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Indonesia's
bitter mining endgame
By Bill Guerin
JAKARTA - The forced sale of one of the world's
biggest coal mines appears set once again to damage
Indonesia's reputation severely as a destination for
mining investment and is likely to leave investors with
the knowledge that vested interests, manipulation and
harsh government disputes leave them devoid of legal
certainty when it comes to doing business.
The
British-owned energy giant BP and Rio Tinto, through its
Sangatta Holdings Ltd (Australia), announced this week
that they have agreed to sell off their stakes in the
country's most profitable coal-mining company, PT Kaltim
Prima Coal (KPC), to Indonesian-owned PT Bumi Resources,
controlled by the Bakrie Group.
The purchase
price of US$500 million is a whopping $322 million less
than the two were offered a year ago and only slightly
more than the $450 million a year that the mining
company contributes to Indonesia's export revenues. BP
and Rio Tinto will get $250 million in cash and Bumi
Resources will also take on KPC's debt. The sale appears
to leave East Kalimantan's regional government, which
had staged a bitter legal fight for the mine, out in the
cold and still considering further strategy.
While the sale appears to bring to an end an
astonishing and protracted saga of conflict of interest
among KPC, the East Kalimantan regional administration
and the central government in Jakarta, it is certain to
discourage international investors who thought the fall
of Suharto as Indonesia's dictator in 1999 after 23
years in power would create a more rational investment
climate. It has not done so, nor has it helped the
Indonesian Mining Association, which has been warning
for months that the country's mining industry is
bleeding to death.
The long-running dispute
began 21 years ago when Rio Tinto, in partnership with
BP, secured a contract to exploit coal in Sangatta, the
capital of East Kutai regency and a jungle village with
some 600 inhabitants on the island of Borneo. It cost $1
billion to build the mine and associated infrastructure
and pay for the 7,900-square-kilometer concession.
Ultimately KPC would become Indonesia's second-biggest
coal producer, exporting some 17 million tonnes of
coking coal from 10 open-cast mines last year. The mine,
employing 4,000 people, ships its high-quality black
gold to steel mills and power utilities in Japan, South
Korea, Malaysia, Taiwan and Hong Kong.
KPC makes
an estimated $8 per ton, producing net profits of some
Rp2.5 trillion (US$297 million) a year and pays the
government 13.5 percent in royalties. Remaining reserves
are estimated at 500 million tons, good enough for at
least another 20 years of continuous extraction - a
veritable money machine.
Under the terms of the
original contract, signed with what is now the
state-owned mining company PT Tambang Butkit Asam, the
mine was required to eventually revert to Indonesian
control although the original contract did not specify
details of the parties entitled to buy the shares other
than a stipulation that part of the shares would be
transferred to the "government".
As late as
1999, KPC had offered 30 percent of its shares to the
government for $175 million. In December of that year,
out of the blue, the East Kalimantan provincial
administration offered to buy the 30 percent at the same
price but nothing further was heard until July 2000 when
the then-minister of finance, Rizal Ramli, announced
that the government would not buy the KPC shares and KPC
should sell to the East Kalimantan administration.
In December 2000 KPC offered 37 percent of its
shares at $216 million. The government insisted on
divestment in full and eventually, in March 2002, both
parties settled on $822 million for 51 percent
ownership.
Eventually, however, regional
autonomy was hastily introduced in January 2001 and the
East Kalimantan provincial administration suddenly
gained clout, claiming the right to represent the
government and demanded to be first in line to buy the
shares. Led by Brigadier-General (retired) Suwarna Abdul
Fatah, the governor of East Kalimantan, Kalimantan
immediately sued the central government, BP Indonesia
and Rio Tinto at the South Jakarta District Court. His
administration is believed to have the financial backing
of David Salim of the Salim Group of companies, owned by
one of Indonesia's powerful political and business
families.
The court duly issued an interim
ruling freezing divestment and threatened to exercise
garnishment over the 51 percent of shares due for
divestment, confiscate KPC's movable goods and,
astonishingly, ownership of the Rio Tinto and BP shares
at KPC. Among assets put under the court's control were
the working interests in the Tangguh liquefied natural
gas project in Papua province owned by BP and the assets
of BP's Tangguh partner, state-owned oil and gas firm
Pertamina, in a tower block in South Jakarta.
Jakarta, in a move to attempt to end the
dispute, allocated 31 percent to the administration of
East Kalimantan and the remaining 20 percent to the
state-owned Tambang Bukit Asam. However, neither of the
parties could pay and they demanded that the price be
renegotiated. The government quickly announced that it
was extending the divestment date up to June 30, 2002,
and the court revoked its interim rulings.
Last
August, KPC offered 51 percent for $419.22 million and
on October 31, two local companies, Perusda Melati
Bhakti Satya and Perusda Pertambangan dan Energi Kutai
Timur, were officially assigned by Jakarta to acquire 31
percent of the divested shares. However, PT Tambang
Bukit Asam, which produces only 10 million tonnes per
year from four open-cast mines, yet again could not
raise the cash for the 20 percent share it had bid.
Last month Energy and Mineral Resources Minister
Purnomo Yusgiantoro warned that KPC would be declared in
default if proved to be in breach of the original
contract calling for divestment.
The Ministry of
State-Owned Enterprises (SOEs), run by Laksamana
Sukardi, took over the KPC case from Yusgiantoro's
ministry on April 21. Sukardi warned of "strict
measures" against KPC if the company did not comply with
Article 26 of the contract. This states that KPC must
divest a total of 51 percent of the company to
Indonesian entities by the end of 2002.
Bumi
Resources, part of a conglomerate owned by the
Indonesian Chamber of Commerce chairman, Aburizal
Bakrie, started life as Bumi Modern in 1973 and became a
major player in the hotel and tourism sector. In 1998,
however, the company, citing adverse economic
conditions, shifted its core business to oil, natural
gas and mining and changed its name.
When
BHP-Billiton became the first to meet its divestment
obligation under Indonesian law by selling down its 80
percent interest in PT Arutmin, the fourth-largest
coal-mining company in the world, Bumi Resources snapped
it up in 2001. It was alleged that Bumi Resources had
used funds from state-run workers' insurance firm
Jamsostek on deposit in Bank Mandiri to pay for the $148
million deal. As PT Bakrie and Brothers Tbk already
owned the remaining 20 percent equity in PT Arutmin,
Indonesia's biggest coal mine was back in Indonesian
hands.
The two Arutmin mines in South
Kalimantan, Satui and Senakin produce about 11 million
tons of coal a year, which is shipped to its
Asia-Pacific markets. The coal goes straight out to
barges in a deepwater port facility, North Pulau Laut
Coal Terminal, owned by Arutmin, unlike the KPC
operation, where coal is carried 24 kilometers on a wide
open conveyor belt to the port.
In the meantime,
the squabble went on for KPC. Only this week the
provincial government (PEMDA) in East Kalimantan
threatened to shut down the KPC operational site,
alleging the company used state-owned coal deposits in
East Kalimantan as collateral for a loan worth $73
million.
Clearly the two multinational resources
companies were wearying of the continued squabble.
Insiders say Bumi Resources approached BP with an offer
that persuaded the British energy giant to get out of
mining altogether. Rio Tinto, clearly averse to being
left as the underdog in Indonesian hands, was quick to
follow suit and agree to the deal.
Djoko
Darmono, secretary general of the Ministry of Energy and
Mineral Resources, on the same day announced that the
divestment of 51 percent of KPC shares would proceed as
planned despite the change in shareholders.
Sukardi claimed on Tuesday that the government
was surprised by the announcement of the sale. "We will
summon Rio Tinto and BP to explain why they suddenly
decided to sell their stakes in KPC," he told the press.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
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