The fuss in mining

The fuss in mining

The fuss now raging in the Indonesian mining sector would not
have occurred had the government fully realized that consistent
and predictable application of rules and contracts over time is
vital for investor confidence.

The manner in which the government proposed what analysts
consider sweeping changes in the seventh generation of mining
contracts is as if the government considered it all right to
compromise the credibility of its public policy for the sake of
national interest. What further impaired the policy's credibility
was the confusion within the government itself and the
conflicting statements by officials over the proposed amendments.

It is regrettable that the government has not learned from the
fiasco it caused with its foiled attempt to obtain a 10 percent
stake in Newmont's Batu Hijau gold property in West Nusa Tenggara
in April. One may argue that the tussle over the government's
move on the Batu Hijau gold mine was different, because Newmont
had signed its contract of work (COW) in 1986. The changes
proposed by the government last week at a series of meetings with
foreign contractors would affect about 200 new seventh generation
COWs which are yet to be signed.

Nonetheless, judging by the negotiations and licensing
procedures for COWs in the country, the changes proposed for the
new contracts have reflected inconsistencies in basic rules.
Moreover, the proposed amendments seem to be quite substantial as
most of them include the basic and principal elements in a COW.
They would give the government the right to obtain and increase
equity and profits from new mining ventures as well as share in
the capital gains made from the public offering of shares.

First of all, even though the COWs still have to be consulted
with the House of Representatives and be approved by the
President, they have been initialed by the contractors and
ministry of mines and energy officials after lengthy
negotiations. The basic and principal terms of the COWs are
usually agreed upon during the negotiations and never, to our
knowledge, have any of the rules and terms already agreed upon
during the negotiations been changed either by the House or by
the President.

Secondly, the government's move to demand a minimum 10
percent stake in a mining venture even before commercial
production starts runs against the regulation which allows
wholly-foreign owned investment projects.

Director General of Mines Adjat Sudradjat said Friday that the
proposed changes were only suggestions to be discussed and would
not be made compulsory. But foreign contractors are highly
apprehensive of the proposals because in the past the government
has sometimes arbitrarily changed its rules for what it claimed
as the promotion of national interests.

True, the changes proposed for the seventh generation COWs are
also meant to promote national interests through national
ownership of natural resources. But as State Minister/Secretary
Moerdiono said Thursday, we badly need foreign capital to help
develop our huge, yet highly risky mineral resources. That means
we should not only offer clear-cut terms which are competitive to
those in other countries with similarly big mineral resources but
should also persistently honor those terms.

We understand that public opinion pressures, and sometimes the
vested interests of some politically well-connected groups, often
prompt the government into policy inconsistency. But as the
government has often learned at great cost, sudden and abrupt
policy changes, especially in high-risk sectors such as the
mining industry which needs long-term investment, are
counterproductive. A high degree of uncertainty is already
inherent in mining businesses -- in most cases commercial
production only starts after more than seven years of major
investment in exploration -- and the government should not
unnecessarily increase the risks by policy inconsistency.