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New Law Makes RI Less Appealing to Foreign Investors

Due to a recent regulatory overhaul, the performance of Indonesias mining industry is expected to weaken, making the country less attractive to foreign investors, a report issued by global rating agency Standard & Poors says.

The report, titled Indonesias Mining Law of 2009 and Subsequent Regulations: Unearthing the Impact, assessed the likely impact of the main provisions of the law and government regulations on companies in the countrys mining sector.

Although the mining law in 2009 only provides a broad framework, government regulations from later that year and 2010 provided greater clarity on both the spirit of the law and the possible credit impact for mining companies with Indonesian operations, Standard & Poors credit analyst Xavier Jean said in a press statement sent to The Jakarta Post.

Some regulatory provisions have direct implications for the revenues, profitability, capital expenditure and cash flows of mining companies in Indonesia.

In addition to increasing uncertainty in operations, the regulations might also make the industry less appealing to foreign investors, Jean said, adding that specific regulations would affect some companies more than others.

Increases in operating costs, possible delays in awarding mining licenses due to the decentralized decision making and domestic processing requirements might change the economics of long-term mining projects, the report said.

However, the agency said in it was too early to quantify the impact of the new regulations on the credit profile of mining companies in Indonesia as implementation of the mining law was ongoing.

The regulatory environment is still evolving, and the implementation of government regulations passed so far may differ somewhat from their original forms, Jean said.

The report seems to challenge the governments optimism for boosting investment in the mining sector this year. Earlier, the Energy and Mineral Resources Ministry said that it expected investment in the mineral and coal mining sector would reach US$3.2 billion this year.

In 2010, the ministry secured $3.18 billion in investment in the mineral and coal mining sectors, comprised of $1.48 billion in mining contracts, $764 million in coal contracts of work, $38 million in state-owned enterprise mining concessions and $904.82 million from mining service businesses.

The ministry promised to combat weak coordination between the central and local governments, particularly on mining license issuances (IUP).

The newly appointed director general for minerals and coal at the ministry, Thamrin Sihite, said recently that the ministry to assemble all governors and regents to discuss coordination in issuing licences for mining companies.

He said that thousands of mining licenses issued by local administrations had not been reported to the central government and that many of those licenses had legal problems, he added.
Such conditions made it difficult for the central government to determine which areas were available for new investment, Thamrin said.

The ministry has been inventorying between 5,000 and 6,000 mining licenses, including those given to coal producers, to identify overlapping licenses that have been issued by provincial and regional administrations, he told reporters.

In addition to the mining sector, foreign investors also complained about uncertainty in oil and gas exploration and production activities.

Tom Cutler, the director for European and Asia and Pacific affairs at the US Department of Energy, said that legal uncertainties remained a problem in Indonesias oil and gas sector.

Speaking during his visit in Jakarta on Tuesday, Cutler said Indonesia needed to ensure the legal certainty such as those related to mining contracts if it wanted to attract more overseas investments.

The Jakarta Post




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