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Regulatory policy update

Indonesia was ranked the least friendly country when it comes to mining policy. The country has to recognise the effects this will have on potential investors

Update on Indonesia’s regulatory policies

Indonesia’s regulatory regime is complex and often criticised by foreign investors for the difficulty of doing business

“The global perception of the Indonesian mining sector is deteriorating. Indonesia comes in last place in terms of friendly government policy in the mining sector,” said Sacha Winzenried, a partner at PwC Indonesia and speaking at the annual Coaltrans Asia conference.

Winzenried was referring to the Fraser Institute’s Annual Survey of Mining Companies, released in February 2013. Indonesia came in 96th place in the policy potential index, which gauges friendly government policy.

Compared to last year, Indonesia is down from 85th place. Out of all the countries surveyed, Indonesia comes in second place for mineral potential, behind Mongolia.

The ranking was expected as many projects have been delayed because of regulatory hurdles. This reduces Indonesia’s competitive advantage over other countries and as a result the country could forfeit the scarce investment funds available in this tough economic climate.

Regulation 5

On April 5 2013, the Indonesian Investment Coordinating Board (BKMP) issued Regulation 5, concerning investment guidelines and procedures. The Regulation sets out new procedural rules on investment licensing and the approval process for foreign investors.

“While Regulation 5 is largely procedural in nature, there are some significant elements buried within it” said Haydn Dare, a partner at Herbert Smith Freehills in Jakarta and speaking at the conference in Nusa Dua, Bali.

Under the Regulation, a listed company (TBK) will be classified as a foreign capital investment (PMA) company if the controlling shareholder is a foreign investor. Any public company that is categorised as a PMA has to apply and obtain prior approval from BKPM when there is any change to its controlling shareholder.

This creates an issue as previously listed companies were treated like domestic investors and could conduct businesses closed to foreign investment. They were also able to satisfy divestment obligations and hold multiple IUPs.

Under Regulation 5, conversion to a PMA company and all subsidiaries must be completed within one year. If a subsidiary company is engaged in a line of business that is closed to foreign investment, the subsidiary must be sold to domestic investors.

Regulation 5 then raises the issue over grandfathering, or whether it will be applied retrospectively to existing structures. There is no such provision included in the Regulation, but early indications from the BKPM show that it will not be applied retrospectively.

Other issues that remain unclear in the Regulation are whether companies in which a PMA company holds a minority stake must be converted and if all subsidiaries must be converted or just directly held subsidiaries.

“Listed companies by nature give a sense of transparency, which foreign investors like. Regulation 5 is the Indonesian government trying to keep tabs on major controlling shareholders being foreign, but this provides another level of positive transparency,” said Alberto Migliucci, an independent at the conference and previously head of oil and gas, South East Asia at Credit Suisse.

On-going regulatory issues

The Indonesian government had previously intended to ban the export of coal with a calorific value of less than 5,700. This meant that producers would have to upgrade low-grade coal before export.

The government has recently announced that it is abandoning this proposal because of the lack of viable technologies. Using the audience response system at Coaltrans Asia, 61% said that having to upgrade the quality of coal would make their projects unviable.

Last year, there was an overhanging threat of an export tax of around 20% that would be placed on coal. Market participants believed this would make the Indonesian coal industry non-economic.

“It is not a good time to have any additional burden. A super tax would be more welcome by the industry, especially if profitability improved,” said Alastair McLeod, director and chief financial office at PT Bayan Resources.

A super tax would only apply when the industry is generating significant returns. McLeod noted that such taxes had been introduced in a number of jurisdictions around the world, with great success.

It remains to be seen if such a tax will be implemented, but the Minister for Energy and Mineral Resources Jero Wacik made it clear during his opening remarks at Coaltrans Asia that he expected better returns from the Indonesian coal mining industry.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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