VZCZCXRO8805
RR RUEHJS
DE RUEHJA #1490/01 2471109
ZNR UUUUU ZZH
R 041109Z SEP 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3258
INFO RUEHJS/AMCONSUL SURABAYA 2512
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC

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