JAKARTA Dec 4 A battle over the control of
Indonesia's resources is intensifying ahead of 2014 elections,
creating legal uncertainty that threatens to drive off
investment and hurt long-term output in one of the world's top
sources of coal, gas and metals.
The central government has shaken up the resource sector
with a series of rules this year that give it greater control,
by centralizing the licensing process, taxing ore exports and
pushing for investment in smelters. The moves have battered
metal ore exports and drove some firms to exit.
"The sector is becoming so over-regulated it's Soviet
Union-like," said the Indonesia country head of an international
energy firm, which is staying in the country. "It will lead to
less confidence, less investment and ultimately less supply."
Entering the fray is an unlikely coalition of local
governments, mining associations and nationalist Muslim groups,
challenging resource laws in court and winning several cases on
the grounds that some of the policies were unconstitutional.
Also at stake are the revenue flows that can be skimmed off
from a complex series of approvals, licenses, royalties or taxes
in one of the region's most corrupt countries.
The policy moves and challenges come as potential
presidential candidates are seeking to raise money and lift
their popularity to contest a wide open race for 2014, when
two-term President Susilo Bambang Yudhoyono has to step down.
"It's a good vote winner - you can wave the national flag
ahead of presidential elections," said David Quinlivan,
executive chairman of Churchill Mining Plc. "A lot of
things that are happening are making it hard for investors to
justify investing in Indonesia," he said.
Corporate disputes have escalated. UK-listed Churchill and
British financier Nat Rothschild have been the highest-profile
casualties of disputes over licenses or partners. Both disputes
are over major coal assets with firms part-owned by leading
Newmont Mining Corp has been caught in the middle of
a dispute in which the business-backed local government is
contesting the central government's right to buy a 7 percent
stake Newmont is divesting in the huge copper and gold mine.
The issue has been further complicated after the
Constitutional Court ruled that the central government must
first have parliamentary approval for the purchase.
UK-listed Avocet Mining is facing a $1.95 billion
lawsuit by former partner PT Lebong Tandai over the sale of gold
mines. Australia-based gold miner Intrepid Mines Ltd
may also be preparing for legal action after being evicted from
its Indonesian asset by its local partner. It has brought in an
Indonesian TV mogul - another presidential candidate - as a
shareholder in an effort to give it some negotiating clout.
Security of tenure is now seen as one of the biggest risks,
and recent events have sent "shivers" through some firms
including his own, one copper mining executive said.
"I'm hearing from a lot of companies that pressure has been
put on them to contribute funds because next year there's a lot
of regional elections," he said, adding officials were 'hinting'
they could cancel contracts if firms did not pay up.
At least five metal exploration firms have pulled out of the
country this year, including Oxindo, a copper explorer owned by
Chinese mining group MMG. Interest in doing coal deals
has also declined, said a Jakarta-based international lawyer.
"You start to think at this time before the elections there
may be other challenges," said one lawyer, who declined to be
identified. "We haven't had people knocking on the door like
they did for coal mine acquisitions last year."
The country's second-largest Muslim group, Muhammadiyah,
succeeded in getting the country's energy regulator scrapped by
the constitutional court in November. Next, it will study
whether laws on mining, water and forests are constitutional,
said Syalful Bakhri, dean of the law faculty at Muhammadiyah
University in Jakarta.
The nationalist push focuses on a line in the constitution,
which says resources "shall be under the powers of the State and
shall be used to the greatest benefit of the people".
Many are against the country's current use of production
sharing contracts, liked by foreign firms as they get a stake in
the resource but also a system opposed by nationalists in other
resource exporters from Iraq to Ecuador.
"Muhammadiyah has a vision to make the state of Indonesia
truly independent. All the sources of energy in Indonesia are
for the people," said Ibnu Sina Chandranegara, one of the
Analysts say the key judge in these constitutional court
cases, Mahfud, has political ambitions himself. Following the
cases, he emerged as the most popular out of 18 contenders for
president in an Indonesian Survey Institute poll last week.
Muslim parties form part of the ruling government coalition,
including the chief economics minister Hatta Rajasa, who some
analysts say has been behind this year's nationalistic resource
policies. He is also a presidential candidate.
All these legal challenges are complicating the outlook for
nickel prices and may delay a rally in the metal, according to
Barclays Capital. It had expected prices to climb because of a
2014 ban on ore shipments from Indonesia, the top exporter.
"Indonesian government policy is the key wildcard for the
nickel story," said Nicholas Snowdon, a Barclays metals analyst.
The immediate impact has been mixed. Nickel ore exports to
key buyer China recovered last month as more firms met the
central government's new permit requirements. But iron ore and
bauxite exports are still well down on last year after the
"My view of next year is there will not be a recovery...
because margins are so small, many firms could not compete with
current prices and so many them have reduced their production.
Some of them have stopped their production already," said
Syahrir Abubakar, chief of the Indonesia Mining Association.
The longer-term result is that firms have to prepare to meet
new rules or work around them, but now don't know if those rules
will be later challenged and overturned.
"Today's investments are tomorrow's production," said Xavier
Jean, credit analyst at Standard & Poor's, adding the major
effect could be plateauing output and depleting reserves.
The government is already reworking one rule and
backtracking on others. It is likely to relax deadlines for two
issues seen as critical for investors - the timeframes for
smelter investment and mining asset divestment.
Investment chief Chatib Basri told Reuters he is seeking
greater investor input before policies are finalised, implying
some of the moves have been overly hasty. The 10 years given for
foreign firms to divest mine assets was too short, he said.
Nationalist sentiment has risen after the good times of
recent years, he said. Although foreign direct investment in
Indonesia has surged to record levels this year, he sees the
legal uncertainty switching investors' focus away from resources
to the consumer sector for next year.
"If you talk to people in the oil and gas and mining
sectors, they are so gloomy about Indonesia," said Basri.