mining sector – regulatory developments, opportunities and ... · indonesian energy and...

Indonesian Energy and Infrastructure Seminar

Luke Devine

Hadiputranto, Hadinoto & Partners is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

Mining Sector –Regulatory Developments,

Opportunities and Challenges

©2005 Hadiputranto, Hadinoto & Partners 2

Mining Sector - Regulatory Developments, Opportunities and Challenges

• For purposes of regulation, mining projects treated differently depending on whether there is any foreign ownership in mining company:– With foreign investment – Contract of Work (CoW)

for general mining and Coal Contract of Work (CCoW) for coal mining (together “CoW”)• Binding legal contract between Government and mining

company (foreign investment (PMA) company)– Without foreign investment

• Mining Authorization (KP) - license (including regional mining license/SIPD for Class C Minerals)

• CoWs and CCoW (PMDN companies)



• For new mining projects involving foreign investment, a CoW is entered into between Government and the mining company:– Investor establishes a foreign investment (PMA)

company• Can be a joint venture with foreign/local interests: current

foreign ownership restriction for new companies is 95% maximum

• No requirement on minimum amount of capital; existing policy refers to what is reasonable in the industry

– PMA signs contract with Government setting out rights and obligations of both parties in relation to mine development

• For new mining projects not involving foreign investment, a KP is issued by the respective regional government



• Contract of Works vs Mining Authorisation– Contract vs Licence

• Dispute resolution– COW: international arbitration– KP: recourse is to local Administrative Court

• Taxes– COW: freezes tax regime to that in place at time of

contract signing– KP: subject to applicable tax regime from time to time



• Contract of Works vs Mining Authorisation– Development phases

• There are a number of phases of mine life development, including general survey, feasibility, exploration and exploitation

– COW: the contract covers all of the various phases, and specifies the contractors obligations for each phase

– KP: only issued in respect of a single phase» Need to re-apply after completion of each phase» Risk of subsequent KPs not being issued



• Contract of Works vs Mining Authorization– Time for grant

• COW application is now done at regional level• COW draft is initialed by the head of region, after being

discussed by the applicant and the negotiation team (comprising central and regional government officials)

• The initialed draft is submitted by the Minister of Energy and Mineral Resources (“Minister”) to BKPM to obtain its recommendation and to be approved by the (central) House of Representative (DPR)

• After being approved by BKPM and DPR, the Minister will submit the draft COW to the President to obtain his approval

• The approved COW draft will be signed between the Minister, on behalf of the Government, and the applicant, witnessed by the relevant head of region

• Hence process is time consuming



• Regional Autonomy– Constantly moving!– All COWs and KPs were previously signed or issued

by Central Government– Grant of new KPs now with Regional Governments – Signing of new COWs are done by the Central

Government with due coordination with the Regional Government

– Existing COWs remain administered by Central Government until expiry

– Existing KPs are now administered by Regional Governments



Regulatory Responsibility

• Regional Autonomy

Mine 1Mine 2

Mine 3

Green Province

Regency 1

Regency 2 Regency 3

Regency 4

Brown Province



• Generations of Contracts of Work– Different generations have different

provisions• 3 Generations of CCOW• 7 Generations of General Mining COW

– Most important differences relate to:• Applicable taxes• Ownership of minerals• Ownership of plant and equipment at site• Divestment requirements



• Development phases– There are a number of phases of mine life

development, including general survey, feasibility, exploration and exploitation, which are covered by CoW

• Minimum spend obligations for each phase• Obligations to relinquish the initial grant area over

time once exploration carried out• Final mining area must be not more than 40% of

initial area (or not more than 25% if extension to exploration period has been granted)



• Work Programs– To be approved by Government each year– Contractor to submit regular reports against

work• Operations

– 30 year operation period from completion of construction (maximum 8.5 years allowed to reach end of construction)



• Key provisions of CCOW– Sharing of coal

• Government entitled to 13.5% of coal or proceeds from the sale of that 13.5%

• Contractor becomes entitled to coal at port of export or point of sale domestically

– Plant and equipment• 1st Gen - all plant and equipment is owned by

Government• 2nd & 3rd Gen – all plant and equipment owned by

Contractor



• Divestment obligations under CCoWs– Differ markedly depending on which generation of

CCoW– All CCoWs require a gradual reduction of foreign

participation by way of offering sale of shares held by foreigner or dilution to Indonesian Participant

– 1st Generation• Annual obligation to offer prescribed percentage of shares

to Indonesians commencing after 4th year of production• Obligation ceases when 51% Indonesian ownership,

therefore maximum foreign ownership is 49% – 3rd Generation

• Requires 5% divestment to Indonesians within 15 years of production



• Divestment obligations under CCOWs– Obligation ceases when 51% Indonesian

ownership (1st generation)– Price formula specified in CCOW: higher of

• Replacement cost of investment• Fair market value for mining company if listed

– In practice, CCOW company has to reach an agreement with Government on price before making offer

– Offer first to Government, then private parties



• Divestment obligations under CCOWs– Case Example: PT Kaltim Prima Coal

PT KPC

BP Offshore SPV

Rio Tinto Offshore SPV

Rio Tinto LtdBP plc

50% 50%

100%100%

PT KPC

BP Offshore SPV

Rio Tinto Offshore SPV

PT Bumi Resources Tbk

50% 50%

100%100%

Pre-Acquisition Post-Acquisition



• Divestment obligations under General Mining COWs– Divestment obligations only apply where PMA

company holding the COW is 100% foreign owned

– Have to divest of 5% to Indonesian parties within first 10 years of operation



• Draft Mineral and Coal Mining Law (January 2005 version)– Key issues:

• No longer different treatment of foreign and domestic investors– COWs and KPs abolished– Replaced with: (i) permits (IUP/mining license, IPR/people’s mining

right) based on application or tender; (ii) agreements between contractor company and state-owned company as IUP holder; and (iii) assignment (penugasan) for radioactive mineral mining activities

• Bring regulation of mining activities into line with principles of the Autonomy Laws

– Proposed provisions on authorities of each level of regional government (central government level, provincial level, district level)

– Generally in accordance with the prevailing laws and regulations on regional autonomy



• Draft Mineral and Coal Mining Law (January 2005 version)– Other new features include:

• Different classification of minerals – Radioactive minerals– Metallic minerals – Non-metallic minerals – Coal, solid bitumen and asphalt

• Mining concession over a mining area through common application or tender procedures

– Tender to be conducted by Minister, governor, bupati, as appropriate

– Applicable procedures to be determined under implementing regulations



• Draft Mineral and Coal Mining Law (January 2005 version)– Other new features include (cont’d):

• BUMN may cooperate with a third party contractor for mining activities

– Cooperation terms to be determined by the Government• Mining support services

– Includes exploration, mining, mining construction, environmental and consultancy services activities

– Mining support services users still hold ultimate responsibilities under IUP

– Subject to further implementing regulation• Provisions on tax (on the right of contractor to choose tax

treatment)– To be subject to the tax regulations upon IUP issuance or tax

regulations from time to time



• Draft Mineral and Coal Mining Law (January 2005 version)– Other new features include (cont’d):

• Mining closure and post mining obligations– Include reforestation, natural conservation and provision of

‘reclamation bond’ by IUP holders– Subject to further implementing regulation

• Suspension of mining activities– Due to force majeure events or other events which result in

partial or whole suspension of mining activities– Suspension does not affect the validity period of IUPs– Subject to further implementing regulation (including what

constitutes force majeure and what constitutes ‘other events’)



• Draft Mineral and Coal Mining Law– Progress of new Mineral and Coal Mining

Law• The latest version has been released for

‘socialization’ within the industry (so may not be finalized in the near future)

• Provisions still very broad, and details will be provided in implementing regulations (so still long way to go)



• What’s happening?– Few new developments, but some M&A

• Challenges– Conflict of Mining and Forestry Laws

• Resolved for 13 companies so far– Regional Autonomy uncertainties

• Overlap of authority in many areas (forestry, environment)

• Examples of regional governments– granting competing concessions



• Challenges– Honoring of tax protections by Government

• At time when 1st Generation CCOW was introduced, there was no VAT in Indonesia

• VAT later introduced• Coal sales exempted from VAT in 2000• Input VAT cannot be passed on• Protection given under CCOW for new taxes

mining sector – regulatory developments, opportunities and ... · indonesian energy and...

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