Newsmaker Interview: Budi Gunadi Sadikin

Former Mandiri chief helping to hammer out controversial new government entity to control Indonesia’s mineral reserves

By Ismira Lutfia Tisnadibrata
Thursday, June 15, 2017

After three years leading Indonesia’s largest state-owned bank by assets, former Bank Mandiri chief executive officer Budi Gunadi Sadikin has a new role as special staff to Rini Soewandi, the Minister of State-Owned Enterprises (SOE). 

In this role, Budi says he aims to make a significant mark on Indonesia’s economic growth and leave a legacy by creating a sovereign fund from the proceeds of Indonesia’s natural resources to be used for future generations.

The vision is at the heart of longstanding nationalist arguments that say the country’s vast and unrenewable mineral reserves should be controlled by Indonesia – instead of the foreign investors that have operated for decades in Indonesia under a contract of work system that splits revenues with the government.

Budi is charged with establishing a holding company made out of state-owned mining enterprises to re-do the way the government handles its future stakes in the industry.

Budi started his new role in late June 2016, and among other things he is charged with looking at how the government will handle the acquisition of mining assets in the future. He shared with AmCham Indonesia what he aspires to achieve going forward.

AmCham Indonesia: Tell us about your role in the SOE ministry?

Budi Gunadi Sadikin:I am a special staff for the minister, specifically to handle activities related to the economy, because I was a banker, and to handle all businesses related to Europe and the United States, and to take part in creating state holding companies. We plan to create six state holding companies: energy, mining, housing, toll-roads, banking, and food commodities. We are starting with holdings for energy and mining. We have cleared the way within the government for energy and mining holdings. It looked like the mining holding company could start first so I was assigned to it.

Do you also need approval from the House of Representatives?

The authority to set up state holding companies lies 100 percent with the government. With lawmakers it was more like a consultation back and forth because SOEs have a unique political constellation, that’s why the consultation takes a bit longer. If we don’t get the lawmakers’ approval that’s fine. It is merely a courtesy call to avoid any fuss. It’s been a year now since I started at the ministry. At that time they said it was going to be finalized in three months, and it extended to the end of the year and now it’s already a year.

What will be the holding company’s structure?

Aluminum producer Indonesia Asahan Aluminium (Inalum) will be the parent company and we will have a 60 percent share of coal miner PT Bukit Asam, tin miner PT Timah and gold miner PT Aneka Tambang, respectively, as well as [eventually acquiring] shares of Freeport Indonesia. Inalum is the holding company because it is 100 percent state-owned and publicly listed. It will be the same with the holding company for banks. The largest one will not be the parent company but the financial services company Danareksa, because it’s 100 percent owned by the government. Bank Mandiri, BNI, BRI and BTN will be subsidiaries.

What’s the plan for this mining holding company?

There are three objectives. First, we want to control Indonesia’s vast mineral reserves. Second, we want to downstream the business. Third, we want to be a world-class company. Each objective has its reasons and strategies. For the first one, this is a non-renewable, God-given endowment. It only exists in Indonesia for a single time and we can never have it again once it’s exhausted. So, it only makes sense that it benefit most for our people. It’s better if we take it instead of letting others take it. It’s very logical and it should be for our next generations.

Why are we doing this? We wish to emulate Norway. Mining companies may argue that they are the biggest taxpayers but the taxes paid only benefit us, the current generation, while our children and grandchildren will not benefit. In Norway, the natural reserve is exploited but they put the royalty into an oil or petroleum fund and live off the interest now. The fund is about $900 billion for around five million people. Imagine if they distribute it evenly for every citizen. What’s good about it is that the wealth stays. When the current generation fades and dies, their children and two or three generations ahead can still enjoy God’s gifts that have been exploited. I think it’s very noble and fair, so it’s not just the current generation who enjoy it. This is our goal. We want to take control of all our vast mineral reserves such as gold, bauxite, or coal.

How are you going to do this? Create a sovereign fund?  

We will take control of the reserves first by creating a holding company. We will create the fund later because to do so we need to write the law first, consult with the finance ministry, et cetera. It will be a long way to go but we want to get there in the end.

So, we will have funds like a mining fund and a petroleum fund?

We may merge it into a single resource fund. But that is just my idea, while the creation of a holding company to control our mineral resources is a constitutional mandate under Article 33 [“sectors of production which are important for the country and affect the life of the people shall be controlled by the state and the land, the waters and the natural riches contained therein shall be controlled by the State and exploited to the greatest prosperity of the people.”].

So far, we do it only by collecting taxes and royalties. For me personally, it’s better if we stash it in a fund because it will be fair for future generations. We can start the acquisition by taking the opportunity of weakening commodity prices or starting new exploration. Either way, it requires a lot of money and these [state-owned mining] companies are small companies, which is why we need to merge them. With the four companies merged, we will have the purchasing power.

For the second objective, downstreaming, Ibu Rini [SOE minister Rini Soemarno] has asked for it but [mining companies] won’t do it because the return of equity and capital expenditures are high while the margin is low. This is why they don’t want to build smelters here and just want to stay upstream. I came up with the justifications because we also have to explain it to Finance Minister Sri Mulyani. The first is to take the economic activities from upstream to downstream. For example, we have bauxite which is the basic commodity for aluminum. But the aluminum is being produced in Australia and then exported to Japan as plates for components to build cars. When we assemble cars here, we import all components, including the plates, from Japan, yet the plates are made from bauxite, which we have here. If Indonesia’s bauxite is processed into alumina, the volume goes down by half while the price goes down six times, but all the value added takes place abroad. Therefore, we have to manufacture the alumina here and it can boost our GDP. So, I argued to Ibu Sri that it will be good for her [the finance ministry].

Downstreaming by having smelters here will also be good because it can stabilize our income stream. Indonesia’s economy will be less volatile. I proposed to Ibu Rini that we can do it through joint ventures, by taking a 51 percent stake. We can also take 30 percent, because what’s important is that we create job opportunities and add economic value. That’s the main goal. Smelters are a globally competitive business but require high energy costs. We can reduce the costs if we build them near places with huge hydropower potential to generate energy, because water energy is the most affordable. We have that potential in places like Jayapura in Papua where the highest peak of Indonesia is located and the next highest peaks could be in North Kalimantan or Sumatra. I asked her to relinquish the licenses to us instead of to private companies so we can build the smelters there. It will be globally competitive. So, that’s our strategy for the downstreaming business. We can set up joint ventures in locations where the energy is much more affordable.

The third objective is to become a world-class company. We already calculated the lowest revenue in Fortune 500 is $20 billion [Britain’s Old Mutual with $20.923 billion in revenue in the 2016 Forbes Global 500 list]. If we merge all [state miners], with [current] concessions we can multiply growth. We have lost a lot of concessions. Now it’s time we take them all back.

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