The Government of Indonesia (“GOI”) began 2017 by issuing Government Regulation No. 1 of 2017 regarding the Fourth Amendment to Government Regulation No. 23 of 2010 regarding the Implementation of Mineral and Coal Mining Business Activities (January 11, 2017) (“GR 1/2017”). To better understand the policies introduced under GR 1/2017, one should also read the corresponding Minister of Energy and Mineral Resources (“MEMR”) regulations, as follows:

1.       MEMR Regulation No. 5 of 2017 regarding Increase of Added Value of Minerals through Domestic Mineral Processing and Refinery (January 11, 2017) (“MEMR Reg 5/2017”); and

2.       MEMR Regulation No. 6 of 2017 regarding the Procedure to Issue a Recommendation for the Export of Processed and Refined Minerals (January 11, 2017) (“MEMR Reg 6/2017”).

Under one of the recitals of GR 1/2017, it appears the GOI is attempting to strengthen the development of domestic mineral processing and refinery businesses. Yet, according to critics, these regulations are discouraging for existing downstream mineral companies with their new share divestment regime and loosening of the rules for the export of processed minerals.

1.         Share Divestment: The requirement that mineral companies gradually divest shares is not new, but in previous regulations the percentage of shares to be divested and the timeline for divestment depended on whether a company was engaged in underground mining or smelting operations. Under GR 1/2017, the share divestment requirement applies uniformly, irrespective of whether a mining company carries out underground mining or smelting operations. Now, all Mining Business License (Izin Usaha Pertambangan or “IUP”) and Special Mining Business License (Izin Usaha Pertambangan Khusus or “IUPK”) holders must begin divesting their shares after five years of production, so that by the 10th year Indonesian party(-ies) own at least 51% of the shares.

The share divestment timeline is as follows:

Year of Production

 

Ownership of Shares

by Indonesian Party(-ies)

 

6th

20%

7th

30%

8th

37%

9th

44%

10th

51%

 

Foreign investors in mining companies with smelting operations now face a lower maximum share ownership (from the previous 60%) and an accelerated deadline for completion of divestment by the 10th year from actual production (previously the 15th year of actual production). These changes may not be attractive for foreign investors considering an investment in Indonesia’s downstream mining sector.

Interestingly, GR 1/2017 deletes the provision under the previous regulation that explicitly exempted holders of Operation Production IUPs specifically for Mineral Processing and Refinery (known as IUP Operasi Produksi Khusus Pengolahan dan Pemurnian) from the share divestment requirement. Nevertheless, GR 1/2017 provides that share divestment applies beginning “five years since the issuance of IUP OP for the mining stage (emphasis added),” leaving room for questions regarding the applicability of the share divestment requirement for IUP Operasi Produksi Khusus Pengolahan dan Pemurnian holders. We will have to wait and see the MEMR’s policies in this regard. We understand the MEMR plans to issue another implementing regulation to clarify share divestment procedures.

Other noteworthy changes regarding the share divestment regime are as follows:

a.       The share divestment timeline commences from the issuance date of the IUP/IUPK OP. Previously, it was typically interpreted that share divestment started five years after the start of “actual production,” which was also typically interpreted that the offer of foreign-owned shares to Indonesian parties commenced five years since “actual production.” IUP/IUPK OP holders must now begin to offer shares to Indonesian parties within 90 calendar days five years after the issuance of the IUP/IUPK OP. It appears that the GOI is trying to clarify the trigger date for share divestment. In the past, some companies attempted to delay the share divestment requirement by postponing the construction phase.

b.       There is no longer a provision expressly stating that IUP/IUPK OP holders whose shares are listed on the Indonesia Stock Exchange will be deemed an “Indonesian party” (maximum 20% of the entire shares) for the purpose of share divestment.

c.       The sequence of parties to be offered divested shares remains unchanged, namely the GOI, regional governments, state-owned and regional-owned enterprises, and domestic private business entities. However, there is no longer a fixed period during which the shares are to be offered to each of the parties to accept or refuse such offer.

2.         Conversion of Contract of Work (“CoW”) to IUPK: MEMR Reg 5/2017 allows IUP/IUPK OP/CoW holders to export processed minerals (known as concentrates) until January 11, 2022, on the condition that (i) the required export recommendation has been obtained from the Directorate General of Mineral and Coal and the required export approval has been obtained from the Ministry of Trade; (ii) the applicable export duty has been settled; and (iii) the minimum quality of processing as set forth in Attachment I of MEMR Reg 5/2017 has been met.

Article 17(2) of MEMR Reg 5/2017 does impose a stringent additional requirement on CoW holders, namely that they convert the CoW to an IUPK OP. Not only is this requirement far-reaching but it is also unclear how it will be enforced, given the possible conflict with the regime under the Indonesian Mining Law, which requires an IUP and IUPK to be tendered,  as well as the interplay with the contractual provisions between the GOI and CoW holders. We are aware that an effort for a judicial review of MEMR Reg 5/2017 has been initiated. The development of this judicial review process and the policies of the MEMR in this regard should be closely followed.

MEMR Reg 5/2017 provides that a CoW is converted to an IUPK OP by submitting an application to the MEMR. If the MEMR approves the application the CoW will be deemed terminated concurrent with the issuance of the IUPK OP. MEMR Reg 5/2017 suggests that the term of such issued IUPK OP will be the same as the remaining term of the CoW. Although there is no explicit wording stating that a CoW must be converted to an IUPK OP, such conversion is a pre-condition for the export of concentrates. As such, CoW holders have limited options: (i) operate until the expiration of their CoW without being able to export mineral concentrates; or (ii) convert their CoW to an IUPK OP and subject themselves to the IUPK OP regime.

3.         Time Limit to Apply for Extension of Mining Business License: GR 1/2017 amends the time limit to apply for an IUP OP extension. Holders of a metal mineral IUP OP may now submit the application to extend their IUP OP within five years and at the latest within one year of the expiration of the IUP OP. Previously, metal mineral IUP OP holders could only submit the extension application at the earliest two years and at the latest six months before the expiration of the IUP OP.

We note that GR 1/2017, MEMR Reg 5/2017 and MEMR Reg 6/2017 have been discussed extensively in the media, with assessments of the regulations covering the full spectrum, from positive to negative, especially related to CoW conversion. Hopefully, the incentives and investment facilities (whether existing or planned) granted to CoW holders and IUP OP holders outweigh any concerns over these new regulations when foreign investors consider investing in smelting facilities in Indonesia.