Industry commentators say the Indonesian government’s new regulation which will cut foreign ownership in local mining projects from 80% to 49% will cost the sector billions by deterring international investors. The law is applicable to new contracts and means the foreign stake can be no more than 49% by the 10th year of production. 1

“It effectively means foreigners are going to lose control after 10 years. It’s going to make Indonesia a lot less attractive to foreign investors, as if it wasn’t already,” says Deloitte’s technical advisor on mining in Indonesia, Julian Hill. “This regulation is the latest in a string of changes to practice that have lessened Indonesia’s attractiveness to investors.”

The new law’s terms include a 20% sale of ownership after the project’s fifth year of production and then a continual reduction in ownership for the next five years.

“Sometimes a mining company doesn’t break even in five years, especially companies that make huge investments, like gold miners,” says Indonesian mining association deputy chairman Tony Wenas.

A record US$20 billion was injected into Indonesia’s economy in 2011 by foreign investors with US$3.6 billion going into the mining sector.

The sector was buoyed by the passage of a new mining law in 2009 which the government cited would improve the investment climate for foreigners, but since then parliament discussions have become increasingly protectionist.

Despite the passage of the 2009 law, discussions in parliament have in recent years taken a more nationalist tone, including the proposal to ban the export of raw materials by 2014 in a bid to stem foreign companies gleaning the country’s natural resources.

The government says the raft of new regulations aims to give Indonesian bodies a greater opportunity to engage in the mineral and coal-mining sector.

An economist at the University of Indonesia, named Kurtubi, welcomed the regulation, saying foreign companies have made huge profits from Indonesian resources without giving enough back to the country for too many years. “It’s not true that the regulation will deter foreign investors, because even if they hold a smaller share, they will still harvest plenty of profits.”

The government has denied claims by some large foreign mining companies that the new law unfairly targets them. “The regulation will be imposed on every mining company operating in Indonesia, in general. That includes Freeport and Newmont,” says deputy energy and mining minister Widjajono Partowidagdo.

Freeport, which contributes 1.6% of Indonesia’s gross domestic product, is negotiating to renew its royalty contract to run the 90%-owned Grasberg mining complex, which has the world’s largest gold reserves and is the second-largest copper mine. The government owns the remaining 10%.

Grasberg has become a publicized example of the growing labor unrest in Indonesia, as workers push for a bigger slice of the spoils in a booming economy. A three month strike in 2011 forced Freeport to partially meet demands for a pay rise for workers in December.

Newmont Mining is also engaged in a renegotiation with the government. Australian-based Intrepid Mines, which owns an 80% stake in the Tujuh Bukit mining concessions, is considering its best course of action given the new law. It was in the process of negotiating the conversion of the wholly-Indonesian-owned company PT IMN, which holds the permits, into a foreign investment vehicle.

Deputy trade minister Bayu Krisnamurthi says, “We still believe, even with only 49%, the mining sector is still very alluring, still very lucrative for everybody. In some countries, this industry is prohibited from international investors.”

INDONESIA - New foreign ownership regulation slammed

Industry commentators say the Indonesian government’s new regulation which will cut foreign ownership in local mining projects from 80% to 49% will cost the sector billions by deterring international investors. The law is applicable to new contracts and means the foreign stake can be no more than 49% by the 10th year of production.

“It effectively means foreigners are going to lose control after 10 years. It’s going to make Indonesia a lot less attractive to foreign investors, as if it wasn’t already,” says Deloitte’s technical advisor on mining in Indonesia, Julian Hill. “This regulation is the latest in a string of changes to practice that have lessened Indonesia’s attractiveness to investors.”

The new law’s terms include a 20% sale of ownership after the project’s fifth year of production and then a continual reduction in ownership for the next five years.

“Sometimes a mining company doesn’t break even in five years, especially companies that make huge investments, like gold miners,” says Indonesian mining association deputy chairman Tony Wenas.

A record US$20 billion was injected into Indonesia’s economy in 2011 by foreign investors with US$3.6 billion going into the mining sector.

The sector was buoyed by the passage of a new mining law in 2009 which the government cited would improve the investment climate for foreigners, but since then parliament discussions have become increasingly protectionist.

Despite the passage of the 2009 law, discussions in parliament have in recent years taken a more nationalist tone, including the proposal to ban the export of raw materials by 2014 in a bid to stem foreign companies gleaning the country’s natural resources.

The government says the raft of new regulations aims to give Indonesian bodies a greater opportunity to engage in the mineral and coal-mining sector.

An economist at the University of Indonesia, named Kurtubi, welcomed the regulation, saying foreign companies have made huge profits from Indonesian resources without giving enough back to the country for too many years. “It’s not true that the regulation will deter foreign investors, because even if they hold a smaller share, they will still harvest plenty of profits.”

The government has denied claims by some large foreign mining companies that the new law unfairly targets them. “The regulation will be imposed on every mining company operating in Indonesia, in general. That includes Freeport and Newmont,” says deputy energy and mining minister Widjajono Partowidagdo.

Freeport, which contributes 1.6% of Indonesia’s gross domestic product, is negotiating to renew its royalty contract to run the 90%-owned Grasberg mining complex, which has the world’s largest gold reserves and is the second-largest copper mine. The government owns the remaining 10%.

Grasberg has become a publicized example of the growing labor unrest in Indonesia, as workers push for a bigger slice of the spoils in a booming economy. A three month strike in 2011 forced Freeport to partially meet demands for a pay rise for workers in December.

Newmont Mining is also engaged in a renegotiation with the government. Australian-based Intrepid Mines, which owns an 80% stake in the Tujuh Bukit mining concessions, is considering its best course of action given the new law. It was in the process of negotiating the conversion of the wholly-Indonesian-owned company PT IMN, which holds the permits, into a foreign investment vehicle.

Deputy trade minister Bayu Krisnamurthi says, “We still believe, even with only 49%, the mining sector is still very alluring, still very lucrative for everybody. In some countries, this industry is prohibited from international investors.”

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