Tenggara Strategics, Jakarta – Indonesian President Joko "Jokowi" Widodo instructed his ministers not to lose focus on establishing the country's downstream industry in light of a recent recommendation from the International Monetary Fund (IMF) for the country to review its downstream policy and consider a phased elimination of the ban on nickel ore exports.
The Indonesian government sees the downstream industry development policy is non-negotiable, that the country will continue to prioritize developing its downstream industry and prohibit raw mineral commodity exports.
According to the IMF's latest country report on Indonesia (IMF Country Report No. 23/221), issued on June 25, 2023, the organization criticized Indonesia's nickel downstream policy for its lack of consideration regarding cost and benefit analysis and the impact of mineral export bans on multilateral trade.
The IMF sees that downstream policies could potentially lead to a loss of government revenue from export taxes as a result of the mineral export bans such as on nickel, bauxite and copper. Furthermore, Indonesia was advised to consider the spill-over effects of downstream policy on commodity prices in the global market, which, according to the IMF, could provoke retaliatory actions from trading partners. Lastly, the IMF suggested that Indonesia phase out export restrictions on nickel and refrain from expanding such restrictions to other commodities.
The IMF's recommendations undoubtedly provoked a strong reaction from the Indonesian government. In a speech delivered during the Full Cabinet Meeting on Monday (July 3, 2023), President Jokowi reminded his ministers to remain focused on implementing the industrial downstream policy, which is a strategic step for Indonesia to achieve its vision of becoming a developed country by 2045.
In response to the IMF's remarks, Coordinating Maritime Affairs and Investment Minister Luhut Binsar Pandjaitan plans to visit the United States to meet with the managing director of the IMF, Kristalina Georgieva, in order to clarify Indonesia's objectives for no longer exporting nickel ore. This planned visit is seen as an opportunity for Indonesia to engage in constructive dialogue. As a sovereign and developing nation, Indonesia's fundamental goal is to enhance downstreaming processes and add value to its natural resource products. Consequently, Indonesia aims to move beyond being solely a raw material exporter.
The key message to be conveyed during the dialogue is that Indonesia does not seek to unilaterally dominate all downstream activities, but rather aims to foster mutually beneficial global cooperation with other industrialized nations. While the initial stages of downstreaming will take place in Indonesia, subsequent stages could potentially be carried out in other countries.
What's more
In line with the Coordinating Maritime Affairs and Investment Ministry, Investment Minister Bahlil Lahadalia challenged the IMF's assertion that downstream policies have led to a decline in Indonesia's state revenue. Bahlil clarified that the implementation of downstreaming policies and the ban of nickel ore exports have actually had positive impacts on Indonesia's economy. This is reflected in the increased export value of processed nickel products within the country. During the period from 2017 to 2018, Indonesia's export value from nickel was merely approximately US$3.3 billion. However, following the enforcement of nickel ore exports ban in early 2020, the export value of processed nickel products skyrocketed to $30 billion by 2022.
Nevertheless, Bahlil admitted that there has been a reduction in state revenue from export taxes in the context of commodity exports since the export ban policy was implemented. However, when downstream is carried out, the government gains additional revenue from corporate income tax (PPh 25), value-added tax (PPN) and income tax for workers (PPh 21), as well as an increase in employment opportunities. The Investment Minister noted that since the implementation of downstreaming policies, the average annual growth in job creation in the downstream industrial sector has reached 26.9 percent over the last four years.
What we've heard
Government officials assert that the IMF's critique of the downstream policy stems from the pressures exerted by the European Union, the United States and other developed nations. The downstream policy impedes developed countries' access to cost-effective raw materials from Indonesia.
Additionally, a prohibition on raw material exports is likely to be adopted by other countries possessing abundant reserves of nickel and lithium.
The core argument is that Indonesia's downstream policy, particularly with respect to nickel, bestows significant advantages upon a privileged few closely associated with the government. These benefits range from fiscal concessions for smelter industries to a series of regulatory measures, including laws and ministerial regulations that facilitate operations, such as relaxed regulations pertaining to foreign labor, as evidenced in Morowali.
On the other hand, this subject has become common discourse among business entities. They find that the nickel downstream policy, aimed at electric vehicle (EV) batteries, primarily benefits a select group of entrepreneurs with close ties to the Presidential Palace. A businessman affirms, "Downstreaming is employed as a facade to grant mining concessions and smelter permits to the ministers' associates."
An illustrative example is the partnership between China's Tsingshan Group Limited and PT Merdeka Copper Gold Tbk. Through Saratoga Investama Sedaya, Sandiaga Uno increased his equity holdings in Merdeka Copper Gold. Another instance is the collaboration between CATL, a Chinese battery manufacturer, and MAB, an electric bus company founded by Moeldoko, whereby CATL supplies battery components.
As a result of this policy, companies like Vale find themselves in a disadvantaged position, necessitating collaboration with Chinese counterparts to construct smelters in Indonesia.
Another challenge pertains to the lack of readiness among most smelter companies in Indonesia to process lower-grade nickel. Notably, Indonesia's nickel resources and reserves predominantly comprise lower-grade nickel. Consequently, the export prohibition applies to nickel ore with a grade exceeding 1.7 percent.
On the ground, many mining concession holders report progress in smelter construction reaching 40 percent. However, this often amounts to mere land clearance or foundation work in reality. Furthermore, the assessment, monitoring and evaluation system for smelter construction overseen by the Energy and Mineral Resources Ministry (ESDM) remains deficient.
Additional sources assert that the downstream policy also confers advantages upon local politicians who control many nickel mining concessions in their respective regions. This is especially true for regents in Morowali, Central Sulawesi, and Central Halmahera, North Maluku.
Nickel-producing regions possess greater prospects for securing strategic positions within central-level political parties. By exerting control over nickel mines, they gain access to potential membership in the central-level legislature, as was the case with the former regent of Morowali.
Concerning Chinese investors, various sources indicate that the protection provided to them assumes an indirect form, often shielding them from legal enforcement. A source claims, "When examining the matter, it becomes evident that violations committed by Chinese corporations are rarely met with robust action."
Indirectly, this downstream of nickel also benefits companies operating in the coal sector, as the demand for coal from power plants rises in smelter industrial areas implementing downstreaming.
[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]