Saturday, December 12, 2015

Political turf wars hurting investment in Indonesia-Investment in Indonesia’s extractive sectors has languished for years, hurt by regulatory confusion, low commodity prices and endemic corruption

Political turf wars hurting investment in Indonesia

The first 12 months of Joko Widodo’s (Jokowi) presidency has seen progress toward reforming the extractive sectors. Jokowi began by appointing a clean and experienced bureaucrat, Sudirman Said, to head the Ministry for Energy and Mineral Resources (MoEMR). Said moved to improve transparency in permitting processes, cut bureaucratic red tape and clamp down on illegal exports.

Jokowi also ordered an investigation into Petral, the crooked trading arm of state oil company Pertamina — something no previous president has dared to do. Until now, political protection at the highest levels prevented any serious legal investigations. Jokowi and Said’s efforts are unprecedented and impressive.

But when it comes to managing the country’s most strategic extractive contracts, the story is one of inconsistency and chaos. Tens of billions of dollars are being held up in delayed contract negotiations with investors. Jokowi’s inability to contain political infighting and manage vested interests is making the situation worse.

The Abadi gas field in Masela, Maluku, for example, contains substantial and desperately needed gas deposits. Japan’s Inpex operates the Masela block and recently increased its production projections from 2.5 to 7.5 million metric tons. Some experts calculate that once it comes online this block could help prevent Indonesia from becoming a net importer of gas.

But government infighting has caused delays. SKK Migas, the industry regulator, recommended MoEMR approve Inpex’s revised development plan and contract extension. But one of Jokowi’s recently appointed Coordinating Ministers, Rizal Ramli, protested publicly, accusing SKK Migas and Said of pandering to foreign lobbyists. The government is now hiring an external consultant to review the company’s business proposal.

Long and fraught negotiations have burdened other strategic projects. Total’s contract extension for the Mahakam block, which provides 24 per cent of the country’s gas, underwent gruelling delays and was eventually transferred to Pertamina. Chevron’s US$12 billion deep-sea gas project in the Makassar Straight was postponed due to permitting and regulatory difficulties.

Much needed geothermal investments have suffered similar setbacks. Indonesia is still highly dependent on fossil fuels — 45 per cent of energy consumption comes from oil, 24 per cent from gas and 24 per cent from coal. Only around 5 per cent is sourced from renewables. The government wants to attract 420 trillion rupiah (about US$30 billion) into the hydro and geothermal industries, which are capital intensive and high risk. But land and permit problems have slowed the industry’s expansion and contract uncertainty has spooked big investors.

Confusion plagues mineral mining contracts too. Since the introduction of the 2009 Mining Law, all foreign mining contracts are being renegotiated so that their terms reflect the new legislation. But years of deliberation have produced only a handful of agreements.

Meanwhile, Phoenix based miner, Freeport McMoran is readying for an US$18 billion underground expansion of its gold and copper mine in Papua. The company is therefore seeking an early extension for its contract that expires in 2021. The extension is complex and controversial because Freeport has a long and checkered history in Indonesia. In October Said was finally preparing to ink a deal. But when other ministers got wind they publicly upbraided Said for undermining Indonesia’s legal sovereignty and siding with a foreign company.

Behind these protracted negotiations are turf wars between politico-business elites, elected officials and state bureaucrats who hold opposing views on how lucrative contracts should be managed and who is entitled to manage them.

These wars have an ideological dimension. For Indonesia’s nationalists, handing out contracts to companies like Freeport, Total or Chevron means subjecting Indonesia’s natural resources to continued exploitation by foreign capital, when the rights should fall to domestic business. State-owned enterprises and local mining businesses are increasingly bullish. Pertamina is demanding first right of refusal to all expiring oil and gas contracts, domestic companies now dominate the coal, tin, and nickel industries, and powerful tycoons are moving into gold mining too.

But others in government doubt the technical and financial capacity of domestic players, seeing these large strategic contracts as a source of much needed foreign investment.

Many of these conflicts are also about access to rents. Contract extensions for large-scale projects are a feeding frenzy for Indonesia’s rent-seeking elites. Different factions within the politico-business class vie for influence over the terms of lucrative contracts, trying to gain preferential access to service contracts or cheap company shares.

For example, in November 2015 a political firestorm erupted when it was discovered that the Speaker of the House of Representatives, Setya Novanto, and a powerful oil-trading tycoon, Reza Chalid, met with the President Director of Freeport Indonesia and allegedly offered to facilitate a contract extension in return for company shares. While Minister Said wants to see Novanto removed from his post, other high level elites are rallying to protect him.

Jokowi must assert authority over his executive and the political operators that surround him. Elite infighting and political turf wars will only hurt the economy and undermine Indonesia’s international repute.

Eve Warburton is a PhD candidate at the Department of Political and Social Change, The Australian National University.



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