Like any developing country, Indonesia is, understandably, anxious to ensure that it derives as much benefit as possible from the exploitation of its mineral resources.

To this end, the new Mining Law requires mining business license holders to carry out downstream processing and refining of mineral products in Indonesia.

In so doing, it is clearly hoped the new Mining Law will ensure that the highly valueadded activities associated with mining take place in Indonesia rather than overseas, as is often currently the case. Regrettably, the government has overlooked the likely negative impact which the downstream processing and refining requirement will have on new foreign investment in the local mining sector.  Foreign investors will only be willing to carry out downstream valueadded activities in Indonesia if this makes sense from an economic perspective.  

By trying to force foreign investors to act in a way that cannot be justified in economic terms, the government is simply imposing an extra deadweight cost on prospective mining projects which will ensure many marginal  projects do not proceed.

If it made good economic sense for foreign investors to carry out downstream processing and refining of minerals in Indonesia then, self-evidently, they would already be doing so.

The downstream processing and refining requirement will ensure that foreign investors only proceed with the largest and most prospective mining projects as these are the projects that can afford to bear the extra deadweight cost. This is fine for those provinces and regencies which are endowed with rich mining opportunities.  It is obviously, however, not fine for those provinces and regencies which only have more marginal mining opportunities to offer foreign investors. These unfortunate provinces and regencies are likely to experience a big downturn in foreign mining related investment with consequent very negative economic and social implications.

William A. Sullivan

Jakarta

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