Bill Guerinl, Jakarta – Indonesia is one of the most resource-rich countries in the world, with coal, gold, bauxite, nickel, copper, silver, tin and iron ores being its main mineral deposits. Yet declining investment in the country's mining sector has been a drag on growth since 1997, when US$2.6 billion of new investment was made. After that, new investment gradually slowed to a trickle. In 2003 mining investment was only $12 million, and last year it was only up slightly at $177 million.
Australia has traditionally been one of the biggest investors in Indonesia's mining and mineral extraction industries, and on a visit Down Under last week President Susilo Bambang Yudhoyono, who served as minister of mines and energy under former president Abdurrahman Wahid, told Australian business leaders he is prepared to make "politically difficult" decisions to ensure continuing growth and attract investment.
According to PricewaterhouseCoopers (PwC), there are several pressing issues in the mining industry that need to be addressed by Jakarta. These include taxation, the system of royalties, judicial corruption, security threats and overlapping regulations. Inconsistency of interpretation and enforcement of regulations, red tape and the absence of legal certainty of contracts, are all a major turn off for high-risk, capital-intensive businesses like mining that require long-term investments.
Several Australian-linked companies have been among those affected by these issues, with some of them leading an exodus from the mines. Aurora Gold sold its Indonesian investments and left the country in 2002, following problems with illegal mining. Newcrest Mining, Straits Resources and Anglo-Australian giant Rio Tinto all have stakes in gold and coal operations in Indonesia, but the latter has scaled down its operations in the country, where it has had a presence for more than 30 years. Rio's main remaining Indonesian investment is a 40% stake in the recently expanded Grasberg copper mine in Papua, the world's largest, which is operated by American giant Freeport-McMoRan.
Rio Tinto and BP, joint owners of PT Kaltim Prima Coal (KPC), made the headlines in October 2003 when they walked away from their 20-year investment after selling it to Bumi Resources, a company connected to prominent businessman Aburizal Bakrie, now Indonesia's chief economics minister. Non-Indonesian companies operating in the coal-mining sector are obliged to sell a majority stake to local companies within 10 years of the start of their production contract, but Rio Tinto and BP sold their stake to Bumi lock, stock and barrel. The acquisition of KPC made Bumi Indonesia's largest coal producer, now supplying more than 40% of the total domestic coal market and controlling 6-8% of thermal coal supply on the international market.
Another coal giant in the making
Another case moving into the international spotlight pits some of Indonesia's top lawyers against each other in a battle over ownership of Australian assets in PT Adaro Indonesia (Adaro), Indonesia's second-biggest coal producer that produces some of the world's most environmentally friendly coal.
Adaro was set up with 100% Spanish equity but was later sold to Australian public-listed company New Hope Corporation Ltd (New Hope), which, with its local partner PT Asminco Bara Utama (Asminco) and other Indonesian interests, took over management of the concession in 1991.
The others were the Raja Garuda Mas group, a business conglomerate belonging to paper and pulp tycoon Sukanto Tanoto and the Tirtamas group, owned by Hasyim Djojohadikusumo and his sister-in-law, Siti Hediyati Hariyadi or Titiek Prabowo, former president Suharto's second daughter.
In February, New Hope agreed to a conditional sale of its 40.83% stake in Adaro and a 50% interest in a related megaport for $378 million to a consortium led by Edwin Soeryadjaya, the younger son of the founder of Indonesia's giant car maker, PT Astra International. However, Singapore-based holding company Beckett Pte Ltd is currently contesting Soeryadjaya's earlier purchase of Adaro shares in the Jakarta and Singapore courts.
In October 1997 Asminco was granted a one-year $100 million bridging loan facility from Deutsche Bank. Beckett guaranteed collateral for the facility through a share pledge of Asminco's shares in Adaro and PT Indonesian Bulk Terminal. In 2002 Deutsche Bank foreclosed on the loan and sold the assets pledged by Beckkett to PT Dianlia Setyamukti (Dianlia), a local mining service company controlled by Soeryadjaya. Dianlia paid $44.2 million for 40% of the shares in the mine facility. Beckkett is suing both Deutsche Bank and Dianlia in the Singapore courts for return of the shares or compensation, claiming the price paid by Dianlia was far below market price.
By 2003 Dianlia had bought the remaining 11% of Indonesian interests in Adaro, giving it majority ownership and control of the coal producer. The proposed sale of New Hope's holding, put to an annual shareholder meeting on Thursday, is likely to be given the go ahead, giving Soeryadjaya almost a 92% stake in Adaro, depending on the final verdict in the court case against him. Soeryadjaya is ready to dig in deep and plans to boost coal production from 24 million tons a year to 35 million tons by 2009. He has already tied up a $950 million financing deal with Singapore's state investment company Temasek Holdings Pte Ltd and US-based equity financier Noonday Asset Management.
Bright future for coal miners
For coal miners who stay put, or who buy into the coal mines, such as Bumi and Dianlia, there are bright prospects ahead. Indonesia is now the third-largest coal exporter in the world, after Australia and China. It has proven coal reserves of 5 billion tons.
Coal prices rose to a record $55-$60 per ton last year, due to China's decision to halt coal exports to meet domestic demand, coupled with rising Japanese coal imports. Japan is the largest importer of Indonesian coal, followed by South Korea, India and Malaysia.
This year prices are considerably lower, about $20-$25 per ton. But with demand from domestic and overseas markets on the rise, Indonesia's coal output for 2005 is expected to increase by 18%, from 127 million tons in 2004 to 150 million tons this year, according to Mahyudin Lubis, an official with the Ministry of Energy and Mineral Resources.
More growth for the coal industry is also expected based on the government's plan to construct and develop nine more coal-fired power plants by 2009.
Autonomy woes
Despite a positive outlook, not everything is shinning, as regional autonomy, which kicked in on January 1, 2001, has negatively affected the investment climate in Indonesia, with efforts to delegate more decision-making and economic power to provincial and local governments, causing legal uncertainties.
Devolving administrative authority to the country's various regions gave local leaders greater authority, but many have singled out investors and levied costly fees and duties impeding business. Foreign companies, particularly in lesser-developed areas, often come under pressure to provide facilities and services usually provided by the government. Moreover, local communities often seek additional gains by promoting extra-contractual concessions and monopoly arrangements between foreign and local firms.
Australian mining giant BHP Billiton's planned $1.6 billion project to build an open-pit nickel mine on Gag Island – a remote and nearly uninhabited site in eastern Indonesia – has environmental groups up in arms over fears that tailings from the mine could damage one of the world's most diverse coral-reef systems, which lies offshore of the island.
During Yudhoyono's visit to Australia, Andrew Wilson, president director of BHP Billiton Indonesia, urged the president to be more serious about tackling corruption within the bureaucracy. "Reports and the facts in the field show how difficult it is to do business in Indonesia, Wilson was quoted as saying.
But it is not only the unofficial kickbacks that make it costly to do business in the country. A recent Arthur Andersen survey showed that the tax and royalty burden on mining operations in Indonesia was the highest among eight countries surveyed. Coal mining companies pay, on average, 58% of their earnings for income tax, royalties and land rent. These payments, among the highest in the world, are 69% higher than in New South Wales, Australia, 65% higher than in China and 80% higher than in South Africa.
'It can happen to anyone'
Little more than a week before Yudhoyono's visit to Australia, Federal Attorney General Philip Ruddock told the country's Channel Nine, "If you're going to have investment from abroad in important projects that are going to help with the development of Indonesia, you need to have it occurring in an environment which is conducive to investment."
Ruddock was speaking about another case being closely watched by international mining companies: the government of Indonesia versus US-based Newmont Corporation's Indonesian subsidiary PT Newmont Minahasa Raya. Newmont's contract with the Indonesian government stipulates that disputes should be resolved through conciliation or international arbitration, and it has vowed to defend six employees and its local unit to the hilt.
The six workers – an Australian, two Americans and three Indonesians – are expected to go on trial this month over allegations they are responsible for environmental crimes stemming from the alleged poisoning of local residents from submarine tailings generated by mining operations. Newmont, the world's largest gold miner, has denied all the allegations.
When referring to the case, Noke Kiroyan, chairman of the Indonesia-Australia Business Council, who also led KPC before its sale, put it simply: "That's not something that would promote investment, because if it can happen to Newmont it can happen to anyone."
Meanwhile, as the Newmont case unfolds, the seven-year absence of a mining law may be nearing its end. A draft law is set to be debated in parliament in the very near future, but industry sources say the proposed new legislation does not go far enough to eliminate the uncertainty created by conflicting laws and regulations, especially over environmental issues. Kiroyan said negotiated contracts of work were to be replaced by a licensing system that was not acceptable to mining companies.
The business council chairman told an Asia Society meeting, "The fact is, in its current form, the mining law will not attract foreign investment," though he hoped there was still an opportunity for the legislation to be improved.
Asia loses out
Although global expenditure on grassroots minerals exploration is on the rise, after being in the doldrums from 1997 to 2002, PwC said that less than 1% of it has gone to Indonesia over the past three years. According to the company, Asia as a whole is not getting a proportional share of new mining investment, which totaled $69 billion last year. The Philippines came out best with $2 billion, compared with $12 billion in Chile and $8 billion in Peru.
Minimal exploration expenditures were also matched by relatively low mining investments across the region. With low exploration levels and most investors holding back on developing new projects at the moment, the risk is that the industry will contract as new mines remain undeveloped.
The writing, then, is on the wall in the region. But for Indonesia in particular, time is fast running out to remedy the fault lines in order to increase investment and restore the long-term future of the industry. The country is missing out on the sustained economic growth that can come from mining investment's capacity to generate employment, earn export revenue and make profits. Unfortunately, international experience shows that once this investment is deterred from a country it traditionally does not return for about three decades.
The World Bank has also warned that a series of unrelated investment disputes with multinationals in other sectors – Mexican cement giant Cemex S A, ExxonMobil Corporation and US power company Karaha Bodas – are repelling foreign investment across the board.
"Indonesia... doesn't look that great [and] at the moment these problems make people hold back and be cautious," the bank's vice president for private-sector development, Michael Klein, was quoted as saying.
Singapore's senior minister, former prime minister Goh Chok Tong, at a recent speech to chief executives in Jakarta, pointed out that the main chance for Indonesia's president and his administration will be to implement difficult but necessary measures such as reducing fuel subsidies, which the new government has shown recently it is prepared to do.
Such policies and measures will build investor confidence, Tong said, and although it will be a long road ahead, with political will and determination and a welcoming attitude toward foreign investments, Indonesia can resume the rate of growth that was disrupted by the Asian financial crisis in 1997.
[Bill Guerin, a freelance journalist who specializes in business/economic and political analysis related to Indonesia, has been a correspondent for Asia Times Online since 2000.]