Indonesian Parliament Passes Important Changes to Mining Legislation

On 12 May 2020, the Indonesian House of Representatives enacted a new law (Mining Law Revision) revising several important provisions of the 2009 Mining Law. Despite criticism that the Mining Law Revision was passed without proper scrutiny (in the midst of the Covid-19 crisis) and has sidelined regional autonomy and local communities’ interests, the Mining Law Revision contains a number of helpful reforms and is generally being welcomed and supported by the Indonesian mining industry.

In summary, the important new reforms introduced by the Mining Law Revision include:

• the purported “guarantee” of the first and second IUPK extension periods (of up to 10 years each) upon conversion from a Contract of Work (COW)/Coal Contract of Work (CCOW) – although the process to convert from a COW/CCOW to an IUPK remains subject to a review process by the Minister of Energy and Mineral Resources (MEMR);
• the simplification and centralisation of licensing arrangements with the MEMR for mining projects through the revocation of regional government authority (although the central government may delegate certain authorities to the regional government in the future);
• seemingly allowing mining services companies to carry out actual mining activities (including “coal/mineral getting” activities) that were prohibited under the 2009 Mining Law, which may see the re-introduction of contract mining in Indonesia;
• obligations for mining companies in the production operation phase to conduct further exploration activities each year and to prepare an annual exploration budget;
• the ability for IUPs and IUPKs to be transferred to third parties (not only subsidiaries) with approval from the MEMR; and
• the ability for the MEMR to determine the minimum budget of IUP/IUPK holders for implementing their community development and empowerment (CDE) plans.

As the Mining Law Revision has only recently been issued (and at the time of writing was still awaiting the President’s signature), it remains to be seen how a number of its provisions will be interpreted and implemented in practice. We expect that further clarity will be provided in time through new or revised implementing regulations. Indeed, based on recent media reports, we understand that the Indonesian government is now preparing at least three new government regulations, expected to be issued later this year or early next year.

Our Indonesian mining team is presenting an overview of the key changes under the new law in a free webinar on 11 June 2020. Please click here to register.

CONVERSION OF COW/CCOW TO IUPK

One of the most prominent changes introduced in the Mining Law Revision relates to the process for converting any remaining COWs/CCOWs to special mining business licenses (Izin Usaha Pertambangan Khusus or IUPK). This has been an objective of the government since the 2009 Mining Law controversially introduced this requirement, although a number of old COWs/CCOWs (particularly in the coal sector) remain unconverted.

Notably, the Mining Law Revision now states that, upon conversion of a COW/CCOW, the COW/CCOW company will be “guaranteed” (jaminan) first and second IUPK periods of up to 10 years each. Further, CCOW companies which have carried out integrated domestic coal development and/or utilisation based on an MEMR-approved area development plan may be granted unlimited 10-year extensions.

The Mining Law Revision provides that the “development” of coal can be in the form of:

• coal upgrading
• coal briquetting
• coking
• coal liquefaction
• coal gasification including underground coal gasification
• coal slurry/coal water mixture.

The “utilisation” of coal may include the development of a mine mouth coal-fired power plant.

Although the Mining Law Revision states that the COW/CCOW companies will be “guaranteed” first and second IUPK extension periods, the process to actually convert a COW/CCOW into an IUPK remains subject to an MEMR review process. The Mining Law Revision sets out several broad factors that the MEMR will consider when deciding to convert a COW/CCOW into an IUPK, including:

• an MEMR review process, whereby the MEMR will seek to increase state revenue through  the re-arrangement of (i) tax revenue and non-tax state revenue and/or (ii) the coverage area of the IUPK based on the MEMR-approved development plan for the relevant COW/CCOW area
• the continuance of operations, mineral and coal reserve optimisation in the framework of mineral and coal conservation and the Indonesian national interest
• any failure of the COW/CCOW company to demonstrate good performance in its mining operations.

Given the considerations above, the most significant development in the Mining Law Revision regarding the “guarantee” of the first and second IUPK extension periods is that, once granted, IUPK holders should arguably be assured that their second extension period will be granted without going through another substantive MEMR review process. This should support long-term investment in the Indonesian mining sector, particularly in the development of downstream processing and refining facilities with significant capital expenditure and lengthy returns on investment.

However, there is one notable wrinkle in the Mining Law Revision, since it states that the IUPK extension periods will be up to 10 years each. As a result, we expect that IUPK holders will seek comfort from the MEMR through the terms and conditions of their IUPKs to confirm that their second extension periods will indeed be for a fixed period of 10 years.

Three other notable changes have been made to the COW/CCOW-to-IUPK conversion process.

Mining Area: Metal-mineral production operation IUPKs are no longer subject to a maximum area of 25,000 hectares, and coal production operation IUPKs are no longer subject to a maximum area of 15,000 hectares. Instead, the coverage area of an IUPK will now be determined based on the MEMR’s evaluation of the relevant MEMR-approved area development plan.

Supporting Area: The IUPK application can now include a request to the MEMR for an area outside the IUPK area to be used for supporting mining activities.

Timeframe: The IUPK application must be submitted to the MEMR between five years and one year prior to the COW/CCOW expiration, whereas the previous regulation allowed extension applications to be submitted between two years and six months prior to the COW/CCOW’s expiration. However, the Mining Law Revision is silent on the application submission timeframe for the “guaranteed” extension of the first IUPK period to the second IUPK period, and we expect this will continue to be governed by implementing regulations or the provisions of the relevant IUPK.

LIMITATION OF REGIONAL GOVERNMENT LICENSING AUTHORITY

Another key reform introduced by the Mining Law Revision is the removal of the authority of regional governments to issue mining-related licenses, including mining business licenses (Izin Usaha Pertambangan or IUP), community mining licenses (Izin Pertambangan Rakyat or IPR), and mining services business licenses (Izin Usaha Jasa Pertambangan or IUJP). All mining licensing authority is now vested in the central government.

This reform has attracted some criticism as being contrary to the principles of regional autonomy prevailing throughout Indonesia. However, the reforms introduced by the Mining Law Revision continue the general trend of the Jokowi government to seek to improve Indonesia’s ease of doing business through centralisation of key licensing functions. These reforms began back in 2014 through the issuance of Law No. 23 of 2014 regarding Regional Administration, which removed the ability of mayors and regents to issue IUPs, IPRs and IUJPs. These further reforms should also help finally bring to an end the issue of overlapping mining license areas, which has plagued Indonesia’s mining industry.

Nonetheless, the Mining Law Revision allows the central government to delegate its authority to regional governments in the interest of efficiency, including the issuance of typically local community-based IPRs and Rock Mining Business Permits (Surat Izin Penambangan Batuan or SIPB). Further, regional governments will continue to be involved in the formal intra-government recommendation process in the determination of mining areas and mining business license areas.

LICENSING REGIME

Fundamentally, the Mining Law Revision retains the mining licensing framework established by the 2009 Mining Law. However, the Mining Law Revision seeks to provide greater legal certainty by formally recognising new mining licenses (some of which were only previously based on regulations) and removing overlapping licenses.

Notably, the Mining Law Revision recognises a new form of IUPK issued through conversion of a COW/CCOW. It also introduces for the first time SIPBs, which allow the mining of certain types of rocks for construction purposes or to support government development projects, and Assignment Licenses (Izin Penugasan), which allow the mining of radioactive minerals within the nuclear power regulatory framework.

The Mining Law Revision also helpfully removes the requirement for stand-alone mineral processing and refining companies to obtain a Special Production Operation IUP for Processing and Refining. Such companies will now be regulated by (and licensed through) the Ministry of Industry regulatory regime. The Mining Law Revision also clarifies that, upon expiry or termination of their mining concession, mining companies are still permitted to sell their stockpiled minerals and coal.

Further details of the adjustments to the mining licensing regime under the Mining Law Revision are set out in the accompanying table (please click on the Download button below this article).

MINING SERVICES COMPANIES

Under the 2009 Mining Law, mining services companies were specifically excluded from engaging in “implementation” of mining. This was interpreted under the prevailing regulations as prohibiting mining services companies from performing actual coal/mineral-getting activities, which had to be performed by the mining company itself as a core business activity.

However, the Mining Law Revision now appears to allow mining services companies to engage in “implementation” of mining. If this reform is reflected in new or revised implementing regulations, mining services companies would have a clear legal basis to now perform actual coal/mineral-getting activities, reflecting modern mining industry practice. This could lead to the re-introduction of contract mining in Indonesia, which would provide mining companies with further flexibility in the structure and performance of their operations.

PROCESSING AND REFINING OBLIGATIONS AND EQUITY LOCALISATION (DIVESTMENT)

In general, the Mining Law Revision retains the domestic processing and refining obligations first introduced by the 2009 Mining Law. However, the Mining Law Revision seeks to further promote downstream processing and refining by allowing metal mineral and coal mining companies with integrated mining, processing and/or refining facilities to be granted IUP/IUPKs for 30 years (instead of the usual 20 years), with unlimited guaranteed extensions of 10 years each instead of the usual maximum two extensions of 10 years each.

The Mining Law Revision also provides a clearer legal basis for mining concession holders that are developing processing and/or refining facilities to continue to export unrefined metal mineral ore for up to three years. These reforms continue government efforts to promote investment in Indonesia’s downstream mineral processing and refining industry.

Similarly, the Mining Law Revision retains the obligation for production operation IUP/IUPK holders to ensure a maximum of 49% foreign ownership through divestment to the central/regional government, state/regional owned enterprises and/or national private entities. While the 2009 Mining Law required such divestment to occur by the end of the fifth year of production, the Mining Law Revision allows such divestment to occur in stages. Depending on its further interpretation through new or revised implementing regulations, this new provision of the Mining Law Revision could permit a longer local divestment timeline (and potentially allow COW/CCOW holders to convert to IUPK before completely satisfying the local divestment obligation). Further, the Mining Law Revision now confirms the legal basis for divestment to be carried out through a share offering on the Indonesian stock exchange where divestment cannot be made to the central/regional government, state/regional owned enterprises and/or national private entities.

HAUL ROADS

The Mining Law Revision places more stringent requirements on mining companies in respect of the use of haul roads. In particular, it requires IUP/IUPK holders that use haul roads in conducting their mining activities to either construct the haul road themselves or use haul roads owned by (and in cooperation with) other IUP/IUPK holders or other parties that own a haul road which complies with mine safety standards.

IUP/IUPK holders can only use public facilities and infrastructure if a haul road is not available, and if the use of these public facilities complies with prevailing laws and regulations. IUP/IUPK holders may also grant community access to their haul roads upon approval from the relevant Head of Technical Mining.

OTHER REFORMS

The Mining Law Revision also introduces the following new provisions:

• IUP/IUPKs can now be transferred to third parties (not only subsidiaries) upon approval from the MEMR, provided that the IUP/IUPK has (i) completed exploration activities as proven through resources and reserves data, and (ii) complied with administrative, technical and financial requirements.
• While the transfer of shares in mining companies still requires prior MEMR approval, no MEMR approval will be required to transfer the shares of listed Indonesian mining companies that are traded on the Indonesian stock exchange.
• IUP/IUPK holders are confirmed to be prohibited from securing their IUP/IUPK and mining products.
• While CDE plans remain subject to MEMR approval as part of the work plan and budget process, the MEMR now also has specific authority to determine the minimum budget for implementing CDE plans.
• In a continued effort to seek to promote mining exploration in Indonesia, holders of production operation IUP/IUPKs are now required to conduct further exploration activities each year and provide a budget for such activities.

We would welcome the opportunity to clarify how these changes may affect your mining business in Indonesia. Please reach out to your usual contact.

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