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.