Mining firms 'misperceived by public'<\/p>\n
By Johannes Simbolon<\/p>\n
JAKARTA (JP): The Indonesian Mining Association has expressed
\nconcern over the spate of criticism currently leveled against the
\ncountry's mining industry, saying much of the criticism is due to
\npublic misperceptions.<\/p>\n
Association vice president M. Simatupang acknowledged that the
\ncontracts of work (COWs) used by the government in the mineral
\nsector for the last 30 years needed to be improved to force
\nmining firms to pay more attention to environmental protection
\nand community development.<\/p>\n
He said COWs, however, were generally considered good
\ncontracts given the fact the system had managed to attract a
\nlarge number of investors to the country and had even been looked
\nat by the United Nations as a model for developing countries.<\/p>\n
\"The public has gained a negative perception regarding the
\nmining industry from people who are apparently laymen in the
\nindustry,\" Simatupang told The Jakarta Post.<\/p>\n
On Thursday, several legislators criticized the giant copper
\nand gold mining company PT Freeport Indonesia, a subsidiary of
\nFreeport McMoRan Copper & Gold of the United States, for failing
\nto improve the welfare of the ethnic tribes living near its
\nmining area in Timika, Irian Jaya, during its 30 years of
\noperation.<\/p>\n
The legislators called on the government to review the
\ncontract.<\/p>\n
Reform figure Amien Rais has also criticized the country's
\nmining companies, including Freeport, for giving too small a
\nshare of their earnings to the government.<\/p>\n
He said the mining industry, dominated by foreign companies,
\nhad been harmful to national interests and called on the
\ngovernment to suspend mining operations so the resources could be
\nsaved for development by domestic firms.<\/p>\n
Some analysts have proposed the royalty system applied in
\nmineral and coal mining COWs be replaced with a production split
\nsystem applied in oil and gas contracts to increase the
\ngovernment's earnings from mining operations.<\/p>\n
Permanent<\/p>\n
\"The country's mining industry is now apparently at a
\ncrossroads. On the one hand, the industry has been well developed
\nover the past 15 years. But the development is mostly driven by
\nforeign companies... while local private companies only play a
\nnegligible role.<\/p>\n
\"The fact has created a public perception, especially in non-
\ngovernmental organizations, that our mining policy favors foreign
\ncompanies too much and should be corrected,\" former director
\ngeneral of mining at the Ministry of Mines and Energy Soetaryo
\nSigit was quoted by Warta APBI, the journal of the Indonesian
\nCoal Mining Association.<\/p>\n
Data at the Ministry of Mines and Energy shows that investment
\nin the country's mining sector totaled US$10.8 billion over the
\nlast 30 years, with U.S. companies accounting for the lion's
\nshare with $6.4 billion. Other investors are from countries like
\nAustralia and Canada.<\/p>\n
Simatupang and Soetaryo said COWs were produced after being
\napproved by the House of Representatives and the president. As
\nsuch, they have a lex specialis (special law) status and cannot
\nbe modified.<\/p>\n
The permanent nature of COWs is suitable for the mining
\nsector, which needs long-term assurances that no changes in law
\nwould affect their investment, they said.<\/p>\n
Soetaryo, however, noted that the COWs which had been signed
\nby the government still contained some weaknesses in the fact
\nthat they did not specify contractors' obligations in terms of
\nenvironmental protection, community development, manpower
\ndevelopment and transfer of technology.<\/p>\n
The government does not need to review the contracts, but
\nshould produce a ruling which specifies the obligations, Soetaryo
\nsaid, adding that a review would amount to breaching the
\ncontract.<\/p>\n
\"In contracts, all the obligations (regarding environmental
\nprotection, community development, manpower development and
\ntransfer of technology) are only briefly mentioned. What is left
\nto do is to further explain the obligations,\" Soetaryo said.<\/p>\n
Minister of Mines and Energy Kuntoro Mangkusubroto recently
\nsaid the eighth generation COWs, which are being prepared by the
\nministry, would emphasize obligations to help community
\ndevelopment in the contract areas.<\/p>\n
He said his office was cooperating with a team from the Gadjah
\nMada University in Yogyakarta, headed by Lukman Sutrisno and
\nMonenco Agra of Canada, to study an effective community
\ndevelopment system to be adopted in upcoming mining contracts.<\/p>\n
Kuntoro said that although contracts thus far had not
\nspecified community development obligations, many mining
\ncompanies had actually taken the initiative to implement
\ncommunity development programs to secure their project from
\nvandalism and to create a sense of belonging in the community
\ntoward the project.<\/p>\n
Many communities, however, have demanded more from neighboring
\nmining operations.<\/p>\n
As a matter of fact, Kuntoro said, all contracts signed after
\n1995 had a clause obliging contractors to send 80 percent of the
\nroyalties to local authorities and only 20 percent to the central
\ngovernment.<\/p>\n
Eighty percent of the royalties for the local administrations
\nshould be sent to the districts where the mines are located, and
\nthe other 20 percent to the provincial administration.<\/p>\n
But, he said, the COW clause could not be implemented since it
\nis in conflict with a governmental regulation which stipulates
\nthe royalties should be first delivered to the central
\ngovernment's coffers before being redistributed to provincial
\nadministrations.<\/p>\n
The government redistributes the royalties with little regard
\nto each province's contribution to the state budget.<\/p>\n
\"The government and the House of Representatives is drafting
\nthe law which will enable provinces to retain most of the
\nrevenues from the development of their natural resources,\"
\nKuntoro said.<\/p>\n
Production sharing<\/p>\n
Simatupang also said many analysts had a misperception that
\nmining operations had given too little to the government compared
\nwith oil and gas operations.<\/p>\n
He said under the COWs, the government received 13.5 percent
\nof coal production in royalties from coal mining companies, and
\n2.5 percent of net profits in royalties from gold and copper
\nmining companies.<\/p>\n
Mining companies also pay an annual rent of approximately $2
\nper hectare and various taxes, including property tax, a 30
\npercent corporate tax, a 10 percent value added tax on imported
\nequipment, a 20 percent duty on imports and a 7.5 percent tax on
\ndividends.<\/p>\n
Under oil and gas production sharing contracts (PSCs), the
\ngovernment, through state oil and gas company Pertamina, receives
\n85 percent of net profits from oil and gas operations, while the
\nremaining 15 percent goes to contractors.<\/p>\n
However, contractors are exempt from royalties and taxes,
\nwhile the government also has to recover their exploration cost
\nand 85 percent of their operating costs.<\/p>\n
Simatupang said the royalties and tax regimes applied for the
\ncountry's mining industry were competitive compared to those
\napplied in other countries.<\/p>\n
He also said the PSC system was unsuitable for the mining
\nsector because, unlike oil and gas, mining products, including
\ncopper, gold and nickel ore, have no economic value until they
\nwere further processed in smelters.<\/p>\n
As far as the oil and gas sector is concerned, Pertamina gives
\nthe government a ready market for its share of oil and gas.<\/p>\n
If the PSC system was applied in mining sector, the government
\nwould have to process its share of copper, nickel, gold ores to
\nmake them have commercial value, he said.<\/p>\n
\"According to the Colorado School of Mines, the production
\nsharing concept is not known in the world's mining sector. If the
\nconcept is forcibly applied, no investor would be interested in
\n(investing),\" Simatupang said.<\/p>\n
Kuntoro recently assured that the government would still use
\nthe COW system in the mining sector.<\/p>\n
\"The government has no plans to apply production-sharing
\nprinciples and demand stakes in new mining projects,\" he said.<\/p>\n
Table: Royalties and corporate taxes<\/p>\n
Country Royalty to government Corporate tax<\/p>\n
--------------------------------------------------------------<\/p>\n
Canada None 45%<\/p>\n
Mexico None (eliminated in 1991) 35%<\/p>\n
Argentina Reduced to 3% 30%<\/p>\n
Bolivia None for new mining (since 1991) 30%<\/p>\n
Brazil 0.2%-2% 30%-35%<\/p>\n
Chile None 35%<\/p>\n
Indonesia 1%-2.5% depending on the types 30%-35%<\/p>\n
and prices of minerals<\/p>\n
Philippines Reduced to 2% from 5% in 1994 35%<\/p>\n
Papua New Guinea 1.25% 35%<\/p>\n
Peru None 30%<\/p>\n
Spain None 35%<\/p>\n
Sweden None 28%<\/p>\n
Australia 3%-4% 39%<\/p>\n
USA None (being proposed to US Congress) 30%<\/p>\n
South Africa Average 1% 40%<\/p>\n
Zimbabwe None 37.5%<\/p>\n
Ghana 3% 35%<\/p>\n
Source: Dr. Fred Bernard, Mining Evaluation Profiles (2) Colorado
\nSchool of Mines, 1997.<\/p>",
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