Extracting Value from Mining
    Category: Issues & Ideas By : Scott Younger Read : 1196 Date : Saturday, October 12, 2013 - 07:31:10

    Ahmad Zamroni / Forbes Indonesia

    Bill Sullivan is a licensed foreign advocate with law firm Christian Teo Purwono and Partners (in association with Stephenson Harwood LLP), who has been in Indonesia since 1991, albeit in two different periods. He is a graduate of the University of New South Wales, Harvard Law School and the University of Sydney, and has six degrees in law, accounting, finance and management. His involvement in mining issues commenced in 2005 shortly after his second tour, and he has become one of the most important voices on industry issues. Bill just wrote a book on local mining laws and regulations – “Mining Law & Regulatory Practice in Indonesia—A Primary Reference Source.” We interviewed Bill in his office in Jakarta.

    A recent USAID study raised some serious issues about implementing the Mining Law. Could you elaborate on this?

    The USAID study concluded that if Indonesia persisted with the blanket enforcement of the domestic processing and refining obligations, Indonesia and Indonesians as a whole would be worse off, thereby completely undermining the rationale for domestic processing and refining in the first place. What is particularly extraordinary is that the government seems to have simply assumed that domestic processing and refining, on a large scale, was a sensible strategy to pursue without ever conducting any comprehensive studies on whether this assumption was correct. It is only now, after nearly five years and with domestic processing and refining mandated to start in 2014, that the fundamental question is finally being asked: does domestic processing and refining make economic sense for Indonesia? It is a frightening to think that the blanket application of the domestic processing and refining obligation, as now contemplated,  could actually cost the country some $30 billion by 2020, according to USAID.

    A major problem is that the domestic processing and refining regulations doesn't account for the different conditions of the various metals. For instance, for copper virtually all the value comes from the primary mining process and only about 2% additional value is added in further refinement. Further, the government is simply ignoring the huge excess refining capacity which currently exists in China and which means that, at least in the case of bauxite, copper and iron ore, the cost of domestic processing and refining is never likely to be competitive with the cost of processing and refining elsewhere.

    Could the law's deadline be extended to allow for adjustments?

    There have been some statements that suggest the domestic processing and refining obligation will only be selectively enforced in 2014 and that aspects of the domestic processing and refining obligation are being reconsidered. However, as recently as 18 months ago a key speech by the president, outlining the country's new energy security policy, made domestic processing and refining one of the primary objectives of that new policy. One needs to be mindful of the forthcoming 2014 presidential election which may make it politically awkward for the government to be seen as backtracking on this issue.