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Implementation Regulations Of The New Mining Law
September 2009 | Indonesia Practice | Regional | Regional Reports
Mark LIN
Robby SULIVAN
Introduction
Law No. 4 of 2009 concerning mineral and coal mining was promulgated on 12 January 2009 (the "New Mining Law"). Some new concepts introduced in the New Mining Law, such as the requirement for adding value to mining products and mandatory divestment requirements, are unclear. The implementation regulations of the New Mining Law are expected to be issued shortly. Such regulations will hopefully eliminate the uncertainty surrounding the New Mining Law.
Implementation regulations are scheduled to be issued within one year of the promulgation of the New Mining Law. Currently, the Indonesian Government is preparing four draft government regulations ("RPP"):
- RPP regarding the implementation of mineral and coal businesses.
- RPP regarding mining concessions.
- RPP regarding mining guidance and supervision.
- RPP regarding post mining reclamation.
This article discusses the RPP regarding the implementation of mineral and coal businesses.
Procedures for having access to mining area (Wilayah Izin Usaha Pertambangan or "WIUP")
This is implementation of article 63 of the New Mining Law. To obtain a mining permit (Izin Usaha Pertambangan, or "IUP"), a party must first obtain access to the mining area (Wilayah Izin Usaha Pertambangan, or "WIUP"). The relevant process depends on the type of resource to be mined and is divided into two categories:-
| (1) | Bid for metal and coal |
| Departing from Law No. 11 of 1967 (the "Old Mining Law"), mining companies are to bid for WIUPs for metal minerals and coal. To submit a bid, a bidder must meet administrative, technical and financial requirements. A specific technical requirement relates to the mining experience of the bidder. Any bidder must have at least three years of mining experience. If the bidder does not have the requisite experience, the bidder is to obtain the recommendation of its holding company or affiliate with the requisite experience. This new technical requirement will be an issue for new companies intending to enter the mining industry in Indonesia. | |
| (2) | Reservation of mining area for non-metal mineral and rock mineral |
| Reservation of WIUPs for non-metal mineral and rock mineral shall be on a first to file basis, with priority given to the applicant who is first in time. Applications to reserve WIUP shall be filed with the Minister of Energy and Mineral Resource (the "Minister"), the governors, the regents or mayors within their authority (the "Authorities"). The Authorities shall approve or refuse an application not later than 15 days of an acknowledgment of receipt of the application. |
Use of land for production operation activities
This is implementation of article 136 of the New Mining Law. Unlike the Old Mining Law, IUP holders who wish to apply for an upgrade to a production operation IUP must obtain the rights to the relevant land within the area of the WIUP from the existing titleholders of land.
IUP holders are obliged to pay a mutually agreed compensation to the titleholders of the affected land. If the amount is not mutually agreed, the issue is first to be brought before the Minister for settlement failing which the dispute is to be brought before the district court with jurisdiction over the WIUP. Mining companies should note that any cost incurred in connection with the compensation, including court fees, shall be for the account of the exploration IUP holders concerned.
National interests
The following implements article 5 of the New Mining Law which relates to matters of national interest.
| (1) | Domestic supply of minerals and coal |
| Domestic mineral and coal users are to submit mineral and coal consumption plans for the following year to the Minister who will determine domestic mineral and coal requirements according to the consumption plans submitted. Such implementation will be in the form of ministerial regulations. IUP holders may sell mineral and coal outside of Indonesia once domestic requirements for the specified period are met. Details of how quotas will be satisfied are expected to be clarified in subsequent ministerial regulations. | |
| (2) | Quantity of mineral and coal production |
| The Government of Indonesia has the discretion to control the production of mineral and coal produced by production operation IUP holders. The Minister can authorise the governors to determine the quantity of mineral production for each district/city. | |
| (3) | Domestic benchmark mineral and coal prices |
| The Minister has the discretion, through ministerial regulations, to determine the prices for minerals and coal produced by IUP holders to meet domestic needs. These are separate from the provisions relating to the setting of general benchmark prices. |
Increase in added value
This is implementation of article 103 of the New Mining Law. Production operation IUP holders have to add value by undertaking processing and/or refining of the minerals or washing of the coal mined, either directly or by cooperation with Indonesian business entities or citizens. Production operation IUP holders are prohibited from selling raw minerals or coal. Applicable limits, the various types of activities and mechanisms for increasing the value of raw minerals and coal will be regulated in the ministerial regulations.
The current holders of a contract of work (Kontrak Karya or “CoW/KK”), coal contract of work (Perjanjian Karya Pengusahaan Penambangan Batu Bara or “CCoW/PKP2B”) and mining right (Kuasa Pertambangan – “KP”) who have commenced production are to comply with this new requirement. Rights holders under the old regime are to comply with these new requirements within five years of the promulgation of the New Mining Law.
Benchmark mineral and coal prices
IUP holders are obligated to sell minerals and coal at least at comparable benchmark mineral and coal prices, including when selling to their affiliates. Any sale of minerals and coals to affiliates shall require prior approval of the Minister. IUP holders selling below the determined benchmark prices must pay (i) the selling price difference to the government, (ii) tax revenues or non tax revenues (where applicable), and (iii) such penalty as prescribed under the prevailing provisions. After the issuance of three notices of violation to an IUP holder, the Authorities have the absolute discretion to prohibit any further deliveries by the IUP holder in default.
| (1) | Benchmark mineral prices | ||
| Benchmark mineral prices shall be mineral prices at a certain point specified by the Authorities. | |||
| (a) | Benchmark metal mineral prices shall be determined on the basis of internationally prevailing metal mineral prices reported in international mineral price publications. | ||
| (b) | Benchmark non-metal mineral prices shall be determined on the basis of a reasonable non-metal mineral price according to market mechanisms. | ||
| (c) | Benchmark rock mineral prices shall be determined on the basis of a reasonable rock mineral price according to market mechanisms. | ||
| (2) | Benchmark coal prices | ||
| (a) | Benchmark coal prices will be determined by the Minister early each month and shall prevail during the relevant month. A benchmark steam and coking coal price shall be determined with reference to the average coal price index published by internationally acknowledged institutions. | ||
| (b) | Benchmark coal prices shall be coal prices at Free on Board ("FOB"), on board vessels carrying coal. | ||
| (c) | Implementation of benchmark coal prices | ||
| (i) | Spot coal prices and term coal prices must follow the benchmark coal prices of the month when coal prices are agreed upon between IUP holders and coal buyers. | ||
| (ii) | The agreed-upon coal prices must immediately be submitted by IUP holders to the Minister. | ||
| (iii) | The signing of coal sale and purchase contracts shall be undertaken at the latest three months after the coal prices are agreed upon. | ||
| (iv) | Prices for long term coal supply contracts must be adjusted once every 12 months, such adjustment to follow the applicable benchmark coal prices during the month in which such adjustment occurs. Where the interval between the signing of a coal sale and purchase contract and the time of coal delivery exceeds 12 months, the price adjustment must be made following the benchmark coal price of the month in which delivery of the coal is undertaken. | ||
Divestment of shares
The much anticipated implementation of article 112 of the New Mining Law addresses the issue of foreign ownership of IUP holders and mandatory divestment requirements. Non-Indonesian shareholders of IUP holders are permitted to own up to a maximum of 80% of the shares in an IUP holder. Divestment requirements apply where foreign ownership exceeds 80% of the share capital of an IUP holder. At least 20% of the issued share capital in the IUP holder must be held by an Indonesian participant (the government, regional governments, state-owned entities, region-owned entities, or national private business entities).
Upon the fifth year of production, foreign shareholders are obligated to divest their shares (in excess of the maximum permitted shareholding) to Indonesian participants. The number of shares divested shall be at least 20%. Divestment may be conducted gradually in accordance with the following schedule:
| (1) | at the end of the sixth year, a minimum of 5%; |
| (2) | at the end of the seventh year, a minimum of 10%; |
| (3) | at the end of the eighth year, a minimum of 15%; and |
| (4) | at the end of the ninth year, a minimum of 20%. |
An offer of shares shall be made no later than the first quarter of the sixth production year. Share divestment as intended above must be made no later than the fourth quarter of each year, commencing the fourth quarter of the sixth production year. The price of shares must be valued by an independent appraiser.
Conclusion
If the RPP regarding the implementation of mineral and coal business is promulgated in its current form, the mining business is clearly open for foreign investment, but with certain restrictions i.e. relating to divestment, national interest and a minimum selling price for an affiliated party of an IUP holder. Some provisions of this RPP will be further regulated under the ministerial regulations (Peraturan Menteri), which will no doubt require further examination.
