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25 July, 2017
While the Indonesian mining industry continues to face significant challenges and regulatory uncertainty, the Minister of Energy and Mineral Resources (MEMR) recently issued a new regulation which introduces some positive simplifications to the licensing framework for mining and mining services businesses in Indonesia.
In May 2017, MEMR issued Regulation No. 34 of 2017 regarding Licensing in the Mineral and Coal Mining Sector (MEMR 34/2017). MEMR 34/2017 was further implemented and clarified through Circular Letter No. 10.E/30/DJB/2017 regarding the Implementation of MEMR 34/2017 (Circular Letter) issued by the Director General of Minerals and Coal (DGMC) in June 2017.
MEMR 34/2017 revokes and replaces a number of key long-standing regulations related to the mining and mining services industry. Fundamentally, MEMR 34/2017 consolidates many of the previous regulations and MEMR policies without making fundamental changes. However, in several ways, MEMR 34/2017 introduces positive reforms including, by streamlining license application processes (including removing the need for certain permits), increasing the validity period for certain licenses, allowing parties longer periods to apply for license extensions and removing the requirement for prior regulatory approval for certain administrative changes to mining companies. However, curiously, given that it was only issued so recently, certain provisions of MEMR 34/2017 have now been revoked (albeit that the revoked provision are almost entirely restated) by MEMR Regulation No. 42 of 2017 on Supervision on Energy and Mineral Resources Business Sectors (MEMR 42/2017) which was issued on 14 July 2017. These regulatory changes are discussed in further detail below.
Reduced regulatory approvals required for mining companies
The previous regulatory regime included the administratively burdensome and time-consuming requirement for mining companies to obtain prior recommendations and/or approvals from the relevant mining business license issuing authority for any amendments to its Articles of Association, any changes to its approved investment/source of funds or any change of its status to become a foreign investment company. These requirements have led to some high profile disputes in which local mining companies claimed that the failure to obtain such recommendations and/or approvals may render any subsequent actions (including obtaining or securing loans, which constitute a change of investment/source of funds) as legally invalid and contractually unenforceable under Indonesian law.
However, under MEMR 42/2017 (in relation to mining companies under the authority of MEMR) and under MEMR 34/2017 and the Circular Letter (in relation to mining companies under the authority of the relevant Governor), prior recommendation/approval is no longer required for those actions. Instead, prior recommendation/approval from DGMC (on behalf of the MEMR) or Governor, as relevant, is now only required for changes to the share composition or the composition of the board of directors or board of commissioners of mining companies. Under the provisions of MEMR 34/2017, mining companies may now undertake changes to their approved investment/source of funds (including changes to paid-up capital) in accordance with their approved work plan and budget which, pursuant to the Circular Letter, will be effective as of the approved 2018 work plan and budget.
These requirements to obtain a prior recommendation/approval (including in relation to approved work plans and budgets) apply to the holders of mining business licenses, processing and refining mining business licenses and special mining business licenses as well as to the holders of contracts of work (COW) and coal contracts of work (CCOW).
This is a welcome regulatory reform and should relieve some of the administrative burden (and delay) that is routinely faced by mining companies doing business in Indonesia.
Revocation of authority for regents/mayors to issue mining and mining services licenses
Under the previous regulatory regime, mining business licenses (including for exploration, production operation or processing and refining) as well as mining services business licenses could be issued by MEMR, the governor or the relevant regent/mayor depending, generally, on the location of the relevant mining or business area. However, MEMR 34/2017 has now completely removed the ability for regents and mayors to issue any further mining business licenses or mining services business licenses, thereby improving, in stages, the consistency of the mining sector licensing framework across Indonesia and hopefully removing the scope for some of the abuses that occurred under the previous decentralized mining licensing system. We note that this revocation of the authority of regents/mayors is consistent with the 2014 Regional Autonomy Law; however, the provisions of the 2009 Mining Law have not yet been adjusted to reflect this change. Under the new regulatory regime, exploration and production operation mining business licenses will now only be issued by MEMR or the relevant Governor. Such mining business licenses will only be issued by MEMR if:
- the applicant is a foreign owned company;
- the relevant mining area is located in more than one province, is directly adjacent to other countries or, in relation to exploration mining business licenses only, is more than 12 miles from the coastline;
- the applicant is a public company which owns more than one metal mineral or coal mining business license and such mining business license area is in more than one province; or
- the application is in relation to a special production operation mining business license (IUPK).
Similar rules (particularly in relation to foreign owned company status and location) apply to the relevant issuing authority for processing and refining mining business licenses and mining services business licenses.
Removal of requirement to obtain transportation and sales mining business licenses
Under the previous regulatory regime, companies engaged in mining sales and transportation activities were required to obtain a separate transportation and sales mining business license.
MEMR 34/2017 now completely removes the requirement for a mining company to obtain a transportation and sales mining business license. Instead, MEMR 34/2017 and, particularly, the Circular Letter state that mining production operation license holders are able to cooperate with third parties for its transportation and sales activities, provided that such third party has obtained a transportation and sales company registration certificate from the DGMC or the Governor, as relevant. However, we note that the relevant Ministry of Trade regulations still need to be amended to allow the holders of such registration certificates to carry out the export of coal as part of their trading activities.
Further, MEMR 34/2017 expressly provides that the holders of processing and refining mining business licenses will be entitled to undertake transportation and sales activities in relation to their processed and refined products.
Processing and refining licenses
MEMR 34/2017 also makes several notable changes to the licensing regime for processing and refining mining business licenses. In particular, under MEMR 34/2017:
- processing and refining mining business licenses can now be issued with a term of up to 30 years with each extension for up to 20 years (this is increased from the previous maximum period of 20 years with each extension of up to 10 years)
- processing and refining mining business license holders can now apply for an extension of their license between one to five years prior to the expiry of their existing license (this is increased from the previous period of two to six months prior the expiry of the relevant license)
- the application process for obtaining a processing and refining mining business license has now been simplified and, as expressly stated in the Circular Letter, there is no longer any requirement to obtain an initial in-principle processing and refining mining business license.
Each of these changes to the licensing regime should allow for easier processes and increased long-term certainty for investors in the processing and refining industry.
Mining services business licenses
Another set of reforms introduced by MEMR 34/2017 is in relation to the licensing regime for mining services business licenses, including:
- mining services business licenses can now clearly be extended for up to 3 years for each extension (this was not previously expressly regulated);
- mining services business license holders can now apply for an extension of their license between two to six months prior to the expiry of their license (this is increased from the previous period of up to one month prior to the expiry of the relevant license which, in practice, often led to a period of time in which the license technically expired before it was renewed); and
- the documentary requirements for applying for an extension of an existing mining services business license are now also expressly regulated and clarified.
However, unfortunately, MEMR 34/2017 does not provide the prescribed form of certain applications, statement letters and implementation reports (which were previously expressly regulated).
In addition to the above, MEMR 34/2017 has removed the detailed list of specific non-core mining services activities which require a statement of registration issued by the relevant licensing authority. Instead, MEMR 34/2017 requires any company which carries out supporting activities other than core mining services to obtain a registration certificate from the DGMC or the relevant governor, as applicable.
Adjustment to the stages of work for the holders of COWs and CCOWs
The terms of several COW/CCOWs include up to five stages of operations (i.e. the stages of general survey, exploration, feasibility study, construction and operation activities). However, pursuant to the terms of MEMR 34/2017, all COW/CCOW holders are now required (within 6 months from the issuance of MEMR 34/2017, i.e. by 9 November 2017) to adjust their mining activities into the following two stages only:
- exploration stage: consisting of general survey, exploration and feasibility study activities; and
- production operation stage: consisting of construction, mining, processing and/or refinery and transportation and sales activities.
While the implementation of these provisions in practice remains unclear, based on the provisions of MEMR 34/2017, it appears that a COW/CCOW holder which has commenced production operation activities in any part of its mining area is required to upgrade its entire mining area to the production operation stage. It appears that these changes are aimed at ensuring that COW/CCOW holders only have one operation stage of mining within a single COW/CCOW. Notwithstanding the upgrade of such mining areas, MEMR 34/2017 provides that any actual production operation activities can only be performed by a COW/CCOW holder within a particular upgraded area once it has complied with the relevant prevailing laws and regulations.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
