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Friday, 23 December 11
CONTENTIOUS ISSUES IN CONTRACT RENEGOTIATION - THE JAKARTA POST
 The government has been renegotiating mining contracts, especially those 30-40 years old, with almost all mining companies, including PT Freeport Indonesia, which has been operating since 1967. This is a major step the government is taking and of course will affect the climate of mining investment in the future. If not carefully planned and executed, renegotiation might severely harm the prospects of the national mining industry.
That is why it is important for the government to choose the most important points to be brought to the negotiating table and to ensure that the results are beneficial to both sides, i.e., the mining enterprises and the government.
The basis for renegotiation is Law No. 4 /2009 on mining, which has changed the mining-concession regime by introducing a new licensing system. The law replaces mining authorizations (Kuasa Pertambangan or KP) as well as contracts of work (CoWs) and contracts of coal mining work (CCoW or PKP2B). The government acknowledges all CoWs/CCoWs that have been awarded before the law was promulgated; however all CoWs/CCoWs still need to be renegotiated.
The fundamental difference between the concession and licensing regimes lies in a number of points. Most important is the difference in the legal nature. While concession is based on civil law and the source of law is the agreement itself, licensing is public and legislation is the source of law. The application of a “concession” is the agreement between the two parties, the mining enterprises and the government, while a “license” is based on permission from the government.
In terms of rights and obligations, a licensing regime puts the government in a more dominant position. Settlement of disputes is through international arbitration for concession agreements but is via a state administrative court for licensing regimes.
These differences, of course, will be perceived differently by different mining enterprises. Large-scale mining companies and international enterprises prefer arbitration as a legal option, because arbitration is considered to be more fair and free from political intervention. Given that perception, the new regime is seen to generate potentially larger political risks.
Moreover, the bilateral nature of the contract system is believed to provide more protection against future changes in the law than a unilateral licensing system.
For small or national mining companies, however, licensing regimes might be seen to be friendlier as they provide equal opportunities to both domestic and foreign investors in applying for licenses.
Renegotiation is needed to adjust the content of contracts, which have been running since before the Mining Law came into being. These contracts need to be adapted to be in accordance with the new law. Renegotiation began in the fourth quarter of 2009 for CoWs and early 2010 for CCoWs.
Philosophically, however, renegotiation aims at restoring the country’s sovereignty over its natural resources as well as providing a better use of the resources for the people. This is reflected in a number of articles to adjust CoWs and CCoWs, to increase the added value for minerals and coal by imposing an obligation on contractors to establish downstream industrial facilities, to enhance state revenue through rate adjustments for royalties and production fees and to prioritize the use of local and national services.
Based on the notion of providing a better use of resources, a number of strategic issues are being brought to the negotiation table, such as the limitation of mining areas, contract extension, state revenue, divestment obligations for foreign investors that hold full-ownership in local mining firms, the obligation of processing and refining in the country’s smelters, as well as the obligations of the use of domestic goods and services.
As expected, the most prominent issue during the renegotiation is about the augmented state revenue — the first contentious issue. State revenue refers to mining taxes and profit-sharing schemes. The government is tightening tax regulations to enhance national revenue. This is the reason why the tax authority is involved in the renegotiation and assesses whether or not an enterprise is losing money.
Renegotiation on profit-sharing might not be necessary with those enterprises that are losing money. But the key point here is transparency — the enterprises must reveal their income — as the fundamental purpose of the renegotiation is for the results to be fair and transparent.
The limitation of mining areas is the second contentious issue. According to the law, all areas of work that exceed the maximum limit of 100,000 hectares (ha) for minerals and 50,000 ha for coal should be returned to the state. This has proven to be difficult, since most of the large mining enterprises have been working areas beyond this threshold. Freeport has a working area of up to 1.8 million ha, and Arutmin about 70,000 ha, and Inco about 180,000 ha.
The third contentious issue is extension of concession contracts. A concession contract is terminated when it expires. After that, the management must submit to the state, represented by state or local enterprises, a proposal to obtain a new mining license. Contract extension with the old contractor can be achieved only if the contractor is a minority shareholder.
These three issues are problems for both the government and the enterprises to resolve. Currently, there are about 113 plans to renegotiate mining contracts, of which 37 CoWs are in the mining of metals and minerals and 76 are contracts of coal mining work (CCoWs). The majority of the mining enterprises seem to be in the “Partially Agree” mode for CoWs and in the “Agree to All Amendment Articles” mode for CCoWS.
The results must be beneficial to both sides, promoting transparency and fairness. Mining has been contributing greatly to the country’s economy, as well as wealth to a number of mining enterprises. In 2010, mining accounted for about 11.15 percent of GDP for Indonesia overall, and a much higher percentage for provinces such as Papua, Bangka-Belitung, West Nusa Tenggara and East Kalimantan. Mining also accounted for 16.91 percent of Indonesian exports, providing Rp 9.7 trillion of government revenue.
But annual average mining investment is not growing as expected. Only in the coal sector has any large-scale new production capacity been developed in recent years. The vast majority of the investment is for the replacement of mining infrastructure to sustain capacity.
Given the long lead times to find and develop new mines, production declines will be inevitable unless the renegotiation can enhance transparency and the mining policy environment is improved.
We have to remember that the country has some of the most prospective geological areas and according to one international survey, only some areas of Canada and Australia have better mineral prospects. Thus, it is possible for mining to make a much larger economic contribution at the local, provincial and national levels.
The renegotiation process cannot be allowed to hinder this contribution. We have to avoid losing our competitiveness at a time when other countries are seeking new mining investment.
By: Montty Girianna
Source: The Jakarta Post
The writer is director for energy, mineral resources and mining at the National Development Planning Agency (BAPPENAS).
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Thursday, 01 March 12
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COALspot.com - PT. Bukit Asam (persero) Tbk, Indonesian state owned coal miner is planning to conduct road show in Europe next week to target at Eur ...
Thursday, 01 March 12
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Wednesday, 29 February 12
69 MINERS AGREE TO RENEGOTIATE CONTRACTS - THE JAKARTA POST
The Jakarta Post, one of the leading English news papaer in Indonesia reported that, as many as 60 coal contracts-of-work (PKP2B) and nine non-coal ...
Wednesday, 29 February 12
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Clifford Reese of the SSOE Group looks at practical solutions for district energy leaders who wish to implement clean coal technology.
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Monday, 27 February 12
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Tempo Interactive reported that, Energy and Mineral Resources Deputy Minister of Indonesia Widjajono Partowidagdo has criticized coal-mining compani ...
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- Economic Council, Georgia
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- Africa Commodities Group - South Africa
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- Standard Chartered Bank - UAE
- Krishnapatnam Port Company Ltd. - India
- Wilmar Investment Holdings
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- Meenaskhi Energy Private Limited - India
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- CNBM International Corporation - China
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- Jorong Barutama Greston.PT - Indonesia
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- Wood Mackenzie - Singapore
- Petron Corporation, Philippines
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- Siam City Cement PLC, Thailand
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- Videocon Industries ltd - India
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- Mjunction Services Limited - India
- Toyota Tsusho Corporation, Japan
- Miang Besar Coal Terminal - Indonesia
- Mintek Dendrill Indonesia
- IHS Mccloskey Coal Group - USA
- SMG Consultants - Indonesia
- Kumho Petrochemical, South Korea
- Karbindo Abesyapradhi - Indoneisa
- Kartika Selabumi Mining - Indonesia
- Planning Commission, India
- Chamber of Mines of South Africa
- Sojitz Corporation - Japan
- McConnell Dowell - Australia
- Chettinad Cement Corporation Ltd - India
- Larsen & Toubro Limited - India
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- Anglo American - United Kingdom
- Australian Coal Association
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- Makarim & Taira - Indonesia
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- AsiaOL BioFuels Corp., Philippines
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- Edison Trading Spa - Italy
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- Kalimantan Lumbung Energi - Indonesia
- Salva Resources Pvt Ltd - India
- Xindia Steels Limited - India
- European Bulk Services B.V. - Netherlands
- Australian Commodity Traders Exchange
- PowerSource Philippines DevCo
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- Energy Development Corp, Philippines
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- VISA Power Limited - India
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- Bangladesh Power Developement Board
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- Truba Alam Manunggal Engineering.Tbk - Indonesia
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- Aboitiz Power Corporation - Philippines
- Jaiprakash Power Ventures ltd
- The Treasury - Australian Government
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- Pendopo Energi Batubara - Indonesia
- Therma Luzon, Inc, Philippines
- Coal and Oil Company - UAE
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- Global Green Power PLC Corporation, Philippines
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- Star Paper Mills Limited - India
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- Samtan Co., Ltd - South Korea
- Gujarat Mineral Development Corp Ltd - India
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- Thiess Contractors Indonesia
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- Minerals Council of Australia
- Indogreen Group - Indonesia
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- Kepco SPC Power Corporation, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- GN Power Mariveles Coal Plant, Philippines
- Kideco Jaya Agung - Indonesia
- Rashtriya Ispat Nigam Limited - India
- ASAPP Information Group - India
- Karaikal Port Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Kobexindo Tractors - Indoneisa
- GAC Shipping (India) Pvt Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Parliament of New Zealand
- Vijayanagar Sugar Pvt Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Directorate General of MIneral and Coal - Indonesia
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- Trasteel International SA, Italy
- GMR Energy Limited - India
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