Buried wealth is the key to Indonesia's prosperity

Rahman Connelly, Jakarta

The world is undergoing an unprecedented mining boom powered, by the explosive growth of the Chinese and Indian economies. In 2005 the highly regarded Fraser Institute Annual Mining Survey ranked Indonesia as, overall, the most prospective country in world.

Yet with world-wide exploration expenditure expected to reach US$8 billion this year, Indonesia is only able to attract a very small amount of this exploration funding. In fact, the latest figures available on exploration spending in Indonesia show that in 2005, the country was only able to attract $102 million of this; mere crumbs from the world-wide exploration table.

Mining brings much needed social infrastructure into regions, especially in remote areas, and provides substantial revenue to central governments. A lack of mining investment in any country, particularly if it is poor, is potentially billions of dollars of forgone tax revenue that might have been channeled into the health and education sectors.

In addition, tens of thousands of jobs, training opportunities and spin-off business opportunities are being lost; a tragedy for the ordinary people of Indonesia, who could otherwise lift their standard of living.

Why is Indonesia missing out? At a political level, there is generally a negative attitude to mining. There are many reasons for this, but foremost among them is that mining as whole is tainted by the New Order's involvement in mining (read: Freeport). But the mining industry is much more than Freeport and such perceptions do nothing to move Indonesia forward.

Looking at Indonesia's near neighbors -- Laos has lifted its GDP by more than 30 percent because of the income from mining, the government of Papua New Guinea is propelling the country into a new era of mining, and the Philippines, despite its strong anti-mining lobby, has a pro-mining stance at the political level welcoming foreign mining investment when it changed its laws in 2004.

There is a perception that mining destroys forests. This simply flies in the face of fact. Of Indonesia's landmass, around 60 percent is forested, with far less than 0.1 percent taken up by mining. Mines and their infrastructure require very little space. As we all know, what destroys forests is logging (illegal and otherwise), forest clearing for palm oil, and other large-scale developments.

The confusion probably arises when people look at maps showing large concessions for exploration; the clarification needs to be strong about this -- exploration is not mining, only a minuscule number of trees are logged in the exploration phase. Taking my own company as an example, while we have a 96,000 hectare exploration concession, any mine developed will use less than 5 percent of this land mass. So mining is not destroying Indonesia's forests.

There are valid concerns about the environment and the historically poor performance of mining companies around the world. But the mining industry has come a long way and in today's world to act in an environmentally responsible manner is no longer a matter of choice; it is a fundamental requirement of both governments and, increasingly, of lenders and investors.

Australia, with some of the toughest environmental laws in the world, has $150 billion of defined mining projects underway. Today, mining and environmental responsibilities can -- and do -- go together.

As Emil Salim wrote in his report for the World Bank's Extractive Industries Review, "... while having a large extractive sector poses special challenges for a country, if these are handled well, the extractive sector can become a powerful engine for poverty alleviation."

There are also concerns about Indonesia's mineral wealth being handed over to foreign companies instead of being developed by Indonesians themselves. The reality is that there are abundant mineral prospects throughout the country, which are available to Indonesian companies through a pretty straightforward permitting system.

But local companies are not taking them up, reflecting the fact that exploration requires very large amounts of extremely high-risk capital. Instead, local capital goes into lower risk areas such as manufacturing and real estate development.

Attracting foreign investment to kick-start the economy is a key part of government policy, but that doesn't seem to apply to the mining sector, which has the potential to be a major employer and key supplier of revenue to the government (the largest taxpayer in the country is a mining company, which this year will pay around $2 billion to the Indonesian Government).

The apparent lack of government interest in Indonesia's mining future has left the industry in a policy vacuum, with for example the Forestry Ministry taking on a de-facto regulatory role by using conflicting and overlapping legislation to stop mining projects throughout the country.

Yet another example is the lack of a definitive mining law. No new mining contracts of work have been issued for about eight years. A new law is promised by the end of this year, but it's not clear how workable it will be and whether it will be effective in attracting the level of investment urgently required to reinvigorate Indonesia's mining industry.

To get a measure of Indonesia's mining potential, Australia currently has $150 billion worth of mining projects in the works and a further $340 billion in planning. Compare this with the latest Foreign Investment Board figures which, across all industry sectors, show total domestic and foreign investment commitments as being $56 billion for the year to date. Mining has the potential to produce an explosion in Indonesia's investment activity.

The question begging to be answered and implemented is: Which way forward?

There is an even more fundamental question: does the government want to embrace mining as a key potential driver of the economy? Once this is answered -- and if the reply is positive -- then an appropriate policy and regulatory environment won't be hard to achieve.

The writer is CEO, Kalimantan Gold Corporation Limited. He can be reached at rconnelly@ozemail.com.au.
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