Newsmaker Interview: Ido Hutabarat
The Chairman of the Indonesian Mining Association discusses the latest government regulation regarding the industry
By Mary R. Silaban and Tellisa Ramadhani
Tuesday, January 31, 2017
Once the backbone of Indonesia’s economy, the mining industry has been in decline for years. The Indonesian government, in an effort to make the industry attractive once more, has launched Government Regulation 1/2017 revising Government Regulation 23/2010, and dealing with long debated issues such as contracts, ownership and mineral exports.
Ido Hutabarat, chairman of the Indonesian Mining Association (IMA), who also serves as President Director of PT Arutmin Indonesia, one of largest coal companies in the country, shared the association’s views on the regulation with AmCham Indonesia.
AmCham Indonesia: How do you think the new government regulation will affect the investment climate in Indonesia, especially the mining industry?
Ido Hutabarat: The significant changes in this government regulation are regarding contract extension and ore export. The IMA worked closely with the government on this matter by giving input. Now requests for a contract extension can be done five years before compared to two years in the previous regulation. The IMA believes five years is the most ideal timespan because in mining, nothing can be done quickly. For example, to close a mining field would take two years, so if we negotiate for two years and it gets cancelled, what would happen then?
The other important point of this regulation is the change from Contract of Work (CoW) to Special Mining Business License (IUPK) and the mandatory requirement to build a smelter in order to be able to export the ore.
There are, of course, pros and cons coming out of this regulation. The positive thing is there's an urgency from the government to push companies to build a smelter so they cannot export uncontrollably. The negative thing is this will be a much slower process.
About the IUPK, as CoW and Coal Contracts of Work (PKP2B) license holders, we want the contracts to be over first before changing to an IUPK. But according to the regulation, within five years all the contracts shall be changed into IUPK. If some want to change immediately into IUPK before their contract is over, there should be an incentive based on mutual agreement. The government can give the license renewal when giving the IUPK, rather than just changing the permit into a different name. The permit's validity period remains the same. Despite the pros and the cons, this regulation is still aligned with Law No. 4 of 2009 on Mineral and Coal Mining.
What is the significant difference between CoW and IUPK?
With CoW, everything goes through negotiation, so until the end of the contract everything remains the same. Whereas with an IUPK, the status is only licensing so everything that applies will use the prevailing law system. For example, under an IUPK, if the Tax Office says mining taxes increase, we should follow.
The second example is royalties. At the moment [with CoW], it is clear how much is the royalty for each mining commodity. But under prevailing law, it is up to the government to set how much the royalty is for this year. The point is with a Contract of Work, whatever happens, rain or shine, royalty and other variables remain the same. An IUPK makes the situation more uncertain. Even now, the uncertainty in tax is already happening with, for example, shipments.
In addition, all the permits have to be requested from the central government, but the monitoring function falls on the local government.
The requirement to build smelters has long been an issue. What are the challenges?
The government assumes all mining commodities share the same added value going through smelters. I think they are looking at the success of PT Timah, who manages to get huge added value from the ore products being processed in Indonesia. I used to work at PT Timah, so I clearly understand how the tin processing industry works. The government thinks that smelters cost less than processing concentrates to metals. But these added values differ from one commodity to the next. For some commodities, the concentrates can we already have high value. The government needs to know that not all minerals have to go through smelters to have high value.
Secondly, the electricity cost for smelters is huge. I use the example of a local company that has built a bauxite smelter, but it cannot function because the electricity cost is not affordable. To build a smelter, companies have to do everything from scratch, from financing and building the infrastructure, to electricity. If you are using diesel for the electricity, you have to build your own power plant. Governments in some countries help companies find financial sources for things like this. For example, in Japan they have the Industrial Bank of Japan, which helps find financing for long term industrial investment. That is why Indonesia is not becoming competitive, because even to start building [the smelters], the cost is bulging. Bear in mind that exploration and producing companies do not specialize in smelters; they need to learn those skills from the bottom up.
The government cannot tell us to just build a smelter without considering all the costs and processes. The government is now aware of the situation to not generalize the mining industries, but this has already been written into the Law. We often discuss this with Commission VII [the special House committee devoted to energy and mining] and the Directorate General of Mineral and Coal Mining to review regulations. I have spoken to Commission VII to include the revision of this law in the National Legislation Program (Prolegnas).
Mining companies have the capacity to supply the local smelters, but the problem is price. If the export price is higher than the DMO [domestic market obligation requirement], then, of course, everyone will choose to export. This is why the government should adjust the DMO price.