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At the sharp end
This edition of Down to Earth focuses on foreign direct investment (FDI) in Indonesia and the ongoing problems that FDI projects bring to local communities and the environment. The failure of investing companies and the Indonesian authorities to seriously address the concerns of local people is evident in the continuing conflicts in existing projects - such as the Newmont and Freeport-Rio Tinto mining operations, which have both sparked violent confrontation in recent weeks. This systematic failure does not bode well for projects under development - such as BP's Tangguh gas project - or for future projects aimed at exploiting natural resources, such as China Light's plans for timber extraction in Papua and potential investors in oil palm for the newly emerging biodiesel market . The continuing conflicts and the potential for many more is prompting civil society groups to renew the call for root and branch reforms towards more equitable and sustainable ways of resource management, based on the recognition of human rights, which end the use of the military and police violence to push through unpopular projects. Some progress has been made - in the work on legality definition for logging, for example, and in the work to raise standards in the oil palm industry, through the RSPO (DTE 68). However, it remains to be seen how far such measures can be translated into improvements for communities at the sharp end.
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In rural areas, foreign direct investment (FDI) projects such as mines, oil and gas fields, pulp mills and plantations often take a devastating toll on local communities and the natural resources they need to sustain their livelihoods. Similarly, infrastructure development projects like roads, dams and ports have destroyed locally-controlled resources and displaced communities. Foreign investors with poor environmental and social records have been complicit in state violence and human rights violations against local people who protest against their operations.
These are familiar themes for Indonesia's civil society and international Indonesia-watchers, who detect a certain continuity from the brutal repression of the Suharto period, through to the present, despite all hopes for reform. As the recent protests over the Freeport-Rio Tinto copper and gold mine in West Papua, and the arrest of opponents of Newmont's Sumbawa mining operations indicate, the fundamental problem of who should have control over Indonesia's natural resources and who should reap the benefits, persists.
FDI, assisted by infrastructure development, is promoted as a solution to Indonesia's continuing economic woes and Indonesia's creditors are pushing these policies. The International Monetary Fund (IMF), for example, states that the government's top priorities for this year are to "restore macroeconomic stability, promote growth, improve the investment climate, and provide a competitive and transparent framework for infrastructure development" (IMF, Indonesia, Fourth Post-Program Monitoring Discussions, 23/Jan/06).
Investment climate
Tackling the poor investment climate has been a target since the economic crash of 1997 and the resignation of Suharto in 1998. Annual FDI levels, which had risen as high as US$6.194 billion in 1996, collapsed into negative figures by 1998, falling as low as minus US$4.55 bn in the year 20001. From 2004 until now, FDI levels have been rising again, reaching $2.3 bn in 2005 and are predicted to rise to $3.8 bn this year. Approvals for FDI by Indonesia's investment coordinating board confirm an upward trend: these amounted to US$13.57 bn for 1,648 projects (excluding oil, gas and certain other sectors) in 2005, up from US$10.41 bn for 1,226 projects in 20042.
Political instability, legal uncertainty, decentralisation, corruption and security problems have been seen as major factors putting investors off Indonesia in the post-Suharto period. Some foreign investors who agreed contracts with the Suharto regime (again Newmont and Freeport-Rio Tinto are the most high-profile cases) have been forced towards a public accountability undreamt of before 1998. Nevertheless, investors generally continue to profit from poor enforcement of environmental laws, and from suppression of local dissent by the security forces.
The current government still has the difficult task of attracting foreign cash by introducing pro-investment policies and legislation, while needing to appeal to the voting public. The public is well aware of the negative social and environmental impacts of some foreign investment projects, thanks to more high-profile media reporting of cases like Newmont's ocean mine waste disposal in Sulawesi. A growing sense of nationalism is also feeding the sense of injustice at the huge profits companies make out of Indonesia's resources, while Indonesians suffering the impacts remain poor.
Recent pro-investment moves by the government include legislation passed in 2004 allowing 13 mining companies to operate in protected forests (see DTE 66) and a presidential regulation on land (Perpres 36/2005) permitting the compulsory acquisition of land (see DTE 66). A further draft presidential regulation on forest zone use (RPP Penggunaan Kawasan Hutan), published last year, permits the opening up of conservation areas to support development outside those areas3. This year, proposed revisions to the labour law, drafted as part of investment policy, have been condemned by Indonesian workers during mass protests in Jakarta.
If these measures do attract higher FDI inflows, it won't just be the investors that profit at the expense of workers, communities and the environment. Alongside the companies, are the 'ancillary' agencies - export credit agencies, corporate risk strategists, insurers, brokers and consultants - who profit from FDI but avoid responsibility when things turn sour. (See, for example, The Risks We Run, reviewed in DTE 67, for a portrait of the political risk insurance industry).
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Where FDI comes from
Japan, the UK and the USA have been big investors in Indonesia's resources sector for many years. In 2005, British investments worth US$1.53 bn were approved, more than any other single country, and clearly warranting prime minister Tony Blair's visit in March this year. Approvals by other big investors were: Singapore: $1.267bn; Japan: $916m and Australia $513.5m. Malaysia has become a major investor in its neighbour, especially in the oil palm plantations sector. Investment by Malaysian companies currently accounts for up to 30% of Indonesia's palm oil production. Total Malaysian investment approvals in 2005 amounted to $485.5m. China is becoming a major investor in Indonesia. One state-owned company plans to log hardwood in Papua and another is involved in the Tangguh project, also in Papua. Another Chinese company is reportedly involved in the oil-palm mega-project in Indonesia's border area with Malaysia, part of a colossal US$30 billion that China expects to invest in Indonesia over the next decade, largely in extractive industries and infrastructure projects. Last year Chinese investment approvals stood at $204.7m. (Bank Indonesia website at www.bi.go.id/ [figures exclude oil, gas and certain other sectors]; Jakarta Post 30&31/Mar/06; New York Times 29/Apr/06.)
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Security arrangements remain 'flexible'
Harsh security arrangements for foreign investment projects in Indonesia have led to human rights violations against local communities, forced evictions and suppression of indigenous resource rights. Disputes between investors and communities have often descended into violence as special forces police (Brimob) or the military are brought in to deal with demonstrators.
Foreign security companies may also be involved in dealing with communities who get in the way of a company's activities, as alleged in the violence in the concession of pulp producers, PT RAPP.
In some cases, security arrangements resemble a protection racket. Until recently, military protection was institutionalised, as the armed forces (TNI) were afforded a legal duty to safeguard projects classed as 'vital national objects'. This meant that large foreign investment projects given this status had no choice but to accept TNI security and the violations that resulted.
The public exposure in 2003 that Freeport-Rio Tinto was paying millions of dollars in military and police protection costs led to a reassessment of the TNI's security relationship with foreign companies. In August 2004, the Megawati government signed a decree (No. 63/2004) transferring authority for security to the operating companies concerned 4. Sixty six projects were said to be classed as 'vital objects', 33 of which were in the mining and energy sector.
However, the scope for the continued involvement of both police and TNI remains wide open under the 2004 decree. This obliges the police to provide assistance, and allows requests for the assistance of the military, but does not state under which conditions this should happen. It also sets out a timeframe of 6 months in which to transfer security from TNI to the project managers4. Armed forces commander General Endriartono had earlier explained that the military would provide a 'third ring' of security during a transition period in which the prime responsibility would be handed over to the operating company and the police (DTE 61). Two years later and with the six-month deadline long gone, the transfer of authority appears to be still at the discussion stage, with security, at least for some projects, still partially in the hands of the military. In January 2006, Endriartono confirmed that troops were still guarding Freeport and ExxonMobil, although these numbered less than one battalion, whereas before there had been a much greater force. "We're reducing now. But when we started to do this, ExxonMobil got scared and asked us for help", he said (Kompas 23/Jan/06).
This continuing 'flexibility' over roles for police and military is likely to be related to these forces' underlying motivations for acting as security guards: to justify their existence and to make money. Particularly in West Papua, an area of rich natural resources, the security forces are widely believed to be provoking conflict in order to justify their presence and maintain the scope for business activities. This remains a major concern both at the Freeport-Rio Tinto mine and at BP's Tangguh gas project.
But how secure is this kind of heavy-handed security anyway? The protection offered by having troops or police stationed around a project may eventually be outweighed by the explosive nature of the relationship with local people that can result, ending in major disruption for the company. The fact that angry crowds have been calling for Freeport-Rio Tinto's Papua mine to be closed down, for example, springs from the decades that the company has made vast profits, while Papuans remain in poverty and suffer human rights abuses at the hands of military security guards. As can been seen from the Newmont case in Sulawesi and the ongoing legal action against the company, public pressure for more accountability is exposing companies to an uncomfortable glare of publicity. This should prompt them to pay more attention to the negative impacts they impose on their hosts, as it becomes clear how far company profits accrue at the expense of communities.
The infrastructure summit
In January 2005, President Susilo Bambang Yudhoyono held an infrastructure summit in Jakarta to convince international investors that his new government was serious about getting them to Indonesia. All infrastructure projects were opened to foreign investment, with overall investment needed in infrastructure estimated at US$70 billion. The summit promised investors "massive and serious offers that have not ever [...] happened before".
Indonesia offered an 'Infrastructure Roadmap' and a list of 91 projects needing a total injection of US$ 22.5 billion. These included toll roads, gas transmission pipelines, water supply projects, a railway access network project, power plants, port and airport development projects.
Most projects are located in Java, with a few in Sumatra, Kalimantan and Sulawesi. None of the listed projects are for Aceh or Papua.
Ten laws are listed on the summit's website, including those on roads, oil and gas and water resources. Land, environmental and labour legislation is not listed.
A follow-up infrastructure conference is planned for mid-2006 (see www.indonesiainfrastructure.com/) sponsored by the IFC - the World Bank's private lending arm.
According to this 2006 infrastructure website, since last year, 24 projects that have 'gone under transaction', covering 17 toll road projects, 2 gas pipeline projects, 1 power generation project and 4 water supply projects with a total investment of US$ 6 billion. In addition, eight projects have reached 'concession agreement': 4 toll road projects and 4 water supply projects.
(Source: Infrastructure Summit website; State Dept website at www.state.gov/e/eb/ifd/2006/62358.htm)
West Java summit
West Java, one of Indonesia's most investment-rich regions, held its own summit in August 2005, offering 57 infrastructure projects worth US$3.5 bn (Rp 35 trillion) to the assembled 174 foreign and domestic investors who attended. The event was supported by the Asian Development Bank.
On the closing day of the summit, around 500 people from Jatigede in Sumedang district, staged a protest outside the meeting venue in Bandung. They were protesting that the Jatigede dam project, which has secured Chinese funding, has cheated them of compensation payments (see DTE 61). The West Java governor has refused to hold talks with the farmers, claiming the issue was settled in 2004. (Jakarta Post 20/Aug/05)
Notes:
1 www.oecd.org/dataoecd/33/45/19501972.pdf
2 IMF Indonesia country report 2005, www.unctad.org/Templates/Page.asp?intItemID=1923&lang=1). Figures on the Investment Coordinating Board website at www.bkpm.go.id/
3 Papua Pos 13/Aug/05
4 The decree is at www.sidoarjo.go.id/hukum/keppres/2004/TH_2004_NO_63.php See also DTE 62 and www.bisnis.com/ 24/Jun/04)