Economist urges better mining contract terms

JAKARTA (JP): An economic advisory group reiterated yesterday its suggestion that the government review the terms of its mining contract policy because the current scheme was outdated and failed to generate the greatest possible benefits for Indonesians.

Rizal Ramly, the director of Econit, said the mining Contract of Work scheme currently used by the government had been designed at a time when Indonesia was in dire need of large foreign investments.

The Contracts of Work were therefore made very attractive for foreign investors and gave them large economic gains, he said.

The facilities given to foreign contractors in the mining sector included tax holidays and other fiscal incentives and, until 1986, exemption from royalty payments.

Rizal said the situation had now changed and the government should consider strengthening its bargaining power for the sake of the people.

He cited, as an example, the activities of New Orleans-based PT Freeport Indonesia -- the holder of vast gold and copper mining concessions in Irian Jaya -- which he said had been given "too much" by the government.

"The government should have made a better deal (for Indonesia) in 1991, when the company's Contract of Work was renewed," he said.

Freeport, a subsidiary of Freeport-McMoRan Copper and Gold, got its first 10,000-hectare concession in 1967 to become the first foreign investor in Indonesia under President Soeharto's administration. It started copper and gold production in 1973.

Under Freeport's first Contract of Work, the government received royalties of 1.5 percent to 3.5 percent from net copper sales starting only in 1986.

The contract was renewed in 1991 -- seven years before the first contract period had ended and shortly after Freeport struck huge gold deposits in Irian Jaya's Grasberg mines.

However, Rizal argued, the terms gained by the government in the second contract did not change much, although it was agreed later on that 20 percent of Freeport's shares belonged to Indonesia: 10 percent owned by the government and 10 percent by PT Indocopper Investama, a subsidiary of PT Bakrie Brothers.

Over the years, however, the Freeport issued more shares, leaving the government and Indocopper now with a 9.36-percent share each and Freeport with an 81.28-percent share.

Econit said last month the revenue received by the government from Freeport's mining activities, including from royalties, taxes and other levies, was too low.

The government's stake in Freeport was also very small, it said.

Rizal said a revision of the contract of work should be made so the government and the people received a larger share in Freeport.

"What we mean by 'share' here not only covers the percentage of shareholding but includes revenues from royalties, taxes and other fees and levies," he told The Jakarta Post.

Rizal suspected there had been collusion between the government and Bakrie when the 20 percent stake for Indonesia was settled as a precondition to the second contract of work.

He said the second contract could have been tailored to "optimize" benefits for Indonesia.

"Freeport no longer had to spend a great deal on exploration under the second contract, but still the government succeeded in imposing only a 35 percent income tax rate -- as it did in the first contract during 1976-1983 -- and only a 15 percent tax on dividend and interest," Rizal said.

Similar to the first contract, the second contract of work also had a period of 30 years. But, again the contractor was granted a very favorable deal as it has the option to extend the contract twice, by 10 years each, Rizal added.

The royalties for copper remained at between 1.5 and 3.5 percent and for gold and silver at 1 percent.

Last week political analyst Amien Rais suggested the government stop Freeport's mining concessions all together because it did not benefit Indonesians but mostly the American company.

Rizal said the same mistakes should not recur in the Busang gold concession.

The mining contract for the Busang II gold mine, with an estimated 57.33 million ounces of gold deposits, is being fought for by Canadian mining companies Bre-X Minerals Ltd. and Barrick Gold Corp.

Both companies have joined with politically well-connected local partners in the hope of winning the contract. (pwn)