MAC: Mines and Communities

Indonesia's Mining Quagmire: A Furious Exchange!

Published by MAC on 2003-05-12
Source: Asia Times Online

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 ...

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