- Regulations intended to boost Indonesian exports of refined metal products have not made much progress.
- In response to the lack of success, Jakarta is preparing to postpone a ban on exports of raw and semi-processed metal ores.
- But until fiscal reforms are in place, Indonesia will have little incentive to implement the ban.
After struggling to grow its domestic smelting capacity, the Indonesian government has announced its plan to revise a ban on raw and semi-processed metal ore exports that was supposed to take effect in January 2017. Under the proposed changes, miners who have built or who are building smelters in Indonesia may continue to export metal concentrates for another three to five years, subject to a progressive tax.
Some miners will welcome the move, and Jakarta will certainly welcome the extra income from leveling additional taxes on resource exports. But the measure could also erode investors' confidence in the government's ability to implement mining regulations. Moreover, relaxing the ban will hurt companies that have made substantial investments in developing stand-alone smelters and the infrastructure to support them.
The Export Ban
Indonesia's pending ban on exports of raw and semi-processed metal ores was initially set to go into effect in 2014 under the country's 2009 Mining Law, which replaced regulations established in 1967 under President Suharto. But in 2013, Jakarta altered its rules. Miners could continue exporting metal concentrates only if they committed to building smelters in Indonesia and agreed to pay a 20 percent export tax, which would rise to 60 percent by the second half of 2016.
The decision to delay the ban once again, announced by the acting chief of the Energy and Metals Resources Ministry on Oct. 4, comes as little surprise. Though foreign investors have committed some $12 billion to build 27 smelters nationwide in the past four years, anecdotal reports and trade data indicate that much of that money has yet to generate higher exports of refined metal products. In one example, the value of Indonesian exports of raw nickel ore — of which the country was once the world's largest producer — has collapsed. In 2013, the year before the first ban took effect, it stood at $1.65 billion, but by 2014 that figure had dropped to $85 million; by 2015, it had fallen to zero. Though exports of refined nickel products rose in 2014 from 2013, they, too, plunged in 2015 and continued to decline in value through the first four months of 2016. Nickel is not unique in this respect, either: The value of metal ore exports as a whole has collapsed, and that of most refined metal products has stagnated or declined.
The 2014 ban came on the heels of a slowdown in China's economy and a dip in metals prices, caused in part by the increasing ore supplies of key competitors such as the Philippines. Low prices then undercut investor interest in building smelting facilities, as did uncertainty surrounding the status of Indonesia's regulations. Meanwhile, the lack of even minimal support infrastructure for construction operations meant that the companies that agreed to build smelters often found themselves responsible for building and funding roads, power generators and other basic utilities to support them. Nevertheless, despite these headwinds, many smelting projects are still underway or in the planning stages.
Considering the circumstances, few expected Jakarta to forge ahead with enacting the metal export ban by Jan. 11, 2017, especially since metal ore exports continue to be a valuable source of revenue for the Indonesian government. (Even in their reduced state, these exports accounted for nearly 6 percent of non-tax government revenue in 2015.)
Resistance to the Delay
Even if Jakarta's recent announcement was unsurprising, the possibility of delay will not be considered good news by everyone involved in Indonesia's mining sector. For the most part, the postponement will have only a limited effect on the country's largest metals miners, which can continue to export semi-processed ores while they develop smelting capacity. Assuming a total ban on raw and semi-processed ores goes into effect by the proposed new deadline of 2022, new smelters should still prove a worthwhile investment. But the delay is bad news for companies that invested in building smelters on the expectation that the full ban would go into effect in 2017. As Jakarta allows miners to continue exporting lightly processed concentrates, rather than requiring them to fully refine their ores domestically, these stand-alone smelters will likely have trouble making ends meet.
Another factor Jakarta's leaders will have to weigh when contemplating a second delay is the impact it could have on investors' confidence that Jakarta will keep its word and implement long-term policy goals, even when those goals create problems for investors in the short term. Without being certain that Jakarta will eventually enforce the metal ore and concentrate export ban, future investors may shy from committing to developing costly smelting facilities, especially if they are not already tied to major mining projects in Indonesia. And so, like so many countries trying to move up the industrial value chain, Indonesia will find it hard to balance its short-term financial and economic interests with promising but costly long-term development goals.
Of course, President Joko "Jokowi" Widodo's increasingly strong political position might someday change things. Jokowi's first year in office was not easy. His party, the Indonesian Democratic Party of Struggle (PDIP), was a minority in parliament, and party Chairwoman Megawati Sukarnoputri was determined to keep him in check. But buoyed by a steadier economy, Jokowi's political prospects have improved dramatically throughout 2016. In January, the Golkar Party, which ruled Indonesia under Suharto and retains much of its former institutional strength, voiced its support for Jokowi's coalition in parliament. Among other things, the move lessened Jokowi's dependence on the PDIP and Megawati, enabling him to surround himself with allies, technocrats and leaders from other parties.
Jokowi's decision to reinstate former Finance Minister Sri Mulyani Indrawati may also bode well for his efforts to reduce Jakarta's reliance on resource-related revenues, to expand the government's overall revenue generation and to accelerate Jakarta's investment in infrastructure development. All are important steps in pushing Indonesia's metals mining industry up the value chain and tightening controls on raw ore and concentrates exports. During her first stint as finance minister, Sri Mulyani won acclaim from foreign investors for her success in reforming the country's tax and customs offices to better prevent fraud and improve government revenue generation, which helped attract more foreign investment. She has announced that strengthening the central government's fiscal foundations will be her primary task now that she has returned to the Finance Ministry.
But attempts to curb Jakarta's reliance on resource-related revenues will almost certainly fall short of expectations. Substantial hurdles remain if Indonesia is to shift its focus to more valuable processed metals and, by extension, to implement a full ban on raw and semi-processed metals exports. Not least among them is the country's profound geographic fragmentation, which makes effective infrastructural integration expensive and technically challenging. Geographic fragmentation, in turn, breeds political fragmentation, hampering efforts by Jokowi and his Cabinet to implement the kind of fiscal reforms that will ultimately make a raw metal export ban feasible. Until those reforms are in place, Jakarta's interest in actually putting its ban into practice will continue to be limited at best.