The 3rd Mining Legal Conference 2019 – A call for better regulations.

The 3rd Mining Legal Conference 2019 A call for better regulations.

Petromindo.com and Coal Asia held the 3rd Mining Legal Conference in Jakarta on the 17 July 2019. Some 40 people attended, of which about 8 were women. Presentations were mainly in English, with translation services provided.

Overview; –

The raft of new regulations certainly lifts the level of accountability of the mining industry. It would seem the Government’s policy of mining “for the greatest benefit of the people” is translated into what can be taken out of the mining industry, rather than how to grow the mining industry such the benefits can grow organically. The new tax regulation 37/2018 and the new banking regulation 1/2019 on the financial aspect of the mining industry appear to change the “free enterprise” mining business. Taking the industry two steps towards simply being Government contractors, without the Governments support for a possible bail out should the industry take a down turn. At least the SOE mining companies can think the Government has their back. The industry is hoping the new government will change direction to deliver hope and growth through simpler regulations, more coordination between government entities and a shift towards encouraging new private enterprise growth in the exploration and mining industry.

The following are notes and personal impressions. It is recommended readers refer to the authors for clarity and accuracy. It is recommended to attend such conferences to determine important insights that may be relevant to each person or company. My apologies for any errors or omissions.

Mr Hendra Sinadia, Executive Director of the Indonesian Coal Mining Association (ICMA) undertook the role of moderator. In his opening remarks Hendra notes that the Minister of Energy & Mineral Resources (MEMR) had introduced many regulations, but investment in exploration has not picked up. There is an ongoing need to review and simplify the mining regulations, and to promote investment. The ICMA recently signed a MOU with its China corresponding party to work together to promote coal value adding projects.

Dr. Ir. Muhammad Wafid A.N, MsC. Director for program supervision for mineral and coal at the Directorate General of Mineral and Energy – The Ministry of Energy & Mineral Resources (ESDM). The Ministries ongoing focus is expected to continue the current programs of Domestic Market Obligation (DMO) to support electrification and industry. The ministry is aware the implementation of the DMO policy is being discussed further with the coal miners and local governments. The present DMO policy shall likely remain in place, wherein the new cabinet may make changes.

Bill Sullivan, Senior Foreign Counsel with Christian Teo & Partners (in association with Stephenson Harwood LLP). Review critical points in the new Indonesia – Australia Comprehensive Economic Partnership Agreement (IA CEPA). Several new clauses that appear to give strength to the agreement are seriously undermine by exemptions such as “in like circumstances” etc. The overall agreement recognizes trade in services and strengthens the diplomatic relationship. The IA CEPA may be expected to be a blueprint for similar new treaties between Indonesia and other countries.

Arfidea Dwi Saraswati, Founding Partner, ASKET LAW – Natural Resources Focused Law Firm. Outlined the tedious administrative process for the Online Single Submission process to start a new mining company, change directors or shareholding. This process requires close working relationship between the BKPM and ESDM.

Reggy Firmansyah, Senior Partner, UMBRA Strategic Legal Solutions. The regulations for renewing the Coal Contract of Works (CCOW) are not yet issued. The conversion process starts with the company applying for conversion to IUPK within the period of 2 years to 6 months prior to the CCOW expiring. The administration for the conversion process takes 4 months, and there is no guarantee the Ministry will approve. Thus, it is recommended to start the conversion process very early, such that if a “no” answer is received, then there is still time for “plan B”, or take action (arbitration?)  before the deadline for action is reached. There are matters to be clarified in the 6th Amendment of GR 23/2010 including; – 1) reducing the areas down to a maximum of 15,000Ha, 2) potential to increase royalty to 15% and 3) the element of State-Owned Enterprise priority rights.

Norman Bissett, Foreign Legal Consultant, Hadiputranto, Hadiaoto & Partners (HHP) Law Office. Brief outline of regulatory regime for electricity & mining sectors. List of requirements impacting on mine mouth power plants, DMO & PLN’s coal purchase plans. List of issues relating to coal pricing, PLN tenders and availability of financing for the coal & coal power sectors. One interesting point outlined with several examples is the various conflicting commercial requirements between mine owner and mine mouth power plant, that are partially imposed by difficult regulations. Korea, Japan and China seem to be the only willing financiers of coal power, but finding insurance support is a further difficulty.

Ali Mardi, Partner at tax services of Deloitte. The new tax regulation 37/2018 (1 August 2018) has many facets that impact most coal miners. It seems Generation 1 CCOW holders may have some grandfather clauses. The regulation clarifies the difference between actual sales price and market price (3% leeway), and tightens up on donations. The industry is still looking at how to bring forward mine closure costs for offsetting against production taxable income. It seems unreasonable that pre-striping costs are amortized over whole mine life. There are some hidden huge land & building costs. Payment of local and regional governments are from net profits that are non-tax deductable. Debt to Equity ratios above 4:1 attract penalties. There are many considerations on revenue and deductable expenses to be considered. A typical example is that the period for depreciation of big mining equipment may be designated by regulation at 16 years, number of years for tax loss carried forward etc. Overall there is a greater need for more miners to undertake detailed documentation. The present negotiations between the Government and the CCOW holders should consider the many financial considerations for the IUPK extensions. In conference discussions it was indicated that new financial regulations may be issued after the main negotiations for the extension of the CCOW into IUPK are completed.

Fransiscus Rodyanto, Partner of SSEK – Indonesian Legal Consultant. Government regulation 1/2019 requires proceeds from export of the countries resource to be parked in Indonesian banks [DHE SDA]. The presentation covered the background to the regulation, obligations of exporter, requirements to open such a special account, plus government supervision and sanctions. There are some mild interest incentives to keep this export earned money in approved Indonesian banks (retain in foreign currency). However, there are also restrictive regulations on the use of such funds. It is questionable if these funds will be allowed to be used to support other businesses, and so strengthen the company through growth and diversity. There seems to be no guarantee approval by the Government to take out and use the funds will be undertaken in a timely manner. This regulation does not apply to SOE mining companies, as they apparently place their funds into bank BI. The stated aim of this regulation is to strengthen the Rp currency, but there is no evidence this regulation will actually support the currency. It seems the government has not done enough homework on this regulation, nor its broader impact on Indonesia.

Eva Armila from Armila & Rako Law offices. Summarized the salient features of the last few years effort by the Government to revise the 4/2009 mining law. The proposed draft amendments were submitted to the President who had reviews undertaken, and then send back to Commission for change. This process stalled when the 600+ comments were not attached to the documents returned to the Commission 7. It seems likely the remaining few months of the government will not prioritize this bill, and the entire process will need to be restarted from the beginning with the new parliament. This may be a good outcome for industry as there may be renewed opportunity for industry input towards the new drafting exercise. It is likely the Jokowi directed focus will continue with the MOM’s (computerization), value adding, DMO, resolving illegal mining and regulatory review. The new law is required due to recent rulings from the constitutional court, pull back some authority from the regional autonomy, updating and closing loop holes, along with various practical issues of implementing the 4/2009 mining law.

Pramudya A. Oktavinanda, Managing partner of UMBRA – Strategic Legal Solutions. Proposed a scheme for companies to list on the Indonesian Stock Exchange (IDX) wherein one of the owners is “public”, and similarly nominated on the company deed (Akta Notaris). These listed shares then may allow foreign parties greater anomality over ownership and control over the company. This scheme is apparently legal, but yet to be tested. The Government may object to this scheme as a circumvent of the regulations.

F.Hary Kristiono, Chief Operating Officer PT. Medco Energi Mining International (MEMI) and Vice Chairman of Indonesian Coal Mining Association (ICMA). A trial project for underground coal gasification was carried out in South Sumatra. However, the present government coal regulations stop at the research stage, and frustratingly do not provide regulations for commercialization. Medco has found that underground coal gasification technical works, but the early financial study suggests the system is somewhat expensive. Other detailed environmental studies etc are required, and acquiring tenements would need to go through the open tender system. The existing national coal reserves are all defined around open cut mining, wherein there is virtually no significant drilling in the 150- 400m depth range to develop underground coal reserves.

Hendra Ong, Partner at Dentons HPRP. A quick summary of regulations for implementing the tender system was presented. Discussion focussed on the excessive entry “data cost”, and other costs (forestry, local land tax) are not determined leading to potentially much larger entry costs. The first such tenement issuance ran into trouble with the ombudsman determining the system before the tender started was flawed, wherein the 2 tenements awarded to Aneka Tambang are still in limbo. It was suggested in the conference that the KPK needs to be shown that having cheap entry into tenements, and spending the money on the ground is of greater long-term benefit to Indonesia, rather than a quick cash grab to sell tenement areas.

PANEL DISCUSSION ON 2019 DMO POLICY – Achmad Reza Widjaja, Vice president Investor Relations with PT. Bumi Resources. Abid Ubaidilla, Commercial Director of PT. Bukit Asam Tbk (PTBA) and substitution Hary Kristiono of Medco. Bumi & PTBA tend to have capacity to oversupply their 25% quota, and are in a position to sell transfer quotas. Essentially their comments were passive and non-controversial. Medco seems to suggest their very high sulphur coal DMO commitments could be solved by more Indonesian companies (particularly in cement) taking high sulphur coal. Overall the ESDM’s involvement in the sale of transfer quotas is seen as an unwelcome aspect for the coal industry. Other options, such as a coal fee, appeared to be simpler and fairer to the coal industry.

 

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