Indonesian mining regulations: notable changes and developments in recent years

Thursday 29 September 2022

Rahmat S S Soemadipradja

Soemadipradja & Taher, Jakarta

rahmat_s@soemath.com

Anandianty Febrina

Soemadipradja & Taher, Jakarta

anandianty_febrina@soemath.com

Alya Meutia

Soemadipradja & Taher, Jakarta

alya_meutia@soemath.com

Madeleine Jacobus

Soemadipradja & Taher, Jakarta

madeleine_jacobus@soemath.com

Introduction

In the past few years, the Indonesian mining sector has undergone several significant regulatory changes. The government claimed that these changes were intended to stimulate mining investments, create jobs and add value to natural resources in Indonesia as well as to simplify licensing procedures to benefit mining companies.

In June 2020, Law No 3 of 2020 (the ‘2020 Mining Law Amendment’) was introduced to amend Law No 4 of 2009 on Mineral and Coal Mining (the ‘2009 Mining Law’). It was soon followed by another ground-breaking amendment by the introduction of Law No 11 of 2020 on Job Creation (popularly known as the Omnibus Law), and details of the changes were further elaborated in its implementing regulations, namely:

  • Government Regulation (GR) No 25 of 2021 on Implementation of the Energy and Mineral Resources Sector (GR 25/2021); and
  • GR No 96 of 2021 on Implementation of Mineral and Coal Mining Business Activities (GR 96/2021).

Notable changes and developments in mining regulations

Licensing

INTRODUCTION OF THE RISK-BASED LICENSING REGIME

One of the major changes made by the 2020 Mining Law Amendment is the shift in authority over mineral and coal mining business licensing, which is now vested in the central government instead of by the central and/or regional government.[1]

Despite the emphasis on centralisation, the central government is given the authority to delegate licensing and permitting matters to the regional government in certain circumstances.[2]

The Omnibus Law introduced a new licensing regime, namely risk-based business licensing which categorises business activities into four different levels of risk: low, medium-low, medium-high and high risk.

Depending on the risk level of its business activity, a mining company may be required to obtain the following licensing document(s):

  • business identification number (nomor induk berusaha or NIB);
  • standard certificate; and/or
  • licence.[3]

Mineral and coal mining business activities are generally categorised as high risk[4] and therefore would be required to have a NIB and a specific business licence (eg, a mining licence (izin usaha pertambangan or IUP) or a special mining licence (izin usaha pertambangan khusus or IUPK)). Specifically for medium-high risk businesses (eg, consultation and/or planning activities in the mining service business),[5] the laws require the relevant company to have a NIB and a newly introduced instrument called a standard certificate.

TRANSFER OF MINING LICENCE OR AREA

While under the 2009 Mining Law, a transfer of either form of mining licence was prohibited, the 2020 Mining Law Amendment allows such transfer, subject to prior approval of the Minister of Energy and Mineral Resources (MEMR).[6]

Such approval will be given if the licence holder: (1) has completed exploration as evidenced by data regarding the availability of resources and reserves; and (2) has satisfied administrative, technical, environmental and financial requirements.[7]

Also worthy of note is that a state-owned enterprise may transfer part of its mining area provided that it satisfies several regulatory prerequisites, including the requirement for the state-owned enterprise to own at least 51 per cent of shares in the acquirer (ie, the recipient of the transferred area).[8]

We have yet to see this in practice.

CLARITY FOR SMELTER COMPANIES

Before the introduction of the 2020 Mining Law Amendment, a processing and/or smelting business activity (smelter company) could be considered as being under the auspices of two ministries, the MEMR and the Ministry of Industry (MoI). This ambiguity often caused confusion with respect to the licensing and supervisory functions of the ministry. Accordingly, it was common for a smelter company to obtain licences issued by both:

  • the MoI, in the form of an industry licence (izin usaha industri or IUI); and
  • the MEMR, in the form of a production operation mining licence (izin usaha pertambangan operasi produksi) or, if the company did not have a mining licence, a specific licence to perform processing and/or refining activities (izin usaha pertambangan operasi produksi khusus untuk pengolahan dan/atau pemurnian or Specific IUP-OPK).

The changes introduced require existing Specific IUP-OPKs to be transformed into an IUI within a year of the promulgation of the 2020 Mining Law Amendment (10 June 2020),[9] which means that a standalone smelter would now come under the authority of the MoI. This is different to mining companies that have integrated processing and/or smelting facilities where the licence and authority remain under the authority of the MEMR. It is now clear that a standalone smelter and an integrated smelter-with-mining-activity are under the auspices of a different authority.

Divestment

The previous law, the 2009 Mining Law, already required a foreign investment mining company to gradually divest 51 per cent of its shares to an Indonesian party (ie, the central government, the regional government, a state-owned enterprise, regional-owned enterprise or a local Indonesian company) after a certain period of commercial production.[10]

Divestment requirements, however, are now more comprehensive and vary depending on whether a company has integrated processing or refining facilities and the type of mining method undertaken. We set out below the divestment requirements based on each type of mining company:[11]

  • a company using open pit mining method but is not integrated with mineral processing and/or refining facilities or, in respect of coal, coal development and/or utilisation facilities:

Number of years after production commences

Minimum shareholding of Indonesian participants

10

5%

11

10%

12

15%

13

20%

14

30%

15

51%

  • a company using open pit mining method that is integrated with mineral processing and/or refining facilities or, in respect of coal, coal development and/or utilisation facilities:

Number of years after production commences

Minimum shareholding of Indonesian participants

15

5%

16

10%

17

15%

18

20%

19

30%

20

51%

  • A company using underground pit mining method but is not integrated with mineral processing and/or refining facilities or, in respect of coal, coal development and/or utilisation facilities:

Number of years after production commences

Minimum shareholding of Indonesian participants

15

5%

16

10%

17

15%

18

20%

19

30%

20

51%

  • A company using an underground pit mining method that is integrated with mineral processing and/or refining facilities or, in respect of coal, coal development and/or utilisation facilities:

Number of years after production commences

Minimum shareholding of Indonesian participants

20

5%

21

10%

22

15%

23

20%

24

30%

25

51%

GR 96/2021 further provides that an IUP holder that has more than 49 per cent foreign shareholding is allowed to transfer the foreign party’s shares to a third party before the divestment requirement is required to commence, provided, however, that the shares must first be offered to a state-owned enterprise.[12]

Fiscal incentives for coal added-value activities

Coal mining companies are obliged to pay royalty of 3 to 7 per cent of the sale price of the coal produced per tonne.

Under the Omnibus Law and GR 25/2021, a coal mining company that holds a coal mining licence and carries out added-value activities (eg, coal briquetting, coal liquefaction, coal gasification) may now be able to receive fiscal incentives, particularly in the form of an exemption from royalty payments.[13]

The granting of the exemption, however, takes the following matters into consideration:

  • energy independence and meeting the need for industrial raw materials;
  • the amount of coal used in the coal added-value activities; and[14]
  • approval of the minister of finance.[15]

Recent coal export ban

On 31 December 2021, the Indonesian government announced a month-long ban on the export of coal[16] after supplies for domestic power plants fell to critically low levels, with the risk that about 20 power plants generating 10,850 megawatts could be out of service.

The government has the authority to impose a ban to prioritise minerals or coal for domestic interests.[17] A holder of a coal mining licence is essentially required to prioritise mineral or coal demands for domestic needs[18] and may only sell overseas after the fulfilment of these needs.[19]

Although the ban was due to continue until 31 January 2022, the government decided to gradually lift the ban from 12 January after a backlash from several parties, including those from Japan, South Korea and the Philippines. Luhut Binsar Pandjaitan, the coordinating minister for maritime affairs and investment, reasoned that since coal supplies for domestic power plants had increased and made it through the critical period, the government could begin to lift the ban not long after it was issued.

As indicated by recent news, to avoid any recurrent domestic coal crisis, the government may change its policy on the domestic market obligation to require coal miners in Indonesia to supply a higher percentage of their annual production to the domestic market.

Conclusion

Recent regulatory developments reflect the efforts of the Indonesian government to improve the investment climate in the mining sector but also to protect the national interest. The central government seems to be playing a more significant role going forward to attract more investment, in accordance with the spirit of the Omnibus Law.

Several matters that used to cause concerns for the mining industry (eg, the authority over smelter companies) have now been clarified, providing more business certainty in the long run. It remains to be seen whether we are going to see further changes with more definitive implementing regulations in the future.


[1] Art 35(1) of the 2020 Mining Law Amendment.

[2] Ibid, Art 35(4).

[3] Ibid, Art 35(2).

[4] Appendix of GR No 5 of 2021 on the Implementation of Risk-based Business Licensing.

[5] Appendix III of MEMR Regulation No 5 of 2021.

[6] Art 93(1) of the 2020 Mining Law Amendment.

[7] Ibid, Art 93(2).

[8] MEMR Decree No 221.K/HK.02/MEM.B/2021 on Guidelines for the Transfer of Mining Business Licence/Special Mining Business Licence and Partial Transfer of Mining Business Licence Area/Special Mining Business Licence Area in Business Activities of the Mineral and Coal Mining Sector.

[9] Art 169C, letter E of the 2020 Mining Law Amendment.

[10] Art 112 of the 2009 Mining Law.

[11] Art 147(2) of GR 96/2021.

[12] Ibid, Art 148(1)(2).

[13] Art 128A(2) of the 2009 Mining Law as amended by the Omnibus Law and Article 3(1) of GR 25/2021.

[14] Art 3(2)(3) of GR 25/2021.

[15] Ibid, Art 3(5).

[16] Director-General of Mineral and Coal Letter No B-1611/MB.05/DJB.B/2021 dated 31 December 2021.

[17] Art 5 of the 2020 Mining Law Amendment.

[18] Art 157(1) of GR 96/2021.

[19] Ibid, Art 158(3).

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