Modernizing Indonesia's mineral resources industry
Modernizing Indonesia's mineral resources industry
The following article is based on a paper presented by the Director General of Mines and Energy, Kuntoro Mangkusubroto, at the 64th annual convention of the Prospectors and Developers Association of Canada, in Toronto, March 11-13, 1996.
TORONTO: The successful development of the Indonesian mineral sector has been largely the result of foreign investment. Due to the policy of allowing foreign companies to develop Indonesia's mineral resources, the mineral and coal contract sectors now dominate the mining industry.
The attractive contractual arrangement of the Contract of Work System, together with Indonesia's advantageous geological setting, the mineral potential and the political stability are the primary reasons behind the continued foreign investment interest.
Our success in attracting foreign investment has been primarily attributed to the implementation of the Contract of Work and the Coal Contract, together with our geological prospects and long-term political stability.
The Contract of Work has been in progress for more than 25 years and has developed through five major generations. It is well-known that the terms and conditions of the later generation Contracts of Work are in the most part standard; it is the financial and fiscal terms that have changed.
The financial and in particular the tax conditions become the only major issues determining the relative attractiveness of a particular Contract of Work generation, which subsequently has defined the investment climate for mining ventures.
We realize that in the future, the role of foreign investment will still be dominant. The government needs to lure more foreign capital to explore and subsequently develop our mineral resources in competition with other countries in the Asia-Pacific region.
Overall, the government has pursued a broad mix of development strategies including deregulation, relaxation of divestment requirements for foreign investment and a number of incentives aimed at improving the investment climate.
Although foreign companies will account for the majority of production in the minerals sectors, to foster competition and to help root the mining industry into our national infrastructure, a role will be maintained for the smaller domestic mining companies. Our aim is to give them better means with which to maintain their role in the industry, in particular to match the standards of safety and environmental protection of the larger companies, and to raise the efficiency of operations.
From the geological perspective, there has never been any doubt about the potential of Indonesian mineral resources. Besides our traditional mineral products, such as tin, nickel, and bauxite, the minerals coal, copper, gold and silver are becoming more and more important. Gold and silver deposits are found in Java, Sumatra, Kalimantan, Sulawesi and in most of Indonesia's other islands.
A wide range of coal types are found in deposits throughout Indonesia, but most of these resources are located in Southern Sumatra and in East and South Kalimantan.
In general, the geology of the eastern part of Indonesia is rich in non-ferrous metal minerals associated with ultrabasic rock. Currently, nickel is being produced in Pomalaa and Soroako, in Sulawesi, and also in Gebe Island, North Maluku.
It is obvious that most investor interest in Indonesia lies in the exploration and development of gold deposits. From the geological perspective, the 16,700 islands of Indonesia have a total area of close to two million square kilometers and contain over 7,000 km of Neogene arcs.
The recent discoveries of the Grasberg deposit in Irian Jaya by Freeport, one of the largest copper/gold deposits in the world, and the Batu Hijau deposit on Sumbawa island by Newmont constitute proof of the great potential the eastern provinces may offer. Recent discoveries of gold deposits in North Sulawesi, in Halmahera, the Mollucas, and particularly in East Kalimantan, have increased confidence among explorers about the bright prospects of success in Indonesia.
The fact that there are at present about 160 Contract of Work applications for minerals and over 60 applications for coal exploration proves that in general Indonesia is still regarded as one of the preferred destinations for mineral investment.
Table 1 through 3 set out the Contract of Work applications based on the mineral commodities and the locations of the exploration areas. It is clear that Bre-X's Busang gold discovery in East Kalimantan has attracted much overall interest in Kalimantan.
Bre-X's Busang gold discovery in Kalimantan, believed to be one of the world's richest, is generating so much interest that junior exploration companies in Canada are getting attention just by announcing property acquisitions near the find. Shares of such companies have also soared significantly on the stock market. Such developments are encouraging, provided that these companies invest the capital they have raised into their exploration projects in Indonesia.
Accordingly, we are planning to introduce a seventh generation Contract of Work, which is very similar to its predecessor, but it provides more stringent control and tighter scheduling in its implementation.
With regard to attractiveness for mining investment, company perception surveys generally rank Indonesia close to or at the top position because the country combines a strong geological prospect basis with conducive mining law, taxation imposts and lack of political risk to mineral exploration and development.
Though Indonesia is still being considered an attractive destination for mining investment, we are aware of the growing number of strong competitors for exploration capital, particularly from within the developing countries in the Asia- Pacific.
The introduction of the sixth generation Contract of Work, which is currently being issued, is primarily intended to accommodate the provisions of the new tax law which came into effect in January 1995.
The new tax law is in general more advantageous for investors, particularly in terms of corporate tax, which is reduced to a maximum 30 percent from the previous 35 percent. The provisions also extend certain incentives with regard to the acceleration of depreciation and lower withholding tax for dividends.
The government has also converted the Coal Contract Agreement into a Coal Contract of Work, which is essentially an ordinary sixth generation Contract of Work, except with regard to the payment of "government share" of the production which for coal is set a maximum of 13.5 percent of Free on Board value.
The success that has been achieved by Indonesia through the implementation of Contract of Work agreements has inspired other developing countries to formulate a similar -- and in some aspects even more attractive -- system. We are facing a strong challenge to maintain our position as one of the favored countries for foreign investment in mineral ventures in the Asia- Pacific region.
With the increasing competition from other countries, we are at present reviewing the provisions of the contract as well as other related issues on its implementation. We have been identifying policy issues and major operational issues which need to be adjusted, revised or even completely replaced in order to further improve the current investment climate.
An improved investment climate is one which ensures that the new investors we attract are professional mining companies which have the skills, expertise and resources to invest in exploration and mineral development.
Accordingly, we are now introducing new regulations which require new applicants to submit a "commitment bond" for every hectare of ground reserved for the contracts. The deposit of the bond, which amounts to Rp 10,000 per hectare (or US$ 5,000/ha), is aimed at minimizing speculation by parties acting as brokers, with the main objective of holding the reserved ground temporarily before transferring it to another party for a profit.
We are also aware of the operational problems that may impede the implementation of the contract agreement, such as the lack of infrastructure, the erosion of security of title and difficulties with land access due to overlapping interests with forestry or other land uses, excessive regional government tax and levies, and illegal mining activity within the contract area.
Realizing that an overall improvement of the policy and its implementation will take a number of years, the Directorate General of Mines has adopted a strategy of focusing its immediate efforts on restructuring the internal organization and improving the operating procedure aimed at enhancing the services rendered to the industry.
This comprises simplification and speeding up of administrative procedures for contract and mining right applications as well as constant supervision throughout their implementation.
It is widely known that the administrative procedure for processing mining permits may be a lengthy process. The Directorate General of Mines is committed to reducing the time period to no longer than six months for Contracts of Work and three months for mining right permits. This will certainly need a well-defined and simple procedure which involves the internal units within the directorate and external institutions, such as the House of Representatives and the Investment Coordinating Board.
To facilitate a modern and accurate mapping system, a computerized Geographical Information System is being devised. This is intended to enhance transparency and to facilitate access for interested parties to study the available areas for new applications. It will simplify the procedure for an applicant to determine the area of interest and to apply for a particular area for reserve.
The Geographical Information System, which has been operational since January 1996, will help reduce the time needed for issuing an Approval in Principle to the applicant in the case of minerals and coal Contract of Work applications or mining right approval for smaller-size mining tenures. The system will also be expanded to encompass a wide range of monitoring and permitting processes throughout the lifetime of the contract or the mining permit.
The formulation of a draft Contract Agreement, which is now more or less standardized for a particular generation Contract of Work, will also help in speeding up the process since the interested parties will be able to study it in advance, so that "negotiations" between the Directorate General of Mines and the applicant should be minimized. Discussion of the draft Contract Agreement will essentially be a series of consultations to clarify details of the Contract Provisions.
Recommendations from the House of Representatives prior to Presidential approval is currently required for each individual contract, although in practice, several contracts are reviewed at the same time. In order to simplify the procedure and to speed up the process we are preparing a proposal which in principle will allow consultation on Contract Generation rather than on an individual contract basis.
Consideration is also being given to setting maximum time limits for the processing of other permits required during operations, thus ensuring that processes are in place to deliver on these commitments.