New Form of Nationalism Stalls International Miners ; British Company's Fight over Indonesia Regulation Is Being Closely Watched

By Schonhardt, Sara | International Herald Tribune, June 7, 2012 | Go to article overview

New Form of Nationalism Stalls International Miners ; British Company's Fight over Indonesia Regulation Is Being Closely Watched


Schonhardt, Sara, International Herald Tribune


Foreign investors in Indonesia have long faced difficulties, particularly those operating in areas of national interest, like coal and oils.

When David F. Quinlivan visits Indonesia, he carries stacks of documents and a well-worn map of a mining concession in East Kalimantan province marked with a dizzying array of timelines and arrows. They are his weapons in a two-year battle with Indonesia's judicial system.

Since 2010, Mr. Quinlivan, the chairman of Churchill Mining, whose stock is traded in London, has been fighting over rights to a $1.8 billion coal project in the Indonesian portion of Borneo, an island laden with lucrative mineral deposits.

On May 22, the company's lawyers filed for arbitration at the International Center for Settlement of Investment Disputes in Washington. Churchill is seeking $2 billion from the Indonesian government over claims the regional government in East Kalimantan had seized its assets without proper compensation.

"This is another phase of the legal process," Mr. Quinlivan said.

Churchill's troubles have attracted the attention of other mining companies and highlighted the uncertainties of investing in Indonesia. And analysts say that new regulations for the mining industry could sharply increase the costs of doing business.

Among the new rules is one that would require foreign companies to cede majority control of their mining projects within 10 years of starting production. Another would impose a 20 percent tax on exports of 65 unprocessed minerals and metals, including nickel, tin and gold.

Indonesia's mines and energy minister, Jero Wacik, said the ministry was contemplating a tax on exports of certain types of coal in which many Indonesian mining companies have invested. At a conference this week in Bali, he said the country needed to conserve its resources for domestic use.

The regulations already in effect aim to add value to the industry by requiring miners to refine metal ores in Indonesia; in 2014, all unprocessed exports will be banned, officials say. The tax would also increase the government's revenue from the mining sector, which already contributes 12 percent, or nearly $85 billion annually, to the country's gross domestic product.

Julian Hill, a mining adviser at Deloitte Touche Tohmatsu in Jakarta, said the tax obligation would not be a "killer" but would stunt the growth of the industry and the country's economy.

Analysts say Indonesia's new rules are part of a trend in resource nationalism and will benefit special interests at the expense of foreign investors.

"What you're talking about is a lack of certainty -- business certainty and contract certainty," said Keith Loveard, an analyst at Concord Consulting, an advisory and consulting firm based in Jakarta. "You don't have either here."

It has always been difficult for foreign investors in Indonesia, particularly in areas of national interest like coal and oil, of which there are large, untapped reserves. Rising resentment from local communities that bear the environmental brunt of mining projects has also fueled opposition.

Bill Sullivan, a legal adviser for many major mining operations at the Jakarta law office Christian Teo Purwono, said the new regulations were the government's way of striking at the mining industry before general elections in 2014.

"What we're seeing is the government trying to garner votes in the forthcoming presidential election by showing that it's taking a tough line with the mining industry and an even tougher line with foreign investors in the mining industry," Mr. Sullivan said.

Other factors are also at work. Some officials question the need for foreign investment in a sector that, unlike oil and natural gas, does not need huge amounts of capital or technical expertise to exploit. Indonesia's murky regulatory environment compounds the situation, according to Concord Consulting. And there are always accusations of opportunism. …

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