ESDM Performance Report on coal & minerals for 2016.

December 18, 2017 Ian Wollff Coal Asia publications 0

ESDM Performance Report on coal & minerals for 2016. (Vol.85)

In July 2017, the ESDM posted its 2016 Performance Report on its website. This 258-page report covers an extensive range of ESDM management activities, wherein the coal and mineral aspects are reviewed herein. [https://www.esdm.go.id/assets/media/content/content-laporan-akuntabilitas-kinerja-instansi-pemerintah-kementerian-esdm-tahun-2016-.pdf ]. This report and quotations are based on a google translation, and I apologize for any errors or misinterpretations.

The ESDM has a roll to support national development, and the economy in the fiscal, monetary and real sectors. The performance of the ESDM is measured through selected performance indicators.

Within the Strategic sector I of “Guaranteed provision of energy and domestic raw materials”, there are 2 performance indicators for the mineral industry being; – 1) increasing mineral production and 2) increase value added that general met their target. Strategic sector II “The realization of state revenues from the EMR sector”, wherein the mineral and coal sub sectors only reached less than 70% of the 2016 target. Strategic Sector III relates to the energy subsidy sector. Strategic sector IV “The realization of increased investment in the EMR sector” where the 2016 target was exceeded. Strategic sector V relates to the ESDM’s internal development of human resource, research, geology and such.

Some key results.

State revenue from the mineral and coal sub sector reached 56.45% of target, and construction of domestic processing and refining facilities reached 50% of target.
The ESDM increased control over coal production. The 2016 the coal production was 434 million ton, being 103.7% of target. The report gives some excellent tables on coal production by PKP2B, IUP and BUMN parties.
Construction of 2 mineral smelters (though 4 planned for 2016).
Mineral production decreased after the implementation of the raw ore export ban in January 2014. However, 2016 production of gold (91 ton), silver (322 ton), copper (246, 155 ton), ferro nickel was higher than 2015, while tin (62,877 ton) and Nickel matte (78,748 ton) were slightly lower than 2015.
The mineral and coal sector comprises about 14% of the ESDM investment sector.
The Geological division has recommended a number of areas for further coal exploration, and summarized the national coal resources / reserves for 2016 as: – “06 billion tons of resources and 28.46 billion tons of coal reserves,…..; solid bitumen resources of 12.44 billion tonnes, and CBM resources of 99,901.9 Bcf.” However, this resource includes 4.5 billion ton of coal in the hypothetical status. Overall coal resources increased from 2015 to 2016, but coal reserves decreased from 32.2 billion ton in 2015 to 28.4 billion ton in 2016.
The Geological division has made a number of recommendations for further exploration of metallic and non-metallic minerals in 23 regions. A number of tables gives 2016 estimates of the nation’s resources and reserves for various minerals and rocks.

Selected points of review.

Like all self-prepared performance reports, there are a few items that seem to deserve a closer look; –

Under the title of “increasing ESDM sector investment” the following statement may be debated by a number of business parties; – “For the sake of creating a conducive investment climate is done through guarantee of legal certainty, simplification of licensing, and create stable social, political and economic conditions”.
Under the title of “Optimizing fossil energy supply capability – coal production”, the report attributes the increase of coal production “due to the significant increase in coal prices, especially in the second half of 2016”. However, under the title “State revenues of mineral and coal sub sectors” the poor realization of state revenues is attributed to “The decline of mineral and coal commodity price in the third quarter of 2016 which is shown in the HBA trend graph…, and to the prolonged rainy season”. I find it a little worrying that the Performance Report attributes cause for failure to meet this state revenue target is seemingly out of the ESDM immediate control (international prices and weather), rather than to look at factors within the ESDM control (limits to coal production, barriers to raw ore exports etc).
The information on tin production is somewhat confusing. Tin production 2016 target of 50,000 ton was exceeded by 12,877 ton to 62,877 ton. This was attributed to an increased production capacity of tin mining companies. However, the 2015 production figure was even higher at 70,310 ton, so it is difficult to understand why the targets seem to be set artificially low, and how a yearly decrease in tin production is attributed to an increase in production capacity??
The underperformance of the construction of new smelters (planned 4, actual 2) is agreeably attributed in part to the condition of the mining investment climate. The 2 delayed construction smelters were “due to obstacles to the machinery import process, as well as the financing factor of smelter projects constrained by the global crisis and falling commodity prices”. The ESDM plans to improve the efforts in future smelter projects through tax incentives and better coordination amongst the various ministries. These moves are a good start, but may not adequately address the fundamental business model. For example, the Middle East is attracting solar power by providing free land and applying a zero tax.
Non- Tax State Revenue (PNBP) from the mineral and coal sector was targeted at Rp 48.2 trillion. However, another target was set in APBN-P 2016 of Rp 30.1 trillion. The actual revenue was Rp 27.21 trillion. This seems to emphasize the issue of setting such targets.
Investment in the coal and mineral sector was targeted at US 6.5 billion and realized US 7.23 billion. This is the only part of the performance report that does not use the Indonesian currency. The report points to the COW holders, PKP2B and BUMN as the key large-scale investors. By inference the IUP and Small Miners seem to be not significant contributors to the investment aspects of mining. The report indicates that, by far, the largest investment was associated with the Mining Service Business Licenses (IUJP) and Registered certificate (SKT) parties. Unfortunately, the report does not give details, nor explain, the nature of IUJP & SKT investment.
The report repeats the Government policy to increase domestic consumption of coal to 240 million ton by 2019 with a corresponding controlled reduction of coal exports to 160 million ton. However, 2016 domestic consumption was planned at 111 million ton, but later adjusted to 86 million ton. This suggests the growth of domestic consumption may under perform these longer-term targets, allowing coal exports to remain strong.
Information on the renegotiation of COW, and conversion to IUPK was not readily identified in this 2016 performance report. However, a “Fact Sheet” from the ESDM (9 August 2017) indicates a 2017 performance indicator includes the “KK and PKP2B amendments and IUP arrangement”. It seems the 2017 target is directed at 47 PKP2B and 25 COW’s of which 15 PKP2B and 14 COW’s had been amended up to 5 July 2017.
I notice the ESDM website stated Vision “The realization of a sovereign, self-reliant Indonesia, with a character based on mutual cooperation” seems to be far broader than the Performance Report stated roll of the ESDM “to support national development, and the economy in the fiscal, monetary and real sectors”. In particular the 7 Development Missions seem sometimes difficult to reconcile with the Performance Reports numerous selected performance indicators. For example, the 4^th Development Mission “To realize the quality of human life on Indonesia is high, advanced, and prosperous” seems to be lacking corresponding significant Performance Report Indicators.

Opinion.

Overall this is an excellent report to promote transparency within the ESDM ministry. This review is limited to the mineral and coal industry, but the report covers a much wider range of topics, including supply and subsidies in the oil & gas and electricity sectors.

It is apparent there are some conflicting forces the ministry has to deal with, particularly the KPI to increase production and associated revenue for the State, as opposed with some other political objectives relating to coal conservation, and developing smelters at the expense of raw ore export ban / limitations.

It is disappointing, though understandable, that this report does not evaluate the implementation of several controversial programs. For example; – How has the renegotiated COW improved the production or state revenues? And how is the drawn-out renegotiation process affecting production and investment? Or how has the new smelter program impacted on the regional GDP and the welfare of the people in the mining districts?

The performance of the ESDM legal team seems to be passed over too lightly in this report. Their work includes tidying up the Clean & Clear process, laborious negotiation amendments to the PKP2B & COW’s, and drafting numerous controversial implementing regulations (PP). There may even be cases where the legal team may need to defend the ESDM from law suits or court challenges by companies, NGO’s, regional government or international courts (Churchill etc). These legal issues have a significant impact on the credibility of the ESDM, on many aspects of the mining industry and the Governments overall performance.

The performance report does not seem to address the ESDM’s failure to implement some works as mandated by the Law (4/2009). For example, the ongoing moratorium on issuing new exploration areas through the bidding system.

It is disappointing that the KPI’s appear to have a selective focus that may be designed to fit the work that is known to be readily achievable, and are not used to broaden the performance of the Indonesian mining industry; –

1) Perhaps 2018 KPI’s could include more minerals, other than the 6 main minerals. The Geological division tables and graphs indicate there are large resources of iron ore, limestone for cement, modest amounts of zircon etc, and a recent PP requires the development of accessory minerals to the tin industry.

2) Perhaps the 2018 KPI’s could also include a significant component to develop the small -mining sector, as this sector apparently provides a livelihood to more than 1 million Indonesians, produces as much gold as the formal sector, and is in desperate need to improve its health and safety record.

3) Perhaps the 2018 KPI’s could be extended into measurements of the well-being of mining companies, mining service providers, health & safety in the mining industry, plus well-being of communities in the mining districts?

“For the benefit of the People”

The ESDM performance review is a good summary of the workings of the ESDM, how they performed such work, plus the output of the mining industry. The performance review does not attempt to measure the impact of such ESDM work on the broader well-being of the industries under its supervision, nor measure the impact of the exploration, mining and smelting industries have on the well-being of the people of Indonesia.

Determining the “benefit of the people” is possible, and was undertaken for West Kalimantan in the report “Impact of Downstream Bauxite against the regional economy of West Kalimantan Province” as published on the ESDM web site, first print Dec 2016. (Bauxite Report) [ https://www.esdm.go.id/assets/media/content/content-dampak-hilirisasi-mineral-bauksit-terhadap-perekonomian-provinsi-kalimantan-barat.pdf ]

This Bauxite Report states that the initial impact of the 2014 raw ore export ban resulted in the mining industry slow-down, plus reduced taxes and foreign exchange from the mining sector. The Bauxite Report acknowledges the social importance of mining on labour, “where even insignificant amounts of work are better than the absence of employment at all”, and “that people around the producing regions will be more advanced”, and “companies engaged in the mining sector have CSR programs that will be felt by the surrounding communities”. The earlier University of Indonesia report on the cessation of raw ore exports in West Kalimantan made similar findings [Coal Asia Vol. 75, UI report opens a window on the struggling bauxite industry by Ian Wollff].

The Bauxite Report reflects upon the welfare of the people through the regional economy of West Kalimantan in terms of A) gross regional domestic product (PRDB), B) Average PRDB per capita (level of community welfare), C) Average household consumption, D) Human development index (HDI), and E) Sectorial Contribution to GDP. The Bauxite Report notes that the health of the mining industry depend on the four factors to support production; – Natural resources, labour, capital and entrepreneurship.

The Bauxite Report’s static economic impact analysis show the impact of the bauxite processing industry was not very significant, with profit growth at 2.40%, GDP growth of 1.43%, tax growth of 0.26%, and income growth of 0.21%. “If the alumina sector continues to be developed, the output and profit aspects contribute positively to the West Kalimantan economy. However, the income, tax and labour aspects are negative, meaning that in the short term the alumina sector contributes negatively to the West Kalimantan economy”. The dynamic economic impact analysis shows the level of alumina production needs to be lifted to compensate for the loss of bauxite exports. Several scenarios of combined alumina production and bauxite exports were undertaken “to find out which scenario gives a higher total value with the same raw materials”. The report shows the significance of bauxite exports, by adding between 4 to 19 fold value to a combined bauxite export and alumina smelter industry.

Conclusion.

The ESDM website continues to improve its format and material such that it grows in importance in presenting the mining industry to the people throughout Indonesia. The 2016 Performance Report adds to the transparency of the ESDM operations. The number and variety of research reports are encouraged to grow, particularly those like the Bauxite Report, that can open a window on the impact of the ESDM upon the community, and hopefully provide fact based feed-back to the ESDM on how to adjust future policy for the optimum use of reserves for the benefit of the people.