The Institutional Arrangements in the Palm Oil Sector : Effort to Spur Economic Growth in Rural Areas

The long-term development emphasizes economic development with the main objective to achieve a balance between agriculture and industry. To achieve this, the agricultural sector requires strength and ability to support its growth amidst the strong, more advanced industrial sector. This can be seen from the development which had been designed during the New Order era in the form of five-year development plans I to V, which focused on the agricultural sector. Since the reform era, the rural-based agricultural sector also has received considerable attention, resulting in the development Vol. 4 | No. 3 ISSN: 2089-6271

Palm Oil is a fantastic plant for the people of Riau Province.It can be seen from the rapid development of plantations, in 2001 palm oil plantations covered an area of 1,119,798 ha and in 2010 it increased to 1,925,341 ha with a growth of 36.02%.Palm oil plantation activities brought economic impact on society, both for the people who are directly involved with the activities of plantations and for their surrounding community.To anticipate the rapid development, a model avoiding inequality of income among farmers needs to be designed, especially for self-supporting farmers in a partnership pattern.Institutional model aims to increase the welfare of rural farmers in the form of Palm Oil Based Agroestate (ABK).The concept of Palm oil Based Agroestate collaborates between farmers, cooperatives, and business enterprises.Through the ABK program, farmers will have an opportunity to buy/have shares of the Palm oil Factory (PKS).There are two main business activities of ABK model; first, business activities that build palm oil plantations and factories of the derivative industry; if necessary the settlement of participaing farmers will be established by the developers; second, managing plantations and participating farmers-owned factories as well as market the products carried out by a business enterprise or a cooperative formed by the participant farmers.
timber seekers in the woods and carpenters.
For the people in rural areas, plantation crops have been an alternative source of income to improve the family's economy, so their interest in the development of plantations remains high.Palm oil cultivation is proved to contribute to the increase in the welfare of farmers in the rural areas.In regard to human activities, the development of plantations has also caused a high mobility of the population.

The development of palm oil plantations in Riau
Province has created impact on the economic activities in rural areas.The results of the research conducted by Almasdi Syahza (2010) show that the farmers' income range from Rp3,475,029 to Rp 4,125,242.If the assumed exchange rate of Rupiah against Dollar is US $ 1 = Rp 9,000, the income of palm oil farmers range from US $ 4,633.37 to USD $ 5,500.32 per year.In addition, the development has impact on the acceleration of development of the people's economy which will help to reduce poverty in rural areas.
The rapid development of palm oil plantations lead to the emergence of centers of economic growth in rural areas surrounding the plantations.This increases the purchasing power of the rural communities, especially to buy the daily needs of the household and palm oil production facilities.
However, the preparation of the development of plantations requires land.If this is not controlled by the policy makers, there will be conversion of land use in rural areas (Almasdi Syahza, 2011).

Theoretical Framework
In Indonesia the agribusiness sector has the potential to compete and seize the market opportunities in this free trade era.Outside the agribusiness sector, not only it is difficult to compete but also it is also challenging to empower the people's economy.The government policy which favors the development of the agribusiness sector at the macro level needs to be combined with efforts at the micro level to ensure that the benefits of the development can be enjoyed by society.Past experience shows that the major contribution of the agribusiness sector to the national economy was not followed by sufficient increase in farmers' income.Therefore, to empower the people's economy, favorable conditions created for the the development of the agribusiness sector at national level should be combined with a mechanism which can ensure that the benefits of the development can be enjoyed by everyone.Zainal Basri, 2003).

One
Income inequality between the rural and urban areas is quite considerable.The agribusiness is seen as the solution to remove this inequality.
According to Lewis in Todaro Todaro, Michael P (2006), underdeveloped economy consists of two sectors, namely: 1) the traditional sector, or the rural subsistence sector which is overpopulated and is characterized by the marginal productivity of the labor which is equal to zero, 2) the modern urban industrial sector with its high productivity level which becomes a transition for workers who gradually move from the subsistence sector.Lewis assumed that the wage level in urban areas is 30 percent higher than the average income in rural areas, and this condition forces the workers to move from the village to the city.According to Ginanjar Kartasasmita (1996), the development of rural areas needs to be carried out using the approach which is suitable to the nature and characteristics of the rural areas.For the government of Indonesia, rural development has been associated with the development of to deviate from the purpose of the research.The accurate information was obtained by using the method of Rapid Rural Appraisal (RRA), which is a participatory approach to obtain data / information and a general assessment in a relatively short time.
The advantage of this approach is that the research can cover a wider area in a relatively short period of time to obtain extensive information in general.
In this RRA method the information collected is limited to the information required in accordance with the purpose of the research, but the data are more in-depth as the sources of the information are traced.This way, complete information about a particular thing can be obtained.
To reduce the bias which is caused by the subjective element of the researcher, a preliminary Thailand Growth Triangle (IMT-GT), which means there are more profitable market opportunities, and Fifth, the results which have been gained show that palm oil generates higher income for farmers compared to other plantation crops (Almasdi Syahza, 2003).
In order to stimulate economic growth, the current This research used the primary and secondary data.
The required primary data include the identity of samples, land ownership and control, household income, diversification of business, business opportunities, and increase in employment.To complement the information, an interview of public figures in the research sites was conducted.
The primary data was collected using a list of  • The participant farmers must comply with and adhere to all conditions as determined in the establishment of plantation which uses the KKPA pattern.
• The farmers are entitled to an opportunity to purchase shares of the palm oil factory which is built by the core company.

Farmers' Cooperative
A farmers' cooperative that manages the community palm oil plantations is a primary According Setiadi Wijaya ( 2002), a cooperative is a business organization that must be managed in the same way as a business institution is run.
Nowadays, a cooperative does not reflect a form of modern business which is professionally managed, and it even has an image that it is only suitable for the poor and does not require management.On the contrary, a cooperative is a business entity, so management is necessary to maintain its survival.
If a cooperative wants to advance itself, it does not have any choice but to establish a partnership with other business entities which share its interests to be mutually beneficial.This business partnership is necessary to support the efforts to develop a cooperative.

Developer (the Nucleus Company)
A nucleus company which becomes a working partner of a cooperative is a privately/state-owned plantation companies or state-owned legal entities in Indonesia which according to the assessment • To assist the farmers in the repayment of credit by making deduction from the sale of FFB at a maximum of 30%.

Models of the Management of Palm oil Plantations
The purpose of the development of palm oil plantations is to improve the welfare of the rural communities (farmers).One of the indicators of welfare is an increase in the farmers' income.One source of their income is the proceeds from the agricultural activities, such as: palm oil plantations, supporting crops which consist of the palawija crops and the horticulture crops.In order that the farmers earn a decent income from cultivating crops, the business must be managed properly.
For this purpose, various stakeholders should be involved, including: farmers, cooperatives, companies, financial institutions and relevant government agencies.To ensure that the system in the development of the community plantations is running as expected, the activity needs to be monitored by independent institutions, including, universities (research institutes, study centers), research and development agencies, or NGOs.
For more details, the model of the management of community palm oil plantations can be seen in Any increase in productivity will be accompanied with an increase in income, whether derived from the added value of the agriculture and nonagriculture products through the cooperative; Second, the establishment of the agribusiness cooperative in non-agricultural activities which have institutional ties with the farmers, among cooperatives, and with the private companies and the state-owned enterprises, will able to eliminate the problem of transmission prices and multiple margins.Thus, the price of agricultural facilities paid by the farmers will be less expensive, stimulating the expansion of agricultural activities, and the price of the final agribusiness products as a whole can be less expensive at the consumer level (encouraging an increased consumption).
In addition, the consistency and continuity of the quality of the final products can be assured.Overall, this will enable agribusiness products to compete in the international markets; Third, the elimination of problem of price transmission will integrate the farmers' economy and the non-farmers' economy.
The increase in non-farmers' income will increase consumption of end products of agro-industry, which is generally elastic to the changes in income.This will increase the farmers' income Based on the illustrations and the problems outlined above, the purpose of this research is to obtain information on the development of palm oil plantations in Riau and the solutions in terms of the institutional arrangements in the context of economic development in rural areas.The research has managed to find a model for Institutional Arrangement of Palm oil in the Efforts to Spur the Economy in Rural Areas.This design is expected to increase rural economic growth from both the plantation and non-plantation sectors.The results of this research can also be used to formulate which activities or strategies should be taken by the local government for future agricultural development and strategies for rural economic development.
reason of the powerlessness of the rural people is the policy mismatch in the past, overlooking the agricultural sector as the basis for comparative and competitive advantages.Meanwhile, in fact the economic empowerment of the rural community of the agribusiness-based agricultural sector.The rural economic development is also accelerated through the increased production and the added value of the agricultural sector.The economic development in Riau Province is based on two general patterns of development: the long-term general pattern and the short-term general pattern.The long-term general pattern includes the foundation of development with economic policy which is directed towards two key sectors, namely agriculture and industry sectors, by taking into account their relationship with other sectors.Specifically, the regional development policy in Riau Province is still focused on the key sectors.The direction of development is to stimulate regional economic growth and increase the contribution to GDP of Riau Province.According to the data from the Plantation Advisory Service (Dinas Perkebunan) in Riau Province (2010) in the 2005-2009 period, the growth in the agricultural sector was at 19.08% per year, while over the same period the plantation sub-sector grew by 18.97% per year.The significant growth in the plantation sub-sector was from the contribution of palm oil.The people in rural areas have given a considerable attention to plantation crops.One reason is because there is a steady market for these plantation crops; meanwhile, the market for other plants outside the plantation sub-sector is very volatile.Especially, palm oil has been an excellent commodity in Riau that grows the interest of the people who are not part of the People's Nucleus Plantations (PIR) scheme from the lower class to the upper class in planting palm oil independently.Since the 1998 post-crisis time, the increase in the area of palm oil plantations in Riau has been dramatic, from 901,276 ha of plantations in 1998 to 1,119,798 ha in 2001.The area increased to 1,925,341 ha in the late 2009.During the 1998-2009 period the average growth rate was 8.59% per year, while other commodities such as rubber and coconut suffered a decrease in the size of plantation areas.The increase in the plantation area and the production of palm oil during the last three years in Riau is presented in Rural development should be able to reduce the disparity between rural and urban areas.One of the concepts put forward by Friedmann.J and Mike Douglass in Almasdi Syahza (2007b) is development of an agropolitan.The concept describes how to accelerate the development in rural areas using the potentials owned by the village itself.The following are the things which should be done: First, to change the rural areas by introducing elements of urban lifestyle (urbanism), which have been adapted to a particular rural environment.This will discourage migration from the rural to urban areas.Investment in rural areas is one way to reduce urbanization and to change rural settlements into a mixed entity which is called an agropolis or a city in the field; Second, to expand the social relations in rural areas beyond the village boundaries, thus forming a broader socio-economic and political space (an agropolitan district); Third, to reduce social dislocation in the development process by maintaining the family unity, increasing the sense of security, and providing personal satisfaction in building a new society; Fourth, to ensure steady revenues of villages and cities.The disparity is minimized by way of increasing productive work opportunities in rural areas, especially by combining the agricultural and non-agricultural activities in the same community; Fifth, to employ the existing workforce more effectively by directing the workforce to activities in the development of resources in each and every agropolitan district, including the increase in agricultural products; Sixth, to establish a network of agropolitan districts into a regional network by establishing and improving the relationship between agropolitan districts and cities; Seventh, to establish a government and a planning process which are adjusted to the rural conditions so that the priority in the development is created and its implementation on the local population is assured; Eighth, to provide financial resources to build an agropolitan.
Rural development should follow four major efforts, which are interrelated and form the main strategies, namely: First, to empower the economy of the rural people.The empowerment requires capital and guidance on the utilization of technology and marketing to empower and create independence of the rural communities; Second, to improve the quality of human resources in rural areas in order that they have an adequate basis to improve and strengthen their productivity and competitiveness; Third, to develop infrastructures in rural areas.Transportation infrastructure is an absolute requirement in these areas, since it will help villages to keep up with other more advanced villages; and Fourth, to build both formal and nonformal rural institutions.The institutional development required is the creation of good services especially to boost the rural economy such as financial institutions.
analysis was conducted each time an interview of the respondent was completed.If the analysis finds data errors or different data from what were expected due to misinformation or incorrect interpretation, the sources of information would be confirmed or the search for additional information would be obtained to complete the one available.Based on the information from the site and the results of data analysis, a institutional model for development of palm oil plantation in rural areas is formulated in an effort to spur the rural economic growth RESULTS AND DISCUSSION Development of Economic Institutional Model in the Palm oil Sector The rapid increase of the community plantation areas particularly those which are individually managed has created the need to design a model to prevent income disparity between plasma farmers and individual farmers.The model which is designed to increase the welfare of farmers in rural areas is the Oil Palm Based Agroestate (ABK).The model presented is intended to remove the dichotomies from the unfair distribution of profits between the (plasma and individual) farmers of palm oil and the core company and to ensure the development and sustainability of palm oil factories (PSK).The results of the research conducted by Almasdi Syahza (2010) show that the program for the development of palm oil plantations has been only limited to the community plantation (plasma) and the company plantation (nucleus).The farmers' ownership is only limited to the parcel of land which has been determined in the plasma program, while the factory which processes fresh fruit bunches (FFB) is owned solely by the company.In the future, it is necessary to consider a model of partnership for the development of palm oil plantations, in which the farmers have some form of ownership of the palm oil plantations and shares of the palm oil mill or factory.Farmers will buy a package consisting of a parcel of palm oil plantation and the factory's shares through a cooperative.In this program the farmers are given the opportunity to buy / own shares in the factory of the nucleus company.The availability of quality, quantity and continuity of raw materials needs to be guaranteed to achieve the agro-industry, including palm oil industry.The link between the source of raw materials and the agro-industry of palm oil should be integrated into a form of ownership.This concept of partnership emphasizes the principle of joint ownership by farmers of the agricultural activities and the processing factory, which is managed by the farmers' cooperative.This implementation is oriented to the welfare of farmers by putting the emphasis on efficiency in the processing of productive agricultural activities and increase in the added value in the context of agribusiness with an institution designed within a working network based on the ability and professionalism of various different actors including the developers, industrial factories, settlement of participant farmers, active participant farmers, business entity for processing (BUP) or cooperative, or management (agricultural activities, industrial factories), and financing institutions.
economic policy should embrace a new paradigm in which the empowerment of people's economy should be a major concern.Since the livelihoods of most people are in the agricultural sector and the sector still makes a significant contribution to the country's economy, the empowerment of the people's economy also means building a better agricultural economy.Industrial development should consider its backward linkage with the agricultural sector or the primary sector while its forward linkages should pay attention to the processing which increases the added value and to effective marketing so that that products are useful.The concept of agricultural development is referred to as the concept of agribusiness In order to realize the objective to develop the people's economy, especially through the agricultural sector, it is necessary to prepare a strategic policy to increase or accelerate the growth of the agricultural sector, particularly to increase the income and improve welfare.One way to achieve this is by the development of agribusiness which is well planned and linked to the development of other economic sectors METHODS The research is conducted using a survey with a descriptive method (Descriptive Research).The purpose of a descriptive research is to capture in a systematic, factual and accurate manner the facts and characteristics of the population (palm oil farmers) in areas selected as the research sites.The research was conducted in several sites in Riau Province which develop the plantation sub-sector particularly by growing palm oils.The sites were decided at random, although a special attention is given especially to the sites in which centers of economic growth emerge in rural areas as the impact of the development of palm oil plantations.The reasons for the site selection include: 1) the spatial plan of Riau Province, which means that the area is part of the center of development of plantation particularly palm oil plantation, 2) the age of palm oil in the survey area on the optimum production age which is 10 to 16 years (for production of FFB, palm oil and palm kernel), 3) on the areas of the development of plantations, there are two types of activities, namely: plasma palm oil plantations with state-owned enterprises as the core and palm oil plantations with private companies as the core, 4) in the surrounding areas of the palm oil plantations a lot of local people plant palm oils independently, and 5) the selected sites taken as samples have different level of plantation productivity.Stratified Cluster Sampling was conducted to obtain samples which represent each of selected sites.This method was used based on the consideration that the research sites are scattered and the characteristics of people who are the object of study are diverse.In each selected cluster, two types of respondents were taken: the respondents who are plantation farmers and the respondents who are non-plantation farmers.The sample size in each stratum (the plantation farmers and the non-plantation farmers) is determined proportionally.
questions that had been prepared based on the needs of the research.The questionnaire serves as a general guideline to remind the researcher not In the palm oil-based agroestate (ABK) model, there are two main business activities: first, the activities to establish plantations and industrial factories, and if necessary, to build the settlement of participant farmers that will be carried out by the developers, second, the business of managing the plantations and factories of the participant farmers and of marketing the yields which is carried out by an entity managing the business or a cooperative established by the farmers themselves.The palm oil-based agroestate (ABK) model is a concept in the development of the plantations in rural areas for the future, and this concept is one form of cooperation with the developer.The above model is designed for the economic development in rural society which is based on agriculture (palm oil plantation).The model aims to build palm oil plantations for farmers who do not have their own land for plantations or for farmers who have land but do not own capital for developing their agricultural business.These farmers do not have adequate land as a source of their livelihoods nor do they have land to live a decent life to support their family.This model is also the development of the agropolitan concept as introduced by Friedman and Douglass (1976).The agropolitan concept is one strategy to accelerate the rural economic development.In brief, the concept of Palm oil-Based Agroestate (ABK) model which involves the rural community (farmers who do not have plantations) is presented in Figure 1.

Figure 1 .
Figure 1.Conceptual Scheme of Palm oil Based Agroestate (ABK) model in Rural Areas (Almasdi Syahza, 2007b) cooperative which is established as a legal entity in accordance with Law No. 25 of 1992 on Cooperatives.In the implementation of partnership, the cooperative must first enter into an agreement for the development of palm oil plantations with the companies which are designated as partners and have the expertise in palm oil plantation.To obtain KKPA funds, the cooperative must submit a project proposal to the implementing bank through and/or in cooperation with the core company as a partner.In order to increase the income of participant farmers, the cooperative should also foster its members in developing the supporting or additional crops, such as palawija crops, horticulture crops, etc.These crops become the source of income other than from the palm oil plantations for its members.In other words, if the price of FFB decreases, the farmers still have another source of income from the other activities.To provide motivation to the farmers, the cooperative must help to establish cooperation for the marketing of agricultural products with third parties.Figure3shows the form of business partners in the community plantations and the supporting plants in rural areas.

Figure 3 .
Figure 3. Model of Partnership in Development of the Community Plantation through KPPA

Figure 4 .
Figure 4. Partnership Model in the Management of Community Palm oil Plantations in Rural Areas (Modified from Almasdi Syahza, 2009a)

Figure 5 .
Figure 5. Conceptual Scheme of Palm oil Factory (PKS) and Small Scale Cooking Oil Factory in Rural Areas (Almasdi Syahza, 2004)

Table 1 .
Increase in Plantation Area and Production of Palm oil in Riau Province in 2007-2009 Source : Regional Office of Plantations in Riau Province, 2011.