Digging new depths in mining investment<\/p>\n
Rudijanto, Contributor, Jakarta<\/p>\n
The Indonesian government's announcement last week of the
\npostponement of 44 oil block tenders to investors scheduled for
\nnext month could have been a nice way to hide the painful fact
\nthat the planned oil block tender had not been able to attract
\nsufficient investors.<\/p>\n
Explaining the reason for the postponement, Director General
\nof Oil and Gas at the Ministry of Energy and Mineral Resources
\nArifin Takhyan said that the government needed time to ensure
\nthat the fiscal incentive provided to investors was appropriate.<\/p>\n
The government plans to offer 65 oil and gas blocks within
\nthis year. Around 20 of the blocks will be offered through an
\nopen tender and another 20 will be done through direct tender.
\nPreviously, 25 blocks were offered but they have not attracted
\nthe attention of any investors.<\/p>\n
The announcement of the postponement happened only a day after
\nMinister of Energy and Mineral Resources Purnomo Yusgiantoro
\nasserted that Indonesia has provided better incentives to oil and
\ngas investors compared to other countries.<\/p>\n
While the government is still revising some fiscal incentives
\nto revitalize exploration and production activities in the oil
\nand gas sector, it is facing a more complicated challenge in the
\nmineral sector.<\/p>\n
In order to bolster the confidence of investors, it issued a
\nshortcut executive regulation (Perpu) in March, 2004 to amend
\nForestry Law No. 41\/1999 so that mining companies that had been
\ngiven permits before 1999 can continue their operations in
\nprotected forests.<\/p>\n
At least 13 major mining companies had to suspend their
\noperations in the protected forests following the enactment of
\nthe Forestry Law which bans open-pit mining in conservation
\nareas.<\/p>\n
The move has caused an outcry from several environmental non-
\ngovernmental organizations (NGOs) and regional governments, some
\nof which have petitioned the Constitutional Court for a legal
\nreview of the so called Perpu.<\/p>\n
While the government's goal is to provide legal certainty for
\nminers, the NGOs say it is the latest regulation that has created
\nuncertainty since the ban on open-pit-mining operations has been
\nclearly stated in the 1999 Forestry Law.<\/p>\n
The continuing environmental pressure and legal tussles are
\njust some of the many problems faced by mining companies.<\/p>\n
During former president Soeharto's New Order regime, the
\ngovernment would likely have silenced the protests by using
\nintimidation and suppression tactics; accusing the NGOs of being
\ncommunists and arresting their leaders.<\/p>\n
But this strategy would be untenable today; a newly empowered
\nenvironmental organizations, academics and a relatively free
\npress would certainly challenge any attempts to stifle debate
\nover mining and the legal battle over mining is likely to
\ncontinue for some time.<\/p>\n
The main problem that frustrates miners is the conflicting
\nnational and regional regulations created after special autonomy
\nwas instituted.<\/p>\n
Company PT Sorikmas Mining's problems with its operation in
\nthe Batang Gadis National Park are an example. Based on
\nPresidential Decree Number 41\/2004, which gave permission for
\nmining operations in protected forests, the company should have
\nno difficulty continuing its operations in the conservation park.<\/p>\n
However, the local regent, Madina Amru Daulay, wants to stop
\nthe company from mining in the area. Madina bases his authority
\nto stop PT Sorikmas on Article 10 of the Law No. 22\/1999 on
\nregional autonomy, which gives the regional government the power
\nto manage the natural resources in its area and maintain their
\nsustainability.<\/p>\n
This inconsistency between central and regional government
\npolicy has created great confusion among current and would-be
\ninvestors in the country's mining sector, many of whom are
\nshutting down operations or staying away until the situation
\nimproves.<\/p>\n
As data from PricewaterhouseCoopers shows, the amount spent on
\nmining exploration in the country has declined drastically to
\nless than 20 percent of the 1995-1997 level, or less than 1
\npercent of global expenditure.<\/p>\n
Any decline in exploration means a likely drop in future
\nproduction, because it will take up to 10 years for a company to
\nbegin producing after a discovery is made.<\/p>\n
Unsurprisingly, overall investment in the sector has also
\nsuffered as a drastic fall during the past few years. In 2003,
\nnew investment in Indonesia's mining sector reached a paltry
\nUS$12 million compared to US$40 million in the same year in
\nArgentina. The latest survey by the Fraser Institute showed that
\nIndonesia's investment conditions were at the bottom of the
\ntable; lower than the Philippines.<\/p>\n
A University of Indonesia researcher Chatib Basri, meanwhile,
\nrevealed in a recent seminar that legal uncertainties and a high
\ntax and royalty burden were two other major turnoffs to new
\ninvestors.<\/p>\n
According to PricewaterhouseCoopers, the total fiscal burden,
\nincluding income tax, royalties and land rent, that has to be
\npaid by mining companies operating in Indonesia is among the
\nhighest in the world.<\/p>\n
Coal mining companies, for example, have to allocate 58
\npercent of their earnings for these payments, 69 percent higher
\nthan in New South Wales in Australia, 65 percent higher than in
\nChina and 80 percent higher than in South Africa.<\/p>\n
Despite all the doom and gloom there are two positive signs;
\ncoal and nickel mining; where local production has increased to
\nmeet higher global demand.<\/p>\n
PT International Nickel Indonesia Tbk (Inco) has spent US$36
\nmillion over the past two years to develop a new mining site in
\nPetea with an estimated 29.7 million tons of total nickel
\nreserves. Inco expects soon to be producing 1.4 million metric
\ntons of wet nickel ore a year.<\/p>\n
Another encouraging sign was unveiled by the Newmont
\nCorporation. The mining giant said last week it would increase
\nits investment in Indonesia by at least US$104 million over the
\nnext few years.<\/p>\n
Robert Gallaher, the vice president of Newmont Indonesia
\nLimited, said about $95 million of the planned investment would
\nbe used to develop existing mines and finance new exploration
\nactivities at the Batu Hijau gold mine in Sumbawa, West Nusa
\nTenggara, with another $9 million to develop the Martabe mine in
\nNorth Sumatra.<\/p>\n
The company has three affiliated companies in Indonesia -- PT
\nNewmont Minahasa Raya in North Sulawesi, PT Newmont Nusa Tenggara
\nin West Nusa Tenggara and PT Horas Nauli in North Sumatra.<\/p>\n
Newmont Minahasa Raya shut down its mining site in North
\nSulawesi two years ago due to the depletion of gold reserves, but
\nit continued processing ore until last year.<\/p>\n
PricewaterhouseCoopers has created a wish-list for the
\ngovernment reform of the extractive sector, with measures
\nincluding improving the country's taxation system, ensuring
\njustice in foreign ownership divestment and in the mining closure
\nprocess, and taking strong measures against illegal miners.<\/p>\n
Meanwhile, before it creates any new policies, the government
\nis now duty-bound to consult with other stakeholders -- NGOs,
\nacademics, experts and local government.<\/p>\n
The mining sector also needs more good press. As long as the
\npublic continues to perceive mining operations as being harmful
\nto the environment and to humans, any government attempts to
\nencourage investment in the industry will be hampered.<\/p>\n
The existing mining companies in the country also need to do
\ntheir part convincing the public, in both words and deeds, that
\ntheir operations are beneficial rather than detrimental.<\/p>",
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