INDONESIA: EXPORT PROSPECTS FOR THE NEW EXTRACTIVE INDUSTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030089-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: October 17, 2011
• Sequence Number: 89
• Publication Date: July 1, 1970
• Content Type: IM

1'/A /Al-79- 7T #14 '1,) - 09
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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Indoneria - Export Pra pear for the Ne w Extractive Industries
.
ER IM 70-89
July 1970
copy No 48
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WARNING
't'his document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 791, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
recludnd Hmm "uromo le
doanRrudiniI and
dedauitmrinn_
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UUN 1' 11JLiN 11itL,
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
July 1970
Indonesia: Export Prospects
For The New Extractive Industries
Introduction
Indonesia's new extractive industries include
nickel, bauxite, copper, fisheries, and timber.
In contrast to petroleum and tin, which tradi-
tionally have been the major non-agricultural ex-
ports, active exploitation of these resources was
neglected until recently because of the general
chaos of the Sukarno years. Now these resources
hold considerable interest for foreign investors,
who are being attracted by the greatly improved
business climate under the present government.
This memorandum reviews the prospects for growth
in these industries in the short and long term
and indicates their possible contribution to Indo-
nesia's much needed foreign exchange earnings.
Background
1. At present, Indonesia's foreign exchange
earnings are grossly insufficient to pay for im-
ports needed to develop the economy and improve
living standards. In 1969, exports were valued
at $975 million, but there regained a deficit in
goods and services transactions .if more than
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and coordinated with the Office of Current InteZ-
Zigence.
I CONFIDENTIAL
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$300 million. Petroleum accounted for a little
more than one-third of the export earnings in 1969
and rubber slightly less than one-fourth. The re-
mainder was derived mainly from tin and a host of
minor agricultural products, such as copra, tobacco,
coffee, palm oil, and spices.
2. Prospects for expanding most of these tra-
ditional exports other than petroleum are not fa-
vorable. This situation has resulted mainly from
the excesses of the Sukarno era, during which agr.:',,-
culture,l plantations and production facilities were
run down and world markets lost. Indonesia, for
example, was the leading world exporter of tin in
the early 1950s, but mining equipment was allowed
to deteriorate and known deposits were depleted.
Similar problems face the rubber :.industry because
foreign-owned plantations taken over by the Sukarno
regime were allowed to deteriorate. The petroleum
industry, unlike the other foreign-owned interests
in Indonesia, was not nationalized. Its equipment
remained in fairly good condition, and the recent
major inflow of new investment gives the petroleum
industry excellent prospects for expansion. Even
so, the foreign exchange gap may grow if other ex-
port commodities a.--e not developed rapidly.*
3. In order to expand exports quickly, the
Suharto government since 1966 has invited foreign
investors to help develop new industries and re-
sources. By the end of 1969 the government: and
foreign business had agreed on the eventual invest-
ment of more than a billion dollars in industries
other than petroleum a;ld banking (see Table 1)
Foreign interest is high in the development of
timber, fisheries, and three minerals -- nickel,
bauxite, and copper. In total, these industries
account for about 80% of the intended new foreign
investment. Until recently, their production has
been small, with output accounting for only 1%-2%
of GNP and about the same share of total export
earnings. Production in forestry and fisheries
can expand rapidly in the short run. Minerals,
on the other hand, require time-consuming surveys
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Indonesia: Approved Foreign Investment
by Sector
1967-69
Disbursements by
December 1969
Intended Capital
Investment a/
on Approved
Contracts b/
Million
US $
Number of
Contracts
Million
US $
Number of
Contracts
Forestry
352.8
35
8.0
25
Fisheries
8.5
6
2.6
4
Mining (excluding
oil)
463.2
8
1.6
5
Manufacturing and
processing
156.0
97
19.8
48
Others
50.1
31
3.1
10
Total
1,030.6
177
35.1
92
a. As shown in the Letter of Intent, excluding petr
and banking investments.
b. Excluding domestic capital invested in joint enter-
prises.
and in some cases the construction of extensive fa-
cilities for extracting and processing the ores
before production can be increased.
Short-Run Prospects -- Timber and Fisheries
4. During the present five-year plan, which
ends in 1974, a rapid increase in exports of for-
estry and fisheries is expected. Even without full
surveys of these resources, it is clear that Indo-
nesia has extensive reserves. The country has about
300 million acres of timber, or about 40% of the
forest area in all Southeast Asia. This is ten
times the"forert area of the Philippines and five
tiries that of Malaysia, the two leading exporters
of wood products in Asia.
5. Indonesia has many types of wood that are
in world demand. The major portion of the forest
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area consists of tropical or semitropical rain for-
ests located on the islands of Kalimantan, Sumatra,
and West Irian. These tall, dense forests contain
literally thousands of tree species, mainly ever-
green broadleaf species which yield hard, heavy
timbers (see the map) . About one-half of the trees
on Sumatra and Kalimantan are hardwoods of high
commercial value. These two islands are said to
be the last frontier in Southeast Asia of the Lauan-
type wood that has been in great world demand from
the Philippines. In addition, as much as one-half
of the forests of the Celebes, Moluccas, and West
Irian consist of giant damars which are suitable
for veneer, plywood, pulp, and matches. Among the
less abundant but better known species are rattan,
bamboo, ebony, sandalwood, and oak as well as ex-
tensive stands of pine on Sumatra and teak planta-
tions on Java.
6. The government, which owns most of the for-
est area, has opened 100 million acres for exploita-
tion, most of which is judged to be relatively
accessible. Present logging activities cover less
than 12 million acres. Of the 100 million acres,
60 million acres are categorized as productive
forests and the rest as suitable for clearing and
subsequent agricultural production. The govern-
ment has also designated a major share of the
forest area as protected forests in order to con-
serve watersheds and prevent floods and erosion,
such as have occurred in Java and the Philippines
as a result of overcutting in certain areas.
7. The timber industry of Indonesia is booming
at present, mainly because of private foreign in-
vestment which is coming in at an increasing rate.
During 1967-69, 35 foreign investment contracts
were signed Involving about one-third of all in-
tended foreign private investment in Indonesia
other than that in petroleum and banking (see
Table 1). Of the 35 contracts, 22 were signed in
1969. From 1 January to 31 March of this year,
another 22 contracts were signed, bringing the
total to 57 with an eventual investment of over
$500 million in both extractive and processing
facilities. Indonesia has still more requests
under consideration. Most of the contracts have
gone to Far Eastern countries, with the US com-
panies getting five and European countries seven.
Philippine companies have been the most active --
some 15 contracts going to ten companies, with
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one contract alone accounting for about half of
the total investment. Japanese companies have
also obtained a number of contracts (see Table 2).
Indonesia: Private Foreign Investment
in Forestry
January 1967 - March 1970
Number of
Country of
Number of
Value
(Million
Companies
Origin
Contracts
US $)
10
Philippines
15
276
10
Japan
12
54
7
Malaysia
8
18
5
United States
5
88
4
France
4
2
3
South Korea
5
56
3
Hong Kong
3
10
2
Singapore
2
2
2
United Kingdom
2
1
1
Netherlands
1
1
Total
47
57
508
In total, contracts already signed involve about
25 million acres, or about one-fourth of the ex-
ploitable area. Most contracts are joint enter-
prises between foreign and domestic firms, both
public and private, but a substantial number are
straight foreign investments. in addition to
foreign contracts, there have been about an equal
number of contracts allocated to domestic companies
since the new Domestic Investment Law was passed
in 1968.
8. Indonesia is having no trouble finding
markets for its timber products, particularly in
Japan, and its exports have increased sharply in
the 1:?st two years. World exports of broadleaf
roundwood increased more than tenfold in the past
decade and are expected to continue increasing at
a high rate. Yet Philippine exports have stagnated
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in recent years, partly because of concern about
overcutting and attempts to restrict certain logging
operations. Indonesian operations are just getting
under way -- about $8 million had been invested in
25 contracts by the end of 1969, as indicated in
Table 1, and at least ten companies exported timber
by the end of the year. In 1969, Indonesia's ex-
ports went to Australia, Taiwan, and South Korea
as well as to Japan, which had been Indonesia's
sole external market in 1967. Although Indonesian
export data are not exact or complete, it appears
that exports of teakwood and junglewood climbed
from a declining volume ,uring the early 1960s,
as shown in the following tabulation:
Export Volume
of Teakwood
and Junglewood
(Thousand
Cubic Meters)
1960-65
annual
average/
110
1966
N.A.
1967
800
1968
1,500
1969
3,300
1973
Plan
5,000
Value of All
Forestry
Exports
(Million US $)
1.5
6.5
16
25
66
120
9. With this production record and excellent
investment prospects, timber exports should far
exceed the planned output by 1973. New investments
in timber in 1970 are estimated at $50 million to
$75 million, and the total will continue to in-
crease rapidly. In addition, the five-year plan
(April 1969-March 1974) includes expenditures of
ten billion rupiahs ($25 million), or about 1% of
the development budget, for surveys, research,
training, and marketing projects in forestry, with
emphasis on expanding' processed forestry products
for domestic and foreign markets. By 1973 the
Indonesian plan also calls for exports to include
some higher value sawn lumber, which has been in-
significant in the past. Already, exports in 1970
are expected to reach $75 million to $95 million.
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In total, timber exports could re
cubic meters of roundwood worth p
1i $
on to 250 million by the end o
10. The prospect for increase
less dramatic in absolute terms,
could be substantial in the short
problem is the industry's technol
ness. Marine fishing is now main
single fishermen using small sail
itive methods. The country also
equipment to transport, preserve,
catch. At present the annual cat
about 15% of the estimated potent
estimated that six million tons*
million) of marine fish, includin
of tuna and shrimp, could be take
lions of square miles of seas sur
Indonesian islands. In addition,
products such as nollusks, seawee
mother-of-pearl are abundant in t
Marine fishing in recent years ha
about 800 , 000 tons and inland fis
500,000 tons. Domestic consumpti
at only 25 pounds per capita annu
in 1968, amounting to about 7,500
imports for the first time. Expo
creased in 1969, to $2.3 million,
lion was shrimp, compared with to
valued at $1.3 million in 1968.
11. The increased exports in
initial inflow of foreign capital
1 b h
although this inflow has een es
culties. Administrative delays a
local fishermen have hampered for
investors, but four of the six ap
tors had invested nearly $3 milli
1969 (see Table 1). Of the six a
and of the numerous proposals sti
proval, shrimp fishing is the mos
involving Japanese, Philippines,
and other approved projects inclu
and tuna fishing and a cold stora
nesian government officials forec
investment in fisheries will tota
the end of 1973. So far, however
vestors have made few onshore dis
Metric tons are used throughou
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ach ten million
erhaps $200 mil-
f the plan period.
d
fish exports is
but the increase
run. The major
ogical backward-
ly carried on by
boats and prim-
lacks modern
and process the
ch amounts to
ial catch. It is
(valued at $600
g large amounts
n from the mil-
rounding the
various marine
d, pearls, and
hese waters.
s yielded only
hing less than
on is estimated
ally, and exports
tons, exceeded
rts again in-
of which $2 mil-
tal fish exports
1969 reflect the
and technology,
et with diffi-
nd protests from
eign and joint
proved contrac-
on by the end of
pproved projects
ll awaiting ap-,
t popular (already
and US interests),
de pearl, lobster,
ge plant. Indo-
ast that foreign
l $30 million by
, foreign in-
bursements, their
t this memorandum.
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ECONOMIC ACTIVITY
0 1uuaor, rice, copra, coffee, tobacco
Q
(sinallholdor cultivation)
? Rubber, tobacco, tea, palm oil
Q Rice and corn
(estate cultivation)
Rice
Copra
Forest, with scattered grassland, and
cultivated plots
R
Rubber
Ni Nickel
C
Coffee
Sn Tin
I
011field
Al Bauxite
It
Oil refinery
C Coal mine
aka
Tin Smelter
Cu Copper
Thermo electric
powerplant
Hydroelectric
powerplant
VEGETATION
- Broadleaf evergreen forest
0 Swamp forest
Mangrove and nipa palms
Broadleaf deciduous forest
Alpine vegetation
[~] Grassland
Cultivated area
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JAS
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Vv1N 1i 1L)J N'1'IAL
~KALIMANTAN
ORTUGUESE
TIMOR
INDONESIA
ur. h.l.
P.Iur(
HALMAHERA
PULAU WAIGEO
ol.~ Sore.,,
BAA'UA`' SEA
rLuntbAplJt?r~
Marauho
Kupanf,
0
9
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activities being largely limited to catching and
freezing at sea for deliveries to foreign ports.
12. Indonesian development expenditures and
foreign grants will also improve the fishing indus-
try. The five-year plan scheduled ten billion
rupiahs ($25 million) for sea fishery development,
with emphasis on research, education, processing,
distribution, and marketing. Appropriations from
domestic sources for the first two years have been
equivalent to about $1.5 million each year. For-
eign grants are an important addition. The United
Nations Development Program gave $2.2 million for
fishery training; and the World Bank has made a
survey in preparation for a $4 million grant. The
Dutch and French governments have made grants for
fishery research, and very recently the Japanese
government also agreed to a $5 million loan for
fisheries projects in three areas of Indonesia in
exchange for lucrative fishing rights in the Banda
Sea. Altogether, it seems quite possible that
fish production will increase rapidly and that
exports could very well grow by several million
dollars each year, making fish a significant export
commodity.
Nickel, and Bauxite
13. Prospects are good that by about 1973 min-
eral exports will also begin to make a substantial
contribution to export earnings. Indonesia has
been exporting small quantities of bauxite and
nickel for many years, but it is development of
new reserves of these and other minerals, partic-
ularly copper, that holds big prospects for the
long run. At present, bauxite is produced by a
single mining venture on Bintan Island near Singa-
pore where equipment, inherited from the Dutch, is
old but well maintained. Nickel is produced in
the Celebes, mainly as the result of a production-
sharing contract signed with the Japanese in 1962.
Crude ore production in 1969 amounted to 225,000
tons of nickel and 780,000 tons of bauxite;
together the exports were valued at about $7 mil-
lion and went mainly to Japan. Additional deposits
of these and other minerals, including tin, are
known or suspected (see the map) , but much sur-
veying and testing needs to be done. The Dutch
made extensive surveys and explored only about
10% of the prospective mineralized area in detail;
only half of this is being exploited.
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14. As in the case of forestry and fisheries,
new foreign investments are the major reason for
the improved outlook. So far, domestic investment
and foreign aid are insignificant in this field.
From January 1967 through May 1970, nine foreign
investments were approved, five of them in'1969
and one in 1970 (see Table 3) . Seven of the nine
projects call for straight foreign investment of
about $75 million each, mainly for exploration.
If commercial deposits are found, the amount of
the investment could go higher. This has already
happened in the case of the Freeport Sulphur project
which was the first foreign investment approved by
Indonesia in 1967. The company is now undertaking
investment of some $120 million to exploit copper
in the Ertsburg Mountains of West Irian, where en-
gineering surveys proved reserves of about 32 mil-
lion tons of good-quality copper ore as well as
substantial quantities of gold and silver. Early
this year, the company signed a contract to supply
a Japanese consortium with 55,000 to 60,000 tons of
copper concentrates annually for 13 years, beginning
in 1973. At current world prices, Indonesia's copper
exports could reach $75 million in 1973.
15. Nickel appears to have an equally bright
but slightly more distant future. The first of
the three projects in nickel exploration was
awarded in 1968 to the International Nickel Company
of Canada (55% US-owned). The area involved,
located just north of the presently exploited area
in the Celebes, is believed to contain 50 million
to 150 million tons of ore of at least La nickel
content. If so, this ore will constitute an ex-
ceedingly valuable deposit. The company estimated
shortly after signing the contract that annual
production beginning in 7-12 years would be worth
$50 million at 1968 prices. Two other nickel
development projects are located in areas of known
nickel deposits. There are also two developments
favorable to Indonesia in its current nickel mining
operation. The price of nickel in Japan, which
receives all Indonesia's production, was raised
by 50% in late 1969, and the Japanese company doing
the mining in Indonesia is studying deposits near
the present mine and is expected to announce soon
whether it considers these deposits exploitable.
16. Exploration for bauxite in Indonesia and
studies of known deposits are now under way by Alcoa.
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Indonesia: Mineral Projects
Approved by the Foreign Investment Board
Type of
Year
Area of
Intended Capital
Investment
Name of Enterprise
Financing
Approved
Mineral
Operations
(Milli
on US $)
Freeport Sulphur Company
Straight
1967
Copper
West Irian
(US)
N.V. Billiton Mij.
Joint
1968
Tin
Offshore
O
(Netherlands)
PT International Nickel
Straight
1968
Nickel
Celebes
d
r
N
(US-Canada)
PT Pacific Nickel
Straight
1969
Nickel
Waigeo
(US-Netherlands)
1\7coa (US)
Indonesia Nickel Develop-
Straight
Straight
1969
Nickel
,
West Irian
Molucca Islands
ment Company (Japan)
Kennecott Copper
Straight
1969
General
Principally
Corporation (US)
Overseas Mineral Resources
Straight
1969
General
West Irian
Western Sumatra
Development Company
(Japan)
Rio Tinto-Bethleham Steel
Straight
1970
General
Western Sumatra
75 a/
(UK-US)
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CON1' l DEN'.1;'IAL
After negotiations lasting about two years, the
Alcoa company won rights in 1969 to explore for
bauxite reserves in nearly all of Indonesia except
on I3intan Island, the site of present production.
If Alcoa finds as much as 50 million tons of bauxite
reserves and if mining operations go well, they will
consider building processing plants within a time
schedule of about ten years. Even if the Indonesian
ores do not prove out, Alcoa is reportedly consid-
ering the construction of a smelter in northern
Sumatra to process Australian ores, if the Indo-
nesian government can offer cheap electricity rates
from the proposed Asahan dam project. The Japanese
are also cooperating with an Indonesian company on
Bintan in the study of low-grade ores there to
determine the feasibility of a processing plant.
In addition to these contracts covering specific
minerals, three of the contracts are for general
exploration. All three contracts specify that the
contractors must pay taxes, land rent, and royal-
ties, and will have a total of eight or nine years
to start exploitation of any minerals found in
their respective areas.
Problems for Investors
17. While the amount of approved foreign in-
vestment and prospects for these industries are
impressive, the situation would be improved if
there were fewer difficulties for investors. These
difficulties have resulted in the withdrawal of
some applications, and long delays between appli-
cation and approval and between approval and in-
flow of investment. The major difficulties that
block the flow of goods and capital fall into two
broad categories: first, legal difficulties which
are gradually being rectified by government regu-
lations; and, second, physical and human difficul-
ties rooted in Indonesia's economic conditions.
Inadequate and antiquated legislation in such
fields as laws concerning companies, land, labor,
and taxes, and uncertainty surrounding the inter-
pretation of these laws lie at the heart of the
first category of difficulties. Among the major
obstacles in the second category are the problems
of finding local partners and sites, inadequate
communication within the government apparatus, and
corruption and bureaucratic inefficiency. To some
extent, these problems are understandable and ex-
pected by investors in most developing countries,
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and in Indonesia in particular,, After yearn of
doctrinaire hostility to private foreign invent-
ment?, the now government has needed Limo to gain
experience in handling foreign investment and has
exercised legitimate caution in trying to find the
right balance between development, using foreign
investment, and protection of national aspirations
and resources. Nevertheless, those problems have
retarded growth.
10. Procedures required of a forestry appli-
cant, for example, are indicative of the tremendous
amount of time and money involved. The main problem
in this case in the lack of coordination between
regional officials and central government officials
processing the application. The applicant first
contacts a technical team in the Forest Directorate.
After initial discussion and approval, a letter of
intent in submitted by the company to the Director-
General of Forestry. Ueforn any further action in
taken, the applicant must submit proof of his bona
fide status and the firm's financial capacity and
technical knowledge; provide a statement of the
relevance of the project to "society and economic
development"; and letters of recorranmendation, cnpe-
cially from the provincial governor, must be ob-
tained. If the proposed area of operation proves
to have no survey records (as ins usually the cane),
the applicant is then required to enter into an
agreement with the Director--General to conduct a
joint survey. No further action is taken until
the final report on the survey is obtained. If
the area also happens to be partly under the juris-
diction of the Director-General of AgriCUlturd, the
applicant must also present his cased to that agency
and obtain its prior approval. The number of appli-
cations from new investors, despite this lengthy
procedure, as well as the number of approved in-
vestors applying to expand their concessions, in
an indication of the high level of returns to in-
vestment in this field.
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Conclusions
19. Export ear.ni.ngn from the new extractive in-
dunt?rien will continue to grow rapidly and possibly
make a sharp jump about 1973. Pores;try and 'finh-
eties will be the ma.lor. growth industr: en for the
immediate future, and their gross foreign exchange
earnings may be about $2S0 million in 1973, com-
pared with about $20 million in 1967. Copper ex-
portri, scheduled to begit, in 1973, could boost the
gross, export earnings of the new industries to more
than $300 million annually, or about equal to the
1969 deficit on Indonesia's transactions on goods,
and nervicen. Net earnings, however, are likely
to be ra;nall at first br_ccaune of profit repatriation
by foreign firms that will account for most of the
development of the new industries. The returns to
the government will also be limited at first because
of generous tax provinionn. Nevertheless, exports
will continue to expand after 1973, and other min-
erals; resources, particularly nickel and bauxite,
will be developed and begin to make their contri-
bution. Net earnings from these industries should
be substantial by the end of the 1970s, and thereby
reduce Indonesia's dependence on foreign aid.
20. Expansion in thenc extractive industries
will have only limited direct impact on the domestic
economy in the short run. Initially at least, the
exportn will consist of unprocessed raw materials.
Mont of thin activity will be located in isolated
r,rIf -contaitied enclaves in the outer islands. Only
in there arvar, will communications, tranalportation,
x;chooln, and other public faei l i t.ier: be developed.
Lcnr than 103, of the labor force is nt-w employed in
these industries, and the numhrrn probably will not
increase significantly in the short run. Nlot until
proccr;r:ing plants and mills are er;tnbli^hed, ponr.ibly
in the late l970n, will there be aiclni f icant rxaw
employment and an impact on the economy in general.
In the long run, devclnpincl these industries; ahc uld
be of major economic bctiefit.
1s -
C:C.)NFI I)I:NTIAL
Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030089-1