East
Kalimantan’s coal mine fiasco
and
structural business power
Mohammad Faisal ;
A doctor of philosophy in political economy
from the University of Queensland in
Australia
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JAKARTA
POST, 06 Maret 2014
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. ●
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