Foreign investment and regional autonomy

Down to Earth No. 46, August 2000

The Wahid government's emphasis on foreign investment prioritises the needs of multinational companies over sustainable, community based natural resource management

Soon after taking office, President Wahid pledged his commitment to foreign companies and declared his new government investor-friendly. This reflected Wahid's view of foreign investment as a key element in Indonesia's economic recovery. Earlier this year President Wahid embarked on a tour of European capitals to try and drum up interest among investors in the opportunities offered by Indonesia. He has emphasised the legal certainty of mining and other contracts signed during the Suharto era and has even offered military protection for mining companies whose operations are opposed by local communities.

These efforts have been criticised for continuing the business-oriented approach of the Suharto regime and increasing the likelihood of more human rights violations and conflicts over resources.

The emphasis on encouraging foreign investment also puts higher priority on the utilisation of resources than on environmental protection and community resource rights, adding to the "exploitation incentive" that comes from requirement that autonomous areas be economically viable (see DTE 46: "Democracy, control and natural resources").

However, investors have not been impressed by the way their needs have been looked after in the regional autonomy process so far. They are continuing to stay away from Indonesia fearing economic chaos and political instability. Among mining companies there is concern that contracts signed by provincial or district governments will lack legal authority and certainty. They also fear that they will have difficulty raising finance for their projects. (Jakarta Post 15/May/00)


D-I-Y taxation

Existing investors are jittery too, as the power struggle between central and local governments over taxes and levies is played out. Although President Wahid has pledged that existing contracts are not subject to change, local authorities have already started imposing taxes on companies, in an early attempt to secure returns on resources whose benefits, until now, have accumulated among a corrupt Jakarta elite.

Provincial and district level 'do-it-yourself' revenue-raising started in 1999, when regional governments began to claim their share of past revenue payments never transferred from Jakarta. In November 1999 members of the South Sulawesi provincial assembly (DPRD) demanded that the central government pay Rp 6 billion (then nearly US $900,000) in outstanding royalties from the PT Inco nickel mine. Central government was accused by newly assertive local governments of delaying payments and helping itself to more than its share of royalties, leaving the producing areas poor and underdeveloped.

Local authorities, tired of waiting for the central government to pay, up started imposing new taxes on companies operating in their areas in order to prove their areas were economically viable. By June this year, this practice had become so widespread that Regional Autonomy minister Ryaas Rasyid was moved to complain about the impact on Indonesia's investment climate. He reported that Singapore had added several provinces and districts in Indonesia to its negative investment list and that at least 13 foreign oil companies had stopped operating in Indonesia due to the levies demanded by local officials. "We call on the governors and the regents (district heads) to stop the practice since it will add burdens to the companies," he said. (Jakarta Post 20/June/00)



The case of local autonomy muscle-flexing which has received most publicity is that of the Newmont Minahasa Raya gold mine in North Sulawesi. The mining company, 80% owned by Newmont of the United States, found itself under order to close by the local court, when it refused to pay taxes on waste rock excavated at the mine. The decision was upheld by the provincial court but then overturned by the Supreme court in Jakarta. The company eventually agreed to pay the tax bill - between $400,000 and $500,000 after the district government agreed to drop the charges. The end result was a compromise deal with neither centre nor region losing too much face.

The case is also an illustration of the priority local governments - and the local judiciary - are giving to making money: NGO and local communities have accused the company of polluting the coastal waters in Buyat Bay near the mine but these considerations were not included in the local government's lawsuit.

Another Newmont operation, Newmont NTT, which operated the giant Batu Hijau copper mine on Sumbawa Island, is taking active steps to court local opinion in an attempt to avoid a repeat of this clash over taxes. It has made a point of publicising monthly the amount of tax it has paid to central government so that the local government can claim its allotted share. The company has also sought to buy off local concerns over job quotas and environmental pollution, caused by a tailings pipe leak last November, by allocating millions of dollars for community development (see Dow Jones Newswires 3/July/00). The Sumbawa operation uses the same sub-sea tailings disposal system as the company's gold mine in North Sulawesi - a practice that is illegal in Europe and North American countries (see DTE 35)

One of Indonesia's biggest corporate tax-payers- the US-based company, Freeport MacMoran, has come under intense pressure to hand over more of its profits for local use. Demands have come from within the Indonesian government despite the fact that Freeport, which is part-owned by British miners Rio Tinto, signed its contracts with the Suharto government and should therefore, according to President Wahid, not have to make changes. But Freeport is also under attack for its close association with the Suharto clique and its failure - thanks to a decree signed by the former President - to divest shares to Indonesian interests as agreed in its contract (see DTE 45).

The investment climate for foreign companies - as well as domestic investors - will almost certainly differ from region to region if decentralisation measures are implemented. Some NGOs fear a scenario where local governments do deals with foreign companies with even fewer environmental and social checks than they are now. Where local democratic controls and appropriate regulations are not in place, the implications for communities and their resources could be worse than if the disposal of contracts remained in the hands of central government.