Nigeria, Africa’s most populous nation, a major OPEC oil exporter and one of the continent’s fastest growing economies is at risk of a reversal in economic fortunes. Continue reading ->
West Africa Political Risk – Despite political violence, Mali economy remains robust
The greatest impact of the rise in political violence in the Sahel and West Africa has been on perceptions of doing business in the region rather than on actual trade volumes themselves. Continue reading ->
West Africa Political Risk – Government collusion in criminality
The financial success of AQIM’s recent kidnap for ransom operations is dependent upon lawlessness and government collusion in criminality. Continue reading ->
West Africa Political Risk – Trade and Terrorism in the Sahel
The seizure in January by heavily armed Islamic extremists of the Algerian In Amenas gas plant in the Saharan desert and the holding of 650 hostages, combined with the escalating war in neighbouring Mali against Islamic insurgents, have highlighted the challenges of protecting assets and personnel for companies trading in the region.
Political risk and Indonesia coal mining sector: Production, prices and quotas
In our previous blog, we set the regulatory context for foreign investors in the Indonesia mining sector. In the following, we’ll explore the raw production, prices and quota data and the implications for investors.
Indonesia coal production levels have risen steadily despite the fall in prices from 2010, which led to a decline in revenue for government and private companies (Table 1).
As export prices for coal are far higher than domestic prices, one of the key provisions of the 2009 mining law was the development of a preference for allocating coal and mineral resources to meet domestic needs through production and exports restrictions known as the Domestic Market Obligation (DMO).
Table 1. Indonesian coal production, 2003 – 2011
| Date Coal production | (million t)
|
| 31 December 2011 | 199.82
|
| 31 December 2010 | 169.23
|
| 31 December 2009 | 157.55
|
| 31 December 2008 | 147.75
|
| 31 December 2007 | 133.42
|
| 31 December 2006 | 119.16
|
| 31 December 2005 | 93.92
|
| 31 December 2004 | 81.40
|
| 31 December 2003 | 70.28
|
Source: BP, Statistical Review of World Energy
Within the coal sector, the DMO stipulates that 25% of coal must be sold in the domestic market to ensure that power plants could access sufficient supply. The law came into effect on 31 December 2009, at which time the 25% requirement equated to approximately 80 million tpa of coal.
This requirement was subsequently scaled back to 65 – 67 million tpa because the state had not built power plants at the pace anticipated to absorb the allocated coal. The imposition of production quotas has been debated as the government has become concerned that Indonesia’s 20 billion t of coal resources were being depleted too quickly. Most of Indonesia’s coal reserves are situated in Sumatra in the south, with the balance located in Kalimantan, West Java and Sulawesi. Coal quality varies, with lower grade lignite (59%), sub‑bituminous (27%) and high grade bituminous and anthracite (14%).
Production has increased from 254 million tpa in 2009 to 390 million tpa in 2012, with projections that it could reach 450 million tpa in 2013. Were quotas to be introduced, the government claims they would be set at limits higher than current production levels, which means their impact would be felt in the medium term.
Indonesia coal sector dominated by domestic companies
The coal sector differs from the rest of the minerals sector because it is not dominated by foreign companies. Therefore, the main beneficiaries would be politically well-connected conglomerates who are likely to receive a disproportionately large quota of shares. The coal mining sector is dominated by Indonesian companies with significant political influence. Some the largest producers, such as Bumi Resources, Kaltim Prima and Arutmin, are owned by Aburizal Bakrie, the chairman of the Golkar party, the second largest party in parliament. Bakrie is also a presidential candidate for 2014. Meanwhile, the owner of Adaro is a supporter of the current President Susilo Bambang Yudhoyono. These firms exercise great influence over policy making.
Irrespective of the imposition of quotas, the largest mining companies have indicated that they may limit production in 2013 until they have a clearer view of international demand. China stockpiled coal during the boom and in a downturn it is unclear how long it will take the country to work through its reserves.
A reduction in coal exports from Indonesia will impact Asian coal importers. India and China rely on Jakarta as their largest supplier of thermal coal, while the country as a whole is a major supplier to Japan and South Korea.
In the third and final blog, we’ll highlight two case studies that illustrate the challenges of doing business in the Indonesia mining sector – and the opportunities presented by Political Risk Insurance.
Political Risk and Commodities Markets – Case Studies
Political Risk Premium for Energy Commodities
Politically charged events in energy producing countries or risks to energy transit routes, have an important influence on perceptions of supply availability and on oil & gas commodity prices. Continue reading ->
Political Risk and Commodities Markets – Case Studies: Cote d’Ivoire Cocoa Embargo
The cocoa crisis began in November 2010, when incumbent president, Laurent Gbagbo, refused to relinquish power to opposition candidate, Alassane Ouattara, who was judged by international observers to have legitimately won the presidential election. A total ban on cocoa exports was imposed by Ouattara, with EU and US backing, in January 2011 to starve Gbagbo of revenue to finance his government and supporters. Continue reading ->
Political Risk and Commodities Markets – Case Studies: Russian Ban of Grain Exports
The power of a single commodity producer to disrupt global supply was starkly demonstrated by Russia’s ban on grain exports 2010. Despite reports of a strong harvest in the US and high wheat inventories that should cover the reduction in Russian output, Prime Minister Vladimir Putin acted prematurely and the markets reacted wildly with wheat prices rising to a 23-month high since the announcement. Continue reading ->
Political Risk and Commodities Markets – The outlook for the future
Pressure on natural resources and the insatiable demand for commodities by a rapidly growing and industrialising global population indicates that the medium to long term is high prices and high demand, with the competition for resources potentially leading to social and political instability and in some cases, war. Continue reading ->
Political Risk and Commodities Markets – beyond the Arab Spring
The Arab Spring serves as useful example of the importance of commodities in geopolitics, especially how several different events, policies and underlying tensions can interact to create heightened political risk. Here we will explore some of the other factors impacting commodities that affect the political risk landscape. Continue reading ->
Political risk and Indonesia coal mining sector: Regulatory background
Investing in the Indonesian mining sector has the potential to be very profitable, but navigating the investment landscape can be fraught. The unpredictable regulatory environment is only part of the challenge: dealing with the personalities and vested interests is even more critical. Extensive due diligence is a pre-requisite, not just of the partner firm but of the individuals involved and their connections with political elites. Continue reading ->
The Pacific Alliance: Promising if…
Latin America seems to suffer from regionalist inflation. Four new integration projects were born in the last ten years: The Bolivarian Alliance for the Americas (ALBA) launched by President Chavez of Venezuela to counter neoliberal policies and US influence and advocating a radical change of economic and social models; The Union of South American Nations (UNASUR) created and supported by Brazil to give a platform to its regional and global projection; the Community of Latin American and Caribbean States (CELAC) to give the region a single voice in its political relations with international partners; and, most recently, in 2012, the Pacific Alliance, composed of Chile, Peru, Colombia and Mexico with a view to foster exchanges with the Asia-Pacific. This one has attracted considerable interest and expectations, especially from the international business community.
The economic prospects look promising for the Pacific Alliance area. The bloc has a population of about 204 million people (roughly equivalent to the size of Brazil’s), generates a GDP of 1.4 billion USD corresponding to 34% of Latin American GDP, GDP per capita is close to 11.000 USD per year, and the four countries account for about half of the foreign trade of the entire region. Besides, exports from the bloc grow by 8% a year on average, with a staggering 13% increase in exports toward Asia in the period 2007-2011. The four members are among the fastest-growing economies in Latin America and the declared objective of the Alliance to provide a common platform towards Asia, the fastest-growing region in the world, make economic projections interesting for both investors and domestic political and social planners.
The political picture is equally encouraging. The four members are relatively stable countries. They are generally considered reliable partners and have a record of compliance with international commitments. Colombia has successfully addressed internal problems of guerrilla and drug trafficking reducing risks and improving the country overall performance and image. The arrival to power in Lima of left-leaning president Humala has not brought about a rejection of business-friendly policies adopted by his predecessor. Mexico has positively re-engaged with Latin America in recent years and the newly-elected president Peña Nieto has pledged to modernise the country and tackle alarming violence rates. Chile is on its way to first world status. All the four associates pursue open economy and free trade, maintain cordial relations with the US and have a clear focus on the Asia-Pacific.
However one may wonder what the newly-launched Pacific Alliance may add to this picture. The two principal objectives of the organisation are the free circulation of goods, services, capitals and people; and the creation of a common platform towards the Asia-Pacific. Now, the bloc commitment to free trade is a well-established policy and all members already have in place Free Trade Agreements (FTA) with one another. Furthermore they all have FTAs with the United States and with several Asian countries. The real added value of the Alliance would be a significant progress in the free circulation of services and capital. But it remains to be seen how serious the members are about this commitment. The creation of the Mercado Integrado Latinoamericano (MILA), which brings together and facilitates operations in the stock exchanges of Santiago, Lima and Bogota, was a positive move. Yet the exclusion of most agricultural products from the existing agreements provides a hint of the potential difficulties ahead.
Regarding the projection to the Asia Pacific, for the time being the Pacific Alliance does not have juridical personality. This means that the organisation is not able to sign any agreement on behalf of his members. Negotiations for new treatis with Asian countries will have to be conducted and concluded by member states. In this case, the real added value would be the ability of the Council of Ministers of the Alliance to exercise strong coordination on policies towards Asia. The extent to which this will be possible remains to be seen. Latin American precedents and traditional adversity to any form of supranationality cannot be discounted.
The Pacific Alliance looks more the reflection and consolidation of changes and policies that have already taken place rather than a driver of change. The enthusiasm it prompted might have been not only premature but slightly overstated. The good political, economic and social performances of its members predate it and transcend it. Its future impact and real weight will depend on the extent and consistency of its members’ commitment to it. After all, the Alliance is not even one year old.
Political risk and Indonesia coal mining sector: Case studies
Indonesia Expropriation of Churchill Mining’s East Kutai coal mine
Churchill Mining, a London Stock Exchange-listed coal miner, is pursuing accusations against the Indonesian Government through the International Centre for the Settlement of Investment Disputes (ICSID). The dispute revolves around the revocation of Churchill’s East Kutai coal site license and its pursuit of recompense. The case has further raised the profile of expropriation risk and contract uncertainty in the Indonesian mining sector.
Although the Indonesian authorities claim that Churchill did not have the appropriate licenses for exploration and extraction at the Kutai site, representatives of the mining company claim that the government arbitrarily altered the terms after the site was found to have vast coal reserves.
Churchill was not only divested of its licenses, but also saw them effectively re-awarded to the Indonesia-owned Nusantra Group, having purportedly been led to believe they had allowed them to expire. That the Nusantra Group is owned by Prabowo Subianto, an Indonesian politician, raises serious questions about political corruption.
Bakrie-Rothschild dispute over Bumi Plc
The ongoing tussle between Nathaniel Rothschild, a British investor, and Aburizal Bakrie, the head of the Bakrie business empire, over control of mining company Bumi Resources highlights the political risks arising from the intersection between business and politics in Indonesia.
The difficulties facing Rothschild as a foreign investor in Indonesia’s extractive sector are in large part derived from Aburizal Bakrie’s political ambitions. As the Golkar party’s 2014 presidential candidate, Bakrie’s Bumi dispute is significant in two ways.
First, Bakrie’s presidential prospects are believed to be closely tied to his financial resources. Given that the acrimonious affair over Bumi Resources has seen his 23.8 % stake in Bumi plc fall in value by 70% in 12 months with further losses a possibility, questions are being raised about the viability of his candidacy come 2014.
Secondly, and notwithstanding scepticism in light of the financial realities, Bakrie may be motivated by opportunism: by gaining sway over Bumi Resource’s substantial mining operations now, he would pre-emptively bring them under state control should he go on to win the presidency.
Lessons for foreign investors in Indonesia’s mining sector
Contrived political risks in Indonesia’s mining sector, such as these, are exacerbated by the country’s underdeveloped legal and regulatory environment. This effectively facilitates underhand business dealings. Furthermore, Indonesia’s investment environment is known to be affected by political patronage and this can often prejudice foreign investments. Investors regularly cite corrupt practices, particularly the awarding of contracts, permits and licenses based on nepotism and personal relationships. Unfortunately, this downside risk is likely to be a long-term reality for investors in Indonesia, as many of the likely presidential candidates for the 2014 election come from the business and finance community with manifold links to private interests.
Political Risk Insurance and the mining sector
Given the sometimes challenging regulatory and political environment in Indonesia, Political Risk Insurance (PRI) can form an important part of an investment strategy.
PRI insures against loss to foreign lenders, investors, suppliers and traders with mining companies. There are a range of perils that these risk participants may be exposed to depending on the specific project, the basis on which it trades, the location and associated contractual agreements.
A key issue that is often misunderstood when looking at political risk in the extractive sector is the idea that the key asset to be insured is the natural resources themselves. In the private sector the asset is in fact the right to explore for and receive a share of the revenue derived from natural resources, not an ownership right in those resources. This means that the fundamental peril for investors in and lenders to resources projects is often the repudiation of the operating agreement by the host government and not the confiscation of the mining assets. This is a crucial in an era where government action may take different forms that are not of the character of expropriation as has been traditionally understood but do constitute a repudiation of existing operating agreements, often through a process of ‘creeping expropriation’.
The private PRI market, comprising of over 40 syndicates and companies, has theoretical capacity for a single project in excess of USD 1billion. Securing this capacity and agreeing conditions and a competitive price is most successfully achieved by demonstrating clear identification of the underlying perils and appropriate risk management. Political risk underwriters of resource projects pay careful attention to due diligence and do distinguish between the qualities of similar projects in the same territories.
PRI won’t fix a bad deal or contract but when a project is well structured and the correct PRI coverage purchased, PRI does act as an effective safety net for your investment.
Nigeria’s sovereign stability at risk as security challenges and sectarian clases threatens economic growth, FDI and capital inflows
Nigeria, Africa’s most populous nation, a major OPEC oil exporter and one of the continent’s fastest growing economies is at risk of a reversal in economic fortunes. Continue reading ->
Ghana’s ruling NDC narrowly escapes defeat to win election by 50.7%
A surge in voter turnout above the historic norm of 70% to almost 80% saw the ruling party winning the election by the skin of their teeth. The close shave with defeat happened despite the ruling party presiding over the most dramatic increases in Ghana’s GDP growth in over four decades, the lowest inflation levels in a decade and raking in almost half a billion dollars in new oil revenues since 2010. Continue reading ->
Political Risk and Commodities Markets – Case Studies
Political Risk Premium for Energy Commodities
Politically charged events in energy producing countries or risks to energy transit routes, have an important influence on perceptions of supply availability and on oil & gas commodity prices. Continue reading ->
G20 avoids censuring Japan but also fails to quell currency tensions to Korea’s chagrin
The weekend’s G20 summit held in Russia released a lengthy communiqué after the event that avoided saying very much at all. Continue reading ->
Implications of political risk for investors in Middle East petroleum sector
What does that panoply of events mean for the erstwhile investor in the Middle East petroleum sector? How can an effective business strategy be devised and lucrative investment returns realised? Continue reading ->
Tensions in the Middle East even more heightened as Israel’s election nears
In response to an escalation of the periodic missile attacks from Gaza, Israel has embarked on a series of air strikes on the Palestinian territories that has galvanised world opinion. Continue reading ->
West Africa Political Risk – Government collusion in criminality
The financial success of AQIM’s recent kidnap for ransom operations is dependent upon lawlessness and government collusion in criminality. Continue reading ->
Turkey gets a local currency uplift but brinkmanship with Israel unhelpful
S&P raised Turkey’s local currency rating one notch to investment grade but left the foreign currency rating at BB. Having worried about a strong currency and calibrating a monetary policy that combined lower interest rates (to weaken the lira) with higher reserve requirements (a vain attempt to curb spiralling credit growth), Turkey’s central bank has now got its wish – the currency has lost ground since the August cut in the repo rate. Continue reading ->