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