Instead of Building Smelters in Indonesia, Why Not Renegotiate Royalties?

This article was first appeared in The Jakarta Globe on Tuesday, 04 March 2014. Click here>> for detail.

It has been confirmed that the government is not going to withdraw the regulation that imposes progressive tax on the export of unprocessed mineral ore. The government is confident that this regulation will effectively force mining corporations to build processing facilities in Indonesia by the end of 2016. The main objective of this regulation is to boost state income from the mining sector. To be exempted from this export levy, a number of mining companies have already committed to building smelters.

Weighing the benefits

There are pros and cons to this regulation. Those who support it argue that it is time to stop selling our natural resources for the benefit of private foreign companies. They say Indonesia should get a bigger share of the money made from the export of our mineral resources.

Those opposing the regulation believe that the imposition of high taxes on the export of ore would force mining companies to scale back production. Mining companies may then have to lay off significant numbers of employees, which may trigger social unrest.

The mineral saga is not going to be over soon. Mining concession holders are considering foreign arbitration. But the government does not feel threatened — neither by the arbitration threat, nor by the possible social unrest that may result from rising unemployment in the mining sector. Also, we shouldn’t forget that this is an election year, which means the mineral ore conflict could be used by political groups to obtain short-term advantages.

To a certain extent, the mining companies’ opposition to the high export levy is reasonable. Within the five years grace period provided for in Law No. 4 of 2009, the government has done very little to ensure that the relevant companies were taking the necessary steps in anticipation of the mineral ore export ban. However, the government’s goal of boosting state income from the export of minerals does deserve our full support. This country needs to gain more from the extraction of its natural resources.

Yet, despite the government’s good intention, it remains unclear exactly how much the state is expecting to gain from forcing companies to build smelting facilities in the country. Additionally, it is doubtful whether the government has taken into consideration the environmental damage the country may bring upon itself as a result of the regulation.

Environmental impact

Article 33 of the Constitution states that Indonesia’s natural resources “shall be used to the greatest benefit of the people.” This is a rather broad concept, but fortunately the Constitutional Court has provided four conditions to test whether or not the objectives of the Constitution are met, relating to (1) the actual benefit of natural resources for the public; (2) the degree to which the benefits are distributed equally; (3) the level of public participation in determining the use of natural resources; and (4) the degree of respect for traditional rights in extracting the resources.

It’s easy to argue that the imposition of a progressive export tax and the development of local processing facilities would bring benefits, because state income will increase. Therefore, the first constitutional condition is met. However, turning to the second condition, problems arise because we cannot easily say that the current regulation would necessarily result in equal distribution of benefits. Among other things, the environmental costs must be considered in this respect.

The development of smelters may cause environmental damage, lead to changes in ecosystems and negatively affect human health. These are costs that have to be included in the government’s calculation. A 2012 study on the impact of the smelting industry in China by Xiuwu Zhang and other scientists found that the industry contributed to pollution of water and soil and had an adverse impact on human health.

Already, a number of Chinese investors have been showing interest in building smelting plants here. Indonesia had better learn from China’s experience, to make sure similar environmental problems do not occur here.

The government may argue that the development of smelter plants, and processing procedures later on, will follow strict environmental and health standards. However, in most of cases, environmental damage from corporate activities happens because the government has no effective surveillance mechanism. The haze problem in Sumatra is just one example of how the government has been unable to prevent companies from using fire to clear land. With the development of a smelting industry in Indonesia, plenty of people could be exposed to pollution in the air, water and soil. It is in this way that the smelting industry may not bring equal benefit to all people.

Renegotiating royalty payments

If the main objective of the government is indeed to increase the state income from the mining sector, there may be another option worth considering — one that does not carry significant risks.

The government may simply negotiate an increase in royalty payments from mining companies. There is no better time to renegotiate such a royalty increase than today, when our bargaining position is at its highest. Total royalty payments may be set to an amount equal to the additional income the government expects to obtain through the development of a local smelting industry. Companies may even be given two options: build a smelting plant or increase your royalty payments.

In conjunction with new royalty deals, the government may force companies to allocate more funds to corporate social responsibility and community development programs. This may also be a good time for the government to endorse the implementation of the 2011 UN Guiding Principle on Business and Human Rights, which may help to reduce conflicts in mining areas.

Regardless of what is decided, mining companies must realize that Indonesia today is a different country than it was few decades ago, when most of the mining contracts were signed.

It is up to the government to regulate how the mining industry should bring the greatest benefit for the Indonesian people. But the impact of the current export ban and smelter plans on the environment and our health must not be ignored.

Iman Prihandono is a lecturer and researcher in business and human rights at the Faculty of Law of Universitas Airlangga in Surabaya. Contact him at iprihandono@fh.unair.ac.id.

See also related article below:

Lead Poisoning Sickens 600 Kids in China

Desa kosong seluruh warga diungsikan PT Smelting Gresik sebar gas beracun (Villagers were evacuated as Poisonous Gas Leaks from PT Smelting Gresik, 07 Juli 2013).

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