Mining Regulation and Economic Development

Law No. 4 of 2009 concerning general mining states at least four important purposes, as made clear in PP 23 of 2010 and PP 24 of 2012.

First meaning This law aims to strengthen the decentralization of mining authority from the center to the regions which was previously regulated in PP No. 75 of 2001 in line with the regional autonomy process. At the same time, the intention is to improve mining governance, which includes regulating procedures for granting mining permits and supervision of mining activities at the Central, Provincial and Regency or City government levels. One of the improvements in licensing procedures is the implementation of an auction process for mineral and coal mining business permit (WIUP) areas. This regulation tries to eliminate conflicts of interest between the government and business actors.

Second meaning The law aims to strengthen the government's protection over the possible social and environmental impacts of mining. The law requires companies to make community empowerment plans, reclamation plans and post-mining activities, as well as asking for proof of the company's seriousness with the obligation to place guarantee funds for reclamation and post-mining activities.

Third meaning This law aims to increase the benefits of the general mining sector for the State and society. Increasing the profits of the mining sector for the State and society is carried out in three ways: the first is through optimizing the involvement of local resources in mining activities, including human resources, procurement of goods and services from local products, and the involvement of local business entities in the mining business chain; second is through the obligation to divest foreign company shares of at least 20% to 51% to domestic business entities (BUMN, BUMD or private); third is by requiring mining companies to process minerals domestically to increase added value.

Fourth meaning This law aims to direct the Indonesian nation to carry out a strategy in globalizing the mining business through reserving state mining areas (WPN). Not all mining potential must be exploited, production must look at market needs for price control, must look at current and long-term national strategic interests, must also look at economic security and sustainability for the industry and future generations.

Neither regulation has been implemented yet

A series of good intentions have been clearly stated in the law but in reality we are still faced with various mining problems. In terms of mining permits, the government after the enactment of Law 4/2009 at various levels still inherited the problem of thousands of overlapping mining permits issued between 2001 and 2009 which were guided by PP 75/2001. In that era, there was a 'mining permit boom' with the issuance of more than 10,000 mining business permits at various levels, half of which are currently still in problematic status.[2] Not to mention that there are so many illegal mining activities taking place. Illegal mining activities are certainly detrimental to the state due to the loss of potential taxes and other levies for development funding sources. In 2012, the Financial Audit Agency (BPK) found that 115 mining activities in Eastern Indonesia were carried out without permits and caused state losses of IDR. 100 billion.[3]

In terms of efforts to increase profits from the mining sector, it has also not met expectations. The involvement of local workers is still limited to manual labor (unskilled labor), the government and companies still make minimal efforts to develop local workers into skilled workers through vocational training and apprenticeship. Based on 2013 BPS data, 56.67 million (46.7%) of the Indonesian workforce were elementary school graduates or below, 22.1 million (18,25%) were junior high school graduates, 11.03 million (9,10%) were high school graduates and only 11.77 million ( 9,71%) college graduates.[4] A good example of a human resource development program is that carried out by PT Freeport Indonesia with the development of the Nemangkawi Mining Institute (IPN) with skills certification to Australian RTO standards and also apprenticeships.[5] The involvement of local business entities (small and medium enterprises, cooperatives, community groups, youth and women's groups) in the mining industry chain also has minimal encouragement from the government and mining companies, for example through partnerships, strengthening capital and increasing human resource capacity.

Judging from the percentage of budget allocation for corporate social responsibility (CSR) activities, it is still very small compared to company profits. Based on records from the Institute for Economic and Community Research, Faculty of Economics, University of Indonesia (LPEM-UI), the percentage of community development funds on the income of national companies producing nickel is only 0.47% and coal between 0.2%-0.55% from net sales.[6] Apart from that, community empowerment programs through CSR are also problematic, the programs are generally charity with minimal community participation, their sustainability is questionable and they are not yet integrated with government programs. As part of public funds, CSR fund management and programs should fulfill the principles of good governance, namely accountability, transparency, ethical behavior, respect for stakeholders, compliance with the law, respect for international behavioral norms, and upholding human rights.[7]

The impact on the environment, according to the Ministry of Forestry, mining activities are the cause of 70% forest destruction in Indonesia.[8] Then where are the environmental management plans, reclamation plans and post-mining activities. What about monitoring the implementation of environmental management, how to manage reclamation funds and evaluating reclamation and post-mining activities? If we refer to government regulations regarding reclamation, for example data in East Kalimantan Province in 2011, the amount of East Kalimantan coal production was around 146 million tons per year, if 1 ton of coal costs 1 USD for reclamation, it means there is a minimum of 146 million USD (around IDR 1.3 trillion) reclamation guarantee funds deposited through government banks to the Ministry of Energy and Mineral Resources. However, the whereabouts of the reclamation funds are not yet clear.[9] Apart from that, the company seems to be free from responsibility for carrying out reclamation and post-mining activities by depositing reclamation guarantees. On the other hand, the government views that the amount of deposit funds for reclamation guarantees is still far from what is needed to cover ex-mining holes. [10]

The implementation of the obligation to divest shares in foreign companies has not yet achieved its objectives. This divestment obligation aims to ensure that control and profits from mining resources are also enjoyed by domestic business actors, especially State-Owned Enterprises (BUMN) or Regional-Owned Enterprises (BUMD). Furthermore, there is an interest in technology transfer and developing the capacity of domestic companies. The most striking case related to divestment is the process of taking over 24% of PT Newmont shares by the BUMD of West Nusa Tenggara Province (NTB). In this case, the BUMD obtained a transaction scheme that was ultimately less profitable. Based on 2010 data, NTB BUMD should receive a share of dividends of 30 million USD but until now they have not received their rights.[11] This is due to problems of unpreparedness of regulatory equipment and capital, difficulties in access to financial institutions and problems with human resource capabilities.

Downstreaming of Minerals and Coal is the most strategic way to reap maximum profits from the mining sector, but it can be done locally. In fact, this mineral processing activity is a downstream business that has a large multiplier effect economically and socially. Absorption of labor, the process of transferring technology, opportunities to regulate the market so as to further increase selling prices which will have an impact on increasing tax revenues, increasing foreign exchange and the growth of businesses supporting the mineral processing industry such as providing electricity, water supply, construction services, ports and transportation. All of this will drive the local economy. For example, bauxite ore costs 30 USD per ton, if it is processed into alumina it will be 320 USD per ton, and if it is processed into aluminum it will be 1800 USD per ton.[12] However, processing activities for various types of minerals have not yet begun, except for the tin mineral. The problem that is currently emerging is the industry's unpreparedness to pursue downstream obligations which according to Law and Government Regulations must be carried out no later than 2014. Another problem is the government's fear of a decline in mining sector exports which will impact monetary conditions. In terms of regulations, the government appears to be very confused and lacking in unity with business actors, as can be seen from the three changes to Ministerial Regulations related to downstreaming in the 2012-2013 period, one of which was the result of a court decision regarding a business actor's lawsuit against regulations.

Currently, a clearer long-term policy for the mining sector is still needed.[13] As an implementation of the mandate of the law regarding the need to determine State Reserve Areas (WPN), what the maximum permitted production limits are, what strategic minerals need to be maintained.

Step forward

Some future steps that must be taken by the government are:

• Carry out all regulations that have been made strictly and plan carefully. The current government at least has a fairly good legal framework as a basis for improving mining governance, including licensing, supervision, social and environmental protection, as well as optimizing profits for regional development and local communities.
• Efforts to maximize profits from the mining sector must continue and must not be reversed. Short term interests should not trump long term interests. Regarding mineral downstreaming, central and regional governments, companies and the community must sit together to create synergy in formulating what must be done. Inventory the required supporting infrastructure (roads, bridges, electricity, water, ports), human resource qualifications needed to support the industry and design the involvement of local business entities in the industrial chain. Determining who does what, both government and private. Then determine where the funding source will come from, whether government funds, private funds or loans. The government must play a very active role in providing business support, creating project feasibility, bridging access to financial institutions, preparing human resources, then companies must be the party that must be very active in project implementation by involving local business entities.
• Optimizing the involvement of public resources in the mining industry chain must continue to be improved, absorbing local workers, procuring goods and services involving local products and local business entities. Business entities, especially State-Owned Enterprises (BUMN) and Regional-Owned Enterprises (BUMD), must immediately prepare for opportunities to implement divestment obligations. There are many choices of funding sources, including issuing bonds, using public funds such as pension funds and strategic collaboration with financial institutions.
• The government must immediately formulate a long-term plan for the mining and energy sector. With large resource reserves, Indonesia should be able to become a major player in the mining and energy commodity industry and trade.
• The principles of sustainability in the mining industry must continue to be applied. Limiting quotas, prohibiting the sale of raw materials, structuring mining commodity trade systems to obtain adequate prices and good environmental management practices are reliable instruments for responding to sustainability challenges.

[2] Data from the Directorate General of Mineral and Coal, Ministry of Energy and Mineral Resources, 2012
[3] IESR, 2013
[4] Finance.detik.com/read/2013/10/30/161901/2399667/4/2/idonesia-dalam-status-emergency-sdm
[5] Antaratb.com
[6] http://www.indonesiafinancetoday.com/read/30141/Persentase-Dana-CSR-Perusahaan-Tambang-Masih-Kecil
[7] IAO 26000: 2010 Guidelines on social responsibility
[8] http://www.republika.co.id/berita/nasional/lingkungan/12/08/07/m8e1ez-70-persen-kerusakan-hutan-akibat-tambang
[9] Director of the International Tropenbos Program, PetrusGunarso, Source: http://sindikasi.inilah.com/read/detail/1838062/URLTEENAGE
[10] http://aspindo-imsa.or.id/page/detail_berita/54: reclamation of the absurd
[11] As is known, the NTB Regional Government, Sumbawa Regency Government, West Sumbawa Regency Government formed BUMD, namely PT DMB, to own Newmont shares. PT DMB then merged with Multicapital to form the Multi Regional Competitive (MDB) consortium. Multicapital itself is a business unit of the Bakrie Group, through PT Bumi Resources Mineral. Multicapital mortgaged 24% shares of PT Newmont Nusa Tenggara owned by MDB to Credit Suisse Singapore (CSS). In 2010, Newmont is known to have paid dividends of more than US$ 500 million, and US$ 120 million went to the MDB consortium. Of the dividend amount of US$ 120 million, US$ 90 million is Multicapital's portion and US$ 30 million is MDB's portion. However, MDB ordered Newmont to pay the dividend directly to Credit Suisse Singapore (CSS).
Source: http://finance.detik.com/read/2011/06/03/143928/1652706/4/
[12] Finance.detik.com, 2013
[13] www.ima-api.com

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