The Suharto government stunned mining companies around the world in November last year when it intervened in negotiations over the development of the giant Busang gold reserve in northeast Kalimantan. Now Jakarta is also feeling the heat at home, amid claims that foreign mining companies are getting too good a deal at the expense of the Indonesian people.
Until the middle of last year, there was little doubt that the right to mine Busang lay with the company which discovered the gold, Bre-X Minerals Ltd of Calgary, Canada. Then another Canadian company, Barrick Gold Corp, teamed up with President Suharto's eldest daughter, Siti Hardiyanti Rukmana (Tutut), and things changed. The government 'advised' Bre-X that Barrick was to receive a 75% share in the project. Lobbying by former US president George Bush, a Barrick advisory board member, and former Canadian prime minister Brian Mulroney, a company director, is widely believed to have influenced Suharto in his decision to weigh in behind the Barrick-Tutut alliance.
By that time, the director general of mines and energy, Kuntoro Mangkusubroto, had taken the unprecedented step of withdrawing both Bre-X's preliminary survey permit and its in-principle mining approval, so the company's bargaining power was close to zero. The move outraged Bre-X's shareholders, since it pre-empted potentially higher bids from other prospective partners.
Barrick and Bre-X reportedly reached an agreement on a 75:25 split in early December. A few days later, the government requested a 10% stake in the mine. This was initially granted, and the Barrick-Bre-X split changed to 67:23. In mid-January, minister of mines and energy IB Sudjana said the government was encouraging Indonesian companies to 'join the battle for ownership of the Busang gold project'.
Late last month, Bre-X announced it had formed a joint venture with US firm Freeport McMoRan Copper and Gold and two Indonesian companies under the control of Suharto to develop the Busang goldfield. The deal apparently cuts out Barrick from the project.
None of this saga would have happened if the Busang discovery hadn't been quite so large. According to Bre-X, the site is estimated to contain 70.95 million ounces of gold, making it the world's largest known single gold deposit. Since exploration of the reserve is still at a preliminary stage, there is plenty of room for the estimate to be revised upwards - perhaps to more than 100 million ounces.
Whatever the outcome, Indonesia's hitherto good reputation in the global mining industry has been dealt a heavy blow by the Busang affair. The fallout may also be felt in other sectors, since it follows the same pattern as the ill-fated 'national car policy', under which Suharto's youngest son, Hutomo Mandala Putra (Tommy) was granted near-complete exemption from the taxes and tariffs which make up 60% of the sale price of rival sedans.
'Before the Busang case, the Indonesian investment climate [for mining] was considered to be quite attractive,' says M Simatupang, vice-president of the Indonesian Mining Association. 'Now many companies are waiting to see what will happen.'
Within Indonesia, the Busang controversy has spawned a barrage of criticism of the government's general policy on mining, with detractors arguing that the current contract-of-work (CoW) system is too investor-friendly and that the Indonesian people are being sold short.
Private sector reaping benefits
Econit, a leading economic think-tank, slammed the government's record of awarding lucrative contracts to the private sector. Each year, billions of dollars of what should be government revenue goes into private hands, it claims, citing connivance between corrupt officials and politically-connected foreign investors as the primary cause.
Attention has also been focused on Freeport, which has been mining copper and gold in Irian Jaya since the late 1960s. Freeport's Grasberg gold concession now ranks as the world's second largest, after Busang.
In a discussion paper in December, Econit said: 'In the light of article 33(3) of the 1945 Constitution - [which states that "the earth, water and the natural resources therein shall be used for the greatest welfare of the people"] - in the management of the Freeport and Busang gold mines . . . the Indonesian people should be the principal beneficiary. In fact, however, foreign investors are receiving greater benefit.
'With its stronger bargaining position, Indonesia should have been able to obtain a higher level of economic rent from the exploitation of non-oil-and-gas natural resources [such as tin and gold]. But, on the contrary, the management of natural resources in Indonesia at the present time is far from transparent and has gone against the interests of the Indonesian people . . . To date, the contracts of work that have been concluded between the Indonesian government and investors have been very loose and have been very lucrative for investors.'
Stinging criticism has also come from Amien Rais, one of the most influential figures in Indonesia as chairman of the country's second-largest Muslim organisation, Muhammadiyah, which has about 28 million members. He has called on the government to put a stop to Freeport's Irian Jaya activities and to review all mining contracts awarded to foreign companies.
'If we do not have the funds and technology to tap the natural resources why don't we leave those resources underground until we are capable of developing them,' Rais says. 'What's the point of us pressing the Canadian firms to solve their conflict quickly so that they can start working immediately to deplete our resources? We should keep them for our grandchildren.'
Controversial agreements
At the core of Indonesia's present mining policy is the CoW. Successive generations of these agreements have been worked out in negotiations with companies applying for mining concessions. Once a CoW has been concluded, its basic terms apply to all companies signing individual agreements.
The regulatory status quo has plenty of defenders, not least among whom is former director general of mining Soetaryo Sigit, who has been credited with developing the CoW. Sigit says that Indonesia now faces severe competition for mining funds and expertise, particularly as Vietnam, Laos and China open up to foreign investment.
There is a consensus within the Indonesian industry that the country's success in attracting mining investment over the past decade - in which more than 250 companies have invested in the sector - would not have been possible without the security provided to investors by the CoW system. The basic principle of the CoW is that the government signs a contract with an investor before detailed exploration of an area has been conducted. With certainty about what the terms would be if a concession proves viable, companies are willing to invest.
'People now start criticising things on the basis of hindsight,' says Sigit. 'They forget that more than 100 companies have withdrawn after spending hundreds of millions of dollars.
'Shell, for instance, spent more than US$60 million for coal and withdrew. Pacific Nickel spent the same amount, more or less. The critics never mention these kinds of failures in exploration.'
Sigit says the recent attacks on the CoW are misplaced, reflecting a basic ignorance about how the mining industry works. 'One thing that has apparently not been understood by these people is that [the CoW] has to be made before you start undertaking surveying and exploration. Of course nobody is willing to have an agreement after you find something. So this apparently is the big mistake all these people [are making in] criticising the government. They want to see a deal made after we know what is in there, and that is certainly not fair because of the risk.'
Graeme Robertson, an Australian-born Indonesian citizen whose Swabara Group of companies has invested extensively in coal and gold, says the critics over-estimate the level of profit in those mines which do go ahead. 'Mining is basically moving vast amounts of earth and material to produce a small amount of commodity,' he says. 'That's why gold is expensive - because it's not easy to mine. If the mineralogy is wrong, your recovery can be very low.'
Robertson, a director of the World Coal Institute, says the benefits to Indonesia from mining have been tremendous. He cites the significant contribution to government revenue from the various taxes to which mining companies are subject, the creation of employment - both in mining directly and in downstream industries such as copper and gold smelting - and the development of infrastructure, including a bulk-handling port under construction by one of his companies off southern Kalimantan.
Exemption from taxes
All mining companies in Indonesia are subject to the general corporate income tax rate of 30%, and in many cases they pay a higher rate (if they are locked in by an earlier generation CoW). They also pay mining royalties of up to 13.5% (coal) of the value of their exports.
So why have miners attracted so much attention, while no fingers have been pointed at the foreign companies operating in the Indonesian manufacturing sector?
'The word "gold" has always been thought of as treasure,' former minister of mines and energy Mohammad Sadli recently told the Jakarta Post.
'It's the lingering image that a lot of Indonesians have of these gold bars leaving the country in the middle of the night,' adds an industry source.
In 1995, Freeport Indonesia booked gross revenues of US$1.48 billion. According to data released by the company early last year, Freeport's 1995 tax, dividend and royalty payments came to US$295 million, while indirect benefits to Indonesia during the same year totalled US$997 million. Of this total, 87.3% of the money Freeport made in 1995 stayed in Indonesia.
Most of its defenders readily concede that the CoW is not perfect, but they are adamant that the system needs to be maintained if Indonesia is to remain attractive to the mining companies which have the expertise and resources to put the country's mineral wealth to use.
'People ask me whether the conditions of the present contracts are already ideal,' says Sigit. 'My question is: "What do you mean by 'ideal'?" It would be ideal for the government if it got a 90% share, but no one would accept that. All you can talk about is whether it is fair or not.'