Resource dispute resolution

By Ryad Areshman Chairil

MELBOURNE (JP): Disputes over the development of mineral resources appear to be inevitable given the high financial stakes, the complexity of financial and development issues, and the changing environment both in host nations and that of developers.

Now the government plans to set up a new system of minerals and petroleum contracts which best suits the interests of empowering the regions.

However, prevailing contracts of work, production sharing contract or coal contracts will still be valid until the expiration date.

The 1999 law no. 22 on regional autonomy, which will be implemented along with the law no. 25/1999 on fiscal balance, states that regions will manage national resources which exist in their territory.

Those laws have introduced Indonesia to a new world of regional governance. It raises the need for a provincial mining or petroleum act to accommodate the development of resources in the region. Each provincial act does not have to be the same, given the social, economic, cultural and religious diversity which exist between one region and another. The laws could accommodate long-ignored customary rights.

Such acts would include the rights of regencies to issue mining permits for investment, exploration and production, covering both technical and administrative matters.

The acts would provide the regencies, or kabupaten, with the rights to plan and control the use of mining and energy natural resources, including the implementation of environmental audits. The regencies would be entitled to carry out geological, mineral and energy research.

The regencies would become a signatory of mining concessions or licenses together with the investors.

These arrangements will change the current licensing system. A new system should be established to reflect the requirements of an effective and productive administration for the development of resources.

This system should create confidence for investors seeking an exploration or mining agreement. A new system only allowing two main licenses, exploration and exploitation, would be preferred. Chile, Argentina, and Australia have endorsed a similar system.

But such a licensing system would not be applicable for large- scale resources projects. An exclusive agreement similar to state agreements in Australia may be better.

The agreements could assign provincial and regency governments the role of signatory party under tight central government supervision. The aim of establishing such agreements is to allow parties to create a unique legal regime for each project.

It is hoped that deficiencies in the ordinary law may be overcome and specific requirements in relation to the project can also be met.

However those above are technical and administrative matters. A further issue is legal certainties relating to the project in the case of disputes. Previous minerals and petroleum contracts have referred to international arbitration.

Today, how will disputes be settled under the autonomy law which now gives a greater role to community rights (hak ulayat)?

One can be cautiously optimistic here. Problems with community rights can be minimized if -- and only if -- the process of granting a license or a provincial agreement follows a transparent and accountable public hearing procedure.

Conflicts of interest between communities and other parties should be resolved at this stage. Mediation therefore takes on a very important role. So far settlement by mediation has been successful to solve most mining and petroleum cases, with no need for international arbitration.

This is where provincial and regency governments are recommended to fulfil the role they are best at.

Complaints have been lodged regarding the appointment of local representatives as mediators. Governments have been found to intervene in deciding who should be representatives -- such people are therefore considered to be representing only the government's interests rather than the locals'.

Candidates for local representative positions should be appointed by their respective communities without any outside intervention.

These appointments must be drawn up in regulations at the regional level. To maintain the objectivity in mediation, non government organizations (NGOs) should not be included as the signatory parties.

NGO people should only supervise and monitor the implementation of a mediation agreement. But free access should be provided to them to evaluate the implementation of mediation.

In some circumstances they would have the right to act in case of violations of the agreement.

Moreover, provincial and regional governments might also learn from Australia's experiences in this area. The set-up of private organizations, providing alternative dispute resolution services and facilities for both international and domestic disputes, has become established in Australia.

If mediation is not satisfactory cases could then be brought to the Indonesian National Arbitration Board (BANI). Unfortunately the board is yet to be effective in settling disputes between local and foreign investors.

The judiciary, meanwhile, is well-known for not being independent. The experience of foreign creditors in the Indonesian courts can only underpin the perception that those institutions are not yet able to provide an international standard for dispute resolution that foreign lenders require.

Most cases have been settled through mediation without involving the Indonesian court system. Both the government and developers have consciously avoided it, given the additional "administration risks" to the project feasibility.

Empowering BANI to be more professional, accountable and trusted by the international world will obviously involve complicated regulatory reforms requiring credible and qualified human resources.

Should BANI still prove incapable, cases would then proceed to international arbitration. Until now, there has been no need for cases to be settled by this means, and it is hoped it will continue this way.

The writer is a Ph.D. candidate at the Center for Energy and Resources Law at the Faculty of Law, the University of Melbourne in Australia.