08 Dec 2016
Why progress towards an Indonesia-Australia FTA is good news for the Australian energy and resources sector
By Graham Taylor, Samy Mansour, Ken Ooi
Australian energy and resources companies should be positioning themselves for the Indonesia-Australia FTA, which is expected to be concluded in 2017.
Australian businesses in the energy and resources sector will likely be in an excellent position to benefit from a free trade agreement between Australia and Indonesia that is in final stages of negotiation, and should be ready to take advantage of the opportunities this could present.
The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) aims to build on the two countries' unique relationship and strengthen their economic and political bonds.
The sixth round of IA-CEPA negotiations is scheduled to take place in Australia in February 2017. It is the intention of both Governments to conclude negotiations of the IA-CEPA before the end of 2017.
The current state of play in the Indonesian energy and resources sector
At first blush, it would seem that there are considerable opportunities for Australian businesses in the energy and resources sector.
Both Indonesia and Australia are large mining nations, and the sector delivers important contributions to their respective exports and GDP. Indonesia also has outstanding prospects for mineral discoveries.
There are more than 40 ASX-listed companies with activities in Indonesia's energy and resources sector. There is clearly opportunity and demand in the energy and resources space for Australian mining, engineering, technology and services companies in Indonesia ‒ the Department of Foreign Affairs and Trade (DFAT), for example, reports that Indonesian demand remains strong for mining and exploration software, specialised mining equipment, education and training services and mining consulting. In addition:
- Indonesian energy demand is predicted to grow strongly over the medium term, and Indonesian President Joko Widodo has signaled that he wants to see a substantial expansion of oil and gas exploration in particular; and
- at a recent Ozmine mining conference in Jakarta, mine safety and training were highlighted as growth opportunities for Australian service providers with the Indonesian mining industry suffering from considerable skills shortages.
There are, however, a number of issues in this sector in Indonesia, which stem from a protective regulatory framework that creates uncertainty, and policies that are generally not conducive for foreign investors, particularly:
- export taxes on certain commodities;
- a ban on the export of unprocessed minerals from Indonesia; and
- an accelerated divestment requirement for foreign shareholders in companies that hold a mining production permit, requiring majority Indonesian ownership within 10 years.
IA-CEPA to remove trade barriers
A successfully negotiated FTA could resolve some of these issues and enhance the economies of both countries.
According to DFAT, the aims of the IA-CEPA are:
- addressing impediments to bilateral trade, including those which impose additional costs on exporters and consumers, and impede economic competitiveness;
- addressing the impediments to increasing Australian investment in Indonesia; and
- exploring ways to enhance economic cooperation in specific sectors identified as key drivers of economic growth, which includes the energy and resources sector.
If these goals are achieved, the IA-CEPA could lead to legal certainty, a liberalisation of investment, reduction in protective regulations and therefore more cross-border trade and growth for the energy and resources sector.
What Australian energy and resources companies should do to get ready for the IA-CEPA
If your business is in this sector and could be benefit from regulatory change, you should be involved in making submissions on this topic through DFAT and share your experiences with market challenges in Indonesia to be considered for the IA-CEPA.
You should also position your business to take advantage of the agreement once negotiations conclude and the IA-CEPA is in place. A successfully negotiated IA-CEPA will result in significant opportunities for Australian businesses and, given the progress and expected timeframe, it would be prudent to consider this potential now.