Indonesia should count the real cost of its mineral incentives

Every year, the Indonesian government forgoes taxes it could collect. Through tax holidays, rate cuts and exemptions, it courts investment while easing the burden on households and small businesses. Economists call this “tax expenditure” because giving up revenue is another way of spending public money. The Ministry of Finance expects it to reach 564 trillion rupiah (US$31.5 billion) in 2026, nearly double the 293 trillion rupiah of 2021. The ministry is now reviewing its tax holidays, which makes this a good moment to ask a simple question about one of Indonesia’s biggest industrial bets: what have tax incentives for processing nickel and bauxite actually bought? Indonesia banned exports of raw nickel ore in 2020 and of raw bauxite in 2023. The aim has been to force companies to process these minerals at home, a policy known in Indonesia as downstreaming. To attract the capital needed to develop value-adding smelters and refineries, the government offered generous support, mostly taken up by Chinese investors. Large investors can receive a corporate income tax holiday of up to 20 years. Companies in special economic zones, meanwhile, can avoid import duties and value-added tax on equipment. A less visible subsidy sits alongside these. Because miners cannot export raw ore, they must sell it to local smelters, often at prices well below the prevailing global market price. The gap transfers wealth from Indonesian miners and regions to smelter owners while appearing nowhere in the national budget. Below-market-price ore also means lower royalties and tax collection for the state. What does all this cost the nation? Nobody can say precisely, and that is the problem. No official figure combines the tax holidays, duty exemptions, cheap ore, cheap land and public infrastructure that nickel and bauxite processing receive. Indonesia is paying a bill it has never fully added up. The results of those holidays, exemptions and subsidies to mostly foreign investors are mixed. Nickel has drawn heavy investment, and the energy minister says the industry has brought in $47.36 billion and created 180,600 jobs. A World Bank study found that an earlier version of the bans increased the value Indonesia added to its exports, but also attracted small, inefficient firms. Much of the output remains in nickel pig iron, a low-value input for stainless steel. This year, the government even proposed a new export levy on such products to push companies toward higher-value goods, an implicit admission that earlier incentives failed to steer investment where the country needed it most. Bauxite illustrates a different risk. When the export ban on raw bauxite ore took effect in 2023, Indonesia’s refineries could process about 13.9 million tonnes of it a year, while its mines produced around 30 million. Some miners had to halt operations and sit on piles of unsold ore. Support without a clear plan does not build an industry. None of this means the government incentives are misguided. Smelters and battery plants are costly and risky to build, and almost every country that has industrialized has helped its firms along the way. But in the successful cases, such as South Korea, help came with duties. Firms that received support had to export, invest and learn, and those that failed lost it. Indonesia should adopt the same rule: when the state helps a company, the company owes something in return. That requires four changes. First, count the cost. Each year, the government should publish the full price of its support for nickel and bauxite processing, including tax holidays, duty exemptions and the gap between local and world ore prices. Citizens should be able to see what each large project receives and what it has delivered in return. Second, attach clear conditions. Support should depend on hiring and training Indonesian workers, from engineers to managers; buying from local suppliers; and bringing research and technology into the country. It should also require compliance with strict pollution and safety standards. Every agreement should set verifiable targets with firm dates. Third, reward the higher rungs of the value chain. Support should flow to battery materials, battery cells and recycling, not to more low-value pig iron. Fourth, claw back support when promises are broken. A tax holiday should end, or be repaid, if a company fails to deliver what it agreed to. Another reason to act now is the global minimum tax, which Indonesia has applied since 2025. It requires large multinationals to pay at least 15% tax in every country where they operate. If Indonesia grants such a company a long tax holiday, another country can collect the tax Indonesia forgoes. That means some tax holidays may now de facto hand Indonesian revenue to foreign treasuries. The Ministry of Finance is already moving toward support that is timely, targeted and temporary. That shift should begin with nickel and bauxite. Indonesia need not choose between attracting investors and protecting public money. It can do both, provided every rupiah of support brings a clear return to the people who fund it. Such a smarter system would also be fairer to the miners, workers and regions that bear much of the cost uncompensated today. Bhima Yudhistira Adhinegara is the executive director of the Center of Economic and Law Studies (CELIOS), a Jakarta-based think tank. Muhammad Zulfikar Rakhmat is the director of the China-Indonesia and MENA-Indonesia desks at CELIOS.