Government Policy for Facilitating Export

(FREE TRADE AGREEMENTS (FTAs))

FTAs (Free Trade Agreements) 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 YEAR OF 2010 AND THE MONTH OF

DECEMBER
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.

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 program.
_ 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.
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 crude palm oil (CPO) by European processed
palm oil (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;
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

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.

The Malaysian Palm Oil Board (MPOB) (website: mpob.gov.my) is a government agency
responsible for the development, promotion and regulation of the palm oil industry in Malaysia.
[1]
MPOB is a department of the Ministry of Plantation Industries and Commodities and is based
in Kuala Lumpur and Selangor, operating over 30 regional offices, laboratories and research
stations in Malaysia as well as Overseas Advisory Offices in Shanghai, Brussels, Washington
DC, Giza, Egypt and Karachi.[2] The Director General of MPOB is Mohd. Basri Wahid (Datuk
Dr). Promotes and develop oil palm industry of Malaysia. Provides information on licensing,
training, daily price statistics, and awards. Virtual tours, facilities, news and events, courses,
publications, research and development and technical enquiries. Located in Bandar Baru Bangi.

Ministry of Plantation Industries and Commodities (kppk.gov.my): Provides services,

publication, act, speech collection, parliament questions and news.

2007 INTERNATIONAL CONFERENCE ON BIOFUELS 5TH JULY 2007 (THURSDAY)

We have approved 92 licences to set up biodiesel plants where currently four are commercially
in production while three are undergoing
production trials. Given the increase in price of palm oil, the biodiesel industry in Malaysia is
confronted with issues of sustaining an economic scale of the biofuel production. I believe that
those who are involved in the palm biofuel business are fully aware of the nature of commodity
price that are influenced by supply and demand, and the vagaries of weather. It is imperative that
the industry strategise and adopt biofuel technology that is economically viable yet producing
high value added products to offset the cost.
I would like to reiterate here that “Malaysia is not destroying rainforests for palm oil
production”. We are committed to ensuring that whatever we do now is not at the expense of the
environment and our future generations. In fact, when Malaysia first embarked on research and
development on biofuel in 1980s, one of the objectives were to develop an environment friendly
alternative fuel.
We have taken steps to facilitate domestic development of the biofuel industry by
formulating the Malaysian Biofuel Industry Act 2006. The Act which is scheduled for
implementation in early 2008 will allow for orderly development and regulation of the industry.
In addition, the Act also allows the Government to mandate the use of biofuel for any activity in
this country.
Y. Bhg. Datu Dr. Michael Dosim Lunjew
Secretary-General,
Ministry of Plantation Industries & Commodities, Malaysia

Dr. Kandeh Yumkella,

Director-General of The United Nations Industrial Development Organisation (UNIDO)
Y. Bhg. Dato’ Sabri Ahmad,
Chairman of Malaysian Palm Oil Board
Y. Bhg. Dato’ Dr. Mohd Basri Wahid,
Director-General of Malaysian Palm Oil Board

Ministry of Plantation Industries and Commodities,

Malaysia
05th July 2007

Right now!

the Minister of Plantation Industries and Commodities (Tan Sri Bernard Dompok)

Chairman of the Malaysian Palm Oil Board (Dato’ Seri Utama Shahrir bin Abdul Samad)

Director General Malaysian Palm Oil Board (Datuk Dr. Choo Yuen May- Director General
MPOB)
As has been briefly outlined the palm oil industry in South East Asia is rapidly growing due to
increasing demands mainly from China, India and especially the European Union.
From the 1970s onwards
the government wanted to reduce the dependence
on the dominating rubber production
and, following a recommendation by the
World Bank, encouraged the agriculture sector
to replace more and more rubber with oil
palm plantations. With strong support
through foreign investment and from developing
banks the palm oil production started in
1971 with 300,000 hectares and reached almost
four million hectares in 2007. The industry
grew rapidly due to increased foreign demand
for vegetable oils and led to an increase
of the planted area by 172 percent only between
1990 and 2001. Today the main producing
areas of palm oil in Malaysia are Johor,
Sabah and Pahang-region.5 In 2007 the palm
oil sector produced around 15.8 million tons
of oil on 4.3 million hectares, which made
Malaysia the second biggest producer in the
world with 41 percent share of the worldmarket
of palm oil from a total production of
38.13 million tons. The main export markets
are China with 3.94 million tonnes or 28.73
percent of total palm oil exports. EU and Pakistan
are next, with an intake of 2.06 million
tonnes and 1.07 million tonnes, respectively.
The whole industry provides employment for
around 900,000 people and accounts for
more than four percent of Malaysia’s GDP.6
The diverse interests of Malay palm oilproducers
and palm-based products and their
derivatives are represented by a number of
industry organisations. The principal organisations
are the Malaysian Palm Oil Association
(MPOA), the Malaysian Palm Oil Board
(MPOB) and the Malaysian Palm Oil Promotional
Council (MPOPC). MPOA is the plantation
owners’ association which has more than
100 members and more than 1.4 million hectares
planted under oil palm. This amounts to

70 percent of the area under private ownership.

MPOB is the public sector establishment
responsible for undertaking research and development
and for regulatory and licensing
functions for the industry. The third organisation,
MPOPC, is responsible to promote Malaysian
palm oil. These organisations faced
massive transnational campaigns in the 1990s
concerning the serious environmental and
social problems that were caused by the massive
growth of palm oil plantations in Malaysia.
Such campaigns focused mainly on the
issue of deforestation (i.e. in Borneo), the loss
of biodiversity (i.e. Orang-Utan), fire clearing
of old plantations and social conflicts with
indigenous people. After the establishment of
the “Roundtable on Sustainable Palm Oil” in
2004 a lot of companies joined this global
forum and developed criteria for sustainable
production.