SOUTHEAST ASIA SPECIAL — Companies must learn political ropes

Mining operations in Southeast Asia must cope with some of the most difficult conditions in the world. But whereas obstacles created by thick jungle, mountainous terrain and swamp- land can, for the most part, be overcome, human relationships require a more delicate hand.

In Indonesia and Papua New Guinea (PNG), tribal societies that have existed for hundreds of years with little contact from the West have become, in effect, real estate agents for mining companies seeking to exploit the natural resource potential of those countries. And as revenues from mines on traditional land increase, so do the landowners’ demands for a larger cut. As London-based RTZ-CRA found out, these demands can be devastating.

Operated by RTZ-CRA subsidiary Bougainville Copper, the Panguna copper-gold mine, on PNG’s Bougainville Island, opened in 1972. RTZ-CRA held a 53.6% interest in the mine, and, as is common with many operations in that part of the world, the government also retained an interest (19.1% in this case).

Part of that royalty (a little less than 5%) was to be distributed to the provincial government of North Solomons, where the mine is situated. The government, in turn, was expected to distribute the funds to the locals who owned the land that the mine occupied. The landowners, however, were not happy with the government’s distribution plan.

“[The landowners] were dissatisfied with the way the mine royalties to the PNG government were distributed to the local populations,” explains CRA spokesman Ian Head. “The locals felt the arrangement was inequitable, and they resorted to violence.”

After riots and attacks on the mine and its personnel in May 1989, RTZ-CRA, which held a 53.6% share, shut down the mine. The situation worsened and the company evacuated all personnel in early 1990. No one has been back since, and the company does not even know how badly the mine and its buildings have deteriorated.

The political situation there has remained unstable, and RTZ-CRA has no plans to re-open the mine in the foreseeable future. Nevertheless, the company is, with two other companies and the PNG government, developing a gold project at Lihir, in the country’s New Ireland province. “The lesson learned at Bougainville by the government will be put in place at Lihir, so that such an occurrence doesn’t happen again,” says Head.

Progessive approach

Toronto-listed Placer Dome, rather than place the onus of responsibility on a relatively inexperienced government (PNG only gained independence from an Australian-based United Nations trusteeship in 1975), has taken a more progressive approach to operating in the country.

“We knew the problems of Bougainville had to be avoided,” explains James Cooney, the company’s director of international affairs, in reference to the early days of Placer Dome’s Misima gold project, which went on-stream in 1989. “There was a far less enlightened view of community relations in the 1980s, and [the Misima mine has] evolved far beyond that view of running a project in that part of the world.” As far as Placer Dome is concerned, the problems faced by RTZ-CRA at Bougainville need not have happened.

Placer Dome concluded, following consultations with anthropologists and sociologists, that it was in the best interests of the project and the local community for the company to contribute to the social and economic stability of the area. To that end, Placer Dome and the government agreed to the Tax Credit Infrastructure Scheme (TCS), whereby improvement projects such as schools and hospitals are built by the company in lieu of some taxes. A similar arrangement is in place at the company’s Porgera gold mine on the mainland.

The tax break, according to PNG’s ambassador to the U.S., Nagora Bogan, is a good idea. “It will help the areas in the vicinity of the mine and do a lot to develop infrastructure there.” Bogan explains that the provincial governments, while struggling to provide improved services to the country’s inhabitants, “don’t have the capacity or technical know-how for these sorts of projects.”

But Cooney says Placer Dome’s contribution to such development projects has made the company a sort of surrogate government. “We were not comfortable with that, but [these projects] were a matter of necessity and somebody had to do it. We cannot avoid a sort of paternalistic relationship with the community,” he says.

But whereas Placer Dome has achieved positive community relations in Papua New Guinea, Freeport-McMoRan’s (NYSE) Grasberg gold project in Indonesia, which is operated by subsidiary P.T. Freeport Indonesia (PT-FI), still is working to achieve this goal.

Situated in the province of Irian Jaya, Grasberg has, of late, been in the news as a result of claims of abuse by the Indonesian army, which provides protection for the mine. These claims prompted an investigation last year by a Jakarta-based human rights commission.

Freeport has stated it has no control over the military. In March, work at the mine was disrupted and four people were killed as local tribesmen rioted in and around the town of Tembagapura, where the mine is situated.

PT-FI has since announced, following consultation with local tribes, that it will provide increased economic and social provisions to the area. The Integrated Timika Development plan (ITD) calls for the company to increase fourfold its Irianese workforce in 10 years and provide a job skills training centre in the Timika area. Over the same period, PT-FI will contribute 1% of the project’s revenue (which could amount to $15 million per year) to those tribes affected by the mine.

“We think [the ITD] is valid and that it’s something the mining industry should be doing,” says Garland Robinette, Freeport’s vice-president of communications. “When the mill is finished operating, the very people who were close to the mine will have the job skills and training necessary to carry on elsewhere.”

Cooney agrees that job skills are essential and says that, with new projects under development all over PNG, the workers of Misima’s mine will be in demand once that operation closes, in six years. “There might be a new migration to [mainland] PNG to find work. I wouldn’t be surprised to see many of these people go to Lihir.”

Placer Dome’s TCS also contains a business development provision, and the company has managed such spinoff projects as a rehabilitation nursery, construction contractors, a sawmill and a brickworks, all of which will be viable even after the mine closes.

Bogan stress that, while his country relies on the outside expertise mining companies are able to provide, Papua New Guinea is starting to invest in its own future through increased education spending. “We all know mining will not be around forever,” he says. “We are still growing as a nation, and it will take time to obtain the requisite skills to undertake projects on our own.”