INDONESIA
HERBERT SMITH FREEHILLS
4 indonesia
Mining activities in Indonesia are governed by
Law No. 4 of 2009 regarding Mineral and Coal
Mining (Mining Law 2009) and implementing
regulations issued pursuant to the Mining
Law 2009. Previously, mining activities were
regulated by Law No. 11 of 1967 on Mining.
Since the enactment of the Mining Law 2009,
mining authorisations are granted in the form
of a mining business licence (Ijin Usaha
Pertambangan or IUP). The Mining Law 2009
recognises that mining authorisations
granted prior to the enactment of the Mining
Law 2009 remain valid for the duration of
their existing term; however, such licences are
subject to certain adjustments as described
in the Mining Law 2009.
Where a mining companys activities are
likely to have a significant impact on the
environment, additional approvals and/or
recommendations will be required under Law
No. 32 of 2009 regarding Environmental
Protection and Management.
Where any part of the mining area is
designated as a forestry area, additional
forestry permits will be required for carrying
out activities in production forest or
protection forest, although only
underground mining is possible in protection
forest. No mining activities can be carried out
in areas designated as conservation forest.
Further, until 20 May 2013, a forestry
moratorium exists on the grant of new
forestry licences for any areas designated as
primary forests or peatland on the New
Licence Suspension Indicative Map, which is
attached to Instruction of the President No.
10 of 2011 regarding Suspension of New
Licence Issuance and Improvement of
Primary Natural Forest and Peatland
Management.
indonesia 43
4.1 Regulatory framework
The regulatory framework for the Indonesian
mining sector is built on the principle set out
in Article 33(3) of the 1945 Indonesian
Constitution which states that the land, water
and natural riches contained therein are
controlled by the state and are to be used for
the greatest prosperity and welfare of the
Indonesian people.
This principle is implemented in the Mining
Law 2009. As is common in Indonesia, the
Mining Law 2009 provides the general
framework and principles with details in
relation to implementation contained in
implementing regulations issued under it. To
date, the following implementing regulations
have been issued to give effect to Mining
Law2009:
Government Regulation No. 22 of 2010
regarding Mining Area (GR22)
Government Regulation No. 23 of 2010
regarding Implementation of Mineral and
Coal Business Activity (as amended by
Government Regulation No. 24 of 2012)
(GR23)
Government Regulation No. 55 of 2010
regarding Empowerment and Supervision of
Implementation of Mineral and Coal Mining
Business Management (GR55)
Government Regulation No. 78 of 2010
regarding Reclamation and Post-mining
(GR78)
Government Regulation No. 9 of 2010
regarding Categories of Tariffs for Non-Tax
State Revenues in the Ministry of Energy
and Mineral Resources (GR9)
Presidential Decree No. 3 of 2012 regarding
the Establishment of a Team to Evaluate and
44 indonesia
Renegotiate the Provisions of COWs and
CCOWs (PR3)
Minister of Energy and Mineral Resources
(MEMR) Regulation No. 18 of 2009
regarding Approvals Required to be
obtained by Existing COW and CCOW
Holders (MEMR Regulation 18/2009)
MEMR Regulation No. 28 of 2009 regarding
Implementation of Mineral and Coal Mining
Business Services (as amended by MEMR
Regulation No. 24 of 2012) (MEMR
Regulation 28/2009)
MEMR Regulation No. 34 of 2009
regarding Prioritisation of Supply of Mineral
and Coal Needs for Domestic Interests
(MEMR Regulation 34/2009)
MEMR Regulation No. 17 of 2010 regarding
Procedures for Determination of Mineral
and Coal Benchmark Prices (MEMR
Regulation 17/2010)
MEMR Regulation No. 12 of 2011 regarding
Procedure for Determination of Mining
Business Area and Information System of
Mineral and Coal Mining Area (MEMR
Regulation 12/2011)
MEMR Regulation No. 7 of 2012 regarding
Upgrading of Minerals Added Values
through Mineral Processing and Refining (as
amended by MEMR Regulation No. 11 or
2012) (MEMR Regulation 7/2012)
In addition to the above, there are several
decrees and decisions issued by both MEMR
and the Directorate General of Minerals and
Coal (DGMC) on more specific matters.
HERBERT SMITH FREEHILLS
4.2 overview of approval
process
(a) Licensing regime prior to the
Mining Law 2009 and status of
pre-2009 licences
The Mining Law 2009 represented a
significant overhaul of the previous regime.
Prior to the Mining Law 2009, mining
authorisations for companies were granted
pursuant to either (i) a contract of work
(COW) or coal contract of work (CCOW) or
(ii) a mining authorisation known as Kuasa
Pertambangan or KP.
Since the introduction of the Mining Law
2009, no new grants of KPs, COWs or
CCOWs are possible. However, pursuant to
the transitional provisions under the Mining
Law 2009, mining authorisations granted
before 2009 were grandfathered as follows:
COWs and CCOWs remain valid and will be
honoured for the remainder of their term.
However, the Mining Law 2009 also states
that the contract terms must be adjusted
within one year from the date of the Mining
Law 2009 (ie by 12 January 2010) to bring
them into line with the new law; and
KPs remain valid until their expiry date but
must have been converted into an IUP
within three months from the enactment of
GR23. GR22 also provided that a mining
area which had been granted to a KP holder
based on the previous mining legislation
must be determined as a Mining Business
Licence Area (Wilayah Ijin Usaha
Pertambangan or WIUP) within the Mining
Business Area (Wilayah Usaha
Pertambangan or WUP) within three
months of the enactment of GR22. This
means that all KPs should have been
HERBERT SMITH FREEHILLS
converted into IUPs and the determination
in respect of the relevant mining areas
should have been carried out by at the latest
30 April 2010.
Since the period within which the IUP
conversions and WIUP determinations were
required to take place under GR23 and GR22
respectively has now expired, all Indonesian
companies that previously held KP licences
should now have converted those licences
into the new form of IUP and their mining
areas should have been determined as a
WIUP within a WUP.
(b) Licensing regime under Mining Law
2009
The Mining Law 2009 introduced a new
licensing system for the grant of mining
authorisations for mining activities in
Indonesia. Under the Mining Law 2009 there
are three types of mining authorisations
which may be issued:
indonesia 45
a mining business licence (Ijin Usaha
Pertambangan or IUP) this is the most
common mining licence granted to most
companies through an auction process for
minerals and coal;
a special mining business licence (Ijin Usaha
Pertambangan Khusus or IUPK) this is a
mining business licence than can be granted
by MEMR over an area which has been
declared a state reserve area with priority to
state-owned entities and then through an
auction process for private participants for
minerals and coal; and
a community mining licence (Izin
Pertambangan Rakyat or IPR) this is
small-scale mining licences (not exceeding
10 hectares) granted to individuals, groups
of community members or cooperatives.
Since most private investors will be issued
with an IUP rather than an IUPK, we will
concentrate on IUPs for the rest of
thischapter.
46 indonesia HERBERT SMITH FREEHILLS

IUPs are granted in two phases, one for exploration and one for production. The
characteristics of each phase of IUP are set out below:

Types of IUP Activities Type of mineral Maximum period and

covered size of mining area
Exploration General survey, Metals Up to 8 years
IUP exploration and 5,000 Ha up to 100,000 Ha
feasibility study stages
of the mining process.

Special types of Up to 7 years

non-metallic minerals 500 Ha up to 25,000 Ha
(diamonds and gemstones,
limestone)
Coal Up to 7 years
5,000 Ha up to 50,000 Ha

Non-metallic minerals Up to 3 years

500 Ha up to 25,000 Ha

Rocks Up to 3 years
5 Ha up to 5,000 Ha
Production Construction, mining, Metals Up to 20 years, subject to two
Operation IUP processing and extensions for 10 years each
refinery, sales and Up to 25,000 Ha
transportation of
minerals.
Special types of Up to 20 years, subject to two
non-metallic minerals extensions for 10 years each
Up to 5,000 Ha

Coal Up to 20 years, subject to two

extensions for 10 years each
Up to 15,000 Ha
Non-metallic minerals Up to 10 years subject to two
extensions for 5 years each
Up to 5,000 Ha
Rocks Up to 5 years subject to two
extensions for 5 years each
Up to 1,000 Ha

Other business licenses can also be granted for specific activities in connection with the mining
process e.g. core and non-core mining services, transportation and sale of minerals and
processing and refining.
HERBERT SMITH FREEHILLS
(c) Grant of new IUPs
The general procedure for grant of IUPs is set
out in GR23, although further details are to
be provided by further ministerial regulation,
which is yet to be issued.
Prior to granting any new mining licenses, the
government is required to prepare a map
setting out the areas which have mineral or
coal potential and which are open for mining
activities. To this end, the government of
Indonesia is undertaking an exercise to
reconcile all the existing mining licences which
were granted prior to the introduction of the
Mining Law 2009. DGMC has issued the
results of the national reconciliation of IUPs in
the form of two clean and clear lists (Clean
and Clear List). Once all existing mining
licences granted prior to the introduction of
the Mining Law 2009 have been reconciled,
the government will issue a map showing
which areas are open for mining activities. It is
unclear at this stage when this mapping
exercise will be completed.
The process for awarding new coal or metal
mining licenses, to the extent that it has been
prescribed by GR23, is as follows:
depending on the location of the proposed
Mining Business Permit Area or WIUP, the
relevant authority (regent or mayor /
governor / MEMR) must announce in a
transparent manner the proposed WIUP at
least three months prior to the start of the
auction process;
the relevant authority must form an auction
committee for evaluation of the bids,
consisting of an odd number (the exact
number depends on which authority will
form the committee) of persons with
experience in the mining sector;
indonesia 47
companies wishing to bid for a WIUP must
satisfy various requirements prescribed by
the law, falling broadly into administrative,
technical and financial categories; and
once the preferred bidder is selected by the
auction committee, the auction committee
must issue a recommendation to the
appropriate authority to notify the
preferredbidder.
In order for the Exploration IUP to be issued,
the preferred bidder must submit an
application to the relevant authority within
five working days from the date of the notice
of the award of the WIUP. The relevant
authority for issuing the IUP for the WIUP will
depend on the location of the WIUP;
however, where the applicant for the IUP is a
foreign-owned company, the relevant
authority for issuing the IUP is MEMR. If the
preferred bidder fails to submit an application
within the five working day period, it will be
deemed to have withdrawn and the WIUP
will be offered to the next bidder in the
ranking, provided that the value of
compensation for access to data and
information is at least equal to the price
offered by the preferred bidder. If the suitable
party(ies) withdraws or is deemed to have
withdrawn, the WIUP will be re-auctioned.
A Production Operation IUP is granted as an
upgrade of the Exploration IUP subject to the
terms of the Exploration IUP, compliance with
law and a further ministerial regulation which
has not yet been issued. Holders of
Exploration IUPs are guaranteed to receive an
upgrade in the form of the Production
Operation IUP if they have complied with all
prescribed requirements to receive
anupgrade.
48 indonesia
(d) COWS and CCOWs under Mining
Law 2009
Adjustments to COWs and CCOWs
The Mining Law 2009 stipulates that existing
COWs and CCOWs will be honoured for the
remainder of their term. However, the Mining
Law 2009 also states that the contract terms
must be adjusted within one year to bring
them into line with the Mining Law 2009. No
details have been provided in the Mining Law
2009 on what this means although due to the
nature of COWs and CCOWs, any adjustment
to their terms must, in our view, be through
negotiation and agreement of both
government of Indonesia and the contractors.
Pursuant to PR3 the government of Indonesia
has established a team headed by the
Coordinating Minister for the Economy to
renegotiate COWs and CCOWs. Negotiations
between the COWs and CCOWs holders and
the government of Indonesia are as at the
date of publication ongoing and the
government of Indonesia has identified six
strategically critical issues that it wishes to
renegotiate. These include:
size of mining areas;
extensions of COWs and CCOWs;
state revenues;
divestment obligations;
domestic processing obligations; and
use of domestic goods and services.
Extension of COWs and CCOWs
Pursuant to GR23, extensions of COWs and
CCOWs which had not been extended prior
to the introduction of the Mining Law 2009
would be granted by way of conversion to
HERBERT SMITH FREEHILLS
IUPs by MEMR. Holders of COWs and
CCOWs will need to apply for an extension at
the earliest two years and at the latest six
months prior to the expiration of the current
term of the COW or CCOW and the mining
company will need to comply with prescribed
requirements set out in GR23. In deciding
whether to grant an extension, MEMR will
consider the potential of the mineral reserves
of the relevant working area and benefits to
the state in granting such an extension.
This language suggest that grant of
extensions to COWs and CCOWs in the form
of IUPs is not guaranteed (as was the case
pursuant to the terms of the COWs and
CCOWs themselves prior to the introduction
of the Mining Law 2009) and the government
of Indonesia will be able to refuse to grant
extensions and, instead, to declare such areas
as state reserve areas. In such a case, it will
be central government owned companies or
regional government owned companies that
will be given priority in applying for a mining
licence over such area.
(e) Obligations on mining companies
under Mining Law 2009
Divestment obligations
IUP holders
The Mining Law 2009 contains a divestment
obligation (applicable to IUP holders)
whereby foreign shareholders in such entities
must, following five years of commercial
production, divest shares to the central
government, the regional government, a state
owned enterprise, a regional owned
enterprise or a national owned enterprise.
GR23 contains some detail on the divestment
obligation, although further provisions on the
procedure applicable for share divestment
HERBERT SMITH FREEHILLS
and mechanisms will hopefully be prescribed
in further MEMR implementing regulations,
which have not to date been issued.
Under GR23, where a foreign party owns
shares in the entity holding an IUP (an IUP
Company) the foreign shareholders are
obliged to divest shares starting from the end
of the fifth year from commencement of
production in accordance with a time table
which would see local parties hold at least the
following percentages of the total issued
share capital of the IUP Company:
in the sixth year from commencement of
production: 20%;
in the seventh year from commencement of
production: 30%;
in the eighth year from commencement of
production: 37%;
in the ninth year from commencement of
production: 44%; and
in the tenth year from commencement of
production: 51%.
Once a requisite percentage of shares is sold,
Indonesian partys share must not be diluted
on a capital raising or otherwise.
Once the divestment process in any particular
year has commenced shares must be offered
in the following order of priority and an offer to
a party with the lower order of priority can
only be made after the parties with higher
order of priority have declined (or are deemed
to have declined) the offer of shares. The order
of priority under GR23 is as follows:
central government;
where the central government is not willing
to buy the shares, the divestment shares
must be offered to the provincial
government or the regency/municipal
government; and
indonesia 49
where the provincial government or
regency/municipal government is not
willing to buy the shares, the divestment
shares must be offered to state owned
enterprises and regional owned enterprises
through a tender process.
Where no priority party is interested in or
able to purchase the divestment shares, the
shares must then be offered to national
private Indonesian parties.
All offers must be made, and acceptances
received, within the relatively short
timeframes stipulated in GR23. Ultimately,
completion of the transfer of shares to an
Indonesian party is expected to occur no later
than ninety calendar days after the date a
particular priority party (in its order of
priority) expresses its interest in purchasing
the divestment shares, (or in the case of a
state owned enterprise or a regional owned
enterprise, from the date that such enterprise
wins a tender to purchase the
divestmentshares).
It is currently unclear whether priority parties
will be required to buy on a all or nothing
basis or whether they will be free to take up
part of the shares offered with the remainder
being offered to parties with lower order of
priority. Draft regulations on the divestment
process indicated that the central
government will not be required to buy on a
all or nothing basis and can instead decide to
purchase a portion of the shares offered. The
draft regulations also provide that provincial
and regional governments with claims to the
divestment shares must agree the percentage
of shares that go to each government and in
the absence of agreement, will be deemed to
have refused the offer.
50 indonesia HERBERT SMITH FREEHILLS

Given the sequential offering process to each localisations in Indonesia under COWs and
priority party, in practice the timing for any CCOWs which contained divestment
divestment process could be very long. obligations have proceeded on that basis).
Historically divestment processes by Equally, in our view, where a proportion of
Indonesian mining companies have been shares less than the requisite percentage of
notoriously protracted. the share capital in an IUP Company is held by
an Indonesian party, this proportion should
Where the divestment shares are not
count towards the relevant percentage of
transferred to an Indonesian party after the
localisation obligation under the Mining Law
relevant anniversary of the Production
2009. Again this is consistent with past
Operation IUP licence date, they must be
practice under COWs and CCOWs which
offered in the subsequent year under a similar
contained divestment obligations.
process. GR23 does not provide for a time
limit on how long IUP Companies will need to COW and CCOW companies
continue to offer the divestment shares for
Whether share divestment obligations apply
but, given the sensitive nature of the issue, in
to the companies holding COWs and CCOWs
our opinion it is likely that the government of
will depend on the precise wording of the
Indonesia will insist on the divestment process
relevant COW or CCOW. To the extent that
to continue annually until the requisite
the COW or CCOW contains a divestment
proportion has been sold to local parties.
obligation, foreign shareholders will continue
However, the divestment process for IUP
be subject to such obligation.
Companies has not yet been tested and it
remains to be seen how it will work in practice. The government of Indonesia has indicated
that the divestment of shares to local parties
It seems unlikely that the listing of the IUP
is one of the key areas that should be
Company itself on the Indonesia Stock
adjusted in COWs and CCOWs, given that in
Exchange, with a minimum public ownership
later generations of COWs and CCOWs the
of the requisite percentage of shares, will
percentage of shares to be divested to local
satisfy the divestment requirement. This
parties was often set at a much lower level
method is not specifically provided for in the
than the 51% stipulated in GR23. However,
Mining Law 2009 or GR23 and the provisions
such adjustments would have to be agreed to
of the draft divestment regulation support
by both the government of Indonesia and the
this conclusion.
mining companies and the government of
On the current wording of the Mining Law Indonesia would not be able to impose such
2009 and GR23, if an IUP Company already adjustments unilaterally.
has, at the relevant deadline, at least the
However, once the COW or CCOW is
relevant percentage of equity ownership held
extended by way of a conversion to IUP, the
by Indonesian parties, the foreign shareholders
mining companies would become subject to
would not need to follow the divestment
the divestment obligations under GR23,
process under GR23 and the divestment
although it remains to be seen how this
obligations under the Mining Law 2009
transition (and any subsequent divestments)
should be deemed satisfied. Officials at the
would be implemented in practice.
MEMR have verbally confirmed to us that this
is their intention (and to date share
HERBERT SMITH FREEHILLS indonesia 51

Appointment of mining services MEMR Regulation 28/2009 therefore

contractors prohibits mining companies from contracting
The Mining Law 2009 introduced an out actual mining activities to mining services
obligation for holders of IUPs to give priority companies. It remains to be seen how these
to local mining services companies and/or restrictions will be implemented in practice
national mining services companies. The given that many of the largest mining
Mining Law 2009 further elaborates that an companies in Indonesia have to date been
IUP holder may only engage a foreign owned operating on the basis of contracting out
mining services company (Other Mining significantly all mining activities to mining
Services Company) if a Local Mining Services services companies.
Company or National Mining Services
MEMR Regulation 28/2009 also prohibits
Company (both of which must be wholly
IUP holders from receiving any fees for work
Indonesian owned) is not available.
contracted out to mining services companies.
Further details in relation to the above
MEMR Regulation 28/2009 is stated to
obligation are set out in the MEMR
apply with immediate effect to all mining
Regulation 28/2009, which provides that an
services contracts entered into on or after 30
IUP holder may only engage an Other Mining
September 2009. Where a mining services
Services Company after publishing an
contract pre-dates MEMR Regulation
announcement in the local and/or national
28/2009, the mining services contract must
mass media and not finding a Local Mining
have been adjusted to comply with the
Services Company or a National Mining
provisions of MEMR Regulation 28/2009
Services Company which can fulfil the
within three years from the date of Regulation
classification and qualification required by an
28 (ie by 30 September 2012).
IUP holder.
A mining services company that acts in
In addition to the new provisions prioritising
contravention of MEMR Regulation 28/2009
use of Local or National Mining Services
and carries out services beyond the scope
Companies, MEMR Regulation 28/2009 also
prescribed in MEMR Regulation 28/2009
introduced an important restriction on the
will be subject to administrative sanctions
types of services that can be contracted out
which range from written warnings,
to mining services companies by IUP holders
temporary suspension of mining licences or,
that have reached exploitation phase.
ultimately, potential revocation of the mining
MEMR Regulation 28/2009 provides that an services business licence or the statement
IUP holder in the Production Operation stage letter of registration.
must conduct its own mining and the only
MEMR Regulation 28/2009 also introduced
operational mining services that a mining
a restriction on ability of IUP holders to
service company can provide are the stripping
appoint subsidiaries or affiliated parties as
of overburden. Mining services companies are
mining services contractors. The
however able to provide a range of other
appointment of subsidiaries or affiliates will
mining services including exploration, mining
require prior approval from DGMC, which will
construction, processing and refining, hauling
only be granted in very limited circumstances.
services and reclamation services.
52 indonesia
Processing obligations and exports of
unprocessed ore
The Mining Law 2009 stipulates that mining
companies must process and/or refine
minerals within the territory of Indonesia.
GR23 clarifies that mining companies do not
need to carry out processing and refining
themselves but may, instead, engage other
Indonesian companies for this purpose.
MEMR Regulation 7/2012 provides further
details on domestic processing obligations.
MEMR Regulation 7/2012 applies only to a
list of specified minerals, including nickel,
bauxite, copper, silver and gold. Minerals to
which MEMR Regulation 7/2012 applies
must be processed or refined to the purity
levels prescribed in the Appendix to the
regulation, which are set at relatively high
levels of between 90% and 99%.
Importantly, however, MEMR Regulation
7/2012 does not apply to coal, although the
processing obligations in Mining Law 2009
do apply to coal.
MEMR Regulation 7/2012 further requires
mining companies engaged in iron, tin and
copper mining to ensure that tailings from
their operations (including from processing
and refining activities) which contain valuable
by-products are securely stored and
maintained until further processing of such
tailings can be carried out.
MEMR Regulation 7/2012 requires mining
companies to carry out domestic processing
and/or refining themselves or to undertake
such activities in cooperation or partnership
with other mining companies subject to
receiving approval from DGMC. Further,
MEMR Regulation 7/2012 gives DGMC
broad powers to facilitate arrangements in
situations where, based on feasibility studies,
independent processing and/or refining is not
economically feasible and joint arrangements
HERBERT SMITH FREEHILLS
or partnership with other parties has not
proved possible. However, it remains to be
seen how DGMC will use these powers.
One key measure introduced by MEMR
Regulation 7/2012 to enforce the domestic
processing and refining obligations is the
introduction of the export ban on
unprocessed ore and minerals listed in
MEMR Regulation 7/2012. The transitional
provisions of MEMR Regulation 7/2012
created considerable uncertainty as to the
timing of the effective date of the proposed
export ban on unprocessed ore and minerals
and appeared to suggest that the export ban
on entirely unprocessed ore and minerals
would be effective from 6 May 2012 while the
obligation to process ore and minerals would
only arise at a later date.
On 4 May 2012, MEMR made an
announcement clarifying its policy on export
of unprocessed minerals and ore to the effect
that exports would be permitted until 2014
subject to (i) companies complying with
several requirements to be stipulated by the
Ministry of Trade regulation and (ii)
payments of export tax to be stipulated by
the Ministry of Finance.
On 7 May 2012, Minister of Trade (MOT)
issued Regulation No. 29/M-DAG/
PER/5/2012 (as amended by MOT
Regulation No. 52/M-DAG/PER/8/2012 on
14 August 2012) (MOT Regulation 29/2012),
which sets out the requirements for
continued export of unprocessed minerals
and ore. MOT Regulation 29/2012 applies to
a list of specified minerals and ore, including
bauxite, nickel, copper, silver and gold.
Importantly, MOT Regulation 29/2012 does
not apply to coal. Under MOT Regulation
29/2012, exports may be carried out only by
companies that produce minerals or ore
under COWs or IUPs.
HERBERT SMITH FREEHILLS indonesia 53

In order to continue export of unprocessed plans for the construction of processing and
minerals and ore, mining company must: refining facilities (or a copy of any agreement
with other mining companies in relation to
have been registered as a Registered Mining
the construction of shared processing and
Products Exporter by the Ministry of
refining facilities).
Finance through Director General of Foreign
Trade (DGFT); and In addition, mining companies also need to
prove title to their mining authorisation and
have received a Mining Products Export
submit evidence of compliance with all
Approval from the Ministry of Finance
requirements under their IUP, including
through DGFT.
payment of taxes and royalties.
In order to be approved as Registered Mining
It will be vitally important that the mining
Products Exporter and to obtain Mining
companys IUP is included in the Clean and
Products Export Approval, mining companies
Clear List prepared by the MEMR, which lists
are required to submit various documents to
the mining authorisations that, in the view of
the DGFT, including a recommendation letter
MEMR, are free from any overlapping claims.
from the DGMC which will set out the type of
Importantly, exports will only be permitted
minerals to be exported by the company, total
subject to payment by the mining companies
export quotas, duration of export activities, the
of an additional export tax (as stipulated in
port of loading and the country of destination.
MOF Regulation No.75/PMK/.011/2012
The requirements for obtaining a (Regulation 75/2012)). The export tax rate
recommendation from DGMC for an IUP for unprocessed minerals and ore is 20%.
company to register as Registered Mining
Regulation 75/2012 sets out two separate
Products Exporter or obtaining the Mining
formulas for calculation of the total export tax
Products Export Approval have now been set
payable, although it appears that only one
out in the new Regulation of DGMC
formula is applicable to exports of
No.574.K/30/DJB/2012 dated 11 May 2012
unprocessed minerals and ore. The
(Regulation 574/2012). The recommendation
calculation is based on the percentage of
from DGMC under Regulation 574/2012is
Export Price (advalorum) set by the Director
only granted to IUP companies; there is no
General of Customs and Excise (DGCE) on
clarity in Regulation 574/2012 as to the
behalf of the MOF and other relevant officials
procedure for a COW company to obtain a
in accordance with the benchmark of Export
recommendation or whether that is required
Price. The Export Price will be stipulated by
at all.
DGCE each month based on international
As part of the process for obtaining a market price for the relevant minerals and in
recommendation from DGMC, a mining consultation with mining companies. Where
company will be required to sign an Integrity the exported product is a compound of
Pact (paketa integritas) with the government several ore, the export tax will be calculated
which, among other things, will provide that based on the Export Price of the
the mining company will cease to export highest-priced component.
unprocessed minerals by 2014. Mining
companies are also required to submit work
54 indonesia
Non-compliance with the above rules may
result in the mining company losing its ability
to export.
In relation to coal, the government has
indicated that it plans to bring in some
restrictions on exports of coal, although it
remains unclear what these restrictions will
be. The latest communications from
government officials have suggested that
restrictions will be placed on low rank coal
and the administrative requirements will be
similar to those set out in Regulation
574/2012although no mention has been
made of whether an export tax will also be
imposed on such exports.
Coal benchmark price
General guidelines on determination of
benchmark price for sale of coal are set out in
MEMR Regulation 17/2010. Under MEMR
Regulation 17/2010, a coal producer must sell
the coal produced at no lower than the
benchmark coal price (harga patokan batubara).
The prices for the spot sales (supplies of coal
for a term not exceeding one year) and term
sales (supplies of coal for a term exceeding
one year) are treated differently:
coal price for spot sales must refer to the
benchmark coal price for the month of
delivery; and
coal price for term sales must refer to the
average benchmark coal price over the
three months preceding the date on which
the coal price is agreed. Where the term
sales are completed more than one year
after the contract is signed, the average
benchmark price must be calculated for the
year in which the sale takes place.
HERBERT SMITH FREEHILLS
The MEMR will stipulate the coal price
reference point (harga acuan batubara) in the
first week of each month. The coal producer
can calculate the benchmark coal price by
applying the relevant formula to the coal price
reference point. There are various formulas to
calculate the benchmark coal price
depending on the quality of the coal (CV, TM,
TS, and Ash).
DGMC has issued implementing regulations
(Regulation No. 515.K/32/DJB/2011) which
sets out the mechanism by which DGMC will
use to determine the thermal and
metallurgical coking coal benchmark price.
The formula refers to average coal price index
in accordance with market mechanism and/
or generally applicable international market
practice. For thermal coal, the benchmark
price index will refer to a mix of indices issued
by various agencies, including Indonesian
Coal Index, Newcastle Export Index, Platts
and the Global Coal Newcastle Index. This
regulation also stipulates the formula to
calculate thermal coal benchmark price for
different types of thermal coal as well as
setting out the formula for term sales, which
is based on average benchmark price for the
last three months preceding the date of
theagreement.
On the 10th day of every month, holders of
Production Operation IUPs must submit a
report on the sale of coal to the relevant
authority that issued the Production
Operation IUP (MEMR/Governor/Regent/
Mayor). The report must include the sale
price, volume, quality, selling point,
adjustment costs and the end-user. The
reports must be supported by, amongst
others, copies of invoices for the coal, bills of
lading and certificates of weight and
notifications on the export of goods.
HERBERT SMITH FREEHILLS
With prior written consent of DGMC, it is
possible to sell fine coal, rejected coal and
coal with impurities within Indonesia at a
price below benchmark price.
Failure to comply with the above restrictions
may result in administrative sanctions in the
form of written warnings, temporary
suspension of sales or revocation of
Operation Production IUP. This is a sliding
scale of sanctions, and the revocation of
Operation Production IUP will only be
imposed on a company that fails to comply
with the benchmark price regulations after
receiving written warnings and a temporary
suspension of sales.
Post-mining and reclamation
Under GR78 all mining companies (ie both
holders of IUPs and COWs) are required to
carry out post-mining reclamation and
restoration of land to its original condition
through a sustainable planned program.
Mining companies are required to restore and
reclaim those parts of their mining tenements
where mining activities have been concluded,
even if mining activities continue on other
parts of the authorisation.
Pursuant to GR78, mining companies which
have completed feasibility study are required
to submit a five-year reclamation plan, which
may be amended during the production
phase activity. Reclamation and post-mining
plan must be submitted for approval to the
authority which issued the IUP or COW.
In addition, mining companies are also
required to provide a reclamation and
post-mining guarantee to the authority which
issued the IUP, COW or CCOW within 30
days from the approval of the reclamation
and post-mining plan. Reclamation and
post-mining guarantee must be in
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accordance with the reclamation and
post-mining budget approved by the
authority which issued the IUP, COW or
CCOW. In the exploration phase, reclamation
guarantee takes form of a term deposit into
an account at a government-owned bank; in
the production phase, reclamation guarantee
may be provided as (i) joint account at a
government-owned bank, (ii) term deposit
into an account at a government-owned
bank; (iii) bank guarantee from a
government-owned bank or Indonesian
private bank; or (iv) accounting reserves.
If the authority which issued the IUP, COW or
CCOW decides that reclamation and
post-mining restoration falls short of the
expected standard, that authority will have
the right to appoint a third party to carry out
reclamation and post-mining restoration with
the costs covered from the reclamation
guarantee. To the extent that reclamation
costs exceed the amount of the guarantee,
the mining company will be responsible for
making good the shortfall.
GR78 is expressed to apply to all mining
companies; holders of COWs and CCOWs
were required to adjust their existing
reclamation and post-mining plans for
compliance with GR78 within three 0 from
the date of GR78 (ie 20March2011).
4.3 Environment
Law No. 32 of 2009 regarding Environmental
Protection and Management (Environmental
Law) came into force on 3 October 2009,
replacing Law No. 23 of 1997 concerning
Environmental Management. One of the key
changes introduced in the Environmental Law
is the requirement to obtain an environmental
permit in addition to the AMDAL approval or
recommendation of UKL/UPL.
56 indonesia
Holders of environmental permit will be
required to set aside funds to be used as an
environmental bond. Such funds must be
deposited in a government-owned bank
designated by the relevant authority
(ieMinister of Environment, governor or
regent/mayor).
Under the Environmental Law, periodic
environmental audits are required to be carried
out by companies engaging in activities which
carry high environmental risk. Where the
company itself fails to carry out the audit, the
Minister of Environment has the right to
appoint a third party to carry out theaudit.
Further details on implementation of the
Environmental Law will be provided for in
implementing regulations, most of which
have not yet been issued.
(a) UKL/UPL and AMDAL
Under the Environmental Law, mining
companies carrying out exploitation of
natural resources that have an environmental
or social impact, or mining companies which
have reached the feasibility study stage, must
obtain certain environmental approvals
andpermits.
The Environmental Law sets out criteria for
activities which require the approval of an
Environmental Impact Analysis Report
(AMDAL), which is a document consisting of
an Environmental Impact Assessment Report
(ANDAL), an Environmental Management
Plan (RPL) and an Environmental Monitoring
Plan (RKL). Activities which do not satisfy
such criteria will require Environmental
Management Effort (UKL) and Environmental
Monitoring Effort (UPL) to be prepared.
HERBERT SMITH FREEHILLS
In relation to mining activities, in the
exploration stage, only UKL and UPL will be
required. If the mining project proceeds to the
production phase, an AMDAL will be required.
In order to obtain recommendation for UKL
and UPL, mining company is required to
submit a UKL and UPL application forms to
the relevant authorities (ie Minister of
Environment, governor or regent/mayor).
The application form will be assessed and
recommendation will be issued within 14
business days from the UKL and UPL
application form being deemed to
becomplete.
By contrast, AMDAL approval is a two-step
process, as follows:
1. Mining company submits the relevant
terms of reference for the AMDAL to the
relevant AMDAL commission for review.
A decision on whether to approve or reject
the terms of reference is made within 30
business days from the submission of the
terms of reference and declaration of these
ascomplete.
2. Based on the approved terms of reference,
mining company prepares the AMDAL
documents (including the ANDAL, RKL and
RPL) and submits these for approval to the
relevant authority (ie Minister of
Environment, governor or regent/mayor)
through the relevant AMDAL commission.
The AMDAL commission reviews the
documents and notifies the mining
company if any further information is
required. A decision on whether to approve
or reject the AMDAL documents is made
within 75 business days from receipt of
complete AMDAL documents.
HERBERT SMITH FREEHILLS
Relevant stakeholders and communities
(including villages in the vicinity of the
proposed mining project) must be involved in
the preparation of AMDAL. To this end,
mining companies will be required to hold
public consultations with the stakeholders
prior to submission of the terms of reference.
(b) Environmental permit
Pursuant to Government Regulation No. 27 of
2012 on the Environmental Licence dated
23February 2012 (GR 27/2012), every legal
entity or person that conducts business
activities and is under an obligation to obtain
an AMDAL or UKL/UPL, should also obtain
an environmental permit from the relevant
authority (ie Minister of Environment,
governor or regent/mayor). The procedures
for the application, approval, and granting of
an environmental permit are set out in
GR27/2012.
Transitional provisions of GR 27/2012 state
that all the environmental documents which
have been approved before the enactment of
GR 27/201, remain in force and will be
deemed to also act as an environmental
permit. Therefore a company with an existing
AMDAL will be deemed to have an
environmental permit by virtue of its
approved AMDAL. However, if any changes
are made to a companys existing AMDAL or
it applies for a new AMDAL, then the
company will also now need to apply for an
environmental permit in addition.
Obligations imposed on holders of
environmental permit include:
compliance with requirements and
obligations set out in the environmental
permit and environmental protection and
management permit;
indonesia 57
preparation and submission of regular
reports on implementation of obligations
and requirements set out in the
environmental permit; and
provision of funds for rehabilitation of
environment to be used as an
environmental bond. Such funds must be
deposited in a government-owned bank
designated by the relevant authority (ie
Minister of Environment, governor or
regent/mayor).
Sanctions for failure to comply with the
obligations under the environmental permit
range from written warnings to revocation of
environmental permit, which may in turn lead
to revocation of the relevant business licence.
(c) Toxic waste
The Environmental Law requires companies
that import, produce, transport, distribute,
store, use, process and/or dump dangerous
and toxic material or waste to manage such
material properly. Further details in relation to
this are to be provided in a government
regulation which has not yet been issued.
Until further implementing regulations will be
issued, the previous regulation, Government
Regulation No. 18 of 1999 on Management of
Hazardous and Toxic Material Waste as
amended by Government Regulation No. 85
of 1999 will continue to apply. This regulation
requires entities that use or produce such
toxic materials or waste to process and
ensure proper temporary storage of such
material or waste. A special licence will be
required for such activities.
58 indonesia
(d) Other matters
Under transitional provisions of the
Environmental Law, companies which
obtained a business permit but did not have
an AMDAL prior to coming into force of the
Environmental Law must have carried out an
environmental audit within two years from
the enactment of the Environmental Law
(ieby 3 October 2011).
4.4 Forestry
(a) Licences to mine in forestry areas
Under the Forestry Law, land which is
categorised as production forest or protected
forest cannot be used for mining activities
without obtaining the relevant permits and
consents described below. Where an area is
categorised as a conservation forest, all
mining activities are prohibited.
Under the Forestry Law:
a production forest is defined as a forest
area where the main function is to provide
forestry products (for example, wood and
related wood products);
a protected forest is defined as a forest
area where the main function is to protect
the environment and act as a buffer
system to regulate water flow, prevent
floods, control erosion, prevent sea water
intrusion to the land and maintain fertility of
soil; and
a conservation forest is defined as a forest
area having certain characteristics where
the main function is to preserve the
diversity of plants and animals including
their ecosystem and also to protect
theenvironment.
Where an area has been categorised as a
production forest or protected forest under
the Forestry Law, a mining authorisation
HERBERT SMITH FREEHILLS
holder must obtain the following from the
Minister of Forestry:
a Borrow and Use Licence to Carry Out
Exploration (Ijin Pinjam Pakaiuntuk Kegiatan
Eksplorasi) before carrying out any
exploration activities; and
a Borrow and Use Licence (IjinPinjamPakai)
before carrying out any exploitation
activities.
Details on application process for Borrow and
Use Licences to Carry Out Exploration and
Borrow and Use Licences are regulated by
Regulation of the Minister of Forestry No.
P.18/Menhut-II/2011 regarding Guidance for
the Leasehold of Forest Area (as amended by
Regulation of Minister of Forestry No.P.38/
Menhut-II/2012).
In areas designated as protected forest,
mining activities can only be carried out by way
of underground mining, provided that the
mining company first obtains the Borrow and
Use Licence and provided that underground
mining activities do not (i) cause land
subsidence, (ii) cause significant and
permanent change to the function of the forest
or (iii) damage water aquifers. Use of protected
forest for underground mining is regulated in
more detail in Presidential Regulation No. 28 of
2011 regarding Use of Protected Forest Area for
Underground Mining.
(b) Forestry moratorium
On 20 May 2011, the President of the
Republic of Indonesia issued Instruction of
the President No. 10 of 2011 regarding
Suspension of New Licence Issuance and
Improvement of Primary Natural Forest and
Peatland Management (Directive 10). The
purpose of Directive 10 is to balance and
harmonize of economic, social, cultural and
environmental development and decrease
HERBERT SMITH FREEHILLS
emissions from deforestation and
degradation of forest areas. This instrument
is an internal government instruction to the
various authorities relevant to use of forest
areas in Indonesia.
By virtue of the Directive 10, the President has
instructed the above officials to suspend
grants of new forestry licences for primary
natural forest areas and peatlands in areas of
conservation forest, protected forest,
production forest (limited production forest,
normal/permanent production forest,
convertible production forest) and certain
other areas. The affected areas are shown on
the New Licence Suspension Indicative Map
attached to Directive 10. The suspension on
new licenses in these areas is valid for two
years (ie until 20 May 2013).
The suspension does not affect those
applications for licences:
where an in-principle approval was granted
by the Minister of Forestry before
20May2011;
in respect of certain types of projects that
are vital for national development, namely:
geothermal projects, oil and natural gas
projects, electricity projects, land required
for paddy field and sugarcane plantations
(but, importantly, not mining);
where application is for an extension of
Borrow and Use Permit which had been
granted before 20 May 2011 provided that
the underlying business licence of the
Borrow and Use Permit holder is still valid;
and
licences granted for ecosystem restoration.
The Directive 10 will affect those mining
projects where the relevant mining
authorisation area overlaps with an area
which is subject to the forest moratorium
indonesia 59
shown on the New Licence Suspension
Indicative Map and where the authorisation
holder has not yet received either the Borrow
and Use Permit or an in-principle approval for
the Minister of Forestry for the required
Borrow and Use Permit.
Mining projects are not included in the list of
vital industry exceptions. Therefore, if the
mining authorisation area overlaps with an
area subject to the forest moratorium and the
project has not yet been granted an
in-principle approval for the Borrow and Use
Permit or the full Borrow and Use Permit by
the Minister of Forestry, it will now not be
possible for the project to obtain the
necessary forestry permit until the expiration
of the forest moratorium in 2013. As a result,
the mining company will not be able to carry
out any mining activities in the area which
overlaps with the primary forest area
although it will be able to conduct mining in
those parts of its authorization area that do
fall within designated primary forest areas.
The New Licence Suspension Indicative Map
will be updated periodically by the Minister of
Forestry based on more accurate updated
information. Mining authorisation holders
should review the updated map when it is
published to ensure that forestry moratorium
has not been extended to cover their
authorisation areas.
4.5 Landowner approval
Mining authorisations, whether in the form of
IUPs, COWs or CCOWs, do not give the
holder the right to enter the land over which
the mining authorisation was granted; rather,
mining authorisation holders will be required
to acquire or obtain the right to use the
requisite land from the relevant land owners.
Generally, a location permit (ijin lokasi) will be
required to be issued by the relevant regent
60 indonesia
or mayor before a mining company can start
a substantial land acquisition process.
Location permit allows the mining company
to negotiate with the relevant landowners.
Due to lack of any reliable public registry of
land rights, mining company will need to
carefully consider and identify the following
matters:
the correct holder of title to the land;
any indigenous communities that it is
required to negotiate with; and
value of the land.
Compensation for the land can be in the form
of monetary compensation, provision of
alternative or substitute land, resettlement of
the land owners or any other form of
compensation that the mining company
agrees with the relevant land owner.
4.6 Other approvals
(a) Foreign investment approval
The main law governing foreign investment
into Indonesia is Law No. 25 of 2007 regarding
Capital Investment (Investment Law).
Foreign companies can directly invest into
Indonesia by establishing a foreign
investment limited liability company (PMA
company). Formation, share capital and other
management matters of PMA companies are
governed by Law No. 40 of 2007 regarding
Limited Liability Companies (Companies Law).
All foreign investment must be registered
with and approved and licensed by the
Foreign Capital Coordinating Board (BKPM).
HERBERT SMITH FREEHILLS
Pursuant to the Investment Law, all business
sectors and activities are open to foreign
investment except for those business sectors
or activities listed in a regulation issued by the
President of Republic of Indonesia known as
the Negative List. Business sectors and
activities listed in the Negative List are either
closed to foreign investment entirely or open
to foreign investment subject to specific
limitations on the maximum percentage of
foreign ownership. Where a company
proposed to engage in more than one
business sector or activity, and there are
different permitted percentages of foreign
ownership, BKPM policy is to limit foreign
ownership to the lowest of those permitted
percentages. Currently, mining sector is
100% open to foreign investment, subject to
compliance with the divestment obligations.
Other than the statutory requirement for
minimum share capital prescribed in the
Companies Law, there are no other statutory
minimum capitalisation requirements.
However, as a matter of policy, for PMA
companies, BKPM usually imposes a
minimum capitalisation requirement
significantly higher than the statutory
minimum under the Companies Law. The
exact minimum capitalisation required will
depend on the business sector in which the
PMA company proposes to engage, the size
of the project and where the project will be
located. BKPM has the powers to determine
whether proposed capitalisation is sufficient.
In addition to PMA companies having to be
registered with and licensed by BKPM,
articles of association of PMA company will
need to be approved by the Ministry of Law
and Human Rights.