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8 August, 2017
Indonesian Government Regulation No.1 2017 triggers major shifts in the country’s mineral and coal mining industries. Mineral mining companies who depend heavily on mineral exports will be particularly affected by the new policies. Primary changes require all companies operating under a Contract of Work to transfer to a single licensing regime, and introduce stringent mineral export processing standards.
Indonesian Government Regulation No. 1 of 2017, issued in January, is the fourth amendment to Government Regulation No. 23 of 2010 on the Implementation of Mineral and Coal Mining Business Activities (“GR 1/2017“).
GR 1/2017 has prompted the Minister of Energy and Mineral Resources (“MEMR”) to issue a suite of 3 (three) implementing regulations so far, as follows:
- MEMR Regulation No. 5 of 2017 regarding Minerals’ Increased Added Value through Domestic Mineral Processing and Refinery, dated 11 January 2017 (“MEMR Reg 5/2017“);
- MEMR Regulation No. 15 of 2017 regarding Procedure for the Granting of Production Operation Specific Mining Business License (Izin Usaha Pertambangan Khusus Operasi Produksi/IUPK OP) as Continuation of Contract of Work (CoW) Operation or Coal Mining Contract of Work (CCoW) dated 10 February 2017 (“MEMR Reg 15/2017”);
- MEMR Regulation No. 28 of 2017 regarding Amendment to MEMR Reg 5/2017 dated 30 March 2017 (“MEMR Reg 28/2017“).
Historically, the MEMR regulations originated from Law No. 4 of 2009 on Mineral and Coal Mining (the “Mining Law 2009”). Article 170 of the Mining Law 2009 requires holders of a Contract of Work (“CoW”) or Coal Contract of Work to commence their mining product processing and purifying activities domestically within 5 years from the enactment of Mining Law 2009 and no later than 12 January 2014.
Requirements for Mineral Exports
MEMR Reg 5/2017 and its amendment set out the requirements that holders of a CoW, Mining Business Operating Production License (Izin Usaha Pertambangan “IUP OP”) or Special Mining Business Operating Production License (Izin Usaha Pertambangan Khusus “IUPK OP”) must meet to continue exporting processed minerals (concentrates) and resume exports of unprocessed nickel and bauxite. In the first instance, mineral mining companies operating under a CoW must convert to an IUPK OP.
Further, both IUP OP and IUPK OP holders (including IUPK OP holders who have converted from a CoW) may only continue mineral exports for five years – up to 11 January 2022, and only if they satisfy the following conditions:
- that they have obtained the required export recommendation from the Directorate General of Mineral and Coal and the required export permit from the Ministry of Trade;
- that they have fully paid the export duty; and
- that they have complied with the minimum processing limit set forth in Attachment I of MEMR Reg 5/2017.
Conversion from a CoW to IUPK OP
The following are the provisions of the MEMR regulations regarding the conversion of the CoW into IUPK OP:
The application for the conversion must be submitted to the MEMR before the expiry of the CoW’s validity period. The application must be accompanied by the required territorial map, proof of the payment of the fees, and the work and budget plans.
The MEMR must issue its approval or rejection of the application at the latest 14 (fourteen) business days as of the submission of the complete application.
The issuance of the IUPK OP does not automatically terminate the CoW.
There are two types of IUPK OP:
1) IUPK OP with validity period until the expiration of the CoW (type 1); and
2) IUPK OP with validity period which covers the adjustment time for the operation’s continuity (type 2).
If a type-2 IUPK OP is granted, the CoW and its related consent documents will still prevail.
Upon the expiration of the type-2 IUPK OP, if a settlement with respect to the adjustment of IUPK OP is reached, the CoW and related documents between the Government and CoW holders become invalid simultaneously with the issuance of the new extended IUPK OP pursuant to the laws.
MEMR REG 28/2017 provides neither further explanation nor reference to the laws regarding the above IUPK OK. That said, Article 112 paragraph 2 of Government Regulation No. 1 of 2017 regarding Implementation of Mineral and Coal Mining Business interprets the situation by stating that “Contacts of Work and Coal Contracts of Work which have not obtained an extension approval may, upon their expiration, be extended into an extended IUPK OP for operation continuation purposes without going through a tender”.
Upon the expiration of the type-2 IUPK OP, if a settlement with respect to the adjustment of IUPK OP is not reached, the IUPK OP becomes invalid and the mining business is to be conducted under the CoW.
Conclusion
As mentioned above, the MEMR regulations are the follow-up regulations of Law No. 4 of 2009 regarding Mineral and Coal Mining, which initially introduced the regime shift from CoW to IUPK OP. The mechanism for conversion from a CoW to IUPK OP under the new regulations is not yet entirely clear. In particular, uncertainty remains over what the new terms and conditions under an IUPK OP will be in comparison to the existing CoW. There is also question over whether the requirements for contract conversion under MEMR Reg 5/2017 are legitimate under the existing mining law, and some speculation that the provisions will be challenged. Nevertheless, at present the regulations offer mining companies which depend on mineral exports little alternative but to convert to an IUPK OP in order to continue these activities. (by: Zensy Pratiwi, Wahyuni Hanindriyowati & Mahatma Hadhi)
For further information, please contact:
Woody Pananto, Partner, Ali Budiardjo Nugroho Reksodiputro (ABNR)
wpananto@abnrlaw.com
