2. Photo: Berau Coal
12.1%
Is the mining sector
come in as low as 11%. While still a big contributor
to national wealth, this is less than the up to the 17%
(Buck & Nottage, University of Sydney) mining previously
contributed to Indonesia’s over-trend GDP growth.
Of course other sectors, such as FMCG and financial
accounted of the total services, have grown very fast indeed so it is quite
possible for the mining sector to grow strongly but to
Indonesian GDP in the decline as a proportion of GDP. Over the coming years,
second quarter of 2012. the government seeks to increase the contribution of the
mining industry to the national GDP.
Foreign investors have viewed Indonesia as amongst
The mining industry is expected to contribute 11% of the darlings of emerging-markets. However, some
GDP in 2012 (Business Monitor, October 2012), which changes and continuing uncertainty over mining law has
is proportionately a 1% decline from 2011 and most led investors in new projects to remain cautious and
analysts have downgraded the expectation of the concerned despite the undoubtedly improving conditions
Indonesian mining sector (which had been forecasted to of investment in Indonesia, overall. The government has
contribute 12-13% GDP in 2012). What has caused this made clear its desire to shift towards more local control
booming sector to falter? of the economy, to ensure Indonesia and its people get
to share in the economic benefits of the country’s rich
The mining industry plays an important role in the natural resources. Sometimes – and not always fairly –
development of Indonesia’s economy. Based on the this is perceived as ‘resource nationalism’.
Indonesian Central Agency of Statistic’s (Badan Pusat
Statistik Indonesia – BPS) data, the impact of Indonesia’s
1 Pricewaterhouse Coopers. April 2012. Mining in Indonesia: Investment and Taxation Guide,
controversial mining law has seen a fall in exports and 4th ed. PwC Indonesia. Retrieved from http://www.pwc.com/id/en/publications/energy-
utilities-mining-publications.jhtml, on October 31, 2012
risks a slackening off in investment, with a result that
2. Retrieved from http://www.miningandengineeringindo.com/id/Untuk-Peserta-Pameran/
total contribution to Indonesian GDP in 2012 may Indonesia--Industri-Pertambangan-yang-Dinamis/
Mining in Indonesia
3. in effect giving greater control to local government
which, unlike in many countries, takes the lead on mining
regulation. To date, the Ministry of Energy and Mineral
Resources (EMR) has yet to follow up on the Supreme
Court’s ruling to cancel several clauses included in the
Ministerial Regulation 7/2012, which is a derivative of
the Mining Law, as the Ministry has not yet received any
copy of the verdict from the SC4. This structural lack of
clarity in the Indonesian legal process is another topic
entirely; nor is it just a feature of the mining sector and
Photo: Berau Coal
does not help FDI into Indonesia. Thus, the ban on ore
exports would still be imposed5. The regulation envisaged
that mining companies would begin building smelters in
2012 which would start operations in 2014. Mining firms
– experienced in smelter development (and its energy
infrastructure they require) protested at the timetable
- if not the policy, saying it can take years to make an
investment return on smelter development.
Further accentuating the risk/reward ratio of the massive
amounts of FDI needed to make successful mining
exploration and development, the 2012 mining regulation
(issued under the 2009 mining law) also requires that,
after ten years of operation, foreign mining firms divest
a majority stake (at least 51%) to domestic Indonesian
Photo: Berau Coal
businesses. This gives further fuel to the argument that
Indonesia is undergoing a phase of Venezuelan-style
resource nationalism and de facto nationalization. Such a
view is clearly a caricature.
A 2012 announcement on banning exports of 14
raw minerals is one factor that forced existing foreign The Indonesian government believes its policy is a way to
mining companies in Indonesia to review their business maximize the domestic economic benefit of Indonesia’s
plans. The new regulation only applies to holders of resources and improve the value-added of Indonesia’s
mining business licenses issued after 2009, while economic exports. The government has now said, of the
companies with a pre-existing “contract of work”, or Supreme Court decision, that a new mining law should
those who agree to build local processing facilities, will be expected in 2013
be allowed to ship ore until 2014. These changes have
led a temporary slowdown in exports while companies
adjusted to the new regime. In August, Chinese imports
of nickel ore from Indonesia dropped 39% to 1.48
million tons3 following steep falls in July and June, while 3. Retrieved from http://www.reuters.com/article/2012/09/30/indonesia-mining-explorers-
idUSL4E8KO3WT20120930
China’s imports from the Philippines nearly doubled
4. Indonesia will maintain a policy that tightens exports of mineral ores amid a ruling by the
over the same period. The drop was due to companies Supreme Court that annulled some articles on the ministerial decree. The Supreme Court
annulled four articles of Ministerial Decree No. 7 on mineral processing that was issued in
having to acquire new export permits certifying they February 2012, including article 21, which bans exports for mining business license holders.
The Nov. 5th. The decision was based on a request from the regencies’ government
are “clean-and-clear” (meaning they have paid all back association, or APKASI, according to a copy of a summary of the Supreme Court verdict
payments and completed the appropriate feasibility seen by Bloomberg News. Ridwan Mansyur, the Court’s head of public relations, confirmed
the summary. He said he couldn’t provide further details on the ruling as the full document
and environmental studies) as well as the firms having isn’t finished. Susyanto said the energy ministry hasn’t received a copy of the ruling.
shown that they plan to set up value-added processing
5. The Ministry of Energy and Mineral Resources insists it will retain the raw mineral export
facilities by 2014. restrictions despite the Supreme Court overturning the policy’s relevant ministerial
regulations. Jero Wacik, Minister of Energy and Mineral Resources, said that the restrictions
on exports of raw minerals are the implementation of the Mining Law, which requires
employers to establish mineral processing industry before the ban on mineral exports in
In November 2012 the Indonesian Supreme Court 2014. Mineral companies who still want to export minerals will therefore be required to build
a smelter in advance. In addition, said Jero, the regulations were designed to control the raw
annulled a number of points under the Mining Regulation minerals export and also to prevent layoffs.
Mining in Indonesia
4. The national government’s reforms to
drive value-added mineral processing10
in Indonesia are surely correct. However,
the continuing of uncertainty in the Mining
Law’s execution might lessen foreign
investors’ interest in the Indonesia’s
mining sector when they saw this
industry’s recent economic performance.
Photo: Berau Coal
Mining expert Kurtubi explained to Kompas on November Freeport, for all sorts of geopolitical reasons prevalent
2nd 2012 that the current regulations, rules and laws at the time in the late 1960s, is a unique case and not a
that regulate the mining sector in Indonesia, benefit good sector guide. But the Freeport argument mirrors
foreign investors more than they promote prosperity of ones recently successfully made by pro-Islamic groups
Indonesian people. He used an example of PT Freeport which, in a landmark Supreme Court judgment, declared
Indonesia’s contract, which was signed by both parties— the government’s oil and gas concession-granting body,
the government and PT FI—and has been extended until BPMigas, unconstitutional (in a move which has knocked
2021. The contract, which was included in the Laws foreign oil & gas confidence in Indonesia). There are
No 1/1967 on Basic Provisions of Mining, proved to be widely- if privately-discussed fears amongst major
more advantageous to PT FI, as Indonesia only received foreign mining groups that nationalism will also attack
a one percent royalty on total production (noting this is in their current legal interests, as part of a general wave of
addition to corporate and other taxes) and did not have xenophobia against foreign investors in natural resources.
the sole authority to amend the agreement clause, as it
should be approved by both parties. Mining FDI may not be as resilient as the government
previously assumed. Unlike non-mining sectors, such
as financial services and consumer goods, which have
a booming market in Indonesia, the mining sector has a
different story to tell and faces great challenges posed
by the fractured licensing system across regents or
Mining Export
‘bupatis’ of provincial government: and a legal system
Movement in Indonesia
with its own operational challenges. This is a situation
25.500
that the President has recognized is not working6 and
has suggested some level of reform. Although it is
25.000 noteworthy that the President’s comments represent
the opposite direction of thought in the recent Supreme
24.500
Court judgment (based on current law).
24.000
23.500
6. The growing mining permit problems in the country, such as clashes between local
residents and mining companies, could get worse if the government fails to find the right
23.000 solution. The uncertainties in mining permits have led to a number of conflicts across the
archipelago. In a press conference held on August 8, 2012, the President said he had
decided to give governors, as the heads of each provincial government, broader oversight
22.500 authority over bupatis or mayors in the issuance of new mining permits.
Since the implementation of the 2009 law, the number of mining permits increased to about
22.000 10,250 as of August last year, up from only 597 permits in 2009, which in turn resulted in
overlapping mining permits (since they were issued without a standard geographic mapping
Jan - Sep 2011 Jan - Sep 2012 system). Based on the ministry’s latest data, just 4,626 out of 10,566 currently active mining
permits had obtained ‘clean-and-clear’ status, which indicates mining activities are in line
with the government’s environmental policies and that all legal requirements, including those
Mining Product on land usage and taxation, have been met.
Mining in Indonesia
5. The local rule of law can be a problematic, where the domestic sector than the current government. Indeed
Indonesian court judgments may on occasion appear to there is a lot to say to bring forward investment and work
be based on nationalist grounds; are somewhat reluctant constructively with government to build a partnership
to enforce foreign judgments, and occasionally indeed that can weather the legal and political wrinkles likely
seem to be only randomly associated with the rule of law7. to come. There is valuable stuff underground Indonesia
and foreign mining firms know they need to be robust,
As implied by the former Chairman of Rio Tinto and equitable and nimble if they are going to have the
former President Director of Newmont Mining in privilege of extracting this wealth.
Indonesia, Noke Kiroyan, to The Australian on October
26, 20128 Indonesia, in some sectors other than mining, The national government’s reforms to drive value-
offers great opportunity for foreign investment (as long added mineral processing9 in Indonesia are surely
as, say, you’re not extracting anything from the ground, correct. However, continuing uncertainty in the Mining
importing nor doing anything involving large amounts of Law’s execution might reduce investors’ interest in the
land). However, if any of these aspects factor in to an Indonesia mining sector, especially having regard to
investor’s business plans, it can be a challenging market, recent its economic performance.
and market entry requires a perhaps greater degree
of pre-planning with other markets to navigate local
complexity and special circumstance.
7. Friday, August 17th 2012: The Corruption Eradication Commission (KPK) caught two
Indonesian anti-corruption judges, red handed as they were allegedly receiving bribes from
an alleged middleman. Supreme Court Deputy Chief Djoko Sarwoko said the incident gave
a bad name to the institutions and anti-corruption court.
Edelman’s Conclusion 8. Burrell, A. October 26, 2012. Indonesian nationalism a growing risk for miners, says
Noke Kiroyan. Retrieved from http://www.theaustralian.com.au/business/mining-energy/
Noke Kiroyan controversially advised foreign mining indonesian-nationalism-a-growing-risk-for-miners/story-e6frg9df-1226503468931, on
October 31, 2012
companies to delay their inward investment into
9. Indonesia will review its rules on the export of unprocessed metal ores after a Supreme Court
Indonesia until after the Presidential elections of 2014. ruling upheld a challenge to a government ban on such shipments. The court decision could
pave the way for a resumption of exports by small mining companies, which were hit hard
This view is not one that pleases the government, by the restriction imposed in May by Indonesia. Energy and Mineral Resources Minister Jero
Wacik said he was seeking information from the court about the ruling but had not seen it
naturally, and Edelman would also add that our reading of personally. The regulations issued this year aimed to add value to Indonesian exports and
encourage firms to build smelters. The have already led to billions of dollars in proposed
the political runes is that the likely serious contenders for smelter investments, particularly for bauxite and aluminums. The court ruling does not affect
parts of the 2009 Law on Mining that ban all raw mineral exports after 2014.
the 2014 Presidency will not be less focused on boosting
Photo: Berau Coal
Mining in Indonesia
6. We can safely conclude that while Indonesia is known Whether hoping to bypass the law, or in ignorance (or
as a world leader in coal exports, as well as tin and perhaps misled by local partners), there is evidently an
nickel production, the recent revision of the Mining Law issue whereby some foreign mining firms have invested
has led to a temporary slowdown in exports, which also in, or formed joint-ventures with, local firms holding
may cause foreign investors to review their decisions mining licenses only valid for local Indonesian mining
negatively. Though this might not affect the FDI in firms and these are not capable of permitting mining
Indonesia’s non-mining sectors, the mining sector could operations by a foreign mining firm. Indeed, the president
do great harm to the reputation for FDI in Indonesia of the association of Indonesian regents, APKASI, (the
as a whole. As such, it is crucial for the Indonesian level of government that carries out mining concession
Government to quickly finalize mining law and give licensing) has recently written to all regents or Bupatis to
certainty for investors to commit investment funds to the recommend that they check that all mining firms in their
country. regency hold the right type of permits and that foreign
miners are not operating using licenses intended only for
In addition, the government should also give assurance domestic firms.
to both foreign and domestic investors by ensuring that
the law is to be strictly obeyed by all relevant parties, As the government reviews licensing and reforms the
including the regulators. Amongst other things Western mining law – moving licensing perhaps to the level of
investors should expect a quid pro quo: better clarity in provincial governors – it needs to bring clarity and boost
the Mining Law in exchange with more Western mining the image of Indonesia as a foreign direct investment
firms’ full compliance with it. destination. Notwithstanding the recent Supreme Court
decision, President Yudhoyono’s suggestion that mining
The recent Churchill mining case is being used by some regulation be moved up a tier in government (from bupati
as the ‘poster child’ to portray Indonesia as a high-risk to provincial government) is surely to be welcomed; as
mining and investment environment [disclosure: Edelman would better transparency throughout the whole process
represents the Government’s viewpoint in this matter]. of mining licensing.
While not getting into the details of this case – where the
government contends that Churchill never held operating The government would be well-advised to consider
licenses valid for a foreign mining firm in the first place an overhaul of the licensing process that leads to a
– this does throw a light on an area of complexity in the streamlined regulatory environment. A transition and
field of mining regulation. ‘grandfathering’ period might also be extended to
mining firms, having previously always acted in good
faith, who wish to step forward to seek an upgrade
in their licenses. This would also have the benefit of
encouraging mining firms to become better corporate
citizens, by incentivizing them to become fully compliant
with Indonesian law, and would also boost the dialogue
and consultative process – pre-regulation – between
government and the industry. Government, the industry
and the foreign investment climate in Indonesia can only
benefit from a closer partnership between state and
foreign private sector.
10. http://www.italaw.com/cases/1479 The Indonesian government remains confident in the
outcome of the Churchill Mining arbitration. The government contends that as a foreign
company, Churchill could not have a stake in a local miner without its approval. Also,
Churchill had the license only to provide general mining support services, not to mine. The
main trigger for action came when the state auditor also found fraudulent documents,
and officials discovered Churchill had explored in a protected area, without the Forestry
Minister’s permission.
“This complaint against the Indonesian authorities for not providing full investment
protection and security has no grounds, since Churchill never had legitimate mining rights in
Indonesia,” said Amyr Syamsuddin, Minsiter for law & Human Rights (quoted in the Jakarta
Post November 16th 2012).
Photo: Berau Coal
Mining in Indonesia