Horticulture Sector Finally Regulated Under a Law

Overview

In 2004 it was reported that the horticulture sector contributed around 22% of Indonesia’s Gross Domestic Income (GDI), where in 2008, the contribution declined to 14.56%. Many attributed the cause of such a dramatic decline to the increase in imported horticultural products, with which domestic horticultural products were unable to compete in terms of price, and the difficulties faced by Indonesia’s horticultural products in penetrating international markets in countries such as the United States, Australia, Japan, South Korea, and China, who impose strict regulations and procedures such as quarantine requirements and quotas.

In addition, the implementation of the ASEAN-China Free Trade Agreement on the Trade in Goods, which in the view of the House of Representative (Dewan Perwakilan Rakyat/DPR) should boost the horticulture sector, does not address the problems faced by farmers/producers relating to infrastructure and land.

To address these problems, the horticulture sector was added to the DPR’s agenda as part of the National Legislation Program. And, on 26 October 2010 the DPR (Commission IV) finally passed the Bill on Horticulture (“Bill”), consisting of 18 Chapters and 132 Articles.

Currently the Bill is awaiting the signatory approval from the President as required under Article 38 of Law No. 10 of 2004 on the Drafting of Legislation. The President will have 30 days to sign the Bill into Law, with the Bill automatically becoming a Law after 30 days in the event that the Presidential signature is not forthcoming.

This edition of the Indonesian Legal Digest will highlight the key features of the Bill and provide analysis of Bill’s provisions.

 

Purpose

Agricultural plant species are divided into three main types by the Ministry of Agriculture: food crops (rice, corn, sago, potatoes, green beans, etc.), plantation plants (palm oil, sugar cane, tea, etc.), and horticultural plants (apples, bananas, spinach, kina, etc.).

Food crops are regulated by Law No.7 of 1996 on Food Crops, and plantation plants by Law No. 18 of 2004 on Plantations. However, for horticultural plants there has not been a any regulation at the level of a law prior to the passage of the Bill.

The Bill serves to provide a regulatory framework for the sustainable development of horticulture in Indonesia. Which will protect horticulture farmers/producers and increase Indonesia’s foreign exchange reserves through foreign trade of horticultural produce.

In doing so, the Bill provides a comprehensive framework for horticultural activities, by covering such aspects as horticultural planning, product development, product distribution, trade, marketing and consumption, investment, and citizen participation.

According to DPR members of Commission IV, which was in charge in passing the Bill, it is expected that with the passage of the Bill into law, the Bill will transform Indonesia from being a horticultural products importer to becoming a horticultural products exporter. The Bill also aims to increase the consumption of domestic horticultural products.

However, problems concerning horticulture are only partially addressed by the Bill, which fails to solve some of the core issues. For example problems with trade horticultural products remain, where horticulture farmers/producers sell their products for only 40% of the retail price due to short expiry dates and infrastructure problems that complicate access to consumers.

 

Definitions

Pursuant to Article 1 (1) horticulture is defined as nearly everything related to fruits, vegetables, medicine derived from plants, and floriculture; as well as fungus, lichen and aquatic plants that have a nutritious, medicinal, and/or aesthetic function.

For a full definition of horticultural products, it is necessary to refer to Appendix III of the Minister of Agriculture Decision No. 511/Kpts/PD.210/9/2006 on the Type of Commodity Plants supervised by the Directorate General of Plantations, Directorate General of Food Crops and Directorate General of Horticulture (“511 Decision”)

The 511 Decision refers to 323 horticultural products that have the potential to be exploited, including 60 types of fruits, 80 types of vegetables, 66 types of plants from which medicine is derived, and 117 types of floricultural plants that are sold to consumers.

 

Endangered plants

Plants listed in Appendix III of the 511 Decision can be sold to consumers in the domestic market and also for export. However, as set out in Articles 28 and 29, rare and endangered plants that are classified as horticultural products may not be exported or sold, with a ministerial regulation due to be issued to address this issue further.

 

Applicability

The Bill will affect individuals and legal entities that engage in the support and/or core business of horticulture. Pursuant to Article 48, horticulture businesses are classified into micro businesses, small businesses, medium businesses, and large businesses.

Whereas horticulture businesses are defined in Article 50 as business engaging in: seeding; cultivation; harvest and post harvest activities; horticultural product processing, distribution, trade, and marketing of horticultural products; research on horticultural products; and agro tourism.

Agro businesses in the horticulture sector require substantial land areas that are not available in proximity to large cities, and are instead typically located in agricultural areas where infrastructure is not well developed. As a result horticultural production is widely spread out throughout the 33 provinces of Indonesia. The Bill requires central, provincial and district government involvement in the supervision and accommodation the development of the horticulture sector according to Article 7. In fulfilling this obligation, pursuant to Article 54 (4), a Minister of Agriculture Regulation will be issued to further regulate the exact procedures and obligations.

 

Development

In developing the horticulture sector, the Bill, in Chapter IV, regulates the development of human, natural, and manmade resources. Pursuant to Article 13, human resource development will be done through sustainable education and training, as well as competency certification.

Natural resources for horticulture include land, climate, water, and genetically engineered resources, and are further elaborated on in Articles 16 through 30.

The infrastructure needed to support the development of the horticulture sector falls under manmade resources, and is further elaborated on in Articles 31 and 32.

 

Licenses

Horticulture businesses that are classified as medium and large businesses are required, under Article 49 (2), to obtain a license from the government, while micro and small businesses are only required to be registered with the district government, pursuant to Article 49 (1).

The basis for the classification as small or large, micro or medium is not specified in the Bill, with a further ministerial regulation due to be issued, pursuant to Article 48 (2), to provide legal certainty on this matter.

Such classification is indeed necessary, considering that medium and large cultivation businesses commonly seek a right to cultivate (hak guna-usaha), which is a land title under Article 28 of Law No. 5 of 1960 on Basic Agrarian Provisions. Where, if the land title is granted, the recipient is obliged to manage a minimum of 5 hectares for horticultural purposes.

 

Land

Land used for horticultural purposes can not be located in conservation areas pursuant to Article 40, and must comply with the district zoning. Of interest is Article 40 (2), in that land used for horticultural purposes must comply with district zoning law, however, the Bill does not restrict horticultural land use, which can take place in residential, forest, industrial, and mining areas.

Zoning may change from time to time, which may result in an established horticultural area becoming a residential, mining, or industrial area, in which event, under Article 41, the government is obliged to provide equivalent substitute land in advance of the zoning change.

 

Horticulture Business

Pursuant to Article 54, horticulture businesses are obliged to comply with the quality standard and food safety regulations for horticultural products. With such due to be set out by further ministerial regulation.

 

Cooperation forms

Under Article 56, horticulture businesses may form partnerships in the form of: plasma-core, subcontracting; franchises; general trading; distribution and services; as well as other forms of partnerships, such as operational cooperation in terms of financing, supply of production utilities, cultivation techniques, management, and marketing support; profit sharing, joint ventures, outsourcing, and cultivation contracts.

 

Seeding

Pursuant to Article 57, business engaged in seeding include: breeding, production, certification, distribution, and importing or exporting of seeds. And, according to Article 57 (3) seeding businesses are required to acquire a competency certificate, with a further ministerial regulation due to set out the exact process involved in doing so. Exceptions are granted to individuals and groups that engage in seeding for personal use.

The results of breeding, and the introduction of new varieties, are required to be registered with the government pursuant to Article 58. Upon such registration laboratory testing by an appointed accredited agency will be conducted prior to distribution, according to Article 59. Seed registration and laboratory testing will be further addressed in future ministerial regulations, pursuant to Articles 58 (3) and 59 (3), respectively.

 

Cultivation

Businesses that engage in the cultivating horticultural products have the freedom to decide the types of plants that they chose to cultivate, however, pursuant to Article 65, in doing so they have to consider: market demand, optimal cultivating methods, efficiency and competition, and the environment.

Medium and large businesses, pursuant to Article 66 (3), are obliged to report the types and quantity of the plants and/or cultivation area. An obligation from which micro and small businesses are exempt, with an appointed official instead collecting data on their activities.

The procedure for the collection of data and the reporting obligation will be further addressed by a future ministerial regulation.

 

Harvest and Post Harvest

Horticultural products may be consumed as-is or may be further processed into added value products. Since harvesting requires that horticultural products are cleaned, sorted, graded, and further processing requires drying, peeling, freezing, preservation, packaging labeling, and storing, Article 69 requires that the harvest and post harvest activities are carried out in a location that meets the sanitary requirements, as further set out by a future ministerial regulation.

 

Distribution, Trade and Marketing

Businesses engaged in distributing, trading and marketing horticultural products ensure that the harvested and processed horticultural products reach the consumers. Under Article 72, businesses are obliged to distribute horticultural products using a logistics system in order to preserve the freshness, quality, food safety, quantity and timely supply.

This must be supported by proper transportation, warehousing, and information systems, which will be supervised by the government pursuant to Article 72 (5).

Trade in horticultural products may take place in the primary market, directly to the end user/consumers via a traditional or a modern market (supermarket, hypermarket) or in the secondary market via a commodity exchange or cultivation contracts, according to Article 82.

In trading horticultural products, pursuant to Article 73, business have to prioritize the sale of domestic horticultural products, and apply transparent grading and quality systems.

Businesses that market horticultural products are required, under Article 74, to prioritize the promotion of market information on domestic horticultural products at the national and the international levels.

 

Agro tourism

Based on Ministry of Agriculture information, there are currently around 20 agro tourism businesses in Indonesia; these are required, under Article 77 (2), to involve the local communities in their businesses.

Agro tourism businesses are also required to comply with the norms, standards, and guidelines that will be set out in further government regulation.

 

Research

Research on horticulture includes research on seeding, cultivation, harvest and post harvest, processing of horticultural products, distribution, trade, marketing, and agro tourism. According to Article 76 parties who benefit from such research are required to provide royalties and/or compensation to the researcher or parties that have rights to the research results. As such, Article 76 is a brief summary of the prevailing intellectual property rights legislation. Further issues relating to research and development are regulated in Chapter IX.

 

Import

A recently emerged issue relating to the importation of horticultural products is that the volume of imported and exported products is widely unbalanced. Export of horticultural products in the first half of 2010 was 77.6 million kilograms, with a value of USD 80.654 million, compared to an imports volume of 367.1 million kilograms, with a value of USD 271.4 million.

It is envisioned that the legal framework set out in Article 88 (1) for importing horticultural products, which obliges importers to bear in mind food security, domestic availability, targeted production and consumption, packaging and labeling requirements, quality standards of the imported products, and regulations on the protection of human health, animals, plants and the environment, will balance and control exports and imports of horticultural products in accordance with Article 90.

Additionally, importers must secure a recommendation from the Minister of Agriculture and an approval from the Minister of Trade pursuant to Article 88 (2).

 

Financing

Financing of horticulture sector, pursuant to Article 96, may derive from the state budget, district budget, and personal financing or third party financing. In promoting the development of the horticulture sector, the government within its authority pursuant to Article 98 may encourage financial institutions to provide loans for horticulture businesses.

 

Foreign Investment

Horticulture is open to foreign investment, with foreign ownership being restricted to 30% according to Article 100 (3). Foreign investors have to place their entire investment in a bank in Indonesia, and, pursuant to Article 100 (5), are barred from financing their investments using credit acquired from financial institution owned by the central or regional government.

Pursuant to Article 131, within 4 years of the Bill coming into force, foreign investors who have obtained a business license will have to adjust their shareholder composition to comply with the provisions of the Bill.

 

Information System

In sustaining the development of horticultural products, the central and regional government will develop an integrated information system, which, pursuant to Article 102 (5), will support horticultural development, and which will assist with planning, observation and evaluation, supply management, and demand estimation, and investment decisions. A further ministerial regulation will elaborate on the exact features and setup of the information system.

 

New Institution

In facilitating the development of the horticulture sector, a non-profit and independent institution will be established by the central and regional government in accordance with Article 114. The institution will serve as a partner for the government, with its functions further elaborated on in Article 115.

 

Community Participation

In ensuring the success of horticultural development, community participation is seen as being vital. Since suggestions and input that are practical and applicable to the development of the horticulture industry generally originate from those who are engaged in horticultural cultivation, Article 119 sets out the form and role of community participation.

 

Sanctions

Pursuant to Article 122 administrative sanctions can take the form or warning letters, administrative fines, temporary suspension of horticultural activities, product recalls, license revocation, and business closure. Administrative sanction are imposed on those who violate any of the provisions enumerated in Article 122 (1)

Criminal sanctions, under Articles 124 through 129, are imposed on those who sell rare and endangered horticultural plants, operate sub-standard or unregistered facilities, those who cultivate horticultural products that are hazardous to public health, and those who distribute sub-standard fresh horticultural products. The criminal sanctions consist of a maximum fine of IDR 3 billion and a maximum of 3 years of imprisonment. With any investigation of the criminal violations being conducted in accordance with Law No. 8 of 1981 on Criminal Procedure.

 

Conclusion

Considering that there was no regulation of the horticulture sector at the level of a law, unlike for food crops and plantation plants, the passage of the Bill is an indication of the horticulture sector receiving the long awaited attention required to spur its further development.

Although there are many provisions of the Bill that call for further implementation in the form of government and ministerial regulations, this is in line with the typical legislative setup, with the Bill providing an adequate legal framework for addressing the problems of the horticulture sector.

 

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