Digging new depths in mining investment

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.