Licensed to Thrive? Indonesia's Need for New Thinking on Mining

One of the biggest extractive industry governance challenges for Indonesia's new Widodo administration is reforming the country's system for licensing mineral extraction.

In the Suharto era, licensing authority was controlled by the country’s central government, which aimed to use the mining of tin, copper, gold and other resources to boost economic development in the then-impoverished nation. After the fall of Suharto, decentralization reforms included a new mining law enacted in 2009. This resulted in the transfer of mineral licensing authority from the national government to local authorities. Decentralization granted wider political berth to resource-rich regions, allowing them to craft their own resource development agenda, fulfil their own growth potential, and better distribute economic gains to their own people.

The rapid change of regulatory framework and political landscape should ideally have provided Indonesia a chance to embark on more democratic, equitable and sustainable management of natural resources. However, practice has proven trickier than theory in this case. Decentralization of mineral licensing power to local government has created a large number of natural resource governance problems. Proliferation of district-licensed mining permits has led to pollution, increased rates of corruption and illegal mining, inadequate revenue collection systems, and a weak investment climate.

Today we’re releasing a policy paper that reviews the impact of mineral licensing decentralization in Indonesia. While many countries with central government licensing face problems related to mining, a decentralized licensing system can exacerbate them. Badly conceived and designed decentralized systems suffer from poor information sharing and coordination between different levels of government.

In Indonesia, the speed at which control over the mineral sector has been decentralized in response to social and political factors has outpaced the development of the capacities of local governments to assume these new duties and responsibilities. This is, unsurprisingly, problematic.

We recommend the following measure to address these problems:

• The Indonesian government should review the legal instruments used in applying for and approving licenses.

• The government should also assess costs to administer and monitor licenses and ensure adequate revenues accrue to relevant government units so they can fulfill their responsibilities.

• The country should reinvest in a uniform cadastral system and geological database (which should include updated information on exploration licenses), with clear reporting procedures for subnational governments.

• The national government should look into using mining-related fees to address specific administrative needs; provide training programs, particularly for field staff; and invest in human resources to attract and retain highly skilled and experienced employees with administrative and technical expertise.

• Government and civil society actors should invest in improving mechanisms to make subnational governments more accountable to citizens. These could include requiring transparency throughout the licensing process, especially in the awarding and monitoring of licenses; creating easy, direct methods for the public to communicate with relevant government employees; and supporting efforts by civil society groups to monitor licensing regulations and procedures at the subnational level (including through EITI).

Emanuel Bria is NRGI’s Asia-Pacific senior regional associate. Varsha Venugopal is NRGI’s subnational capacity development program officer.