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Budget 2020 – SOPPOA responses

Wednesday, 16 October 2019

The Malaysian Finance Minister tabled the Budget 2020 on 11th October 2019 which amongst others, increase allocation to the Agriculture sector by raising from RM4.4bil in 2019 to RM4.9bil which is deemed to be a pragmatic move. The Budget however, did meet some but not most of the more urgent requests which are critical to the sustainability and development of the Palm Oil industry in Sarawak. The Industry here is still facing difficulties with high shortage of labor, low CPO prices and high production costs. The lack of tax incentives to invest in mechanization and automation to push work productivity, value added downstream activities, R &D and building a more much needed competent work force to endure challenges ahead is not encouraging and forthcoming. As a result, the Industry here will still be lagging behind on innovation, creativity, productivity and value creation on its upstream and downstream activities.

For the Palm Oil sector in Sarawak, the following Budget 2020 provisions allocated only show more emphasis and focus must be given to overcome the challenges of the Industry here.

  • Reducing dependency on foreign labor – Locals @Work incentive of RM350 or RM500 per month for two years for companies hiring locals to replace foreign workers. This scheme fails to take cognition of the fact that locals still shun plantation work due to the 3-Ds mentality i.e. `Difficult, Dirty and Dangerous’ nature of plantation work as compared with plenty of other opportunities in other sectors to secure employment, especially now with more school leavers of secondary and tertiary education levels. To improve work productivity by investing in mechanization and more efficient work methods, field infrastructure access and all-weather roads for machines mobility must also be in place to succeed. This is to support infield machineries and need huge capital outlay. Purchasing expensive agriculture machineries and land development costs will need a longer period to break even especially with the lower yields and higher production costs in Sarawak

  • SOPPOA requested for tax incentives to purchase and deploy machineries to improve work productivity and subsequently reduce dependency on foreign workers by abolishing import tax for such agriculture machineries imported from overseas. There must be a clear guideline for these tax exempted items and without any hindrances from other ministries once approval is obtained from the single approving Ministry. This will gradually help to speed up and reduce land-man ratios from current 1:7.5 to 1:10 at the least.

  • SOPPOA also requested for extension of accumulated business losses and unutilized capital allowances from proposed 7 to 14 years for this high capital investment industry to enable the industry to remain competitive and not continue to suffer losses or help to recover was not apparent in Budget 2020 for Sarawak. The bulk of the new oil palm development or expansion was mostly from recent years and are more costly than in other parts of the country. The prolonged low CPO price, lower early yields and high cost of production need a much longer recovery period than just 7 years.

  • A total of RM30 million was allocated for R&D matching grants for collaborations with industry and academia to develop higher value added downstream uses of palm oil in tocotrienol in pharmaceuticals and biojet fuel under the Budget 2020. This fails to address the much-needed grants for other investments in other fields like food processing and related products for Sarawak which will boost the industry. A POIC (Palm Oil Industrial Clusters) should be set up to meet this downstream requirement with its excellent port facilities and cheaper hydroelectric power source available here. Exported CPO from Sarawak has always fetched a lower price than Peninsula produced CPO due to lesser refineries and value-added downstream investments even though with BIMP-EAGA, ASEAN or ASIAN favourable logistics.

  • Another area of concern for the industry here is the extension of minimum wage increase to RM 1,200 from RM 1,020 for major cities should not be even considered for anywhere for Plantations. This will further impact the bottom line of palm oil companies operating in Sarawak irrespective of whether upstream or downstream activities. The low price of CPO, lower yields of the oil palm and high cost of production will cause the Plantation industry in Sarawak to be further burdened with more loans financing and other commitments. As reported by many public listed Palm Oil Companies from Sarawak for 2018, many are showing losses and further increasing labour costs and production cost will only accentuate the losses of these companies for the coming years. There was also a rapid and sudden increase in minimum wage to bring in line with Peninsula only just recently. Any increase in wages should come with higher productivity should be deliberated and agreed by all stake holders.

  • With the reduction of the Pan Borneo Highway construction costs, priority should be given to improve existing feeder roads infrastructure and connectivity to the Pan Borneo highway with the funds available apart from connecting a new highway to the proposed new capital of Indonesia in Kalimantan.