Regional mining autonomy

Regional mining autonomy

The government will soon end the lingering legal limbo about
the mining industry with a firm ruling that will vest local
administrations with authority over mining resources, except the
hydrocarbon industry, which will stay under the control of
central government.

A presidential decree, expected this month, will stipulate
clear-cut provisions on the authority to be held by provincial,
district and city administrations over licensing, business
establishment, information, evaluation and reporting
requirements. That will remove the controversy caused by an
earlier plan to delay transferring mining control to local
administrations for five years to give them time to prepare.

The confusion over the mining authority has irked mining
companies, and latest reports say at least 20 foreign firms have
suspended or stopped exploration activities, pending a resolution
of the problem.

Understandably, legal uncertainty is extremely inimical to
mining investment as the business is usually capital and
technology intensive, highly risky, and has a long gestation
period. It often takes several years of exploration before
production starts. The big risk is that a large investment in
exploration often ends up with a total loss due to the absence of
commercially viable deposits.

Also of greater concern to mining investors, insofar as the
Jan. 1 introduction of the regional autonomy policy is concerned,
is that mining operations are undertaken mostly in remote areas
with the least developed infrastructure.

Hence the vital importance of going ahead with transferring
mining authority to local administrations in line with the
autonomy laws. A delay would utterly disappoint local
administrations and have a damaging backlash on investors and
mining companies. They could find themselves operating in a
hostile environment or might become the target of frustration and
anger from the local people who feel their natural resources have
for decades been 'poached' by the central government.

Needless to say, the mining industry plays an important role
in the country, accounting for more than 10 percent of gross
domestic product, as Indonesia holds major deposits of oil and
gas, gold, copper, coal, tin, silver, nickel, diamonds and base
metals.

Of most importance, though, is for the government to clearly
rule that in spite of the regional autonomy policy, past
contracts will continue to be honored, which means that all
mining contracts awarded or licensed before January 2001 continue
to operate under the old laws.

Mining companies, notably foreign ones, may welcome the
decentralization of mining authority with mixed feelings. Many
may be greatly concerned that not all local administrations have
been well prepared to properly exercise their authority. Some
investors have expressed fear that the hasty transfer of such
authority, which involves complex technical matters yet produces
lucrative deals, would create a bureaucratic jungle, forcing
investors to deal with inept local officials who may know very
little about how the mining industry actually works.

However valid this concern, the impact of a delay in
transferring mining authority to regions would still be much more
devastating than the haggling likely to be encountered with local
officials who have yet to learn the ropes of administering mining
operations.

It is nevertheless imperative that in the early implementation
of the regional mining autonomy, local administrations cooperate
with the central government in preparing human resources and
administrative and regulatory infrastructure. Local
administrations should fully realize that it is primarily in
their own great interest to have the autonomy exercised properly
and efficiently because they are entitled to 80 percent of
revenues from the mining sector, except oil and gas for which the
revenue-sharing ratios are respectively 85:15 and 70:30 in favor
of the central government. If they botch up the autonomy,
investors won't come and their mining resources would remain
underground, worthless and meaningless to the local economy.

But working under the decentralized autonomy will also require
mining investors to work harder to become good corporate citizens
among the local people, not only to the central government as in
the past. That requires them to devote more resources to
empowering locals, which means procuring as much as possible from
local suppliers, hiring as many locals as possible and
contributing more to community development.