Divestment of foreign mining interests in Indonesia
16 May 2012
Professor Luke Nottage and Dr Simon Butt examine Indonesia's new mining regulation, which requires majority or wholly foreign-owned companies holding mining licenses in Indonesia to divest a majority share of the company- a minimum of 51 per cent- to an 'Indonesian participant' after 10 years of production.
In article for the East Asia Forum, they suggest for many foreign investors, this may mean a mandatory divestment of equity.
"An offer to purchase the share must first be made to the central government.
"If the central government is not prepared to purchase the share, then it must be offered to the provincial government or city/county government.
"And if they also refuse, then the shares are to be offered by auction to (in order of priority) a state-owned enterprise, a regional state-owned enterprise or a national company.
"Failure to divest according to this schedule can lead to suspension of production and even a revocation of the mining license."
Ina follow-up article with Dr Brett Williams, they suggest the regulation is unlikely to generate many formal investor-state arbitration (ISA) claims against Indonesia, based on existing bilateral or regional FTAs, or investment treaties, but potential violations of substantive protections under the treaties (including two with Australia) can help frame renegotiations with foreign investors.
"Avoidance of arbitration is primarily motivated by immediate pragmatic considerations.
"But considerable scope remains to use the international investment law framework further down the track and this may lead to complex adverse effects on cross-border investment, particularly in the rapidly evolving Asia Pacific region.
"A conciliatory attitude toward the new regulation is still likely where the investor's home state desperately lacks natural resources, such as Japan.
"This is one explanation for the lack of (direct) ISA claims by Japanese investors, despite Japan's growing number of investment treaties around the world.
"These include the investment chapter contained within the 2006 Japan-Indonesia Economic Partnership Agreement, with its heavy focus on enhancing Japan's energy security."
Longer versions of both are on Professor Luke Nottage's Japanese Law and the Pacific blog
Dr Simon Butt, who is presently serving as Director of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), recently co-authored an article on Indonesian in a special edition of the Sydney Law Review - Reining in Regional Governments? Local Taxes and Investment in Decentralised Indonesia
Further, Sydney Law School will deliver specialist units concerning Indonesia as part of its postgraduate program for 2012:
For University of Sydney enrolled students, the unit can count towards the following degrees and diplomas:
You can enrol in this unit on a or non-award basis if you do not wish to commit to a degree or diploma.
The unit may be credited towards an award course providing you complete the relevant assessment.
Subject to approval from the Associate Dean, candidates in other Faculties at the University of Sydney or from other universities may be able to enrol in this unit.
You can also enrol in this unit on an Legal Professional Development (LPD) basis.
Seminars, courses and units of study offered under Sydney Law School's LPD Program meet the necessary requirements of both the Law Society of New South Wales and the New South Wales Bar Association in relation to their individual members.
Contact: Greg Sherington
Phone: +61 2 9351 0202