Indonesian resource nationalism irks foreign investors

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Indonesian resource nationalism irks foreign investors

Indonesian resource nationalism irks foreign investors

Wednesday, March 21, 2012
  • rinda
Workers sorting out coal at a mine in Samarinda. Indonesia is rich in natural resources, a lot of it still untapped.

JAKARTA: Foreign investors are bemoaning a new law in Indonesia that strips them of control over mining assets, the latest in a rash of regulations that reflect what they see as growing resource nationalism.

 

The law announced this month obliges foreigners to divest at least 51 per cent of their shares to Indonesians over a 10-year period.

 

"We would like the benefits of our country's resources to reach more Indonesians," energy and minerals ministry resources director Thamrin Shiite said.

 

"Locals living around mines always say they want a share of what the companies are earning."

 

Indonesia, Southeast Asia's largest economy, has some of the world's biggest untapped mineral reserves, including tin, nickel, copper and gold.

 

Talks of benefit-sharing intensified last year in parliament during a three-month strike at a giant gold and copper mine owned by US company Freeport-McMoRan, which ended with a 37 per cent pay hike for workers.

 

Political and economic stability over the past decade have empowered Indonesians to demand a greater share of the country's wealth -- and stability has also attracted investors.

 

Foreigners poured a record $20 billion of investment into Indonesia last year, according to government data, as the economy grew by 6.5 per cent. Of that money, $3.6 billion went into mining.

 

But investors now complain the government is sending mixed messages, passing a mining law in 2009 to improve the investment climate, then shifting to a more protectionist stance.

 

"Under the 2009 mining law, foreigners could for the first time fully own mining licences," Deloitte mining consultant Julian Hill said.

 

"It seemed to be a new dawn in Indonesian mining, so foreigners rushed in. It was a false dawn as it turned out."

 

Since the 2009 law was passed, no new licences have in fact been passed.

 

"The new law requires a tender process, but the terms for the tender process have never been decided, so no licences have been issued. Talk about uncertainty," Hill said.

 

Perth-based mining veteran David Quinlivan is all too aware of that uncertainty. His London-listed company Churchill had its exploration permits revoked.

 

In partnership with a local company, Churchill had obtained permits on 35,000 hectares of land on Indonesian Borneo, expecting to find 100 million tonnes of coking coal.

 

Instead, it found a staggering 2.8 billion tonnes, one of the world's largest reserves, which it says could bring in up to $1 billion a year for the next 25 years.

 

After Churchill publicised the finding, its permits were revoked by the East Kutai district head and were returned to the former concession holder, the Nusantara Group, which declined to comment.

 

Nusantara is owned by one of Indonesia's wealthiest men, Prabowo Subianto, the former head of the notorious Kopassus special forces unit, and a presidential aspirant.

 

He stands accused of orchestrating atrocities, including rape, murder and torture, in East Timor during Indonesia's brutal 24-year occupation.

 

Churchill -- whose share price plunged 10-fold, from above 130 pence ($2) in 2010 to around 13 pence today -- is now banking on the Supreme Court to overturn the revocation, or to achieve a commercial settlement with Nusantara.

 

"It's disappointing where we are. Indonesia's a great place for natural resources," Quinlivan said.

 

"But we never expected the government to reissue licences, that never entered our heads. If land title isn't fixed, that's a real problem for Indonesia. Investors need security."

 

The case highlights the difficulty of working in Indonesia's decentralised context, with the power to issue permits devolved to 399 district governments, who now do the job that one central body had done for more than 30 years.

 

But Indonesia is not alone in seeking to prise back some of the booming revenues flowing to miners in recent years, as global commodity demand has surged on the back of growth in China and the rest of Asia.

 

Australia, Ghana and South Africa have all either introduced or deliberated higher taxes or levies on miners to ensure the wealth is more evenly distributed.

 

Accounting firm Ernst & Young in a report last year cited resource nationalism as the biggest global risk in mining and metals, ahead of infrastructure access and problems obtaining permits.

 

Indonesia plans to ban the export of raw minerals by 2014 to stop foreigners gutting the land and to encourage local processing industries.

 

But the Indonesian Mining Association warns that the country will be no better off if foreign investors are turned away.

 

"We're not ready for these policies," the association's executive director Syahrir Abu Bakar said.

 

"It takes six or seven years just to build a smelter, so if the government doesn't come up with better infrastructure fast, Indonesians will lose jobs," he said.