Faisal Basri’s Blog

Business News - Tuesday, August 19, 2008

Alfian, The Jakarta Post, Jakarta

Amid skyrocketing global coal prices, producers have been waging protracted battles with the central and local governments over issues ranging from overlapping land ownerships to royalties and tax refunds.

The climax of the fighting came this month when the immigration office banned 14 coal executives of six companies from traveling overseas over allegations their companies had evaded royalty payments between 2001 and 2007.

Weak coordination between government agencies and political party factions vying to get a slice of the profits have exacerbated the problems.

Indonesian Coal Mining Association president Jeffrey Mulyono told The Jakarta Post coal producers had been under severe pressure since prices began to increase in 2004.

"Many have begun to perceive coal as an expensive commodity. The situation has been heating up as many outsiders want to become involved in the coal business," Jeffrey said.

Pre-2004, the price of 6.300 calorie coal stood at around US$25 per ton, but the price has since soared to $150, Jeffrey said.

The rush to mine coal has ignited a series of disputes between miners and regional authorities over increasing costs of concessions.

Jeffrey said newcomers in the sector were lobbying local officials to short cut their way to concessions.

"I am not referring to the government in general, but only to some officials," Jeffrey said.

Several sources in the industry have indicated that the influx of players into the business is linked to the needs of political parties to secure funds for campaigning ahead of next year’s general and legislative elections.

State-controlled mining firm PT Tambang Batubara Bukit Asam had its mining concession illegally confiscated by the Lahat regency administration, which went onto offer the site to five new companies linked to the administration.

"It doesn’t make any sense that a local government should give the concessions of a state company to private parties," Jeffrey said.

PT Kaltim Prima Coal (KPC), a unit of Asia’s top coal exporter PT Bumi Resources, and PT Perkasa Inakakerta, a unit of PT Bayan Resources, are involved in a dispute with East Kutai authorities.

Interim East Kutai Regent Irsan Noor last month ordered KPC and Perkasa to halt operations at some of their concessions, claiming the firms were operating in a forest area without a proper license.

Energy and Mineral Resources Minister Purnomo Yusgiantoro argued the problems related to local administrations were the result of overlapping regulations on regional autonomy.

"There is a different legal frame at play here. Companies with first-generation contracts of work use mining laws to operate, while local authorities use regional autonomy laws to provide mining contracts to companies," he said.

Local authorities often insist that mining companies operate according to regional autonomy law, he said.

"We have frequently informed them that firms with first-generation contracts are still under the central government’s authority.

"The firms cannot cope with the autonomy law because their contracts are drawn up based on different laws," he said.

Purnomo said he believed local authorities had begun harassing coal producers in order to benefit from windfall profits amid high global prices.

However, coal producers have recently been forced to fend off attacks by the government over revenue payments.

The ban on the 14 company executives shows that the six coal companies are reluctant to share their windfall profits with the government.

The six coal companies are PT Kideco Jaya Agung, KPC, PT Kendilo Coal Indonesia, PT Arutmin Indonesia and PT Berau Coal and PT Adaro.

Director general of mineral resources, geothermal and coal at the Energy and Mineral Resources Ministry Bambang Setiawan on Aug. 6 said the companies owed the state a total of Rp 7 trillion (US$769 million).

The mining companies have denied any wrongdoing, saying the royalties were withheld to compensate for tax refunds owed to them by the government.

In 2000, the tax office declared that coal products were exempt from value-added tax (VAT), meaning coal firms could no longer claim refunds for VAT from the government for goods and services purchased to produce coal.

However, the mining companies have argued for their continued entitlement to VAT refunds, citing that their contracts of work, signed before 2000, protected them from future tax policies.

Following negotiations, the government agreed to honor the contracts of work, meaning that producers can continue to claim VAT refunds on the proviso they pay royalties.

"We have agreed to respect the contract. The State Finance Comptroller will do the calculation," Purnomo said.

He said the coal contracts had been inked well before the new law was enacted.

However, University of Indonesia economist Faisal Basri argued the rift over royalty payments stemmed from a weak legal system and poor coordination between state agencies.

Faisal said the country should enact a single law on natural resources.

"At the moment, every type of natural resource has its own law. As a result, overlapping regulations and disputes with central and local governments over varying interpretations have frequently occurred," Faisal said.

The condition is inflamed by the weak coordination between state agencies.

"Before issuing a new regulation, the government is supposed to run a simulation on how it will work for different sectors," Faisal said.

However, he also criticized coal producers for mixing up royalties and tax payments, which he said were mutually exclusive.

Faisal and Jeffrey urged the government and the House of Representatives to immediately pass a three-years-overdue bill on coal and mineral resources to end the legal uncertainties.