Modernizing Indonesia's mineral resources industry

Wed, 03 Apr 1996, 00:00 WIB

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.

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