14 Jul 2020
Indonesia’s New Mining Law Heralds Significant Change but Challenges Lie Ahead

Indonesia’s Parliament (Dewan Perwakilan Rakyat / DPR) and Government have availed themselves of the public’s preoccupation with the Covid-19 pandemic to successfully push through important new mining legislation with a minimum of publicity, thus avoiding the concerted opposition that thwarted earlier attempts to reform the sector.

The new legislation (Law No. 3 of 2020 / the “New Law”, effective 10 June 2020)[1] significantly amends (but does not entirely replace) Law No. 4 of 2009 on Coal and Mineral Mining (the “Old Law”).

As mining is an important sector of the Indonesian economy, we will discuss the key changes brought about by the New Law in some detail in this ABNR Legal Update.

Note: Given the large number of abbreviations employed in the New Law, a list of the most common of these is provided for the convenience of the reader at the end of the update.

KEY CHANGES UNDER NEW LAW

The most important changes brought about by the New Law relate to the following aspects:

1. Centralization
2. Licensing
3. Conversion of Contracts of Work and Coal Contracts of Work
4. Rights and Obligations of IUP and IUPK Holders
5. Divestment Obligations
6. Processing and Refining
7. Mining Services
8. Government Involvement in Land Disputes
9. Rules on Unprocessed Ore Exports

We will now discuss each of the above in greater detail.

A. Centralization

Under the Old Law, authority over the mining sector was shared by central and regional government. By contrast, the New Law vests virtually all authority over the mining sector in the center, including all regulatory, licensing, management, control, and supervisory authority. However, the central government may delegate authority to regional (provincial) government as it deems fit.

The New Law establishes a transitional period during which regional government will retain its management authority over mining for 6 months or until the central government has issued ancillary/implementing regulations for the New Law, whichever is the earlier. However, during the transition period, regional government will not have authority to issue new licenses. Shortly after the enactment of the New Law, the Ministry of Energy and Mineral Resources (MEMR) stated in a circular sent to regional governments that the prohibition on issuing new licenses applied only to those listed in the New Law. Regional governments may continue to issue certain licenses and approvals, including extensions of mining business licenses for production operations (Izin Usaha Pertambangan Operasi Produksi / “IUPOP”).

B. Licensing

Under the New Law, companies that wish to undertake mining or related commercial activities are required to obtain a set of operational documents from the central government. These consist of (i) a Business Identification Number (Nomor Induk Berusaha / “NIB”), (ii) a Standards Certificate, and/or (iii) a License. While the New Law attempts to integrate the mining licensing regime with the Online Single Submission System (“OSS”),[2] it fails to provide any explanation as to what a Standards Certificate is or from which organization it should be obtained.

Importantly, the New Law significantly simplifies the situation as regards the key license issued for mining activities, namely, the Mining Business License (Izin Usaha Pertambangan / “IUP”). Previously, the IUP regime comprised two separate components (effectively 2 separate licenses): one IUP for exploration and another IUP for production. By contrast, now both exploration and production are covered by a single IUP. This gives an IUP holder the assurance that it will be able to continue to the production stage after having invested in exploration activities.

Holders of existing mining licenses must obtain the above operational documents and adjust their existing licenses so as to comply with the provisions of the New Law within 2 years of its enactment.

The New Law also introduces a number of new licenses for specific purposes, such as the Stone Mining License (Surat Izin Penambangan Batuan, “SIPB”) for quarrying, and the Assignment License (Izin Penugasan) for the extraction of radioactive minerals.

The following table presents a comparison of the licenses established by the Old Law and those prescribed by the New Law:

C. Conversion of Contracts of Work and Coal Contracts of Work

The New Law provides that an existing Contract of Work (Kontrak Karya / COW) or Coal Contract of Work (Perjanjian Karya Pengusahaan Pertambangan Batubara / CCOW) may be extended by its conversion into an IUPK-Continuing Contractual Operations (IUPK sebagai Kelanjutan Operasi Kontrak/Perjanjian) – this conversion process was previously governed by an ancillary/implementing regulation (MEMR Regulation No. 15/2017). The New Law affirms that an IUPK that results from conversion will be valid for 10 years and may be extended for another 10, provided that the COW/CCOW was not previously extended.

As part of such COW/CCOW conversion process, the New Law requires the government to make endeavors to increase state revenue. Such endeavors shall include the restructuring of taxes and royalties and other fees that will be payable after COW/CCOW conversion, as well as total mining areas in accordance with development plans approved by MEMR. This could have financial implications for miners as COW/CCOW holders benefit from specific provisions of their respective contracts that result in them paying lower taxes, royalties and other charges than would otherwise be the case. Upon the conversion of their COW/CCOW into IUPK, these fiscal incentives will no longer apply with the result that they could end up paying more to the state, depending on the approach adopted by the government of the day.

The New Law also allows the holder of a COW/CCOW more time to apply to the MEMR for conversion of their existing contracts into IUPK. They may now apply for an IUPK up to 5 years before the COW/CCOW expires, thus providing greater certainty for their investments.

D. Rights and Obligations of IUP and IUPK Holders

D.1. Mine Roads

Under the New Law, holders of IUPs and IUPKs are required to use mine roads when carrying out their mining operations. The New Law further elaborates on arrangements for the use of / access to mine roads: (i) IUP/IUPK holders themselves may develop mine roads; (ii) IUP/IUPK holders may collaborate with other IUP or IUPK holders which are developing mine roads; (iii) IUP/IUPK holders may collaborate with third parties that have constructed and own mine roads. The latter is a common arrangement in practice but had previously not been subject to regulation.

D.2. IUP/IUPK Assignment

A significant change in the New Law relates to the assignment of an IUP / IUPK to a third party, which was prohibited under the Old Law. By contrast, such assignment is now permitted subject to MEMR approval. However, a number of minimum requirements must be satisfied:

1. The IUP / IUPK holder must have completed exploration operations, as evidenced by the availability of data on resources and reserves; and
2. The IUP / IUPK holder must fulfill the prescribed administrative, technical, and financial requirements.

Additional requirements and assignment procedures are to be established by ancillary/implementing regulation. Depending on those requirements and procedures, IUP / IUPK assignment could become an option when structuring an acquisition of mining interests.

D.3. Environmental Protection

The New Law imposes additional requirements on IUP / IUPK holders as regards the protection of the environment and local communities, including more rigorous rehabilitation and post-mining obligations. The holder of an IUP / IUPK must now complete all (100%) of their reclamation and post-mining obligations, and deposit a rehabilitation bond and/or post-mining bond. Those who fail to comply with these obligations are liable to criminal sanctions of up to 5 years in jail and fines of up to Rp 100 billion. In addition, non-compliant former IUP / IUPK holders may be ordered to cover the cost of rehabilitation and post-mining cleanup work.

D.4. Exploration Operations

The New Law imposes a new obligation on the IUPs / IUPK holders, namely, the obligation to conduct exploration activities every year and to set aside funds for such purpose to be known as the “mineral / coal reserves maintenance fund.” The New Law leaves the details of this obligation to be filled in by an ancillary/implementing regulation.

E. Divestment Obligations

The New Law now sets out the percentage divestment obligations that are applicable to foreign-invested mining companies. Holders of IUPs / IUPKs at the production-operational stage whose shares are majority-owned by foreign investors must gradually divest their foreign-owned shares so that 51% become owned by Indonesian parties. Indonesian parties may consist of the central government or a regional government, or a state- or local government-owned company, or a domestic private company. The fact that a specific percentage is now enshrined in statutory form should provide greater certainty to investors as the extent of their divestment obligations will no longer be subject to government discretion.

However, the New Law does not stipulate a timetable for commencement of the divestment schedule or for the completion of each stage of the divestment process. Thus, this is something that will continue to be dependent on government policy.

F. Processing and Refining

The New Law addresses the issue of duality of authority as between the MEMR and Ministry of Industry for the licensing of ore processing and refining. The question of whether such operations come within the authority of MEMR or the Industry Ministry will now depend on whether they form an integral part of or are separate from mining operations. Companies engaged in processing and refining that is discrete (separate) from mining operations are now only required to obtain an Industrial Business License (Izin Usaha Industri / “IUI”) from the Ministry of Industry and no longer need an IUPOP for Processing and Refining from the MEMR (under the previous system of dual authority, processing and refining companies were required to have both licenses)

An existing IUPOP for Processing and Refining must be converted into an IUI within one year of enactment of the New Law.

The duration of an IUP / IUP-based mining operation that is integrated with a processing facility is 30 years, extendable for further periods of 10 years per extension, subject to the fulfillment of various requirements. It is unclear how many times an integrated IUP may be extended, particularly if mineral reserves are exhausted. By way of comparison, the maximum term of an IUP / IUPK for mineral or coal mines that are not integrated with processing and refining operations is 20 years, extendable twice for a maximum period of 10 years each time.

G. Mining Services

An important change in the New Law related to mining services concerns the scope of a mining services business license (Izin Usaha Jasa Pertambangan / “IUJP”). Previously, such license did not cover actual mining operations. As a result, coal / mineral-ore extraction could not be carried out by a mining services company. The most common way to circumvent this restriction was through a wet lease heavy equipment rental. As mining services providers may now directly conduct mining operations, mining companies should be able to subcontract all of their mining operations to mining services providers. Thus, wet lease arrangements with mining services providers should no longer be necessary.

H. Government Involvement in Land Disputes

The New Law addresses government involvement in the settlement of land disputes. However, it fails to specify the extent and nature of this involvement. The key question is whether the government will only facilitate negotiations in disputes between mining companies and landowners or whether it will actively get involved in resolving disputes? Whatever the case, both parties involved in a dispute (land-title holder and mining company) will continue to have the option of bringing the dispute to court.

In addition, both central and regional government are required to provide assurance that there will be no changes to the zoning of mining concessions (which the New Law refers to as “mining license areas” (Wilayah Izin Usaha Pertambangan / WIUP). However, no details are given as to what form such assurance will take and whether an IUP holder will be entitled to compensation if zoning changes do occur.

I. Rules on Unprocessed-Ore Exports

The Amended Mining Law gives an additional three years from its enactment to holders of a COW, IUP and IUPK for minerals to export their unprocessed mineral ores, subject to the fulfillment of the prescribed requirements. To avail of this, the license holder should: (i) have commenced processing / refining operations; (ii) be in the process of constructing a processing / refining facility; or (iii) have entered into a collaboration agreement with another IUP / IUPK holder or a third party that has a valid processing and refining license. The sale of metallic mineral ores continues to be subject to export tax, as applicable under the relevant export and customs regulations.

This could turn out to be the final relaxation in the export rules for unprocessed ores as any further relaxation would theoretically require the New Law to be amended.

ABNR Commentary

Leaving aside the democratic ethics of pushing far-reaching legislation through the national legislature while the public’s back is metaphorically turned, there is no doubt that the New Law marks a step forward for Indonesia’s mining industry, which has long been held back by legal uncertainty. However, the precise extent of this step forward will only become apparent after the ancillary/implementing regulations that are required to give effect to the legislation have been issued.

In a recent development, it has been reported in the media that the New Law is now facing a challenge in the Constitutional Court, thereby joining a long list of other laws that have been hauled before the Court over the years as part of what seems to be a concerted effort by traditionalists to stymie economic reform. As to the chances of success of such challenge, nothing can be vouchsafed at this stage given the Court’s fondness for intervening in economic issues based on the state-control-of-resources provisions of the 1945 Constitution. Indeed, it is worth remembering that the Court found various parts of the Old Law to be unconstitutional on no less than four separate occasions.[3]

List of Abbreviations

1. MEMR: Ministry of Energy and Mineral Resources
2. IUPOP: Mining License for Production Operations (Izin Usaha Pertambangan Operasi Produksi)
3. NIB: Business Identification Number (Nomor Induk Berusaha)
4. OSS: Online Single Submission
5. IUI: Industrial Business License (Izin Usaha Industri)
6. IUJP: Mining Services License (Izin Usaha Jasa Pertambangan)
7. IUP: Mining License (Izin Usaha Pertambangan)
8. IUPK: Special Mining License (Izin Usaha Pertambangan Khusus)
9. SIPB: Stone Mining License (Surat Izin Penambangan Batuan)
10. WIUP: Mining License Area (Wilayah Izin Usaha Pertambangan)

Contact Us

Should you have any queries or require legal advice on how you can best protect your interests during this time of uncertainty, please contact any of the persons below, call us on +6221-2505125, or email us at info@abnrlaw.com.

Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com)

Mr. Nafis Adwani (nadwani@abnrlaw.com)

Mr. Agus Ahadi Deradjat (aderadjat@abnrlaw.com)

[1] Law No. 3 of 2020 on the Amendment of Law No. 4 of 2009 on Mineral and Coal Mining (Undang-Undang Nomor 3 Tahun 2020 tentang Perubahan atas Undang-Undang Nomor 4 Tahun 2009 tentang Pertambangan Mineral dan Batubara)

[2] The OSS is a centralized, online business licensing system operated by Indonesia’s Investment Coordinating Board (BKPM).

[3] Constitutional Court Decisions No. 10/PUU-X/2012, dated 22 November 2012; No. 32/PUU-VIII/2010, dated 4 June 2012; No. 30/PUU-VIII/2010, dated 4 June 2012; and No. 25/PUU-VIII/2010, dated 4 June 2012.

This edition of ABNR News and the contents hereof are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained herein. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.