Uncertainties continue to overshadow mining industry
Sudibyo M. Wiradji and Hendarsyah Tarmizi, The Jakarta Post, Jakarta
The surprise move by Rio Tinto and BP Plc to sell their entire stake in the country's second largest coal producer, PT Kaltim Prima Coal (KPC), to local company PT Bumi Resources might look like a normal business decision.
But for those who closely watch the country's mining sector, the decision was a clear indication of their frustration in dealing with the uncertainty in the country's mining policy.
The Indonesian Mining Association (IMA) has warned that more foreign companies might follow suit if improvements are not made in the investment climate in the country's mining sector.
"It has become a growing trend now among foreign mining companies to sell their mining interests in Indonesia. They simply have no confidence in the country's mining policy," the association's executive director, P.L. Coutrier, told The Jakarta Post recently.
Bumi Resources' acquisition of KPC surprised the country's mining community not only because the deal was made when the coal producer's shareholders were still in the process of completing their mandatory divestment program, but also because of the relatively low price of the deal.
For Rio Tinto and BP Plc, the sale of their stake in KPC ended years of uncertainty regarding their mandatory divestment. Being wholly owned by foreign investors, 51 percent of KPC was required to be divested to local investors after 10 years of the company's operation. But it was not easy to meet this divestment requirement, which became effective in 2001. Besides the fact that Rio Tinto and BP had to rely on companies appointed by the government to buy the stake, differences in price also become a major hurdle.
The government last year named the East Kalimantan provincial government as the buyer of a 31 percent stake in KPC and state- owned coal producer PT Batubara Bukit Asam as the buyer of the other 20 percent stake, in a move it hoped would settle the long- delayed KPC divestment.
But a difference of opinion over the value of the stakes and a lack of say by Rio Tinto and BP in determining the buyers slowed the KPC divestment.
KPC has often been blamed as the main source of the delay. The East Kalimantan provincial government, for example, several times took the KPC shareholders to court for failing to implement the mandatory divestment program.
Besides taking KPC to court, the administration also threatened to close down KPC's operations for failing to meet the local people's "aspirations".
Threats by the local government and local legislators to mobilize the people to blockade the company's operations became everyday problems the KPC shareholders had to deal with.
Observers believe such threats and distrust from the local government prompted the KPC shareholders to sell their entire stake to Bumi Resources at a relatively low price.
Bumi Resources will buy a 100 percent stake in KPC for US$500 million under the deal, which will be completed later this year. The amount is almost equal to the US$419 million price tag offered for the 51 stake that was to be sold to the local government and PT BA under the mandatory divestment program.
"KPC shareholders instead sold its entire stake to Bumi Resources because they might have felt that it would not be feasible to continue doing business in such a situation," one observer said.
The Indonesian Mining Association describes the problems experienced by KPC as only the tip of the iceberg.
The association's executive director, Coutrier, listed at least four major factors that discouraged existing mining companies and potential investors from investing in the country's mining sector. These include uncertainty in mining policy, high taxes, a lack of security guarantees and legal inconsistency as a result of regional autonomy.
At least 22 companies have become the victims of legal uncertainty. These companies secured contracts to operate mines in eastern Indonesia in the early 1990s, but were forced to suspend their operations because parts of their concession areas were located in protected forests.
According to the new forestry law issued in 1999, open-pit mining in protected forests is prohibited. But Coutrier said that enforcing the new law in relation to the 22 companies was unfair because they obtained operation permits before the law was issued.
The government is seeking the approval of the House of Representatives to allow the 22 companies to resume their operations. This plan is strongly opposed by local green activists, who say allowing the operations would damage conservation areas and harm biodiversity.
Besides uncertainty in mining regulations, the government's fiscal policy is also considered one of the factors impeding mining operations. In addition to income tax, valued added tax, sales tax, dividends and royalties, mining companies also have to pay a series of levies imposed by local governments.
"In total, a mining company has to pay 60 percent of their earnings to the government. This amount is the highest in the world," Coutrier said.
Another factor is a lack of security guarantees. Illegal miners often face no barriers and can easily operate within a concession area owned by a mining company due to a lack of legal enforcement.
"Illegal mining activities continue to grow, jeopardizing the operation of already licensed mine operators," he said, adding that the lack of security also made mining operations easy targets for demonstrations, which often resulting in damage to the mining companies' property.
The other serious problem hampering mining investment is related to overlapping and inconsistent regulations as the result of regional autonomy. Mining companies often face difficulty determining which rules they have to follow due to these inconsistencies.
The poor investment climate has resulted in a lack of fresh investment in the country's mining sector over the last 10 years. This is very different from the early 1970s and 1980s, when Indonesia was considered a haven for mining operations.
"The worsening of the investment climate in the country's mining sector has resulted in the halt of mine explorations. No explorations have taken place during the past four years," Coutrier said.
According to the association, Indonesia's position in the world's mining industry has continued to decline due to the worsening of the investment climate. Indonesia was ranked 27th out of 35 countries surveyed in 2001-2002 in terms of the "attractiveness" of their mining sectors.
Richard B. Ness, the president of the Indonesian subsidiary of the United States-based Newmont Corporation, PT Newmont Pacific Nusantara, said Indonesia received less than 1 percent of the world's mining investment in grassroots exploration, despite the high geological potential offered by the country.
"This to me indicates that the policies that govern mining are not yet aligned to attract investors," he said.
He said many countries had updated their mining regulations over the past 20 years to enable them to compete for new investments.
Most mining companies operating in Indonesia today discovered their deposits in the 1970s and 1980s. Exploration activities have continued to decline throughout the 1990s due to a lack of competitive policies.
"This will undoubtedly result in a substantial decline in gold and other mineral production within the next decade," Ness said, adding that the fact that some companies such as PT Kelian Equatorial Mining and PT Newmont Minahasa were closing their gold mining operations would contribute to the drop in the nation's future production.
Ness said high taxes, legal uncertainties such as those related to the change in the status of forests, and legal inconsistency related to regional autonomy were contributing to the decline in new investments.
"It is therefore important for related government agencies, the mining community and other stakeholders to continue to work together to seek solutions to improve the investment condition," he said.
He said improving the investment climate was not only related to tax rates, but also to how Indonesia can create a globally competitive environment and regulatory framework in which mining and other businesses can thrive.
Mining operations should not merely be seen as tools to increase state revenue, but also as agents for development and growth, he said, adding that many mining companies in many countries had successfully turned rural areas into centers of business growth and enhanced the welfare of the people in the surrounding areas.
Ness acknowledges that it would not be easy for Indonesia to accommodate all of the needs of investors and society.
"But at least we can hope that the new general mining law which will be soon be submitted by the government to the House of Representatives for approval will be able to turn Indonesia into a better place for mining operations, for the nation as a whole."