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INDONESIA

HERBERT SMITH FREEHILLS indonesia 43

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Mining activities in Indonesia are governed by 4.1 Regulatory framework


Law No. 4 of 2009 regarding Mineral and Coal The regulatory framework for the Indonesian
Mining (Mining Law 2009) and implementing mining sector is built on the principle set out
regulations issued pursuant to the Mining in Article 33(3) of the 1945 Indonesian
Law 2009. Previously, mining activities were Constitution which states that the land, water
regulated by Law No. 11 of 1967 on Mining. and natural riches contained therein are
Since the enactment of the Mining Law 2009, controlled by the state and are to be used for
mining authorisations are granted in the form the greatest prosperity and welfare of the
of a mining business licence (Ijin Usaha Indonesian people.
Pertambangan or IUP). The Mining Law 2009 This principle is implemented in the Mining
recognises that mining authorisations Law 2009. As is common in Indonesia, the
granted prior to the enactment of the Mining Mining Law 2009 provides the general
Law 2009 remain valid for the duration of framework and principles with details in
their existing term; however, such licences are relation to implementation contained in
subject to certain adjustments as described implementing regulations issued under it. To
in the Mining Law 2009. date, the following implementing regulations
Where a mining companys activities are have been issued to give effect to Mining
likely to have a significant impact on the Law2009:
environment, additional approvals and/or Government Regulation No. 22 of 2010
recommendations will be required under Law regarding Mining Area (GR22)
No. 32 of 2009 regarding Environmental
Protection and Management. Government Regulation No. 23 of 2010
regarding Implementation of Mineral and
Where any part of the mining area is Coal Business Activity (as amended by
designated as a forestry area, additional Government Regulation No. 24 of 2012)
forestry permits will be required for carrying (GR23)
out activities in production forest or
protection forest, although only Government Regulation No. 55 of 2010
underground mining is possible in protection regarding Empowerment and Supervision of
forest. No mining activities can be carried out Implementation of Mineral and Coal Mining
in areas designated as conservation forest. Business Management (GR55)
Further, until 20 May 2013, a forestry Government Regulation No. 78 of 2010
moratorium exists on the grant of new regarding Reclamation and Post-mining
forestry licences for any areas designated as (GR78)
primary forests or peatland on the New
Licence Suspension Indicative Map, which is Government Regulation No. 9 of 2010
attached to Instruction of the President No. regarding Categories of Tariffs for Non-Tax
10 of 2011 regarding Suspension of New State Revenues in the Ministry of Energy
Licence Issuance and Improvement of and Mineral Resources (GR9)
Primary Natural Forest and Peatland
Presidential Decree No. 3 of 2012 regarding
Management.
the Establishment of a Team to Evaluate and
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Renegotiate the Provisions of COWs and 4.2 overview of approval


CCOWs (PR3) process
Minister of Energy and Mineral Resources (a) Licensing regime prior to the
(MEMR) Regulation No. 18 of 2009 Mining Law 2009 and status of
pre-2009 licences
regarding Approvals Required to be
obtained by Existing COW and CCOW The Mining Law 2009 represented a
Holders (MEMR Regulation 18/2009) significant overhaul of the previous regime.
Prior to the Mining Law 2009, mining
MEMR Regulation No. 28 of 2009 regarding authorisations for companies were granted
Implementation of Mineral and Coal Mining pursuant to either (i) a contract of work
Business Services (as amended by MEMR (COW) or coal contract of work (CCOW) or
Regulation No. 24 of 2012) (MEMR (ii) a mining authorisation known as Kuasa
Regulation 28/2009) Pertambangan or KP.
MEMR Regulation No. 34 of 2009 Since the introduction of the Mining Law
regarding Prioritisation of Supply of Mineral 2009, no new grants of KPs, COWs or
and Coal Needs for Domestic Interests CCOWs are possible. However, pursuant to
(MEMR Regulation 34/2009) the transitional provisions under the Mining
MEMR Regulation No. 17 of 2010 regarding Law 2009, mining authorisations granted
Procedures for Determination of Mineral before 2009 were grandfathered as follows:
and Coal Benchmark Prices (MEMR COWs and CCOWs remain valid and will be
Regulation 17/2010) honoured for the remainder of their term.
MEMR Regulation No. 12 of 2011 regarding However, the Mining Law 2009 also states
Procedure for Determination of Mining that the contract terms must be adjusted
Business Area and Information System of within one year from the date of the Mining
Mineral and Coal Mining Area (MEMR Law 2009 (ie by 12 January 2010) to bring
Regulation 12/2011) them into line with the new law; and

MEMR Regulation No. 7 of 2012 regarding KPs remain valid until their expiry date but
Upgrading of Minerals Added Values must have been converted into an IUP
through Mineral Processing and Refining (as within three months from the enactment of
amended by MEMR Regulation No. 11 or GR23. GR22 also provided that a mining
2012) (MEMR Regulation 7/2012) area which had been granted to a KP holder
based on the previous mining legislation
In addition to the above, there are several must be determined as a Mining Business
decrees and decisions issued by both MEMR Licence Area (Wilayah Ijin Usaha
and the Directorate General of Minerals and Pertambangan or WIUP) within the Mining
Coal (DGMC) on more specific matters. Business Area (Wilayah Usaha
Pertambangan or WUP) within three
months of the enactment of GR22. This
means that all KPs should have been
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converted into IUPs and the determination a mining business licence (Ijin Usaha
in respect of the relevant mining areas Pertambangan or IUP) this is the most
should have been carried out by at the latest common mining licence granted to most
30 April 2010. companies through an auction process for
minerals and coal;
Since the period within which the IUP
conversions and WIUP determinations were a special mining business licence (Ijin Usaha
required to take place under GR23 and GR22 Pertambangan Khusus or IUPK) this is a
respectively has now expired, all Indonesian mining business licence than can be granted
companies that previously held KP licences by MEMR over an area which has been
should now have converted those licences declared a state reserve area with priority to
into the new form of IUP and their mining state-owned entities and then through an
areas should have been determined as a auction process for private participants for
WIUP within a WUP. minerals and coal; and

(b) Licensing regime under Mining Law a community mining licence (Izin
2009 Pertambangan Rakyat or IPR) this is
small-scale mining licences (not exceeding
The Mining Law 2009 introduced a new 10 hectares) granted to individuals, groups
licensing system for the grant of mining of community members or cooperatives.
authorisations for mining activities in
Indonesia. Under the Mining Law 2009 there Since most private investors will be issued
are three types of mining authorisations with an IUP rather than an IUPK, we will
which may be issued: concentrate on IUPs for the rest of
thischapter.
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IUPs are granted in two phases, one for exploration and one for production. The
characteristics of each phase of IUP are set out below:

Types of IUP Activities Type of mineral Maximum period and


covered size of mining area
Exploration General survey, Metals Up to 8 years
IUP exploration and 5,000 Ha up to 100,000 Ha
feasibility study stages
of the mining process.

Special types of Up to 7 years


non-metallic minerals 500 Ha up to 25,000 Ha
(diamonds and gemstones,
limestone)
Coal Up to 7 years
5,000 Ha up to 50,000 Ha

Non-metallic minerals Up to 3 years


500 Ha up to 25,000 Ha

Rocks Up to 3 years
5 Ha up to 5,000 Ha
Production Construction, mining, Metals Up to 20 years, subject to two
Operation IUP processing and extensions for 10 years each
refinery, sales and Up to 25,000 Ha
transportation of
minerals.
Special types of Up to 20 years, subject to two
non-metallic minerals extensions for 10 years each
Up to 5,000 Ha

Coal Up to 20 years, subject to two


extensions for 10 years each
Up to 15,000 Ha
Non-metallic minerals Up to 10 years subject to two
extensions for 5 years each
Up to 5,000 Ha
Rocks Up to 5 years subject to two
extensions for 5 years each
Up to 1,000 Ha

Other business licenses can also be granted for specific activities in connection with the mining
process e.g. core and non-core mining services, transportation and sale of minerals and
processing and refining.
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(c) Grant of new IUPs companies wishing to bid for a WIUP must
satisfy various requirements prescribed by
The general procedure for grant of IUPs is set
the law, falling broadly into administrative,
out in GR23, although further details are to
technical and financial categories; and
be provided by further ministerial regulation,
which is yet to be issued. once the preferred bidder is selected by the
auction committee, the auction committee
Prior to granting any new mining licenses, the
must issue a recommendation to the
government is required to prepare a map
appropriate authority to notify the
setting out the areas which have mineral or
preferredbidder.
coal potential and which are open for mining
activities. To this end, the government of In order for the Exploration IUP to be issued,
Indonesia is undertaking an exercise to the preferred bidder must submit an
reconcile all the existing mining licences which application to the relevant authority within
were granted prior to the introduction of the five working days from the date of the notice
Mining Law 2009. DGMC has issued the of the award of the WIUP. The relevant
results of the national reconciliation of IUPs in authority for issuing the IUP for the WIUP will
the form of two clean and clear lists (Clean depend on the location of the WIUP;
and Clear List). Once all existing mining however, where the applicant for the IUP is a
licences granted prior to the introduction of foreign-owned company, the relevant
the Mining Law 2009 have been reconciled, authority for issuing the IUP is MEMR. If the
the government will issue a map showing preferred bidder fails to submit an application
which areas are open for mining activities. It is within the five working day period, it will be
unclear at this stage when this mapping deemed to have withdrawn and the WIUP
exercise will be completed. will be offered to the next bidder in the
ranking, provided that the value of
The process for awarding new coal or metal
compensation for access to data and
mining licenses, to the extent that it has been
information is at least equal to the price
prescribed by GR23, is as follows:
offered by the preferred bidder. If the suitable
depending on the location of the proposed party(ies) withdraws or is deemed to have
Mining Business Permit Area or WIUP, the withdrawn, the WIUP will be re-auctioned.
relevant authority (regent or mayor /
A Production Operation IUP is granted as an
governor / MEMR) must announce in a
upgrade of the Exploration IUP subject to the
transparent manner the proposed WIUP at
terms of the Exploration IUP, compliance with
least three months prior to the start of the
law and a further ministerial regulation which
auction process;
has not yet been issued. Holders of
the relevant authority must form an auction Exploration IUPs are guaranteed to receive an
committee for evaluation of the bids, upgrade in the form of the Production
consisting of an odd number (the exact Operation IUP if they have complied with all
number depends on which authority will prescribed requirements to receive
form the committee) of persons with anupgrade.
experience in the mining sector;
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(d) COWS and CCOWs under Mining IUPs by MEMR. Holders of COWs and
Law 2009 CCOWs will need to apply for an extension at
Adjustments to COWs and CCOWs the earliest two years and at the latest six
months prior to the expiration of the current
The Mining Law 2009 stipulates that existing
term of the COW or CCOW and the mining
COWs and CCOWs will be honoured for the
company will need to comply with prescribed
remainder of their term. However, the Mining
requirements set out in GR23. In deciding
Law 2009 also states that the contract terms
whether to grant an extension, MEMR will
must be adjusted within one year to bring
consider the potential of the mineral reserves
them into line with the Mining Law 2009. No
of the relevant working area and benefits to
details have been provided in the Mining Law
the state in granting such an extension.
2009 on what this means although due to the
nature of COWs and CCOWs, any adjustment This language suggest that grant of
to their terms must, in our view, be through extensions to COWs and CCOWs in the form
negotiation and agreement of both of IUPs is not guaranteed (as was the case
government of Indonesia and the contractors. pursuant to the terms of the COWs and
CCOWs themselves prior to the introduction
Pursuant to PR3 the government of Indonesia
of the Mining Law 2009) and the government
has established a team headed by the
of Indonesia will be able to refuse to grant
Coordinating Minister for the Economy to
extensions and, instead, to declare such areas
renegotiate COWs and CCOWs. Negotiations
as state reserve areas. In such a case, it will
between the COWs and CCOWs holders and
be central government owned companies or
the government of Indonesia are as at the
regional government owned companies that
date of publication ongoing and the
will be given priority in applying for a mining
government of Indonesia has identified six
licence over such area.
strategically critical issues that it wishes to
renegotiate. These include: (e) Obligations on mining companies
size of mining areas; under Mining Law 2009
Divestment obligations
extensions of COWs and CCOWs;
IUP holders
state revenues;
The Mining Law 2009 contains a divestment
divestment obligations; obligation (applicable to IUP holders)
domestic processing obligations; and whereby foreign shareholders in such entities
must, following five years of commercial
use of domestic goods and services. production, divest shares to the central
government, the regional government, a state
Extension of COWs and CCOWs owned enterprise, a regional owned
Pursuant to GR23, extensions of COWs and enterprise or a national owned enterprise.
CCOWs which had not been extended prior GR23 contains some detail on the divestment
to the introduction of the Mining Law 2009 obligation, although further provisions on the
would be granted by way of conversion to procedure applicable for share divestment
HERBERT SMITH FREEHILLS indonesia 49

and mechanisms will hopefully be prescribed where the provincial government or


in further MEMR implementing regulations, regency/municipal government is not
which have not to date been issued. willing to buy the shares, the divestment
shares must be offered to state owned
Under GR23, where a foreign party owns
enterprises and regional owned enterprises
shares in the entity holding an IUP (an IUP
through a tender process.
Company) the foreign shareholders are
obliged to divest shares starting from the end Where no priority party is interested in or
of the fifth year from commencement of able to purchase the divestment shares, the
production in accordance with a time table shares must then be offered to national
which would see local parties hold at least the private Indonesian parties.
following percentages of the total issued
All offers must be made, and acceptances
share capital of the IUP Company:
received, within the relatively short
in the sixth year from commencement of timeframes stipulated in GR23. Ultimately,
production: 20%; completion of the transfer of shares to an
Indonesian party is expected to occur no later
in the seventh year from commencement of
than ninety calendar days after the date a
production: 30%;
particular priority party (in its order of
in the eighth year from commencement of priority) expresses its interest in purchasing
production: 37%; the divestment shares, (or in the case of a
state owned enterprise or a regional owned
in the ninth year from commencement of enterprise, from the date that such enterprise
production: 44%; and wins a tender to purchase the
in the tenth year from commencement of divestmentshares).
production: 51%. It is currently unclear whether priority parties
Once a requisite percentage of shares is sold, will be required to buy on a all or nothing
Indonesian partys share must not be diluted basis or whether they will be free to take up
on a capital raising or otherwise. part of the shares offered with the remainder
being offered to parties with lower order of
Once the divestment process in any particular priority. Draft regulations on the divestment
year has commenced shares must be offered process indicated that the central
in the following order of priority and an offer to government will not be required to buy on a
a party with the lower order of priority can all or nothing basis and can instead decide to
only be made after the parties with higher purchase a portion of the shares offered. The
order of priority have declined (or are deemed draft regulations also provide that provincial
to have declined) the offer of shares. The order and regional governments with claims to the
of priority under GR23 is as follows: divestment shares must agree the percentage
central government; of shares that go to each government and in
the absence of agreement, will be deemed to
where the central government is not willing have refused the offer.
to buy the shares, the divestment shares
must be offered to the provincial
government or the regency/municipal
government; and
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Given the sequential offering process to each localisations in Indonesia under COWs and
priority party, in practice the timing for any CCOWs which contained divestment
divestment process could be very long. obligations have proceeded on that basis).
Historically divestment processes by Equally, in our view, where a proportion of
Indonesian mining companies have been shares less than the requisite percentage of
notoriously protracted. the share capital in an IUP Company is held by
an Indonesian party, this proportion should
Where the divestment shares are not
count towards the relevant percentage of
transferred to an Indonesian party after the
localisation obligation under the Mining Law
relevant anniversary of the Production
2009. Again this is consistent with past
Operation IUP licence date, they must be
practice under COWs and CCOWs which
offered in the subsequent year under a similar
contained divestment obligations.
process. GR23 does not provide for a time
limit on how long IUP Companies will need to COW and CCOW companies
continue to offer the divestment shares for
Whether share divestment obligations apply
but, given the sensitive nature of the issue, in
to the companies holding COWs and CCOWs
our opinion it is likely that the government of
will depend on the precise wording of the
Indonesia will insist on the divestment process
relevant COW or CCOW. To the extent that
to continue annually until the requisite
the COW or CCOW contains a divestment
proportion has been sold to local parties.
obligation, foreign shareholders will continue
However, the divestment process for IUP
be subject to such obligation.
Companies has not yet been tested and it
remains to be seen how it will work in practice. The government of Indonesia has indicated
that the divestment of shares to local parties
It seems unlikely that the listing of the IUP
is one of the key areas that should be
Company itself on the Indonesia Stock
adjusted in COWs and CCOWs, given that in
Exchange, with a minimum public ownership
later generations of COWs and CCOWs the
of the requisite percentage of shares, will
percentage of shares to be divested to local
satisfy the divestment requirement. This
parties was often set at a much lower level
method is not specifically provided for in the
than the 51% stipulated in GR23. However,
Mining Law 2009 or GR23 and the provisions
such adjustments would have to be agreed to
of the draft divestment regulation support
by both the government of Indonesia and the
this conclusion.
mining companies and the government of
On the current wording of the Mining Law Indonesia would not be able to impose such
2009 and GR23, if an IUP Company already adjustments unilaterally.
has, at the relevant deadline, at least the
However, once the COW or CCOW is
relevant percentage of equity ownership held
extended by way of a conversion to IUP, the
by Indonesian parties, the foreign shareholders
mining companies would become subject to
would not need to follow the divestment
the divestment obligations under GR23,
process under GR23 and the divestment
although it remains to be seen how this
obligations under the Mining Law 2009
transition (and any subsequent divestments)
should be deemed satisfied. Officials at the
would be implemented in practice.
MEMR have verbally confirmed to us that this
is their intention (and to date share
HERBERT SMITH FREEHILLS indonesia 51

Appointment of mining services MEMR Regulation 28/2009 therefore


contractors prohibits mining companies from contracting
The Mining Law 2009 introduced an out actual mining activities to mining services
obligation for holders of IUPs to give priority companies. It remains to be seen how these
to local mining services companies and/or restrictions will be implemented in practice
national mining services companies. The given that many of the largest mining
Mining Law 2009 further elaborates that an companies in Indonesia have to date been
IUP holder may only engage a foreign owned operating on the basis of contracting out
mining services company (Other Mining significantly all mining activities to mining
Services Company) if a Local Mining Services services companies.
Company or National Mining Services
MEMR Regulation 28/2009 also prohibits
Company (both of which must be wholly
IUP holders from receiving any fees for work
Indonesian owned) is not available.
contracted out to mining services companies.
Further details in relation to the above
MEMR Regulation 28/2009 is stated to
obligation are set out in the MEMR
apply with immediate effect to all mining
Regulation 28/2009, which provides that an
services contracts entered into on or after 30
IUP holder may only engage an Other Mining
September 2009. Where a mining services
Services Company after publishing an
contract pre-dates MEMR Regulation
announcement in the local and/or national
28/2009, the mining services contract must
mass media and not finding a Local Mining
have been adjusted to comply with the
Services Company or a National Mining
provisions of MEMR Regulation 28/2009
Services Company which can fulfil the
within three years from the date of Regulation
classification and qualification required by an
28 (ie by 30 September 2012).
IUP holder.
A mining services company that acts in
In addition to the new provisions prioritising
contravention of MEMR Regulation 28/2009
use of Local or National Mining Services
and carries out services beyond the scope
Companies, MEMR Regulation 28/2009 also
prescribed in MEMR Regulation 28/2009
introduced an important restriction on the
will be subject to administrative sanctions
types of services that can be contracted out
which range from written warnings,
to mining services companies by IUP holders
temporary suspension of mining licences or,
that have reached exploitation phase.
ultimately, potential revocation of the mining
MEMR Regulation 28/2009 provides that an services business licence or the statement
IUP holder in the Production Operation stage letter of registration.
must conduct its own mining and the only
MEMR Regulation 28/2009 also introduced
operational mining services that a mining
a restriction on ability of IUP holders to
service company can provide are the stripping
appoint subsidiaries or affiliated parties as
of overburden. Mining services companies are
mining services contractors. The
however able to provide a range of other
appointment of subsidiaries or affiliates will
mining services including exploration, mining
require prior approval from DGMC, which will
construction, processing and refining, hauling
only be granted in very limited circumstances.
services and reclamation services.
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Processing obligations and exports of or partnership with other parties has not
unprocessed ore proved possible. However, it remains to be
The Mining Law 2009 stipulates that mining seen how DGMC will use these powers.
companies must process and/or refine
One key measure introduced by MEMR
minerals within the territory of Indonesia.
Regulation 7/2012 to enforce the domestic
GR23 clarifies that mining companies do not
processing and refining obligations is the
need to carry out processing and refining
introduction of the export ban on
themselves but may, instead, engage other
unprocessed ore and minerals listed in
Indonesian companies for this purpose.
MEMR Regulation 7/2012. The transitional
MEMR Regulation 7/2012 provides further
provisions of MEMR Regulation 7/2012
details on domestic processing obligations.
created considerable uncertainty as to the
MEMR Regulation 7/2012 applies only to a timing of the effective date of the proposed
list of specified minerals, including nickel, export ban on unprocessed ore and minerals
bauxite, copper, silver and gold. Minerals to and appeared to suggest that the export ban
which MEMR Regulation 7/2012 applies on entirely unprocessed ore and minerals
must be processed or refined to the purity would be effective from 6 May 2012 while the
levels prescribed in the Appendix to the obligation to process ore and minerals would
regulation, which are set at relatively high only arise at a later date.
levels of between 90% and 99%.
On 4 May 2012, MEMR made an
Importantly, however, MEMR Regulation
announcement clarifying its policy on export
7/2012 does not apply to coal, although the
of unprocessed minerals and ore to the effect
processing obligations in Mining Law 2009
that exports would be permitted until 2014
do apply to coal.
subject to (i) companies complying with
MEMR Regulation 7/2012 further requires several requirements to be stipulated by the
mining companies engaged in iron, tin and Ministry of Trade regulation and (ii)
copper mining to ensure that tailings from payments of export tax to be stipulated by
their operations (including from processing the Ministry of Finance.
and refining activities) which contain valuable
On 7 May 2012, Minister of Trade (MOT)
by-products are securely stored and
issued Regulation No. 29/M-DAG/
maintained until further processing of such
PER/5/2012 (as amended by MOT
tailings can be carried out.
Regulation No. 52/M-DAG/PER/8/2012 on
MEMR Regulation 7/2012 requires mining 14 August 2012) (MOT Regulation 29/2012),
companies to carry out domestic processing which sets out the requirements for
and/or refining themselves or to undertake continued export of unprocessed minerals
such activities in cooperation or partnership and ore. MOT Regulation 29/2012 applies to
with other mining companies subject to a list of specified minerals and ore, including
receiving approval from DGMC. Further, bauxite, nickel, copper, silver and gold.
MEMR Regulation 7/2012 gives DGMC Importantly, MOT Regulation 29/2012 does
broad powers to facilitate arrangements in not apply to coal. Under MOT Regulation
situations where, based on feasibility studies, 29/2012, exports may be carried out only by
independent processing and/or refining is not companies that produce minerals or ore
economically feasible and joint arrangements under COWs or IUPs.
HERBERT SMITH FREEHILLS indonesia 53

In order to continue export of unprocessed plans for the construction of processing and
minerals and ore, mining company must: refining facilities (or a copy of any agreement
with other mining companies in relation to
have been registered as a Registered Mining
the construction of shared processing and
Products Exporter by the Ministry of
refining facilities).
Finance through Director General of Foreign
Trade (DGFT); and In addition, mining companies also need to
prove title to their mining authorisation and
have received a Mining Products Export
submit evidence of compliance with all
Approval from the Ministry of Finance
requirements under their IUP, including
through DGFT.
payment of taxes and royalties.
In order to be approved as Registered Mining
It will be vitally important that the mining
Products Exporter and to obtain Mining
companys IUP is included in the Clean and
Products Export Approval, mining companies
Clear List prepared by the MEMR, which lists
are required to submit various documents to
the mining authorisations that, in the view of
the DGFT, including a recommendation letter
MEMR, are free from any overlapping claims.
from the DGMC which will set out the type of
Importantly, exports will only be permitted
minerals to be exported by the company, total
subject to payment by the mining companies
export quotas, duration of export activities, the
of an additional export tax (as stipulated in
port of loading and the country of destination.
MOF Regulation No.75/PMK/.011/2012
The requirements for obtaining a (Regulation 75/2012)). The export tax rate
recommendation from DGMC for an IUP for unprocessed minerals and ore is 20%.
company to register as Registered Mining
Regulation 75/2012 sets out two separate
Products Exporter or obtaining the Mining
formulas for calculation of the total export tax
Products Export Approval have now been set
payable, although it appears that only one
out in the new Regulation of DGMC
formula is applicable to exports of
No.574.K/30/DJB/2012 dated 11 May 2012
unprocessed minerals and ore. The
(Regulation 574/2012). The recommendation
calculation is based on the percentage of
from DGMC under Regulation 574/2012is
Export Price (advalorum) set by the Director
only granted to IUP companies; there is no
General of Customs and Excise (DGCE) on
clarity in Regulation 574/2012 as to the
behalf of the MOF and other relevant officials
procedure for a COW company to obtain a
in accordance with the benchmark of Export
recommendation or whether that is required
Price. The Export Price will be stipulated by
at all.
DGCE each month based on international
As part of the process for obtaining a market price for the relevant minerals and in
recommendation from DGMC, a mining consultation with mining companies. Where
company will be required to sign an Integrity the exported product is a compound of
Pact (paketa integritas) with the government several ore, the export tax will be calculated
which, among other things, will provide that based on the Export Price of the
the mining company will cease to export highest-priced component.
unprocessed minerals by 2014. Mining
companies are also required to submit work
54 indonesia HERBERT SMITH FREEHILLS

Non-compliance with the above rules may The MEMR will stipulate the coal price
result in the mining company losing its ability reference point (harga acuan batubara) in the
to export. first week of each month. The coal producer
can calculate the benchmark coal price by
In relation to coal, the government has
applying the relevant formula to the coal price
indicated that it plans to bring in some
reference point. There are various formulas to
restrictions on exports of coal, although it
calculate the benchmark coal price
remains unclear what these restrictions will
depending on the quality of the coal (CV, TM,
be. The latest communications from
TS, and Ash).
government officials have suggested that
restrictions will be placed on low rank coal DGMC has issued implementing regulations
and the administrative requirements will be (Regulation No. 515.K/32/DJB/2011) which
similar to those set out in Regulation sets out the mechanism by which DGMC will
574/2012although no mention has been use to determine the thermal and
made of whether an export tax will also be metallurgical coking coal benchmark price.
imposed on such exports. The formula refers to average coal price index
in accordance with market mechanism and/
Coal benchmark price or generally applicable international market
General guidelines on determination of practice. For thermal coal, the benchmark
benchmark price for sale of coal are set out in price index will refer to a mix of indices issued
MEMR Regulation 17/2010. Under MEMR by various agencies, including Indonesian
Regulation 17/2010, a coal producer must sell Coal Index, Newcastle Export Index, Platts
the coal produced at no lower than the and the Global Coal Newcastle Index. This
benchmark coal price (harga patokan batubara). regulation also stipulates the formula to
The prices for the spot sales (supplies of coal calculate thermal coal benchmark price for
for a term not exceeding one year) and term different types of thermal coal as well as
sales (supplies of coal for a term exceeding setting out the formula for term sales, which
one year) are treated differently: is based on average benchmark price for the
last three months preceding the date of
coal price for spot sales must refer to the theagreement.
benchmark coal price for the month of
delivery; and On the 10th day of every month, holders of
Production Operation IUPs must submit a
coal price for term sales must refer to the report on the sale of coal to the relevant
average benchmark coal price over the authority that issued the Production
three months preceding the date on which Operation IUP (MEMR/Governor/Regent/
the coal price is agreed. Where the term Mayor). The report must include the sale
sales are completed more than one year price, volume, quality, selling point,
after the contract is signed, the average adjustment costs and the end-user. The
benchmark price must be calculated for the reports must be supported by, amongst
year in which the sale takes place. others, copies of invoices for the coal, bills of
lading and certificates of weight and
notifications on the export of goods.
HERBERT SMITH FREEHILLS indonesia 55

With prior written consent of DGMC, it is accordance with the reclamation and
possible to sell fine coal, rejected coal and post-mining budget approved by the
coal with impurities within Indonesia at a authority which issued the IUP, COW or
price below benchmark price. CCOW. In the exploration phase, reclamation
guarantee takes form of a term deposit into
Failure to comply with the above restrictions
an account at a government-owned bank; in
may result in administrative sanctions in the
the production phase, reclamation guarantee
form of written warnings, temporary
may be provided as (i) joint account at a
suspension of sales or revocation of
government-owned bank, (ii) term deposit
Operation Production IUP. This is a sliding
into an account at a government-owned
scale of sanctions, and the revocation of
bank; (iii) bank guarantee from a
Operation Production IUP will only be
government-owned bank or Indonesian
imposed on a company that fails to comply
private bank; or (iv) accounting reserves.
with the benchmark price regulations after
receiving written warnings and a temporary If the authority which issued the IUP, COW or
suspension of sales. CCOW decides that reclamation and
post-mining restoration falls short of the
Post-mining and reclamation expected standard, that authority will have
Under GR78 all mining companies (ie both the right to appoint a third party to carry out
holders of IUPs and COWs) are required to reclamation and post-mining restoration with
carry out post-mining reclamation and the costs covered from the reclamation
restoration of land to its original condition guarantee. To the extent that reclamation
through a sustainable planned program. costs exceed the amount of the guarantee,
Mining companies are required to restore and the mining company will be responsible for
reclaim those parts of their mining tenements making good the shortfall.
where mining activities have been concluded, GR78 is expressed to apply to all mining
even if mining activities continue on other companies; holders of COWs and CCOWs
parts of the authorisation. were required to adjust their existing
Pursuant to GR78, mining companies which reclamation and post-mining plans for
have completed feasibility study are required compliance with GR78 within three 0 from
to submit a five-year reclamation plan, which the date of GR78 (ie 20March2011).
may be amended during the production
phase activity. Reclamation and post-mining 4.3 Environment
plan must be submitted for approval to the Law No. 32 of 2009 regarding Environmental
authority which issued the IUP or COW. Protection and Management (Environmental
Law) came into force on 3 October 2009,
In addition, mining companies are also
replacing Law No. 23 of 1997 concerning
required to provide a reclamation and
Environmental Management. One of the key
post-mining guarantee to the authority which
changes introduced in the Environmental Law
issued the IUP, COW or CCOW within 30
is the requirement to obtain an environmental
days from the approval of the reclamation
permit in addition to the AMDAL approval or
and post-mining plan. Reclamation and
recommendation of UKL/UPL.
post-mining guarantee must be in
56 indonesia HERBERT SMITH FREEHILLS

Holders of environmental permit will be In relation to mining activities, in the


required to set aside funds to be used as an exploration stage, only UKL and UPL will be
environmental bond. Such funds must be required. If the mining project proceeds to the
deposited in a government-owned bank production phase, an AMDAL will be required.
designated by the relevant authority
In order to obtain recommendation for UKL
(ieMinister of Environment, governor or
and UPL, mining company is required to
regent/mayor).
submit a UKL and UPL application forms to
Under the Environmental Law, periodic the relevant authorities (ie Minister of
environmental audits are required to be carried Environment, governor or regent/mayor).
out by companies engaging in activities which The application form will be assessed and
carry high environmental risk. Where the recommendation will be issued within 14
company itself fails to carry out the audit, the business days from the UKL and UPL
Minister of Environment has the right to application form being deemed to
appoint a third party to carry out theaudit. becomplete.
Further details on implementation of the By contrast, AMDAL approval is a two-step
Environmental Law will be provided for in process, as follows:
implementing regulations, most of which
1. Mining company submits the relevant
have not yet been issued.
terms of reference for the AMDAL to the
relevant AMDAL commission for review.
(a) UKL/UPL and AMDAL
A decision on whether to approve or reject
Under the Environmental Law, mining the terms of reference is made within 30
companies carrying out exploitation of business days from the submission of the
natural resources that have an environmental terms of reference and declaration of these
or social impact, or mining companies which ascomplete.
have reached the feasibility study stage, must
obtain certain environmental approvals 2. Based on the approved terms of reference,
andpermits. mining company prepares the AMDAL
documents (including the ANDAL, RKL and
The Environmental Law sets out criteria for RPL) and submits these for approval to the
activities which require the approval of an relevant authority (ie Minister of
Environmental Impact Analysis Report Environment, governor or regent/mayor)
(AMDAL), which is a document consisting of through the relevant AMDAL commission.
an Environmental Impact Assessment Report The AMDAL commission reviews the
(ANDAL), an Environmental Management documents and notifies the mining
Plan (RPL) and an Environmental Monitoring company if any further information is
Plan (RKL). Activities which do not satisfy required. A decision on whether to approve
such criteria will require Environmental or reject the AMDAL documents is made
Management Effort (UKL) and Environmental within 75 business days from receipt of
Monitoring Effort (UPL) to be prepared. complete AMDAL documents.
HERBERT SMITH FREEHILLS indonesia 57

Relevant stakeholders and communities preparation and submission of regular


(including villages in the vicinity of the reports on implementation of obligations
proposed mining project) must be involved in and requirements set out in the
the preparation of AMDAL. To this end, environmental permit; and
mining companies will be required to hold
provision of funds for rehabilitation of
public consultations with the stakeholders
environment to be used as an
prior to submission of the terms of reference.
environmental bond. Such funds must be
(b) Environmental permit deposited in a government-owned bank
designated by the relevant authority (ie
Pursuant to Government Regulation No. 27 of Minister of Environment, governor or
2012 on the Environmental Licence dated regent/mayor).
23February 2012 (GR 27/2012), every legal
entity or person that conducts business Sanctions for failure to comply with the
activities and is under an obligation to obtain obligations under the environmental permit
an AMDAL or UKL/UPL, should also obtain range from written warnings to revocation of
an environmental permit from the relevant environmental permit, which may in turn lead
authority (ie Minister of Environment, to revocation of the relevant business licence.
governor or regent/mayor). The procedures
for the application, approval, and granting of (c) Toxic waste
an environmental permit are set out in The Environmental Law requires companies
GR27/2012. that import, produce, transport, distribute,
store, use, process and/or dump dangerous
Transitional provisions of GR 27/2012 state
and toxic material or waste to manage such
that all the environmental documents which
material properly. Further details in relation to
have been approved before the enactment of
this are to be provided in a government
GR 27/201, remain in force and will be
regulation which has not yet been issued.
deemed to also act as an environmental
permit. Therefore a company with an existing Until further implementing regulations will be
AMDAL will be deemed to have an issued, the previous regulation, Government
environmental permit by virtue of its Regulation No. 18 of 1999 on Management of
approved AMDAL. However, if any changes Hazardous and Toxic Material Waste as
are made to a companys existing AMDAL or amended by Government Regulation No. 85
it applies for a new AMDAL, then the of 1999 will continue to apply. This regulation
company will also now need to apply for an requires entities that use or produce such
environmental permit in addition. toxic materials or waste to process and
ensure proper temporary storage of such
Obligations imposed on holders of
material or waste. A special licence will be
environmental permit include:
required for such activities.
compliance with requirements and
obligations set out in the environmental
permit and environmental protection and
management permit;
58 indonesia HERBERT SMITH FREEHILLS

(d) Other matters holder must obtain the following from the
Minister of Forestry:
Under transitional provisions of the
Environmental Law, companies which a Borrow and Use Licence to Carry Out
obtained a business permit but did not have Exploration (Ijin Pinjam Pakaiuntuk Kegiatan
an AMDAL prior to coming into force of the Eksplorasi) before carrying out any
Environmental Law must have carried out an exploration activities; and
environmental audit within two years from
the enactment of the Environmental Law a Borrow and Use Licence (IjinPinjamPakai)
(ieby 3 October 2011). before carrying out any exploitation
activities.
4.4 Forestry Details on application process for Borrow and
(a) Licences to mine in forestry areas Use Licences to Carry Out Exploration and
Borrow and Use Licences are regulated by
Under the Forestry Law, land which is
Regulation of the Minister of Forestry No.
categorised as production forest or protected
P.18/Menhut-II/2011 regarding Guidance for
forest cannot be used for mining activities
the Leasehold of Forest Area (as amended by
without obtaining the relevant permits and
Regulation of Minister of Forestry No.P.38/
consents described below. Where an area is
Menhut-II/2012).
categorised as a conservation forest, all
mining activities are prohibited. In areas designated as protected forest,
mining activities can only be carried out by way
Under the Forestry Law:
of underground mining, provided that the
a production forest is defined as a forest mining company first obtains the Borrow and
area where the main function is to provide Use Licence and provided that underground
forestry products (for example, wood and mining activities do not (i) cause land
related wood products); subsidence, (ii) cause significant and
permanent change to the function of the forest
a protected forest is defined as a forest or (iii) damage water aquifers. Use of protected
area where the main function is to protect forest for underground mining is regulated in
the environment and act as a buffer more detail in Presidential Regulation No. 28 of
system to regulate water flow, prevent 2011 regarding Use of Protected Forest Area for
floods, control erosion, prevent sea water Underground Mining.
intrusion to the land and maintain fertility of
soil; and (b) Forestry moratorium
a conservation forest is defined as a forest On 20 May 2011, the President of the
area having certain characteristics where Republic of Indonesia issued Instruction of
the main function is to preserve the the President No. 10 of 2011 regarding
diversity of plants and animals including Suspension of New Licence Issuance and
their ecosystem and also to protect Improvement of Primary Natural Forest and
theenvironment. Peatland Management (Directive 10). The
Where an area has been categorised as a purpose of Directive 10 is to balance and
production forest or protected forest under harmonize of economic, social, cultural and
the Forestry Law, a mining authorisation environmental development and decrease
HERBERT SMITH FREEHILLS indonesia 59

emissions from deforestation and shown on the New Licence Suspension


degradation of forest areas. This instrument Indicative Map and where the authorisation
is an internal government instruction to the holder has not yet received either the Borrow
various authorities relevant to use of forest and Use Permit or an in-principle approval for
areas in Indonesia. the Minister of Forestry for the required
Borrow and Use Permit.
By virtue of the Directive 10, the President has
instructed the above officials to suspend Mining projects are not included in the list of
grants of new forestry licences for primary vital industry exceptions. Therefore, if the
natural forest areas and peatlands in areas of mining authorisation area overlaps with an
conservation forest, protected forest, area subject to the forest moratorium and the
production forest (limited production forest, project has not yet been granted an
normal/permanent production forest, in-principle approval for the Borrow and Use
convertible production forest) and certain Permit or the full Borrow and Use Permit by
other areas. The affected areas are shown on the Minister of Forestry, it will now not be
the New Licence Suspension Indicative Map possible for the project to obtain the
attached to Directive 10. The suspension on necessary forestry permit until the expiration
new licenses in these areas is valid for two of the forest moratorium in 2013. As a result,
years (ie until 20 May 2013). the mining company will not be able to carry
out any mining activities in the area which
The suspension does not affect those
overlaps with the primary forest area
applications for licences:
although it will be able to conduct mining in
where an in-principle approval was granted those parts of its authorization area that do
by the Minister of Forestry before fall within designated primary forest areas.
20May2011;
The New Licence Suspension Indicative Map
in respect of certain types of projects that will be updated periodically by the Minister of
are vital for national development, namely: Forestry based on more accurate updated
geothermal projects, oil and natural gas information. Mining authorisation holders
projects, electricity projects, land required should review the updated map when it is
for paddy field and sugarcane plantations published to ensure that forestry moratorium
(but, importantly, not mining); has not been extended to cover their
authorisation areas.
where application is for an extension of
Borrow and Use Permit which had been 4.5 Landowner approval
granted before 20 May 2011 provided that
the underlying business licence of the Mining authorisations, whether in the form of
Borrow and Use Permit holder is still valid; IUPs, COWs or CCOWs, do not give the
and holder the right to enter the land over which
the mining authorisation was granted; rather,
licences granted for ecosystem restoration. mining authorisation holders will be required
The Directive 10 will affect those mining to acquire or obtain the right to use the
projects where the relevant mining requisite land from the relevant land owners.
authorisation area overlaps with an area Generally, a location permit (ijin lokasi) will be
which is subject to the forest moratorium required to be issued by the relevant regent
60 indonesia HERBERT SMITH FREEHILLS

or mayor before a mining company can start Pursuant to the Investment Law, all business
a substantial land acquisition process. sectors and activities are open to foreign
investment except for those business sectors
Location permit allows the mining company
or activities listed in a regulation issued by the
to negotiate with the relevant landowners.
President of Republic of Indonesia known as
Due to lack of any reliable public registry of
the Negative List. Business sectors and
land rights, mining company will need to
activities listed in the Negative List are either
carefully consider and identify the following
closed to foreign investment entirely or open
matters:
to foreign investment subject to specific
the correct holder of title to the land; limitations on the maximum percentage of
foreign ownership. Where a company
any indigenous communities that it is proposed to engage in more than one
required to negotiate with; and business sector or activity, and there are
value of the land. different permitted percentages of foreign
ownership, BKPM policy is to limit foreign
Compensation for the land can be in the form ownership to the lowest of those permitted
of monetary compensation, provision of percentages. Currently, mining sector is
alternative or substitute land, resettlement of 100% open to foreign investment, subject to
the land owners or any other form of compliance with the divestment obligations.
compensation that the mining company
agrees with the relevant land owner. Other than the statutory requirement for
minimum share capital prescribed in the
4.6 Other approvals Companies Law, there are no other statutory
minimum capitalisation requirements.
(a) Foreign investment approval
However, as a matter of policy, for PMA
The main law governing foreign investment companies, BKPM usually imposes a
into Indonesia is Law No. 25 of 2007 regarding minimum capitalisation requirement
Capital Investment (Investment Law). significantly higher than the statutory
minimum under the Companies Law. The
Foreign companies can directly invest into
exact minimum capitalisation required will
Indonesia by establishing a foreign
depend on the business sector in which the
investment limited liability company (PMA
PMA company proposes to engage, the size
company). Formation, share capital and other
of the project and where the project will be
management matters of PMA companies are
located. BKPM has the powers to determine
governed by Law No. 40 of 2007 regarding
whether proposed capitalisation is sufficient.
Limited Liability Companies (Companies Law).
All foreign investment must be registered In addition to PMA companies having to be
with and approved and licensed by the registered with and licensed by BKPM,
Foreign Capital Coordinating Board (BKPM). articles of association of PMA company will
need to be approved by the Ministry of Law
and Human Rights.