Grace Nirang, Jakarta – Little fresh investment will flow into Indonesia's mining sector this year as companies hug the sidelines due to a host of problems plaguing the industry.

Rampant illegal mining, conflicts with local residents and uncertainty over implementation of autonomy laws in outlying provinces made Indonesia's mining sector attractive only to the brave foreign miner, industry sources and analysts said.

"Existing investors will wait for the implementation of the autonomy laws, while prospective ones will be waiting for better security," Erry Riyana Hardjapamekas, president of state-owned tin producer PT Timah Tbk, told Reuters. "I don't think anyone will dare to make major investments [in the industry] at least until next year."

Such an outlook poses another blow to Indonesia, once regarded as one of the most lucrative mineral destinations in the world. Indeed, the mining sector accounted for 10 percent of gross domestic product in 1999, according to official figures.

Analysts had hoped the mining sector – which encompasses gold, tin, silver, copper and coal – would provide fresh impetus to an economy struggling to find its feet after nearly three years of crisis.

The Mines and Energy Ministry has said that at least 24 foreign mining companies, mostly in exploration stages, had already delayed their operations in Indonesia due to uncertainty over security and financial problems.

A ministry official said overall new mining investment was worth $327 million last year. "This year it will be much lower," said the official.

Host of problems hobble miners

With the breakdown of law and order in Indonesia following economic crisis and the downfall of former president Suharto in 1998, illegal mining and tension with disgruntled residents in mining areas has become widespread.

The autonomy law, which takes effect in 2001, will give regional governments more say in managing their own affairs, including mining, partly as a way of easing tensions over who benefits from extracted minerals. The ultimate impact of that law is unclear.

Mines and Energy Minister Susilo Bambang Yudhoyono recently said Indonesia had lost around 30 tonnes of gold ore and four million tonnes of coal last year because of illegal mining.

Rick Ness, president director of gold miner PT Newmont Minahasa Raya, told Reuters that illegal miners had hampered ore extraction and processing and also damaged the environment.

"Big mining companies are usually held to high standards when it comes to waste control. But this is not the case for illegal miners, who operate in the same areas and for whose actions mining companies are often blamed," he said.

Newmont Minahasa Raya, a unit of Denver-based Newmont Mining Corp, has had its share of problems with regional authorities flexing their muscles in Indonesia's new democracy.

In Sulawesi last April a tax row with regional authorities threatened to close the mine until a compromise was found after Newmont agreed to pay $3 million for tax and community services.

Various problems have also affected gold and silver miner PT Kelian Equatorial mining, owned by Rio Tinto, and the giant Freeport gold and copper mine in remote Irian Jaya, majority owned by Freeport-McMoran Copper & Gold Inc.

In May, Kelian Equatorial was forced to temporarily halt production and evacuate workers from its site in East Kalimantan after protesters seeking land compensation blockaded all access roads to the site.

More conflicts predicted

Ness said implementation of the autonomy law could trigger more disputes between local governments and mining firms because the new rules could contradict existing mining contracts.

President Abdurrahman Wahid has pledged to honour all international contracts, but urged foreign firms to renegotiate any deals that resulted from corruption under Suharto's regime.

"As well, it will be difficult for regional authorities to provide the same standards of expertise as the central government," Ness added.

South Sumatra Governor Rosihan Anwar said the autonomy law was not enough to settle problems between miners and locals. He said some conflicts during the transition were to be expected. "Local expectations of the autonomy laws are too high. More demands are likely because locals still feel what they receive is too little," Anwar said.

Royalties hike criticised

In light of these problems, the government's recent move to raise royalties poses another blow for the mining industry. "Foreign investors rely on financing in order to develop or expand projects.

The royalty increases reduce our ability to raise necessary financing because they effectively reduce the level at which a project becomes financially feasible," Ness said.

An official at a foreign bank in Jakarta said problems and uncertainties would make banks reluctant to finance miners. "Investment in the mining sector in Indonesia is now categorised as high-risk. Mining companies will find it more difficult to get loans from banks," the banker said.

Ness of Newmont called on the government to show clear leadership during the period of transformation for the sector. "Foreign investors, particularly those in the mining industry where investments often have a 20- or 30-year lifespan, must have an element of certainty in order to secure financing," he said.