Plunging price of oil resolves several complex problems for Jokowi

Plunging price of oil resolves several complex problems for Jokowi Vincent Lingga  ;   Senior editor at The Jakarta Post

JAKARTA POST, 25 Januari 2015

                                                                                                                                     

                                                

The more than 55 percent plunge in oil prices since July has resolved several potentially explosive political and economic problems for the new government of President Joko “Jokowi” Widodo. But he should not get complacent, as the condition is largely a matter of good fortune. As the saying goes, lightning never strikes twice in the same place. This could be the only oil-price down-cycle during Jokowi’s five-year term until October 2019. The government, therefore, should seize the opportunity for energy reform to reduce the nation’s dependence on fossil fuels and gear up the economy for weathering perpetually volatile oil prices. As a net oil importer since 2004, Indonesia enjoys a state-budget windfall savings every time international oil prices drop steeply that creates fiscal room for a massive cut or the abolishment of fuel subsidies. Now that oil prices have fallen to below US$50 a barrel, the government expects to save almost Rp 200 trillion ($16 billion) throughout this year. The government should not succumb to the temptation to squander the huge savings on populist programs. It should instead direct them toward more productive programs in poverty alleviation and infrastructure to improve our economic competitiveness. The government made the right policy with its quick decision to put domestic fuel prices on a managed floating market-price mechanism early this month. This move immediately set off a virtuous circle: it will spare the government from wasteful political bickering with the House of Representatives every time international oil prices rise sharply and has freed the government from being held hostage to the wildly volatile international oil market. In the oil market nothing is simple. Predicting oil prices is always a mug’s game because the prices are influenced by both economic and non-economic factors. In mid-2008, for example, international prices skyrocketed to a peak of almost $150 a barrel, but collapsed to as low as $47 later the same year. A similar down-cycle has taken place since last July. Consequently, by its very nature oil trading is beset by uncertainty and it is not just due to the precarious geopolitics in countries where most of the world’s oil reserves are located. But bringing domestic fuel prices closer to — or on par with — their economic costs will also remove the fuel-subsidy time bomb. But more important is that abolishing subsidies will encourage the development of renewable energy, energy efficiency and conservation. Energy reform will cut Indonesia’s trade deficit and, consequently, the current account deficit, which has been exerting strong downward pressure on the rupiah exchange rate.   But energy reform should not end at putting fossil fuels on a managed floating market-price mechanism. The government should instead bolster energy diversification programs by providing fiscal incentives for investment in developing more biofuels and gas and their infrastructure, mini hydro-power, geothermal and other renewable energies. In short, the government should launch a more concerted effort to implement the 2007 Energy Law that stipulates strategic measures aimed not only at reducing dependence on fossil fuels but at compelling the government to provide incentives for energy efficiency and conservation. Companies should be given fiscal incentives to invest in energy-conservation programs, such as in-house management of energy efficiency; performing maintenance and housekeeping measures; replacing select equipment; or modifying entire manufacturing processes. No one can predict how long the oil price down-cycle will last or where prices will bottom out. But the government should design a formula for determining the ceiling and floor prices for oil to cope with future price volatility. Ceiling prices should be set at levels that will encourage fuel efficiency, but which will not impose large subsidies on the state budget. Floor prices, meanwhile, should be designed to make the development of renewable energies like biofuels, geothermal and biomass still commercially viable. The oil-price collapse has changed almost all the basic assumptions used for predicting key economic indicators for the 2015 state budget for the better. We are glad to learn that the proposed amendments in the 2015 state budget the government proposed to the House will allocate the bulk of savings from the slashed fuel subsidies to developing infrastructure. The rationale is that poor and inadequate infrastructure has become the biggest barrier to investment and among the main drivers of high logistics costs limiting the competitiveness of exports. But given the dismal record in infrastructure development over the past decade, the new government should be able to make headway on several vital projects, including roads, airports, seaports and power generation that have been stalled for several years due to arduous land-acquisition procedures. Making a breakthrough in such high-profile projects as the multibillion dollar Batang power plant in Central Java; the access road to Indonesia’s biggest seaport, Tanjung Priok; and the access railway to Soekarno-Hatta International Airport in Tangerang will boost market confidence in the government’s capacity to develop basic infrastructure. Fortunately, this year marked the start of the full enforcement of the 2012 Land Acquisition Law, which provides stronger legal certainty for land appropriation for infrastructure projects. The law stipulates a clear-cut, shorter time frame for land acquisition, expedites court proceedings for appeal and mandates the appointment of an independent committee for setting compensation levels with property owners. The acute lack of strong legal frameworks to regulate land acquisition and rampant land speculation has long been the main obstacle to infrastructure development, as the costs of land often make projects financially unfeasible. ●

Indonesia : More aggressive in fighting for fair trade Vincent Lingga  ;   A staff writer at The Jakarta Post

JAKARTA POST,  03 Desember 2014

                                                                                                                       

Strikingly different from the seemingly high nationalistic tone of his election campaign rhetoric a few months ago, President Joko “Jokowi” Widodo has immediately embarked on a high-power drive to woo more foreign investment to reinvigorate Indonesia’s economy. He fully tapped the recent Asia-Pacific Economic Cooperation (APEC) and G20 leaders and CEO summits in Beijing and Brisbane to convey his welcome message to investors, promising them a much easier way of doing business in the largest Southeast Asian economy and enlightening them on the great opportunities available in the development of infrastructure and natural resources. Jokowi’s predecessor Susilo Bambang Yudhoyono went on a similar drive early on during his first term, organizing an infrastructure summit in early 2005. But nothing much happened even after three such international investment summits. It was business as usual in the bureaucratic and regulatory framework, as the national leadership did not show any sense of urgency at all. But Jokowi tried to give more teeth to his campaign. Two weeks before his first debut on the international stage, he had staged a similar campaign within the country, enlightening officials, the people and regional government leaders on the importance of private investment. He rightly selected the Investment Coordinating Board as the first office to experience the well-known Jokowi-brand blusukan or impromptu inspection of how the bureaucratic licensing machinery worked and how public services were delivered. This reiterated his overriding concern with making things easier for business people and investors, knowing that it is private investment that creates jobs, providing wages for generating purchasing power to propel the wheels of the economy. Good also to learn that his plenary Cabinet meetings and limited Cabinet sessions headed by the coordinating ministers also run like a nerve or operation center where bureaucratic actions are considered much more important and urgent than bureaucratic procedures. We are still far from the point of an economic crisis. But the high sense of urgency Jokowi has been showing from the outset has nurtured a kind of mindset that treats his Cabinet as the emergency center of a hospital where fast decisions and concrete programs of action are much more important than bureaucratic procedures or rigidities. During the commodity boom from 2010 to early 2013, Indonesia was notorious internationally for the series of protectionist measures the complacent government took. But Jokowi himself has been campaigning for a more fair trade, cautioning its major trading partners that Indonesia does not want to serve primarily as the market for foreign manufacturers. He openly told the leaders of Indonesia’s major trading partners to remove barriers to Indonesian products such as palm oil. At a recent meeting in Jakarta with the European Council president, Herman van Rompuy, Jokowi personally asked the EU’s principal representative to ease the barriers to palm oil products in the union, as this sector supports millions of smallholders and workers. Indonesia’s palm oil industry is the largest in the world with an annual capacity of more than 31 million tons. Lately though, the government seems to have raised the ante. Apparently buoyed by its recent success in its fight against the United States tobacco control law that discriminates against the sale of clove-blended cigarettes from Indonesia, the Industry Ministry has embarked on a campaign against Australia’s plain cigarette packaging regulation. Indonesia, the world’s top producer of clove cigarettes, first brought its complaint against the US in 2010, arguing that the ban hampered trade between the two nations. The WTO ruled in September 2011 that the US ban was discriminatory. But last June, the two countries asked the WTO to suspend arbitration proceedings as they worked toward a deal after they signed an agreement whereby the US would not unjustifiably discriminate against certain tobacco products from Indonesia that aren’t currently banned but could fall under a new US rule leading to further regulations. Director General for Agro-industries at the Industry Ministry Panggah Susanto has started the campaign in print media and online news services, attacking the Australian regulation as violating international agreements on protected trademarks and international property. “We should retaliate by requiring Australian wines and beers sold in Indonesia to use plain packaging as well, because the regulation seems designed to specifically hinder Indonesian cigarette sales in Australia,” Susanto asserted. Earlier, Indonesian Trade Minister Rachmat Gobel, at a meeting with Australia’s Trade and Investment Minister Andrew Robb on the sideline of the APEC Summit in Beijing, asked Australia to review its plain cigarette packaging regulation because of its adverse impact on Indonesia’s cigarette industry, which is a very labor intensive sector, contributing more than US$12 billion in excise tax revenues to the state budget. Indonesia has also joined several other countries in filing an international arbitration lawsuit at the WTO in Geneva against the Australian regulation. On a cautious note, though, both countries should act quickly to settle the dispute, and not allow it to damage the tens of billions dollars worth of their two-way trade. Indonesian clove cigarette sales to Australia are still quite a negligible portion of its global exports. Likewise, Australian alcohol drinks will never enjoy brisk sales in Indonesia, the country with the world’s largest Muslim population. A protracted dispute over such a small part of their expanding two-way trade landscape could create more problems to the long-term relationship of the two neighboring countries. ●

Smuggling makes fuel-subsidy cut even more imperative Vincent Lingga  ;   Senior editor at The Jakarta Post

JAKARTA POST,  28 September 2014

                                                                                                                       

Several military (TNI) and police members were embroiled in a brawl at a housing complex on Batam Island near Singapore early this week after a police raid nearby on an alleged illegal storage house of subsidized fuel leaving four TNI non-commissioned officers with gunshot wounds. A few days earlier, a low-ranking female civil servant, also in Batam, was arrested on charges of laundering Rp 1,300 billion (US$108 million) in cash allegedly derived from the illicit export of subsidized fuel. Four others, including an employee of state-owned oil company PT Pertamina and two temporary Navy employees, have also been implicated in the contraband fuel trade case. Earlier this month, the Supreme Court almost doubled the sentence of former low-ranking police officer Labora Sitorus to 15 years’ imprisonment for fuel smuggling, illegal logging and money laundering worth about $103 million. These are just a few of the dozens of cases of subsidized-fuel smuggling uncovered over the past 10 years. It is common knowledge that a lot of subsidized fuel has always been smuggled overseas; the long coastlines of the world’s largest archipelagic nation provide great opportunities for such contraband trade. Poorly-paid officials, police, members of the military and employees of state oil company Pertamina, the sole supplier of fuel oil, are all highly prone to corruption. Most importantly, the subsidized prices of domestic fuel oil are far — almost 50 percent — lower than in neighboring Singapore and Malaysia, which are only about 20 minutes by ship from Riau Islands, including Batam and Bintan. The customs agency, the police and patrolling naval units do reveal from time to time the interception and foiling of oil smuggling, but this is simply a ploy to mislead the public into thinking that they are doing their best to prevent fuel being smuggled overseas. The greatest credit for the latest uncovering of massive fuel smuggling should go to the Financial Transaction Report and Analysis Centre (PPATK), which in most other countries is called the financial intelligence unit. It was the PPATK, which routinely scours financial records for signs of illegal activity and suspicious transactions through bank accounts, that discovered the fuel smuggling in Papua and Batam. PPATK analysts realized that the billions of rupiah flowing weekly or monthly through the bank accounts of the low-ranking woman civil servant and former police officer Labora did not comply with their earning profiles, as their official salaries did not exceed Rp 4 million ($333) monthly. The analysis and further police investigations finally traced the suspicious transactions to a ring of subsidized fuel smuggling that had been in operation for several years. The rings of fuel smugglers in Riau Islands, Central and East Java, East Kalimantan, Papua and several other provinces that have been uncovered in recent years could not have occurred without collaboration with Pertamina officials or Navy members or seaport officials. Pertamina still has the monopoly on the distribution of subsidized fuel throughout the country and it must know if a significant volume originally allocated for certain areas is diverted overseas. Smuggling and other forms of malfeasance related to the misuse of subsidized fuel once again show how imperative and urgent it is now to bring domestic fuel prices closer to international levels. As long as domestic fuel prices remain at only 50 percent of international prices, the large margin is too much of a temptation for profiteers and corrupt officials to resist. As the country now depends on imports for almost 60 percent of its oil needs and oil imports have become the main cause of the ballooning current account deficit and the sharp rupiah depreciation, subsidized fuel smuggling could be considered an act of economic subversion. The government therefore should be deadly serious in investigating and dealing with the brains and leaders behind oil smuggling, unlike in past cases where only the “small fry” have ended up in court. It is not exaggeration to say that the way the new government addresses the runaway fuel subsidy will be the litmus test of its economic management and policy-making capability. President-elect Joko “Jokowi” Widodo promised in his election campaign to abolish fuel subsidies within four years. He should deliver this promise, but time the gradual phase-out wisely to minimize the impact on inflation. Most analysts consider November or April, which are the harvest seasons, as the most appropriate time to usher in the fuel subsidy cut. Certainly, reforming the fuel subsidy system will inflict some short-term pain, as production costs and prices of goods and services will increase. Therefore the new government should conduct a nationwide information campaign to prime the public on the benefits of the fuel reform measure. Many ideas have been touted on how to phase out the fuel subsidy. One reform scenario calls for the indexation of the subsidized fuel prices to an agreed threshold, thereby allowing the prices to move up and down on a monthly or quarterly basis. The second idea sets a quarterly subsidy spending limit, then adjusts the prices in subsequent quarters when international market oil prices cause subsidies to breach the ceiling. The fixed-subsidy scheme is attractive because the automatic monthly price adjustment provides policy predictability for the market and general public, as well as protecting the economy from sharp price adjustments and their shocking inflationary pressures. Whichever policy the new government implements, the energy reform should from the outset clearly set out the fuel-policy direction for the next five years, instead of muddling through one-off price rises. ●

PDI-P has to bite the bullet or face fuel-subsidy bomb Vincent Lingga  ;   A senior editor at The Jakarta Post

JAKARTA POST,  23 Maret 2014

                                      

                                                                                         

                                                      

The Indonesian Democratic Party of Struggle (PDI-P), so far a staunch supporter of the hugely wasteful government spending on the fuel subsidy, will have to bite the bullet if its candidate wins the July presidential election to lead the next government. Stubbornly resisting the urgent need to reform the energy policy could set off a fuel-subsidy time bomb, causing fiscal distress and market turbulence and eventually social and political upheaval as well. The PDI-P would be well advised to realize that its leader, Megawati Soekarnoputri, refused to raise fuel prices a few months before the presidential election in 2004 despite the steep rises in oil market prices, apparently with high hopes of being reelected. But she lost miserably to Susilo Bambang Yudhoyono, who was immediately forced to increase fuel prices twice in 2005 in the face of an unmanageable fiscal deficit. This simply shows that the wasteful fuel subsidy has nothing to do with gaining voter support because the subsidy benefits mostly private-car owners. It would be better for the PDI-P, so far seen as the most likely party to win the presidential election, if it drastically changed its stance on the fuel subsidy early in the upcoming deliberation of the draft 2015 state budget that President Yudhoyono will propose to the House of Representatives in mid-August. The latest World Bank report cites the ballooning fuel subsidy and the big risks of widening trade and current-account deficits, with their multiple ramifications on the rupiah exchange rate and inflationary pressure, as the biggest downside risks to Indonesia’s economy this year and in 2015. The World Bank estimates that the steady increase in fuel consumption and a weakening rupiah will increase the fuel subsidy to Rp 267 trillion (US$22.6 billion) this year (2.6 percent of gross domestic product), far higher than the Rp 211 trillion budgeted for this year. The report says that including the Rp 40 trillion in fuel subsidy carried over from last year, total subsidy for this year could skyrocket to over Rp 300 trillion, or more than 3 percent of GDP and almost 20 percent of central government spending. The amount of the fuel subsidy could even be much higher than the World Bank estimate because average daily oil output this year will most likely be 60,000 barrels short of assumed production in this year’s state budget. This means that oil imports will have to increase to cover the shortfall, thereby causing a bigger oil trade deficit. This deficit, combined with the $5 billion to $6.5 billion export losses caused by the ban on unprocessed mineral exports, will sharply increase the current-account deficit, setting off stronger downward pressure on the rupiah and stronger inflationary pressure. The World Bank has suggested two reform scenarios to reduce and control the fuel subsidy along the same idea that Finance Minister Chatib Basri started promoting soon after his appointment last May. Under the current fuel-subsidy regime, it is the price of subsidized fuel that is fixed (currently at Rp 6,500 per liter against the market price of Rp 11,200)). But the ultimate amount of the subsidy depends on the average oil market price and the rupiah’s exchange rate. Since oil prices and the rupiah’s exchange rate tend to fluctuate wildly, the final amount of the fuel subsidy also tends to increase steeply. The plan that Chatib has been promoting will fix the amount of the fuel subsidy per liter irrespective of eventual oil market price developments and the rupiah’s movements. Under this regime, the amount of fuel subsidy per liter would not fluctuate along with oil market prices or rupiah rate quotations because it would be the price of subsidized fuel that would rise or fall monthly following oil market quotations. This plan actually amounts to floating the price of subsidized fuel at market prices as the Megawati government did in 2002 but stopped a few months before the 2004 legislative and presidential elections.. Hopefully, the PDI-P faction at the House will take the initiative to support the stipulation of the fixed fuel-subsidy plan in the draft 2015 state budget, which will be tabled for deliberation in August. The fixed-subsidy plan should be attractive because the automatic monthly price adjustment would provide policy predictability for the market and the general public, protect the economy from sharp price adjustments and their shocking inflationary pressure. Yet more politically encouraging is that such a plan would spare the government the wasteful political bickering at the House every time international oil prices fluctuate widely. Past experience shows that any time the government moves to raise fuel prices, irrespective of the amount, there is always political turbulence at the House, not to mention street demonstrations and the temporary shocking impact on general price levels. Still most important is that floating the price of subsidized fuel at market prices would free the government from being held hostage by the wildly volatile international oil market and remove the fuel-subsidy time bomb from government fiscal management. However, the uncontrolled fuel subsidy is not only the issues of fiscal and current-account deficit. The wide price disparity between market and subsidized fuel prices is a big incentive for export smuggling but hinders energy efficiency and conservation. Yet more damaging in the long term is that the huge subsidy that made fuel prices artificially low has hindered the development of renewable energy, such as biofuel and biodiesel, which has huge potential to grow in the country, already the world’s largest palm oil producer with an annual output of more than 25 million tons. ●

Multilayered control fails to prevent misuse of rice imports

Multilayered control fails to prevent misuse of rice imports Vincent Lingga  ;   Senior Editor at The Jakarta Post

JAKARTA POST,  18 Februari 2014

                                                                                                                        

                                                                                         

                                                                                                                       

Since rice is classified as one of the nation’s strategic commodities, its import is severely restricted and subject to multiple layers of control under the regulations of several ministries. The import of medium-quality rice for domestic price stabilization can be made only by the state-owned State Logistics Agency (Bulog) and the imports are based on the volume set annually by an inter-ministerial rice task force chaired by the chief economics minister.  Only rice of premium quality and for special purposes can be imported by private companies (non-Bulog).  But imports of both medium-quality and premium-quality rice can be made only by companies that have both general import licenses and special rice-importer licenses. Imports should be endorsed by a letter of recommendation from the Agriculture Ministry which clearly stipulates details on the quantity and the quality of rice, the countries of origin and the seaports of unloading in Indonesia. The Trade Ministry (directorate general of foreign trade) can issue import licenses only on the basis of the letter of recommendation from the Agriculture Ministry and the import specifications must also conform to those stipulated by the latter. Copies of rice-import licenses are sent to 11 parties, including senior officials at the customs offices at the designated seaports of unloading in Indonesia (mainly Tanjung Priok, Tanjung Perak, Tanjung Emas and Belawan), to the Agriculture Ministry, the Office of the Coordinating Economic Minister and the trade office of the Jakarta municipal administration. Before imports can be realized, importers must notify state-owned surveyor companies, either PT Sucofindo or PT Surveyor Indonesia, in Jakarta about their import plans, complete with technical specifications. This surveyor company will inspect the technical specifications of the rice at the seaports of loading overseas or the warehouses of the rice suppliers overseas. Rice imports can be cleared by the customs service in Indonesia only if they are supported by a surveyor’s verification report certifying that the imported rice fully conforms to the specifications as stipulated in the import license. Importers also must have a Rice Import Control Card which must be filled out by the local customs service each time imports are realized stipulating such details as the volume and classification of imported rice. And importers must report to the Trade Ministry the import realization, supplemented with the Rice Import Control Card bearing the signature and stamp of the local customs service. The question is then why after all this elaborate bureaucratic procedure and multilayer supervision, misuse of rice import license still takes place? Furor broke out over the past two weeks after it was discovered that more than 17,000 tons of medium-quality rice had been brought in by private (non-Bulog) importers by manipulating their quality and their harmonized-system (HS) tariff codes. Deputy Trade Minister Bayu Krisnamurthi cried foul, pointing out that if the rice was medium-quality it would have entered the country illegally, because his ministry issued import licenses to private importers only for premium-quality rice and only on the basis of letters of recommendation from the Agriculture Ministry. This started a heated blame game. The Agriculture Ministry vehemently defended its position, stressing it never recommended imports of medium-quality rice to private importers. Likewise, the customs service, seemingly “burned” by Krisnamurthi’s tirade, said it only cleared rice imports supported with approved documents from the ministries of trade and agriculture. The Supreme Audit Agency (BPK), the customs service and the ministries of trade and agriculture are still digging into the alleged rice-import scandal. The manipulation of the quality of the imported rice did not cause any state losses because all grades of rice are subject to a fixed, specific import duty of Rp 450 (4 US cents) per kilogram and the impact was negligible as the volume involved was a mere 0.0005 percent of the national rice production.  But the controversy conveyed a strong warning. The government is acutely short of adequate technical competence and integrity in managing such trade-protectionist measures through the distribution of import quotas of basic commodities. Just look at the recent wave of sugar- and beef-import scandals.  Such import irregularities never happened between 1985-1997 when Indonesian imports were subjected by then president Soeharto to pre-shipment inspection at the countries of origin by the global surveyor company, Geneva-based Société Générale de Surveillance (SGS). Part of the problem should be blamed on the vague HS classification of tariff codes for rice in place since 2012. First of all, the import-tariff book does not mention such terms as medium or premium quality for rice but classifies this commodity only using 10-digit codes for its specific characteristics. When the government changed the import-tariff book in 2012, medium-quality rice, which under the old tariff regime had been under a separate HS tariff code (1006.30.90.00), was classified in the same tariff code (1006.30.99.00) together with such premium-quality rice as Basmati and Japonica. Thai Hom Mali rice was moved from the 1006.30.15.00 to the 1006.30.40.00 code. Futher complicating the matter, such rice trademarks as Japonica (formerly Japan), Basmati (India) and Thai Hom Mali (Thailand) can currently be imported from anywhere, as these rice varieties are now grown outside their native countries. Just like Thailand’s Munthong durian, which is now planted in Bogor.  These rather blurred tariff classifications seem to open loopholes for manipulation by importers who exploit the inadequate technical competence of officials or in collusion with corrupt officials. The clearest and loudest warning from this controversy is that the government should improve its institutional capacity and the internal control of officials directly involved in managing import-restrictive measures, especially as regard to such basic commodities as rice, sugar, beef and horticultural products. The future challenges are even tougher because the new Trade Law which was enacted last week vests ever broader authority in the government to control the import or export of certain commodities considered vitally important to the basic needs of the people. This means the government will be involved directly in the trading of many more commodities through the distribution of quotas, special import licenses and other restrictive measures.  A corrupt bureaucratic and political system crowded by greedy businesspeople could “creatively” exploit and turn such import-restrictive measures into cash cows. ●

Unnecessary confusion in enforcing the 2009 Mining Law Vincent Lingga  ;   Senior Editor at The Jakarta Post

JAKARTA POST,  19 Januari 2014

                                                                                                                       

The government resolved the confusion over the enforcement of the 2009 Mining Law, preventing massive worker layoffs and a potential loss of at least US$5 billion in export earnings, through an 11th hour regulation that lowered the purity levels of most exportable minerals as from Jan. 12. Though the regulation seemed disgraceful and inconsistent with the true spirit of the mining law, which aims to develop as high a value-added as possible for mineral ores, it appeared to be the best compromise, a face-saving solution to the debacle caused by the incompetency of the Energy and Mineral Resources Ministry. The government’s claim that it fully enforced the law by the Jan. 12 deadline is debatable. It did totally ban the export of nickel ore and bauxite but still allowed the exports of copper concentrate with a purity level of at least 15 percent and other minerals with purity levels of 62 percent for iron, 49 percent for manganese, 57 percent for lead, 52 percent for zinc and 56 percent for ilmenite, which is refined into titanium.  Such purity levels certainly are not the final goal, let alone the spirit, of the 2009 Mining Law. The six concentrates are subject to 20 percent export tax, which will gradually be increased up to 60 percent by July 2016 in a strong bid to push mining firms to fully process their minerals in the country by 2017. Indonesia has long been a major exporter of nickel, bauxite, copper, tin, coal and several other minerals. Therefore, the 2009 Mining Law which, among other things, requires the processing of minerals within the country and prohibits exports of mineral ores starting Jan. 12, had been welcomed as a strong legal foundation to bring Indonesian natural resources up on the value-added chain. Even though the law was enacted a few months before the legislative and presidential elections in 2009, when the sentiment of economic nationalism usually escalates, the legislation is rational as it provides a five-year transition period for miners to meet the mandatory processing requirement and 10 years (after commercial production) for the divestment of controlling ownership by foreign investors to national interests. Five years should have been adequate for investors wanting to abide by the law in good faith even though smelters require big investments, especially because smelting is high, energy-intensive manufacturing, while areas outside Java, where most of major mineral resources are located, still suffer a large power deficit. But alas, confusion had surrounded the enforcement of the law, especially since early last year when the government confirmed it would push ahead with a total export ban on unprocessed minerals starting from mid-January 2014. The government and mining companies should only blame themselves for the policy uncertainty within the mining industry. The problem was that the law was virtually shelved for more than three years because ministerial regulations on the technical details on the provisions on the domestic processing of mineral ores were issued only in May 2012. This caused misperceptions among mining companies that the government would not be steadfastly serious about enforcing the law’s provisions on a complete ban of the export of mineral ores. Certainly, two years are not adequate to build smelters that require big investments. Moreover, while smelters require a large volume of electricity and support infrastructure as ports, almost all the mining firms are located in areas outside Java, which still suffer from a huge power deficit. In fact, investment for a captive power unit is sometimes larger than the investment for the smelter itself. The policy reaffirmation last year set off a sort of chaotic reaction, even among giant mining firms such as Freeport and Newmont, which cried out that they would not be able to meet the deadline for processed mineral exports and demanded a reschedule of two to three years. Mining firms blamed the weak commodity market, an acute lack of infrastructure and what they considered an accelerated period of divestment by foreign investors while at the same time investors were required to put up additional investment for processing. The government, greatly concerned about the temporary loss of $5 billion in export earnings annually at a time when the country has been suffering big current account deficit, seemed willing to reschedule the deadline for the mandatory processing.  But the plan plunged into chaos in November after the House of Representatives rejected the government’s proposal to amend the mining law so as to allow a longer transition period. But full enforcement of the export ban would increase the current account deficit and strengthen the downward pressures on the rupiah, which has so far depreciated by more than 21 percent against the dollar. Yet more politically sensitive, the export ban could anger regional administrations because they would certainly lose tax and royalty revenues. It is encouraging to note that the government has learned a great lesson from the confusion. The latest regulation will be more powerful in terms of forcing miners to build smelters because of the 10 percentage-point increase to be made in the export tax on the semi-processed minerals every half of the year, starting in January 2015 until the export tax reaches as high as 60 percent in the second half of 2016. Certainly, an export tax of as high as 60 percent will make the export of semi-finished minerals commercially unfeasible because not a single commodity is able to provide a profit margin of over 60 percent. Of more importance is the government should resolutely enforce the latest rule. Big risks are already inherent within the mining sector without legal uncertainty and policy inconsistency. ●