Mining firms 'misperceived by public'
By Johannes Simbolon
JAKARTA (JP): The Indonesian Mining Association has expressed concern over the spate of criticism currently leveled against the country's mining industry, saying much of the criticism is due to public misperceptions.
Association vice president M. Simatupang acknowledged that the contracts of work (COWs) used by the government in the mineral sector for the last 30 years needed to be improved to force mining firms to pay more attention to environmental protection and community development.
He said COWs, however, were generally considered good contracts given the fact the system had managed to attract a large number of investors to the country and had even been looked at by the United Nations as a model for developing countries.
"The public has gained a negative perception regarding the mining industry from people who are apparently laymen in the industry," Simatupang told The Jakarta Post.
On Thursday, several legislators criticized the giant copper and gold mining company PT Freeport Indonesia, a subsidiary of Freeport McMoRan Copper & Gold of the United States, for failing to improve the welfare of the ethnic tribes living near its mining area in Timika, Irian Jaya, during its 30 years of operation.
The legislators called on the government to review the contract.
Reform figure Amien Rais has also criticized the country's mining companies, including Freeport, for giving too small a share of their earnings to the government.
He said the mining industry, dominated by foreign companies, had been harmful to national interests and called on the government to suspend mining operations so the resources could be saved for development by domestic firms.
Some analysts have proposed the royalty system applied in mineral and coal mining COWs be replaced with a production split system applied in oil and gas contracts to increase the government's earnings from mining operations.
Permanent
"The country's mining industry is now apparently at a crossroads. On the one hand, the industry has been well developed over the past 15 years. But the development is mostly driven by foreign companies... while local private companies only play a negligible role.
"The fact has created a public perception, especially in non- governmental organizations, that our mining policy favors foreign companies too much and should be corrected," former director general of mining at the Ministry of Mines and Energy Soetaryo Sigit was quoted by Warta APBI, the journal of the Indonesian Coal Mining Association.
Data at the Ministry of Mines and Energy shows that investment in the country's mining sector totaled US$10.8 billion over the last 30 years, with U.S. companies accounting for the lion's share with $6.4 billion. Other investors are from countries like Australia and Canada.
Simatupang and Soetaryo said COWs were produced after being approved by the House of Representatives and the president. As such, they have a lex specialis (special law) status and cannot be modified.
The permanent nature of COWs is suitable for the mining sector, which needs long-term assurances that no changes in law would affect their investment, they said.
Soetaryo, however, noted that the COWs which had been signed by the government still contained some weaknesses in the fact that they did not specify contractors' obligations in terms of environmental protection, community development, manpower development and transfer of technology.
The government does not need to review the contracts, but should produce a ruling which specifies the obligations, Soetaryo said, adding that a review would amount to breaching the contract.
"In contracts, all the obligations (regarding environmental protection, community development, manpower development and transfer of technology) are only briefly mentioned. What is left to do is to further explain the obligations," Soetaryo said.
Minister of Mines and Energy Kuntoro Mangkusubroto recently said the eighth generation COWs, which are being prepared by the ministry, would emphasize obligations to help community development in the contract areas.
He said his office was cooperating with a team from the Gadjah Mada University in Yogyakarta, headed by Lukman Sutrisno and Monenco Agra of Canada, to study an effective community development system to be adopted in upcoming mining contracts.
Kuntoro said that although contracts thus far had not specified community development obligations, many mining companies had actually taken the initiative to implement community development programs to secure their project from vandalism and to create a sense of belonging in the community toward the project.
Many communities, however, have demanded more from neighboring mining operations.
As a matter of fact, Kuntoro said, all contracts signed after 1995 had a clause obliging contractors to send 80 percent of the royalties to local authorities and only 20 percent to the central government.
Eighty percent of the royalties for the local administrations should be sent to the districts where the mines are located, and the other 20 percent to the provincial administration.
But, he said, the COW clause could not be implemented since it is in conflict with a governmental regulation which stipulates the royalties should be first delivered to the central government's coffers before being redistributed to provincial administrations.
The government redistributes the royalties with little regard to each province's contribution to the state budget.
"The government and the House of Representatives is drafting the law which will enable provinces to retain most of the revenues from the development of their natural resources," Kuntoro said.
Production sharing
Simatupang also said many analysts had a misperception that mining operations had given too little to the government compared with oil and gas operations.
He said under the COWs, the government received 13.5 percent of coal production in royalties from coal mining companies, and 2.5 percent of net profits in royalties from gold and copper mining companies.
Mining companies also pay an annual rent of approximately $2 per hectare and various taxes, including property tax, a 30 percent corporate tax, a 10 percent value added tax on imported equipment, a 20 percent duty on imports and a 7.5 percent tax on dividends.
Under oil and gas production sharing contracts (PSCs), the government, through state oil and gas company Pertamina, receives 85 percent of net profits from oil and gas operations, while the remaining 15 percent goes to contractors.
However, contractors are exempt from royalties and taxes, while the government also has to recover their exploration cost and 85 percent of their operating costs.
Simatupang said the royalties and tax regimes applied for the country's mining industry were competitive compared to those applied in other countries.
He also said the PSC system was unsuitable for the mining sector because, unlike oil and gas, mining products, including copper, gold and nickel ore, have no economic value until they were further processed in smelters.
As far as the oil and gas sector is concerned, Pertamina gives the government a ready market for its share of oil and gas.
If the PSC system was applied in mining sector, the government would have to process its share of copper, nickel, gold ores to make them have commercial value, he said.
"According to the Colorado School of Mines, the production sharing concept is not known in the world's mining sector. If the concept is forcibly applied, no investor would be interested in (investing)," Simatupang said.
Kuntoro recently assured that the government would still use the COW system in the mining sector.
"The government has no plans to apply production-sharing principles and demand stakes in new mining projects," he said.
Table: Royalties and corporate taxes
Country Royalty to government Corporate tax
--------------------------------------------------------------
Canada None 45%
Mexico None (eliminated in 1991) 35%
Argentina Reduced to 3% 30%
Bolivia None for new mining (since 1991) 30%
Brazil 0.2%-2% 30%-35%
Chile None 35%
Indonesia 1%-2.5% depending on the types 30%-35%
and prices of minerals
Philippines Reduced to 2% from 5% in 1994 35%
Papua New Guinea 1.25% 35%
Peru None 30%
Spain None 35%
Sweden None 28%
Australia 3%-4% 39%
USA None (being proposed to US Congress) 30%
South Africa Average 1% 40%
Zimbabwe None 37.5%
Ghana 3% 35%
Source: Dr. Fred Bernard, Mining Evaluation Profiles (2) Colorado School of Mines, 1997.