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.