Photo: Berau Coal

Mining inindonesiaIndonesIa Is a major player In the global mInIng Industry wIth sIgnIfIcant levels of productIon of coal, copper, gold, tIn and nIckel1 . as of today, IndonesIa Is one of the world’s leadIng coal exporters and the world’s second largest tIn and nIckel producer2 , whIle bauxIte exports have spIked In recent years.

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January 4th 2013

A short

viewpoint

Mining in indonesia

The mining industry is expected to contribute 11% of GDP in 2012 (Business Monitor, October 2012), which is proportionately a 1% decline from 2011 and most analysts have downgraded the expectation of the Indonesian mining sector (which had been forecasted to contribute 12-13% GDP in 2012). What has caused this booming sector to falter?

The mining industry plays an important role in the development of Indonesia’s economy. Based on the Indonesian Central Agency of Statistic’s (Badan Pusat Statistik Indonesia – BPS) data, the impact of Indonesia’s controversial mining law has seen a fall in exports and risks a slackening off in investment, with a result that total contribution to Indonesian GDP in 2012 may

come in as low as 11%. While still a big contributor to national wealth, this is less than the up to the 17% (Buck & Nottage, University of Sydney) mining previously contributed to Indonesia’s over-trend GDP growth. Of course other sectors, such as FMCG and financial services, have grown very fast indeed so it is quite possible for the mining sector to grow strongly but to decline as a proportion of GDP. Over the coming years, the government seeks to increase the contribution of the mining industry to the national GDP.

Foreign investors have viewed Indonesia as amongst the darlings of emerging-markets. However, some changes and continuing uncertainty over mining law has led investors in new projects to remain cautious and concerned despite the undoubtedly improving conditions of investment in Indonesia, overall. The government has made clear its desire to shift towards more local control of the economy, to ensure Indonesia and its people get to share in the economic benefits of the country’s rich natural resources. Sometimes – and not always fairly – this is perceived as ‘resource nationalism’.

Is the mining sector accounted of the total Indonesian gdp in the second quarter of 2012.

12.1%

1 Pricewaterhouse Coopers. April 2012. Mining in Indonesia: Investment and Taxation Guide, 4th ed. PwC Indonesia. Retrieved from http://www.pwc.com/id/en/publications/energy-utilities-mining-publications.jhtml, on October 31, 2012

2. Retrieved from http://www.miningandengineeringindo.com/id/Untuk-Peserta-Pameran/Indonesia--Industri-Pertambangan-yang-Dinamis/

Photo: Berau Coal

Mining in indonesia

A 2012 announcement on banning exports of 14 raw minerals is one factor that forced existing foreign mining companies in Indonesia to review their business plans. The new regulation only applies to holders of mining business licenses issued after 2009, while companies with a pre-existing “contract of work”, or those who agree to build local processing facilities, will be allowed to ship ore until 2014. These changes have led a temporary slowdown in exports while companies adjusted to the new regime. In August, Chinese imports of nickel ore from Indonesia dropped 39% to 1.48 million tons3 following steep falls in July and June, while China’s imports from the Philippines nearly doubled over the same period. The drop was due to companies having to acquire new export permits certifying they are “clean-and-clear” (meaning they have paid all back payments and completed the appropriate feasibility and environmental studies) as well as the firms having shown that they plan to set up value-added processing facilities by 2014.

In November 2012 the Indonesian Supreme Court annulled a number of points under the Mining Regulation

in effect giving greater control to local government which, unlike in many countries, takes the lead on mining regulation. To date, the Ministry of Energy and Mineral Resources (EMR) has yet to follow up on the Supreme Court’s ruling to cancel several clauses included in the Ministerial Regulation 7/2012, which is a derivative of the Mining Law, as the Ministry has not yet received any copy of the verdict from the SC4. This structural lack of clarity in the Indonesian legal process is another topic entirely; nor is it just a feature of the mining sector and does not help FDI into Indonesia. Thus, the ban on ore exports would still be imposed5. The regulation envisaged that mining companies would begin building smelters in 2012 which would start operations in 2014. Mining firms – experienced in smelter development (and its energy infrastructure they require) protested at the timetable - if not the policy, saying it can take years to make an investment return on smelter development.

Further accentuating the risk/reward ratio of the massive amounts of FDI needed to make successful mining exploration and development, the 2012 mining regulation (issued under the 2009 mining law) also requires that, after ten years of operation, foreign mining firms divest a majority stake (at least 51%) to domestic Indonesian businesses. This gives further fuel to the argument that Indonesia is undergoing a phase of Venezuelan-style resource nationalism and de facto nationalization. Such a view is clearly a caricature.

The Indonesian government believes its policy is a way to maximize the domestic economic benefit of Indonesia’s resources and improve the value-added of Indonesia’s economic exports. The government has now said, of the Supreme Court decision, that a new mining law should be expected in 2013

Photo: Berau Coal

Photo: Berau Coal

3. Retrieved from http://www.reuters.com/article/2012/09/30/indonesia-mining-explorers-idUSL4E8KO3WT20120930

4. Indonesia will maintain a policy that tightens exports of mineral ores amid a ruling by the Supreme Court that annulled some articles on the ministerial decree. The Supreme Court annulled four articles of Ministerial Decree No. 7 on mineral processing that was issued in February 2012, including article 21, which bans exports for mining business license holders. The Nov. 5th. The decision was based on a request from the regencies’ government association, or APKASI, according to a copy of a summary of the Supreme Court verdict seen by Bloomberg News. Ridwan Mansyur, the Court’s head of public relations, confirmed the summary. He said he couldn’t provide further details on the ruling as the full document isn’t finished. Susyanto said the energy ministry hasn’t received a copy of the ruling.

5. The Ministry of Energy and Mineral Resources insists it will retain the raw mineral export restrictions despite the Supreme Court overturning the policy’s relevant ministerial regulations. Jero Wacik, Minister of Energy and Mineral Resources, said that the restrictions on exports of raw minerals are the implementation of the Mining Law, which requires employers to establish mineral processing industry before the ban on mineral exports in 2014. Mineral companies who still want to export minerals will therefore be required to build a smelter in advance. In addition, said Jero, the regulations were designed to control the raw minerals export and also to prevent layoffs.

Mining in indonesia

Mining expert Kurtubi explained to Kompas on November 2nd 2012 that the current regulations, rules and laws that regulate the mining sector in Indonesia, benefit foreign investors more than they promote prosperity of Indonesian people. He used an example of PT Freeport Indonesia’s contract, which was signed by both parties—the government and PT FI—and has been extended until 2021. The contract, which was included in the Laws No 1/1967 on Basic Provisions of Mining, proved to be more advantageous to PT FI, as Indonesia only received a one percent royalty on total production (noting this is in addition to corporate and other taxes) and did not have the sole authority to amend the agreement clause, as it should be approved by both parties.

mining Product

mining export movement in Indonesia

25.500

25.000

24.500

24.000

23.500

23.000

22.500

22.000Jan - sep 2011 Jan - sep 2012

The national government’s reforms to drive value-added mineral processing10 in Indonesia are surely correct. However,

the continuing of uncertainty in the Mining Law’s execution might lessen foreign

investors’ interest in the Indonesia’s mining sector when they saw this

industry’s recent economic performance.Photo: Berau Coal

Freeport, for all sorts of geopolitical reasons prevalent at the time in the late 1960s, is a unique case and not a good sector guide. But the Freeport argument mirrors ones recently successfully made by pro-Islamic groups which, in a landmark Supreme Court judgment, declared the government’s oil and gas concession-granting body, BPMigas, unconstitutional (in a move which has knocked foreign oil & gas confidence in Indonesia). There are widely- if privately-discussed fears amongst major foreign mining groups that nationalism will also attack their current legal interests, as part of a general wave of xenophobia against foreign investors in natural resources.

Mining FDI may not be as resilient as the government previously assumed. Unlike non-mining sectors, such as financial services and consumer goods, which have a booming market in Indonesia, the mining sector has a different story to tell and faces great challenges posed by the fractured licensing system across regents or ‘bupatis’ of provincial government: and a legal system with its own operational challenges. This is a situation that the President has recognized is not working6 and has suggested some level of reform. Although it is noteworthy that the President’s comments represent the opposite direction of thought in the recent Supreme Court judgment (based on current law).

6. The growing mining permit problems in the country, such as clashes between local residents and mining companies, could get worse if the government fails to find the right solution. The uncertainties in mining permits have led to a number of conflicts across the archipelago. In a press conference held on August 8, 2012, the President said he had decided to give governors, as the heads of each provincial government, broader oversight authority over bupatis or mayors in the issuance of new mining permits.

Since the implementation of the 2009 law, the number of mining permits increased to about 10,250 as of August last year, up from only 597 permits in 2009, which in turn resulted in overlapping mining permits (since they were issued without a standard geographic mapping system). Based on the ministry’s latest data, just 4,626 out of 10,566 currently active mining permits had obtained ‘clean-and-clear’ status, which indicates mining activities are in line with the government’s environmental policies and that all legal requirements, including those on land usage and taxation, have been met.

Mining in indonesia

Photo: Berau Coal

The local rule of law can be a problematic, where Indonesian court judgments may on occasion appear to be based on nationalist grounds; are somewhat reluctant to enforce foreign judgments, and occasionally indeed seem to be only randomly associated with the rule of law7.

As implied by the former Chairman of Rio Tinto and former President Director of Newmont Mining in Indonesia, Noke Kiroyan, to The Australian on October 26, 20128 Indonesia, in some sectors other than mining, offers great opportunity for foreign investment (as long as, say, you’re not extracting anything from the ground, importing nor doing anything involving large amounts of land). However, if any of these aspects factor in to an investor’s business plans, it can be a challenging market, and market entry requires a perhaps greater degree of pre-planning with other markets to navigate local complexity and special circumstance.

edelman’s conclusIonNoke Kiroyan controversially advised foreign mining companies to delay their inward investment into Indonesia until after the Presidential elections of 2014. This view is not one that pleases the government, naturally, and Edelman would also add that our reading of the political runes is that the likely serious contenders for the 2014 Presidency will not be less focused on boosting

the domestic sector than the current government. Indeed there is a lot to say to bring forward investment and work constructively with government to build a partnership that can weather the legal and political wrinkles likely to come. There is valuable stuff underground Indonesia and foreign mining firms know they need to be robust, equitable and nimble if they are going to have the privilege of extracting this wealth.

The national government’s reforms to drive value-added mineral processing9 in Indonesia are surely correct. However, continuing uncertainty in the Mining Law’s execution might reduce investors’ interest in the Indonesia mining sector, especially having regard to recent its economic performance.

7. Friday, August 17th 2012: The Corruption Eradication Commission (KPK) caught two Indonesian anti-corruption judges, red handed as they were allegedly receiving bribes from an alleged middleman. Supreme Court Deputy Chief Djoko Sarwoko said the incident gave a bad name to the institutions and anti-corruption court.

8. Burrell, A. October 26, 2012. Indonesian nationalism a growing risk for miners, says Noke Kiroyan. Retrieved from http://www.theaustralian.com.au/business/mining-energy/indonesian-nationalism-a-growing-risk-for-miners/story-e6frg9df-1226503468931, on October 31, 2012

9. Indonesia will review its rules on the export of unprocessed metal ores after a Supreme Court ruling upheld a challenge to a government ban on such shipments. The court decision could pave the way for a resumption of exports by small mining companies, which were hit hard by the restriction imposed in May by Indonesia. Energy and Mineral Resources Minister Jero Wacik said he was seeking information from the court about the ruling but had not seen it personally. The regulations issued this year aimed to add value to Indonesian exports and encourage firms to build smelters. The have already led to billions of dollars in proposed smelter investments, particularly for bauxite and aluminums. The court ruling does not affect parts of the 2009 Law on Mining that ban all raw mineral exports after 2014.

Mining in indonesia

Photo: Berau Coal

We can safely conclude that while Indonesia is known as a world leader in coal exports, as well as tin and nickel production, the recent revision of the Mining Law has led to a temporary slowdown in exports, which also may cause foreign investors to review their decisions negatively. Though this might not affect the FDI in Indonesia’s non-mining sectors, the mining sector could do great harm to the reputation for FDI in Indonesia as a whole. As such, it is crucial for the Indonesian Government to quickly finalize mining law and give certainty for investors to commit investment funds to the country.

In addition, the government should also give assurance to both foreign and domestic investors by ensuring that the law is to be strictly obeyed by all relevant parties, including the regulators. Amongst other things Western investors should expect a quid pro quo: better clarity in the Mining Law in exchange with more Western mining firms’ full compliance with it.

The recent Churchill mining case is being used by some as the ‘poster child’ to portray Indonesia as a high-risk mining and investment environment [disclosure: Edelman represents the Government’s viewpoint in this matter]. While not getting into the details of this case – where the government contends that Churchill never held operating licenses valid for a foreign mining firm in the first place – this does throw a light on an area of complexity in the field of mining regulation.

Whether hoping to bypass the law, or in ignorance (or perhaps misled by local partners), there is evidently an issue whereby some foreign mining firms have invested in, or formed joint-ventures with, local firms holding mining licenses only valid for local Indonesian mining firms and these are not capable of permitting mining operations by a foreign mining firm. Indeed, the president of the association of Indonesian regents, APKASI, (the level of government that carries out mining concession licensing) has recently written to all regents or Bupatis to recommend that they check that all mining firms in their regency hold the right type of permits and that foreign miners are not operating using licenses intended only for domestic firms.

As the government reviews licensing and reforms the mining law – moving licensing perhaps to the level of provincial governors – it needs to bring clarity and boost the image of Indonesia as a foreign direct investment destination. Notwithstanding the recent Supreme Court decision, President Yudhoyono’s suggestion that mining regulation be moved up a tier in government (from bupati to provincial government) is surely to be welcomed; as would better transparency throughout the whole process of mining licensing.

The government would be well-advised to consider an overhaul of the licensing process that leads to a streamlined regulatory environment. A transition and ‘grandfathering’ period might also be extended to mining firms, having previously always acted in good faith, who wish to step forward to seek an upgrade in their licenses. This would also have the benefit of encouraging mining firms to become better corporate citizens, by incentivizing them to become fully compliant with Indonesian law, and would also boost the dialogue and consultative process – pre-regulation – between government and the industry. Government, the industry and the foreign investment climate in Indonesia can only benefit from a closer partnership between state and foreign private sector.

10. http://www.italaw.com/cases/1479 The Indonesian government remains confident in the outcome of the Churchill Mining arbitration. The government contends that as a foreign company, Churchill could not have a stake in a local miner without its approval. Also, Churchill had the license only to provide general mining support services, not to mine. The main trigger for action came when the state auditor also found fraudulent documents, and officials discovered Churchill had explored in a protected area, without the Forestry Minister’s permission.

“This complaint against the Indonesian authorities for not providing full investment protection and security has no grounds, since Churchill never had legitimate mining rights in Indonesia,” said Amyr Syamsuddin, Minsiter for law & Human Rights (quoted in the Jakarta Post November 16th 2012).Photo: Berau Coal