Will Indonesia’s new president turn the tide on resource nationalism?

Author: Eve Warburton, ANU

Resource management is a pressing policy problem in Indonesia, but it is also ripe for nationalist grandstanding. In the lead up to Indonesia’s recent elections, both presidential candidates deployed the mantra of energy independence and resource sovereignty in their campaigns.

The victor, Joko Widodo (Jokowi), used far less incendiary language than his competitor, Prabowo Subianto. But both espoused a nationalist vision for the mining and energy sectors — promising to wean the country off foreign oil imports, cultivate a value-added resource economy and renegotiate contracts with foreign mining companies. Such promises smack of populist electioneering. But Indonesia’s presidential candidates were offering little more than a continuation of current government policy.

Freeport security personnel look on at the Freeport McMoRan's Grasberg mining complex, one of the world's biggest gold and copper mines, located in Indonesia's remote eastern Papua province, 16 August 2013. After an export ban last year, Freeport recently agreed to pay high royalties and taxes, and concede divestment provisions. (Photo: AAP)

Indonesia appears regularly in industry and international press reports as an example of a country where ‘resource nationalism’ is on the rise. This term refers to government efforts to extract greater value from, and assert more control over, its natural resource sectors — usually at the expense of foreign investors. Over the past 10 years, there has been significant legal change and an increasing incidence of legal disputes affecting foreign mining companies in the mineral and oil and gas sectors. Nationalist policy changes and legal interventions are justified by Article 33 of the Indonesian Constitution, which states that natural resources belong to the people and should be controlled by the state.

The 2009 Mining Law is the most commonly cited example of Indonesia’s ‘resource nationalism’ because it changed the terms of investment for foreign mining companies. For example, it mandates an increase in royalty payments, local content requirements and new divestment rules. But one of the most controversial aspects of the 2009 law took shape this year with the introduction of an export ban for raw nickel and bauxite, and a massive export tax (starting at 20 per cent and increasing yearly) on the export of other strategic minerals such as copper. The goal is to add value to the sector by compelling companies to invest in refining facilities and process their mineral ores on Indonesian soil.

In the years leading up to the export ban, most mining companies made little progress towards investing in refining facilities. Many simply didn’t believe the government would follow through with such a bullish policy. Nor did they see the economic value in smelting, because it requires high capital costs, significant investment in energy infrastructure and low returns.

So, when the ban was enacted in January this year, exports ground to a halt as there were virtually no facilities ready to purchase and refine stocks of mineral ore. For example in Sulawesi, Indonesia’s nickel hub, thousands of mine workers have been laid off, contractors have recalled their mining equipment and piles of dirt, rich in nickel ore, line the island’s silent ports. The mineral sector is now suffering reported losses of half a billion dollars in exports each month.

The ban does appear to be incentivising investment into nickel smelting, with the Investment Coordinating Board claiming 50 new smelter projects are currently underway. In the meantime, outside institutions such as the World Bank and USAID consistently argue that this policy is doing more harm than good.

The prohibitive export tax of 20 per cent also led to the cessation of production and exports at some of the country’s most profitable copper mines — including Newmont’s Batu Hijau mine in West Nusa Tenggara and Freeport’s Grasberg mine in Papua. Negotiations between the mining giants and the Indonesian government have been incredibly fraught. On 25 July 2014, the government announced a breakthrough whereby Freeport agreed to pay royalties and taxes, and conceded to new divestment provisions — a significant success for the Indonesian government.

Newmont, on the other hand, is refusing to budge. The company recently declared force majeure and filed for international arbitration. In response the government has threatened to rescind Newmont’s license to operate, sending a clear message to mining companies who might also be considering arbitration.

Despite significant economic losses, and the prospect of costly legal conflicts, Jokowi and Jusuf Kalla — the president- and vice president-elect — have expressed their commitment to domestic processing and the export ban. This is because these policies have broad support from across Indonesia’s political spectrum. Throughout major parties, and among many regional leaders in Indonesia’s mineral rich provinces, there is a common belief that the short-term pain is worth the expected long-term gains of these policy interventions.

Some politico-business elites backed the ban because they see opportunities for self-enrichment in a domestic smelting market. But in places like Sulawesi, the political elite are also in support because they are tired of watching swathes of raw ore being dug up and shipped off shore, with serious environmental consequences and little revenue sent directly to provincial or district coffers. Environmentalists and anti-corruption activists also like the ban as it has temporarily stopped the irresponsible and illegal mining activities of many local and foreign investors. In other words, there is a broad consensus that minerals should be left in the ground until they can be exported at a higher price.

Some industry insiders hope that Jokowi’s reputation for pragmatism will bring change to a stagnating industry and breathe fresh life into stalled negotiations with foreign mining companies. There have indeed been tentative signs that the new president will move away from the combative approach that has characterised the current administration, toward a more conciliatory style. For example, one of Jokowi’s economic advisors recently indicated that he believes the mining sector needs more government support to build a domestic smelting industry.

But overall, few within the industry expect that Jokowi and Kalla will bring any significant change. This is because resource nationalism in Indonesia reflects real anxiety within the public and the political elite, from the central government down into the regions, that Indonesia is not getting enough out of its finite resources. Most expect Jokowi’s administration to maintain pressure on foreign investors and continue cultivating a value-added resource economy. The new government’s style and momentum may shift, but its commitment to the fundamental philosophy of resource nationalism will not.

Eve Warburton is a PhD candidate at the Department of Political and Social Change, The Australian National University.