MAC: Mines and Communities

Indonesia sends mixed messages to miners

Published by MAC on 2009-01-19

Indonesia's parliament passed a long-awaited mining law in mid December which both adds - and removes - obstacles for foreign investors.

Indonesian Mining Law Adds Obstacles for Foreign Investors

by Tom Wright, Wall Street Journal

17th December 2008

JAKARTA -- A new Indonesian mining law aimed at taking more local control of the country's resources will go into effect as commodities prices are tumbling, a combination likely to deter foreign investment and hamper the industry.

The measure was passed by the parliament Tuesday after years of wrangling between the central government and provincial politicians over who should control the nation's abundant resources of coal, gold, nickel and copper.

In the meantime, nations including Brazil and Australia cashed in on a global commodities boom that has now fizzled.

The timing of the law's passage couldn't be worse for would-be investors. Prices for key commodities are falling sharply: the price for nickel, of which Indonesia is a major producer, is off 60% so far this year.

"It will be a very tough year for Indonesian mining after this law," said Priyo Pribadi Soemarno, executive director of the Indonesia Mining Association.

The new law, which takes effect within three months, gives greater power to local governments and requires mine operators to process raw materials locally.

It is widely viewed as favoring small, local investors over large foreign miners such as Rio Tinto PLC and BHP Billiton Ltd. that have been in talks for years with authorities here over multibillion dollar mining projects.

Under authoritarian former president Suharto, who ruled from 1967 to 1998, the central government offered long-term contracts to foreign miners, spurring huge investments from U.S. companies, including Freeport-McMoRan Copper & Gold Inc. and Newmont Mining Corp.

Since Mr. Suharto lost power, however, Indonesia's provincial and local governments have pushed to take more control of natural resources in their regions. Foreign investors have made no major mining investments in Indonesia in the past decade because of the regulatory limbo.

The new mining law scraps the Suharto-era contract system in favor of locally issued mining licenses, underscoring the growing power of provincial authorities. Under the new system, local authorities will give companies five-year exploration licenses that can later be turned in to full mining-development agreements.

But big foreign miners like Rio Tinto and BHP Billiton are unlikely to proceed with projects until they can get assurances of longer-term licenses backed by the central government, industry analysts said.

The law grants the central government the right to issue long-term mining licenses for vaguely defined "strategic areas." This provision is seen by analysts as an attempt to assuage investors' fears of having to deal exclusively with inexperienced local governments.

"For small-scale projects, the new law's probably not that bad," said Sacha Winzenried, a mining analyst at PricewaterhouseCoopers in Jakarta. "But for big mining projects like the Rio Tinto's going to be hard to attract that kind of investment."
Rio Tinto is planning to invest up to $2 billion in a 46,000-tons-a-year nickel mine on Sulawesi island, and remains committed to the project, said Omar Anwar, president of Rio Tinto Indonesia. But the company, which has been locked in talks with Indonesian authorities since 2005, is watching closely to see whether, in practice, the new law allows central government involvement, he added.

A spokeswoman for BHP Billiton, which is hoping to develop a major coal mine in Kalimantan province, on the Indonesian side of Borneo island, declined to comment on the new law.

The new legislation also stipulates that mining companies have to have raw minerals processed locally or set up smelters on their sites to do so within five years.

The idea is for Indonesia to earn more by processing its metals and minerals at home rather than sending raw commodities overseas.

But few investors want to invest millions of dollars in local smelters unless they get assurances of long-term contracts, said Mr. Winzenried.

Write to Tom Wright at

Indonesia passes new mining law


17th December 2008

JAKARTA - Indonesia's parliament passed a long-awaited mining law on Tuesday designed to boost government revenues and remove obstacles to foreign investment.

The law was passed at a plenary session after more than three years of deliberations by a special committee tasked with overhauling the legislative framework covering mining in the resource-rich country.

Lawmaker Sonny Keraf, who headed the working committee that designed the bill, said it would encourage business by removing legal uncertainty while boosting the revenues and powers of provincial governments.

"It gives a chance for people to do business and gives leeway for provincial administrations to enforce provincial autonomy," he said.

But the Indonesian Mining Association has criticised the law, saying it will deter investment rather than help to unlock the country's under-exploited mineral wealth.

Association executive director Priyo Pribadi Soemarno told Dow Jones Newswires ahead of the plenary session the new rules weakened security for large-scale investments and could push big industry players away to countries with more conducive investment climates.

"This mining law (shows the government) is not learning from the current situation, with the global crisis," he said.

"This decision says 'no more investment, we don't need more investment.'"

Countries with freer investment regimes such as Malaysia and the Philippines could continue to attract mining investment while Indonesia languished, Soemarno said.

The new law installs a licensing system for most mining investments in place of the previous contract system which large investors saw as more secure and simple, he said.

Companies would have to acquire a mining licence from local governments, and new permits would be needed for each stage of the mine from exploration to production.

Under the Contract of Work system all these steps were merged into a single contract with the central government.

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