Raw Deal - Indonesian coal for Indian power generation - My article in MEAI Journal
Indonesia is one of the largest suppliers of coal to India and many Indian power generation companies have made or planned investments in coal mining sector in Indonesia. However, the projects have faced teething problems, which need to be addressed on fast track. That will help Indian power generation companies tide over supply risks and also help investment flow into Indonesia. Indonesian coal mining sector has been regulatory flux since the passing the new law in January 2010. The implementing regulations (GR 22 & 23 and PerMin 28 & 34) that have followed have led to a certain degree of clarity but the kinks nonetheless remain. The conversion of coal contracts of work (CCoW) and kuasa pertambangan (KPs) into universal license (Ijin Usaha Pertambangan or IUP, which has lifted restriction on investments in KPs by foreign investors) have had its share of uncertainty in terms of continuance of provisions of taxes and royalties. Domestic market obligations have been purported and that is likely to impact the quantum of exports to India. Benchmarking of coal prices with global indices has been introduced, which looks justifiable for royalty and other state revenues but looks stretched for all commercial transactions. This will have impact on the cash flows of power generation assets in India that will source coal from Indonesia. These developments have escalated the politico-regulatory risk of investment in Indonesia.
On the facilitation front, Indonesia has recently created provision for single window clearance through BKPM, the Capital Investment Advisory Board, but for the lack of supporting statutory provisions, the nodal agency has been often less than effective. Even for seeking incentives for project developments in remote areas, the foreign investor may have to knock several doors at central, provincial and municipal government levels. These are true for infrastructure sector as well, and considering that many coal mining companies may have to develop their own transportation and logistics facilities, these procedural hurdles may be challenging. The infrastructure projects may be developed on public private partnership model with the government facilitating land acquisitions, clearances, approvals and other preparatory work. That will go a long way in attracting foreign investment in Indonesian coal sector.
On the operational level, the implementing regulations provide that coal mining companies cannot outsource the entire value chain activities and have restrained use of contractors in coal winning. This may be challenging for power utilities as their expectation had been to hire specialists in mining since contract mining in Indonesia has been relatively higher on maturity level. This in light of the requirement of ministerial approval for employment of expatriates only seems making foreign investment tougher.
From the taxation point of view, coal being non-VATable good has had additional cost in the form of input VAT not being able to be passed through. This has been a long pending request from the industry in Indonesia but has not been allowed in view of higher electricity tariff it is likely to result in Indonesia.
Indonesia has enacted new environmental law (No. 32 of 2009) and issued government regulation (GR 24 of 2010) on use of forest land for mining activities. These are expected to affect the resource base in Indonesia, as some of these may fall in conservation forest (equivalent of a no-go zone in India) and protected forest (where only underground mining methods can be implemented). These are also likely to raise compliance costs, some of which, of course, is justifiable.
On these accounts, the government of Indonesia may need to engage with stakeholders, including potential investors from India, and provide for supportive investment environment. With some efforts Indonesian coal is likely to steam the Indian thermal power generation in times to come.
On the facilitation front, Indonesia has recently created provision for single window clearance through BKPM, the Capital Investment Advisory Board, but for the lack of supporting statutory provisions, the nodal agency has been often less than effective. Even for seeking incentives for project developments in remote areas, the foreign investor may have to knock several doors at central, provincial and municipal government levels. These are true for infrastructure sector as well, and considering that many coal mining companies may have to develop their own transportation and logistics facilities, these procedural hurdles may be challenging. The infrastructure projects may be developed on public private partnership model with the government facilitating land acquisitions, clearances, approvals and other preparatory work. That will go a long way in attracting foreign investment in Indonesian coal sector.
On the operational level, the implementing regulations provide that coal mining companies cannot outsource the entire value chain activities and have restrained use of contractors in coal winning. This may be challenging for power utilities as their expectation had been to hire specialists in mining since contract mining in Indonesia has been relatively higher on maturity level. This in light of the requirement of ministerial approval for employment of expatriates only seems making foreign investment tougher.
From the taxation point of view, coal being non-VATable good has had additional cost in the form of input VAT not being able to be passed through. This has been a long pending request from the industry in Indonesia but has not been allowed in view of higher electricity tariff it is likely to result in Indonesia.
Indonesia has enacted new environmental law (No. 32 of 2009) and issued government regulation (GR 24 of 2010) on use of forest land for mining activities. These are expected to affect the resource base in Indonesia, as some of these may fall in conservation forest (equivalent of a no-go zone in India) and protected forest (where only underground mining methods can be implemented). These are also likely to raise compliance costs, some of which, of course, is justifiable.
On these accounts, the government of Indonesia may need to engage with stakeholders, including potential investors from India, and provide for supportive investment environment. With some efforts Indonesian coal is likely to steam the Indian thermal power generation in times to come.
posted by Dipesh Dipu @ 11:03 PM
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