Digging new depths in mining investment

Rudijanto, Contributor, Jakarta

The Indonesian government's announcement last week of the postponement of 44 oil block tenders to investors scheduled for next month could have been a nice way to hide the painful fact that the planned oil block tender had not been able to attract sufficient investors.

Explaining the reason for the postponement, Director General of Oil and Gas at the Ministry of Energy and Mineral Resources Arifin Takhyan said that the government needed time to ensure that the fiscal incentive provided to investors was appropriate.

The government plans to offer 65 oil and gas blocks within this year. Around 20 of the blocks will be offered through an open tender and another 20 will be done through direct tender. Previously, 25 blocks were offered but they have not attracted the attention of any investors.

The announcement of the postponement happened only a day after Minister of Energy and Mineral Resources Purnomo Yusgiantoro asserted that Indonesia has provided better incentives to oil and gas investors compared to other countries.

While the government is still revising some fiscal incentives to revitalize exploration and production activities in the oil and gas sector, it is facing a more complicated challenge in the mineral sector.

In order to bolster the confidence of investors, it issued a shortcut executive regulation (Perpu) in March, 2004 to amend Forestry Law No. 41/1999 so that mining companies that had been given permits before 1999 can continue their operations in protected forests.

At least 13 major mining companies had to suspend their operations in the protected forests following the enactment of the Forestry Law which bans open-pit mining in conservation areas.

The move has caused an outcry from several environmental non- governmental organizations (NGOs) and regional governments, some of which have petitioned the Constitutional Court for a legal review of the so called Perpu.

While the government's goal is to provide legal certainty for miners, the NGOs say it is the latest regulation that has created uncertainty since the ban on open-pit-mining operations has been clearly stated in the 1999 Forestry Law.

The continuing environmental pressure and legal tussles are just some of the many problems faced by mining companies.

During former president Soeharto's New Order regime, the government would likely have silenced the protests by using intimidation and suppression tactics; accusing the NGOs of being communists and arresting their leaders.

But this strategy would be untenable today; a newly empowered environmental organizations, academics and a relatively free press would certainly challenge any attempts to stifle debate over mining and the legal battle over mining is likely to continue for some time.

The main problem that frustrates miners is the conflicting national and regional regulations created after special autonomy was instituted.

Company PT Sorikmas Mining's problems with its operation in the Batang Gadis National Park are an example. Based on Presidential Decree Number 41/2004, which gave permission for mining operations in protected forests, the company should have no difficulty continuing its operations in the conservation park.

However, the local regent, Madina Amru Daulay, wants to stop the company from mining in the area. Madina bases his authority to stop PT Sorikmas on Article 10 of the Law No. 22/1999 on regional autonomy, which gives the regional government the power to manage the natural resources in its area and maintain their sustainability.

This inconsistency between central and regional government policy has created great confusion among current and would-be investors in the country's mining sector, many of whom are shutting down operations or staying away until the situation improves.

As data from PricewaterhouseCoopers shows, the amount spent on mining exploration in the country has declined drastically to less than 20 percent of the 1995-1997 level, or less than 1 percent of global expenditure.

Any decline in exploration means a likely drop in future production, because it will take up to 10 years for a company to begin producing after a discovery is made.

Unsurprisingly, overall investment in the sector has also suffered as a drastic fall during the past few years. In 2003, new investment in Indonesia's mining sector reached a paltry US$12 million compared to US$40 million in the same year in Argentina. The latest survey by the Fraser Institute showed that Indonesia's investment conditions were at the bottom of the table; lower than the Philippines.

A University of Indonesia researcher Chatib Basri, meanwhile, revealed in a recent seminar that legal uncertainties and a high tax and royalty burden were two other major turnoffs to new investors.

According to PricewaterhouseCoopers, the total fiscal burden, including income tax, royalties and land rent, that has to be paid by mining companies operating in Indonesia is among the highest in the world.

Coal mining companies, for example, have to allocate 58 percent of their earnings for these payments, 69 percent higher than in New South Wales in Australia, 65 percent higher than in China and 80 percent higher than in South Africa.

Despite all the doom and gloom there are two positive signs; coal and nickel mining; where local production has increased to meet higher global demand.

PT International Nickel Indonesia Tbk (Inco) has spent US$36 million over the past two years to develop a new mining site in Petea with an estimated 29.7 million tons of total nickel reserves. Inco expects soon to be producing 1.4 million metric tons of wet nickel ore a year.

Another encouraging sign was unveiled by the Newmont Corporation. The mining giant said last week it would increase its investment in Indonesia by at least US$104 million over the next few years.

Robert Gallaher, the vice president of Newmont Indonesia Limited, said about $95 million of the planned investment would be used to develop existing mines and finance new exploration activities at the Batu Hijau gold mine in Sumbawa, West Nusa Tenggara, with another $9 million to develop the Martabe mine in North Sumatra.

The company has three affiliated companies in Indonesia -- PT Newmont Minahasa Raya in North Sulawesi, PT Newmont Nusa Tenggara in West Nusa Tenggara and PT Horas Nauli in North Sumatra.

Newmont Minahasa Raya shut down its mining site in North Sulawesi two years ago due to the depletion of gold reserves, but it continued processing ore until last year.

PricewaterhouseCoopers has created a wish-list for the government reform of the extractive sector, with measures including improving the country's taxation system, ensuring justice in foreign ownership divestment and in the mining closure process, and taking strong measures against illegal miners.

Meanwhile, before it creates any new policies, the government is now duty-bound to consult with other stakeholders -- NGOs, academics, experts and local government.

The mining sector also needs more good press. As long as the public continues to perceive mining operations as being harmful to the environment and to humans, any government attempts to encourage investment in the industry will be hampered.

The existing mining companies in the country also need to do their part convincing the public, in both words and deeds, that their operations are beneficial rather than detrimental.