Key points:
- The Bill on Mineral and Coal Mining (New Mining Law) was passed by the Indonesian Parliament on 16 December 2008 and provides for a new system of mining permits.
- The New Mining Law gives the government wide ranging powers to control the level of production of minerals and coal and the amount exported, and to determine the priority of use of minerals and coal for domestic purposes.
- The New Mining Law also imposes an obligation to process or refine commodities within Indonesia.
The Bill on Mineral and Coal Mining (New Mining Law) was passed by the Indonesian Parliament on 16 December 2008. The New Mining Law introduces numerous fundamental changes to the manner in which the mining industry in Indonesia is regulated. Possibly the most significant aspect of the New Mining Law from the point of view of foreign investors is the abolition of the Contract of Work (COW) and Kuasa Pertembangan (KP) system and its replacement with a system of mining permits.
The New Mining Law is intended to be general in nature with specific detail to be provided in the implementing regulations. At least 20 implementing regulations will likely be required to implement the New Mining Law. These implementing regulations are yet to be issued, which currently makes it difficult to interpret many provisions of the New Mining Law with certainty.
Licencing regime
COWs and KPs have been replaced with various forms of mining licences (principally the Izin Usaha Pertambangan or IUP), to be issued by either the Central Government (government), the provincial governments or the regional governments, depending on the size and location of the relevant area.
Licences to be issued include:
- Exploration IUPs and Production/Operation IUPs
- People’s Mining Permits (IPRs) which will be granted for smaller mining projects, and
- Special Mining Business Permits (IUPKs) which are licences to be granted over State Reserve Areas (being areas that have been declared reserved as being of national strategic interest), comprising of Exploration IUPKs and Production/Operation IUPKs.
Foreign ownership of IUPs
The New Mining Law is silent as to any restrictions on foreign ownership of IUPs. This is a significant departure from the previous KP regime, where KP holders were required to be Indonesian nationals or Indonesian companies which are controlled and managed by Indonesians.
Granting of IUPs
Depending on the geographical location of the proposed mining area, IUPs can be granted at either municipality, regency, regional or national level. IUPs can be granted to incorporated entities, cooperatives or individuals. There may be requirements for the grant of an IUP to be by way of public tender (for metallic minerals and coal).
Further provisions dealing with the procedures for granting IUPs will be set out in the undrafted implementing regulations. Similar considerations apply to IUPKs.
Obligation to process or refine concentrate in Indonesia
The New Mining Law imposes an obligation on the IUP holders to ‘increase the added value of the mineral or coal resources’. This materialises in an obligation to process or refine the relevant commodity within Indonesia. This obligation has a serious impact on existing mining operations in Indonesia, particularly in respect of existing production KP holders, who are faced with the alternatives of either constructing or using their own domestic processing and refining facilities, or using the facilities of others.
Reporting obligations
The New Mining Law requires the holders of IUPs to provide the government and any relevant governor, regent or mayor with a report on the proposed usage of all parts of the mining area, for both exploration and production licences. The detail on this reporting obligation will be provided in the undrafted implementing regulations.
Domestic market obligation and control of sale and export of minerals
The New Mining Law gives the government wide ranging powers to control the level of production of minerals and coal and the amount exported and to determine the priority of use of minerals and coal for domestic purposes. An implementing regulation will be issued to give further detail on this topic.
Obligation to engage domestic mining services
The New Mining Law contains an obligation on all IUP holders to engage domestic mining services companies unless such a company is unavailable, in which case a mining services company that is an Indonesian legal entity must be engaged.
Significantly, an IUP holder is prohibited from engaging a subsidiary or affiliate company to undertake mining services except with the approval of the Minister. Such approval will only be granted in the event that there is no other mining services company capable of, or interested in, carrying out the required services.
Royalties and other revenues
IUP holders are subject to prevailing state and regional royalty and revenue payments under
the New Mining Law.
Restrictions on sale or transfer of IUPs
IUPs may not be transferred to third parties. Further, the issued capital of corporate IUP holders may only be sold or transferred after a certain amount of exploration has been undertaken (the exploration requirement is not specified), and upon receipt of consent to the sale or transfer from the minister or the relevant governor, regent or mayor.
Thanks to Soemadipradja & Taher, our Indonesian partner firm, for providing input into this overview.
More information
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