Holes in Indonesia's mining law
JAKARTA - Indonesia's highly anticipated new mining law threatens to become a non-starter just three months after its passage, denting hopes generated over three years of parliamentary debate that a new legal regime would spur more development in the sector.
The "New Indonesian Mineral and Coal Mining Law" passed last December has, despite various investor-friendly provisions, so far been given mixed reviews from the big foreign miners it nominally aimed to attract.
The law, rather than providing greater certainty, transparency and accountability for mining investments, has triggered greater uncertainty and left investors who had relied on the previous
Contract of Work (CoW) system of fixed contracts in a legal lurch, industry executives say. The CoW system provided foreign investors certain legal guarantees, including rights for as long as 30 years, but is now effectively obsolete with the new law's passage.
Companies now operating under CoWs have one year to comply with the new system and a five-year limit to begin onshore processing. The transitional clauses for existing CoWs have caused uncertainty for investors who had grown accustomed to the protection of a legal contract with the central government. Under the new law, they will have to rely on arbitration in any dispute over claims through the Indonesian judiciary, which many investors view as opaque and ambiguous.
Mining investments peaked last year at US$1.5 billion in new committed capital amid a temporary surge in global commodity prices. Mining project inflows are expected to fall off considerably this year, in light of the global economic crisis, falling commodity prices and the uncertainty generated by the new law. A mining executive with Kaltim Prima Coal (KPC), one of the country's leading miners, said Australian mining giant BHP Billiton Ltd had recently canceled a planned $4 billion investment in Indonesia.
"Although the new mining law may not be directly responsible for the cancelation on the part of BHP Billiton, there is strong reason to believe that it is one of the factors leading to the decision of [the company] to re-evaluate its position in Indonesia," said the KPC official. The new mining law has created concerns for several long-term players in the market because they had lost all protection under the old CoW system, he said.
Indonesia is home to some of the world's richest untapped reserves of coal, copper, gold, nickel and tin. The country is prospected to have some of the world's largest coal, gold and copper deposits. Several international mining powerhouses, including Newmont Mining Corporation, Freeport-McMoran Copper & Gold and the Rio Tinto Group, have substantial operations in the country.
Local claims
The operating environment became problematic for many foreign miners after regional autonomy laws passed in 2001 brought some of their centrally allocated CoWs into dispute with local politicians. According to Minister of Energy and Mineral Resources Purnomo Yusgiantoro, the new law was designed specifically to address foreign investor concerns about provincial challenges to their centrally administered CoWs.
Under the 2001 autonomy laws, regional authorities gained the power to issue Kuasa Pertambangan (KP), or mining concessions that in certain instances conflicted with centrally administered contracts. One point in case concerned a regent, or locally elected leader, in Central Sulawesi, who issued several KPs that overlapped with CoWs issued for the area already held by state-owned Aneka Tambang and Rio Tinto.
"We have to learn that natural resources are deemed to be the wealth of the public of Indonesia and do not just belong to the regency," said Yusgiantoro. "In the past, we were players as well as regulators. The government now does not want to be a player but rather a regulator."
That's likely to be a mixed bag for big foreign miners. For instance, the new law limits the scope of exploration areas, which is intended to benefit small and medium-sized mining companies that lack the capital resources of big multinational miners. The law also requires companies to seek separate permits - some centrally administered, some locally - for each phase of mining activity, from surveying to exploration to feasibility studies to actual production.
That represents a significant change to the previous system of one-stop centrally granted mining contracts that covered all aspects of a start-to-finish mining operation. It also replaces the contentious localized KP system with a mining license known as the Izin Usaha Pertambangan (IUP). Under the new law, local-level regents will have the power to issue exploration IUPs, while the Jakarta-based minister will grant the actual production operation IUP.
The new IUPs cover up to 50,000 hectares for coal exploration and 100,000 ha for metals and other minerals. Before the new law's passage, the production area was limited respectively to 15,000 ha and 25,000 ha. There is also a new tender system, authorized by the central government, which will decide control over mined areas and mediate problems of overlapping concessions granted separately by regents and Jakarta.
The new system, which for a period allows 100% foreign investor ownership, would eventually remove the distinction between Indonesian and foreign investors. Previously, foreign miners had to work with local partners in joint ventures. There is, however, some ambiguity regarding the percentage of mandatory divestment required by the foreign investor at the end of a circumscribed five-year production period.
Another blind spot in the new law is the lack of reference to the conversion process of KPs to IUPs. Most significantly, it is uncertain under the law if issued KPs will automatically be renewed as new IUPs. Since the exploration KP generally had a lifespan of three years, with some areas limited to two years, it is uncertain when the initial granted time period will expire, or if the original KPs can automatically be renewed as IUPs, industry analysts say.
The government, analysts and executives say, has so far failed to provide firm assurances. According to Mineral, Coal and Geothermal Department director general Bambang Setiawan, the ministry would respect the KPs that were issued by the regents and would look on the KP in a similar fashion as an IUP. "We would look upon these changes in a logical manner since the mining laws were not written on stone," he said.
Investor perceptions
The new law is incomplete, according to Jeffrey Mulyono, chairman of the Indonesia Coal Mining Association (ICMA), which is working with the government to make it more investor-friendly. "The new mining laws address up to 90% of the concerns of the mining community. There is still a gap of 10% which is not being addressed," he said.
Mulyono said the new law was an imperfect political product of three-and-a-half years of legislative squabbling. "I confess that there is still no one-stop solution for the investor. The problem is that we don't have a comprehensive planalogy of the mining area in the regional areas. There is still some homework left to be done by the government."
However, he believes fears that the government could backtrack and repeal existing KPs or CoWs are misguided and that the negative criticism arises mostly from foreign lawyers representing overseas investors. "They seem to act as a provocateur harping on the uncertainly rather than looking at the positive side of the new mining law," he said.
Perhaps, but a recent survey by mining industry consultants PricewaterhouseCoopers (PwC) showed that many investors felt the new law would not facilitate clear solutions to longstanding problems plaguing Indonesia's mining industry. The survey concluded that the law was adequate to encourage investors to take direct equity stakes in relatively small-scale projects, but that there was more uncertainty over large-scale affairs. Those concerns centered on the fact the new law fails to offer long-term protection of contracts granted under the previous CoW system.
Despite the shortcomings, industry analysts agree that the new law creates greater state-controlled regulations and through new checks and balances less reliance on regional governments, which often abused the KP regime. The new law makes clear that the central ministry can suspend or revoke locally administered IUPs if regulations are not followed. Jakarta can also impose criminal sanctions, with a maximum penalty of two years in prison, against regents who ignore or sidestep regulatory requirements.
Still some see significant political risks on the horizon. Erwin Baumgartner, a mining consultant at Fusion Consulting in Singapore, contends that local-level laws lack transparency and investors fear they could change after legislative and presidential elections are held this year. Despite the new law, regional regulations are not always in line with central government ones, he said.
"These differences are causing delays in getting projects off the ground. There is high uncertainty and a lack of transparency for mining claims and trustworthy on-the-ground agents are essential to clarify legal matters for potential investors. And above all, the high share of tolerated illegal mining activities makes the situation even more acute for foreign investors," he said.
Some investors have a greater risk appetite than others. India's Tata Power, which in 2007 took a 30% stake for $1.3 billion in Kaltim Prima Coal and PT Arutmin Indonesia, has with the new law's passage sent signals it would like to make another big coal-mining acquisition. Coal India, one of India's largest state-owned coal ventures, is also reportedly on the hunt in light of Indonesia's comparatively lower costs and cheaper logistics and freight charges compared with Australia and Africa.
"We are not afraid of taking mitigated risks in Indonesia," said the vice president of one major Indian mining corporation. "It all boils down to a matter of economics and the overall compatibility to our bottom line."
Tony Sitathan is a correspondent for several Asian and foreign news publications. He may be reached at tony_sita@yahoo.com.
The "New Indonesian Mineral and Coal Mining Law" passed last December has, despite various investor-friendly provisions, so far been given mixed reviews from the big foreign miners it nominally aimed to attract.
The law, rather than providing greater certainty, transparency and accountability for mining investments, has triggered greater uncertainty and left investors who had relied on the previous
Contract of Work (CoW) system of fixed contracts in a legal lurch, industry executives say. The CoW system provided foreign investors certain legal guarantees, including rights for as long as 30 years, but is now effectively obsolete with the new law's passage.
Companies now operating under CoWs have one year to comply with the new system and a five-year limit to begin onshore processing. The transitional clauses for existing CoWs have caused uncertainty for investors who had grown accustomed to the protection of a legal contract with the central government. Under the new law, they will have to rely on arbitration in any dispute over claims through the Indonesian judiciary, which many investors view as opaque and ambiguous.
Mining investments peaked last year at US$1.5 billion in new committed capital amid a temporary surge in global commodity prices. Mining project inflows are expected to fall off considerably this year, in light of the global economic crisis, falling commodity prices and the uncertainty generated by the new law. A mining executive with Kaltim Prima Coal (KPC), one of the country's leading miners, said Australian mining giant BHP Billiton Ltd had recently canceled a planned $4 billion investment in Indonesia.
"Although the new mining law may not be directly responsible for the cancelation on the part of BHP Billiton, there is strong reason to believe that it is one of the factors leading to the decision of [the company] to re-evaluate its position in Indonesia," said the KPC official. The new mining law has created concerns for several long-term players in the market because they had lost all protection under the old CoW system, he said.
Indonesia is home to some of the world's richest untapped reserves of coal, copper, gold, nickel and tin. The country is prospected to have some of the world's largest coal, gold and copper deposits. Several international mining powerhouses, including Newmont Mining Corporation, Freeport-McMoran Copper & Gold and the Rio Tinto Group, have substantial operations in the country.
Local claims
The operating environment became problematic for many foreign miners after regional autonomy laws passed in 2001 brought some of their centrally allocated CoWs into dispute with local politicians. According to Minister of Energy and Mineral Resources Purnomo Yusgiantoro, the new law was designed specifically to address foreign investor concerns about provincial challenges to their centrally administered CoWs.
Under the 2001 autonomy laws, regional authorities gained the power to issue Kuasa Pertambangan (KP), or mining concessions that in certain instances conflicted with centrally administered contracts. One point in case concerned a regent, or locally elected leader, in Central Sulawesi, who issued several KPs that overlapped with CoWs issued for the area already held by state-owned Aneka Tambang and Rio Tinto.
"We have to learn that natural resources are deemed to be the wealth of the public of Indonesia and do not just belong to the regency," said Yusgiantoro. "In the past, we were players as well as regulators. The government now does not want to be a player but rather a regulator."
That's likely to be a mixed bag for big foreign miners. For instance, the new law limits the scope of exploration areas, which is intended to benefit small and medium-sized mining companies that lack the capital resources of big multinational miners. The law also requires companies to seek separate permits - some centrally administered, some locally - for each phase of mining activity, from surveying to exploration to feasibility studies to actual production.
That represents a significant change to the previous system of one-stop centrally granted mining contracts that covered all aspects of a start-to-finish mining operation. It also replaces the contentious localized KP system with a mining license known as the Izin Usaha Pertambangan (IUP). Under the new law, local-level regents will have the power to issue exploration IUPs, while the Jakarta-based minister will grant the actual production operation IUP.
The new IUPs cover up to 50,000 hectares for coal exploration and 100,000 ha for metals and other minerals. Before the new law's passage, the production area was limited respectively to 15,000 ha and 25,000 ha. There is also a new tender system, authorized by the central government, which will decide control over mined areas and mediate problems of overlapping concessions granted separately by regents and Jakarta.
The new system, which for a period allows 100% foreign investor ownership, would eventually remove the distinction between Indonesian and foreign investors. Previously, foreign miners had to work with local partners in joint ventures. There is, however, some ambiguity regarding the percentage of mandatory divestment required by the foreign investor at the end of a circumscribed five-year production period.
Another blind spot in the new law is the lack of reference to the conversion process of KPs to IUPs. Most significantly, it is uncertain under the law if issued KPs will automatically be renewed as new IUPs. Since the exploration KP generally had a lifespan of three years, with some areas limited to two years, it is uncertain when the initial granted time period will expire, or if the original KPs can automatically be renewed as IUPs, industry analysts say.
The government, analysts and executives say, has so far failed to provide firm assurances. According to Mineral, Coal and Geothermal Department director general Bambang Setiawan, the ministry would respect the KPs that were issued by the regents and would look on the KP in a similar fashion as an IUP. "We would look upon these changes in a logical manner since the mining laws were not written on stone," he said.
Investor perceptions
The new law is incomplete, according to Jeffrey Mulyono, chairman of the Indonesia Coal Mining Association (ICMA), which is working with the government to make it more investor-friendly. "The new mining laws address up to 90% of the concerns of the mining community. There is still a gap of 10% which is not being addressed," he said.
Mulyono said the new law was an imperfect political product of three-and-a-half years of legislative squabbling. "I confess that there is still no one-stop solution for the investor. The problem is that we don't have a comprehensive planalogy of the mining area in the regional areas. There is still some homework left to be done by the government."
However, he believes fears that the government could backtrack and repeal existing KPs or CoWs are misguided and that the negative criticism arises mostly from foreign lawyers representing overseas investors. "They seem to act as a provocateur harping on the uncertainly rather than looking at the positive side of the new mining law," he said.
Perhaps, but a recent survey by mining industry consultants PricewaterhouseCoopers (PwC) showed that many investors felt the new law would not facilitate clear solutions to longstanding problems plaguing Indonesia's mining industry. The survey concluded that the law was adequate to encourage investors to take direct equity stakes in relatively small-scale projects, but that there was more uncertainty over large-scale affairs. Those concerns centered on the fact the new law fails to offer long-term protection of contracts granted under the previous CoW system.
Despite the shortcomings, industry analysts agree that the new law creates greater state-controlled regulations and through new checks and balances less reliance on regional governments, which often abused the KP regime. The new law makes clear that the central ministry can suspend or revoke locally administered IUPs if regulations are not followed. Jakarta can also impose criminal sanctions, with a maximum penalty of two years in prison, against regents who ignore or sidestep regulatory requirements.
Still some see significant political risks on the horizon. Erwin Baumgartner, a mining consultant at Fusion Consulting in Singapore, contends that local-level laws lack transparency and investors fear they could change after legislative and presidential elections are held this year. Despite the new law, regional regulations are not always in line with central government ones, he said.
"These differences are causing delays in getting projects off the ground. There is high uncertainty and a lack of transparency for mining claims and trustworthy on-the-ground agents are essential to clarify legal matters for potential investors. And above all, the high share of tolerated illegal mining activities makes the situation even more acute for foreign investors," he said.
Some investors have a greater risk appetite than others. India's Tata Power, which in 2007 took a 30% stake for $1.3 billion in Kaltim Prima Coal and PT Arutmin Indonesia, has with the new law's passage sent signals it would like to make another big coal-mining acquisition. Coal India, one of India's largest state-owned coal ventures, is also reportedly on the hunt in light of Indonesia's comparatively lower costs and cheaper logistics and freight charges compared with Australia and Africa.
"We are not afraid of taking mitigated risks in Indonesia," said the vice president of one major Indian mining corporation. "It all boils down to a matter of economics and the overall compatibility to our bottom line."
Tony Sitathan is a correspondent for several Asian and foreign news publications. He may be reached at tony_sita@yahoo.com.