Indonesia's new power industry ministers face big challenges

Indonesia's new power industry ministers face big challenges

In surprise appointments of not one but two ministers to the energy and
mineral resources portfolio earlier this month, Indonesian President Jokowi
acknowledged the complexity and strategic and economic importance of the
sector.

New Energy and Mineral Resources Minister Ignasius Jonan and Vice Minister
Arcandra Tahar take on a portfolio that, including processing, contributes
around 24% of Indonesia's GDP. Key portfolio functions include primary
mining (minerals, coal, oil and gas), processing of energy and mineral
products; electricity generation, transmission and distribution; gas supply;
and renewable energy and energy conservation.

Indonesia is consistently identified in industry surveys and expert
assessments as having among the highest potential for policy reform of any
resource-rich nation, reform that would lead to increased investment. At
least 65% of all industry investment in Indonesia during the past decade has
come from foreign sources.

While Vice Minister Arcandra has a background in offshore oil and gas
technologies through his Houston-based consulting business, Minister Jonan
(a former investment banker, railway CEO and transport minister) has by his
own admission no direct experience of the energy and mineral sector. He
joked to Ministry staff that his principal asset was being an ex-minister,
but that he did have energy experience as a consumer of petroleum and
electricity.

Nevertheless, Jonan's success in investment banking and reforming the
moribund state-owned railway operator KAI has fuelled hope that will be able
to build on the reforms of his predecessors in policy and legislation and
across the Ministry of Energy and Mineral Resources.

Jonan summarised priorities for him and Arcandra in the handover ceremony
from the Acting Minister, Luhut Panjaitan on 17 October. Understandably,
electricity got first mention, with Jonan highlighting the need to
accelerate the delayed 35000 MW construction program and achieve 90%
electrification in 2016.

He then mentioned application of new technologies in oil and gas and
equitable cost recovery by explorers and producers under production-sharing
contracts. The minister also highlighted the need to address the export ban
on unprocessed ores and concentrates, smelter development obligations and
taxes on exports.

While all of these issues need to be addressed by the Ministry, they
represent only a subset of the structural inadequacies in policy and
legislation that hold back sorely needed investment and the flow of benefits
to national and regional economies.

Oil exploration in Indonesia has fallen and production has declined during
the past six years to the point where Indonesia is the only oil-importing
member of OPEC. Investment in minerals processing and new mines is fitful,
in large part as a result of misfiring policies that aimed to lift
processing investment. Minerals exploration has slumped to levels well below
what is needed to sustain the sector, while shortfalls in gas production are
leading to uncompetitive energy costs for manufacturing.

The first minister for energy and mineral tesources under Jokowi's
administration, Sudirman Said, implemented a comprehensive reform program
that included a complete clean-out of the corruption-implicated oil and gas
directorate and a spill of most other executive positions across the
ministry. He also oversaw a policy review for oil and gas, put forward
legislative changes and established a series of task forces to expedite
project delivery and implementation of policy. Projects included the 35000
MW project and implementation of a renewable electricity generation program
targeting 23% of total generation needs.

But for now many international resources investors are staying away from
Indonesia, reducing investment exposure there, or actively exiting in favour
of other destinations. The principal reasons given are policy and regulatory
uncertainty, and investor-unfriendly settings compared to other nations.
Resource nationalism and associated policy shifts affecting major projects
have highlighted the hazards for investors. Former Minister Sudirman himself
fell afoul of entrenched interests, thought to be a major factor behind his
removal in a July reshuffle.

Minister Jonan and members of the parliament have acknowledged the need to
progress amendments to the oil and gas law and minerals and coal law that
are currently being considered by the Indonesian Parliament. Those close to
the process, however, are pessimistic about passage of amendments to
either or both laws before the end of 2016.

As important a step as legislative change is meeting the need for clear
pathways for the development of energy and minerals commodities. Such
pathways are needed to restore investor confidence. While there is a
codified policy for upstream and downstream energy, there are no such
guiding policy principles for minerals. And both the energy sector and the
minerals sector lack roadmaps for how the policies and laws will be
implemented on the ground.

In minerals and coal, there is additional complexity for investors and
regulators in the ongoing disjunction between national and sub-national
jurisdictions in the administration of exploration and mining. While
attempts have been made to resolve jurisdictional overlap and misalignment,
more changes are needed to bring about certainty and administrative
efficiency.

In his address to Ministry personnel and guests, Jonan highlighted the need
for greater community engagement in resources development, including
economic engagement. While Indonesia has a law mandating corporate social
responsibility activities by major mining and non-mining projects, mining
and petroleum policies are largely silent on community engagement during
licensing, development and operating phases of projects.

Jonan repeated the capacity-building theme of his predecessors, highlighting
the need for expertise within the Ministry to manage the technical and
policy complexities of the minerals and energy sector. The abolition of
specialist ad hoc groups within the Ministry by Acting Minister Luhut,
however, has reduced its capacity to work cross-sectorally with other
agencies to expedite investment.

Despite the challenges, the experience of Jonan in reforming organisations
and in private sector investment, plus Vice Minister Arcandra's oil and gas
knowledge, may help them to advocate and adopt packages of policies and
legislation that deliver energy and minerals development objectives and
contribute substantially to Indonesia's economic goals.

The ministers don't have much time, however. While there is almost three
years left of the first Jokowi Presidency, reforms are unlikely to be passed
by parliament or implemented in the 10 months leading up to the 2019
elections, meaning that Jonan and Arcandra have just two years to use their
skills to turn the energy and minerals sector around.

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Ref:
http://www.lowyinterpreter.org/post/2016/10/25/Policy-challenges-to-test-new
-Indonesian-energy-and-minerals-ministers.aspx

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com