Price for KPC divestment

Price for KPC divestment

The central government and PT Kaltim Prima Coal (KPC) have
finally agreed to value the mining company at US$889 million,
thereby clearing almost two years of deadlock in the negotiations
for KPC's divestment of a 51 percent stake to national interests,
as required by Indonesian law and the company's mining contract.

The agreement should be greatly welcomed, not only because it
could become a benchmark for similar divestments by other foreign
nonoil mining contractors, but also as it reaffirms legal
certainty in the mining sector in spite of the start-up problems
in the implementation of regional autonomy.

Most encouraging are the immediate agreement on the valuation
from the East Kalimantan provincial and Kutai regency
administrations, which are greatly interested in acquiring the 51
percent equity, and their decision to withdraw their lawsuit
against the company at the South Jakarta District Court.

Even though the asset valuation is solely the rightful
business of both the central government and KPC, the endorsement
from East Kalimantan and Kutai, which host KPC mining areas, is
quite crucial. This is because, seen from the safety and
stability of KPC future operations and security for the extension
of its mining contract, the 51 percent stake is best acquired by
local administrations or interests.

KPC, which is owned jointly by Anglo-Australian mining company
Rio Tinto and Anglo-American oil and gas company BP PLC, is
indeed required by Indonesian law to divest at least 5l percent
of its shares within five years to ten years after the start of
commercial operations, a deadline which fell due in January.

But the process had been held up by a combination of central
government-requested delays, the economic crisis and by what
local administrations have claimed to be KPC's procrastination.

Impatient with what they saw as the central government's
inert stance on the divestment issue, East Kalimantan and Kutai
administrations took the initiative to bid for the stake in early
2001 at $319 million. KPC not only turned down the bid as too low
but objected to negotiating directly with local administrations,
rightly arguing that it was willing to negotiate only with the
central government, which, in the first place, had awarded the
coal mining contract in April 1982.

The dispute escalated late last year after the two local
administrations sued KPC for $776 million, consisting of $144
million in dividends they claimed should have been paid out to
them under the stalled divestment plan since 1996 and $628
million in dividends projected over the next 10 years of the
mine's 30-year life, on the basis of 51 percent ownership.

The $889-million value of KPC ($453 million for the 51 percent
stake) agreed last week tallies with the valuation of KPC made by
Salomon Smith Barney late last year. The local administrations
stated in an open letter to KPC, BP and Rio Tinto carried by The
Jakarta Post newspaper early in March that they had accepted the
$889 million price based on the valuation made by Salomon.

It should nonetheless be noted that the price agreement is
only a step, though a big one, along the legal road before the
divestment is ultimately closed. A national commercial entity
has yet to be set up as a holding company for the 51 percent
stake. It is encouraging though to know that both KPC
shareholders and the central government have agreed to give top
priority to a bid made jointly by East Kalimantan and Kutai
regency administrations.

The central government should, however, see to it that the
local administrations are not a front for unscrupulous investors,
who have only short-term interests in the company and with whom
KPC founding shareholders feel uncomfortable.

In fact, for the sake of KPC's international credit rating,
the local administrations would be well advised to ask the
central government to take a portion of the 51 percent stake.

Local government and political leaders should live with the
blunt reality that despite the introduction of regional autonomy
in the country last year, foreign entities, notably international
creditors, still feel uneasy and legally insecure about dealing
solely and directly with local administrations.