Indonesia makes it harder for foreign miners

Australia – Indonesia’s decision to start cancelling investment treaties with 62 countries has passed with little comment, but the move may have a greater impact than the recent banning of mineral ore exports.

Indonesia last month kick-started the process of terminating all of its bilateral treaties by notifying the Netherlands that its agreement to protect and promote investment would end in 2015, and signaling that the others would end as soon as possible.

The agreements, which are common between states, protect the rights of investors in each other’s country, and typically include clauses about fair treatment, no expropriation and guarantees that profits can be repatriated.

Most importantly for many investors in countries like Indonesia, with its patchy record on legal certainty, is the right of appeal to the Washington-based International Centre for Settlement of Investment Disputes.

Among the countries that have treaties with Indonesia are major foreign investors including China, India, Australia, Britain, Singapore and Russia. However, the United States and Japan are among nations that don’t have agreements.

Why would the Indonesian government seek to end agreements that were designed to foster foreign investment and economic development, as well as protect Indonesian investments abroad?

The main argument seems to be that their time has passed and they belong to an earlier era when foreigners feared assets would be nationalized.

The treaties are seen favoring foreigners over domestic investors, something at odds with the government’s drive to ensure greater control of Indonesia’s mineral resources.

This can be seen against the backdrop of a raft of changes to Indonesian law and regulations, which among others enforced a ban on exporting unprocessed ores, mandated the building of smelters and introduced laws to force the sale of stakes to locals of foreign-owned mines.

Indonesia is the world’s biggest exporter of nickel ore and supplies about two-thirds of top buyer China’s imported bauxite, the raw ingredient for making aluminum.

London-traded nickel has gained almost 32 percent so far this year after the export ban came into force in January, with China’s imports of nickel ore from Indonesia plunging 79 percent in March from a year earlier and bauxite slumping 86 percent.

Indonesia is also the world’s biggest exporter of thermal coal used in power-stations, but the impact on coal has been muted so far as it isn’t subject to a ban, but foreign owners will be caught by the need to divest.

The problem for many foreign investors is that they will doubt whether the need for investment protection has passed.

I doubt that any investor in the Southeast Asian nation would privately agree that his company would get a fair hearing in the legislative and court processes, especially if the opponent was the government or a well-connected local.

It seems that the decision to end investment treaties is part of the ongoing process to ensure that Indonesia’s resources are controlled by the government, and/or domestic investors.

The dispute between the government and London-listed Churchill Mining provides a short-term impetus for the end of investment treaties.

The miner won the first round of its dispute over coal assets with the Indonesian government in February at an ICSID tribunal.

The Jakarta Globe reported on Feb. 28 that the government will appeal the decision and it doesn’t want to face the risk of paying compensation to Churchill, which the newspaper said could be as much as $1.05 billion.

The risk for the Indonesian government is that it could be hit with dozens of cases in the ICSID from disgruntled foreign investors.

It’s not hard to imagine Indian or Australian coal miners challenging the rule that they have to sell half of their stake in a mine once it has been producing for 10 years.

Ending the investment agreements will mean foreign companies having to take their chances in Indonesian courts, a far better prospect for the government.

However, cancelling the treaties will take time, as some run for extended periods and have additional protection clauses once notice of termination is served.