Jurisdiction - Indonesia
Reports and Analysis
Indonesia – Ban on Exports of Certain Unprocessed Metals & Non-Metallic Minerals, and Changes to Policy on Mandatory Divestment of Shares to Local Parties.

8 March, 2012

 

 

On 6 February 2012, the Indonesian Minister of Energy and Mineral Resources (“MEMR“) enacted Regulation No. 7 of 2012 regarding the Improvement of Mineral Added Values Through Mineral Processing and Refining (“Regulation 7“).
 
Implementing the general principle introduced in Law No. 4 of 2009 regarding Mining (the “2009 Mining Law“), Regulation 7 provides further details regarding processing and refining obligations of mining companies in respect of certain specified metals and non-metallic minerals, as well as introducing a ban on exports of certain specified unprocessed metals and non-metallic minerals. The export ban on unprocessed metals or non-metallic minerals appears to come into force on 6 May 2012, although under the transitional provisions in Regulation 7, certain mining companies will have a longer period of time to bring their level of mineral processing into line with the levels required by Regulation 7. 
 
On 21 February 2012, the Indonesian government enacted Government Regulation No. 24 of 2012 regarding Amendments to Government Regulation No. 23 of 2010 regarding Implementation of Mineral and Coal Mining Business Activities (“GR24“). The main amendments introduced by GR24 concern the increase of the mandatory share divestment obligations from 20% after five years of commercial production to 51% after ten years of commercial production in accordance with the prescribed timetable as well as the extension of existing Contracts of Work and Coal Cooperation Agreements in the form of IUPs and grants of new IUPs to foreign-owned companies.
 
Processing and refining obligations – Regulation 7
 
Application of Regulation 7
 
Articles 3(4) – 3(6) of Regulation 7 list the metals and non-metallic minerals to which provisions of Regulation 7 apply. These include, among others, copper, gold, silver, tin, bauxite, iron ore and iron sands, nickel and cobalt, manganese, limestone, silica, diamonds, marble, slate and granite. Please click here for the full list of the metals and non-metallic materials to which Regulation 7 applies.
 
Regulation 7 does not apply to coal, although the value adding obligations under the Mining Law are intended to apply to coal also.
 
Processing obligations
 
Appendices to Regulation 7 set out the purity levels to which each specified metal or non-metallic mineral, and any by-product or residue from the processing of such metal or non-metallic mineral, must be refined and/or processed. The minimum purity levels have been set at a high level, and for most specified metals are around 99%. Further, metals and non-metallic minerals specified in Regulation 7 may not be exported unless they have been refined to the purity levels stipulated in appendices to Regulation 7.
 
Mining companies engaged in mining of copper, iron sands or tin must also ensure that the tailings from their operations which contain valuable by-products are securely maintained until further processing of such tailings can be carried out.
 
Mining companies must carry out processing and/or refining themselves, or in cooperation or partnership with other mining companies, provided that prior approval for such cooperation or partnership has been granted by the Director General of Minerals and Mining (“DGMM”) on behalf of MEMR. If based on feasibility studies it is found that it is uneconomic to carry out processing and/or refining, or it is not possible to establish cooperation or partnership with other mining companies, the relevant mining companies must consult with DGMM. DGMM appears to have broad powers to “facilitate” other mining companies to process and/or refine the minerals from mining companies where such processing and/or refining is uneconomic if done on an independent basis. It remains to be seen how these powers will be exercised in practice. 
 
Sanctions
 
Failure to comply with these requirements attracts administrative sanctions on a sliding scale from written warnings, through suspension of processing, refining, transportation or sale activities of the company, to revocation of the mining business licence of the company.
 
Transitional provisions and export ban
 
Regulation 7 introduces a ban on export of unprocessed mineral raw materials or ore with effect from the expiration of three months from the date of Regulation 7, i.e. from 6 May 2012. The export ban applies to all mining companies whose Production Operation IUP was granted before 6 February 2012.
 
The principle of an export ban on unprocessed ore, as introduced by Regulation 7, was anticipated by the 2009 Mining Law. A statement from a senior official at the Directorate of Mining Supervision and Development has at this stage confirmed that the export ban on unprocessed raw materials would be applied from 6 May 2012 although it remains to be seen how effectively this will be implemented in practice.
 
Further, mining companies are required to bring their processing and refining plans into line with the provisions of Regulation 7 within a time period specified in the transitional provisions, where the exact timing depends on the stage of the mining project as at 6 February 2012 (i.e. by 6 February 2015, for projects at the exploration and/or feasibility study stages; by 6 February 2016, for projects at the construction stage; and by 12 January 2014, for projects at the production stage). The transitional provisions also expressly provide that holders of Contracts of Work which are already at the production stage before 6 February 2012, must adjust their plans regarding processing and refining levels in order to bring them into line with the level required by Regulation 7 by 12 January 2014.
 
It could be argued that the wording of the transitional provisions suggests that the export ban will not apply to companies that carry out some processing or refining of minerals, albeit to lower purity levels than stipulated in Regulation 7 during the transitional period.
 
Observations
 
These significant changes are based on the reasonable philosophy that Indonesia should benefit more from downstream processing of its mineral resources. This is in line with the guiding principle in Indonesia’s constitution that its natural resources should be for the greatest benefit of its people. However, the processing and refining obligations as well as the export limitations introduced by Regulation 7 will have a significant impact on the Indonesian mining sector in light of the currently limited availability of processing and refining facilities in Indonesia. 
 
As things currently stand – unless there are further regulations in the future suggesting otherwise – for holders of Production IUPs issued before 6 February 2012 the export ban, for unprocessed mineral raw materials or ore, will take effect from 6 May 2012. 
 
However, Regulation 7 suggests that, for holders of Production Operation IUP or Contracts of Works which have carried out production before 6 February 2012, export of minerals that have been processed to some degree – but which are below the purity levels stipulated in Regulation 7 – may still be  permitted on a case-by-case basis until 12 January 2014, provided that they can clearly demonstrate to DGMM that they are actively planning and taking steps to comply with the level of processing required by Regulation 7.  
 
Significant investment into establishment of new and/or expansion of existing processing and refining facilities will be required in the years ahead if mining companies are to comply with the obligations imposed by Regulation 7. It will also be interesting to see how the DGMM will use its powers to “facilitate” other mining companies to process and/or refine the minerals, from mining companies where such processing and/or refining will be uneconomic if done on an independent basis. 
 
Share divestment obligations, extensions of Contracts of Work and Coal Cooperation Agreements and grant of IUP licences to foreign-owned mining companies – GR24 
 
Share divestment obligations
 
GR24 introduces a significant reversal of current policy on mandatory divestment of shares to local parties by reinstating the old policy applicable in 1980s that required a majority of shares in producing mining companies to be divested to Indonesian parties after a certain period. 
 
GR24 stipulates that 51% of shares in operating mining companies must be owned by Indonesian shareholder(s) by the end of 10th year from commencement of productions. Mining companies must ensure that the following proportions of shares are held by such Indonesian shareholder(s) according to the following schedule:
 
  • during 6th year from commencement of production: 20% 
  • during 7th year from commencement of production: 30% 
  • during 8th year from commencement of production: 37% 
  • during 9th year from commencement of production: 44% 
  • during 10th year from commencement of production: 51% 
 
Once the shares have been divested to local shareholders, the proportion of equity held by Indonesian parties may not be diluted by further share issues. 
 
GR24 also sets out the order of priority of Indonesian shareholders to whom the shares must be sold. Similarly with the previously applicable policy, the order of priority is:
 
1.     central government 
2.     regional, provincial or regency government 
3.     central government owned company 
4.     regional government owned company 
5.     private company wholly-owned by Indonesian entities 
 
The prescribed timetable for offers to be made by the mining companies, acceptance by the relevant purchasers and payments remains as set out in Government Regulation No. 23 of 2010 regarding Implementation of Mineral and Coal Mining Business Activities.
 
However, GR24 does not expressly set out whether or not the mandatory divestment requirement will be applicable where a mining company has already divested the requisite shareholding proportion to Indonesian shareholder(s) before the expiration of the relevant deadline. We are of the view that the mandatory share divestment process under GR24 should not apply where a mining company has sold the requisite proportion of shares to Indonesian shareholder(s) before the deadlines stipulated in GR24. This has been the experience in terms of Indonesian localisation obligations generally and in the mining sector specifically. 
 
The previous divestment policy contained in Contracts of Work or Coal Cooperation Agreements under which foreign investors could undertake mining projects in Indonesia prior to enactment of the 2009 Mining Law, resulted in a series of significant investment disputes between major international mining companies and Indonesian governmental authorities. The return to this retrograde policy will significantly hinder development of major new mining projects and reduce Indonesia’s competitiveness in the global mining industry. In order to minimise the risk of disputes arising, mining companies should consider bringing in private Indonesian shareholder(s) with whom proper commercial arrangements have been agreed ahead of the deadlines stipulated in GR24 in order to avoid the need to comply with the mandatory divestment process.
 
Extension of existing Contracts of Work and Coal Cooperation Agreements
 
GR24 also expressly provides that any extensions of existing Contracts of Work and Coal Cooperation Agreements will be granted in the form of IUPs to be issued by MEMR. Holders of Contracts of Work and Coal Cooperation Agreements must apply for such extensions at most two years and at least six months before the expiry date of the relevant contract. 
 
GR24 specifies certain administrative, technical,environmental and financial requirements that must be satisfied by the holder of Contract of Work or Coal Cooperation Agreement as part of the application. 
 
MEMR can reject an application for extension of Contracts of Work or Coal Cooperation Agreements if, based on supporting evidence submitted by the applicant, it appears that the applicant cannot demonstrate good performance of its mining business.
 
Grant of new IUP licences to foreign-owned mining companies
 
In a potentially significant departure from the previous policy, MEMR rather than the relevant local authorities will grant new IUPs to foreign-owned mining companies. However, in practice, the local authorities will remain responsible for conducting tenders over areas of land open for mining activities. 
 
The amendments introduced by GR24 appear to suggest that a foreign-owned mining company will need to participate in the tender declared by the local authority and, if it successful, will need to apply to MEMR for the grant of the IUP licence over such area. It is currently unclear how the local authorities and MEMR will coordinate in conducting the tender process by the regional government for new IUPs and the Minister issuing an IUP to a PMA company which wins the tender for grant of the IUP.
 
 
For further information, please contact:
 
David Dawborn, Partner, Herbert Smith
david.dawborn@hbtlaw.com
 
Brian Scott, Partner, Herbert Smith
brian.scott@herbertsmith.com
 
Mira Fadhya, Partner, Hiswara Bunjamin & Tandjung
mira.fadhya@hbtlaw.com
 
Vik Tang, Hiswara Bunjamin & Tandjung
vik.tang@herbertsmith.com
 

 

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