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Cablegate: Indonesia's Legislature Passes New Mining Law

VZCZCXRO0413
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2293/01 3540612
ZNR UUUUU ZZH
R 190612Z DEC 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 1017
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 2869
RUEHBY/AMEMBASSY CANBERRA 3429
RUEHBJ/AMEMBASSY BEIJING 5750
RUEHJS/AMCONSUL SURABAYA 2340
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 002293

DEPT FOR EAP/MTS AND EB/ESC/IEC/ENR
DOE FOR PI-32 CUTLER AND GILLESPIE
COMMERCE FOR 4430/NADJMI AND 6930/HUEPER
DEPT PASS USTR EHLERS

SIPDIS

E.O. 12958: N/A
TAGS: EPET ENRG EINV PREL ID
SUBJECT: INDONESIA'S LEGISLATURE PASSES NEW MINING LAW

JAKARTA 00002293 001.2 OF 002


1. Summary. On December 16, Indonesia's legislature (DPR) passed a
new mining law that will promote domestic small and medium sized
investments at the expense of large international mining companies.
Bowing to opposition from the Ministry of Energy and Mineral
Resources, the DPR agreed that the law will not force existing
mining contracts of work (COW) to convert to mining licenses,
although provisions remain that erode the sanctity of current
contracts. Industry reaction to the new bill has been almost
universally negative, with trade groups predicting that uncertainty
will increase, causing foreign investment to decrease. The law also
seeks to build local government capacity to oversee mining
operations. End Summary.

-------------------------
NO MORE CONTRACTS OF WORK
-------------------------

2. Policymakers have sought to revise Indonesia's 1967 Mining Law
for some time, to reflect the new, decentralized governing
structure. In earlier versions of the new bill, legislators sought
to eliminate existing contracts of work (COW) and replace them with
mining licenses. A COW defines a mining company's rights and
obligations in all aspects of a mining operation - tax and fee
obligations, royalties, concession size and duration, land use,
construction of facilities, divestiture requirements, etc. - and it
remains independent of Indonesia's overall tax and corporate laws
for the duration of the COW. In the system of mining licenses
created in the new law, licenses give the right to mine in a defined
area but leave the mining company subject to all changes in
Indonesia's mining, tax, and corporate laws. Legislators were
unhappy with the prospect of a two-tier COW/licensing system for the
duration of current COWs, many of which will remain valid for
decades.

3. The Ministry of Energy and Mineral Resources resisted the DPR's
plans to convert COWs, and the President threatened to veto earlier
versions of the proposed bill over this issue. In the end, the DPR
gave in and grandfathered existing COWs. Nevertheless the
legislation mandates undefined changes to "non-state-revenue" COW
provisions to comply with the new law.

--------------------------
NEGATIVE BUSINESS REACTION
--------------------------

4. Business reaction to the new law has been negative. Priyo
Pribadi Soemarno, Executive Director of the Indonesian Mining
Association (IMA), a business group that includes foreign and
domestic mining companies, believes that it will further erode
Indonesia's mining investment climate. The new risks and
limitations for mining companies that the law creates include:

-- Government can cancel mining licenses, with little recourse from
an affected company.
-- Companies will be subject to all changes in royalties, taxes,
fees, and corporate ownership. Soemarno highlighted the fact that
all levels of Indonesian government have reputations for frequently
imposing new financial obligations on resource extraction
companies.
-- Foreign mining companies must begin a divestment program within 5
years of production, even though Indonesia's investment laws allow
foreign companies to own 100% of a mining operation. Divestment
problems have caused major challenges for a number of foreign mining
companies in Indonesia, most recently Newmont.
-- Concession areas are smaller than in the past, which works
against the business plans of large companies such as Freeport,
Newmont, and Rio Tinto.
-- Companies can no longer export unprocessed ore, but must smelt it
in-country. Legislators hope this provision will spur new
value-added industries, but industry analysts fear that this
requirement may give local smelters monopoly-pricing powers.
-- Mining companies are barred from hiring subsidiaries and
affiliates for mining operations. Companies must give preference to
local and national companies when subcontracting, although local
subsidiaries of international companies qualify as national
companies.

------------------
THERE IS AN UPSIDE
------------------


JAKARTA 00002293 002.2 OF 002


5. The law addresses local governments' lack of institutional
capacity to manage licenses. Provincial and regency governments
have had the authority to issue mining licenses to domestic
companies for several years, but previously there was no attempt to
train these levels of government in contracting, management, or
oversight of mines. The new law obligates central government
ministries to train local governments on a range of mining oversight
issues, including safety, research, and environmental issues. The
law also states that central government ministries retain the
primary authority to inspect mining operations, although they can
delegate this right to local governments at their discretion.

-----------------------------
KEY PROVISIONS OF THE NEW LAW
-----------------------------

6. Types of Licenses
-- Mining Permit (IUP): Awarded by central or local governments
(governor, mayor, or regent) through tender.
-- Special Mining Permit (IUPK): Awarded only by the central
government through tender for mining regions designated as State
Reserve Areas. Only for coal, copper, lead, gold, iron, nickel, and
bauxite.
-- People's Mining Permit (IPR): Awarded by a mayor or regent, only
for small-scale mining (currently unlicensed and considered
illegal).

7. License Duration
-- IUP and IUPK: Exploration licenses are for 7 or 8 years.
Production licenses are for 20 years for coal and metal, 10 years
for precious stones, all with the option of two 10-year extensions.
-- IPR: Production license is valid for 5 years, but extendable.

8. Concession Size
-- IUP and IUPK: Exploration concessions of 100,000 hectares (ha)
for metal, 50,000 ha for coal. Production concessions capped at
25,000 ha for metal, 15,000 ha for coal.
-- IPR: Individual license - 1 ha; group license - 5 ha; cooperative
- 10 ha.

9. Foreign Ownership: Foreign companies are allowed to own 100% of
mining operations under Indonesia's investment law, but must begin
an undefined divestment process within five years of production
under the new mining law.

10. Royalties: All license holders must pay royalties, to be
defined by regulation. IUPK holders must additionally pay 10% of
their production to the government - 4% central government, 1%
provincial, 2.5% regency of production, 2.5% other regencies in the
province.

11. In-Country Processing: IUP and IUPK holders must refine their
product inside Indonesia, whether by establishing their own smelters
or using others. COW holders have 5 years to comply with this
requirement.

12. Subcontracting: License-holders cannot subcontract to
subsidiaries, and they must give preference to local or national
mining service companies in their operations.

13. Production Controls: The central government may set provincial
production limits for certain commodities and mandate domestic
market obligations.

HUME

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