Page 2 of 2 The pitfalls of Indonesian
coal By Bill Guerin
blow to hopes
that the new law will attract more foreign
investment. A group of major mining companies has
already issued a statement urging the government
to retain the existing CoW system to avoid
creating any "obstacles" to new investments.
Successive Indonesian administrations have
failed to attract enough foreign investment,
technical expertise and managerial
resources to extract more of
the country's mineral wealth, crucially when
global commodity prices are soaring. Vested
interest groups have long manipulated loopholes in
mining regulations for their own particular
interests.
Indonesia's mining sector was
one of the country's biggest revenue earners under
former strongman Suharto's 32-year tenure. Then,
massive amounts of foreign investment were pumped
into the sector, primarily because of government
flexibility that allowed production contracts to
be signed before any major exploration had been
carried out.
The risks and investments
were previously shouldered largely by foreigners,
rather than by wealthy local investors, who have
developed a habit in recent years of swooping in
only after big mineral deposits have been
discovered. Several first-generation CoWs that in
recent years have come up for renewal have forced
big multinational mining companies to sell their
majority stakes in invested operations at
fire-sale prices to local companies. Bumi in
particular has profited hugely from the
controversial practice.
Forced
divestments Both BP and Rio Tinto were
required to divest their 51% holding in the KPC
mine to Indonesian interests by the end of 2002,
because of a stipulation in their original CoW
that the mine must eventually revert to local
control. The agreement did not specify details
concerning who would be entitled to buy the shares
other than the stipulation that a partial holding
must be transferred to the government.
Invoking the new autonomy laws, the East
Kalimantan provincial administration assumed the
right to represent the government and demanded
that the two foreign investors sell their stake in
KPC to it. After a protracted and bitter dispute
over pricing and other issues with local
authorities, Rio Tinto and BP eventually lost and
sold their stakes on slightly more favorable terms
to Bumi. Bumi's purchase of BHP Billiton's Arutmin
mine represented another government-enforced
divestment, where Bumi secured funding from the
state-run workers' pension fund and state-owned
Mandiri Bank to finance the $150 million purchase.
That local-over-foreign precedent has
recently steered multinational mining concerns
clear of new Indonesian ventures, even at a time
when surging global demand, sparked largely by
China's and India's growing appetites for
commodities, is outstripping available supplies.
Australian mining giants BHP Billiton and Rio
Tinto both currently cannot deliver enough copper
and nickel to meet their growing global orders,
and both companies have indicated plans to spend
more on exploration activities than they jointly
spent last year.
Nonetheless, Rio Tinto
said this week that a possible $1.3 billion
investment in an Indonesian nickel mine was
contingent on winning what it vaguely referred to
as a new government "accord". Meanwhile, BHP
Billiton reportedly has interest in investing in
two major coal mines in Kalimantan, but has put
the plans on hold because of the continued
regulatory uncertainty looming over the entire
mining sector.
That they maintain any
interest at all in Indonesia is indicative of
surging global demand. Both companies have endured
particularly tough times in Indonesia. Rio Tinto
spent an estimated $8 million on exploration
activities in Central Sulawesi, but was forced to
sell its gold-mining interests in 2005 for a mere
$800,000. Across the bay in North Sulawesi, BHP
Billiton sold its copper mine for $2 million after
spending an estimated $27 million on exploration.
The bargain-basement buyer in both cases: Bumi.
Bumi now plans to pay off its total
outstanding debt of about $1 billion and plans to
spend another $1 billion to bring on stream by
2010 two new copper and gold mines it owns on
Sulawesi with the $1.3 billion proceeds of the
proposed Tata Power transaction. And Bumi also has
its eye on other forced divestment deals,
including Newmont Nusa Tenggara (NNT), the US
mining giant's gold and copper venture in
far-flung West Nusa Tenggara.
NNT is
obliged through a provision in its CoW to divest
the first 7% of its 31% stake in the Batu Hijau
gold mine by next March. Politically connected
Bumi is in a joint venture with the provincial
government and Sumbawa Regency to bid for the
shares. According to news reports, big US hedge
fund Farallon Capital, which owns a controlling
stake in Indonesia's biggest bank, BCA, is
likewise sniffing around a potential deal.
With those forced foreign divestments in
the cards, and indications that Indonesia's new
mining law could be more prohibitive than the
current investment framework, it seems clear that
India's Tata Power is taking on an enormous risk.
In a statement, Tata recently described the two
Bumi-owned mines it hopes to take minority stakes
in as "world-class assets". But the fact that
those same assets were only recently stripped from
foreign investors that owned majority stakes, it
would seem, should temper Tata's hopeful
expectations.
Bill Guerin, a
Jakarta correspondent for Asia Times Online since
2000, has been in Indonesia for more than 20
years, mostly in journalism and editorial
positions. He specializes in Indonesian political,
business and economic analysis, and hosts a weekly
television political talk show, Face to Face,
broadcast on two Indonesia-based satellite
channels. He can be reached at
softsell@prima.net.id.
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