Jakarta’s about face

The new head of the Indonesian Investment Coordinating Board says a ten year deadline given to foreign owners of resource projects in February to sell a majority stake to domestic investors may be dramatically extended.

Speaking in a interview in Jakarta this month, Chatib Basri, 46, who was appointed by President Susilo Bambang Yudhoyono to the position in June, told Australian Mining industry ministry officials were directed to develop a “roadmap” toward extending the current ten year deadline to sell at least 51 per cent of a foreign owned project to domestic investors.

“If you have to divest your investment there is no point in investment,” Basri said.

“How about something that makes sense for the investor what about a time horizon of 20 or 30 years? It builds confidence.”

The comments suggest a face saving solution for hardliners in the government who, in the run up to the presidential election in 2014, advocate more national control of the country’s resources.

Earlier this year the government imposed export bans of some metals by 2014 to encourage a domestic process industry.

“The spirit (of compromise) is there.”

For Basri, who is charged not only with the promoting the investment case for Indonesia abroad but with improving the environment for foreign capital once it arrives, the challenge is to get results fast without picking fights with powerful ministries in the two years he will likely have the job before term limits forces his boss from office in 2014.

Basri says the onslaught of proposed regulations have rattled investors.

“People are now questioning our credibility,” Basri said.

“Given the decree, the question is how do you deal with that? I try to work within constraints.”

Basri says other compromises may be in the offing such as excusing foreign investors from selling down stakes in smelters and other facilities that would promote domestic processing of raw materials.

The suggestions follow meetings between Basri and key ministers shortly after he took over as chairman.

The officials include Hatta Rajasa, the country’s chief economics minister, minister of energy and mineral resources Jero Wacik, Gita Wirjawan — trade minister, and industry minister Mohamad S. Hidayat, who has routinely called for steep export taxes on resources to boost the government’s share of resource earnings.

Hidayat must report back with detail on a plan to develop a smelting industry and say whether the 2014 deadline is practical, Basri said.

“I understand this process (of establishing a smelting industry) is not easy. You need capability. Maybe we can discuss the timing,” he stated.

A spokesman at the trade ministry did not return phone calls or emails regarding comment.

If Indonesian officials dramatically extend the deadline for divestment and make other exclusions it would fit a broader trend.

Officials jockeying for political advantage can issue sweeping edicts or proposals only to backpeddle when it comes time to implement them.

Ahead of the 2009 presidential election, proposed mining laws threatened to ban overseas mining service providers.

But after the re-election of President Susilo Bambang Yudhoyono that year the restriction was watered down.
Instead, foreign operators can assess the skills of domestic providers and opt for foreign ones what’s on offer at home was found lacking.

Peter Lynch, who up until two years ago ran Clive Palmer’s Waratah Coal, says that trend is all part of doing business in Indonesia.

“It doesn’t do them much of a service,” Lynch said.

“They come up with the idea and then after the feedback they make it more palatable.”

A softly-softly approach to the prospect of sudden policy shifts can pay dividends in Indonesia where the cost of operation can be a fraction of what it might be in Australia, Lynch told Australian Mining.

Drilling, for example costs a third what it does in Australia.

Lynch now heads start up Cokal, which is aiming to seize on Indonesia’s cheaper cost of production by exporting coking coal from a remote part of Indonesia’s Kalimantan’s province and hopefully undercut his old boss.

The company is putting the finishing touches on a pre-feasibility study and expects to unveil it in early October
Cokal will likely produce coking coal at a cost of $US110 a tonne at the start of production, Lynch says.

As scale and operations improve that cost of production will fall to as low as $US70 a tonne.

That’s roughly half what it costs BHP Billiton to produce coking coal in Queensland, analysts say.

Lynch likens Australia’s carbon tax, and the Mineral Resources Rent Tax as proof sudden changes in government policy are not limited to Indonesia.

Basri’s ability to prod high level ministers into seeking a compromise within months of the proposed changes underscores his own influence and reputation in government.

In June President Yudhoyono reached Basri on his mobile phone to personally offer him the job while he was attending a conference at Harvard University.

Indonesia’s resource sector, its growing numbers of middle class consumers and rising cost of manufacturing abroad is also playing into Basri’s hand.

Realised investment will likely top $US20 billion this year, beating the forecast for $18 billion, Basri says.

Basri earned both his Master’s Degree and Ph.D in economics at the Australian National University.

He has a knack for devising simple solutions to systemic problems.

In the four years he was special adviser to the reformist finance minister, Sri Mulyani Indrawati, he helped tap into Indonesia’s tax evading elite by requiring them to register for a tax file number or face exit fees the equivalent of $250 every time they leave the country.

Next month Basri will unveil an online tracking system so applicants, seeking tax exemptions or registering their business at his office can monitor progress of their requests — an idea he says he got from Amazon.com.

Those small fixes improve improve transparency and accountability in time helping improve the investment climate in Indonesia so smaller investors can be feel more secure, said Jon Lindborg, Indonesia country director for the Asian Development Bank.

“To describe Chatib I would use ‘pragmatic’ up front,” Lindborg stated.

“He’s after the low hanging fruit and what’s doable.”

Basri declines to give his opinion on the underlying premise of the divestment deadline and the export ban saying to do so would sew uncertainty.

By focusing on reforms that can be realised immediately, Basri’s aim is show investors that problems can be worked out when they emerge.

“In the cause of reform you have to continue to provide progress. People get down,” Basri says.

“I’m an economist. I was trained to be realistic about my goals. I have to produce something.”

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.