Mining sector waits for further government action

Rudijanto, Contributor, Jakarta

The government's recent decision to amend the Forestry Law is expected to boost the performance of the mining sector, but unresolved issues on taxes and legal certainty in doing business here remain stumbling blocks.

The law, issued in late 1999, bans open-pit mining in protected forests, and ensued in the suspension of at least 22 mining projects in conservation areas, even though their permits had been issued long before.

With the amendment of the law, such mining projects can be resumed.

The suspension of the mining projects further worsened the investment climate in the country's mining sector which has been severely affected by prolonged economic crisis and unstable political and social environments, and global mining trends, like weak metal prices and consolidation of major mining companies.

According to a PricewaterhouseCoopers survey, exploration projects and feasibility studies have declined for a successive seven years, from US$160.2 million in 1996 to merely $18.9 million in 2002 due to the worsening of the investment climate.

According to data from the Ministry of Energy and Mineral Resources, total investment in the mining sector -- which reached $1.15 billion in 1999 -- continued to drop in the following five years: investment had dropped to $422.30 million in 2000, to $319.73 million 2001, to $298.12 million in 2002 and in 2003, it plunged to $63.93 million.

With practically no new investments since 1999 other than the expansion of existing mining sites, the government can expect a drastic decline in revenue from this sector after 2005.

Data also reveals that revenue from the mining sector has continued to dwindle: In 2001, the country received Rp 1.74 trillion from this sector, Rp 1.31 trillion in 2002 and Rp 1.07 trillion in 2003.

Current production levels in the mining sector parallel the downward trend. Except for coal, the production of other major mineral commodities have showed a significant decline in the last three years: In 2003, copper production dropped to 1 million tons, from 1.17 million tons in 2002; gold production had fallen to 141,019 tons in 2003, from 142,238 kg in 2002 and 162,605 kg in 2001; while silver and tin fell respectively from 285,206 kg and 14,512 tons in 2003, from 293,520 kg and 88,142 tons in 2002.

According to a study published this month by University of Indonesia's Institute for Economic and Social Research (LPEM), without exploration and new discoveries, in a few years production will drop even further and subsequently, threaten the sustainability of the mining sector.

Against this backdrop, the government's newly issued Regulation in Lieu of Law No. 1/2004 is expected to reverse the downward trend. By allowing previously banned mining companies to resume operations in protected areas, the government is sending a positive signal to mining investors.

Of the 22 mining companies affected by the Forestry Law, 13 of them are being allowed to resume their projects under the new policy.

While the Indonesian Mining Association (IMA) perceives the new regulation may boost mining investors' confidence, it still expects the government to allow the nine remaining companies to resume operations also.

IMA executive director PL Coutrier said last month that mining has a positive impact not only on the central government, but also has a trickle-down effect in their areas of operation.

He added that even though the sector's contribution to the national economy was only around 3.1 percent of the Gross Domestic Product (GDP), its provincial contribution was much larger.

For instance, in Kutai Timur, East Kalimantan, the mining sector contributed 74.7 percent of the region's GDP, while in Mimika, Papua, it contributed 97.4 percent of the local GDP. In Sumbawa, it also contributed 97.4 percent of the regional GDP.

With such highly significant contributions to regions, it is understandable that the government cannot afford this sector to weaken. Although it is in apparent contradiction to its previous environmental stance, the government has no other choice than to allow the 13 companies to resume operations in protected forests.

Like the government, the IMA also expects the new regulation to increase mining investment. Meanwhile, although investor confidence rose upon the issuance of the regulation, the government still has much to do at home to attract them.

Committee for Country Development chairman Herman Afif Kusumo at the Indonesian Chamber of Commerce and Industry (KADIN) said the government still needed to lower taxes for the mining sector by 25 percent or a maximum 28 percent to be globally competitive.

The proposed tax reduction will certainly cut into the government's revenue, but Herman said a new mechanism that supported the mining industry and new investments should be able to reclaim the revenue cut.

Herman was quoted by Tempo Interaktif as saying that most mineral-producing countries had undertaken tax reform in the mining sector within the last five to 10 years.

China and India, for example, are aggressively promoting mining investments through incentives and a more favorable investment climate.

To be more competitive, KADIN suggested that the government provide tax incentives to companies that take "a green approach" in their activities. It has proposed that environmentally friendly companies enjoy a tax cut of 2.5 percent.

On the other hand, for those mining companies that operate in a way that is detrimental to the environment, KADIN proposes that the government levy an additional 5 percent tax on their revenue.

While the mining sector is indeed crucial to national revenue, a great effort is necessary to prevent environmental damage and destruction. Without such a combined effort in the mining sector, the country's international image will be at stake.