T

he State Investment Agency (PIP) will have to review its investment procedures and operations following the Constitutional Court’s decision on Tuesday that annulled the government purchase, through PIP, of a 7 percent stake in gold and copper mining PT Newmont Nusa Tenggara (NNT) in May last year.

The Constitutional Court’s verdict stipulates that since the PIP is simply a working unit within the Finance Ministry — unlike most other state companies with limited-liability corporation status — PIP investment plans must be detailed in the state budget and be approved by the House of Representatives.

Finance Minister Agus Martowardojo’s decision in May last year to take up the 7 percent stake in NNT, as the last tranche of NNT compulsory divestment to allow for controlling shareholders acting in the national interest, had been opposed as legally flawed by House members, notably those of the Golkar Party, and the Supreme Audit Agency.

Both the House and the audit agency demanded that the finance minister and the PIP should seek prior approval from the House for such an investment and the court’s decision has supported this demand.

Agus argued there was nothing wrong with his US$247 million investment decision because it was the central government — which awarded the mining contract to NNT in the first place in 1986 — that held the right of first refusal regarding the shares.

NNT has since 2006 gradually reduced its equity stake in the Batu Hijau mining venture, one of the world’s largest gold mines. This divestment has enabled the administrations of West Sumbawa and Sumbawa regencies and West Nusa Tenggara province to own 24 percent of NNT through their joint venture with PT Multicapital, a unit of the Bakrie group.

The finance minister reckoned that the central government’s acquisition of the remaining 7 percent stake would result in an ideal composition of NNT shareholders: foreign and national private companies, regional administrations and the central government. Obviously, such a complementary mixture of shareholders could contribute greatly to maintaining good corporate governance within the company and protecting national interests.

Now that the Constitutional Court has ruled that PIP investments must first be approved by the House within the state annual budget, the central government will no longer have broad leeway and flexibility in acquiring shares from foreign mining investors, who are required by the 2009 mining law to divest their controlling stakes after the 10th year of commercial production.

Having to go through a political process at the House for every investment PIP plans to make will severely restrict any initiative by the agency. Consequently, foreign investors that will have to start divestment within the next few years may face difficulties in finding the right buyers.