Bureaucratic
June 7, 2010
This is perhaps the greatest risk I assign to my investment in Southern Arc. With a newly distributed framework (from Central to Provincial and Regency levels), the processes for advancing mining projects in Indonesia are still a work in progress and lacking in transparency. The idea of downward distribution is a good one, bringing social benefits directly to the people immediately in the proximity of mining projects. The challenge is in the complexity of these relationships, achieving buy-in around the table, and ensuring that the benefits actually accrue to the people, rather than leaking out of the system into the hands of a few corrupt individuals. While this appears at first blush to raise the odds against success, three things work in favour for SA. One, the Central government’s mining department (ESDM) is not entirely taking a back seat here. It’s difficult to characterize that department’s role in terms we can easily relate to, but it seems to me one of paternalism, there to aid the lesser sophisticated levels of government as they step into greater roles of involvement, there to arbitrate in times of dispute, and there to protect against those ‘old boys’ who would play extortive roles on the local scene. Second, the distribution of rights to the regency level creates an environment in which the local populations have a reason to support mining projects. In the past, contracts have been with the Central government, with profits being stolen from a local population left to feel used and abused. Witness the ongoing shootings and sabotage at Freeport’s Grasberg mine in Papua. Third, Southern Arc is breaking new ground by including equity positions for local government in its local operating companies. Such precedent setting initiatives should go far in mitigating what I see as the greatest risk facing the Company. I expect historic bureaucratic stumbling blocks to be much reduced if not eliminated with this new structure. As Lyndon Johnson said of J. Edgar Hoover, “I would rather have him inside the tent pissing out than outside the tent pissing in.”
Unlike some of the major operators in this region, Southern Arc has spent meaningful time and energy investing in cultural awareness and sensitivity. Key personnel have lived in Indonesia for a long time, are married to Indonesian nationals, and as such, protect the Company from stepping on bureaucratic land mines. The bull-in-a-china-shop routine doesn’t work in Indonesia. What seems to us in the West as waiting time is often just a reflection of better understanding of how things work in that part of the world. Happy to place my trust in Hamish Campbell in this regard.
The new mining regime in Indonesia requires all virgin properties to undergo a tendering process. In such a framework, too much energy and resources will be expended on projects subject to being scooped by others sitting on the sidelines. In response, Southern Arc will only take on properties that have been previously worked and therefore have existing permits. By doing so, an entire section of new bureaucracy will be avoided.
Full mining licenses (called IUPs) are, in my view, a much less risky structured system than offered by many other countries, including here in the West. Once secured, an IUP provides for a minimum of 26 years tenure over a property, covering both exploration and production. Replacing the previous Contract of Work system (CoW), this system will cover everything from start to finish, including how many trees you have to plant in site rehabilitation after the mine is closed. Since December 2009, SA has been issued IUPs on five of its six properties. The remaining IUP, for West Lombok, is described as imminent (updated July 12, 2010). I accept this as so.
Each province in Indonesia has recently been responsible for creating and having approved by the Central government a new spatial plan. After more than three years of bureaucratic choreography, this plan (known to us as the Perda) provides a working framework for what activities can take place in what regions. mining, tourism, etc. On July 1st, the Governor of West Nusa Tenggara proclaimed the new spatial plan for his province. Signed on March 18th and enacted on March 20th of this year, the new Perda is critical as an enabler for all forward movement on Southern Arc properties located on Lombok Island. Finally made public with the Governor's proclamation, it is the last piece in the puzzle to be placed before the issuance of an IUP for the Company's flagship property on West Lombok. (updated July 12, 2010)