BALI, Indonesia, July 15 (Dow Jones) - Indonesian plantation companies aregetting around the credit squeeze in the country by partnering withinvestors who can build mills on a "build-operate-transfer" basis, aMalaysia-based private consultant told Dow Jones Newswires.The method appears to be the most viable way ahead, says Henry Fernandez,a consultant to several Indonesian companies.In an interview on the sidelines of an oil palm conference in Bali lastweek, Fernandez said plantation companies in Indonesia have issued tendersfor the construction of about 30 new oil palm mills this year, includingthree being built by the Sinar Mas Group.Many of these plants are expected to be built through the"build-operate-transfer" arrangement.Before becoming a private consultant, Fernandez spent over 20 yearsworking at Malaysia's Kumpulan Guthrie Bhd., before retiring as aproduction controller in 1996. He then served Indonesia's Sinar Mas Groupas a vice president for four years, before starting his consultancy workin 2000.The "build-operate-transfer" arrangement is usually structured in a waywhere the investor builds the mill and runs it for a period of seven to 10years, after which ownership is transferred to the plantation company.The plantation company, on the other hand, guarantees a steady supply offresh fruit bunches, or FFB, the feed stock for crude palm oil throughoutthis period.Growth in Indonesia's milling capacity lagged behind plantation outputexpansion following the Asian financial crisis of 1997, when internationalfunding of the Indonesian oil palm industry nearly stopped, according toFernandez."In the case of Indonesia, country risk is taking a higher profile thanindustry risk," he said adding Indonesia is still plagued by a prolongedcredit squeeze compared with most of its Southeast Asian neighbors.Internal funding is still very tight, while foreign investment hasremained sluggish ever since, he said.When international funding was abruptly cut off in the midst of thefinancial crisis, most Indonesian companies were in the early stages ofdeveloping their plantations, he said. Building milling capacity was of alower priority, he added.Plantation companies typically borrow funds over an extended period, firstfor land acquisition and oil palm cultivation and later for otherinvestments such as building mills and refineries. They borrow to set upmills usually in the third or fourth year of development when trees nearmaturity and are about to bear fruit.After the financial crisis, many companies which had developed plantationson borrowed funds found it impossible to raise new funds for setting upmills.In some rare cases when domestic banks were willing to lend, interestrates were extremely high amid the plunging rupiah versus the dollar.Processing Capacity To Be Immediate Investment PriorityFernandez said despite the recent increase in the international prices ofpalm oil, setting up processing capacity - particularly milling plants -will remain a priority for Indonesian companies in the years to come.Bringing new areas under cultivation will take a clear back seat, headded.Indonesia also has enough refining capacity to process all of its currentrequirement for processed palm oil.Some of this capacity may also be underutilized because much of theIndonesian palm oil is still exported in the crude form, Fernandez said.Crude palm oil exports constituted 43% of the total production in 2001.In contrast, there is a severe shortage of milling capacity, especiallywith newer areas planted before the crisis reaching maturity now, he said.Unlike in the case of other oilseeds, oil palm fruits need to be crushedsoon after harvesting and even a slight delay can lower the quality of theoil that is extracted. Too long a delay makes the crop completelyunusable.In Indonesia, many of the smaller plantations and small farmers depend onmills owned by larger companies to buy their fruits, but in times of peakproduction and capacity constraints, big companies are reluctant to takein outside crop, leaving much of it to rot on trees, Fernandez said.Capacity Shortage More Acute In Kalimantan, SumatraShortage of milling capacity is the most acute in Kalimantan and SouthSumatra, areas where plantation development was the fastest in the yearsbefore the financial crisis.Rough industry estimates indicate at least one million tons of fresh fruitbunches, or FFB, were wasted last year due the lack of milling capacity."When prices are too low, it doesn't make economic sense to take your cropto someone else's mill. So they let it rot," Fernandez said.According to private estimates, Indonesia has nearly 300 mills spread oversome 16 provinces.About 240 of these are in Sumatra and nearly 40 in Kalimantan, but Sumatrastill faces a capacity shortage, particularly in the peak productionmonths.Sumatra's mature plantations of about 2.12 million hectares yield about 43million tons of FFB a year. In other words, the area requires a millingcapacity of around 10,320 tons of FFB/hour in peak production months.The available capacity, however, is only about 9,650 tons/hour, leaving ashortfall in capacity of 256,000 tons of FFB a month, Fernandez said.The scarcity will become more severe this year when some 200,000 hectaresof newly mature plantations are expected to come onstream.

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