Instability hampers mining industry

By Adjat Sudradjat

BANDUNG (JP): In Indonesia's transition period, the mining industry has suffered much. This is largely because of uncertainty in the investment climate while the mining industry requires an intensive amount of capital. Investors seem to be waiting for things to get better before they start new explorations.

Existing mining activities are also experiencing a difficult time. The interrupted operation of Newmont Minahasa Raya Mines in North Sulawesi related to a lawsuit by the local government, the never ending environmental problems of Freeport in Irian Jaya and, most recently, a strike at the production facility of Kalimantan Prima Coal (KPC) in East Kalimantan are examples of the hard times being faced by mining investors.

The new policy of autonomy has also created some difficulties, leading to worries about the future of mining operations here.

Mining in Indonesia is governed by Mining Law No. 11/1967. It regulates mining licenses for domestic investment and contracts of work (COWs) for foreign investors.

Under Chapter 10 of the law, the government, following consultation with the House of Representatives, may invite foreign participation if the government is considered incapable of developing a mining source by itself. This particular arrangement between the government and foreign investors, also called contractors, is known as a COW. The contract should be approved or given the consent of the House of Representatives.

The main differences between a mining license and a COW lies in the scope of coverage of the activity. A license is limited to a particular phase, such as general surveys, exploration, construction, exploitation, transportation or marketing. This "step by step" permit allows the government to intensively supervise or control the miners.

The COW, on the other hand, covers the whole spectrum of activities from the very beginning until the marketing stage. A COW also operates under Foreign Investment Law No. 1/1967 which provides facilities for importing materials needed to develop the mines. The area covered in the COW is unlimited, while with mining licenses it is 5,000 hectares at the most.

The most important clause in the COW is the lex specialis nature of the contract, which provides legal assurances for the investor. Given the considerable time needed to develop a mine, which in Indonesia is eight to 15 years before production, the assurance is highly appreciated and has become one of the most attractive aspects for investors. The present administration has frequently expressed their commitment to respect the COW.

The acute problem of mining activities in many developing countries is that of illegal mining. In Indonesia, illegal miners have long been a problem for the government and mining companies. Despite the government's attempts, no adequate remedy has so far been found to totally solve the problem. Illegal mining has instead increased along with the depressing economic situation.

The most embarrassing situation for mining investors is that the illegal miners tend to ignore the property rights of companies. They also operate with modern and heavy equipment. In the coal sector in South Kalimantan alone, it is estimated that more than 2 million tons, or approximately 3 percent, of 70 million tons of national production has been yielded by illegal mining. Illegal gold mining in West Kalimantan, Irian Jaya, North Sulawesi and West Java have long been targets of the government's elimination program. However, with the present situation, the program seems to have ceased.

The other disturbing problem is the land of inhabitants. Insufficient authentic land administration has made it hard for companies to settle land compensation. This problem was solved amicably in the past but now it has suddenly reoccurred. Kelian Equatorial Mines (KEM), a gold mining company in East Kalimantan, for instance, temporally stopped operating because of an interruption by a group of local inhabitants demanding "additional" land compensation.

Slightly different cases have occurred with Indomuro in Central Kalimantan, and with Vico Oil Company in East Kalimantan. It was reported also that Caltex Pacific Indonesia (CPI) in Riau, Sumatra, experienced a difficult situation. Peaceful settlements have so far been achieved thanks to the immediate and positive responses launched by those companies.

The occupation by a small group of workers at KPC's mining site in East Kalimantan has forced the company to fail in the fulfillment of its delivery contract. A los of approximately Rp 3 billion of company earnings per day was estimated. The occupation and seizure of production facilities have, up to now, been ongoing for almost one month. The occupants have demanded an increase in wages and serious negotiations are underway with all parties concerned.

Regarding Freeport, the company has been engaged in all possible ways to control and eliminate environmental damage, but their efforts have not satisfied the environmentalists. An ore production increase, exceeding 200,000 tons a day from the previous production level of approximately 160,000 tons a day, has recently caught the attention of the people. Tailing and waste materials are the main concerns of the environmentalists.

Besides, the mining site is close to a permanent tropical ice cap covering the Cartenz Peak. It is very difficult to prove that the mining activities have never influenced the erosion of the glacier.

The potential problem anticipated by many mining companies in Indonesia is the forthcoming regional autonomy. The autonomy law stipulates the transfer of various powers to local administrations and will be in effect by next May. While Mining Industry Regulation No. 25/2000 states that all permits shall be transferred to the local authority, it is not yet clear whether this means at provincial or regency level. Mining Law No. 11/1967 must, therefore, be modified in line with the autonomy law.

Many companies have anticipated another potential problem relating to legal documents needed for financial arrangements with international funding agencies. From a financial and legal point of view, it might be rather difficult for international agencies to recognize documents issued by a local government. The wishes of various local governments to actively participate or to own shares in the companies is another potential problem.

The economic potential of natural resources is undoubtedly important in helping the country to recover from the crisis. Minerals and oil contributed more than 54 percent to the state budget in the first half of the 1970s; this increased to more than 67 percent in the next second half, and in the early 1980s.

Despite decreasing oil reserves, exploitation will be sustainable for another 10 to 15 years, given estimates of the present level of production of 1.3 millions barrel a day.

Additional reserves may be revealed should exploration be intensified, similarly with hard minerals, such as gold, copper, nickel, tin and coal. Coal is essential to maintain electricity generation, particularly in Java, home to more than 70 percent of the population and most of the industries.

Total reserves of mineable coal are estimated at 36 billion to 38 billion tons, 40 percent of which is of good enough quality to meet the requirement of electricity generation. At the present production level of 70 million tons of coal a year, reserves are predicted to last for more than 300 years.

The hard minerals, distributed across 15 mineral belts, extend from Aceh to Irian Jaya and less than 30 percent of those belts have been carefully explored. Geological maps of suitable scale covering the entire land area of the country have been successfully produced by the Geological Survey of Indonesia, thus providing the basic information for mineral exploration. Although exploration has to compete with the expansion of industrial and reservation forests, the remaining potential area is still vast.

The problems outlined above could be summed up in one word: Stability. An assurance of security is absolutely needed in the development of mining.

President director of Rio Tinto in Indonesia and vice president of the Indonesian Mining Association Noke Kiroyan believes that the present instability and difficult situation affecting the mining industry is just temporary.

With better governance, peace and stability shall follow, and dawn will be due to break. With long-term vision, important in the mining industry, the opportunities are there.

The writer is a professor at the Geology Department of Padjadjaran University in Bandung and a former director general of geology and mineral resources at the Ministry of Mines and Energy.