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Indonesia's mining
quagmire
By Bill Guerin
JAKARTA - Indonesian Vice President Hamzah Haz,
when launching his book New Indonesia and National
Self-sufficiency last week, called on all
stakeholders in the mining industry to "introspect" and
find breakthroughs and solutions. Indonesia's new mining
law has to be implemented and incentives offered to
investors, Haz said.
The mining companies may
have collectively sighed in agreement, but many have
already packed up and left Indonesia, once a prime
destination for mining investment because of its rich
natural resources.
By the next decade there may
be only four major mines left, according to analysts.
The embattled mining sector has been under siege on all
fronts since regional autonomy moved the goal posts.
Former president Abdurrahman Wahid was forced to speed
up decentralization after the loss of East Timor and
amid ongoing demands for a referendum in Aceh and for
separation in Papua. Investment in exploration has
dropped in the last few years, against a backdrop of
political, social, economic and security concerns.
A PricewaterhouseCoopers study late last year
showed that new capital invested for green fields
projects in Indonesia in 2001 amounted to a paltry US$7
million, a far cry from the $200 million spent on
exploration in both 1997 and 1998. This is way below the
minimum investment levels needed to ensure the discovery
of new mine sites.
There has been very little
new exploration in the past four years and the country's
mineral reserves are depleting rapidly because
production by existing companies is high. Low market
prices have also hit the country's mining sector hard.
In 1999 the sector generated $8.5 billion,
reflecting a 2.8 percent contribution to gross domestic
product (GDP), but since then more than 220
exploration-stage mining projects have been terminated,
experienced temporary closure, simply been left idle or
inactive or suffered destruction of their facilities.
In 2001, the mining sector still accounted for
11 percent of the economy, though investment that year
fell 42 percent to $1.43 billion.
By 2010
probably only four major mines will have survived: PT
Freeport Indonesia, PT Newmont Nusa Tenggara, PT Inco
and PT Kaltim Prima Coal.
Foreign companies have
frozen or abandoned mining investments worth $2 billion
since 1998, driven away by a weak policy framework,
disruptive activism at mine sites and other stifling
handicaps.
The long-awaited draft bill on
general mining, which is expected to improve on the 1967
Mining Act, remains stuck in the corridors of power.
Industry players and the Indonesian Mining Association
(IMA) worked together last year to evaluate the draft
bill and submit recommendations and amendments but it is
still being deliberated in the House of Representatives
(DPR).
The bill would regulate all mining
concessions for exploration and development and resolve
some of the issues thrown up by the autonomy laws.
Regional Administration Law No 22/1999 and the
Intergovernmental Balance Law No 25/199, were enacted in
January 2001 amid regions' outcries for greater
authority in managing their own affairs.
The
result was chaos and confusion and an industry which had
been one of the pillars of the economy during the
Suharto era was quickly brought to its knees as
investment ground to a virtual halt.
The law
gives greater control over mineral resources to
provinces and is in direct conflict with the still
current mining laws that give the central government
authority over the industry.
Conflicts have hit
many mining operations across the nation because local
villagers, supported by non-governmental organizations
(NGOs), considered that the mining companies did not pay
enough attention to community development, environmental
protections and the local people's land rights.
The impacts of mining operations in an area, and
the politics of community unrest, are extremely complex
but leading local anti-mining NGOs welcome the current
downturn in the industry. Walhi (the Indonesian
Environment Forum) and Jatam (the Mining Advocacy
Network), follow the gospel as laid down by anti-mining
foreign NGOs to the point that they pursue global
anti-mining campaigns and spend their time attacking
foreign companies rather than working to protect and
preserve the environment.
Though mining
companies work closely with local communities to
overcome the damage caused by their operations, these
NGOs and the government itself, do little about the
widespread social and environment damage from illegal
mining.
Anti-mining groups have the time,
commitment and financial resources to persuade
communities to destabilize mine sites. They are a
driving force behind much of the unrest that has caused
investors to head for the door.
Illegal mining
activities are rampant as the economic crisis forces
people to look for lucrative sources of income and coal
and tin mining operations are among the worst hit by the
illegal miners.
Illegal mining companies in
South Kalimantan, for example, work hand in hand with a
motley crew of land-claim activists in order to unsettle
and ultimately displace international companies, so that
the illegal companies can move in and grab the mineral
deposits.
These illegal companies are not in any
way community-based but are part of a much wider
government-business complex, often supported by security
forces and with a war chest partly funded by regional
politicians. It is estimated that illegally mined coal
accounts for some 10 percent (4 million tonnes) of the
country's total coal exports.
The essence of
regional autonomy was to be an expression of the
Indonesian wish to narrow the disparity between local
and central governments and, in so doing, to better the
social welfare of local communities.
Java,
though it has few if any natural resources, has been the
power base of Indonesia for many decades. The other
provinces, many of them very rich, had never received a
decent share of the national purse despite the fact that
the island of Java accounts for only seven percent of
the total land area of Indonesia.
Regional
autonomy has indeed resulted in power moving to the
local level, often at the village and community level.
The ministries in Jakarta may remain important, but it
is the communities, the representative institutions, the
DPRD, the DPRP, and the bupatis who all now
exercise far more influence and far more control.
They all want to be part of the action and share
the cake, and the uncertain legal environment has
resulted in local administrations making their own
interpretation of the law. Mining companies are an easy
target for further demands of cash or "compensation".
Fighting permanent battles on the home front is
not the only worry for mining companies in Indonesia.
Depressed global market prices and, ironically,
a stronger rupiah, have cast a shadow over future
profitably, particularly with base metals. For example
PT Timah Tbk - the largest tin producer in the world -
made a net profit of only Rp11.3 billion in 2002, a
drastic decrease of 70 percent from Rp36.8 billion in
2001. The 2002 sales decreased 15 percent to Rp1.58
trillion from Rp1.87 trillion in 2001.
The
decreased net profit and revenues were due to the low
price of tin in world markets and the currency drop
between the stronger rupiah and the dollar.
The
added "Indonesia" factor is always a risk of serious
civil conflict. Oil and mining companies are used to
this but it costs them dearly.
Papua's main
investor, gold and copper mining giant Freeport McMoran,
operates Grasberg, the third-largest copper deposit and
the largest gold deposit in the world. Papua is one of
Indonesia's "unsettled" provinces where the army is in
confrontation with a separatist movement. Freeport is
almost permanently at odds with the local community and
needs to pay the Indonesian army to guard their
facilities.
Contractual issues worry investors
across the board where Indonesia is concerned. The new
mining bill, so far amended no less than 10 times, is
meant to do away with the current contract of work (COW)
system that gives special incentives and guarantees to
foreign investors.
Though the COW system has
gained appreciation by the international mining
industry, it will be replaced by mining agreements.
Unlike the COW, which requires a presidential
signature, future mining agreements would be subject
only to approval from the local authorities, although
the central government would handle the drafting of the
contents of the contracts with foreign mining firms.
Under the bill, the central and regional
governments would issue three types of licenses: a
Mining Venture License (IUP), People Mining License
(IPR) and a Mining Venture Contract (PUP).
IPR
licenses will be for small-scale traditional miners,
while IUP and PUP will be allocated for major players,
either local or foreign investors.
Would-be
investors can choose an IUP license or a PUP contract.
The PUP license will be issued by either the regional or
central governments, and similar to the COW, will have
to be approved by the House of Representatives.
Sensitive issues in the contract concerning
state income would be handled directly by the central
government.
Recent increased royalty rates also
badly impact on the commercial viability of operations
and under the existing autonomy law, regional
governments retain 80 percent of mining royalties.
Several mining companies have held back royalty
payments amounting to Rp1.4 trillion because of an
unresolved issue under government regulation (PP) No
144/2000. Mahyudin Lubis, director of coal and mineral
mining ventures of the directorate general of geology
and mineral resources, last week warned the companies
against "mixing up" the unresolved solved issue under
the PP with the payment of royalties.
One
company that has paid up is PT Newmont Nusa Tenggara. It
paid a $3,206,749.22 royalty on copper, gold and silver
concentrate shipments in the first quarter of this year.
Since its operations began in 1999 the company has
handed over $52,361,150 in royalties.
Mining
companies want regional government transparency in the
use of these royalty revenues, which are meant to be
redistributed to the mine sites and thus fulfill the
obligation to generate economic benefits for the area.
Community unrest can stem from a variety of
causal factors and is not prima facie evidence of
transgression by mining companies. Those from outside
the community often engineer compensation
claims.
Kalta Prima Coal (KPC), for example,
jointly owned by UK-based energy group BP and
Australia's mining giant Rio Tinto, has been trying for
well over a year to fulfill contractual obligations with
Jakarta to divest 51 percent of its shares to Indonesian
parties.
A protracted dispute with the East
Kalimantan government and East Kutai Regency trying to
force unfavorable terms on KPC has shown that
first-generation contracts, made with the central
government long before autonomy was even on the table,
still end up totally enmeshed in the maze of unresolved
regulations that followed devolution of mining and
forestry rights to the regions.
And yet Rio
Tinto and BP are global players in the mining, oil and
gas industry, and have not only invested massive sums in
the country but have transferred technology that has
enabled Indonesia's oil, gas and mining sector to bring
in more than a quarter of the national revenue.
The KPC issue is only the tip of the iceberg as
a bundle of these first generation contracts are now due
for divestment back into the hands of Indonesians. Four
other foreign coal-mining firms and three gold mining
companies need to divest their shares in the very near
future.
The slow pace of action in addressing the
problems facing the mining industry is damaging the
mindsets of potential investors and has reinforced the
impression of Indonesia as unfriendly to foreign
investment.
Losing investment, revenues and
growth potential is nothing new for Indonesia since the
pseudo-reformasi began in 1998, but to lose a
whole industry sector through greed and a lack of
transparency will mark a victory for the vested
interests groups who cleverly manipulate the new
political freedom to benefit themselves at the expense
of their countrymen.
Exhortations by the
Indonesian Vice President for 'introspection' would be
better articulated to the government than to the
victims. An entire industry waits ...
(©2003
Asia Times Online Co, Ltd. All rights reserved. Please
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