Rio Tinto says will withold investment in Indonesia

Alex Wilson, The Jakarta Post, Jakarta

Anglo-Australian mining giant Rio Tinto will not make significant investments in Indonesia until uncertainties over regional autonomy and mining legislation are resolved, according to Indonesian CEO Lex Graefe.

"At the moment we are working reasonably cautiously -- we are not spending a lot of money in Indonesia," he said.

Mr Graefe told The Jakarta Post on Wednesday he was concerned about a lack of clarity in drafts of the proposed new mining legislation, which meant interpretation of the law could change over time.

Concern over regional autonomy legislation enacted last year had also stemmed the flow of investment within Indonesia's mining sector. Confusion over the law stemmed from the lack of regulations on its implementation.

"It's not regional autonomy as such that is a problem, it's the lack of clarity about what regional autonomy means that is causing ongoing uncertainty," he said. "In principle we have no objection to regional autonomy."

One aim of the new regional autonomy law was to distribute a portion of the royalties from mining companies to regional and local governments.

"So far it seems that, by and large, those funds have not reached them, even though it's been more than a year," he said.

Rio Tinto and several other mining companies wanted to pay royalties directly to the local governments to speed up the process and allow local people to see some benefit from mining operations.

Under regional autonomy provincial governments were providing a greater level of services, and taxes had been raised to cover the expense.

"That's one of the reasons we would like the royalties to flow through to them so that they can afford to fund the activities for which they are now responsible, instead of us basically, in a way, being taxed twice."

He said until these issues were resolved investment would remain at low levels. Mining companies could not justify making the large up-front investments, "typically in the order of US$500 million", if their position were unclear.

"When you don't know what the rules are going to be or who will be responsible for making the rules or enforcing them then it's difficult to invest," he said. "Uncertainty in any form mitigates against large investment."

Graefe did, however, re-affirm Rio Tinto's commitment as a serious long-term investor in Indonesia.

"A number of other smaller exploration companies have left, we didn't -- we're still here and we're working," he said, adding that exploration activities would continue across the archipelago at a reduced rate.

Graefe said no agreement had been reached with the government on a price for shares in PT Kaltim Prima Coal (KPC), of which Rio Tinto and BP each own half.

KPC is obliged to offer 51 percent of its shares at a price agreed with the government by March 2002. The government believes 51 percent of the Kalimantan coal mining company is worth around US$320 million, while KPC maintains $450 million is fair. Without an agreed price the divestment may take place much later than March, unless the government opts for independent valuation.

Graefe denied KPC was dragging its heels on the divestment. He said the government wanted a percentage of the shares valued at the prices offered last March, while KPC believed regulations required shares to be revalued based on company returns for the year.

He said the company would also appeal a decision by the South Jakarta District Court to hear a civil suit brought by the East Kalimantan provincial government against KPC. While this appeal was being heard the case would proceed.

The East Kalimantan government contends KPC is obliged to sell 51 percent of its shares to it and wants US$ 766 million compensation for lost dividends and legal costs. Graefe denied there was any such obligation. "We don't think the case has any legal justification," he said. He ruled out any chance of an out- of-court settlement.