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.