Contract guarantees rights of mining contractors

JAKARTA (JP): Mining investors and the Indonesian government must agree on a contract of work (COW) before exploration work can start, Minister of Mines and Energy I.B. Sudjana says.

"I should reaffirm here that a COW guarantees the right to mine for the contractor which found the economically viable mineral deposits," Sudjana said Wednesday.

Sudjana added that all basic provisions in a COW, especially those regarding taxation and other financial obligations, should not be changed during the validity of the COW.

The minister, as instructed by President Soeharto two weeks ago, prepared a statement on mining sector policy and released it after the cabinet meeting Wednesday.

The explanation was given in response to criticism that the government's mining policy, especially in relation to foreign contractors, does not generate the greatest benefits for the people as required by the constitution.

The following are excerpts from Sudjana's statement:

The government has divided the mining sector into two major areas:

1. General mines, which are governed by Law No.11/1967 on general mining and Law No.11/1967 on foreign capital investment.

2. Oil and natural gas mining, which is governed by Law No.8/1971 on the state oil and natural gas mining company, Pertamina.

Oil and natural gas mining projects are based on a production- sharing contract (PSC) in line with Article 12 of Law No.8/1971. General mining operations are based on a contract of work (COW) in line with Article 10 of Law No.11/1967 on basic regulations in general mining.

Mining operations by contractors cover five stages of work:

a. The stage of general surveys (usually lasting between three and five years).

b. The stage of exploration (between three and five years).

c. The stage of feasibility studies (for about one year).

d. The stage of construction (around three years).

e. Exploitation and production (30 years).

A contractor may wait between eight and 12 years from the general surveying stage before embarking on production.

Risky

Given the amount of investment needed in all the stages and the unpredictable results, mining investments are highly risky.

Between 1967 and 1994, for example, 131 COWs were awarded but only 10 have reached the production stage. Ninety others were stopped after failing to discover commercially viable deposits, while the other 41 contractors are still in the exploration stage.

General surveys and explorations are usually financed by equity capital (a contractor's own money) because financing from banks or the capital market is only made available when feasibility studies on mineral deposits yield positive results.

The economic value of a mineral is strongly determined by the prevailing market price of that particular commodity. A delay in production could result in the loss of an opportunity to develop the mineral deposits.

Agreement

A COW is an agreement between the government and an investor (contractor) which must be a company incorporated under Indonesian law.

A COW stipulates all aspects of mining operations, including technology, financing, taxation, legal matters, manpower, environment and area development.

A COW must first be agreed upon by the government and an investor before exploration can begin.

A COW must follow the following procedures:

a. Approval from the Ministry of Mines and Energy

b. Approval from the Investment Coordinating Board

c. Consultations with the House of Representatives to obtain a recommendation.

d. Approval from the President

A COW requires the contractor to:

- Conduct explorations as intensively as possible and to report its results to the government.

- Pay taxes and other financial obligations, such as land rents, production royalties, local taxes and other local levies in line with the law.

- Bear all risks involved in mining operations.

- Report to the government all mining activities.

- Conduct environment-friendly mining operations.

- Give top priority to the employment of Indonesians and the use of domestic goods and services.

- Give top priority to the fulfillment of domestic needs when the mineral is being produced.

- Insofar as it is technically and economically feasible, to process the mineral in Indonesia.

Government receipts from a general mining contractor are derived mainly from land rents, royalties and taxes. The royalties range from 1 percent to 2 percent of the value of the output, depending on the type of mineral and production capacity. The corporate income tax ranges from 30 percent to 45 percent, depending on the prevailing taxation laws. The tax on dividends ranges from 7.5 percent to 20 percent of the dividends paid out to the shareholders.

Principles

A COW holds to two basic principles:

1. A COW guarantees the right to mine for the contractor which discovered the commercially viable mineral deposits.

2. All basic provisions in the COW, especially the ones on taxation and other financial obligations, shall not change during the validity (30 years) of the COW.

The government has amended the COW concept five times, with each amendment producing a new generation of COW. Around 70 applications for sixth generation COWs have been endorsed by the House of Representatives.

In the meantime, 230 other applications for seventh generation COWs are being evaluated, 176 of which are ready for House consultation. (vin)