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Jakarta Post

Coal mining slump a blessing in disguise

  • Mohammad Faisal

    The Jakarta Post

Jakarta   /   Mon, February 16, 2015   /  06:58 am

The growth of the coal-mining industry, which has diminished in the last two years, is expected to slump even further this year following weakening demand for coal in the world market. This has been worsened by the more recent tumbling price of oil as the world'€™s main source of energy, which has discouraged the conversion of energy use from oil to coal.

The diminishing growth of the coal-mining sector has contributed to a decline in  government revenue over the last two years. Since coal has become Indonesia'€™s major export commodity, the weakening of coal exports has resulted in a declining trade performance of Indonesia'€™s non-oil and gas sector, and in turn, contributed to an overall trade deficit in the past three years.

However, the diminishing shine of the coal industry has its bright side. This is because the increasing amount of coal-mining activity in the past decade has not only resulted in serious environmental degradation, but also enhanced the proliferation of corrupt and clientelistic practices in the regions.

The previous rapid growth in coal demand  not only benefited large coal-mining firms, but also increased the escalation and dispersion of small-scale coal mining activities, particularly after the decentralization of the coal sector in 2009. Law No.4/2009 on mineral and coal mining grants the province and district governments new authorities for issuing coal mining licenses for Indonesian companies, cooperatives or individuals, which covers an area of less than 50,000 hectares.

Since then, the magnitude of small-scale coal mining activities has increased tremendously. The Energy and Mineral Resources Ministry records that 9,662 permits were issued for small-scale coal mining by regencies as of 2011. Of these permits, only 3,778 were supported with the necessary documents without any outstanding legal issues.

Local governments have benefited from these mining operations through accepting large royalty payments from miners. In some coal-rich regencies, the revenues generated from coal royalties can be worth several times more than the contributions made by land and building taxes. The high profitability of small-scale coal mining has encouraged many regencies to allow these mining operations to operate without considering their detrimental impacts on the environment and the surrounding communities.

Many of these small open-pit coal mines are near residential areas, polluting rice fields and fish ponds and triggering landslides and floods.

Besides being an important source of local government revenue, coal has also become a source of funds for certain political groups close to local governments. Those who can obtain small-scale mining licenses in the regions are usually those who have some special or familial relationship with local government leaders, or are in some way connected to certain powerful local councilors.

Due to the high-cost politics associated with the direct elections of local government leaders since 2005, the money generated from small-scale coal mining activities has become an important source of political funding for government and political leaders participating in elections. An incumbent from a ruling political party can generate funds for a political campaign by developing a coal-mining business or issuing coal-mining licenses.

Apart from its high profitability, local politicians'€™ attraction to coal mining businesses is also due to the  quick returns on investment compared to other booming commodities, such as palm oil. The quick returns generated by coal mining is very important for local politicians, who need to mobilize assets in anticipation of the local elections conducted every five years.

This high-cost politics and the local government'€™s lack of accountability have also provided a favorable environment for business actors and brokers to take advantage of the situation. Businessmen in the coal industry have often provided financial backing for the candidates for local government and legislative leaders who they think have a high chance of winning in the local elections, known as pilkada.

In exchange for financial backing, businessmen expect to gain rewards in the form of projects or certain policies in favor of their coal-mining business from the candidates they support, should they win the election.

Although the 2009 mining regulation has given greater opportunity for locals to obtain a mining permit, many have been reluctant to apply for a permit due to complications and bureaucratic red-tape in the processing of mining licenses. As a result, many  locals choose to engage in illegal mining activities, frequently also supported by business actors, who serve as the financial backers and collectors of the coal extracted by local people.

These illegal activities have resulted in the extraction of millions of tons of coal per annum during its peak period.

Considering the serious problems resulting from the escalation and dispersion of coal-mining operations in the regions, the industry'€™s current downturn is a blessing in disguise. Weakening of coal demand has forced many coal-mining firms, particularly the illegal ones and the small- and medium-sized ones, to cease their operations.

This substantial reduction of coal-mining has reduced the frantic pace of exploitation and slowed environmental degradation in the last few years, which usually involves corrupt and clientelistic cooperation between businesses, government and political actors.

Nevertheless, if the government shows little concern for accountability and does not strengthen monitoring mechanisms overseeing the implementation of coal-sector decentralization, corrupt and clientelistic practices that have triggered rapid and careless coal exploitation will likely re-flourish once the demand for the commodity recovers. And undoubtedly, this condition is not only applicable to coal mining, but also to any other lucrative industry in Indonesia.

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The writer is the research director at the Center of Reform on Economics (CORE) Indonesia, Jakarta

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