Opinion: Questioning the Stipulation of Mining Business License (IUP) Production Quota

On February 7, 2019, the government (under the Energy and Mineral Resources or ESDM authority) sent a letter to the heads of ESDM offices in East, South, and Central Kalimantan provinces to inform the 2019 stipulation of coal production quotas. For East Kalimantan, the coal production quota is set at 33.28 million tons (the 2018 production reached 69.64 million tons); for South Kalimantan, the quota is 32.19 million tons (the 2018 production reached 78.06 million tons; while for Central Kalimantan, the quota is 5.5 million tons (the 2018 production reached 11 million tons).

The ESDM authority affirms that the decision to set the 2019 production quotas for the entire provinces in Kalimantan for holders of Mining Business Licenses (IUP) as well as Coal Contract of Works (PKP2B) was already stipulated in Decree of the ESDM Ministry No.2841/30/MEM.B/2018 dated June 8, 2018. With the stipulation of production quotas, coal production in the whole of Kalimantan for holders of IUP is set at around 50 percent of the total production of the year 2018.

Calculation on the 2019 coal production quota is based on the Domestic Market Obligation (DMO) realization in 2018 of East Kalimantan, reaching 8.32 million tons; South Kalimantan, reaching 8.05 million tons; and Central Kalimantan, reaching 0.64 million tons.

The stipulation on the 2019 production quota has sparked many debates among holders of IUP. Moreover, the quota is set at approximately 50 percent of the total production of the previous year. For the government, there is nothing wrong in having the control over the production and exports in each province because that is already mandated under Article 5 of Law No. 4 of 2009 on Minerals and Coal.

However, there are questions on whether the stipulation and control over the production quota should be based only on the realization of DMO. Similarly, should the stipulation on the production quota be done only through a bottom-up mechanism? Can it be done under a topdown mechanism, after the government considering various aspects attached to the current coal mining industry?

Quota Stipulation Mechanism.

We have to admit that Law No. 4 of 2009 has rightfully set the mandate that the government has to control the coal production and exports in every province. Article 3 of Law No. 4 of 2009 even emphasizes that the control over the production and exports of minerals and coal should be done, among others, to secure the availability of the minerals and coal as the raw materials or the source of energy for the domestic use.

Besides that, such control is done, also to secure the interest of the government in its effort to build the national capability to survive the competition in the regional and international levels, and to secure the legal certainty in the management of the minerals and coal mining to be able to survive a sustainable and environmentally sound business.

All goals of a sound management of coal mining that includes the production and exports, should be massively based on the mindset that coal, as a mining product, should be managed as energy product that is non-renewable, having a relatively low reserve, and a spread limited to Kalimantan and Sumatra.

With a total coal reserve reaching 24.24 billion tons of the 125 billion tons of coal resources worldwide, besides having the control over production and exports, ESDM needs to push speedy activities of coal explorations. With measured resources reaching 39.67 billion tons, ESDM authority also needs to expedite the economical calculation of the measured resources to increase the proven reserves. Considering the small amount of the proven reserves, ESDM needs to, not only control the production, but also take further steps such as pushing the exploration activities that has become the important, urgent measure.

Regulating the production quota on the provincial, even the national level based on only the realization of DMO would cause the ESDM authority to be entrapped in a biased calculation for optimizing the coal utilization. Even now, the current government cannot be sure whether the Indonesian coal richness has been utilized as an economic booster of energy in building the national industry, or it is just a revenue driver for increasing the country’s foreign reserves.

The government’s plan to increase the coal production by 100 million tons in 2018, when the government faced the current account deficit, reflects the fact that such measure is far from the point of view of the mining industry. Only adding 100 million tons of production in a year, in the mining industry community, is actually valued as irrational policy. Procuring various heavy-duty equipment (not easy to do at the moment) and having a mine plan will not be established by mining companies only to increase the production within a year.

What actually happened is a backfire,considering the fact that the decision to increase the national coal production was made when the international coal marketwas in the oversupplied condition. There have been negative sentiments in the market, resulting in the repressed coal price in the international market that eventually reduce the Coal Reference Price (HBA), issued every month by the ESDM authority.

We also have to admit that the government is the one causing the industry to speed up the growth of the IUP-scaled mining. In 2008, when the coal demand (particularly of China) was very high, and at the same time, the regional autonomy policy was initiated, the government never had any long-term vision concerning the management of coal mining industry. As the result, thousands of the IUP-scaled mining companies were established, the ones that were declared Clear-and-Clean, also the ones that were still Non-Clearand-Clean. Such condition shifted the control over the industry from the hands of multi-national-scaled corporations to the hands of personal-scaled mining companies on the Mining Business License (IUP) level. The coal mining industry has been developed thus far, with the government limitedly involved just in deciding the coal production quota based on the realization of Domestic Market Obligation (DMO). Such government policy is not appropriate. Moreover, we have to acknowledge the fact that the coal DMO is not just a calculation on the domestic supply-and-demand, but it includes calculation of various issues concerning the chain of logistics, including the coal qualities, the volume of the yearly production, the amount of DMO, the capacity of the loading port, the size of the transport fleet, the capacity of the unloading port, the limits of minimum or rejection qualities, the coal-fueled power plants (PLTU), and the long-term contracts already signed with the state-owned electricity company PLN or Independent Power Producers (IPP).

Therefore, DMO is not an “open space” where any company can or has the capability to supply the coal. Many technical aspects should be taken into account related to DMO. Based on tha treasoning, the inability of a company to supply its coal to meet the DMO requirement is not necessarily such company’s fault. In such case, it would not be right if the government impose a punishment on that company or require it to make a quota transfer. Ironically, producers of coking coal, clearly not much absorbed through the domestic use, are still required to meet the DMO demand, including making the quota transfer as necessary.

Calculating the volume under long-term contracts already signed by companies with the state-owned electricity company PLN or Independent Power Producers (IPP), the products with coal qualities over 4,200 kcal/kg (ar) are currently more utilized by PLN and IPPs. It would be difficult to IUP and PKP2B scaled companies producing coal with qualities below 4,000 kcal/kg (ar) to meet their DMO obligations. In such condition, the export market can be the only market for companies producing low quality coal to trade their products. On the other hand, forcing these companies to purchase quota transfers under a business-to-business (B-to-B) pattern with a price far above the margin will not work either. This problem should be solved by the government (ESDM). On the side of the PLTU investors, aspects concerning the supply security, quality consistency, as well as choice of the coal technology, should become the main considerations before making the investment. And this is very different from those in the coal mining industry that calculate their business based on the availability of access to the domestic, as well as export markets, also estimation of the arising mining cost.

We have to understand various parameters attached to the miners and coal-fueled power plants. Enforcing DMO as the sole policy to control the total national coal production (including those under DMO) would not be right. The growth of the coal mining industry already established by the government should become the lesson learned, and the government should consequently make efforts to solve the arising problems.

However small the scale of the coal mining companies, as long as they meet the legality requirement, the government should provide the security for their protection, considering the fact that these companies had previously contributed to the state revenue through taxes and Nontax National Revenue (PNBP), Corporate Social Responsibility (CSR) programs, and Community Development programs. All that should be taken into account. The government should not play-it-safe concerning other policies, already released on control over the total coal production (including the General Plan of National Energy or RUEN). And the ESDM authority should not simplify the problems related to the growth of the industry, established on their own terms.

Based on such various reasons, it is only natural that the provinces in Kalimantan cannot easily accept the stipulation as it is based only on the realization of the DMO obligation.

The failure to meet DMO requirement should not be entirely attributed to these companies. Therefore, the bottom-up mechanism through DMO is not the right policy. The government should combine the top-down mechanism based on various parameters, then stipulate the production quota for every province. Even such production quota per province should not be fulfilled within the current year, but within the next two or three years after the official stipulation. Considering the model of investment in the coal mining industry, almost all require a calculation of long-term investment that includes the financing banks.

Appropriate Policies

We have to admit that it would not be easy for the government to find the instrument of policies that can be accepted by all stakeholders in controlling the national coal production. Finding the right measures is certainly not easy for the government, considering the fact that hundreds of holders of IUP licenses, already declared Clear-and-Clean (CNC) have entered the Production Operation stage. But giving up should not be an option. Moreover, the coal reserves are declining, while the energy demand is projected to continue increasing.

In 2018, the total coal production of the entire IUP companies in Kalimantan reached 158.70 million tons. Observing the size of the IUP concessions, without any control on production, the coal can be over-exploited. Such circumstances can cause external damages on the ecosystem, environment, and social conditions.

Similarly, without estimating the utilization of the production for the domestic use through DMO policy, there would be impacts on the balance of Indonesian coal reserves, apart from a decline of the international coal price index.

By understanding the condition of the mining industry and production limits already set forth in RUEN, the government (through the ESDM authority) can consistently achieve the objectives on energy mix as determined, make efforts to implement appropriate control over the production, reduce exports in stages when the domestic demand is high compared to the coal reserves, and optimize the coal utilization using the right technology.

Observing the coal mining industry on the IUP CNC scale, already established thus far, the government should implement appropriate control using, not only the bottom-up mechanism (only through DMO realization), but also the topdown mechanism on other parameters, such as condition of investment of the IUP-scale company (just entered the IUP for Production Operation stage, in which the company has opened the mine, prepared the coal processing plants, and mobilized the heavy-duty equipment), the environmental capacity where the IUP company is operated, the locally generated revenue or PAD, mining circle community, and of course, the decision to control the production, not immediately stipulated within the current year, but after the next two or three year, providing enough time for the IUP companies to prepare for the planned investment. Without having understanding over the current business atmosphere (of the IUP as well as PKP2B companies), there will be rejections against policies applied by thegovernment.

Finally, the government is indeed holding the mandate to manage the natural resources (including coal) owned by the country. Control on production and export, as mandated under Law No. 4 of 2009, should be done. Necessary measures in the form of firm control over production and exports are not meant for complicating the process nor closing the investments. They are done for the most interest of the people, for the most welfare of the people. Therefore, thecontrol over production and exports are not based on the scales of corporations, but on the scales of the government’s long-term vision in managing the natural resource, as well as establishing the national energy endurance.