INDONESIAN RESOURCE

PROJECTS – UPDATE ON
REGULATORY CHANGES

COALTRANS ASIA 2014

June 2014
Haydn Dare, Senior International Counsel | Partner
haydn.dare@hbtlaw.com
PANEL

• Haydn Dare Senior International Counsel, Hiswara Bunjamin & Tandjung

Partner, Herbert Smith Freehills

• Ali Masykur Musa, Member IV - The Audit Board, Republic Indonesia

• Ir. Gultom Guska, Deputy Director of Coal Production and Marketing,Directorate General Mineral
and Coal

• Satya Zulfanitra, Director for Electricity Business Supervision

• Bob Kamandanu, Chairman, Indonesian Coal Mining Association (APBI ICMA)

• Tino Ardhyanto A.R., Director of Government Relations PT. Indika Indonesia Resources

• David Cardell, CEO, PT COAL, a member company of mgmcoal

COALTRANS ASIA 2
FORMAT

• Audience Response System

• Keynote presentation – Ali Masykur Musa

• Update on recent regulatory developments

• Comments from the panel and questions from the floor

COALTRANS ASIA 3
RECENT DEVELOPMENTS

• New mining royalty payment requirements

• Tender rules for grant of new mining concessions
• MEMR issues regulation on divestment obligation
• Coal royalty increase on hold
• Reclamation and post mining plans
• Pricing of coal for mine-mouth power plants
• DMO for coal mining companies
• Technical considerations for forestry areas
• Tax office to target IUP mining firms
• Termination of BITS
• Government grants clear and clean status
• IPO for mining firms
• Ban on exports of unprocessed minerals
COALTRANS ASIA 4
AUDIENCE RESPONSE – QUESTION 1

In which country or region are you based?

1. Indonesia
2. Asia/Pacific (excluding China/India)
3. China/India
4. Europe/North America
5. Other

COALTRANS ASIA 5
AUDIENCE RESONSE – QUESTION 2

What sector of the coal industry are you from?

1. Coal miner
2. Potential investor in coal mines or financier
3. Coal consumer
4. Coal trader
5. Legal or accounting advisor
6. Other

COALTRANS ASIA 6
NEW MINING ROYALTY PAYMENT REQUIREMENTS AT
A GLANCE
• Royalties
– Circular Letter No. 04 E/84/DJB/2013 requires holders of Production
Operation Mining Permit to pay production royalties upfront before shipping
or transporting mining commodities by any method of transportation.
– Mining companies will need to make sure that they initially have sufficient
funds for making such royalty payments.
– Gives comfort to offtakers that the mining companies have good title to the
minerals or coal.
– Calculation for royalty payment:
• Excavated Material for Sale X Tariff x Selling Price
– Consistent with Article 92 of the Mining Law which provides that title to coal
only transfers to the IUP holder following payment of production royalties.

COALTRANS ASIA 7
NEW MINING ROYALTY PAYMENT REQUIREMENTS AT
A GLANCE
• Dead Rent
– Holders of Mining Permits must pay the first
year’s dead rent to the State Treasury within one
month of having the Mining Permit approved by
the Governor/Regent/Mayor.
– Dead rent for subsequent years must be paid
one month before the anniversary of the Mining
Permit.
– Calculation of dead rent: Area x Tariff
• Sales Price
– International market price; and/or
– Benchmark price set by the Government.
– For purposes of royalty calculation, the FOB
price is used.
COALTRANS ASIA 8
NEW MINING ROYALTY PAYMENT REQUIREMENTS AT
A GLANCE
• Heavy sanctions for failure to comply
– Warning letter requiring payment in 1 month.
– Failure to pay within 1 month leads to ban on sales by that producer.
– Failure to submit proper reports can lead to imprisonment for up to 1 year
and fines of up to 2 times the amount of outstanding dead rent or royalty.
– Wilful failure to pay, to produce books during an audit or to submit reports or
to wilfully submit incorrect or incomplete forms can lead to imprisonment for
up to 6 years and fines of up 4 times the outstanding dead rent or royalty.

COALTRANS ASIA 9
AUDIENCE RESPONSE – QUESTION 3

Will this upfront royalty requirement impact your company’s business model? Is it
practical to require payment of the royalty before coal is shipped?

1. Yes
2. No

COALTRANS ASIA 10
BIDDING RULES FOR GRANT OF CONCESSIONS

• Regulation 28/2013 details the bidding

procedures for mining and special mining
work areas for minerals and coal.
• The grant of Special Mining Permits (IUPKs)
are prioritized to State-owned enterprise
(BUMN) and regional government-owned
enterprise (BUMD). In the event that there
are more than 1 BUMN and/or BUMD
interested in the WIUPK, a bidding process
will be held.
• In the event that no BUMN or BUMD are
interested in the WIUPK, the WIUPK will be
offered to private business entities through a
bidding process.

COALTRANS ASIA 11
REGULATION 28/2013 BIDDING PARTICIPANTS

Tender participants for WIUPs

• 1000 Ha or less:
– BUMD;
– National Private Business Entity;
– Cooperative; and
– Individual, Firma Partnership or Limited Partnership.

• 1000 Ha to 5000 Ha:

– BUMN;
– BUMD;
– National Private Business Entity; and
– Cooperative.

COALTRANS ASIA 12
REGULATION 28/2013 BIDDING PARTICIPANTS

Tender participants for WIUPs

• Greater than 5000 Ha:
– BUMN;
– BUMD;
– National Private Business Entity; and
– Private business entity in the context of foreign capital investment.

Tender participants for WIUPKs:

• BUMN;
• BUMD;
• private business entity.

COALTRANS ASIA 13
REGULATION 28/2013 BIDDING PARTICIPANTS

• National Private Business Entity

– A legal business entity having its capital 100% domestically owned.

• Private business entity in the context of foreign capital investment

– Foreign capital is capital owned by foreign countries, citizens of foreign
countries, foreign business entities, or Indonesian legal entities with some or
all of its capital owned by foreign parties.

• Private business entity

– Not clarified under Regulation 28/2013.

COALTRANS ASIA 14
REGULATION 28/2013 BIDDING ORGANISATION

• Bids for WIUPKs are organized by the Minister of Energy and Mineral
Resources.
• Bids for WIUPs are organized by:

Organized by Requirements

Minister WIUP location crosses provincial borders or is more than 12 miles

offshore, upon receiving recommendation from the local governor
or regent/mayor.
Governor WIUP location crosses different regencies or cities in one
province or is between 4 to 12 miles offshore, upon receiving
recommendation from the local regent/mayor.

Regent/Mayor WIUP location is within the regency or city border or is less than 4
miles offshore.

COALTRANS ASIA 15
REGULATION 28/2013 EVALUATION METHOD

• The Tender Committee must consist of representatives from the Central,

Provincial and Regional Governments
• Bidding for WIUP and WIUPK is done in two stages consisting of:
– Pre-Qualification stage; and
– Qualification stage.
• Evaluation of the Pre-qualification proposal consists of:
– Experience in the field of mining (20% consideration)
– Human resources capability (35% consideration)
– Work plan (45% consideration)
• Evaluation and Determination of the winning bidder consists of:
– Results of pre-qualification evaluation (40% consideration)
– Financial bid (60% consideration)

COALTRANS ASIA 16
REGULATION 28/2013 BIDDING REQUIREMENTS

• Key requirements for bidding participants for coal or mineral WIUP:

– Must have technical or management expertise in mining coal or mineral of at
least 3 years. New companies should get endorsed by their parent company,
partners, or affiliates in the field of mining;
– Must submit a work plan and budget (Rencana Kerja dan Anggaran Belanja)
for 4 years of exploration activities;
– Must place “guarantee of seriousness” money, in cash, in an Indonesian
state-owned bank equal to 10% of the value of the compensation for data and
information;
– Must provide a statement that if it wins the bid, it will pay the value of the
compensation for data and information within 5 business days after the
announcement of the winner is made.

COALTRANS ASIA 17
AUDIENCE RESPONSE – QUESTION 4

Should PMA companies be restricted to tenders on areas above 5,000 ha?

1. Yes
2. No

COALTRANS ASIA 18
DIVESTMENT REGULATION AT A GLANCE

• MEMR has issued Regulation No. 27/2013 on divestment procedures and

changes in investment for mining and coal companies.

• Holders of Production Operation IUP and Production Operation IUPK in the

context of foreign capital investment are obligated to divest their shares
gradually after 5 years of production so that by year 10, at least 51% of the
shares are held by Indonesians participants.

• Shares to be divested cannot be pledged and shares sold through the

Indonesian capital market are not counted as divestment shares.

COALTRANS ASIA 19
DIVESTMENT REGULATION AT A GLANCE

• The gradual divestment of the shares to Indonesian participants must not be

less than these thresholds:

Year Percent of total shares divested

6 20%
7 30%
8 37%
9 44%
10 51%

COALTRANS ASIA 20
DIVESTMENT OBLIGATION PRIORITY

Indonesian participants and priority:

• The Government via the Ministry, Provincial
Government, and local Regency/Mayor;

• State-Owned Enterprises (BUMN) and Local

Government-Owned Enterprises (BUMD); and

• Indonesian legal entities.

COALTRANS ASIA 21
DIVESTMENT PRICE

• The price of the shares to be divested is determined by an independent

appraisal based on the replacement cost on investment by the holders of the
Production Operation IUP and Production Operation IUPK.
• The replacement cost is determined by the accumulated investment cost that
has been invested since the exploration stage until the time of divestment
minus:
– the accumulated depreciation and amortisation which are based on the
economic life or benefit of the different class of assets as adjusted by
inflation; and
– the financial obligations of the company to the end of the financial year in
which the divestment obligation is due to be carried out.
• Not a market price.

COALTRANS ASIA 22
DIVESTMENT PRICE

• The sale price of the divestment shares determined by the independent

appraisal is treated as:
– “highest” price when offered to Indonesian government or provincial/regional
governments; and
– “floor” price when offered to Indonesian state-owned or provincial/regional-
owned companies and Indonesian legal entities through a bidding process.

COALTRANS ASIA 23
IMPACT OF THE NEW REGULATION

• Investment changes in IUP holders now require approval from the Minister,
Governor, or Regent/Mayor in accordance with their respective authorities.

• These include changes in the following:

– change in investment and source of funding;
– change in status of a PMA company (Penanaman Modal Asing) to a PMDN
(Penanaman Modal Dalam Negeri) company, or vice versa;
– change in the articles of association;
– change in the board of directors and commissioners; and
– change in the shareholders.

COALTRANS ASIA 24
IMPACT OF THE NEW REGULATION

• Requirements for change of status of the company:

– The application for the change of status of a company from a PMDN to a
PMA (vice versa) holding an Exploration IUP or IUPK must include a
feasibility study showing discovery of at least 2 prospects within IUP area.
– The application for the change of status of a company from a Non-public
listed company to a public listed company (vice versa) holding an Exploration
IUP or IUPK must include a feasibility study showing discovery of at least 2
prospects within IUP area.
– This requirement is most likely aimed at halting the trading of the IUPs
between investors.
– This requirement may hurt the junior explorer market.

COALTRANS ASIA 25
IMPACT OF THE NEW REGULATION

• When transferring shares in a company holding an IUP:

– Foreign ownership in a company holding the Exploration IUP is limited to

75%.

– Foreign ownership in a company holding the Production Operation IUP is

limited to 49%.

• Companies holding the Exploration IUP and the Production Operation IUP that
changed its status from a PMDN to a PMA through foreign capital of more than
49% prior to the enactment of this regulation will still have to abide by the
divestment obligation.

COALTRANS ASIA 26
IMPACT OF THE NEW REGULATION

– Production Operation IUP (and IUPK) holders that will be divesting shares
and their affiliates cannot lend money to the Indonesian buyers for the
purpose of buying the shares to be divested.

– Production Operation IUP (and IUPK) Companies that have 51% Indonesian
ownership by the 5th year of production will not have to divest.

– There is a restriction on diluting the Indonesian ownership after there has

been a divestment to Indonesians. Indonesian ownership must not be less
than the divestment schedule.

COALTRANS ASIA 27
AUDIENCE RESPONSE – QUESTION 5

Do you agree that this regulation is a positive development for the industry by
formalising the procedures for divestment?

1. Yes
2. No

COALTRANS ASIA 28
GOVERNMENT CANCELS COAL ROYALTY HIKE

Background:
• Government planned to introduce a single coal royalty tariff of 13.5%.
• Part of planned revision of Government Regulation No. 9/2012 on tariffs and
types of non-tax state revenue.
• Applying a single royalty rate is aimed at ensuring fairness between coal miners
holding the IUP mining licence (lower tariffs) and miners holding the coal
contracts of work (higher tariffs).
Cancellation:
• The Government has announced that the revision of Government Regulation
No. 9/2012 on royalty will go ahead, but there will be a clause stating that the
royalty for coal will be adjusted once the coal price has recovered.
• Indonesia Coal Mining Association stated that the royalty could be increased if
the coal price recovers to the US$100 per ton level.

COALTRANS ASIA 29
AUDIENCE RESPONSE – QUESTION 6

Would the obligation to pay the increase in royalties make many projects unviable?

1. Yes
2. No

COALTRANS ASIA 30
RECLAMATION AND POST - MINING PLANS

• MEMR has issued Regulation No. 7/2014 detailing the requirements and
guidelines for coal and mineral miners to prepare reclamation and post mining
plans.
• Miners must prepare a reclamation plan before carrying out exploration and
production activities.
• Reclamation plan at exploration stage must include information regarding:
– Land use before and after exploration activities;
– Disturbances of the land that will result from the land clearing;
– Reclamation plan;
– Criteria for a successful reclamation program that covers responsibility for the land, revegetation,
and completion; and
– Financial plan for the Reclamation plan.
• The reclamation plan must be submitted to the minister at least 45 calendar
days before the start of exploration activities.

COALTRANS ASIA 31
RECLAMATION AND POST - MINING PLANS

• Holders of Exploration IUP and IUPK that have completed their feasibility study
must draft a reclamation plan for the production operation stage covering a 5
year period.
• Reclamation plan at production operation stage must include information
regarding:
– Land use before and after exploration activities;
– Disturbances of the land that will result from the land clearing;
– Reclamation plan;
– Criteria for a successful reclamation program that covers responsibility for the land, revegetation,
and completion; and
– Financial plan for the Reclamation plan.
• This plan must be submitted with the application for a Production Operation IUP
or IUPK.

COALTRANS ASIA 32
RECLAMATION AND POST - MINING PLANS

• Miners that have gone through a preliminary study at the exploration stage must
also prepare a post-mining plan.
• This post-mining plan is a requirement to obtain the Production Operation IUP
and IUPK and must include the following:
– Profile of the mining area;
– Description of the initial reserves, system and method of mining, refining method, and support
facilities;
– Post mining conditions including the remaining reserves, land condition, morphology, water
reserve, water and terrestrial biology, and community impact;
– Post mining plan;
– Organisation and post mining plan schedule;
– Criteria for a successful reclamation program; and
– Financial plan for the post mining plan.
• Miners must also make a deposit guarantee to ensure compliance with the
reclamation and post-mining plans.
COALTRANS ASIA 33
SUPPLY AND PRICING OF COAL FOR MINE-MOUTH
POWER PLANTS AT A GLANCE
• MEMR has issued Regulation 10/2014 on
the mechanism for the supply and
determination of price of coal for mine-mouth
power plants.
• Coal supply based on agreement between
miners and mine-mouth power plants.
• To be eligible as a supplier of coal for mine-
mouth power plants, the miner must:
– possess a mining permit with a clean and
clear status;
– Have reserves meeting the quality
required by the mine-mouth power plants;
– Get approval for the coal floor price from
the Director General.
COALTRANS ASIA 34
DMO FOR COAL MINING COMPANIES

• MEMR Regulation No. 2901/K/30/MEM/2013 sets

the amount for the domestic market coal
consumption and the percentage of production that
must be sold locally.
• Demand for coal domestically in 2014 is expected
to be approximately 95,550,000 tons.
• Coal mining companies is obligated to allocate
25.9% of their estimated production of
368,899,464 tons to meet domestic demand.
• This DMO is imposed on:
– 50 Coal Contract of Work holders;
– a state-owned coal mining company; and
– 34 coal mining firms holding coal mining
business licences.
COALTRANS ASIA 35
TECHNICAL CONSIDERATIONS TO USE FOREST AREA

• MEMR has issued Regulation No. 216

K/30/DJB/2014 on the procedures to obtain
technical consideration to borrow and use a
forest area for coal and mineral mining
activities.

• Essentially, Exploration IUP and Production

Operation IUP holders whose concessions
are in forest areas must get the Technical
Consideration from MEMR before applying
for the permit to the use a forest area from
the Ministry of Forestry.

COALTRANS ASIA 36
TECHNICAL CONSIDERATIONS TO USE FOREST AREA

• Some of the requirements for the holders of the Exploration IUP and Production
Operation IUP to obtain technical considerations include providing:
– a clean and clear certificate;
– work plan;
– payment of non-tax revenue;
– evidence of reclamation guarantee deposit;
– mining map;
– statement that the documents are true; and
– recommendation from relevant governor or mayor/regent for use of the forest
area.

COALTRANS ASIA 37
MINISTRY OF FORESTRY ISSUES NEW FOREST
MORATORIUM MAP
• The Ministry of Forestry has issued the fifth revision of the forest moratorium
indicative map, covering 64,701,287 ha of natural forests and peatlands.
• Expansion of 24,257 ha from the fourth revision.
• Map represents forest areas where no clearing activities can take place.
• Provincial and regency administrations must use this map as a guideline when
issuing permits.

COALTRANS ASIA 38
TAX OFFICE TARGETING OVER 6,000 IUP MINING
FIRMS
• The tax office is looking to collect tax arrears that could potentially be worth
trillions of Rupiah from about 6,000 IUP holders.

• According to the director of the Tax Office, the Tax Office is interested in
pursuing the small miners for tax arrears because there are many of them and
they are potentially a large source of tax revenue.

• However, this will be challenging because of:

– The small miners have their operations in remote areas; and
– Lack of data as the local governments do not forward the necessary data or
production reports to the Tax Office.

COALTRANS ASIA 39
INDONESIA: TERMINATION OF BITs

• Indonesia plans to “terminate” more than 60 bilateral investment treaties (BITs).

• Some argue that the BITs allows foreign investors to bypass local courts and
seek compensation in international tribunals. They argue that multinational
companies are using BITs to circumvent national regulations.

• Indonesia is revising the BITs in consideration of new laws and regulations

arguing that these BITs were signed decades ago.

• The Netherlands was first to be told that its BIT with Indonesia was going to be
terminated in July 2015.

COALTRANS ASIA 40
INDONESIA: OTHER PROTECTIONS

• The Indonesian Investment Law provides foreign investors with many of the
protections offered by BITs including:
– compensation at market value for expropriation; and
– disputes may be submitted to international arbitration.

• Contracts of Work and Coal Contracts of Work also contain a provision requiring
disputes to be settled by international arbitration which gives these companies
additional protection.

• Indonesia may join the Trans-Pacific Partnership and this agreement may have
better protections for investors than those offered under the BITs.

COALTRANS ASIA 41
INDONESIA: ASEAN, AUSTRALIA, NEW ZEALAND

• Australian BIT may be terminated in 2022.

However, there will still be an additional
15 years of protection.

• Most of the BITs have this 15 year sunset

period.

• ASEAN, Australian, and New Zealand

investors have similar if not better
protection under the ASEAN-Australia-
New Zealand Free Trade Agreement.

COALTRANS ASIA 42
AUDIENCE RESPONSE – QUESTION 7

Is Indonesia’s claim that it will terminate the BITs a concern for you in terms of
investing in Indonesia?

1. Yes
2. No

COALTRANS ASIA 43
AUDIENCE RESPONSE – QUESTION 8

Do you agree that Indonesia should revise its BITs in light of the age of these BITs
and enactment of new regulations?

1. Yes
2. No

COALTRANS ASIA 44
GOVERNMENT GRANTS CLEAN & CLEAR STATUS

• MEMR has been reviewing thousands of IUPs issued by regional governments

because many of the IUPs were issued improperly and have overlapping issues

• In general, in order to be granted the “Clean and Clear” certificate, the IUP
holders should abide by their obligations:
– Set in Law No. 4 of 2009 regarding Mineral and Coal Mining; and
– Set in Government Regulation No. 23 of 2010 regarding the Implementation
of the Mineral and Coal Mining Business Activities.
• In addition:
– there must be no overlap of the IUP area; and
– the IUP documents are in order.
• Currently just over half of the approximately 11,000 IUPs on issue have been
declared clean and clear.

COALTRANS ASIA 45
 NEW IPO RULING FOR MINING FIRMS

• New ruling on Initial Public Offerings (IPOs) will be

applied next year.
• This ruling will make it easier for mining companies to
go public and list their shares on the Indonesia Stock
Exchange (IDX).
• Mining companies still in the exploration stage can go
public provided they submit supporting documents
(feasibility study report, business plan, mining
reserves).
• According to the President Director of IDX, this ruling
will allow fund managers to invest in mining
companies that are still in the exploration stage and
discourage Indonesian miners from listing overseas.
• But will not assist in satisfying divestment requirement.
COALTRANS ASIA 46
BAN ON EXPORT OF UNPROCESSED MINERALS –
WILL THIS BE EXTENDED TO COAL
• Indonesia has banned the export of unprocessed
minerals in January 2014 citing Law No. 4 of 2009 on
Mineral and Coal.
• The rationale for the ban was to benefit the mining
industry because of the value added to processed
minerals.
• The ban is expected to cause lay offs to thousands of
workers. In addition, government revenue is also
expected to decline this year due to reduction in
royalties and export taxes.
• Considerations on whether ban will be extended to
coal:
– Outcome of the presidential election; and
– Creates regulatory confusion for investors and the
industry.
COALTRANS ASIA 47
AUDIENCE RESPONSE – QUESTION 9

• Do you think the export ban will be extended to the export of coal in the near
future?

1. Yes?
2. No?

COALTRANS ASIA 48
STRATEGIES FOR TACKLING THE ESTIMATED 56
MILLION TONNES OF MISSING COAL ANNUALLY
• To tackle this problem, the Indonesian
government is considering restricting coal
loading to certain ports. However, enforcing
this is will be extremely difficult.
• The Indonesian Corruption Eradication
Commission (KPK) is said to be
investigating the loss of state revenue as a
result of illegal mining.
• The Indonesian government could increase
centralisation and supervision by the
MEMR.

COALTRANS ASIA 49