Rio Tinto says will withold investment in Indonesia

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.