4 indonesia. 4.1 Regulatory framework

Transcription

1 INDONESIA

2

3 HERBERT SMITH FREEHILLS indonesia 43 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 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 Where a mining company s 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. 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 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 Law 2009: 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

4 44 indonesia HERBERT SMITH FREEHILLS 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. 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

5 HERBERT SMITH FREEHILLS indonesia 45 converted into IUPs and the determination in respect of the relevant mining areas should have been carried out by at the latest 30 April 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: 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 this chapter.

6 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 covered Exploration IUP General survey, exploration and feasibility study stages of the mining process. Type of mineral Metals Maximum period and size of mining area Up to 8 years 5,000 Ha up to 100,000 Ha Special types of non-metallic minerals (diamonds and gemstones, limestone) Up to 7 years 500 Ha up to 25,000 Ha 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 Production Operation IUP Construction, mining, processing and refinery, sales and transportation of minerals. Rocks Metals Special types of non-metallic minerals Up to 3 years 5 Ha up to 5,000 Ha Up to 20 years, subject to two extensions for 10 years each Up to 25,000 Ha Up to 20 years, subject to two extensions for 10 years each Up to 5,000 Ha Coal Non-metallic minerals Rocks Up to 20 years, subject to two extensions for 10 years each Up to 15,000 Ha Up to 10 years subject to two extensions for 5 years each Up to 5,000 Ha 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.

7 HERBERT SMITH FREEHILLS indonesia 47 (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 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; 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 preferred bidder. 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 an upgrade.

8 48 indonesia HERBERT SMITH FREEHILLS (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 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 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

9 HERBERT SMITH FREEHILLS indonesia 49 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 party s 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 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 divestment shares). 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.

10 50 indonesia HERBERT SMITH FREEHILLS Given the sequential offering process to each priority party, in practice the timing for any divestment process could be very long. Historically divestment processes by Indonesian mining companies have been notoriously protracted. Where the divestment shares are not transferred to an Indonesian party after the relevant anniversary of the Production Operation IUP licence date, they must be offered in the subsequent year under a similar process. GR23 does not provide for a time limit on how long IUP Companies will need to continue to offer the divestment shares for but, given the sensitive nature of the issue, in our opinion it is likely that the government of Indonesia will insist on the divestment process to continue annually until the requisite proportion has been sold to local parties. However, the divestment process for IUP Companies has not yet been tested and it remains to be seen how it will work in practice. It seems unlikely that the listing of the IUP Company itself on the Indonesia Stock Exchange, with a minimum public ownership of the requisite percentage of shares, will satisfy the divestment requirement. This method is not specifically provided for in the Mining Law 2009 or GR23 and the provisions of the draft divestment regulation support this conclusion. On the current wording of the Mining Law 2009 and GR23, if an IUP Company already has, at the relevant deadline, at least the relevant percentage of equity ownership held by Indonesian parties, the foreign shareholders would not need to follow the divestment process under GR23 and the divestment obligations under the Mining Law 2009 should be deemed satisfied. Officials at the MEMR have verbally confirmed to us that this is their intention (and to date share localisations in Indonesia under COWs and CCOWs which contained divestment obligations have proceeded on that basis). Equally, in our view, where a proportion of shares less than the requisite percentage of the share capital in an IUP Company is held by an Indonesian party, this proportion should count towards the relevant percentage of localisation obligation under the Mining Law Again this is consistent with past practice under COWs and CCOWs which contained divestment obligations. COW and CCOW companies Whether share divestment obligations apply to the companies holding COWs and CCOWs will depend on the precise wording of the relevant COW or CCOW. To the extent that the COW or CCOW contains a divestment obligation, foreign shareholders will continue be subject to such obligation. The government of Indonesia has indicated that the divestment of shares to local parties is one of the key areas that should be adjusted in COWs and CCOWs, given that in later generations of COWs and CCOWs the percentage of shares to be divested to local parties was often set at a much lower level than the 51% stipulated in GR23. However, such adjustments would have to be agreed to by both the government of Indonesia and the mining companies and the government of Indonesia would not be able to impose such adjustments unilaterally. However, once the COW or CCOW is extended by way of a conversion to IUP, the mining companies would become subject to the divestment obligations under GR23, although it remains to be seen how this transition (and any subsequent divestments) would be implemented in practice.

11 HERBERT SMITH FREEHILLS indonesia 51 Appointment of mining services contractors The Mining Law 2009 introduced an obligation for holders of IUPs to give priority to local mining services companies and/or national mining services companies. The Mining Law 2009 further elaborates that an IUP holder may only engage a foreign owned mining services company (Other Mining Services Company) if a Local Mining Services Company or National Mining Services Company (both of which must be wholly Indonesian owned) is not available. Further details in relation to the above obligation are set out in the MEMR Regulation 28/2009, which provides that an IUP holder may only engage an Other Mining Services Company after publishing an announcement in the local and/or national mass media and not finding a Local Mining Services Company or a National Mining Services Company which can fulfil the classification and qualification required by an IUP holder. In addition to the new provisions prioritising use of Local or National Mining Services Companies, MEMR Regulation 28/2009 also introduced an important restriction on the types of services that can be contracted out to mining services companies by IUP holders that have reached exploitation phase. MEMR Regulation 28/2009 provides that an IUP holder in the Production Operation stage must conduct its own mining and the only operational mining services that a mining service company can provide are the stripping of overburden. Mining services companies are however able to provide a range of other mining services including exploration, mining construction, processing and refining, hauling services and reclamation services. MEMR Regulation 28/2009 therefore prohibits mining companies from contracting out actual mining activities to mining services companies. It remains to be seen how these restrictions will be implemented in practice given that many of the largest mining companies in Indonesia have to date been operating on the basis of contracting out significantly all mining activities to mining services companies. MEMR Regulation 28/2009 also prohibits IUP holders from receiving any fees for work contracted out to mining services companies. MEMR Regulation 28/2009 is stated to apply with immediate effect to all mining services contracts entered into on or after 30 September Where a mining services contract pre-dates MEMR Regulation 28/2009, the mining services contract must have been adjusted to comply with the provisions of MEMR Regulation 28/2009 within three years from the date of Regulation 28 (ie by 30 September 2012). A mining services company that acts in contravention of MEMR Regulation 28/2009 and carries out services beyond the scope prescribed in MEMR Regulation 28/2009 will be subject to administrative sanctions which range from written warnings, temporary suspension of mining licences or, ultimately, potential revocation of the mining services business licence or the statement letter of registration. MEMR Regulation 28/2009 also introduced a restriction on ability of IUP holders to appoint subsidiaries or affiliated parties as mining services contractors. The appointment of subsidiaries or affiliates will require prior approval from DGMC, which will only be granted in very limited circumstances.

12 52 indonesia HERBERT SMITH FREEHILLS 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 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.

13 HERBERT SMITH FREEHILLS indonesia 53 In order to continue export of unprocessed minerals and ore, mining company must: have been registered as a Registered Mining Products Exporter by the Ministry of Finance through Director General of Foreign Trade (DGFT); and have received a Mining Products Export Approval from the Ministry of Finance through DGFT. In order to be approved as Registered Mining Products Exporter and to obtain Mining Products Export Approval, mining companies are required to submit various documents to the DGFT, including a recommendation letter from the DGMC which will set out the type of minerals to be exported by the company, total export quotas, duration of export activities, the port of loading and the country of destination. The requirements for obtaining a recommendation from DGMC for an IUP company to register as Registered Mining Products Exporter or obtaining the Mining Products Export Approval have now been set out in the new Regulation of DGMC No.574.K/30/DJB/2012 dated 11 May 2012 (Regulation 574/2012). The recommendation from DGMC under Regulation 574/2012 is only granted to IUP companies; there is no clarity in Regulation 574/2012 as to the procedure for a COW company to obtain a recommendation or whether that is required at all. As part of the process for obtaining a recommendation from DGMC, a mining company will be required to sign an Integrity Pact (paketa integritas) with the government which, among other things, will provide that the mining company will cease to export unprocessed minerals by Mining companies are also required to submit work plans for the construction of processing and refining facilities (or a copy of any agreement with other mining companies in relation to the construction of shared processing and refining facilities). In addition, mining companies also need to prove title to their mining authorisation and submit evidence of compliance with all requirements under their IUP, including payment of taxes and royalties. It will be vitally important that the mining company s IUP is included in the Clean and Clear List prepared by the MEMR, which lists the mining authorisations that, in the view of MEMR, are free from any overlapping claims. Importantly, exports will only be permitted subject to payment by the mining companies of an additional export tax (as stipulated in MOF Regulation No.75/PMK/.011/2012 (Regulation 75/2012)). The export tax rate for unprocessed minerals and ore is 20%. Regulation 75/2012 sets out two separate formulas for calculation of the total export tax payable, although it appears that only one formula is applicable to exports of unprocessed minerals and ore. The calculation is based on the percentage of Export Price (advalorum) set by the Director General of Customs and Excise (DGCE) on behalf of the MOF and other relevant officials in accordance with the benchmark of Export Price. The Export Price will be stipulated by DGCE each month based on international market price for the relevant minerals and in consultation with mining companies. Where the exported product is a compound of several ore, the export tax will be calculated based on the Export Price of the highest-priced component.

14 54 indonesia HERBERT SMITH FREEHILLS 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 574/2012 although 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. 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 the agreement. 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.

15 HERBERT SMITH FREEHILLS indonesia 55 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 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 20 March 2011). 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.

16 56 indonesia HERBERT SMITH FREEHILLS 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 (ie Minister 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 the audit. 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 and permits. 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. 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 be complete. 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 as complete. 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.

17 HERBERT SMITH FREEHILLS indonesia 57 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 23 February 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 GR 27/2012. 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 company s 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; 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.

18 58 indonesia HERBERT SMITH FREEHILLS (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 (ie by 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 the environment. Where an area has been categorised as a production forest or protected forest under the Forestry Law, a mining authorisation 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

19 HERBERT SMITH FREEHILLS indonesia 59 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 20 May 2011; 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 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 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

20 60 indonesia HERBERT SMITH FREEHILLS 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). 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.