Mining News

Indonesia’s Troubling Mining Situation

Posted by Cheryl Rutledge on 9/11/2014 3:05:56 PM

By Taylor Jackson and Kenneth P. Green

This week the Indonesian government took steps that may derail future investment within the country’s mining industry. The Wall Street Journal is reporting that Indonesia has reached an agreement with two major mining operators—Freport-McMoran and Newmont—that will see a 7.5% levy on mineral exports.

While this may be staggering, seeing as the two companies had long term contracts “which guaranteed their investments a stable regulatory environment free from political oppression,” it can be considered a victory for the mining sector as Jakarta initially wanted to levy a 20% duty that would increase to 60% by 2016.

Unfortunately for the mining sector, the story does not end there. Part of the 2009 law, which acted as a catalyst for these issues, contains onshore processing obligations, and as part of the deal struck with Jakarta the two companies are on the hook to begin financing the construction of smelters, at a cost of $25 million to Newmont and $115 million to Freeport.  Further, Indonesia has signaled that it wants to cancel 67 bilateral investment treaties because they have dispute settlement mechanisms for firms, if the country decides to expropriate assets.

Reaction from the mining industry has understandably been hostile. Indonesia’s chamber of commerce mining committee chairman was quoted as saying “[t]his policy has made a situation where our natural resources wealth doesn't make a contribution (to the economy)." Even Indonesia’s state controlled mining company is feeling the negative impact of the 2009 law, as foreign investment reacts negatively and ore exports are banned.

Such news will not help a country which has been consistently slipping in the Fraser Institute’s Annual Survey of Mining Companies. On the Policy Perception Index (PPI), which assesses a jurisdiction’s hospitality to mining investment, Indonesia in the 2013 edition of the survey ranked as the 9th worst (of 112) jurisdiction in the world making it one of the least attractive jurisdictions in the world for mining investment. Just a year earlier, in the 2012/2013 edition of the survey, Indonesia ranked as the least attractive (of 96) jurisdiction in the world for the relative attractiveness of mining investment.

Experience from 13 previous years of the Mining Survey paints a grim picture for Indonesia. When countries make similar policy decisions, they tend to become significantly less attractive to investment. In the end, such protectionism only hurts those who the government is trying to help.

While the actions of the government may result in short term national political gains, if Indonesia is serious about developing its mining and energy sectors, it may want to reconsider the policy path it’s treading.

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