Modernizing Indonesia's mineral resources industry<\/p>\n
The following article is based on a paper presented by the
\nDirector General of Mines and Energy, Kuntoro Mangkusubroto, at
\nthe 64th annual convention of the Prospectors and Developers
\nAssociation of Canada, in Toronto, March 11-13, 1996.<\/p>\n
TORONTO: The successful development of the Indonesian mineral
\nsector has been largely the result of foreign investment. Due to
\nthe policy of allowing foreign companies to develop Indonesia's
\nmineral resources, the mineral and coal contract sectors now
\ndominate the mining industry.<\/p>\n
The attractive contractual arrangement of the Contract of Work
\nSystem, together with Indonesia's advantageous geological
\nsetting, the mineral potential and the political stability are
\nthe primary reasons behind the continued foreign investment
\ninterest.<\/p>\n
Our success in attracting foreign investment has been
\nprimarily attributed to the implementation of the Contract of
\nWork and the Coal Contract, together with our geological
\nprospects and long-term political stability.<\/p>\n
The Contract of Work has been in progress for more than 25
\nyears and has developed through five major generations. It is
\nwell-known that the terms and conditions of the later generation
\nContracts of Work are in the most part standard; it is the
\nfinancial and fiscal terms that have changed.<\/p>\n
The financial and in particular the tax conditions become the
\nonly major issues determining the relative attractiveness of a
\nparticular Contract of Work generation, which subsequently has
\ndefined the investment climate for mining ventures.<\/p>\n
We realize that in the future, the role of foreign investment
\nwill still be dominant. The government needs to lure more foreign
\ncapital to explore and subsequently develop our mineral resources
\nin competition with other countries in the Asia-Pacific region.<\/p>\n
Overall, the government has pursued a broad mix of development
\nstrategies including deregulation, relaxation of divestment
\nrequirements for foreign investment and a number of incentives
\naimed at improving the investment climate.<\/p>\n
Although foreign companies will account for the majority of
\nproduction in the minerals sectors, to foster competition and to
\nhelp root the mining industry into our national infrastructure, a
\nrole will be maintained for the smaller domestic mining
\ncompanies. Our aim is to give them better means with which to
\nmaintain their role in the industry, in particular to match the
\nstandards of safety and environmental protection of the larger
\ncompanies, and to raise the efficiency of operations.<\/p>\n
From the geological perspective, there has never been any
\ndoubt about the potential of Indonesian mineral resources.
\nBesides our traditional mineral products, such as tin, nickel,
\nand bauxite, the minerals coal, copper, gold and silver are
\nbecoming more and more important. Gold and silver deposits are
\nfound in Java, Sumatra, Kalimantan, Sulawesi and in most of
\nIndonesia's other islands.<\/p>\n
A wide range of coal types are found in deposits throughout
\nIndonesia, but most of these resources are located in Southern
\nSumatra and in East and South Kalimantan.<\/p>\n
In general, the geology of the eastern part of Indonesia is
\nrich in non-ferrous metal minerals associated with ultrabasic
\nrock. Currently, nickel is being produced in Pomalaa and Soroako,
\nin Sulawesi, and also in Gebe Island, North Maluku.<\/p>\n
It is obvious that most investor interest in Indonesia lies
\nin the exploration and development of gold deposits. From the
\ngeological perspective, the 16,700 islands of Indonesia have a
\ntotal area of close to two million square kilometers and contain
\nover 7,000 km of Neogene arcs.<\/p>\n
The recent discoveries of the Grasberg deposit in Irian Jaya
\nby Freeport, one of the largest copper\/gold deposits in the
\nworld, and the Batu Hijau deposit on Sumbawa island by Newmont
\nconstitute proof of the great potential the eastern provinces may
\noffer. Recent discoveries of gold deposits in North Sulawesi, in
\nHalmahera, the Mollucas, and particularly in East Kalimantan,
\nhave increased confidence among explorers about the bright
\nprospects of success in Indonesia.<\/p>\n
The fact that there are at present about 160 Contract of Work
\napplications for minerals and over 60 applications for coal
\nexploration proves that in general Indonesia is still regarded as
\none of the preferred destinations for mineral investment.<\/p>\n
Table 1 through 3 set out the Contract of Work applications
\nbased on the mineral commodities and the locations of the
\nexploration areas. It is clear that Bre-X's Busang gold discovery
\nin East Kalimantan has attracted much overall interest in
\nKalimantan.<\/p>\n
Bre-X's Busang gold discovery in Kalimantan, believed to be
\none of the world's richest, is generating so much interest that
\njunior exploration companies in Canada are getting attention just
\nby announcing property acquisitions near the find. Shares of such
\ncompanies have also soared significantly on the stock market.
\nSuch developments are encouraging, provided that these companies
\ninvest the capital they have raised into their exploration
\nprojects in Indonesia.<\/p>\n
Accordingly, we are planning to introduce a seventh generation
\nContract of Work, which is very similar to its predecessor, but
\nit provides more stringent control and tighter scheduling in its
\nimplementation.<\/p>\n
With regard to attractiveness for mining investment, company
\nperception surveys generally rank Indonesia close to or at the
\ntop position because the country combines a strong geological
\nprospect basis with conducive mining law, taxation imposts and
\nlack of political risk to mineral exploration and development.<\/p>\n
Though Indonesia is still being considered an attractive
\ndestination for mining investment, we are aware of the growing
\nnumber of strong competitors for exploration capital,
\nparticularly from within the developing countries in the Asia-
\nPacific.<\/p>\n
The introduction of the sixth generation Contract of Work,
\nwhich is currently being issued, is primarily intended to
\naccommodate the provisions of the new tax law which came into
\neffect in January 1995.<\/p>\n
The new tax law is in general more advantageous for investors,
\nparticularly in terms of corporate tax, which is reduced to a
\nmaximum 30 percent from the previous 35 percent. The provisions
\nalso extend certain incentives with regard to the acceleration of
\ndepreciation and lower withholding tax for dividends.<\/p>\n
The government has also converted the Coal Contract Agreement
\ninto a Coal Contract of Work, which is essentially an ordinary
\nsixth generation Contract of Work, except with regard to the
\npayment of \"government share\" of the production which for coal is
\nset a maximum of 13.5 percent of Free on Board value.<\/p>\n
The success that has been achieved by Indonesia through the
\nimplementation of Contract of Work agreements has inspired other
\ndeveloping countries to formulate a similar -- and in some
\naspects even more attractive -- system. We are facing a strong
\nchallenge to maintain our position as one of the favored
\ncountries for foreign investment in mineral ventures in the Asia-
\nPacific region.<\/p>\n
With the increasing competition from other countries, we are
\nat present reviewing the provisions of the contract as well as
\nother related issues on its implementation. We have been
\nidentifying policy issues and major operational issues which need
\nto be adjusted, revised or even completely replaced in order to
\nfurther improve the current investment climate.<\/p>\n
An improved investment climate is one which ensures that the
\nnew investors we attract are professional mining companies which
\nhave the skills, expertise and resources to invest in exploration
\nand mineral development.<\/p>\n
Accordingly, we are now introducing new regulations which
\nrequire new applicants to submit a \"commitment bond\" for every
\nhectare of ground reserved for the contracts. The deposit of the
\nbond, which amounts to Rp 10,000 per hectare (or US$ 5,000\/ha),
\nis aimed at minimizing speculation by parties acting as brokers,
\nwith the main objective of holding the reserved ground
\ntemporarily before transferring it to another party for a profit.<\/p>\n
We are also aware of the operational problems that may impede
\nthe implementation of the contract agreement, such as the lack of
\ninfrastructure, the erosion of security of title and difficulties
\nwith land access due to overlapping interests with forestry or
\nother land uses, excessive regional government tax and levies,
\nand illegal mining activity within the contract area.<\/p>\n
Realizing that an overall improvement of the policy and its
\nimplementation will take a number of years, the Directorate
\nGeneral of Mines has adopted a strategy of focusing its immediate
\nefforts on restructuring the internal organization and improving
\nthe operating procedure aimed at enhancing the services rendered
\nto the industry.<\/p>\n
This comprises simplification and speeding up of
\nadministrative procedures for contract and mining right
\napplications as well as constant supervision throughout their
\nimplementation.<\/p>\n
It is widely known that the administrative procedure for
\nprocessing mining permits may be a lengthy process. The
\nDirectorate General of Mines is committed to reducing the time
\nperiod to no longer than six months for Contracts of Work and
\nthree months for mining right permits. This will certainly need a
\nwell-defined and simple procedure which involves the internal
\nunits within the directorate and external institutions, such as
\nthe House of Representatives and the Investment Coordinating
\nBoard.<\/p>\n
To facilitate a modern and accurate mapping system, a
\ncomputerized Geographical Information System is being devised.
\nThis is intended to enhance transparency and to facilitate access
\nfor interested parties to study the available areas for new
\napplications. It will simplify the procedure for an applicant to
\ndetermine the area of interest and to apply for a particular area
\nfor reserve.<\/p>\n
The Geographical Information System, which has been
\noperational since January 1996, will help reduce the time needed
\nfor issuing an Approval in Principle to the applicant in the case
\nof minerals and coal Contract of Work applications or mining
\nright approval for smaller-size mining tenures. The system will
\nalso be expanded to encompass a wide range of monitoring and
\npermitting processes throughout the lifetime of the contract or
\nthe mining permit.<\/p>\n
The formulation of a draft Contract Agreement, which is now
\nmore or less standardized for a particular generation Contract of
\nWork, will also help in speeding up the process since the
\ninterested parties will be able to study it in advance, so that
\n\"negotiations\" between the Directorate General of Mines and the
\napplicant should be minimized. Discussion of the draft Contract
\nAgreement will essentially be a series of consultations to
\nclarify details of the Contract Provisions.<\/p>\n
Recommendations from the House of Representatives prior to
\nPresidential approval is currently required for each individual
\ncontract, although in practice, several contracts are reviewed at
\nthe same time. In order to simplify the procedure and to speed up
\nthe process we are preparing a proposal which in principle will
\nallow consultation on Contract Generation rather than on an
\nindividual contract basis.<\/p>\n
Consideration is also being given to setting maximum time
\nlimits for the processing of other permits required during
\noperations, thus ensuring that processes are in place to deliver
\non these commitments.<\/p>",
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