Clouds Gather Over Indonesia
Investors Fear That Contract Disputes, Nationalism Will Curb Access to Natural Resources
By Kathy Chu
And I Made Sentana
JAKARTA, Indonesia-Indonesia is struggling to contain rising con cern that contract disputes and nationalism could impede investors' access to its valuable stores of oil, gas and minerals.
European financier Nat Rothschild stepped down last month from the board of London-listed Bumi PLC after Indonesia's Bakrie fantily offered to buy the coal miner's Indonesian assets. U.K. based Churchill Mining PLC is locked in a battle with local authorities over a coal project in Borneo. Australia-listed mining company Intrepid Mines Ltd. says its employees were forced off a gold and copper exploration project by Indonesian investors. And four employees of U.S.based Chevron Corp., which has been in Indonesia almost 90 years, have been jailed as the at torney general's office investigates possible corruption at a Sumatra environmental cleanup site.
"The issues are accumulating to that investing in Indonesia is not easy," says Dipnala Tamzil, executive director of the Indonesian Petroleum Association trade group.
Business disputes can crop up in any country. And this archipelago of nearly 250 million people, with one of the world's fastest-growing econ omies in the world, has attracted record foreign direct invesonent in recent quarters.
But Indonesia's recent incidents are fueling concern about regulatory transparency and predictability, says Andrew White, managing director of the American Chamber of commerce in Indonesia.
"The question is: How much more investment could Indonesia realize if it addresses these critical issues?" he says. ''There are tens of billions of dollars sitting on the sidelines." Chevron spakesman Alex Yelland says the company "regularly reviews its investment plans, and confidence in the legal and regulatory framework is a critical part" of any decision.
Indonesia's foreign direct investment rose to a record $5.9 billion in the third quarter, up 22% from a year earlier, a sign the country remains attractive to foreign investors because of its swelling middle class. Indonesia's palicies are "robustly supportive of a continuously improving investment climate," says Indonesian Trade Minister Gita Wirjawan last month.
Yet while Indonesia ranks among the world's top 10 countries in mineral POtential , it is among the bottom 10 as far as the effect of government policies on exploration, aecording to a survey late last year by Canadian think tank Fraser Institute of about 800 mining-related companies. Indonesia, a former member of the Organization of the Petroleum Exporting Countries, has be a net importer of oil for years as its aging fields have yielded progressively less oil.
As the presidential election approaches in July 2014, there is alSo a "very nationalistic tone" to the country's mining regulations that could hurt foreign investment, says "Adam Worthington, an analyst with Macquarie Securities. Mr. Rothschild, the European financier, wrote in his resignation letter that the Bakrie family's offer to buy the coal miner's Indonesian assets was "obviouslY not in the Utterests of minority shareholders and the "vast majority of indonesian business people are shocked by the appalling impression" that the dispute gave to foreign investors. The Bakries declined to comment.
Indonesia has introduced new restrictions on .foreign ownership of mines and is renegotiating mining royalty rates with major foreign investors. Some investors view the government's actions as nationalistic, and "maybe there's,some truth to it,"says Muhamad Chatib Basri, chairman of Indonesia's Investment Coordinating Board. But Indonesia needs to diversify from its reliance on natural-resource mining, so must encourage companies to move to higher value services, according to Mr. Basri. Only a quarter of the companies in the American Chamber of Commerce's most recent pall said they planned to expand in Indonesia, compared with 72% last year and 69% in 2010. The latest survey, of 356 chamber members in seven Southeast Asian countries. was conducted between June 15 and July 3.
While the reason for this year's drop wasn't clear, corruption, infrastructure, protectionism and government regulations consistently rank as top concerns for chamber members, Mr. White
says. Whether contracts in Indonesia will be honored also is key, he says. Churchill Mining is pursuing its claims on the Borneo coal project through arbitration at the International Centre for Settlement of Investment Disputes in Washington. Intrepid Mines alleges that its Indonesia partner, PT Indo Multi Niaga, breached their contract by selling a stake in the gold and copper exploration project. "This episode, and others in Indonesia recently, have demonstrated that so,me elements of the business community believe they can act unlawfully with impunity," says Intrepid Chief Executive Brad Gordon.
Indo Multi Niaga declined to comment. And Mr. Wirjawan, the Indonesian trade minister, calls the Bumi struggle a "corporate issue." Meanwhile, the Chevron employee arrests could set a "new precedent" for the oil and gas industry, says the petroleum association's Mr. Tamzil, because production sharing contracts say dlsputes should be resolved through civil not criminal law. The Indonesian attorney general's office aJleges Chevron's cleanup project was "fictional" and cost the country $23.4 million be cause oil drilling related waste wasn't removed from the soil.
Chevron's Mr. Yelland says the project was approved by the government and has rehabilitated enough soil for 75 football fields. The U.S. company requires employees to commit to a "stringent" code of conduct, he says.
Todung Mulya Lubis, a lawyer for the Chevron workers, says the project was conducted by the rules and proof submitted to the attorney general's office.
Eric Bellman
and Joko Hariyanto
contributed to this article