Case Study 10 Mine closure in Kalimantan, Indonesia

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Case Study 10 Mine closure in Kalimantan, Indonesia Powered By Docstoc
					                 Partnerships for managing social issues in the extractive industries

                                              Case Study 10
                           Mine closure in Kalimantan, Indonesia
           Location        … Kalimantan, Indonesia                          Operator         … Kelian Equatorial Mining
           Investment      … US$220,000 (annual direct cost)                Partnership      … Mine Closure


                           This case study report describes and analyses the tri-sector partnership approach
                           applied to the management of environmental and social issues related to the closure of
                           the Kelian Equatorial Mining (KEM)
                           project. In the context of a highly dynamic
                           and difficult operating environment, this
                           partnership achieves positive outcomes and
                           promises further benefits for all participant
                           stakeholders, and it is likely that its overall
                           objective, ‘responsible mine closure’, will
                           be met. These benefits are primarily related
                           to the ability of the partnership to establish
                           the buy-in of all relevant stakeholders and
                           to create an accountable and transparent
                           framework for making consensus-based
                           decisions, which allow for the collective          The KEM mine pit (source: PT KEM)
                           ownership of decisions and actions taken. The
                           case study therefore shows that tri-sector partnerships can be successfully implemented
                           in a highly dynamic and even conflict-prone institutional context, but that this requires
                           far-reaching commitment from all participants – the company in particular.

                           The tri-sector partnership approach

“The partnership           It is becoming increasingly important for mining companies to manage social issues
allowed for structured     resulting from mining activity and demonstrate maximum development benefit. This is
dialogue, instead of       especially pertinent in the closure phase of mine operations, particularly in rural areas
roadblocks or              where communities are dependent on the socio-economic benefits of the mine. Tri-sector
violence. It’s not just    partnership between the company, government, and civil society is emerging as a
about the outcomes,        potentially effective and efficient mechanism for companies to fulfil these social
but about how people       responsibilities. The fundamental philosophy of these partnerships assumes that each
are thinking, how          sector has unique resources, experiences or contacts to offer. By working together to
they’ve developed a        identify these ‘core complementary competencies’, each sector is able to capture benefits
                           that exceed those that they would be able to achieve on their own.
awareness and an
appreciation of
others. This is the key
element: to build          Case study context
trust. If you don’t
have the trust, then       KEM operates a large open-cut gold mine in a remote area in East Kalimantan. The mine
you don’t have             is scheduled to close in 2004. The far-reaching political and institutional changes that
anything.”                 have taken place in Indonesia since the fall of President Suharto in 1998 have also
         Neil Makinuddin   impacted significantly on the mine’s local context, by way of, for instance, the increased
        MCSC Facilitator   importance of local government and an increased need for local people to participate in
                           and benefit from decision-making. These institutional changes, however, also contributed

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                           to a large degree of uncertainty at the local level, and in connection with land
                           compensation-related grievances, this led to a period of troubled relations between KEM
                           and local communities in 1999 and 2000 (culminating in a 40-day shutdown of

                                                                These tensions were particularly problematic because
                                                                the successful management of closure-related issues,
                                                                such as the loss of local livelihoods, dam safety, and
                                                                environmental concerns, required the involvement of
                                                                local communities and government. For the
                                                                company, improved relationships with local
                                                                stakeholders and a responsible mine closure planning
                                                                process were vital both for continued operation until
                             Community protest (roadblock) in   closure and for reputation assurance after closure.
                                      early 2000

                           Partnership process and structure

                           Early attempts to initiate a partnership for mine closure were hampered by the troubled
                           relationship between KEM and local stakeholders, which mainly concerned land
                           compensation-related grievances. It was therefore necessary first to implement a
                           dedicated and mutually agreed grievance-resolution process. The dispute did not need to
“We spent the first        be resolved entirely, but what was required was the initiation of a sincere and respected
few meetings               process that all parties believed would eventually lead to the resolution of all grievances.
establishing the           This allowed all stakeholders to come together to explore and design the partnership
Charter of the MCSC.       structure.
It was critical to do
that; it defined the       The Mine Closure Steering Committee (MCSC) was established in late 2000. Its first few
various actors’ roles      meetings were dedicated to defining the objectives of the MCSC, its decision-making
and responsibilities,
                           mechanisms, and the roles and responsibilities of the representatives. It was also decided
the way we make
decisions, the way we      that there would be four Working Groups (dams, environment, site uses and assets, and
resolve conflicts,         community development and regional planning), which research, explore, and propose
what the criteria of       options as directed by the MCSC, and are also responsible for consulting with
project selection is,      constituents. These decisions were formalised in the MCSC Charter, which provides a
and so on, and we          vital guide and point of reference for the ongoing process, allowing the partnership to
keep referring back to     adapt to changing circumstances or objectives. Eligibility for MCSC membership is
our charter time and       defined in the Charter as those “who are affected by, or who can affect, the closure of
time again.”               Kelian Mine”. This includes representatives from the company (at operations and
   Dr Geraldine McGuire    corporate level), local, provincial and national government, and local community groups.
      MCSC Secretariat
                           While the MCSC consists of high-level representatives (it is chaired by the head of the
                           District Government and the Managing Director of the mine), the Working Groups
                           generally comprise more technically orientated representatives. Table 1 summarises the
                           partnership development process.

                           The Charter stipulates a clear focus for the
                           partnership, mutually agreed criteria for
“All stakeholders are      membership, roles and responsibilities of members,
equally important in       consensus-based decision-making principles, and
the MCSC; all have a       dispute resolution mechanisms. A list of criteria to
voice, if we can’t all     be used in devising and deciding among options
agree then there           was also established, thereby providing for an
won't be a decision.”      objective framework for decision-making. These
           Pius Nyompe     far-reaching measures to increase accountability         A meeting of the MCSC
       LKMTL Executive     and transparency, the company’s commitment to a
                Director   consensus-based decision-making process, the MCSC Secretariat’s proactive

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                communication strategy, separation of the political and technical aspects of decision-
                making, and effective third-party facilitation may be seen as key success factors for the
                partnership’s success.

                The MCSC and the Working Groups essentially constitute a participatory, deliberative
                decision-making forum. The implementation of decisions made is not an explicit
                objective of the partnership, although the forum assigns roles and responsibilities for such
                implementation. However, there are a number of project- or issue-based partnerships,
                particularly with respect to community development projects, that have varying degrees
                of inter-relationship with the MCSC process. The most notable example is the school
                dormitory, which is a direct result of MCSC discussions and is currently being
                established with the active participation and contributions from the company, district
                government, and local communities.

Table 1: Summary of partnership development

 Period        Local context                          Partnership-related activity            Outcome
 Partnership Exploration
 Mid-1999 to   Community and employee protests        Initial objectives of the partnership   Heightened awareness of the need
 late 2000     related, inter alia, to grievances     and potential partners are              for an integrated and committed
               about land compensation;               identified, but KEM’s initial           approach to building better
               concerted dispute resolution           partnership efforts are hampered        stakeholder relationships and
               efforts in mid-2000 achieve            by land-compensation dispute            planning for mine closure;
               agreement on compensation                                                      improved relationships due to
               payments and improved                                                          grievance-resolution process
               relationships between

 Partnership Building
 Late 2000     Ongoing implementation of the          Mine Closure Steering Committee         Initial agreement on the purpose,
 to mid-2001   land-compensation process;             (MCSC) established; negotiations        roles and responsibilities,
               improved relationships between         and agreements on process               composition, and decision-making
               KEM and local stakeholders             issues, resulting in the MCSC           modalities of the partnership –
                                                      Charter; initiation of partnership      formalised in the MCSC Charter
                                                      communication and accountability

 Partnership Maintenance
 Mid-2001 –    Land-compensation process nears        Quarterly meetings of the MCSC          Continual improvement of
               completion; relationships between      and the Working Groups,                 partnership structure to suit
               stakeholders improve on the basis      convened by independent                 stakeholders’ requirements;
               of the MCSC and its initial tangible   facilitators; increased deliberation    tangible sense of progress and
               outcomes                               and agreement on modalities and         higher levels of buy-in from most
                                                      key indicators/objectives of the        stakeholders (although challenges
                                                      partnership                             remain); initial agreements
                                                                                              reached on key closure issues and
                                                                                              responsibilities for implementation

                Outcomes of the partnership

                Everyone interviewed stated that the partnership was ‘on track’ to achieve its overall
                objective of implementing a ‘responsible mine closure’ with sustainable benefits for local
                communities. Most of the objectives identified by the various partners as indicators of
                success in early 2002 have been, or are likely to be, met by the partnership. Box 1 lists
                some of the key agreements reached by the MCSC prior to May 2002, as well as some of
                the community development initiatives supported.

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                            Box 1     Some agreements reached and initiatives supported by the MCSC (prior to May 2002)

                             ·    Agreement on international standards and procedures to guarantee dam safety; this includes an
                                  agreed process for the formulation of a Risk Management Plan, agreed distribution of responsibilities,
                                  as well as the identification of suitable trust-fund options.
                             ·    Agreement on high water-quality standards for drainage from post-closure mine site, including the
                                  identification of resulting implications for post-closure site uses, such as the need for wetlands.
                             ·    Identification of a preferred 'Integrated Site Use' – chosen from a range of options – which requires,
                                  inter alia, the demolition of all site buildings, the use of the building materials at a nearby village, and
                                  the establishment of wetlands for water-quality maintenance.
                             ·    Implementation of a drilling and sampling programme to ascertain feasibility of mining alluvial gold
                                  deposits with benefit-sharing among the partners (as a prerequisite to establishing the wetlands).
                             ·    Agreement on suitable hand-over arrangements (from the company to relevant government institutions)
                                  for maintenance and operation of community infrastructure established by the company (e.g., roads,
                                  schools, clinic, electricity supply).
                             ·    Agreement on statutory and contractual requirements for the company with respect to mine closure.
                             ·    Construction of school dormitory as a sustainable solution to the absence of a school bus.
                             ·    Coordination of various community development projects, including support for agricultural projects, the
                                  establishment of self-help groups, and the identification of suitable trust fund options for sustainable
                                  community development after closure.

                           Many respondents noted, however, that the partnership might yet fail in achieving its
                           objectives, but that this would be due to circumstances beyond the control of any one
                           party. Significantly, all respondents felt that this was the best possible way of dealing
                           with the considerable challenges faced by mine closure, and that alternative approaches
“For every month
                           would not have had such positive outcomes.
delay [in mine
closure[ we are
probably looking at        From a business perspective, the benefits of the partnership include a marked decrease in
indirect costs in the      the risk of disruption to mining operations prior to closure, an increased likelihood of
millions of dollars.       effective returns on mine-closure investments, effective legal compliance, effective
[…] If we don’t            returns on social investments, and reputation assurance at local, national, and
achieve responsible        international levels. Hence the direct annual costs of the partnership, US$220,000,
mine closure, KEM          compare favourably to the orders of magnitude of potential savings (“millions”).
and Rio Tinto are
going to have              Development benefits of the partnership relate to the continued operation of the mine,
obligations here that
                           increased information about the closure, less likelihood of conflict among community
go on forever.”
       Charles Lenegan
                           groups, more effective community development projects, improved governance, and
         KEM Managing      increased human and social capital in local communities. In terms of governance, the
                Director   partnership provides an important model for mine closure, by providing both procedural
                           and substantive standards for the management of a wide range of mine-closure issues
                           (e.g., dam safety). It also provides a model for participatory decision-making and
                           accountable governance – it is widely seen as a ‘pioneer process’ – and this is particularly
                           significant in this time of political and institutional change in Indonesia. Table 2
                           summarises the business, developmental, and governance benefits of the partnership.

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Table 2: Summary of partnership benefits.

 Benefits/indicators               Impact of partnership
                                                      Business case
 Decreased investment risk:        Partnership is widely seen as contributing to better relationships and improved planning,
 mine is likely to operate until   preventing possible causes for community protest
 Increased effectiveness of        MCSC provides platform for effective closure planning with stakeholder buy-in
 mine-closure investments
 Legal compliance                  MCSC provides platform for clarifying legal requirements and provides process for meeting
 Increased effectiveness of        Most community development projects benefit from the partnership by means of improved
 social investments                communication, leverage of critical resources (e.g., land), and improved governance
 Reputation assurance              Partnership is widely seen as a ‘model’ process, therefore improving the company’s
                                   reputation at a variety of levels; better relationships with local stakeholders improve local
                                   reputation; spread of responsibility amongst partners for decision-making and post-closure
                                   management diminishes likelihood of company being solely blamed in the event of negative
                                   post-closure impacts

                                                     Development case
 Maintained socio-economic         Partnership has contributed to continued operation until closure, on the basis of improved
 benefits from mine operation      planning and relationships
 Improved access to                Partnership has provided a forum for proactive supply of information, including also a
 information and less              communication strategy with the wider community
 likelihood of conflict
 More effective / sustainable      Partnership has allowed for accountable handover arrangements of KEM community
 development projects              development projects, and has also contributed to the successful planning and
                                   implementation of new projects, e.g., the dormitory
 Increased human and social        Partnership has contributed to the improvement of skills and confidence amongst local
 capital                           community representatives, has contributed to improved community representation
                                   structures, and has improved relations between communities and government, and among
                                   different community groups

                                                     Governance case
 A model for mine closure          MCSC process is recognised as a model for mine closure in Indonesia, indicating the extent
                                   to which the process is seen to hold replicable lessons for other mine closures
 A model for participatory and     The process has set a high standard for the participation of local communities in decision-
 accountable governance            making and for transparent and accountable governance
 Improved responsiveness,          Partnership has provided for improved interactions between government and local
 accountability and visibility     communities, and has allowed government to make public commitments to respond to
                                   communities’ concerns
 Improved cost-effectiveness       Public spending, e.g., on the dormitory, has increased community benefits due to
 of social spending; improved      contributions from other partners; the partnership has allowed for effective coordination
 regional planning; and better     between government and company plans and activities, as well as between different levels
 cooperative governance            and departments within government
 Human capital development         Partnership is widely seen to have contributed to increased skills in negotiation and
                                   participatory decision-making, as well technical competencies

                 Emerging lessons

                 Many of the lessons of this case study relate to the relationship between tri-sector
                 partnership and context. At KEM, far-reaching socio-political and institutional changes at
                 a national and regional level, and troubled relationships between the company and local
                 stakeholders, provided crucial incentives for an adoption of the partnership approach, as
                 well as significant challenges. The fact that many participants in the process feel that
                 ‘there was no alternative’ indicates that tri-sector partnership may be particularly apposite
                 in instances where the stakes are high – as in the case of mine closure – and where
                 distrust amongst stakeholders requires a high degree of commitment to accountable,

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“There has to be real        transparent, and consensus-based decision-making. Far-reaching commitment from the
commitment to this           company has been an especially important factor, demonstrated by the adherence to
process and it’s not         consensus-based decision-making rules and the designation of the MCSC as the strategic
just an add-on. For          decision-making body for the company in all matters related to closure. A key lesson,
KEM the MCSC with            therefore, is that tri-sector partnership may be an effective, even necessary, approach in
its various                  challenging circumstances, but that such a partnership cannot be implemented half-
representatives are          heartedly.
the strategic
decision-makers for
the mine closure
                             The case study also shows that a tri-sector partnership cannot be implemented unless a
project. This is an          parallel and separate process is initiated in order to deal with unresolved grievances. This
enormous and                 process need not be completed prior to partnership building, but needs to have the
frightening thing,           commitment and buy-in of all relevant stakeholders.
especially for mining
companies, who like          Other success factors of the MCSC process worth considering in difficult circumstances
to have complete             are the following:
control over all             · The assistance of external, trusted facilitators;
                             · Dedication early in the process to negotiating and determining a jointly agreed
   Dr Geraldine McGuire
      MCSC Secretariat            process and decision-making principles;
               Manager       · Demonstrated commitment from top-level stakeholder representatives; and
                             · Persistent dedication to involving local stakeholders and supporting stakeholder
                                  representatives in their role as intermediaries with their constituents.

                             The case study demonstrates that tri-sector partnerships are highly effective in helping
                             companies improve and maintain their reputation, in a variety of ways. In particular, it
“We could have done          suggests that the company can secure itself against reputation damage after closure by
it ourselves and we
could have told
                             implementing and demonstrating commitment to a process that is respected and
people what we were          appreciated by a wide array of key stakeholders. This is especially because the MCSC
doing, and we could          process spread the responsibility and ownership for decisions taken in mine-closure
have then tried to           planning. It also provided all stakeholders with a better understanding of why these
persuade them to buy         decisions were taken. In this way, even events occur that could harm Rio Tinto’s
in. The most                 international reputation, they are less likely to be blamed unfairly on the company, and
important thing is the       respected local stakeholders are more likely to defend its reputation.
buy-in, and we would
not have got it! So my       Finally, the case study has shown how the MCSC, essentially a strategic, deliberative
conclusion would be          forum, has interacted with, and benefited, implementation partnerships at the project
that I don’t think there
was another way that
                             level. The dormitory is the most illustrative example in this regard. This ‘nested’
would work.”                 complementarity may also apply at higher levels, such as industry-level partnerships.
        Charles Lenegan      There is hence considerable scope for developing a better understanding of the potential
         KEM Managing        for partnerships at different scales, and the development of more explicit linkages among
                 Director    them.

       Contributors   Authors: Ralph Hamann of the Secretariat of the Natural Resources Cluster, BPD.
                      Editor: Paul Mundy

       Published      Natural Resources Cluster, Business Partners for Development, c/o CARE International, 10-13 Rushworth Street, London
                      SE1 0RB, Tel 0207 934 9334; Fax: 0207 934 9335; e-mail: :
                      Full Case-study available at:

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