Why Indonesian coal is best avoided

Author: | Published: 22 Oct 2012
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Foreign investors should buy into Indonesia's coal market with caution.

Panelists on the IFLR Indonesia Forum 'M&A Structuring' session complained regulatory revisions to Indonesia's 2009 mining law had fostered uncertainty in the sector in significantly extending the divestment requirements within the regime.

The 2012 government regulation 24 (GR24) requires foreign investors to follow a tiered divestment process. In the sixth year of acquisition an asset must first be offered to central government then to provincial and municipal entities, followed by state owned enterprises, public and finally private companies. The move has significantly complicated the mining investment process for overseas buyers.

But Ancora International's general counsel Nicholas Serwer suggested that prospective investors in Indonesia’s coal sector should be aware that there are uncertainties as to how several details of the regulatory regime may be implemented in practice. “They should also note that the upcoming election cycle may present uncertainties for the sector,” he said.

Others warned the coal sector was high risk. One panelist said the sector could very quickly become a political football. “It's very easy for politicians to make nationalistic hay out of it, and say if foreigners don't come in so be it because it's our coal,” he said.

"Combine that with the number of regulatory requirements swirling around the sector presently, and the fact that coal prices are dropping with no immediate prospect for them to be turning round, I think it's fair to predict we are maybe heading into quiet period for coal," the panelist said.

O' Melveny & Myers' Joel Hogarth said GR24 had significantly deterred foreign investors from the market.

"Regulators should consult before simply pinging rules out into market," he said. "Regulations are being issued in a way that is absolutely haphazard and the result is chaotic. Clients are now questioning whether they want to invest in the sector at all."

O' Melveny & Myers' Siew Kam Boon agreed there were a lot of unclear areas in Indonesia's current mining law regime. She recommended regulators interpret such uncertainties in a way that scaled back on some of the harsher recent legislative changes.

Nonetheless, Hogarth, Boon and Serwer agreed the regulatory treatment of the banking sector had developed much more favourably.

See also

‘How to improve Indonesian corporate governance’ http://www.iflr.com/Article/3098348/Search/Results/How-to-improve-Indonesian-corporate-governance.html

‘The Indonesian M&A structuring quirks to watch out for’ http://www.iflr.com/Article/2939252/The-Indonesian-M-A-structuring-quirks-to-watch-out-for.html

‘Is MIST the new BRIC?’ http://www.iflr.com/Article/3093823/Is-MIST-the-next-BRIC.html

‘The corporate governance issues changing Asian governance funds’ http://www.iflr.com/Article/3093903/The-corporate-governance-issues-changing-Asian-funds.html