Instability hampers mining industry
Instability hampers mining industry
By Adjat Sudradjat
BANDUNG (JP): In Indonesia's transition period, the mining
industry has suffered much. This is largely because of
uncertainty in the investment climate while the mining industry
requires an intensive amount of capital. Investors seem to be
waiting for things to get better before they start new
explorations.
Existing mining activities are also experiencing a difficult
time. The interrupted operation of Newmont Minahasa Raya Mines in
North Sulawesi related to a lawsuit by the local government, the
never ending environmental problems of Freeport in Irian Jaya
and, most recently, a strike at the production facility of
Kalimantan Prima Coal (KPC) in East Kalimantan are examples of
the hard times being faced by mining investors.
The new policy of autonomy has also created some difficulties,
leading to worries about the future of mining operations here.
Mining in Indonesia is governed by Mining Law No. 11/1967. It
regulates mining licenses for domestic investment and contracts
of work (COWs) for foreign investors.
Under Chapter 10 of the law, the government, following
consultation with the House of Representatives, may invite
foreign participation if the government is considered incapable
of developing a mining source by itself. This particular
arrangement between the government and foreign investors, also
called contractors, is known as a COW. The contract should be
approved or given the consent of the House of Representatives.
The main differences between a mining license and a COW lies
in the scope of coverage of the activity. A license is limited to
a particular phase, such as general surveys, exploration,
construction, exploitation, transportation or marketing. This
"step by step" permit allows the government to intensively
supervise or control the miners.
The COW, on the other hand, covers the whole spectrum of
activities from the very beginning until the marketing stage. A
COW also operates under Foreign Investment Law No. 1/1967 which
provides facilities for importing materials needed to develop the
mines. The area covered in the COW is unlimited, while with
mining licenses it is 5,000 hectares at the most.
The most important clause in the COW is the lex specialis
nature of the contract, which provides legal assurances for the
investor. Given the considerable time needed to develop a mine,
which in Indonesia is eight to 15 years before production, the
assurance is highly appreciated and has become one of the most
attractive aspects for investors. The present administration has
frequently expressed their commitment to respect the COW.
The acute problem of mining activities in many developing
countries is that of illegal mining. In Indonesia, illegal miners
have long been a problem for the government and mining companies.
Despite the government's attempts, no adequate remedy has so far
been found to totally solve the problem. Illegal mining has
instead increased along with the depressing economic situation.
The most embarrassing situation for mining investors is that
the illegal miners tend to ignore the property rights of
companies. They also operate with modern and heavy equipment. In
the coal sector in South Kalimantan alone, it is estimated that
more than 2 million tons, or approximately 3 percent, of 70
million tons of national production has been yielded by illegal
mining. Illegal gold mining in West Kalimantan, Irian Jaya, North
Sulawesi and West Java have long been targets of the government's
elimination program. However, with the present situation, the
program seems to have ceased.
The other disturbing problem is the land of inhabitants.
Insufficient authentic land administration has made it hard for
companies to settle land compensation. This problem was solved
amicably in the past but now it has suddenly reoccurred. Kelian
Equatorial Mines (KEM), a gold mining company in East Kalimantan,
for instance, temporally stopped operating because of an
interruption by a group of local inhabitants demanding
"additional" land compensation.
Slightly different cases have occurred with Indomuro in
Central Kalimantan, and with Vico Oil Company in East Kalimantan.
It was reported also that Caltex Pacific Indonesia (CPI) in Riau,
Sumatra, experienced a difficult situation. Peaceful settlements
have so far been achieved thanks to the immediate and positive
responses launched by those companies.
The occupation by a small group of workers at KPC's mining
site in East Kalimantan has forced the company to fail in the
fulfillment of its delivery contract. A los of approximately Rp 3
billion of company earnings per day was estimated. The occupation
and seizure of production facilities have, up to now, been
ongoing for almost one month. The occupants have demanded an
increase in wages and serious negotiations are underway with all
parties concerned.
Regarding Freeport, the company has been engaged in all
possible ways to control and eliminate environmental damage, but
their efforts have not satisfied the environmentalists. An ore
production increase, exceeding 200,000 tons a day from the
previous production level of approximately 160,000 tons a day,
has recently caught the attention of the people. Tailing and
waste materials are the main concerns of the environmentalists.
Besides, the mining site is close to a permanent tropical ice
cap covering the Cartenz Peak. It is very difficult to prove that
the mining activities have never influenced the erosion of the
glacier.
The potential problem anticipated by many mining companies in
Indonesia is the forthcoming regional autonomy. The autonomy law
stipulates the transfer of various powers to local
administrations and will be in effect by next May. While Mining
Industry Regulation No. 25/2000 states that all permits shall be
transferred to the local authority, it is not yet clear whether
this means at provincial or regency level. Mining Law No. 11/1967
must, therefore, be modified in line with the autonomy law.
Many companies have anticipated another potential problem
relating to legal documents needed for financial arrangements
with international funding agencies. From a financial and legal
point of view, it might be rather difficult for international
agencies to recognize documents issued by a local government. The
wishes of various local governments to actively participate or to
own shares in the companies is another potential problem.
The economic potential of natural resources is undoubtedly
important in helping the country to recover from the crisis.
Minerals and oil contributed more than 54 percent to the state
budget in the first half of the 1970s; this increased to more
than 67 percent in the next second half, and in the early 1980s.
Despite decreasing oil reserves, exploitation will be
sustainable for another 10 to 15 years, given estimates of the
present level of production of 1.3 millions barrel a day.
Additional reserves may be revealed should exploration be
intensified, similarly with hard minerals, such as gold, copper,
nickel, tin and coal. Coal is essential to maintain electricity
generation, particularly in Java, home to more than 70 percent of
the population and most of the industries.
Total reserves of mineable coal are estimated at 36 billion to
38 billion tons, 40 percent of which is of good enough quality to
meet the requirement of electricity generation. At the present
production level of 70 million tons of coal a year, reserves are
predicted to last for more than 300 years.
The hard minerals, distributed across 15 mineral belts, extend
from Aceh to Irian Jaya and less than 30 percent of those belts
have been carefully explored. Geological maps of suitable scale
covering the entire land area of the country have been
successfully produced by the Geological Survey of Indonesia, thus
providing the basic information for mineral exploration. Although
exploration has to compete with the expansion of industrial and
reservation forests, the remaining potential area is still vast.
The problems outlined above could be summed up in one word:
Stability. An assurance of security is absolutely needed in the
development of mining.
President director of Rio Tinto in Indonesia and vice
president of the Indonesian Mining Association Noke Kiroyan
believes that the present instability and difficult situation
affecting the mining industry is just temporary.
With better governance, peace and stability shall follow, and
dawn will be due to break. With long-term vision, important in
the mining industry, the opportunities are there.
The writer is a professor at the Geology Department of
Padjadjaran University in Bandung and a former director general
of geology and mineral resources at the Ministry of Mines and
Energy.
By Adjat Sudradjat
BANDUNG (JP): In Indonesia's transition period, the mining
industry has suffered much. This is largely because of
uncertainty in the investment climate while the mining industry
requires an intensive amount of capital. Investors seem to be
waiting for things to get better before they start new
explorations.
Existing mining activities are also experiencing a difficult
time. The interrupted operation of Newmont Minahasa Raya Mines in
North Sulawesi related to a lawsuit by the local government, the
never ending environmental problems of Freeport in Irian Jaya
and, most recently, a strike at the production facility of
Kalimantan Prima Coal (KPC) in East Kalimantan are examples of
the hard times being faced by mining investors.
The new policy of autonomy has also created some difficulties,
leading to worries about the future of mining operations here.
Mining in Indonesia is governed by Mining Law No. 11/1967. It
regulates mining licenses for domestic investment and contracts
of work (COWs) for foreign investors.
Under Chapter 10 of the law, the government, following
consultation with the House of Representatives, may invite
foreign participation if the government is considered incapable
of developing a mining source by itself. This particular
arrangement between the government and foreign investors, also
called contractors, is known as a COW. The contract should be
approved or given the consent of the House of Representatives.
The main differences between a mining license and a COW lies
in the scope of coverage of the activity. A license is limited to
a particular phase, such as general surveys, exploration,
construction, exploitation, transportation or marketing. This
"step by step" permit allows the government to intensively
supervise or control the miners.
The COW, on the other hand, covers the whole spectrum of
activities from the very beginning until the marketing stage. A
COW also operates under Foreign Investment Law No. 1/1967 which
provides facilities for importing materials needed to develop the
mines. The area covered in the COW is unlimited, while with
mining licenses it is 5,000 hectares at the most.
The most important clause in the COW is the lex specialis
nature of the contract, which provides legal assurances for the
investor. Given the considerable time needed to develop a mine,
which in Indonesia is eight to 15 years before production, the
assurance is highly appreciated and has become one of the most
attractive aspects for investors. The present administration has
frequently expressed their commitment to respect the COW.
The acute problem of mining activities in many developing
countries is that of illegal mining. In Indonesia, illegal miners
have long been a problem for the government and mining companies.
Despite the government's attempts, no adequate remedy has so far
been found to totally solve the problem. Illegal mining has
instead increased along with the depressing economic situation.
The most embarrassing situation for mining investors is that
the illegal miners tend to ignore the property rights of
companies. They also operate with modern and heavy equipment. In
the coal sector in South Kalimantan alone, it is estimated that
more than 2 million tons, or approximately 3 percent, of 70
million tons of national production has been yielded by illegal
mining. Illegal gold mining in West Kalimantan, Irian Jaya, North
Sulawesi and West Java have long been targets of the government's
elimination program. However, with the present situation, the
program seems to have ceased.
The other disturbing problem is the land of inhabitants.
Insufficient authentic land administration has made it hard for
companies to settle land compensation. This problem was solved
amicably in the past but now it has suddenly reoccurred. Kelian
Equatorial Mines (KEM), a gold mining company in East Kalimantan,
for instance, temporally stopped operating because of an
interruption by a group of local inhabitants demanding
"additional" land compensation.
Slightly different cases have occurred with Indomuro in
Central Kalimantan, and with Vico Oil Company in East Kalimantan.
It was reported also that Caltex Pacific Indonesia (CPI) in Riau,
Sumatra, experienced a difficult situation. Peaceful settlements
have so far been achieved thanks to the immediate and positive
responses launched by those companies.
The occupation by a small group of workers at KPC's mining
site in East Kalimantan has forced the company to fail in the
fulfillment of its delivery contract. A los of approximately Rp 3
billion of company earnings per day was estimated. The occupation
and seizure of production facilities have, up to now, been
ongoing for almost one month. The occupants have demanded an
increase in wages and serious negotiations are underway with all
parties concerned.
Regarding Freeport, the company has been engaged in all
possible ways to control and eliminate environmental damage, but
their efforts have not satisfied the environmentalists. An ore
production increase, exceeding 200,000 tons a day from the
previous production level of approximately 160,000 tons a day,
has recently caught the attention of the people. Tailing and
waste materials are the main concerns of the environmentalists.
Besides, the mining site is close to a permanent tropical ice
cap covering the Cartenz Peak. It is very difficult to prove that
the mining activities have never influenced the erosion of the
glacier.
The potential problem anticipated by many mining companies in
Indonesia is the forthcoming regional autonomy. The autonomy law
stipulates the transfer of various powers to local
administrations and will be in effect by next May. While Mining
Industry Regulation No. 25/2000 states that all permits shall be
transferred to the local authority, it is not yet clear whether
this means at provincial or regency level. Mining Law No. 11/1967
must, therefore, be modified in line with the autonomy law.
Many companies have anticipated another potential problem
relating to legal documents needed for financial arrangements
with international funding agencies. From a financial and legal
point of view, it might be rather difficult for international
agencies to recognize documents issued by a local government. The
wishes of various local governments to actively participate or to
own shares in the companies is another potential problem.
The economic potential of natural resources is undoubtedly
important in helping the country to recover from the crisis.
Minerals and oil contributed more than 54 percent to the state
budget in the first half of the 1970s; this increased to more
than 67 percent in the next second half, and in the early 1980s.
Despite decreasing oil reserves, exploitation will be
sustainable for another 10 to 15 years, given estimates of the
present level of production of 1.3 millions barrel a day.
Additional reserves may be revealed should exploration be
intensified, similarly with hard minerals, such as gold, copper,
nickel, tin and coal. Coal is essential to maintain electricity
generation, particularly in Java, home to more than 70 percent of
the population and most of the industries.
Total reserves of mineable coal are estimated at 36 billion to
38 billion tons, 40 percent of which is of good enough quality to
meet the requirement of electricity generation. At the present
production level of 70 million tons of coal a year, reserves are
predicted to last for more than 300 years.
The hard minerals, distributed across 15 mineral belts, extend
from Aceh to Irian Jaya and less than 30 percent of those belts
have been carefully explored. Geological maps of suitable scale
covering the entire land area of the country have been
successfully produced by the Geological Survey of Indonesia, thus
providing the basic information for mineral exploration. Although
exploration has to compete with the expansion of industrial and
reservation forests, the remaining potential area is still vast.
The problems outlined above could be summed up in one word:
Stability. An assurance of security is absolutely needed in the
development of mining.
President director of Rio Tinto in Indonesia and vice
president of the Indonesian Mining Association Noke Kiroyan
believes that the present instability and difficult situation
affecting the mining industry is just temporary.
With better governance, peace and stability shall follow, and
dawn will be due to break. With long-term vision, important in
the mining industry, the opportunities are there.
The writer is a professor at the Geology Department of
Padjadjaran University in Bandung and a former director general
of geology and mineral resources at the Ministry of Mines and
Energy.