A quick look over some regulations of the Omnibus Law for the mineral and coal sectors. Vol 124

Introduction.

A recent press release indicated the government has issued a number of implementing regulations [Peraturan Pemerintah, PP] and Presidential Regulations [PERPRES] to support the Omnibus Law Number 11 of 2020 (also referred to as the Job Creation Law). The implementing regulations can be downloaded through the State Secretariat Ministry’s Legal Documentation and Information Network  www.jdih.setneg.go.id   This government web site lists 50 PP and 14 PERPRES have been issued in 2021 (as at 24 Feb) with combined 110,410 pages. Another press statement indicates these laws will come into effect upon 30 days of their issuance date of 2 February 2021. Further regulations to support the Omnibus Law are apparently expected in the coming months.

The Omnibus Law objective is to stimulate employment and new business. The Omnibus Law is designed to achieve these objectives through developing a degree of regulatory uniformity for manpower and business across all industry sectors. The implementing regulations include some generalities, and others cater more directly for specific industry sectors. These PP regulations largely expanding upon the administrative rules set out in the Omnibus Law on job creation, and combine with existing industry sector laws and regulations.

The mining of minerals and coal is addressed in one such PP. However, the mining industry is also impacted by manpower, finance, environment etc, wherein there are aspects within some of the other PP’s and PERPRES that may impact on the mining industry. Various reports reflecting this interwoven complexity are being highlighted by several parties. HHP Law firm has identified PP 21 on Spatial Planning, and PP 43 on Settlement of Discrepancies as potentially impacting the mining industry. Umbra Law draws attention to the PP 10 positive investment list for foreign investment up to 49% for some river and ocean transport of certain goods.

These regulations are mostly set out in the standard format, starting with the legal background and list of definition, preceding to the substance of the regulation, penalties and then closes with short chapters on other factors, synchronization, transition and such. This is followed by an elucidation of the regulation and appendix that provide a format for the administrative guidance for evaluation and such.

A Google translate was undertaken into English on a number of these regulations for this quick review, by the author who is not a lawyer or business development professional. Many of the regulations are very long, and may take a team of lawyers some time to identify all the implications for the minerals and coal industries. This informal review is designed to be a layman’s quick look into selected parts of these regulations, and should not be relied upon for commercial or legal consideration. I apologise for any errors or misunderstandings that may appear in this article.

PP 25 of 2021 on Management of Energy and Mineral Resources

The original PDF Indonesian version is 71 pages long that contains 65 articles in 60 pages, with the remaining as elucidation.

The minerals and coal chapter (1 page) briefly mentions the previously regulated zero % royalty for coal for coal-value-adding, and that the minister will make other regulations.

The geothermal chapter (12 pages) sets out various directions, and penalties, for the licence [IPB] to operate in the geothermal sector. Government bodies can undertake exploration and feasibility studies. The electricity so produced can be sold to PLN or other parties, or used by the IPB holder. Operational ancillary obligations and data management are identified, along with reclamation and resolution of financial liabilities are to be included in closing the geothermal area.

The electricity chapter (37 pages) mentions state funds for the support of the electricity sector in line with the National & Regional Electricity Plans. The electricity supply business is outlined in terms of power generation, transmission and power distribution, sales etc.  Electricity support service business areas are listed and regulated accordingly. Criteria for operating a domestic or foreign reprehensive office, and for consulting services are outlined. Every type of electricity generating technology, power transmission and distribution applies to this regulation. Manpower training, competency and other operational obligations are mentioned, along with safety and the vague obligation to be “environmentally friendly” [article 48]. The Minister shall determine the equipment to be used and impose mandatory national standards, product certification etc.

PP 23 on Forestry Management

 The original PDF Indonesian version is 218 pages long that contains 302 articles in 177 pages with the remaining as elucidation.

The regulation covers the main heading areas of a. Forestry Planning; b. Change of Forest Area; Designation and Change Forest Area Function; c. Use of Forest Areas; d. Forest Administration and Forest Management Plan Formulation and Forest Utilization; e. Social Forestry Management; f. Forest Protection; g. Supervision; and h. Administrative Sanctions.

It would seem mining is mentioned directly in several cases, such as;

• Article 91 on mining being included in permitted industries to use forest areas.
• Article 92 on mining conditional use of production and protected forest areas, with article 96 on ministerial approval, and article 103 on terms of use, and article 279 & 280 on associated administrative sanctions.
• Article 296 on borrow and use of forest areas, wherein allocated land to be handed back to the government on completion of obligations.

PP 22 on Environment Protection and Management

The original PDF Indonesian version is 483 pages long that contains 534 articles in374 pages with the remaining as elucidation.

The regulation covers the main heading areas of a. Environmental Approval; b. Protection and Management of Water Quality; c. Air Quality Protection and Management; d. Protection and Management of Marine Quality; e. Control of Environmental Problems; f. Hazardous and Non-hazardous Waste Management; g. Guarantee fund for the restoration of environment; h. Environmental Information System; i. Supervision; and j. Sanctions.

It would seem mining is mentioned directly in several cases, such as;

• Article 10 on miners excluded from needing AMDAL outside of the approved business plan.
• Article 272 on defining environmental damage
• Article 367 on stockpiling hazardous (including radioactive minerals) and non-hazardous waste.
• Article 392 on dumping of mine tailings or drill cuttings into the sea, and article 394 on application of permits to dump waste into the sea.

PP 5 on Implementation of Risk Based Business Licenses.

The original PDF Indonesian version is 390 pages long that contains 567 articles in 321 pages with the remaining as elucidation. The total document including appendix 1-4 being 7,026 pages.

The general requirements indicates that new business licenses shall now be issued based on the estimation that the business may impose as a risk upon Indonesia, rather than the business risk envisaged by the investor. This risk approach to issuing business licenses applies to many sectors, including the energy and mineral resource sector. The Central Government preparation of the risk analysis will include; – Article 8; a. identification of business activities; b. hazard level assessment; c. assessment of potential hazards; d. determination of risk level and business scale rating; and e. determination of the type of business license. The business risk categories are low, medium low, medium high and high. Risk analysis is carried out involving the ministers of manpower, health, environment, related sector and business actors and /or community. There are essentially only two phases of business, being 1) preparation [including feasibility] and 2) operation. The Central Government will formulate national standards and procedures for each business sector. The business license will be carried out by the OSS Institution.

The direct reference to the minerals and coal industry is limited to a few lines in this 390-page document. The business license for minerals and coal [Article 41 (4)] is simply stated; “Business Licensing in the mineral and coal subsector as referred to in paragraph (1) letter c which is determined based on the results of the activity risk analysis business consists of: a. mining; b. special mining; c. special mining operations as a continuation agreement contract; d. community mining; e. rock mining; f. transport and sale; g. mining services; and h. mining for sale.” And supporting business license for minerals and coal [Article 42 (3)] as; “(3) Undertaking Licensing to support business activities in the mineral and coal sub-sector as referred to in Article 4I paragraph (1) letter c includes: a. partnership program approval; b. consultation approval and or planning on mining service business; and c. consent to the use of subsidiary companies and / or affiliates in service businesses mining.” Note that the oil & gas business license includes consideration for “general survey activities”, but the minerals and coal busines license does not appear to acknowledge the exploration business phase. There are a number of points that follow the mining law, such as; the coordinating minister plays a role in developing the busines license, and the minister and other government leaders have a role to resolve issues / conflict with community.

The penalties follow the trend of the mining law, including for various non- compliance offences, or simply for those who do not fulfil allocated compliance requirements. These can be simple warnings leading to very severe penalties, including termination of business, administrative of fine (up to $5 mill), confiscation of equipment etc. It would seem (article 390) that the determination, imposition, and appeal of sanctions is all under the Minister’s authority.

The penalties appear to be coordinated with various other segments of the Omnibus Law. Article 382 (3) for representative office obligations include requirements for employing more Indonesians than non-Indonesians, or does not place an Indonesian citizen as the person in charge of the representative office business entity – see also PP 34 of 2021 on Use of Foreign Workers. Also, in that exports and imports of commodities are to be “balanced” by the minister or head of the institution.

It would seem this new risk-based permit system will apply to new business. We might assume the first few mining companies to register under this new risk system will involve a learning curve for several government departments, that may slow down the process.  We will see if the first applications will be the Coal COW companies converting to become PKP2BK?

PERPRES 10 on Investment Business Fields.

The original PDF Indonesian version is 13 pages long with 15 articles, though several appendices are not attached, as so required.

The Government changes the concept from a negative foreign investment list, to investments of large, medium and small scale. Foreigners are still blocked from several sectors, particularly defence, government industries etc. Priority business sectors include a number of criteria, including capital intensive and export orientated business. Foreigners are encouraged to enter the large business sector with a minimum investment of Rp 10 billion [US1 mill]. Foreigners can invest in medium business scale provided they have a local partner with certain requirements. “Privileged Investors” are based on country of origin having suitable trade and investment agreements that may exclude some investment restrictions.

Will this encourage more employment in the mineral and coal sector?

1. Some time back the President is reported to have urged ministers to reduce the number of regulations as an incentive to promote investment. The above government web site lists 50 PP and 15 PERPRES have been issued in 2021 (as at 24 Feb) with combined 110,410 pages. It seems that the number and size of regulations has actually swelled, with the effect that regulatory risk appears more onerous.

2. The obvious impact of these regulations is to expand the overheads of the work force, with personnel to undertake compliance monitoring, reporting, and accompany inspections by the many government agencies.

3. It will take time for the industry to understand the full nature of these regulations, and probably even longer for the government administrators (ministry staff, governor, district heads etc) to come to terms with the implementation processes. The regulatory requirement to be effective in 30 days may not be sufficient for effective implementation. We might expect that some business may delay new activity and expanding the work force until the new regulations have gone past their teething phase, and survived various judicial reviews.

4. The new Mining Law 3/2020 was issued shortly before the Omnibus Law, wherein the Omnibus Law has relatively little further impact to stimulate investment or employment in the mining sector. These regulations do not seem to reduce or simplify the more than 50 licenses and permits required to operate a mine. There seems to be nothing much in these regulations to stimulate the mineral industry, wherein the actual benefit to the mining industry remains to be seen. At present there seems to be no reliable report on which existing mining companies will be stimulated, and by how much, from this Ombudsman Law.

5. The minimum investment requirements to get started, and the ever-increasing regulatory complexity may be off putting for small and local investors entering the exploration and mining industry. This may be intentional to attract only serious players, but tends to cut out the option for the small local prospector from taking advantage of a local mineral find to grow into a larger business. Unfortunate these regulations do not seem to recognize the exploration busines sector of the mineral and coal industries.

6. It is difficult to see where this regulation can directly lead to business growth and job creation. Perhaps the setting out of the rules for state owned busines and private business in which to operate may be a useful guide to present and future parties.

Possible impact on foreign investment in the exploration and mining sector.

1. Most mining industries business model are based on discovery, mining and export sales. However, the national trend towards downstream processing to supply domestic needs may change this profile considerable. The stated national policy for coal is to end exports, and minerals are coming under pressure to follow this same path to support the domestic industry at the expense of exports.  The other part of this national policy seems that price controls are to apply to domestic sales of raw materials, as a support for manufacturing and ultimately supporting the affordability “for the benefit of the people”.  Will mining continue to be a “priority” export industry, and combined with the limitations on project ownership, therein will mining be a suitable long-term destination for foreign investment?

2. Many exploration juniors have been willing to form a joint venture with a local private medium sized company, and this may be a continued strategy. Forming a joint venture with a smaller state / provincial company may be less attractive, as such government / research companies typically do not have a clear history of performance. The minimum investment of around US$ 1 million will certainly dissuade small private exploration juniors from entering, though listed and medium sized companies may accept this investment requirement.

3. These regulations emphasize the strong role of governance by the elite (president, minister, governor etc) as implementing the parliamentary laws. The increased responsibility of such persons may enable industry and government to work more efficiently together. The business risk lies with the ethics, politics and energy of such elite persons that will change every few years. This apparent focussing of authority in the Minister, and perhaps less emphases on the civil courts, may be off-putting for some western parties that are not familiar / comfortable with doing busines in Indonesia.

Conclusion;

The IDX listed mining companies 2019 annual reports are unanimous in identifying the greatest business risk is regulatory uncertainty and commodity price. The Omnibus Law and its numerous implementing regulations unquestionably add to the pile of regulations. The implementing regulations provide limited, and sometimes questionable incentives, but seem to spend more attention to defining the penalties. The Omnibus Law does not seem to address the key issue of regulatory certainty. One proven way to reduce regulatory risk is to set out all the implementing rules in the Agreement between the Government and the investor, as was successful done in the old Contract of Work agreements. We must applaud our industry for-fathers for their outstanding success in building todays vibrant mining industry, and find ways to emulate their success.

I do hope the success of this Omnibus Law will come with transparent and independently verifiable statistics that reflect sustained growth in the mineral and coal mining industries. It is further hoped that the present issues of EITI in Indonesia will be quickly resolved, so that EITI may continue as one of the credible independent bodies that may help in measuring the success of this program.