Contract guarantees rights of mining contractors<\/p>\n
JAKARTA (JP): Mining investors and the Indonesian government
\nmust agree on a contract of work (COW) before exploration work
\ncan start, Minister of Mines and Energy I.B. Sudjana says.<\/p>\n
"I should reaffirm here that a COW guarantees the right to
\nmine for the contractor which found the economically viable
\nmineral deposits," Sudjana said Wednesday.<\/p>\n
Sudjana added that all basic provisions in a COW, especially
\nthose regarding taxation and other financial obligations, should
\nnot be changed during the validity of the COW.<\/p>\n
The minister, as instructed by President Soeharto two weeks
\nago, prepared a statement on mining sector policy and released it
\nafter the cabinet meeting Wednesday.<\/p>\n
The explanation was given in response to criticism that the
\ngovernment's mining policy, especially in relation to foreign
\ncontractors, does not generate the greatest benefits for the
\npeople as required by the constitution.<\/p>\n
The following are excerpts from Sudjana's statement:<\/p>\n
The government has divided the mining sector into two major
\nareas:<\/p>\n
1. General mines, which are governed by Law No.11\/1967 on
\ngeneral mining and Law No.11\/1967 on foreign capital investment.<\/p>\n
2. Oil and natural gas mining, which is governed by Law
\nNo.8\/1971 on the state oil and natural gas mining company,
\nPertamina.<\/p>\n
Oil and natural gas mining projects are based on a production-
\nsharing contract (PSC) in line with Article 12 of Law No.8\/1971.
\nGeneral mining operations are based on a contract of work (COW)
\nin line with Article 10 of Law No.11\/1967 on basic regulations in
\ngeneral mining.<\/p>\n
Mining operations by contractors cover five stages of work:<\/p>\n
a. The stage of general surveys (usually lasting between three
\nand five years).<\/p>\n
b. The stage of exploration (between three and five years).<\/p>\n
c. The stage of feasibility studies (for about one year).<\/p>\n
d. The stage of construction (around three years).<\/p>\n
e. Exploitation and production (30 years).<\/p>\n
A contractor may wait between eight and 12 years from the
\ngeneral surveying stage before embarking on production.<\/p>\n
Risky<\/p>\n
Given the amount of investment needed in all the stages and
\nthe unpredictable results, mining investments are highly risky.<\/p>\n
Between 1967 and 1994, for example, 131 COWs were awarded but
\nonly 10 have reached the production stage. Ninety others were
\nstopped after failing to discover commercially viable deposits,
\nwhile the other 41 contractors are still in the exploration
\nstage.<\/p>\n
General surveys and explorations are usually financed by
\nequity capital (a contractor's own money) because financing from
\nbanks or the capital market is only made available when
\nfeasibility studies on mineral deposits yield positive results.<\/p>\n
The economic value of a mineral is strongly determined by the
\nprevailing market price of that particular commodity. A delay in
\nproduction could result in the loss of an opportunity to develop
\nthe mineral deposits.<\/p>\n
Agreement<\/p>\n
A COW is an agreement between the government and an investor
\n(contractor) which must be a company incorporated under
\nIndonesian law.<\/p>\n
A COW stipulates all aspects of mining operations, including
\ntechnology, financing, taxation, legal matters, manpower,
\nenvironment and area development.<\/p>\n
A COW must first be agreed upon by the government and an
\ninvestor before exploration can begin.<\/p>\n
A COW must follow the following procedures:<\/p>\n
a. Approval from the Ministry of Mines and Energy<\/p>\n
b. Approval from the Investment Coordinating Board<\/p>\n
c. Consultations with the House of Representatives to obtain a
\nrecommendation.<\/p>\n
d. Approval from the President<\/p>\n
A COW requires the contractor to:<\/p>\n
- Conduct explorations as intensively as possible and to
\nreport its results to the government.<\/p>\n
- Pay taxes and other financial obligations, such as land
\nrents, production royalties, local taxes and other local levies
\nin line with the law.<\/p>\n
- Bear all risks involved in mining operations.<\/p>\n
- Report to the government all mining activities.<\/p>\n
- Conduct environment-friendly mining operations.<\/p>\n
- Give top priority to the employment of Indonesians and the
\nuse of domestic goods and services.<\/p>\n
- Give top priority to the fulfillment of domestic needs when
\nthe mineral is being produced.<\/p>\n
- Insofar as it is technically and economically feasible, to
\nprocess the mineral in Indonesia.<\/p>\n
Government receipts from a general mining contractor are
\nderived mainly from land rents, royalties and taxes. The
\nroyalties range from 1 percent to 2 percent of the value of the
\noutput, depending on the type of mineral and production capacity.
\nThe corporate income tax ranges from 30 percent to 45 percent,
\ndepending on the prevailing taxation laws. The tax on dividends
\nranges from 7.5 percent to 20 percent of the dividends paid out
\nto the shareholders.<\/p>\n
Principles<\/p>\n
A COW holds to two basic principles:<\/p>\n
1. A COW guarantees the right to mine for the contractor
\nwhich discovered the commercially viable mineral deposits.<\/p>\n
2. All basic provisions in the COW, especially the ones on
\ntaxation and other financial obligations, shall not change during
\nthe validity (30 years) of the COW.<\/p>\n
The government has amended the COW concept five times, with
\neach amendment producing a new generation of COW. Around 70
\napplications for sixth generation COWs have been endorsed by the
\nHouse of Representatives.<\/p>\n
In the meantime, 230 other applications for seventh generation
\nCOWs are being evaluated, 176 of which are ready for House
\nconsultation. (vin)<\/p>",
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