Thursday, March 23, 2017
Mining Businesses in the Wake of PP Minerba: Many Issues Loom Regarding Indonesia’s Mining Divestment Policy
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Marcell Sihombing, M. Dani Pratama Huzaini


Illustration by: BAS.


The implementation of Indonesia’s mining divestment policy, as stipulated under Law No. 4 of 2009 on Minerals and Coal Mining (“Mining Law”), as well as all of the relevant implementing regulations, represents the government’s intention of firmly underlining its absolute authority over the country’s mineral resources. Through this policy, any foreign mining companies investing in Indonesia are required to periodically sell a portion of their shares to Indonesian parties, thereby transferring the ownership of said investments to local companies.
The government strongly believes that this particular policy has two major benefits for Indonesian citizens. Firstly, the policy will enable any Indonesian citizens who possess shares in mining companies to directly access profits from this line of business, instead of only having access to indirect benefits in the form of increases to the country’s tax revenue. Secondly, the policy also allows Indonesian companies to gain access to new mining technologies, as well as to develop new and inventive business practices and generate greater domestic employment and business opportunities.
The Natural Resource Governance Institute (“NRGI”), however, recently commented that expecting these kinds of benefits to emerge from the divestment policy might prove overly optimistic, as they will surely require large amounts of funding.
“Critically speaking, our analysis shows that this policy will ultimately hinder foreign investment in the future, and may even lead to the diminution of the country’s mining sector as a whole,” asserted NRGI researcher David Manley.
Mr. Manley admitted that the government’s decision obliging foreign companies to comply with the mandatory divestment policy may bring greater benefits to Indo0nesian citizens. However, through his research, Mr. Manley has also identified several possible difficulties which the government will have to face when attempting to secure any major benefits from the divestment policy.
Firstly, the domestic purchase of divested shares will eventually lead to an increase in Indonesia’s level of foreign debt or at the least funnel a major portion of domestic investment away from other sectors and into the mining sector. Mr. Manley went on to explain that most of Indonesia’s investments were generated from foreign investors, and that only a quarter of the USD 21 billion (IDR 2,394 trillion) total investment in Indonesia had been generated from domestic investors. Conversely, over the course of the last five years, the extractive sector has successfully attracted some USD 21 billion (IDR 279 trillion) through foreign-investment schemes, a figure that is equal to half of the country’s total domestic investment across all business sectors.
Mr. Manley also asserted that any divestment policy which mandates that foreign companies divest some 51% of their equity capital represents a far superior amount of shares when compared with the country’s average annual investment flow. Should Indonesian citizens attempt to purchase any divested shares in excess of 51% of any company’s equity capital, then the necessary funding required to do so might have to be derived from a significant portion of the investment which was originally ploughed into other sectors of the economy.
In other words, Mr. Manley has asserted that an effective divestment policy mandates that domestic investors take on the role which was previously performed by foreign investors. However, in reality, the abovementioned data reveals that domestic investors rarely engage in investment activities in order to take up said roles, and instead mainly invest fixed amounts of short-term funding into various economic sectors.
Mr. Stanley has also described the various options which are available to any domestic investors who are intending to purchase foreign mining-company assets, as follows:

“The consequences of these options might not be appealing to Indonesian citizens and may also mean that the purchase of any mining shares amounts to little more than a hollow victory,” Mr. Manley asserted.
Moreover, the amount of dividend yields (imbal hasil) which are generated through a given investment may be lower than expected. Mr. Manley admitted that owning shares in mining companies enabled Indonesian citizens and state-owned enterprises (“SOE”) to receive dividends, however he also pointed to the fact that said dividends might not ultimately prove satisfactory, due to the fact that in most cases, Indonesian entities do not have the necessary funding required to purchase divested shares and instead have to secure loans in order to do so.
The various provisions which are set out under Article 2 (1) of Ministry of Energy and Mineral Resources Regulation No. 9 of 2017 on Procedures for Share Divestment and Mechanisms for the Determination of the Prices of Divested Shares for Coal and Mineral Mining Business Activities (“Regulation 9/2017”) prohibits foreign companies from lending out any of their funds for the purpose of purchasing shares. This means that Indonesian buyers are required to secure such loans from other sources. Described below is an example of how a private party may ultimately become trapped in a complex process when simply attempting to purchase shares in a given mining company.

Thirdly, in contrast with commonly held expectations, any transfer of ownership from foreign parties to Indonesia may not actually lead to any drastic increase in domestic employment opportunities within the mining sector, and may indeed actually reduce business opportunities for Indonesian citizens within this important sector. Mr. Manley has asserted that by becoming majority shareholders in mining businesses, Indonesia should be able to steer said companies in the direction of offering more employment and business opportunities for Indonesian citizens, in comparison with leaving them to be managed by foreign companies.
“These opportunities can be generated through the creation of employment for Indonesian citizens within mining companies or within mining companies which are owned by Indonesia in cooperation with Indonesian service companies instead of international companies,” Mr. Manley has claimed.
Mr. Manley has also revealed that Indonesian mining companies tend to have stronger local business networks that foreign entities do. Theoretically speaking, the transfer of majority ownership to Indonesia after the tenth year of production (as mandated under the policy) should ultimately contribute to the development of domestic connections. However, in reality there is a strong possibility that the transition process whereby Indonesia becomes the majority shareholder will have little or no impact upon such opportunities, in stark contrast with the government’s expectations.
There are three main reasons underlying this predicted failure. First of all, most mining project expenses are incurred during a project’s development stage and the 10-year development phase that takes place when a company is being managed by foreign parties who are the controlling shareholders. Secondly, projects tend to establish their own supply networks during such periods, and these are generally utilized by Indonesian owners, should the networks in question lead to more effective operations.
“Meanwhile, foreign companies may not wish to lose their access to their supply chains, so as to maintain dividends from the remaining equity, while a continuous supply of the relevant materials will also provide new business opportunities for the foreign company in question,” asserted Mr. Manley.
Thirdly, the composition of local employees within the mining sector may not experience any significant increase, in spite of any changes which are made to the ownership of a given company. By way of example, as of 2015, PT Freeport Indonesia consisted of some 32,400 Indonesian employees but only 152 expatriate employees, while all of the company’s employees were being properly remunerated for their work.
“So any change in ownership does not necessarily guarantee an increase in the number of Indonesian employees. Indeed, if the divestment policy ultimately turns out to be a hindrance in terms of new investments, then employment opportunities for Indonesian citizens may actually be reduced instead,” Mr. Manley concluded.
The Need to Establish a Special Institution

Priyo Pribadi Soemarno, the Executive Director of the Indonesian Mining Industry Development Council (Dewan Pengembangan Industri Pertambangan Indonesia) has also commented on this issue and has emphasized the need to establish a special, independent institution which has the authority to assess the worthiness of any company shares which are earmarked for divestment. According to Mr. Soemarno, there are four factors that need to be taken into consideration in order to assess the worthiness of foreign shares prior to their divestment. First, there is the share value of the company in question. Second are the assets of the company in question. Thirdly, the mineral reserves of the entrenchment of the company should be taken into consideration. And finally, the business license of the company should also be considered.
“Who assesses companies such as Newmont and Inalum? After all, such assessments are often undertaken by interested parties. By way of example, if an assessor is a prospective buyer, then this can prove problematic. Assessors should be independent and should serve the country’s interests, so that any purchase conforms to the actual value of any enterprise. This kind of assessor should be in possession of plenty of references and should also be connected to an international network,” Mr. Soemarno asserted.
In regard to the issue of share value, Mr. Soemarno claimed that obtaining knowledge of a company’s share value had become a lot simpler, owing to the fact that information on the prices of single shares had become available through the capital market. Thus all that remains to be done is to multiply this value by the number of available shares.
Another factor that needs to be taken into consideration is the value of a company’s assets. According to Mr. Soemarno, this is where an independent institution is required, due to the fact that assessing the assets of foreign mining companies requires the support of an international network. In contrast, Indonesia lacks experienced experts who can serve as a proper reference within Indonesia.
“I believe that there is a need to check and recheck any references with their foreign counterparts. By way of example, the bookkeeping value of a major company should be processed in a way that will ultimately determine its actual value (nilai riil). Thus, share values should be actual values as opposed to marked up values,” Mr. Soemarno told Hukumonline.
Mr. Soemarno also claimed that an independent institution was necessary in relation to the available mineral reserves of any given mining company and stated that there was an important dilemma to address involving such mineral reserves. Indeed, despite the stipulations set out under the 1945 Constitution which state that earth, water and any natural resources contained therein should remain under the country’s control and must be utilized for the benefits of the people, companies that end up discovering coal reserves tend to consider such reserves as their own property.
Mr. Soemarno therefore asserted that a regulatory framework should be introduced in order to determine the percentages of reserve ownership. After all, in practice, mine owners are allowed to secure loans from international financial institutions while using their mineral reserves as collateral. It is therefore imperative that the government is ultimately able to clarify the percentages which can be granted to finders of reserves, and thus the percentages which are owned by the government.
Finally, Mr. Soemarno addressed the issue of licensing, asserting that any license should specify an expiration date. This expiration date can then be used as a basis to predict the total profit that can be generated during the operational lifetime of any mine. This information should also be included in a company’s profile, thus affecting its share value.
Should any divestment process be undertaken in the middle of a mine’s operational period, then the government and the relevant domestic companies should pay certain compensation fees in accordance with the total projected profit for the mine’s operational period.
Divestment: Formulating a Clear Purpose

Mr. Soemarno also claimed that the government should not be focusing exclusively on majority share ownership as the sole purpose of divestment, as there is also a pressing need to reinforce various instruments which support the divestment policy itself, so that the policy does not hinder the development of the national economy.
“This is essential for the country and for the nation. We cannot allow the existence of a divestment policy which does not generate any profit for Indonesia. Indonesia may well possess a greater portion of shares than foreign parties do, but what will be the consequences of taking ownership of so many shares? What will we sacrifice through the obtaining of so many shares?” asserted Mr. Soemarno.
In conclusion, Mr. Soemarno expressed his regret regarding the fact that the initial purpose of the divestment policy’s implementation had been to strengthen the role of government and domestic mining companies, but that this had been hampered by an unreasonable share price. However, if the assessment of any foreign shares is undertaken properly by an independent institution without any mark ups being introduced, then Mr. Soemarno claimed that both the government and domestic mining companies should be more than capable of purchasing the requisite foreign shares.