- Long-awaited implementing regulations for Indonesia’s new Mining Law have recently been passed.
- The regulations govern the process for obtaining licences and require licence holders to comply with reporting, domestic demand, divestiture and other requirements.
- The regulations impose some onerous obligations on investors, including a requirement that foreign licence holders divest a 20 percent stake to Indonesian investors after five years of production.
- It is important for existing investors in the Indonesian mining industry to seek advice as certain permit holders have a short time frame in which to comply with the implementing regulations.
Investors in Indonesia’s mining industry have finally received much anticipated clarification on the operation of Indonesia’s new Law on Mineral and Coal Mining (Mining Law) with the passing of two key implementing regulations. The regulations take effect from 1 February 2010 and govern the issuance of mining licences—a new form of tenure introduced by the Mining Law—and also the delineation of mining areas.
Mining Business Activities
Government Regulation No. 23 of 2010 on the Implementation of Minerals and Coal Mining Business Activities sets out the process for obtaining exploration and production licences. It also outlines various requirements for licence holders including reporting, domestic demand and divestiture requirements.
This regulation provides clarification on the following key areas of uncertainty identified since the passing of the new Mining Law:
- A mining licence (Izin Usaha Pertambangan or IUP) is a key form of mining tenure and may be granted to local as well as foreign investors.
- IUPs are only granted after a Mining Business Permit Area (Wilayah Izin Usaha Pertambangan or WIUP) is issued. WIUPs for metallic minerals and coal are allocated via an auction process following which the auction winner has five business days to apply for an IUP.
- Exploration IUP holders are guaranteed the right to move to an Operation-Production IUP if an application is made and requirements such as the submission of a feasibility study report are met.
- Holders of Operation-Production IUPs as well as existing holders of mining contracts of work and coal contracts of work must meet domestic demand before exporting minerals or coal. Further detail on this obligation is provided under Regulation No. 34 of 2009 issued by the Ministry of Energy and Mineral Resources which provides that domestic market obligation pricing should be based on the benchmark price applicable in the international market for the relevant mineral. Heavy penalties may apply for a failure to meet the domestic market obligation.
- The regulations confirm that mining contracts of work and coal contracts of work signed before the regulation was issued remain in force until expiry.
- As expected, mining authorisation (Kuasa Pertambangan or KP) holders are under an obligation to convert their KPs into IUPs however they have only three months from 1 February 2010 to do so.
- Significantly, the regulations mandate that foreign holders of IUPs must divest a 20 percent stake to Indonesian investors after five years of production. The regulations do not stipulate the mechanism for determining the sale price. Investors must wait for further regulations on this issue.
Government Regulation No. 22 of 2010 on Mining Area sets technical guidelines on determining state reservation areas, mining business areas, and local people’s mining areas. The regulation outlines the conduct of surveys and mapping to set areas in which certain mining activities may take place.
The regulation stipulates that mining areas which have been granted to holders of contracts of work and coal contracts of work must be included in a Mining Business Area (Wilayah Usaha Pertambangan or WUP) within three months from 1 February 2010.
The passing of these regulations is likely to reinvigorate investment in Indonesia’s mining industry which had almost stalled due to uncertainty around the introduction and operation of the new Mining Law.
Thanks to Soemadipradja & Taher, our Indonesian partner firm, for input into this overview.