1 MINING LAW AND POLICY (REGULATORY FRAMEWORK): AN IMPACT TO FOREIGN DIRECT INVESTMENT AFTER CoW Novi Yanthy Tinauw Abstract When it comes to mining Indonesia is a massive player. The country is characterized by its massive exports of coal, tin, gold and copper. Abundant resources and favorable government policies have historically marked it as an attractive destination for foreign investments. Exploitation of mineral and coal (Mining) in Indonesia began intensively to take place in Erstberg, Timika, Papua, after the extractive mineral rights have been granted to Freeport in 1967. This partnership supported by a Contract of Work (COW) Freeport Generation I (GI) which was signed in 1967 and its essence was the origin of the various terms contained in Mining Law no. 11 of 1967. Within the period of 1967-1998 there were seven generations of contract of work (COW) in lieu with the foreign capital investment in the field of non-coal general mining and three generations of coal contract of Coal (CCOW) in Indonesia. After the Reformationin 1999 as the marked of fee elections, Indonesia’s government announced new regulation that will require foreign mining companies in Indonesia to increase domestic ownership of their mines to at least 51 percent by the 10 th year in which the mine has enjoyed production. This paper evaluate how far that mining law and policy especially regulatory framework could give impact to FDI as an contract of work system being replaced after 14 Reformation. Keyword: Indonesia Mining, COW, FDI, Mining Law, Regulatory Framework. Background and Introduction Indonesia continues to be a significant player in global mining industry with significant production of coal, cooper, gold, tin and nickel. This fact supported by data’s of MINISTRY OF ENERGY AND MINERAL RESOURCES OF THE REPUBLIC OF INDONESIA looking from INDONESIA MINING IN THE WORLD CONTEXT such as: World Market Within the global context, Indonesia is one of the major mineral within the global context, Indonesia is one of the major mineral producers and exports numerous commodities around the world, producers and exports numerous commodities around the world, such as: tin, copper, nickel, bauxite, gold). Mining production growth is relatively high. At the last ten years the average growth production are coal 15%, copper15%, gold 15%, average growth production are coal 15%, copper15%, gold 15%, nickel 9% and tin 7.5%. Nickel 9% and tin 7.5%. Export demand relatively higher than domestic demand. For Export demand relatively higher than domestic demand. For instance, export demand to total production are coal 75%, tin instance, export demand to total production are coal 75%, tin 87.5%, gold 87.5%, silver 80%, tin 96.5% and nickel 100%. 87.5%, gold 87.5%, s ilver 80%, tin 96.5% and nickel 100%. Within the year 2007-2015 domestic coal demand will increase significantly, mainly due to the crash program ofcoal power plant development. GOI has decided to GOI has decided to reduce oil share in energy mix from 55% (2005) to 20% in 2025, and that coal share from 15.7% in 2005 to 33% in 2025. The current situations of Indonesian mining resources are: Coal resources estimated around 61.3 billion tons with mine able reserve approximately 6.9 billion tons (15th rank of world coal reserve). Gold resources estimated around 6,369 tons with mine able reserve approximately 3,254 tons (7th rank ofworld gold reserve). Copper resources estimated around 68.11 million tons with mine able reserve approximately 31.85 million tons (7th rank of world copper reserve). Tin resources estimated around 0.622 million tons with mine able reserve approximately 0.462 million tons (5th rank of world tin reserve).
MINING LAW AND POLICY (REGULATORY FRAMEWORK): AN IMPACT TO FOREIGN DIRECTINVESTMENT AFTER CoW
Novi Yanthy Tinauw
AbstractWhen it comes to mining Indonesia is a massive player. The country is characterized by its
massive exports of coal, tin, gold and copper. Abundant resources and favorable government policieshave historically marked it as an attractive destination for foreign investments. Exploitationof mineral and coal (Mining) in Indonesia began intensively to take place in Erstberg, Timika, Papua,after the extractive mineral rights have been granted to Freeport in 1967. This partnershipsupported by a Contract of Work (COW) Freeport Generation I (GI) which was signed in 1967 and itsessence was the origin of the various terms contained in Mining Law no. 11 of 1967. Within the periodof 1967-1998 there were seven generations of contract of work (COW) in lieu with the foreign capitalinvestment in the field of non-coal general mining and three generations of coal contract of Coal(CCOW) in Indonesia. After the Reformation in 1999 as the marked of fee elections, Indonesia’sgovernment announced new regulation that will require foreign mining companies in Indonesia to
increase domestic ownership of their mines to at least 51 percent by the 10th
year in which the minehas enjoyed production. This paper evaluate how far that mining law and policy especially regulatoryframework could give impact to FDI as an contract of work system being replaced after 14Reformation.
Keyword: Indonesia Mining, COW, FDI, Mining Law, Regulatory Framework.
Background and Introduction
Indonesia continues to be a significant playerin global mining industry with significantproduction of coal, cooper, gold, tin and nickel.This fact supported by data’s of MINISTRY OF
ENERGY AND MINERAL RESOURCES OFTHE REPUBLIC OF INDONESIA lookingfrom INDONESIA MINING IN THE WORLDCONTEXT such as:World Market
Within the global context, Indonesia isone of the major mineral within theglobal context, Indonesia is one of themajor mineral producers and exportsnumerous commodities around theworld, producers and exportsnumerous commodities around the
world, such as: tin, copper, nickel,bauxite, gold). Mining productiongrowth is relatively high. At the lastten years the average growthproduction are coal 15%, copper15%,gold 15%, average growth productionare coal 15%, copper15%, gold 15%,nickel 9% and tin 7.5%. Nickel 9% andtin 7.5%.
Export demand relatively higher thandomestic demand. For Export demandrelatively higher than domestic
demand. For instance, export demandto total production are coal 75%, tininstance, export demand to total
production are coal 75%, tin 87.5%,gold 87.5%, silver 80%, tin 96.5% andnickel 100%. 87.5%, gold 87.5%, silver80%, tin 96.5% and nickel 100%.
Within the year 2007-2015 domestic
coal demand will increase significantly,mainly due to the crash program of coal power plant development.
GOI has decided to GOI has decided toreduce oil share in energy mix from55% (2005) to 20% in 2025, and thatcoal share from 15.7% in 2005 to 33%in 2025.
The current situations of Indonesian miningresources are:
Coal resources estimated around 61.3billion tons with mine able reserveapproximately 6.9 billion tons (15th
rank of world coal reserve). Gold resources estimated around 6,369
tons with mine able reserveapproximately 3,254 tons (7th rank of world gold reserve).
Copper resources estimated around68.11 million tons with mine ablereserve approximately 31.85 milliontons (7th rank of world copper reserve).
Tin resources estimated around 0.622million tons with mine able reserveapproximately 0.462 million tons (5th
Nickels ore resources estimated around1,412 million tons with mine ablereserve approximately 485.33 milliontons (8th rank of world nickel reserve).
Compared with other countries of Asiafrom Kazakhstan to Philippines,
Indonesia is still a leader in copper,gold, silver, nickel and coal resourcesand production.
In particular, Indonesia remains among the
world’s larger exporters of thermal coal. Global
mining companies consistently rank Indonesia
highly in terms of coal and mineral prospects;
however assessments of its mining policies and
investment climate have not been so positive.
As such, in recent years there have been
limited levels of investment, particularly inGreenfield project other than in the coal sector
compare with abundance recourse which are
represent on table 1. (Source:
http://psdg.bgl.esdm.go.id).
Table 1 Indonesia’s Mineral Production
Untapped PotentialMining Companies rank Indonesia’s investment climate as among the worst in the world. But itsmineral wealth gets a top score from miners asked to assess countries assuming they implementedinvestor-friendly mining laws.
Investment Climate Resources PotentialTop Score= 100* Top Score= 1
Source: Wall Street Journal, February 7, 2007
Nevada
Chile
Western Australia
Mongolia
South Africa
Bolivia
Russia
Indonesia
Congo
Zimbabwe
93
87
73
54
45
24
23
22
13
2
Source: Fraser Institute 2005/6 Survey of
Mining Companies.
*Score based on a number of factors
including regulatory consistency, security of investment and taxation policies.
Regulation of mining areas perceived lessfriendly toward FDI due to such a tax / royaltyis high, the overlap with forestry issues (Lawno. 41, 1999), decentralization andenvironmental concerns. Basically the priority
in the grass root exploration activities(Exploration Greenfield areas) in all areas of potential mineral resources, including forestscan be done to make inventarisation mineralwealth of natural resources and coal as abargaining quantitative in inviting investmentin Indonesia.
CoW (Contract of Work)
The CoW system for regulating miningoperations has played a key role in the successof Indonesia’s contemporary mining industry.The CoW system was introduced in 1967 hasbeen gradually refined and modernized overthe past forty years to reflect changingconditions in Indonesia and abroad. To date,
there has been seven generation of CoWs. A comparison of the various generations oddCoWs are provided in Appendix E.(ww.pwc.com).
CoWs were regulated under Minister of Energy and Mineral Resources Decision LetterNo. 1614/2004. In essence, a CoW is acomprehensive contract between theGovernment of Indonesia and an IndonesiaCompany. The company could be 100 percentforeign-owned. However, if the company was100 percent foreign-owned, it may have beensubject to divestment requirements at latterdate. As a practical matter, most CoWs havesome level of Indonesian ownership as showedbelow.
Table 5 Level of CoW in IndonesiaStage Terms (years) Available Extension1
General survey1 1 6 months – 1 yearExploration2 3 1 – 2 years
Feasibility Study 1 1Construction 3 -
Production 30 20 or other period as approvedby the Government1): Depends on the CoW generations. For the detail, refer to Appendix A. (www.pwc.com)2): For first generation, the maximum period for general survey until feasibility study was 18 monthsand can be extended for a maximum of six months.Source: PricewaterhouseCoopers (2011)
Some of the important considerations thatare covered by a CoW include: expenditureobligations; important and exports facilities;marketing; fiscal obligation; reportingrequirements; records; inspection and workprogram; employment and training of Indonesia nationals; preference to Indonesiansuppliers; environmental management and
protection; regional cooperation in regard toinfrastructure; provision for infrastructure forthe use of local population and local businessdevelopment. It’s a tribute to the governmentand to the industry that these importantmatters can be appropriately addressed in aconcise legal contract.
CoW itself covers all tax/royalty and othersfiscal changing including: dead rent in theContract Area; production royalties; incometax payable by the company; employeespersonal income tax; withholding taxes ondividends, interest, rents, royalties, and
similar payments; value added tax (VAT);stamp duty, import duty and land and buildingtax.
Indonesia’s long standing Contract of Work(CoW) framework for foreign investment andlistening system for Indonesian investor, havebeen replaced under the Mining Law. TheMining Law implemented a new area-basedsystem of licensing, incorporating transparenttendering producers for granting licenses.
Indonesia FDI situation
Foreign direct investment (FDI) is a key pillarof sustainable economic growth and offers non‐
financial benefits, most notably positive spil‐lovers such as productivity gains and knowledgetransfers. Aware of this, Indonesia seeks notonly more but also better FDI, the kind thatreduces unemployment, social inequality andpoverty. Foreign direct investment in
Indonesia grew 20% last year to 175 trillionrupiah ($19.3 billion), the country'sInvestment Coordinating Board saidThursday. At that rate, Indonesia now appearsto be significantly outpacing many other Asiancountries that used to easily surpass it indrawing foreign money, such as Thailand.China still attracts much more, with $116billion in FDI in 2011. This graphic belowshows the growth of Fixed Investment inIndonesia.
Table 6 Fixed Investment in Indonesia’s Mining Sector
Source: PricewatershouseCoopers. 2008
The New Mining Law
Mineral and Coal mining activities aregoverned under the Law on Mineral and CoalMining No. 4/2009 dated 12 January 2009(“Mining Law”). This Law replaces thepredecessor Mining Law no. 11/1967, whichprovided the framework for all of Indonesia of Indonesia’s pre-2009 mining concessionsincluding all of the existing CoWs and CCoWs.The Mining Law is dependent on a significantnumber of implementing regulations have
recently been issued, a number of regulationsand clarifications in respect of key areas of the
new law area still to be issued. Theintroduction of the Mining Law in 2009represented a significant change to theprevious Indonesia Mining regulatory regime.Contractual-based concessions are no longeravailable for new mining projects. Both thewell-regarded CoW/CCoW framework forforeign investor and “Kuasa Pertambangan”(KP), or mining rights, framework forIndonesia investor, were replaced by a singlearea-based licensing systems based licensingsystem based on specified mining areas.
The Mining Law provides for three categoriesof mining license, depending upon the locationand nature of the resources. Unlike therestriction on ownership of KP license toIndonesian nationals, the IUP based licenseare open to the both Indonesian nationals and
foreign invest who own Indonesian companies.
Mining Regulatory Framework
Indonesia Mining Regulatory Framework wascreated as the Mining Law and Policy changed.These regulatory frameworks below are someof them which give direct impact to foreigndirect investment itself and local investment.
a. Domestic Market Obligation (DMO)
The Mining Law and implementing
regulations contain a framework for DMO(Domestic Market Obligation) where theCentral Government has the authority tocontrol production and of each mining product.The regional government is obliged to complywith the production and exports controlcontrols imposed by the Central Government.This policy is to guarantee the supply forincreasing domestic demand, especially forcoal. Details of the DMO procedures wereissued in PerMen 34 on 31 December 2009.This policy provides that DMO applies to all
types of coal and minerals. Broadly, miningcompanies must comply with the DMOrequirements by telling to domestic consumersof mineral coal.
Neither PerMen 34 nor GR23 provide for aspecific DMO percentage rather the decisionfor particular years is to be made by theMinister upon the following procedures:
1. Domestic users submit their forecastrequirements by no later than Marchof the preceding year.
2. The Minister review and calculate the
domestic requirements submitted andthe production plans of the miningcompanies.
3. The Minister must then issue a decreeon the minimum DMO percentage byno later than June of the precedingyears. The decree must also list thedomestic users and their respectiveneeds: and
4. The mining company must thensubmits its work program and budgetfor the relevant year to the authority
that issued its license (Minister,Governor or Mayor/Regent) and theDirector General of Minerals and Coal
stating its commitment to the DMOpercentage.
b. Divestment
The Mining Law provides that foreign capital
controlling shareholders must diver’s part of their interest in a mining concession companyby the fifth year of production. GR23 providesthat Indonesia Nationals must own aminimum of 20% of the shares in an IUPholding company. Divestment is to be made to(in order of preference) the CentralGovernment; Provincial Government orbusiness entry.
c. Mandatory in-country processing
Under the Mining Law, holder of IUPs and
IUPKs are required to carry out in-countryprocessing and refining to increase the value of the relevant mineral or coal. They may alsohave processing and refining undertaken byentities which have already obtained a SpecialProduction Operational IUP/IUPK forprocessing and refining.
d. Royalties
All IUP/IUPK holders are required to payproduction royalties, the rates which wall varydepending on mining scale, production level
and mining commodity price. Currently, arange of percentages of sale proceeds appliesfor the different types of coal and mineralmining and it is expected that such anarrangement will continue under the MiningLaw. The stakeholders will be required to payan additional royalty of 10 percent of netprofit. The Central Government is entitled toreceive 40 percent of this additional royaltywhile the balance is to be shared between therelevant and regencies. Since this additionalroyalty is determined based on net profit, it is
expected that government will have a greatermonitoring role over capital expenditure andmining operating costs in the case of IUPKs.The current production royalty rates for aselection of key Indonesia commodities are setout in the following table.
On 20 December 2010, the Governmentreleased Government regulation No. 78/2010that deals with reclamation and post-miningactivities for both IUP-Exploration and IUP-Production Operation holders. An IUP-Exploration holder, among other requirements,must include a reclamation plan in its
exploration work plan and budget and providea reclamation guarantee in the form of a timedeposit it placed at a state-owned bank. Therequirement to provide reclamation and post-mine guarantees does not release the IUPholder from the requirement to performreclamation and post-mine activities.
The above is a brief analysis of some of the keyterms of the Mining Law likely to be interestto investor. Through the enactment of theMining Law, the Government has sought tocreate more certainty about Indonesia’s
Mining. This certainty will only crystallize,however when all the regulationsimplementing the Law are in place.
Impact of Mining Law and RegulatoryFramework
Many foreign players, such as NewmontMining Corp. (NEM) and Vale SA (VALE3),are still planning on further investing inIndonesia’s resources. Edward Rochette,chairman of East Asia Minerals, exclaimed
“Indonesia is, without doubt, one of the topthree places for current investment in mineralprojects”, suggesting the country offers toomuch opportunity to turn down. David Lennox,analyst at Fat Prophets, also shared the belief that “this rule won’t make a company go awayfrom Indonesia”. He also noted, however, thatit would “obviously mean [companies] will lookover their shoulders if an opportunity pops outelsewhere”. But it may have a heavier effect onprospective investors. Syahrir Abubakar,Executive Director of the Indonesia Mining
Association, noted, “I’m sure foreign investors
will not invest in the mining sector anymore inIndonesia.
This policy will threaten Indonesia’s mininginvestment climate”. That may be true, to adegree. Indonesia’s mining prospects are aboutlarge numbers. Last December, AFG Venturegroup completed a survey of 3,000 companiesinterested in Asia, and found that 77 percent
were considering investing in Indonesia.Comparatively, only 60 percent saw China andIndia as targets. Such figures are unlikely tobe replicated in the wake of these newregulations, but the numbers were largeenough to suggest that not all interest willwane.
The terms of the Mining Law may be adequateto encourage some investor especially foreigninvestor to take directly equity stakes in IUPsfor relatively small-scale projects. However,there is likely to be greater uncertainty aroundproposed large-scale projects as the MiningLaw does not offer the long-term protection of the CoW system for large, long-life projectswhich require significant investment. Investorwill also be relying on the effective operation of the Indonesian legal system to protect theirinvestment in these large projects, which arethe life-blood of a strong mining sector.
Conclusion
The Mining Law is expected to provide greater
certainty for investment in the miningindustry in Indonesia. However, it is evidentfrom the provision of the Law thatGovernment has had a difficult task inbalancing the interest of foreign investorwishing to invest in Indonesia’ highly lucrativemining industry with those of IndonesianNationals, wishing to ensure that a fairproportion of the wealth derived from theexploitation of Indonesia’s minerals is retainedby Indonesians for the benefit of Indonesia.The balance formulated by the Government inthe Law is intended to achieve the best result
for Indonesia. Under the Mining Law, theCentral Government will determine areas thatcan be mined, which is still pending to date.With this mechanism, it is expected that theCentral Government will have more controlover determination of areas open for mining,and this may reduce the instances of overlapping mining concessions with areasreserved for other purpose, such as forestry.
The new rule does particular harm by cloudingthe country’s mining industry under even
greater uncertainty. Is there more governmentregulation to follow? Is that a risk one iswilling to take? And what are the added costs
of such policies? There is also a concern overthe proper allocation of greater governmentwealth. Foreign miners have had to overcomeIndonesia’s weak infrastructure, and they hopegreater government financing will reduce suchburdens on the industry. But with a history of
corruption, many have their doubts.
Future Work
After three years on, the Law still requiressome further implementing regulations which
have not been issued yet. Furthermore someimplementing regulations are not entirelyclear in addressing the issues and furtherguidance is required. This may cause furtheruncertainty for investor. As the major concernof Indonesia Government should have to
ascertain if the new mining law will be a win-win for both the investors and the country.
References
Administrator. 2012. Eksploitasi Mineral dan Batubara di Indonesia dan Dampaknya terhadapPerekonomian Nasional, Institute for Global Justice, February 10, 2012.
Bellman. E & Sentana. I M. 2012. Foreign Investment Jump in Indonesia, The Wall Street Journal, April 23, 2012.
Bhasin, B. & McKay, J. 2001. Mining law and policy in Indonesia: Issues in current practice that needreform, Journal of Energy & Natural Resources Law, 19-4, 329-243.
Bhasin, B. & McKay, J. 2002. Mining law and policy in Indonesia: Reforms of the Contract of Worksmodel to promote foreign direct investment and sustainability, Australian Mining and Petroleum LawJournal, 21-1, 77-90.
Bhasin, B. & Venkataramany, S 2008. Mining Law and Policy: Replacing the “Contract of Work”System in Indonesia, CEPMLPIJ, 1-16.
Bhasin, B. & Venkataramany, S. 2009. Foreign Direct Investment: Replacing the “Contract of Work”System in Indonesia, International Business & Economics Research Journal, 8-8, 35-44.
Bissoon, O. 2001. Can be Better Institution Attract More Foreign Direct Investment (FDI)? Evidencefrom Developing Countries, International Conference on Applied Economics, Working Paper No. 7, pp.1-12, EuroJournals Publhing, Inc.
Cronin, R & Pandya, A. 2009. Exploiting Natural Resources: Growth, Instability and Conflict in The
Middle East & Asia , The Henry L. Stimson Center, Washington DC: USA.Goodspeed, T, Martinez- Vazquez, J & Zhang, L. 2006. Are other Government Policies more Important than Taxation in Attracting FDI?, Hunter Econ, Working Paper No. 414, pp. 1-23.
Dpa, 2007. Indonesian parliament passes new investment bill, German Press Agency, March 29,2007. Lipsey, R. E, Sjoholm, F & Sun, J. 2010. Foreign Ownership and Employment Growth in
Indonesia Manufacturing, IFN, Working Paper No. 831, pp. 1-29.
Emmy Hafild, “Foreign Direct Investment in the Indonesian Mining Sector,” paper presented in theCCNM Global Forum on International Investment, February 7 – 8, 2002, Paris. See also the websitesof the Mineral Policy Institute (www.mpi.org.au/regions/asia/indonesia).
Investment Coordinating Board of The Republica of Indonesia. 2010. FDI Paper Strategy, BKPM, April, 2010. (www.bkpm.go.id).
McMahon, Fred, 2006. Annual Survey of Mining Companies 2004/2005, The Fraser Institute, Centrefor Trade & Globalization Studies, Vancouver BC Canada.http://www.fraserinstitute.ca/shared/readmore.asp?sNav=pb&id=738.
mineIndonesia. 2006. Review of Trends in the Indonesian Mining Industry , PricewaterhouseCoopers,December, 2006.
mineIndonesia. 2011. Mining in Indonesia: Investment and Taxation Guide , PricewaterhouseCoopers,May, 2011.
Ministry of Energy and Mineral Resources of the Republic of Indonesia. 2001. Indonesia’s draftmining law.
Ministry of Energy and Mineral Resources of the Republic of Indonesia. 2008. Recent Developmentsin Indonesia’s Mining Industry Situtation and Policy, as an Information to IEA, February 11, Paris.
Naito, K, Otto, J, Eggert, R. G. 1998, Mineral Investment Risk and Opportunities in Asia, ResourcesPolicy, 24(2), pp. 77-78.
O’Callaghan, T & Vivoda, V. 2010. Regimes, Mining Investment and Regulatory risk in the Asia-Pacific Region: Comparative Evaluation and Policy Implications, UPF Regulation No. 514, pp. 1-32.
PricewaterhouseCoopers (PWC), mineIndonesia. 2007. Review of Trends in the Indonesian Mining
Industry (Jakarta: KAP Haryanto Sahari & Rekan, 2008); CEIC Asian Data Base (Jakarta, 2008).
World Investment, 2011. World Investment Report 2011: Non-Equity Modes of International Product
and Development , United Nation Publication, Switzerland: Swiss.
Wright, Tom & Barta, Patrick (2007). Indonesian Mining Stalls: Disputes over control haltdevelopment steps, pressure commodities, The Wall Street Journal, February 7, 2007.
