from Asia Unbound

New Indonesian Law Constrains Gas Exports

July 05, 2012

Indonesia's President Yudhoyono waits to give his keynote address during the opening of the 11th IISS Asia Security Summit. Kurlantzick discusses Yudhoyono’s recent attempts to reduce Indonesia’s openness to investment, and focus on domestic concerns.
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Over at Asia Sentinel, today there is a succinct overview of the announcement, made on July 4, that the Indonesian government may stop the signing of any new deals to export natural gas. According to Asia Sentinel, the director general of the Energy and Mineral Resources Ministry announced that the administration may use this moratorium to shift natural gas deliveries to more domestic users, such as a range of Indonesian industries. But Asia Sentinel reports that Indonesia also has vast reserves of natural gas, and that to utilize more of it for domestic uses would require sizable changes in its gas delivery infrastructure. Indonesia does have a strong domestic economy, and local companies certainly are going to see demands for gas grow, but this announcement comes as part of a trend.

More broadly, this announcement comes as one in a series of recent moves by the Susilo Bambang Yudhoyono (SBY) administration to dial back the country’s openness to investment, and to focus more on domestic concerns — at a time when SBY’s popularity is falling, candidates for the next presidential election are lining up, and the promise of SBY’s presidency overall seems to have almost totally dimmed. Earlier in the SBY administration, the government, realizing that Indonesia already was receiving far less investment than it should for its size, economic might and potential (partly because of red tape and investors’ uneasiness with a culture of graft), committed to fighting corruption, reducing red tape, and making it easier for investors to figure out how to navigate among the maze of ministries and local officials that were needed to get projects approved. Many ASEAN and Western companies started to give Indonesia a second look —Japanese firms generally hung in through the chaos in Jakarta of the late 1990s and early 2000s. The SBY administration seemed to be reaching a balance between welcoming more foreign investment and catering to domestic companies —and domestic voters. But that balance is again going out of whack, and the shift back to protecting local companies is only likely to benefit Indonesian tycoons who have long operated in protected local markets. Jakarta recently announced that foreign mining companies must give up 51 percent of their shares to Indonesian firms.

To be sure, foreign firms working in Indonesia in the  extractive industries have had a long history of conflict with local authorities and local people, and allegations of involvement, in some cases, with allegedly abusive elements of the Indonesian military. Still, many of the foreign firms, having dealt with challenges in the past, have adapted and improved their corporate governance. And while some Indonesians may see the SBY administration’s move toward nationalizations as helping them, in reality the shift probably will only still help big business —of the Indonesian kind.