an edelman Indonesia Think PieceJanuary 4th 2013Mining in                                                                 ...
Photo: Berau Coal   12.1%     Is the mining sector                                                             come in as ...
in effect giving greater control to local government                                                              which, u...
The national government’s reforms to   drive value-added mineral processing10  in Indonesia are surely correct. However,th...
The local rule of law can be a problematic, where               the domestic sector than the current government. IndeedInd...
We can safely conclude that while Indonesia is known          Whether hoping to bypass the law, or in ignorance (oras a wo...
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Mining in indonesia 030113

  1. 1. an edelman Indonesia Think PieceJanuary 4th 2013Mining in t A shor t in viewpoIndonesiaIndonesia is a major player in the global mining industry with significantlevels of production of coal, copper, gold, tin and nickel1 . As of today,Indonesia is one of the world’s leading coal exporters and the world’ssecond largest tin and nickel producer2 , while bauxite exports havespiked in recent years. Photo: Berau CoalFor further information please contact STEPHEN LOCK or IGNATIUS (‘IPUNG’) PURNOMO on tel: +62 21 721 59000or email or©2013 Published by PT IndoPacific Edelman Indonesia. All rights reserved. Mailing address: Recapital Building, 3rd floor; Jalan Adityawarman kav.55; Kebayoran Baru, Jakarta 12160; Republic ofIndonesia. Edelman in Indonesia and elsewhere represents clients in the sector(s) discussed in Indonesia and around the world however nothing in this document can be assumed to represent theviews of any client unless expressly so stated. While every effort has been made to ensure accuracy no responsibility accepted for any errors or omissions contained in this document or for any lossesarising from acting on the views herein disclosed.
  2. 2. Photo: Berau Coal 12.1% Is the mining sector come in as low as 11%. While still a big contributor to national wealth, this is less than the up to the 17% (Buck & Nottage, University of Sydney) mining previously contributed to Indonesia’s over-trend GDP growth. Of course other sectors, such as FMCG and financial accounted of the total services, have grown very fast indeed so it is quite possible for the mining sector to grow strongly but to Indonesian GDP in the decline as a proportion of GDP. Over the coming years, second quarter of 2012. the government seeks to increase the contribution of the mining industry to the national GDP. Foreign investors have viewed Indonesia as amongstThe mining industry is expected to contribute 11% of the darlings of emerging-markets. However, someGDP in 2012 (Business Monitor, October 2012), which changes and continuing uncertainty over mining law hasis proportionately a 1% decline from 2011 and most led investors in new projects to remain cautious andanalysts have downgraded the expectation of the concerned despite the undoubtedly improving conditionsIndonesian mining sector (which had been forecasted to of investment in Indonesia, overall. The government hascontribute 12-13% GDP in 2012). What has caused this made clear its desire to shift towards more local controlbooming sector to falter? of the economy, to ensure Indonesia and its people get to share in the economic benefits of the country’s richThe mining industry plays an important role in the natural resources. Sometimes – and not always fairly –development of Indonesia’s economy. Based on the this is perceived as ‘resource nationalism’.Indonesian Central Agency of Statistic’s (Badan PusatStatistik Indonesia – BPS) data, the impact of Indonesia’s 1 Pricewaterhouse Coopers. April 2012. Mining in Indonesia: Investment and Taxation Guide,controversial mining law has seen a fall in exports and 4th ed. PwC Indonesia. Retrieved from utilities-mining-publications.jhtml, on October 31, 2012risks a slackening off in investment, with a result that 2. Retrieved from contribution to Indonesian GDP in 2012 may Indonesia--Industri-Pertambangan-yang-Dinamis/ Mining in Indonesia
  3. 3. in effect giving greater control to local government which, unlike in many countries, takes the lead on mining regulation. To date, the Ministry of Energy and Mineral Resources (EMR) has yet to follow up on the Supreme Court’s ruling to cancel several clauses included in the Ministerial Regulation 7/2012, which is a derivative of the Mining Law, as the Ministry has not yet received any copy of the verdict from the SC4. This structural lack of clarity in the Indonesian legal process is another topic entirely; nor is it just a feature of the mining sector andPhoto: Berau Coal does not help FDI into Indonesia. Thus, the ban on ore exports would still be imposed5. The regulation envisaged that mining companies would begin building smelters in 2012 which would start operations in 2014. Mining firms – experienced in smelter development (and its energy infrastructure they require) protested at the timetable - if not the policy, saying it can take years to make an investment return on smelter development. Further accentuating the risk/reward ratio of the massive amounts of FDI needed to make successful mining exploration and development, the 2012 mining regulation (issued under the 2009 mining law) also requires that, after ten years of operation, foreign mining firms divest a majority stake (at least 51%) to domestic IndonesianPhoto: Berau Coal businesses. This gives further fuel to the argument that Indonesia is undergoing a phase of Venezuelan-style resource nationalism and de facto nationalization. Such a view is clearly a caricature.A 2012 announcement on banning exports of 14raw minerals is one factor that forced existing foreign The Indonesian government believes its policy is a way tomining companies in Indonesia to review their business maximize the domestic economic benefit of Indonesia’splans. The new regulation only applies to holders of resources and improve the value-added of Indonesia’smining business licenses issued after 2009, while economic exports. The government has now said, of thecompanies with a pre-existing “contract of work”, or Supreme Court decision, that a new mining law shouldthose who agree to build local processing facilities, will be expected in 2013be allowed to ship ore until 2014. These changes haveled a temporary slowdown in exports while companiesadjusted to the new regime. In August, Chinese importsof nickel ore from Indonesia dropped 39% to 1.48million tons3 following steep falls in July and June, while 3. Retrieved from idUSL4E8KO3WT20120930China’s imports from the Philippines nearly doubled 4. Indonesia will maintain a policy that tightens exports of mineral ores amid a ruling by theover the same period. The drop was due to companies Supreme Court that annulled some articles on the ministerial decree. The Supreme Court annulled four articles of Ministerial Decree No. 7 on mineral processing that was issued inhaving to acquire new export permits certifying they February 2012, including article 21, which bans exports for mining business license holders. The Nov. 5th. The decision was based on a request from the regencies’ governmentare “clean-and-clear” (meaning they have paid all back association, or APKASI, according to a copy of a summary of the Supreme Court verdictpayments and completed the appropriate feasibility seen by Bloomberg News. Ridwan Mansyur, the Court’s head of public relations, confirmed the summary. He said he couldn’t provide further details on the ruling as the full documentand environmental studies) as well as the firms having isn’t finished. Susyanto said the energy ministry hasn’t received a copy of the ruling.shown that they plan to set up value-added processing 5. The Ministry of Energy and Mineral Resources insists it will retain the raw mineral exportfacilities by 2014. restrictions despite the Supreme Court overturning the policy’s relevant ministerial regulations. Jero Wacik, Minister of Energy and Mineral Resources, said that the restrictions on exports of raw minerals are the implementation of the Mining Law, which requires employers to establish mineral processing industry before the ban on mineral exports inIn November 2012 the Indonesian Supreme Court 2014. Mineral companies who still want to export minerals will therefore be required to build a smelter in advance. In addition, said Jero, the regulations were designed to control the rawannulled a number of points under the Mining Regulation minerals export and also to prevent layoffs. Mining in Indonesia
  4. 4. The national government’s reforms to drive value-added mineral processing10 in Indonesia are surely correct. However,the continuing of uncertainty in the Mining Law’s execution might lessen foreign investors’ interest in the Indonesia’s mining sector when they saw this industry’s recent economic performance. Photo: Berau CoalMining expert Kurtubi explained to Kompas on November Freeport, for all sorts of geopolitical reasons prevalent2nd 2012 that the current regulations, rules and laws at the time in the late 1960s, is a unique case and not athat regulate the mining sector in Indonesia, benefit good sector guide. But the Freeport argument mirrorsforeign investors more than they promote prosperity of ones recently successfully made by pro-Islamic groupsIndonesian people. He used an example of PT Freeport which, in a landmark Supreme Court judgment, declaredIndonesia’s contract, which was signed by both parties— the government’s oil and gas concession-granting body,the government and PT FI—and has been extended until BPMigas, unconstitutional (in a move which has knocked2021. The contract, which was included in the Laws foreign oil & gas confidence in Indonesia). There areNo 1/1967 on Basic Provisions of Mining, proved to be widely- if privately-discussed fears amongst majormore advantageous to PT FI, as Indonesia only received foreign mining groups that nationalism will also attacka one percent royalty on total production (noting this is in their current legal interests, as part of a general wave ofaddition to corporate and other taxes) and did not have xenophobia against foreign investors in natural resources.the sole authority to amend the agreement clause, as itshould be approved by both parties. Mining FDI may not be as resilient as the government previously assumed. Unlike non-mining sectors, such as financial services and consumer goods, which have a booming market in Indonesia, the mining sector has a different story to tell and faces great challenges posed by the fractured licensing system across regents or Mining Export ‘bupatis’ of provincial government: and a legal system Movement in Indonesia with its own operational challenges. This is a situation 25.500 that the President has recognized is not working6 and has suggested some level of reform. Although it is 25.000 noteworthy that the President’s comments represent the opposite direction of thought in the recent Supreme 24.500 Court judgment (based on current law). 24.000 23.500 6. The growing mining permit problems in the country, such as clashes between local residents and mining companies, could get worse if the government fails to find the right 23.000 solution. The uncertainties in mining permits have led to a number of conflicts across the archipelago. In a press conference held on August 8, 2012, the President said he had decided to give governors, as the heads of each provincial government, broader oversight 22.500 authority over bupatis or mayors in the issuance of new mining permits. Since the implementation of the 2009 law, the number of mining permits increased to about 22.000 10,250 as of August last year, up from only 597 permits in 2009, which in turn resulted in overlapping mining permits (since they were issued without a standard geographic mapping Jan - Sep 2011 Jan - Sep 2012 system). Based on the ministry’s latest data, just 4,626 out of 10,566 currently active mining permits had obtained ‘clean-and-clear’ status, which indicates mining activities are in line with the government’s environmental policies and that all legal requirements, including those Mining Product on land usage and taxation, have been met. Mining in Indonesia
  5. 5. The local rule of law can be a problematic, where the domestic sector than the current government. IndeedIndonesian court judgments may on occasion appear to there is a lot to say to bring forward investment and workbe based on nationalist grounds; are somewhat reluctant constructively with government to build a partnershipto enforce foreign judgments, and occasionally indeed that can weather the legal and political wrinkles likelyseem to be only randomly associated with the rule of law7. to come. There is valuable stuff underground Indonesia and foreign mining firms know they need to be robust,As implied by the former Chairman of Rio Tinto and equitable and nimble if they are going to have theformer President Director of Newmont Mining in privilege of extracting this wealth.Indonesia, Noke Kiroyan, to The Australian on October26, 20128 Indonesia, in some sectors other than mining, The national government’s reforms to drive value-offers great opportunity for foreign investment (as long added mineral processing9 in Indonesia are surelyas, say, you’re not extracting anything from the ground, correct. However, continuing uncertainty in the Miningimporting nor doing anything involving large amounts of Law’s execution might reduce investors’ interest in theland). However, if any of these aspects factor in to an Indonesia mining sector, especially having regard toinvestor’s business plans, it can be a challenging market, recent its economic performance.and market entry requires a perhaps greater degreeof pre-planning with other markets to navigate localcomplexity and special circumstance. 7. Friday, August 17th 2012: The Corruption Eradication Commission (KPK) caught two Indonesian anti-corruption judges, red handed as they were allegedly receiving bribes from an alleged middleman. Supreme Court Deputy Chief Djoko Sarwoko said the incident gave a bad name to the institutions and anti-corruption court.Edelman’s Conclusion 8. Burrell, A. October 26, 2012. Indonesian nationalism a growing risk for miners, says Noke Kiroyan. Retrieved from Kiroyan controversially advised foreign mining indonesian-nationalism-a-growing-risk-for-miners/story-e6frg9df-1226503468931, on October 31, 2012companies to delay their inward investment into 9. Indonesia will review its rules on the export of unprocessed metal ores after a Supreme CourtIndonesia until after the Presidential elections of 2014. ruling upheld a challenge to a government ban on such shipments. The court decision could pave the way for a resumption of exports by small mining companies, which were hit hardThis view is not one that pleases the government, by the restriction imposed in May by Indonesia. Energy and Mineral Resources Minister Jero Wacik said he was seeking information from the court about the ruling but had not seen itnaturally, and Edelman would also add that our reading of personally. The regulations issued this year aimed to add value to Indonesian exports and encourage firms to build smelters. The have already led to billions of dollars in proposedthe political runes is that the likely serious contenders for smelter investments, particularly for bauxite and aluminums. The court ruling does not affect parts of the 2009 Law on Mining that ban all raw mineral exports after 2014.the 2014 Presidency will not be less focused on boostingPhoto: Berau Coal Mining in Indonesia
  6. 6. We can safely conclude that while Indonesia is known Whether hoping to bypass the law, or in ignorance (oras a world leader in coal exports, as well as tin and perhaps misled by local partners), there is evidently annickel production, the recent revision of the Mining Law issue whereby some foreign mining firms have investedhas led to a temporary slowdown in exports, which also in, or formed joint-ventures with, local firms holdingmay cause foreign investors to review their decisions mining licenses only valid for local Indonesian miningnegatively. Though this might not affect the FDI in firms and these are not capable of permitting miningIndonesia’s non-mining sectors, the mining sector could operations by a foreign mining firm. Indeed, the presidentdo great harm to the reputation for FDI in Indonesia of the association of Indonesian regents, APKASI, (theas a whole. As such, it is crucial for the Indonesian level of government that carries out mining concessionGovernment to quickly finalize mining law and give licensing) has recently written to all regents or Bupatis tocertainty for investors to commit investment funds to the recommend that they check that all mining firms in theircountry. regency hold the right type of permits and that foreign miners are not operating using licenses intended only forIn addition, the government should also give assurance domestic both foreign and domestic investors by ensuring thatthe law is to be strictly obeyed by all relevant parties, As the government reviews licensing and reforms theincluding the regulators. Amongst other things Western mining law – moving licensing perhaps to the level ofinvestors should expect a quid pro quo: better clarity in provincial governors – it needs to bring clarity and boostthe Mining Law in exchange with more Western mining the image of Indonesia as a foreign direct investmentfirms’ full compliance with it. destination. Notwithstanding the recent Supreme Court decision, President Yudhoyono’s suggestion that miningThe recent Churchill mining case is being used by some regulation be moved up a tier in government (from bupatias the ‘poster child’ to portray Indonesia as a high-risk to provincial government) is surely to be welcomed; asmining and investment environment [disclosure: Edelman would better transparency throughout the whole processrepresents the Government’s viewpoint in this matter]. of mining licensing.While not getting into the details of this case – where thegovernment contends that Churchill never held operating The government would be well-advised to considerlicenses valid for a foreign mining firm in the first place an overhaul of the licensing process that leads to a– this does throw a light on an area of complexity in the streamlined regulatory environment. A transition andfield of mining regulation. ‘grandfathering’ period might also be extended to mining firms, having previously always acted in good faith, who wish to step forward to seek an upgrade in their licenses. This would also have the benefit of encouraging mining firms to become better corporate citizens, by incentivizing them to become fully compliant with Indonesian law, and would also boost the dialogue and consultative process – pre-regulation – between government and the industry. Government, the industry and the foreign investment climate in Indonesia can only benefit from a closer partnership between state and foreign private sector. 10. The Indonesian government remains confident in the outcome of the Churchill Mining arbitration. The government contends that as a foreign company, Churchill could not have a stake in a local miner without its approval. Also, Churchill had the license only to provide general mining support services, not to mine. The main trigger for action came when the state auditor also found fraudulent documents, and officials discovered Churchill had explored in a protected area, without the Forestry Minister’s permission. “This complaint against the Indonesian authorities for not providing full investment protection and security has no grounds, since Churchill never had legitimate mining rights in Indonesia,” said Amyr Syamsuddin, Minsiter for law & Human Rights (quoted in the Jakarta Post November 16th 2012).Photo: Berau Coal Mining in Indonesia