Uncertainties continue to overshadow mining industry

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."