As regular readers will know, I’m a bull on Indonesia. But one problem that occurs regularly there is the inability of the Indonesian government to refrain from changing or trying to change the rules of the game. Very unsettling.
We see it in the regular calls by the government to re-negotiate the commercial gas contracts that S’pore has with Indonesia*. We also see it in the plan mooted last year by the central bank to limit bank ownership to 49%. This would mean Temasek, all three local banks, and M’sian banks having to cut back their holdings. So far nothing concrete has emerged.
Now Indonesia will force foreign firms to sell down stakes in mines by the 10th year of production, with domestic ownership to be at least 51%, in a move likely to hurt existing miners and scare off potential investors. The new rule is the latest government attempt to extract greater domestic profit from the vast mineral wealth in the world’s top exporter of thermal coal and tin. Indonesia contains some of the world’s richest mineral deposits, such as the Freeport-run Grasberg, the world’s largest gold mine, and its fast-growing mining sector accounts for about 11% of GDP.
The requirement, stated in a regulation on the mining ministry’s website, comes as the government is renegotiating contracts with the leading foreign metals miners in the country, Freeport McMoRan Copper & Gold Inc and Newmont Corp.
To be fair, the rule isn’t a brand new outbreak of resource nationalism. It is ad hoc legislation to fill in holes in a 2009 mining law, which followed 2003 revisions to royalties and 2001 rules on distributing mining revenue. The 2009 law required foreign owners to start divesting after five years of production, but didn’t say by how much. A number has now been provided, but it’s still not clear which existing mines the new terms will affect, if any.
*S’pore’s new liquefied terminal will be able to handle sufficient imports of the fuel to cover all of the country’s power needs, even if piped gas supply contracts with Malaysia and Indonesia are not renewed, a senior civil servant said a few days ago. It depends on natural gas for around 80% of its power generation needs, with the bulk sourced from Indonesia and Malaysia under long-term contracts.