View Point: Unnecessary
confusion in enforcing
the 2009 Mining Law
Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, January 19 2014, 1:17 PM
The government resolved the
confusion over the enforcement of the 2009 Mining Law, preventing massive
worker layoffs and a potential loss of at least US$5 billion in export
earnings, through an 11th hour regulation that lowered the purity levels of
most exportable minerals as from Jan. 12.
Though the regulation seemed
disgraceful and inconsistent with the true spirit of the mining law, which aims
to develop as high a value-added as possible for mineral ores, it appeared to
be the best compromise, a face-saving solution to the debacle caused by the
incompetency of the Energy and Mineral Resources Ministry.
The government’s claim that it
fully enforced the law by the Jan. 12 deadline is debatable. It did totally ban
the export of nickel ore and bauxite but still allowed the exports of copper concentrate
with a purity level of at least 15 percent and other minerals with purity
levels of 62 percent for iron, 49 percent for manganese, 57 percent for lead,
52 percent for zinc and 56 percent for ilmenite, which is refined into
titanium.
Such purity levels certainly
are not the final goal, let alone the spirit, of the 2009 Mining Law.
The six concentrates are
subject to 20 percent export tax, which will gradually be increased up to 60
percent by July 2016 in a strong bid to push mining firms to fully process
their minerals in the country by 2017.
Indonesia has long been a
major exporter of nickel, bauxite, copper, tin, coal and several other
minerals.
Therefore, the 2009 Mining Law
which, among other things, requires the processing of minerals within the
country and prohibits exports of mineral ores starting Jan. 12, had been
welcomed as a strong legal foundation to bring Indonesian natural resources up
on the value-added chain.
Even though the law was
enacted a few months before the legislative and presidential elections in 2009,
when the sentiment of economic nationalism usually escalates, the legislation
is rational as it provides a five-year transition period for miners to meet the
mandatory processing requirement and 10 years (after commercial production) for
the divestment of controlling ownership by foreign investors to national
interests.
Five years should have been
adequate for investors wanting to abide by the law in good faith even though
smelters require big investments, especially because smelting is high,
energy-intensive manufacturing, while areas outside Java, where most of major
mineral resources are located, still suffer a large power deficit.
But alas, confusion had
surrounded the enforcement of the law, especially since early last year when
the government confirmed it would push ahead with a total export ban on
unprocessed minerals starting from mid-January 2014.
The government and mining
companies should only blame themselves for the policy uncertainty within the
mining industry.
The problem was that the law
was virtually shelved for more than three years because ministerial regulations
on the technical details on the provisions on the domestic processing of
mineral ores were issued only in May 2012.
This caused misperceptions
among mining companies that the government would not be steadfastly serious
about enforcing the law’s provisions on a complete ban of the export of mineral
ores.
Certainly, two years are not
adequate to build smelters that require big investments. Moreover, while
smelters require a large volume of electricity and support infrastructure as
ports, almost all the mining firms are located in areas outside Java, which
still suffer from a huge power deficit. In fact, investment for a captive power
unit is sometimes larger than the investment for the smelter itself.
The policy reaffirmation last
year set off a sort of chaotic reaction, even among giant mining firms such as
Freeport and Newmont, which cried out that they would not be able to meet the
deadline for processed mineral exports and demanded a reschedule of two to
three years.
Mining firms blamed the weak
commodity market, an acute lack of infrastructure and what they considered an
accelerated period of divestment by foreign investors while at the same time
investors were required to put up additional investment for processing.
The government, greatly
concerned about the temporary loss of $5 billion in export earnings annually at
a time when the country has been suffering big current account deficit, seemed
willing to reschedule the deadline for the mandatory processing.
But the plan plunged into
chaos in November after the House of Representatives rejected the government’s
proposal to amend the mining law so as to allow a longer transition period.
But full enforcement of the
export ban would increase the current account deficit and strengthen the
downward pressures on the rupiah, which has so far depreciated by more than 21
percent against the dollar.
Yet more politically
sensitive, the export ban could anger regional administrations because they
would certainly lose tax and royalty revenues.
It is encouraging to note that
the government has learned a great lesson from the confusion. The latest
regulation will be more powerful in terms of forcing miners to build smelters
because of the 10 percentage-point increase to be made in the export tax on the
semi-processed minerals every half of the year, starting in January 2015 until
the export tax reaches as high as 60 percent in the second half of 2016.
Certainly, an export tax of as
high as 60 percent will make the export of semi-finished minerals commercially
unfeasible because not a single commodity is able to provide a profit margin of
over 60 percent.
Of more importance is the
government should resolutely enforce the latest rule. Big risks are already
inherent within the mining sector without legal uncertainty and policy
inconsistency.
The writer is senior editor at
The Jakarta Post.
