EI1 Mining Licensing (english)


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Revenue Watch Institute - Seminar on Extractive Industry Governance at the Local Level: Challenge and Opportunities; Jakarta, May 22-23, 2012
John Strongman & Ambarsari DC

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  • Good morning everyone and thank you to the organizers for inviting Ambasari and myself to make this presentation.It is about some research that we have been undertaking on Sub-National Mining Licensing and in particular the results of research on two districts – Bangka Belitung and Kutai Kartanegara.I will briefly present the Framework that we have prepared. Then I will hand over to Ambarsari who will then present the results of applying it to the two districts. After that I will finish with some preliminary thoughts on the policy implications of the work.
  • Over the past two decades a number of countries have moved towards decentralization of mining licensing. Indonesia is one of the most prominent examples. Others include Argentina, the Philippines and Lao. Prior to the decentralization of powers in 1999, Indonesia has a national licensing system and was one of the most successful countries in the 1970s, 1980s and 1990s for attracting both domestic and foreign mining investments and developing world class mines. The decentralization of powers that took place in 1999 shifted the authority from the national government primarily to district level. But there was a vacuum in terms of guidance for licensing procedures and each district developed its own individual regulations and procedures. Since then no new major investments have taken place. Instead 10,235 mining licenses have been issued by districts but a national audit indicated only 41% are “Clean and Clear”. The 2009 Mining Law is helping to rectify this situation but a license moratorium is presently in placeWith this background, the purpose of the research is to: Develop a conceptual; framework for examining the potential benefits and the potential vulnerabilities of a decentralized licensing systemApply the framework to Bangka and Kutai Kartanegara as an initial, pilot application and identify possible steps to improve the licensing arrangements in Indonesia.Develop preliminary conclusions and recommendations on policy improvements
  • The proposed framework consists of three main building blocksThey are: First: the Performance of the Mining IndustryThe key question is how good is it or how bad is it? In particular regarding illegal mining; environmental and social impacts; and tax paymentsSecond: The Performance and Capacity of the Government Mining Institutions The key question is how good a job are they doing in overseeing and administering the sector? Are they working well or following poor practices? Key issues here relate to governance and corruption; license record keeping, over lapping licenses, reporting; inspections; budgets; staffing and coordinationThird is the Mining Regulatory Environment – that is the rules and regulations which govern both how the industry operates and how the sector institutions are organized and operate. The key question is are the rules part of the solution or part of the problem? Important aspects include whether regulations are set at the sub national or national level? Are they adequate? Are institutional roles clearly and adequately defined? Are reporting requirements sufficient including data sharing with the taxation authorities.
  • The application to Bangka and Kukar involved an intensive literature review including, in particular, media reports about mining activities in the those two districts. The literature review was then followed by a series of stakeholder interviews including government officials, mining community representatives, civil society organizations and a mining company in each of the two districts Wherever possible quantitative data was requested and collected, including data on licenses issued, budgets, staffing and tax receipts.While by its nature, much of the data is qualitative and subjective, the overall conclusions are considered to be robust and to be representative of what is taking place in other districts throughout Indonesia.
  • We will now look at the first build block Building Block #1 : How Good or How Bad is the Performance of the Mining Industry?which as shown has three main aspects, namelyIllegal MiningEnvironmental and Social ImpactsTax Payments
  • The research has indicated that as much as half of tin mining may be illegal in Bangka. As of May 2012, only 17 mining operations permits (IUP) out of 283 issued by the local government have been given Clean and Clear (CNC) status. In Kutai Kartanegara (Kukar) as May 2012, less than half - 240 IUPs out of 485 IUPs - issued by local government got CNC status. A significant problem in Kukar is that new licenses are often issued that overlap with existing licenses so overlapping licenses is a growing problem. With regard to environmental and social impacts local communities considered that environmental impacts and social impacts are poorly managed in both Bangka and Kukar. In Bangka, as illegal mining practices have became rampant, environmental damage has increased significantly. This also reflects a noticeable trend of local livelihoods shifting from agriculture (in particular, pepper farming) to artisanal mining. There are also outsiders going into Bangka to undertake unlicensed artisanal mining. Environmental impacts are poorly managed in Kukar, in particular regarding discharge of polluted waste water and pollution from poorly managed coal stockpiles. In both Bangka and Kukar, there are also frequent conflicts between the mining operations and the people living in the area.
  • TI is unconventional tin mining which consist of small groups of miner, generally less than ten, mining tin manually or with very simple equipment. The illegal tin is either smuggled out directly or sold to other miners, collectors or smelters who may include with their legal stocks of tin or may also export it illegally as smuggled tin.
  • The Second Building Block is the performance of public mining institutions - Are Government Mining Offices Working Well or Following Poor Practices? which as shown has three main aspects, namelyGovernance and Corruption; and Budgets, Staffing and Mine Site Inspections
  • There are many reported concerns regarding poor governance and corruption. The mafia in mining sector in Bangka is reportedly massive with close links to public officials who benefit from mafia links and fail to attempt to police the mafia operations. Licensing award and trading are not transparent and prone to corruption in both Bangka and Kukar. In Kukar license approvals are reported to normally take nine months or more due but some applicants are able to get special treatment with licenses issued in just a few days. Some applicants in Kukar are allowed to apply for adjacent areas of less than 100 ha and thereby avoid environmental protection requirements which are required for licenses over that area size. In both districts, Mining and Energy Office budget and staffing are relatively small to properly oversee mining activities For example, in 2011, occupational safety and health inspection could only be undertaken at 65 out of 285 operations in Kukar due to inadequate budget and staffing. There are only 16 officials in Kukar that have mining, geology, and environmental qualifications in their educational background. Kukar has an only partially effective complaints mechanism for environmental issues and no such mechanism for communities for conflict resolution with mining operators. Bangka has neither mechanisms.
  • The Third Building Block is Building Block #3 : Are the Rules and Regulations Part of the Solution or Part of the Problem?which as shown has two main aspects, namelySub-National and National Procedures Different Sub-National Procedures
  • The above diagram outlines the rules for issuing IUPs to majority owned Indonesian companies which only involves the Regent in a district or the Mayor in a municipality.The diagram also show the application procedure for a contract of work for a majority foreign owned company. In this case, the Regent will obtain on approval of the local investment office and the local parliament as part of the license application decision. Other points to note.First, local level licensing procedures and regulation raise concerns of both how well the regulations are designed (in terms of detail and linkages to other related laws and regulations such as environmental and asocial safeguards) Second, is the degree of transparency required by local regulations Third, is the amount of discretionary authority given to the Mayor or Regent to issue licensesForth, whether information reporting and disclosure requirements are clearly specified
  • The disparities between mining rules in different jurisdictions are well illustrated between Bangka and Kukar. In both cases the regulations were issued in 2001. First, Bangka has three type of licenses, the IUP ( general mining license), a PUP (mining agreement) and a IUPR (people’s mining license) whereas Kukar just issues an IUP.Second, Bangka issues licenses for two mining stages – exploration and production. Kukar issues licenses for six stages - general investigation; exploration; exploitation; processing and refining; transport; and selling)Third, Bangka’s licensing procedures are considered to be have appropriate detail and to be understandable whereas Kukar’s lack specificity and are not well related to other regulations. In the case of Kukar, many legitimate investors may simply not apply for licenses for fear of graft or fear of the licenses area being awarded on a preferential basis to a local vested interest, relative or crony of the issuing authority. This reflects a high degree of discretionary power regarding licenses being issued By comparison, in the case of Bangka legitimate investors may not apply because of the influence of the mafia.
  • Sub-national environmental and social protection are legislated by both districts in the form of compensation for land acquisition, compensation to replace plantation, land use for indigenous people, environmental management and reclamation, partnership with local people, and development of community surrounding mining area. In terms of land use for indigenous people, Bangka mining regulation article 52 states that in determining land use for mining, local government must consider holder of land rights including rights of indigenous people in accordance to regulations and laws. The other sub-national regulations don’t precisely mention on indigenous people. On compensation of land use and environmental management, mining regulations in both districts address compensation of land use, and environmental management and reclamation. All selected regulations state on mining license holders oblige to compensate damage caused by their activity inside or outside of their mining area, intentionally or unintentionally.District of Kukar specifically addresses compensation for mining activities including repairs of buildings for water, dams, infrastructure for fishery, and canal for water. On partnership with local people and community development, Bangka addresses partnership with local people. Kukar addresses community development for people surrounding mining area.
  • Problems of illegal mining and unacceptable environmental and social performance are widely reported. Illegal miners are able to avoid paying production –related taxes and royalties because production is not reported. Underlying these industry performance problems are inadequate performance by government institutions including enforcement authorities turning a blind eye to illegal mining especially on Bangka. There are indications of corruption in the form of graft, bribery and cronyism in both Bangka and Kukar. There appear to be many examples of over-lapping licenses – not only license that overlap with other existing mining licenses but in some cases also licenses that encroach on and permit mining in protected areas. Some may be due to inaccurate records, others to malpractice. Underlying the poor presence of government institutions is a legal framework that has resulted in sub-national licensing rules and procedures including social safeguards that are generally both inconsistent and inadequate. Points of particular concern are that licensing rules give great discretionary power to Regents in issuing licenses and do not hold Mining and Energy offices accountable for transparent licensing processes, for maintaining up to date and accurate licensing records, and for disclosure and dissemination of licensing and performance data to other government agencies. Most importantly sub-national governments are not providing licensing data to national government, in a timely and reliable manner
  • As we have seen, the mining industry and government offices have had poor performance in terms of illegal mining, unacceptable environmental and social impacts, tax avoidance, corruption, inadequate licensing record keeping, overlapping licenses and insufficient inspections and a licensing moratorium is now in place.There are a number of ways that can bring about improvements. The government enacted the new mining Law number 4 of 2009 and has since issued the implementing regulations. The Law now needs to be fully implemented – but this will take political will, as well as time and resources. It will also require much larger budgets, professional leadership, better systems and many more competent and qualified staff.This may require dedicated funds from mining-related payments to be allocated to increase sub national mining agency budgets.Improved reporting and greater openness and transparency are preconditions for improved mining sector governanceThe national government will need to complete the Clean and Clear program and decide on final steps.Civil society can mobilize itself to engage on enact of these points
  • The 2009 Mining Law has made an important step towards improving inconsistent and inadequate sub-national licensing rules, but even so excessive discretionary power and inadequate disclosure and release of information and data still need to be addressed through further changes to laws and regulations. Ideally the Mining Law should be modified to make the issuing of licenses mandatory providing that the licensing criteria have been satisfied. Equally and most importantly, the laws and regulations should require full transparency regarding licensing applications, evaluation, approvals and records including mandatory disclosure of licensing information and production, environmental and social performance data Full transparency is a regulatory change that would considerably improve governance and reduce corruption.Making sure that production data is provided to tax authorities will also help reduce tax avoidance. Just as EITI has established the importance of transparency for extractive industries tax payments and collections, so there should also be licensing transparency But what if sub-national authorities do not follow the new Mining Law or the regulatory requirements proposed here for greater transparency and information disclosure. The national government may have to both reward and coerce improved sub national government performance through legal measures regarding “carrots and sticks”. These could include a moratorium on issuing licenses for non-performing governments and adjusting transfers of mineral-related payments to sub-national governments according to their needs and performance
  • EI1 Mining Licensing (english)

    1. 1. Sub-National Mining Licensing:The Results of Research on Two Districts – Bangka and Kutai Kartanegara John Strongman and Ambarsari DC RWI Conference Jakarta May 22-23 1
    2. 2. Presentation OverviewA. Research Objective: A Framework for Examining Sub-National LicensingB. Application to Bangka and Kutai KartanegaraC. Summary of Main FindingsD. Preliminary Policy Implications 2
    3. 3. Background and PurposeBackground• Some countries including Indonesia have moved towards mining license decentralization• Year 1999 Decentralization of Powers in Indonesia primarily to district level• 10,235 mining licenses issued by districts – of which 41% are “Clean and Clear”Purpose of Research:• Develop a framework for examining the potential benefits and the potential vulnerabilities of a decentralized licensing system• Apply the framework to Bangka and Kutai Kartanegara• Develop preliminary conclusions and recommendations on policy improvements identify possible steps to improve the decentralised licensing arrangements in Indonesia. 3
    4. 4. Framework for Examining Sub-National Licensing Three main building blocks: 1: Mining Industry Performance Key Q: How good or how bad is mining industry performance? Issues – illegal mining; environmental/social impacts; tax avoidance 2: Government Mining Institutions’ Performance Key Q: Are they working well or following poor practices? Issues: governance and corruption; overlapping licenses; licensing record keeping; licensing reporting; mine site inspections; budgets and staffing; inter agency coordination 3: Mining Regulatory Framework Key Q: Are the rules part of the solution or part of the problem? Issues - National or local licensing and safeguard rules? institutional roles? reporting and data sharing requirements including to tax agency 4
    5. 5. Application to Bangka and Kukar: Methodology• Method of data collection – Desk study and references – Interviews• Type of data – Government “clear and clean” license data• Overall reliability/validity of data 5
    6. 6. Building Block #1: How Good or How Bad isthe Performance of the Mining Industry? »Illegal Mining »Environmental and Social Impacts »Tax Payments 6
    7. 7. How Good or How Bad is Mining Industry Performance?Illegal Mining Bangka - As much as half of tin mining may be illegal. As of May 2012, only 17 mining operations permits (IUP) out of 283 issued by local government got Clean and Clear (CNC) statusKutai Kartanegara (Kukar) As of May 2012, only 240 IUPs out of 485 IUPs issued by local government got CNC status. New licenses are often issued that overlap with existing licenses so overlapping licenses is a growing problem.Environmental and Social ImpactsBangka Both environmental impacts and social impacts are poorly managed. As illegal mining practices have became rampant, environmental damages increase significantly. Livelihoods are shifting from agriculture (pepper farm) to artisanal mining. Kukar Environmental impacts are poorly managed, for example in water waste and stockpile for coals and there are frequent conflicts between the mining operations and the people living in the area. 7
    8. 8. How Good or How Bad is Mining Industry Performance?Mining-related Tax PaymentsBangka - as much as half of tin productionmay be smuggled out untaxed Transit (Domestic)Miner TI Owner TI Collector Smelter Export Market Smuggler Source: Ambarsari and Mumbunan, 2012. 8
    9. 9. Building Block #2:Are Government Mining Offices Working Well or Following Poor Practices? »Governance and Corruption »Budgets, Staffing and Mine Site Inspections 9
    10. 10. Are Mining Offices Working Well or Following Poor Practices? Governance and Corruption  Illegal Mining  Graft and Bribery in Issuing Licenses  Avoiding environmental protection requirements Budgets, Staffing and Mine Site Inspections  Inadequate Mining Office budget and staffing  Too few occupational safety and health inspection took place at  Inadequate or lack of complaint and conflict resolution mechanisms. 10
    11. 11. Building Block #3:Are the Rules and Regulations Part of the Solution or Part of the Problem?»Sub-National and National Procedures»Different Sub-National Procedures 11
    12. 12. Are the Rules Part of the Solution or Part of the Problem? Procedures for Mining Licenses (IUPs) and Contracts of Work (CoW) Minister EMR Governor Local Investment Office Regent/ Regent Local Mayor parliament Applicant MoENR Applicant Province Graph A – Procedure to apply IUP Graph B – Procedure to apply CoW Lampiran Kepmen ESDM 1453/2000 12
    13. 13. Are the rules part of the solution or part of the problem? Different Sub-National Procedures Local mining regulations : the differences are more than the similarities.The potential disadvantages and vulnerabilities are that investor has to examine each regulation for each jurisdictionJurisdictions are not required to report production data to taxation agencies Description Bangka Kutai KartanegaraYear of Issue 2001 2001Name and type of license IUP, PUP, IUPR - IUPStage of licensing for mining 2 (exploration and exploitation) 6 (general investigation; exploration;activity exploitation; processing and refining; transport; and selling)Procedures/ IUP: Detailed and easy to Not detailed and no other regulationRequirements understand. as reference IUPR: to be regulated by RegentIf more than one applicant Not regulated First priority is decided by Regent,for the same area. 13
    14. 14. Are the rules part of the solution or part of the problem? Environment and Social Impact Sub-national environmental and social protection are legislated by both districts Bangka mining regulation addresses land rights including the rights of indigenous people. Mining regulations in both districts addresses compensation for land acquisition, environmental management and reclamation Bangka addresses partnership with local people, while Kukar addresses community development for people surrounding mining area.
    15. 15. Summary of Main Findings Mining Industry Performance:1. Extensive illegal mining and smuggling including mining in protected areas2. Unacceptable, non-compliant environmental and social impacts3. Tax avoidance by illegal mining operations Government Mining Institutions1. Corruption – licensing graft, bribery and cronyism2. Inadequate mining licensing records3. Newly issued licenses overlap other licenses or protected areas4. Insufficient minesite inspections and lack of oversight of illegal mining Mining Regulatory Framework1. Inconsistent and inadequate sub-national licensing rules and procedures and environmental and social safeguards including conflict resolution2. Excessive discretionary power to license offices and Regents3. Full transparency of license applications awards and licensing records 15
    16. 16. Mining and Government Performance IssuesPotential ways forward to improve the poor past performance of manysmall mining operators and sub national offices and officials so that themoratorium on mining licenses can be lifted – Prompt and effective implementation of Mining Law 4/2009 and associated regulations which will require political will and mobilization of much larger budgets for sub-national offices • More and better staff • Improved systems especially licensing records • Regular inspections – Information reporting, especially to National Government – Much greater openness and transparency regarding licensing – Resolution of licenses that are not Clean and Clear – Engagement of civil society to support
    17. 17. Regulatory Framework Issues• An important start has been made to improving the previous shortcomings in the licensing laws and regulations with – Mining Law 4/2009 – Clean and Clear Program• But vulnerabilities remain.• Further legal reforms in terms of additions to laws and regulations are needed to – Reduce the discretionary powers of the officials who grant the licenses – Make full transparency mandatory regarding licensing applications, processing, decisions and records etc. – Allocate part of the mining-related payments by licenses holders to support the budgets of sub-national government mining agencies – Provide sanctions (like the present licensing moratorium) for non- compliance by sub-national governments with the Mining Law 4/2009 and other new rules and regulations 17