Behind the politics of the 2009 Mining Law Winarno Zain  ;   An economist

JAKARTA POST,  20 Januari 2014

                                                                                                                       

The Mining Law that was passed by the House of Representative in 2009 represents the Indonesian dream that at some point in time, the country’s natural resources will be exported as processed minerals that bring in added value as much as five times the amount currently received from ore exports.  But five years on, that dream remains a dream.  The passing of the law also represents the victory of nationalist aspirations over the commercial interests of mining companies. There is widespread sentiment among the broad spectrum of social groups that the exploitation of the country’s natural wealth by mining companies, domestic as well as foreign companies, have unfairly disadvantaged the country, by giving only a small share of the value of the raw minerals, while allowing other countries that are able to process the minerals in their smelters to reap most of the benefits. The creation of the law was heavily influenced by political consideration, and there was no room for any economic or efficiency consideration It is unrealistic to think that policies on mining natural resources can be disconnected from politics. There is no country in the world where politics is not involved in mining policy.  Because mining involves the extraction of natural resources, it will always be a political issue. Various business and political interests both at national and local level, or even at the transnational level, as well as other interest groups, align themselves and compete with other interest groups to get a share of the economic pie from mining. Mining policy, of course, is not running in a political vacuum. In Indonesia, policies that have to do with the exploitation of natural resources will always be political.  After all, the management of the country’s natural resources did concern one of our nation’s founding fathers when the 1945 Constitution was being drafted.  Because natural resources beneath Indonesian soil shall be controlled by the state and shall be used to achieve maximum prosperity for the people, every law and government regulation on exploitation of natural resources should not deviate from the underlying philosophical and political principles of the  Constitution.  As such, it would be politically difficult, if not impossible, to delink mining policies from political perspective.  Any decision regarding the mining of natural resources should go through this political prism. The use of the strict standard of commercial viability and cost-benefit analysis as well as efficiency consideration do not apply here.  From a political perspective, the fact that the management of natural resources is embedded in the Constitution has made mining industries distinct from other industries.  While in the market economic system, minimum government control and regulation over industries is considered raison d’etre for the growth and development of industries, the government’s control and intervention in mining industries in Indonesia is considered constitutionally, legally and politically  valid. After years of deregulation and economic reforms in Indonesia, it is in the mining industries that a certain form of government dirigiste still finds its legitimacy. Market mechanism cannot be relied upon to achieve the Indonesian dream of exporting its mineral wholly in the form of processed minerals.  Left to market mechanism, no smelters with enough capacity to absorb Indonesian mineral ore production would be built. They need huge investment but with unattractive returns. That is why, five years after the Mineral Law was passed in 2009, when export of minerals is supposed to be in the processed form, no smelter with significant capacity has been built. The government also has to deviate from free-trade practices with regard to mineral trade.  Left to free trade, mining firms would be exporting mineral ores only. The government could impose a total ban on ore export as mandated by the Mining Law effective January 2014, but there would be significant risk.  Aside from widespread layoffs in mining firms, a total export ban would widen current-account deficits that have been in the red since last year. Indonesian mineral exports (outside oil and gas), both processed and unprocessed, totaled US$ 10.4 billion in 2012 or around 5 percent of total exports.  The overall share of processed exports has risen steadily from 40 percent in 2001 to 52 percent in 2012. This means that a ban on ore exports would wipe out $5 billion from export revenue.  Such losses would be quite a shock for the current account, which has already suffered a deficit of $24.2 billion for the three quarters in 2013.  The government finally admitted that enforcing a total ban on ore exports at a time when the country’s external accounts are weak and vulnerable to external shocks is not in the best interest of the country.  Investor confidence in the Indonesian economy could be further eroded with disastrous consequences for capital flows and the rupiah exchange rate.  Of course Indonesia could not afford to suffer another blow, at a time when external financing requirement is large, and global liquidity is tightened. The government’s final decision was a bit of a compromise to ease the payment burden balance. The government decided that some types of mineral ore are totally banned for export; while exports are allowed for other ore minerals to meet the required purity level as determined by the government and export taxes.  However, in the short term, the government will still suffer from revenue loss. Trade balance loss will more significant because of the required import of machinery and equipment to build smelters. If things run according to the government’s set-up, then the Indonesian dream will only come true in 2017. ●