TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Analysis: Govt, Faisal Basri lock horns over downstream nickel policy
Change Size
Workers are heading toward or back from the Morowali industrial complex in Bahodopi district, Morowali regency, Central Sulawesi, during a work shift change on around 3 p.m. on Oct. 18. As of October, the industrial estate claimed it had employed more than 15,000 local workers and around 2,500 Chinese workers (JP/Viriya Paramita/Adi)
P
resident Joko “Jokowi” Widodo’s policy to develop the country’s mineral downstream industry, especially for nickel, is once again facing scrutiny after senior economist Faisal Basri called out the policy for benefitting other countries, especially China, more than Indonesia. Jokowi refuted Faisal’s claims, sparking a series of counterarguments from his camp in defense of the policy.
Jokowi highlighted the importance of his mineral downstream policy for the country’s path to becoming a developed country during his annual address before the People’s Consultative Assembly (MPR) on Tuesday as well as plans to expand to the downstream policy to other sectors such as palm oil and seaweed, and thus bringing more added values to the country.
Jokowi’s downstream policy, especially on nickel, has drawn harsh criticism from Institute for Development of Economics and Finance (INDEF) senior economist Faisal Basri who stated that the policy particularly benefitted China, which would capture 90 percent of the value created, leaving only 10 percent for Indonesia.
Speaking at the INDEF Mid-Year Review discussion on Aug. 8, Faisal explained Indonesia had been shipping 99 percent of its nickel products to China. The specific nickel product in question is nickel pig iron and a low-grade ferronickel that has been processed onshore from nickel ore. To this end, Faisal highlighted that the policy merely serves to support China's industrialization.
Refuting Faisal’s claims, Jokowi questioned Faisal’s methodology in asserting that China and other countries benefit more from the downstream policy. Based on the President’s data, the nickel downstreaming had boosted the industry’s annual export value from Rp 17 trillion (US$1.1 billion) prior to the downstream policy to Rp 510 trillion afterward.
Jokowi further added that from this figure alone, the country could generate larger tax revenues, encompassing taxes such as value added tax (VAT), corporate income tax, employee income tax, royalties and export duties.
However, Faisal remained unconvinced. In an open letter published on his personal blog, Faisal rebutted Jokowi’s counterargument by presenting data that set out to challenge the accuracy of Jokowi’s version of the story, highlighting aspects concerning the state’s revenue and tax facilities. Based on his calculation, which was a bit lower than that of Jokowi’s, Faisal did not deny that nickel smelters for the downstream processing created high-added value, having mentioned that exports from this downstream have surged by 414 percent compared to before the policy was implemented.
Despite these points, Faisal’s main concern seemingly remains on how Indonesia pockets the earnings of the export less than it should, further describing the government’s revenue as “practically non-existent”. He said almost all nickel smelting companies in the country were owned by Chinese investors, and with Indonesia adhering to a free flow of foreign exchange, these companies were not obligated to keep their export earnings in Indonesia. Moreover, Faisal argued that the nickel smelting companies had received a 20-year tax holiday from the government, allowing them to be exempted from certain types of taxes and levies.
What’s more
Jokowi’s response to Faisal’s harsh criticism of the government’s nickel downstream policy has set off a flurry of responses from members of the government looking to defend the policy. Septian Hario Seto, deputy of investment and mining at the Office of the Coordinating Maritime Affairs and Investment Minister, stated that the government’s nickel tax and export revenue would not have increased significantly had the government not enforced its downstream policy.
In 2022, the government received Rp 17.96 trillion in tax revenue from the nickel downstream industry, or an increase of 10.8 times compared to Rp 1.66 trillion recorded in 2016. Septian further mentioned that exports of nickel products were not limited to iron and steel alone, with Indonesia also booking export revenues of nickel matte and mixed hydrate precipitate (MPH) at US$3.8 billion and US$2.1 billion, respectively.
Additionally, Septian dismissed Faisal’s claims concerning the tax holiday, arguing that only two companies had received a 20-year tax holiday while companies running local smelters in 2018-2020 received tax holidays of seven to 10 years on average and many more do not receive such taxes.
Industry Ministry spokesperson Febri Hendri Antoni Arif also came out in defense of the President, explaining that since the enforcement of the downstream policy for natural resources, especially nickel, several multiplier effects had become evident in the national economy. One effect in particular was the substantial investments in pyrometallurgical and hydrometallurgical smelters, amounting to US$11 billion and US$2.8 billion, respectively.
What we’ve heard
Sources within the government indicate that the denials from government officials regarding Faisal Basri's statements about nickel downstreaming are from those with close relationships with smelter investors, most of whom are from China.
According to several sources, it's no longer a secret that these Chinese smelter investors have close ties with the Coordinating Ministry for Maritime Affairs and Investment. The influence of these Chinese investors is also what compelled Vale to cooperate with Chinese smelter companies.
Another source states that every smelter investor planning to enter Indonesia must accept a package deal: specifying which local investor to partner with and which bank to use. This proposal comes from an official within the Ministry of Maritime Affairs and Investment.
Another aspect that is rarely discussed is the impact of downstreaming on weakening foreign exchange earnings and the stability of the Indonesian rupiah. This is because export earnings from smelting products are repatriated to the parent companies.
In Morowali, for example, the role of household consumption in the economy has significantly declined. Initially contributing around 50 percent to the Gross Regional Domestic Product (GRDP) in 2010, it has now dropped to only 5.2 percent of the GRDP in 2021. This means that local economic participation remains minimal in the economic growth supported by the nickel industry.
On the other hand, there is a government-owned company that is currently collaborating with China's Tsingshan Group Limited to establish a joint venture named PT Merdeka Tsingshan Indonesia. This joint venture operates in the field of mineral ore processing for electric vehicle battery materials. This government official is Sandiaga Uno—who, through his company, PT Saratoga Investama Sedaya Tbk (SRTG)—has increased his ownership in PT Merdeka Copper Gold Tbk (MDKA).
Disclaimer
This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia’s political and business landscape. Access the latest edition of Tenggara Backgrounder to read the articles listed below:
Politics
- Prabowo’s presidential bid gains upper-hand as alliance grows
- Jokowi appointing interim regional heads ahead of the 2024 elections
- Signs of Indonesia easing on capital punishment
- MPR to open Pandora’s box with constitutional amendment plan
Business and Economy
- OJK to regulate banks’ dividend payout ratio, investors dismayed
- Govt mulls over Jakarta-Bandung HSR fare subsidies
- Imported Australian cattle diseased, govt seeks alternative beef sources
