Indonesian Mining Law: An Overview

Indonesian Mining Law: An Overview of the Recent Implementing Government Regulations

The enactment of Law No.4 of 2009 on Mineral and Coal Mining (Law No. 4/2009) ushered in a new regulatory regime for mining in Indonesia. Law No.4/2009 has broad ranging implications for future and existing mining concessions, including the introduction of a new mining licensing system that replaces both mining authorizations (Kuasa Pertambangan, KPs) that were only available to wholly owned Indonesian companies as well as contracts of work (CoWs) and coal contracts of work (CCoWs).

However, as with many laws in Indonesia, Law No. 4/2009 provides only substantive principles and has left many specific issues relating to the implementation to be fleshed out in implementing regulations. These issues include how the new mining regime impacts on existing KPs and CoWs/CCoWs and how certain processes work, such as the issuance of the new mining business licences (Izin Usaha Pertembangan, IUPs) and the relevant auction process.

The government issued two regulations effective 1 February 2010 that have gone some way to assisting in the implementation and clarification of Law No.4/2009. These regulations are:

Government Regulation No.22/2010 on Mining Areas (Regulation No. 22/2010); and
Government Regulation No.23/2010 on Conduct of Coal and Mineral Mining Business Activities (Regulation No. 23/2010).

This article provides an overview of the salient features of these regulations and their impact.

Existing KPs and CoWs/CCoWs

Regulation No. 23/2010 provides clarification on the following key areas of uncertainty concerning existing KPs and CoWs/CCoWs.

KPs issued under the old mining regime and CoWs/CCoWs entered into before Law No.4/2009 will be honoured until they expire (with certain adjustments to be made).
As expected, existing KP holders must convert their KPs into IUPs. However, they only have 3 months from the enactment of Regulation No. 23/2010 to do so (that is by 1 May 2010).
Those who had applied for a KP before the enactment of Law No. 4/2009 and obtained an area reservation (pencadangan wilayah), will have their application processed as an IUP without the requirement for public auction within 3 months of the enactment of Regulation No. 23/2010 (again, that is by 1 May 2010).

The above matters confirm the practice that existed in relation to the conversion of existing KPs into IUPs carried out by the relevant regional governments before Regulation No. 23/2010, based on certain circular letters issued by the Director General of Minerals, Coal and Geothermal.
At this stage, it is unclear what the consequences would be if KPs are not converted to IUPs by the 1 May deadline.

Mining Areas and Mining Licences

Regulation No.22/2010 provides some technical guidelines as to how Mining Areas (Wilayah Pertambangan, WPs) will be designated.

WPs can be designated as mining business areas (Wilayah Usaha Pertambangan, WUPs), state reserve areas (Wilayah Pencadangan Nasional, WPNs) (both of which will be determined by the Minister of Energy and Mineral Resources) and people’s mining areas (Wilayah Pertambangan Rakyat, WPRs) (which will be determined by the local regent or mayor). In respect of non-metallic minerals and rocks, the Minister of Energy and Mineral Resources may delegate his authority to determine WUPs to the relevant governor.
A WUP may be categorized into 5 types, namely, radioactive, metallic mineral, coal, non-metallic and/or rock WUPs. After categorisation has been carried out, the WUP can be determined to be a mining business licence area (Wilayah Izin Usaha Pertambangan, WIUP) and be issued with an IUP.

Regulation No.23/2010 provides the following clarification on the issuance of IUPs and the auction process.

An IUP will only be issued after a WIUP has been granted. In respect of metallic minerals and coal, an auction process must be carried out with the winner of the auction being granted the WIUP. To qualify to bid, bidders must be entities established and domiciled in Indonesia, cooperatives or Indonesian citizens.
It would therefore appear that foreign investors may only participate in an auction through a foreign investment company (PMA company).
Once the bid process is complete, the successful bidder must then apply for an IUP within five business days of the announcement of the winner of the public auction. Failure to do so will result in the successful bidder being deemed to have withdrawn from the bid and forfeiting any bond paid as part of the bidding process.
Further details on the auction process will be set out in a separate Ministerial Regulation.

Relinquishment

Regulation No.23/2010 provides greater detail concerning the areas to be progressively reduced as part of the relinquishment process under Law No.4/2009. It is now clear that an exploration IUP has the following area and time limits:

a maximum of 50,000 hectares (for metals) and 25,000 hectares (for coal) for a WIUP in the fourth year of exploration;
a maximum of 25,000 hectares (for metals) for a WIUP in the eighth year at the end of exploration or the commencement of production-operation; and
a maximum of 15,000 hectares (for coal) for a WIUP in the seventh year at the end of exploration or the commencement of production-operation.

Divestment

Regulation No.23/2010 provides some clarity regarding the scope of divestment obligations under Law No.4/2009.
The level of domestic ownership required through divestment must be a minimum of 20%, effective 5 years after the commencement of commercial production and cannot be diluted through subsequent capital increases.
There is a procedure that must be followed to divest shares so that 20% local ownership can be achieved. The divestment shares must first be offered to the central and the relevant regional government. If the central government or the regional government declines such offer, the divestment shares must then be offered to state owned and regional entities and if such entities decline, then offered to private entities. The offer to the stated owned entities, regional owned entities and private entities is made through a tender process.

It would seem that a practical solution would be for the foreign owners to find a suitable local party before the divestment obligation arises and to sell the divestment shares to such local party in order to avoid the convolutions of the divestment obligations.

Contracting Out

Regulation No.23/2010 provides some scope for a holder of a Production Operation IUP to contract out processing, refinery, sales and transportation activities to another party to perform those activities. However, only a holder of a specific Production Operation IUP for processing and refining may process ore and refine minerals.

The procedures and requirements to obtain the specific mining licences to carry out these activities will be set out in a follow-up Ministerial Regulation.

Domestic Market Obligations

Regulation No.23/2010 clearly reinforces domestic market obligations (DMO) for holders of Production Operation IUPs in respect of minerals and/or coal.

The earlier issued Ministerial Regulation No.34 of 2009 on Prioritisation of Domestic Mineral and Coal Supplies (Ministerial Regulation No.34/2009) requires mining companies to sell a certain percentage of their production to domestic users

Neither Ministerial Regulation No.34/2009 nor Regulation No.23/2010 sets out the new minimum pricing structures for sales of coal and other minerals or how these will be set in practice. Ultimately these matters are to be determined by the Minister of Energy and Mineral Resources in a follow-up regulation.

While Regulation No.22/2010 and Regulation No.23/2010 go some way towards addressing the concerns and uncertainty of Law No.4/2009 and its operation, further implementing regulations are required to be issued as soon as possible to instill confidence and certainty in the Indonesian mining industry.

Dezi Kirana and Mufti Habriansyah are both partners in the Energy, Resources & Infrastructure Practice at Soemadipradja & Taher. Dezi Kirana can be contacted at dezi_kirana@soemath.com or at +65 6236 9937 and Mufti Habriansyah can be contacted at m_habriansyah@soemath.com or at +62 21 574 0088.


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