Opportunities, challenges in mining investment

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.