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China-backed mine in Indonesia poses high risk, World Bank watchdog warns

The mouth of the China-backed zinc and lead mine, Dairi Prima Mineral, in Indonesia’s North Sumatra province. Image by Ayat S. Karokaro/Mongabay Indonesia.

  • An assessment by the World Bank’s internal watchdog has found indications of “extreme” environmental and social risks posed by a China-backed zinc and lead mine in Indonesia’s Sumatra Island.
  • Among the identified risks are the potential for the mine’s tailings dam to collapse as it would lie on a fault line, as well as the risk of acidic drainage from the dam contaminating surface and groundwater sources that serve local communities.
  • While the project was suspended earlier this year in the face of protests, local and international activists say the findings should be reason enough for it to be terminated outright.

JAKARTA — A China-backed zinc and lead mine being developed in Indonesia’s Sumatra Island may pose “extreme” risks to the environment and nearby communities, according to an assessment by the World Bank’s internal watchdog. Public opposition to the project forced the developer to suspend it indefinitely earlier this year, but not halt it.

The WB’s Compliance Advisor Ombudsman (CAO) carried out a preliminary review of the mine in response to a community complaint made in October 2019. The complaint argued that the WB is exposed to the risks posed by the mine because its private sector arm, the International Finance Corporation (IFC), has ties to the mine developer, Dairi Prima Mineral (DPM), a subsidiary of China Nonferrous Metal Industry’s Foreign Engineering and Construction (NFC).

In 2015, IFC made a $286 million equity investment in Postal Savings Bank of China (PSBC), the fifth-largest commercial bank in China, which had active working capital loans to NFC and its parent company, China Nonferrous Metal Mining (Group) Co. Ltd. (CNMC).

In its review of available information, the CAO found a number of risks in the mining project.

The first one is the possibility of the failure of the mine’s tailings dam.

DPM proposed building a 25-meter-high (82-foot) starter dam to store the first eight years of tailings production and prevent toxic waste from flowing downstream. But the CAO’s appraisal found shortcomings in the design of the proposed tailings dam as well as in the assessment of associated risks compared with good international industry practice.

The shortcomings are even more pronounced due to the topographical, geological, seismic and climatological characteristics of the site, the CAO noted. The region where the mining site is located is mountainous and prone to seismic activity, with a tropical rainforest climate that includes heavy rains from September to May.

This area is also in an active earthquake zone, near the Sumatra subduction megathrust that in 2004 and 2005 produced earthquakes of very high magnitude, the CAO said.

Richard Meehan, an expert on dams in areas with seismic activity, said in his review of the tailings dam’s latest environmental impact assessments in 2021 that the proposed site has unstable foundations as it’s underlain by volcanic ash deposits rather than stable bedrock.

Taking into account the extreme earthquake potential and high rainfall in the project area, any tailings dam in the location DPM has proposed is almost certain to collapse, even if DPM uses a sturdier rock-fill dam wall to retain the tailings, Meehan said.

“[W]hatever the strength of the dam wall might be (even if it is massive concrete), if it rests on unstable foundations, it will fail by sinking, spreading or sliding, with either overtopping of the sunken dam wall or a local space breach that then enlarges and may substantially empty the tailings storage facility with discharge to the lands below,” he said. “A structure built on a failing foundation will not stand.”

But the developer says the earthquake risk is no greater than for most other projects in Indonesia, which is crisscrossed by fault lines.

“In our location there’s also a hydropower plant as well as a 23-kilometer [14-mile] underground tunnel, which sits right on the fault line,” Achmad Zulkarnain, a spokesman for DPM’s minority owner, Indonesian mining giant PT Bumi Resources Minerals (BRM), told Mongabay in Jakarta. “And there’s no problem with them. They were built many years ago. So this [our project] should be fine.”

As for the concern over the unstable terrain, Achmad said the developer would carry out mitigation measures to ensure that the tailings dam doesn’t fail.

Map of Dairi district in North Sumatra province, where the zinc and lead mine is located in. Image courtesy of ewesewes/wikimedia commons.

‘Significant and potentially irreversible impacts’

Meehan and the CAO also found the tailings management and storage to be lacking in critical detail.

Meehan pointed out that the stability analysis of the dam was carried out by a newly established engineering firm, China Nerin, using specifications from 2012 that have been superseded by standards issued in 2019.

The latter standards account for recent major mine tailings disasters and attempt to mitigate against them. Meehan called the use of the 2012 standard “a significant mistake or misrepresentation.”

Achmad said that if the Indonesian government body that evaluates the safety of dams deemed the standard used in this project’s stability analysis to be outdated, then the developer would conduct a new analysis using the current standard.

“If we’re told to repeat [the analysis], then we will do another study. It’s fine,” he said.

The CAO also noted that there are no details available on the proposed tailings storage facility beyond the first eight years of the mine’s projected 30-year life. It said DPM would need to significantly increase the size of the starter dam to a height of 75 m (246 ft) or higher to store the tailings produced over the mine’s expected life span.

“These factors give rise to preliminary indications of risks of tailings dam failure, which could result in significant and potentially irreversible impacts on the lives and livelihoods of several thousand villagers located downstream of the mine,” the CAO wrote.

Achmad said the dam is designed for only eight years because the mine’s potential reserve is estimated to last that long.

“If we find new potential, then we would add to the capacity of the tailings dam,” he said. “Why would we build a big dam if we would only mine a small amount [of minerals]?”

The CAO warned that a tailings dam failure would be considered “extreme” under internationally accepted guidelines. According to Steve Emerman, an expert on lead-zinc mine environmental issues, the tailings dam’s collapse would likely lead to widespread deaths in surrounding communities and long-term environmental destruction.

There are 11 communities living around or downstream of the proposed tailings dam.

Map of the China-backed zinc and lead mine, Dairi Prima Mineral, in Indonesia’s North Sumatra province.

Other potential risks

There are also risks of high-acidity content leaching from the planned tailings dam and contaminating surface and groundwater sources that serve local communities, the CAO said.

It said the sulfidic tailings are expected to generate acidic drainage with high concentrations of dissolved metals, particularly lead and zinc, and that this drainage will require treatment prior to release into water bodies in the area.

Achmad said DPM would treat the acidic drainage and rainfall runoff in sediment ponds before discharging into a separate pond with fish in it — the idea being that if the fish survive, the acidic drainage has been treated properly.

The CAO, however, said DPM didn’t specify which treatment method will be used and didn’t adequately describe the treatments planned in the company’s documents. DPM also didn’t assess whether the method would be appropriate and effective, the CAO said. The sediment pond’s capacity may also be inadequate to handle the likely high suspended sediment loads and flow rates, the CAO said.

Another potential risk is associated with an onsite facility for storing explosives, built in 2020 and located just 50 m (164 ft) from a settlement. Achmad said the warehouse is only a temporary storage facility, and DPM plans to relocate the warehouse further away from the settlement.

The CAO said it’s unclear whether DPM has provided appropriate mitigating and safety measures, and thus the facility presents a potential risk for the nearby community.

In 2005, an explosion at a copper mine owned by CNMC in Zambia killed 51 miners, making it one of the deadliest blasts in the nation’s history.

“[I]f the DPM mine was a direct IFC investment it would be a Category A project — the highest E&S [environmental and social] risk level,” the CAO said.

Category A projects are defined as “business activities with potential significant adverse environmental or social risks and/or impacts that are diverse, irreversible, or unprecedented.”

The findings from the CAO’s review should be reason enough for the mining project to be halted and relocated elsewhere, said Tongam Panggabean, the director of BAKUMSU, a legal advocacy group in North Sumatra province that’s representing local communities opposed to the mine project.

“The World Bank has confirmed that the Dairi mine is a disaster waiting to happen,” he said. “If the Indonesian government greenlights this project now, it’s clear they are willing to sacrifice these communities’ safety to big business.”

An aerial view of the onsite facility for storing explosives in Dairi Prima Mineral’s concession, built in 2020 and located just 50 m (164 ft) from a settlement. Image courtesy of Jatam.

Local communities sidelined

Besides environmental risks, there’s also the potential for the mine to harm local communities, the review found.

For one thing, there’s been lack of disclosure of information and of informed consultations with communities potentially affected by the mine, the CAO said.

And while most of the villagers surrounding the mine self-identify as Indigenous peoples, DPM hasn’t identified them as such and hasn’t consulted with them according to good international industry practice, according to the CAO. This suggests the need for free, prior and informed consent (FPIC) may have been overlooked, the CAO said.

“We have never agreed to this enormously risky mine. We have never been given an opportunity to decide about this project,” said Rainim Purba, one of the villagers who filed the complaint to the CAO. “It has the potential to kill us, and we have made it abundantly clear that we do not want this dangerous mine and its hazardous waste stored in our backyard.”

Achmad said DPM had consulted intensively with the owners of ancestral lands in the mining site and gained their approval.

Tongam acknowledged that some in the community support the mine, but questioned whether the project’s risks and benefits were conveyed to them honestly.

“We don’t blame locals who support [the mining project], but has the company truly given objective information to the public so that they could give approval or understand [the impacts] of a certain policy in their area?” he said. “That’s what needs to be questioned.”

‘Systemic’ shortcomings in IFC’s investments

Besides looking at the potential risks, the CAO also looked into whether there was negligence on the part of the IFC that led it to overlook the risks when investing in Postal Savings Bank of China, a creditor of DPM’s parent company.

Under IFC policy, the mine developer must comply with World Bank standards for social and environmental protection. And the legal agreement between the IFC and PSBC made no mention of any exceptions to the application of the World Bank standards, meaning PSBC was required to apply the performance standards to all the operations it financed — including DPM’s mine project.

The IFC said it was confident in PSBC’s capacity to apply the World Bank standards to its loans “within a reasonable period.”

But the CAO said it’s not clear how the IFC reached such a conclusion. At the time of investment approval, the IFC didn’t have a detailed understanding of PSBC’s risks associated with lending activity or its capacity to manage that risk due to limited access to client information.

When looking at PSBC’s environmental and social management system, the CAO found it didn’t refer to or require the application of the World Bank standards to its loans as required by its investment agreement with the IFC. This indicates the IFC didn’t adequately review and supervise its investment in PSBC in accordance with its environmental and social requirements, according to the CAO.

The CAO said these shortcomings are likely systemic in nature since similar problems have been identified in the CAO’s reviews of other IFC banking investments.

All these led the CAO to conclude that there’s a plausible link between the potential harm flagged by the complainants regarding the DPM mine and potential noncompliance in the IFC’s review and supervision of its investment in PSBC.

Heavy equipment operated by China-backed zinc and lead mine, Dairi Prima Mineral, in Indonesia’s North Sumatra province. Image by Ayat S. Karokaro/Mongabay Indonesia.

Question of ‘leverage’

In their responses to the complaints filed by local communities on the mine’s potential risks, neither the IFC nor PSBC addressed the concerns raised by community members.

Instead, PSBC said it’s not linked to DPM and that DPM is “far beyond its leverage,” requesting that the CAO close the case.

The IFC said any risks or impacts related to the project can’t be linked to PSBC or the IFC because the working loans from PSBC to CNMC or NFC were subject to national legal and regulatory requirements, which in this case is Chinese law.

Under Chinese law, it’s not possible for CNMC or NFC to either use the proceeds of PSBC’s working capital loans to support a subsidiary or affiliate or to use the working capital loan proceeds to invest in an enterprise outside China such as the mine in North Sumatra, according to the IFC. In short, any loans that either CNMC or NFC obtained from PSBC could not have gone toward the mining project in Indonesia.

However, the CAO pointed out that the Chinese law referenced by the IFC and PSBC only prevents the use of working capital funds to finance fixed assets, equity, or capital investments. It doesn’t restrict the use of working capital funds to support business activities outside China.

And this is what appears to have happened with the DPM mine project, according to the CAO.

Since NFC is the majority owner of DPM, it’s responsible for many aspects of the mine’s operation and management, such as plant engineering, procurement of supplies, construction, and installation and commissioning supervision.

“NFC’s business activities to support DPM were within the potential use of proceeds of PSBC’s working capital loans to NFC,” the CAO said. “By providing working capital to NFC, PSBC became financially exposed to its investee’s general operations, including activities related to engineering, procurement and construction for the DPM project.”

But while the CAO found the mine poses risks to the environment and local communities, and thus meets the criteria for a compliance investigation, the watchdog decided to not investigate the project further after PSBC reported during the appraisal process that it no longer had active loans with either CNMC or NFC. The IFC retains its active investment in PSBC.

The entrance into the onsite facility for storing explosives in Dairi Prima Mineral’s concession, built in 2020 and located just 50 m (164 ft) from a settlement. Image by Ayat S. Karokaro/Mongabay Indonesia.

‘Too big to fail’

That hasn’t allayed the concerns of communities at highest threat from the project’s potential risks.

Community members held a protest on June 30 outside the district government headquarters and legislature in North Sumatra’s Dairi district, demanding that DPM leave the area.

Dairi district is located on the western shore of Lake Toba, an ancient volcanic caldera that’s estimated to hold 5% of the world’s zinc reserves.

The proposal to mine the area was first made in 2005. Construction of the mine soon followed, but was halted in 2012 because of public opposition. It then reportedly resumed in 2017.

NFC said at the time that it had secured loans for the mine, allowing it to press ahead with the project.

BRM’s Achmad said the project officially broke ground in May 2019, after the company had completed its land acquisition in March that year.

To date, DPM has built a mining road and strengthened the foundation of the hills in the mining site to prevent landslides. While construction work has begun, most of the mining infrastructure, including the tailings dam, has not yet been built.

This is because DPM has had to revise its environmental impact analysis report, locally known as an Amdal. That includes changing the locations of some of the project’s infrastructure, such as the proposed tailings dam and the explosives warehouse, Achmad said.

The proposed new Amdal presents a new location for the tailings dam compared to the 2005 Amdal, about 2 km (1.2 mi) north of the processing plant. The warehouse will be relocated 293 m (961 ft) from the nearest settlement.

DPM has submitted the revised Amdal to the environment ministry, which has yet to accept it, Achmad said. With public scrutiny of the mining project quite high, and activists demanding the project be scrapped altogether, it doesn’t look like approval will be coming any time soon, he added.

“So there’s a lot of studies [needed to be done],” Achmad said. “It feels like making a new Amdal document, not revising it.”

Given the uncertainty, DPM announced earlier this year that it was suspending the project indefinitely, he said.

That hasn’t gone down well with the government, which has pushed for infrastructure and development projects to be prioritized under President Joko Widodo’s bid for Indonesia to be more “investor-friendly.”

“What we maintain is the ecological function [of mining areas],” Ridwan Djamaluddin, the director-general of mines at the energy ministry, told BBC Indonesia in 2021. “As long as they’re not damaged, what’s the problem [with mining]?

“Don’t let fault lines like the one in Dairi or small islands [like the one] in Sangihe prevent us from utilizing [natural] resources there,” he added.

Tongam of BAKUMSU said the government appears to want projects like the Dairi mine to proceed because of the investment that’s already gone into them.

“We’re afraid that the government and the companies deem the project to be too big to fail,” he said. “That seems to be the case.”

Natalie Bugalski, the legal and policy director at human rights organization Inclusive Development International, said the Dairi mining project should be scrapped altogether since it carries too much of a risk as shown by multiple analyses from the CAO and other experts.

“According to one expert opinion after another this proposed mine is far too dangerous to be developed in any form,” she said. “Clearly environmental approval should not be forthcoming. The CAO’s findings should be the death knell for the Dairi Prima Mineral mine.”



Banner image: The mouth of the China-backed zinc and lead mine, Dairi Prima Mineral, in Indonesia’s North Sumatra province. Image by Ayat S. Karokaro/Mongabay Indonesia.


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