The Indonesian archipelago is composed of about 17,500 islands that contain at least 15% of Earth’s historically active volcanoes. About 80% of Indonesia”s Cenozoic volcano-plutonic arc complexes are reported to contain mineral deposits, and the country’s metallogeny is dominated by porphyry copper and epithermal gold deposits. Indonesia also has resources of commodities such as bauxite, coal, nickel, and tin, for which the country has been a regionally or globally top-ranked producer and exporter. Since 2014, a ban on exports of unrefined ores, which was implemented gradually by regulations imposed through the Mining Law No. 4/2009, came into full effect. The Indonesian Government now requires that the beneficiation of ores take place domestically in order to make the country a producer of higher value finished goods rather than an exporter of raw materials. Few mining companies in Indonesia had complied with the requirement to incorporate processing plants into their operations, Plans for about 100 smelter projects were submitted to the Government, but only 28 had broken ground and only one had been commissioned. According to Directorate General of Mineral and Coal (2018), there are 19 existing smelters in 2017, which consist of 12 nickel smelters, 2 bauxite smelters, 2 copper smelters, and 3 iron smelters.
Minerals in the National Economy
Released by Indonesia’s statistical agency show that Indonesia’s year-over-year real gross domestic product (GDP) rate of growth was 5,07% in 2017 and that the rate of growth had increased each year since 2015 when it was 4,88%. The source of Indonesia’s economic growth in 2017 is the manufacturing industry, which is 0,19%, followed by the construction sector 0,67%, trade 0,59%, and agriculture 0,49%. The value of mining and quarrying of all mineral commodities accounted for 0,06%, the value of growth had decreased compared with 0,09% in 2016. It’s happened because two big companies (PT Freeport Indonesia and PT Amman Mineral Nusa Tenggara), experienced a production decline of up to 60% since last January in line with the expiration of concentrate export permits for the company.
Government Policies and Programs
Mineral and coal mining activities are governed under the Mining Law. In 2009, the Indonesian Parliament issued a new Mining Law No. 4/2009 ti replaced the previous law no. 11/1967, which provided the frame work for all of Indonesia’s pre-2009 mining concessions including all of the existing CoWs and CCoWs. The introduction of the Mining Law in 2009 represented a significant change to the previous Indonesian mining regulatory regime.
Contractual-based concessions are no longer available for new mining projects. Both the well-regarded CoW/CCoW framework for foreign investors and Mining Rights framework for Indonesian investors were replaced by a single area-based permit system based on specified mining areas.
The Mining Law provides for three categories of mining permit depending upon the location and nature of the mineral resources. The categories are as follows:
· Mining Permit
· Special Mining Permit, and
· Small scale Mining Permit
Prior to the passage of Law No. 4/2009, foreign-owned companies seeking to conduct mining activities in Indonesia signed production-sharing contracts directly with the Government. The Contract of Work (CoW) system was replaced with a two-stage permitting process (IUP), that includes the issuance of an Exploration IUP and an Exploitation IUP. CoWs that remained in effect were supposed to be adjusted to comply with the requirements were the prohibition of exporting unprocessed minerals and the obligation to process and refine their product in domestically. Also, foreign shareholders in companies with an Exploitation IUP are required to divest shares within 10 years from the commencement of commercial production in order that the Government of Indonesia may achieve majority ownership.
In 2012, the Government established a team to evaluate the adjustment of CoWs and Coal Contracts of Works (CCoW) required by the 2009 law. In addition, the evaluation team was to enforce CoW and CCoW holders obligations regarding processing and refining of minerals and coal. Regulation of Ministry of Energy and Mineral Resources No. 7/2012 on increasing the added value of minerals through processing and refining was passes on February 6, 2012, with the aim of developing the country’s domestic mineral-processing industry and deriving more revenue from its mineral vector. Value-added minerals affected by the regulation included metals, non metallic minerals, coal, and stone, The regulation set out minimum levels of processing that the minerals must be subjected to prior to export and prohibits the export of minerals in raw form. The ban on unprocessed mineral exports was to be imposed gradually, beginning in May 2012, with full implementation in 2014, The regulation provides for cooperation among the holders of mining permits and other parties with respect to the sale and purchase of ares or concentrates, activities to undertake processing and / or refining, and the joint development of processing and or refining facilities or infrastructure.
On May 6, 2012, to discourage massive exports of raw minerals before the export ban came into full force, the Government also imposes a 20% duty in exports of 14 minerals ores that were not yet subject to the export ban, including copper, gold, and nickel. Later in the year, the list was extended to include 21 other mineral commodities. In total, 65 specific types of mineral ores and concentrates, not including coal, were subject to the duty. The duty was designed to increase revenues from the mining sector and was part of the Governments effort to push mining companies to process raw ore domestically and export higher value finished metals.
The Government appealed to the Parliament to amend the Mining Law in order to extend the date for compliance with the processing requirement, but the appeal was denied, and the Government implemented a two-tier solution through the creation of new regulations. Government Regulation No. 1/2014, which addresses the value added through domestic processing and refining, decreased the purity threshold for many minerals (excluding bauxite, chromium, gold, nickel, silver, and tin for which smelting capacity existed) for 3 years to allow the continued export of partially processed minerals. Commodities for which the purity level was decreased included copper, ilmenite, lead, manganese, titanium, and zinc. Under GR 1/2014, the purity requirement for copper was reduced to 15% from 99%; ilmenite, to 56% from 98%; lead, to 57% from 99,8%; manganese, to 49% from various previous purity requirements; titanium, to between 56% and 58% from 98%; and zinc, to 52% from 90%.
According to the second regulation, Ministry of Finance Regulation No. 6 of 2014, which addresses the determination of export goods that are subject to export duty and the export duty tariff, partially processed minerals are subject to an export duty during the 3-year period of reduced purity threshold at a progressive rate commencing at 25% (for copper concentrates) and 20% for other specified concentrates and increasing to 60% after the 3-year period. Both GR 1/2014 and MoFR 6/2016 apply to all mining companies, regardless of whether the company holds a CoW or an IUP. It remained unclear, however, what would happen when the terms of any still-active CoWs were in conflict with new regulations, and there were other inconsistencies that needed to be clarified regarding the compromises brought into effect through GR 1/2014 and MoFR 6/2014. Also, the Ministry of Trade and the Ministry of Energy and Mineral Resources announced an export regime on February 3,2014, that requires all mineral exporters to be registered at the MoT and to undergo pre-shipment verification that the exporter has met the processing level of purity for processed minerals.
In December 2014, Government issued GR 77/2014, which was the third amendment to the principal regulations of the mining law that described the maximum foreign share of ownership allowed by the type of mining permit held by a mining company. For those businesses with an IUP or an Exploration Special Mining Permit (IUPK), a 75% ownership share is allowed. For foreign companies with Operation Production Mining Permit (IUP-OP) or Operation Production Special Mining Permit (IUPK-OP) that do not carry out their own processing and (or) refining activities, a 49% maximum share of ownership is allowed. A company with a IUP-OP or IUPK-OP that carries out its own processing and (or) refining activities is allowed to hold a 60% share of ownership, and a foreign company with a IUP-OP that conducts underground mining is allowed to hold a 70% share of ownership. GR 77/2014 also sets out the progressive divestment requirements for foreign mining companies, which, for the previously described license holders, varies from 20% divestment by the 6th year to 51% divestment by the 10th year, as well as some instances whereby divestment is not required. It is apparent that the Indonesian government is committed in taking a more dominant role in the development of the mineral resources and mining sector in Indonesia.
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