By: Dr. Will Hickey | Distinguished ASEAN Scholar, Guangdong University of Foreign Studies, Canton, China

It has been all over the news recently that Indonesian president-elect Prabowo Subianto will continue the current President Joko Widodo’s policy of downstream or value-added activity on the processing of Indonesia’s vast natural resources. Nonetheless, Indonesian politicians' ideas of down-streaming are half-baked, with too much focus on slogans and rupiah returns and not the overall societal benefits that are derived from real activities. Is it really ‘more profitable for the people’, or is it more profitable for the business insiders and investors?

If a narrow definition is used, downstream then becomes one of adding some (or any meager) value to the raw natural resource, such as sweetening crude oil (by pulling out the sulfur gas), creating a lithium slurry from lithium ores, smelting nickel in laterite form to perfect it for export only (more on nickel smelting below) or shipping refined crude palm oil abroad, then many things are lost in the mission of what seems to be a true ‘downstream’ activity.

There are upstream, midstream, and downstream processes in all natural resources. It would seem that Indonesia is currently stuck in both the middle-income trap and in the midstream (not really downstream) processing of its natural resources. It is doubtful that President-elect Prabowo can tackle one issue without addressing the other.

The electric vehicles, or the EV, industry is still largely influx in terms of type of battery components. Currently, all the rage is nickel batteries or NCM type, but many EV manufacturers, including Tesla, are starting to shift their focus to lithium batteries, or LFP, which are cheaper and lighter, though they still do not have the same power as the NCM type. In other words, the nickel demand could all shift quickly, further, 90% of the nickel processing business in Indonesia is controlled by China. China with its BRI (Belt and Road Initiative) as an example, is not particularly concerned with ‘downstream’ in other countries. They are more concerned with upstreaming to feed their own domestic mills, with foreign down-streaming activity only as robust as the demand from China’s industry dictates, (i.e. finished nickel, steel, or oil products). Right now, China is declining economically and has several domestic growth challenges and unfavorable aging demographics.

Both coal and gas in their ultimate downstream form can become substrates for plastic PVC beads and specialized liquid fuels. Yes, coal and gas can even make gasoline, kerosene, and other synthetic liquids, via the Fischer–Tropsch process, but this reaction requires a large electricity input. South Africa, similar to Indonesia with large coal reserves, uses this process to produce heavily polluting diesel fuel.

What about then the ultimate downstream goal of oil and gas for Indonesia: namely, producing enough gasoline for its domestic market? As of 2023, Indonesia still imports nearly 400,000 barrels of gasoline a day. What currently softens this imported price blow is not any increased domestic refining capacity, but rather fuel subsidies, still in the range of around $32 billion a year, this is roughly the same amount of money needed to finish the new Indonesian capital, in Nusantara. We can see that a successful move to ‘downstream’ could then provide real tangible economic results for Indonesia via economic improvements.

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As for palm oil, a special mention should be made that Indonesia seems perpetually stuck in the midstream, not downstream of its production. Indonesia produces 58% of the world’s palm oil or CPO. This is more than double that of Malaysia and Thailand combined. However, palm oil in itself is not ultimately the finished product, but rather still a substrate, that can be broken down into many more specific oils beyond cooking oil, such as stearins, oleins, and ethers. These are used for specialty foods, detergents, and cosmetics. Gaining the know-how to make those types of products would be the formula for any successful down-streaming.

We have not even mentioned other downstream processing efforts in Indonesia mining, such as bauxite to produce aluminum used in aircraft, iron ore to produce specialized steel tools, or gold resources to produce jewelry and industrial products, such as the plating on semi-conductors used in smartphones and computers. Yes, far-fetched it seems, but that would be the goal in a vertically inlined downstream process, namely, from refinement to finished products.

Of course, again all of this downstream from cracking oil, to plated nickel, to plastic PVC beads, to specialized oleins, requires a large input component of electricity. In Indonesia, it is obviously going to be produced by burning more coal, and thus more environmental problems.

A broader definition of ‘downstream activity’ should include a matrix of objectives, in order to really make down-streaming ‘more profitable (or palatable?) to the people’. This matrix would include the following, beyond just measuring profits and increased taxation, (historically, money alone in Indonesia tends to be siphoned off by inside actors, misappropriated, misspent, or simply disappearing, meaning the downstream never really reaches the people the slogans intend it to reach anyway) such as:

Knowledge Transfer: Mentoring, educational, shared learning, and vocational programs that create sustainable know-how for downstreaming. Is the knowledge of downstream creating new opportunities for many or just the well-connected with specialized knowledge? The knowledge transfer must be open learning, so all can engage and participate. These are the German, U.K., and Swiss models of industrial knowledge transfer, and a good template to follow.

DMO (Domestic Market Obligations) and local content initiatives: Requiring a specific amount of not only physical content but also knowledge content should be included in all exports. This can lead to bigger opportunities for small businesses in products and services. These opportunities should also include recycling, repairing, and refurbishing, which creates a plethora of secondary jobs.

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Employment: Both knowledge transfer and local content initiatives should be generating significant employment, in particular for youth. Notably, all three candidates in the 2024 presidential election promised to ‘do something’ about job creation. Jobs creation and downstream go hand in hand, and consolidate each other. Therefore, the focus must be on training youth to engage in and amplify downstream. Paid internships and business incubators that get youth involved are the first half-step, the real drivers though come in lowering obstacles such as in reducing bureaucracy to hire young people formally, and correspondingly dismantling the monopoly power state-owned companies exert on the economy. These will be Prabowo’s, or any politician's, test in getting more people employed.

Environment and ecology: This may be the most important, but a hidden component of downstream. A successful downstream requires strong environmental awareness, such as in fishing, farming, parks, wildlife, etc… Are the sites being used to mine and drill for oil being returned to their natural states such as in ‘abandoned site recovery’ efforts? Does the downstream initiative over-pollute (such as in Jakarta Bay, Citarum River, or the Mahakam in coal-rich Kalimantan), thus making any downstream activity worse off for the wear? Pollution has a real cost to the society and people’s health. While that seems obvious, downstream that ignores waste generation is a zero-sum creation, or 'I win, you lose’ game.

A final note here, merely trying to legislate all the above with diktats and proclamations in the letter of ‘procedures’ is useless. People and businesses will always find ways to get around that, downstream rules must be legislated in substance, or holistically, meaning with a real integration and alignment of the various aspects of the downstream activity, as noted in above.

Simply, Indonesia must prioritize expanded downstream policies in natural resource sectors with a bigger impact on small businesses, the environment, vocational training, youth, and job creation. If the politicians, and their advisors, merely define ‘downstream’ as more money from processes, they are missing the point, and creating damage rather than solutions. A larger and more comprehensive definition then must be sought that engages all society, not the few.

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