Mining Law Revision – Delayed Again. [Coal Asia magazine Vol,65]

Mining Law Revision – Delayed Again.

Introduction.

The initial response to the world wide commodity price crash was for companies to stop exploration, then embark on efficiency & productivity drives, followed by closure of high cost mines. Then the governments sought to protect their mining industries through currency devaluation to support exports. The next step is now in progress, wherein governments around the world are competing to reducing taxes and simplifying regulations so that their mining industries can start to grow. As Minister Luhut recently mentioned, Indonesia needs exports, wherein domestic production & consumption is not enough for the country to advance.

Hundreds of geologists, miners, surveyors and many other professionals, plus thousands of skilled mine workers are out of work in Indonesia. A contributing factor for the depth of hurt is the delay in revising the mining law, which is needed to help revitalize the industry.

The Government prompted a review of the Mining Law (4/2009) to bring it into harmony with several more recent laws. Rather than change a few clauses, the Government called for a broader review of the law. In preparing the Draft Mining Law the Director General of Minerals and Coal (DGoMC) has formed the Drafting Team of Mining Law Academic Draft based DGoMC Decree No. 765.K / 73.07 / DJB / 2015 that involves scholars, practitioners,  professional associations, and representatives of the SOE.  The revised mining law was scheduled on the parliament’s priority list for 2015, but this was not achieved, and is rescheduled for 2016.  So the geologists, miners and skilled workers must suffer prolonged hardships while the minerals and coal lie idle or undiscovered in the ground.

This article looks a number of diverse and complex influences that may impact on those charged with developing and passing the new mining law.

Political Perspective.

Indonesia has a long history of state monopolies over natural resources, from pre colonial princes, VOC and Japanese, to Sukarno’s nationalization of the Dutch mines. President Suharto then introduced a capitalistic approach which successfully brought meaningful development to Indonesians. This history has left Indonesians divided over the philosophy of development, with one side looking for socialist State driven development and the other side favoring free enterprise and equal opportunity. This is an ongoing political division amongst all levels of Indonesian bureaucracy and society, between resource nationalization and a free capitalist approach.

The Directorate General of Minerals and Coal  (DGoMC) recorded a focus group discussion with Prosperous Justice Party fraction DPR (22 Oct 2015). They contend that the Mining Law is not performing well, and thus the people of Indonesia are not deriving the optimum benefit from the minerals & coal resources. This resource nationalism political outlook provides a schematic philosophy for controlling natural resources starting with the constitution Article 33, paragraph (3) that defines the Earth & Water as belonging to Indonesia, as controlled by the State. It is further proposed that State control be split between ownership rights (People / Government) and economic rights (controlled by business). This discussion looks at several areas where it considers adjustment to Law 4/2009 could be reviewed in keeping with this political outlook, and includes introducing a broader concept for strategic minerals. The PERHAPI workshop (24 Sep 2015) and other parties have adopted a similar philosophy and proposed that a separate Government State company (BUMNK) be established to hold actual ownership of exploitation rights, and then contract out the economic rights. Apparently the DGoMC finds this option too complicated and costly to implement. Certainly such a scheme may prove difficult for investors to secure their capital. Mr Bill Sullivan of Christian Teo & Partners undertook a review (Dec 2015) of the PERHAPI and DGoMC papers. This review emphasizes a fundamental problem with both papers, in that they do not provide suitable encouragement for private investors and their backers. Bill also calls into question the recent apparent historical change in interpretation of “optimum benefit for the Indonesian people” and provides good insight into the ensuing current nationalization trends in the higher courts and politics. Apparently PERHAPI have recently resubmitted a new proposal. Note that at a recent seminar (25 Feb 2016) Hanief Setianto of the ESDM indicated the outlook of the Mines Department is to exercise control over the mineral industry through being the facilitator for real investors.

At the UNSW Business Think Indonesia seminar (26 Nov 2015) the introductory remarks reflected on the change of outlook brought by president Jokowi’s government, including:  Previous Indonesian politics avoided “pro business’ in public speeches, as this was seen to contradict the “pro poor” policy, wherein the populace considered all business being out for greedy profit and not caring about people. However Indonesia’s growing middle class and increased connectivity now realize business provides jobs for the people, thus politicians are now able to promote pro business. The government now recognize its responsibility is to provide a climate for business to grow (not be the main employer itself). The key note speaker, Minister Luhut made a number of points that may be of interest to the mining law revisionists.

• Understand the effect of government & leadership has on business confidence.
• Reduce income inequality, if people see gap between rich & poor diminishing, then we may expect more civil instability.
• Improve competitiveness – not allow one group to dominate an industry / sector – thus people can see there are opportunities for themselves.
• Deregulation – President Jokowi said not to bother him until the number of permits drops from 3 digits to 2 digits.
• Recognition for the need for exports (and imports) wherein domestic production & consumption is not enough for the country to advance.

Professional Approach.

The forum for Mineral Exploration and Development (EMD), with PERHAPI, submitted a white paper; “Towards a positive investment climate for exploration in Indonesia” (Nov 2015) to the DGoMC. This paper highlights practical issues that may be reviewed to encourage exploration activity through the private sector. One of the main points is that exploration is a separate industry to that of production, wherein simpler rules are needed to offset the higher investment risk profile.

The Exploration Industry Transparency Initiative (EITI) has worked closely with the government on a number of reports. Such work has helped drive administrative improvements in the DGoMC and other state institutions to improve effective industry monitoring.  EITI’s scope is broadening and each annual report brings further recommendations for improvement. The 2009 mining law includes the need for transparency, but lacks suitable articles to reflect such principals. There is the opportunity for the mining law revision process to incorporate the concepts behind a number of the EITI recommendations into the new law, to provide stronger legal backing to underpin various administrative regulations.

In early 2015 the ESDM went through a major restructuring and staff training program. This was designed to improve the Mines Department’s credibility and performance, and appears to be in line with President Jokowi’s concept of “mental revolution” for improving the public service. An unfortunate side effect was significant disruption in a number of services, resulting in limited priority on revising the mining law.

Predatory & Vested Interests.

The exploration and mining community are well aware that vested interests and extortion activities have exponentially grown under the regional administration of the IUP system, and have extend laterally into other ministries. The improper development of vested interests with the IUP system is widely acknowledged as one of the reasons for the need to revise the mining law, so that issuance and management of tenements need to be centralized.

The “papa minta saham” case is a rare public exposure of senior politicians attempting to extort personal benefits from a mining company (Freeport), and brings into question the motives behind the raw ore export ban. The conviction of a past Minister of Mines for corruption reflects on a general public outlook to consider such immoral behavior as “normal” for politicians. Besides this “grab for cash” there appears to be a bigger play wherein some key influential politicians are subtly exerting predatory influence at all levels of government such that they will gain control/domination of large sectors of the oil & gas and mining industry.

Luhut’s comment to “improve competitiveness – not allow one group to dominate an industry / sector – thus people can see there are opportunities for themselves”, would seem to be directed at the power play between various Indonesian conglomerates and also in the peripheral forestry sector, or for IPP power projects. It would seem Luhut and others are concerned that the revised mining law will include opportunities for smaller players.

The Jakarta Post (24 Feb) opinion reporting on President Jokowi gathered the governors, regents and mayors more than four times to his office to drill into them the importance of private investment. Investors no longer look at and analyze simply Indonesia’s country risk profile but also provincial and even regency risk profiles. Overly zealous regional distortive and rent seeking regulations to raise local revenue may work against investors. There is the opportunity for the mining law revisionists to incorporate provisions into the law to restrict the uncertainty that comes from poor implementing regulations at the national and district level.

International Competition.

For many years the Frazer Institute has ranked Indonesia very low on the “ease of doing business” scale, wherein the mining laws, and associated regulations, are a principal factor for concerned international investors. The numerous flip-flops in changing the regulations and imposition of overlapping new regulations from other ministries are recognized as being significant contributors to Indonesia’s poor ratings. In light of these international ratings, the present mining law review may provide an opportunity to create a simpler bureaucracy and more investor friendly laws, along with clearer guidance for the implementing regulations.

Other countries are also reviewing their mining laws in the global competition for a shrinking pool of exploration funds, and endeavoring to increase each country’s GDP from the mining sector. Typical of the industry is the Canadian CANACCORD report (Jan 2016). This refers to a SNL Metals & Mining survey wherein exploration activity has declined over the past three years, now estimated at $8.8 billion in 2015, down from $20.5 billion in 2012 [Based on OECD data with adjustments]. Most exploration is related to reserve expansion on existing mines, with some late stage advanced exploration, but significant reduction in grass roots exploration. In general, late stage and mine site exploration activities are producer funded, while grass roots exploration is largely funded by small cap companies reliant upon specialist venture capital funds and retail investors.

The Indian National Mineral Exploration Policy white paper was developed in the latter part of 2015, and is scheduled for parliamentary discussion in the first quarter of 2016. The white paper is based around supporting exploration, as a separate industry to that of mining (similar to EMD outlook) and goes on to cover a wide spectrum of the industry. India’s goal is to have mining’s contribution to GDP increase from 2% to 4%. The paper acknowledges the past laws have not triggered the required growth, and look to Australia and Canada for inspiration as having successful exploration industries. Like Indonesia, India intends to retain an element of its national & SOE’s involvement, along with further emphases of building up the private sector.

Myanmar’s parliament passed a new mining law (72/2015), with implementing regulations due at the end of March 2016. The laws are designed to attract foreign investment across a wider spectrum of the industry. A number of industry expert advisors consider these laws still contain a number of issues for foreign investors, but clearly Myanmar is moving towards attracting a greater share of the limited international exploration funds. Mr Bill Sullivan’s opinion on the Myanmar mines law (Coal Asia Vol. 64) brings out the importance that exploration and mining laws need to be holistic. Having only a part of the law attractive to investors will not be effective.

The Canadian and other stock exchanges are no longer focused on Indonesia, wherein exploration plays in North & South America plus West Africa seem to attract exploration investment. Recent industry news includes;

• The Democratic Republic of Congo, Africa’s top copper producer, has abandoned a 3 year mining law review process due to opposition to a proposed raise in taxes and royalty.
• Zambia plans to provide stable policies and predictable tax regime to keep mine production in Africa’s second largest copper producer viable.
• Argentina has revoked a 5% tax imposed by the previous administration on mining and energy companies. The governments winning platform included a policy of repealing government intervention that scared investors away.

The pool of international funds available for mineral and coal investment has shrunk, and other nations are more successfully attracting such limited exploration and mining investment.

In the Jakarta Post (24 Feb16) President Jokowi is quoted “In a world where everything moves so fast and economic rivalry becomes fiercer  among nations, Indonesia should no longer take anything for granted, or it will be left behind”. “Indonesia should regard other nations as its rivals, including other ASEAN members”. Such competition is clear in the  bauxite and lateritic nickel industry where Indonesia’s raw export ban was suppose to restrict world supplies and push up prices to support the construction of smelters. However Malaysia & Philippines mining industries took advantage to develop their own raw ore export industry, bring benefits to their people, and pushing down international prices. Indonesian geologist, miners and skilled workers lost their jobs, while Malaysia and Philippines professionals and workers stepped into the supply vacuum. The Indonesian politicians acknowledged the raw ore export ban would come with short term “pain”, but promised there would be long term “gain”. The mining law revisionists may take this opportunity to evaluate the performance the raw ore export ban policy, and make adjustments. The mining law revision team may take the advice from Sri Mulyani given at a recent World Bank seminar wherein she appealed for all governments to make “evidence based policy decisions”.

Other Inputs.

Developing a revised mining law with public consultation is clearly a complex task. The DGoMC focus group discussion meeting of 16 February 2016 indicated that parts of the Mining Law 4/2009 are “no longer applicable”, and should be synchronized with the regional Governance law 23/2014 and other regulations. However synchronization between various government ministries may need to be much broader, to include aspects of BKPM, international arbitration, tax & finance, manpower, spatial planning, communication etc. It is widely recognized that coordination at the higher levels of ministries can be achieved, however it is significantly more difficult to implement at the daily practical level, where bureaucratic compliance rules and procedures confound the staffers at all ministries.

There are further considerations from academics, NGO’s etc, wherein it may be a delicate task to consider some narrow focused issues within the bigger picture. Fortunately Indonesia lawmakers can also draw upon its history of a successful exploration and mining industry. It is widely recognized that there are some practical issues that should be addressed to improvement to the exploration and mining industry, these include: 1) Disincentives related to legal certainty, ownership and land access need to be removed. 2) Incentives are needed to restart the exploration and mining industry, as it is no longer a matter of – there are people lining up to participate. 3) Profit verses risk need to be improved along with simplified regulations and lower administrative costs.

It is likely the 2015 manpower shake up of the ESDM may have delayed the deliberation process for developing a revised mining law. We might expect the purpose of the shake-up was to improve the performance of the ESDM however recent press releases continue to reflect the delayed target of initially 2015, then mid to late 2016, or before 2017. It is understood the ESDM and Commission 7 has prioritized other legislative targets, such as renegotiation of the COW, revision of the Oil & Gas law, resolving the IUP mess etc. These are good specific objectives, and we may expect such detailed deliberations to provide more thoughtful input towards the revision of the mining law.

The ongoing delay in developing the new mining law is resulting in hundreds of geologists, miners and thousands of skilled workers continuing to languish. The regions cannot begin to gain “optimum benefit” from their mineral resources for their people until the passing of the new mining law, the development of implementing regulations and the end of the moratorium on new tenements.

Conclusion.

• Indonesia has much to draw upon from the past workable mining laws & regulations, along with a great pool of experienced human resources to consult. It is clear that some of the unworkable aspects of the mining law 4/2009 were more aspirational rather than evidence based laws. It is prudent that Indonesia does not throw the baby out with the bath water!
• The new mining law has the opportunity to reflect a more mature legal system, wherein the following implementing regulations are confined more closely by the law, bringing more certainty to the industry.
• A new mining law is a justifiable and necessary goal, but so far is proving just too difficult for this Government. There is much good will for this mining law revision to succeed.