Implications of Indonesia mining law clear but consequences are not – by Peter Alford (The Australian – November 13, 2013)

IT took 4 1/2 years for regulations to be published giving teeth to the foreign investment provisions of Indonesia’s mining law – but what teeth!

Ministry of Energy and Mineral Resources Regulation 27/2013, when it appeared two months ago, crystallised almost everything that worried foreigners about the tone and intent of the mining law passed in 2009.

Although one key intent was to re-create a reliable framework for foreign investment – which, outside coal, remains critical to developing Indonesia’s mineral resources – the law is characterised by a general suspicion of mining activity, a particular impatience with foreign ownership, unsparing regulation and government rent-seeking.

Under MEMR 27/2013 the divestment schedule for mine production licences (production IUPs) is as severe as foreshadowed – from maximum 80 per cent foreign ownership in year six to 49 per cent in year 10 – with national, provincial and local governments having first rights of acquisition.

The pricing formula in the regulation requires foreign equity to be divested at a discounted replacement cost (that is, significantly below market value), and at a lower effective cost to governments than to the other potential acquirers, state-owned enterprises and private investors.

That appears to embed an incentive for governments to buy divested shares for the purpose of selling them to favoured private interests, possibly in back-to-back deals pre-financed by the entrepreneurs.

Further, foreign interests buying into local operations holding exploration IUPs would have to divest to 49 per cent on conversion from exploration to production.

In other words, a foreign miner, having possibly spent tens of millions of dollars funding exploration, would be reduced to 49 per cent equity in the first year of mine operation rather than in year 10.

In a generally unanticipated blow to foreign operators planning to fulfil local ownership requirements by a flotation on the Indonesia Stock Exchange, MEMR 27/2013 now says this would not qualify as divestment.

The regulation also asserts that the divestment and pricing procedures under the 2009 mining law will override those applying to pre-existing Contract of Work and Coal Contract of Work projects.

The awkward point there is that divestment conditions for CoW projects are in every case superior – from the viewpoint of the foreign owners, if not the ministry – and cemented by a contract with the state.

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