A tough time lies ahead for Indonesian miners and mineral processing firms now that the government plans to at least double royalties for 12 mining products under the guise of "getting a fairer share" of the country's natural resources.

The hike comes as the administration of President Prabowo Subianto desperately seeks quick extra revenue to plug the state budget already burdened with costly priority programs like the free nutritious meal program and new sovereign wealth fund Danantara, not to mention tax collection that fell by more than 30 percent in the first two months of this year.

Under the new scheme, nickel ore could face a royalty rise of up to 19 percent from the previous rate of just 10 percent. Nickel products, meanwhile, will be subject to around 7 percent royalties from the previous tariff of between 2 and 5 percent.

Copper ore royalties may rise to 17 percent from the previous 5 percent, while copper product royalties may rise to 10 percent from no more than 4 percent.

As for coal, the new regulation would require miners to use the Indonesian coal reference price (HBA), which is set higher than the usual benchmark, when paying royalties.

The timing of the royalty increases could not be worse. The global mining industry is already facing headwinds from declining commodity prices, rising operational costs and increasing pressure to implement costly measures to ensure sustainable practices.

Early this year, Indonesia required natural resource exporters to keep their entire export receipts (DHE) onshore for a year, which strained the cashflows of companies in affected industries.

Others complained about the value-added tax (VAT) hike that makes mining equipment more expensive, while at the same time, fuel has become more costly due to the increase in palm oil mixture in the mandatory biodiesel program.

The policies could have unintended consequences for Indonesia's downstream ambitions. Higher royalties could increase the cost of raw materials for downstream industries, making Indonesian products less competitive in international markets and thus less likely to be included in a larger global supply chain.

Even now, some miners are mulling a shutdown or reducing their production capacity, while others have considered halting investments. For nickel processing plants, this could be a nightmare for firms already struggling with a raw material dearth and the imminent Philippine nickel ore export ban.

When the Prabowo administration hopes for increased revenue from the hike, planned production cuts or possible declines in exports may render such a move ineffective. It could even become counterproductive to the President's bid to boost economic growth and develop downstream industry.

For decades, the nation's extractive industries have been plagued by issues such as corruption and regulatory inconsistency, as well as unfair profit-sharing mechanisms with local governments.

This has raised questions about the government's priority given the focus is only limited to increasing revenue from the mining sector per se, while necessary reforms to improve transparency, accountability and governance of the extractive industry have been neglected.

On top of that, the Prabowo administration came out with the radical policy but left businesses with hardly any time to react, including to talk with their foreign buyers.

The government did little to disseminate the royalty hike plan to related stakeholders. When the Energy and Mineral Resources Ministry unveiled the plan in a public forum, it gave miners only 1.5 hours to scrutinize and question it.

The revision of the government regulation that will justify the royalty hike is already at the final stage and will come into effect soon, according to media reports. The way the policy was designed demonstrates a continued and persevering trend of poorly communicated government policies.

The government still has a chance to amend its controversial policy by striking a fine balance between short-term fiscal needs and the policy's direct economic impact, particularly on the affected industry, which has thus far contributed so much to the country's exports and gross domestic product growth.

While the government's intention to boost state revenue is commendable, the policy must be carefully designed and implemented to avoid unnecessary consequences.

Source: https://www.thejakartapost.com/opinion/2025/03/25/cashing-in-mining-royalties.htm