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Jakarta Post
The Jakarta Post
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East Kalimantan'€™s coal mine fiasco and structural business power

  • Mohammad Faisal

    The Jakarta Post

Bogor | Thu, March 6, 2014 | 09:46 am

The dispute between the Indonesian government and Churchill Mining Plc over a coal mine concession in East Kalimantan has reached a new stage as the International Center for Settlement of Investment Disputes (ICSID) in Washington has rejected the government'€™s jurisdictional challenge against the arbitration body and maintains that it will handle the case filed by the British company.

The clash started in 2010 when the head of East Kutai regency, Isran Noor, granted the concessions to PT Nusantara Group and revoked the concessions granted in 2007 by the former regent to PT Ridlatama, another Indonesian company that made a deal to collaborate with Churchill Mining in 2008, selling 75 percent of its shares to the London-based company.

The revocation by the regent was based on two reasons, i.e. illegal logging activities conducted by Churchill Mining in the concession area, and the transfer of shares from Ridlatama to Churchill without the knowledge of the regent, which was deemed illegal.

The license granted to Ridlatama for the 35,000 hectare-mine site was a mining license or Ijin Usaha Pertambangan (IUP), which is issued only for a domestic company based on the 2009 Mining Law.

Isran'€™s decision, therefore, gained support from President Susilo Bambang Yudhoyono. Churchill Mining, which opposed the revocation, took the case to the ICSID in 2012 and sought US$2 billion in compensation from the government, after it failed twice to sue the regent through the State Administrative Court as well as the Supreme Court.

Even though the dispute has yet to be resolved, the dispute over the coal mine concession, claimed to be the seventh-largest undeveloped coal mining asset in the world, has so far demonstrated how a transnational company with huge capital and extensive political and business networks has failed to exert its putative structural power over the Indonesian government.

By this, the structural business power, as suggested by Charles Lindblom, a political scientist and economist from Yale University, refers to the power of business in influencing government policy and threatening the government if it cannot fulfill the required conditions for investment that meet business expectations.

This concept applies to a market economy in which the government is concerned about investment, while investment is controlled by business that has the capacity to decide the location, timing and levels of investment, especially given the supposed mobility of business interests.

Nonetheless, the notion of structural business power does not come without its challenges. David Marsh, a political scientist from the Australian National University contends that the structural power theory is flawed because the credibility of business threats or the capacity of business to cause
economic disruption is contingent and contextual depending on several conditions.

Among these conditions are the alternative options available to business and to government if the threat is not carried out, and the opportunity cost to business of carrying out the threat and to government of ignoring it.

In the struggle against Churchill Mining, the leverage of the Indonesian government is strong, not only because of the lucrative nature of coal resources but also due to the scarcity and immobility of the resources as well as the geographical advantage of coal sites in East Kalimantan in terms of proximity to potential international markets, particularly China and India.

It is not easy to find such an attractive coal mining concession in East Kalimantan, especially the disputed mine site in East Kutai, which has been claimed to contain 2.73 billion tons of coal.

The existence of such resources in other regions are usually less abundant, of lower quality and more costly to exploit and to sell to international markets.

The courage of the East Kutai government to challenge a multibillion-dollar company with extensive international business and political networks like Churchill Mining, in particular, does not necessarily imply that the government is not concerned about investment in the region, even though this is plausible for many local governments in Indonesia due to limited capacity and accountability.

Regardless of the close relationship between Isran and Prabowo Subianto, a powerful politician and businessman who owns Nusantara, the courage is due more to the regent'€™s confidence with the prospect of the coal mining business in the region given the comparative advantage of coal resources in the regency, high international and domestic demand for coal, and the backing of the central government.

With support from Jakarta, the regency government believes that the revocation of one investment license will not affect the whole investment climate or result in a lack of investment in the region in this sector. If one investor pulls out, other investors will line up.

With these options in mind, they may even have enough confidence to reject investment from a given company and allow others to invest in their area.

Furthermore, because coal resources, just like other mining resources, are immobile and require massive investment, once a company decides to invest in the sector, it will get trapped and find it difficult to withdraw without adverse financial consequences resulting partly from the abandoned fixed asset, and partly due to the opportunity costs of potential future profit if it continues its operations. Hence, in this context, business is not particularly privileged.

There is a possibility that the Indonesian government may lose in international arbitration and thus may have to pay the $2 billion compensation.

Whatever the decision will be, however, the coal mine fiasco in East Kalimantan has proven that the notion of structural business power does not affect the important characteristics of investment or the investment dynamics surrounding natural resource extraction such as coal mining, which is highly lucrative, but not very mobile in nature.

Such fixed assets in a particular location will hand power back to the government, which possesses the legal ownership of the location as well as the assets.

The writer obtained a doctor of philosophy degree in political economy from the University of Queensland in Australia.

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