Opportunities, challenges in mining investment

The following is based on the address of Noke Kiroyan, vice chairman of the Indonesian Mining Association, at the Indonesian Investment Summit on Mining and Energy, held in Jakarta on July 12. Kiroyan, the president director of Rio Tinto Indonesia, also chairs the Indonesia-Australia Business Council.

JAKARTA: As members of the mining industry -- one of the most successful revenue-generating national industries -- we are in a position of being able to contribute significantly to Indonesia's future.

All of us, Indonesian citizens, have clamored for change in the last two years and we have achieved this. But we must also recognize that change is a process that requires a spirit of cooperation.

There is a parallel between the tasks lying ahead for the Indonesian government and our mining industry. The government is working to draw on the wealth of our nation and reveal its potential to investors.

In much the same way, it is the nature of our industry to uncover and tap the wealth inherent in the earth. We all know the minerals are there -- there is no problem geologically. Our task is therefore clear-cut; to raise the potential of the mining industry in the eyes of foreign investors.

To accomplish this, we must relinquish our total and unmitigated dependency on the previous terms of the industry's Mining Law and Contract of Work, and actively grasp the opportunity presented by their absence. "It ain't broke so why fix it" is an attitude that obscures the view to this beckoning opportunity.

We have the chance to contribute to the new regulations and guidelines and herald the shifting paradigm of our industry. The success of the mining sector will work toward securing the trust and loyalty of investors and thus, ultimately contributing to the country's future.

First and foremost in this task is to invest in ourselves and learn to trust the ongoing progress and reform. After all, we cannot expect others to believe in the steadfast progress of our nation's reform if we don't put faith in it ourselves.

Second, we also need to undergo introspection. This applies to Indonesians like myself, who are fiercely loyal to the international companies we belong to, but also fiercely Indonesian, and also our partners from other countries, who are here to help develop the nation's riches.

The time has come to be more flexible, to allow the smaller voices to be heard, to be more democratic and to be more fair. We can do this in a mature fashion, embracing change and allowing ourselves to be seen as an industry that shows the way for other sectors. Or, we can be seen as fighting tooth and nail, squabbling over every tiny concession we have to give up. The choice is ours.

The way we approach this change will have ramifications on how we are perceived by the world at large. Foreign investors already face many challenges in Indonesia.

There is a gap that at times seems insurmountable between our political and legal practices with those of our investors' nations. Our business cultures are frequently at odds with each other, even without the damaging practice of corruption, collusion and nepotism. It would obviously help to move closer to the mainstream of international business practice.

It also goes without saying that the current political, economic and social situation renders an even higher risk, and therefore results in a highly unattractive, investment zone.

Compounding this outlook is the ongoing efforts at reform, in which we expect our potential investors to believe that the nation is changing and becoming more democratic.

Yet, viewed from a distance all we do at home is fan the flames of trouble and strife, breaking up into factions and criticizing every move the government makes. Foreign investment has become a mantra in the political, economic or business sectors, and yet, we have done little to show that we can deliver our end of the deal.

I am not advocating massive and immediate change. In our efforts to do well, we must not throw out the baby with the bath water. The government must realize that too much, too soon a change in the mining sector is not conducive to certainty and commitment. This may well produce a round of applause at the announcement of the play, but it does no good if the actors refuse to come on stage.

Managed change is required. We must and will become more open to voices from the regions and communities asking for a fair share. However, it must be balanced with acceptance by the authorities that the more extreme among the voices heard are asking for the outright, absurd, wide-sweeping populist demands ignoring economic principles, get-rich-quick schemes and in some cases, plain greedy opportunism.

Voices like these must not be pandered to, for acquiescence would be the signal to investors to give Indonesia wide berth.

It is therefore easily understandable to be apprehensive -- even suspicious -- of change and an unknown future. The mining industry finds itself in uncharted territory once again after 30 years of a favorable, if lackluster, working environment, and we are now full of trepidation.

In this new ball game we are young and inexperienced players and yet because of this, we have the advantage of generating a truly innovative and unique course for the industry.

A major part of the insecurity may be prompted by the absence of a new Contract of Work and a new Mining Law, whereas the current one is for all practical intents and purposes no longer existent.

Other additional challenges include the emergence of regional autonomy, the implementation of new regulations and policies in various spheres, and renewed expectations and demands from our government. In this, we may sense a lack of control.

But this is an opportunity for us to embrace. By redefining our role and proactively helping shape this shifting paradigm, we can assume control of our destiny. We can fashion our future.

We are in many instances moving in the right direction. Already, we have begun to implement international standards of good corporate governance and are becoming better at regional and community development efforts, including the protection of human rights.

In so many ways, the reorientation toward the communities makes sound business sense. The chief economist at Rio Tinto London, David Humphreys, recently wrote a paper on business needs and community values and how the two not only interrelate but also have the ability to work in synergy, providing better results for all involved.

He believes that the improvement in recent years in regards to the industry's approach to community relations has come about due to two reasons: one, because simply the industry had little choice, and two because the benefits to be gained from good community relations directly affected the bottom line for all in the mining industry.

Humphrey cites the loss of value through project delay to demonstrate what he means. Consider for example a US$600 million mine project with a net present value (NPV) of $76 million which is planned to come onstream in eight years, five for proving and feasibility and three for development.

Delays of five years at the proving stage and two years at the development stage -- by no means an extreme example -- could reduce the project NPV to $26 million. A mining company working in a community that trusts it will benefit so much in the smooth day-to-day running of the operation.

So this changing paradigm is evident everywhere. From 1967 to 1997, the working system of our industry was supported by the political system, at least that is what some fellow citizens believe. Now that the government has changed, there needs to be complementary amendments to our working system.

The new government is feeling its way forward to establish a true democratic system, implementing changes and improvements across the board -- in politics, law, business, the economy and society at large. The government has its hands full.

We can help by putting our faith in our leaders and letting them lead, while we, as experienced industry players, must apply our know-how toward regulating and changing our industry and initiating our own terms of a working contract. The time is ripe for us to take our place as active participants in this period of reform.

As a sector that has benefited so much from the past 30 years, it is not only our responsibility, but also our duty as the current mining leaders in Indonesia to contribute toward playing our role and bringing change into our industry responsibly, fairly and ethically.