RECENT ECONOMIC REPORTS

INDONESIA’S DRAFT MINING LAW

SUMMARY: The Ministry of Energy and Mineral Resources is in the final stages of preparing a new mining bill that should be submitted to Parliament shortly. The draft law will update a 1967 law by defining local government responsibilities under fiscal decentralization and regional autonomy. It also eliminates differences in treatment of foreign and domestic investors by stating that both will be eligible to receive either a Mine Operation Permit or Mine Operation Agreement. The new mining law will thus disestablish the current "Contract of Work" system that provides special incentives and guarantees to foreign investors only. While the draft mining law updates mineral resources management in many respects, it may not go far enough to remove some of the legal inconsistencies and uncertainties now bedeviling investors. Some shortcomings might be remedied through development of implementing regulations. End summary.

Ministry of Energy and Mineral Resources (MEMR) Director General for Geology and Mineral Resources Wimpy S. Tjetjep provided an overview of Indonesia’s draft mining law at a June 21 roundtable discussion organized by business consultant Apco Indonesia. MEMR Chairman of the interministerial drafting team Supriatna Suhala provided further details, while Indonesian Mining Association Chairman B.N. ("Benny") Wahju and BHP Indonesia President Andrew Wilson gave an industry perspective. Our summary of the draft mining law draws from the roundtable presentations.

Basic Principles

Statutory and regulatory management of Indonesia’s mineral resources is rooted in Article 33 of the 1945 Constitution: "all natural resources in the soil and the waters of the country are under the jurisdiction of the State and shall be used for the greatest benefit and welfare of the People." That said, the Indonesian government officials argued that Law No. 11 of 1967 needed updating to recognize significant changes, principally the fiscal decentralization and regional autonomy brought about by Laws 22/1999 and 25/1999. A new mining law also needed to provide a greater level of environmental protection and to incorporate a greater recognition of local community rights, such as human rights and land rights.

Along with harmonization with a changed statutory framework, Tjetjep and Supriatna noted that a new mining law should optimally minimize some of the obstacles faced by mining investment in Indonesia. The law should recognize that country risk increased investment costs and enhance investment returns accordingly. It should also reduce uncertainty arising from regional autonomy’s implementation and eliminate the contradictions of overlapping laws and regulations. Finally, a new mining law should promote an increase in legal certainty and enhance legal protections.

Key Elements of the Draft Law

The Ministry of Energy and Mineral Resources developed several drafts of a mining law, but completed a final revision on May 25 and submitted it to the State Secretariat in the last step prior to submitting the bill to Parliament (DPR). The 17 chapters and 58 articles contain the following key elements:

-- Reclassification: Law No. 11/1967 placed mineral resources into three categories: (a) strategic, (b) vital, and (c) non-strategic and non-vital (frequently referred to as "category c"). Supriatna dismissed these as a "Cold War relic." Instead, the draft law groups mineral resources as "radioactive," "metal," "non-metal," and "coal, peat, and oil shale." To these are added two new areas of regulation –- "geothermal" and "groundwater" –- not formerly included as mineral resources.

-- Decentralization: Both Law No. 11/1967 and the new draft preserve the constitutional principle that mineral resources are a national asset, but the draft law divides responsibility for controlling mineral resources between local governments and the central government while Law No. 11/1967 recognizes only the central government’s role. The draft law reduces the central government role to policy and management oversight and direct management only of undersea resources beyond 12 nautical miles. The local government role is enhanced and defined.

-- Operating Permits: The draft law simplifies mining administration by eliminating distinctions between foreign and domestic investors. Under the new law, both domestic and foreign investors will operate mines under the authority of a "mining operation permit" (Izin Usaha Pertambanga, IUP) or a "mining operation agreement" (Perjanjian Usaha Pertambangan, PUP). Under Law No. 11/1967, domestic investors could operate mines under a mining right (Kuasa Pertambangan or KP), a local mining permit (Surat Izin Pertambangan Daerah, SIPD), or a coal contract of work (Perjanjian Karya Pengusahaan Pertambangan Batubara, PKP2B). Foreign investors operated under the different terms of a Contract of Work (Kontrak Karya, KK). Only in the coal mining sector did foreign investors operate under the same PKP2B as domestic investors. (The People’s Mining Permit (Izin Pertambangan Rakyat, IPR) will regulate traditional mining, as its own distinct category.)

-- Community Development: The draft law will also explicit state that community development is a responsibility of the mining permit holder. Community development will be supervised and be developed based on local and community input.

-- Other details: The draft law will also address areas on which Law No. 11/1967 was either silent or vague. These include environmental protection, reporting of data and operations, financial requirements, land compensation requirements, and criminal investigations and penalties.

Missed Opportunities

Industry representatives generally welcome the draft mining law as a step in the right direction but criticize it for insufficiently recognizing the high risk, capital intensive nature of mining and for failing to eliminate the uncertainty created by conflicting laws and regulations, for instance in the environmental area. (See reftel for details of mining investment obstacles.)

Specifically, the mining bill does not provide a basis for exempting mining waste from being classified as "toxic waste" ("bahan berbahaya dan beracun" or B3) or provide a clear basis for conducting mining operations in areas designated as protected forests. While Article 16 allows mining operations to be conducted except in areas where otherwise not permitted with the consent of local authorities and the approval of the authorizing agency, BHP President Wilson noted the draft was conspicuously silent on the identity of authorizing agencies and the appropriate procedure. On a positive note, Wilson observed that Article 39 in the draft was clearly targeted at preventing a recurrence of the problem arising from North Sulawesi Province’s attempt to tax overburden from the Newmont Minahasa Raya goldmine. The article says that mining operators shall not be obliged to pay regional taxes for mining wastes.

Industry analysts note problem areas which may heighten investor uncertainty:

-- Article 37 on taxation does not clearly establish a tax regime for the life of a mine. It says changes in law and regulation can reduce the tax burden on a mine, but does not protect a mine from tax increases.

-- Article 62 on transitional provisions does not grandfather existing Contracts of Work by clearly stating that they will continue to be administered under the old law.

-- The draft law does not state the duration of mining permits.

Comment: Implementation is the Key

The draft mining law still has a way to go as it must undergo State Secretariat and Parliamentary scrutiny and may be amended further. And, like most Indonesian legislation, many details of the new law will be fixed and implemented by regulation. The implementing regulation can elaborate on and remedy many of the omissions noted above. Most importantly, the implementing regulation should ensure that registration of mining rights is done in a consistent and uniform fashion nationwide and define the central government’s oversight role to ensure adequate mine safety and environmental standards. Beyond these key elements, however, we can expect that, as local governments assume greater responsibility for regulating mining, local mining regimes will become more diverse, resulting in varying degrees of attractiveness to potential investors. The final proof of the new law’s effectiveness will be whether it attracts new mining investment and greater levels of investment.

Trends | Reports | Energy | Coal | Petroleum | Investment