The week in review: The bashing of contractors

The Jakarta Post | Sun, 06/12/2011 7:00 AM

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Foreign mining investors should be increasingly confused and jittery after this week more senior economic officials and analysts reaffirmed the imperative to review foreign mining concessions and revise any assessed as extremely unfair to Indonesian national interests.

On Tuesday, Coordinating Economic Minister Hatta Rajasa said a special inter-ministerial team was reviewing mining contracts and, if deemed necessary, would renegotiate (except for oil and natural gas contracts) in light of new requirements obliging contractors to establish mineral processing plants in Indonesia.

Hatta said many mining contracts needed to be renegotiated because the royalties contractors paid to the government were relatively small compared to the sales prices of the minerals.

“The government has ruled that all mining contracts that expire will no longer be renewed or extended [automatically]. The concessions should first be returned to the government, which will then negotiate new terms and conditions with new investors or the old contractors,” he said.

Minerals and Coal Director General Thamrin Sihite immediately explained that existing contracts would not be “touched”, but his and Hatta’s repeated use of the term “re-negotiating” only added to the confusion that has gripped the mining industry since last week.

President Susilo Bambang Yudhoyono himself asserted last week that the government would review and, if necessary, renegotiate mining contracts seen as unfair to national interests, without “breaching the sanctity of contracts”.

These confusing policy signals could become a hot topic among the 500 business leaders from around the world who gather here for the Geneva-based World Economic Forum on East Asia beginning Sunday.

In another bizarre development in the mining sector occurred earlier in the week when an Indonesian-Australian mining joint venture, PT Sorikmas Mining (SMM), stopped gold explorations in Mandailing Natal regency in North Sumatra after hundreds of residents from a nearby village attacked and burned its camp, destroying an estimated US$7 million worth of buildings and $20 million in mining samples.

An SMM executive explained that the incident seemed to have been triggered by the company’s rejection of a demand from local residents that their children be given educational allowances ranging from Rp 500,000 (US$58) and Rp 2.5 million a month, depending on the level of their education.

There is no way SMM could have met such an unusual request because it was still in an exploration stage. The mining company, which started its explorations in 1999, also had to stop its operations in 2004 because of a lack of support from the local administration. It resumed operations in 2009 only to be stopped again early this week because of the violent attack.


In another absurd development in the mining industry, Finance Minister Agus Martowardoyo reaffirmed on Tuesday his threat to resign if his decision, on behalf of the central government, to acquire the remaining 7 percent divestment stake of gold miner PT Newmont Nusa Tenggara (NNT), is rejected by the House of Representatives.

Agus has been fighting against street protests, political lobbies and a lawsuit filed by West Nusa Tenggara provincial administration and West Sumbawa regency administration, which are also keen to purchase the stake in cooperation with private investors.

The finance minister and the government’s sovereign wealth fund (PIP) concluded early last month a sales and purchase agreement with NNT for the stake, worth US$246.8 million — the last tranche of shares Newmont has to sell in light of its compulsory divestment scheme.

But the transaction is still in limbo because the minister of mines and energy has not approved the deal, as required by mining and investment laws, and President Susilo Bambang Yudhoyono simply sat by and relaxed as a disinterested bystander.

The ambivalent attitude within the central government itself seemed to have emboldened the regional administrations to step up their legal and political battle to get the stake, even though they simply have no money to fund that deal.

As strange as the fact is, these regional administrations still depend on grants from the central government for more than 80 percent of their budget, but they have been stubbornly fighting to acquire the gold assets.

A few weeks ago, the regional administrations sponsored street demonstrations and even threatened to close down NNT’s $3.8 billion copper and gold mine unless they were given the right to acquire the stake.

The administrations of West Sumbawa and Sumbawa regencies and West Nusa Tenggara province in 2009 acquired 24 percent of NNT through their joint venture with PT Multicapital, a unit of the Bakrie group.

But it was revealed recently that the acquisition was fully funded with foreign loans by the Bakrie unit, pledging the acquired shares as securities for the debts.

The central government is fully aware that the regional administrations, invoking the regional autonomy law as the legal foundation for their fight for the gold miner’s shares, simply acted as the fronts for private investors to buy the Newmont shares.

However, many House members, notably those of the Golkar Party, have supported the regional administrations, arguing that the finance minister has to obtain prior approval from the House to acquire the NNT shares.

It should be noted that Golkar Party chairman Aburizal Bakrie is also the chairman of the Bakrie business group, which is the shareholding partner of the regional administrations in acquiring 24 percent stake in NNT.

— Vincent Lingga


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