Indonesian Minister Tried But Couldn't Block His Own Mining Law

By Wilda Asmarini & Kanupriya Kapoor 4 February 2014

JAKARTA — Indonesia’s mines minister, Jero Wacik, has been on an unusual mission in recent months: finding a way out of implementing his own government’s policy.

A smiling, well-rehearsed politician, Wacik was earlier tourism minister, pushing the charms of his native Bali Island and other Indonesian attractions. In 2011, he was given the role of supervising the country’s $6 billion-a-year mining sector despite having no experience of the industry.

At the time, part of his job was to enforce a law President Susilo Bambang Yudhoyono had pushed through, a bold ultimatum to the mining industry: process your ores in Indonesia by 2014 or stop exporting.

But around the middle of last year, the government came to the conclusion that a ban on the export of ore would hurt the economy and lead to job losses that would be damaging in the 2014 election year. Wacik tried postponing the law, but parliament, already tired of the administration’s ambiguities, wouldn’t play ball. He then tried to water it down, but was not successful.

Now the ultimatum has come into force, a self-inflicted crisis in a sector that accounts for 12 percent of the GDP of Southeast Asia’s biggest economy.

“If this law was implemented completely, stopping everything, there would have been mass layoffs,” Wacik told reporters. “But if there was to be zero layoffs, the law could not be implemented.”

“This was impossible. But the government had to find a way.”

Indonesia is the world’s biggest exporter of nickel ore, refined tin and thermal coal and is an important producer of copper and gold.

U.S. mining giants Freeport-McMoRan Copper & Gold Inc and Newmont Mining Corp are among the hundreds of miners that have suspended ore and concentrates shipments.

When the law was enacted in 2009, it went down well at home, appealing to nationalist political sentiment at a time when commodity prices were still booming. It gave miners five years to stop exporting unprocessed ore and start investing in the refineries and smelters they would need to stay in business.

But the policy looked less promising as commodity prices came off the boil because of the slowdown in China. It also became clear that very few miners were able to comply or ever took the law seriously—and the result is that Indonesia’s biggest export industry has come to a shuddering halt.

Hundreds of companies had told the government that they would construct the necessary refining facilities as required by the 2009 mining law. That proved to be wishful thinking.

“At the last minute, we evaluated all of their preparations,” said Mineral Enterprise Director Dede Suhendra. “The fact was that many of those documents did not match what the companies had told us. They had promised to build smelters.”

Everybody Was Angry

In early December, lawmakers denied Wacik’s last-ditch request to delay the implementation of the mineral export ban by three years.

“Everybody was very angry that he was trying to introduce these changes. We didn’t even listen to the rest (of what he had to say),” said Bobby Adithyo Rizaldi, a lawmaker on the energy and mines committee.

Given the fear of widespread layoffs, Wacik and his ministry now had just five weeks to find a way to water down the ban to save jobs and the economy, without breaking the law. And it went on until the final hour.

Wacik fought his case in an eight-hour cabinet meeting the evening before the ban was to go into force. He convinced Yudhoyono to significantly dilute its provisions, including changing the way the purity of concentrates was defined and freeing some miners from the purvey of the law, according to officials and ministers at the meeting.

But the new regulations were poorly defined and, at the last minute, the finance ministry insisted on a progressive export tax on concentrates, part of the move to force miners to process minerals in Indonesia and add value to exports.

When the law came into effect on Jan. 12, there was widespread policy confusion and one of the world’s biggest mining industries swiftly shut down. Tens of thousands of people have been made jobless, trade groups say.

“Our task is to create jobs. If the (new) policies cause mass layoffs, well then we were wrong,” Wacik said.

However, he added the government’s action in the end “was a good decision that is good for our country because it will protect the environment and increase the value (of our minerals).”

Train Wreck

Indonesia is well known for its unpredictable regulatory environment but nevertheless, the latest policy mishap stands out. The government had since January 2009 to prepare for the law, and in the end still had to rush out rules that only added to the uncertainty.

“The whole situation we are facing now … has been like a slow-moving train wreck,” said Andrew White, managing director of American Chamber of Commerce in Indonesia.

It hasn’t helped that Wacik is an outsider to the mining industry.

When Yudhoyono handpicked him to head the energy and mineral resources ministry, few in the industry had heard of his name—and Wacik himself had reservations about taking on the role.

An avid golfer who has a degree in mechanical engineering from Indonesia’s Bandung Institute of Technology, Wacik is a trusted adviser to the president and a top official of the ruling Democratic Party.

Within his party, the minister is highly regarded because he is a self-made man and made his way up to a senior position, said two senior party officials. But critics describe the 64-year-old as arrogant and patronizing.

Many in the industry viewed his appointment as a political move by Yudhoyono.

“We know Jero Wacik has integrity but in some technical aspects maybe his expertise is not that good,” said parliamentarian Rizaldi. “His background is not in this business (of commodities).”

Canadian-based think-tank Fraser Institute has said Indonesia has become one of the worst countries to invest in mining under Wacik’s watch, ranking it at the very bottom in a 2012 survey of 742 mining firms.

While mining firms await more clarity on the government’s policy, Wacik has said the industry may have to undergo a one-year transition period and that small miners may have to reduce or momentarily halt operations.

“Once the smelters are finished, we will see mining (resume),” the minister said. “Their ore will be taken to domestic smelters. It cannot be taken to China or Korea. I think this is a good way out.”