Mining law passes with unwanted catch
By Andrew Symon
SINGAPORE - A new mining law in Indonesia, long delayed and keenly anticipated
by foreign investors, secured passage through parliament last month with
complications that dimmed hopes it would quickly unleash a new spate of
exploration and development.
Indonesia, the world's largest exporter of thermal coal, has major copper,
gold, nickel, tin and bauxite deposits. Mineral and coal exports were worth
about US$23 billion in 2007, according to central bank statistics.
Legal uncertainties, particularly confusion over responsibility between central
and local governments for mining areas, have for
nearly a decade stymied new foreign investments, apart from expansion of
existing operations.
The new mining law, stuck in parliament since it was proposed in 2000,
establishes an overarching permit regime for all foreign and domestic mining,
including the coal sector, but adds new complications that could deter new
investments.
The new regime replaces the earlier Contract of Works (COW) system for
foreign-invested ventures and the so-called Kuasa Pertambangan (KP) permit
system for fully owned domestic operations. The COW regime, instituted in 1967
in one of the early legislative acts of then president Suharto, aimed to
attract foreign capital after years of economic nationalism.
The COW regime was to a large extent held in high regard by the international
industry, allowing big miners such as US-based Freeport and others to develop
major extractive operations in the country. In the wake of Suharto's fall in
1998, the regime failed to keep pace with legislative change, particularly in
regard to new laws on local autonomy and splitting of resource revenue between
local and central governments.
For big international miners, including Freeport and US-based Newmont, and
Anglo Australian outfits RioTinto and BHP, the COW system had provided a
measure of legal certainty, guaranteeing that a contract had the status of law
and stood above changes in regulations for the duration of previously signed
contracts.
For the past decade, however, no new COWs apart from an iron-ore operation last
November were issued by the government due to the legal logjam over the new
bill. Moreover, foreign companies not operating under old COWs were able only
to partake in new developments via indirect relations with fully domestic-owned
KP holders.
With the new mining law in place, miners will again be able to directly operate
as exclusive mining permit holders, known as mining business permits (IUPs).
Nonetheless, there are investor concerns about the new regime, particularly a
requirement that all mined minerals be processed and smelted domestically
rather than exported in raw form.
"No other country, to my knowledge, requires mining companies to smelt their
ore," said Ken Day, a long-term Jakarta-based mining entrepreneur. Also, "there
are many loopholes left open that will need to be resolved in the regulations."
As many as 20 additional regulations must be made over the next calendar year
in order for the law to come into full operation.
Even so, Philip Payne, a legal advisor specializing in mining at the Jakarta
firm of Ali Budiardjo, Nugroho, Reksodiputro, said that while there will be
uncertainties until regulations are clarified and implemented, "people should
be able to work with" with the new law. For example, he notes, fully foreign
invested operations are possible once again, though they would be subject to
divestment requirements to local interests over time, similar to the COW
regime.
Such a permit system, rather than a contractual regime, is not unusual.
Australia, with a large mining sector, uses a similar permit system. Some in
the industry have argued that for a developing country, where there may be
greater perceived political risk, that a contractual system may be favored by
financiers because of its greater legal certainty.
Under the new law, exploration permits may be granted for eight years for metal
minerals mining and seven years for coal. A company exploring for metals,
minerals and coal will also have the guaranteed right to proceed to the
development and production stages under another permit for a period of 20
years, with two permit extensions of 10 years. Permits for metal mining and
coal mining will be awarded by tender while permits for non-metal mining will
be awarded after investors submit requests for mining areas.
Under the old COW system, a single 30-year period was granted by the president
and with parliamentary approval through the Ministry of Mines and Energy for
exploration, development and production, with the operating company required to
meet various obligations at the different stages. A 20-year extension could be
granted if agreed by both sides.
Unlike the old COW system, which was centralized in Jakarta, the new law
empowers local district governments to allocate IUPs if mining blocks fall
within their areas and empowers provincial governors for blocks that overlap
districts. Jakarta will allocate blocks that overlap provinces. The geological
survey and determination of mining blocks will continue to be undertaken
centrally in the Ministry of Mines and Energy.
Special mineral reserve areas will be determined by Jakarta. Permits to these
will be granted by the central government. These would be prospective mineral
or coal areas deemed "strategic" for Indonesia’s broad development.
Payne said this provision could enable the central government to continue to
have the main hand in administering and regulating large foreign-invested
mining operations, while smaller domestic-owned miners may more likely operate
at the local government level. In all situations, a percentage of mining
royalties are earmarked for local governments under the terms of recently
passed autonomy laws.
The new requirement that all mined ore and minerals must be refined and
processed domestically before exporting will likely be a sticking point with
many foreign firms.
Industry analysts note that most mining companies seldom engage in downstream
processing, so any Indonesia venture would likely require commitments by other
commercial entities to invest in the necessary facilities. Companies now mining
in the country may also be committed under long-term contracts to supplying
overseas processors and may not have sufficient spare output to support a local
smelter or refinery.
Further, a five-year lead time will likely be too short for most miners to
secure investment for and construct downstream plants. The minerals processing
requirement, some analysts say, points to a resurgence of the economic
nationalism that contributed to the long debate in the parliament over the law.
Nevertheless, fully owned domestic mining operations are also subject to the
same provision.The requirement may therefore have been shaped by a misguided
concern for economic security and development. In petroleum and coal, those
concerns are expressed requirements that producers must reserve a certain
proportion of their output for local markets.
Payne said the law as its stands reflects its long gestation and a lot of
parliamentary "horse-trading" - "The drafting is not perhaps as clear as it
could be." Nor, now, is the future of Indonesia's mining sector.
Andrew Symon is a Singapore-based analyst and writer specializing in
energy and resources. He may be reached at andrew.symon@yahoo.com.sg
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