Heru Pamungkas, Rangga D. Fadillah and Aditya Rakhman
JAKARTA. In early 2014, the Indonesian government released an energy and mineral resources ministerial regulation that required holders of commercial mining permits (IUP) and special mining licenses (IUPK) in metal production to conduct a minimum amount of their processing and refining within the borders of Indonesia. This move triggered an outer), especially from extractive industries.
It was reported last week that PT Newmont Nusa Tenggara (NNT) has filed a lawsuit against the government with the International Centre for the Settlement of Investment Disputes (arbitration) in response to the emergence of the regulation.
NNT has stated that the regulation, which came into force on Jan. 12, 2014, has caused its mining site in Batu Hijau to cease operations, inevitably inflicting economic damage on NNT employees, contractors and other stakeholders. NNT in its submission stated that the regulation was not aligned with the contract of work and bilateral investment agreement between Indonesia and the Netherlands (NNTs major shareholder is an entity based on Dutch laws).
In spite of harsh reactions from the extractive industry, the underlying question remains.
At the very core of its systemic design and the implications that it brings, is this regulatory approach strategic in approaching a -better resource management system?
One can argue that the policy brings more harm than good or vice versa, but what one cannot deny is that this approach provides the country with "better", although far from perfect, regulatory architecture to help the government in managing its mineral resources. Poor management of natural resources, particularly minerals, has inflicted tremendous economic loss in the form of opportunity cost that is too apparent to ignore any longer.
Earlier this year, the Finance Ministry’s tax director general, Fuad Rahmany, revealed that the country lost approximately Rp 14.7 trillion (US$1.26 billion) per year due to illegal exports of minerals.
There are around 1,000 illegal seaports operating across the archipelago that facilitate these activities, including in Kalimantan, one of the country’s richest natural resource producers.
The seaports in question lack the necessary supervising and security details from officers and officials, so the ports can easily be used by delinquent miners to export mineral ores without paying taxes to the government.
If regulatory frameworks can be prescribed that make life slightly harder for the illegal exporters, the government will be able to tap into the lost economic benefit. This is where the export ban (together with more rigid licensing requirements) may serve that purpose.
With the export ban, mining companies are obliged to process their raw minerals up to a certain degree of purity inside the boundaries of the country. It is essential to note that this does not imply that all mining companies should build their own processing facilities or smelters; alternatively, they can process their mineral ores through smelting companies or at other mining companies’ smelters.
But things are never that simple; new smelters will not be ready until as early as 2017. A major cause of the current turbulence has been the government’s indecisiveness in implementing the 2009 law on minerals and coal over the past few years.
Thus, companies are still allowed to export ores but must pay some amount of duties, implemented as disincentives.
The situation has raised concern that the high cost of operating businesses in Indonesia will further reduce investors trust in Indonesia’s investment climate in the mining sector.
However, this is only a temporary effect. When the smelters are ready and the government continues to facilitate the business through regulatory frameworks with certainty and decisiveness in the coming two or three years, the benefits of this policy will outweigh any discounts on Indonesia’s investment climate initially.
And therefore, despite the challenges, this policy is worth fighting for. In light of achieving the desired effects laid out above, the ball is now in the government’s court, because the authority to manage natural resources is ultimately in the hands of the government, as mandated in the Constitution.
To that end, the government enacted the 2009 Law on Mineral and Coal Mining, which aims to manage mining activities that may well be a key contributor to the economic development of the country.
Government Regulation (PP) No. 23 of 2010, which was amended by PP No. 1 of 2014 as well Ministerial Regulation (Permen) No. 1 of 2014, obliges mining companies to revise their contract of works and Working Agreements (Perjanjian Karya), which consequently requires the companies to refine mineral ores within Indonesia at the latest by five years after the issuance of the regulation.
As a consequence of the regulations, mining companies need to ensure the availability of smelters to refine mineral ores that can be built by the mining companies themselves and/or other mining companies. The system requires mining companies to submit and apply for business licenses from the government.
The companies, however, should satisfy all of the conditions as set out in the Energy and Mineral Resources Ministry’s Regulation No. 32 of 2013 before obtaining a refining license that, among other things, includes providing a Memorandum of Understanding on Sale and Purchase Material made between the IUP holder and the company, as well as providing proof of the validity of the IUP.
As part of the architecture, the regulatory framework allows the government to have expanded management.
As laid out early in the article, the cost of not having a proper framework to regulate natural resource management for this bustling archipelago is astronomical.
This situation can be reversed, and the governments steps in early 2014 need to be supported.
If today it can tackle illegal mining, perhaps tomorrow it can raise Indonesias bargaining position in negotiations.
The prospects are excitingly promising.
Heni Pamungkas is a litigation attorney at Assegaf, Hamzah Partners (AHP), Rangga D. Fadillah is an analyst at BowerGroupAsia and Aditya Rakhman is a consultant at the REDD Agency Indonesia.
Source : The Jakarta Post, July 18, 2014