KPC hits new minefield

KPC hits new minefield

The three-year legal tangle over the divestment of 51 percent
of shares in PT Kaltim Prima Coal (KPC) took a new twist this
week after KPC's controlling owners, British BP Plc and Anglo-
Australian Rio Tinto, reportedly agreed to sell their entire
stake to PT Bumi Resources, an Indonesian company listed on the
Jakarta Stock Exchange.

The transaction, which Rio Tinto spokesman Anang Rizkani said
would be closed in October with loan financing from European and
Asian banks, seemed, at first glance, lawful, as the deal simply
executed KPC's long-delayed divestment to Indonesian interests,
as required by its 1982 coal mining contract.

However, the deal seems to have plunged KPC divestment into a
new legal and political minefield.

State Minister of State Enterprises Laksamana Sukardi accused
the two giant mining companies of acting in bad faith as regards
their obligation to divest 51 percent of their shares in the East
Kalimantan coal mine operator.

Suwarna, the governor of East Kalimantan, where KPC operates,
insisted he would fight all out to get 51 percent of the company,
threatening to blockade the largest, most profitable coal mining
company in Indonesia to support his claim.

Rio Tinto's and BP's move is indeed highly controversial
because the central government and KPC, after protracted
negotiations, had previously agreed to value the mining company
at US$ 822 million, on which the 51 percent divestment would have
been based. But while the 51 percent divestment is still pending,
the foreign mining giants suddenly sold out the whole company at
only $500 million.

The two mining companies' transaction is also legally
questionable because, even though Bumi Resources is known as one
of Indonesia's entities interested in buying KPC shares, it
violates the government previous decision to allot 31 percent of
the divested stake to the East Kalimantan administration and the
other 20 percent to state-owned PT Tambang Batubara Bukit Asam.

Indeed, for the sake of a positive social and political
environment for KPC's future operations, and security for the
extension of its mining contract, the 51 percent stake should
best be acquired by local administrations (East Kalimantan
province and East Kutai district) and a state company, which
would represent the central government's interests, provided all
the agreed terms of the sale could be fulfilled.

Even though KPC understandably felt frustrated at the legal
tangle and acrimonious negotiations over the divestment, the
controlling shareholders should not have made such a deal without
prior consultation with the central government. Even KPC's board
of commissioners, which include several wise, broad-minded
Indonesians, might not have priorly been notified on the deal,
otherwise they would have strongly advised against such a
controversial transaction.

Bumi Resources, too, should not have been so blinded by the
potential huge gain in the deal as not to realize the hostile
social and political environment it would encounter in taking
over KPC's operations.

As the KPC deal with Bumi Resources has yet to be closed, it
is not yet too late for both KPC and the central government to
negotiate a commercially and politically acceptable solution to
the divestment dispute.

In fact, a new ball is being thrown into the game, as both BP
and Rio Tinto now seem willing to divest themselves totally of
KPC, apparently out of concern over losing management control and
facing likely hostile majority shareholders after a 51 percent
divestment.

The controversial, preemptive move by both BP and Rio Tinto
has made it most urgent now for both sides to intensify their
negotiations to sort out whatever differences still stand in the
way of the divestment.

The government should see to it that however the divestment is
concluded, the deal should be based on what is in the best
interests of the nation. That means that the divestment should
sustain both the viability of KPC's operations and the company's
international credit standing. It also means that KPC creditors
and East Kalimantan provincial and East Kutai district
administrations should feel comfortable with whomever eventually
takes over control of the company.

The deal should also be seen by the market as fair, otherwise
it will adversely affect the process of regaining foreign
investor confidence. A KPC divestment that is perceived to be
fair could even become a benchmark for other, similar
transactions with foreign resource-based companies that are
required by Indonesian law to divest their majority interest
within a fixed period.