Wanted by the taxman: Indonesia's $5 billion of lost coal

Reuters
File photo of trucks and machinery being pictured at a PT Exploitasi Energi Indonesia Tbk coal mine in Samarinda
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Trucks and machinery are pictured at a PT Exploitasi Energi Indonesia Tbk coal mine at Palaran district in Samarinda, Indonesia east Kalimantan province, in this September 14, 2013 file photo. REUTERS/Zevanya Suryawan/Files

By Fergus Jensen

JAKARTA (Reuters) - Indonesia may be the world's top exporter of thermal coal, but that masks an embarrassing fact for a government scrambling to raise revenue - more than $5 billion worth of the fuel is mined illegally and goes untaxed each year.

Export and consumption data shows Indonesia produces around 12-15 percent more coal annually than the ministry of energy and mineral resources reports. That's enough to supply Taiwan, the world's fifth-largest coal importer, for a year.

The $460 million of lost tax revenue that industry officials estimate this represents would provide Jakarta, which is considering roughly doubling royalties paid by coal producers, with some of the funds it needs to redress its budget deficit.

The gap between recorded and actual output has also attracted the attention of Indonesia's top anti-graft agency the Corruption Eradication Commission (KPK).

A combination of export data from the Bureau of Statistics, using customs information, and consumption data from state electricity utility Perusahaan Listrik Negara (PLNEG.UL), shows Indonesia's total coal output at 451.9 million tons in 2012.

That is 56 million tons higher than production estimates from the energy ministry, which gathers its information from licensed companies and regional authorities.

"The question we've always asked is: 'where's the missing 50-to-60-something million?'" said Pandu Sjahrir, commercial committee chairman for the Indonesian Coal Mining Association, which represents 125 coal firms including PT Adaro Energy (ADRO.JK) and PT Berau Coal (BRAU.JK).

Indonesia's government pegged the average benchmark coal price in 2012 (HBA) for its coal at $95.48 per ton last year, which would mean the missing 56.3 million tons is worth $5.4 billion.

In a global context, 60 million tons of thermal equates to around 6-8 percent of total global seaborne trade this year, based on analysts' estimates of 800-950 million tons.

"That's probably a year or two's demand growth," said Tom Sartor, an analyst with Morgans Stockbroking in Brisbane.

"MOUSE PORTS"

The data discrepancy dates back to Indonesia's decentralization of the mining sector in 2004, when control over mineral resources shifted to regional administrations, said Xavier Jean, credit analyst at Standard & Poor's.

"Regencies and provincial governments and so on suddenly had so much power to grant licenses so it became difficult to keep pace with what's going on with this part of the market," Jean said.

Industry and government officials said the discrepancy was due to illegal mining and patchy supervision of the coal industry by the energy and mining ministry.

The government's official position is that the gap is a reflection of how widespread illegal mining is in Southeast Asia's largest economy.

"So where is the leak? As we have said, it's from mining without permits with (coal shipped through) what is known as mouse ports," Thamrin Sihite, a director general at the ministry, said earlier this month. Mouse ports are small docks used to load boats with illegally mined coal.

A KPK spokesman said the anti-graft agency was investigating the loss of state revenue from illegal coal mining.

The government is considering restricting coal loading to certain ports in an effort to stop illegal shipments, a ministry spokesman said. But enforcing the proposed regulation could prove difficult, if not impossible, for a country comprising thousands of islands.

During boom times for producers, when the coal price was higher, the discrepancy was largely overlooked. But the problem has been thrown into relief with the coal price near a four-year low and Indonesia's weakening currency piling pressure on the government to address fiscal and current account deficits.

"Everyone still remembers the boom years when we created so much wealth in such a short amount of time. The question is why didn't we tax more back then?" Sjahrir said.

Jakarta is considering raising royalties on coal output to 13.5 percent from 5 to 7 percent now, although it delayed the planned rise to early 2014 from this year. The government has also ditched plans to impose an export tax.

Miners, already battered by falling prices and weakening demand from top buyer China, say rising royalties could force some firms to stop producing.

Coal is Indonesia's largest export-earner, with around $2 billion worth shipped abroad each month.

Raising royalties could backfire and drive more production underground, said Sjahrir, with negative consequences for both the fiscal and current account deficits.

"My worry is that we will see more mining that we cannot register. There would still be excess supply," he said. "The export numbers would still be big and there would be less income to the government. That's my biggest fear."

($1 = 11,485 rupiah)

(Additional reporting by Adriana Nina Kusuma in Jakarta and Rebekah Kebede in Perth; Writing by Randy Fabi; Editing by Simon Webb and Alex Richardson)

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