Government Policy for Facilitating Export

(FREE TRADE AGREEMENTS (FTAs))

FTAs negotiated bilaterally, and at the ASEAN level further enhanced market access for
Malaysia’s products.

Apart from ASEAN, Malaysian government made a bilateral Free Trade Agreements with Japan,
Pakistan, New Zealand, Chile and India; with ASEAN, Malaysia has concluded agreements with
the PRC, the Republic of Korea (ROK), as well as Australia and New Zealand, and the FTA in
goods with Japan and India.
For 2010, there was an increase of 35.8% in the utilisation of Preferential Certificate of Origin
based on the 509,897 Certificate of Origins issued compared with 375,589 issued in 2009.
Exports performance under FTAs and GSP, recorded an increase of 37.9% in the FOB value of
exports to RM103.83 billion compared with RM75.30 billion in 2009.

TRADE PERFORMANCE FOR THE MONTH OF DECEMBER 2010 AND THE YEAR
OF 2010#
Malaysia’s total exports in December 2010 increased by 4.6% to RM57.16 billion compared
with December 2009. This was the highest exports value ever recorded for the month of
December. Imports expanded by 11.5% to RM47.48 billion, resulting in a total trade of
RM104.64 billion, an increase of 7.6% from the corresponding month in 2009. A trade surplus of
RM9.69 billion was registered, making it the 158th consecutive month of trade surplus since
November 1997.
Compared with November 2010, exports in December 2010 increased by 8.5% while imports
expanded by 8.6% and total trade was 8.6% higher. Total trade in 2010 was valued at RM1.169
trillion, an increase of 18.3% from RM988.24 billion in 2009 and 1.2% lower compared with
RM1.183 trillion registered in 2008, the highest total trade ever recorded by the country. This
was contributed by exports of RM639.43 billion and RM529.19 billion of imports. Exports
expanded by 15.6% while imports rose 21.7% compared with 2009, resulting in a trade surplus
of RM110.23 billion.
Total trade in the fourth quarter of 2010 was RM304.15 billion, an increase of 3.0% compared
with the third quarter of 2010. Exports expanded by 3.8% to RM164.84 billion, while imports
grew by 2.1% to RM139.30 billion. Compared with the fourth quarter of 2009, exports and
imports in the fourth quarter of 2010 were higher by 3.7% and 10.1% respectively. Total trade
increased by 6.5% compared with the same quarter last year.

EXPORTS IN DECEMBER 2010

The increase in exports in December 2010 of RM2.49 billion from a year ago was largely
contributed by higher exports of palm oil, refined petroleum products, chemicals and chemical
products, manufactures of metal, crude rubber, iron and steel products as well as optical and
scientific equipment. On a month-on-month basis,exports expanded by 8.5% attributed mainly to
higher exports of electrical and electronic (E&E) products, refined petroleum products,
chemicals and chemical products, machinery, appliances and parts as well as iron and steel
products.The performance of major export products is shown in Chart 1, while Chart 2 shows
the performance of the top five major export destinations in December 2010.
Exports to ASEAN was valued at RM15.03 billion, accounting for 26.3% of Malaysia’s total
exports in December 2010. Total exports to this region increased by 5.7% compared with
RM14.22 billion registered a year ago due to higher exports of refined petroleum products, palm
oil, manufactures of metal and jewellery.
Exports to ASEAN: Exports to major EU countries:

 Singapore RM 7.90 billion  Netherlands RM 1.66 billion

 Thailand RM 3.02 billion  Germany RM 1.66 billion

 Indonesia RM 1.60 billion  United Kingdom RM 645.1 million

 Viet Nam RM 1.23 billion  France RM 610.6 million

 Philippines RM 1.01 billion  Italy RM 364.1 million

 Brunei Darussalam RM 134.3 million  Belgium RM 197.6 million

 Myanmar RM 74.3 million  Spain RM 164.0 million

 Cambodia RM 59.0 million  Sweden RM 105.6 million

 Lao PDR RM 3.0 million  Finland RM 91.4 million

 Poland RM 70.4 million
Base of above information we are going to evaluate the government policy about Palm oil.

Introduction:

Malaysia, along with some of their Southeast Asian neighbors, has managed to combine high
export growth in natural resources with industrialization in the early years of their take-off. Palm
oil is a potentially sustainable resource sector that in recent decades has increased the forward
linkages into manufacturing sectors which use palm oil as its main input. Both the fact that palm
oil is sustainable and can promote manufacturing sectors make it a good object of study to
understand how other developing countries potentially can manage their natural resource sectors.

The Malaysian palm oil sector did have a large degree of technological development. In the
1960s started out by exporting mainly crude palm oil; in the 1970s the country started to export
the more highly value added processed palm oil. From the 1980s and onwards palm oil was
increasingly being used in downstream activities such as the oleochemical industry and more
recently biodiesel.
The technological learning in the Malaysian palm oil industry was influenced by all four
mechanisms which were; incentives, skills, market building and institutional support.

At first, Malaysia did not have a large domestic market which limited the attractiveness of
investments in general. For palm oil the limits of home-market led development led to an early
exhaustion of the easy phase of import substitution.

Government Policy Regarding to Palm Oil Export :

The Investment Act of 1968 was a more export-oriented attempt to promote investments
(Gopal 2001 pp.251–252). It provided several incentives:

- The investment abatement allowance: Allowed for a 40 percent tax deduction of

corporate income tax for two years. This deduction could be extended to at most eight
years (Gopal 2001 p. 254).
- Pioneer status: The status could be given if there were good prospects for further
development or it was in the public interest to do so, in the case of palm oil it was both
(Fong and Lim, 1984 p.399). Those palm oil refineries obtaining a pioneer status got a
tax holiday for seven years. In all nine palm oil refineries obtained pioneer status between
1969 and 1974. Following 1974 palm oil refineries were not considered eligible for the
pioneer status.
- Investment tax credit: Allowed tax exemptions through investments.
- Export allowance: Tax deduction of 5 % of export sales the same year.
- Deduction of Expenses Incurred on Promotion of Exports Overseas:
These were deductions of expenses occurred when attempting to promote Malaysian
products abroad.
- Accelerated Depreciation Allowance: Those companies exporting at least 20 % of their
production value and incur costs for the purpose of modernizing their plant could get an
accelerated depreciation allowance of 20 percent.
Production structure of palm oil:

The current production structure of the palm oil sector can be divided into three.
On the first level are plantations that produce the palm oil fruit, which will be called the Fresh
Fruit Brunches (FFBs).
On the second level are the mills that process the FFBs to produce two main products, crude
palm oil (CPO) and palm kernel (PK). To be economic viable the FFBs have to arrive at the
mills within 24 hours of being released by the tree, therefore the mills have to be in close range
of the plantations.
On the third level are the refineries that process CPO into processed palm oil (PPO) products.
The ownership structure in the plantation sector can roughly be divided into three, the private
plantations, the government schemes (with FELDA being the largest) and the independent
smallholders. According to Fold (1994) it is the private estates which have the largest areas and
are the most productive given the economics-of-scale. Government schemes attempt to organize
smallholders to exploit some degree of economics-of-scale, but these cannot match the
productivity levels of the private estates. The independent smallholders are the ones with the
lowest degree of productivity. In figure 5 the ownership structure and their land areas are shown
over time. The expansion of government schemes seems to have been important for the initial
growth in the industry in the 1970s and 1980s. However, private estates took over as the most
important factor in during the 1990s.

The government started to promote the higher value added PPO from the late 1960s. This was
controversial as many economists at the World Bank and other agencies did not believe that
Malaysia had a comparative advantage in the production of PPO. To promote the investment in
refineries investment incentives were given through the already mentioned1968 Act.
As a result: Oil palm cultivation and downstream processing has enjoyed considerable
government support in Malaysia. In Malaysia, government efforts have been dominant as Export
Oriented interventions were instrumental in the deliberate shift from CPO to PPO production,
and providing the leadership necessary to motivate private firms to participate in new product
development.

Malaysian Government Intervention Regarding to Subsidy:

Under British rule, planters of oil palm specialized in primary production and received no
subsidy or protection from the government. Specialization in primary production continued after
independence. The government’s first intervention came in the late 1960s, when foreign-owned
estates were acquired by parastatals—among them the state economic development corporations,
Permodalan Nasional (PERNAS) and later Permodalan Nasional Berhad (PNB). In the 1950s
and 1960s the government extended the Rural Industry and Smallholders Development Authority
(RISDA) to include oil palm cultivation and launched FELDA and the Federal Land and Crop
Authority (FELCRA) to alleviate poverty.

When launched in 1957, FELDA applied to rubber cultivation. Oil palm (375 hectares) was
added in 1961 (Tunku, Shamsul, and Thong 1988). Unlike the estate cultivation, which was
motivated by market expansion and the search for profit, FELDA focused on alleviating poverty
while improving efficiency. In line with the Second Malaysia Plan’s objective of engendering
restructuring along ethnic lines, only poor Bumiputeras, primarily those with experience in
agriculture, were targeted (Malaysia 1971; Arif and Tengku Mohd Ariff 2001).
Government efforts to diversify Malaysia’s exports to reduce the negative effects of poor terms
of trade in rubber and tin1 focused on oil palm (Malaysia 1971, 1981, 1984; Rasiah, Osman and
Rokiah, 2001). As a consequence, rubber plantations gave way to oil palm plantations (Sekhar
2000). While agricultural land use has gradually expanded, rubber acreage has declined in
absolute terms (Table 1). Oil palm acreage grew from 320,000 hectares in 1970 to 3.3 million
hectares in
2000.
Export:

For exports, the first real incentives came with the Investment Act of 1968. However, the export
allowance and the deduction of expenses incurred on promotion of exports overseas were not as
effective as the investment incentives as the benefits from them were small (Gopal, 2001 p.260).
International agencies such as the World Bank warned Malaysia against a policy to attempting to
shift from CPO to PPO production as Malaysia did not enjoy a comparative advantage in
processing but The Malaysian government went against their advice and implemented an export
tax on CPO exports in 1976. This tax meant that world prices for CPO would increase which
would reduce demand for CPO by European PPO producers. The increase in CPO prices would
effectively mean an increase in the production costs for PPO producers in Europe. Given the
supply of CPO, those willing to invest in PPO production in Malaysia would enjoy a
considerable competitive advantage over their international competitors. The government also
increased tariffs on bleaching earth which is a major input in the production of PPO. To avoid
adverse effects the government tied prices on bleaching earth sold domestically with world
prices. According to Gopal (2001 p.290) the government imposed the duties to i) Make PPO
production more economically attractive; ii) Avoid overburdening CPO producers; iii) Protect
duty revenue as much as possible; and iv) Avoid providing financial support from other sources,
even when the industry was not profitable.

To promote the export of PPO an export tax on CPO was introduced in 1976. The export tax had
several effects. First, it made the CPO more expensive for foreigners, effectively reducing
exports and the supply of CPO for PPO producers in Europe. Second, it increased the supply of
CPO for local Malaysian refineries. Thirdly, it lessened the supply constraints plantations and
mills had as they did not have the capacity to supply demand. Finally, it signaled to potential
investors that the government would promote refineries making it a safer investment prospect.
The effect was an increase in PPO export and a reduction in CPO exports as can be seen in figure
6.
Export taxes:

Malaysia taxes exports of palm oil, rubber, and timber products in order to protect domestic
processing production. Malaysia is the second largest producer and largest exporter of palm oil
and products made from palm oil, which account for approximately 15 percent of world
production and 30 percent of world trade in vegetable oils. Malaysia uses export taxes of 10
percent to 30 percent ad valorem to discourage the export of crude palm oil and to encourage
development of the local refinery sector. Refined palm oil and products are not subject to export
taxes. The Malaysian government waives export taxes on exports of crude palm oil to Malaysia-
invested foreign vegetable oil refineries, giving Malaysia-invested plants an advantage in foreign
markets, including the United States.

Conclusion:

Palm oil in Malaysia grew from virtually nothing to the most important agriculture sector with
strong linkages to the rest of the economy. There was a strong government effort to promote
palm oil and the technological development of the sector.
Tentative conclusions are based on online data and a literature overview. The first is that
industrial policy was effective in increasing production, but less so in promoting productivity.
The most productive estates, based on an interview with an industry representative and Fold
(1994), are the private estates. United Plantations, one of the main players, has an OER of 28 %,
while the average for the country is around 20 %. It is hard to assess the spread of technology
given the lack of data, but it does seem that the spread of technology was less effective as has
been claimed by the MPOB.
Second, industrial policy was effective in promoting the refinery sector in Malaysia and move
into the higher value-added production of PPO. I still need to assess the role of the government
in promoting the further downstream activities.
History Of The Malaysian Palm Oil Industry
Oil Palm Introduction and Commercialisation
_ The oil palm tree was first introduced to Malaya by the British as an ornamental plant in 1875
but
it was only commercially planted in Tennamaran Estate, Selangor 1917 by Henri Fauconnier.
Crop Diversification Efforts
_ Despite threats of the Emergency during the 1960s, the oil palm expansion in Malaysia was
rapid as its economic potential was recognised by the Malaysian Government as a
complementary
crop to rubber in the poverty eradication programme.
_ The Federal Land Development Authority (FELDA) first introduced the oil palm in 1961
on an initial size of 375 ha to help the landless farmers.
_ Due to the fall in rubber and tin prices, estate planting of oil palm tended to be on old rubber
estate land when the prospects of high yields and profitability of palm oil were recognised.
_ In 1966, Malaysia overtook Nigeria as the world’s leading exporter of palm oil.
_ Compared to Malaysia, the Indonesia government only started to directly invest in state owned
plantations in 1968.
Export Diversification
_ Realising from historical experience with rubber and tin that dependence on narrow product
lines can
bring price downswings, the Malaysian government embraced diversification as a way to sustain
production and exports.
_ Acting against the advice of international agencies, the Malaysian government began in the late
1970s to encourage a shift from CPO exports to refined products through taxation and
incentive policies.
_ The 1980s saw the “Malaysianisation” of 3 major plantation companies previously run by
the British i.e. Sime Darby, Guthrie and Harrison & Crossfield (later Golden Hope Plantations)
_ 1980 also saw the founding of the Kuala Lumpur Commodity Exchange (KLCE), a key
instrument for price setting, hedging and dissemination of market information to reduce
market risk in the trading of palm oil.

Industrialisation & Market Expansion

_ Seeing the need for product development to sustain the upstream development of palm oil, the
industry
was flagged for sectoral support under the Industrial Master Plan of 1986 (IMP1).
_ The IMP1 emphasised on the rationalisation of refining and fractionation to increase efficiency
and
competitiveness of Malaysian palm oil in the world market.
_ As a result, Malaysia became a hub of palm oil downstream processing as it was more
economical to export refined products than to have them processed in Europe.
_ While Malaysia became a leading exporter of refined oil, demand for CPO exports then shifted
to Indonesia as further oil palm expansion was encouraged through Indonesian government
initiated smallholder schemes.
_ By the time the Industrial Master Plan 2 (IMP2) was launched in 1996, Malaysia’s processing
capacity has exceeded the supply of CPO.
_ IMP2 led to the expansion of oil palm hectarage to East Malaysia and also encouraged the
private sector to seek raw materials from abroad.
_ IMP2 also saw stimulated participation in R&D to meet the call for productivity gains and
further value-added product development along the value chain.
_ The Malaysian Palm Oil Council (MPOC) was tasked to develop a comprehensive strategy
to position Malaysia as an international leader in the oils & fats market through
promotional activities.
_ Despite Indonesia having overtaken Malaysia as a leading producer of palm oil since 2007 due
to its
vast landbank expansion and labour opportunities, the industry is still thriving in Malaysia.
_ Malaysia is still a leading exporter of palm oil to major consumers in China, EU and India.
_ In fact, Sime Darby and FELDA, both Malaysian-based companies are today the world’s
largest plantation companies (based on planted area).

1. http://siteresources.worldbank.org/EDUCATION/Resources/278200-
1121703274255/1439264-1242337549970/Malaysian_Palm_Oil_Industry.pdf

2. http://www.americanpalmoil.com/pdf/biodiesel/Malaysia%20Biofuel%20Policy.pdf

3. http://www.mpob.gov.my/

4. http://www.mpob.gov.my/
THE NATIONAL BIOFUEL POLICY
MINISTRY OF PLANTATION INDUSTRIES AND COMMODITIES
MALAYSIA
21 March 2006

Paraphrased shode neveshte khodam. (Aabi ha)

Since fossil fuels are being depleted rapidly and regarding the fact that the prices of petroleum,
green house gas emissions and awareness of environmental issues has increased, countries are
trying to come up with an idea to use environmentally-friendly and renewable sources of energy
like biofuel. In the recent years, the use of methyl esters as diesel has increased especially in EU.

In 1982, Malaysia began to establish the use of palm methyl esters as a suitable fuel and a
comprehensive palm biofuel program embarked at the time.

According to the foreword of the article published by the Malaysian ministry of plantation
industries and commodities on biofuel policy on March 21st 2006, …

The National Biofuel Policy envisions

• Use of environmentally friendly,

sustainable and viable sources of energy
to reduce the dependency on depleting
fossil fuels,

• Enhanced prosperity and well-being of

all the stakeholders in the agriculture
and commodity based industries
through stable and remunerative
prices.
The biofuel policy of Malaysia is based on Malaysia's National Biofuel Policy
document. It was launched by the federal government of Malaysia on 10 August
2005. The policy is primarily aimed at reducing the country's fuel import bill, further
promoting the demand for palm oil, which is expected to be the primary commodity
for biofuel production in Malaysia, as well as to shore up the price of palm oil
especially during periods of low export demand.

The Malaysia's National Biofuel Policy (interchangeably known as the National Biodiesel
Policy) entails a four-prong strategy, which encompass:

• Producing a biodiesel fuel blend of 5% processed palm oil with 95%

petroleum diesel.
• Encouraging the use of biofuel among the public, which will involve giving out
incentives for oil retail companies to provide biodiesel pumps at fueling
stations.
• Establishing an industry standard for biodiesel quality, which will be the
responsibility of SIRIM.
• Setting up of a palm oil biodiesel plant, which is targeted to be built in Labu,
Negeri Sembilan.

Yanmar, a Japan-based global manufacturer of diesel engines planned to build a

research facility in Malaysia to conduct research on the development of palm oil
biodiesel. It plans to develop and test biodiesel for the industrial diesels it develops
for its machines and generators. The research facility will be set up in Kota
Kinabalu.