FOR GENERAL ISSUE - JULY 26

FOR GENERAL ISSUE - JULY 26

;JP;HEN;
ANPAf..r..
Coal-industry-outlook

Rikza Abdullah
Contributor
Jakarta

Coal industry grows robustly but still lacks fresh investment

Indonesia is enjoying robust growth in its coal industry but
it needs to be aware of the signals threatening its future
development due to a possible stagnation in new investments.

The government reported a 20.2 percent growth in the country's
coal output and a 12.4 percent increase in its coal exports last
year, but industrial executives revealed that a difficult
investment climate, unfavorable mining regulations and
uncertainty in the implementation of laws on regional autonomy
had discouraged companies from making new investments.

The Directorate of Mineral and Coal Enterprises, as quoted by
an economic report of the U.S. embassy here, says that the
country's coal production, which rose by 4.52 percent from 73.68
million metric tons (MT) in 1999 to 77.01 million tons in 2000,
further increased by 20.2 percent to 92.55 million tons last
year.

Out of last year's output, 76.53 million tons (82.7 percent)
were produced by companies operating under contracts of working
with the government, 10.21 million tons (11 percent) by the
state-owned PT Tambang Batubara Bukit Asam (PT BA) and the
another 5.8 million tons (6.27 percent) by small entities and
cooperatives.

PT Adaro Indonesia, a joint venture of New Hope Corporation of
Australia, PT Asminco Bara Utama of Indonesia and Mission Energy
of the United States, emerged as last year's largest producer
with an output of 17.7 million tons, followed by PT Kaltim Prima
Coal, a joint venture of Anglo-Australian company Rio Tinto and
British-American oil and gas company BP, with 15.53 million tons,
and PT Kideco Jaya Agung, a subsidiary of Samtan Co. of South
Korea, with 10.38 million tons.

The country's coal exports rose by 12.4 percent to 66.52
million tons last year from 59.19 million tons in 2000. Exports
by companies operating under contract with the government
increased by 17.21 percent to 60.65 million tons from 51.74
million tons, while exports by PTBA declined by 11.73 percent to
1.89 million tons from 2.15 million tons and exports by small
entities and cooperatives fell 25.1 percent to 3.97 million tons
from 5.3 million tons.

Indonesia's coal exports were destined mostly to Hong Kong,
Japan, the Netherlands, the Philippines, South Korea, Spain,
Taiwan, Thailand and the United States.

Domestic utilization of coal, which reached 22.3 million tons
in 2000, last year increased by 22 percent to 27.2 million tons,
out of which 8.2 million tons were supplied by PTBA and the
remainder by private companies and cooperatives.

Government officials are optimistic that coal production and
exports would increase further this year due to expected higher
demands both domestically and internationally. On the domestic
market, for example, the State Electricity Company (PLN) will
increase its coal purchases after the start of the operation of
its two 65-megawatt coal-fired power plants in Tanah Laut, South
Kalimantan, in February. On the international market, the
Philippines alone started this year to take an additional three
million tons of coal per annum from Indonesia under a long-term
contract agreement.

However, business leaders and financial executives have warned
that delays in new investments may hamper the growth of
Indonesia's coal industry in the future.

A spokesman for the Indonesian Association of Coal Mining
Companies (APBI), E. Koswara, told The Jakarta Post last week
that legal uncertainties had discouraged coal mining firms from
making new investments over the last three years.

Noke Kiroyan, president Kaltim Prima Coal, confirmed that no
single company would make new investments at this time of
uncertainty and that existing firms would only maintain their
current level of investments for their operations.

"The absence of new investment has caused the coal industry to
lose some US$7.8 billion in potential profits per annum," Koswara
said.

The legal uncertainty, combined by the recent economic crisis,
has also discouraged investors to start new mining projects.
According to APBI chairman Jeffrey Mulyono, 24 investors had
abandoned or canceled coal-mining projects worth a total of US$1
billion since 1998. Out of the 24 companies, three pulled out in
1998, 15 in 1999 and six in 2001.

Mulyono attributed that to a difficult investment climate and
unfavorable mining regulations. Government regulation No.
144/2000, for example, effectively abolished a restitution
facility on the 10 percent value added tax (VAT) that coal mining
companies have to pay on capital goods or services.

"Our costs have increased between 6 percent and 10 percent
because of this new tax policy," he was quoted as saying by an
economic report from the U.S. embassy.

Furthermore, he said, that law No. 34/2000 had expanded the
range of taxable commodities to include previously exempted heavy
equipment used in coal mining.

Koswara said the legal uncertainty was also partly caused by
the overlapping of laws on mining and forestry.

"APBI has repeatedly urged the government and the House of
Representatives (DPR) to amend the overlapping laws on mining and
forestry but government officials and DPR members are apparently
too busy with preparations for the general elections in 2004," he
said.

Mining executives have also complained that many local
administrations are imposing additional taxes after Jakarta
granted wide-ranging autonomy to regions in January 2001, further
deterring foreign companies from making additional investments.

A local administration in Kalimantan, for instance, has issued
a regulation instructing coal mining companies to pay a tax of Rp
250 per metric ton of coal mined.

Kiroyan said the legal uncertainty was also caused by the
government's 4-year-old amendment of the mining law and the
authorities' tendency not to honor existing contracts.

The government has submitted to the DPR a mining bill that
will abolish the existing ruling for contracts of work and
eliminate distinctions between foreign and domestic investors in
the mining sector. The bill, if passed into law, will also
recognize changes created by the implementation of Law No.
22/1999 on fiscal decentralization and Law No.25/1999 on regional
autonomy, which delegates responsibility for mineral resources to
local administrations.

Kiroyan explained that the current process of power
decentralization had encouraged local authorities to breach the
contract that his company had signed with the central government
for coal mining at Sangatta in East Kalimantan's Kutai Timur
regency.

The Kutai Timur regency and East Kalimantan provincial
administrations have demanded that Kaltim Prima Coal sell 51
percent of its shares to them only, even though its contract
agreement with the central government requires it to sell the 51
percent to a "domestic party", including the Indonesian
government, state-owned companies, private firms and citizens.

Kiroyan said the local administrations' demand for the
acquisition of the 51 percent shares was baseless because his
company's contract agreement did not provide exclusivity or
priority for any party.

Assuming that the local administrations would cooperate with
local firms inexperienced in coal mining, KPC preferred to sell
part of its shares to strategic partners and refused to sell all
51 percent to the local administrations. Then, East Kalimantan
Governor Suwarna, feeling offended by Kaltim Prima Coal's
refusal, filed a law suit at the South Jakarta District Court
against the company on charges of purposely delaying its
divestment. While waiting for the trial, the court sequestered
the company's assets at the request of the administration.

The World Bank's country director Mark Baird has also warned
that legal uncertainty and violence are the main stumbling blocks
in Indonesia's push to attract foreign investments.

"Currently, many investors are frightened away by the
inability of the judicial system to enforce contracts and by the
increased tendency to resort to violence to settle disputes," he
told a seminar in Jakarta in May.

The Asian Development Bank also said in April that there "is a
widespread perception that the policy environment for investment
in Indonesia has turned harsh and unsupportive."