Fri, 11 Mar 2011

From: The Jakarta Post
Kurtubi, Jakarta

The management of non-oil and gas mining resources has, since 1967, applied the model of working contracts pursuant to the law on mining operation. By this model, the management of these resources is fully in the hands of contractors. By the system of production sharing contracts in the oil and gas sector, however, contractors’ management is under the control of the Upstream Oil and Gas Regulating Agency (BPMigas).

In addition, under working contracts the government received a relatively small royalty, around 1 percent, which equaled the rate according to the concession system in colonial times, based on the Dutch East Indies Mining Law (Indische Mijnwet, 1890).

On account of the insignificant contribution of working contracts to the state, the next generation of this system was improved to increase its profitability. One of its advancements was the obligation for foreign contractors to divest the shares to up to 51 percent in favor of Indonesian companies or the government.

This provision also applies to the working contract with PT Newmont Nusa Tenggara (PT NNT) for mining operations in Batu Hijau, West Sumbawa regency in West Nusa Tenggara (NTB) province, and mining expansion in Elang Dodo, also in Sumbawa regency.

It should be appreciated that, so far, PT NNT has consistently observed the working contract provision as evidenced in the divestment of 24 percent of its shares in the government’s favor, in this case the regional administration, though due to the policy the foreign shareholders of PT NNT were sued by PT Pukuafu Indah.

The right awarded to the regional administration to buy divested shares is in conformity with the intent of Article 33 of the 1945 Constitution, stipulating that mining resources reserved beneath the earth shall be controlled by the state and utilized for the maximum welfare of the society. The government and people in a mining production area should thus gain concrete benefit from the presence of mining activities there.

With the rules so far enforced, regional revenue from local mining operation is very small. This happens because a region’s natural resources profit sharing fund is only derived from a very small royalty and dead rent (around 1 percent), which constitutes non-tax state revenue.

Meanwhile, about 40 percent corporate tax paid by PT NNT entirely goes to the central government’s coffer.

As an illustration of revenue disparity between the regional administration and the central government, in 2007, for instance, the central government received about US$800 million from PT NNT in tax revenue, while the regional administration (NTB province, West Sumbawa and Sumbawa regencies) got only Rp 200 billion ($22 million) in royalties.

It is indeed unfair. Actually, the regional administration and local communities have to bear the risk and suffer the negative impact of the mining operation, such as environmental degradation.

As required by the working contract, PT NNT realized 3 percent share divestment in 2006, and 7 percent in 2007, 2008 and 2009, respectively. With the central government’s approval, the divestment was in favor of the regional administration. Undoubtedly, the policy has immediately given a boost to the region’s income in dividends from the operation of PT NNT.

The remaining 7 percent, which was due in 2010, has not yet been divested because the central government unexpectedly is reportedly interested in buying the shares, while PT Aneka Tambang, a publicly-listed state-owned mining company, indicates no intention.

In order to strengthen the regional position in the management and board of PT NNT, especially with PT NNT’s plan to launch its initial public offering (IPO) at the Indonesian Stock Exchange, it’s only proper to divest the 7 percent in the region’s advantage as well.

Besides, this move will increase regional income so that the regional administration can better afford to build its economic infrastructure to jack up the socio-economic standards of the people living in NTB. At present, the rate of poverty in NTB remains relatively very high, far above the average national poverty level. Among the country’s 33 provinces, NTB ranks 28th in poverty, meaning it’s one of the seven poorest regions along with other natural resources-rich provinces of Aceh, Papua, West Papua, Maluku, Gorontalo and East Nusa Tenggara.

Central Statistics Agency data show the national poverty rate is around 13.3 percent while in NTB the rate stands at about 22 percent, which means one of every five people is poor.

The mining operation of PT NNT is one of the main sources of the region’s revenue. It will be regrettable if the central government deprives the region of this 7 percent divestment opportunity.

The cooperation between the three regions (NTB province, West Sumbawa and Sumbawa regencies) and PT Multicapital constitutes a long-calculated decision and has been approved by the regional legislative council and regional administration. But there’s still the likelihood of the regional administration launching a kind of contest to find partners for the 7 percent divestment, as well as seeking independent funding.

As this final-stage divestment also faces a time constraint, the central government should promptly name or delegate its right to the three regions as was already done with the 24 percent divestment, instead of one of them (such as West Sumbawa regency) because the expansion area of Elang Dodo is just not located in West Sumbawa regency.

The purchase by the three regions (through region-owned enterprises) is the wisest way of inducing the thorough relief of poverty in NTB, which in fact is among the richest copper and gold producers. The regional administration and local people deserve a larger share through increased ownership and bigger dividends.

The writer is a postgraduate lecturer, School of Economics, University of Indonesia, and a member of PT NNT board of commissioners. The views expressed are his own