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Coal Mining Business Activities In Indonesia
September 2008 | Indonesia Practice | Regional | Regional Reports

Indonesia is among the world’s major coal producers and is currently a leader in thermal coal exports. Domestically, Indonesia plans to double its coal use by 2025, mostly to generate electricity. Coupled with worldwide demand for coal, which is anticipated to continue growing as developing nations increase coal consumption for electricity generation and steel making purposes, the Indonesian coal mining industry presents attractive investment opportunities.
 
Coal mining business activities can generally be conducted through two schemes in Indonesia: Coal Contract of Work (Perjanjian Karya Pengusahaan Pertambangan Batubara - "PKPB" or "CCoW") or Mining Authorisation (Kuasa Pertambangan or "KP"). The appropriate scheme under which such activities are to be carried out will depend on whether there is foreign direct ownership in the operating company.

In the absence of foreign ownership in the operating company, coal mining should be carried out by obtaining a KP. Foreign ownership in the operating company will require coal mining activities to be carried out by obtaining a CCoW.

Based on Law 11/1967, a KP may only be issued to an ordinary Indonesian limited liability company ("PT") which is wholly owned by Indonesian nationals or other completely Indonesian-controlled entities. Such type of PT does not operate under a foreign investment licence ("PMA") granted by the Capital Investment Coordination Board (Badan Koordinasi Penanaman Modal or "BKPM"). It should be noted that an ordinary PT does not enjoy the foreign investment facilities (for example, import facilities, profit expropriation, etc.) which are only available to foreign investment companies.

Pursuant to Government Regulation ("GR") 75/2001, a KP is granted by the relevant head of regional government, depending on their jurisdiction (that is, it is granted by the head of regional district (Bupati) or city mayor if the site is located within one regional district (Kabupaten) or city, by the governor if the site is located in more than one regional district, and by the minister if the site is located in more than one province). As such, additional policies or regulations issued by the relevant regional government may affect the activities of the KP holders (or their rights and obligations).

Based on Law 11/1967 and Presidential Decree ("PD") 75/1996, a foreign party intending to get involved in the coal mining business should form a foreign investment limited liability company ("PT PMA") dedicated for such purpose and then the said PT PMA should enter into the CCoW with the Government. The rights and obligations of such PT PMA are usually stated in the CCoW signed with the Government.

Foreign investment through the CCoW scheme has slowed significantly in recent years. Such a state of affairs is directly attributable to the uncertain status of the new draft Mining Law and its enactment, which would eliminate the present CCoW system. Undeterred, innovative investors have explored the possibility of contractual arrangements by entering into mining agreements with holders of KPs. Such coal mining agreements set out the contractual rights between both the foreign investment company and the holder of the KP in relation to mining activities in the concession area under the KP. A common arrangement under such mining agreements will allow the foreign investment company to carry out mining activities in exchange for royalty payments on the output of the mine.

Given that coal prices have increased tremendously over the past year and there are relatively easier open pit mining options here compared to other parts of the world, it is no wonder that investors are tapping into this lucrative sector in Indonesia.