Newmont falls victim to Indonesia's fledging democracy

By Berni K. Moestafa

JAKARTA (JP): It was all bleak for the American gold mining company PT Newmont Minahasa Raya, when a tax dispute with the Minahasa regency, North Sulawesi caused the company last week to face a closure order of its gold mine.

Despite strong protests from government officials, mining observers and legislators, the regency kept pursuing litigation at a local district court, which issued the closure order.

All efforts to seek an out of court settlement seemed futile. The latest attempt saw the Supreme Court itself ordering the delay of Newmont's mine closure.

The helplessness of the central government, as the signatory of Newmont's contract, in controlling the unruly regency, raised the question of how long foreign investors could survive in Indonesia's fledging democracy.

Newmont's case is just the latest in a series of conflicts between foreign investors and local administrations or communities.

Pulp and paper producer PT Indorayon Utama faces a more distressing situation, with its operation already suspended since 1998, pending the execution of an independent audit.

The company, which floated its bonds on the New York Stock Exchange, has been charged with causing environmental damages. The United States-based Freeport Indonesia, which operates the world's largest gold mine in Irian Jaya, is the recipient of similar charges.

The string of disputes between natural resources-based companies and their hosts generally stretches from quarrels over tax payments, royalties, and land disputes to alleged environmental destruction.

It began with the fall of former president Soeharto in 1998 when people in the provinces felt free to voice their demands to control their natural resources, still directly managed by the central government.

It is understandable if the locals want to take over the control of their wealth form the central government as most taxes, royalties and other benefits from their natural resources still go to the central government's coffers.

According to economist Faisal Basri, the amount of royalties transferred by the central government to the local administration is simply too small.

He said the total royalties paid to provinces with major mineral resources were a mere Rp 800 billion (US$105 million) in the 1999/2000 state budge, which ended last month.

The reform era has unleashed an outburst of regional discontent, that eventually targets the foreign companies operating under contracts with the central government.

For many investors, even those coming from liberal countries, the situation in Indonesia right now is very discouraging as the local people often take aggressive approaches in delivering their demands.

"Foreign investors don't come into a country because the country has adopted a democratic system," Harvey Goldstein chairman of PT Harvest International Indonesia said. Most important for the investors is stability, he added.

"What use is democracy for investors if they face demonstrations every day?" he asked.

Transition

Goldstein said foreign investors now find themselves in a transition period, where the rules of the game are not clear yet.

Pushing this transition period, are the autonomy laws No. 22/1999 on Regional Administration and No. 25/1999 on Intergovernmental Fiscal Balance.

Under the law on intergovernmental fiscal balance, provinces will get 15 of the government's oil revenue, 30 percent of gas receipts and 80 percent of income derived from forestry and fisheries.

"Foreign investors should welcome autonomy because it is adapted by the country for cohesiveness and to stabilize," Goldstein said.

While autonomy will allow regions to draft their own contracts with investors, government officials have warned them not to meddle with existing contracts.

But Goldstein said that although a contract sanctuary was important, unfair contracts should be open for renegotiation.

"Again there must be rules of the game," he said.

The transition period, he said, offered the opportunity for investors to contribute to the negotiations of these rules.

The chairman of the Board of Advisors at the Indonesian Coal Mining Association Soetaryo Sigit faulted the past central government for failing to involve regions in drafting the contracts with investors.

He said present contracts of mining companies require them to pay royalties directly to the central government. The process of disbursing the regions' shares could take at least six months, he added.

"They assume that just because the money from Jakarta never comes on time, they must now turn to the companies," he said.

Chairman of South Kalimantan's provincial development board, Ismet Ahmad said that regions were under pressure to generate revenue in order to win the autonomy status by next year.

Under Article six of the Regional Administration Law, local administrations will be merged or dissolved if they fail to become autonomous.

Ismet said that the clause was forcing many regencies and mayoralties to issue regulations in order to generate revenue.

He warned that some regions might not meet the criteria for autonomy, which included a certain degree of financial independence.

"That's why many are turning to mining companies to collect funds," Ismet said.

Aside from disputes over new tax regulations or royalties, foreign investors also often face rampant illegal mining or timber activities on their concessions.

These activities mostly arise from social disparity that lead local people to seek alternative livelihoods.

Director general of production forestry management Soegeng Widodo said the government saw a growing tendency toward land disputes between locals and timber companies.

According to media reports, the land disputes caused foreign investor to consider withdrawing from the forestry sector, which families and associates of Soeharto largely control.

Soegeng said the government has just began to study why local communities are increasingly confronting timber companies over their forest concessions and engage in illegal logging.

He suspected that locals who derived no economic benefits from the logging, could easily be angered when outsiders came onto their land and take control of vast areas of their forests.

Meanwhile, giant gold mining company PT Freeport Indonesia has long been the prime target of activists charging the company with neglecting community development on top of causing environmental destruction.

The company has repeatedly denounced these accusations, claiming it had spent millions of U.S. dollars in community development programs and has practiced good environmental standards.

That, however, did not stop local people and legislators from demanding the renegotiation of Freeport's contract.

But as Goldstein has said, renegotiation needs a general agreement, as does the shift to decentralization and democracy.

His call for investors to contribute to the negotiations of these "rules of the games" may come true.

Some 300 participants from the government, entrepreneurs, non- governmental organizations, universities and shareholders have been invited to a national congress next week that will seek a general agreement on natural resources exploitation for investors.