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