GOVERNMENT SEEKS FLEXIBILITY IN MINING

UNCLAS SECTION 01 OF 02 JAKARTA 001490

SENSITIVE
SIPDIS

STATE FOR EAP/MTS AND EEB/ESC/IEC/ENR
COMMERCE FOR 4430/NADJMI AND 6930/HUEPER
ENERGY FOR PI-32 CUTLER
STATE PASS TO USTR EHLERS AND WEISEL
STATE PASS TO EXIM HANNELENE BEILLARD

E.O. 12958: N/A
TAGS: ECON EMIN EINV ID
SUBJECT: GOVERNMENT SEEKS FLEXIBILITY IN MINING
REGULATIONS, BUT ACKNOWLEDGES POLITICAL PRESSURE IS STRONG

REF: 08 JAKARTA 02293


1. (SBU) Summary. In a meeting with Indonesian Mining
Director General Bambang Setiawan, representatives from
Canada, Australia, the EU and the United States expressed
concerns regarding draft regulations for the new mining law.
Setiawan acknowledged concerns, but he stressed the need to
satisfy some Parliamentary demands. Indonesia will mandate
that mining companies give priority to local mining service
companies, but Setiawan agreed to listen to
counter-proposals. The government will try to be flexible
with local smelting requirements, although increased domestic
copper smelting remains a priority. Indonesia hopes to
renegotiate all current mining contracts of work holders,
although Setiawan claims he will consider each company's
situation. End Summary.


2. (U) Representatives from the Canadian, Australian, EU, and
U.S. missions to Indonesia met with Dr. Bambang Setiawan,
Director General of Mining, Coal and Geothermal at the
Indonesian Ministry of Energy and Mineral Resources and
Director of Mine Inspection Mangantar Marpaung on August 28
to discuss government and industry concerns with Indonesia's
new Mining Law. The Indonesian government has not yet
released the implementing regulations for the law, although
they expect to finalize them before the new government takes
office on October 20.


3. (SBU) All four missions had heard concerns from their
business communities regarding the new law. Although most
foreign investors acknowledge that the law solves a number of
problems that exist in the current mining regulations, they
are worried by a small number of provisions: an in-country
smelting requirement; mandatory preferences for local and
national companies; mandatory renegotiation of existing
mining contracts of work; smaller mining concession areas;
and mandatory divestment, currently set at 20%.

Political Requirements and Possible Flexibility
-------------- --


4. (SBU) DG Setiawan stressed the political nature of the new
law. Although he recognized that the law has some
unfavorable implications for investors, he claims that there
are strong political interests in Parliament that the
government was unable to overcome. He wants Parliament to
recognize that the government is trying to satisfy its goals,
while still keeping the investment climate favorable.


5. (SBU) Setiawan pointed out that the implementing
regulations will be split into two types: a presidential
decree and a ministerial decree. He stressed that many of
the more controversial elements of the law, including the
in-country processing and the distinction between foreign
invested and local/national services firms are in the
ministerial decree. The ministerial decree will give the
ministry more regulatory flexibility, because it does not
require interagency approval for future changes.

Message on Foreign Investment Unclear
--------------


6. (SBU) The new law and current draft regulations contain
provisions that differentiate mining service companies into
three categories: local (owned by a local government or
province),national (private company majority owned by
Indonesians),and other (foreign-invested firms). The law
requires mining companies to give preference to local and
national service companies. The Australian Embassy
representative objected to the requirement, noting that this
provision is contrary to the spirit of the Investment Law,
which makes no distinction between foreign and domestically
owned companies established locally. Australia agreed to
follow up with a proposal to DG Setiawan to mitigate the
negative impact of this regulation.


7. (SBU) According to Marpaung, DPR members claim to be wary
of foreign mining service companies for several reasons:
foreign companies repatriate their profits, putting a strain
on the national balance of payments; foreign companies are
considered to employ fewer Indonesians; foreign companies may
leave in time of crisis; and local companies want a greater
share of the market. Marpaung stressed that he did not agree

JAKARTA 00001490 002 OF 002


with these arguments, but he implied that the Ministry was
helpless to overcome them.

Smelting Still a Goal
--------------


8. (SBU) DG Setiawan affirmed Indonesia's intent to go ahead
with an in-country processing requirement for local ore. He
repeated the Indonesian belief that smelting will lead to
significant value-added, so the Indonesian government would
encourage mining companies to go as far downstream as
possible in-country.


9. (SBU) The Ministry will make the processing mandate
mineral-specific and modify the regulation based on
production levels and processing requirements, according to
DG Setiawan. For example, he said that bauxite could be
processed into alumina rather than aluminum, and lead and
zinc may get a waiver, because current production levels are
too low. However, the Indonesian officials were determined
to increase local copper smelting.

What To Do With Contracts of Work?
--------------


10. (SBU) The Indonesian government intends to renegotiate
mining contracts of work under the new law, but DG Setiawan
stressed that he wants true negotiations. He does not intend
to "kill investment" with strong-arm tactics. Setiawan
repeatedly stressed that he needs to show publicly that he
has negotiated with the contract-holders, and that they have
agreed to make changes. He recognized that different
companies would require different outcomes, but the visible
process of renegotiation was more important to him.
HUME