ICSG Information Paper Indonesia’s Experience Mining and Copper 1990-2000 February 2002 Notice: The information contained in this document is intended to provide an overview of the current situation in Indonesian Mining and Copper sector. This paper is provided for reference purposes only. References to sites, companies, and agencies are for information purposes only. For further information regarding this document please contact Mr. Juan Carlos Guajardo Beltrán, Economist, International Copper Study Group ([email protected]). International Copper Study Group Rua Almirante Barroso, 38-6, 1000-013 Lisbon, Portugal Tel: +351-21-351-3870 Fax: +351-21-352-4035 OECD Foreign Investment Conference Paris, February 2002 Indonesia’s Experience Mining and copper 1990-2000 International Copper Study Group1 Abstract Mining foreign direct investment2 has been important to Indonesia in the last decade but even more so since the financial regional crisis in Asia and the internal changes that followed. Since the nineties, Indonesia has received large amounts of FDI inflows in every economic sector. The crisis which started in 1997, however resulted in an exit of important component of previous FDI inflows. The long-term requirements condition of mining investment means that the copper projects which started in the early nineties and which finished only some years ago, compensated in part the strong FDI flow exits. As every mining project, there are not only economic consequences on the country and specific area where the project is developed but also environmental and social impacts. This paper strives to show the relationship between FDI in the copper sector and its impacts on Indonesia at a national and local level from a Sustainable Development perspective. Overview of Indonesia Indonesia is the fourth most populated country in the world with 210 million persons in 2000, making it a key country in South East Asia. Geographically, it is a widely dispersed country with 17,500 islands spread over 5,000 Km. over the Equator latitude as showed in Figure 1. 1 Notice: The information contained in this document is intended to provide an overview of the current situation in Indonesian Copper sector. This paper is provided for reference purposes only. References to sites, companies, and agencies are for information purposes only. 2 This paper is focused on mining sector and does not address investment issues related activities (smelting, refining, etc…). 1 Figure 1 Map of Indonesia Indonesia gained economic relevance in the nineties when it received important flows of FDI and was highlighted by international organizations as a result of economic performance. However, financial instability in 1997 strongly shocked Indonesia, reverting the FDI inflows and causing an internal crisis that eventually led to the end of the Suharto regime established in 1965. The internal consequences continue to this day. Table 1 Indonesia Economic Basic Facts 1996 1999 2000 GDP growth (Annual %) 7.8 0.8 4.8 GNI per capita GNI Atlas method (current US$) 1,110 580 570 % World Atlas method (current US$) 0.7% 0.4% 0.4% Population Million 197.2 207.0 210.4 % World 3.5% 3.5% 3.5% Surface Area (million sq. km) 1.9 1.9 1.9 % World 1.4% 1.4% 1.4% Employment Thousands - - 89,837.7 Source: World Bank except Employment, International Monetary Fund IMF, Dissemination Standards Bulletin Board (DSBB) 2 Table 2 Environmental Basic Facts 1996 1999 2000 Annual % Change - - 1.2 Deforestation World mark - - 0.2 Fresh water Cubic meters - 13,708.7 - resources per capita World mark - 8,240.4 - CO2 Emissions Metric tones per capita 1.3 - - World mark 4.2 - - Electric power Kwh 288.8 - - consumption per capita World mark 2,042.9 - - Source: World Bank - Not Available / Not Applicable Foreign Investment Indonesia has received 21,252.5 million dollars of FDI since 1970, and was during the nineties one of the main undeveloped recipient countries in the world, as shown in Figure 2. Figure 2 FDI Indonesia 1970-2000 8,000 6,000 4,000 2,000 0 Million Dollars 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -2,000 -4,000 -6,000 Source: 1970-1997, "The World Bank World Development Indicators 1999 on CD-ROM (Development Data Group, The World Bank, Washington, D.C., 1999). 1998-2000, "UNCTAD "World Investment Report 2001: Promoting Linkages" 3 The 1997 crisis has affected Indonesia strongly and negative flows are observed in the last three years due to the exit of previous investments. FDI inflows in Southwest Asia has decreased from 30% of the world total in the middle 90's to just 10% in last decade. One of the main reasons is the Indonesian disinvestments as shown in figure 2. The national FDI regulations introduced after the 1997 crisis has been, in general terms, more restricted than those in the precrisis period. Two important laws were discussed into the Indonesian Parliament in 1999: Law No. 22/1999, Regional Political Autonomy, and Law No. 25/1999, Fiscal Decentralization. In spite of the application of these laws, which started recently, Law No. 22 set up the election of regional and local authorities that previously were appointed by the central government. Law No. 25 mandates that a minimum of 25% of domestic revenue would be transferred to local governments through the General Allocation Fund. In addition, the Provincial Governments and other local governments of areas where mining operations were located would receive after-tax royalties, such as 15% from oil, 30% from natural gas, and 80% from mining, fishing, and forestry. Also, Law No.41/1999 on forestry prohibits open cast mining. In Irian Jaya, about 68% of the area potentially available for mining exploration was covered by protected forest; 53%, in Sumatra; 50%, in Maluku; 39%, in Sulawesi and 33 percent in Kalimantan3. The environmental regulation in Indonesia falls under the responsibility of the Minister of Environment and BAPEDAL (National Environmental Impact Analysis Board, Indonesia’s Environmental Regulatory Agency). The main environmental regulation that affect the mining sector started with the Mining 1967 law, currently under revision (June 2001) by the Ministry of Energy and Mineral Resources (MEMR). The other important legal regulations are the Living Environment Law (1982), Ministerial Decree Concerning the Prevention and Remedial of Damage and Pollution, Bond Reclamation (1986) and the Environmental Impact Assessment (EIA). Mining Sector4 The mining sector, including oil and gas, contributed 9% to Indonesian GDP in 2000 as shown in Figure 3. 3 United States Geological Survey, USGS, 2000, (U.S. Embassy, Jakarta, Indonesia, November 30, 2000 and Petrominer, 2001). 4 Mining sector includes oil & gas otherwise is mentioned. As was mentioned before, industrial process related to mining (smelting, refining, etc), are not include in this information, underrepresenting the total contribution by mining related activities to the Indonesian economy. 4 Figure 3 Source: International Monetary Fund IMF, Dissemination Standards Bulletin Board (DSBB) The mining and quarrying sector increased by 2.3% in 2000; this sector had declined by 2.4% in 1999. According to a Pricewaterhouse Cooper's 2001 report5, the mining industry contributed strongly to Indonesia's economy in recent years (Table 3). The value of mining exports was about 11% of total exports that year. Table 3 Mining Contribution to Indonesian Economy Billion Rp. 1994 1995 1996 1997 1998 1999 2000 Contribution to 1,809.80 2,779.70 3,233.66 4,104.13 11,443.69 11,632.22 13,572.40 Indonesian economy Employee - - 247.93 290.97 546.98 844.23 964.95 compensation Purchase from - - 1,214.47 1,455.83 3,050.22 3,233.65 4,842.60 domestic suppliers Government - - 1,489.91 1,921.03 6,765.15 6,962.99 6,843.76 revenue Dividends paid to - - 140.90 177.94 203.32 297.86 657.58 Indonesian shareholders Interest paid to - - 140.45 267.36 878.02 293.50 263.52 Indonesian companies/banks Source: PricewaterhouseCoopers 2001. - Not Available 5 Indonesian Mining Industry Survey 2001. PricewaterhouseCoopers. 5 For the mining sector, the total export value of Indonesian minerals, was $3.0 billion; copper ore and coal accounted for 93% of this amount. Other major export commodities were bauxite, dimensional stone, nickel ore, and tin. Plywood, garments, textiles, processed rubber, palm oil, and electrical apparatus dominated Indonesia’s manufactured exports in 20006. The Indonesian production of mineral commodities in 2000 is shown in Table 4. Table 4 Production of mineral Commodities Indonesia 2000 Bauxite tonnes 1,551,000 Copper tonnes 1,004,600 Gold kilograms 124,596 Iron tonnes 489,126 Nickel tonnes 98,200 Silver kilograms 255,578 Tin tonnes 51,269 Coal tonnes 76,000 Coal tonnes 76,800,000 Gas, natural Million cubic meters 82,334 Petroleum & Thousand 42-gallon 516,070 Condensate barrels Source: ICSG, 2001 and USGS, 2000. Mining sector issues are coordinated by the Ministry of Energy and Mineral Resources (MEMR). In 2000-2001 the Ministry was reorganized, and, among other changes, resulted with the Directorate General of Mining being merged into the Directorate General for Geology and Mineral Resources. The Ministry of Energy and Mineral Resources (MEMR) and other related departments jointly drafted a new mining law/regulation to replace Law No. 11/1967 with an updated regulatory framework that recognizes the changing role of Government, especially with regard to implementation of regional autonomy and fiscal decentralization and further safeguarding of the natural environment7. Up to now, foreign private companies or foreign/Indonesian joint ventures engaged in mining in Indonesia are either contractors working for the Government of Indonesia which operate under ‘Contracts of Work’ (CoW) for base metals, or ‘Coal Contract of Work’ (CCoW) for coal mining.