Coal companies could pay their royalties to the government in coal, rather than in rupiah, under a proposal made by Energy and Mineral Resources Minister Purnomo Yusgiantoro in a bid to help secure domestic coal supply.

"We have proposed to the Finance Ministry that they don't take royalties from coal producers in cash, but in kind. This is an official request," he said.

Under the current system, the state gets a 13.5 percent cut of the combined taxes and royalties paid on coal production. Coal producers pay this share to the Finance Ministry in rupiah.

In the revised 2008 state budget, the government has forecast Rp 6.78 trillion (US$737 million) in revenue from coal royalties.

Indonesia's coal production target for this year is about 225 million tons, up 4 percent on last year's production of 215 million tons.

"About 13.5 percent of the production target will be sufficient to meet the needs of state power utility firm PLN to fuel its power plants," Purnomo said.

According to Purnomo, the proposal will not affect the state budget because PLN will pay market price for the coal.

The Finance Ministry's head of fiscal policy, Anggito Abimanyu, said the proposal would be beneficial because sources of low-calorie coal, the main type used in PLN's plants, had not been fully tapped.

Anggito said the Finance Ministry was also seeking a larger share of the coal royalties.

PLN president director Fahmi Mochtar told The Jakarta Post the proposal would help resolve the company's current coal shortage, but warned prices that followed international prices would be too high.

"We won't be able to afford it if the producers charge us at the international market price. The price should be equal to the minimum export price," he said.

He said PLN's coal supply tended to run out not long after a contract expired.

"Often when the company opens the bidding, the prices offered by coal producers are too high for us," he said.

The troubled company is currently the biggest single domestic coal consumer.

PLN coal consumption is expected to reach 34 million tons this year, 43 million tons in 2009 and 82 million tons in 2010.

The soaring demand will be driven primarily by the company's ongoing project of building new coal-fired power plants by 2011 with a combined capacity of 10,000 megawatts.

Fahmi claimed PLN had already managed to secure between 10 and 30 years of contracts with some coal producers in anticipation of the rising demand.

Indonesian Coal Mining Association president Jeffrey Mulyono said coal producers would have no objections to the minister's in-kind proposal.

"It's all up to the government. We will simply follow along," he told the Post.

Nevertheless, he warned the in-kind system could get messy because the quality and standard of Indonesian coal varied considerably, making it difficult for the government to allocate coal for specific purposes.

"I wonder how the government will make sure which types of coal are suitable for domestic needs," he said.

Jeffrey also suggested PLN review its operations to determine the real problems leading to the coal supply shortage.

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