Leony Aurora, Jakarta – Lack of legal certainty continues to dissuade investors from exploring mining prospects in Indonesia, particularly with a bill introducing a licensing scheme to replace the sector's contract of work system currently being deliberated.
Spending on greenfield exploration in the country stood at US$7 million in 2004, which represented less than 0.44 percent of spending worldwide, down from 0.67 percent a year earlier, PricewaterhouseCoopers (PwC) mining partner Ray Headifen said recently.
Global exploration investment rose by 50 percent to $1.59 billion in 2004 from 1.05 billion the previous year, PwC said in a report on the state of the country's mining industry in 2005.
"There is no doubt that Indonesia is a mineral prospective country," said Headifen. "The concern here is whether Indonesia is acting quickly enough to capture global exploration spending." Quoting a recent study by the Fraser Institute, the PwC report said that Indonesia ranks sixth worldwide in terms of mineral prospectivity but third last on investment conditions with a score of 12 out of 100.
The new mining bill, which is aimed at replacing the contract of work system with licenses issued by local administrations, would further deter investors, said Headifen.
A contract of work sets out the terms, as well as the tax and royalty rates, upfront, while a license would be at the mercy of changing rules, rendering it difficult to make financial and profitability predictions. "(The proposed change) hasn't been well received by foreign investors," said Headifen.
The bill, intended to supersede Law No. 11/1967 on mining, stipulates that exploration and production licenses will be awarded by local administrations in line with the local autonomy law.
Simon Sembiring, the Mineral Resources Ministry's director general of coal, mineral, and geothermal energy, said that the government would be barred from entering into direct business deals with investors.
One possible solution would be to form a legally incorporated agency to represent the state's interest in the mining sector. "In the oil sector, such an agency has already been established," said Simon, referring to the Upstream Oil and Gas Regulatory Agency (BP Migas), which represents the government in dealing with oil and gas contractors.
The PwC report also shows revealed that despite a relatively high effective tax rate of 37 percent in 2004 compared to 24.7 percent on average worldwide, net profit margins were also higher here at 19.3 percent compared to 15.2 percent globally.
Boosted by high commodity prices, the earnings before interest, taxes, depreciation and amortization (Ebitda) of mining companies in Indonesia stood at 38.9 percent in 2004 while return on equity was 27.3 percent. The corresponding global figures were 29.7 percent and 18.9 percent, respectively.
Indonesian Mining Association chairman Jeffrey Mulyono warned that although the short-term prospects for the industry were good, the longer term ones remained open to question.
"Investment in exploration is almost non-existent," said Jeffrey. "Meanwhile, all the discovered deposits will be depleted in time." The mining sector is an important contributor to the state coffers. According to figures from the ministry, total revenues from the sector almost doubled to Rp 17.68 trillion ($1.86 billion) last year from Rp 8.99 trillion in 2004.
Tax revenues from the sector came in at Rp 12.9 trillion in 2005, up from Rp 6.42 trillion the previous year, while non-tax income, including royalties, stood at Rp 4.78 trillion and Rp 2.57 trillion, respectively.