spRING 2011 GlobAl MARKETs INTERNATIoNAl - Willis

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70 | Willis | Mining Market Review 2011
(ii) Decentralisation:
Under the decentralisation framework, regional and local governments gained the
power to issue mining licences and some have issued licences over areas where
existing contracts already exist or contractual negotiations are already underway
between investors and the central government.
For instance, in May 2008, Niko Resources filed suit against the Morowali regional government
in Central Sulawesi over mining rights to the La Sampala nickel deposit. It was said that the
Morowali regional government appeared to have granted mining rights to La Sampala to local
mining companies despite the fact that Niko was concluding its contract with the central
government over the same site. In another case in Central Sulawesi, the regional leader granted
mining licences to various local firms over a deposit already covered by a contract between
the central government and a joint venture between U.K.’s Rio Tinto and the 65% state-owned
mining company, PT Aneka Tambang. In some cases, regional governments imposed taxes
that were illegal under the regulatory framework. The overlapping jurisdictions of local and
central government means investors can find they are subject to overlapping and contradictory
regulatory requirements.
Under the 2008 mining law, regional and provincial governments can grant Mining Business
Licences. The central government will grant the licence if the mining area extends beyond
a provincial boundary or falls within strategic areas under the government’s authority.
The licences will be for up to seven and eight years for metal and coal exploration respectively
and for up to 20 years for both metals and coal production operations. The 20-year period can
be extended up to two times for 10 years each. Previously, investors were not required to obtain
separate exploration and production licences. The requirement under the new law for separate
production and exploration licences raises a risk that an investor having discovered a mineral
deposit may be denied production opportunities from it. A significant change introduced by the
new law is the requirement for mine operators to process ores and concentrates in Indonesia
itself. Presently, the majority of mine production is processed outside Indonesia. Under the new
law, mining companies with existing contracts with the central government for instance, are
required to set up refineries and smelters in Indonesia by 2014.
(iii) The 2008 Mining Law:
The dominance of local mining firms is likely to increase given the implementation
of the 2008 mining law.
The Law on Minerals and Coal Mining (2008 mining law) was designed to eliminate some of
the regulatory and contractual uncertainties under the current frameworks. Under the 2008
law, regional and local government still have the power to issue mining licences but come under
tighter central government supervision. For instance the new law carries a criminal penalty of
up to two years jail for regional leaders who circumvent regulations. Despite such features, the
new law still presents some uncertainty for investors. For instance, under the new law, foreign
investors are required to divest 20% of their interests in mining operations within five years of
the start of operations. Those companies which have entered into joint ventures in which local
companies have at least a 20% stake are exempt from this divestment requirement. Many of
these firms are not as large as the multinational mining companies but are also likely to benefit
from the fact that the new law has substantially reduced the size of mining areas, making it more
feasible for local companies to successfully tender for, win and operate the smaller projects that
will be on offer.