sharing in governance of extractive industries
Indonesia has the most detrimental mineral policies for exploration companies, according to a recent Canadian survey. The results of the Fraser Institute’s latest (2012/13) Survey of Mining Companies confirm what many in the industry already know; Indonesia’s increasingly nationalistic mining legislation is making new exploration ventures unviable. Faced with divesting foreign equity to 49 percecnt by the 10th year of production and requirements for domestic processing (despite a recent reprieve from the Supreme Court), expenditure on greenfields exploration has remained stagnant over the past five years. Despite this, what is promising – for Indonesia’s legislators at least - is that the country’s mineral potential - assuming best practice (i.e. a world class regulatory environment) is 3rd after only Mongolia and the territory of Yukon in Canada. The picture presented is a country with immense mineral wealth, if only the Government would enact legislation that was more favourable to investors.
The 2012/13 survey reflects the responses of more than 700 industry professionals on legislative frameworks in 96 jurisdictions. Fifteen key policy areas are scored according to the extent to which they encourage (score of 1) or deter (score of 5) exploration investment. Examples include taxation regimes, environmental regulations, uncertainty concerning disputed land claims, political stability and infrastructure. The latest survey shows that 86 percent of the respondents consider the ‘uncertainty of the administration, interpretation and enforcement of existing regulations’ to be the strongest deterrent to exploration investment in Indonesia.
Since the last survey was released (2011/12), all policy areas have improved except for environmental regulations, ‘uncertainty of the administration, interpretation and enforcement of existing regulations’ and political stability. Between the 2010/11 and 2011/12 surveys, all fifteen policy areas became more detrimental for investment with the most significant being taxation legislation (42 percent of respondents felt it was detrimental to investment in 2010/11 compared to 63 percent in 2011/12 - a 50 percent year-on-year decline) and environmental regulations (40 percent in 2010/11 to 60 percent in 2011/12, also a 50 percent year-on-year decline). Only the 2006/7 to 2007/8 period was worse: environmental regulations were considered 400 percent more detrimental to investment in 2007/8 than in 2006/7, community development agreements more than 200 percent more detrimental year-on-year and land claims at 126 percent year-on-year. In total, the country’s mineral policy framework in 2007/8 was considered 57 percent more detrimental to exploration investment than in 2006/7. It is likely that this was largely caused by the delay in ratifying the much anticipated new mining law.
Since Indonesia was first included in the survey in 2001/2, the extent to which ‘uncertainty concerning native/aboriginal land claims’ has been considered a detriment to investment has increased the most significantly – from 15 percent in 2001/2 to 80 percent in 2012/13. Interestingly, the largest year-on-year change for land claims was between 2001/2 (15 percent considered related policies detrimental) and 2002/3 (46 percent); this is likely to be a result of the 2001 Decree on Agrarian Reform and Natural Resources Management. Similarly, the country’s environmental regulations were considered a detriment to investment by just 13 percent of respondents in 2001/2 compared to 67 percent in 2012/13. The biggest year-on-year change for environmental regulations was between 2006/7 (9 percent considered related policies detrimental) and 2007/8 (46 percent). This is possibly related to the release of Ministerial Regulation Number 11 of 2006 regarding the type of businesses and/or activities required to complete a full environmental impact assessment (AMDAL).
The other key policy area that has worsened over the past decade is ‘uncertainty concerning what areas will be protected as wilderness or parks’; just 22 percent of respondents considered this to be detrimental to investment in 2001/2 compared to 64 percent in the most recent survey. By comparison, political stability, quality of infrastructure and the security situation have all improved (although figures for security were only available from 2004/5 onwards). Three key policy areas experienced a fleeting but considerable improvement during the period between 2003/4 and 2007/8; political stability, ‘uncertainty of the administration, interpretation and enforcement of existing regulations’ and regulatory duplications and inconsistencies. This is possibly a reflection of the first public presidential election of President Susilo Bambang Yudhoyono in 2004 and the creation of the DPD (Dewan Perwakilan Daerah – Regional Representative Council) as a second parliamentary chamber in an effort to increase regional representation.
A little over a decade ago, Indonesia was ranked only 40th out of 45 jurisdictions for policy potential -understandable considering the country had only recently gone through a dramatic political and economic crisis. The most recent statistics reflect that the new legislative framework has really not improved the country’s attractiveness to investors. In fact, if we take the average score of all fifteen areas, Indonesia’s mineral policies were considered 56 percent more detrimental to investment in the 2012/13 survey than they were in the 2001/2 survey. What is also clear is that the fifteen policy areas are increasingly showing a tendency to be interrelated. It would appear that investors are more aware that poor policies developed by one ministry (forestry, for example) have significant consequences for the mining industry. Evidently, there needs to be a unified approach to improving the country’s legislation as it affects exploration companies, and soon.
*This article appears courtesy of Coal Asia magazine.
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