CorporateBriefing

February2009

TheLawonMineralandCoalMining(LawNo.4of2009,commonlyreferredtoasMinerba)replacestheprevious
MiningLawof1967.ThenewlawdoesawaywiththeContractofWork(CoW)andmarksthebeginningofthepermit
(IUP) era. Overall, the new law is more attractive to junior mining companies and less attractive to major world
class mining companies. Unfortunately, it is likely to deter large foreign investors from investing in the mining
sector.

The timing of the new law is significant as it is introduced in an election year. Appealing to current populist
sentiment,nationalinterestandnationalstrategicconsiderationsareclearlybeingpromoted.Forexample:

ThereisachangeintheconceptualframeworkfromaContractofWork,wheretheinvestorandthegovernment
are essentially equal partners to a contract, to a licensing system where the investor is subordinate to the
government.
Thenewlawimposesadomesticmarketobligationwherebyacertainamountofproductionmustbesetaside
fordomesticneeds(e.g.coalandironore).
Smelting/processingmustbeperformedinIndonesia.
PriorityistobegiventotheuseofdomesticgoodsandIndonesianmanpoweraswellasarequirementtouse
Indonesianminingservicecompanies.

Many issues require further guidance in the form of implementing regulations in order to make the new law
operational.ConsideringthattheGeneralElectionbeginsinApril2009,thesubjectispronetopoliticaldebateand
maneuvering.Consequently,whentheseregulationswillbeissuedremainsuncertain,butitislikelytobealengthy
process.Thecriticalquestioniswhetherthelawwillbepracticalandinvestorfriendlyonceitbecomesoperational.

Highlightsofthenewlawareprovidedbelow.

Miningareasandlicenses
Under the new law, the government will designate
certain areas as mining areas (Wilayah
Pertambangan). Those mining areas which have a
potentialforreserveswillbedividedintooneofthree
categories:
State Reserve Areas (Wilayah Pencadangan
Negara or WPN) this is similar to what was
coveredbytheformerContractofWork
General Mining Area (Wilayah Usaha
PertambanganorWUP)thisissimilartowhat

HarsonoHermantoStrategicConsultingistheadvisorofchoiceforprovidingbusiness,investmentandrelatedtaxandcustomsadvisoryservicesto
multinationalanddomesticcompaniesinawiderangeofbusinesssectors.


wascoveredbytheformerminingrightsystemor is issued a Mining Business License (Ijin Usaha
KP(KuasaPertambangan) Pertambangan or IUP) for a WIUP or a Special
Smallscale mining (Wilayah Pertambangan Mining Business License (IUP Khusus or IUPK) for a
Rakyat) WUIPK. This license system takes the place of both
theformerKPandCoW.
(Welimitourdiscussiontominingofcoalandmetals
and do not address smallscale mining in this Under the former KP and CoW systems, a company
newsletter.) was the sole contractor for all mining in the area,
although overlap between areas could exist in
TheStateReserveAreasareforlargestrategicmineral practice. In contrast, the IUP is issued for a specific
reservesofcopper,lead,nickel,gold,bauxite,ironore mineral or coal, not for a particular area. Thus, the
and coal. These areas are to be determined by the situation could potentially develop where multiple
Central Government with approval from the IUPs are issued to different companies which cover
Parliament. the same area. Although the original IUP holder is
grantedprioritybeforeanotherIUPisissued,itisnot
Once the government decides a WPN/State Reserve clearhowthisnewsystemwillworkinpracticeandwe
Area should be exploited, it will be converted to a await further clarification in the implementing
WUPKhusus(WUPK).TheWUPandWUPKarethen regulations.
subdivided into one or more smaller areas which can
be developed (Wilayah Izin Usaha Pertambangan or Below is a table whichsummarizes someof the main
WIUPandWIUPKhususorWIUPK).TheWIUPand differences between mining concessions under the
WIUPKareputtotenderandthewinnerofthetender newlawascomparedtotheKPandCoWsystem.

IUP/IUPK KP/CoW
Methodtoobtain WIUP:Tender KPandCoWgrantedbyrequest
concession WIUPK:OfferedfirsttoStateownedcompanies,then
totheprivatesectorthroughtender
Licensing IUP: KP:MiningrightgrantedbytheRegent(Bupati)
authority MinisterofEnergyandMineralResources:cross
province,oroffshoremorethan12miles CoW:ContractbetweentheGovernmentofIndonesia
Governor:crosssectorareasofregency/city,or andanIndonesianlimitedliabilitycompany(which
offshore412miles includesanIndonesiancompanywithforeign
Regent/mayor:regency/city,oroffshoreupto4 shareholder(PMA))
miles
IUPK:Minister
Issuedto IUP: KP:IndonesianindividualorwhollyIndonesianowned
Businessentity(includingPMA) company
Cooperative
Individual CoW:Limitedliabilitycompany(includingPMA)
IUPK:Businessentity(includingPMA)
Typeoflicense ExplorationIUP/IUPK(coversgeneralsurvey, KPsissuedfor:
exploration,feasibilitystudy) generalresearch/survey
ProductionIUP/IUPK(coversconstruction, exploration
mining,processing&refining,transport&sales) exploitation
processingandrefining

IUP/IUPK KP/CoW
transportationandsales
OneCoWcoversallminingactivities
Term ExplorationIUP/IUPK: KP:
Metals:8years Exploration:5years(3+2)
Coal:7years Exploitation:50years(30+20)
ProductionIUP/IUPK: CoW:
40years(20+10+10) Preoperatingphase:812years
Production:50years(30+20)
Maximum ExplorationIUP/IUPK: KP:
concessionarea Metals:100,000hectares 1,00010,000hectares
Coal:50,000hectares CoW:
ProductionIUP/IUPK: Minerals:250,000hectares
Metals:25,000hectares Coal:100,000hectares
Coal:15,000hectares

Even where the Central Government/Minister grants
the IUP, this is only done after obtaining a
recommendation from the governor as well as the
localregent/mayor.Asmorethanoneprovincewould
be involved, a number of recommendations will be
required.Thiscouldcreatedelayandotherpotential
issuesforinvestors.
Obligationsandrestrictions
Divestment
The IUP and IUPK may be issued to foreign owned
Indonesian companies (PMA), including those with
100% foreign ownership. This is consistent with the
new investment law and is a welcome improvement
over the KP scheme where only wholly Indonesian
owned companies could be granted the mining right.
If a foreign shareholder is involved, there is a
requirement to divest a portion to local parties after
five years from the start of production. Details
regardingdivestmentrequirementsaretobeprovided
inagovernmentregulation.
Onshoreprocessing
MineralsaretobeprocessedandrefinedinIndonesia.
Thedetailsofwhatthismeansaretobeclarifiedina
government regulation. However, the new law does
state that existing Contracts of Work are to comply
with this requirement within five years. In addition,
IUP/ IUPK holders will be able to process and refine
themineralsorcoalofotherIUP/IUPKholders.
The processing requirement is based on the well
established principle that governments have a policy
interest inrequiringvalueadded asa precondition of
exportingnaturalresources.Indonesiahassofarbeen
knownasanexporterofnaturalresources,wherethe
added value has taken place overseas, to the
detriment of Indonesia. However, there may be
practicalissuesforestablishedoperationswhichcould
render this onshore processing requirement difficult
toimplement.
Domesticmarketobligation
Acertainamountofproductionmustbesetasidefor
domestic needs. The unrestricted export of coal, for
example,hascreatedsignificantproblemsintermsof
meeting the domestic requirements needed to
generateelectricity.Byimposingthisdomesticmarket
obligation, the government is trying to fix a problem
whichhasbeenanissueforquitesometime.

Transitionalprovisions
The transitional provisions could potentially create
conflict.Ontheonehand,thelawstatesthatexisting
contractsaretobehonored.Ontheother,exceptfor
thoseprovisionsregardingStaterevenue,Contractsof
Workaretobeincompliancewiththenewlawwithin
oneyear.Nofurtherdetailisprovided.Accordingto
press reports, the government has said it will honor
existingcontractsandexpectsonlyminoradjustments
to be made to the existing contracts. However, it
remains to be seen whether the government will, in
fact, try to renegotiate existing contracts. If it does,
thiscouldcreatepoliticaldifficultiesaswellasamajor
disputewithexistingCoWcompanies.
KPs are not mentioned and their status is unclear.
OnepossibilityisthataKPwillbeconvertedtoanIUP
andforeigninvestorsallowedtotakeaninterestinthe
concession.Thismeansaforeignpartywhocurrently
hasaninterestintheprofitsbutdoesnotholdshares
in the KP Company can become a legal shareholder.
Note that care should be taken to consider the tax
implications if this change takes place, in particular,
thepotentialtaxoncapitalgains.
Other
Mining companies will be taxed in accordance
withtheprevailingtaxlaws,asineffectfromtime
totime.
A holder of a Production IUPK is required to pay
10% of net profit6% to regional governments
and4%tothecentralgovernment.
Mining companies with existing contracts must
submit a plan for their working area within one
year.Iftheplanisnotmet,thecontractareawill
bereducedinaccordancewiththenewlaw.
Indonesian mining support service companies
must be used. Mining companies cannot use an
affiliated mining service contractor without
Ministryapproval.
An IUP/IUPK cannot be transferred. The
appropriate authority must be informed of a
transfer of shares on the Indonesian stock
exchange.
To safeguard the national interest, the
government can determine the volume of
productionperyearforeachprovince.
SummaryWheredowegofromhere?
Implementing regulations, through government
regulation or decrees of a minister or regional
government,areneededtoprovidefurtherdetailsand
guidancetomakethenewlawoperational.Although
thelawstatesthesearetobeissuedwithinoneyear,
based on past experience, this is highly unlikely to
happen. Until further clarification is provided, we
expect many investors will take a wait and see
approachbeforemakingalargefinancialcommitment.
Miningisapoliticallysensitivetopicandthereisarisk
toforeigninvestmentifthemorepopulistpartieshave
theirway.Thenewlawcouldbechallengedbycertain
groups which would argue the law is contrary to the
Constitution as it does not fully protect the national
interest.Ifthishappens,thelawcouldbebroughtby
such groups for judicial review by the Constitutional
Court,resultinginfurtherdelayanduncertaintyasto
whenthenewlawwillbecomeoperational.
Another concern with the new law is that the
environment could potentially suffer. Smaller local
mining companies will likely be operating more
concessions and these companies often have less
oversightandoperatewithlessregardtotheirimpact
on the environment than larger companies which are
subjecttogreaterpublicscrutiny.
Onthebrightside,thetaxregimeunderthenewlaw
may be more favorable to mining companies than in
the past. The tax provisions in a CoW are not
superseded by the general tax laws (lex specialis).
Overtime,the tax lawshave become more favorable
to the taxpayer. Consequently, mining companies
have generally had to pay higher taxes under the
terms of their CoW thantheywould havepaid under
theprevailingtaxlaws.
Thebigquestioniswhatwillbetheimpactofthislaw
on investment in the mining sector. A CoW provides
greater legal certainty to the investor than a permit
systembecausetheCoWisprotectedbycontractlaw.
The new license system may create an unfavorable
situation for investors because they are now
subordinatetothegovernment.Thus,thenewlawis
a disappointment to foreign investors who were
hopingtheCoWsystemwouldremaininplace.
In addition, the size of the concessions is likely to
discourage the entrance of worldclass mining
operators as we believe the area offered will be
considered too small to justify any significant
investment.
Nevertheless, the new mining law may still be
attractive to junior mining companies (both national
companiesandmediumsizeinternationalcompanies)
andtocompaniesofferingprojectfinancingtosmaller
mining operations. However, it remains to be seen
whether large foreign mining companies will bother
investinginIndonesiauntilthereisamorewelcoming
environment.

Foradditionalinformation,pleasecontact:
HarsonoHermantoStrategicConsulting
SudirmanPlaza,PlazaMarein9thFloor
Jl.Jend.SudirmanKav.7678
Jakarta12910,Indonesia
Telephone:+62(21)57936777
Facsimile:+62(21)57936778

SonyB.Harsono,ChiefExecutiveOfficer
Email:sony.harsono@harsonostrategic.com
DwiAryRetnani,SeniorDirector
Email:dwiary.retnani@harsonostrategic.com
TerriShreve,DirectorAdvisor
Email:terri.shreve@harsonostrategic.com

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