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Mining Industry in Indonesia: Obstacles to Foreign Direct Investments

BHP Billiton, a leviathan mining company, in early June 2009, announced its plans to lay off all 450 of its workers, at its coal project in Sungai Maruwai, Indonesia. This year has seen several foreign companies including Australia Oriental Minerals and Newmont either suspend projects, or lower forecasts of annual production or activate divestment procedures. Where are the problems? Can these developments be attributed to the current economic crisis and shortfalls in economic returns for the investors? Or, are there other reasons, including some local socio-political forces that have been brewing for a while?

According to US Commercial Service’s 2007 report, Indonesia was estimated to supply 26 percent of the world’s coal. Another report by the World Bank in 2005 ranked Indonesia 2nd in tin production; according to this report, Indonesia, is the world’s 4th largest producer of copper, the 5th largest producer of nickel and the 7th largest producer of gold and the 8th largest producer of coal. Revenues accrued from foreign direct investments in the mining industry in Indonesia are widely understood in scholarly circles to be a ladder towards economic development. In addition, the mining industry is also perceived as crucial towards combating the current economic crisis and bringing about an upturn for this newly developing economy.

However, it seems that the clock might be turning backwards as far as liberalization in Indonesia’s mining industry is concerned. Peter Fanning, a Jakarta based lawyer and chairman of the International Chamber of Commerce recently commented to Asiamoney that, “There is a deal of excessive nationalism and xenophobia around. It’s certainly not the official view but everyone comes up against it. There’s no doubt that there are those who want to make it as difficult as possible for foreign investors.”  On the one hand this may simply be a case of ‘temporary insecurity’ and a ‘re-prioritizing’ during hard economic times. On the other, it could be a step toward a larger economic re-structuring.

Allocation of mining permits and contracts of work in Indonesia is a highly decentralized process. All tiers of government – national, state and local can give the required authorization to foreign investors. Complicating the matter are instances wherein the national governments grant concessions and permission without the consent of or compensation to the local communities that have for centuries, dwelled and derived much of their subsistence and cultural heritage from their land. However augmenting indigenous participation in the development of natural resources and guarding against too much foreign influence has for the most part been a matter of importance to the Indonesian government. The core tenets of the mining laws were established in 1976 and they stipulated stringent tax regulations including a profit tax, transfer of at least 51 percent of equity to Indonesian nationals within ten years of initiating exploration and processing of materials within the country, possibly to create more local jobs.

As Indonesia moved towards greater regional autonomy, regions demanded a bigger slice of the economic gains. In early 1999, the Indonesian government passed Law 22/99 on regional autonomy which covered revenue sharing with the national government. According to this new law, the provinces would be entitled to 15 percent of the returns from onshore oil production, 30 percent from on shore gas, 80 percent from mining, forestry and fisheries each and 20 percent from reforestation funds.
However, despite this appeasement by the Indonesian government, governing the mining industry has not gotten easier in the recent years. Apart from land-grabbing, there is also illegal mining which has caused many foreign companies to cease operations entirely. Foreign investors often find themselves subject to a whole gamut of levies and demands that were never mentioned in their initial contract of work. Thus such socio-political obstacles in addition to NGO’s taking issue with the environmental side-effects of mining, all contribute towards conditions that have made it hard for foreign companies in Indonesia to pursue their production process.

It is apparent that the Indonesian government is having to walk a fine line between managing public displeasure and safeguarding foreign investments which are crucial for reviving  it’s economy. In October 2003, Newcrest of Australia was forced to suspend operations after hundreds of locals occupied the site and demanded profits from their nearby, exhausted Gosowong gold mine. In 2006, a group of 50 unidentified people wrecked a worker’s camp on the island of Sumbawa. It was set up by one of the world’s largest gold producers, US company, Newmont. Adding to the political instability was the fact that many local governments often take control of mining areas prematurely and the national governments hesitate to interfere or set matters straight so as to avoid a local political backlash. In 2009, itself British energy firm BP was warned by the Tangguh Independent Advisory Panel (TIAP), against relying on Indonesia’s military as it developed a gas field in a remote, politically unstable area of the West Papua province.

The situation in Indonesia could very well be an example of when the goals and values of the government are not in line with mass sentiment. Then again, perhaps the masses underestimate the usefulness of foreign investments for both the Indonesian economy and creating a multitude of local jobs. Nevertheless, what is clear is that the Indonesian government needs to take an assertive stance in balancing not only FDI but also the grassroots demands.