Bill on Amendment to Indonesia's Mining Law: The Road to Clarity and Reform

What you need to know

• Following years of deliberation and delay, during which it seemed to have fallen off the Government’s radar, the Indonesian House of Representatives finally passed the Bill on Amendment to the 2009 Mining Law ("Mining Bill") on 12 May 2020. The prescribed 30 day period from issuance within which the bill needed to be signed by the President lapsed this 11 June 2020 and it will now automatically become a law (even without the President's signature) and become effective once it has been published in the State Gazette and Supplement to the State Gazette.  
• The Mining Bill contains sweeping amendments to many of the original provisions of Law No. 4 of Year 2009 on Mining (the "2009 Mining Law") and introduces a significant number of new provisions, which make numerous important changes to the 2009 Mining Law. In this brief we focus on the key changes and provide a comparative analysis between the key provisions of the 2009 Mining Law and the changes brought by the Mining Bill.
• The changes, on the whole, reflect the policies of the central government of the Republic of Indonesia ("Central Government") (primarily the Ministry of Energy and the Mineral Resources - MEMR") that have developed organically through various implementing regulations since the enactment of the 2009 Mining Law.  On the whole, the changes brought by the Mining Bill should provide greater clarity and certainty to those looking to invest, or continue operations, in the Indonesian mining sector.

Six most important changes

The six most important changes proposed by the Mining Bill are as follows:

• (Central Government control) The Central Government will become the sole authority for the issuance of mining licenses. The Mining Bill removes the power of regional governments to issue mining licenses.  This may result in changes to the application and renewal process, including for licenses that have previously been issued by regional governments.
• (Foreign ownership rules confirmed) The Mining Bill confirms that Indonesian shareholders must hold at least 51% of the shares of a mining company by way of a divestment requirement, that, pursuant to the existing implementing regulations, must commence after the 5th anniversary of the commencement of the relevant mine's production period.  To the extent foreign companies hold more than 49% of the shares of a mining company, those shares must be sold to Indonesian investors to reduce foreign ownership to no more than 49%.  This is consistent with the current regulations in force (although we note that the divestment percentage itself has changed several times over the past few years, increasing gradually from 20% to 51%). The key take away here is that the maximum foreign ownership threshold of 49% has now been enshrined in law (as opposed to an implementing regulation).  
• (Transfer of mining business licenses) The Mining Bill authorises the holder of a mining license to transfer the license to a third party.  This lifts restrictions under Government Regulation No. 23 of 2010 as amended ("GR 23/2010") on transfers to related entities. This change has the potential to introduce much greater flexibility in the disposal and acquisition of mining companies and assets, although relevant implementing regulations (which are yet to be legislated) might impose additional restrictions on this right to transfer.
• (Extension of COWs/CCOWs) The Mining Bill confirms that existing Contracts of Work (COWs) and Coal Contracts of Work (CCOWs) may be extended for two additional terms of up to 10 years.  While this is broadly consistent with the MEMR's current approach to administering COWs/CCOWs, the Mining Bill provides greater certainty for holders of existing COWs/CCOWs.
• (Export ban postponed) The Mining Bill confirms that the Central Government intends to introduce a ban on the export of minerals. However, the Mining Bill postpones the ban for a period of three years from when the Mining Bill becomes effective as law.  This is a confirmation of the Central Government's determination on promoting the establishment of a domestic processing/refining industry but taking stock of the current progress in the build-up of processing/refining capacity and allowing more time for relevant facilities to come online.
• (Role for mining services contracts expanded) The Mining Bill opens the door to allowing mining services contractors to become directly involved in the core activities of extracting minerals (which was not permitted under the 2009 Mining Law), although the exact scope of the functions that those contractors can perform will depend on the relevant implementing regulations.

Conclusion 

Overall, the passing of the Mining Bill reflects the Central Government's efforts to address several issues that have arisen since the enactment of the 2009 Mining Law, and take into account some of the concerns voiced by stakeholders in the mining sector.  Those concerns included the need for greater certainty in relation to the continuation of mining operations by the holders of COWs/CCOWs, the need for relaxation around the restrictions on mining services companies conducting core mining activities and the recognition of the substantial burden created by processing requirements and export bans.  

However, the main message underlying the Mining Bill remains consistent:  the Central Government remains committed to managing the mining sector for the maximum benefit of the Indonesian people.  Although the export ban policy is temporarily postponed, the obligation to conduct processing in Indonesia remains and appropriate facilities will need to be developed.  Further, the Mining Bill also focuses on the sustainability of mining in Indonesia, as indicated by the obligation for mining companies to set aside exploration funds to find new mineral deposits.  Finally, the government also locks in a number of mining policies which, in the past, have usually been left to regulations of a lower rank in the rules hierarchy.  This will create greater certainty but also limit the ability of mining companies to challenge those policies on the basis that they are contrary to the 2009 Mining Law.  

Consistent with Indonesian normative practice, further details and clarifications will presumably be provided for under further implementing regulations that remain to be considered and issued by the Government. We will continue to keep you updated on any further developments on this topic.  

Authors: Frederic Draps, Partner; Ratih Nawangsari, Partner; Lorenzo Pacitti, Partner; Andrew Digges, Partner; Rika Salim, Senior Associate.