MAC: Mines and Communities

Indonesia's mining quagmire: a furious exchange!

Published by MAC on 2003-05-12

Indonesia's mining quagmire: a furious exchange!

Source: Asia Times Online - By Bill Guerin, Jakarta

May 12, 2003

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 ...

An NGO takes issue with ATol

June 3, 2003

Asia Times Online

This letter is in response to comments made by Bill Guerin in the May 12, 2003 Asia Times Online article, "Indonesia's mining quagmire".

The item made misleading and disparaging remarks about some of the non-governmental organizations supporting communities affected by the mining, oil and gas industries in Indonesia and being one of those organizations that was unfairly portrayed in the article, JATAM (Mining Advocacy Network), we would like to make comments and clarifications on some of the content of that article. We are very disappointed that at no stage did Guerin discuss with JATAM staff the allegations made in his article. If he or staff from the Asia Times Online had done so, several errors of fact need not have been published.

First of all, JATAM does not follow the gospel as laid down by the so-called "anti-mining foreign NGOs". JATAM's work mandate comes from the communities affected by the mining industry. JATAM works with international NGOs, only if it will further support the communities affected by mining, through for example creating greater public awareness and pressure to fight the injustices being suffered by these communities.

Secondly, the statement that we spend our time "attacking foreign companies rather than working to protect and preserve the environment" infers that the foreign companies play no part in environmental destruction. The environment of two coastal communities in Indonesia has been degraded with the tailings disposal of Newmont. BHP Billiton has pressured the Indonesian government into allowing them permission to mine in a protected forest area on the tiny Gag Island. Freeport has destroyed a river and community sago palm plantation with their waste in West Papua. Aurora Gold's Indo Muro Kencana mine in Central Kalimantan has caused a severe acid mine drainage problem that will continue long after the mine is shut down. Inco's nickel plant has degraded the air and water of Soroako, South Sulawesi. Rio Tinto's Kelian Equatorial Mining has left open pits in East Kalimantan and they plan to close the mine without backfilling all the pits, thus leaving the potential for toxic cesspools. These are just a sampling of the cases that we work on that do involve foreign companies destroying the environment and impacting the local communities surrounding these mines. It is very important for the rehabilitation of these environments and survival of these communities that organizations such as JATAM exist and advocate on their behalf to ensure this occurs.

Thirdly, the suggestion that NGOs have abundant resources, both the time and finances, to conduct our campaigns is also not true. Unfortunately, NGOs such as JATAM have limited resources due to high ethics in fundraising but manage to carry out the needed advocacy work due to committed activists willing to sacrifice for a greater cause.

Fourthly, the reference that groups such as JATAM are persuading communities to destabilize mine sites is deceptive. We support the communities' plight to maintain and uphold their rights. Public education serves the purpose of providing an information forum of the negative impacts of mining because the mining companies entering these remote areas only tell of the positive aspects associated with development of their area. The community has a right to know all the impacts including the negative environmental and social impacts that mining will bring to their area so that they can make an informed decision as whether or not to allow mining to proceed in their area.

Fifthly, we would like to comment on the statement that: "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". Mining companies have been forced to commit to environmental rehabilitation and community development efforts in this era of corporate social responsibility but problems still remain at mining sites including among others the creation of divisions within the community, forced compliance, and unequal distribution of benefits. However, it must be noted that a mining company's main concern is generating the highest profits at the lowest possible costs. Thus, social programs are an afterthought, important only if it threatens the continuation of their operations in an area. That is why pressure groups and watchdog organizations are so important to ensure that bar of environmental and social responsibility is raised to the highest possible to ensure that the environment and people are protected against short-term capital gain and exploitation.

Finally, regarding the small-scale mining issue, Guerin's article sounds like a mouthpiece of the mining industry that attempts to deflect responsibility for their environmental and social impacts onto another poorer, defenseless segment of society. We do recognize that small-scale mining is very destructive to the environment and is a real problem in Indonesia. Organizations such as Indigenous Mining Alliance (ATA) based in West Kalimantan are part of JATAM's network working on small-scale mining issues in that province. JATAM also works on providing information to the community on the impacts of toxic materials used in mining, both large-scale and small-scale like mercury and cyanide. However, as stated above, JATAM's mandate comes from the local communities and will not be stopped by multinational corporations. These multinational corporations must never be portrayed as sacred and untouchable as done so in Mr. Guerin's article.

We further note that many of the allegations regarding JATAM's conduct made in the article are exactly those made by the public relations staff of key foreign mining companies operating in Indonesia. We could use this circumstantial evidence to claim that Guerin is being manipulated by foreign interests, just as he has claimed of JATAM. We could ask whether Guerin has attended junkets, ie accepted travel, accommodation and meals at the expense of foreign mining companies, and become a "captured" journalist? We won't make such claims, however, unless Guerin or Asia Times Online is able to confirm or deny such dealings.

For all the above reasons, we find the article misleading and an unrealistic portrayal of mining, its players and issues in Indonesia. We await a reply from the editors of the Asia Times Online.

Tracy Glynn,
Chalid Muhammad, JATAM National Coordinator
JATAM (Jaringan Advokasi Tambang)
Mining Advocacy Network
Jakarta, Indonesia

Guerin responds: The gospel according to JATAM

One is never surprised to see pseudo crusaders with time on their hands rise to the bait and seize the moral high ground. Unfortunately JATAM (Mining Advocacy Network) engages in a blunderbuss approach to dialog that takes no prisoners. Dare to question such activists and you are branded as a "mouthpiece of the mining industry" and a "captured" journalist being "manipulated", as Tracy Glynn ridiculously postulates.

The "errors of fact" I am accused of do not, in fact, exist. In true G W Bush "you are either with us or against us" style, Glynn complains of my "misleading and disparaging remarks", "unfairly portrayed allegations", "foreign companies destroying the environment'" and so on whilst leaving us all in the dark as to what their network has actually done toward "supporting communities affected by the mining, oil and gas industries in Indonesia".

No less than the State Minister for the Environment Nabiel Makarim laid bare the Newmont tailings disposal allegations by JATAM. Makarim told House Commission VIII last week that though it was possible that discharging 110,000 tons of tailing every day into the Sumbawa sea may eventually impact on the marine ecosystem, monitoring in 2001-2002 showed there has not been a significant impact on the coral reefs, organisms, nor habitats of marine life.

Fish, pelagic elements, and "demersal" on the southern coast of Sumbawa were not adversely affected. Significantly the minister said that potential damage to the environment of the coastal community has been anticipated by the company in their Amdal (mandatory evaluation on environmental impact) and are further detailed in the RKL (plan for environmental management) and RPL (plan of environmental monitoring).

Indonesia's Amdal is widely acknowledged to be an enlightened environmental impact process: in the form of the most countries only insist on technical environmental impacts, the Amdal integrates the technical environmental with the social.

The rash of community hostility around mine sites, in the opinion of mining experts, is partly due to the efforts of organizations like JATAM. Prejudice seeps out of every sentence from Glynn, and not one word is said about the benefits mining companies bring to the communities that surround their operational areas.

Indonesian Mining Survey 2000, a PricewaterhouseCoopers report shows that the few international mining companies left in Indonesia spent more than US$30 million on community development that year. The anti-mining brigade cannot simply dismiss such a contribution to the community.

The most breathtaking example of deliberate and contrived ignorance can be seen in the statement that '"Freeport has destroyed a river and community sago palm plantation with their waste." OK, but let's remember that Freeport, one of the largest corporate taxpayers in Indonesia, has built a hospital in Timika, schools, and a whole town.

It must be noted that mining companys' main concern is "generating the highest profits at the lowest possible costs'", says Glynn, inferring I presume that such a concern is unworthy. JATAM, we are told, has volunteers "willing to sacrifice for a greater cause"; clearly not a cause that would see a resurrected mining sector bring employment and economic benefit to those for whom JATAM purports to carry the torch.

Suharto's corporate cronies rode roughshod over local communities in their search for profits but it can be argued that international mining companies are clear victims of actions by vested interests that use new political freedoms to benefit themselves, at the expense of their country. Deja vu indeed..

Harriet Richards, a former CEO of BHP Indonesia and director of government relations with Newmont is on record as saying of JATAM and Walhi (Indonesian Environment Forum) that "their persuasive logic is that any inequality in the whole area related to the mining project reflects social injustice. It feeds into a poverty mentality of, 'Let's focus on divvying up all the cake we have', rather than an enterprise mentality of, 'Let's focus on creating more cake'.

Exploitation of the environment and people for short-term capital gain are the modus operandi of individuals and organizations, often from outside the area, who offer advocacy services (the organization of protests or other disruptive activities) either to secure a 'success fee' if the company settles the dispute through payments, or to increase their political prestige as champions of the masses.

I was encouraged to read that JATAM admits that "we do recognize that small-scale mining is very destructive to the environment and is a real problem in Indonesia", until I realized that was it - no clarification of what their network is actually doing about it.

I do admit to a certain satisfaction though in learning that "many of the allegations regarding JATAM's conduct are exactly those made by the public relations staff of key foreign mining companies operating in Indonesia. Quad erat demonstrandum or, if the cap fits, wear it.

Bill Guerin
Jakarta, Indonesia

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