Finbarr Bermingham reports on the changeable regulation of Indonesia and how it is affecting the country’s perennial battle to fulﬁl its potential.
In January, when the Indonesian government relaxed a controversial and hotly-debated ban on certain mineral exports, the most surprising thing was that people were surprised at all.
The country is a notoriously difﬁcult place to do business. Exporters have to deal with continual regulatory upheaval, poor trade infrastructure and an economy that’s in the ﬁring line for even the slightest change in commodity prices. Importers have to deal with signiﬁcant regulatory barriers to entry, pervasive graft and, again, an infrastructure deﬁcit that makes it extremely difﬁcult to get their goods to market. Investors? They must surely look at the situation and wince.
The relaxation in January of the 2014 ban on the export of nickel ore and bauxite was the latest chapter in the country’s confusing dance with mineral export laws. The law was initially mooted in 2009 – at a time when commodity prices seemed to be on a perpetual northbound trajectory. Its purpose was to force companies to invest in smelters and processing facilities, expensive projects that would guarantee more valuable exports for the local economy.
“The policy was rolled out as a resource-nationalist initiative at a time when Indonesia thought that mineral commodity prices only went in one direction – up,” Bill Sullivan, senior foreign counsel at Jakarta-based law ﬁrm Christian Teo & Partners, tells GTR. “The mineral commodities price cycle didn’t exist and therefore the government could continually increase the price to play in the Indonesian mining space by imposing ever more onerous obligations on mining companies, and foreign and domestic investors would still be very pleased to participate in Indonesia’s mining industry.”
However, by the time the rule kicked in, the bubble had burst. The economic landscape had changed. China’s construction market had slowed signiﬁcantly, which hammered commodity prices, and resource-rich Indonesia was no longer as lucrative a market as it had been back in 2009. While prices have recently staged something of a recovery, it is unlikely to be long term, given the inﬂationary effect of Chinese government stimulation. Certainly, we won’t see the return of the supercycle any time soon.
Some companies – mainly Chinese and Japanese ﬁrms – have invested in smelters, but not as many as the government had hoped, perhaps understandably given the shocks commodities markets have undergone recently. In Indonesia’s absence, other nickel exporters made hay. Malaysia and Madagascar gained ground, while the Philippines overtook the country to become the world’s largest nickel ore exporter.
The Jokowi administration was faced with a dilemma: stick with an export ban devised by a previous government that was draining the national coffers, or twist. The government, two years into an election cycle and in need of a popularity boost, chose the latter. It relaxed the ban, while vowing to encourage companies to show signs of moving towards smelter construction in the years to come.
“The immediate winners from the relaxation of the export ban appear to be larger players who have not yet constructed smelters, who may now export certain amounts of mineral concentrates,” Rick Beckmann, senior foreign counsel at TNB & Partners, a Jakarta law ﬁrm associated with Norton Rose Fulbright, tells GTR.
“On the other hand, the loudest criticism is from those who have already invested in the Indonesian smelter industry. Following the relaxation announcement, shares in smelter investment companies, together with nickel prices, tumbled. A major Chinese investor has indicated it is considering joint legal action against the Indonesian government with others impacted by the relaxation,” he adds.
The Indonesian government will be hoping that the ban’s relaxation will boost trade, create work for unemployed miners (made redundant by the ban’s introduction) and see it return to the top table of nickel exporting (especially given the actions of Rodrigo Duterte, the neighbouring Filipino president, who has been closing mines for “operating irresponsibly”).
President Joko “Jokowi” Widodo may also be hoping that it acts as an olive branch to lenders and investors, some of whom view Indonesia as an economy too volatile in which to place their money. But many people with experience of working in the country have slammed the change as being another twist in an unpredictable tale that will only tarnish Indonesia’s international reputation.
“The fact that there is no sustainability in the mining laws will discourage foreign investment,” says Brahim Zerouki, commodity trading director at Tricore Capital, who has signiﬁcant experience of the mining laws and markets of the Southeast Asian country.
Manu Bhaskaran, Singapore-based director of policy advisory forum Centennial Group International, tells GTR: “The mineral export laws have unsettled foreign investors, not just in the mining sector but more generally. It is not just the ﬂip-ﬂopping but the impression given that Indonesia is deeply suspicious of foreign investment. This feeds into a sense that Indonesia is too difﬁcult a place to do business.”
A case in point might be the recent US$2bn international arbitration dispute the government was embroiled in with Churchill Mining. The company bought a 75% stake in Indonesian mining company PT Ridlatama in 2007. The local company claimed to own hold four mining licences in the coal-rich East Kutai district of Kalimantan, and when Churchill’s exploration teams found 250 million tonnes of coal there in 2008 – 150% more than anticipated – they must surely have thought they’d hit the jackpot.
However, the government backed a rival claim from PT Nusantera, a local energy company with links to some of Indonesia’s most powerful ﬁgures, in its claim to the resources. A lengthy arbitration ensued, and eventually the Indonesian government emerged victorious in an investor-state dispute settlement (ISDS) case brought via Indonesia’s bilateral investment treaties (BITs) with Australia and the UK. The judges ruled that Churchill’s partner PT Ridlatama’s claims were the product of fraudulent documentation, and so the concession went to PT Nusantera.
While perhaps viewed as a cause for celebration in some quarters of Indonesia’s government, the case reﬂected very poorly on the business climate in the country. Many public ofﬁcials were caught up in allegations of fraud, with one local bureaucrat ending up as the proud owner of a private jet. Allegations of corruption are not new in Indonesia (indeed, it is accepted as an occupational hazard for many contractors and traders), but having its dirty laundry aired in such an international and public forum has done the country few favours.
The case also means that companies from Australia and the UK, in the future, may not expect to beneﬁt from the basic investor rights from their respective BITs, Christian Teo’s Sullivan says.
“Assuming it is not overturned on appeal, the outcome of the Churchill Mining arbitration has important implications for how prudent foreign investors should operate in Indonesia as well as for the Indonesian government’s opposition to existing BITs and international arbitration of investment disputes,” he explains.
As President Jokowi looks to international markets to ﬁnance his infrastructure improvement plans, all of these factors contribute to a ﬁckle and changeable image that he must be desperate to shake.
In January, the Asian Infrastructure Investment Bank (AIIB) pledged a series of loans for Indonesia’s infrastructure, including US$216mn to ﬁnance the development of slum areas and US$100mn for regional infrastructure development. The government is also hoping to tap the development bank for its Java 7 power plants initiative and to fund a toll road project in Sumatra.
But generally speaking, fundraising is proving to be a huge challenge, even for projects that are underway. Indonesia’s reputation on the project ﬁnance markets is poor. Lenders are wary, and further changeability will act as a further deterrent.
“Indonesia says it has a national pipeline of 240 projects priced at however many billions of dollars. It does that every year and yet doesn’t actually produce any projects. They don’t project their attention and resource into delivery of two projects, never mind 200. This action of prioritising projects is a big political risk and one which stops a lot of projects coming to market,” Roddy Adams, managing director for infrastructure ﬁnance at engineering consultant Atkins Acuity, tells GTR.
It would be unfair to place the entire blame on the sitting government. The laws on mineral exports were, as mentioned, the product of a previous administration. The Churchill Mining case also predates Jokowi’s tenure, and even so, it would be unrealistic to expect him to eliminate corruption in a country and population as vast as Indonesia’s.
“I would argue that the Jokowi administration has tried and done reasonably well. Anti-corruption efforts have continued to shift incentives against bad behaviour – it is slow but persistent,” Bhaskaran says.
For traders, exporters and banks, however, the change can’t come soon enough. Until it becomes a place people are happy putting their money, we’ll continue to talk about Indonesia in terms of its potential.