After three years of debate, the Bill on Mineral and Coal Mining was finally passed by the Indonesian House of Representatives on Tuesday, 16 December 2008. This new law will come into force once approved by the President and promulgated by the Ministry of Laws and Human Rights.
THE 1967 MINING LAW
For over forty years, Indonesia’s mining industry has operated under Law No.11 of 1967 concerning the Basic Principles of Mining (the 1967 Mining Law).
The 1967 Mining Law (and its implementing regulations) permitted mining activities to be carried out under a mining authorization (know as a Kuasa Pertambangan or KP). As a general proposition, KPs could not be held either directly or indirectly by foreign investors (although a foreign investor could hold an interest in a listed Indonesian company that holds a KP).
However, the 1967 Mining Law also authorised the Ministry of Energy and Mineral Resources to appoint any other party as a contractor to carry out greenfields mining activities which had not yet been, or could not be carried out by the State. This provision, together with Indonesia’s prevailing investment laws, led to the development of a regime that permitted foreign investment in mining through a comprehensive mining concession known as a Contract of Work – CoW (or in the coal sector, a Coal Contract of Work – CCoW) between the Indonesian Government and an Indonesian incorporated company which may be owned by foreign entities.
The Indonesian Government has been considering changes to this regulatory regime for mining for several years. Since Indonesia’s regional autonomy laws were enacted in 1999 (where substantial authority for the governance of, among other sectors, the mining sector, was devolved down to regional governments), there has been significant uncertainty which has discouraged new investment in mining because of the introduction of new levies and a reduction in the levels of administrative certainty over the grant and administration of CoW, CCoW, KPs and other necessary licences and permits.
The new Law on Mineral and Coal Mining (the New Mining Law) will abolish the concept of KPs, CoWs and CCoWs, and instead will adopt a new licensing regime. The New Mining Law provides that existing CoWs and CCoWs will be ‘grandfathered’ until they expire, however they will to a certain degree need to be adjusted to align their terms with those of the New Mining Law. These ‘transitional’ arrangements are perhaps the most contentious element of the New Mining Law, and are discussed further below in detail.
In other respects, the New Mining Law is intended to clarify the nature of community involvement, increase Indonesian local content, mandate in-country processing and improve environmental protection.
The full impact of the New Mining Law will only be known when the Government adopts the necessary implementing regulations. Nevertheless, we have summarised the key elements below.
NEW LICENSING REGIME
The New Mining Law establishes the following two principal types of mining concessions:
a Mining Business Permit (IUP) – a basic permit for conducting a mining enterprise within an IUP Area (WIUP); and
a Special Mining Business Permit (IUPK) – a permit for conducting a mining enterprise within an IUPK Area (WIUPK). A WIUPK is part of a ‘State Reserve Area’ (WPN) of national strategic interest. Minerals within the ambit of a WPN are copper, tin, gold, iron, nickel, bauxite and coal.
The New Mining Law also recognises the concept of an IPR (People’s Mining Permit), which is a permit designed to be granted to local residents to carry out a mining enterprise within a restricted area and with a restricted level of investment. We have not discussed IPRs below.
There are two types of IUP envisaged under the New Mining Law:
an Exploration IUP – which is granted for the general survey, exploration and feasibility study phases of a mining project; and
a Production IUP – which is granted for the construction, production, refining and processing, and transportation and sale phases of a mining project.
An IUP is granted with respect to one type of mineral (and associated minerals) or coal. However, if the holder of an IUP discovers another mineral within its licence area, it has a priority right to exploit that mineral resource under a new IUP.
The term of an Exploration IUP depends upon the type of mineral to which it relates.
metallic minerals – a term of up to eight years.1
stone/rock – a term of up to three years.4
coal – a term of up to seven years.5
Holders of Exploration IUPs are ‘guaranteed’ a Production IUP for the continuation of their mining activities. The term of a Production IUP depends upon the type of mineral to which it relates.
Metallic minerals – a term of up to 20 years6 with two possible 10-year extensions.
Non-metallic minerals – generally a term of up to 10 years with two possible five-year extensions. However, for limestone extraction for the cement industry, diamonds and precious stones, the term is up to 20 years7 with two possible 10-year extensions.
Rock/stone – the term is up to five years with two possible five-year extensions.
Coal – term of up to 20 years8 with two possible 10-year extensions.
APPLICATION PROCESS FOR IUP
The process for obtaining an IUP also differs depending on the type of mineral involved.
Metallic minerals IUP will be granted by tender. An Exploration IUP area for this type of mineral must be 5,000 ha – 100,000 ha, and a Production IUP area cannot exceed 25,000 ha.
Non-metallic minerals IUP will be granted by direct application. An Exploration IUP area for this type of mineral must be 500 ha – 25,000 ha, and a Production IUP area cannot exceed 5,000 ha.
Rock/stone IUP will be granted by direct application. An Exploration IUP area for this type of mineral must be 5 ha – 5,000 ha, and a Production IUP area cannot exceed 1,000 ha.
Coal IUP will be granted by tender. An Exploration IUP area for coal must be 5,000 ha – 50,000 ha, and a Production IUP area cannot exceed 15,000 ha.
ISSUER AND ELIGIBLE HOLDER FOR IUP
Exploration and Production IUPs may be issued by the Minister or the relevant Governor (of the province) or the Regent/Mayor (of the regency/municipality) in accordance with their respective authority and areas of responsibility as set out below.
the Minister (after receiving recommendation from the relevant Governor and the Regent/Mayor) will be responsible for the grant of permits that cross provincial boundaries and in sea areas more than 12 miles from the coastal line;
the Governor (after receiving recommendation from the relevant Regent/Mayor) will be responsible for the grant of permits that cross regency boundaries and in seas area of four miles up to 12 miles from the coastal line; and
the Regent/Mayor will be responsible for the grant of permits wholly within the relevant regency/municipality and in sea areas of less than four miles from the coastal line.
The eligible holders of IUP are business enterprises (including state-owned enterprises (BUMN), region-owned enterprises (BUMD)), cooperatives and individuals. Whilst not expressly stated, from the divestment requirements in the New Mining Law (discussed below), it can be interpreted that an IUP can be held by an Indonesian company with foreign shareholding (PMA company). This issue, along with the mandatory divestment requirements, should be clarified by the implementing regulations.
There are two types of IUPK envisaged in the New Mining Law:
an Exploration IUPK – which is granted for the general survey period, exploration and feasibility study phases of a mining project; and
a Production IUPK – which is granted for the construction, production, refining and processing, and transportation and sale phases of a mining project.
An IUPK is granted with respect to one type of mineral (and associated minerals) or coal. However, if the holder of an IUPK discovers another mineral within its WIUPK, it has a priority right to exploit that mineral resource under a new IUPK.
The term of an Exploration IUPK depends upon the type of mineral to which it relates.
If the holder of an Exploration IUPK intends to sell metallic minerals and coal, it must obtain a temporary permit granted by the Minister for the transportation and sale.
Holders of Exploration IUPKs are ‘guaranteed’ a Production IUPK for the continuation of its mining activities.
The term of a Production IUPK for metallic minerals and coal is up to 20 years11 with two possible 10-year extensions.
APPLICATION PROCESS FOR IUPK
The Exploration IUPK and Production IUPK will be granted through open tender.
For metallic minerals, an Exploration IUPK area cannot be greater than 100,000 ha. An Production IUPK area cannot exceed 25,000 ha.
For coal, an Exploration IUPK area cannot be more than 50,000 ha. A Production IUPK area cannot be more than 15,000 ha.
ISSUER AND ELIGIBLE HOLDER FOR IUPK
IUPKs may be issued by the Minister having regard to local interests. The eligible holders of IUPK are BUMN, BUMD and private companies (including foreign investment, or PMA, companies). BUMN and BUMD have priority in respect of the grant of an IUPK. For a private company, an IUPK will be granted through open tender.
OTHER KEY PROVISIONS
In-county processing obligations
One of the key policy objectives of the New Mining Law has been to add value for Indonesia by requiring that processing and refining be conducted in Indonesia. To this end, the holder of a Production IUP or IUPK is required to carry out processing and refinement within Indonesia. The holder of a Production IUP or IUPK can process and refine minerals from other holders of IUPs and IUPKs.
Like many other provisions of the New Mining Law, this requirement is be implemented through Government Regulation, and it remains to be seen how this obligation will be implemented for the range of commodities that exist to be mined in Indonesia (including those commodities such as coal which are inherently less susceptible to processing and refinement).
Entities or individuals that carry out mining activities under IUPs or IUPKs are required to pay central taxes (including income tax and other centrally administered taxes, as well as import / customs duties), non-tax state revenue (principally royalties, dead rent and exploration contributions) as well as regional taxes and retributions.
There is no specific provision in the New Mining Law for IUP or IUPK holders to be provided with fiscal security (such as the special fiscal regime that prevailed under CoWs and CCoWs). Indeed the New Mining Law appears to intend that both IUP and IUPK holders will be taxed in accordance with prevailing laws and regulations. However, it is unclear whether or not any concessionary regime can or will be implemented within the framework of the New Mining Law (particularly with respect to IUPKs) to provide foreign investors with greater fiscal security.
In addition to the above taxes and charges, the holders of Production IUPKs for metallic minerals and coal have an obligation to contribute, after production, 10 per cent of net profit to central and regional government in accordance with the following formula:
4 per cent will be contributed to the central government;
6 per cent will be contributed to regional government, with 1 per cent going to the provincial government, 2.5 per cent going to the regional government and 2.5 per cent going to other regencies within the same province.
After five years of production, the holders of IUPs and IUPKs whose shareholders are foreign parties are required to divest a portion of their shares to the central government, regional governments, BUMNs, BUMDs or national companies. It is not yet clear what foreign shareholding threshold will apply, what proportion of shares must be divested, and how this divestment obligation will be implemented. Again, this divestment obligation will be regulated by Government Regulation.
Settlement of disputes
The New Mining Law states that any dispute arising out of the implementation of an IUP or IUPK will be settled through domestic courts and arbitration in accordance with prevailing laws and regulations. It remains to be seen whether this provision will be implemented (in combination with existing Indonesian investment laws) in a manner that permits foreign investors sufficient scope to resolve disputes through international arbitration.
As noted above, one of the most contentious elements of the New Mining Law is the transitional provisions, and in particular, the impact of the New Mining Law on CoWs and CCoWs that exist at the time the New Mining Law comes into force.
The New Mining Law provides that pre-existing CoWs and CCoWs will remain applicable until the expiration of their respective terms. However, the New Mining Law provides that the terms of such pre-existing CoWs and CCoWs must be adjusted to comply with the New Mining Law within one year from the promulgation of the New Mining Law except for matters related to state revenues. For CoWs and CCoWs that have entered the production phase, there will be a five year transitional period within which to fulfill the requirements for in-country refining and processing.
Furthermore, within one year of the promulgation of the New Mining Law, the holders of CoWs and CCoWs that have carried out exploration, feasibility study, construction or production must submit a work plan for the entire contract area up to the expiration of its term to obtain an approval from the Government. Non-compliance will result in the adjustment of the contract area that has been granted under the CoW and CCoW. This precise intention behind this provision, and the manner in which it will be implemented, is not clear. However, it appears designed to require existing CoW and CCoW holders that have a contract area greater than that which they would be entitled to under the New Mining Law to ‘justify’ retaining such greater area.
Finally, the New Mining Law provides that applications for CoWs and CCoWs that were submitted to the Minister at least one year prior to the promulgation of the New Mining Law, and that have obtained in-principle approval or a Preliminary General Survey Licence (SIPP), will be honored and can be processed without tender under the New Mining Law.
It is notable that the transitional provisions do not address pre-existing KPs at all. This may be interpreted as requiring existing KP holders to immediately move to the new licensing regime following promulgation of the New Mining Law. We would expect that this issue will be clarified by the implementing regulations.
OTHER NOTABLE MATTERS
The New Mining Law makes provision for increased environmental protection requirements for mining operations, mining reclamation obligations and post mining management. The New Mining Law also provides for employment of local personnel, priority for the procurement of domestic good and services and for partnerships with local community and businesses.
It is notable that the New Mining Law requires the use of local/national mining services companies. If such local/national companies do not exist, the holder of an IUP or IUPK may use other mining services companies established under Indonesian law which include foreign investment companies. Without a prior approval from the Minister, the holder of an IUP or IUPK may not use mining services subsidiaries and/or affiliates. The Minister may issue such permit if no similar mining services companies exist in that area or no mining services companies are capable of providing the services (or otherwise such companies are not prepared to provide the required services).
The New Mining Law states that IUPs and IUPKs are not transferable. A change in ownership in the holder of an IUP or IUPK (including through public offering) must be notified to the Minister, Governor or Regent/Mayor in accordance with their respective authorities, and may only be carried out after a certain stage of exploration activities (the elucidation to this provision states that two prospective mining areas must have been identified for further exploration activities).
Finally, the New Mining Law also includes financial penalties and penal sanctions for non-compliance.