Indonesia’s mining asset-grab overplays its hand

March 8, 2012

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Indonesia is overplaying its hand with foreign investors. A decree forcing foreign miners to cut their stakes in projects below 50 percent demonstrates a worrying disregard for overseas capital. Indonesia’s finances are robust, but ongoing fuel supply issues, caused by a lack of energy investment, show it can’t afford to play too rough.

The rule isn’t a brand new outbreak of resource nationalism. It is ad hoc legislation to fill in holes in a 2009 mining law, which followed 2003 revisions to royalties and 2001 rules on distributing mining revenue. The 2009 law required foreign owners to start divesting after five years of production, but didn’t say by how much. A number has now been provided, but it’s still not clear which existing mines the new terms will affect, if any.

In a nation renowned for red tape and corruption, veteran investors recognise periodically shifting goalposts as an invitation to haggle. The lack of clarity in the newest law will strengthen the government’s hand in ongoing talks on Freeport McMoRan’s 90.64 percent stake in the gold and copper mine in Indonesia’s restive Papua province.

But haggling and uncertainty don’t make for a game that everyone wants to play. Indonesia’s ratio of foreign direct investment to GDP is lower than Syria’s. The shortage of foreign capital explains Indonesia’s need to import refined fuel, despite being East Asia’s second-largest oil producer and having its largest natural gas reserves.

The Indonesian government provides subsidies to keep the domestic price of fuel and electricity down. With the global oil price rising, these payments now take up roughly 18 percent of Jakarta’s expenditures. Leaving aside the inevitable distortions of subsidies, it’s short-sighted to finance them by grabbing a larger slice of the resource pie. It would be far better to provide enough legal certainty to attract investment in desperately needed ports, mines, wells, refineries and power plants.

Indonesia’s rich resource base, 240 million people and a record of fast growth are all enticing to foreign investors. But if it keeps reshuffling the legal deck, fewer of them will be willing take a gamble.

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