Nationalist mining rules in Indonesia spell trouble ahead

Nationalist mining rules in Indonesia spell trouble ahead
This picture taken in Kereng Pengi, Pontianak on August 24, 2013 shows a general view of Kereng Pengi traditional gold mining as the sun sets.

Mining firms seem to assume that the nationalist policies now buffeting the industry are all to do with Indonesia's 2014 elections and that there will be a general retreat once a new government has had a chance for a rethink.

But is that really the case? Logic would suggest otherwise, unless it all goes south far quicker than anyone imagines - as happened with the government's efforts to create beef self-sufficiency out of thin air.

The Mines and Energy Ministry has long been under the control of President Susilo Bambang Yudhoyono's Democrat Party, which has been so hard hit by corruption cases it can't hope to win back votes by playing the nationalist card. Its coalition partners have little to gain either.

After all, nearly two-thirds of the electorate live in Java, where there are few mines and voters pay little attention to such issues. Nor, for that matter, do most of the country's voters.

It is wiser to remember the winds of economic patriotism began with the 2009 Mining Law. This legislation erased the Contract of Work regime, imposed a 2014 ban on ore exports and laid out an onerous divestment schedule for foreign firms.

With that in mind, it is clear that current policies are being driven by other factors. Some are founded on a genuine desire for value-add. But many have also been hijacked by self-interest groups with campaign finance in mind and little regard for the impact on a widening trade deficit.

The mining law calls only for more processing and refining. But a ministerial regulation issued three years later added tough new requirements, many of which are either impractical, technically unfeasible or economically unworkable.

"There's no economic nationalism," a senior government official told The Straits Times in a scathing off-the-record conversation. "It's just people playing with licences and regulations. They don't know they are managing such an important sector."

The post-election outlook may not be any brighter. Indeed, Ms Megawati Sukarnoputri's Democrat Party-Struggle (PDI-P), which looks well placed to head the next government, is probably the most nationalist of all the political parties.

Golkar, running second in the polls and almost certainly the prospective senior partner in any PDI-P-led coalition, retains connections to some of Indonesia's most powerful business interests who see the value in waving the nationalist flag.

If wiser heads do finally prevail, it almost certainly won't happen under the current government. And even then, given the glacial pace of lawmaking in Indonesia, it will take two years or more for any new government to row back into calmer waters.

Slowly but surely, things are coming to a head. If the administration sticks to its Jan 12 ban on mineral ore exports, the industry will come to a virtual standstill, and hurt state revenues and the country's balance of payments.

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