After almost four years of Parliamentary debate, on January 12 2009, Indonesia’s new Law 4/2009 on Mineral and Coal Mining came into effect, replacing its 1967 predecessor.
A strong impetus for an overhaul of the country’s mining regime derived from the fact that since the passing of the post-Dutch regime in 1967, the Indonesian regulatory and political landscape had undergone some major changes. There was particular upheaval in the areas of regional autonomy introduced in 1999 (where the Central Government devolved significant powers to Indonesia’s provinces and regions) and the principle of equal treatment of foreign and domestic investors introduced under the 2007 Investment Law. The new Mining Law has been drafted in a manner respecting these principles.
The key changes introduced under the new Mining Law, and its expected impact on investment in Indonesia’s lucrative mining sector, include:
• Abolishing the Contract of Work system for new foreign investment. The regulation of foreign investment in the mining sector has moved from the previous contract-based system (with contracts signed between investors and the central government) to a licence-based system equally applicable for both foreigners and domestic investors. The licences (Izin Usaha Pertambangan or IUP) are issued by central, provincial or regional government depending on whether the mining project crosses regional or provincial boundaries. Large foreign investors have criticised this move, because the bilateral nature of the contract system gives much more protection against future changes in law than the unilateral licensing system. The law preserves the validity of existing Contracts of Work, but requires them to be amended and brought into line with the principles of the new law by January 12 2010.
• Foreign investment open but with divestment. A foreign investor can hold 100% of an IUP concession. However within five years of the start of production, the foreigner must divest a portion of its shareholding in the IUP holder. The implementing regulations have yet to specify the percentage to be divested, and accordingly, this issue is being eagerly watched by foreign investors.
• Designation of mining areas within Indonesia: Under the new system, mining will only be permitted in areas which are designated as Mining Areas (Wilayah Pertambangan) by the central government, after consultation with the Indonesian parliament and regional governments. Under the previous system, mining could (with very limited exceptions) be carried out in any part of Indonesia.
• All new coal and mineral mining concessions must be granted by way of tender. To achieve higher decrees of transparency, any award of an IUP must be made by way of a tender process, replacing the previous system of direct application. Whilst the need for a tender prior to the grant of a concession may slow down the process for developing new mining projects, it should lead to a more level playing field for genuine investors, as it is designed to remove pure brokers from the equation.
• Larger areas and reduced term. The maximum areas for IUPs have been significantly increased. Coal IUPs can be 50,000 hectares and 15,000 hectares for exploration and production phases respectively. For mineral IUPs, the maximum areas are 100,000 hectares and 25,000 hectares for exploration and production respectively. However, the term of production phase IUPs has been reduced to 20 years, with the possibility of two 10-year extensions. The predecessor production licence was for 30 years, with two 10-year extensions.
• Onshore processing obligation. To help develop the downstream refining and processing industries in Indonesia, the new law requires all mineral and coal miners to carry out processing and refining of the coal or mineral ores onshore. A five-year grandfathering provision exists for existing Contract of Work (foreign investment) mineral projects. But Indonesia does not have the refining or processing capacity to process all mineral ores currently being produced, so there is significant concern as to whether Indonesian miners will be able to find adequate processing facilities.
• Regulation of mining contractors: The new law specifically regulates the mining support services activities, and requires mining companies to use national mining contractors over foreign-owned contractors (which can only be used where no local contractors are available). Similarly there is an outright ban on a mining company using an affiliated mining services contractor, unless it obtains minister approval.
The new Mining Law set out some very clear guiding principles as to the regulation of Indonesian mining projects into the future. However, like all things, the devil will be in the detail, and the industry is eagerly waiting the issuing government’s implementing regulations to provide some further clarity regarding how these broad principles are to be applied in practice.
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