Objectives and Policies of the Indonesian Mineral Sector Development

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By Sony Rospita Simanjuntak (1995)
1 Objectives
As applied elsewhere, Indonesia’s mineral development constitutes only one element of its total national development. Therefore, the development must be structured to fit into the total economic development plan. Today, Indonesia has just commenced the second long term development plan. [Indonesia adopts a 25 year long term development plan consisted of five short term plans. The first long term plan ceased in 1994] In brief, the objective of the second long term plan is to prepare the nation for a take-off process (into an industrial country). As to mineral development, the claimed objectives are: to support the industrialisation program through an adequate supply of raw material inputs for industry and energy, to earn or save foreign exchange, and to create employment. [Directorate-General of Mines and Energy, Kilas Balik 50 Tahun Pertambangan Umum dan Wawasan 25 Tahun Mendatang (A Reflection of 50 Years General Mining and a View for the Next 25 Years), 1995, VIII-1. In practice, however, the Government is still emphasising in the earning of foreign exchange than the two other goals. It is also suffice to say here that the latter objective ha never been addressed properly. There has not been any directions requiring mining projects to increase their labour intensity]

2 National Mineral Policy
In order to achieve goals of mineral development, it is fundamental for a country to have a national mineral policy. [R Bosson & B Varon, The Mining Industry and the Developing Countries (1977), 153] Indonesia, however, has not had a clear defined national mineral policy yet, although one may argue that it has one incorporated in its total economic policy. [The formulation of a mineral policy is not, however, an easy task. This is in particular because in the mining industry, issues are not homogeneous for all type of minerals. Each mineral has its specific consideration economic, military and socially. See R F Mikesell & J W Whitney, The World Mining Industry: Investment Strategy and Public Policy (1987), 129. It has been suggested that for the establishment of a mineral policy, a team of specialists is needed. The team must not be the monopoly of people with expertise in subjects like geology, exploration, mining and mineral processing mineral economics, macroeconomics only but also people with expertise in development strategy and legislation, public organisation and administration, law, and taxation regimes. See Bosson & Varon, ibid, 176] The absence of this policy for developing countries is not unusual. [Bosson & Varon, ibid] The World Bank said that in such countries, ‘decisions are made on an ad hoc basis and development of the mineral sector is often sporadic and ill-directed, at times even forfeited by the absence of a clearly defined policy.’ [Ibid]
The absence of a national mineral policy for Indonesia, to some extent, has come to the stage of creating legal uncertainties. Often, changes were made without amendments to the Mining Act. This lack in policy has contributed to the delay in the process of revising the Mining Act 1967.
For the benefit of the policy makers, the World Bank has elaborated important elements of a national mineral policy, they are: [Ibid 154-6]
• the basis of mineral development: weather a private, public, or mixed system;
• the mineral conservation measures;
• the procurement, maintenance, and dissemination of geological and mineral resource data;
• the encouragement of land reclamation and the elimination or control of air and water pollution;
• the incentives for mining which serves as a basis for regional development;
• the guidelines for determining whether responsibility for the infrastructure lies with government, the private sector, or both;
• the adequate provision for training and employment of indigenous personnel;
• the equitable share of the revenue;
• the channelling of the government revenues into continuing productive investment in industry, agriculture, and supporting infrastructure. (In many cases, developing countries have mistakenly channelled the revenues: foreign exchange earnings from mineral exports, for instance, go into the purchase of consumer goods; revenues from mineral activities including part of the royalties are used to support the government’s national budget; and alternative productive capacity or revenue-earning facilities are not formed to take over from the depleted reserves)
The current condition in Indonesia shows us that programs in Indonesian mineral development is still concentrating in the maximising foreign exchange earnings from resources.
3 Important Steps to Implement National Mineral Policy
1. An Effective Ministry of Mines or Mining

If one country wishes to develop its mineral resources, a ministry of mines is a must. The World Bank’s study in 1977 found that ‘the Ministry of Mines in developing countries is often large, bureaucratic, and ineffective institution It may suffer from over-staffing, low salaries leading to inability to attract qualified personnel, inadequate budget, incorrect procedures, lack of planning and inability to formulate policies or monitor relevant legislation, and ineffective decision-making’.[Bosson & Varon, ibid 157]

At present, Indonesia has a ministry of mines combined with energy, [See the organisational Chart of Indonesia’s Department of Mines and Energy] which is speculated to be separated soon. Actually, to some extent, the need for an effective ministry of mines is also shared by Indonesia. Today, for instance, a review on the organisational structure of the Directorate-General for General Mining is taking place.

The World Bank again has also pointed out primary responsibilities off a ministry of mines, they are:[Bosson & Varon, ibid 158-9]
• planning and co-ordinating current operations and future development;
• establishing an effective documentation centre; and
• supervising compliance with the mining legislation which is ‘sometimes the only function of a mining ministry but, sadly, one which is often neglected.’

2. A Working Geological Survey

To invest in the mineral sector development, an investor must have a plan which requires a factual basis. Thus, a government that wishes to develop its mineral resources must prepare a geological map of the entire country. It is crucial to keep in mind that it is the government’s duty to supply basic geological data and maps, and to carry out the infrastructure geology.

Officially, in Indonesia, this particular task is handled by the Directorate-General of Geology & Mineral Resources (DGGMR).[Presidential Decree No. 15 of 1984] Last year, the Directorate-General finished its duty in preparing a geological map of the entire country. However, it has still to deal with problems in fulfilling its function regarding basic geological data. A good Geological Survey must be able to obtain all data from surveys by private parties or other public agencies. One example is in the sector of coal, not to mention data held by private parties, all data in the public domain are widely scattered. Apart from data held by the DGGMR, there are data held by Pertamina (coal-related data collected from drilling) and PT PTBA (the State Coal Corporation).

3. The Availability of Onshore Financial Institutions

This is in particular essential for medium and small-scale mining operations, [Bosson & Vron ibid 160] since large-scale mining projects have usually relied on offshore sources.[Mikesell & Whitney, ibid 96. That is why for foreign investors in the mining industry, the availability of offshore financing is essential apart from the stable political-economic conditions of the country in whichh the mining is taking place. Ibid 104]
Indonesia does not have a special bank for mining. Although it has a development bank, the writer doubts whether this bank has a special window which serves the mining industry. However, commercial banks in Indonesia (including Bank Bukopin) have already been involved in financing the medium and small-scale mining sector, but it is also doubtful whether they serve the mining industry as effectively and probably not as generously as other sectors.

The Department of Mines and Energy has taken an active role in promoting the mining industry to bankers in Indonesia. Last year, for instance, it gave a seminar in the Reserve Bank (Bank of Indonesia). Bank Bukopin, for instance, has showed its strong interest in coal mining by small-scale operators. Also in this context, the Department of Mines and Energy has actively promotes the opening up of a ‘Mining House’ within the domestic stock exchanges in order to support mineral exploration and exploitation activities.

4. The Establishment of State-Owned Operating Company

This is particularly important if a country wants to establish a state monopoly to develop its mineral resources or to joint ventures with the private sector.[Bosson & Varon, ibid 161] However, this entity must be established as a stock company operating under the same rules and regulations as a private company.[Ibid] It must pay tax as any other company, transfer earnings to the government only as dividends, must be free from political interference in its daily operations, recruit staff on a professional basis, and must be headed by people who, though they may be political appointees, bring high professional competence to the job.[Ibid] In further, the company must have managerial and financial autonomy.[Ibid, 163] Employment policies must be also competitive with the private sector.[Ibid]

The current position of Indonesia shows us that the oil & gas industry is still a state monopoly.[Actually, radioactive minerals are also the state monopoly. However, no activities occurred in this are yet] Pertamina, the State Oil Company is, however, not a stock company but is claimed as a ‘corporate body’ established under a special statute (Pertamina Act 1971).[The Pertamina Act 1971 regulates the operation of this company] In the area of general mining, Indonesia has PT Timah (the State Tin Corporation), PT Tambang Batubara Bukit Asam (the State Coal Corporation), and PT Aneka Tambang (the State Corporation for Various Minerals). These three companies are now stock companies operating under the same laws and regulations as a private company. In fact, PT Timah has been partially privatised which will be followed soon by PT Tambang Batubara Bukit Asam.

Thus, apart from the petroleum industry, the Indonesian Government, to some extent, has walked away from the principle of permanent sovereignty over its mineral resources into a privatisation. This was stimulated by the fact that the country is lacking public funds and its heavy debt has caused difficulties in borrowing from international finance institutions.

With the swing into a privatisation, a future Indonesian mining code must provide a better legal framework defining, the relations between the investor and the government. The fundamental premise is that without a mining law, no mining right can be established; without a right, no company would venture to risk its capital.

Thus for Indonesia, a review in the granting of the so called ‘Contracts of Work’ concluded directly with the Government is crucial. This practice, although using the name authorised by the Mining Act 1967 does not have a legal foundation. Under the Mining Act 1967, a mining activity without a mining title is illegal. This particular contract is not limited to exploration activities carried out on behalf of the Government but a mineral development. In recognising the problem, a suggestion has been made by the World Bank to have a provision in a modern mining code requiring a contract to be annexed to each mining right.[Bosson & Varon, ibid 269]

5. A Proper Control over Mineral Products

A state marketing monopoly is one method in controlling mineral products. The reason for particular government to centralise the marketing functions is to strengthen its role as a controller and co-ordinator, [Ibid 157] especially to exercise its fuller control over its export earnings and foreign exchange flows. This method will, certainly, push away potential investors interested in large-scale projects because in many cases, the viability of large-scale projects depends upon the captive markets provided by the sponsors. Too often, these offshore financing parties require repayment in kind and firm marketing contracts.

Another method to maintain the role of controlling mineral products by the government is by imposing special rules like the meeting of the domestic need, including ‘the basis for establishing prices and by exercising the right of prior approval of all sales contracts’.[Ibid 163-4]

At present, the Indonesian government does not have monopoly on marketing its mineral products. There is no demand for the Indonesian government to take this role in the future either. So far, the Indonesian government has utilised the second method that of market regulator. A special rule of meeting the domestic need has been imposed for the coal industry. In the past, this requirement did not create problems to coal producers, due to the insignificant domestic demand on coal. However, an increase in the domestic need has made large producers put their efforts demanding the government to lift this condition from their contracts.

As to the control through the basis for establishing prices, the Indonesian government, for gold for instance has used the London Metal Exchange quotation. As to the control by exercising the right of prior approval for all sales contracts, the Indonesian government has this provision in mining contracts. There has been many complaints made by large producers about this requirement. They argued that their competitiveness has been disadvantaged, if they have to get the government’s approval every time they enter a tender. In response to this request, the Indonesian government requires prior approval for long term contracts only. However, the producers are asking for a change from getting an approval into a notification only.

6. An Establishment of a Suitable and Efficient Research and Development Institute

Indonesia is one of the developing countries that has already set up its own R&D Institute serving the mining sector.[The Mineral Technical Research & Development Centre (Pusat Penelitian dan Pengembangan Teknologi Mineral; PPPTM)] In line with the World Bank’s suggestion, due to the readiness of many R&D institutes in the world and also the possibility for a regional co-operation in R&D, it is important to bear in mind that the Indonesian R&D must emphasise in the acquisition of special expertise and training for the characteristic of the country’s mineralogy only.[Bosson & Varon, ibid 165]

7. A Flexible and Dynamic Mining Code

Normally, a mining code is a reflection of a national mining policy. Thus, any change in the policy must be adjusted in the mining code or at least in its supplementary laws. In addition, due to the continuous change, a periodical revision of the mining code is prudent. The Mining Act 1967 is the current basic mining code of Indonesia. As mentioned earlier, it is now being revised.

Ideally speaking, investors will be happy if they can deal only with one department: the ministry for mines which possibility will be achieved only if the mining code also covers the taxation, investment and other related matters. This one stop service has claimed to be a motto for the Directorate-General of General Mining in granting a mining title. However, this has not yet been achieved for investors in Indonesia, where apart from the Department of Mines and Energy they have also still to deal with the Department of Forestry, the Department of Internal Affairs, the Capital Investment Co-ordinating Board, the Department of Transmigration, the Department of Agriculture, the Department of Transportation etc.

8. A Sound Mining Taxation & Revenue Sharing

The basic premise of a mineral policy is that the country should benefit from every mining activity. On the other hand, a delay in mining means also a loss to the country. If in the mineral development by public sector, the contribution to the economy depends on the efficiency of operations, with privatisation investors must be allowed a normal return on their capital while the governments are entitled to gain revenue from the mining of their non-renewable resources.

Below are some elements of a fiscal regime in the mineral sector:
• administrative fees which are generally small but should cover the cost of the service;
• surface taxes (land rental) which are normally low because the main purpose is to ensure continuity and effective work of the area. A consideration must be made in imposing a rate that can discourage a practice of speculation;
• royalties which are paid to the owner of the mineral deposit. Normally, the rate is specified in the tax code but can be also negotiated. Royalties are set as a percentage of the gross, market, or mine-head value of the mineral extracted;
• export taxes, import taxes, and artificial exchange rates;
• income taxes (corporate tax);
• tax concession & subsidies;
• repatriation.

In Indonesia, there is a problem in regards with the imposing of administrative fees. The old regulation of Indonesia does not allow the government to impose an administrative fee on public service. This has been a problem also in providing prospective investors with printed brochures and regulations since the government does not have fund to provide them but cannot charge a service fee.

As to the surface taxes, apart from the dead rent imposed by the Department of Mines and Energy, mining title holders are also charged with a land and building tax which is not exclusively applied to the mining industry only but to all industries and private land owners. The Department of Mines and Energy has been successful in persuading the Taxation Department to impose lower rates for the mining sector.

As to the income taxes, mining companies are levied with a single income tax which is a central government’s tax. Thus, provincial governments do not levy income tax. However, these provincial governments impose regional taxes, of which vehicle tax is the importance one.

As to the revenue sharing, it is important to bear in mind about the basic principle in this area which is the encouragement for further investment rather than concentrating in gaining more revenue by imposing higher rate of taxes.[Bosson & Varon ibid 170] The Department of Mines and Energy of Indonesia has, to some extent, made its efforts to bring the Tax Department to recognise the high risk of the mining industry so that it can impose a lower income tax rate but has generally failed to make this change.

9. The Passing of Other Legislation

Apart from the mining and tax codes, in the case of privatisation in the mineral development, a good investment code is required. It is crucial that this legislation must provide guarantees to investors.

Indonesia has already had a special law in investment. The current legislation is the Foreign Investment Act 1967 which was passed 11 months before the passing of the Mining Act 1967. The Investment Act has the guarantee provision needed.

10. The Availability of Specialists in dealing with Multinationals & Proper Utilisation of Technical Assistance

It has been indicated that most developing countries are facing the lack of negotiators. This disadvantage may result in a loss to the host government because its interests are not protected or to the other extreme, no investment made because it frightens away potential investors.[Ibid 175] To some extent, this lack of expertise also causes a delay in the negotiating process. It is suggested that countries should not hesitate to engage experts to assist in such negotiations.[Ibid] Although the effectiveness of this mechanism is now in question since external factors such as the roles play by the international market and the international banking system are becoming more influential.[S Zorn, Recent Trends in LDC Mining Agreements, in Sideri & Johns (ed.), Mining for Development in the Third World: Multinational Corporations, State Enterprises and the International Economy (1980) 217]

As to the technical assistance, it has also been indicated that many developing countries refuse this aid and persuade themselves that they have sufficient internal capability.[Bosson & Varon, ibid 175] According to the World Bank, again, this attitude is wrong because this aid can be utilised in training nationals.[Ibid 177]

Today, not much of this aid is available. The current framework is that the project is funded half:half. The aid provider institution finances its experts and the recipient government finances its own personnels. Ironically, due to the lack of negotiators who can protect the interest of the Government, many technical assistance arrangements are not really aimed for the transfer of technology or training of nationals above mentioned.