This is my latest writing. Quite long since my last logout in wordpress. I hope you find this useful. This summarizes a major transition from the previous to the new mining law. At the time this writing is made public here, yes, we have a new mining law. But we are still waiting for the implementing regulations pending to several months later. I hope to complete my writing soon after the regulations are issued.
(A. Prasusetya, writer)
“MINING CONCESSIONS BETWEEN THE TWO MINING LAWS:
A TRANSITIONAL OVERVIEW”
‘A hard time’s product’, that is probably the most suitable nickname for the Law 4 of 2009 re. Mineral and Coal Mining (the New Mining Law). Even months before its stipulation, its bill gained numerous pros and cons from both mining business doers and amongst the Government officials itself. This issue was also quickly responded by Indonesian local governments; many of them seemed eager to execute this bill’s ideas, even at the sunset time where the Law 11 of 1967 (the Previous Mining Law) still reigned. For an instance, some local governments issued either double or quasi version of these regimes titled “KP/IUP” since confusions grew in the mining licences they issued. Before, for years, this bill had been remaining uncertain. In December 2008, Indonesian Senate eventually passed this bill, and soon, the President stipulated it into a law in 12 January 2009.
Indonesian mining business climate is well known as ironic, and to some degrees, paradoxical. The Fraser Institute made a breathtaking report in the year 2007 where Indonesia was found as one of the ten highly potential countries in connection with its mineral and coal resources. Yet on the same paper, Fraser Institute also stated that Indonesia was standing at the poorest appeal of foreign investment. Many things were calibrated in this issue with regulation uncertainty issues included.
What goes on particular concern here is how Indonesia would answer its challenge in this dilemma. Many people believe that mining industries in Indonesia must definitely be able to improve people’s welfare. That is exactly the solemn purpose of the Indonesian Constitution, containing a virtue by which Indonesian people must achieve these welfare goals.
As a country, Indonesia depends on international relationship with others. And Indonesia, however, must secure its interests by convincing other countries in order to establish mutual relationships and keep it alive. On the other hand, Indonesian mining business authorization lately, although seemed to be increasing before the New Mining Law stipulation, is now stopped at all. The Directorate General of Mineral, Coal, and Geothermal of Ministry of Energy and Mineral Resources (DGMCG) issued a circular early this year to maintain the business stabilization within a condition of regulation vacuum. Through a circular No. 03.E/31/DJB/2009 dated 30 January 2009 re. Authorizing Mining Licences Issued before the Law 4 of 2009 (Circular 03/2009), Government stopped authorizing mining licences at all, temporarily, until the implementing regulations of the New Mining Law are done. And what matters the most is, that the existing mining concessions including any contract with Government must be completely adjusted with this law.
As a matter of fact, since the New Mining Law definitely relies on its implementing regulations which, by the date this paper is made public, are not yet done. The real living mining law will, however, be completely subject to these regulations. Some of information obtained in this material are taken from the drafts of these implementing regulations. But the final provision takes some more times.
B. Mining concessions adjustment
One of the issues that significantly rises as the central spot, for which all main adjustment must be held, is a system transition from the Previous Mining Law to the New Mining Law. And for this, the New Mining Law only provides a 1 year period as of the date of 12 January 2009 when the law stipulated.
It is known that the New Mining Law applies only licence model for all mining authorizations issued thereunder (the licence regime). To the contrast of it, the Previous Mining Law applied both (but mainly addressed as the contract regime). Following is a table describing a comparison of transitional system change for Contract of Work (Ind., KK), Coal Contract of Work (Ind., PKP2B), Coal Mining Licence (Ind., KP), and Local Mining Licence (Ind., SIPD), into Mining Business Licence (Ind., IUP)/Special Mining Business Licence (Ind., IUPK) in their connection with contract and licence regimes.
Under the Previous Mining Law, the contract regime was applied. The most significant matter adopted by the New Mining Law is that the contract regime is over and now replaced by licence regime. Such transition from contract to licence regime is ruled by the New Mining Law as follow:
- “Contracts of works and coal contracts of works that already exist prior to the effectiveness of this Law shall remain valid until the contracts/agreements expire.
- The terms that are stated by articles of Contracts of works and coal contracts of works as intended by point (a) shall be adjusted at the latest 1 (one) year of the promulgation of this Law, with the exception of state revenues.”
Slightly seen, there is an inconsistency between the two points, for which many controversies arise. Point a of this provision respects the Contract of Work (Ind., KK) and Coal Contract of Work (Ind., PKP2B), while point b strongly requires these contracts to be adjusted accordingly with the New Mining Law. Such inconsistency created a hole for which the Government itself must try to cover in order to maintain mining business climate stability in Indonesia. And once again, what Fraser Institute concerned does occur.
From the provision above, we may conclude this:
In accordance with article 1338 of the Indonesian Civil Code as a basic law, upon which common practices occur, any agreement into which parties enter prevails and binds them as a law (pacta sunt servanda). This is also known as the principle of Sanctity of Contract where contract must be respected. Therefore, although the New Mining Law’s provisions must prevail by adjusting the contracts, it cannot overrule the pacta sunt servanda principle. All in all, the KK and PKP2B contracts remain valid as contracts until their respective expiries and will not be changed into IUP/IUPK licences until their respective expiry date.
Beside a requirement to adjust, the law also limit the extension of KK and PKP2B. Generally, a contract can be renewed or extended whensoever the expiry date comes to occur, subject to the contract’s provisions themselves. But the New Mining Law prevents this, ruling that after the expiry date each contract must be proceeded through an tender. In connection with the tender activities, this concept is newly introduced in our mining law. Tender, as provided under the New Mining Law, must be performed when:
(1) applying new mining licences
The drafts of implementing regulations govern that the new mining licences (IUP/IUPK) applied must go through 2 mechanisms consecutively, i.e. (1) a tender process to obtain the mining area (later explained as WIUP and WIUPK) and (2) a mechanism to obtain the relevant mining licences (IUP/IUPK) in accordance with the obtained area. The drafts do not explain any procedure should an applicant manages to obtain a mining area but is failed in obtaining the mining licence.
The types of mining licence which require tender mechanisms are:
– IUP for metal mineral,
– IUP for coal, and
– IUPK in case it is applied by private business entities.
(2) adjusting the KK and PKP2B contracts after it is expired.
In the events of expiry, the KK and PKP2B contracts will be terminated. And through tender mechanisms, they will become IUP/IUPK. Through these mechanisms, a KK/PKP2B holder cannot extend the contracts validity. Instead, it may obtain the area after a tender process. A special right is introduced here as the right to match, by which a chance is given to the (former) KK/PKP2B holder to match the highest bidder at the tender process. Should it be able to match the price, then it will be the mining licence holder upon the ex KK/PKP2B area. And thereon, the mining concession will take form in IUP/IUPK instead of KK/PKP2B.
The elucidation to article 169(b) explains that such adjustment must apply over all articles of KK and PKP2B contracts. The only thing excluded from this provision is any effort to increase the State’s income. In other words, the Government may discretionally determine which provision under either the original contracts or the adjustment benefits it the most.
The New Mining Law does not regulate any event of incompliance with this provision. Most likely, should any incompliance event occurs, article 154 will prevail. Article 154 provides that any dispute (including incompliance in adjusting the KK and PKP2B contracts) will be filed to the relevant domestic courts and domestic arbitration. Related to this issue, the only possible way of disputing a licence is settled by the administrative courts, not arbitration. This is because IUP/IUPK, into which KK and PKP2B will be changed, is a licence discretionally issued by Government and no longer is a contract.
Further, article 172 of the New Mining Law details that KK/PKP2B which will be processed without tender are those which meet following requirements:
- had been submitted to the Minister at the latest of 1 year before the law’s stipulation; and
- already obtained principal approval or preliminary survey licence.
C. The two regulations guiding the transitional period
Indonesian mining business doers must be thankful for the initiatives made by the Ministry of Energy and Mineral Resources (MEMR). The ministry provides several regulations to cover the orders vested in the New Mining Law. Since the law itself is a political product and not the experts’, there are many weaknesses in countless number. But this stimulates the Ministry to be open in persuading mining business doers to participate in the making of implementing regulations. In Indonesia where the government is accustomed with one way direction of regulation, this is very rare and should be highly appreciated.
The DGMCG also issued a letter No. 1053/30/DJB/2009 dated 24 March 2009 re. Mining Business Licences (Letter 1053/2009) following the Circular 03/2009 where it is regulated therein that any in-process KK and PKP2B application which (1) had been applied 6 months before the New Mining Law stipulated (before the date of 12 January 2009) and (2) already obtained a Principal Approval, can proceed for an IUP/IUPK without having to go through tender. But the applicant must establish an Indonesian legal entity, for which the applicant must have an approval from the Minister of Law and Human Rights. Here lies a triangle of authorization where the Indonesian legal entity establishment requires followings:
- recommended by the DGMCG;
- coordinated with the Ministry of Law and Human Rights (MLHR); and
- coordinated with Indonesian Coordination Board for Investment (Ind., BKPM).
Lastly, the application which will end in IUP/IUPK authorization must be arranged accordingly with the format explained in the Letter 1053/2009.
The Circular 03/2009 which was issued in 30 January 2009 mainly governs the provisions as follow:
(1) To cover the absence of KP regulation under the New Mining Law (although it engages a new difficulty, see point F of this paper).
(2) To halt temporarily all mining concession authorizations until the implementing regulations are issued. All mining authorization issued by Minister, governors, regents/mayors dated after 12 January 2009 must be held null and void (note that this circular letter issued by DGMCG is directed to deal with Minister’s decrees using this treatment, while DGMCG is clearly subordinated under the Minister himself).
(3) To invite all relevant KP holders to submit the KPs which had been applied and had already obtained area allocation approval before the New Mining Law was stipulated (12 January 2009) at the latest of 1 month after the circular’s issuance, to the Minister.
(4) To invite all relevant KP holders which already at the stage of exploration or exploitation at the latest 6 months before 12 January 2009 to submit their mining activity plans containing all areas until the KP expiry date, to the Minister.
(5) New applications to SIPD will be processed accordingly for IUP.
(6) Each of the KK/PKP2B applicant intended by article 172 of the New Mining Law, must establish an Indonesian incorporated legal entity.
And lastly, the Letter 1053/2009 which was issued in the date of 24 March 2009, following the Circular 03/2009 governs followings:
(1) Obligation to change KP into IUP using the attached formats.
(2) All KP new application (which initially to obtain a new KP) submitted before 12 January 2009 can be proceeded without having to go through tender procedure.
(3) All KP stage improvement and extension application must be proceeded accordingly with the New Mining Law using the attached IUP formats (using tender procedure).
(4) All KP new application, stage improvement, and extension must provide sitemap and coordinates to the DGMCG.
(5) Each of the KK/PKP2B applicant intended by article 172 of the New Mining Law, must establish an Indonesian incorporated legal entity. The applications will be proceeded without tender, but using attached IUP format.
(6) Triangle coordination: MLHR, BKPM, and DGMCG.
D. Area Concept
The concept adopted in authorizing the new licence types are principally based on area concept. IUP and IUPK are granted after tendering the relevant area. Following is a diagram describing how mining area in Indonesia are assigned.
|Area allocation scheme for IUP|
|1||WUP is allocated from some parts of WP area, marked by availabilities of geological and potentials information|
|2||A WUP consists of several WIUP|
|3||WIUP is an area assigned to IUP holder|
|Area allocation scheme for IUPK|
|4||WPN is a part of WP which is exclusively allocated in connection with national strategic interest|
|5||WUPK is a part of WPN upon which particular mining activities are authorized|
|6||WIUPK is a part of WUPK|
|7||WIUPK is an area assigned to IUPK holder|
|Area allocation scheme for IPR|
|8||WPR is a part of WP allocated solely for people mining activities|
|9||WPR is an area assigned to IPR holder|
E. New forms: IUP and IUPK
IUP and IUPK both are created from different concept and each has different nature. Following is a table of comparison to these mining licences. Beside the two types, the New Mining Law also provides the smallest scale of mining licence, by which the local people perform their mining activities, i.e. People Mining Licence (Ind., IPR). The IUP mining activities are conducted in WIUP (IUP Area) while IUPK and IPR are conducted consecutively in WIUPK (IUPK Area) and WPR (IPR Area).
Following is a table explaining a simple comparison between IUP and IUPK contained in the GR draft.
WIUPK, in which area IUPK mining activities are performed, is authorized by Minister of Energy and Mineral Resources (Minister). Article 27 rules that WIUPK is an area derived from the State Allocation Area (Ind., WPN). The WPN is jointly determined by President and Senate concerning national strategic interests. For this reason, all IUPK authorizations must be granted by the Minister and subject to the Senate’s approval. Therefore, we may conclude that IUPK is obtained for more specific and strategic business objectives in connection with the State’s interests.
F. KP is at a null-regulation condition
As a political product, a law cannot be expected much. Instead, it is the government’s role (through MEMR) to cover such legal ideas in proper regulations. The fact is, the New Mining Law does not mention any provision, neither directly or indirectly, regulating the KP. It is quite unreasonable since the number of this type of mining licence under the Previous Mining Law positions at the highest rank over the number of KK and PKP2B. Pursuant to information from DGMCG this year 2009, there are 2513 active KPs (from general survey to transportation and selling); compare with the number of active KKs (42) and PKP2Bs (76). Here the mining business doers sense that there is something not right with regulation making process in Indonesia, by which the mining business climate darkens.
Viewing that Indonesian Government must be responsible for business climate in Indonesia, the DGCMG tries to cover this problematic condition by issuing the 2 regulations, i.e. the Circular 03/2009 and Letter 1053/2009. The latest regulates that KP will change into IUP and not IUPK. Despite of these responsive initiatives, there is a weakness in relying on the circulars. Theoretically, a law must be delegated into a regulation. But it needs a very clear certainty whether the circular types can be classified into regulation class. And in accordance with the Law 10 of 2004 re. Forming Laws and Regulations (Law 10/2004), it is not classified into the regulation class.
Pursuant to article 7.1 of the Law 10/2004, the hierarchy of laws and regulations in Indonesia is constituted by (a) Constitution 1945, (b) Laws/Government Regulations in lieu of Laws, (c) Government Regulations, (d) Presidential Regulations, and (e) Local Regulations.
Furthermore, the elucidation to article 7.4 provides several items which can be classified into the laws and regulations type, i.e. regulations issued by (a) People Assembly, (b) Senate, (c) House of Representatives, (d) Supreme Court, (e) Constitutional Court, (f) State Audit Board, (g) Bank Indonesia, (h) Ministers, (i) head of state organs, (j) head of state agencies, (k) head of commissions, (l) People Legislative Council in each province, (m) governors, (n) People Legislative Council in each regency/municipality, (o) regents/mayors, and (p) village heads.
Therefore, the KP position regarding the two circulars governing it is basically on an improper standing. The most effective solution for this is by changing these circulars into ministerial regulation by the Minister of Energy and Mineral Resources, by which the legal effect is acknowledged as conferred from regulation class.
Compared to the KK and PKP2B, KP consists practically of several steps of mining stages. Unlike KK and PKP2B, KP is rather complicated to be authorized. For example, a KK or PKP2B grants the licence holder rights to mine, starting from general survey to transportation and selling. But each stage of KP requires obtaining a specific and relevant mining licence respectively. Nevertheless, the New Mining Law guarantees that a licence holder will obtain the licence for next mining stages, whereby a certainty is created. Following is a table overviewing its stages, compared to the IUP/IUPK, into which the KP licence will be changed.
G. Concept of mining product ownership
Concept of ownership to the mining product is perhaps the backbone concept of the entire mining business activities, by which a mining business doer sells its mineral/coal excavated from the mining licence area. Article 92 of the New Mining Law states a concept of mining product ownership as follow:
“IUP holders and IUPK holders shall be entitled to own minerals, including associated minerals, or coal they have produced if already paying exploration contribution or production contribution, except for radioactive associated minerals.”
From the provision above, we may conclude that a transfer of ownership occurs once the mining company pays: (a) exploration contribution, or production contribution (royalty). In the KK and PKP2B practices, and for KP, based on Government Regulation No. 45 year 2003 re. Tariffs on Non Tax State Income Prevails for the MEMR (GR 45/2003), such payment (the production contribution) is acknowledged as royalty, i.e. percentage given to the Government(s). Under the Previous Mining Law and GR 45/2003, royalty is a percentage set against sales price (practically FOB prices). The royalty tariffs are set differently for both open pit mining and under ground mining variously from low calorie-coal to high calorie-coal. Under the New Mining Law, royalty will most seemingly adopt the GR 45/2003, unless provided otherwise in the future by another GR.
Obligation to pay royalty prevails over KK, PKP2B, and KP holders. But in accordance with the Presidential Decree No. 75 of 1996 re. Main Regulation to PKP2B (PR 75/96), PKP2B holders are also charged with certain contribution in addition for royalty namely Fees for Coal Sales Proceed (Ind., DHPB) for an amount of 13.5% set against the coal production, paid based on FOB price. This percentage is nailed down and not subject to any change of taxation policies during the contract period. What differs DHPB from royalty is that DHPB is charged to a mining company regardless of the mining product quality mined. On the contrary, royalty is charged to a mining company based on the mining product quality. Further, the GR 45/2003 sets out the royalty fee for each mining product along with their qualities. In addition, DHPB in 13.5% already includes (1) exploration contribution, (2) exploitation contribution (or royalty), and (3) VAT.
Particularly to Operation-Production IUPK holder under the New Mining Law, an extra contribution fee (IUPK contribution fee) is charged. IUPK contribution fee is set against nett income, and the tariff is flat at the rate of 10%. This means that besides the royalty obligation, IUPK holders must also pay the contribution fee. The implementing regulation of this law must clearly define whether or not such payment includes royalty. This fee is unique since it is related with the concept of local governance. Under the Law 32 of 2004 re. Autonomous Governments (Law 32/204), Indonesia no longer applies centralization like it did completely before the 4 amendments to Constitution 1945 (year 1999 to 2002). This is an age where local governance concept pushes forward and influences almost over all issues. Accordingly, the governing approaches, especially in the mining business authorization case, are completely different as well. This description might give representing ideas for the authorities held by the Government and local governments in connection with 10% contribution fee payment charged to IUPK holders; through article 129 of the New Mining Law, local governments have more powerful authorization, including income arrangement governed by the New Mining Law as provided following in the table:
In the mining area, it is possible to discover another type (or more than one) of mining material other than what authorized by the mining licence to holders. Mining any material other than what authorized must be licenced as well. But in this case, a right of first priority is given to the relevant holder in order to mine the newly discovered material, regardless the holder is to accept or decline such right. This right is also known as the right of first refusal. In case the holder accepts it, then it will be granted with an Exploration IUP.
An excavated mining material might be accompanied by a secondary mining material.
H. Transitional provisions to mining area
Principally, under article 169 of the New Mining Law, all aspects regulated by the existing mining concessions must completely be adjusted accordingly to the law’s provisions. Another important issue to the mining business is the area issue. In connection with such change this law brings about, any undesired effect is, however, inevitable.
The mining area must be adjusted in a complete accordance with the New Mining Law as follow:
Based on the area limitation explained above, an adjustment must follow. In case the real area is bigger than the maximum area allowed, it must be narrowed down due to the maximum area. But the New Mining Law does not rule any event in case the real area is smaller than the minimum area allowed. This issue is deeply concerned by local governments since in certain regencies, the areas are already blocked with other big mining licences, so there are only small-sized areas left and they definitely do not meet the minimum area requirement. Following is an adjustment mechanism which is contained in the GR draft.
I. Who can hold mining licences?
Another significant basic principle brought by the New Mining Law, which basically is quite contrary with the previous law, is the legal entities permitted to hold the mining licences. Below is a comparison for the certain mining concessions under both Previous Mining Law and New Mining Law.
The draft of implementing regulations state that unlike KP, IUP ownership is limited to one IUP can be held by a mining company, unless the company goes through an IPO to become a public listed company. The issue change, from exclusive concession holding to open concession holding as drawn in the table above, is predicted to influence the mining investment climate considerably. Under the New Mining Law both domestic investment and foreign investment companies are treated equally in connection with holding mining licences. Unlike the Previous Mining Law period in which many Indonesian and foreign companies conduct nominee arrangements to manoeuvre the Law in connection with KP holding, which eventually is banned by the Law 25 of 2007 re. Investment, such trick is now no longer necessary since the New Mining Law opens opportunities of holding mining licences fairly.
One thing must be noted that foreign investment has never been meant to be held as merely business activities. Indonesian laws and regulation from time to time, both directly or indirectly regulating foreign investment, require several mutual understandings focused in spirit of welfare achievement for Indonesian people. For an instance, related to manpower, a foreign investment company must limit the number of their foreign employees to work in Indonesia, or otherwise set a first priority to using Indonesian workers. This also becomes concern of the New Mining Law.
Based on this objective, the New Mining Law directs the mining business climate in Indonesia to be fair for any business doer and prioritize the people welfare at the same time. This stimulates more restrictive design charged to foreign investment such as divestment obligation to mining foreign investment companies. Now, although chances for obtaining mining licences are opened fairly, mining foreign investment companies must perform divestment after five years producing. The drafts of implementing regulations appoint that divestment obligation must be conducted to achieve a minimum limit of 20% shares divested. This divestment obligation must be performed gradually in 4 years consecutively after the fifth year of producing respectively 5%, starting from the sixth year to ninth year. It is expected that at the end of ninth year, the companies will already have divested at least 20% of its shares. Should any of the companies finishes its obligation before the ninth year, it will not be charged with the same obligation. A further and prominent opinion was contributed by some of mining business doers during the beginning of the drafting process that all of the mining companies must perform initial public offering (IPO) processes to achieve a status of Tbk. or publicly listed limited liability company. This is believed to optimize the transparency of the respective companies and to boost up the output performance. In addition, this idea was based on the fact of a post IPO condition to a BUMN mining company in which its performance increased remarkably. Nonetheless, in spite the idea’s fineness, more business doers are certainly objected with that and concern about the small scale mining companies which outnumber the big companies, so perhaps it could be applied in the future.
Another provision which is believed to tremble down business investment climate in Indonesia is the prohibition against using foreign investment mining services companies. Article 124 of the New Mining Law states as follow:
(1) “IUP holders or IUPK holders must engage local and/or national mining services companies.
(2) Where no mining services company as intended by section (1) is available, IUP holders or IUPK holders may engage other mining services companies of Indonesian legal entity.”
The provision above does not clearly direct that the foreign investment mining services companies are prohibited. But the section (1) is clear enough to be interpreted that the local and/or national mining services companies will always be engaged since the local and/or national mining services company do exist. Therefore, insofar as the local and/or national mining service company is available, the licence holder cannot use foreign investment mining services companies. Consequently, the foreign investment mining services companies simply can no longer operate their business in Indonesia. Such condition must also be covered by the implementing regulations.
As a political product, a law cannot cover the entire things. After a long deliberation, Indonesia cannot prolong its outdated mining law. A need of a new law replacing the Previous Mining Law is urgent, and perfection is something everyone must not expect. Instead, knowing that the New Mining Law is not as once expected, the MEMR takes remarkable initiatives to cover its shortcomings. The MEMR is perhaps the first governmental instrument in Indonesia which welcomes the business entities to contribute their ideas through regulation making. And this is highly appreciated by the business entities doing their mining activities in Indonesia.
Regarding the foreign investment in Indonesia, especially related to divestment obligation and prohibition against foreign mining service, this is perhaps the time where contributions are most welcomed due to the implementing regulation making. But certain legal consultation field might seemingly be able to legalize the transaction by using corporate structuring. Learning from the past where nominee agreements arose, this exercised corporate and transaction structuring mechanism as well by taking part in corporate identity changing. Such mechanism is believed could be applied by either changing the corporate identities or changing the nature of transaction itself. If all difficulties have their way out, then the next challenge is how to trust the system. This question is given exclusively to all the mining practitioners with no exception, towards better prospective and brighter dream of people’s welfare. (Andree Prasusetya)