Undermining mining contracts

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.