Changes in mining laws to come into force in 2007

Down to Earth No. 72 March 2007

Two significant changes to national regulations on mining are due to affect the mining industry in Indonesia. The mining minister, Simon Sembiring, said recently that the Indonesian government was intending to approve laws to ensure that more of the mineral resources mined in Indonesia will be processed within Indonesia rather than be shipped abroad. As well as this, new laws are due to come into force in early 2007 that will strengthen the role of regional governments in assigning and approving mining contracts in their regions. Both these changes will have an impact upon the role that the mining industry plays within the wider Indonesian economy and society.

It is generally accepted that involvement in the processing of natural resources is, in the long-term, more financially rewarding than the extraction of the raw materials themselves. Currently, most of the processing of mineral ore is done outside Indonesia, as is the case in many developing countries. Increasingly though, countries with significant mineral and raw material resources are wanting to develop their capacity to process these raw materials before exporting them to other countries. Currently, processing facilities associated with multinational mining operations in Indonesia include a copper smelting plant (at Gresik in East Java) and a nickel furnace facility (operated by Inco at Soroako, South Sulawesi). The new regulations will be aimed at making it more difficult for companies to export unprocessed concentrates and products abroad, so creating jobs, and more tax revenues for the government.

This is not to the liking of international investors in the mining sector in Indonesia, who are also claiming that changes to the laws governing investment in mining enterprises in the different regions of Indonesia will 'further inhibit' their access to these markets, so reducing the likelihood of involvement of international companies in new mining initiatives in Indonesia. The Indonesian Mining Association (IMA) has also reaffirmed their rejection of the new law. These regulations will have the effect of replacing a centralised Contract of Work system with a licensing system for mining projects through regional governments. The changes are aimed at resolving disputes between the regions and central government over the control of resources and a perceived imbalance between Jakarta and regional governments in the receipt of royalties on revenues. Previously central government received 80% of the royalties on revenue gained from mining activities, with only 20% earmarked for the government and people of the province where the mine was located. Under regional autonomy legislation passed in 1999 and which came into effect in 2001, the percentages were supposed to be 80-20 in favour of the regions (see DTE 46 and DTE 48 for more background on regional autonomy). Disputes have arisen over the allocation of royalties as well as additional levies imposed by regional governments, plus a long period of uncertainty over mining in protected forest areas (see DTE 66 for more background). As a consequence, the central government stopped issuing new 'Contracts of Work, so all but drying up new investment in mining. Pro-industry observers claim that this investment is a necessary part of the development of the mining industry, if Indonesia is to take advantage of a soaring global commodities markets (fuelled in part by the economic boom in China). However, civil society organisations remained deeply concerned that the social and environmental impacts of mining and the effect on communities whose lives it disrupts have still not been paid the attention they deserve.

It remains to be seen what effect this regionalisation of licensing will have on the mining industry in Indonesia, whether it will increase accountability of mining companies to local populations and whether it will indeed reduce or increase mining activity in Indonesia. (Source: Dow Jones Newswires 30/Jan/07 and Dorothy Kosich, Mineweb 04/Jan/07.)