Wednesday, July 11, 2018

Commentary: Freeport divestment, capital flight and collateral damage

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Jakarta | Tue, July 10, 2018 | 09:41 am

Commentary: Freeport divestment, capital flight and collateral damageDozens of people claiming themselves as workers of gold and copper miner PT Freeport Indonesia hold a rally in front of the Energy and Mineral Resources Ministry in Jakarta on March 7, 2017, urging the government to immediately resolve its dispute with the company. (JP/Dhoni Setiawan)For the umpteenth time the government announced last week it would soon close the deal to acquire the controlling ownership of PT Freeport Indonesia (FI), which has owned and operated the world’s largest gold and copper mine in the easternmost province of Papua since 1972.

Many times, the government has renewed FI’s license to export copper concentrate even though the 2009 Mining Law has banned the export of unrefined minerals since 2014. The latest renewal was in February 2018

Acquiring the majority ownership of FI, the subsidiary of American mining giant Freeport-McMoran, would indeed generate big political gains for President Joko “Jokowi” Widodo ahead of the presidential election in April 2019. No previous president has been able to discipline FI under Indonesian laws. 

FI has been able to dodge for more than seven years the government regulation that requires the American company to cede its controlling ownership of the mine to Indonesian interests. 

The divestment agreement would also bring to an end to decades of rising public anger over the American control of the country’s largest mining venture, which has been looked on with suspicion and perceived to be a symbol of American economic imperialism in Indonesia.

But there is an immediate loss as well: the capital flight of US$4 billion, the estimated sum the government or state-owned Inalum Holding Company will have to pay for the share acquisition at a time when Bank Indonesia’s foreign reserves have been eroded steadily in defending the rupiah from further weakening against the United States dollar.

During the first semester, the rupiah depreciated by 5 percent. Last month alone, the central bank had to take $3.1 billion from its international reserves to prevent the rupiah from falling steeply, thereby decreasing its foreign exchange reserves to $120 billion.

Many foreign analysts have also warned that the compulsory divestment would cause collateral damage as it would strengthen the public perception that Indonesia can now afford to stay the nationalistic path in the natural resource sector. 

This is quite a sensitive topic, as the upcoming campaigns for the legislative and presidential elections in April 2019 could again raise the ugly head of inordinate nationalist sentiments. 

This may scare off new investors in the mining industry.

But given FI’s notorious reputation with all the preferential treatment and generous mining concessions it has enjoyed over the past 45 years, several analysts have also opined that it is the right time for Indonesia to discipline FI. 

The government has been facing extraordinary pressure from the people and national media to be firm with FI. This is driven by a perception that the company has consistently taken advantage of the Indonesian government since it entered the country in 1967 as its largest foreign investor.

Hence, FI has been seen as a special case. Jokowi’s determination to acquire the controlling ownership of FI cannot be considered a “conventional” breach of the sanctity of a contract but the revision of a contract that was made in bad faith by a foreign giant mining group exploiting the weakness of Indonesia’s government.

We should give the benefit of the doubt to Inalum as to whether FI will run better and generate more benefits for the Indonesian people or not, despite the notorious reputation of many state companies as cash cows for politicians and senior officials.

Certainly the primary challenge during the remaining 23 years of FI’s operation until 2041 (including a 20-year extension under the Special Mining License) is to secure financing for the estimated $20 billion in additional investment needed and the billions of dollars more in annual working capital as the mining operations will soon go underground. 

Technically wise, we are confident FI’s operations will continue to be fairly smooth because Freeport-McMoran will remain as the operator and manager, which will simply execute whatever business plan is given by the government (Inalum) as the controlling owner.

The question though is the source of financing for investment and operational funds because the bulk of the money is supposed to be fulfilled with loans, while the lending capacity of local banks is severely limited. At issue now is how high the credit rating of FI is under the government’s controlling ownership. 

Another task is to ensure that the smelter, one of the three key conditions for the extension of Freeport’s Special Mining License, is completed within the next five years. The 2009 Mining Law prohibits the export of unprocessed minerals. The ban should have been enforced in 2014, but it has since been postponed because most mining companies have yet to build their smelters.

The construction of the smelter has become even more imperative because of the lingering suspicions that Freeport-McMoran has not been fully transparent and honest with the gold concentration it extracted from the copper mine because the refining has from the outset been done overseas. 

Another factor is the local administration. The government made the right decision to allocate 20 percent of the central government’s equity holding to the Papua provincial and regency administrations. But controlling ownership will not automatically mean direct benefits to the local people, especially because many state companies have yet to build good corporate governance. Papua has long been Indonesia’s least developed and most restive province, with intermittent waves of security disturbances.
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Friday, July 06, 2018

Belt and Road Initiative projects pick up momentum

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Vincent Lingga
The Jakarta Post
Hong Kong | Sat, June 30 2018 | 02:39 am

Massive infrastructure project: Business delegates and visitors listen to speakers during the third Belt and Road Initiative (BRI) summit in Hong Kong on Thursday. More than 100 infrastructure projects are under construction in 36 countries along the BRI route stretching from Asia to Europe, says Ning Jizhe, the vice chairman of China’s National Development and Reform Commission. (JP/Vincent Lingga)
The Thai official and business delegation, led by Deputy Prime Minister Somkid Jatusripitak, signed several agreements with Hong Kong companies for renewable energy, tourism and smart city development projects worth US$3 billion during the third Belt and Road Initiative (BRI) summit on Thursday.

Though overshadowed by negative media reports over the past few weeks on the controversy surrounding BRI infrastructure projects in several South and Southeast Asian countries, the summit and exhibition attracted more than 5,000 business and official delegates from 55 countries, including Indonesia.

Ning Jizhe, vice chairman of China’s National Development and Reform Commission, told the meeting that more than 100 infrastructure projects were under construction in 36 countries along the BRI route stretching from Asia to Europe.

“The BRI program has really been picking up strong momentum almost five years after its launch,” Carrie Lam, chief executive of the Hong Kong Special Administrative Region noted in her opening speech.

The BRI was launched by President Xi Jinping in September, 2013 to build a network of overland road and rail as well as maritime routes, oil and natural gas pipelines and other infrastructure projects in 65 countries from Central China through South, Southeast and Central Asia and Europe.

None of the 80 government and business leaders, who shared their views on the BRI infrastructure projects at the plenary meetings and concurrent thematic forums, directly reacted to the reported complaints about the lack of local participation and too dominant role of Chinese companies and workers in the implementation of BRI projects.

But the theme of the summit, “collaborate for success”, seemed designed to address the complaints, conveying the message that BRI project implementation needs to involve more local companies and workers and use local materials to convince people on the benefit of BRI’s programs. 

In contrast to the first BRI summit in Beijing in May 2017, the third BRI summit was organized by the government of the Hong Kong Special Administrative Region and the Hong Kong Trade and Development Council (HKTDC). The conference also arranged dozens of investment and business matching and project pitching sessions.

“Local participation, the sharing of benefits and high quality work are key to the smooth, sustainable implementation of infrastructure projects,” asserted Liu Qitao, chairman of China Communications and Construction Company, which is building many BRI projects.

A change of government in a host country would not affect infrastructure projects if the projects generated mutual benefits and were properly planned and designed with high economic viability, added Liu in response to a question about the new Malaysian government’s plan to review Chinese-funded projects. 

HKTDC chairman Vincent HS Lo noted that managing risk and debt, ensuring mutual benefit, cooperating with local companies and local worker involvement are the main challenges of BRI projects. 

Bank and insurance executives speaking at the plenary and thematic sessions shared their views that infrastructure investment is very complex, involving strategic planning, technical assessment, feasibility studies, deal structuring, financial and tax planning, financing, project management and risk control.

According to the Hong Kong International Arbitration Centre, the number of cases related to BRI projects rose by over 70 percent to 125 last year as a large number of Chinese companies rushed overseas to implement BRI projects in countries with different regulations, business landscapes and cultures. 

During the summit Hong Kong official and business leaders campaigned to leverage Hong Kong’s strength of being the most complete platform for fundraising, a regional logistics hub for sea and air cargo and a conduit for investment between mainland China and the rest of the world.

Most speakers agreed that even though the BRI primarily and initially aimed at enhancing connectivity for investment and trade, it goes beyond these areas. Physical connectivity will create a virtuous cycle to eventually expand and deepen economic, social and cultural connectivity.

 
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Monday, July 02, 2018

Commentary: Time of reckoning on pace of Belt and Road Initiative

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Vincent Lingga
The Jakarta Post
Hong Kong | Tue, July 3, 2018 | 09:33 am


Commentary: Time of reckoning on pace of Belt and Road Initiative
Closer ties: President Joko "Jokowi" Widodo (second right) and Chinese Prime Minister Li Keqiang (second left) witness the signing of an agreement on the review design of the Janelata and Riam Kiwa dam construction projects at the Bogor Palace in Bogor, West Java, on May 7. (Antara/Puspa Perwitasari)

Hundreds of infrastructure projects worth hundreds of billions of dollars have been getting off the ground in Asian, European and African countries included in China’s Belt and Road Initiative (BRI), along with controversy, hurdles, delays and polarized public opinion in several countries.

Physical infrastructure, as the backbone of economic development, is critical to the success of the BRI agenda. But as a large number of Chinese enterprises seem to have rushed overseas, expanding their foothold across BRI-related countries, the process has not been smooth at all times.

Hence nearly five years after the BRI launch in late 2013, the third BRI summit here last Thursday was really the right time of reckoning, on the pace of the implementation of BRI projects. This reflection included contemplating why in several countries BRI projects have caused so widely polarized public opinion.

The BRI scheme has been designed by President Xi Jinping to build a network of overland road and rail routes, oil and natural gas pipelines, and other infrastructure projects that will stretch from central China, through Central Asia, Europe and Africa.

The BRI agenda certainly fits well with Indonesia’s top-priority development program to improve connectivity within the country and between the country and the global value chains.

A recent report by Baker & McKenzie consulting company concluded that from a geographic perspective, Indonesia stood to be the biggest beneficiary among the ASEAN economies, with more than US$87 billion identified in the BRI-related pipeline of infrastructure projects.

The Indonesian government itself has signed a $5 billion contract for the Jakarta-Bandung high-speed railway project under the BRI, and has been promoting special economic zones in North Sulawesi, North Kalimantan and North Sumatra for the BRI program.

But the main concerns raised about BRI project implementation in several South and Southeast Asian countries are related to the alleged lack of local worker participation and companies, the risk of unmanageable debts and the rather dominant geostrategic interest of China, rather than the economic viability and shared benefits, in several projects. 

As most BRI projects are funded by long-term and very low-interest-rate loans from China’s state (policy) banks, most of the investment and construction also have understandably been made by Chinese companies.

Problems usually arise because many of these companies still lack work experience in foreign countries where they have to face a web of local and international laws, not to mention the full spectrum of political, security and economic risks.

Many speakers and analysts at the Hong Kong summit, including Suteja Sidarta Darmono, chief executive officer of PT Jababeka, which manages two of Indonesia’s largest industrial estates and two special economic zones, reiterated the strategic importance of tie-ups with local partners, local hiring and the procurement of local materials.

“Look for local companies with a good track record as they are the ones who know the local rules, business landscape, the local culture,” Darmono asserted in one of the sessions during the summit.

“Almost 90 percent of China-funded projects have been implemented by Chinese companies,” cautioned Shinta Widjaja Kamdani, vice president of the Indonesian Chamber of Commerce and Industry, in one of the plenary sessions.

This shows that in a more fundamental way, the biggest challenge is how China communicates its intentions and its vision for the BRI programs and reconciles its geostrategy with the interest of the host country of the projects, while it tries to flex its economic muscles as a regional and global power.

Fortunately, Hong Kong, seen as the super connector and most strategic gateway to mainland China, seems to have been aware of the start-up problems encountered in BRI projects in several countries.

One day before the summit, the Hong Kong Trade Development Council (HKTDC) initiated the establishment of a global alliance, the Belt and Road Global Forum, comprising over 110 chambers of commerce, industry associations, investment promotion agencies and think tanks from around 30 countries. 

The forum will steadily admit new members from the BRI-related countries with the spirit of collaboration and openness in sharing experiences and views about infrastructure and business development.

Hong Kong has a significant role to play in the development and success of the BRI. The city is regarded among the world’s freest economies, with a vibrant capital market, and a regional logistics hub for sea and air cargo. 

Earlier on June 20, according to China Daily, the All-China Journalists Association and around 100 journalists from 47 countries gathered in Beijing and set up the BRI Journalists Forum. This forum will be developed as a platform for mass media to nurture a better, comprehensive understanding of the BRI goals, through news sharing, mutual learning, policy studies and building bridges between cultures.

The BRI understandably still seems far away from being a coherent blueprint of interconnected international infrastructure investment. Infrastructure investment is very complex, involving strategy planning, technical assessment, feasibility studies, deal structuring, financial and tax planning, financing, project management and risk control. 

The greatest benefit, though, is that physical connectivity could create a virtuous cycle to expand and deepen economic, social and cultural connectivity. The main challenges are identifying and designing the right projects, assessing the risks and then packaging projects in a way that ensures they are economically viable, beneficial, bankable and, most importantly, directly benefit the local people.
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The writer is a senior editor at The Jakarta Post.

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