
is contractually bound, or that the company is            contract or an obligation to sell back to the
the only mill operator locally, these are                 company. This means that farmers must have
                                                     16
access to either savings or outside credit in           Legal Structure
order to purchase the seedlings – but once
                                                        •   Government       policies    that    influence
they do, they have more flexibility in selling
                                                            smallholder development range from
their fruit to either GOPDC or another
                                                            requirements       on      plantations      for
company.
                                                            smallholder allocations, to price-setting
                                                            formulas,    to    the    administration     of
Impact
                                                            cooperatives.
Vandermissen reports that this rethinking of            •   Land tenure is a continued concern in oil
approaches is ongoing, and neither the credit               palm, with many areas of cultivation
model nor the cash and credit model is without              (especially     Indonesia)      inconsistently
challenges. The credit model created risk of                enforcing laws requiring acquisition of land,
default; cash and carry is more straightforward             especially land held through native
for the company to administer, but requires                 customary rights.
smallholders to be able to afford the subsidized
price. GOPDC’s evolution of approaches,                 Sawit Watch’s Norman Jiwan emphasized the
though, is reflective of the type of ongoing            continued challenge of land tenure in
learning and adjustment required to work                Indonesia: “Of course, a key issue is land
effectively with smallholders.                          titles. The law recognizes indigenous peoples’
                                                        rights to land, but there’s no basic principle of
                                                        self-determination as to those rights. There’s
Enabling Environment
                                                        rarely full free, prior, and informed consent.”

There are several types of factors related to           Market Dynamics
the   enabling     environment  that    affect
                                                        •   Accessibility    of  certification  systems,
smallholder livelihoods. While these factors
                                                            including appropriate mechanisms for
may be outside the direct influence of
                                                            incorporating smallholder involvement in
smallholders, they set the context for
                                                            certification, and sufficient demand for
smallholder development.
                                                            certified product.
                                                        •   Volatility of global prices, in terms of how
Organizing Structures
                                                            the market price ultimately translates into
•   Type of smallholder structure, whether                  individual smallholder incentives.
    independent, supported, or a hybrid, can            •   Access to reliable market information
    be a major influencing factor on the                    regarding price dynamics and any relevant
    conditions faced by smallholders.                       opportunities to participate in value-added
•   Level of organization among farmers, for                portions of the supply chain.
    example      through     a    smallholders’
    association or cooperative; these take a            Jonas Dallinger of Thailand’s Bureau of
    variety of specific forms (e.g., farmer-            Agricultural Economic Research expresses both
    initiated or run by the plantation                  the opportunities and challenges presented by
    company).                                           smallholders’ role in certification: “We need to
•   Capacity of smallholders’ associations in           make sure that sustainability certification
    management, negotiations, and service               doesn’t mean that at the end smallholders will
    provision to members.                               be ruled out of the market. And we need to try
                                                        to build smallholders’ capacities and impart
Simon Winter of Technoserve sees organizing             truly improved practices, not just get them to
smallholders and developing the capacity of             comply with criteria.”
cooperatives as essential steps to improving
productivity and sustainability: “The first             Social Development
question is how to give smallholders bargaining
                                                        •   Access to health and education services is
power – if you’re independent, you’re not
                                                            essential to the well-being of smallholders,
going to get a decent deal with the buyer. But
                                                            plantation workers, and their families; the
even if you’re organized, you face general
                                                            regions of oil palm cultivation often have
challenges of farmer groups: you need to run
                                                            low human development index scores.
the group as a business.”
                                                        •   Gender dynamics are an important
                                                            consideration in smallholder schemes,
                                                            particularly when considering the effects of

                                                   17
    introducing    significant   new   income            Jens Mesa-Dishington, President of Fedepalma,
    streams.                                             outlines how a process might start:
•   Role of migrants is involved in several oil
    palm regions; countries like Indonesia                  “The producer with the mill might invite
    have used oil palm smallholdings as a way               50, 100, even 200 peasants to get
    of promoting internal migration.                        organized into a project. Perhaps they each
                                                            have ten hectares of land to work with.
Marcus Colchester of the Forest Peoples’                    Now you’ve got 500-2000 hectares to work
Programme notes the importance of the effects               with, and that creates advantages: now,
of oil palm smallholdings on traditional gender             the entrepreneur has more fruit for the
dynamics: “Smallholdings are always given to                mill, more efficiency, and more economies
the heads of families, whereas customary land               of scale for all involved. And the peasants
may be held evenly by men and women – it                    ensure not only the sale of their fruit, but
creates big gender issues that need to be                   also the technical assistance and therefore
focused on.”                                                a    sustainable    livelihood  and   better
                                                            opportunities to grow.”
Organizations that are working to improve
these factors of the enabling environment                The peasants entering into the alliance could
include Fedepalma, Bidco, GOPDC, and the Oil             come from diverse backgrounds: they could be
Palm Research Association of PNG.                        existing oil palm smallholders, farmers
                                                         cultivating another crop, or entrepreneurs
             Enabling Environment Example:               looking to newly acquire land.
             Organizing Smallholders into
    6        Associations                                Fedepalma has worked with over 100 of these
             Fedepalma (Colombia)                        Alliances, providing training in a number of
                                                         areas. At the onset, Fedepalma, its research
                                                         center (Cenipalma), and the mill might
Challenges                                               together     provide      technical  agronomic
                                                         assistance for smallholders. But Fedepalma
Many oil palm experts see organizing
                                                         also makes sure to support the smallholders in
smallholders     as      a   prerequisite    for
                                                         areas that strengthen the alliance itself:
development, in terms of delivering extension
                                                         “There’s a lot of training needed on how to run
services,     establishing    certification   of
                                                         a cooperative, on understanding that getting
independent smallholders, and improving
                                                         organized is useful,” says Mesa.
smallholder negotiating positions with mills.
While associations and cooperatives are no
                                                         Mesa makes the case for these alliances on
panacea, they do play an important role in
                                                         multiple grounds. First, he cites the need for
smallholder development. Yet many farmer
                                                         increased     technical   knowledge     among
associations    and     cooperatives     in the
                                                         smallholders, and the opportunity to use the
developing world are plagued with chronic
                                                         alliance as a platform for delivering training.
mismanagement, inefficiency, and corruption,
                                                         He emphasizes the economies of scale for all
preventing them from successfully advocating
                                                         parties, due to having consistent market
on behalf of smallholders.
                                                         access, as well as consistent supply. He also
                                                         describes a role for the alliance in promoting
Activities
                                                         social development in the area, the importance
In Colombia, the national federation of oil palm         of    education,    and   improving    housing
growers (Fedepalma) plays a leading role in              conditions.
promoting        smallholder        development.
Fedepalma provides information, research, and            Notably, Mesa cites the opportunity for these
training programs to oil palm producers. They            types of alliance-based smallholder structures
have played a leadership role in rolling out             to promote whole new relationships and
RSPO standards to the country. For the last 15           attitudes between mills and smallholders. In
years, one of Fedepalma’s major efforts has              some cases, mill operators have sold stock in
been     promoting     the     development     of        the mill to the smallholders, and the effects
smallholder alliances. These alliances consist of        have been striking: “Owning productive land
a central mill operator inviting local farmers to        was already a big change for them, but to
organize themselves into a productive unit.              become shareholders in the mill, it changes
                                                         their perspective on everything. They’re ready
                                                    18
to put in     all   their effort   to   protect   the        being among the major challenges facing
business.”                                                   smallholders: “One of the primary issues is
                                                             price fluctuation. It’s a commodity, so you will
There are, of course, challenges with this                   always have fluctuations, but the fact that oil
approach. Access to finance is crucial. The mill             palm is a perennial crop makes it even more
operator needs financing to establish the                    difficult, as you need to make a relatively long
project, and as Mesa notes, “If the private                  term commitment to the crop.”
partner invests his own money to help the
project for the smallholders along and it does               In Uganda, the Government with the support
not come to fruition, all the efforts are thrown             of the International Fund for Agricultural
away. And usually after that first experience                Development     (IFAD)    has    developed     a
happens, the entrepreneur says ‘I won’t do this              partnership with the private sector to introduce
again!’” Similarly, smallholders may need                    and develop domestic production of oil palm.
access to bank loans if they are newly                       Palm oil accounts for about 80 to 90% of
acquiring the land.                                          vegetable oil imports for Uganda, costing as
                                                             much a $150 million of foreign exchange per
Impact                                                       year to the country. The Vegetable Oil
                                                             Development Project (VODP) was developed in
Looking across the alliances in the country,
                                                             the mid-1990s to reduce Uganda’s heavy
Mesa sees significant success. “There are
                                                             reliance on imported vegetable oils by
several examples in our affiliates [of
                                                             promoting domestic vegetable oil production.
companies providing best-practice smallholder
                                                             In particular, the project has worked in
support],” he says. “Together with the
                                                             ensuring a transparent and fair pricing system
government, we’ve developed maybe 60-70%
                                                             through a unique mechanism. “Palm oil is an
of the alliances in the country, and it’s been
                                                             extremely productive crop compared to other
very successful. For certain they have
                                                             vegetable oils, says Marian Bradley of IFAD.
improved the livelihoods of the smallholders
                                                             “The industry has been very important for
and their families, and it’s a model that should
                                                             Ugandan smallholder farmers.”
be pursued in the future.”
                                                             Activities
An evaluation of several of the alliances by the
consulting firm Alianza SNV-CECODES found                    Bidco    Oil  Refineries,     Uganda’s  largest
several success factors among the alliances.                 vegetable oil processing and marketing
These included market security, access to                    company, partnered with Wilmar to form a
finance, and ability to tap into the business                consortium for private sector oil palm
experience of       the   plantation     company.            plantation development called Oil Palm Uganda
Perceived threats to the success of the projects             Limited (OPUL). The project recognizes that
included    the    health    status     of   crops,          the private sector is a very large player who
deterioration of public order in some regions,               has a de facto monopsonistic position for both
the    high   cost    of   fertilizers,    untimely          supplying inputs to farmers and purchasing
disbursement of bank loans, and volatility in                their fresh fruit bunches. The investment
international prices of palm oil (Rodriguez Raga             agreement signed between the government
et al 2010).                                                 and Bidco requires OPUL to provide all inputs
                                                             to smallholders at the same cost it pays itself.
          Enabling Environment Example:                      More importantly, to avoid a situation where
          Ensuring Fair Prices                               OPUL independently determines the prices it
     7                                                       pays to smallholders for their FFBs, the
          IFAD/Bidco (Uganda); GOPDC
          (Ghana)                                            agreement lays out a specific pricing formula
                                                             that determines the prices that smallholder
                                                             farmers receive for their fruits.
Challenges
                                                             According to the formula, the reference price is
As a commodity crop, oil palm FFBs can see
                                                             that of crude palm oil (CPO) in Malaysia or
substantial price fluctuations, even on a month
                                                             Indonesia, adjusted to include transport costs
to month basis. These changes can lead to
                                                             to Uganda, the actual oil extraction rate, and a
disincentives for smallholders to enter the
                                                             factory milling constant. Linking the price in
sector or invest in improvements in their land.
                                                             Uganda to the world market price for CPO
Billy Ghansah, an expert on oil palm in sub-
                                                             eliminates the risk of monopolistic buying
Saharan Africa, cites these fluctuations as
                                                        19
power by the sole purchasing private sector,              smallholder farmers and in most cases,
thus ensuring fair financial returns to farmers.          farmers have used the extra income to
IFAD research shows that the price which                  purchase food and improve their diets, and to
Uganda smallholder farmers will receive for               pay family expenses such as school fees. IFAD
their FFBs represents about 75-80% of the                 expects that as a result of the project, farmer
world price, compared to about 60% paid to                incomes would be, on average, about $3,000
farmers    in   other   countries      in  Africa.        per year. For a family of five, that translates to
“Smallholder     farmers     in     this   project        a per capita income of $600, significantly more
understand that they’re getting a fair price;             than Uganda’s national average of $270 per
they don’t feel like they’re just price takers,”          capita.
explains Bradley. An Oil Pricing Committee is
currently being set up and will include                   In addition, the project has led to increased
members from the local government, the                    investment in infrastructure, such as a ferry
private sector and farmers; this committee will           service and electricity, increased tourism as a
be     responsible     for      validating     the        result of improved infrastructure, and greater
implementation of the pricing formula and                 empowerment of smallholders and their
monitoring that the price is adhered to by the            families in the region. “What we’ve learned is
private sector.                                           that putting together these multi-stakeholder
                                                          partnerships take a significant amount of time
Price-smoothing efforts are underway by                   investment and commitment, but the approach
several companies. BOPP and TOPP, both now                we took in developing the pricing policy has
owned by Wilmar, take one approach. Ghansah               been very successful to date,” concludes
describes their efforts as “providing constant            Bradley.
prices throughout the year which are relatively
higher, though prices can be depressed or not                       Enabling Environment Example:
in the local market.” GOPDC takes another                           Ensure Women Benefit from Oil
approach, paying market prices on the spot                    8     Palm
but providing a year-end top-up based on the                        Mama Lus Frut Scheme (Papua New
overall world market price trends. Price-                           Guinea
smoothing efforts need to take local market
dynamics into account. For example, Ghansah
describes why the West African market led to              Challenges
these specific systems: “The cropping pattern
in West Africa is such that the first four months         Smallholder oil palm cultivation in Papua New
of the year can provide more than 50% of the              Guinea faces a number of challenges. One is
annual crop, and that depresses prices in the             low productivity. Productivity challenges in
local market. On the other hand, the prices               PNG include wasting of around 70% of loose
shoot up during the third quarter because                 fruit, poor crop management, inability to
there is little crop.”                                    consistently save and invest back into farm
                                                          inputs, and a shortage of available farm labor
Impact                                                    in some areas. Other significant challenges
                                                          include social issues in the agriculture sector:
The VODP in Uganda has seen multiple types                for example, the introduction of cash crops like
of positive impact on smallholders, in part as a          oil palm has been accompanied by new gender
result of the unique price setting mechanism.             dynamics. Ian Orrell of PNG’s Oil Palm
Comments Bradley, “Once farmers realized                  Research Association (PNGOPRA) explains,
they were no longer just price takers, we saw             “Women are traditionally the farmers in PNG,
the participation grow. The price still                   but with cash crops, it suddenly puts men in
fluctuates, but it’s not because the private              the decision making role. The subsequent
sector manipulates it to take advantage of the            distribution and utilization of the cash from the
smallholders.” The increased popularity of                farming activity often leads to domestic
palm oil farming has led to increased income              conflicts and sometimes violence, and men
for a large number of local residents. “The               often use money less efficiently than the
smallholder farmers are definitely better off             women do in supporting family livelihoods.”
than what they would be doing otherwise,
most likely fishing,” explains Bradley. IFAD
studies have shown that compared to a
baseline survey, incomes have increased for

                                                     20
Activities                                               Impact
The oil palm sector in PNG saw opportunities             The scheme is seen as highly successful. On
amid these challenges: they identified an                smallholder plots without the mama card,
approach to boost smallholders’ productivity             women received around 16% of household
and livelihoods while also improving women’s             income; with the card, they get 29% (Warner
earning power and status.                                and Bauer, 2002). Anecdotally, other results
                                                         on social dynamics have included a decrease in
The Mama Lus Frut scheme was introduced in               the rate of smallholder domestic disputes
a pilot region in 1997 and quickly scaled up to          reported to extension workers, an increase in
cover over 5,000 smallholder blocks by 2001.             financial independence allowing some women
The program provides women in smallholder                to establish small businesses, and more
households with nets to collect the loose                willingness by shop owners to extend credit to
fruitlets dislodged from oil palm bunches                women.
during harvesting. Under the scheme, women
are paid separately from their husbands for the          One key success factor in the Mama Lus Frut
loose fruit thereby guaranteeing payment for             scheme was the presence of multisectoral
their labor in loose fruit collection. With the          collaboration. OPRA and academic researchers
company paying women directly for their labor,           were involved in the initial conceptualization of
women’s incentive to harvest loose fruit                 the research program to assess and expand
increased significantly, to the extent that              the scheme. Plantation companies have played
nearly all loose fruit is now collected.                 a crucial role in adjusting their payment
                                                         schemes and providing financial support. The
The key element explaining the success of the            OPIC extension service promoted the scheme,
program is that women are guaranteed                     hiring female extension workers for outreach.
payment of their labor. Women obtain                     Each of these entities played a critical role in
individual cards (known as “mama cards”)                 ensuring that the program was culturally
which they use to receive separate payment               relevant and successful.
for their fruits. These payments – either in the
forms of checks from the receiving mill, or              There are some remaining challenges in the
received via transfers to the woman’s bank               scheme. There have been some reports of
account – allow the women an individual                  smallholders placing FFBs on the loose fruit
income stream beyond what they received in               scales as a way of avoiding the loan repayment
food crop cultivation, that they can dedicate to         obligations that are associated with men’s FFB
household use. As Ian Orrell puts it, “In PNG,           harvest. However, researchers cite several
the income that goes to women is basically               ways of addressing this practice, such as
what gets directly applied to livelihoods, school        changing the ways that companies calculate
fees, medical costs, clothes, etc.”                      loan repayments.

The program also enabled the “papas” to make             The program’s overall success has led to
greater contributions to the household. George           several types of replication. For example, a
Curry of Curtin University, who worked on the            “mobile card” now allows for flexible use with
formation of the scheme, describes: “Because             family (e.g., adult sons) or hired labor,
of the traditional economy in PNG, there are             enabling smallholders to pay for labor in oil
significant barriers to savings funds when cash          palm fruit rather than cash. A “C card” allows
is available. It was difficult for husbands to           for further allocation within families, in order to
commit cash to the household, because there              prevent some of the intergenerational conflicts
were so many other social obligations on it.             associated with crowded land.
But with the mama card, husbands could make
direct contributions of the FFBs that they               Overall, the mama card and related payment
harvested, placing them on the mama blocks               initiatives are effective examples of a public-
to contribute to the household and compensate            private collaboration aimed at improving
women for their labor.”                                  smallholder livelihoods – both in terms of the
                                                         economic productivity, and in positively
                                                         affecting social dynamics within a local context.




                                                    21
4. Implications for Further Smallholder Development Efforts

Trends in Private Sector Efforts                                  strengthening associations among their
Beyond the specific case examples of existing                     smallholders, or by addressing social issues
projects, our research identified several                         in affected communities. However, few are
themes regarding the role of the private sector                   working on broad enabling environment
in promoting smallholder development.                             conditions, such as developing national
                                                                  institutional capacity related to extension
•    More Is Needed: Despite important efforts                    and research. This theme stands in
     by some companies, there is a need for                       contrast to some other crops such as cocoa
     significantly more engagement by the                         and rubber, where several initiatives are
     private sector in order to address                           under way that take systemic approaches
     smallholder livelihood challenges. There is                  to development.
     a continued substantial gap between the               •      Power of Partnering: Collaboration across
     yields of smallholder farms and that of                      sectors is a critical component of many
     plantations, highlighting the need for a                     existing efforts. While companies can play
     sustained focus on the development of                        an important role in directly improving
     smallholder farmers.                                         livelihoods of their associated smallholders,
•    Leadership Vacuum: Stakeholders could                        there is significant potential for more
     not identify specific companies that are                     systemic challenges to be addressed
     leaders     in     improving   smallholder                   through multi-sectoral collaboration
     livelihoods in palm oil. In some other
     corporate      sectors,   such   as    the            Opportunities for Further Engagement
     pharmaceutical industry, multiple leading             Based on the existing examples as well as the
     companies model best practice approaches              factors identified as critical gaps, there are
     to corporate social responsibility efforts.           several opportunities for further engagement
     The palm oil sector does not have widely              by the private sector. These opportunity areas
     accepted leaders in CSR related to                    reflect a subset of the many ways that the
     smallholders                                          private sector can engage. The areas
                                                           highlighted here represent the highest-
•    Systems Matter: Few companies are
                                                           potential smallholder factors where companies
     working on enabling environment issues
                                                           can use their assets and expertise to have
     that can have large scale impact beyond
                                                           unique impact on livelihoods.
     their own smallholders. Several companies
     work on enabling environment factors in a
     more limited way, for example, by

Figure 5: Key Opportunities for Further Development Efforts


                     Agronomy                                               Supply Chain

                                                               Access to           Infra-
    Knowledge        Land Quality     Input Quality                                                 Mill Access
                                                                Credit           structure

                                       Enabling Environment

    Organizing Structures       Legal Structures           Market Dynamics                   Social Dynamics


Each of these opportunity areas is described in            investments that require companies to engage
more detail below. In addition to specific                 on these opportunities.
opportunities for companies, there are also
ways that the IFC, the broader World Bank
Group, and other donors can play roles. The
IFC can also place conditions on its

                                                      22
Knowledge is a critical area for the private                  smallholder    productivity    gains    possible.
sector to engage, as there is a need for                      Currently, the availability of these services is
improvement in the kind of technical                          limited,   especially     among     independent
assistance and extension services that make                   smallholders, and the quality is variable.


          Opportunities for Companies                         Opportunities for IFC and Other Donors


 Invest in communications technologies for                   Research the business case for improving oil
 disseminating agricultural knowledge to farmers             palm smallholder productivity
 (e.g., mobile phone or radio-based
 communications strategies)                                  Support intermediaries to provide technical
                                                             assistance to independent smallholders
 Improve the quality of government-run                       (through common curricula, innovative delivery
 extension services by working in public-private             mechanisms, or direct service provision through
 partnerships                                                micro enterprises)

 Include other economic development
 opportunities in technical assistance (e.g.,
 intercropping techniques to boost smallholder
 income)

 Invest in technologies that allow for
 incentivizing quality of production (e.g., oil
 content measurement at the point of delivery)


Input Quality is another significant driver of                smallholders in the quality of their seed stock,
smallholder productivity, and there are ample                 as well as in more continuous inputs such as
opportunities for the private sector to engage.               the application of fertilizer.
Companies have opportunities to support


          Opportunities for Companies                         Opportunities for IFC and Other Donors


 Expand access to plantations’ seed stock,                   Support the creation and strengthening of
 whether on credit or for subsidized sale; include           research on seed stock, through consortia of
 independent smallholders where possible based               companies and/or national governments
 on factors such as geographic dispersal of mills
 and extent of local access to credit                        Create a fund to reward companies that
                                                             creatively incentivize their smallholders to
 Create new incentive structures that link the               purchase and apply inputs consistently
 availability of inputs to the provision of technical
 assistance, and ultimately to the price paid for
 FFBs (e.g., by paying for quality instead of just
 volume)




                                                        23
Access to Credit is an important area of                inputs, and ultimately to replant. While there
opportunity for the private sector to engage as         are a range of existing efforts by plantation
it serves as a foundational component of                companies, banks, and governments to provide
smallholder activity. Smallholders need credit          credit, there are significant gaps in the current
to be able to finance initial planting, access          approaches.

         Opportunities for Companies                     Opportunities for IFC and Other Donors


 Provide plantation company support to                 Provide capital to promote lending to
 smallholder efforts to obtain credit, via             smallholders, whether through support to
 either direct credit or by guaranteeing loans from    plantation companies or by capitalizing banks
 local banks                                           and microfinance institutions that are providing
                                                       credit to the sector
 Work with banks to ensure understanding
 of the most appropriate credit mechanisms             Provide incentives for banks to accept a
 for smallholders (e.g., the need for deferred         more flexible range of collateral and
 repayment of principal)                               repayment terms, to account for smallholder
                                                       needs
 Develop a levy system to incrementally fund
 smallholder replanting over the course of             Influence country governments to address
 production, implementing in conjunction with          aspects of land title uncertainty that prevent
 associations                                          smallholders from borrowing against their
                                                       holdings

                                                       Promote new mechanisms among banking
                                                       sectors such as Certificates of Rural Product
                                                       that allow for commodity buyers to lend against
                                                       crop in the ground

Organizing Structures are key determinants              associations, and/or schemes are better able to
of smallholder livelihoods, as smallholders who         receive technical assistance, bargain with mills,
are organized into effective cooperatives,              and engage in certification.

          Opportunities for Companies                    Opportunities for IFC and Other Donors

 Support the development of associations of            Research models for engaging smallholder
 smallholders (whether independent or scheme)          organizations in value-added portions of
 by providing management advice and financial          the supply chain (e.g., through approaches
 support while preserving associations’ autonomy       like selling shares of a mill to smallholder
                                                       cooperatives)
 Partner with civil society organizations to
 identify the capacity needs of local                  Identify and disseminate best practices
 cooperatives                                          among smallholder associations, including
                                                       their formation, governance, and ongoing
                                                       management




                                                  24
Market       Dynamics,     and   in   particular             the RSPO principles and criteria will require full
certification, are pressing areas for improved               participation of smallholders, and there are
smallholder engagement. Successful rollout of                several challenges still to be addressed.

             Opportunities for Companies                     Opportunities for IFC and Other Donors


    Incorporate productivity improvements into              Identify financial mechanisms to cover
    steps taken toward certifying smallholders              cost shortfalls to achieving certification
                                                            (e.g., buying CSPO certificates, or capitalizing
    Explore private sector collaboration                    intermediaries, or directly investing in
    strategies to achieve certification of independent      companies)
    smallholders at a sustainable cost level
                                                            Strengthen the governance structure of the
                                                            RSPO by encouraging broader participation
                                                            (e.g., a greater smallholder voice) and
                                                            instituting good governance practices

                                                            Support efforts to increase demand for
                                                            certified sustainable palm oil (e.g., through
                                                            consumer campaigns)

                                                            Research the future of price premiums
                                                            resulting from achieving certification and how
                                                            these premiums could be passed to
                                                            smallholders



Recommendations for Prioritizing                             opportunities identified above could create
Opportunities                                                shared value for the business and for
                                                             smallholders. Companies seeking shared value
There are several recommendations that
                                                             opportunities might look at productivity
companies should consider in identifying how
                                                             interventions such as promoting access to
to select the opportunities where they are best
                                                             credit, providing low-cost seed stock, and
suited to engage.
                                                             providing technical assistance aimed at long-
                                                             term sustainability.
Companies should identify opportunities for
shared    value     creation 3  that    improve
                                                             Investments     in   smallholder development
smallholder livelihoods as well as providing
                                                             should focus on issues that leverage the
economic value for the company. Efforts that
                                                             company’s core capabilities. For instance,
focus on issues in which both companies and
                                                             agricultural input companies are well suited to
smallholders     stand     to   benefit    from
                                                             benefit    smallholders    through   increased
improvements are more likely to succeed and
                                                             research and development on seedlings, but
be sustained in the long term. Several of the
                                                             may be less well positioned to provide unique
                                                             value in areas such as infrastructure
3                                                            development.
  For more context on shared value creation as a
strategy for corporate social responsibility, see
                                                             The     challenges    affecting     smallholders’
“Strategy     and  Society:   The    Link   between
Competitive Advantage and Corporate Social                   livelihoods – especially those related to the
Responsibility,” a Harvard Business Review article           enabling environment – extend well beyond
(2006) by Michael Porter and Mark Kramer. Porter             any one company’s (or even one sector’s)
and Kramer describe the traditional motivations for          reach. In many cases, working in partnership
CSR as assuming that business and societal interests         with governments, NGOs, donors, and/or other
are working in opposition. In contrast, a shared             companies will allow acceleration of impact.
value approach focuses CSR efforts onto the social           Smallholder development efforts should be
dimensions of a company’s competitive context,
                                                             designed and conducted in partnership with
allowing for CSR efforts that use unique corporate
assets and provide value to both the business and to         other    actors   through    collective   impact
society at large                                             strategies – partnerships where multiple actors
                                                       25
contribute according to       each    of   their            cocoa and rubber may provide the most
comparative advantages.                                     direct parallels, other crops, such as
                                                            coffee, that have historically received more
Companies should also take advantage of the                 international development attention may
existing momentum in the field on certain                   be informative as well.
issues to increase their chances of success.
                                                        •   Development Opportunities for Others in
There is momentum – globally and in specific
                                                            the Sector: Looking beyond smallholders,
countries – on issues such as certification and
                                                            there are substantial questions to be
access to financial services for the poor.
                                                            addressed        around       development
Companies can build on this momentum by
                                                            opportunities   for  plantation   workers,
linking their smallholder productivity work to
                                                            surrounding    communities,    and   other
broader trends, for example by working with
                                                            stakeholders in the sector. Issues such as
emerging microfinance organizations, or by
                                                            labor conditions need to be addressed in
including productivity advice into training
                                                            these contexts.
programs        focused   on    environmental
sustainability.                                         •   Policy Dialogue on Cross-Cutting Issues:
                                                            Other critical issues in oil palm that affect
Companies should also consider the scale of                 smallholders and the sector at large need
impact of interventions, and focus on                       to be addressed through high-level policy
opportunities with large-scale, transformational            dialogue.      These      issues     include
benefits that can serve as models for                       environmental impact, the role of climate
replication, rather than focusing only on niche             change, and land rights issues.
projects aimed at local relations.
                                                        •   Deeper Assessment of Country-Specific
Finally, companies need to measure the results              Smallholder Needs: The challenges facing
of smallholder development efforts in order to              the palm oil sector vary significantly across
learn effectively to inform future projects.                countries. This is particularly true in
                                                            smallholder cultivation, where geographic
Additional Implications for the Field                       differences in relationship structures can
                                                            present very different opportunities across
Based on the current landscape of oil palm                  countries. In order to target corporate
smallholder challenges and efforts by the                   engagement on the most effective levers,
private sector, there are several other                     the sector should further explore how
questions that emerge as topics for further                 these opportunities and guidelines would
research in the sector:                                     be applied in different country-specific
•   Lessons from Other Crops: The oil palm                  settings by conducting country-specific
    sector could more proactively consider                  needs assessments and developing tailored
    lessons from smallholder development                    solutions.
    efforts in other crops when formulating
    their approaches. While tree crops such as




                                                   26
5. Conclusions

Smallholders represent a critical component of           improvements into steps          taken   toward
the palm oil industry, as well as a significant          certifying smallholders.
opportunity to improve livelihoods in resource-
poor settings. The major factors that affect             These private sector efforts should take into
smallholder development include agronomy,                account     opportunities for   shared   value
supply chain, and enabling environment issues            creation,    leverage     the company’s   core
– and there are examples of existing private             capabilities, work in partnership with others,
sector efforts to address each of these factors.         leverage existing momentum in the field, aim
                                                         for achieving large-scale impact, and measure
While private sector efforts have benefited              the results of their efforts.
some smallholders, significant opportunities
exist for corporations to commit to smallholder          Donors and development agencies, such as
livelihood development in ways that link efforts         IFC, can play a catalyzing role to set the
more closely with their business priorities and          conditions for private sector involvement, for
create large-scale livelihood improvements.              example, by supporting innovative models and
Based on views of stakeholders, the most                 research efforts that encourage additional
promising opportunities for corporations to              investments.
improve     smallholder    livelihoods   include
creating new incentive structures that reward            We hope that the opportunities presented here
farmers for utilizing agronomy best practices;           will inform and energize the field to take action
working with financial institutions to develop           on the challenges faced by smallholders,
appropriately-designed financial products for            leading to improved smallholder livelihoods in
farmers;     and    incorporating    productivity        the oil palm sector.




                                                    27
Appendices

Appendix A: References
1. Ayat Rahman et al. 2008. “The Malaysian           8. Porter and Kramer. 2006. “Strategy &
   palm oil supply chain: The role of the               Society: The Link Between Competitive
   independent   smallholder.”   Oil   Palm             Advantage       and    Corporate     Social
   Industry Economic Journal Vol 8 (2): 17-             Responsibility.” Harvard Business Review.
   27.
                                                     9. Rodríguez Raga et al. 2010. “Las Alianzas
2. Chaichee,   Nadia. 2007.   “Smallholder              Estratégicas Productivas en palma de
   Production of Palm Oil – Sustainable                 aceite, un modelo aún vigente, con
   Source of Income? Case Indonesia.” FAO               resultados importantes, que requiere
   case study.                                          algunos ajustes para su sostenibilidad. ”
                                                        Draft in progress, Alianza SNV- CECODES.
3. Colchester and Jiwan. 2006, “Ghosts on
   our Own Land: Indonesian Oil Palm                 10. Teoh, Cheng Hai. 2010. “Key Sustainability
   Smallholders and the RSPO.” Unpublished               Issues in the Palm Oil Sector.” Discussion
   manuscript, Forest Peoples Programme and              Paper,       WBG        Multi-Stakeholders
   Sawit Watch.                                          Collaboration.

4. IFAD. 2010. Republic of Uganda: Vegetable         11. Vermeulen and Goad. 2006. “Towards
   Oil Development Project. IFAD Working                 better practice in smallholder palm oil
   Paper 4: Oil Palm Development.                        production.” Natural Resource Issues
                                                         Series No. 5. International Institute for
5. IFC   Agribusiness     Department. 2009.              Environment and Development. London,
   “Investment Guidance Note: Palm Oil                   UK.
   Sector.” Draft in progress.
                                                     12. Warner and Bauer, 2002. “Mama Lus Frut
6. Koczberski, G., Curry, G. and Gibson, K.              Scheme: An Assessment of Poverty
   2001. “Improving Productivity of the                  Reduction.” ACIAR Impact Assessment
   Smallholder Oil Palm Sector in Papua New              Series, Centre for International Economics.
   Guinea.” Research Unit for the Study of
   Societies in Change, Curtin University of         13. Zen, Z., Barlow, C. and Gondowarsito, R.
   Technology, Perth, Western Australia.                 2005.     “Oil    palm  in    Indonesian
                                                         socioeconomic improvement: a review of
7. New Britain Palm Oil Limited. 2010.                   options.” Working Paper in Trade and
   “Sustainability Report 2009.” Available               Economics 11. Economics, Research School
   http://www.nbpol.com.pg/environment/                  of Pacific and Asian Studies, Australian
   rspo.html                                             National University.

Appendix B: Sources in Figures

Figure 1: Smallholder Production in Major            Figure 2: Palm Oil Productivity in Indonesia:
Producer Countries: Teoh 2010; Vermeulen             Suharto, cited in Teoh 2010.
and Goad 2006.


Appendix C: List of Interviewees

•   Tulio Dias, Agropalma Group                      •   Robert van Otterdijk, FAO
•   John     McCarthy,   Australian  National        •   Garry Smith, FAO
    University                                       •   Peter Thoenes, FAO
•   Billy Ghansah, Consultant to IFAD –              •   Jens Mesa Dishington, Fedepalma
    Uganda Project                                   •   Marcus    Colchester,     Forest   Peoples
•   Cheng Hai Teoh, Consultant to WBG                    Programme
•   George Curry, Curtin University                  •   Motoko Aizawa, IFC
                                                28
•   Bruce Wise, IFC                               •   Ian Orrell, Oil Palm Research Association of
•   Panayotis Varangis, IFC                           PNG
•   Chris Richards, IFC                           •   Norman Jiwan, Sawit Watch
•   Andrew Hamilton, IFC                          •   Gert Vandersmissen, Siat Group
•   Juan-Jose Dada, IFC                           •   Simon Winter, TechnoServe
•   Rosediana Suharto, Indonesian Palm Oil        •   Victor Ganoza, TechnoServe
    Commission                                    •   Jonas    Dallinger,   Thailand   Office   of
•   Marian Bradley, International Fund for            Agricultural     Economics,    Bureau     of
    Agricultural Development (IFAD)                   Agricultural Economic Research
•   Tian Sang Tan, Musim Mas                      •   Simon Siburat, Wilmar
•   Simon Lord, New Britain Palm Oil Ltd.         •   Patrick Labaste, World Bank




                                             29
                 About FSG

                 FSG Social Impact Advisors (FSG) is an international nonprofit consulting firm founded
                 in 1999 by Harvard Business School Professor Michael Porter and Mark Kramer. FSG
                 works with corporations, foundations, donors, and nonprofits to develop high impact
                 strategies, tailor operations, and evaluate results. Our work combines the analytical
                 rigor and data-driven approach of world-class strategy development and evaluation
                 with expertise in the management and organizational issues unique to the donor
                 community. We have invested years of in-depth research into successful funder and
                 nonprofit practices, recruited an outstanding consulting staff from top strategy firms
                 such as McKinsey, the Boston Consulting Group, Monitor, and Mercer, and focused
                 their talents on the unique strategic challenges of the social sector. FSG has 65
                 employees located in four office locations: Boston, Geneva, San Francisco, and
                 Seattle. For more information, visit http://www.fsg-impact.org

                 For questions or comments about this report, please email Adeeb Mahmud at
                 adeeb.mahmud@fsg-impact.org




2121 Pennsylvania Ave., NW, MSN 8P 807
Washington DC, 20433, USA
Tel. + 1 202 458 0430
Fax: + 1 202 974 4338
palmoilstrategy@ifc.org




                         www.ifc.org/palmoilstrategy




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