The government will require 20 percent of shares in mining companies entirely owned by foreign shareholders to be divested to local partners, in accordance with the new mining law,

an official says.

Speaking at a forum on Monday, Bambang Setiawan, the director general for coal, minerals and geothermal energy at the Energy and Mineral Resources Ministry, said the government would issue a regulation in August on the divestment obligation.

“The law stipulates that foreign mining license holders must divest their shares to the central government, regional government, state enterprises or domestic private companies starting in the fifth year after production starts,” Setiawan said.

Director for coal and mineral utilization Bambang Gatot Ariyono said the government was in the process of finalizing the new regulation, which will implement the new mining law passed in December last year.

“Based on our research, state enterprises usually seek to buy 20 percent of shares in foreign-controlled companies,” Gatot said, adding that the obligation would not affect joint ventures where a domestic player, or a local consortium, hold 20 percent of shares or more.

Those affected by the new regulation, he said, would be those applying for new contracts, because contracts signed by earlier generations (one to four) already specified share divestment obligations.

“[And] the fifth to seventh generations of mining contracts do not require any divestment,” he said.

The 20 percent divestment must be completed within four years, starting in the fifth year after production starts, Gatot said.

The required percentage, he said, would be cumulative if companies could not sell the shares in the targeted number of years, meaning if a company failed to sell 5 percent of shares in the fifth year, it must sell 10 percent in the sixth year and so on.

However, the regulation does not stipulate sanctions for companies who fail to divest their shares to domestic players within the allocated time frame.

“In this case, we will ask them to continue their efforts to divest the shares, but we cannot force them to sell shares if there are no buyers,” Gatot said.

Jeffrey Mulyono, former chairman of the Indonesian Mining Association (IMA) and president director of PT Bhakti Energi Persada, said the 20 percent divestment requirement was “still acceptable” to investors.

A 20 percent share divestment would allow the original shareholders to keep officials at management levels intact, Jeffrey said.

He also supported a provision in the regulation stipulating that state enterprises would enjoy a priority in buying the divested shares, citing that dividends paid to state enterprises would become state revenue while revenues garnered by private companies would go to individual pockets.

“Because money has no citizenship, the person could simply use it to buy another company outside Indonesia,” Jeffrey said.

However, divesting shares to state enterprises was not necessarily free from problems, he said.

“The question we need to address is whether state owned enterprises can manage the companies as well as private actors do.”

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