HOME
ABOUT US
SERVICES
OUR CLIENTS
CAREER
GALLERY
OPINION
CONTACT US
Training News
More News »


Call Us
+62 21 57903873 or click here to apply online
Investment Advisory Business Advisory Event Management

Opinion
06-08-2012
EMR Ministerial Regulation No 7/2012 in the Framework of Game Theory

The EMR Ministerial Regulation No 7/2012 regarding Added Value on Minerals through Processing and Refining issued in February 2012 contains problems that have yet to be solved. The impact of this Regulation is quite extensive in the circles of mining business players that caused some activities of mining happened to be haltered for not meeting the requirements embodied in said Regulation. 

In fact the mining regulation connected with Ministerial Regulation (Permen) No 7/2012 has long been regulated in the Mining Law and, in fact this Permen is also to improve the quality of Indonesia’s human and mineral resources. The issue of Permen No 7/2012 was none other than the firmness of the government that judged several entrepreneurs had failed to comply with the provisions in the prevailing Mining Law.

This writing wishes to give an opinion of how the government as regulator and entrepreneurs as business players should preferably respond to Permen 7, by using the basis of Game Theory.

 

Background of Permen 7/2012

In 2009 the government had issued EMR Law No 4/2009 that obliged the processing and refining of metal in the country. It was done so as to increase the added value of mining products and also for national interest. The aim was for the government to be able to determine the domestic market obligation (DMO) for minerals and coal and to stimulate the implementation of good mining practice norms that prioritizes the environment, guarantee of certainty in doing business, integrating the management of mining data and divestment of foreign shares for the national party.

Owner of contract, IUP Production Operation and Special IUP (IUPK), should process minerals so that they can have added value. The government sets a time on entrepreneurs to make necessary preparations at least five years since this Law becomes effective, i.e. up to 2014. The government hopes that by January 2014 all the processes of processing and refining are already running and plants are in operation.

To regulate minerals and coal mining activities, the government issues Government Regulation (PP) No 10/2010 which in essence is regulating the procedures of mining and that the state could obtain the portion of profit from mining activities affected by holders of IUP OP/K.

Following up to the putting in order the activities of IUP OP and IUPK, a reconciliation of National IUP took place in May 2011, to obtain data of mining activities in every region, and inventorying potential regions where processing and refining facilities of minerals can be built.

The above stages, according to the Director General of Minerals and Coal were unsuccessful in making the holders of IUP seriously carry out the obligation of building smelters. Since Law No 4/2009 was passed, up to January 2012, very few proposals for building smelters were submitted by IUP holders. Instead of planning to build smelters, they were competing in exporting raw minerals, like being chased by the target before Law No 4 becomes effective by 2014. The trend of exporting mineral ores up to October 2011 had reached eightfold compared to 2008 (prior to the issue of Law No 4). At present the export of nickel ore, for instance, has amounted to 33 million tons, whereas in 2008 it was only four million tons.

 

The Issuance of Permen No 7

The government, in this case the EMR Minister, viewed that if the holders of IUP are not serious in their building smelters, it is not impossible that by the time Law No 4/2009 becomes effective the amount of ore left is very small it would not be economical to build smelters.

Therefore, on February 6, 2012, the Minister issued Ministerial Regulation (Permen) No 7/2012 regarding Added Value on Minerals through Processing and Refining.

This Ministerial Regulation becomes controversial as there are articles that according to mineral industrialists burdensome.

 

  • Article 21 on Transitional Provision states: From the time this Permen becomes effective, holders of IUP Production Operation (OP) and IPR (people’s mining license) issued prior to the putting into effect of this Permen are prohibited to export raw mineral ore within a period of not later than three months as of the issuance of this Permen.
  • Article 22 states: Holders of IUP of Exploration and Contract of Work (KK) being in exploration stage and have made feasibility studies before this Permen becomes effective, shall make adjustments to the planned minimum limit of processing within a period of three years and report periodically to the director general, governor, regent/mayor in accordance with his/her competence. In case they are unable to make the adjustments they should consult the director general.
  • Article 23 states: Holders of IUP OP and KK being in construction stage, shall make adjustments to the planned minimum limit of processing/refining of mining mineral commodities within a period of four years as of the enactment of this Permen, and if they are unable to meet the requirements in accordance with the plan, they should consult the director general to carry out processing and/or refining.

Given said Ministerial regulation, entrepreneurs in the mineral industry reacted against the regulation. The EMR Ministerial Regulation No 7/2012 was judged as not in compliance with Law No 4/2009. It had given rise to layoffs of many mine workers that some lawyers brought the case to the Supreme Court (MA).

 

Requirements for Export of Mineral Ore

Observing the restlessness and upheavals in the sector of mineral mining, the government did something. After the issuance of Permen No 7/2012, additional regulations were issued consecutively for making it possible for mineral businesspersons to continue exporting ore with the following conditions:

Ministry of EMR:

  1. Holders of IUP OP and IPR may export raw minerals after acquiring recommendation from the Director General of Minerals and Coal.
  2. Recommendation is given after the holders of IUP OP and IPR meet the requirements of i.e.: 
    • Clean and Clear (C&C) status of IUP OP and IPR
    • Having settled financial obligations to the state
    • Submission of work plan and/or cooperation on processing and/or refining of minerals in the country.
    • Signing the treaty of integrity

 

Ministry of Trade:

  1. The export of mineral ore can only be carried out by companies received acknowledgement as registered exporter of mining product from the Director General of Foreign Trade.
  2. To obtain the acknowledgement, companies must submit a written application by attaching:
  •     
    • Photocopy of IUP OP and IPR,
    • Photocopy of company’s registration card (TDP),
    • Photocopy of taxpayer’s ID (NPWP),
    • Recommendation of the Director General of Minerals and Coal.

      3.  Acknowledgement as registered exporter of mining product is valid for two years.

 

Ministry of Finance

 

  1. Export of metallic mineral ore (21 products), non-metallic minerals (10 products) and rocks (34 products) are subject to 20% export duty.
  2. Mixed mineral ores containing two or more kinds of mineral ores may be subject to 20% export duty.

 

One thing stressed by the Director General of Minerals and Coal is that the entire mining policies are devised by referring to the directives of the EMR Minister, i.e. ‘EMR for the welfare of the people’.

At present, at the Directorate General of Minerals and Coal, one door service has been effected, where entrepreneurs wishing to process the requirements for export license may do so at the provided counter. The hope of the Director General is to put mineral mines in order, controlled exports (no vying with one another) and the planned constructions of smelters can be realized.

 

Game Theory

Game Theory was first developed by a French scientist Emil Borel. In general this theory is used to solve problems connected with a company’s action such as for winning a business competition. As is well known, every company frequently must face competitions. In order to win the competition, analysis and accurate marketing strategy are required, particularly the most optimal competing strategy for the company concerned.

Models in the Game Theory are classified in several methods such as the number of players, the amount of profit and loss and the number of strategies used in the game. The benefits of Game Theory are:

 

  1. Developing a framework for decision making analysis, either in a competitive situation or cooperation.
  2. Analysing a systematic quantitative method for players involved in the competition to choose the accurate and optimum strategy.
  3. Providing a picture and explanation of the phenomena and issues of competitive situation such as bargaining.

Analysis of the EMR Ministerial Regulation No 7/2012 is hereby exposed by using the Game Theory. The figure shows several schemes to be used in analyzing the ‘playing method’ of the government and mineral entrepreneurs in response to Ministerial Regulation no 7/2012.

 

Game Theory Scheme

 

Two-Person Game

In the Game Theory the government and mineral entrepreneurs are illustrated as two players who are making interactions. Two players with differing interest with relatively the same product that are ‘competing’ with each other in a market to reach their respective ‘Payoff’. Payoff or reward of each party differs:

  • Payoff for the government is the control of export, the increase in added value, environmental control, income for the government through export duty and foreign exchange and opening up of work opportunity (an addition of around 300 workers for each smelter).
  • Payoff for entrepreneurs is profit.

 

Repeated-Finite Game

The government as regulator has the power to issue regulations to be followed and abide by the entrepreneurs, while the entrepreneurs have the right to submit their objections against the regulation issued if it has a foundation. In the Game Theory, it is called repeated if interactions between players happen continuously within a finite period or within an infinite period.

In this case, Ministerial Regulation No 7/2012 is limited to the activity of mineral processing by mining entrepreneurs in meeting the requirements set out by the government toward mineral entrepreneurs in order to be able to carry out export. It can be said that this ‘game’ is certain to end by January 2014, at the time when Law No 4/2009 is officially becomes effective.

Tit-for-tat Strategy

This strategy is a strategy of cooperation on a quid-pro-quo basis. This strategy is seeking a most appropriate option in facing the dilemma the entrepreneurs are facing in responding to Ministerial Regulation No 7/2012. This concept is trying to analyze competition to look for a way out over the problem facing mineral mining entrepreneurs.

In sequence, the game of quid-pro-quo between the government and the entrepreneurs happens as follows:

  1. The government: Law No 4/2009 (issued on January 12, 2009) obliges the holders of IUP OP and IPR to carry out refining of minerals in five years at the latest of the establishment of this Law.
  2. Entrepreneurs: on the contrary, they export ore in large scale since the issuance of this Law with the target of exporting as much as possible before year 2014.
  3. The government: Ministerial Regulation No 7/2012 (issued on February 6, 2012) prohibits holders of IUP OP and IPR from exporting ore within three months as of the establishment of this Regulation.
  4. Entrepreneurs: Judicial Review against Ministerial Regulation No 7/2012 (submitted in March 2012).
  5. The government: Coordinated meeting on economy was held on May 1, 2012 followed up with the issue of several supplementary regulations such as Regulation of the Minister of Trade No 29/M.DAG/PER/5/2012 regarding the Provisions on Export of Mining Products (May 7, 2012), Regulation of the Director General No 574.K/30/DJB/2012 regarding the Procedures and Requirements for the Export of Mining Products (May 11, 2012), EMR Ministerial Regulation No 7/2012 regarding the Need to Increase Added Value on minerals through Processing and Refining (May 16, 2012) and Regulation of the Finance Minister No 75/PMK.011/2012 year 2012 regarding the Determining of Export Commodities Subject to Export Duty and Tariff of Export Duty (May 16, 2012).
  6. Entrepreneurs: some were processing the requirements for obtaining export permit; some retained their lawsuit against Ministerial Regulation No 7.

 

From the formulation of the case between the government and the entrepreneurs and the inclusion of value as the result of using various strategies chosen by both parties, a payoff matrix will be formed on Regulation No 7/2012 as follows:

 

Game Theory Matrix

 

In the government’s case:

 

  • ‘adjust’ refers to the government’s action to adjust to the entrepreneurs’ hope, namely by adjusting Ministerial Regulation No 7 to various new policies that open the opportunity for ore export (Trade Ministerial Regulation, EMR Ministerial Regulation and Finance Ministerial Regulation).
  • ‘don’t adjust’ refers to the government’s action to NOT to adjust to the entrepreneurs’ hope, thus Ministerial Regulation No 7 that totally bans the export of ore remains valid.

 

In the entrepreneurs’ case:

 

  • ‘adjust’ refers to the entrepreneurs’ actions to adjust to the policies issued by the government, either Ministerial Regulation No 7 that bans the export of ore or the new policies that open that opportunity to export ore.
  • ‘don’t adjust’ refers to the entrepreneurs’ actions NOT to adjust to the policies of the government, either the one that bans export of ore or the ones that open the opportunity to export ore. In the case of ‘don’t adjust’, entrepreneurs only resist (lawsuit, demonstration, press conference) with no adjustment at all.

 

 

Discussion

The above payoff matrix can be explained as follows:

 

  1. First quadrant: adjust, adjust (payoff 10 for the government, payoff 6 for entrepreneurs). In this respect the government obtains maximum payoff, because all of its aims are achieved, either the aim of controlling ore export or the increase in revenues through the policy of export duty. Likewise is the government’s aim of ‘forcing’ entrepreneurs to build smelters, in such a way absorbing work force. Meanwhile, the entrepreneurs also obtain a maximum payoff (compared to entrepreneurs’ payoff in other quadrants), because here entrepreneurs could still export although they must build smelters. Therefore, even though entrepreneurs have to adjust to the government policy, they could still gain profit.
  2. Second quadrant: adjust, don’t adjust (payoff 4 for the government, payoff 0 for entrepreneurs). In this respect the government does not obtain a maximum payoff, because entrepreneurs decline to adjust to the government’s policy although it has been adjusted. The government only receives additional income in the form of export duty from players that have owned smelters, such as Antam and Vale. No new entrepreneur is processing export permit as everyone is busy suing Ministerial Regulation no 7.
  3. Third quadrant: don’t adjust, adjust (payoff 8 for the government, payoff 4 for entrepreneurs). Here the payoff received by the government is quite large, because entrepreneurs may adjust to Ministerial Regulation No 7 without having to be revised with other policies. However, the most that entrepreneurs can do is only to sell their ore to smelters already in operation or join together to build a new smelter. Thus the payoff obtained by both parties is not optimal.
  4. Fourth quadrant: don’t adjust, don’t adjust (payoff 2 for the government, payoff 0 for entrepreneurs). Here the respective parties hold on to their initial position, no one is willing to adjust. The government holds on to Ministerial Regulation No 7 with no adjustment, while the entrepreneurs hold on to their suit with no intention to build smelters or sell their ore to smelters already existed. The government still gets a point, because export of ore is totally closed, environment is safeguarded, while smelters of Antam and Vale can continue producing. But, of course there is no addition of new smelters of business players and no additional income from export duty. Entrepreneurs are certain to shut down their businesses or go bankrupt because they do not make adjustments as demanded by Ministerial Regulation no 7, thus they cannot produce and are only busy suing.

 

From the above matrix a conclusion can be made that both players have dominant strategies – the strategy that will remain optimum for the party, whatever will be done by the other party. The dominant strategy is adjust, adjust (first quadrant), because both the government and the entrepreneurs receive optimum payoff compared to other quadrants.

From the simple analysis of using this Game Theory, it may be summed up that the most optimum strategy for both sides is that there should be adjustment on both sides instead of being insistent on maintaining their positions. Mining business players should adjust to the demand of the government with the risk of reduced profit since they must build high cost smelters, but in the matrix it was illustrated as temporary. After smelters are built the companies’ profit will be rising compared to selling raw ore. On the government’s side, by making adjustments, the government will gain profit from the limited export by mining companies while carrying out the mandate of Law No 4/2009 on the building of smelters. This will greatly help the state’s finance, the economy, environment, workforce and the people of Indonesia in general. Therefore, it doesn’t make sense if there is one party that refuses to adjust to the other, as the result will be less optimal to both sides.

If the government and the entrepreneurs can be called as national interest (both are national assets), the payoff can be added up to show the payoff national wise. In the quadrant [adjust, adjust], the total payoff is 16, far higher than the other quadrants (4 in second quadrant, 12 in third quadrant, and 2 in fourth quadrant).

 

Conclusion and Suggestion

According to the Director General of Minerals and Coal, like or dislike, given the Ministerial Regulation No 7/2012, export activities are halted during the transition period of three months (as of May 2012), including PT Antam.

During the transition period, in compliance with the regulation, all holders of IUP OP, IUPK and IPR should report the condition at their mines to the Director General. The report will result in a recommendation on where and which are the holders of IUP (either single or consortium) that should build the smelter.

From the side of the entrepreneurs, Ministerial Regulation No 7/2012 is considered as a hasty decision, for besides lack of its familiarization to the concerned parties, there is no way out from the regulation.

That subsequently the government issued new policies to adjust the desire of entrepreneurs to export mineral ore, should preferably be obeyed by the entrepreneurs through processing the necessary licenses in compliance with the new regulations determined by the government through the EMR Ministry, Trade Ministry, and Finance Ministry. By remain putting national interest to the fore, there has to be adjustments on both sides i.e. government and entrepreneurs in order to obtain optimum payoff for the Indonesian nation.

 

Estelita Hidayat, MBA

(Article published in CoalMin Magazine, No. 04 Vol. 1 July 2012)

 

 




Index Article
04-06-2013 » Quo Vadis Oil Fuel Subsidy?
04-06-2013 » Quo vadis subsidi BBM?
18-04-2013 » Peraturan Menteri ESDM No 7 tahun 2012 di dalam kerangka Game Theory (Part 2)
18-04-2013 » Peraturan Menteri ESDM No 7 tahun 2012 di dalam kerangka Game Theory (Part 1)
06-08-2012 » EMR Ministerial Regulation No 7/2012 in the Framework of Game Theory
09-10-2009 » BBM, BLT, BKM, dan ‘BT’
11-05-2009 » Siapkah Kita Memaafkan Koruptor?
11-05-2009 » Selamat Hari Kartono