Indonesian Insights

Written by Sofia Angeline Manalu

Although some progress has been made by the Government of Indonesia during 2011, the Government still has plenty of work to do to ease investment in the mining sector. The issuance of implementing regulations of the 2009 Mining Law is still on going despite the fact that Indonesia’s new mining law was issued three years ago.  As a consequence, no new mining business licenses for coal or minerals have been issued since the enactment of the 2009 Mining Law.

Likewise, the regulation requiring the domestic processing and refining  of minerals and coal is still unclear.  Overlapping land issues  also remain a fundamental issue, as does the issuance of a forestry moratorium by the President of Indonesia.

Issuance of Mining Business Licenses (IUP)

The Mining Law stipulates that new IUPs for exploration may only be issued by way of a tender. The rules of the tender process, as set out by the Mining Law, do not thoroughly cover all aspects of the tender process. As a result, no new IUPs for exploration have been issued. IUPs for production have been issued, but these are merely based on the extension of pre-existing IUPs for exploration. There have been no developments regarding clarification of the tender process or issuing new exploration IUPs in 2011.

Processing and Refinery

The Mining Law also sets forth the requirement to process and refine mineral and coal domestically before export. While the Mining Law and its implementing regulations ban the export of raw material exports as of 2014, the law does not clearly set out the extent  or form required for  domestically processed minerals and coal.  The Directorate General of Mineral and Coal (“DGMC”) advises the standards for processing based on its internal policy, which has been known to change over time.  Unlike coal, processing and refining minerals (such as copper, tin, gold, etc) are typically more complex and more costly than those for coal.

Mineral investors have to be certain of the extent or form that their minerals should be processed and/or refined domestically. Some mineral companies argue that the ability to domestically process their material is also not yet readily available in Indonesia. There is a draft ministerial regulation that should provide greater legal certainty in respect of this matter currently being prepared by the Energy and Mineral Resources Ministry. While the draft regulation was anticipated to be issued by the end of 2011, it has not been issued yet and it is unclear of the extent that the Ministry has responded to the industry’s concerns.

Separate from the requirement to process materials domestically, there have been discussions amongst the industry and government officials of an export tax on coal. These discussions are still in their infancy and observers disagree on whether a coal export tax will be implemented in the near future .

Overlapping Issues

The overlapping issues for mining rights remain a fundamental concern of every mining business in Indonesia.  Mining companies should know whether their mining areas are overlapping with other mining concessions, other business concessions or whether they are located within forestry areas. The importance of due diligence of mining rights was highlighted in 2011 when Churchill Mining Plc effectively lost their coal mining rights in East Kutai, East Kalimantan to Nusantara Group. While Churchill had obtained the required licenses, the local government and courts rejected their claims and upheld Nusantara’s licenses for the coal concession. Churchill alleged that Nusantara’s permits had expired years ago and the case is now pending with Indonesia’s Supreme Court.

To help settle the issue of overlapping rights, the Government formed a team called the BKPRN (Spatial Layout Coordinating Body or Badan Koordinasi Penataan Ruang Nasional) that will coordinate with all relevant ministries and institutions in preparing a spatial layout plan and utilization purpose for all areas within Indonesia.

Likewise, the DGMC on behalf of the Ministry of Energy and Mineral Resources (“MEMR”) is also working to clarify mining areas in Indonesia. In 2011, the MEMR published a central database on mining rights which compiled and reconciled data of all IUPs. By gathering and disseminating national data of IUPs, the MEMR aims to ensure coordination, verification and synchronization of IUPs issued by provincial governors, regents and mayors throughout Indonesia, to stimulate investment and increase state revenues. Prior to this initiative, Indonesia did not have an accessible central database on coal and mineral mining rights in Indonesia or integrated IUP data between the central and local governments.

The Forestry Moratorium

The President of Indonesia also issued a Presidential Instruction to all central and regional authorities to support the Government’s plan for a forestry moratorium by suspending the granting of forestry permits in “primary natural forests” as of May 20, 2011 for two years. There are considerable exemptions to this moratorium, including permits already given in principle by the Ministry of Forestry prior to the moratorium and extensions of existing permits.

In effect, mining companies operating in natural forests that have not yet obtained an in-principle approval must suspend mining activities until May 20, 2013.

Conclusion

While the Government has been making some progress in the mining sector this year, there are several important matters noted above which still require resolution. Ideally in 2012, the upcoming regulation on domestic processing requirements balances the need to be economically feasible and provide legal certainty for investors, while also supporting the domestic industry and increasing value to material exports.

This article is part of our 2011 Indonesian Law Review series, in which our attorneys discuss recent legal developments  over the past year and track the main trends in each industry. To date, we’ve also published reviews on Geothermal Mining & Power Production, Investment and Labour & Employment among others.