New Indonesian Mining Divestment Rules

Is Mining Divestment Such a Benefit to Indonesia?
Indonesia is following a worldwide trend of pushing out foreign ownership of mining assets. A March 8 Reuters story began “Indonesia will take more of the profits from its vast mineral resources by limiting foreign ownership of mines”. But, is that what necessarily happens when more of the share of an enterprise is owned locally? How can the government be so sure that it will benefit when it may not be the one owning the shares? How can it guarantee that a local company or shareholders on the bourse won’t just invest their profits somewhere else, developing a new mine in Kazakhstan, or buying US real estate? I am troubled by divestment rules in Indonesia just as I was in the 1980’s when the Japanese owned US landmarks like Rockefeller Center and there were shrill jingoistic demands that they be made to divest. (Turns out the Japanese bought high and had to sell low, and nothing changed with the properties or the revenues earned by the government)

The background to this is a Feb. 21 regulation that requires all foreign investors in mining to divest 51% of their shares within 10 years of starting commercial operations. “The aim is the state has to get more. For new investment it will be simple, but for existing investment there must be re-negotiation,” Mining Minister Jero Wacik told Reuters. However, the Director General for Mining, Thamrin Sihite, stated that this new requirement would only be for new contracts and extensions of existing contracts. The Deputy Minister for Trade told reporters that this change shouldn’t be an issue: “We still believe, even with only 49 percent, it (the mining sector) is still very alluring, still very lucrative for everybody.” The Executive Director of the Indonesian Mining Association, Syahrir Abubakar, begged to differ: “I’m sure foreign investors will not invest in the mining sector anymore in Indonesia. This policy will threaten Indonesia’s mining investment climate.” Abubakar is probably right, ROI in mining often takes more than 10 years; giving up half your profits as well as control within that time frame may be unworkable for certain mining projects.

The government’s two principal arguments for divestment are: more revenue for the state and more incentives for local companies. Clearly, who owns what number of shares in an enterprise should have little effect on government revenues. Aren’t taxes and royalty payments the same whether the majority of a mining enterprise is owned locally or not. Assuming the mine was profitable, the only situation where the State would gain would be if it owned the mine itself. So a local province, state-owned company, or the national government would have to put up its own money (or borrow it) to buy shares and presumably, the foreign shareholders would have to agree on a “fair price”. If one were looking for a simple mechanism for divestment as Minister Wacik explained in the above quote, this negotiation would be among the worst examples. Newmont Mining – whose existing contract best approximates the new regulation- has had a long and tortuous path to meet its 51% divestment obligation (and remains 7% short) and Freeport, with a much different contract, may have difficulty selling the 9.3% stake it has offered to sell locally. (It should be noted that Newmont has had 20 years to divest, not 10.) But is the potential revenue from owning shares — the government still earns significant tax and royalty revenues–worth all the trouble and the uncertainty it breeds in the investment climate ?

The second reason for requiring a divestment, incentives for local companies, makes one wonder what kind of business community Indonesia is now trying to build. Is it one in which local and foreign investors are treated equally, as stipulated in the 2007 Investment Law, or one in which only local firms are allowed to do certain activities and foreign firms are penalized. How far has Indonesia moved from its post colonial mentality of distrust of foreign investment, and does it not recognize the positive role foreign companies have played in building communities, local businesses, training people, raising standards, and supporting the country in international forums. Cannot local firms be “incentivized” in a more neutral way, or is the politics of pride of ownership so overwhelming that grave risks to the investment climate and a sense of fairness are overlooked. Significant properties and businesses in NY are still owned by Dutch and English interests (part of our colonial heritage) but no one cares anymore. Finally, there are many Indonesian mining companies already in operation, mostly (but not exclusively) in coal. Over time, they are developing the expertise and financial clout to move into the hard rock major leagues (gold, nickel, copper, zinc etc.) where foreign ownership has been dominant. But why should the government enable them through divestment? Cannot it be allowed to occur naturally and through the principle of competitive advantage? What if they aren’t ready to assume the mantle? Are divestment measures also a vehicle for politically connected local firms to buy into existing operations at a discount ? That might have been expected in a previous era, but Indonesia is now a functioning democracy trying to end such anachronistic practices.

One can understand the government’s desire to keep more money in Indonesia through vehicles such as capping foreign ownership or requiring local processing of all mining products (a measure instituted in the 2009 mining law). But time and again, we have seen that such protectionist measures have unintended consequences. If over all investment drops in mining (especially in precious metals) because its not profitable to raise capital with a 10 year divestment period, how can that be good for the country? Mines, especially the large ones funded through foreign investment, have been proven to be huge employment and development engines and are among the highest taxpayers in the country. Also, if local processing has to be coupled with measures to limit imports of similar products (as may be expected), inflation will rise and Indonesian products will be less competitive and employment will sink.

Mining players from resource-hungry countries whose record on the environment, local community, labor relations, and human resource development is spotty, are willing to enter Indonesia on just about any terms. What a shame if that was the final outcome of these new rules.

This cautionary tale deserves to end on a positive note. That is, experience has taught that the Indonesian government has been practical in modifying new rules that are not working. Not in every case, mind you, but often enough for one to say that perhaps that will be the case here. I certainly hope so.

These views are those of the writer and do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members.

About the Author:

Wayne Forrest is President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

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