Divesting interest: New framework for contracts and business licences

As part of Indonesia’s push to ensure that more benefits from resource extraction carried out by mining activity are preserved and reinvested domestically, the government is revamping the framework regulating mining contracts. This is aimed at facilitating greater local participation in operations and securing a larger proportion of revenues for the state. The overhaul of the longstanding Contracts of Work (CoW) regime for foreign companies and the separate mining rights, or kuasa pertambangan (KP), system for local companies, which has served as the framework for mining contracts between the state and private companies, has progressed under the unified new mining business licence (IUP) scheme created in 2009. As a result, existing CoW deals are in the midst of being renegotiated and any new mining operations – once issuances of these resume – and will operate under the IUP system.

New Regime

The specifics established under the IUP system are noticeably different from the CoW in play previously, in particular in terms of both length of contract and concession size. The mines already operating for decades in Indonesia would not be possible under the new system: metallic mineral exploration areas are limited to between 5000 ha and 100,000 ha (to be reduced to a maximum of 50,000 ha after three years), with a production area no larger than 25,000 ha, and non-metallic minerals exploration areas capped at 25,000 ha (reduced to 12,500 ha after two years) and a 5000-ha production area.

In terms of duration, exploration IUP contracts for rocks, non-metallic minerals and metallic minerals are capped at a maximum of two, three and seven years, respectively. Production IUPs, meanwhile, are limited to five, 10 and 20 years. Rock and non-metallic mineral agreements may also be extended twice for a period of five years each, while metallic mineral contracts may be extended twice for 10 years.

Legal

Of equal, or perhaps greater, importance to mining groups is the evolution of divestment requirements laid out in the 2009 Mineral Law. Initially, implementing regulations for the law was enforced through Government Regulation No. 23 of 2010 (GR23) which required a minimum divestment of 20% of foreign capital in IUP holders following the fifth year of production operations. This proved short-lived, however, as the government exercised its power – as stipulated in the Mining Law – to independently set divestment levels, as well as raise divestment requirements to 51% by the completion of the tenth year of production. This was possible through the issuance of Government Regulation 24 of 2012 (GR24) in February 2012 and, later, Ministry of Energy and Mineral Resources Regulation 27/2013 (MEMR 27). Under the revised timetable, foreign investors in the sector must reduce their ownership to: a maximum of 80% six years after production begins; 70% after seven years; 63% after eight years;

56% after nine years; and 49% after 10 years. Local, regional and then federal governments are afforded first rights of refusal for these shares at below market value discounted replacement costs, creating an incentive to either participate directly in the operations or transfer them to locally-registered third parties.

Wide Impact

Apart from the decreased revenue and control of mining operations, exploration activity carried out by foreign mining interests could also be affected as upfront investment in costly exploratory activity may not necessarily be recouped once operations move from exploration to production phases where further divestment is required. According to MEMR 27, reducing ownership to 49% by floating shares on the Indonesian Stock Exchange would not qualify as divestment, and the new regulations supersede any arrangements included in existing CoW contracts, meaning that companies which have been operating for decades must now also comply with the law.

As it is currently unclear how, and to what extent, divestment requirements will be applied to pre-existing CoW contracts, these last two provisions have been the focus points of ongoing negotiations between the government and large mining players in the country.