A glimmer of hope amid chaos in Indonesia

Hans Vriens, Managing Director, PT APCO Indonesia, Jakarta

Indonesia produces little good news for foreign investors these days. Headlines from the last three weeks speak about Koreans and Japanese companies threatening en masse to pack up and move to greener pastures. Newspapers predict the coming collapse of the footwear, textile and mining sectors. Much is being written about the dismal state of Indonesia's court system. According to a detailed report by the Indonesia Corruption Watch verdicts are sold to the highest bidder as if it were an auction. This has resulted in ludicrous verdicts as in the case of Manulife, Kaltim Prima Coal (KPC) and Karaha Bodas.

Throw in a worrying combination of decentralization, misguided nationalism, local civil wars, higher taxes and new regulations, and one has a frightening mix that should have investors running for the exits.

However, amid the chaos there is hope. Indonesia is not falling apart. The administration of President Megawati Soekarnoputri has restored macro economic stability. Yes, decentralization is chaotic, but it has not resulted in a collapse of government services outside Jakarta.

On top of this, one of the most complicated, acrimonious and prolonged investment disputes is very close to a happy ending. Ten years after starting commercial production Indonesia's largest coalmine, KPC has finally been able to offer 51 percent of its shares, valued at US$419 million, to Indonesian parties.

KPC is jointly owned by the Anglo-Australian mining company Rio Tinto PLC and the British energy company BP PLC. According to a divestment agreement with the government KPC is obliged to offer 51 percent of its shares to Indonesian parties this year. However, the contract, signed in 1982, doesn't specify how the buyer would be chosen or how to deal with provincial and district governments that want to take over or buy into the mine.

Looking at the range of characters featured in this case, a happy ending was far from a likely outcome. Everything comes together in this case that gives hope and could spell disaster about the "triple transition": From an over-centralized state to one of the most decentralized states, from a dominant executive to a dominant legislature and the liberation of civil society.

That this landmark case involves a mining company is no coincidence. Miners, more than anybody else, have to contend with the vagaries of decentralization and are more than other investors besieged by competing demands from regional authorities. This is important, because in no other sector has so much power been transferred from the central government to regency authorities or kabupaten.

The cast that plays important roles in this case is enough to produce a horror movie. It includes as villain a crooked provincial governor claiming to fight for the interests of his people. However, non government organizations from East Kalimantan have convincingly proven that in reality the governor is trying to fill his own pockets. There is the regent of the district of East Kutai, who opposes the governor, and instead wants the district to buy a stake. East Kutai is the kabupaten that thrives economically as a result of the success of KPC. The mine exports around 14 million tons of coal a year, which is a quarter of Indonesia's total coal exports.

The governor has used every trick in the post-Soeharto book to get control of the "Pearl of Sangatta". His tricks included threats of blockades, harassment by hired youth gangs, death threats against NGO-members that exposed him, ludicrous court rulings, and aggressive lobbying of the DPR and the central government.

The most important question in this landmark test case was who would dare to stand up and stop this determined wicked governor, who claims to be acting in the spirit of regional autonomy.

The central government and the DPR were facing a dilemma. They had to be seen to be acting in the spirit of regional autonomy, accommodating aspirations of the provinces and districts while at the same time adhering to the contractual obligations vis-a-vis Rio Tinto and BP, two large foreign direct investors in Indonesia, the 6,000 employees of KPC and the US$ 500 million in yearly export revenues.

The workers justifiably feared for their jobs if PT Intan, a dubious private company with no experience in mining with the exception of a secret private agreement with the governor, would have been allowed to take over the running of the mine. In fact, PT Intan doesn't even have an office.

In the end the central government and President Megawati dared to stand up and decided not to give in to the aggressive tactics of the crooked governor and his small band of supporters. In a remarkable show of determination, the Ministry of Energy and Mineral Resources threatened to counter sue if the provincial government didn't withdraw a lawsuit through which it was blocking the divestment to any other party than itself.

At a limited cabinet meeting on July 31 President Megawati broke the deadlock. She decided that the provincial and district governments had to split a 31 percent stake in KPC. The remaining 20 percent would be sold to the state-owned coal mining company, PT Batubara Bukit Asam, so assuring a role for the central government. The governor is angry. He claims he is not interested in a minority stake. He wants control of the mine.

The decision by the President is remarkable because it successfully balances the interests of regional governments, workers, the revenues for the central government, and foreign investors. President Megawati has shown that the central government is willing to stand up and deal with irresponsible provincial authorities who are not acting in the interest of the state. This is a significant piece of good news.

PT APCO Indonesia is a subsidiary of APCO Worldwide, a Washington-based firm specializing in government relations, and political and economic risk analysis.