Contract of Work system needs review

Following the implementation of the autonomy law and the government's plan to introduce a mining law, some people suggest that the government drop the existing Contract of Work (COW) system. Alexander Hallatu, a journalist with Jakarta-based economic daily Bisnis Indonesia, looks into the issue in his opinion article published Wednesday on the paper. Following are the excerpts of the opinion:

The status and position of the contract of works (COW) system continues to be a sensitive issue in the development of Indonesia's mining sector, and this system needs to be reviewed moreover in anticipation of the new mining law and also the implementation of regional autonomy.

Most investors, be they foreign and domestic investors, are now taking a wait-and-see attitude before taking any decision on new investment, considering the new mining bill and also the regional autonomy.

The government itself seems to take a safe measure by delaying the passage of the Eighth Generation COW, pending the deliberation of the new mining bill. And this delaying approval of COW had affected a number of mining firms, including state mining company PT Aneka Tambang (Antam).

Antam's aluminum mining project in Tayan, West Kalimantan, is still in limbo because it is governed by the eighth generation COW. The government had only given its approval in principle for the aluminum mining project, but the COW had not been signed.

Antam expects that the new COW could be signed next year so that mining activities in Takyan would not be stopped. Tayan mining site has total reserves of 69 million tons of aluminum ores and 47 million tons of sands. It is expected that Antam would be able to produce 300,000 tons of chemical grade aluminum, with a total investment of $177.4 million.

Although there are drastic views that the COW system should be dropped altogether, there are also positive views about the COW. The latter would prefer to retain the COW system as it serves as an attractive incentive for investors, especially foreign investors, to enter into Indonesia's mining business.

The attractive feature of the COW system includes its offer for investors to negotiate with the government over the terms of the contract, in which the government could give incentives to the investors.

Those who are against the COW system would argue that such flexibility often creates problem later. The Freeport Indonesia case serves as an example. Although the COW rules that Freeport's owners are required to divest certain percentage of ownership in the company, they are reluctant to do so as the article in the COW that requires divestment is overruled by a government regulation that frees mining investors from divesting their stake at their mining firms.

On top of the COW, the main concerns for mining investors is the strong drive among local administrations to control mining activities in their respective areas in line with increased regional autonomy. This would give more burden to investors unless the system in licensing mining operation is also granted to local administrations so that there would be no dualism in control and authority.

If the licensing is given directly to local administrations, it would cut the long chain of bureaucracy in licensing mining operation.

Therefore, it is suggested that the central government and local administrations divide their power over mining licensing authority. Local administrations, for instance, are given authority to license mining investment by local investors, while the central government retain its authority to license mining investment by foreign investors. (*)