Ilham Azhar Lubis – After losing in The Dispute settlement with the European Union at the WTO on the basis of national mineral downstream policy, especially for nickel ore, in December 2022, Indonesia is facing challenges regarding the impact of the program that has been running for a decade, which was considered by economic experts as insignificant, especially in helping to strengthen domestic manufacturing industries.
In the data, the role of Indonesia's manufacturing industry sector in generating foreign exchange income for the country in 2022 "declined" to 18.3%, the lowest in a decade. Senior Economist at the Institute for Development of Economics and Finance (Indef), Faisal Basri, stated that there is a discrepancy in the promised outcomes of the national nickel industry downstream program by President Joko Widodo.
Indonesia's mineral downstreaming program is a processing and refining project for nickel ore into Nickel Pig Iron (NPI) and Ferro Nickel, which has been running for a decade and is actually considered to benefit the industrialization process of China. Since August, Faisal and President Joko Widodo have clashed over data on the calculation of foreign exchange earnings through the downstreaming program.
Faisal revealed that 99% of processed nickel ore in the country is exported to China. Consequently, Indonesia's downstreaming program for the nickel industry specifically supports the industrialization process of China rather than helping to improve the domestic manufacturing industry sector, as quoted from an Indef discussion last August. Beyond that, this has become a polemic for the issue of national mining resource security.
In response to the criticism, President Joko Widodo did not remain silent. He questioned Faisal Basri's calculations by giving an example that the national nickel ore downstream program brings benefits to Indonesia itself.
In an interview with LRT Dukuh Atas Jakarta, President Jokowi illustrated the data, that when nickel is exported as raw materials, within a year, it would only generate around Rp 17 trillion. In the downstreaming process, after entering the downstreaming process, the export value of the nickel industry can increase up to Rp 510 trillion. This certainly can add value to Indonesia's nickel industry sector, said President Jokowi, refuting the views of the Indef senior economist.
When compared, the foreign exchange income for the country through taxes such as VAT, corporate income tax, employee income tax, company income tax, export duty royalties will be much higher when the export value of nickel is at Rp 510 trillion compared to if Indonesia only exports raw nickel with a value of Rp 17 trillion.
The discrepancy in the data presented by President Joko Widodo
The figures presented by President Joko Widodo in his earlier statement did not match the data obtained by Faisal Basri through the official Indef website. In 2014, the value of raw nickel exports with HS code 2604 was only IDR 1 trillion. This figure was obtained from the export value of nickel ore with HS code 2604, worth USD 85,913 million, multiplied by the average exchange rate in the same year at IDR 11,865 per USD 1.
In 2022, the result of the national downstreaming program in the iron and steel sector had an export value of USD 27.8 billion. If converted using the average exchange rate at that time, which was IDR 14,876 per USD, the value obtained was only IDR 413.9 trillion.
How is Indonesia's nickel downstreaming program more beneficial for China's industrialization?
Currently, Indonesia implements a free foreign exchange regime, which is a system of free foreign exchange traffic without cost through the transfer of assets and financial obligations between residents/non-residents and between foreign assets and liabilities among residents. This allows asset owners to move processed nickel, obtained through downstreaming processes where the smelters are 100% owned by China in Indonesia, to China without taxes and fees. This, of course, provides significant benefits to China's industrialization through the supply of processed nickel from Indonesia.
If the national nickel downstreaming program is considered capable of benefiting the country's foreign exchange earnings, Faisal Basri questioned where the revenue from exports that should have been enjoyed by Indonesia went, according to the data presented by President Joko Widodo earlier regarding the benefits of the nickel industry downstreaming program.
Through this downstreaming program, smelter owners received luxurious access to utilize Indonesia's nickel industry wealth, granted the program with national strategic project status. However, the downstreaming of Indonesian nickel was considered "reckless" in terms of Indonesian mining exploration, with profits flowing back to the homeland by only 10%.
The reduction in the manufacturing sector's contribution to the country's foreign exchange earnings over the past decade to 18.3% proves that the downstreaming program did not significantly affect the sector. However, smelter products in the form of iron and steel could be directly used for raw material necessity in industries such as aircraft, ships, and automobiles, or even in household equipment such as pans, spoons, forks, and knives.
Almost half of the processed nickel exports with HS code 72 are in the form of ferro alloy or ferro nickel. There are also those that are still in the form of nickel pig iron and nickel mate. Almost all of these processed nickel products were not continued to strengthen the national manufacturing industry sector, even though there were some, the number was considered not significant.
The value-added from the nickel downstreaming program is mostly enjoyed by business owners in the form of profits, investors in the form of interest, workers in the form of wages, and landowners in the form of rent. This differs significantly from almost all of the nickel smelters being owned by Chinese entrepreneurs. Not to mention the tax holiday facilities they received, not one percent of those profits flow back to the homeland.
The construction of nickel smelters in Indonesia relied almost 100% on Chinese banks with almost all interest incomes returning to them. Their experts, such as cooks, security personnel, statistical experts, and drivers, are also from China. Moreover, many of their workers use visitor visas instead of work visas, resulting in a loss to the state in the form of a worker contribution of USD 100 per worker per month. On average, Chinese workers are paid between IDR 17 million to IDR 54 million. However, the wages of Indonesian workers are much lower, typically at the minimum wage range. With visitor visa status, it is very likely that Chinese workers at the smelter would not pay income tax.
Although smelter owners also pay land and building taxes, the value is very small compared to the profits they generate. They obtain Indonesian raw nickel at a very low price. Faisal Basri revealed that the government was very generous in setting a nickel ore price far below the international price.
In summary, no expert doubts that nickel smelting is capable of creating high added value for Indonesia's nickel industry. However, one question remains: Who benefits from the added value?
Source: https://moderndiplomacy.eu/2023/10/29/a-debate-on-indonesias-nickel-downstreaming-will-it-revive