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Sub-National Mining Licensing:The Results of Research on Two Districts –

Bangka and Kutai Kartanegara

John Strongman and Ambarsari DC

RWI ConferenceJakarta May 22-23

Presentation Overview

A. Research Objective: A Framework for Examining Sub-National Licensing

B. Application to Bangka and Kutai KartanegaraC. Summary of Main Findings D. Preliminary Policy Implications

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Background and Purpose

Background• Some countries including Indonesia have moved towards mining

license decentralization • Year 1999 Decentralization of Powers in Indonesia primarily to

district level• 10,235 mining licenses issued by districts – of which 41% are “Clean

and Clear”Purpose of Research: • Develop a framework for examining the potential benefits and the

potential vulnerabilities of a decentralized licensing system • Apply the framework to Bangka and Kutai Kartanegara• Develop preliminary conclusions and recommendations on policy

improvements identify possible steps to improve the decentralised licensing arrangements in Indonesia.

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Framework for Examining Sub-National Licensing

Three main building blocks: 1: Mining Industry Performance Key Q: How good or how bad is mining industry performance?

Issues – illegal mining; environmental/social impacts; tax avoidance

2: Government Mining Institutions’ Performance Key Q: Are they working well or following poor practices?

Issues: governance and corruption; overlapping licenses; licensing

record keeping; licensing reporting; mine site inspections; budgets

and staffing; inter agency coordination

3: Mining Regulatory FrameworkKey Q: Are the rules part of the solution or part of the problem? Issues - National or local licensing and safeguard rules? institutional roles? reporting and data sharing requirements including to tax agency

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Application to Bangka and Kukar: Methodology

• Method of data collection– Desk study and references– Interviews

• Type of data– Government “clear and clean” license data

• Overall reliability/validity of data

Building Block #1:How Good or How Bad is

the Performance of the Mining Industry?

»Illegal Mining»Environmental and Social Impacts»Tax Payments

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How Good or How Bad is Mining Industry Performance?

Illegal Mining Bangka - As much as half of tin mining may be illegal. As of May 2012,

only 17 mining operations permits (IUP) out of 283 issued by local government got Clean and Clear (CNC) status

Kutai Kartanegara (Kukar) As of May 2012, only 240 IUPs out of 485 IUPs issued by local government got CNC status. New licenses are often issued that overlap with existing licenses so overlapping licenses is a growing problem.

Environmental and Social ImpactsBangka Both environmental impacts and social impacts are poorly

managed. As illegal mining practices have became rampant, environmental damages increase significantly. Livelihoods are shifting from agriculture (pepper farm) to artisanal mining.

Kukar Environmental impacts are poorly managed, for example in water waste and stockpile for coals and there are frequent conflicts between the mining operations and the people living in the area.

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Mining-related Tax PaymentsBangka - as much as half of tin production

may be smuggled out untaxed

Source: Ambarsari and Mumbunan, 2012.

Miner TI Owner TI Collector Smelter

Smuggler

Export Market

Transit (Domestic)

How Good or How Bad is Mining Industry Performance?

Building Block #2: Are Government Mining Offices

Working Well or Following Poor Practices?

»Governance and Corruption»Budgets, Staffing and Mine Site

Inspections

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Are Mining Offices Working Well or Following Poor Practices?

Governance and Corruption Illegal Mining Graft and Bribery in Issuing Licenses Avoiding environmental protection requirements

Budgets, Staffing and Mine Site Inspections Inadequate Mining Office budget and staffing Too few occupational safety and health inspection took place at Inadequate or lack of complaint and conflict resolution

mechanisms.

Building Block #3: Are the Rules and Regulations

Part of the Solution or Part of the Problem?

»Sub-National and National Procedures »Different Sub-National Procedures

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Are the Rules Part of the Solution or Part of the Problem?

Procedures for Mining Licenses (IUPs)

and Contracts of Work (CoW)

Regent/ Mayor

Governor Minister EMR

Applicant

Graph A – Procedure to apply IUP Graph B – Procedure to apply CoW

Lampiran Kepmen ESDM 1453/2000

Local

Investment Office

Regent Local parliament

Applicant MoENR

Province

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Description Bangka Kutai KartanegaraYear of Issue 2001 2001Name and type of license IUP, PUP, IUPR - IUP

Stage of licensing for mining activity

2 (exploration and exploitation) 6 (general investigation; exploration; exploitation; processing and refining; transport; and selling)

Procedures/Requirements

IUP: Detailed and easy to understand. IUPR: to be regulated by Regent

Not detailed and no other regulation as reference

If more than one applicant for the same area.

Not regulated First priority is decided by Regent,

Are the rules part of the solution or part of the problem?

Different Sub-National Procedures Local mining regulations : the differences are more than the similarities. The potential disadvantages and vulnerabilities are that investor has to examine each regulation for each jurisdiction

Jurisdictions are not required to report production data to taxation agencies

Are the rules part of the solution or part of the problem?

Environment and Social Impact

Sub-national environmental and social protection are legislated by both districts

Bangka mining regulation addresses land rights including the rights of indigenous people.

Mining regulations in both districts addresses compensation for land acquisition, environmental management and reclamation

Bangka addresses partnership with local people, while Kukar addresses community development for people surrounding mining area.

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Summary of Main Findings Mining Industry Performance:

1. Extensive illegal mining and smuggling including mining in protected areas

2. Unacceptable, non-compliant environmental and social impacts 3. Tax avoidance by illegal mining operations

Government Mining Institutions 4. Corruption – licensing graft, bribery and cronyism5. Inadequate mining licensing records6. Newly issued licenses overlap other licenses or protected areas 7. Insufficient minesite inspections and lack of oversight of illegal mining

Mining Regulatory Framework 8. Inconsistent and inadequate sub-national licensing rules and

procedures and environmental and social safeguards including conflict resolution

9. Excessive discretionary power to license offices and Regents10. Full transparency of license applications awards and licensing records

Mining and Government Performance Issues

Potential ways forward to improve the poor past performance of many small mining operators and sub national offices and officials so that the moratorium on mining licenses can be lifted

– Prompt and effective implementation of Mining Law 4/2009 and associated regulations which will require political will and mobilization of much larger budgets for sub-national offices

• More and better staff• Improved systems especially licensing records • Regular inspections

– Information reporting, especially to National Government– Much greater openness and transparency regarding licensing – Resolution of licenses that are not Clean and Clear– Engagement of civil society to support

Regulatory Framework Issues

• An important start has been made to improving the previous shortcomings in the licensing laws and regulations with – Mining Law 4/2009 – Clean and Clear Program

• But vulnerabilities remain. • Further legal reforms in terms of additions to laws and regulations are

needed to – Reduce the discretionary powers of the officials who grant the licenses – Make full transparency mandatory regarding licensing applications,

processing, decisions and records etc.– Allocate part of the mining-related payments by licenses holders to

support the budgets of sub-national government mining agencies– Provide sanctions (like the present licensing moratorium) for non-

compliance by sub-national governments with the Mining Law 4/2009 and other new rules and regulations

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