Tenggara Strategics' Job Creation Law series
Jokowi calls for downstreaming in exchange for waived coal royalties
This article is a part of a Tenggara Strategics series on the Job Creation Law.
President Joko “Jokowi” Widodo has urged coal companies to stop exports of unprocessed coal and to build downstream industries. He has promised a zero percent royalty and other incentives for coal companies that build downstream industries and add value to coal-based commodities. Jokowi’s comments align with the new Job Creation Law, which provides major incentives for mining companies that downstream their production.
In a meeting called “Accelerating the Added Value of Coal” on Friday (10/25), Jokowi shared a vision of transforming Indonesia from a natural resources exporter to an industrial nation with the capacity to process its own resources into manufactured goods or semi-finished goods.1 He ordered the creation of a road map for the acceleration of the process though ecofriendly technology and the mapping of downstream industrial coal areas.
It is hoped that improving the downstream sector will create more job opportunities, particularly as it will reduce the nation’s reliance on imported fuel and increase the domestic industry’s ability to produce value-added commodities.
This vision is also embedded in the Job Creation Law. Article 39 of the law amends the recently passed Mineral and Coal Mining (Minerba) Law by inserting Article 128A, which waives royalties for mining companies that have developed downstream production and have produced value-added commodities. The Minerba Law itself mandates downstreaming as a prerequisite for contract extension.
The zero percent royalty provision has created an uproar within civil society organizations. They believe the provision will pave the way for large mining companies to excessively exploit natural resources. In addition, the policy will reduce revenue for regional governments that have benefitted from the royalty. East Kalimantan and South Kalimantan have been the biggest recipients of the royalty because of their large mining concession areas, receiving Rp 9 trillion and Rp 6 trillion per year respectively.2
The Indonesia Coal Miners Association welcomes the incentive for building downstream industries.3 Some mining companies are already in discussions regarding the development of the downstream industry for coal derivatives, especially since the government plans to cut down the import of liquefied petroleum gas (LPG) and substitute it for coal-based dimethyl ether (DME). PT Bukit Asam Tbk (PTBA), for instance, has been working on a 1.4 million ton capacity coal-to-DME project that is expected to begin operation in 2024. PT Batubara Bukit Asam is planning to open new coal brick factories in 2026 and 2028 with 20,000 ton yearly capacities.
United States chemical company Air Products & Chemicals will team up with two local companies, Bakrie Capital Indonesia and Ithaca Resources, to build a US$2 billion coal-to-methanol production facility in Bengalon, East Kalimantan. This facility will produce nearly 2 million tons of methanol per year from nearly 6 million tons of coal. The project is expected to begin in 2024.4
President Jokowi has called on the coal industry to concentrate on improving quality standards, smelting, coal gasification, coal brick manufacturing and the production of coal-water mixtures as part of his grand strategy for ensuring energy security. In addition to the zero percent royalty, the government plans to provide incentives in the form of tax holidays, customs reductions and local tax incentives to encourage investors to develop the downstream mining industry.5
However, at the current rate of production, Indonesia’s coal reserves are predicted to be depleted in the next 20 years.6 The incentives given to the coal mining industry have been criticized for potential conflicts of interest, particularly because of the lobbying efforts of private sector players that disregard the possible long-term effect on the environment. With added incentives for coal, the development of renewable energy sources in Indonesia could be compromised.
The Job Creation Law stipulates a new value-added tax (VAT) for coal as a commodity (Article 112). The 10 percent VAT will be charged to domestic consumers, such as PLN and industrial users, while coal exports still benefit from zero percent VAT.
Coal mining companies are now waiting for the supporting government regulations that will further regulate the incentives and contract extension processes.
Some sources from the Energy and Mineral Resources Ministry said that the companies that lobbied for a zero percent royalty are divided into two big groups. The first group comprises coal companies that also own power plants and the second comprises coal companies whose contracts are about to end.
The sources added that Adaro pushed for giving a zero percent royalty for power plant usage. This is not surprising since Adaro is the only coal mining company that has its own power plant.
Meanwhile, other companies whose contracts are about to end are proposing a zero percent royalty for companies that will downstream their production. One of the key players is Bakrie Group. Added-value downstreaming is one of the criteria for a contract extension. Without a plan for downstreaming, the contract extension will not be granted.
In its proposal, Arutmin and KPC, whose contracts are about to end on Nov. 1, 2020, have promised to conduct downstreaming so that their coal products will have added-value. The problem is, establishing a downstream coal industry would require a lot of investment.
Besides, downstreaming in the form of coal gasification to produce DME is already outside the scope of the mining industry. In the eyes of coal companies, this derivative product is closer to the chemical industry. That is why they asked the government for a zero percent royalty. Currently, the only coal company that produces DME is Bukit Asam.
Other sources added that, as of last week, the Energy and Mineral Resources Ministry was still going back and forth on deciding the volume for coal that would be given a zero percent royalty. Coal companies asked for the volume levied from the royalty charge to be as high as possible, though the ministry said the incentive could not be applied to all types of produced coal.
Indonesia’s coal production and exports (in million tons)
|
Year |
Production |
Export |
|
2019 |
616.16 |
454.50 |
|
2018 |
557.77 |
356.39 |
|
2017 |
461.36 |
286.94 |
|
2016 |
456.17 |
331.37 |
|
2015 |
461.29 |
365.75 |
Source: Energy and Mineral Resources Ministry Minerba One Data Indonesia (MODI)
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