The issuance of Indonesia’s recent presidential decree instructing foreign mining investors to reduce their share ownership from 80 percent to 49 percent within 10 years from the date of production commencement may have a negative impact on the country’s investment climate, say lawyers interviewed by ALB.

“Mining is a risky, complicated, time consuming, and capital intensive business to invest in,” said Leon Yee, head of Duane Morris & Selvam’s Indonesia desk. “Forcing foreign companies to divest within a time period and drastically changing the mining regulations is likely to decrease the interest of potential foreign investors to invest in the mining sector.”

Luke Devine, head of Baker & McKenzie's Asia-Pacific energy, mining and infrastructure practice agreed. “The requirement for foreign majors to give up control of a mining project after 10 years will likely deter a number of them from entering the market, and investing in any meaningful way,” he said. “For a number of these technically challenging megaprojects, where foreign skill sets and funds are necessary to turn these projects into reality, closing the door on foreign investment is going to cost the Indonesian government and the Indonesian people significant tax and royalty revenue from mining operations.”

Indonesia’s new mining law, enacted in 2009, moved from what was historically a contract-based mining concession system for foreign investors to a licence system. While in the former, any changes to the terms and conditions governing the mining project needed to be mutually agreed upon between the government and foreign investor, the government can unilaterally change the rules in the latter. “These recent changes vindicate the stated concerns of foreign investors at that time,” he added.

Devine, who is based in Indonesia, added that from a broader perspective, “clearly such a dramatic shift in foreign investment policy in the mining sector will have investors in other politically-sensitive sectors concerned that changes in those sectors may also be just around the corner.” According to Yee, this “increasing regulatory uncertainty in Indonesia” may consequently impact investment interest in other sectors as well.

Meanwhile, Andrew Brereton, banking and finance partner at Clifford Chance's Singapore office said that while the changes would concern foreign investors, taking a balanced approach was important. "There is no doubt that political risk exists in some of the growth markets, but the more established economies are not immune to this phenomenon – consider the carbon tax in Australia and the various 'windfall' taxes on privatised utilities in the UK for example," he said. "For this reason we expect strong investor interest in Indonesia will continue, particularly given relative growth prospects in the established markets."

He added that the key issue remained the proper calibration of risk and reward, and this required an understanding of the lay of the land in Indonesia.  "For example, although some new laws in Indonesia may initially appear to be detrimental from the perspective of foreign investors, these new laws often contemplate that implementing regulations will be introduced later," Brereton said. "Typically there is a period of consultation in relation to these implementing regulations, and it is not uncommon for the law to be 'softened' through this process and implemented in a manner which is less detrimental to the business community than was suggested by the original law. "

On the other had, Hanim Hamzah, ZICOlaw’s resident partner in Jakarta, said the presidential decree was part of a “positive agenda” beneficial to all concerned. “Indonesia generally promotes and maintains a friendly investment climate,” she said. “Compared to its ASEAN neighbours, it can be said that foreign ownership thresholds for various industries from mining and resources to banking and plantations are most liberal and encouraging."

“As the country develops, the government's strategy to encourage a healthy divestment programme can only be seen as a positive agenda of an ‘everybody wins’ concept. Any divestment must surely be on market-value basis to maintain fair business competition,” she added.

Hamzah said that in any event, Indonesia's market was too big to be ignored. “This is the cost of doing business in Indonesia, and it is arguably not as dear if compared to some other ASEAN economies that practice much more restrictive business practices,” she added. ALB

Click here for a Reuters piece on the possible fallout of the rule change

Ranajit Dam is Southeast Asia Editor at ALB. Follow him on Twitter: @RanajitDam_ALB