Mining Law and Regulatory Practice in Indonesia: A Primary Reference Source

By William A. Sullivan and Christian Teo Purwono & Partners

The first and only English-language reference to the laws and regulations of the booming Indonesian mining sector

As the growing Indonesian mining industry attracts new investment from foreign mining companies, those companies are faced with the daunting challenge of unraveling the hugely confusing and complex plethora of local laws and regulations that govern the industry. Until now, there has been no comprehensive English-language guide to Indonesia's mining laws that western companies could turn to for reliable guidance and advice. This detailed reference fills that gap for the mining companies, advisors, and consultants who must navigate this confusing and growing web of regulation on a daily basis.

• The only English-language reference on the subject of Indonesian mining law
• A valuable guide for anyone in the mining industry currently doing business or intending to do business in Indonesia
• Written by a highly regarded legal expert with deep experience in the Indonesian mining industry
• Combines all the relevant regulations in one comprehensive guide

Ideal for professionals in the mining industry, as well as academics, government institutions, policy makers, and industry associations, Mining Law & Regulatory Practice in Indonesia is the perfect guide for an underserved market.

• Language: English
• Publisher: Wiley
• Release date: Jul 1, 2013
• ISBN: 9781118613214

Book preview

Chapter 1

Overview of Mining Regime

Chapter 1 provides an overview of Indonesia’s legal and regulatory regime for mining business activities.

I. Prevailing Laws and Regulations

The more important laws and regulations currently governing Indonesian minerals and coal mining and their related activities are as follows:

a. Law No. 4 of 2009, dated January 12, 2009, re Minerals and Coal Mining ("2009 Mining Law");

b. Minister of Energy and Mineral Resources (MoEMR) Regulation No. 18 of 2009, dated August 19, 2009, re Procedures for Amendment of Investment in relation to Contracts of Work and Coal Contracts of Work ("MoEMRR 18/2009");

c. MoEMR Regulation No. 28 of 2009, dated September 30, 2009, re Minerals and Coal Mining Services Business ("MoEMRR 28/2009");

d. MoEMR Regulation No. 34 of 2009, dated December 31, 2009, re Prioritization of Coal and Mineral Supply for Domestic Interest ("MoEMR 34/2009");

e. Government Regulation No. 22 of 2010, dated February 1, 2010, re Mining Area Determination ("GR 22/2010");

f. Director General of Minerals and Coal ("DGoMC) Regulation No. 376 of 2010, dated May 10, 2010, re Affiliated Mining Services Providers (DGoMCR 376/2010");

g. Government Regulation No. 23 of 2010, dated February 1, 2010, re Minerals and Coal Mining Enterprise Activities ("GR 23/2010");

h. Government Regulation No. 55 of 2010, dated July 5, 2010, re Direction and Supervision of the Management and Implementation of Mining Business ("GR 55/2010");

i. MoEMR Regulation No. 17, dated September 23, 2010, re Procedures for Minerals and Coal Benchmark Price Determination ("MoEMRR 17/2010");

j. Government Regulation No. 78 of 2010, dated December 20, 2010, re Reclamation and Post-Mining Activities ("GR 78/2010");

k. Presidential Regulation No. 26 of 2010, dated April 23, 2010, re Extractive Industry Income Transparency ("GR 26/2010");

l. MoEMR Decree No. 617 of 2011, dated March 3, 2011, re Coal Prices for PLN Operated Power Plants ("MoEMRD 617/2011");

m. DGoMC Regulation No. 999 of 2011, dated August 26, 2011, re Procedures for Determining Cost Adjustments to Coal Benchmark Price ("DGoMCR 999/2011");

n. Presidential Decree No. 3 of 2012, dated January 10, 2012, re Establishment of Evaluation Team for Renegotiation of Contracts of Work and Coal Contracts of Work ("PD 3/2012");

o. MoEMR Regulation No. 7 of 2012, dated February 6, 2012, re Local Processing and Refining of Minerals ("MoEMRR 7/2012");

p. Government Regulation No. 24 of 2012, dated February 21 2012, re Amendment of GR 23/2010 ("GR 24/2012");

q. Minister of Trade ("MoT) Regulation No. 29 of 2012, dated May 7, 2012, re Mining Product Export Requirements (MoTR 29/2010");

r. Minister of Finance ("MoF) Regulation No. 75 of 2012, dated May 16, 2012, re Export Tax on Export Goods (MoFR 75/2012");

s. MoEMR Regulation No. 11 of 2012, dated May 16, 2012, re Amendment of MoEMRR 7/2012 ("MoEMRR 11/2012");

t. MoEMR Regulation No. 24 of 2012, dated October 8, 2012, re Amendment of MoEMRR 28/2009 ("MoEMRR 24/2012");

u. MoEMR Decree No. 2934 of 2012, dated October 8, 2012, re Domestic Coal Supply Quota for 2013 ("MoEMRD 2934/2012");

v. Presidential Instruction No. 3 of 2013, dated February 13, 2013, re Acceleration of Domestic Processing and Refining ("PI 3/2013"); and

w. DGoMC Regulation No. 644 of 2013, dated April 23, 2013, re Amendment of DGoMCR 999/2011 ("DGoMCR 644/2013").

There are also a number of advanced drafts of other regulations available which, if and when finalized and issued, will significantly impact minerals and coal mining activities in Indonesia. These draft regulations relate, among other topics, to (i) coal upgrading (ii) the procedures for issuing new mining licenses, (iii) procurement of goods and services, and (iv) community development and empowerment.

Each of the above referenced laws and regulations (including some of the draft regulations but excluding MoEMRD 617/2011, DGoMCR 999/2011, MoEMRR 11/2012, DGoMCD 644/2013 and DGoMCR 614/2013) is the subject of a separate chapter that sets out the details of the main provisions of the relevant law or regulation as well as provides an executive summary of the relevant law or regulation.

II. Former Mining Regime

Under Law No. 11 of 1967 re the Main Provisions of Mining ("Old Mining Law), foreign parties could participate in large-scale mining projects through Contracts of Work (CoWs) and Coal Contracts of Work (CCoWs) whilst relatively small- and medium-scale mining projects could only be conducted by Indonesian national parties by virtue of Mining Licenses (KPs").

In other words, neither (i) a foreign entity nor (ii) an Indonesian foreign investment company, in which a foreign party is able to legally hold shares ("PMA Company"), could hold a KP under the Old Mining Law. A PMA Company could, however, hold a CoW or a CCoW.

On January 12, 2009, the Old Mining Law was replaced by the 2009 Mining Law. Unlike the Old Mining Law, the 2009 Mining Law allows a Mining Business License ("IUP") to be held by any type of Indonesian business entity, including a PMA Company, without any initial restriction or limitation on share ownership.

The Indonesian Government has issued Presidential Regulation No. 36 of 2010 dated May 25, 2010, on the List of Business Fields Closed and Open for Investment with Requirements for Investment ("Negative List 2010). Negative List 2010 confirms that general mining is open for 100% foreign investment. This has also been verbally confirmed by the Capital Investment Coordinating Board (BKPM). In other words, PMA Companies (wholly owned by foreigners), are now allowed to engage in general mining business activities in Indonesia (PMA Mining Companies").

III. CoWs/CCoWs

1. Nature of CoWs/CCoWs

A CoW/CCoW is a contract between the Government of Indonesia ("GoI) and an individual mining company, which contract has been individually (i) approved by the Indonesian Parliament (DPR") and signed by the President of Indonesia.

Over time, GoI decided that CoWs/CCoWs were unduly favorable to mining companies and overly restrictive on GoI. Accordingly, in the 1990s GoI stopped entering into CoWs/CCoWs and all new mining concessions were, henceforward, granted on the basis of KPs.

GoI considered itself obliged, however, to honor and otherwise allow to continue until the end of their term those CoWs/CCoWs already in existence. Although CoWs/CCoWs contemplate the possibility of extensions, GoI has indicated it will not agree to any further extensions of CoWs/CCoWs.

There are approximately one hundred and eighteen CoWs/CCoWs still in existence.

There are seven generations or versions of CoWs/CCoWs. Each of the 7 generations or versions of CoWs/CCoWs has somewhat different provisions reflecting the evolution, over time, of GoI’s thinking as to what should be included in a CoW/CCoW.

2. Impact of 2009 Mining Law

The 2009 Mining Law contemplates a twelve-month deadline for bringing CoWs/CCoWs into line with IUPs except with regard to matters related to state revenue. Although this twelve-month deadline has been well and truly missed, GoI has consistently pressed for amendments to CoWs/CCoWs since mid 2009 when MoEMR presented all CoW/CCoW holders with a list of proposed amendments which CoW/CCoW holders were asked to consider and agree to.

3. Renegotiation of CoWs/CCoWs

In early 2012, GoI used PD 3/2012 to form an Evaluation Team for the purpose of overseeing the adjustment of CoWs/CCoWs and with the stated duties of:

a. evaluating CoWs/CCoWs for the purpose of determining which provisions need to be amended in order to bring the CoWs/CCoWs into line with IUPs;

b. determining the necessary steps for finalizing GoI’s position on the maximum permitted area for CoWs/CCoWs and the applicable taxes and royalties to be paid by CoW/CCoW holders; and

c. determining the necessary steps for the carrying out of the proposed domestic processing and refining obligation to be imposed on CoW/CCoW holders.

The list of issues which GoI has with regard to CoWs/CCoWs has varied somewhat over time but now comprises six substantive or strategic issues being:

a. submit an action plan for the utilization of all the contract area up to the expiry of the CoW/CCoW, failing which there will be an automatic reduction in the CoW/CCoW area to 50,000 HA by year four in the case of exploration stage CoWs/CCoWs and to 25,000 HA by year eight in the case of production stage CoWs/CCoWs;

b. no extensions of CoWs/CCoWs beyond the end of the current term and replacement thereafter of the CoWs/CCoWs with IUPs;

c. pay (i) regional taxes based on applicable laws and regulations and (ii) royalties at rates determined by regulation from time to time, thereby ending certainty of applicable royalties and taxes;

d. carry out local processing and refining;

e. in the case of foreign owned CoW/CCoW holders, a 51% divestiture requirement to be implemented in stages starting in year six of commercial production with 20% of issued shares and ending in year ten with 51% of issued shares; and

f. (i) prioritize the use of local and national mining services providers and (ii) not use affiliated mining services providers without prior MoEMR approval (together, the "Outstanding Strategic Issues");

In early 2013, MoEMR held meetings with individual CoW/CCoW holders regarding the Outstanding Strategic Issues and presented CoW/CCoW holders with draft CoW/CCoW Amendment Agreements reflecting MoEMR’s position on each of the Outstanding Strategic Issues.

IV. Regional Autonomy

In 1998, Indonesia introduced regional autonomy pursuant to which GoI, as the central government, retained control of only six specific areas of government activity while control over all other areas of government activity was devolved to the Provincial Governments and the Regional Governments. Among the areas of government activity, control over which devolved to the Provincial Governments and the Regional Governments, was the licensing of activities taking place exclusively within a particular Province or Regency. In the case of mining, regional autonomy meant that (i) where a mining concession was located wholly within a particular Regency, the relevant Regional Government now had the authority to issue a KP and (ii) where a mining concession crossed the borders of two or more Regencies in the same Province, the relevant Provincial Government now had the authority to issue a KP. GoI only retained the authority to issue KPs in the case of those mining concessions which crossed the borders of two or more Provinces.

V. Mining Activities

Pursuant to the 2009 Mining Law, mining activities are divided into the following categories:

a. Minerals mining, which includes the mining of (i) radioactive minerals, (ii) metal minerals, (iii) nonmetal minerals, and (iv) rocks; and

b. Coal mining.

See Chapters 8 and 16 for further details of the different categories of mining activities.

VI. Mining Areas

Mining Areas ("WPs) are areas determined to have mineral and coal potential. WPs are divided into three categories, namely (a) Mining Business Areas (WUPs), (b) Community Mining Areas (WPRs), and (c) State Reservation Areas (WPNs").

WPs are to be determined by coordination between the relevant Government authorities, being the relevant Regent/Mayor, Governor, or MoEMR in accordance with their respective authority ("Relevant Government Authority") and following consultation on the same with the DPR.

A WUP is that part of a WP in respect of which there is available sufficient geological data or information regarding local mineral potential to enable mining business activities to proceed. WPs include Mining Business License Area ("WIUPs").

In the case of radioactive minerals, MoEMR will determine the WUPs and the mining activities that may be carried out in respect of the same.

WIUPs will be granted in the following manner:

a. WIUPs for nonmetal minerals and rocks will be granted on the basis of an application; and

b. WIUPs for metal minerals and coal will be granted on the basis of a tender.

A WPR is that part of a WP where community mining business activities take place.

A WPN is that part of a WP reserved for the purpose of national strategic interests. The DPR will determine that part of the WPN that can be utilized for certain minerals such as copper, tin, gold, iron, nickel, bauxite, and coal. The status of this part of the WPN will then be converted to become a Special Mining Business Area ("WUPK). Any mining activities carried out in a WUPK must be on the basis of a Special Mining Business License (IUPK). A WUPK may consist of one or more Special Mining Business License Areas (WIUPKs").

See Chapter 3 for further details of the determination of WPs.

VII. Mining Licenses

1. Mining Business Entities

An IUP is a mining license granted by the Relevant Government Authority to (i) a business entity (A) engaged in mining activities, (B) domiciled in Indonesia, and (C) established under Indonesian law ("Business Entity"); (ii) a cooperative; or (iii) an individual, for the purpose of carrying on mining business activities.

A Business Entity, cooperative, or individual, intending to carry on mining business activities, must fulfill all applicable administrative, environmental, financial, and technical requirements.

2. Mining Business License

There are two types of IUPs being:

a. Exploration IUP: An Exploration IUP enables the holder to carry out preliminary mining activities, being general survey, exploration, and feasibility study activities; and

b. Production Operation IUP: A Production Operation IUP enables the holder to carry out various main mining activities such as development, mining, processing, refining, transportation, and sales activities.

The Exploration IUP will be granted by:

a. The relevant Regent/Mayor of the relevant Regency/City, if the area to be covered by the IUP falls within one Regency or City;

b. The relevant Governor if the area to be covered by the IUP falls partly within the boundaries of one Regency and partly within the boundaries of another Regency as long as both Regencies are in the same Province. The Governor will grant the IUP on the basis of a recommendation from the relevant Regents/Mayors; and

c. MoEMR if the area to be covered by the IUP falls partly within the boundaries of one Province and partly within the boundaries of another Province. MoEMR will grant the IUP on the basis of a recommendation from the relevant Governors.

The Production Operation IUP will be granted by:

a. The relevant Regent/Mayor of the relevant Regency/City, if the area of the mining, processing and refining activities, and the relevant port, fall within one Regency or City;

b. The relevant Governor if the area of the mining, processing, and refining activities, and the relevant port, fall partly within the boundaries of one Regency and partly within the boundaries of another Regency as long as both Regencies are in the same Province. The Governor will grant the IUP on the basis of a recommendation from the relevant Regents/Mayors; and

c. MoEMR, if the area of the mining, processing, and refining activities, and the relevant port, fall partly within the boundaries of one Province and partly within the boundaries of another Province. MoEMR will grant the IUP on the basis of a recommendation from the relevant Governors.

In addition to IUPs, there are also Special Mining Business Licenses for national and strategically important mining projects ("IUPKs) and Community Mining Licenses for local community mining projects (IPRs").

The following is a summary of the key features of each type of Exploration IUP:

The following is a summary of the key features of each type of Production Operation IUP:

3. Expiration and Revocation of IUPs

An IUP will expire if (i) the term of the IUP comes to an end, (ii) the IUP is returned by the holder to the Relevant Government Authority, (iii) the IUP is revoked by the Relevant Government Authority, or (iv) in the case of a Production Operation IUP, the IUP is not renewed before its term comes to an end.

An IUP may be revoked by the Relevant Government Authority if any of the following events occur:

a. The IUP holder does not fulfill its obligations as provided for in the IUP or is not otherwise in compliance with the prevailing laws and regulations;

b. The IUP holder is guilty of certain criminal acts, which are specified in the 2009 Mining Law; or

c. The IUP holder is declared bankrupt.

The temporary cessation of mining activities does not reduce the validity period of the IUP.

See Chapters 8 and 16 for further details of the regulation of mining licenses.

VIII. Procedures for Obtaining WIUPs and IUPs

In order to obtain an IUP, a party must, first, obtain a WIUP. A WIUP for metal mineral and coal mining business activities is obtained by way of tender, with the tender winner being directly issued with an Exploration IUP. A WIUP for nonmetal mineral and rock mining business activities is obtained by way of application.

A Business Entity, cooperative or individual, having the intention to carry out minerals and coal mining activities, may only hold one WIUP while a publicly listed company may hold more than one WIUP.

The presently contemplated tender procedures and requirements for WIUPs in respect of metal mineral and coal mining business activities are as follows:

a. The Relevant Government Authority will (i) announce a WIUP tender to Business Entities, cooperatives, and individuals not later than three months prior to the tender date and (ii) form a tender committee that will act as implementer of and handle the carrying out of the tender procedures ("Tender Committee").

b. For the purpose of the WIUP tender:

i. MoEMR must, first, obtain a recommendation from the relevant Governor and Regent/Mayor; and

ii. The Governor must, first, obtain a recommendation from the relevant Regent/Mayor.

c. The tender procedure consists of the following stages:

i. Prequalification announcement;

ii. Procurement of prequalification documents;

iii. Submission of prequalification documents;

iv. Evaluation of prequalification documents;

v. Clarification and confirmation of prequalification documents;

vi. Determination of prequalification result;

vii. Announcement of prequalification result;

viii. Invitation to participants that have passed the prequalification stage;

ix. Procurement of tender documents;

x. Tender explanation;

xi. Submission of price offering;

xii. Cover opening;

xiii. Determination of tender rankings;

xiv. Stipulation/announcement of tender winner based on price offering and technical considerations; and

xv. Opportunity for challenge to the tender winner stipulation.

A Production Operation IUP will be granted to an Exploration IUP holder, without any tender, on the basis of an application and after fulfilling all the administrative, technical and financial obligations attached to the Exploration IUP.

The activities covered by the Production Operation IUP include (i) construction, (ii) mining, (iii) processing and refining, and (iv) transportation and sales.

In the event the holder of a Production Operation IUP does not wish to carry out its own (i) transportation and sales activities or (ii) processing and refining activities, such activities may be carried out by another party that holds:

a. A Special Production Operation IUP for Transportation and Sales only;

b. A Special Production Operation IUP for Processing and Refining only; or

c. A Production Operation IUP.

Special Production Operation IUPs for Transportation and Sales will be granted by:

a. The Regent of the relevant Regency, if the transportation and sales activities are to be carried on within one Regency;

b. The Governor of the relevant Province, if the transportation and sales activities are to be carried on across Regencies or cities in one Province; or

c. MoEMR, if the transportation and sales activities are to be carried on across two or more Provinces or countries.

See Chapters 8, 22, and 23 for further details of the procedures for obtaining WIUPs and IUPs.

IX. Rights and Obligations of IUP Holders

The rights of an IUP holder are as follows:

a. An IUP holder may carry on the designated mining business activities, in whole or in part, whether exploration activities or production operation activities.

b. An IUP holder may use public facilities (e.g., roads, bridges, railroads) for the purpose of carrying on its mining activities subject to compliance with the provisions of the relevant regulations.

c. An IUP holder has the right to sell the minerals derived from its IUP area and in accordance with the prevailing laws and regulations although the minerals belong to the State until all applicable royalties and taxes are paid.

d. In the event that an IUP holder determines there are minerals present in its IUP area, other than the minerals specified in its IUP, the IUP holder has a first-priority right to exploit these other minerals by obtaining from the Relevant Government Authority a separate IUP for these other minerals.

e. Subject to certain limited exceptions, an IUP holder may not transfer its IUP to another party.

f. The most important exceptions to (e) above are (i) where the IUP holder has found at least two prospective mining sites in its IUP area during the course of its exploration activities and (ii) transfers to subsidiary companies, the issued shares of which are owned as to not less than 51% by the transferor.

The obligations of an IUP holder are as follows:

a. An IUP holder is obliged to:

i. Apply good technical mining principles;

ii. Manage its finances in accordance with the Indonesian accounting system;

iii. Add value to its mineral resources;

iv. Assist with local community development; and

v. Protect the environment.

b. In applying good technical mining principles, the IUP holder is obliged to ensure:

i. The health and safety of workers;

ii. General mining operational safety;

iii. The proper management and surveillance of the mining environment, including the activities of reclamation and post-mining;

iv. Mineral and coal resources conservation; and

v. The proper management of mining residue from the mining business activities, whether in the form of solids, liquids, or gases, and to comply with prevailing environmental standards before releasing mining residue into the environment.

c. An IUP holder must guarantee the implementation of all applicable environmental quality standards.

d. An IUP holder is obliged to preserve the availability and quality of local water resources in accordance with the prevailing laws and regulations.

e. An IUP holder is obliged to prepare and submit a Reclamation and Post-mining Plan when applying for the Production Operation IUP.

f. The activities of reclamation and post-mining must be conducted in accordance with the Land Utilization Agreement between the IUP holder and the relevant land owner.

g. An IUP holder must provide a Reclamation and Post-Mining Guarantee Deposit. The Relevant Government Authority may appoint a third party to carry out the reclamation and post-mining activities using the Reclamation and Post-Mining Guarantee Deposit. This, however, will only apply if the IUP holder does not carry out the necessary reclamation and post-mining activities.

h. An IUP holder is obliged to carry out the processing and refining of mining products in Indonesia. The IUP holder may also process and refine mineral products that are produced by other IUP holders.

i. In carrying out the activities of processing and refining, the Production Operation IUP holder is allowed to cooperate with a Business Entity or cooperative holding an IUP for processing and refining.

j.

i. A Business Entity that wishes to sell mineral products, but is not otherwise engaged in mining activities, is obliged to obtain a Special Operation Production IUP for sales.

ii. The specified Special Operation Production IUP will usually be granted by the Relevant Government Authority for a single sale only.

iii. The mineral product that is sold will be subject to a specified production fee.

iv. The Business Entity holding the Special Operation Production IUP must submit a report on the mineral product sales proceeds to the Relevant Government Authority.

k. The IUP holder must give priority to the utilization of local employees and domestic goods and services in accordance with the prevailing laws and regulations.

l. In order to conduct operational production activities, the Business Entity holding an IUP must also allow participation by local entrepreneurs in accordance with the prevailing laws and regulations.

m. An IUP holder is obliged to prepare a Community Development and Empowerment Program for the local community surrounding the mine. This Program must be discussed with the Relevant Government Authority and the local community.

n. An IUP holder must submit to the Relevant Government Authority all information derived from the activities of exploration and production operation.

o. An IUP holder is obliged to submit a periodic written report regarding its work plan and the implementation of its mining activities to the Relevant Government Authority.

p. Commencing in the fifth year of production, an IUP holder must divest, in annual installments, part of its foreign shareholding (if any) to the Government, Regional Government, BUMN, BUMD, or BUMS (not including PMA Companies) such that local parties hold not less than 51% of the issued capital of the IUP holder by the end of the tenth year of production.

q.

i. The IUP holder is obliged to contribute to State Revenue and Regional Revenue by way of a tax on its net profits.

ii. The Production Operation IUP holder, in the case of the mining of metal minerals and coal, is obliged to pay 4% of its net profits to the Central Government and 6% of its net profits to the Regional Government.

iii. The IUP holder is only liable to pay a production fee in the case of mineral products derived from its mining activities if it intends to further utilize or sell the same.

iv. The amount of nontax State Revenue to be derived from the IUP holder will be subsequently stipulated in accordance with the prevailing laws and regulations.

See Chapters 8, 22, and 23 for further details of the obligations of IUP holders.

X. Domestic Market Obligation

The 2009 Mining Law differentiates between three different mining business actors, as follows:

a. Mineral and Coal Mining Entity ("Mining Entity"). A Mining Entity is a business entity carrying out mining activities in respect of minerals or coal by virtue of a CoW, CCoW, Production Operation IUP, or Production Operation IUPK.

For the purpose of prioritizing the supply of minerals and coal to satisfy domestic needs, a Mining Entity is obliged to fulfill any specified annual minimum domestic selling percentage by selling the specified percentage of its mineral or coal production to domestic mineral users or coal users ("Domestic User) before it can export the minerals or coal production (Minimum Selling Percentage) (Domestic Market Obligation").

The Minimum Selling Percentage obligation only applies to Mining Entities and not to Domestic Users or Traders.

b. Domestic Users: GR 34/2009 divides Domestic Users into two categories, namely (i) Domestic Mineral Users and (ii) Domestic Coal Users. A Domestic Coal User is an entity or individual that utilizes coal as raw material or fuel.

GR 34/2009 highlights that a Domestic Coal User, utilizing coal as a raw material, may be engaged in the following business activities: (i) production of coal briquettes; (ii) metal processing, (iii) coal liquefaction, (iv) coal gasification, or (v) coal upgrading.

A Domestic User is restricted from directly exporting the mineral ore or newly mined coal that it purchased from the Mining Entity. The main purpose of this export restriction is to ensure that Domestic Users actually carry out the processing and refining of mineral ore or newly mined coal in Indonesia.

c. Minerals and Coal Trading Business Entity ("Trader"): A Trader is a business entity carrying out the sale and purchase of minerals or coal in Indonesia. A Trader may only export processed or purified minerals or coal.

Sales to Traders are not considered to be part of Domestic Market Obligation sales except where all the following conditions are met:

i. Sales to Traders are conducted between June and November of the relevant year;

ii. The Traders hold valid mineral or coal trading licenses (i.e., Production Operation IUPs for transportation and sales); and

iii. The relevant sale and purchase agreements between the mining companies and the Traders are attached to the annual Budget Plan Report of the Mining Entity for the relevant sale year.

The 2009 Mining Law also recognizes Domestic Market Obligation Credits Trade ("Credits Trade"), which is intended to enable an otherwise likely noncompliant Mining Entity to fulfill its Domestic Market Obligation.

The Credits Trade principle refers to the following:

a. If there is a Mining Entity that has exceeded its Domestic Market Obligation in a relevant year; and

b. There is another Mining Entity that is likely to be unable to fulfill its Domestic Market Obligation commitment for the relevant year; then

c. The first Mining Entity may sell and transfer its excess Domestic Market Obligation commitment (i.e., the "credits") to the second Mining Entity.

The purchase price of the Domestic Market Obligation credit is subject to commercial agreement between the relevant Mining Entities provided that the maximum price of the Domestic Market Obligation credit is equal to the referenced or minimum sale price of the relevant mining product applicable in the current month (i.e., the month in which the transaction involving the Domestic Market Obligation credits occurs).

See Chapters 6 and 7 for further details of the Domestic Market Obligation.

XI. Divestiture of Shares Requirement

After five years of production, a PMA Mining Company must begin to divest some of its shares ("Divestiture Shares) to Indonesian parties, so that the Indonesian parties (being GoI, Regional Government, BUMN, BUMD or BUMS (not including PMA Companies)), hold not less than 51% of the PMA Company’s issued shares by the end of the tenth year of production (Divestment Requirement").

The Divestiture Shares must be offered, in the first instance, to GoI. In this regard, GoI may appoint a BUMN to acquire the Divestiture Shares. If GoI is not interested in acquiring the Divestiture Shares, the Divestiture Shares must then be offered to the Regional Government. If there is no Regional Government that is interested in acquiring the Divestiture Shares, the Divestiture Shares must then be offered to BUMN and BUMD by way of tender. If there is no BUMN or BUMD that is interested in acquiring the Divestiture Shares, the Divestiture Shares must then be offered to BUMS (not including PMA Companies) by way of tender.

By implication, the Divestment Requirement is only applicable to the holders of Production Operation IUPs.

If, prior to the end of the tenth year of production, a PMA Mining Company already has a shareholding composition that includes Indonesian parties holding not less than 51% of the issued shares, the Divestment Requirement is no longer applicable.

Generally, the holder of a Special Production Operation IUP (i.e., for transportation and sales or for processing and refining) does not independently produce its own minerals or coal. Therefore, the Divestment Requirement will only bind the holder of a Production Operation IUP that develops its own mining concession.

See Chapters 8 and 16 for further details of the divestiture requirement.

XII. Procedures for Minerals and Coal Benchmark Price Determination

The benchmark price for mining products must be determined pursuant to a market mechanism and/or in accordance with prevailing prices in international markets. In selling mining products, Production Operation IUP/IUPKs holders are obliged to comply with the benchmark price, which is applicable to sales made to either domestic parties or foreign parties (pursuant to export trading activities) and any sales made to affiliates of the Production Operation IUP/IUPK holders.

The Relevant Government Authority will determine the benchmark price for mining products on a monthly basis.

The coal benchmark price distinguishes between:

a. The coal benchmark price for steam (thermal) coal, namely coal used as fuel for power plants and steam machines in industries ("Steaming Coal"); and

b. The coal benchmark price for coking (metallurgical) coal, being coal used in iron smelting industries or metallurgy ("Coking Coal").

DGoMC, on behalf of MoEMR, shall, on a monthly basis, determine the coal benchmark prices for Steaming Coal and Coking Coal based on calculations made with reference to the average coal price index as determined in accordance with the market mechanism and/or the prevailing prices in the international market ("Coal Benchmark Price").

The Coal Benchmark Price must be used as the price setting reference by holders of Production Operation IUP/IUPKs for coal in carrying out coal selling activities. The Coal Benchmark Price is the price of coal at the sale point and Free on Board ("FOB") vessel.

Coal sales must comply with the Coal Benchmark Price and may be conducted on the basis of:

a. FOB vessel;

b. FOB barge;

c. Sales to domestic end consumers (in the same island);

d. Cost Insurance Freight ("CIF) or Cost and Freight (C&F").

The calculation of the coal selling price, as mentioned above, must comply with the Coal Benchmark Price subject to cost adjustment (either by way of addition or reduction) as approved by DGoMC on behalf of MoEMR, which shall include the following components:

a. Transportation cost (barge cost);

b. Surveyor cost;

c. Transshipment cost; and/or

d. Insurance cost.

Production Operation IUP/IUPK holders must reset metal mineral and coal prices, in the case of term sales, once a year.

Production Operation IUP/IUPK holders must submit reports regarding sales of mining products, on a monthly basis, to the Relevant Government Authority.

Low-quality coal may be sold at a special Benchmark Price, below the Coal Benchmark Price, and in accordance with the Low-Quality Coal Benchmark Price. Certain Types of Coal and Coal for Specific Purposes may be sold at a price below the Coal Benchmark Price following approval from DGoMC on behalf of MoEMR.

Sellers of metal minerals and coal must use:

a. Indonesian flagged transportation services providers;

b. National or domestic insurance companies in the case of CIF sales; and

c. Verification surveyors approved by DGoMC.

Violations of the benchmark price requirements may result in the imposition of administrative sanctions as follows:

a. Written warnings;

b. Suspension of sales of mining products; or

c. Revocation of Production Operation IUP/IUPKs.

Following the introduction of the benchmark price requirement pursuant to MoEMRR 17/2010:

a. Holders of CoWs and CCoWs must comply with all provisions of MoEMRR 17/2010 in connection with all sales of mining products;

b. After not later than six months, spot sales contracts, which were entered into by the holders of Production Operation IUP/IUPK/CoW/CCoWs prior to the introduction of MoEMRR 17/2010, must be adjusted so as to comply with MoEMRR 17/2010; and

c. After not later than twelve months, term sales contracts, which were entered into by the holders of Production Operation IUP/IUPK/CoW/CCoWs prior to the introduction of MoEMRR 17/2010, must be adjusted so as to comply with MoEMRR 17/2010; but

d. (b) and (c) above shall not apply to existing spot sales contracts and term sales contracts to the extent that the selling price has been renegotiated in accordance with instructions from MoEMR or DGoMC.

The benchmark price requirement applies to sales of mining products to both arms-length buyers and to affiliates of the seller (i.e., related parties).

MoEMRD 617/2011 makes it clear that the state owned electricity company, PT Perusahaan Listrik Negara (Persero) ("PLN"), is also obliged to pay the relevant Coal Benchmark Price for coal which it buys for PLN operated power plants.

DGoMCR 999/2011, as amended by DGoMR 644/2013, sets out the procedures for making certain permitted cost adjustments to Benchmark Prices for coal.

See Chapters 10 and 11 for further details of Benchmark Price determination.

XIII. Domestic Processing and Refining

1. Background

A domestic processing and refining obligation ("DPR Obligation), otherwise known as the local value added requirement", was one of the major changes introduced by the 2009 Mining Law (see Articles 95(c), 102, and 103). Although poorly worded, not mentioning any specific mineral or coal and only expressly referring to CoWs and CCoWs, Article 170 of the 2009 Mining Law was generally understood as meaning that the DPR Obligation would become a reality in not later than five years or by 2014.

In February 2012, GoI finalised and issued MoEMRR 7/2012. MoEMRR 7/2012 deals exclusively with domestic processing and refining of metal minerals, non-metal minerals and rock minerals but not with coal. To date, GoI has not finalised and issued the proposed regulation on domestic processing and refining or upgrading of coal.