Ranking for Resource Development in Indonesia [Coal Asia Vol. 31]

Ranking for Resource Development in Indonesia

By Ian Wollff

The author is an expatriate principal geologist of about 28 years experience in the Indonesian exploration & mining industry, and is employed by an international consultant company.

 

Introduction

The exercise of ranking is a technique widely used to recognize the best and poorest examples of what we are measuring. A typical example is a child that ranks top in a school class. The ranking enables all to see what is perceived to be the best and encourages others to achieve better results. Those carrying out the ranking are biased to the factors they are using to decide on best or worst. Thus an international beauty pageant may prefer a shapely body, whereas a modeling agency may prefer a lean body. The act of ranking is based around competition, for example Indonesia has Qoran reading competitions. The ranking also carries with it a social aspect, as most of us don’t want to be ranked the best criminal, although amongst gangsters this may be a sought after goal.

There are several international ranking agencies that look at the mining industry of each country. In general these mining surveys rank Indonesia high for its geological potential, but low as a place for private enterprise to invest in. There are also a number of international agencies that rank countries on the ease of doing business for all industries. There is often an interconnection where some of the ranking agencies are influenced by surveys conducted by other ranking agencies. Each of these agencies derives their ratings in a different manner, with some using questionnaires from business decision makers, while others use brain power from recognized professional research institutions. Most use similar principals of free enterprise as their basis, rationalizing this model is preferred over national enterprises, communes etc, for the development of nations.

International Rankings

The Fraser Institute is a Canadian based international research institute with partners in some 80 countries. Their 2012/2013 survey is based upon some 742 responses from company executives of exploration and mining companies. Some 17 factors representing barriers to investment, and that influence company decisions to invest in particular areas, were graded into 5 categories from encourage (1) to discourage (96) investment. This ranking excludes the geological potential and reflects the desirability of engaging in the business aspects of exploration and mining. Indonesia is presently ranked last from 96 countries and provinces in the Policy Potential Index, a ranking that reflects the attractiveness of mining policies from the view point of international exploration managers. (See S&P below). The Current Mineral Potential Index ranks Indonesia 81st indicating the geological considerations are still favorable despite the current policy environment. Uncertainty of government policy or rule ranks Indonesia 88th. However Indonesia ranks 4th for Current Mineral Potential Index, where it is assumed best industry policy is in place. Similarly Indonesia ranks 4th should best practices be undertaken, and room-for-improvement ranks Indonesia 2nd , indicating that if the government’s management of the exploration and mineral industry was to be improved, then private investors would be more willing to invest in Indonesia.
The Fraser Institute goes on to estimate that the world wide exploration industry spent US $ 6.2 billion in 2012, with US $4.3 billion coming from large producing companies and US $1.6 billion from exploration companies.

Behre Dolbear is a well established American based international consultant to the mineral and coal industry that has more than 150 senior professionals in 12 offices around the world. For the past few years they have issued on their web site a ranking of countries for mining investment. Their survey does not include the geological potential, but focuses on the political risk related to investing in the exploration and mining industry in 25 selected countries. The ranking is undertaken internally on each country based upon 7 criteria with the premise that a free democratic government with good rule of law, well functioning bureaucracy, transparency, sound fiscal policy and social awareness makes for the best investment destination. The Behre Dolbear 2013 ranking of Indonesia is number 18 of 25, with no change of position from 2012, but a slight increase in score associated with perceived improvement in fighting corruption.

The Global Competitive Index is produced in North America for the World Economic Forum and is compiled by about 165 institutes (business schools, research institutes etc), including the Indonesian Center for Industry & Business Competition Studies, University of Trisakti. The index is designed for countries and provinces to stimulate productivity through global competitiveness. The index reviews a country’s 1) basic requirements [institutions, infrastructure, macroeconomics, health & education] to derive factor driven economies, 2) efficiency enhancers [ higher education, goods, market and labor factors etc] for efficiency driven economies, and 3) innovation [ business sophistication, innovation] for innovation driven economies. Indonesia scores well at 44th out of 144 on its overall competitiveness outlook, representing a slight improvement over the past 2 years and classed as an efficiency driven mode of development. The main detracting factors are inefficient government bureaucracy and corruption. The least problematic factors are public health and capacity to innovate.

The exploration and mining industry is not directly rated in the Global Competitive Index, but some related factors are; strength of investor protection ranks 39/144, prevalence of foreign ownership ranks 74/144, intensity of local competition ranks 96/144 while irregular payments and bribes ranks 111/144.

The World Bank and International Finance Corporation sponsored “Doing Business – measuring business regulations” 2013’s ranking of Indonesia is 128 out of 183 countries, showing a slight improvement over last year. “This is a ranking of small to medium domestic business’s compliance to government regulations when starting a business. It measures and tracks changes in regulations affecting 11 areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers. The ranking on the ease of doing business, and the underlying indicators, do not measure all aspects of the business environment that matter to firms and investors or that affect the competitiveness of the economy. Still, a high ranking does mean that the government has created a regulatory environment conducive to operating a business”.

The Berlin based Transparency International World Corruption Index is based on expert assessments and data from 13 surveys from independent institutions and is closely watched by investors and other civil society groups. In 2012 Indonesia ranked as equal 118 out of 176 countries, with a decrease in transparency of 18 places since 2011. In May 2013 the Transparency International Indonesian youth survey found that “more than 78 percent of Indonesian youths believe honesty is more important than wealth, but the belief may not be enough to curb corruption”. However the agency said “most will find it hard to resist temptation and that peer pressure is often found in a working place where corruption is rampant”. “Nearly 30 percent of the youths said it is permissible to violate the law as a sign of solidarity to friends and family in need. The survey also showed that 47 percent would not report corruption cases they encountered, as the majority responded with “it is not my business.” Fortunately the Government and Mines Department are proactive in improving transparency through the Extractive Industries Transparency Initiative (EITI), wherein the first EITI report covering 2009 was expected to be published in April 2013, (not on EITI web site as first week of May 2013) and Indonesia is working hard to become “Compliant” at the EITI biannual conference in Sydney in May 2013.

The credit rating agencies of Fitch, Moody’s and Standard & Poor’s assess how likely a borrower is able to repay its debts, and helps those trading debts in the secondary market. Issuers with lower credit ratings pay higher interest rates embodying larger risk premiums than higher rated issuers. The sovereign credit rating is determined by a rating committee that includes assessment reviews and statistical performance factors. On the 3rd January 2013 the sovereign rating of Indonesia by Fitch as BB+ (POS), Moody’s as Baa3 (STA), and S&P as BBB- (STA). Standard and Poor’s was slow from upgrading the country’s credit rating to investment grade due to a deteriorating policy environment. The ratings agency cited the government’s policies in the mining sector and failure to hike the price of fuel as negative factors. More recently S&P press statements mention that the “US rating agency Standard & Poor (S&P) downgraded the outlook rating on Indonesia’s debt to “stable” from “positive” on Thursday (2nd May 2013), arguing that reform had lost momentum”. “Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential, thus delaying poverty reduction and economic development” S&P kept its credit rating for Indonesia’s long-term sovereign debt at BB+, one notch below investment grade, and B for short-term sovereign debt. In response to this rating change, the Indonesian stock exchange and currency experienced a negative impact. Indonesia’s acting finance minister Hatta Rajasa said: “The (revision) is a signal that there are a lot of things that need to be fixed and by doing that, market confidence will stay (strong)”.

PWC Mining in Indonesia investment and taxation guide (April 2012) is a well recognized and influential summary for operating in the Indonesian mining sector. This booklet does not rank mining investment but provides some further insight for investors. In particular, PWC emphasize the need to “quickly inject some certainty back into the mining regulatory environment to give all investors the stability necessary to commit investment funds to Indonesian mining projects.” PWC recognize that the Government policy includes an element to promote domestic control in the resources sector, and thus is no longer a level competitive playing field.

Indonesian Rankings

There are a number of Indonesian awards that tend not to rank companies in sequence of best to worst, but generally provide a rating of compliance with best group (typically Green or Gold), to poorest group (typically Red or Black). Many of Indonesia’s SOE’s and leading mining companies participate in these awards.
The PROPER rating is one of the Indonesian ministry of environment’s efforts to encourage compliance in environmental management. The Ministry selects target companies based upon their significant impact on the environment, listed on the IDX, is product orientated for the export or domestic market. Evaluation is through environmental management reports prepared by the companies plus site inspection by officials from the department of environment (PPLH). A report card is prepared as an indication of ranking of the companies performance related to its environmental obligations. The report card goes through a number of steps, including being discussed with the company, peer reviewed and discussed further with the Ministry of Environment etc.

There are a number of other Indonesian awards including GCG (Good Corporate Governance), IMAC (building and managing corporate image), Indogreen award, Vision award, Ministry of Energy and Natural Resources Award, PERHUMAS and Anugerah BUMN awards. These awards are often displayed on mining companies web sites and in annual reports etc.

Free enterprise leading the mining industry

President Soeharto championed the free enterprise system to develop Indonesia, starting with Freeport in the mining sector, and continuing with a foreign investment policy based on the Contract of Work (COW) system for minerals. This system was copied for coal, wherein nationalism started with the second generation of coal COW’s being excluded to foreign ownership. President Soeharto’s politics also introduced bias to increase the participation of the indigenous (pribumi) Indonesians in the wider business sector.

The Indonesian mining sector has always had two parts, a competitive private sector, and a less completive State Owned Enterprises(SOE) sector. Over recent years we have seen the SOE’s develop further towards the competitive private sector, with listings on the Indonesian and foreign stock exchanges etc. This move by the SOE’s was largely driven by their desire to become more efficient and transparent, and thereby become more acceptable to tap into international sources of credit. This policy also allows the Government to run its SOE’s more efficiently, allowing more state funds to be directed to develop other parts of the Indonesian society.

Indonesian mineral policy is now influenced by a variety of outlooks, 1) that of the American lead principal of competitive free enterprise, 2) the new Asian growth and the apparent success of the SOE’s from communist China, 3) the Australian trend for governments to extract greater benefit from the mining industry, 4) a reinvigorated Indonesian mining agency wishing to better manage the industry, and 5) a new self awareness of competitive nationalism, where Indonesia wants to conserve its mineral resources for “centrally directed” domestic development, with this last outlook perhaps being somewhat similar to President Soeharto’s guided democracy !

ESDM

The ranking of the mining business in Indonesia is in part a reflection of many different government ministries, the nature of the legal system and social factors etc. The principal responsibility lies with Commission VII, with implementation through the Mines Department and Ministry of Coordination.

The web site of the Energi & Sumber Daya Minerals (ESDM), is the Indonesian Mines Department’s front door to the world. The ESDM stated role in national development includes considerations to contribute towards national fiscal planning. The ESDM recognizes that to fulfill this national objective, the ESDM requires the mining sector to grow through investment. State revenues from energy and mineral resources sector in 2012 amounted to Rp 427 trillion, or about 27% of total state revenue. Therein, the Government should pay close attention to the outlook of the various rating agencies that reflect and influence the investment community.

Some of the ESDM listed challenges includes 1) developing regulations for value adding to mined minerals and coal, 2) improving inventory and monitoring of the mining industry, 3) engaging stakeholders in strategic policy decisions,4) improving public service performance, 5) identifying overlapping laws with other sectors, and 6) restructuring and improving the mines department organization. With favorable implementation we may expect improved mining and national ratings, with corresponding improved prospects for national growth.

Conclusions and Recommendations

1. The various rating agencies are a reminder of how others see the Indonesian mining and investment sector, and this reflects on the world’s wider view of Indonesians as a friendly and fair people.
2. The ranking agencies of the Fraser Institute, Behre Dolbear and others may give early warning signals to the government, such that suitable policy and implementation responses can be undertaken to avert other ranking agencies (S&P) having a more significant impact on Indonesia.
3. Indonesia’s generally low ranking for investment in the mining industry should provide incentive to the government to redouble its efforts to address industry concerns, promptly resolve the challenges identified by the ESDM, and in doing so support Hatta Rajasa’s outlook that “a lot of things need fixing”.
4. It would appear the better mining SOE’s are incorporating business best practices to combat the old inefficiencies in the work place, poor fiscal accountability, lack of transparency etc.
5. The Indonesian ranking agencies have started an important trend to encourage best business practices. This should be advanced to allow for more interaction with international rating agencies. In the mining sector the rating agencies may be encouraged to widen their participants to include all COW and IUP holders.
6. Indonesian based mining executives should be encouraged to participate more positively in international rating agencies surveys (Behre Dolbear and others) to give a more balanced “understanding” of the Indonesian mining business sector.
7. Ongoing efforts should be continued to improve transparency amongst the exploration and mining industry, and amongst the Indonesian rating agencies.