Industry minister MS Hidayat says he will ask the finance ministry to give tax incentives to mining companies to build power plants for their own smelters.
Speaking to reporters on Tuesday, Hidayat said it would be difficult for mining companies to build smelting plants in their mining areas due to a lack of available power.
“Smeltering plants will need massive amounts of electricity, and currently there is not enough electricity infrastructure in areas outside Java,” Hidayat said.
The export of unprocessed ore will be banned starting 2014, requiring mining companies to build their own smelting plants or cooperate with other operators to comply with the 2009 Minerals and Coal Law.
“This is why we are currently offering tax incentives to potential investors who want to build mining smelter plants together with power plants. We will just prepare the tax-incentive scheme. Other ministries will have the final say,”
The government has also issued a regulation imposing a 20 percent tax on ore exports to ensure that mining firms do not overexploit their concessions before the ban comes into effect.
Mining companies now also need a permit to export ores that can be issued only if the firms can show concrete plans on how to process ore once the ban is fully implemented.
The trade ministry has issued 31 permits to mining companies, including Aneka Tambang, the country’s largest nickel producer, Freeport Indonesia and Newmont.
The country exported 572,106 tonnes of nickel in June, down 80 percent from a month earlier, while copper exports shrank to 20,000 tonnes, down 89 percent in the same month.
While the government considers the regulations necessary to ensure compliance with the law, domestic and foreign investors have mostly criticised the rules, arguing that their companies had suffered massive losses since implementation of the regulations.
The Indonesian Chambers of Commerce and Industry (Kadin), for example, called the regulations a “huge mess” for the nation’s mining business, saying that local mining companies have lost Rp 1 trillion (US$106 million) in revenues since the rules came into effect.
Meanwhile, government officials have been upbeat, saying that the regulation has encouraged investors to enter the downstream mining industry.
According to a report from the Energy and Mineral Resources Ministry, at least 19 smelters would begin commercial operation between 2012 and 2017, including seven currently under construction, six projects in the feasibility-study phase and six projects that have recently been issued construction permits.
Hidayat previously said that companies building smelting plants would also receive fiscal incentives in the form of tax holidays, tax allowances and free import duties for imported machines and facilities used for production.
Separately, Sofjan Wanandi, the chair of the Indonesian Employers Association (Apindo), said that he doubted the effectiveness of the government’s plan to give incentives for companies that planned build their own power plants for mineral smelting plants.
“No matter how much in incentives Pak Hidayat proposes, mining companies will not dare to develop their own power plants because such projects are financially unfeasible,” Sofjan said on Tuesday.
“Building power plants requires a huge expense and the smelting business, in reality, does not promise a huge profit margin.”
If the government really wanted to lure investors into the smelting business, then it should build necessary infrastructure, including providing electricity to accommodate the smelting plants, Sofjan said.
State electricity power company PLN has said that Java was the most suitable place to build smelters, although it would be too expensive for mining firms in Sulawesi and Kalimantan to ship their ore to the island for processing.