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70

Legal Focus

JUNE 2012

Mining Law Indonesia

Growing demand and increasing scrutiny from regulators means that companies operating in the mining industry are constantly under mounting pressure and continuous legal developments have had a significant impact on the exploration and exploitation of minerals, meaning companies have many legal challenges to navigate. To find out about these challenges and other issues surrounding the mining industry, Lawyer Monthly speaks to Rahmat S.S. Soemadipradja, Senior Partner and head of Soemadipradja & Taher’s (S&T) energy & natural resources practice. S&T is widely regarded as having one of the leading practices in Indonesia and has recently worked on some of the most significant/high-value M&A transactions in the Indonesian minerals and coal sector.

What are the common challenges faced by your clients when involved in Mining Law– e.g. too many/not enough restrictions, working conditions/strikes, poverty for workers, etc?

The common challenges faced by our clients involved with the Indonesian mining law include an uncertain legal and regulatory environment, multiple levels of bureaucracy (central and regional governments) resulting in delays/slow progress of bureaucratic processes (including obtaining relevant forestry and environmental permits), poor infrastructure and unavailability of public records on mining data.

How has/can your firm assist the client when such challenges arise?

We assist clients by ensuring that they are kept up to date with the latest regulatory and legislative developments which may impact their business/ operations, by mitigating potential risks and by successfully navigating clients through Indonesia’s complex legal and business environment, and provide advice as required.

What have been the main legislative developments within the mining industry recently?

The main recent legislative developments within the mining industry include the issuance of several controversial implementing regulations of Law No.4 of 2009 on Mineral and Coal Mining (Mining

Law), namely, Government Regulation No.24 of 2012 (GR24), which amended Government Regulation No.23 of 2010, and Minister of Energy and Mineral Resources Regulation No. 7 of 2012 on Adding Value to Minerals Through Processing and Refining Activities (MR 7) as amended by Minister of Energy and Mineral Resources Regulation No.11 of 2012 (MR 11) and supplemented by Director General of Minerals and Coal Regulation No.574.K/30/DJB/2012 (DGR 574).

GR24 The key provisions of GR24 that are of concern to foreign investors include the divestment of a majority stake and time line, the transfer of mining business licences/special mining business licences (IUPs/IUPKs), the issuance of IUPs to foreign-owned mining companies and the procedures for the extension to Contracts of Work (CoW) and Coal Contracts of Work (CCoW).

divestment obligation GR24 limits foreign ownership in mining concession companies to 49% by the 10th year of production (previously 80% from the 5th year of production).

The shareholding percentage of the Indonesian participant for each year after the 5th year of production must be not less than:

• 20% in the 6th year; • 30% in the 7th year; • 37% in the 8th year; • 44% in the 9th year; and • 51% in the 10th year.

The divestment shares must first be offered to the central government and if the central government declines then they must be offered in order of priority, to the relevant regional government, state or regional-owned companies and finally to Indonesian private entities. The offer to state or regional-owned companies and to Indonesian private entities is to be carried out by way of open tender.

GR24 is silent on the pricing of offers made to the government and on the auction process for offers made to state or regional-owned companies and Indonesian private entities. A draft ministerial regulation addressing these matters has been publicized, however, due to the most recent regulation changes, the draft ministerial regulation will likely be the subject of further changes before it is formally issued.

transfer of IUPs/IUPKs GR24 provides an exception to the Mining Law’s prohibition on the transfer or assignment of an IUP/IUPK to another party. Under GR24, an IUP/IUPK can be assigned to another entity if the IUP/IUPK holder owns 51% or more of the shares of the entity.

Issuance of new IUPs to foreign-owned mining companies GR24 provides that the central government, i.e. the Minister (rather than the relevant regional governments), will issue IUPs to foreign-owned mining companies. In practice, however, the relevant regional governments will continue to be responsible for the tenders of the IUP areas available for mining activities.

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