Institutional Structures and Transaction Costs in Indonesian Sustainable Palm Oil (ISPO) Certified Smallholder Palm Oil Value Chains

Abstract

Indonesian Sustainable Palm Oil Certification (ISPO) is expected to improve the competitiveness and governance of the sustainable palm oil value chain. However, compliance with ISPO standards often leads to complex institutional interactions, which can increase transaction costs. This study aims to map the institutional structure of the value chain and examine the differences in transaction costs between the ISPO and non-ISPO smallholder palm oil value chains. Face-to-face surveys were conducted with 160 smallholders in Batubara Regency and Labuhan Batu Regency, North Sumatra, Indonesia. The smallholders consisted of 80 ISPO smallholders and 80 non-ISPO smallholders, who were selected through a multistage sampling process. The data were analyzed using a quantitative descriptive approach, transaction cost structure, and the Mann-Whitney test to examine the differences in transaction costs between ISPO and non-ISPO smallholders. The results showed that the ISPO farmer value chain consisted of three institutional layers: primary institutions, which were the main actors in the value chain; secondary institutions that facilitated cultivation, financial access, and marketing; and tertiary institutions that supported value chain development through the implementation of sustainable palm oil certification, such as ISPO. In contrast, the non-ISPO value chain only involved primary institutions. Furthermore, there are significant differences in transaction costs between ISPO and non-ISPO smallholders. These findings highlight the importance of policies in encouraging the strengthening of smallholders' institutions in the collective provision of inputs and harvesting processes to reduce transaction costs.