«adb economics no. 411 working paper series october 2014 ASIAN DEVELOPMENT BANK ADB Economics Working Paper Series Industrial Policy in Indonesia: ...»
PT Smelting is currently the only company that has built a large copper processing facility in Indonesia. The only other copper smelter that is built in Maluku by PT Batutua Tembaga Raya has a relatively small capacity. Since PT Smelting is only able to process one-fifth of Indonesia’s output of copper concentrate, several companies have started to build new copper processing facilities as a response to the new policy. However, the development of these facilities will take a few years, leaving very little possibility that it will be up and running at full capacity by 2017.30 PT ANTAM is among the first company that started processing and refining bauxite into alumina in 2013 in preparation for the ban, although its smelter will only start to operate optimally by the second quarter of 2014. PT ANTAM has set up a smelter in Tayan, West Kalimantan, to process bauxite into chemical grade alumina (CGA). The smelter is set up as a joint venture between Antam and Showa Denko K.K. (SDK) Japan (Kota, 2014). This is Indonesia’s first bauxite smelter and is the biggest in Southeast Asia, with annual capacity of 850 thousand tons of bauxite or 300 thousand tons of CGA. West Kalimantan, along with North Sumatra, has been identified by the Ministry of Industry as the location for aluminium industry cluster.
Firms from the PRC have also stepped up plans to build refineries for nickel pig iron (a substitute for higher grade refined nickel in stainless steel), although plans for more expensive alumina refineries have progressed less quickly. One firm indicated that it would be ready to export nickel pig iron from its new facility in the second half of 2014, which will be further processed in the PRC into 10%–15% grades. One firm, Bosai Minerals, pulled out its plan to build alumina plant that was expected to produce 2 million tons per year, while Hongqiao Group expects its alumina plant to be completed by the end of 2014 (Yam 2014).
The mining sector accounted for one-fifth of total realized foreign direct investment (FDI) in
2013. The GOI claims that the policy will attract more investment into the smelting industry in the future. The Investment Coordination Board (BKPM) estimated that prospective investments in the construction of mineral smelting amounted to $12.36 billion (Sambijantoro 2014). It further predicted that total realized investment in local smelters could increase up to threefold within the next few years if the Mining Law is implemented consistently. Any inconsistency in policy implementation, on the other hand, will result in a set back as investors will be unwilling to commit themselves to high investment in the midst of policy uncertainty. The recent backtracking was necessitated by poorly designed initial policy and time constraints. It is hoped that any future backtracking would be minimal and the GOI will be able to stand its ground to give better assurance of policy certainty.
Support to the policy has also been expressed by a number of parties. The Research and Technology Application Body (BPPT = Badan Pengkajian dan Penerapan Teknologi) expressed its readiness to provide technical support in the development of mineral processing and refining industry (Kompas 2014). It has provided similar support in the past, such as the development of nickel processing technology in Pomalaa, Southeast Sulawesi, and iron ore processing technology in South Kalimantan. The Indonesian Science Institute (LIPI = Lembaga Ilmu Pengetahuan Indonesia) also has the potential and capacity to provide similar support through its research center for metallurgy.31 A number of universities in Indonesia have also developed prototypes of mineral processing and refining
The Jakarta Post (2014c).
http://www.metalurgi.lipi.go.id/industrial-research-partnership-and-support/ 38 | ADB Economics Working Paper Series No. 411 equipment, but none of which have been applied by the industry. This nevertheless points to a potential area for future collaboration.
D. Lessons for Policy Recommendations While there is a general agreement to the spirit of the policy, the case study has shown the challenges and complexities in its implementation. The GOI appears to lack a well-formulated comprehensive strategy to implement the policy as evidenced in the ad hoc last minute responses to ensure the timely implementation of the export ban. There is however, growing evidence of increased coordination across ministries, in particular among the ministry responsible for the sector (KESDM), the Ministry of Industry, Trade, and Finance.
Reactions to the policy vary even among the private sector, reflecting the diverse business interests in any particular sector or industry. Some have embraced the policy as demonstrated in the increased realized investment in local smelters, while others have adopted a more aggressive stance.
Further, as it was becoming more obvious that the GOI will consistently implement the policy, there were observed shifts of the industry’s response toward finding a solution to deal with the situation.
Equally important is the GOI’s future management of the policy. Sustainable upgrading of the sector would require a more holistic approach and a greater focus on innovation and industry collaboration.
The underlying issues of infrastructural deficiency and cumbersome regulatory process also need to be addressed.
The paper has attempted to do an in-depth comprehensive assessment of the evolution of Indonesia’s industrial policies and recent efforts to enhance GVC participation. It has highlighted the complexities and challenges in policy making and implementation. While the challenge is not exclusive to industrial policies, increasing complexities and interdependencies in global trade and production networks, the role of external governance, and the cross-cutting nature of relevant support policies further reinforce the challenge. In a world of GVCs, competition is intensified while at the same time new opportunities emerge. With many countries the world over seeking to enhance their GVC participation, a better understanding of the working and configuration of GVCs as well as recognition of the inevitable necessity of international competitiveness and the amplified costs of inefficient policies become more important. While policy risks raise caution on the costs of policy mistakes, leaving matters entirely to markets carries as much a risk.
The role of government policies, both broad-based and specific policies, remains important.
Their effectiveness in maximizing the gains from GVC participation depends not only on policy design, but also synergies across supporting policies. Effective implementation requires intensive coordination among stakeholders, both in the government and the business community. In the case of Indonesia, along with the fundamental problems of infrastructure and energy deficiency, the double-calamity of volatile labor market and low productivity, bureaucratic red tape, lack of synergies in government policies as well as lack of coordination among implementing agencies have all taken their toll on the competitiveness of the industry sector.
Successful industrial policy in a world of GVCs requires a few ingredients. First, government capabilities are required along the policy process, from design, translation into operating regulations, interpretation, and administration. Second, the willingness of the government to monitor policy Industrial Policy in Indonesia: A Global Value Chain Perspective | 39 outcomes and change its policies as needed, including to revisit, stop, fine-tune programs with poor results, is required. To do so, there needs to be some distance between policy decisions and business interests, and this is a question of governance. Third, often, the most important change is simple.
Consistency, transparency, and clarity of policy and policy process are extremely important, especially for an economy as big and as diverse as Indonesia. Clear leadership and effective coordination is key for consistency of policy, and include intra- and inter-ministerial coordination, sectoral–functional coordination, central–regional–local coordination, domestic–external coordination as well as intergovernment coordination. Last, but not least, good policies are only half the battle won.
Implementation is just as, if not more, important. The capacities of bureaucrats and administrators are crucial to effective implementation, while dedicated resources and efforts are necessary.
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