Legal spat 'risking Indonesian coal sale'


President Megawati during a visit to Kalimantan in 2001. She is now in China on a trade and investment mission

Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Miner Rio Tinto says a deal with Indonesia to sell a majority of the company's Kaltim Prima coal mine has been put at "serious risk" by fresh legal action from a provincial government.

The South Jakarta District Court last week granted an order to the East Kalimantan provincial government that effectively freezes any share transfers by Kaltim Prima Coal (KPC).

KPC, regarded as the richest coal mine in Indonesia, is jointly owned by Anglo-Australian miner Rio Tinto and London-based BP PLC.

Rio Tinto has called for the litigation to be withdrawn so that the share sale can go ahead.

But the East Kalimantan government is demanding that KPC sell its shares exclusively to it by April 5 or face a "people's blockade" of its operations on the island of Borneo.

KPC reached a deal with the Indonesian government on March 18 to offer 51 percent of the company to Indonesian parties by March 31.

Divestment process

KPC initially wanted $453 million for the 51 percent stake, but has dropped its price to $419 million. The provincial government, which is seen as the leading bidder for the shares, is offering $320 million.

In addition, the provincial government is suing KPC for $776 million in lost revenue, due to delays in the divestment.

Under its 1992 contract of operation, KPC was required to sell the 51 percent stake by end of 2001. But the parties involved could not agree on the price.

In a statement late Monday, Rio Tinto said the share sale deal "has been seriously put at risk by further legal action".

The latest order, following an earlier one on March 12, puts control of the shares under the South Jakarta District Court.

"As long as the orders are in place, KPC cannot complete its divestment offer and transfer shares to Indonesian parties," Rio Tinto said.

It added that KPC was willing to make the share offer to Indonesian parties "as soon as all the litigation" is withdrawn.

Test case

The KPC sale is regarded as a test case for investors watching the dynamics of power in Indonesia between the central government and the provinces.

The administration of President Megawati Sukarnoputri is giving more authority to local governments. But it is also concerned not to upset potential overseas investors.

Last week, State Owned Enterprises Minister Laksaman Sukardi said he expects Indonesia to develop along U.S. lines, with a federal system and states.

During her current visit to China, Megawati has emphasized that Chinese business people are welcome in Indonesia, and that the political situation is conducive to investment.

While the East Kalmintan provincial government is regarded as the front-runner for the KPC shares, the Indonesian website Laksamana.net says that other bidders have been identified in local media reports.

They include PT Nusantara Energi, controlled by Prabowo Subianto, a retired lieutenant general and son-in-law of former president Suharto.

Prabowo was widely rumoured to have been involved in the political violence which wracked Indonesia after Suharto's fall. He has always denied any role.

In its statement announcing the March 18 agreement with Indonesia, Rio Tinto said the offer would be made "concurrently to the Provincial Government of East Kalimantan, the East Kutai Regency and other interested Indonesian parties pursuant to KPC's Coal Agreement."

Rio Tinto shares closed 54 cents or 1.42 percent lower at A$37.44 in Australia Tuesday. The broader market declined 1.18 percent.

The island of Borneo is divided into East Kalimantan and three other Indonesian provinces, the Malaysian states of Sarawak and Sabah, and the country of Brunei.