Indonesia’s coal

royalty regime
Prepared for the Focus Group
Discussion with the Indonesian Coal
Mining Association (APBI/ICMA)

February 2020
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 Agenda
# Activity

1 Background and purpose of the FGD

2 Member introductions

3 Discussion on royalty regime

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Project
background and
purpose of FGD
 Current coal royalty regime
Types of mining permits
Mining Business Licence (IUP)
Open pit
1. < 5,100 kCal/kg
2. 5,100 – 6,100 kCal/kg
3. > 6,100 kCal/kg
Underground
1. < 5,100 kCal/kg
2. 5,100 – 6,100 kCal/kg
3. > 6,100 kCal/kg
Coal Contract of Work
All licence holders
PwC
Current Royalty Rate Over the next several years,
CCoW holders will be required
to switch over to an IUP
licence as their exisitng
3% CCoW expires.
5%
This has implications for the
7% coal royalty rate they are
charged (as CCoWs would
2% move from 13.5% to the
applicable IUP rate, which is
4% lower).
6%
Given this situation the
Indonesian Government is
considering whether to
13.5% change the current IUP royalty
system – potentially resulting
in a change to the rates
and/or charging basis.
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Purpose of Focus Group Discussion
The World Bank commissioned PwC
to support the government in
assessing options for changing the
current approach for royalty charges.
We will be assessing the potential
impact on firm finances, and overall
royalties paid to the government.
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As part of this project we are seeking
members view on:
• The current royalty system and
how it could be improved
• The potential impact on members
if rates were to increase
• The level of flexibility members
currently have to maintain
profitability levels – e.g. through
adjustments to production,
stripping ratio etc.
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Member
introductions
Discussion
 Current tiered structure for charging IUPs
Indonesia’s royalty charges for
IUPs are currently tiered based
on the calorific value (CV) of coal
sold, which is then applied to the
sales volume.
The rationale for the current
approach is that higher CV
values should be able to
command a higher price per
tonne.
It is therefore a progressive
charging structure.
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Other countries vary in their
method of charging. Examples
include:
• Coal type – e.g. unprocessed,
washed, upgraded etc.
• Type of mine – e.g. surface or
underground
• Some countries or regions
apply a single royalty rate to
sales volume, regardless of
CV, coal type, mine type etc.
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 Discussion

Charging basis

1. Are the three CV groupings appropriate? (e.g. < 5,100 kCal/kg, 5,100
– 6,100 kCal/kg, > 6,100 kCal/kg).

2. Does the range of rates applied to them (e.g. 3% to 7%) make sense?
– i.e. does it fairly reflect the differential in sales price?

3. Do members think there are other charging methods which would be

more appropriate?

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 Discussion Example Profit and Loss for Coal Miners

Net Sales

Changes to the royalty rate Cost of Sales*

Mining contractor expenses
Government royalty
Salaries and allowances
1. What are the implications for firm Shipping and transportation
profitability if rates were to increase? Fuels
Depreciation and Amortisation
Others
Total Cost of Sales
2. How much flexibility do firms have to
Gross Profit
adjust operations in order to maintain
profitability – e.g. adjusting production Operating expenses*
General and administrative expenses
volume, stripping etc. Marketing expenses
Selling expenses
Finance Income
Operating Income / EBIT
3. Would it impact planned
Finance Costs
investment/capex? Interest Expense
Loss from interest rate swaps
Finance charges
Profit before income tax / EBT
4. Would it impact financing structure?
Income tax expense
Net Income

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 Final comments

1. Do members have any other comments on the outlook for the

industry?

2. Do members have any comments on what government can do to

improve or maintain the investment climate?

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Thank You
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