Indonesia: Mining regulations

Author: | Published: 1 Oct 2008
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The basis for the regulation of the Indonesian mining sector is ultimately derived from Constitution 1945 of the Republic of Indonesia, which stipulates that Indonesia's natural resources are to be controlled by the state and must be used for the maximum benefit of the Indonesian people. Law 11 of 1967 on Mining and its implementing regulations adopt this fundamental principle. Control has been interpreted as being equivalent to ownership. Therefore, there is no title to particular mineral deposits granted by the state to private companies or individuals. Instead, the state only grants rights to exploit and sell the mineral deposits.

Domestic investment in mining is further governed by Government Regulation 32 of 1969 on the Implementation of Law 11 of 1967, as further consecutively amended by Government Regulation 79 of 1992 and Government Regulation 75 of 2001 (GR 75/01). Domestic investment in the mining industry is conducted through a Kuasa Pertambangan (KP). Essentially, a KP is a licence issued by the Head of Regency, the Governor and the Minister of Energy and Mineral Resources, depending on where the mining area lies. If the mining area delineated by the KP is located within one Regency, the KP will be issued by the Bupati or Head of the Regency. On the other hand, if the mining area crosses the boundary between two Regencies, the KP is issued by the Governor (head of the province). If the mining area crosses the boundary between two provinces, the authority to issue the KP lies with the Minister of Energy and Mineral Resources.

Although the Mining Law considers that a KP applicant should have a demonstrable capacity to exploit minerals in its KP area, this is often not the case. As a result, KP holders on occasion enter into agreements with foreign mining companies to conduct mining activities on their behalf.

A KP grants exclusive mining rights within the delineated mining area to its holder for specified minerals or metals and a defined stage of mining activities. There are several types of KP depending on the stage of development of the mining area itself, as follows.

General Survey KP

A General Survey KP serves as a licence for preliminary surveys within a mining area. It is valid for a limited term of one year, which can only be extended for one additional year. The maximum area coverage of a General Survey KP is 5,000 hectares.

Exploration KP

An Exploration KP is a type of mining licence for exploration activities in a mining area. It is valid for a limited term of three years and can be extended twice, each time for a one-year period. The maximum area covered by an Exploration KP is 2,000 hectares.

Exploitation KP

An Exploitation KP is a type of mining licence for exploitation activities in a mining area. It is valid for a limited period of up to 30 years and can be extended twice, each time for a 10-year period. The maximum area coverage for an Exploitation KP is 1,000 hectares.

An Exploitation KP may include KPs for processing and refining, as well as transportation and marketing. If an Exploitation KP does not include the necessary KPs for those activities, the holder will be required to apply for the other types of KPs.

Processing and Refinery KP

A Processing and Refinery KP is a type of mining licence for processing and refining activities. It may be granted for a period of up to 30 years and is extendable for additional periods of 10 years at a time.

Transportation and Marketing KP

A Transportation and Marketing KP is a type of mining licence for transportation and marketing activities. It is valid for a period of up to 10 years and is extendable for additional periods of five years at a time.

Under Article 15.4 of the Mining Law and Article 23 of GR 75/01, a KP is transferrable. The provisions state that a KP is transferrable to any other entity/individual under certain circumstances before approval from the competent officials. The KP can be transferred if the requirements are met: for instance, if the KP holder is not able to continue operating its business because of lack of funds, knowledge or technologies. On the other side, the receiver must prove that he/she/the entity is capable of running the mining business (for example, the individual or the entity is in a good financial position and is experienced in mining). If the receiver is a company, it should be a wholly Indonesian-owned company. If it is a foreign investment company (Perusahaan Penanaman Modal Asing – PMA), the KP must be converted into a Contract of Work (CoW) because a PMA company can only hold either a CoW or Coal Contract of Work (CCoW).

Contract of Work (CoW)

A sole foreign investor or a joint venture between foreign investors and Indonesian investors may carry out mining activities through a CoW granted to an Indonesian foreign investment company (Perusahaan Penanaman Modal Asing – PMA). A CoW is signed between the PMA company established by the foreign investors (and, if applicable, their Indonesian partners) and the Government of Indonesia.

The CoW sets out in detail the rights and obligations of the mining company in relation to the development and operation of the mining project. From the initial CoWs signed in the sixties to the last of those signed in the late nineties, there have been a number of revisions to the CoW terms. Each revision is referred to as a generation of CoW. There have been a total of seven different generations of CoWs signed.

The regulation of the rights and obligations of a mining company engaged under a CoW principally constitutes the CoW itself. The CoW covers all stages of the mine development.

Under Indonesian law, the CoW has the status of special law, meaning that it overrides the Indonesian laws of general application (for instance, general tax law) where the relevant subject matter is specifically dealt with in the terms of the CoW itself. This treatment is of utmost importance in relation to the taxation provisions of the CoW, which set out the detailed tax regime applicable to the relevant mining company throughout the life of the CoW, regardless of occasional changes to Indonesia's tax regulations.

Principally, a CoW serves as a contract between the Government of Indonesia and an Indonesian incorporated company. Under a CoW, a PMA company acts as a contractor to the government for the exploration and exploitation of certain minerals in the specified CoW area. A CoW is valid for a period of 30 years as of the commencement of commercial production and its term is extendable.

CoWs are theoretically negotiable, but they have in practice followed a series of evolving standard agreements (from the first to the eighth generation), all of which have been approved by parliament and the president.

A PMA company planning to engage in a mining business must first obtain a CoW. Because of its difference to a KP, the PMA company only needs a single CoW for all of the mining activities. A PMA company is permitted to subcontract such phases of its operations as it deems appropriate.

Foreign business entities may establish a PMA company to engage in a mining business with a maximum 95% of total share ownership. A PMA company as a CoW contractor does not automatically acquire any interest in the land covered by the CoW. A CoW is granted for a maximum mining area of 250,000 hectares.

Coal Contract of Work (CCoW)

The legal framework for coal mining is the same as for general mining. Coal mining activities also require KPs, and a contract of work. The differences lie, among others, in the contract's name, the mining area, the amount of royalty to be paid to the government and the specific line of business.

A contract of work for coal mining is a Coal Contract of Work (CCoW), also recognised as PKP2B in its Indonesian abbreviation. The CCoW is a contract between the Government of the Republic of Indonesia and an Indonesian incorporated company. As with the CoW, the CCoW has been developed over generations: for the time being, the "three plus" generations of CCoW are being used. All PMA companies in the same generation have the same terms and conditions in their CCoW.

The mining area of a CCoW contractor is 100,000 hectares and the amount of royalty for a CCoW contractor to pay is 13.5% of its coal production. The royalty is to be delivered to the government in cash at the free on board (FOB) or point of sale price. Also, a CCoW company is not allowed to engage in any other business other than coal mining. In other words, the PMA company should be a special purpose company engaged in coal mining. It must be able to demonstrate its technical and financial capacity when applying to the government as a contractor.

Duties, royalties and taxes

A holder of mining rights is required to pay deadrent and royalties as provided under Government Regulation 45/2003, which specifies the deadrent and royalty obligations of KP holders. Circular Letter of the Director General of Geology and Mineral Resources (DGMR) 008.E/84/DJG/2004 provides instructions for calculating payments of deadrent and royalties. Law 25/1999 specifies to which level of government KP holders and CoW contractors are to pay royalties and how such levels of government are to allocate and transfer the funds to other levels of government.

An attachment to Government Regulation 45/2003 sets out the deadrent charges based on the number of hectares covered by a KP and the stage of mining involved. For KPs, deadrent charges begin at Rp500 ($0.05) per hectare per year during the General Survey KP and increase to as much as Rp25,000 per hectare per year during the Exploitation KP.

Royalties for KP holders are defined as percentages of FOB sales prices for minerals exported. The current defined rates for coal distinguish between open-cut and underground mining. For open-cut mining, the royalties start at 3% per tonne for 5,100 kcal/kg airdried basis and below and rise to 7% per tonne for coal with a quality above 6,100 kcal/kg airdried basis. For underground mining the royalties start at 2% per tonne for 5,100 kcal/kg airdried basis and below and rise to 6% per tonne for coal with a quality above 6,100 kcal/kg airdried basis.

Companies holding KPs are also subject to income tax at generally applicable rates (30% at present) and are subject to the generally applicable tax laws governed by Law 7 of 1983 as amended by Law 7 of 1991, as amended by Law 10 of 1994 and, most recently, as amended by Law 17 of 2000 on Income Tax.

For the surface area within the mining site used for offices, housing and other buildings and facilities and that have land title, they will be subject to land and building tax. Land and building tax is governed by Law 12 of 1985 as amended by Law 12 of 1994 on Land and Building Tax.

Forestry issues

Based on Article 38.4 of Law 41 of 1999 on Forestry (Forestry Law), open-cut mining in a conservation forest is prohibited. General exploration activities, including drilling, in conservation forest areas may also be affected, as discussed below.

When the Forestry Law was firstly introduced, it created a great deal of uncertainty as to whether mining companies with mining concessions which pre-dated the Forestry Law were entitled, in accordance with the terms of their CoWs and mining regulations, to carry out open-cut mining in conservation forests.

Through emergency Government Regulation (PERPU) 1 of 2004, the government stipulated that any agreement and licences in the mining industry that had been granted before the Forestry Law would remain valid until their expiry date. Subsequent to the PERPU, through Presidential Decree 41 of 2004 (PD 41/2004), the government authorised 13 mining companies to continue operations (including open-cut mining) in their CoW area despite the provisions of the apparently inconsistent Forestry Law. The PERPU was later ratified by parliament and accordingly has the legal effect of amending Article 38.4 of the Forestry Law.

Following PD 41/2004, the Minister of Forestry issued the Regulation of the Minister of Forestry P.12/Menhut-II/2004 on the Use of Conservation Forest Areas for Mining Activities (Reg P-12) in September 2004, which essentially stated that the licences to carry out mining activities in conservation forests (for both the exploration and exploitation stages) will only be valid for the mining companies included in the list of 13 authorised by PD 41/2004 to conduct mining activities.

For all other mining companies, Ministry of Forestry Regulation P.43/MENHUT-II/2008 (Reg 43/2008) imposes similar requirements but requires a replacement non-forest area of 200% for mining activities in forest areas located in a province that has less than 30% forest area. Reg 43/2008 also provides a softer approach to the obligation to obtain, borrow and use a licence. That is, a mining company must pay the Non-Tax State Revenue for the non-forestry use of production and conservation forests and re-direct its payment from the Ministry of Forestry to the Ministry of Finance. The regulation covers a range of non-forestry activities, including mining, oil and gas, geothermal, power, telecoms and toll road projects carried out within a forest area.

The amount of revenue to be paid by the mining company each year depends on non-forest activity being carried out in the forest area and, within that activity, the specific use to which the forest area is being put, as evidenced from the formula for the calculation of the annual payment, as follows.

PNBP = (L1 × tariff) + (L2 × 4 × tariff) + (L3 × 2 × tariff) Rp/year

Where:

  • L1 is the area affected by permanent infrastructure development or open-cut mining operations;
  • L2 is the area affected in a temporary manner and that can be reclaimed; and
  • L3 is the affected area that is used for a permanent purpose and cannot be reclaimed.

The tariff also varies depending on whether the activity is being carried out in conservation forests or production forests. The applicable tariffs are as below.

Table
Activity Rp/annum for Production forests Rp/annum for Conservation forests
Open-cut mining (horizontal) Rp2.4 million Rp3 million
Open-cut mining (vertical) Rp1.8 million Rp2.25 million
Underground mining Rp1.8 million Rp2.25 million
Oil and gas, geothermal, telecoms, power and radio station towers, among others Rp1.2 million Rp1.5 million

Land remediation

With respect to remediation of the mining area after completion of mining activities under the KP, based on Decree of the Director General of General Mining 336.K/271/DDJP/1996 on Reclamation Bonds (Decree on Reclamation Bonds), the KP holder is required to provide remediation security (in the form of deposits with a government bank or third-party guarantees: for instance, government banking or other security institutions owned by the government) before the commencement of operations.

The amount of the remediation security will be determined based on the estimated remediation cost stated in the Annual Environmental Management Plan prepared by the holder of the KP for a period of five years. The remediation costs will consist of: (i) direct costs (for instance, the cost of removing mine facilities and re-plantation costs); and (ii) indirect costs, including heavy equipment mobilisation and demobilisation costs, remediation planning costs, administration costs and remediation contractors' profits.

To the extent that security has been provided, release of remediation security will be made in stages, in accordance with the completion of the remediation work. Any interest accruing in respect of remediation cash security posted will also be released to the mining company.

Export of mining material

A KP holder is entitled to export the exploited minerals (apart from tin) without obtaining a specific exportation permit.

In general, all businesses may export goods from Indonesia. The only requirement is that they have: (i) in the case of domestically-owned companies, a Trade Business Licence (SIUP) issued by the Minister of Trade; (ii) in the case of a foreign-owned company, an investment licence from the BKPM or other relevant business licences from the technical government institutions; and (iii) for all companies, a Company Registry Certificate (TDP) issued by the Minister of Trade.

All exports must be notified by submitting an Export Declaration (PEB) and supporting documents. The PEB should be sent to the customs official either by written or electronic notification. In general circumstances, there is no export tax or duty applied for any exported goods. However, Law 17 of 2006 regarding Customs (Customs Law) provides that the government may impose export duty for certain exported goods with the following considerations:

  • to secure domestic consumption;
  • to preserve natural resources;
  • to anticipate the price rise of certain commodities; and
  • to stabilise the price of certain commodities.

Following this provision, the government may at any time impose export duty for certain exported goods, including mining materials (for instance, coal, iron ore and nickel ore).

Draft mining law

The Indonesian Parliament is now discussing the Bill of the New Mining Law. Under its latest draft mining law that we are aware of, there will be no more KP for investment in the mining industry. The KP will be replaced by the Mining Business Licence (Izin Usaha Pertambangan – IUP). The IUP can be obtained by both foreign and domestic investors. Unlike the five types of KPs, there will only be two types of IUP: the Exploration IUP and the Operational and Production IUP. The Exploration IUP will be valid for a maximum period of eight years. This period includes general survey, exploration and feasibility study activities. The Operational and Production IUP will be valid for a maximum period of 23 years but can be extended by periods of 10 years at a time. This period includes construction, mining, processing, refining, transporting and selling activities.

In addition, the holder of the Operational and Production IUP is obliged to process and/or refine the mined minerals within the territory of the Republic of Indonesia.

Author biography

Dendi Adisuryo

Adisuryo Sudjana & Associates

Dendi Adi Suryo specialises and has practical experience in general corporate matters, energy and mining projects and the banking/finance sector. He also has broad experience in assignments related to banking finance transactions, foreign capital investments and corporate restructuring.

Dendi has engaged in almost every aspect of legal practice in the mining industry, from acquisitions to divestment, from project finance to mining service arrangement and from termination of employment to dispute resolution.

He has first-hand experience of dealing with local government officials in Indonesia, dealing with the issuance of new mining licences: this experience has greatly enriched his "paper work" abilities.

During his legal studies at the University of Indonesia, he received a scholarship from the Sumitomo Mitsui Bank Corporation four years in a row. He was active in campus politics (he was chairman of Students' Senate) and graduated top of the class of 1999.