MAC: Mines and Communities

New Laws Won't Solve Indonesia Mining Investment Woes

Published by MAC on 2007-01-30

New Laws Won't Solve Indonesia Mining Investment Woes

By Reuben Carder, Dow Jones International News

30th January 2007

JAKARTA (Dow Jones)--Indonesia is home to some of the world's richest deposits of copper, gold and nickel, but outdated policies have stalled foreign investment in its mining sector as other developing nations race ahead.

Revamped investment regulations, mooted for Indonesia's mining sector since late last century, are finally due to be implemented in March. But analysts and executives say the changes will strengthen the influence of regional governments over foreign investment and may worsen Indonesia's investment climate.

Parliament plans to replace the current mining contract-of-work system with mining licenses issued by regional governments, to resolve a dispute over control of resources that has led Jakarta to put issuance of new contracts on hiatus. This has led to an investment slump at a time when global commodities prices are soaring to record levels, Indonesian Mining Association executive director Priyo Pribadi Soemarno said.

The mining license system will grant regional governments more direct control over their resources, allowing those administrations to set their own investment regulations and wield an effective veto on licenses, Soemarno told Dow Jones Newswires.

The regional government will decide whether investors qualify for a mining license by assessing proposed exploitation sites and checking the company's balance sheet. The central administration will receive only a copy of the investor's application for its records, Soemarno said.

Newmont Is Test Case For Foreign Investors

Under former dictator Suharto, 80% of royalties on revenue gained from mining activities went to state coffers in Jakarta, with only 20% earmarked for the government and people of the province in which the mine was located.

After the country shifted to democracy in 1998, regional administrations demanded a bigger slice of the royalties, and in response Jakarta simply stopped granting contracts, virtually drying up investment.

Foreign companies have since been able to invest in Indonesia only via a local partner with a mining license granted by a regional administration.

Despite accounting for about 95% of regional copper production, 84% of nickel production and 77% gold production in the Association of South East Asian Nations, Indonesia is outpaced in terms of foreign investment growth in the sector by ASEAN neighbors like the Philippines and by Latin American nations such as Chile.

Official data show that Indonesia's mining sector logged foreign direct investment approvals in the mining sector of $285.6 million from January to November last year, compared with $613.5 million in the same period in 2005.

Some foreign companies already operating in mineral-rich provinces such as Sulawesi and Kalimantan face legal uncertainty, with the most high-profile case involving American Richard Ness, who heads a local subsidiary of Newmont Mining Corp. (NEM) of the U.S.

Ness, the president-director of PT Newmont Minahasa Raya with two decades experience in Indonesia's mining industry, has been on trial for the past 18 months in a district court in Manado, Sulawesi, on charges the company polluted a bay with toxic levels of mercury and arsenic.

Studies by the World Health Organization and Australia's Commonwealth Scientific and Industrial Research Organisation found negligible levels of either pollutant in Buyat bay.

The case was thrown out of a court in Jakarta due to a lack of evidence, but analysts say the central government has little jurisdiction in Sulawesi.

Ness and his legal team earlier this month began presenting evidence for the defense, and a decision is expected by the court within weeks.

George Haley, director of the University of New Haven, Conn.-based Center for International Industry Competitiveness, said Newmont may have been targeted for political expediency.

The Sulawesi provincial government couldn't be reached for comment.

Mining Investment In Chile, Philippines On The Rise

While foreign investors keep to the sidelines, local companies are filling the investment vacuum and keeping up metals output; exports of nonferrous metals in January-November last year jumped from to $4.85 billion from $2.46 billion from the same period in 2005.

But without the exploration resources of large foreign players, analysts say Indonesia's production and exports of metals will stall in the long term.

"Indonesia is receiving less than 1% of the world's exploration dollars; nobody's replacing reserves," Ness told Dow Jones Newswires.

The incoming laws have already cast doubt over Rio Tinto Plc's (RTP) plans to pump $2 billion into a nickel deposit in Sulawesi that the company says could produce 46,000 metric tons of the metal a year.

The Anglo-Amercian giant has been negotiating with the federal government since 2004 to develop what would be its first nickel asset, but says the mining license system may not provide the security it needs.

"We need to determine whether the project could proceed under such a regime," Charlie Lenegan, Rio Tinto's managing director for Australia, told a conference Tuesday.

Even if exploration dollars were to flood back into Indonesia, commercial production would only be realized from successful exploration after 10-15 years, Ness said.

Ness and Soemarno say Indonesia should take a leaf from the book of countries like Chile and the Philippines, whose mining-sector growth rates are surging ahead of Indonesia.

Chile's mining policy "offers not only stability... but offers incentives to reinvest capital in the country itself," Ness said.

While Chile's effective income tax rate is comparable to those of the U.S. and Australia, foreign companies in Chile pay withholding tax on dividends that are repatriated to home countries. That encourages companies to reinvest profits in Chile, Ness said.

In Indonesia, foreign companies pay royalties in addition to income tax on revenue, with the royalties "becoming an operating expense rather than a tax credit," he said.

Under the new law, each province will be able to set its own policy on the royalty system, Soemarno said.

In the Philippines, fast becoming Indonesia's closest ASEAN challenger in terms of metals exports, the government in 2004 launched a new policy to open borders to foreign investors. It has come under criticism from some nationalists and by people who say the mining sector has prospered at other industries' expense.

Net foreign investment into the Philippine mining sector reversed from an outflow of $7.15 million in full-year 2003 to an inflow of $2.26 million in January-September 2006.

-By Reuben Carder, Dow Jones Newswires; 62 21 3983 1277;


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