With impeccable timing Indonesia has created a new mining law just as the biggest resource boom in history has come to a grinding halt. Someone recently wrote that Indonesia is the last country miners come to during a mining boom and the first they leave when it ends -- and we have already seen evidence of that in BHP Billiton walking away from its US$5 billion Gag Island nickel project.
The new mining law will further hasten exits, and major mining companies will go to countries that foster a vigorous mining industry which -- implicit in the new mining law -- Indonesia clearly doesn't.
There is a big and a little picture to the new mining law.
First, the little picture.
A contract with the Government of Indonesia (GOI) -- the old Contract of Work (CoW) system -- is being replaced with a permit system which, in most cases, will be issued by regional governments. It's very hard to see how 350 regional governments will be able to competently and consistently apply a mining law. In most countries, mining laws are administered by provincial or state governments for the good reason that a critical mass of expertise can be developed.
Instead of a straight-through process from exploration to mining (the CoW system), the new system has a series of permits for a tendering system, a mining business and exploration and exploitation -- all of which can be expected to lead to bureaucratic delay -- if not worse.
The bill gives the government the right to set annual production levels for each type of mineral. Thus companies are expected to invest millions, if not billions, and then the government decides how much they can produce. And there will be so called "domestic obligations". Will these be used as a lever to pay less than international prices?
A fundamental principle of the new law was to be equal treatment of foreign and local investors. The draft bill allowed foreign investors to hold an interest in Mining Permits (KPs) issued by regional governments, but those provisions were excluded from the final bill leaving one wondering what vested interests were at work to cause such a fundamental last minute U-turn?
The introduction of a tendering system assumes there already is a competitive environment for mineral areas, whereas, other than in the now fading coal business, there is almost zero local appetite for the high-risk business of exploration and mining. At the height of the resource boom, only a few mining companies ventured into Indonesia; now there will be a lot fewer, so where is the competitive bidding going to come from?
Another principle expected to underlay the law was that existing CoW's would be grandfathered. Under the bill, whilst the CoW "shell" remains in place, existing CoWs will have to comply with specific provisions of the new law. This gives a brand new meaning to the word "grandfathering".
The government also wants to reduce the size of exploration areas in existing CoWs. What about those companies that have spent millions on exploration, but have been unable to continue their work due to the conflict between forestry and mining laws? Will they be rewarded for these efforts by having their areas arbitrarily taken away? And why the rush to reduce size when there is pretty much no interest by local or foreign investors in the first place?
The government will have the right to declare certain areas as State Reserve Areas, with state/provincial companies having the first right to these areas, and only after that can they be offered to the private sector -- all of which sounds like a lever to provide government companies with free-carried interests, thus adding further "lead" to project viability.
The new mining law is a grab bag of provisions delivering extensive bureaucratic layering, with a strong whiff of certain interest groups being catered to.
That's the little picture; now to the big picture.
The fundamental problem in fact is not the new law, but the complete absence of strategic intent by the government. It lacks vision for an industry that could be a pillar of the country's economy. Until the government adopts such a vision and a strategy to implement it, including a mining law that facilitates rather than debilitates the industry, then Indonesia's wealth will remain buried while its people go wanting.
The writer is CEO of Kalimantan Gold Corporation Limited.
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