3rd ASIAN NICKEL CONFERENCE
Jakarta, 22-23 September 2015
DOMESTIC PROCESSING & REFINING POTENTIAL ECONOMIC & POLITICAL IMPLICATIONS OF UNREALIZED EXPECTATIONS Presented by:
Bill Sullivan CHRISTIAN TEO & Partners (in association with Stephenson Harwood LLP) Indonesia Stock Exchange Building Tower II Floor 16 Suite 1604 Sudirman Central Business District Jl. Jend. Sudirman Kav.52-53, Jakarta 12190 Tel : 62 21 515 0280 Fax : 62 21 515 0281 Email :
[email protected] Mobile: 62 815 8506 0978 © CHRISTIAN TEO & Partners 2015
OUTLINE OF SESSION 1.
Introduction
2.
Government’s Dilemma
3.
ResourceNationalismVsEconomic/PoliticalReality
4.
Government’s Proposed Solution
5.
Inevitability of Some Policy Change
6.
Early Signs of Change
7.
Resistance to Change
8.
Policy Alternatives
9.
Summary and Conclusions
3rd ASIAN NICKEL CONFERENCE
1
CHRISTIAN TEO & Partners
INTRODUCTION – PART I 1.
The Export Ban has not been relaxed as part of the First September Stimulus Package
2.
Does this mean the Export Ban will remain in place indefinitely?
3.
It depends!!
3rd ASIAN NICKEL CONFERENCE
2
CHRISTIAN TEO & Partners
INTRODUCTION – PART II 4.
More particularly, the continuation of the Export Ban depends on: (a)
how serious is the ongoing downturn in the Indonesian economy
(b)
the success or otherwise of GoI in finding alternatives to the mining industry as a sources of revenue for funding its Infrastructure Program
(c)
the extent to which the President becomes concerned about the deterioration in his voter support base as 2019 approaches
(d)
President’s assessment of creation potential of DP&R
3rd ASIAN NICKEL CONFERENCE
3
employment CHRISTIAN TEO & Partners
GOVERNMENT’S DILEMMA - ECONOMIC 1.
DP&R was originally mandated when Indonesia was in a very strong economic position
2.
DP&R has taken far longer to realize than GoI anticipated
3.
Projected short run negative economic impact of Export Ban has become medium term negative economic impact of Export Ban
4.
Indonesia’s rapidly deteriorating overall economic position means GoI is now much less able to bear the medium term negative impact of the Export Ban
3rd ASIAN NICKEL CONFERENCE
4
CHRISTIAN TEO & Partners
GOVERNMENT’S DILEMMA - POLITICAL 1.
As a populist, the President equates improved employment prospects as the primary indicator of good GoI performance
2.
To date, the most obvious impact of the Export Ban has been to reduce employment in the local mining industry
3.
Increasing unemployment in the local mining industry risks alienating the President’s voter support base
4.
To the extent it becomes apparent smelter development can only be realized on a large scale after 2017-2018, the President will face a growing political crisis in the run up to the 2019 Presidential Elections
3rd ASIAN NICKEL CONFERENCE
5
CHRISTIAN TEO & Partners
RESOURCE NATIONALISM VS ECONOMIC/POLITICAL REALITY – PART I 1.
GoI’s dilemma highlights growing conflict between (a)
resource nationalism goals
(b)
current economic/political reality
2.
DP&R and Export Ban are the products of resource nationalism
3.
Economic/political reality of DP&R and Export Ban are exposing the true costs of resource nationalism
3rd ASIAN NICKEL CONFERENCE
6
CHRISTIAN TEO & Partners
RESOURCE NATIONALISM VS ECONOMIC/POLITICAL REALITY – PART II 4.
Continued prioritizing of DP&R may undermine implementation of Infrastructure Program
5.
Can Indonesia afford the cost of “fast tracking” both DP&R and Infrastructure Program?
6.
If “no”, which of DP&R and Infrastructure Program will have the greatest appeal to GoI?
7.
Availability of funding for Infrastructure Program may determine future priority accorded to DP&R
3rd ASIAN NICKEL CONFERENCE
7
CHRISTIAN TEO & Partners
GOVERNMENT’S PROPOSED SOLUTION 1.
Revised 2015 State Budget shows GoI collecting Rp52.2 trillion from the mining industry in 2015 compared to Rp 35.4 trillion in 2014
2.
Draft 2016 State Budget shows GoI collecting 21% more revenue from mining industry in 2016 compared to 2015
3.
Mining industry is expected to make up for a very large part of decline in GoI’s O&G industry revenue
4.
Is a more than 70% increase in GoI revenue from the mining industry realistic given the current state of the mining industry?
3rd ASIAN NICKEL CONFERENCE
8
CHRISTIAN TEO & Partners
AVAILABLE ALTERNATIVES In seeking to generate 70% more revenue from the mining industry, GoI has 3 broad strategic options open to it: (a)
increase taxes paid by mining companies (“Option 1”)
(b)
be more efficient in collecting taxes due (“Option 2”)
(c)
encourage more mining activity through different policies (“Option 3”)
3rd ASIAN NICKEL CONFERENCE
9
CHRISTIAN TEO & Partners
GOVERNMENT’S PREFERRED ALTERNATIVE 1.
GoI has expressed its intention to adopt Option 1 and Option 2
2.
As of 1 April, IUP coal royalties were meant to be increased from 3%, 5% and 7% to 7%, 9% and 13.5%
3.
As of 8 August, an export tax of 1.5% on coal was meant to apply
4.
DGoMC has indicated that metal mineral producers will also be expected to pay higher taxes
5.
Various new regulations have been issued in order to improve tax collection from mining companies
3rd ASIAN NICKEL CONFERENCE
10
CHRISTIAN TEO & Partners
INCREASING MINING TAXES 1.
Mining companies are currently: (a)
experiencingverydifficultfinancial conditions due to lowcommodityprices
(b)
laying off workers
(c)
mothballing high cost mines
(d)
postponingallnon-essentialcapital expenditure
2.
Capacity of mining companies to pay much increased royalty rates is questionable
3.
Previous profitability of mining activities is largely irrelevant
3rd ASIAN NICKEL CONFERENCE
11
CHRISTIAN TEO & Partners
MORE EFFICIENT COLLECTION OF TAXES Difficult to achieve in the short to medium term due to: (a)
GoI’s inability to prevent illegal mineral exports
(b)
Political difficulties associated with forcing well connected domestic mining companies to pay back taxes
(c)
Threat to employment and local community wellbeing if mining companies are shut down due to non-payment of back taxes
3rd ASIAN NICKEL CONFERENCE
12
CHRISTIAN TEO & Partners
ENCOURAGING MORE MINING ACTIVITY 1.
If Option 1 and Option 2 fail to deliver the expected revenue increases, Option 3 becomes the only viable alternative
2.
Option 3: (a)
promises best employment outcome
(b)
involves GoI acknowledgement of past policy mistakes
(c)
is politically dangerous for weak GoI
(d)
requires a convincing “cover story”
3rd ASIAN NICKEL CONFERENCE
13
CHRISTIAN TEO & Partners
INEVITABILITY OF SOME POLICY CHANGE – PART I 1.
Even the last GoI began to realize that a change in mining policies was necessary
2.
Last GoI was constrained by the fact that it was also the architect of most of the existing mining policies
3.
Current GoI has more flexibility to make changes because it has merely inherited and was not the architect of the existing mining policies
4.
Current GoI also faces much more challenging economic conditions than did last GoI
3rd ASIAN NICKEL CONFERENCE
14
CHRISTIAN TEO & Partners
INEVITABILITY OF POLICY CHANGE – PART II Current GoI’s “cover story” may be: (a)
Encouraging more mining activity is the only practical way to generate substantial additional revenue from the mining industry
(b)
Generating more revenue from mining industry will make possible funding infrastructure development
(c)
Infrastructure development makes it possible for 7% GDP growth rate to be achieved
(d)
All Indonesians will benefit from higher GDP growth rate
(e)
Indirectly the mining industry will make this possible if better mining policies are in place
3rd ASIAN NICKEL CONFERENCE
15
CHRISTIAN TEO & Partners
EARLY SIGNS OF CHANGE 1.
Proposed revisions to 2009 Mining Law in 2015
2.
Reconsideration of IUP royalty increase for low CV coal
3.
Suspension of export tax for coal
4.
Acknowledgment that insufficient time has been allowed for smelter development
5.
Apparent approval of early issuance of IUPK to Freeport
6.
Expressions of pro foreign investment sentiment
7.
Impressive performance of GoI representatives at Coaltrans Asia Conference 2015
3rd ASIAN NICKEL CONFERENCE
16
CHRISTIAN TEO & Partners
RESISTANCE TO CHANGE 1.
Resource nationalism is deeply entrenched
2.
Unclear whether resource nationalism or economic/ political reality will triumph in short term
3.
Considerable pushback by resource nationalists: (a)
reluctance to conclude Freeport CoW Renegotiations without “total victory” for Indonesia
(b)
imposition of IDR requirement
(c)
new Work Permit rules for expatriates
3rd ASIAN NICKEL CONFERENCE
17
CHRISTIAN TEO & Partners
EXPORT BAN POLICY ALTERNATIVES 1.
Policy alternatives are not full Export Ban or no Export Ban
2.
Export Ban can remain in place but more “temporary” exemptions to/relaxations of Export Ban maybe allowed
3.
Export tax may be used to justify/offset “temporary” exemptions/relaxations of Export Ban
4.
Final policy formulation of Export Ban is likely to be “grey” (i.e., ambiguous) not “black”/”white” (i.e., clear cut)
3rd ASIAN NICKEL CONFERENCE
18
CHRISTIAN TEO & Partners
CONCLUDING REMARKS – PART I 1.
Smelters are not the “objective”, they are just a supposed means of achieving the “objective”
2.
The “objective” is actually to ensure that Indonesia and Indonesians as a whole derive more from the local mining industry than they have in the past
3.
GoI needs to see material benefits of smelter development in 2016-2017 not in 2018 and beyond
4.
Populist President is likely to be particularly concerned about loss of employment in bauxite and nickel producing regions
3rd ASIAN NICKEL CONFERENCE
19
CHRISTIAN TEO & Partners
CONCLUDING REMARKS – PART II 5.
DP&R/Export Ban remains “ground zero” in struggle between resource nationalism and economic/political realism
6.
DP&R will continue to be a priority but not necessarily the number one priority
7.
If it comes down to a choice between DP&R and the Infrastructure Program, DP&R may well lose out
8.
Employment implications are the “key” understanding current GoI decision making
3rd ASIAN NICKEL CONFERENCE
20
to
CHRISTIAN TEO & Partners
Thank You
3rd ASIAN NICKEL CONFERENCE
21
CHRISTIAN TEO & Partners
