Weak Legal Certainty; Indonesia Ranks Lowest in Mining Sector
The Indonesian Mining Institute (IMI) is concerned about foreign perceptions of Indonesia's mining sector. According to the Fraser Institute, a Toronto-based public policy research and educational organization, Indonesia now ranks lowest in terms of the "state of the investment climate in the mining sector across the world". A new survey, conducted by the Canadian think-tank, shows that Indonesia's recently introduced government policies (stemming from the New Mining Law) that affect the activities in the mining sector has seriously undermined foreigners' confidence in a conducive investment climate in Indonesia's mining sector.
Hendra Sinadia, Deputy Chairman of the IMI, said this low ranking is very unfortunate because Indonesia has abundant mineral resources, but needs investment to tap this potential. The weak state of legal certainty in Indonesia's mining sector is a major obstacle to foreign investment. Not only new investors are hesitant to invest in the nation's mining sector but also existing miners are reluctant to invest in costly expansion plans or smelter development projects due to weak legal certainty. Considering investment in mining is capital intensive and long-term in nature, a low degree of legal certainty is a major obstacle.
An example of weak legal certainty is the clash between Freeport Indonesia, the local unit of US mining giant Freeport-McMoRan, and the Indonesian government. This case may require arbitration because both sides are still poles apart. The main problem is that the Indonesian government unveiled its Law No. 4/2009 on Mineral and Coal Mining (New Mining Law) eight years ago. This New Mining Law introduced a range of "protectionist" regulations that were not in line with the long-standing Contract of Work that was signed by both parties in 1991.
The government wants its existing contract with Freeport Indonesia to be converted into the special mining business permit (IUPK), a license that was introduced through the New Mining Law. In order to safeguard a harmonious relation with the government and its business in Indonesia, Freeport Indonesia had already agreed to pay export taxes, higher royalties on copper, gold and silver sales, and to triple its smelter capacity, while cutting its concession size by more than half. However, the New Mining Law also includes an export ban on mineral ore, a strategy to reduce the nation's dependence on exports of raw commodities and seek more revenue by only allowing exports of processed mining products.
In January 2017 the government said Freeport Indonesia would be allowed to resume exports of copper concentrate but only if it would convert its contract into a IUPK. If the contract would have IUPK status then both parties can also start negotiating an extension of the mining contract after 2021 when Freeport Indonesia's existing contract expires. For the miner it is important to have certainty about its activities in Indonesia beyond 2021 (whether or not the contract can be extended) because it needs to invest heavily in underground mining facilities at its Grasberg mine in Papua. Without certainty about the extension it is too risky to conduct capital intensive investment.
However, considering the IUPK status would also imply certain rules and changes to taxes and other terms from which Freeport Indonesia is currently exempt, it would be much tougher, financially, for Freeport Indonesia if its contract is converted into a IUPK. For example it would need to start paying a dividend tax, a ten percent value-added tax (VAT) and an export duty of up to 7.5 percent on copper concentrate exports. It would also need to divest up to 51 percent of its Indonesian unit compared with a mandatory 30 percent currently (although the miner, so far, has only divested 9.36 percent).
For the next couple of months Freeport Indonesia and the government will continue to negotiate. However, if this leads to nothing, then there is the possibility to seek arbitration.
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It is not just the mining sector, it is all of the resource sector. At times, it appears that regulations are being changed for change sake. If it is not broken, maintain it only. It really is felt that many of the people changing the regulations are not looking outside of the window.
All the changes are stopping Indonesia getting to where it should be and I think it wants to be.