[Tirto.id] Potential for False Sovereignty in Mining Divestment

• Indonesia doesn't have the money to buy mining shares.
• Newmont Nusa Tenggara's divestment is a failed example.

For the sake of sovereignty, the Indonesian government has made regulations on the divestment of shares in mining companies. Is it true that Indonesia can be sovereign with this regulation?

"The value of half of Freeport Indonesia's total shares is equivalent to 40 percent of the health budget in Indonesia. It is the same as the cost of all hospitals in Kalimantan, Nusa Tenggara and Sumatra. Do you want this large budget from the APBN to be used to buy mining companies?”

David Manley, senior economic analyst from the Natural Resource Governance Institute (NRGI), asked discussion participants from various institutions. There are those from ministries, Commission VII DPR, a number of NGOs, and even journalists. David is discussing the divestment policy that applies in Indonesia.

Hearing this question, a participant sitting at the same table as me said, "Well, no." Several other participants seemed to shake their heads slowly. No one in the room agreed.

Energy sovereignty, nationalism, state control over mineral resources. These three phrases became the spirit in the rollout of the divestment policy. This is a policy that mandates foreign mining companies to release their shares to the government.

The release of shares must be carried out periodically in increasingly larger portions. The size of the portion of shares released depends on the length of time the company has been in production. For the first five years, divestment is not mandatory. But in the sixth year, the mining company must sell 20 percent of its shares.

In the 7th year, the portion of shares released must be 30 percent. And in the tenth year, the mining company must have released 51 percent of its shares. Share sales can be made to the central or regional government through negotiations. If it fails to sell, foreign mining companies can sell it to state-owned companies or regional-owned companies. In this second option, the sale is carried out in the form of an auction.

If it fails to sell, you can sell it to a national private company. Even if it is not sold, the mining company must sell it via the Indonesian Stock Exchange.

This rule was recently created. The divestment policy itself has existed since 2009, in the Mineral and Coal Law. The details are discussed in Government Regulation no. 1/2017 and Minister of Energy and Mineral Resources Regulation No. 9/2017.

January 2016, news about plans to divest shares in PT Freeport Indonesia was widely circulated in the media. At that time, Freeport intended to sell 10.64 percent of its shares to the Indonesian government for $1.7 billion or the equivalent of IDR 23.5 trillion.

The Indonesian government was interested in buying it, but refused because the price set was too high. "We are interested in buying Freeport shares, but we think what is being offered is too high," said BUMN Minister Rini Soemarno at that time.

The government had offered it to $630 million. However, to date, this divestment has not materialized.

David Manley believes that buying Freeport shares is something the government does not need to do. Because there are many other things that should be Indonesia's priorities. Currently, the government is also working to advance infrastructure and increase overall economic productivity.

The construction of ports, power plants, schools and hospitals is certainly necessary for the economy to develop. "However, domestic capital to invest in infrastructure and other projects that Indonesia needs to increase economic productivity is relatively scarce," said David. Until 2025, Indonesia needs IDR 1,800 trillion to build infrastructure.

David recommends the government consider eliminating divestment rules and explore other approaches to the state's presence in the mining sector. However, David continued, if the government still wants to maintain the divestment regulations, he has seven other recommendations.

First, the government must limit government purchases of mining shares and limit how public funds are used to finance BUMN investment in the mining sector.

Second, the government should reduce the share of mining share divestment which now reaches 51 percent. Third, the government is advised to establish clearer rules for the negotiation and auction process, as well as appoint a third party to manage the process. Fourth, companies that buy mining shares are required to openly disclose the true owner of the company.

Fifth, the government must provide the option to sell through an initial public offering on the stock exchange. Sixth, there must be further definition of the approach to valuing shares. Finally, the government is advised to develop policies to manage mining BUMN. The seven recommendations are not only for dealing with Freeport, but all foreign mining companies.

Responding to this, Deputy Chairman of Commission VII DPR RI Hadi Mulyadi agreed that there was the potential for pseudo-sovereignty in the divestment policy. His party feels that there are many things in the Minerba Law that need to be reviewed.

"We are currently revising the Oil and Gas Law, maybe next year we will draft the Minerba Law," he said, Thursday (23/2).

M. Iqbal Damanik, one of the researchers from Article 33— an association that focuses on natural resource governance issues — said Indonesia could still have a bargaining position with mining companies without having to buy their shares. In fact, share ownership by the state or BUMN does not guarantee a reduction in negative impacts on the environment or the fulfillment of community rights.

"Reduce the risk of using public funds and increase revenue through taxes," said Iqbal.

Throughout 2016, Iqbal conducted research related to divestment practices in several mining companies. One clear example that divestment regulations do not produce benefits for society is the purchase of shares in PT Newmont Nusa Tenggara in West Nusa Tenggara (NTB) Province.

In 2009, PT Daerah Maju Bersaing (DMB) acquired 24 percent of Newmont's shares. DMB is a joint stock company owned by the provincial government, two district governments in NTB, and a national private company called PT Multicapital. Multicapital owns 75 percent of DMB shares, the rest belongs to the regional government.

So, from the purchase of Newmont shares, Multicapital gets 18 percent, while the regional government gets 6 percent. However, DMB did not have the money to acquire it and had to borrow from Multicapital's parent, PT Bumi Resource Minerals (Bumi).

Bumi doesn't have money either. So Bumi first borrowed from Credit Suisse in Singapore for $300 million or IDR 3.9 trillion. What is called a loan, of course there is interest. The initial agreement stated that to repay the loan, Bumi would use dividends from its ownership in Newmont.

As a result, until now, the regional government has not received anything. In fact, Newmont has paid dividends worth $35.75 million or around IDR 475 billion after divestment.

"Even if the government still wants to divest, we need to ask them to negotiate openly," said Iqbal. "Don't let the government's share ownership be just an illusion, false sovereignty," he added.

Source : TIRTO.ID – Potential for False Sovereignty in Mining Divestment