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Indonesia Enacts New Mining Laws
March 2009 | Indonesia Practice | Regional | Regional Reports

Introduction 

The new Law on Mineral and Coal Mining Number 4 Year 2009 (the “New Law”) was finally passed by the Indonesian Parliament on 16 December 2008 after its first proposal on 4 July 2005 and was enacted by the President of the Republic of Indonesia on 12 January 2009. The New Law replaces the Law of the Republic of Indonesia No. 11 of 1967. Implementation regulations are scheduled to be issued within one year and will provide much needed clarity on the impact of the New Law.

Change and continuity

Under the New Law, the distinction between foreign investors and Indonesian entities under the former legislation has been removed. Previously, direct participation by a foreign investor was limited to involvement via a contract of works (“CoW”) and a coal contract of works (“CCoW”), whereas coal concessions (Kuasa Pertambangan or “KP”) were only issued to Indonesian entities. Now, mining activities are to be carried out under a mining permit, the Izin Usaha Pertambangan (“IUP”) or Izin Usaha Pertambangan Khusus (“IUPK”), to be issued to Indonesian legal entities. Foreign investors may apply for an IUP or IUPK through a foreign investment company incorporated in Indonesia (Penanaman Modal Asing or “PT PMA”).

As for existing CoWs and CCoWs signed by the Indonesian Government with foreign investment companies, section 169 of the New Law states that those shall remain valid until the expiration of their relevant terms. The New Law also makes it mandatory for such contracts: (1) to comply with the New Law within one year of its enactment, save for provisions related to the income of the government; and (2) to comply with the requirement of onshore processing and purification activities within five years from the enactment of the New Law. Pending the new implementing regulations, it remains unclear how the government, and in particular the Ministry of Energy and Natural Resources (“ESDM”), will require existing CoWs and CCoWs to comply with the mandatory requirements. Perhaps it will be done through a process of re-negotiation of existing CoWs and CCoWs among the relevant counterparties.

While the New Law does not expressly address the status of existing KPs, the ESDM, in response to our enquiries, has said that existing KPs will continue to be valid and enforceable. Such existing KPs will however be required to comply with the provisions of the New Law and converted into the corresponding IUP under the New Law pending issuance of the implementation regulations. The latter development raises the possibility that foreign investors may acquire direct interests in the former KPs once these are converted into IUPs. Such development would no doubt be welcomed by foreign investors, as it removes the complex and circuitous arrangements currently employed for investing in KPs.

While the New Law permits foreign investors to apply for IUPs or IUPKs through a PT PMA, the establishment of a PT PMA is subject to the approval of the Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”). Currently, it is unclear when the current Negative List which prohibits foreign investments in mining sectors other than in the form of CoW or CCoW will be revised, and consequently when applications may be made to BKPM for investment approval.

Additionally, the New Law will require foreign investors in the PT PMAs holding IUPs or IUPKs to divest their investment after five years of commercial production. It remains to be seen what level of divestment is required.  

Categories of IUP and IUPK

The main development relates to the new categorisation of applicable licences in relation to the different phases of mining activities. Instead of four categories of KPs issued in stages (exploration, exploitation, purification, transportation and marketing), the New Law divides the IUP and IUPK licences into only two categories: (1) IUP or IUPK Exploration (ekplorasi), covering general survey, exploration and feasibility study activities; and (2) IUP or IUPK Production (operasi produksi) which is issued after successful completion of the exploration phase, covering  construction, mining, processing and purification, transportation and sale, as well as environmental control activities. Exploration IUPs and IUPKs for coal and metal are to be issued through a tender process. To protect the initial investment made by IUP and IUPK holders, the issuance of an IUP or IUPK Production is guaranteed upon successful completion of IUP or IUPK Exploration.

An IUP issued by the relevant local, provincial or central authority will apply to a specific mining working area (wilayah izin usaha pertambangan or “WIUP”) designated by the central government in coordination with regional governments. This is to prevent an overlapping area between holders of the same mineral issued by regional governments and give legal certainty to the IUP holders. An IUPK will be issued by the central government in relation to land designated as State Reserve Areas (wilayah pencadangan negara or “WPN”) with priority given to state-owned companies.

Foreign investors who had previously submitted their applications to ESDM for CoW or CCoW one year prior to the enactment of the New Law and who have obtained in-principle approval or permit to perform an initial survey will be exempted from having to restart the tender process as required for a new application under the New Law. Their application will continue to be processed for obtaining an IUP or IUPK.

Other significant developments

• On shore processing: IUP holders are now required to perform mineral processing and purification within Indonesia. Such requirement extends to CoW and CCoW holders. IUP holders may cooperate with other entities who have already obtained the IUP or IUPK Production.



• Mining support services: IUP or IUPK holders are required to engage the mining support services of local and national mining services companies. Subsidiaries and/or affiliates of IUP or IUPK holders are restricted from performing mining service activities for the IUP holder without approval of ESDM, which approval will only be given where no mining services company is capable of or interested in supporting the relevant IUP or IUPK holder. This probably is intended to curb the current practice by KP holders of selling their economic benefits under the KPs to foreign investors, via mining contracts entered into with mining services companies.



• Payment obligations: In addition to the taxes and levies under the previous law, the New Law specifically obliges the IUPK holder to share 4% of its net income with the central government and 6% with the regional government. Production fees payable will vary depending on the difficulty level, production and market price of the commodity.



• National interest: The Indonesian government has the right to issue regulations or directives where the national interest so demands. The government may then control the production and export of the mineral, and such powers include the power to limit production and export of each specific commodity in each province or region.

Conclusion

The New Law establishes a new legal framework for the mining industry and seeks to create greater certainty and attract more investment.  The implementation of the new legal framework will be dependent on the implementation regulations. Only then will one be able to determine the actual effect of the New Law in enhancing the investment climate of the mining sector.