Thu, 06 Jul 2006
Why is investment in the mining industry stagnant?

Montty Girianna, Jakarta

Exploration and investment in the mining industry have seen a significant downturn. This has resulted in a considerable decrease in production. On top of that, there tends to be unavoidable social and environmental issues that occur when the mining is in the operation phase.

This article addresses three issues. What is needed to revive exploration and mining investment in the country? What is needed to ensure that mining takes place in an environmentally and socially sustainable manner? What can be done to ensure effective coordination between government ministries and agencies in the future?

Our country has lost its international competitiveness for new mining investment. New exploration and project development are stalled due to problems and uncertainties with respect to legal and fiscal regimes and difficulties in obtaining forestry permits.

Despite the fact that all these are factors under government control, they are under the jurisdiction of different government agencies and different level of government.

The fiscal regime is not promising due to a number of reasons, i.e., unpredictability of fiscal policies and the burden of levies, particularly those introduced by local governments.

Mining and forestry interface creates delays in the endorsement of forestry permits. As the forestry impasse continues, new investment has been largely concentrated in existing mines. Furthermore, the mining industry is stalled mainly because investors are waiting for the new mining law. The bill is currently being deliberated by the House of Representatives. Based on this bill, the licensing regime will be based on a tendering system in which the national government would determine mining areas or zones which would be tendered by local and provincial governments.

The bill also stipulates that mineral reserve areas may be reserved for the state and may be allocated to state companies to develop. When our government designates the bulk of the unlicensed land as state reserves and allocates them to state enterprises than this will likely become a major obstacle, at least to international mining companies who do not want to be obligated to have a state enterprise as a partner -- especially where the state enterprises holds the license. Finally, the bill requires that priority be given to domestic mineral and coal needs. This domestic preference may also be viewed as a major obstacle by investors.

While access to land for mining must be secured, it is necessary to place mining development and forestry management in the development of a land-use context.

To attract investors there is a need to put in place a new licensing regime based on decentralization that will ensure a level playing field for private and state companies. A licensing regime plays a prominent role in the success of mining investment. The bill has provided a basis for licensing with local governments issuing licenses based on the criteria and procedures determined by the central government (presently tendering is proposed).

To sustain investment there is a need to rebuild investor confidence that they can keep a fair share of the profits. Adequate assurances for mining companies are necessary for their legitimate interests to be protected. This could be through strong provisions regarding security of tenure for a mining business license or it could be through contracts with a state enterprise. As licensing will mostly be undertaken by local governments, it is a great concern that they have very little capacity to do so.

While a proper licensing regime helps the entry of investors, a mineral fiscal regime determines the feasibility of a mining business. It is necessary to identify and address uncertainties regarding the fiscal regime, particularly with respect to royalty rates and export levies, state and local taxes, and tax stabilization.

Unpredictable changes in fiscal regimes, as has often happened, have jeopardized the sustainability of mining investment. Within the framework of a fiscal regime, it is also necessary to address the tax status of expenditure to improve the social impact of the mining operation.

There is a need to have strong decentralized capabilities to ensure that environmental protection laws and regulations are enforced especially for small and medium mines. Environmental protection is of paramount concern when one deals with the sustainability of mining development. The role of local governments as the guardians should not be underestimated.

It is therefore necessary to have adequate environmental regulations and procedures in place and to ensure they are being enforced at the local level in particular. For the guardians to be effectively functioning it is necessary to identify where and what type of capacity building is needed.

Illegal mining, especially in coal and tin, causes great environmental harm and affects not only the security of mining but also the surrounding environment of mining sites. It is therefore necessary to prepare a more detailed assessment of the scale and location of illegal mining.

Communities need to be properly consulted regarding mining activities that affect them, including mine closure. Emission created from the burning of coal on a large scale must be assessed for possible impacts. A consensus on how the assessment is prepared and executed, including the formulation of a mitigation plan, is critical for its success.

The bill has stipulated a provision on community development. Overall, however, the law does not provide sufficient provisions for community consultation at all stages of the mining cycle -- prospecting, exploration, feasibility, construction, operation, closure, and post closure. Detailed requirements and procedures, therefore, need to be provided in the implementation of the regulations for a participatory approach of the affected communities in local economic development programs -- this may include procedures for identification of community representatives, consultation and participation in the decision process and associated capacity building initiatives.

No doubt, mining crosses many sectors. A clear example is when a potential mine is located in a protected forest. Conflicts occur since each sector has specific concerns, and most of the time conflicts remain unresolved for several years. It is necessary, therefore, to have a Cabinet-approved sustainable mining policy that would provide the framework to resolve inter-ministerial conflicts and support synergy for development.

The writer is Director for Energy, Mineral Resources and Mining at the National Development Planning Agency, BAPPENAS. The article reflects the writer's personal views.



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