MAC: Mines and Communities

Brits in first

Published by MAC on 2001-05-01

Brits in first

The contractual engagement between Suharto's regime and Rio Tinto (formerly RTZ), the world's most powerful mining company, has just reached its twenty-second anniversary (a gold, diamond, coal and copper jubilee?). Signed in June 1977, the contract was the first between the government and a foreign mining company under the COW system (in this case the "third round" of COWs) [Wall Street Journal, 28 February 1977]. While the contract introduced new measures intended to buttress the regime's revenues (a 10% profit tax on exported unprocessed minerals, and a 60% windfall tax, when average returns on investment exceeded 15% over a three-year period), it also empowered the company to keep foreign exchange revenues in its own offshore account. This COW was designed specifically to facilitate Rio Tinto's exploration for copper and other base metals in North Sulawesi, and had a thirty-year life attached. However, it also specified that the company should offer 51% of its shares (in PT Rio Tinto Indonesia) to Indonesian nationals, within ten years of commencement of production - and it didn't include coal or uranium exploitation [Wall Street Journal, June 14 1977].

It took another five years (1982) before Rio Tinto signed its first (and so far only) coal contract in the country - to exploit the highest quality steam coal deposits known in Indonesia, centred on the Pinang dome within the Kutai Basin, along the river Sangatta. Apart from the intrinsic value of the coal, the deposits are close to the surface and - equally important - only 12.7km (by conveyor) from the loading facilities at the port of Tanjung Bara, on the coast of East Kalimantan [Engineering and Mining Journal, USA, May 1991]. Under the terms of the production-sharing agreement, the Indonesian government takes a 13.5% royalty - either in revenue or coal - and the companies pay tax at 35% for the first ten years. [Financial Times December 9 1998]. KPC also undertook to divest some of its holding to local interests after the first five years of production (i.e.1997) - offering the stake initially to the government. (In 1997 KPC had to transfer its coal agreement from PT Tambang Bambara Bukit Asam to the government itself). By the tenth year of production (2002), KPC was committed to divesting up to 51% of shares [Jakarta Post June 26 1998].

A joint British Petroleum (BP) - Rio Tinto mine, KPC remains an anomaly for the former company. In 1989 Rio Tinto bought up all BP's mining interests apart from some Canadian gold projects (later sold), but BP retained its 50% stake in Kaltim Prima. The company's evasive response to queries as to why it held on to its share was that it was "for local reasons" [Financial Times June 22 1989]: four years earlier, Britain's biggest company had announced that it wanted to expand oil production and petrochemicals in Indonesia, as well as exploit the Sulawesi natural gas fields [Financial Times October 25 1985].

But it is also perhaps relevant that, in the months before BP made this decision, Friends of the Earth had criticised the aspiring "green" benchmark company for entering into deals with "dirty" Rio Tinto [Roger Moody "BP and RTZ: an Unholy alliance" Tropical Rainforest Times, FOE-UK, Autumn 1989]. Apparently partly in response to this broadside, BP organised a swift audit of all its operations in tropical rainforest areas. When presenting the findings, one of the BP scientists admitted that the overburden dumps at Kaltim Prima had been "constructed upside down" - by which he meant that they had not been lined with HDPE (high density polyethylene) to prevent acid rock drainage from the bottom of the piles [personal communication from FOE-UK to Minewatch 1989]. It is tempting - though doubtless naive - to credit BP with remaining in management of the project, in order to ensure that its reputation did not suffer even more back home.

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