Indonesia: Government Consolidates Permitting In The Mining Sector.

 

6 July, 2017

 

 

In brief

 

The Ministry of Energy and Mineral Resources (MEMR) has issued Regulation No. 34 of 2017, effective on 9 May 2017 (Regulation 34/2017), replacing various existing MEMR regulations in relation to permitting in the mining sector, including for mining services.

 

Regulation 34/2017 is intended to consolidate and simplify the process for permitting, previously contained in numerous MEMR regulations, and clarify the respective authorities of the MEMR and the relevant Governor in issuing permits.

 

Key terms of the new regulation

 

Regulation 34/2017 further reinforces the principle contained in Government Regulation No. 1 of 20171 and the Regional Autonomy Law2 that regents (bupati) no longer have authority to issue permits in the mining sector. Mining permits will be issued by the Governor or the Minister in accordance with their respective authorities, and importantly, all permits issued in the framework of foreign investment (penanaman modal asing, PMA) will be issued by the Minister.

 

Regulation 34/2017 regulates the granting of, and rights, obligations and restrictions for the holders of, mining business permits (Izin Usaha Pertambangan, “IUP”), special mining business permits (Izin Usaha Pertambangan Khusus, “IUPK”), special operating mining business permits for refining and processing (Izin Usaha Pertambangan Khusus untuk Pengolahan dan/atau Pemurnian, “IUP OPK”) and mining services permits (Izin Usaha Jasa Pertambangan, “IUJP”). The key changes are summarised below.

 

Regulation 34/2017 replaces a number of previous regulations regulating the award and administration of these permits. 3 The transitional provisions provide that existing permits awarded under the previous regulations are grandfathered, but must now comply with the requirements of Regulation 34/2017. In particular, Regulation 34/2017 will now regulate changes to work plan and budgets, shareholding composition and management (the Board of Directors – BOD and the Board of Commissioners – BOC) for holders of Contracts of Work and Coal Contracts of Work, given that Regulation 34/2017 replaces the previous regulation on this topic.

 

IUP/IUPK

 

Regulation 34/2017 provides further guidance on the grant of IUP/IUPK and confirms the authority of the Minister and Governor to issue the relevant permits. The Minister will grant IUPK and IUP:

 

• that cross multiple provinces;
• are located more than 12 nautical miles from the coastline;
• are located on the border with another country;
• where the applicant is a PMA company;4 and
• where the applicant is a publicly listed company which owns more than 1 IUP in multiple provinces.

 

Where an existing IUP within these categories was issued by the Governor, Regulation 34/2017 expressly instructs the Governor to hand over the IUP and all supporting documents to the Minister, so that the IUP can be re- issued by the Minister.

Further, upon satisfying the administrative, technical and environmental and financial requirements, the applicant for Exploration IUP/IUPK must provide a commitment guarantee5 for exploration (around USD380 if the mining area is less than 40 hectares, or around USD11.50 per hectare if the mining area is more than 40 hectares). The commitment guarantee can be re-claimed once the feasibility study undertaken during the exploration period has been approved (or in other words, at the end period of exploration once the permit holder’s work commitments during the exploration period have been 

completed). Failure to perform the committed exploration activities may result in the commitment guarantee being cashed out by the government.

 

IUP OPK

 

Under Regulation 34/2017, there is only one type of IUP OPK for Processing and Refining which covers the activities of both processing and/or refining, as well as sale and transportation. This allows these activities to be undertaken on an integrated basis under a single permit. Previously, separate permits were issued for processing/refining and sale/transportation.

 

IUP OPK is granted for a period up to 30 years, and is extendable for 20 years for each extension. Regulation 34/2017 is silent on how many extensions are permissible. Previously, IUP OPK for sale and transportation was granted for a maximum period of 5 years and extendable for up to 3 years for each extension, while IUP OPK for processing and refining was granted for a maximum period of 20 years (including 2 years of construction) and extendable for up to 10 years for each extension. The longer initial term should provide reassurance to investors willing to invest in capital intensive processing and refining facilities that they will be afforded sufficient time during the initial term of the IUP OPK to generate returns on their significant investment.

 

Change of Investment

 

Under the previous regulatory regime, specific approval was required for any change of investment and source of financing of the mining company. Certain court decisions in the context of insolvency proceedings involving mining companies interpreted that this requirement extended to contingent liabilities, such as guarantees granted by the mining company, and also could render any guarantees or loans not covered by an approval invalid or unenforceable (rather than simply an administrative compliance breach by the mining company itself).

 

Under Regulation 34/2017, only transfer of shares and change of the BOD and BOC will require prior recommendation from the Director General on behalf of the Minister. This requirement is applicable to the holder of IUP, IUPK and IUP OPK.

 

Mining Services

 

IUJP will be issued by the Minister for mining services carried out in multiple provinces, or issued to a PMA Company. Where the holder of an IUJP changes status to a PMA Company, the relevant Governor must hand over the IUJP to the Minister for the IUJP to be re-issued by the Minister. The application for obtaining IUJP will be submitted to and processed through BKPM – the Investment Coordination Board (for an application to the Minister) or the Integrated One Door Services of the Provincial Government (for an application to the Governor). Regulation 34/2017 maintains a 5-year term for IUJP, with the possibility for 3 year extensions for each extension.

 

The IUJP will be issued for specific services of the types listed in attachment IVB to Regulation 34/2017. Regulation 34/2017 abolishes the distinction between “core” and “non-core” mining services adopted by the previous regulatory regime. Instead, Regulation 34/2017 contemplates a specific list of services requiring IUJP (essentially based on the previous list of “core” services under the previous regulatory regime).

 

However, there remains a registration requirement that will be issued by the Directorate General of Minerals and Coal or Governor (as applicable) to provide mining services other than those listed in Regulation 34/2017, or to provide transportation services, to the holder of IUP/IUPK. In this sense, the concept of registering to provide “non-core” mining services does remain; albeit not based on a defined list of “non-core” services but instead a general concept of providing mining services to mining companies. In any event, this registration should be a largely administrative process given that no technical expertise needs to be disclosed as part of the application process.

 

Regulation 34/2017 also abolishes the distinctions between different types, classifications and qualifications of mining services companies.6 In so doing, the regulation has also relaxed the requirement for the holder of IUP/IUPK to tender or at least make announcement prior to using a mining services PMA company.

 

Regulation 34/2017 reinforces the limitation on services that can be outsourced to mining services companies in the context of mineral extraction. The services that can be outsourced in this context include the stripping of overburden, and the construction of tunnel access to veins or coal seams for underground mining. Industry participants have long argued this limitation is an unnecessary limitation on mining services from a global mining practice stand-point, however the limitation ultimately derives from the 2009 Mining Law itself, and therefore would require a change in law to remove. Regulation 34/2017 does not, however, expressly contemplate a compromise solution recognised in previous regulations on mining services – the ability for the mining company to effect mineral extraction services via a “wet lease” of equipment from the mining services company. It appears therefore that this wet leasing scheme reverts to operating somewhat in a “grey area”, and further clarification from the Government will likely be required on this issue.

 

Finally, Regulation 34/2017 preserves the previous prohibitions on:

 

• a holder of IUJP providing mining services to its parent company or affiliated IUP/IUPK holders without an approval from the Minister (unless there is no local mining services company available or no other mining services company is interested or capable of providing the services); and
• a holder of IUJP transferring its IUJP to a third party.

 

1  Government Regulation No. 1 of 2017 issued on 11 January 2017 sets out the fourth amendment to Government Regulation No. 23 of 2010 regarding implementation of mineral and coal mining business activities.

2  Law No. 23 of 2014.

3  Regulation 34/2017 replaced the following regulations:

• MEMR Regulation No. 18 of 2009 on procedures for changes of investment in the framework of contract of work and coal contract of work;
• MEMR Regulation No. 28 of 2009 on undertaking mining services of coal and minerals, as amended;
• MEMR Regulation No. 27 of 2013 on procedures and stipulation of divestment price and change of investment in general coal and minerals mining; – provisions on procedures of mandatory divestment and pricing have been revoked by MEMR Regulation No. 7 of 2017 issued earlier this year;
• MEMR Regulation No. 32 of 2013 on Procedures for Granting Special Permit in Coal and Mineral; and
• Decree of MEMR No. 555.K/26/M.PE/1995 on Work Health and Safety in General Mining – to the extent with granting of permits.

4  A PMA company is an Indonesian limited liability company with foreign shareholders.

5  Article 8 of Regulation 34/2017. The commitment guarantee is in the form of a certificate of deposit placed with a government owned bank in favor of the Directorate General of Minerals and Coal.

6 The previous regulatory regime distinguished between different types of mining services companies, based on domicile and equity of the company (local, national, PMA company); different classifications (based on type of services provided); and different qualifications of mining services company (based on net assets).

 

 

For further information, please contact:

 

Widyawan, Senior Partner, Widyawan & Partners

widyawan@linklaters.com