Fri, 25 Jul 2003

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.