Friday, March 9, 2012

Indonesia Pulls the Rug Out on Multinational Miners

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.

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