core sector communique

Indonesia to Map Coal Mines to Avoid Overlapping Claims

By:Zubaidah Nazeer - Straits Times Indonesia

Indonesia will start mapping all its coal mines to ensure there are no overlapping licenses issued for the same area, in a bid to improve its reputation with investors following several disputes.The move comes after one of the world's biggest mining firms threatened to take the country to international arbitration over a dispute, in a high-profile case that highlights the risks of doing business here.

There have also been cases of foreign investors winning million-dollar compensation payouts from the Indonesian government over projects that failed to take off.

This week, the director-general for coal and minerals at the Energy and Mineral Resources Ministry said the ministry is mapping mining areas in the hope of uncovering licenses that have not been reported to the central authority.

"There are several disputes over overlapping licenses, not just Churchill's," said Thamrin Sihite. "Our aim... is to provide more legal certainty to businesses."

Analysts note that the expansion of the mining industry went out of control after the authority to regulate it was taken out of the hands of the federal government and delegated to regional authorities in 2001.

Economist Winarno Zain believes that more than 8,000 mining licenses have been issued to "unworthy and unqualified" investors.

Resource-rich Indonesia is the world's largest supplier of thermal coal, but critics say that poorly regulated licensing has resulted in much pollution and even land-grabbing, affecting villagers.

Experts say more has to be done to clean up the industry.

"Mapping the areas alone does not mean an end to this issue," said consultant Noke Kiroyan, a former mining executive. "The purpose should be about putting order in this jungle."The government's latest move comes amid an ongoing dispute between London-based Churchill Mining and local company Nusantara Group in East Kalimantan province.

In 2008, Churchill discovered a 2.8billion tonne coal reserve worth about US$1.8billion (S$2.3 billion), making it the world's seventh largest.It estimated that the East Kutai project would have earned it a pre-tax cash flow in excess of US$500 million annually over 20 years.

But the Nusantara Group, which is controlled by opposition political leader and possible presidential candidate Prabowo Subianto, later managed to renew a lapsed license that overlaps with Churchill's. The two firms took the case to a local court, which ruled in favor of Nusantara.

Churchill appealed to the Supreme Court in September, but the case could drag on for years.

In a 10-page letter it sent late last month to President Susilo Bambang Yudhoyono and several ministers, including those in charge of forestry and mining, and which was seen by The Straits Times, the company warned that it might take the matter to international arbitration.

"If an amicable resolution cannot be achieved, we regret that Churchill will have no other choice than to initiate international arbitration against the Republic of Indonesia, thus putting Indonesia's reputation as a reliable country for foreign investment at risk," it said.

Thamrin told Bisnis Indonesia that Churchill had every right to pursue arbitration, but added: "Once the courts issue a verdict, we will follow the procedure, we should not be scared."

Last week, Churchill's executive chairman David Quinlivan told The Straits Times he hopes for a response from the Indonesian government within six months - failing which the company will go to the Washington-based International Centre for Settlement of Investment Disputes.

A lawyer familiar with the matter said Churchill had a strong case at the international courts, but was unsure it would get its mining licenses reinstated, even with valid documents.

"They have to be prepared for the long haul," he said.

The case has put the spotlight not only on the risks of investing in Indonesia - which analysts say is fraught with obstacles such as red tape, corruption and political interests - but also on the issuing of mining licenses from the regional authorities. They say this opens the system to more corruption and disorder.

But consultant Kiroyan said it is unlikely the central government will want to reclaim this right, as it would undermine the political authority of district heads and counter efforts to boost regional autonomy.

He said: "What the government should do is allow the right of the licenses to be decided on by the district heads, but verified by the central authority to give it more certainty."