Indonesian prosperity needs certainty on resource regulation
By Ben Bland
the many floral tributes to Jakarta Governor Basuki Tjahaja Purnama,
who lost his bid for a second term in last month's religiously-charged
election, one in particular struck me.
'Mr Ahok,' it read, using the governor's nickname, 'we are waiting for you to become minister of energy and mineral resources.' It was signed, 'from we who need certainty'.
Put aside whether the question of whether Ahok's brusque style would
make him a good energy minister, and whether President Joko Widodo would
risk his political capital two years before his own re-election bid by
resurrecting the career of his former protégé. The plea for certainty is
one that executives in the oil and gas and mining industries in
Indonesia have been echoing for years, alongside many other investors
frustrated by the seemingly interminable red tape and policy
flip-flopping that besets Southeast Asia's biggest economy.
Eve Warburton is right to point out in her new paper
for the Lowy Institute that resource nationalism is driven by more than
mere rent-seeking by well-connected business elites and their political
allies. Despite the continuing obsession of the military and
police with uncovering non-existent Communist threats by detaining tourists
wearing hammer-and-sickle t-shirts, Indonesia has deep socialist roots
that hark back to the era of Sukarno, the founding President.
Indonesia's constitution declares that natural resources should be
'controlled by the state', the government aspires to set prices for
everything from rice to car-hailing apps, and there is a national planning ministry (BAPPENAS) that lays out unrealistic long-term plans to transform the economy.
Calls for self-sufficiency are an evergreen electoral tool, as we saw during the last presidential campaign when President Widodo and his challenger Prabowo Subianto tried to outbid each with empty promises of autarky.
The combination of popular support for protectionism, rent-seeking
opportunities for smart tycoons and political expediency together make
for solid foundations for resource nationalism in Indonesia. But if
there is such a strong consensus and this is the 'new normal', why does
the Indonesian government find it so hard to implement these
nationalistic policies successfully?
Take the example of the 2014 ban
on mineral exports, which was designed to promote the development of a
downstream processing industry. Despite five years of warnings that it
would be implemented, at the eleventh hour the government agreed on carve-outs
for some companies including foreign miners Freeport and Newmont (whose
Indonesian operation has since been taken over by a local tycoon).
Still, the policy appeared to be somewhat successful in pushing some nickel and bauxite miners to start building processing facilities
in order to obtain export licences. Billions of dollars in investment
in smelters and refineries was promised, much of it by Chinese
companies, which are the ultimate buyers of these minerals.
Then, in January this year,
the government changed tacked again, ending the prohibition on the
export of nickel ore and bauxite, driving down the prices of these
commodities and upsetting those who had only agreed to build processing
plants because they believe that supply would be constrained by the
This does not look like a government and business elite joining hands
to implement a universally accepted goal. It looks more like the
typical regulatory uncertainty, which stems from a mix of incompetence,
corruption, bureaucratic infighting and the contested nature of power
structures in heavily decentralised Indonesia. Some of the more
straightforward and lower-cost natural resource sectors, like open-cast
coal mining, are able to ride out the policy muddle, in particular when
prices are high. But certainty is a must for the more capital-intensive
endeavours, such as offshore oil and gas exploration or Freeport's plan
to dig a vast underground mine at Grasberg in Papua.
Warburton points out the growing involvement of Indonesian investors
in the natural resources sector – much of that is concentrated in the
simpler projects mentioned above. It is doubtful that many Indonesian
investors have the capital and the risk appetite for the sort of
mega-projects normally developed by multinational giants such as BP or
ExxonMobil. But if Indonesia is serious about local companies taking on
the biggest natural resource extraction opportunities, they will need
the same levels of (currently non-existent) policy certainty as their
Whether Indonesia's resources are owned by locals or foreigners, only
regulatory certainty will ensure that, as the Constitution states,
these riches are 'used for the greatest possible prosperity of the
This article first appeared in the Lowy Institute's 'Interpreter' online Blog on 9th May 2017