BUSINESS

Mining for favors

Bre-X unearths ethical questions in Indonesia

PATRICIA CHISHOLM November 11 1996
BUSINESS

Mining for favors

Bre-X unearths ethical questions in Indonesia

PATRICIA CHISHOLM November 11 1996

Mining for favors

BUSINESS

Bre-X unearths ethical questions in Indonesia

In Indonesia, the rules of business may be fluid one day, immutable the next. Those who fail to keep up often find themselves benched, with very little warning. David Walsh, chief executive of Calgary-based BreX Minerals Ltd., seemed to acknowledge that reality last week with the announcement that the gold-mining junior has formed an alliance with PT Panutan Duta, a company controlled by Sigit Haijojudanto, 45, the eldest son of Indonesia’s autocratic ruler, President Suharto. Shareholders were relieved, ending a flight from the company’s stock that began early last month, after two other Indonesian companies claimed a 40-per-cent interest in the richest section of Bre-X’s monstrous gold find in Borneo. Most believe the connection to the all-powerful ruling family will cut a swath through the legal wrangling that has stalled the project. “They did what they had to do,” said Frank Giustra, chairman of Vancouver-based Yorkton Securities Inc. “It’s commonly known in the industry that if you want to get anywhere in Indonesia, you need one of the Suharto children.”

Despite the recovery in Bre-X’s share price, there was uneasiness over the deal among some in the business community. Giustra noted that, while such transactions are far from unheard of, the Bre-X deal is in a class of its own. “This one is over the top, in terms of being blatant,” he said. Bre-X officials declined to comment last week. In a written statement outlining the terms of the transaction, the company made no mention of the connection with the Suharto family.

Of course, most companies do not want to

discuss the problems of dealing with corruption in foreign countries, but at least one Canadian group is trying to bring the issue into the open. Later this month, a handful of companies, including Canadian General Electric and gold-mining giant Placer Dome Inc., will launch the Canadian branch of Transparency International, a German-based business coalition committed to cleaning up international business practices. The motivation is partly

practical. After all, notes York University business professor and Transparency member Wesley Cragg, corruption sucks revenue from a company’s legitimate operations and creates something that most businesses hate—an unpredictable political environment.

But there are other, more ominous considerations, Cragg adds. Accepting corruption as a locally condoned practice in countries like Indonesia, where the human rights record is abysmal and the governing family has grown wealthy by manipulating the bureaucracy, perpetuates a vicious circle. The rationale that corruption is the norm soon becomes a self-fulfilling prophecy. “This is a pattern established by a ruling elite. People have to do it because of the power of the family, not because it is a local custom,” Cragg says.

There is another downside. Cragg says companies often discover that, in the murky world of patronage and influence-peddling, there are rarely any guarantees. Bre-X, for instance, hardly appears to have solved its regulatory problems in Indonesia. Last week, Indonesia’s director general of mining, Kuntoro Mangkusubroto, announced that the vital government approvals necessary to be-

gin mining operations will be withheld until the company resolves its dispute with the two Indonesian companies seeking a stake in the project.

Bre-X might have avoided some of its current problems, some experts say, if it had sought a strong Indonesian partner from the beginning and established government contacts early. Such arrangements are common around the world. Walsh, a stock promoter who ran Bre-X out of his Calgary basement until last spring, may have tried to move too quickly. Although Bre-X acquired its gold-rich Indonesian properties in 1993, Walsh

did not meet Indonesia’s director-general of mining until last June, at a Toronto dinner. Such oversights appear to have been costly: Bre-X’s consulting and services contract with the Suharto family company will cost it a staggering $1 million a month for 40 months. As well, Bre-X will give the Indonesian company 10 per cent of its profits, with nothing in return, a concession that

could cost hundreds of millions of dollars.

In an unfamiliar and corrupt business climate, is it possible to avoid payoffs altogether? Jim Cooney, director of international and public affairs for Vancouver-based Placer Dome, often travels in regions where the company has interests: Africa, Southeast Asia and South America. “There is only one way to work around it,” Cooney says. “That is to build a critical mass of legitimate allies who have some concurrent interest with *yours, like other businesses and the World Bank.” Added Cooney: “You might ultimately spend as much money as you would in a bribe— which is a simple way of getting things done—and it’s much more demanding in terms of time and energy, but in the end, there is likelihood of change.” Taking that approach, he says, sometimes adds several years to a project—a delay Bre-X was apparently unwilling to accept.

PATRICIA CHISHOLM