Vincent Lingga - Opinion Column

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.