Pillars of Stability: Open Government, Energy Transition, and Diverse Markets

The energy transition, geopolitical competition, and financial instability are reshaping Asia and the Pacific. Maintaining independence means diversifying international partnerships and improving governance. Isolation is not an option.

The Morowali Industrial Park in Sulawesi, Indonesia is home to many of the world’s leading nickel refining operations and was the site of a fatal explosion in 2023. (Photo credit: Free Malaysia Today)

By Joseph Foti

Spotlight on Indonesia’s nickel boom

On December 24, 2023, at Morowali Industrial Park in Sulawesi, Indonesia, an explosion killed at least 13 workers and injured nearly 40 more. To date, there have not yet been any consequences for this tragedy. This is particularly concerning given the smelter is one of the major installations in Indonesia’s nickel boom and a sign of promise and opportunity.

Indonesia’s “nickel rush” is changing the world. The metal is essential for heavy industry, long having been a part of stainless steel. Now, it is essential in the electric vehicle battery supply chain as well.

Indonesia accounts for 42 percent of the world’s known nickel reserves and the nickel is of high quality. Following a series of export laws and regulations, the country has moved to value-added processing. This has tremendous consequences. In 2020, there were 13 nickel smelters operating in the country. Within four years, there are now at least 60 operating, with as many as 80 coming online in the next several years. This sudden increase has led the Ministry of Energy and Natural Resources to consider a moratorium on smelter construction, fearing oversupply and price volatility.

The boom has consequences well beyond the archipelago. Prices of nickel have dropped by half since the start of 2023. Australia and France (in New Caledonia) have closed or divested mines, leaving China, Russia, and Canada as the remaining major suppliers.

All of this may set Indonesia up to dominate the global market. Yet its sector is increasingly dominated by Chinese firms, squeezing out almost all foreign competitors, leaving only Brazil’s PT Vale. Consequently, 90 percent of the smelters are operated by four Chinese companies.

The combination of overdependence on a single set of investors and inadequate good governance measures exposes the country to a number of risks, some of which are outlined below.

• Limits to market access: As geopolitical tensions rise between competing global powers, protective measures have gone up around the world. Indonesia has announced its intent to access subsidies from the United States under the US Inflation Reduction Act. However, the US puts a 25 percent cap on Chinese ownership of firms along the value chain and is actively promoting expensive domestic alternatives. To access these subsidies, Indonesia may need more diverse ownership and transparency. Concerns go beyond US-China rivalries. Recently, German and French companies withdrew €2.6B planned investments in nickel extraction over concerns that operations would displace indigenous populations in the country.
• Fiscal concerns: Narrow dependence on just a few partners can cause problems, especially when public financing is involved or when governments take on debts of risky private sector actors. Without adequate oversight or transparency, debt can lead to instability (see Kenya or Sri Lanka, for example), lowered social spending, and stalled growth. Thailand, the Philippines, and Malaysia have high debt-to-GDP ratios, around 60 percent. While Indonesia’s debt-to-GDP ratio is considerably lower, it has a much lower tax collection rate, making debt payments similarly difficult. To be clear, none of these countries have reached the level of debt distress that countries like Sri Lanka or Kenya have. Nonetheless, they will want to keep debt sustainable, lenders diverse, and liabilities transparent. This will allow them to grow social spending and infrastructure.
• Labor and environmental concerns: Low-cost nickel refining comes at a high environment and labor cost, using a technique called high-pressure acid leaching. Existing operations are not subject to the same regulations and shareholder expectations that they would be in other countries. In spite of this, some headway has been made already, as Chinese firms wishing to access European markets have improved their reporting requirements. Harita Nickel, a major Chinese operator, announced that it plans to pursue IRMA certification (see below). Nonetheless, the sector as a whole remains opaque — S&P Commodity Insights states that only one third of firms release reporting data. This is much lower than the metal mining market average of 90 percent.
• Domestic instability and security issues: The current operations in Indonesia pose a number of risks for the country, including the destruction of local fisheries, labor unrest, and excessive deforestation. Weak law enforcement is often closely related to stubbornly high rates of corruption. Corruption results in lax law enforcement, weak tax collection, and poorly negotiated deals. This in turn hollows out the regulatory capacity of the state and its ability to provide universal security.
• International conflict: Some exertions of power are more overt as well. Countries in Asia and the Pacific face destabilizing threats which could impede domestic growth or stability. Current threats include gray zone confrontations or more subtle disinformation and strategic corruption. As the links show, risks do not necessarily come from a single source. Consequently, countries must focus on strengthening their own internal democratic resilience and cooperation with diverse partners — not just in trade, but in regional and global governance as well.

Find out more about Indonesia’s nickel boom in the CSIS Indonesia mining report and BRI Monitor report.

Open government supports democratic sovereignty and diverse markets

Market diversity is key to long-term stability, sovereignty, and security. But market diversity is impossible to achieve without open government.

Indonesia’s announcement of its intent to join the OECD suggests the government understands the benefits of addressing these issues. Membership can help move a country toward wealthier, more diverse economies, but requires meaningful governance reform. Such reforms are good in their own rights, but also help boost the economy.

Fortunately, there are a number of proven ways that countries can work together to improve governance based on shared values, transparency, and mutual respect. Open government reforms can help to ensure that countries are attracting the highest quality of investment, thereby helping diversify and secure supply chains. These include the following.

• Open licenses and permitting processes: Transparent and efficient licensing and permitting processes are essential for attracting investment and facilitating innovation. Streamlining these procedures ensures that businesses can operate smoothly and competitively across coalition member states.
• Open contracting: Governments are not just sellers of primary goods. They are also buyers of infrastructure and energy. Open procurement systems reduce corruption risks and promote fair competition. By implementing procurement processes that are transparent and accessible, coalition members can ensure that their markets remain fair and attractive for ethical companies.
• Open lending and borrowing: Transparent lending and borrowing practices, especially in development cooperation, foster trust and accountability. By promoting transparency in financing, the coalition can set a standard that attracts responsible investments and aligns development goals with democratic values.
• Supply chain ownership and control transparency: Ensuring transparency in supply chains is vital for building trust and accountability. Publicly available information about suppliers, sourcing, and labor practices helps coalition members maintain high standards and avoid unethical or illegal practices that undermine shared values. Specifically, this means knowing who the beneficial (real human) owners and controlling entities are of each company and its contractors.
• Community engagement and oversight: Involving local communities in supply chain oversight guarantees that economic activities align with local interests and human rights standards. By empowering communities to monitor and engage in supply chain processes, coalition members can ensure that economic growth benefits all stakeholders.
• Enforcement and compliance actions transparency: The public and investors deserve to know whether companies are following the law and if government officials are enforcing that law. Numerous countries have taken steps to publish violations and data on government enforcement actions
• Political finance transparency: While open contracts and ownership are valuable in and of themselves, it is essential to be able to trace political finance — both donations and spending — to ensure that companies are not bribing officials, whether through campaign contributions. Open political finance data, including asset disclosures, are one way of detecting kickbacks among other issues.
• Civic space protections: A robust civic space is critical for effective oversight and advocacy. Protecting civic rights and freedoms enables civil society organizations and independent monitors to advocate for ethical supply chain practices and hold violators accountable.
• Information integrity: Reliable information is essential for energy transition goals. Combating disinformation and misinformation — the source of which can be external or internal — helps get consensus on how to manage economic, social, and environmental tradeoffs. This means trustworthy information on supply chains, transition plans, and the funding behind them. Any efforts to counter disinformation, including on energy or trade, should be proportional to the problem and balanced with robust protections of civil liberties and high standards of official communication.

As countries in Asia and the Pacific seek to achieve the twin objectives of economic growth and energy transition, they do not need to work alone. Nor do they need to reinvent the wheel. Rather, they can seek to improve market regulations, enhance labor and environmental protections, and strengthen overall governance by re-invigorating their participation in a number of multi-stakeholder initiatives.

• Extractive Industries Transparency Initiative (EITI): EITI is a global standard for countries that promotes transparency and accountability in the oil, gas, and mining sectors by requiring companies and governments to disclose payments, revenues, and contracts. Joining EITI strengthens governance, reduces corruption risks, and builds trust with citizens and investors, ensuring natural resource wealth drives sustainable development.
• Initiative for Responsible Mining Assurance (IRMA): IRMA is a certification system that sets high standards for ethical mining, addressing environmental protection, social responsibility, and community engagement. IRMA evaluates individual companies and mining projects. Joining IRMA demonstrates a commitment to sustainable practices and helps companies meet rising expectations for ethical sourcing from investors and consumers.
• Open Government Partnership (OGP): OGP is an international partnership of governments and civil society working together to advance transparency, civic participation, and public accountability through concrete reform commitments. OGP action plans do not prescribe specific commitments. Therefore, OGP can act as an umbrella for a variety of reforms, ranging from tackling disinformation and bribery to dealing with tax evasion and public procurement.

Conclusion

Strength and growth do not come from independence alone. Rather, strength comes from diverse interdependence to face the challenges of climate change, the energy transition, and complicated geopolitics. Part of limiting risk and diversifying partnerships is about improving governance, especially through collaboration across governments, communities, and the private sector. Fortunately, a solid foundation for this cooperation is in place. Let us make sure that we take advantage of it.