Jakarta Globe | Insight

Flip-Flop in Mining Regulations Deter Investment

Jakarta. Indonesia, a major player in the global mining industry, has abundant deposits of copper, gold, nickel, tin and thermal coal across its vast archipelago.

Since its independence in 1945, each presidential administration has sought to draw in foreign investment to tap into those deposits, though domestic laws surrounding the mining industry enacted in 2009 and subsequent regulations have served to dissuade many investors.

“The mining industry is different than the manufacturing industry. Let’s say there is a problem, like there is a protest [from the local community]. They can can easily relocate [the facilities]. In the mining industry, we can’t do that,” Ido Hutabarat, chairman of the Indonesia Mining Association (IMA), told the Jakarta Globe, adding that mining companies must stick within concession areas outlined in their contract.

Controversial Ban

Major changes in the country’s mining sector began after the Law on Mineral and Coal Mining No. 4 was enacted in 2009 under former President Susilo Bambang Yudhoyono. Subsequent regulations were issued afterwards to boost the country’s export revenue by shipping processed materials while clamping down on the export of mineral ore.

In early 2014, Yudhoyono’s government banned the export of metal ores, forcing miners to develop smelting operations in the country to create local jobs and increase export revenues. Those restrictions have in effect caused the local industry, which before 2009 was the world’s top nickel ore exporter, to lose billions of dollars in export revenue.

Source: PricewaterhouseCoopers Consulting Indonesia
Source: PricewaterhouseCoopers Consulting Indonesia

Caught Between a Rock and a Hard Place

Noticing the negative effects of his predecessor’s legislation on the industry, current President Joko “Jokowi” Widodo, earlier this year, relaxed the controversial ban on unprocessed mineral exports and allowed the export of nickel ore and bauxite. He also extended a temporary deal to allow miners operating in the country to export copper concentrate.

However, Jokowi’s policy reversals, while beneficial to mining companies like the state-controlled Aneka Tambang, have upset local smelters who previously invested significantly in capital-intensive projects in the country, believing they secured a guaranteed supply of mineral ore to export processed minerals.

Indeed, some industry experts have decried the country’s apparent policy flip-flop, which they say underscores an unpredictable investment climate.

Under Jokowi, mining companies are now required to renegotiate their contracts, provide higher royalties to the government and divest greater stakes in their Indonesian operations to state-controlled companies. Mining companies are also now required to apply a higher proportion of local content during production and processing of ores gathered in Indonesia.

Though perhaps the toughest new demand is the request for mining companies to construct facilities in-country to process mineral ore, which will force hefty new investments in downstream facilities.

Mining companies operating in the country have struggled to adapt to the new regulations, in part because the policy changes came during a time of low global commodity prices. The contribution of the mining sector to the country’s gross domestic product has been in decline over the past few years, though their contribution to overall export revenue remains large.

Source: PricewaterhouseCoopers Consulting Indonesia
Source: PricewaterhouseCoopers Consulting Indonesia

Ido of the IMA said that while investors in the mining sector are willing to spend money on processing facilities, they are more worried about the uncertainty they face over their contract renegotiations with the government.

Investors, he added, need to ensure that their investment for both mineral extraction and processing activities can yield into positive financial returns in the face of greater demands from the government.

“As investment in the sector declines, exploration activities have also declined. This is not good at all for the industry,” he said.

Renegotiation

Ido said most mining companies operating in Indonesia secured their contracts in the form of “Contracts of Work (CoWs) and Coal Contracts of Work (CCoWs). However, the 2009 Mining Law scrapped those contracts and replaced them with Mining Business Licences (IUPs), which gives less privileges to mining companies.

He said that while most of CoWs and CCoWs are set to expire in 2019 or 2020, the government has not offered instant transfer of such contracts into new IUPs. Industry representatives, he said, want the government to issue a regulation to ease the painful process of transferring the old contracts into new ones.

“What we need is actually simple, we need assurance that our contracts, or concessions [to operate a mining site] can be extended over a significant period of time. Let’s say 10 years, so we can ensure investment we will spend is worth it,” he said.

Freeport

Ido said the mining industry is closely watching the contract renegotiation between the government and Freeport Indonesia, the local arm of US mining giant Freeport-McMoran.

“Freeport’s [contract renegotiation] will be the benchmark for the industry,” he said, adding that other mining companies in Indonesia will review how difficult it is to renegotiate new terms and conditions with the current administration.

In August, the government announced that Freeport-McMoran agreed on divestment, smelter construction and taxes and royalty payments as part of its contract renegotiation, allowing the company to continue its operations at its Grasberg copper and gold mine in Papua.

While this may be good news, experts are concerned over the undiscussed details in a recent agreement that could potentially cause a new dispute.

Ido  said he estimates that about 40 percent of CoWs and CCoWs have not been renegotiated with the government. “This trend made investors re-think their future investment. Without any certainty, they will hesitate to invest more.”

Multinational professional consultancy firm PricewaterhouseCoopers (PwC), in its “Mining in Indonesia: Investment and Taxation Guide” report released in May, summed up the complexity of the existing administration’s demand for mining companies.

Source: PricewaterhouseCoopers
Source: PricewaterhouseCoopers

PwC said in its May report that companies are concerned about their lex specialis status, applicable fiscal regime (including royalty rates); in-country processing requirements; reductions in the size of the contract areas; and foreign divestment requirements.

“An urgent solution is key, as CoW/CCoW companies still produce the majority of Indonesian coal and minerals, and some significant projects have been put on hold as investors become concerned with uncertainty surrounding their contracts, and in particular the possibility for extension. Without certainty around the rights to extension of existing contracts, miners will not be able to commit to large expenditures on exploration, development or downstream processing,” it said in the report.

 

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