Reformasi 20 years on for Exploration.
Reformasi 20 years on for Exploration. (Vol 93)
Introduction
In May 2018, a number of NGO’s made short presentations regarding the performance of the ministry of Energy and Mineral Resources(ESDM) on the 20th anniversary of the Indonesian reformation movement. I worked as a geologist in Indonesia in the 70’s for a few years, and again entered Indonesia in 1985 to work in exploration and remained till the present. I lived through these reformasi times, wherein this NGO presentation stimulated me to reflect on my own outlook for the development of the exploration and mining industry through the Reformasi era till today.
Pre reformasi.
In the 1980’s – 90’s Indonesia mining industry had little financial and human capital, and foreign explorers and miners were eager to invest in this pioneer industry for Indonesia. The Contract of Work (COW) documents were developed though close cooperation between various lawyers on behalf of the industry and the government. This COW format proved so successful that it was later copied in a number of other developing countries. The evolution of the COW system with the ESDM was undertaken on a “win-win” bases, wherein the Indonesian government actively sought to develop the exploration and mining industry through the introduction of foreign investors. If sticky issues came up during the various meetings, then the Mines Department would simply say to leave it to them to sort out. This was backed with immense “good faith” that developed between the industry and the Mines Department.
On behalf of various Australian and Canadian companies I acquired and managed a number of mineral COW’s in joint venture with junior Indonesian companies. Significant money was raised overseas and spent in Indonesia undertaking grass roots exploration. At first there were simply not enough Indonesian geologists, and few were interested in entering the physical and socially hard life of mineral exploration. Over time the number of Indonesian geologists began to replace the Philippine and Western geologists. The COW companies were compliant and produced so many reports that the Mines Department hallways and stair cases began to fill up with boxed reports. These were exciting times to be a geologist in Indonesia.
Reformasi.
I saw the downfall of Suharto that was widely attributed to Suharto’s children and a number of cronies seemingly taking all the business opportunities and leaving not enough opportunities for others. Behind this personal facade, the Indonesian Government had not developed a sophisticated financial system, and so was heavily impacted by the Asian Financial Crisis (AFC). Many Indonesians were embarrassed that Suharto was humiliated in accepting an international bailout, and so the seeds of a revival of Nationalism were lit. At this time Indonesia had started it’s shift from a rural economy to an urban economy. This meant that cash paying jobs were becoming more important than village self-sufficiency. The AFC saw rampant inflation and peoples buying power disappeared, sparking wide spread civil unrest. In many ways this was a precursor to the Arab Spring so many years later, and looking back it was so important for the mob cry to be diverted from “revolution” to “Reformasi”.
Reformasi and the Mines Department.
At the time of Reformasi I was managing a Contract of Work and stayed in Jakarta for the whole “event”. It was clear that the replacement government supported the concept of Regional Autonomy as one of the main concessions to the wide spread social upheaval. The Districts were given authority over the mining industry (but not the oil industry). At the time this move was considered as “giving a dog a bone’ to appease the reformasi movement. I attended meetings at the ESDM on the handing over authority to the Districts to manage the COW’s. The ESDM was to provide training to the Districts in how to manage the mining industry. But the Mines Department did not have the budget nor the skilled manpower, and it was soon evident this training faltered, and the Districts were left to sort it out for themselves.
Once the post Suharto governments began to stabilize, the new mining law 4/2009 was brought in to formally recognize the districts authority in conjunction with the new Regional Autonomy laws. This new mining law also reflected upon the new generation of politicians and bureaucrats wherein a more pronounced national planning agenda was introduced. This mining law also saw the introduction of a moratorium on applications for new exploration tenements, that was largely obeyed by foreign investors. However, it took several more years for the district mines department to formally apply this moratorium.
In its own way the regional autonomy worked well for the mining industry, ultimately around 11,000 IUP’s were issued over vast tracks of Indonesia and numerous small mines sprung up giving employment and opportunities in so many remote areas. Unfortunately, a side effect was more corruption, collusion and nepotism (KKN) with some of the District leaders becoming wealthy “little kings”. Eventually the Central Government stepped in to bring the IUP industry under control, starting with the Clean & Clear (C&C) program to ensure IUP owners paid their fees. The more difficult work to sort out tenement overlap, demarcation of regional boundaries and other issues took longer to resolve.
The new mining law of 2009 saw a shift in emphases towards tighter control, and the following issuance of many implementing regulations took the divestment and value adding obligations further to the extreme. Nickel laterite and bauxite exports had quickly boomed but were snuffed out by the smelter policy. The KPK entered the mining sphere and was a driver behind cleaning up the messy IUP industry, with many District heads (“little kings”) being sent to prison for corruption. The Mines Department clamped down on foreign experts working in the Mining Sector, that further dissuaded foreign investment. The Forestry introduced new spatial planning components that hit the exploration and mining industry badly, and a whole raft of regulations made the exploration and mining industry more complex and risky. As mentioned in a recent EMD seminar – there has been no significant grass roots exploration in Indonesian since the end of the issuances of the COW system some 20 years ago. The introduction of the new mining law 4/2009 saw a hard landing for the grass roots exploration industry. A few of exploration contractors (drilling, assay laboratories, geological modelling etc) survived through limited brown fields exploration around existing mines and well-developed feasibility projects.
Balance between control and growth.
The recent NGO talks remined me that perhaps Indonesia has gone from a Suharto era of highly centralized power / business base, to a Regional Autonomy with a somewhat out of control free-for-all, and now, under the present government is headed back to a highly centralized power / business base. The Oil, Gas & Mining industry are being slowly diverted from a diverse private enterprise base to a few State-Owned Companies. The oil & mining conglomerates are growing stronger and fewer through mergers and acquisitions. A part of this trend to centralizing power are the new regulations designed to accommodate responsible and professional mining, but these laws also create barriers for small start-up players in the exploration and mining industry. These new regulations also create disincentives for foreign investors to enter the industry.
Certainly, the ESDM has a difficult task to balance responsible development in the exploration and mining sector, along with providing opportunities and incentives for new players to enter at the lower levels of the industry.
Historical Perspective.
I am reading an interesting book “East Indies” by Ian Burnet that outlines the history of European traders entering Indonesia, China and Japan in the 1500 – 1600’s. Indonesia, Japan and China were initially eager to develop trade, but once the social influence of the Europeans started to impact on the general population then the European traders were quarantined or excluded. The Asian rulers feared the European ways would undermine their absolute authority over their subjects. Indian traders introduced the Islam religion to Indonesia that lead to the defeat of various kings and the introduction of a new social system. The Dutch trading company morphed into the Dutch colonial rule that saw the further demise of the regional king system and the development of a broader regional government, laws and social system that placed the new rulers (Dutch) at the top. This colonial period saw the introduction of systematic geological mapping and the exploitation of oil and minerals added new wealth and opportunity to Indonesia. After World War 2, the great exploration era of the COW’s saw foreigners and mostly Java geologists become pioneers for the Central Government in entering the remote corners of Indonesia – often not previously visited by government officers. The exploration programs offered local employment, a window to a wider Indonesia, and many mines brought opportunities to remote districts. The Reformasi era saw exploration wither. Later the smelter policy saw remote mines suddenly close, with opportunities stripped away from village communities. Today there are less international companies, and more local conglomerates that do business the “Indonesian way”.
We may ask the question if today’s power brokers want to use Nationalism to justify a social system that maintains their control over the people? The ESDM needs to balance the trend towards too much power in too few hands, to allow room for small players, and so avoid another Reformasi? The ongoing freedom for NGO’s is a measure that Indonesia has not gone to a more closed society approach such as was seen in other countries.
The sustainability of National policies.
The NGO’s presentations brought out a point that I found interesting. Essentially the recent energy sector initiative to have one capped price for petroleum through-out Indonesia is great for the users of fuel. However, the cost to Pertamina will yield less profit margin and therefore less opportunity to grow the overall business. There are similar policies applied to the electricity and coal sectors, all of which may give short term benefit to the economy and users, but in the long run will be paid for by a lack of maintenance of the systems, lack of exploration and development to provide new reserves, and finally the whole industry may suffer. I see two social parallels here; –
1) The upland farmers of Kalimantan live in remote areas growing a balance of food and cash crops (coffee etc) and buy in fuel and such. These farmers look upon their lowland rice growers with pity, and see such farmers locked into a poverty cycle through the governments control over inputs (fertilizer price) and control over outputs (rice price) that is designed to support the urban poor. By keeping electricity and fuel prices low (control over inputs and outputs) to be affordable by the masses, the producers of such energy (miners & power plants) are trapped in a minimal profit scenario and may eventually fail.
2) Some years ago, I visited a small Kalimantan village that was generally self-sustaining, but drought had brought famine. This is what the State logistic agency was designed to combat – if there is excess food in one area it can be traded to a hungry area. An inter village and inter state trading system can elevate occasional distress in one area. If Indonesia wants a policy to keep all its coal and oil for its own development, so who will come to Indonesia’s aid when some disaster befalls the country? The World Bank and others helped Indonesia out of the great Asian Financial Crisis (AFC) because they could see that Indonesia could better manage the export orientated extractive (oil) industry. Will Indonesia’s new trend towards nationalism and self-interest as expressed through the raw ore export ban, and the changing coal policy bring similar “self-supporting or famine” risks to Indonesia? Strong international trade is required for the long-term wellbeing of Indonesia.
Certainly, the ESDM has a difficult task to balance popular vote winning policies to please the masses, against the more responsible aspect of governing to ensure sound extractive industries to underpin growth.
Governance.
The Reformasi saw the end of Suharto’s philosophy of “guided democracy” and a rubber stamp parliament. Post Reformasi has seen the ongoing development of a more ethical governance approach. There is a certain amount of consultation between the Ministry of Mines, parliamentary commission 7 and key industry players in the development of regulations – though there is still more to do to catch up with consultation process of some advanced countries. The international EITI Indonesian office has stimulated greater transparency and accountability for the mining & oil industries. The government has recently introduced the Beneficial Ownership regulations and continues to build better web sites (One Map) for ease of public access to basic government information. The KPK, ombudsman and various whistle blowing programs developed for state institutions and companies allow people direct access to air issues and so raise the responsibility of managing companies and institutions. A significant factor going forward is the government’s tolerance and overall recognition of many diverse NGO’s.
These NGO’s keep the reformasi spirit alive and are areas where diverse views can be freely expressed.
- In the spirit of reformasi, questions are posed on the centralization of business power through the SOE’ Should the government sell off some SOE’s and create more opportunities for the people to develop private development?
- Pertamina’s monopoly on the distribution of fuel was recently broken up, wherein the public have benefited from clean and honest petrol outlets, that now employ women. Pertamina petrol outlets were obliged to compete in providing a better service. Should more of Pertamina’s vertical monopoly be broken up and sold off to create greater benefits to the community through business-driven competition?
- The introduction of private power producers has helped the nation to generate more power. Should PLN also follow various international models of allowing the privatization of the power distribution sector.
At the time of the 98 reformation, the universities were full of student activists and NGO’s, but today the universities are trending towards religious focus. Perhaps this religious focus is the first phase of a social response that the professional work opportunities are being limited by fewer professional opportunities [no work so just pray], including the ESDM policies that support big mining but discourage exploration start-ups from generating new work and business opportunities.
NGO’s were part of the popular movement that brought the reformasi movement to Indonesia, and some continue with their roll of a reflecting a moral and purposeful outlook upon Indonesia. The Indonesian extractive industry is well served by responsible NGO’s made up of bright young professionals who are passionate and dedicated for the greater transparency and the overall betterment of Indonesia.
What Next?
The authority to issue and manage the mining industry was recently taken away from the Districts, and so undermined much of the basic principal of Regional Autonomy. The Central Government is now giving each village a cash grant to undertake local development, along with a shareholding in IUPK companies operating in their Districts, but this may make the districts more dependent on the central government, and less autonomous. The present Mines Department is keen to restart exploration in 2018, and has issued many supporting regulations, decrees as implementation guideline’s, and nominated an initial 16 areas for state and private investors. We hope this first auction system will be successful, and it will be quickly followed by many more new tenements all over Indonesia.
The opening up of new exploration areas may give the Districts some business and work opportunities and bring a sense of optimism back to the districts. Perhaps a successful opening up of the exploration industry may help divert a possible future repeat of the Reformasi movement.