Indonesia could become a world-class mining country but new investors are steering clear because of legal uncertainty and red tape, according to an annual survey of the industry.
"Investment spending on exploration and new mines has now been very low for several years," said the report by accounting firm PricewaterhouseCoopers.
"This investment activity will not return to previous levels until certainty over long term investment conditions is restored. The long lead time and success rate from exploration to development means that there will not be significant mine development in Indonesia for several years."
The government's revenue from the sector amounted to 919 million dollars last year and Indonesia could become a world-class mining country if six problems are tackled, said PwC mining partner Marc Upcroft in a statement.
He said these include improving the competitiveness of the taxation and royalty system; resolving conflicts between work contracts and the forestry law; and restoring long term certainty in the work contract system.
Authorities should also minimize the potential for "over-regulation" in the proposed draft mining law and draft law on management of natural resources, act against illegal mining and ensure fairness in divestment of foreign interests, he said.
Last year exploration companies from around the globe rated Indonesia as a poor place to develop mines despite its good prospects for minerals, the report said.
"These are not promising signs for the mining industry." Earlier this year Anglo-Australian giant Rio Tinto and British-American energy firm BP, joint owners of a huge coal mine on Borneo island, sold out their entire interest to a local firm.
The decision followed years of legal wrangling about the divestment of a 51 percent stake to local investors.
Lex Graefe, president of the Indonesian arm of Rio Tinto, said in July that Indonesia's shaky legal system could destroy much of its mining industry.
Last month Australia's Newcrest Mining said some 1,000 illegal miners who claim ownership of an Indonesian gold mine had forced its subsidiary temporarily to halt operations.