Early assessment of tobacco excise sharing fund as policy for farmers’ viable alternatives in Indonesia: case study of four municipalities in Indonesia

Article 17 of the FCTC calls for economically viable alternatives for those affected by reduced tobacco demand, including farmers. Evidence indicates tobacco farming is often economically unfavorable due to high input costs and reliance on family labor, with many farmers incurring losses and depending on loans. In Indonesia and the ASEAN region, smallholder tobacco farmers face low prices, unfair grading, weather risks, and high input costs, prompting diversification or substitution to other crops. Indonesia finances diversification through the Tobacco Excise Sharing Fund (DBHCHT), sourced from tobacco excise and allocated to provinces and municipalities per Law No. 39/2007 (2% of excise revenue; 30% province, 40% producing/manufacturing municipalities, 30% other municipalities). In 2021, 2% totaled ~3.5 trillion rupiah across 26 provinces, with East Java receiving ~1.9 trillion. Under PMK No. 206/2020, DBHCHT is earmarked: 50% social welfare (including farmer support and diversification), 25% law enforcement, 25% public health. Despite increasing excise revenues, farmers remain in unfavorable conditions and little is known about DBHCHT’s role in improving livelihoods. This study evaluates DBHCHT utilization for Indonesian tobacco farmers, particularly regarding Article 17 (diversification).

Prior research shows tobacco farming often yields poor economic returns for smallholders in multiple countries (Chingosho et al., 2021; Magati et al., 2019; Makoka et al., 2017; Sahadewo et al., 2021). In Indonesia, many tobacco-farming households spend more on production than they earn, especially when accounting for household labor; 53% rely on loans (World Bank, 2017). Farmers consider switching due to low prices, unfair grading, and adverse weather; those who switch typically improve profits (Sahadewo et al., 2020a, 2020b). Regional evidence in ASEAN highlights labor-intensive family involvement and high input costs with low returns (Tan and Dorotheo, 2018). Policy-oriented literature suggests using excise revenues and DBHCHT to support transitions to alternative crops, but effectiveness is constrained by limited coordination and technical guidance; diversification efforts often originate from farmers rather than government (World Bank, 2016/2017; Ahsan et al., 2022; Wan et al., 2021).

Setting: Two main tobacco-producing provinces (East Java and Central Java). Selected municipalities: Pamekasan and Jember (East Java; 14.5% and 15.7% of provincial production) and Temanggung and Rembang (Central Java; ~13.2% and ~14.3% of provincial production). In 2019, East Java and Central Java accounted for ~50.7% and 21.5% of national production, respectively. Design and participants: Qualitative study using focus group discussions (FGDs) and in-depth interviews (IDIs). Two FGD series were conducted: (1) current tobacco farmers (N=25) and (2) ex-tobacco farmers (N=15). Each series ran four rounds (one per municipality). FGDs covered background, farming profile, DBHCHT use (grants, inputs, equipment, training), financing, profit/loss, challenges, prices, and diversification. IDIs: National-level informants from the Fiscal Policy Agency (Ministry of Finance), Directorate General of Plantations (Ministry of Agriculture), and Directorate General of Fiscal Balance (Ministry of Finance). Subnational-level informants in each municipality included Regional Agricultural Agency, Regional Development Planning Agency, agriculture instructors, farmer support groups/associations, civil-based organizations, and village leaders. IDIs addressed agricultural policy overview, farmer welfare, DBHCHT use under PMK No. 206/PMK.07/2020, and policy options. Public and stakeholder involvement: Policymakers and public members helped identify informants/participants and co-developed key questions. Participants could propose additional questions. Findings were disseminated via a public webinar (late January 2022). Data collection and analysis: All FGDs/IDIs were audio-recorded, transcribed verbatim, and analyzed via qualitative content analysis (Hsieh and Shannon, 2005) to explore perspectives on DBHCHT utilization. Ethics: Approved by MHREC, Faculty of Medicine, Public Health, and Nursing, Universitas Gadjah Mada (No. KE/FK/0433/EC/2021); informed consent obtained.

- Municipality-specific findings: - Pamekasan: Reported declines in production and profits; current selling price ~Rp 27,000/kg vs. Rp 45,000–50,000/kg previously. Some also planted shallots, chili, and rice. Farmers were unaware of DBHCHT; some received rice/corn seeds that failed. Expect DBHCHT support for fertilizer and rice seedlings. - Jember: Tobacco area decreased from ~23,000 ha to ~15,000 ha; production down; high costs and land rent. Prices fluctuate by quality; profits declining due to rising costs. Some experienced with non-tobacco crops (corn, chilies, red onion, cabbage). Reported receiving DBHCHT assistance (Kasturi tobacco seeds, fertilizer, intensification programs). Desire sustained, welfare-enhancing DBHCHT. - Temanggung: Productivity declining due to shrinking land and COVID-19-driven focus on food crops. Prices by grade: Tlahap farmers ~Rp 50,000–65,000/kg (higher grades >Rp 100,000/kg), low-quality yields minimal profits (valued ~Rp 45,000/kg). Coffee identified as most profitable alternative; horticulture costly and price-volatile. Farmers aware of DBHCHT and generally receive fertilizer support. - Rembang: Annual, fluctuating harvest cycle; prices stagnant; buyers determine price/quality, perceived monopoly (only one selling point). DBHCHT distribution seen as relatively even; received machinery, fertilizers, and comparative studies. Farmers want DBHCHT to focus on land management, infrastructure, and solar ovens for rainy season. - Legal and policy basis: Law No. 39/2007 allocates 2% of excise revenue to provinces for listed activities. Six MoF regulations (2008–2020) detail eligible uses; PMK No. 206/2020 explicitly permits funding diversification/transition, vocational training, direct cash assistance to tobacco/cigarette workers, and inputs/infrastructure for continuing tobacco cultivation. - Utilization prior to PMK No. 206/2020: No municipality allocated DBHCHT for diversification. Jember (since 2016) had no specific farming assistance; funds went mainly to health care and law enforcement. Pamekasan similarly used DBHCHT for UHC. Temanggung (2019): of Rp 31.47 billion DBHCHT, Rp 6.19 billion (19.7%) for tobacco farming; UHC Rp 17.09 billion (54.3%). Rembang funded fertilizer/infrastructure and low-nicotine leaf development; farmer allocation only ~10% of DBHCHT. - Utilization after PMK No. 206/2020: Pamekasan designed seven programs (four for farming, three for welfare), but only three implemented (vocational training, agricultural chemicals, direct cash transfer). East Java circular letter allowed farmers to receive DBHCHT cash transfers even if receiving other transfers; Jember followed. Another circular restricted uses (tools, chemicals, infrastructure), contradicting central guidance and overlooking mandated programs (e.g., vocational training, capacity building, enterprise finance, direct transfers). Diversification received no DBHCHT budget; shifts largely farmer-initiated. - Bottlenecks identified: (1) Constantly changing regulations; (2) Farmer and facilitator unawareness of DBHCHT; (3) Delayed implementation and disbursement (e.g., late vocational training, undermining pre/postharvest support); (4) Supply-demand mismatch—insufficient funds relative to eligible farmers and weak beneficiary identification. Examples: In Jember, ~50% of farmers received financial assistance; in Pamekasan, only 2 of 43 farmer groups received funding. - Recommended steps: Establish multisectoral taskforce for coordination; conduct organized socialization/education; issue technical and practical regulations at ministerial and local levels to speed disbursement; develop a robust beneficiary database to align allocations with need.

Findings show that DBHCHT’s potential to promote economically viable alternatives (Article 17, FCTC) is undermined by regulatory volatility, bureaucratic complexity, and weak awareness at local levels. Repeated revisions to MoF regulations led to confusion in budgeting and interpretation (e.g., viewing DBHCHT as a grant), misalignment with intended purposes, and inconsistent local practices. Limited awareness among technical facilitators and farmer groups reduced engagement and accountability, while delayed disbursements weakened the intended timing and effectiveness of interventions, increasing farmers’ reliance on industry financing. Funding was also insufficient relative to the number of eligible farmers, and beneficiary identification processes were weak, producing inequitable distribution. Consistent with prior literature, diversification efforts often originated from farmers themselves due to gaps in coordinated policy implementation and lack of cross-sector technical guidance. Addressing these gaps through stable, clear regulations, multisectoral coordination, targeted socialization, timely execution, and better data systems is essential for DBHCHT to effectively facilitate diversification and reduce dependence on tobacco farming.

DBHCHT represents a significant government mechanism to support tobacco crop diversification in Indonesia, but current utilization is suboptimal due to complex bureaucracy, frequent regulatory changes, limited awareness, delays, and mismatches between funds and needs. Strengthening DBHCHT requires technical and practical regulations at ministerial and local levels, establishing multisectoral taskforces (especially in major tobacco areas) to coordinate implementation, and improving monitoring beyond financial reporting to track outcomes. Engagement with local NGOs and cooperatives can provide technical support for diversification/substitution, as evidenced in other countries. Ensuring market security and prices for alternative crops, along with targeted financial support, can incentivize transitions. The study recommends prioritizing DBHCHT allocations that directly facilitate crop diversification and, where appropriate, complete substitution away from tobacco.