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
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
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.
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
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
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
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.
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
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
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
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
PNBP = (L1 × tariff) +
(L2 × 4 × tariff) + (L3 × 2 × tariff)
- 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.
|Oil and gas, geothermal,
telecoms, power and radio station towers, among
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
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
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
- to secure domestic consumption;
- to preserve natural resources;
- to anticipate the price rise of certain commodities;
- 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
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.
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
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
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.