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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, 09 November 23
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- Binh Thuan Hamico - Vietnam
- Uttam Galva Steels Limited - India
- Australian Commodity Traders Exchange
- IHS Mccloskey Coal Group - USA
- PTC India Limited - India
- Kartika Selabumi Mining - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Georgia Ports Authority, United States
- Indonesian Coal Mining Association
- PNOC Exploration Corporation - Philippines
- Samtan Co., Ltd - South Korea
- Tata Chemicals Ltd - India
- Cement Manufacturers Association - India
- Antam Resourcindo - Indonesia
- Chamber of Mines of South Africa
- Manunggal Multi Energi - Indonesia
- Bhoruka Overseas - Indonesia
- Jaiprakash Power Ventures ltd
- Bayan Resources Tbk. - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- San Jose City I Power Corp, Philippines
- Indogreen Group - Indonesia
- Aboitiz Power Corporation - Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Videocon Industries ltd - India
- Oldendorff Carriers - Singapore
- Deloitte Consulting - India
- Trasteel International SA, Italy
- ASAPP Information Group - India
- Directorate Of Revenue Intelligence - India
- Sinarmas Energy and Mining - Indonesia
- IEA Clean Coal Centre - UK
- TeaM Sual Corporation - Philippines
- Bharathi Cement Corporation - India
- Baramulti Group, Indonesia
- Sree Jayajothi Cements Limited - India
- Central Java Power - Indonesia
- Savvy Resources Ltd - HongKong
- Price Waterhouse Coopers - Russia
- GN Power Mariveles Coal Plant, Philippines
- Semirara Mining Corp, Philippines
- Eastern Coal Council - USA
- SMG Consultants - Indonesia
- GVK Power & Infra Limited - India
- The University of Queensland
- CIMB Investment Bank - Malaysia
- Petrochimia International Co. Ltd.- Taiwan
- Offshore Bulk Terminal Pte Ltd, Singapore
- Gujarat Sidhee Cement - India
- Posco Energy - South Korea
- Bangladesh Power Developement Board
- Kalimantan Lumbung Energi - Indonesia
- Salva Resources Pvt Ltd - India
- Edison Trading Spa - Italy
- Bukit Baiduri Energy - Indonesia
- Siam City Cement PLC, Thailand
- Meralco Power Generation, Philippines
- Kumho Petrochemical, South Korea
- Mjunction Services Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Globalindo Alam Lestari - Indonesia
- Port Waratah Coal Services - Australia
- India Bulls Power Limited - India
- Attock Cement Pakistan Limited
- Barasentosa Lestari - Indonesia
- Global Green Power PLC Corporation, Philippines
- Sojitz Corporation - Japan
- Bahari Cakrawala Sebuku - Indonesia
- Latin American Coal - Colombia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Global Coal Blending Company Limited - Australia
- Tamil Nadu electricity Board
- Coalindo Energy - Indonesia
- Romanian Commodities Exchange
- Renaissance Capital - South Africa
- Mercuria Energy - Indonesia
- Therma Luzon, Inc, Philippines
- Bhushan Steel Limited - India
- Planning Commission, India
- Makarim & Taira - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- McConnell Dowell - Australia
- Vijayanagar Sugar Pvt Ltd - India
- CNBM International Corporation - China
- ICICI Bank Limited - India
- Eastern Energy - Thailand
- Minerals Council of Australia
- Sarangani Energy Corporation, Philippines
- Global Business Power Corporation, Philippines
- Goldman Sachs - Singapore
- Energy Development Corp, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Singapore Mercantile Exchange
- Ambuja Cements Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- Xindia Steels Limited - India
- Energy Link Ltd, New Zealand
- Power Finance Corporation Ltd., India
- The Treasury - Australian Government
- Siam City Cement - Thailand
- Sindya Power Generating Company Private Ltd
- White Energy Company Limited
- Intertek Mineral Services - Indonesia
- Ministry of Finance - Indonesia
- Sical Logistics Limited - India
- Banpu Public Company Limited - Thailand
- PowerSource Philippines DevCo
- Commonwealth Bank - Australia
- Asmin Koalindo Tuhup - Indonesia
- Lanco Infratech Ltd - India
- Grasim Industreis Ltd - India
- Petron Corporation, Philippines
- Madhucon Powers Ltd - India
- Aditya Birla Group - India
- Vizag Seaport Private Limited - India
- Economic Council, Georgia
- Star Paper Mills Limited - India
- Semirara Mining and Power Corporation, Philippines
- Altura Mining Limited, Indonesia
- European Bulk Services B.V. - Netherlands
- Kaltim Prima Coal - Indonesia
- Kideco Jaya Agung - Indonesia
- Central Electricity Authority - India
- South Luzon Thermal Energy Corporation
- Indian Energy Exchange, India
- MS Steel International - UAE
- Jindal Steel & Power Ltd - India
- Independent Power Producers Association of India
- Agrawal Coal Company - India
- Riau Bara Harum - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Toyota Tsusho Corporation, Japan
- Sakthi Sugars Limited - India
- Orica Australia Pty. Ltd.
- Larsen & Toubro Limited - India
- Ministry of Transport, Egypt
- Maheswari Brothers Coal Limited - India
- Vedanta Resources Plc - India
- Dalmia Cement Bharat India
- The State Trading Corporation of India Ltd
- Marubeni Corporation - India
- Karaikal Port Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Cigading International Bulk Terminal - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Gujarat Electricity Regulatory Commission - India
- Billiton Holdings Pty Ltd - Australia
- Jorong Barutama Greston.PT - Indonesia
- Wood Mackenzie - Singapore
- Ministry of Mines - Canada
- Thai Mozambique Logistica
- Bhatia International Limited - India
- Meenaskhi Energy Private Limited - India
- Chettinad Cement Corporation Ltd - India
- LBH Netherlands Bv - Netherlands
- Anglo American - United Kingdom
- Kohat Cement Company Ltd. - Pakistan
- Coastal Gujarat Power Limited - India
- Parliament of New Zealand
- Thiess Contractors Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Essar Steel Hazira Ltd - India
- Formosa Plastics Group - Taiwan
- Kobexindo Tractors - Indoneisa
- Mintek Dendrill Indonesia
- VISA Power Limited - India
- Electricity Authority, New Zealand
- GMR Energy Limited - India
- Indian Oil Corporation Limited
- Merrill Lynch Commodities Europe
- Parry Sugars Refinery, India
- AsiaOL BioFuels Corp., Philippines
- Leighton Contractors Pty Ltd - Australia
- London Commodity Brokers - England
- Interocean Group of Companies - India
- Coal and Oil Company - UAE
- Karbindo Abesyapradhi - Indoneisa
- Indo Tambangraya Megah - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Electricity Generating Authority of Thailand
- Rashtriya Ispat Nigam Limited - India
- Africa Commodities Group - South Africa
- OPG Power Generation Pvt Ltd - India
- Medco Energi Mining Internasional
- PetroVietnam Power Coal Import and Supply Company
- Orica Mining Services - Indonesia
- Timah Investasi Mineral - Indoneisa
- Malabar Cements Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Wilmar Investment Holdings
- Straits Asia Resources Limited - Singapore
- Australian Coal Association
- Rio Tinto Coal - Australia
- Kepco SPC Power Corporation, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Carbofer General Trading SA - India
- Standard Chartered Bank - UAE
- Indika Energy - Indonesia
- Simpson Spence & Young - Indonesia
- New Zealand Coal & Carbon
- Bulk Trading Sa - Switzerland
- International Coal Ventures Pvt Ltd - India
- Heidelberg Cement - Germany
- Metalloyd Limited - United Kingdom
- Miang Besar Coal Terminal - Indonesia
- Borneo Indobara - Indonesia
- Bukit Makmur.PT - Indonesia
- GAC Shipping (India) Pvt Ltd
- Mercator Lines Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- SMC Global Power, Philippines
- Krishnapatnam Port Company Ltd. - India
- Directorate General of MIneral and Coal - Indonesia
- SN Aboitiz Power Inc, Philippines
- Pendopo Energi Batubara - Indonesia
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