While it will certainly ensure more business, the soon-to-be passed mining bill is likely to discourage large multinational mining companies from investing in Indonesia, putting the future of the industry at stake, mining groups warn.
A new permit system, which will replace the Contract of Work (CoW) system, is the primary thing deterring firms from investing here, chairman of the Indonesian Coal Producers Association, Jeffrey Mulyono, told The Jakarta Post.
"I won't be surprised if we will see some of them pulling out of this country," Jeffrey said, adding that some miners had planned to cancel investments, including British-Australia mining giant BHP Billiton, which has already withdrawn their US$4-billion investment plan in Maluku.
He argued that the bill would only serve the interests of small and medium sized miners and only hinders the operation of big players.
Under the bill, which will be endorsed this week by the House of Representatives after three years of political struggle, the government will cap the size of mining activities based on the type of mineral resources in a specific area.
Areas for coal exploration, for example, will be capped at between 5,000 and 50,000 hectares for exploration and 15,000 hectares for production -- sizes deemed insufficient for big miners, according to Jeffrey, who is the former president director of coal miner Berau Coal.
Speculation is rife that the new limitations are the result of the teaming up of key politicians with officials from local administrations, in an effort to try and protect mineral resources from big, especially foreign miners.
The politicians are believed to have indirect investments in dozens of mining concessions in Kalimantan and Sumatra and are attempting to expand their business through the new legislation.
Under the new mining law, once their contracts expire existing CoW holders have one year to comply with the new system. However, for mining companies operating smelters, five years is allowed.
Indonesia, Southeast Asia's largest economy, has rich reserves of coal, copper, gold, tin, and nickel, which lures numerous multinational companies including Rio Tinto, Newmont Mining Corporation, Vale-Inco, and Freeport McMoran.
Jeffrey believes that investment in the mining sector is likely to be less than the targeted $8 billion this year, as some companies postpone or even drop their investment plans due to various reasons aside from the bill, including legal disputes with the local administrations.
Last year, mining investment hit $1.5 billion, up from $900 million in 2006.
"It won't be surprising if the amount of mining investments plummets," Jeffrey said.
He added that the bill had also failed to provide long-term certainty for miners because the government could revoke permits at any time.
Indonesian Mining Association Executive Director Priyo Pribadi Soemarno said the association would study the bill, before it took any measures, including a possible judicial review with the Constitutional Court.
In response to concerns, a member of the House working committee for the bill, Sony Keraf, insisted investors should not worry about their investment as the law would provide clarity.
"We have an article, and this is for the first time, that will punish and fine government officials who misuse their authority to issue mining permits," Sony said.
However, many doubt this article can be strictly enforced given the country's weakness in law enforcement.
The up-side of the bill, however, is the certainty miners now have after having to guess for some time as to which routes the industry would head, something that put future business plans in the dark.
"Now it's up to the investors. They can take it or leave it. We can not do anything about it as it is the law. We have tried our best to give inputs but the decision is in their (legislators) hands," said Priyo.
Key points in the bill
1. The permit can not be transferred to other parties, the transfer of shares can be done only after it is certain the company will mine.
2. Permit holders must submit post mining and reclamation plans before seeking a permit.
3. Permit holders must build smelters.
4. All mining activities must prioritize the use of local workers and the involvement of local companies. Mining companies cannot involve units or subsidiaries.
5. The mining permit can be revoked should the permit holders not comply with the law, are involved in criminal offenses or go bankrupt.
6. A Mining company should pay
- Fixed production and exploration fees
- Reclamation and post mining costs
- After five years of production, companies, whose shares are owned by foreign firms, must divest its shares to the government, state owned enterprises and national private companies.
- Production permit holders must allocate 10 percent of their net profits for government, for which 4 percent will go to the central government and 6 percent to local governments.
7. Officials who misuse their authority in issuing permits will face imprisonment for 2 years and a fine Rp 200 million.
- Exploration permit
*Metal: Given for an eight year period with a concession area of between 5,000 hectares and 100,000 hectares.
*Non-metal: Given for a three year period with a concession area of between 500 hectares and 25,000 hectares.
*Specific non-metal: Given for a three year period with a concession area of between 5 hectares and 5,000 hectares or seven years for a concession area of between 5,000 hectares and 50,000 hectares
- Production permit
*Metal: Given for an area of 25,000 hectares for a 20 year period, but can be extended for ten years a maximum of two times.
*Non-metal: Given for an area of 5,000 hectares for period of 10 years, but can be extended for a period of five years a maximum of two times.
Specific non-metal: Given for 20 years, but can be extended for ten years a maximum of two times.
*Rocks: Given for an area of 1,000 hectares for a period of five years, but can be extended for five years a maximum of two times.
*Coal: Given for an area of 15,000 hectares for a period of 20 years, but can be extended 10 years a maximum of two times.