New Indonesian mining regulations

March 2012



There have been some significant recent regulatory developments relevant to the mining sector in Indonesia, which we briefly examine below.

New Rules on Divestment and Transfer of Mining Licenses (IUPs)

On 21 February 2012, the Indonesian Government issued Regulation No. 24 of 2012 on Amendment to Government Regulation No. 23 of 2010 on Mineral and Coal Mining Business Activities (“Regulation No. 24”). Regulation No. 24 increases the divestment requirement to Indonesian interests for Foreign Investment Companies (“PMA Companies”) holding an IUP, from 20% to 51%. The new divestment requirement commences after five years of commercial production, and is as follows:

  • 20% in the sixth year;
  • 30% in the seventh year;
  • 37% in the eighth year;
  • 44% in the ninth year; and
  • 51% in the 10th year.

The order for offers where the divestment obligation applies basically stays the same ­– an offer must first be made to the national government, then to provincial/local governments and state/region-owned enterprises, and lastly to private interests.

While slightly contradictory, the elucidation to Regulation No. 24 indicates that an IUP may be transferred to another entity as long as the original IUP holder holds at least 51% of the shares in the entity receiving the IUP. There has previously been some confusion as to the transferability of IUPs, as Indonesia’s New Mining Law of 2009 provides that IUPs are non-transferable, while the Ministry of Energy and Mineral Resources has issued circulars to the contrary.

The Regulation also provides that IUPs for PMA Companies are to be issued at the central, rather than regional, level. Under the New Mining Law, mining rights are subject to tender/auction provisions. Pending the issue of implementing regulations that detail the tender/auction provisions, the general view is that IUPs should not currently be issued directly. Accordingly, the requirement that IUPs be issued at the central level will not immediately impact on new concessions. However, to the extent that a PMA company wishes to upgrade an existing IUP from the status of an Exploration IUP to a Production Operation IUP, it appears that the Production Operation IUP will need to be issued at the central level.

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Ban on export of raw commodities

Regulation No.7/2012 issued by the Ministry of Energy and Mineral Resources on 6 February 2012 will prohibit the export of unprocessed raw materials or ore by IUP holders. At this point, there appears to be confusion as to the commencement date of the prohibition, with some government officials saying May 2012, while others have indicated 2014.

Mineral raw materials will have to be processed in Indonesia, rather than being exported in a raw state. This regulation is intended to develop the country’s downstream mining industry, increase domestic revenues, and ensure availability of refined products for domestic use. Sanctions for failure to comply include suspension of activities and/or permit revocation. The above prohibitions do not include coal.

The practical implications of the in-country processing requirement are challenging. At present Indonesia does not have sufficient smelters to process raw materials in-country, nor is it likely to have sufficient capacity by 2014. Constructing smelters is time-consuming and capital-intensive: on average, it takes around 7-8 years from inception to operation, and costs can be in the region of US$800m-US$1bn or more. Mining companies appear reluctant to diverge into processing. Newmont, for example, indicated in February 2011 that its feasibility studies indicated that setting up gold and copper smelters would be uneconomical.  

One of the companies in Indonesia committed to building new smelters at present is state-owned PT Aneka Tambang, which is raising finance for a US$1.6bn ferronickel smelter in East Halmahera. Construction commenced at the close of 2011, with the plant due to become operational towards the end of 2014. Production capacity will be in the region of 27,000 tonnes per year. The company is also planning to build three other processing plants in Kalimantan and Sulawesi, but these projects are some years away from development.

The government is lobbying hard to attract investment for the development of new smelters, and recently it issued a series of statements announcing new smelter projects. According to the government, 19 metal processing and refining facilities are currently under construction or undergoing feasibility studies as part of the country’s response to the prohibition on ore exports. Of the 19 facilities, seven are now in the construction phase, six are having their feasibility assessed, and the remaining six have just obtained construction permits; Krakatau Steel, South Korea’s POSCO, Japanese companies Showa Denko and Marubeni Corporation, China’s Ning Xia Hengshun Group, Dubai’s MEC Holdings and India’s NALCO are all reportedly investing in the development of new smelters in Indonesia. However, market commentators appear united in their view that whether or not these proposed projects come to fruition, Indonesia is unlikely to have sufficient processing capacity available to comply with the regulatory requirements by 2014.

With respect to coal, Indonesia’s government has also indicated its intention to ban low-calorific coal exports from 2014. The Minister of Energy and Mineral Resources circulated a draft regulation regarding “value added upgrading of minerals and coal through processing and refining activities” (the “Draft Regulation”). Under the Draft Regulation, coal with a calorific value of 5700 kcal/kg or below on an air-dried basis will be banned from being exported from January 2014. This threshold has oscillated between 5100 and 5700 kcal/kg; a 5700 kcal/kg threshold would of course have a more serious impact than would a 5100 kcal/kg threshold. However, given that the Draft Regulation has already been revised several times, some analysts do not expect it to be implemented by 2014. The Indonesian Coal Mining Association (ICMA) believes that the plan to ban low-calorific coal exports is not viable, even if the technology to upgrade the calorific value of coal is available.

With such uncertainty about when (or indeed whether) the Draft Regulation will be implemented, it is important that investors who are considering entering Indonesia’s low-calorific coal market should be aware of the latest developments with regard to the Draft Regulation. Norton Rose and Susandarini & Partners have been guiding organisations on investments in the Indonesian coal market and continue to update investors on changes in the market.

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New rules concerning receipt of export proceeds into Indonesian bank accounts and withdrawal of foreign exchange from external debt

The regulations relating to offshore borrowings (foreign exchange from external debt, or “DULN”) and export proceeds came into force in January 2012. Bank Indonesia’s stated aim in introducing these regulations is to support the creation of a sounder financial market by bringing Indonesia’s considerable export proceeds into the local banking system. 

In short, the regulations stipulate that:

  • export proceeds must be received through a local foreign exchange bank, and
  • DULN must be withdrawn through a local foreign exchange bank account.

There is neither a requirement for foreign currency to be converted into local currency nor a time limit on the period of time it must remain onshore. There are some additional reporting requirements. 

Sanctions, which take effect from 2 July 2012, include a fine of Rp10 million for each non-compliant drawdown of offshore borrowings and a fine of 0.5% of export proceeds that have not been received onshore, subject to a minimum amount of Rp10 million and a maximum of Rp100 million.

Where it has been contractually agreed that the export proceeds will not use a local foreign exchange bank before 2 January 2012, they will not be subject to this Bank Indonesia Regulation until 2 January 2013. Similar conditions will apply for DULN, except for DULN withdrawals based on an increased offshore loan facility as a result of an amendment to the agreement signed after 2 January 2012.

The regulation does not specifically prohibit transfers of funds, once made into a local foreign exchange bank account, to an offshore bank account. As a passing comment, financiers of Indonesian mining projects often prefer funds to be kept in offshore bank accounts, as these may be subject to registrable securities. As of about five years ago, cash in bank accounts can no longer be registered as security in Indonesia.

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‘Adjustment’ of CoWs and CCoWs to the New Mining Law

The New Mining Law provides that Contracts of Work (CoW) and Coal Contracts of Work (CCoW) remain valid for their stated period but must ‘adjust’ to the new law. In June 2011 it appeared that most CoW and CCoW holders were resisting changes to the preferential tax provisions on the grounds that CoWs and CCoWs constitute contracts with the Government and cannot be unilaterally amended by the Government without the approval of concession holders. 

However, in February 2012 Energy and Mineral Resources Minister Jero Wacik announced that 69 mining companies had agreed to renegotiate six main issues in their contracts, and a further 13 mining companies were at the point of signing re-negotiated contracts. The Government recently announced that the Indonesian subsidiaries of Newmont Mining Corporation, which operates the Baju Hijau mine, and Freeport-McMoran, which operates the Grasberg mine, had both agreed to renegotiate their contracts.

Press reports have indicated that the six main issues are: the size of the mining areas, contract extensions, royalty amounts, the in-country processing obligation, the divestment obligation, and the utilization of local goods and services.

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Forest moratorium

In May 2011 the Government through Presidential Instruction introduced a two-year moratorium on the grant of new licenses in peatland and primary natural forest. The forest conservation moratorium is one of several commitments made by the President in support of a bilateral agreement with Norway, under which Norway has pledged up to US$1bn for Indonesia to reduce greenhouse gas emissions. There are exemptions under this Presidential Instruction, including for companies that have already received a forest use permit at the production stage or have successfully applied to extend an existing permit.

Critics claimed that the Presidential Instruction fell short of expectations, with the moratorium map attached to the Presidential Instruction, which sets out the affected areas, scheduled to be revised every six months. The most recent revised map was issued in November 2011.

For the mining industry, the moratorium is most likely to impact on concessions located within production forest areas. There is some concern that the moratorium may even be extended to areas not currently zoned as forest.

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Land Acquisition Law now in effect

The process of land acquisition has historically been one of the longest lead items in the development of an Indonesian mining project, and ensuring the exclusive right to conduct mining activities within a specific area is a key concern for investors. Many problems faced by mine developers have arisen due to the difficulties of land acquisition, including the issue of overlapping concessions and the different forms of land rights. A related and well-acknowledged curb to the development of the mining industry is the lack of infrastructure – particularly power, rail, roads and ports – without which a mining project may fail its first test of economic viability.

The land acquisition bill was approved by the Indonesian House of Representatives on 16 December 2011, and came into effect on 14 January 2012 as Law No. 2 of 2012 on Land Procurement for Development in the Public Interest (“Law No. 2”). Law No. 2 provides that its implementing regulation must be issued within one year of its enactment.

Law No. 2 concerns the compulsory acquisition of land by the government for use in the public interest, and payment of compensation to the former landowners. It covers government projects, but also contemplates the government partnering with state-owned firms and the private sector.

The new law lists 18 kinds of development activities that are in the public interest, including among them:

  • public roads, highways, tunnels, railway lines, railway stations, railway operations and facilities;
  • reservoirs, dams, weirs, irrigation, drinking water supply, drainage and sanitation, irrigation and other constructions;
  • ports, airports, and terminals;
  • oil, gas, and geothermal infrastructure;
  • electricity generation, transmission, relay stations, networks, and distribution;
  • telecommunications and information networks of the government;
  • disposal and recycling centres;
  • public safety facilities; and
  • nature and cultural reserves.

While mining is not included in the list of prescribed development activities, improving the speed and ease with which a developer can acquire land to develop infrastructure that falls within the prescribed development activities and also supports mining activities will go some way towards making a mining project bankable. It appears unlikely that Law No. 2 will help mining companies to acquire land, since it was expressly issued to support infrastructure development in the public interest, rather than mining business activities.

Law No. 2 sets out a timeframe for each stage of the land acquisition process, including specified periods for appeals and compensation.

Compensation for landowners may take any form agreed between the parties, including cash, replacement land, share ownership, or resettlement. The appraiser is appointed by the National Land Office (BPN), and the compensation will be based on the value of the land at the time the project is announced. The parties have 30 business days to deliberate the amount of compensation, calculated from the date the evaluation report is submitted. If no consensus is reached, the landowner may file a claim with the relevant district court and may then appeal the decision to the Indonesian Supreme Court.

The scheme for dispute settlement under Law No. 2 is rather optimistic; courts must issue their decisions within 30 business days after receiving a complete claim and if there is any appeal, the Supreme Court must make a decision within 30 business days. This contrasts with the previous situation, where the court process could take years.

The transitional provisions of Law No. 2 are unclear; indicating that a land acquisition process underway before Law No. 2 comes into effect should continue to apply the old laws, except where the land acquisition was not covered by the old rules, in which case it should be completed using Law No. 2.

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