27 May 2015

Update on mineral royalty rates in Western Australia

No increase in mineral royalty rates in the 2015-16 State Budget

The Western Australian Government (Government) has confirmed in the 2015-16 State Budget that mineral royalty rates will not be increased as a result of the Mineral Royalty Rate Analysis Final Report 2015 (Review).

In the Review, which was published on 25 March 2015, the Department of State Development and the Department of Mines and Petroleum recommended 18 changes to the current system of mineral royalties, including:

  • increasing the ad valorem rate for gold from 2.5% to 3.75%,
  • introducing an additional royalty tier of 3.75% for minerals that are subject to more intensive processing than is typically used to produce concentrates, and
  • keeping the 10% benchmark rate as a gauge of fair return to the community.

When the Review was published, the WA Mines and Petroleum Minister Bill Marmion ruled out any immediate royalty increases for commodities in the 2015-16 State Budget. On 14 May 2015, the 2015-16 State Budget confirmed that no increases will be introduced.

The decision not to increase royalty rates seems to have been met with widespread relief from miners, mining services contractors and industry groups, in particular the gold sector. In a media release, the Chamber of Minerals and Energy of Western Australia Chief Executive Reg Howard-Smith welcomed the move and said that it provided royalty rate certainty for the WA resources sector.

Iron ore royalty forecasts cut

The Government has also cut its iron ore royalty forecasts from a peak of almost $5.5 billion in 2013-14 to $3 billion in 2015-16. This represents a decline from 19.5% to 11.5% of total government revenue, and is largely due to a sustained fall in the iron ore price.

The Government expects the 2015-16 iron ore price to be US$47.50 per tonne, which is just slightly lower than the Commonwealth Government’s forecast of US$48 per tonne. Last year, the Government forecasted a 2014-15 price of around US$123 per tonne.

Iron ore volumes are expected to rise from 632 million tonnes in 2013-14 to 716 million tonnes in 2014-15 and 799 million tonnes by 2018-19. The three biggest iron ore miners, BHP Billiton, Rio Tinto and Fortescue Metals Group are expected to account for 92.8% of all production volume in 2014-15, and 94.2% of royalty income.

For further information, please contact Jay Leary, Partner, Perth, or your usual Herbert Smith Freehills contact.

20 May 2015

Indonesia announces renegotiation of BITs

Since the Dutch government’s announcement last year that Indonesia had terminated the 1995 Bilateral Investment Treaty (BIT) between those countries, speculation has been rife regarding the status of Indonesia’s remaining BITs, signed with more than 60 countries.

On 12 May 2015, The Jakarta Post reported that the Indonesian Government intends to renegotiate its BITs, to bring greater certainty both to foreign companies doing business in Indonesia and to the Indonesian government. In particular, The Jakarta Post quotes Azhar Lubis, deputy director for investment monitoring and implementation at the Indonesian Investment Coordinating Board (BKPM), as suggesting that Indonesia may seek to restrict access to Investor State Dispute Settlement under its treaties to cases where the government has expressly consented that disputes with a particular investor may be referred to arbitration. Lubis stated that such a revision would be consistent with Indonesia’s 2007 Direct Investment Law, which stipulates that international arbitration claims should be filed based on an agreement between both parties.

Hikmahanto Juwana, international law expert at the University of Indonesia, told The Jakarta Post that provisions in existing BITs that permit one party to commence arbitration without the other party’s consent disadvantage Indonesia, which has often experienced losses in international arbitration.

Indonesia’s position is not entirely surprising, in light of Churchill Mining Plc v Indonesia (ICSID Cases ARB/12/14 and 12/40), in which it sought to challenge the tribunal’s jurisdiction on the basis that the Investor State Dispute Settlement clause in the Indonesia-Australia BIT had not been triggered. The government submitted that a further positive act was required before Indonesia could be said to have consented to arbitration. On 24 February 2014, the Tribunal rejected Indonesia’s jurisdictional challenges, leaving it susceptible to a claim for damages of not less than US$1.05bn, excluding interest.

As noted in a previous post, UNCTAD recognised in a 2013 report a possible trend away from bilateral arrangements and towards wider, regional, multilateral agreements involving greater economic integration and free trade obligations. This may ultimately impact on whether Indonesia is willing to expend resources on negotiating or renegotiating bilateral agreements, when the trend worldwide seems to be towards negotiation of “mega-regional” agreements, such as the Transatlantic Trade and Investment Partnership, the Trans-Pacific Partnership and the ASEAN Regional Comprehensive Economic Partnership. If Indonesia, and other states, shift their focus from BITs to such multilateral agreements, we may see a dramatically different investment protection landscape in future.

For further information, please contact Antony Crockett, Senior Associate, Catherine Eglezos, Solicitor, or your usual Herbert Smith Freehills contact.

This post was first published at Herbert Smith Freehills - Arbitration Notes Blog on 13 May 2015.