Indonesia Update: MEMR Draft New Mining Law

In response to the enactment of Law No.23 of 2014 on Regional Autonomy (“Regional Autonomy Law”) (which transferred certain licensing authority of regent/municipality governments to provincial governments) and the downturn of the global commodities markets (which has impacted the ability of Indonesian mining companies to comply with the obligation to refine/smelt mining products domestically), the Indonesian Government is currently reconsidering the regulatory framework for mining businesses in Indonesia. In particular, the Indonesian Government has been considering revisions to Law No. 4 of 2009 on Mineral and Coal Mining (“2009 Mining Law”). As part of these on-going considerations, in June 2016, the Minister of Energy and Mineral Resources (“MEMR”) has issued a comprehensive updated draft new mining law which would seek to repeal and replace the 2009 Mining Law (“MEMR Draft New Mining Law”).

While no amendments to the 2009 Mining Law have yet been finalized and the amendments continue to be discussed by the Indonesian House of Representatives, the MEMR Draft New Mining Law provides useful insight into the latest policy positions of the Indonesian Government in relation to mining business activities in Indonesia. Although we expect the MEMR Draft New Mining Law will be subject to further changes, we note that the MEMR Draft New Mining Law is a significant update on (and more developed than) the previous draft prepared by MEMR in April 2016. Further, given that the revisions to the 2009 Mining Law are expected to be passed later this year, it is possible that any finally agreed revisions to the 2009 Mining Law could substantially reflect the MEMR Draft New Mining Law.

In summary, the MEMR Draft New Mining Law seeks to readdress some of the more troublesome reforms introduced in the 2009 Mining Law. While the MEMR Draft New Mining Law is a generally positive development, it fails to properly resolve several existing issues. The most significant changes from the 2009 Mining Law proposed by the MEMR Draft New Mining Law are as follows:

• Every existing Coal Contract of Work (“CCOW”) and Contract of Work (“COW”) must be converted into an Exploration or Production Operation Special Mining Business License (“IUPK”) (which will have a validity period equal to the remaining term of the relevant CCOW/COW) within one year from the enactment of the law.
• The current exemptions to the ore export ban (due to expire on 11 January 2017) will be extended for a further 5 years for mining companies who already conduct processing facilities and are in the process of building refining facilities.
• Tax and non-tax incentives will be granted to the holders of Production Operation Mining Licenses (“IUPs”) and Special Production IUPs who carry out processing/refining activities by constructing processing/refinery facilities.
• Production Operation IUPs will be granted a longer validity period if they are integrated with processing/refining facilities or a steam power plant and will not be required to comply with the local divestment obligation until the tenth year after the commencement of production operation activities.
• Production Operation IUP and IUPK holders with foreign shareholders can satisfy their share divestment obligations through an initial public offering on the Indonesian stock exchange.
• The operation of actual mining exploitation activities may be able to be sub-contracted by a mining company to a mining contractor which holds a Mining Services Business Licence (Izin Usaha Jasa Pertambangan or “IUJP”) (currently controversially prohibited under the 2009 Mining Law).
• Consistent with the Regional Autonomy Law, the elimination of the authority of local regents and/or mayors to issue mining licenses.
• The mining of rare earth minerals is only permitted to be undertaken by Indonesian state owned enterprises (“BUMNs”).
• The existence of poor global economic conditions is included as a new reason to allow an IUP holder to apply for a suspension of its mining activities.
• The percentage of regional revenue from mining operations which will be distributed to the provincial governor is increased from 1% to 2%.

The most important sections of the MEMR Draft New Mining Law are discussed in further detail below.

1. Conversion of Existing CCOW/COWs

Perhaps the most significant provision in the MEMR Draft New Mining Law is a single transitional provision which states that all existing CCOW/COWs must be converted by MEMR into an Exploration or Production Operation IUPK within one year from the enactment of the law. These new Production Operation IUPKs will be issued with a validity period equal to the remaining term of the relevant CCOW/COW.

This provision of the MEMR Draft New Mining Law is a significant departure to the existing controversial transitional provisions of the 2009 Mining Law which state that all existing CCOW/COWs will remain valid but must be adjusted within one year from the date of the 2009 Mining Law (i.e. by 12 January 2010) to bring them into line with the 2009 Mining Law. In reality, these adjustment provisions of the 2009 Mining Law have proven very difficult to implement. Despite protracted negotiations between the Indonesian Government and various CCOW/COW holders, numerous CCOW/COWs have still not been adjusted or amended in accordance with the provisions of the 2009 Mining Law. In this regard, it is significant that the MEMR Draft New Mining Law states that all existing CCOW/COWs must be converted by MEMR (rather than the CCOW/COW holders themselves). This appears to suggest that the Indonesian Government is seeking to take control of the CCOW/COW licensing conversion process. However, in practice, we query whether MEMR would actually be willing to take such unilateral action against CCOW/COW holders, particularly given that any such action will likely be vigorously litigated.

The MEMR Draft New Mining Law further states that the rights and obligations of the holder of an Exploration or Production Operation IUPK (following conversion from a CCOW/COW) will be based on the rights and obligations as set out in the relevant amended CCOW/COW. The meaning and intention of this provision remains somewhat unclear. On a plain reading, the MEMR Draft New Mining Law appears to suggest that the terms and conditions for the adjustment of a CCOW/COW to an Exploration IUPK or a Production Operation IUPK will be based on the provisions agreed between the Indonesian Government and the relevant CCOW/COW holder through a negotiation process. However, the MEMR Draft New Mining Law is silent as to the rights and obligations of a new Exploration IUPK or Production Operation IUPK in the event that the Indonesian Government and the CCOW/COW holder fail to agree the terms of amendment. Arguably, only CCOW/COW holders which have agreed to amend their CCOW/COWs will be entitled to retain the rights and obligations under their amended CCOW/COWs. This provision (if enacted) does not deal with a major shortcoming in the 2009 Mining Law and, similarly, is likely to be interpreted in different ways by the various different stakeholders and could lead to further significant delays or further inaction in the CCOW/COW amendment and licensing conversion process. We also expect detailed implementing regulations would need to be issued to set out the process through which MEMR would seek to adjust each CCOW/COW into an Exploration or Production Operation IUPK.

2. Domestic Processing and Refining Obligation

The 2009 Mining Law stipulates that mining companies must process and/or refine minerals within the territory of Indonesia by constructing processing and/or refinery facilities or otherwise engaging other Indonesian companies to carry out processing/refining activities. This fundamental position is continued in the MEMR Draft New Mining Law; however, the MEMR Draft New Mining Law further relaxes the time-frame in which mining companies must comply with this domestic processing and refining obligation.

Under the implementation regulations of 2009 Mining Law, it is possible to obtain a special exemption (valid for no more than 6 months, which may be extended) to export processed but unrefined concentrates, which comply with the relevant minimum metal content. Under the current regulations, this exemption is only available until 11 January 2017 and only applies to certain minerals (such as copper) and does not include the export of gold or silver.

The MEMR Draft New Mining Law states that CCOW/COW holders as well as IUP holders who already conduct processing activities and are in the process of building refining facilities are permitted to continue to export their processed (but unrefined) concentrate for five years from the enactment of the MEMR Draft New Mining Law. For such export activities, the mining companies must continue to pay export duties in accordance with the prevailing laws and regulations. The further five year transition period set out in the MEMR Draft New Mining Law is a major development and a clear acknowledgement from the Indonesian Government that many existing operations will require more time to fully implement the domestic processing and refining obligation first set out in the 2009 Mining Law. This is a welcome development and will allow Indonesian mining companies to further plan and invest in mining activities in Indonesia without the looming 11 January 2017 export ban deadline.

Further, in an apparent attempt to attract IUP holders and other parties to invest and engage in processing and refining activities, the MEMR Draft New Mining Law states that the Indonesian Government will provide tax and non-tax incentives to the holders of Production Operation IUPs and Special Production IUPs who carry out processing/refining activities by constructing processing/refinery facilities. It is proposed that the precise details of these tax and non-tax incentives will be further determined by the Indonesian Government through implementing regulations. In our view, these provisions of the MEMR Draft New Mining Law are an acknowledgement by the Indonesian Government that many processing/refining projects in Indonesia are currently economically unviable and that the development of this fledgling industry will require significant contribution from the Indonesian Government. Ultimately, the benefit of these provisions will be determined by the details of the proposed tax and non-tax incentives set out in the implementing regulations (which have not been issued).

3. Divestment Obligation

Under the 2009 Mining Law, the requirement of foreign-owned mining companies to commence divestment of equity from its foreign shareholders to local parties starts in the fifth year after the commencement of production operation activities. This position is fundamentally the same in the MEMR Draft New Mining Law. However, the MEMR Draft New Mining Law states that Production Operation IUPs which are integrated with processing/refining facilities (for metal minerals projects) or a steam power plant (for coal projects whether the majority of coal production is used as fuel for the operation of such power plant) will not be required to start local divestment until the tenth year after the commencement of production operation activities.

The existing implementing regulations of the 2009 Mining Law state that the local divestment obligations must be satisfied through a tender process, with the following priority: (i) firstly, to the central government; (ii) next, where the central government is not willing to buy the shares, to the provincial government or the regency/municipal government; and (iii) finally, where the provincial government or regency/municipal government is not willing to buy the shares, to BUMNs and Regional Owned Business Entities (Badan Usaha Milik Daerah or “BUMDs”).

However, the MEMR Draft New Mining Law only requires the local divestment obligations to be satisfied by first offering the shares to the central government (which will be represented by a BUMN) and, if the BUMN is not willing to buy the shares, then to the regional government (which will be represented by a BUMD). The MEMR Draft New Mining Law then states that, if the shares have not been purchased by the BUMN or BUMD, then the divestment shares must be offered through an initial public offering on the Indonesian stock exchange and can only be subscribed by various Indonesian parties. However, it remains entirely unclear how this process would operate in practice given that there is currently no mechanism to limit the parties who are entitled to purchase shares which have been offered to the public on the Indonesian stock exchange. We expect that this proposal in the MEMR Draft New Mining Law will be subject to further debate and revision before being formally enacted into law.

4. Mining Services

The 2009 Mining Law introduced an obligation for IUP holders to give priority to local and/or national mining services companies and to only engage a foreign owned mining services company if no local and/or national mining services company was available. In practice, this principle has provided difficult to implement and is often unrealistic. In a positive development, the MEMR Draft New Mining Law has eliminated this express obligation on IUP holders. While MEMR may seek to reintroduce the prioritization of local and/or national mining services companies in the relevant implementing regulations, the elimination of this clause from the MEMR Draft New Mining Law should give IUP holders some hope that they will be permitted to appoint any mining services company that meets their criteria and work specifications.

In addition, the MEMR Draft New Mining Law removes the current prohibition on IUP holders contracting with third party mining services companies to undertake actual mining exploitation activities. Again, in our view, this is a positive development for both IUP holders and mining services companies and represents an increased willingness from MEMR to grant flexibility to IUP holders as to how they can choose to conduct their actual mining operations.

5. Granting of IUPs

To ensure consistency with the Regional Autonomy Law, the MEMR Draft New Mining Law removes the authority of regents and/or mayors to issue IUPs. Under the MEMR Draft New Mining Law, all IUPs must be granted by either MEMR or the relevant governor based on their authority as further detailed below:

 The MEMR Draft New Mining Law is silent as to the issuing authority of IUPs for a PMA company which has foreign ownership of more than 33%, but less than 34%. However, we expect that this is a typographical error which will be corrected in any final version of the new mining law. Separately, as set out above, the MEMR Draft New Mining Law removes individuals from the list of eligible holders of an IUP.

6. Increased concession areas and duration of IUPs

In addition, the MEMR Draft New Mining Law removes the previous minimum total area for IUPs. Further, Production Operation IUPs will be granted a longer validity period if they are integrated with processing/refining facilities (for metal minerals projects) or a steam power plant (for coal projects whether the majority of coal production is used as fuel for the operation of such power plant). We understand that the granting of longer term Production Operation IUPs for these projects is to further assist with the financing and bankability of processing/refining facilities and mine-mouth power plans.

Further details on the period and size of the mining areas that can be granted for IUPs under the MEMR Draft New Mining Law are set out below: