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Friday, 09 March 12
MINING IN INDONESIA: RESTRICTION ON FOREIGN INVESTMENT - SUNIL K KUMBHAT
 COALspot.com - Recently Govt has passed regulation instructing foreign mining companies to reduce their ownership stake.
The regulation known as GR 24 of 2012 ( Amendment of GR 23 of 2010 ), signed by President of Indonesia on Feb. 21,2012 stipulates that foreign shareholders/ Companies must gradually divest 51 percent of their shares in local mining companies to local investors after the fifth year of commercial production and complete the divestment by the 10th year of production. The divestment regulation resulted from a revision to a earlier GR 23 of 2010 that required foreign shareholders in local mineral and coal mining companies to divest 20 percent of their holdings.
The Director general for minerals and coals, said the regulation would not directly apply to contracts made prior to the issuance of the regulation , but so far no clarification in writing.
Local investors were defined by the regulation as the:
1.Central government,
2.Provincial , regency or municipal governments,
3.State-owned enterprises,
4.Regional enterprises and
5.National private companies.
The disinvestment shares are to be offered to entities in the order of priority listed above by way of auction.
Under the new requirement, mining companies must divest a total of 20 percent of their foreign shares from 6th year of starting production, 30 percent by the seventh year, 37 percent by the eighth year, 44 percent by the ninth year and 51 percent by the 10th year.
Prior to the issueance of GR 24/2012 , Mining Licences (IUP's) could not be transferred or assigned from one entity to another but GR 24/2012 provides that an Mining Licence may be transferred to another entity on the basis that the transferor holds a minimum of 51% of the shares in the assignee.
It effectively means foreigners are going to lose control after 10 years. Mining Sector is a capital intensive, risky , Complicated and time consuming business to invest in. By passing regulation and forcing foreign companies to divest within a fixed time frame and drastically changing the mining regulations is likely to discourage the interest of potential foreign investors to invest in the Mining Sector.
Historically, major foreign backed mining projects in Indonesia have been developed under contract based concessions - Contracts of Work (CoW) and Coal Contracts of work( CCoW )- entered into directly with the Government. These contracts covered the life of the project and larger areas than the new licence regime and were seen as a more secure regime , having economic and fiscal terms agreed in a contract that formed a "special law" between the Government and the mining company. In broad perspective such major changes in Govt regulations and increasing uncertainty and shift in foreign investment policy in the mining sector may consequently impact investment interest in other sector also.
The government is currently renegotiating all its contracts with CoW / CCoW mining companies across the nation in compliance with provisions of the 2009 Minerals and Coal Law.
The regulation would act as a disincentive for mining companies as five years is too short period to begin divestment, given that firms typically had 8 to 10 years to repay bank loans. If they have to divest 51% within 10 years, they are not yet reaching the break-even point of their investment.
Indonesia ,southeast Asia’s largest economy contains some of the world’s richest mineral deposits, such as the Freeport-run Grasberg, the world’s largest gold mine, and its fast-growing mining sector accounts for about 10-11 percent of GDP. The new regulation is the latest government move to extract higher domestic profit from the vast mineral wealth in the world’s top exporter of thermal coal and other minerals like tin , nickel, copper , Bauxite etc. But the change in regulation may deter foreign investment in mining sector.
The 2009 mining law was aimed at boosting investment in mining and metals processing, but its supporting regulations have not gone down well with the industry, and new investors still face risks such as policy reversals, local community demands, a tortuous permit process and poor infrastructure.
The latest regulation stipulating foreign ownership in Indonesia’s mining industry is bound to upset foreign investors and cheer local companies. The ruling will limit foreign companies from owning more than 49 percent of some mines, potentially limiting investments in a fast-growing sector.
Under the new regulation, foreign holders/ Companies of mining licenses in Indonesia , will have to cut their stakes to 49 percent at most within 10 years of starting production. Many foreign investors have already expressed grave concerns over this new ruling, arguing that mining is a capital-intensive industry and requires a long payback period.
Under the new ruling, foreign owners’ coal and minerals assets would required to sell the shares to the central and regional governments, state-owned companies or local private companies. This is itself not new, but the new time frame means that investors will not have enough time to recoup their investments, let alone make a profit.
Any country and Indonesia in this particular issue has every right to dictate the terms and conditions for foreign investors who wish to invest in the country. Many other countries also protect their local businesses, and it is the government’s duty to ensure that its own citizens benefit from the nation’s natural wealth.
Foreign investors often take huge risks and invest billions of dollars before they see returns. Their risk-taking allows the mining sector to grow and develop; without them, the country will be worse off. They have a right to expect a reasonable return on their investment, too.
The regulation had been promulgated with good intentions to empower local companies and boost their involvement in the mining industry.
But a balance must be struck between the two goals: attracting foreign investments and ensuring local communities also benefit. By requiring foreign shareholders to sell their stakes in mining assets to local entities, the government is attempting to strike this balance. The key issue is proper calibration of risk and reward ,considering the law of the land.
In spite of the fact that Mining sector in Indonesia is overregulated and lot of uncertainties ,the mining sector will remain most hot sector and cannot be ignored. There is always cost of doing business in Indonesia.
By : Sunil K Kumbhat , Jodhpur( Rajasthan ) India
Views expressed herein are personal views of the author and not that of COALspot.com.
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Thursday, 08 March 12
INDONESIA'S COAL SECTOR CAN BENEFIT FROM CLEARER REGULATIONS - FITCH RATINGS
Fitch Ratings says Indonesia's coal mining sector should continue to see strong growth prospects but can benefit from clearer and more predictable ...
Thursday, 08 March 12
DRY BULK MARKET ON THE RISE; CHINAS COAL IMPORTS COULD INCREASE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market kept on rising back to healthier levels yesterday, with the BDI (Baltic Dry Index) the industry’s benchmark, marking its 8 ...
Wednesday, 07 March 12
INDONESIA COAL BENCHMARK PRICE GAINS FOR SECOND MONTH
COALspot.com - Indonesia raised the monthly coal reference price for sales in March by 1.15 percent, the second increase since February.
The Mini ...
Wednesday, 07 March 12
INDONESIA TO LIMIT FOREIGN OWNERSHIP IN MINES TO 49 PERCENT WITHIN 10 YEARS OF PRODUCTION
COALspot.com - Foreign holders of mining licenses in Indonesia have to divert 51% of their stakes to Indonesian government or domestic entitie ...
Wednesday, 07 March 12
ASSESS ASIAS POTENTIAL, DEVELOPMENTS AND APPETITE FOR SHALE AT SHALE GAS SUMMIT
Press Release - Assess Asia’s Potential, Developments and Appetite for Shale at Shale Gas Summit on 23-24 Apr, 2012 in Beijing
China is rep ...
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- Orica Mining Services - Indonesia
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- Goldman Sachs - Singapore
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- Indian Oil Corporation Limited
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- Chamber of Mines of South Africa
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- Gujarat Mineral Development Corp Ltd - India
- The State Trading Corporation of India Ltd
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- Australian Coal Association
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- Savvy Resources Ltd - HongKong
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- Bhoruka Overseas - Indonesia
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- OPG Power Generation Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Eastern Coal Council - USA
- Altura Mining Limited, Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Bayan Resources Tbk. - Indonesia
- Siam City Cement PLC, Thailand
- Holcim Trading Pte Ltd - Singapore
- Maheswari Brothers Coal Limited - India
- Planning Commission, India
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- The University of Queensland
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- Cigading International Bulk Terminal - Indonesia
- Malabar Cements Ltd - India
- Energy Link Ltd, New Zealand
- MS Steel International - UAE
- Ministry of Finance - Indonesia
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- Wood Mackenzie - Singapore
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- Rio Tinto Coal - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
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- Global Green Power PLC Corporation, Philippines
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- GMR Energy Limited - India
- White Energy Company Limited
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