Govt to impose higher royalties in mining firms

JAKARTA (JP): The government will impose higher royalties on mining contractors awarded new contracts of work (COWs) to increase earnings from the development of the country's mineral resources, the Ministry of Mines and Energy's Director General of Mining Rozik B. Soetjipto said on Thursday.

Rozik said the government would require mining contractors to give the government about 5 percent of the sales of their mineral production in royalties, up from between 1 percent and 2 percent paid by many mining contractors at present.

The new royalty scheme will only be imposed on future recipients of the eighth generation of COWs being drafted by the ministry.

"We arrived at the 5 percent royalty after studying royalties applied in neighboring countries and seeing the financial strength of mining companies operating in the country and abroad," Rozik said on the sidelines of the Indonesia Mining 1998 conference at the Jakarta Fairgrounds in Kemayoran, North Jakarta.

"We don't think the rise in royalties will be burdensome to them," he added.

Rozik said the ministry was adding finishing touches to the draft COWs.

Government critics have repeatedly called on the government to raise state income from mining operations which they claim have given huge profits to mining contractors and left too small an earning for the government.

Apart from royalties, the government receives various taxes from mining contractors, including income tax and property tax.

Rozik said the new royalty scheme would not affect recipients of the previous generation of COWs. They still have to pay royalties to the government of the amount stated in their contracts.

Rozik said the government imposed royalties of between 1 percent and 2 percent of sales under the first to fifth generation COWs issued to mining contractors. This includes PT Freeport Indonesia, which is developing a huge copper and gold reserve in the Grasberg area in Irian Jaya, and Newmont Minahasa Raya, which is developing a gold reserve in North Sulawesi.

The government changed the royalty scheme for sixth and seventh generation COWs, which were respectively issued in 1997 and early this year. Under the new scheme, gold mining contractors, for example, have to pay US$235 per kilogram of gold in fixed royalties to the government.

Rozik said local mining contractors which sold their products on the local market had complained about the dollar-based royalty scheme following the sharp drop of the rupiah against the dollar since mid-last year. They said they could not afford to pay the royalties due to the monetary crisis.

"That is also the reason we returned to the sale-based royalty scheme," Rozik said.

Rozik said eighth generation COWs would also put emphasis on programs to increase the welfare of communities living around the mining areas.

Mining contractors will be obliged to propose a community development program to be assessed in the feasibility study. Mining companies have to carry out community development activities based on their proposals.

The previous generation of COWs also obliges mining contractors to carry out community development, but the contracts do not give any details on how contractors should carry out community development programs.

Analysts say several mining companies in the country have bad relationships with communities living in their mining areas due to their failure to carry out good community development.

Rozik also said the eighth generation COWs would stipulate that any dispute involving contractors and the government would be settled at the local arbitration court and the settlement of the dispute would be based on the Indonesian version of the contract.

A COW is written both in English and Indonesian.

Under the previous generation of COWs, the government and contractors were instructed to settle their dispute at international arbitration courts in reference to the English version of the contract.

"It's to promote national pride," said Rozik when asked the reason behind the making of the new scheme for dispute settlements. (jsk)