IA CEPA, COVID 19 and Miners Wishful Thinking. Vol 116
Introduction.
The Indonesia Australia Comprehensive Economic Partnership Agreement (IA CEPA) [Agreement] shall come into effect on the 5th July 2020. The preamble includes one of the key aspects; – “RESOLVING to create clear and mutually advantageous rules governing their trade and investment to promote a predictable, transparent and consistent commercial framework for business operations, minimise barriers, enhance economic efficiency and create a larger market with more opportunities for business”. The Agreement consists of an extensive series of documents, attachments, letters & MOU’s that make tedious reading.
It would seem the thrust of the Agreement is aimed at managing the traditional international barriers of trade, tariffs, investment and manpower each country raises around itself. The Agreement is touted as being an incentive to improve economic cooperation between each country. The Agreement goes into some detail about each sector of the economy, wherein Indonesia essentially gives a detailed list of what can & can not be done in the mining sector, while Australia is almost silent on the mining sector. This is a reflection of the present situation, where Indonesia is seen as “protective” while Australia is more “open” in the mining sector. Indonesia’s approach to each sector’s Agreement tends to be more prescriptive. For example, the mining law 4/2009 is largely exempt from these ‘mutually advantageous rules”, include divestment and other controlling features for foreign participation remain largely excluded from the Agreement. Australia’s sector by sector approach in the Agreement is less defined, with the typical statement that “Australia reserves the right to adopt or maintain any measures with respect to……” for each sector.
Mining Sector.
The mining sector seems to be mentioned almost in passing, suggesting the drafters of this Agreement did not adequately involves experts from this industry sector. There are some brief, though often vague, references to mining.
Chapter 4 rules of origin, Article 4.3; “For the purposes of Article 4.2, a good that is wholly obtained or produced in the territory of a Party means: (e) minerals and other naturally occurring substances extracted or taken from the soil, waters, seabed or beneath the seabed there;” It would seem this rule is directed at determining custom fees and customs systems.
Chapter 14 on Investment with the definition “investment means every asset that an investor owns or controls, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk”. This chapter of the Agreement has been discussed by a number of mining industry expert lawyers, wherein investment in the mining sector is likely to be influenced by the restriction on foreign investors into Indonesia by the provision; – “relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives or on the basis of nationality.” Similarly, there are various clauses throughout the Agreement restricting foreign investment and busines with State Owned Enterprises. The current trend in the Indonesian mining industry is to prioritize and promote SOE’s, thus providing a diminishing options for Australian participation in the mining industry.
The mineral smelting sector is almost completely missing from this agreement. Annex 4-c on product specific rules headnote on general rules mentions ‘refining process (chemical or physical), but this is clearly in relation to cooking oils or such.
It is also noted that the Annex 1 – schedule of Indonesia – introductory notes section b mentions mining and quarrying with reference to law 4 of 2009. This law was amended / updated just prior to the introduction of the Agreement, wherein it is assumed the new amendments shall apply when considering the IA CEPA.
IA CEPA Medium term objectives.
The Agreements opportunities for the mining industry seem to come with Chapter 15 on Economic Cooperation, with Article 15.1 Objectives that includes: – “1. Economic cooperation under this Chapter shall be built upon a common understanding between the Parties to support the implementation of this Agreement, with the objective of maximising its benefits, supporting pathways to trade and investment facilitation, and further improving market access and openness to contribute to the sustainable inclusive economic growth and prosperity of the Parties.” In particular “The first Annual Work Program will be developed in accordance with the medium-term objectives attached to the exchange of letters constituting an agreement on economic cooperation signed between Australia and Indonesia in connection with the signing of this Agreement.”
These exchange letters include the Memorandum of Understanding on the Indonesia-Australia Skills Development Exchange Pilot Project. Under point 4 Governing Principals, exchanges will include mining engineers and related technical services.
The Agreement was prepared prior to the COVID 19 pandemic and subsequent economic challenges. Both countries are now reappraising their economic recovery strategies. Prior to COVID 19, Australia had a narrow focus on driving an influx of tourism, education and export of agriculture products. Prior to COVID 19, Indonesia had a focus to improve human capital, manufacturing, and encourage tourism. It is likely both countries will reassess all sectors, with a short-term view to restart the economies, and medium term to grow diversification.
The Agreement is full of nice words to reflect a good intention to work together. It would seem the post COVID 19 world is now more reliant on such good intentions to enable adaptation and innovation from policy makers and regulators for a ‘common understanding’.
Webinar opening the door for change.
On the 4th June 2020, a webinar was undertaken on the IA CEPA as moderated by Phil Turtle of the Australia Indonesia Business Council (IABC). There were presentations from the Indonesian Ambassador to Australia, BKPM, KADIN and others. The webinar made reference to the mining industry, as an established positive industry between Indonesia and Australian business. Some key points to come out of this post COVID 19 webinar included 1) each country is looking for quick recoveries of their economies, 2) that Indonesia is preparing similar Comprehensive Agreements with other countries, wherein Indonesia & Australia business players have a short window to ‘get in first’ with business opportunities.
Perhaps one of the most interesting comments came from Ibu Shinta W. Kamdani of KADIN, who suggested that Indonesia may need to change some of the implementing regulations to accommodate the IA CEPA, and to stimulate the economy in the post COVID 19 era.
The mining law has a long history of recognizing the need to adapt to new economic challenges, and the growing sophistication of the mining industry. It is herein noted that the Mining Law 4/2009 opens with considerations for revising the 1967 mining law with the rational “ that in consideration of national and international developments, Law Number 11 of 1967 concerning Basic Provisions of Mining is no longer current so that revision of laws and regulations in the field of mineral and coal mining is required in order to manage and seek potential minerals and coal in independent, reliable, transparent, competitive, efficient and environmentally-sound manners to sustainably assure national development;” The 2020 amendments to the Mining Law further recognize the need to revise the mining law with considerations for various constraints that prevented the effective running of the mining industry.
The 2020 amendments to the mining law were drafted in the pre COVID 19 era with an initial aim to update and coordinate the legal foundation with the change to the Regional Autonomy law and such. After a few years of debate, the amendments were passed by Parliament at the height of the COVID 19 pandemic in Indonesia, presumably to provide financial and legal stability to the mining industry and therein support to the Indonesian economy at this time of national stress.
Wishful Thinking.
The new amendments to the Mining Law 4/2009 are typically seen by local and foreign investors to have closed off any ‘breakthrough” opportunities to stimulate new players for exploration and mining. Fortunately, the amended mining law still has a number of implementing regulations that could be significantly revised to help stimulate the mining industry, and so lift the Indonesian economy.
Wishful thinking 1 Exploration: The short-term stimulus to the Indonesian economy may come with a surge of new exploration players and new money. Such stimulus would be spread over many districts throughout Indonesia, and may also involve small to medium enterprises – all objectives of the IA CEPA. This new exploration play may be encouraged by dramatic changes; to reduce the exploration data fee (KDI), that the bidding system be radically changed, allow private parties simple access to large areas, and that the foreign divestment regulations could be further softened etc. There are hundreds of Australian listed Junior exploration companies that may be eager to raise new funds and explore in Indonesia. However, they would need to be adequately encouraged to come to Indonesia, and given just incentive for investors to commit to exploration.
At present, several Australian states are offering a range of financial and technical assistance packages to encourage exploration companies to explore in Australia. There are hundreds of ASX companies that may welcome cornerstone investors from Indonesia to explore in Australia. Perhaps an outcome of the Agreement may see an outflow of Indonesian capital and talent into the Australian exploration industry.
Wishful thinking 2 Smelters: Both Indonesia and Australia are supportive of the concept of international “added value”. The prime example is that Australia exports wheat to Indonesian, Indonesia then makes noodles, and then exports the finished product. Perhaps this concept could be extended to the mineral industry, wherein Indonesia exports raw ore (bauxite) or concentrates (lead, zinc and other minerals) to existing Australian smelters for ready processing, and then exporting the metals. The deal could come with conditions, say after X years the Australian smelters may be encouraged to build new smelters in Indonesia, subject to commercial viability etc. This may widen the pool to attracting smelter builders, from the reluctant miners to the experienced smelting industries. In the short-term Indonesia could earn more from ore exports, and in the medium to long term expand the domestic smelter industry. This sense of cooperation may deter Australia from a new path to develop its own manufacturing industry further – perhaps wherein Australia limits exports of wheat to support growth of new noodle factories in Australia, and thereby place pressure on the international noodle market.
The COVID 19 experience of market disruption has brought the risk profile of diversification back into a leading concern. The new amendments to the mining law allows raw ore and concentrates to be exported for 3 years under certain circumstances. Disruption of the domestic smelter operations has the potential to completely stop the upstream mining industry and bring zero benefit to Indonesia. Marketing disruptions are starting to be felt with WTO levies on some Indonesian metal goods into Europe, and the China policy of on & off for coal imports is already beginning to spread to the metal market commodities. The COVID 19 travel restrictions have imposed operational stress on the Morowali smelters. There are also natural hazards that can abruptly stop the smelter industry. We recently saw local flooding threaten the Morowali complex, but more sever events could come from of tsunamis triggered by undersea slumps, earthquakes and such. Many Indonesian raw ores are smelted in China, wherein diplomatic relations can come under stress, particularly with the maritime boarder, treatment of Indonesian fishermen on Chinese ships etc. The IA CEPA could be an opportunity for Indonesia to diversify offshore smelting to include refining in Australia.
Wishful thinking 3 Open Data; Many of the progressive pro-business governments of UK, Canada, Australia and others, have government funded programs to provide open data to the public. This has stimulated new IT / unicorn companies to evolve which use this data to derive new exploration targets, predict environmental outcomes of old mines, provide input for urban design, update geo-risk urban planning along with yet to be discovered uses for such data. Indonesia has various public libraries, research centres, universities and numerous private libraries of open data. It is wishful thinking for the Mines Department to provide all non-competitive data free to the public on a digital platform. Although the Mines Department is assigned the role of managing the nations resources for the benefit of the people, it is wishful thinking that the Mines Department may not restrict /exclude others from the nations data, and so limit /deny others from contributing towards the “befit of the people”.
Wishful thinking 4 Manpower; The Jakarta Post ran an article (9 June) quoted Wang Liping, a minister counsellor on economic affairs at the Chinese embassy in Jakarta statement that “every Chinese worker in Indonesia can create at least three jobs for the local Indonesian people”, wherein he was referring to smelter operations. In exploration and mining the ratio can be significantly greater. The proposed omnibus law is designed to stimulate employment. The present rules for employing Indonesian and foreign experts is clearly of a pre COVID 19 era where limitations on age and experience may have precluded the local SOE or foreign investor assigning critical roles to their selection of the best people. Indonesia private business does not impose restrictive age criteria. One of the principals of IA CEPA is to treat Australian companies on an equal footing to Indonesian companies, wherein wishful thinking may see age and other restrictions be eliminated. Why not engage the foreign innovative IT expert with only 1-year experience, or why not engage the 75-year-old engineer with heaps of technical hands on experience?
Reality Bites with Amendments to Mining Law.
The new mining law amendments requires no new tenements be issued for the transition period of 6 months after the issuance of the Law, scheduled for 12th June 2020. There are some parties looking into contesting the amendments of the Law in the courts, and that process could take many months before the amended law may be considered sufficiently established for many new investors to commit to new exploration tenements.
The new amendments also need to be examined for the elucidation clauses, further interpretation and updating of implementing regulations. The new amendments now centralize the main mining business license; however, a raft of other operational supporting licenses remain with the provinces that may, or may not, be quick and easy to be undertaken.
At a recent webinar, the Canadian Ambassador to Indonesia mentioned his impression that COVID 19 had the effect of encouraging governments to become more extreme in their direction. Indonesia may further trend away from free enterprise business and expand towards State Owned Enterprises. This would seem to be the case with the Indonesian mining industry, wherein several amendments to the mining law appear to favour the SOE’s over private enterprise. The new amendment clause to introduce the “resilience fund” would also seem to require existing miners to fund government directed exploration programs, rather than attract new players with new exploration money.
Conclusion.
During the COVID 19 lock down, the mining industry was seen as a critical industry, wherein miners undertook personal sacrifices to keep the industry running, while mine owners struggled with off take issues and low commodity prices. The question now is to see if there is political and administrative will to use the IA CEPA as a tool to make breakthrough implementing regulatory changes in the exploration, mining and smelting industries to “create a larger market with more opportunities for business”. Indonesia certainly needs to grow the mining industry.