Why reclamation bonding mechanisms fail in Indonesia

Abstract

The objective of this article is to critically examine the regulatory framework associated with reclamation bonding mechanism in Indonesia. It suggests that the failure of the Indonesian reclamation bonding mechanism is due to a lack of regulatory clarity and the consequent weaknesses in law enforcement. In this context, this article reviews the existing literature on policy models pertaining to bonding mechanisms before arriving at the conclusion that the worst-case scenario described by Costanza and others (2015) represents the most apt remedy to improve Indonesia's reclamation bonding mechanism policy. Under a worst-case scenario bonding mechanism, the bond value is set up according to the costs associated with the most extensive probable environmental destruction. Such costs are over and above those associated with identified environmental damage. Companies intending to conduct mining activities are required to provide such a bond upfront, prior to commencing their exploration and operation–production.

Keywords:

• reclamation bonding mechanism
• legal enforcement
• worst-case scenario

Notes

1 Komari et al. v. Walikota Samarinda et al. (District Court of Samarinda, 2013), Decision No. 55/Pdt.G/2013/PN.Smda.

2 Ibid [8]–[24].

3 Ibid [33].

4 Yayasan Riau Mandiri v. PT. Riau Bara Harum et al. (District Court of Rengat, 2017), Decision Number 221Pdt.G-LHI20161PN Rgt, [5]–[7].

5 Ibid [8].

6 Ibid [55].

7 Wan Ulfa Nur Zuhra, ‘Utang Reklamasi Tambang yang Kerap Tak Dilunasi’, Tirto.id (31 August 2016), www.tirto.id/utang-reklamasi-tambang-yang-kerap-tak-dilunasi-bFD9 accessed on 16 April 2020; see also similar reports from Jaringan Advokasi Tambang (Jatam, Mining Advocacy Network) in Ria Anjani, ‘Pengurus Negara dan Perusahaan Tambang Lari dari Tanggung Jawab Reklamasi dan Pascatambang di Kalimantan Timur’ in Abdullah and others (eds), Tidak Hanya Kotor, Batubara itu Mematikan: Potret Daya Rusak Hulu-Hilir Batubara terhadap Keselamatan Rakyat dan Iklim (Jaringan Advokasi Tambang 2016), 45.

8 Ardiyanto W Nugroho and Ishak Yassir, ‘Policy Study on Post Coal Mining Reclamation Assessment in Indonesia’ (2017) 14(2) Jurnal Analisis Kebijakan Kehutanan 121, at 122.

9 Environmental Law Alliance Worldwide (ELAW), Guidebook for Evaluating Mining Project EIAs (2010), 4.

10 Wu Xiao, Zhenqi Hu and Yanhua Fu, ‘Zoning of Land Reclamation in Coal Mining Area and New Progresses for the Past 10 Years’ (2014) 1(2) Int. J. Coal Sci. Technol. 177, at 178–179; Jozef Dubinski, ‘Sustainable Development of Mining Mineral Resource’ (2013) 12(1) J. Sust. Min. 1, at 4; see also Bian Zhengfu and others, ‘Environmental Issues from Coal Mining and Their Solutions’ (2010) 20 Mining Science and Technology 215, at 216–218.

11 Zafira Mdazin, Mohamad Fitri Shai-in and Faradiella Mohd Kusin, ‘Comparing Heavy Metal Mobility in Active and Abandoned Mining Sites at Bestari Jaya, Selangor’ (2015) 30 Procedia Environmental Sciences 232, at 232–237; see also Nhi Nguyen, Bryan Boruff and Matthew Tonts, ‘Fool's Gold: Understanding Social, Economic and Environmental Impacts from Gold Mining in Quang Nam Province, Vietnam’ (2018) 10 Sustainability 1355, at 1356–1358.

12 Rina Kristanti and others, ‘Institutional Performance of Mining Reclamation in Forest Areas of East Kalimantan’ (2019) 25(2) Jurnal Manajemen Hutan Tropika 69, 72.

13 Tommy Apriando, ‘Who Owns Indonesia's Deadly Abandoned Coal Mines? An Investigation into the People, and the Institutional Failures, Responsible for the Abandoned Coal Mine Pits Scattered Across Indonesian Borneo’, (Mongabay, 25 May 2017), www.news.mongabay.com/2017/05/who-owns-indonesias-deadly-abandoned-coal-mines accessed on 12 May 2020.

14 See note 31–32.

15 Andri Prasetiyo and Liza Mashita Ramadhania, ‘Compliance of Reclamation and Post-Mining Fund Placement in Indonesia’ (Publish What You Pay (PWYP) Indonesia's Policy Brief, November 2018), 3.

16 Clara Ferreira Marques, ‘Indonesia Faces Environmental Time Bomb after Coal Bust’ (Reuters, 29 June 2016) www.reuters.com/article/us-indonesia-coal-environment/indonesia-faces-environmental-time-bomb-after-coal-bust-idUSKCN0ZF03U accessed on 15 December 2019.

17 Bersihkan Indonesia, Untouchable: The Vulnerability of Reclamation and Post-Mining Guarantees to Corruption (2020), 12 www.auriga.or.id/resources/reports/64/untouchable-the-vulnerability-of-reclamation-and-post-mining-guarantees-to-corruption accessed on 12 May 2020.

18 Ibid 13.

19 Anjani (n 7) 42–44; see also Budi Afandi, ‘Listrik dan Batubara Mematikan’ in Abdullah and others (n 7) 8–9.

20 David Gerard, ‘The Law and Economics of Reclamation Bonds’ (2000) 26 Resources Policy 189, at 191, fn 6.

21 Ibid 191.

22 Richard Poulin and Michel Jacques, ‘Mine Reclamation Bonding and Environmental Insurance’ (2007) 7(5) Int. J. Risk Assessment and Management 589, at 591.

23 Linlin Cheng and Jeffrey G Skousen, ‘Comparison of International Mine Reclamation Bonding Systems with Recommendations for China’ (2017) 4(2) Int. J. Coal. Sci. Technol. 67, 69–73. For a general account of the mining law applicable in these three countries, see, respectively, Jay Leary and Geoff Kerrigan, ‘Chapter 2: Australia’ in Erik Richer La Fleche (ed), The Mining Law Review (8th edn., 2019) Law Business Research Ltd., 13; Erik Richer La Fleche, David Masse and Jennifer Honeyman, ‘Chapter 5: Canada’, in Richer La Fleche, Mining Law Review, 52; Karol I Kahalley and Erica K Nannini, ‘Chapter 19: United States’ in Richer La Fleche, Mining Law Review, 217.

24 Ibid.

25 Ibid.

26 Ibid 69–74.

27 Ibid 69.

28 As this may be a comparative matter to foreign readers, the Indonesian law structures its legal system hierarchically, which is inspired from Hans Kelsen's Stufentheorie, and is also stipulated as such in Law No. 12 Year 2011 Concerning Lawmaking. Under this hierarchical structure, the Law (Undang-Undang) stands as the highest level of law, just one level directly under the Indonesian Constitution, i.e. UUD 1945. At the central state level below the law is, in a consecutive regression, the government regulation, presidential regulation and ministerial regulation. It is important to note that Indonesia also has a decentralisation policy that allows local-state governments to devise their own policy and regulations. In this sense, local-state government law products may at times be indifferent to state-level ministerial regulation given the decentralisation powers vested in them, but never towards the law and government regulation. See further Simon Butt and Tim Lindsey, Indonesian Law (OUP 2018), 34–57; Maria Farida Indrati Soeprapto, Ilmu Perundang-Undangan (1): Jenis, Fungsi, dan Materi Muatan (Penerbit Kanisius 2007).

29 Law 4/2009 defines post-mining rehabilitation as planned, systematic, and continuous activities subsequent to the completion of all mining activities that aim at restoring the functions of the natural environment and social functions according to local conditions throughout the mining zone.

30 Art 99 para (1) Law 4/2009.

31 Both IUP and IUPK licences are granted to licence applicants intending to engage in either exploration (Eksplorasi) or operation–production (Operasi Produksi) mining activities. As such, the respective licence will then be, for example, IUP Eksplorasi or IUPK Operasi Produksi, depending on the licence applicant's proposed activity; the same applies to IUPK as well. The granting of IUP and IUPK licences is also incumbent upon the area in which a licence applicant intends to conduct its mining activities. IUP and IUPK can only be granted to the respective licence applicant when the location it chooses to conduct its proposed mining activities actually falls within the area where such an activity can be conducted. This area is divided into two respective areas, namely Wilayah Izin Usaha Pertambangan (WIUP), designated for the kinds of activities included under the IUP; and Wilayah Izin Usaha Pertambangan Khusus (WIUPK), designated for the kinds of activities included under the IUPK licence.

32 Art 100 para (1) Law 4/2009.

33 Art 10 GR 78/2010.

34 Art 31 para (2) GR 78/2010.

35 Art 30 para (2) and art 73 para (3) GR 78/2010.

36 Art 10 para (4) and art 12 para (8) MEMRR 7/2014.

37 Appendix VI, Section D, Sub-Section 1, Letter a, Number (6) and (21) of MEMRD 1827/2018.

38 Art 34 GR 78/2010.

39 Exploration phase: art 11 MEMRR 7/2014; Appendix VI, Section D, Sub-Section 1, Letter a, Number (1) of MEMRD 1827/2018. Production–Operation phase: art 13 MEMRR 7/2014; Appendix VI, Section D, Sub-Section 1, Letter b, Number (1) of MEMRD 1827/2018.

40 Art 10 para (1) MEMRR 7/2014; Appendix VI, Section D, Sub-Section 1, Letter a, Number (1) of MEMRD 1827/2018.

41 Art 12 para (1) MEMRR 7/2014; Appendix VI, Section D, Sub-Section 1, Letter b, Number (2) of MEMRD 1827/2018.

42 The Indonesian mining law regime law also acknowledges small-scale artisanal mining activity. However, it is not relevant to the discussion about reclamation bonds, as small-scale artisanal mining activity is required neither to perform reclamation nor to provide a reclamation bond.

43 For exploration, see art 28 MEMRR 7/2014; Appendix VI, Section D, Sub-Section 3, Letter a, Number (1), Letter (b) MEMRD 1827/2018. For operation–production, see art 32 para (5) MEMRR 7/2014; Appendix VI, Section D, Sub-Section 3, Letter a, Number (2), Letter (e) MEMRD 1827/2018.

44 Art 100 para (1) and art 151 para (1) and (2) Law 4/2009.

45 Art 48–49 MEMRR 7/2014; Appendix VI, Section D, Sub-Section 5, Letter a, Number (1), Letter (a) – (f) MEMRD 1827/2018.

46 Art 50–51 and art 54 MEMRR 7/2014; Appendix VI, Section D, Sub-Section 5, Letter a, Number (2), Letter (a) – (f) MEMRD 1827/2018.

47 In the case of an IUP that is issued by the MEMR, the report and claim is filed to the MEMR through the Directorate General.

48 Art 82 para (2) MEMRR 7/2020.

49 Art 82 para (1) MEMRR 7/2020.

50 Art 61 para (3) MEMRR 7/2014; Appendix VI, Section D, Sub-Section 5, Letter c, Number (3), Letter (a) MEMRD 1827/2018.

51 Appendix VI, Section D, Sub-Section 5, Letter c, Number (3), Letter (b) MEMRD 1827/2018.

52 Art 61 para (4) letter a. MEMRR 7/2014; Appendix VI, Section D, Sub-Section 5, Letter c, Number (4), Letter (a) MEMRD 1827/2018.

53 Art 61 para (4) letter b. MEMRR 7/2014; Appendix VI, Section D, Sub-Section 5, Letter c, Number (4), Letter (b) MEMRD 1827/2018.

54 Appendix VI, Section D, Sub-Section 5, Letter c, Number (4), Letter (c) MEMRD 1827/2018.

55 Xia Cao, ‘Regulating Mine Land Reclamation in Developing Countries’ (2007) 24 Land Use Policy 472, at 474.

56 Ibid.

57 Ibid.

58 BPK is a central government agency responsible for auditing the finances of every other government agency, at both the central and the local government level. However, BPK audit reports are only informative and can only provide a basis for further legal actions by other competent government agencies upon discovering some potential criminal and/or administrative offences in the financial activity of the government agency being audited.

59 BPK, Laporan Hasil Pemeriksaan Kinerja atas Efektivitas Pengelolaan Reklamasi dan Pascatamang TA 2015 dan Semester I TA 2016 pada Pemerintah Provisnsi Kalimantan Timur dan Pemerintah Kabupaten Kutai Kartanegara. Audit Report No. 36/LHP/XIX.SMD/XII/2016 (5 December 2016), 53.

60 Ibid.

61 Ibid 56–59.

62 Ibid 59.

63 Ibid 60.

64 Ibid 63–64.

65 Ibid 107.

66 Overlapping, and often conflicting, administrative jurisdiction is likely to yield inefficient and burdensome governance cost. See Todd S. Aagaard, ‘Regulatory Overlap, Overlapping Legal Fields, and Statutory Discontinuities’ (2011) 29 Virginia Environmental Law Journal 237.

67 Ibid 64.

68 Art 1 no. 26 Law 4/2009.

69 Bersihkan Indonesia (n 17), 15.

70 Politically exposed persons (PEPs) include individuals who currently hold or have held a public office or a prominent public role, as well as their family members and to their personal/social/professional associates. See Bersihkan Indonesia, Coalruption: Shedding Light on Political Corruption in Indonesia's Coal Mining Sector (2018), at 15 www.auriga.or.id/resources/reports/24/coalruption-shedding-light-on-political-corruption-in-indonesia-s-coal-mining-sector accessed on 12 May 2020.

71 Bersihkan Indonesia (n 70) 7.

72 Ibid 25.

73 See The Republic of Indonesia v. Nur Alam (District Court of Central Jakarta, 2017), Decision No. 123/Pid-Sus-TPK/2017/PN.Jkt.Pst.; Nur Alam v. The Republic of Indonesia (Jakarta Court of Appeals, 2018), Decision No. 16/Pid.Sus-TPK/2018/PT.DKI; Nur Alam v. The Republic of Indonesia (Indonesian Supreme Court, 2018), Decision No. 2633 K/Pid.Sus/2018.

74 Research by Sumarto, Suryahadi and Arifianto demonstrated that the implementation of decentralisation policy after the demise of the dictatorial New Order regime in Indonesia has resulted in increased corruption at a local-state government level compared with that occurring at a central government level. Moreover, another study by Prabowo and Cooper argued that corrupt practices tend transpire in a quotidian manner as if they were actually legal. See Sudarno Sumarto, Asep Suryahadi and Alex Arifianto, Governance and Poverty Reduction: Evidence from Newly Decentralized Indonesia (SMERU Working Paper, March 2004), 17–33; Hendi Yogi Prabowo and Kathie Cooper, ‘Re-Understanding Corruption in the Indonesian Public Sector through Three Behavioral Lenses’ (2016) 23(4) Journal of Financial Crime 1028, at 1048. However, this is not to say that decentralisation has the potential to or can be generally linked with an increase in corruption rate; cf Raymond Fisman and Roberta Gatti, ‘Decentralization and Corruption: Evidence Across Countries’ (2002) 83 Journal of Public Economics 325.

75 Gerard (n 20) 190.

76 Gary S. Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76(2) The Journal of Political Economy 169, at 180–185.

77 Gerard (n 20) 190.

78 Jason F. Shogren, Joseph A. Herriges and Ramu Govindasamy, ‘Limits to Environmental Bonds’ (1993) 8 Ecol. Econ. 109, at 122.

79 Gerard (n 20) 192. Setting a reclamation bond equivalent to the expected cost of reclamation is also efficient for firms; see Chen Lin-lin and Hu Zhen-qi, ‘Economic-Theory-Based Analysis of the Collection Standard of Mine Land Reclamation Bond and Its Calculation Approach’ (2009) 1 Procedia Earth and Planetary Science 1275, at 1275–1279.

80 Gerard (n 20) 189.

81 Ibid 190.

82 Ibid 191–192.

83 Ibid 192.

84 Ibid.

85 Ibid. Cultural norms may also play an important role in the firm's behaviour towards legal compliance; compare with Raymond Fisman and Edward Miguel, ‘Corruption, Norms, and Legal Enforcement: Evidence from Diplomatic Parking Tickets’ (2007) 115(6) Journal of Political Economy 1020.

86 Becker (n 76) 186.

87 Shogren, Herriges, and Govindasamy (n 78), 109–110.

88 Gerard (n 20) 190.

89 Robert Costanza and others, An Introduction to Ecological Economics (2nd edn, CRC Press 2015), 252. See also Laura Cornwell, ‘An Experimental Analysis of the Effectiveness of an Environmental Assurance Bonding System on Player Behavior in a Simulated Firm’ (1994) 213 Ecol. Econ. 213, at 215; Robert Costanza and Charles Perrings, ‘A Flexible Assurance Bonding System for Improved Environmental Management’ (1990) 2 Ecol. Econ. 57, at 65–66.

90 Costanza and others, 252–253.

91 Ibid 253.

92 Gerard (n 20) 192.

93 Yayasan Riau Mandiri v. PT. Riau Bara Harum et al. (n 4) [53]–[54].

94 This follows one of Shogren, Herriges and Govindasamy's conditions for an effective reclamation bonding mechanism, i.e. the terms of the bonding agreement should be clearly defined. See Shogren, Herriges and Govindasamy (n 78) 122.

95 Francesco Parisi and Vincy Fon, The Economics of Lawmaking (OUP 2009) 10.

96 Ibid 11. This is also a factor essential to the making of, according to de Benedetto, a good rule. A good rule minimises the potential of producing non-favourable conditions to transgress and to corrupt. A rule should be able to decrease bureaucratic and discretionary powers as well as monopolies. See Maria de Benedetto, ‘Is it Possible to Prevent Corruption via Controls?’ (2014) 100 Amicus Curiae 6, at 9.

97 Ibid 12.

98 Ibid 11.

99 Art 161B para (1) Law 3/2020.

100 Art 161B para (2) Law 3/2020.

101 Ibid 138–139. When an offence is unlikely to pose a serious risk of resulting in an imminent irreversible loss or catastrophic damage, a graduated response is advisable. It is important to note that it is generally held that criminal law should only be pursued only under limited circumstances because its enforcement is relatively costly and that it involves a relatively severe sanction. see also Michael G Faure and Katarina Svatikova, ‘Criminal or Administrative Law to Protect the Environment? Evidence from Western Europe’ (2012) 24(2) Journal of Environmental Law 253, at 254.

102 Ibid 139. This is when a regulator has a relationship that involves a continuing interaction with those regulated, a less interventionist approach – that would escalate over time (in a ‘tit for tat’ fashion) when legal obedience has not yet been achieved – will likely to be sufficient.

103 See Neil Gunningham and Darren Sinclair, ‘Regulatory Pluralism: Designing Environmental Policy Mixes for Environmental Protection’ (1999) 21 Law & Policy 49.

104 An administrative sanction can nevertheless be challenged to the administrative court. However, an administrative sanction is deemed legally valid and binding, and hence enforceable by the respective government body, until pronounced otherwise by an administrative court judgement. See Indroharto, Usaha Memahami Undang-Undang Peradilan Tata Usaha Negara, Buku I: Beberapa Pengertian Dasar Hukum Tata Usaha Negara (CV Muliasari, 2000), 172–176.

105 On the range of applicable administrative sanctions under the Indonesian mining law regime, see (n 44).

129 Art 53 para (2) MEMRR 7/2014; Appendix VI, Section D, Sub-Section 5, Letter a, Number (2) of MEMRD 1827/2018.