New regulation
says multinationals must divest control to locals
Mining exploration has come to a halt in Indonesia and international
investors are dismayed as a result of a new mining regulation signed into law
last week by President Susilo Bambang Yudhoono that forces multinational mining
companies to divest majority shares to domestic companies.
It isn’t the first time the government has thrown a roadblock in front
of international investors, and it is almost certain that it won’t be the last.
Because of the country’s steady economic growth and its wealth of natural
resources, however, investors have kept coming back for more.
“One of the dangers you are warned about in visits to Indonesia is the
rise of ‘nationalism'," said Dr Jim Walker, the head of the Hong
Kong-based Asianomics financial research firm, who recently visited the country
on a research trip. "This is partly based on hubris as the government sees
its successes over the last few years as being down to its economic management
skills. This is one way of making sure that the pumped-up bubble of arrogance
is well and truly pricked quickly.”
Foreign investors holding mining business and special mining business
permits must begin divesting their mining operations to Indonesian entities
within a five-year period under the terms of the law. The divestment must begin
during the sixth year of mining production.
Under the existing regulations, by the sixth year, Indonesian investors
must own at least 20 percent, which must be increased to 30 percent in the
seventh year, 37 percent in the eighth, 44 percent in the ninth and 51 percent
at the end.
“I don’t understand the Indonesian government’s attitude,” a
Jakarta-based mining consultant told Asia Sentinel. “They seem determined to
make investing in this country a bad idea. The mining sector particularly has
been beset over recent years by a whole raft of changes to the regulations and
requirements, none of which has made it any more attractive to do business
here.”
“I don’t know how you are going have a mine if you don’t explore for
them,” he added.
Although extractive industries production has declined in recent years,
the sector still plays an important role in government revenues, with oil and
gas revenues accounting for about 25 percent of government revenues and 25
percent of foreign trade. Indonesia has become one of the world’s biggest
producers of coal. It also has vast stores of gold, copper, tin, bauxite and
other metals.
East Kalimantan, the site of much of the exploitation, earns huge
amounts of money off of coal exports. According to the industry publication
Live Trading News, East Kalimantan earned US$36.33 billion from coal exports,
or 95 percent of its total export earnings. Palm-oil was second with less than
2 percent.
It is unclear how much of Indonesia’s mining industry is controlled by
multinationals. ”I don’t think even the government knows,” the consultant said.
Control of the divested shares is to be passed to central, provincial or
district governments, state-owned enterprises, local government-owned companies
or local private firms.
The immediate suspicion on the part of many in Jakarta was that
Aburizal Bakrie, the patriarch of the Bakrie Group and head of Golkar, the
country’s second-biggest political party, was behind the move. However, another
source said that while the change in the law probably would be beneficial to
the interests of Bakrie and other politically powerful coal interests,
nationalism was probably playing a bigger role.
The government, he said, is aware that the industry will shrink
considerably because of the law. But, he said, “I think they feel they will get
a bigger slice of a smaller pie.”
The regulation itself states that “In a bid to give a greater
opportunity for Indonesian entities to participate in the mineral and
coal-mining business, it needs to be regulated that foreign investors must
divest parts of the stake to Indonesian entities.”
There is nothing particularly new about the requirement to divest
interests to domestic companies. Under the previous mining law, companies
operated under what was called a contract of work, in which the multinationals
negotiated detailed plans for divestment under much longer timelines. Control
of one of the richest prizes in the mining world – the US-based Newmont Mining
Corp's US$4 billion Batu Hijau copper and gold mine on the remote island of
Sumbawa, 1,500 kilometers east of Jakarta in Indonesia – was passed over to a
domestic entity in 2009 under the scheme.
Newmont's divestment process began in 2006, after years of strained
relations between the national and state governments. In 2007, the Nusa
Tenggara provincial government threatened to shut the mine if the contract to
sell wasn't honored.
While there was concern about another of the world’s richest mines –
the world’s biggest gold mine and the second-biggest copper one -- currently
being operated by Freeport Indonesia, the local arm of the US-based
Freeport-McMoRan Copper & Gold, the company said the mine would remain
under its control as it continues to operate under the previous contract of
work scheme.
There are other problems. One that exacerbates the situation is after
obtaining a three-year exploration permit, there is a requirement that in order
to explore in a forest, a forest use permit must be obtained first. Given red
tape and other impediments, it takes at least a year before the forest use permit
can be granted, effectively meaning the three-year exploration period is
actually only two years – unless “informal payments” – bribes are paid. That
requirement has made some local officials very rich, the consultant said.
Eramet chairman and chief executive Patrick Buffet told Jakarta Globe
last September that the company planned to spend $450 million in the first
phase of a $6 billion investment to develop a nickel and cobalt mine as well as
a processing plant on North Maluku’s Halmahera Island.
“If they [the government] want to put a brake on this sector, that’s
fine, but the fact is they want more investment in the mining sector,” Buffet
said. “This regulation will make Indonesia less attractive to new investors.
“Five years is too short for investors to enjoy a profit in the mining
sector.”
Supriatna said that with bank-loan maturity in the mining sector being
at between 10 and 13 years, divesting after five years would lose whatever
potential gains already existed.
Asia Sentinel
Business & Investment Opportunities
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