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fter political rows in Jakarta and a series of protests in North Sumatra, the government has dropped a plan to continue a joint venture with Japan in operating PT Indonesia Asahan Aluminium (Inalum).

State-Owned Enterprises Minister Mutafa Abubakar told reporters on Tuesday that the government would not renew a master agreement on the joint venture, which should expire on Oct. 31, 2013.

“The plan to end the master agreement is based on a schedule. We will convey the decision to Japan. This is a positive conclusion and we appreciate Japan’s cooperation,” Mustafa said.

Inalum, which was established through an agreement with the Japanese government in 1976, operates an aluminium smelter in Asahan, North Sumatra.

The Indonesian government currently owns a 41.12 percent stake in the company, with the remaining 58.88 percent held by a consortium of 12 Japanese companies including Sumitomo Chemical Co. Ltd., Sumitomo Shoji Kaisha Ltd., Mitsui Aluminium Co. Ltd. and Mitsubishi Corporation.

Industry Minister MS. Hidayat, who was appointed to lead the Japan negotiations, was not aware of the government’s decision. Hidayat said the negotiations with Japan were scheduled for Nov. 5.

In a House of Representatives hearing, executives representing the Japanese consortium said they planned to increase the Inalum factory’s capacity from 250,000 to 317,000 tons per year, with the potential for US$367 million in new investment should the contract extension be approved.

Japanese representatives at the hearing asked for a 30-year extension after 2013, with plans to expand the capacity of its aluminium smelting factory and build a 150-megawatt power plant.

With Inalum’s total assets estimated at $1.23 billion, the Japanese consortium’s stake in the joint venture is worth $723 million, according to data provided by the Asahan Authority, an agency established by the Indonesian and Japanese governments to oversee the operation of Inalum.

The private auditing firm Ernst & Young is currently finalizing its audit of Inalum’s assets.

Asahan Authority chief Effendi Sirait said the money needed to buy out the Japanese companies’ stake would be much less than the actual value of the stake because the government could use the company’s own cash to partially finance the takeover. He estimated the government would only need to raise an additional $120 million.

“We will try to get the funds from the state budget. If that is not enough, we will possibly ask state companies [to contribute],” Mustafa said, adding that it would be possible to partner with state companies in the acquisition of shares.

State metal and mineral mining firm PT Aneka Tambang and state steel manufacturer PT Krakatau Steel have been told by the government to prepare to take over Inalum.

Apart from capital, Indonesia has the necessary skills to manage the company after cooperating with Japan for more than 30 years, Mustafa said.

“There was a knowledge transfer from Japan to Indonesia. We have to change if we want to move forward,” Mustafa said.

Of the 250,000 tons of aluminium ingots it produces each year, Inalum sells 100,000 tons to the domestic market.

Sixty percent of Inalum production goes to Japan, and the remainder is distributed to the domestic market. Besides operating an aluminium smelting plant, Inalum also manages two hydropower plants to support the smelting operation.