Indonesia may give tax breaks to support new biodiesel mandates

[JAKARTA] Indonesia may introduce tax breaks for crude palm oil producers to head-off a budgetary problem caused by overlapping biodiesel legislation announced in recent weeks, energy ministry officials said on Monday.

Looking to protect its biofuels industry against lower crude prices and cut costly diesel imports, Indonesia's government ramped up biodiesel subsidies last month after getting parliamentary approval for its 2015 budget.

But its efforts are now threatened by a funding gap caused by the government's decision late last week to increase the minimum bio content in diesel fuel to 15 per cent from 10 per cent, meaning additional monies would be needed to pay the subsidies for the higher volumes of biodiesel.

Instead of turning to parliament to get additional funding, however, the government is now looking to offer tax breaks to palm producers on the additional 5 per cent of biodiesel supplies needed, Rida Mulyana, director general of renewable energy at the energy ministry told reporters.

"The incentive to (palm) producers will be tax incentives," he said, adding that the government may link the tax breaks to global CPO prices but that the details were still being discussed by different ministries.

Southeast Asia's biggest economy and top producer of palm oil introduced a 2013 regulation on biodiesel content to boost the use of the palm-based fuel and cut diesel imports.

And while Indonesia missed last year's biodiesel targets, due to logistical and infrastructure problems and a failure to enforce its mandate, the government is still looking at ways to improve the current account deficit and steady a weak rupiah, which hit its lowest since August 1998 last week.

Indonesia's total biodiesel consumption is now seen at 5.5 million kilolitres in 2015 due to the increase in the minimum bio content in diesel fuel, analysts said, up from 1.8 million kilolitres in 2014.

Questions remain on how these targets will be met, however, because of low crude prices making biodiesel less profitable, the lack of penalties for those not meeting the biodiesel mandates and a failure to enforce the new rules.

"We are positive on CPO prices following this development, but our price forecasts will remain unchanged until we see concrete steps taken by the government to forcefully implement the mandate," CIMB analyst Ivy Ng said in a note on Monday.

Malaysian palm oil futures 1FCPOc3 slid to their lowest in nearly six weeks on Monday at RM2,172 (S$815) a tonne and fell nearly 15 per cent last year.

REUTERS