Toward more transparent and accountable downstreaming
The IMF recently advised Indonesia to reopen exports of nickel ore. This recommendation was issued in “IMF Executive Board Concludes 2023 Article IV Consultation with Indonesia” (IMF Country Report 23/221) on June 25, 2023. The IMF noted that the success of the nickel downstreaming program in Indonesia is in doubt, and there is even the potential loss of state revenue from the export of nickel ore.
Although the downstreaming policy aims to increase the added value of nickel, due to weak governance oversight of the nickel export ban, it has led to environmental damage and state losses. The government should reopen nickel ore exports without abandoning the planned smelter construction. The program can be continued without banning the export of nickel ore because the illegal export practices have been happening massively while the smelter construction has failed to catch up.
The downstreaming policy depends on the smelter industry ecosystem and the ability of human resources and technological support, not an export ban. If the ecosystem, human resources and technological support are inadequate, the policy will only benefit illegal exporters.
The policy can be carried out in tandem with the legalization of nickel ore exports. That way it can increase the price of nickel ore in the country. The much cheaper price has provided incentives for illegal exporters to game the system by bribing surveyors, port and customs officers.
The policy also provides incentives to foreign smelter investors who have so far enjoyed low domestic nickel ore prices. They often extract as much nickel as possible without any future social and economic considerations. Just look at the current smelter projects in Sulawesi and Maluku. The presence of foreign investors has actually accelerated the destruction of the environment, without providing benefits to the surrounding communities. In addition, the current policy does not prepare an industrial road map and build a complete down stream industry to absorb more output by the smelters.
On one hand, the downstreaming policy is a positive step toward increasing the competitiveness of the domestic industry and open window of opportunities for Indonesia to be integrated into the global value chain (GVC). On the other hand, the export ban will create a negative impact, such as risk of reprisal or retaliation from trade partners. The international commodity market will fluctuate because the existing supply cannot meet the demand. The export ban, such as the one previously imposed on crude palm oil (CPO), will affect Indonesia’s trade in other commodities. Protectionist policies are not the right answer to Indonesia’s ongoing economic recovery.
At a time when the risks of protectionist policies are increasing during a pandemic, Indonesia’s integration into GVC actually needs to be strengthened. Meanwhile, downstreaming, which aims to increase the added value of raw commodities by turning them into finished or semi-finished goods, will require a domestic supply or imported components. Downstreaming will create jobs, increase the value of exports (which in turn improve the trade balance and increase foreign exchange) and attract more investments.
Ideally, downstreaming should increase the added value of domestic commodities, by turning them into finished or semi-finished goods. However, they government should not sanction companies that still want to export raw materials. One approach is to provide fiscal incentives and subsidies for companies that go downstream. If the incentives are attractive, existing companies will be encouraged to build smelters and new investors will come. At the same time, companies that are only able to export raw materials can still operate.
Policy instruments that are worth considering in downstreaming are the determination of different taxes/ export duties and/or levies for upstream and downstream products. Thus, entrepreneurs have incentives to carry out mineral processing domestically. This policy is beneficial for state revenues, is more transparent and accountable, and can forestall smuggling and retaliation & lawsuits from other countries.
Closing remarks
KPK’s information regarding 5.3 million tons of nickel being illegally exported shows that there are irregularities in the supervision of the export ban that the Jokowi administration has been touting, when it was stipulated in ESDM Ministerial Regulation 11/2019. He even exploited the ban to enhance his image, claiming that it was done in national interests. In fact, the nickel ore export ban only benefits illegal exporters who caused state losses.
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The policy is a curse for state finances and creates a haven for illegal exporters. Therefore, KPK’s findings should be followed up by relevant stakeholders to create better governance. The government should reconsider the downstreaming policy which only benefits thieves and corrupt individuals. Instead, it should craft a policy that can benefit state finances and, by extension, the Indonesian people.
It is necessary to consider other policy instruments in encouraging the downstreaming of natural resources which the country has in abundance. One of them is a different export tariff regime for upstream and downstream products which provides entrepreneurs with incentives to process their upstream products domestically. This policy will benefit state finances, is more transparent and accountable. (Achmad Nur Hidayat and Fadhil Hasan)