Tue, 07 Jul 2009
From: Reuters
By Fitri Wulandari
JAKARTA, July 7 (Reuters) - Indonesia has struggled to lure foreign investment to its mining sector in recent years, and the nationalist line on resource exploitation taken by politicians ahead of Wednesday's presidential election has hardly helped.

The mining industry is also awaiting details of regulations in a new mining law passed last year which was aimed at squeezing more from the country's rich mineral resources.

President Susilo Bambang Yudhoyono, who is widely expected to be returned to power, is seen as more open to foreign investment than his challengers, Megawati Sukarnoputri and Jusuf Kalla.

Here are some questions and answers on mining and the election.

IS INDONESIA GROWING MORE NATIONALISTIC OVER ITS RESOURCES?

Megawati has said she would take a tougher stance in contract negotiations with foreign resource firms if elected, singling out the Grasberg copper mine in Papua run by a unit of Freeport McMoRan Copper & Gold (FCX.N) for criticism.

Kalla has also said that "unfair" contracts with foreign resource companies should be re-negotiated.

The Yudhoyono administration, however, has previously said it would respect contracts.

Analysts say a more nationalistic stance on resources is no surprise during an election period, but it could mean Indonesia loses out on investment later on, particularly given the current scarcity of global capital.

WHAT ARE THE RISKS OVER THE NEW MINING LAW?

The government is currently drafting regulations on the law for presidential approval and has said it plans to issue them by October before a new government takes office.

Issuing the regulations is seen as crucial to give certainty to investors. In the case of an oil and gas law passed in 2001, it took three years to issue the implementing regulations.

The new mining law means that investors will be put on shorter-term mining permits rather than longer-term contracts of work, while they will also have to process minerals in Indonesia and to set aside some of their coal for the domestic market.

Foreign investors will also have to divest to local players some of their shares in a mining project after a period.

Investors want clarity on all of these issues, particularly to ensure that previously agreed contracts of work are respected.

The plan to oblige coal-mining firms to set aside coal for local consumption has also sparked concerns among buyers over the long-term availability of coal from the world's top thermal coal exporter.

Details are still sketchy on the percentage coal producers must set aside, the price they will receive, and arrangements for producers who do not mine coal that is suitable for domestic use.

WHAT IS THE OUTLOOK FOR NEW FOREIGN MINING INVESTMENT?

The government has frozen new mining permits until the regulations are finalised and if they are not implemented by October there is a risk of further delays under a new government.

Either way, mining firms and experts say the mining law in its current form may not offer enough certainty to attract major new investment. The previous contract of work system was seen as more secure than the new licences, while the new law also limits the size of mining areas, also less attractive for big miners.

However, more smaller projects, which often run for a shorter period and need less capital, could go ahead under the new law.

The Indonesian Mining Association has said mining investment would fall below $1 billion this year due to uncertainty over the new mining law, although the government says investment from mining -- including geothermal -- could surpass $2 billion.

Some foreign companies have shelved investment plans since last year. BHP Billiton (BHP.AX) scrapped a study to develop an integrated nickel project in eastern Indonesia and also decided it would not go ahead with a coal mine in Central Kalminantan. Tsingshan Mineral Company Ltd had scrapped a $500 million nickel project in North Maluku in Indonesia.

WHAT ABOUT LEGAL CERTAINTY FOR MINING?

Legal certainty is a key issue for investors in Indonesia's mining sector and the government has been involved in a number of disputes with foreign mining companies.

PT Newmont Nusa Tenggara, an Indonesian unit of Newmont Mining Corp. (NEM.N), and the government went to arbitration over a dispute on divestment.

The two sides are still negotiating over price after the government ordered Newmont to sell 17 percent of its shares to the Indonesian government within six months.



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