Controversy over forest mining and upholding the rule of law

Andrew I. Sriro, Jakarta

Fair question has been raised as to whether it was appropriate for the House of Representatives (DPR) to lift the ban on open- pit mining in environmental protection forests by passing "emergency" Government Regulation in lieu of Law No. 1 of 2004. This regulation, together with Presidential Decree No. 41 of 2004, puts thirteen mining concessions back in business after a five year hiatus beginning when Law No. 41 of 1999 banned operations.

Parties are poised to pounce in what could become a major international legal battle to be waged between the Indonesian government and mining giants. Environmentalists are screaming bloody murder.

The various scenarios are almost completely foreseeable as the government teeters on the fine line between wisdom and disaster.

To avert disaster, the government must construct equitable policies in defense of legal claims while protecting the environment from unacceptable mining damage.

The problem should be approached more strategically than outright legislation of mining license terminations. There are solutions available under Indonesian law which protect the environment and sustainable national development while avoiding unacceptable levels of State liability. Consider the following rules:

Indonesian law guarantees the quiet enjoyment of property rights unless a disturbance is necessary for public interests. Only the state is empowered to terminate property rights if the state pays reasonable compensation.

Article 499 of the Indonesian Civil Code, Law No. 5 of 1960 concerning agrarian affairs and mining regulations lead to an important legal conclusion: While mining operators do not have full rights of ownership over the land on which they mine, mining operators do own their license rights.

Article 570 of the Indonesian Civil Code and Law No. 5 of 1960 clearly state that ownership rights may be enjoyed to the extent not in conflict with the law and those rights may only be terminated for public interests provided the State pays reasonable compensation.

Law No. 11 of 1967 concerning mining also allows the government to cancel mining concessions for public interests provided the government pays reasonable compensation.

Article 2 of the Algemene Bepalingen (old Dutch law still applicable in Indonesia) absolutely prohibits the legislature from imposing retroactive regulatory obligations.

The government does have authority to protect the environment. Article 33(3) of the Constitution of 1945 grants the State authority to manage all Indonesian land, water and airspace for the greatest benefit of the community.

Article 41(1)(e) of government Regulation 32 of 1969 concerning mining as amended by Government Regulation No. 75 of 2001 grants authority to the government to cancel mining licenses if licensees fail to observe environmental issues. Even Article 13 of old forestry Law No. 5 of 1967 required sustainable, safe and responsible forestry activities management.

Articles 16 through 20, 27, 41 and 42 of Law No. 23 of 1997 concerning environmental management provide license revocation sanctions and up to fifteen years imprisonment for polluters.

Guidelines to the establishment of equitable public policy rest in the quantum of compensation payable to licensees. Unfortunately, the determination is complex requiring independent expert evaluations which must take into account the high risk nature of mining exploration investments, the value of economically extractable ore reserves and associated costs of extraction. Reasonable compensation should also be a function of the quantum of bona fide investments actually made in the exploration phase as a measure of risk to capital expended.

An unfair compensation policy will unnecessarily prolong the six year decline in Indonesian mining investment despite the abundance of mineral resources. Limited economic opportunities available to remote provincial communities could also be impacted.

Certainly, no mining concessionaire should be permitted to pollute the air, rivers and earth outside of their concessions. Thus, the costs of environmental remediation conducted by the State should also be set-off against compensation with responsibility for any uncovered costs of clean-up remaining with concessionaires.

On the basis of the foregoing, investors can be divided into three basic compensation groups:

The first group would receive zero compensation and may be subject to environmental clean-up liability. These parties would include: Holders of licenses proven to have been obtained through corruption; holders who cannot prove actual investment detriment in the form of funds reasonably expended; and holders who have recklessly violated environmental regulations.

The second group would include investors who have undertaken significant good faith investments. After evaluating budgetary capacity, compensation according to the above considerations should be offered as amicable settlement for license terminations.

The third group would include investors with compensation rights in excess of State budget constraints. The government should provide fair warning and a reasonable opportunity to cure any outstanding environmental violations through immediate and aggressive environmental clean-up and then, subject to full regulatory compliance, these investors should be allowed to continue to operate until the end of their license terms. At the same time, early termination incentives should be negotiated and future violations of environmental regulations should lead to license revocations.

To eliminate surprise, the rules for compensation should be published in advance with a requirement that investors present legal opinions and proof of damage claims by license holders to the government during a statutorily limited submission deadline. Failure to submit claims should constitute a waiver of the right to contest application of the rules.

The government should consider claims and opinions prior to engaging in a final round of settlement negotiations with licensees. For those cases that don't settle, final disposition should be left to fairly constituted international arbitrators who understand Indonesian law prior to license termination.

Regulations should be implemented obligating the losing litigant to pay the winner's legal fees in order to dissuade bad faith suits. Provision by plaintiffs of performance bonds to cover opposing parties' legal fees should be legislated prior to the commencement of litigation as a mandatory legal trigger to any tribunal's authority to consider a case.

The government has its work cut out for it in attempting to find a fair balance between good faith mining investors, environmentalists, mining communities and overall national economic development through the strength of the rule of law. In accomplishing this task, the government should take a strict view on enforcement of reasonable environmental regulations. New environmental regulations ensuring compliance with international environmental standards prevalent among developing nations should be enacted. Then, if investors fail to comply with the law, their license should be terminated without a right to compensation.

The writer, California lawyer with the Jakarta law offices of Dyah Ersita & Partners, can be reached at asriro@sriro.com