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Our Business >> Mining in Indonesia

 
 
Background Information:
 
Indonesia is one of the world’s largest producers of tin (ranked 2nd after China), coal (ranked the 3rd largest thermal coal exporter after Australia and South Africa) and copper (ranked 3rd largest, after the USA and Chile). It also produces significant quantities of gold and nickel. Minerals and related products represented 19% of Indonesia’s total exports, with gold being the largest revenue earner. Indonesia is also a producer of bauxite, phosphates and iron sand, with potential for alluvial diamond production as well.
Formerly, mining was regulated with Law No. 11 of 1967 on Basic Regulation on Mining (“Law No. 11 of 1967"). But with the development of mining, nationally and internationally, Law No. 11 of 1967 had become obsolete under modern conditions. That is why the need for changes of regulations on mineral and coal mining which could develop the potential of mineral and coal mining in Indonesia and could ensure a continuous streamlining of national development accordingly.

In January 2009 the government stipulated a new regulation on mining. It is Law No. 4 of 2009 on Mineral and Coal Mining (“Law No. 4 of 2009"). This Law is changing the use of Kuasa Pertambangan into Mining Business License (Izin Usaha Pertambangan)   (“ IUP").
 
 
Mining in General:

The definition of mining according to Law No. 4 of 2009 is some or all stages of activities related to research, management and utilization of mineral or coal which includes general investigation, exploration, feasibility studies, construction, mining, utilization and purification, transportation and sales, and also after mining activities. The activity of utilizing mineral or coal is called “mining business”.
 
The “Mining Business”  are categorized under two sections, Mineral Mining and Coal Mining and there are three types of Mining Business which are:
 
  1. Mining Business License (Izin Usaha Pertambangan), license to do mining business
  2. Public Mining License (Izin Pertambangan Rakyat) (&quotIPR"), license to do mining business in the area of public mining area and with limited area width and investment
  3. Special Mining Business License (Izin Usaha Pertambangan Khusus) (“IUPK"), license to do mining business in the area of Special Mining Business License.
 
 
Types of IUP:
 
IUP consists of two stages:
 
  1. Exploration IUP, including activities of general investigation, exploration, and feasibility study
  2. Production Operation IUP, including activities of construction, mining, utilization and purification, and also transportation and sales.
 
Every Exploration IUP holder is guaranteed to get Operation Production IUP as a continuation of mining activities. IUP is given to (i) business entities (ii) corporations and (iii) individuals and for one only type of mineral or coal only. For business entities who want to sell excavated minerals and/or coal but are not in the area of mining business, shall obtain a Production Operation License to sell beforehand.
 
 
Transfer of IUP and IUPK:
 
IUP and IUPK holders (the “License Holders") cannot transfer their IUP and IUPK to another party. Meanwhile, to transfer ownership and/or shares on the Stock Exchange in Indonesia, it can only be done after a specific stage of exploration activities has been achieved. To transfer ownership and/or shares, the holders shall inform the minister, governor, or regent/mayor (the “Authorities") to ascertain that the transfer is suitable with the authorities and that the transfer itself is not in conflict with the current applicable regulations.

 
Time Period:
 
The licence for different kinds of mineral or stone or coal are allocated a varying time period for its License. The period of time for Exploration License for coal mining is 7 (seven) years. Meanwhile, the period of time for Operation Production License for coal mining is 20 (twenty) years and can be extended twice each for a period of 10 (ten) years each. In the event that such time has expired and the License Holder does not apply for an upgrade or extension or has submitted an application for extension but does not meet the licence conditions then the License is terminated.
 
 
Termination of IUP and IUPK:
 
IUP and IUPK can be terminated by the following reasons,
 
  1. If the licence is returned
  2. If the licence is revoked
  3. or if the licence expires
 
The License Holder can return their IUP or IUPK by giving a written statement to the Authorities with a full and detailed explanation of the reasons for the return. IUP and IUPK can also be revoked by the Authorities if (i) the License Holder did not fulfil their obligations as stipulated in the IUP or IUPK and regulations; (ii) the License Holder committed a violation as referred to under  this Law; or (iii) the License Holder is declared bankrupt.
 
 
Taxes:
Operation Production License Holders shall pay to the government 4% (four percent) and to the local government 6% (six percent) of the total net income once the production  has commenced.
 
Refining License Holders shall increase the value of the excavated mineral and/or coal in the activity of mining, processing and refining, and also the utilization of mineral and coal. License Holders shall conduct the processing and refining of the mine results within the country. License Holders are allowed to process and refine mine results from other License Holders.
 
 
The Use of Local Service:
 
License Holders shall use the service of local and/or national mining service companies to do all sorts of mining activities such as,  general investigation, exploration, feasibility studies , mining construction, transportation and many more. In the event of the License Holder using a Mining Service company’s help, the responsibility for the activities of the mining business lies on the License Holders.
 
 
Divestation of Shares:
 
After 5 (five) years of production, any legal entity whose shares are owned by foreigners, must divest these shares to the Government, local government, state company, local company, or national public company.
 
 
Types of Mining Area:
 
Mining Area (Wilayah Pertambangan) (“WP") is areas with mineral and coal potentials and not bound by the limits of government administration which is a part of the national spatial.
 
There are 3 (three) kinds of WP:
 
  1. The Area for Mining Business License (Wilayah Izin Usaha Pertambangan) (“WIUP")
  2. The Area for Public Mining (Wilayah Pertambangan Rakyat) (“WPR")
  3. The Area for State Reserve (Wilayah Pencadangan Negara) (“WPN"). WIUP is a mining area given to the holder of IUP.
 
Rights over WIUP, WPR, or WIUPK does not include rights over land.  An Exploration License shall have to have an agreement with the holder of whomever has rights over the land prior to conducting any  activities. Rights over IUP, IPR, or IUPK is not a right to own land.
 
WIUP for coal is given to business entities , corporations  and individuals  through tender. License Holders for coal exploration are  given WIUP at least 5.000 (five thousand) hectares and a maximum of 50.000 (fifty thousand) hectares. As for the License Holders for operations is given a maximum of 15.000 (fifteen thousand) hectares.
 
 
Dispute Settlement:
 
Any & every dispute that may arise from the implementation of IUP, IPR, or IUPK (the “License") is settled through the national courts and/or arbitration in accordance with the currently applicable regulations.
 
Sanctions:
 
There are two kinds of sanctions in this law. Administrative sanction and criminal sanction.
 
The administrative sanction are imposed by the Authorities to the License Holder for any violations against Law No. 4 of 2009. The administrative sanction are as follows:
 
  1. Written warning
  2. A temporary halt, partly or wholly, of the exploration or production operation -  and/or
  3. Revocation of IUP, IPR, or IUPK.
Penalties imposed for criminal sanctions differ depending on the type and severity of the committed violation. An example of this is that any person or entity found mining without an IUP, IPR or IUPK can be convicted and imprisoned for a maximum of 10 years and fined up to a maximum of Rp.10,000,000,000 (Ten Billion Rupiah).
 
 
Transitional Provision:
 
This Law No. 4 of 2009 also regulated the transition from the former mining law in some aspect. By the time Law No. 4 of 2009 was enacted , every currently existing Kontrak Karya (“KK") and Perjanjian Karya Pengusahaan Pertambangan Batubara (“PKP2B") remained in force until the expiration date of such document . The provisions contained in such KK and PKP2B shall be modified in accordance with this Law No. 4 of 2009 at the latest one year after the enactment date. As for the application for KK and PKP2B that have been submitted to the minister at least 1 (one) year before the enforcement date of this Law and have got the principle approval letter or preliminary investigation permit letter remain applicable  and can be processed without tender according to this Law.
 
 
Mining Rights and Title:
 
The state (i.e. the government of the Republic of Indonesia) is deemed to have title to minerals in the ground and to mined and processed minerals and metals. Parties granted mining rights under the New Mining Law are in effect ‘contractors’ of the government and do not by virtue of holding mining rights acquire title to minerals in the ground. Parties holding mining rights for exploitation, transport and sale under IUP are granted the exclusive right to sell and export mined minerals and retain the proceeds of sale (assuming royalties and other payments to the government are made in a timely manner).
 
IUPs grant exclusive mining rights to the holder for specified minerals or metals, stages of mining activity and specific time periods within a defined IUP area. However, a holder of a IUP for exploration of a specified mineral has a priority in applying for a IUP for other minerals discovered in the same area. The holder of a general survey IUP has priority over other applicants for an exploration IUP within the same area.
 
Mining-related obligations of a holder of mining rights are set forth in the Mining Law. For IUP holders, the conditions are stated in the IUP permit. Work must commence within six months from issuance of exploration IUPs, within six months for pre-exploitation work under exploitation IUPs and within one year for exploitation work under exploitation IUPs. A six-month hiatus when no work is carried on can result in the IUP being deemed abandoned. Failure to comply with such deadlines, work obligations and permit conditions can result in IUPs companies being terminated.
 
Holders of mining rights are entitled to conduct exploration, construct required infrastructure and carry on other mining activities using proper mining techniques and equipment. Holders are required to deposit reclamation funds. IUP holders must submit preliminary reports detailing mining plans, production (incomplete statement, not sure what is supposed to be here)
 
 
Environment, Health and Safety:
 
Mining companies must prepare AMDAL (Environmental Impact Analysis) documents which are open to the public. Review of AMDAL documents is carried out by either a central review team (located in Jakarta) or a regional review team (i.e. a team designated in the relevant province).
 
The AMDAL report contains a collection and analysis of data on all physical aspects and issues, including climate, flora, fauna, soils, river flows, tides, waves, topography (land and sea), social studies on population, health, education, employment and religion. Community consultation is required.
 
Holders of mining rights are required to submit annual plans for environmental management that include a reclamation plan before commencing exploitation. Reclamation must be conducted in accordance with reclamation plans and applicable laws. Completion of reclamation must be confirmed by a DEMR decision.
 
Before commencing exploitation, a company must deposit a reclamation fund in a bank appointed by the relevant government authority (i.e. central or regional). The amount of the reclamation fund is based on estimated reclamation costs under the relevant AMDAL.
 
 
New Indonesian mining service business regulation:
 
On September 30 2009, the Minister of Energy and Mineral Resources (the MEMR) in Indonesia issued Regulation No. 28 of 2009 regarding Mining Service Business (PerMen 28/2009). PerMen 28/2009 implements certain provisions of Law No. 4 of 2009 regarding Mineral and Coal Mining (the New Indonesian Mining Law) related to mining service business activities. To an extent, PerMen 28/2009 redefines certain mining service business activities and practices that have been implemented in the Indonesian mining sector, such as:
 
  • mining companies now have to undertake on their own certain coal/mineral extraction and loading activities, which have been traditionally contracted out to mining contractors
  • local and national mining contractors are now given preferential treatment in securing mining service contracts, compared to foreign-owned mining contractors; and
  • there are stricter requirements for a mining company using subsidiary/affiliated mining contractors.
 
 
Actual mining company activities:
 
PerMen 28/2009 still allows a large number of mining activities to be contracted out to mining contractors. However, certain mining activities – namely coal/mineral extraction (which arguably includes blasting activities at the coal/mineral seam) and loading will have to be undertaken by mining companies themselves. This has, to an extent, given rise to a number of concerns to both mining companies and mining contractors. For mining companies, the obligation to undertake coal/mineral extraction and loading means that they will have to procure their own mining equipment and make available the related manpower and expertise to undertake those activities. For mining contractors, the obligation for mining companies to undertake their own coal/mineral extraction and loading means that a portion of their revenue will be lost.
 
A number of alternatives have been considered and discussed by Indonesian mining stakeholders in order to deal with the above-mentioned matters. One of these is to have the mining contractors supply related equipment for coal/mineral extraction and loading activities on a ‘dry-lease’ basis. Effectively, mining contractors lease out to mining companies the relevant equipment (whether on a fully maintained basis or otherwise) that will be used for coal/mineral extraction and loading activities. Manpower would be excluded from such an arrangement because, if supplied, it would appear in substance that the lease arrangement was no different from an actual mining service contract arrangement – the latter being prohibited under PerMen 28/2009. The mining companies would have to provide and make available their own manpower to undertake the actual coal/mineral extraction and loading activities.
 
Clearly, there will be concerns on how to implement the abovementioned separation of mining activities. This is particularly the case with coordination, health and safety and liability issues, which may not be easily defined and need to be appropriately arranged and structured so as to avoid unnecessary interruption to the production of the mines.
Local, national and foreign (other) contractors
 
The New Indonesian Mining Law provides that local and national mining contractors must use local and national contractors. PerMen 28/2009 provides the following definitions:
 
  1. ‘Local contractor’ - a service company in the form of an Indonesian legal or non-legal entity, which is established in a certain municipality/regency/province, whose entire capital originates domestically (Indonesia) and has activities only within the municipality/regency/province in which it is established
  2. ‘National contractor’ - a service company in the form of an Indonesian legal entity, whose entire capital originates domestically (Indonesia) and has activities within or outside the territory of the Republic of Indonesia, and
  3. ‘Other (foreign) contractor’ - an Indonesian legal entity whose capital is partly or entirely owned by foreign parties.
 
One of the most hotly-debated matters during the preparation of PerMen 28/2009 was how to implement the preferential treatment/right of local and national contractors. Based on PerMen 28/2009, if a mining company wishes to engage ‘other/foreign’ contractors, it will have to initially make a newspaper announcement (related to the mining service contract) and there would have to be no local and/or national contractors who were financially and technically capable of undertaking the work and meeting the requirements set out by the mining company. The overall process of electing foreign contractors (including determination of capability) must be fair, transparent and reasonable.
 
It is interesting to note that PerMen 28/2009 does not specifically use the term ‘tender’ for the purpose of electing other/foreign contractors. This is unlike in certain PerMen 28/2009 provisions relating to the appointment of subsidiary/affiliated contractors where the term ‘tender’ is used.
 
If ‘other/foreign’ contractors are appointed, PerMen 28/2009 requires that those contractors subcontract part of the contracted work (from the mining companies) to appropriately competent local contractors. However, it is still unclear what the scope of that subcontracted work should be, given that the requirement is qualified by the need for a competency test. As a comparison, an earlier draft of PerMen 28/2009 required at least 30% of the contract value to be subcontracted, but this requirement was no longer stipulated in the final text of the version of PerMen 28/2009 that was issued. Accordingly, any part of the work scope (even a very small component e.g. subcontracting maintenance work, or the supply of spare parts) would meet the obligations under PerMen 28/2009.
 
(The contents of the above were all correct as of June 2010)