Newmont falls victim to Indonesia's fledging democracy

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.