Undermining mining contracts

Major investment in natural-resource development in Indonesia would grind to a complete halt if other local administrations treated foreign companies the same way Newmont Mining Corp. has been treated in North Sulawesi. The Minahasa regent has insisted that Newmont Minahasa Raya close its gold mine on April 16 despite an appeal by the American company against the provincial court order to the Supreme Court in Jakarta. This action is an arrogant exercise of power that will benefit no one; but it will cause material losses and frighten away other companies interested in investing in developing local resources.

True, the Minahasa district court ruled in January in favor of the local administration's lawsuit that demanded Newmont pay Rp 61.5 billion (US$8.2 million) in back local taxes for overburden and underground water usage plus Rp 30 billion in damages and Rp 2.5 billion legal fees. And the verdict was upheld by the provincial high court.

But ordering immediate closure of the mine that produces 340 kilograms of gold annually and employs hundreds of workers, while the appeal process is still underway amounts to the use of naked power to force Newmont to immediately pay the back taxes and damages to the Minahasa administration. It is difficult to believe the local administration would consider that such a drastic action was necessary to prevent the American company from fleeing without settling the obligations imposed by the court.

Newmont Minahasa's assets are all secured in the mine and these assets could be foreclosed if the Supreme Court further upheld the provincial court's verdict and the company refused to pay. Moreover, Newmont is a well-respected company with a long history in Indonesia. The American company also has invested $2.5 billion in a huge copper and gold mine on Sumbawa island, east off Bali.

The case would be strikingly different and an immediate closure would be warranted if the litigation related to issues on environmental destruction and danger to human life.

But the lawsuit concerns only a tax dispute caused by different interpretations of regulations. Newmont insists, and the ministry of mines and energy in Jakarta agrees, that based on its mining contract, awarded by the central government, it is not required to pay local taxes on overburden or materials removed during the mining process. But the local administration has a different opinion, arguing that Newmont used part of its mining overburden for commercial purposes and was therefore subject to the local taxes.

It is hard to understand why the high court in Manado and the Minahasa administration did not consider the findings of an independent audit made three weeks ago to prove whether or not Newmont did use part of the overburden from its mining operations for commercial purposes.

The manner in which the Minahasa administration pushed ahead with its demand for the mine's closure implies that the case against Newmont is more complex than a simple tax dispute. It reflects the venting of frustration and resentment of exploitation of local resources by outside investors.

The disillusionment, unleashed after the fall of the authoritarian government of former president Soeharto, reflects local opposition against the central government for taking the bulk of revenues derived from exploitation of local resources. It also amounts to an expression of anger against the arrogance on the part of some investors who, under the Soeharto regime, could operate in total disregard of local interests as long as the central government was kept satisfied.

Local administrations appear to have become increasingly frustrated with the slow pace of the devolving of power and resource-sharing as promised by the new laws on regional administration and inter-governmental fiscal relations.

Even though the new laws do not become effective until next January, local administrations should be able to know now exactly how they will fare with the expanded autonomy. The longer this uncertainty continues, the more damaging will be the impact on the investment climate in Indonesia. Worse, more foreign investors could fall victim to arbitrary claims for back taxes, special payments or community development funds.

Surely, these underlying problems and the importance of the Newmont case to other mining contractors in the country make it clear to the central government that it is urgent that fairer revenue sharing and devolving of authority to provinces and regencies be expedited.