Opinion: New restrictions introduced for mining projects

Opinion: New restrictions introduced for mining projects located within timber concession areas
By: Hadiputranto, Hadinoto & Partners (www.hhp.co.id)

The Minister of Forestry (MOF) has further amended its Pinjam Pakai regulation (i.e., MOF Regulation No. P.18/Menhut-II/2011 on Guidelines on Pinjam Pakai of Forest Area, as amended by MOF Regulation No.P.38/Menhut-II/2012) with the issue of MOF Regulation No. P.14/Menhut-II/2013 (P14) . P14 is effective as of 25 February 2013 but it has just been made public by the Ministry of Forestry.

What has changed?

It has long been the case that Indonesias forestry regulations generally permitted mining activities (i.e., coal and mineral mining, geothermal, and oil and gas) in Production Forest areas, whilst certain restrictions existed for carrying out certain of these activities in Protected Forest (where no open cut mining is allowed) and Conservation Forest (where no mining activities are allowed). Through P14 however, the MOF has introduced a new provision which prohibits the issue of Borrow and Use permits (Pinjam Pakai) for mining in certain Production Forest areas over which a forestry timber concession exists. The forestry timber concession areas where Pinjam Pakai cannot be granted are as follows:

(a) ecosystem restoration concession (IUPHHK-RE) areas; and

(b) logging concession (IUPHHK-HA) or industrial timber concession (IUPHHK-HTI) areas where:
(i) the area is allocated as a buffer zone which borders with Protected Forest or Conservation Forest areas;
(ii) the area is allocated as a protected area; or
(iii) the area has been stipulated in the ongoing years Annual Working Plan (Rencana Kerja Tahunan/RKT) under the cultivation technique of Intensive Silviculture System.

With the passing of P14, the developers of mining projects which fall within the above areas can no longer obtain Pinjam Pakai to commence mining projects. Accordingly, this new provision may significantly impact mining concession holders (these include oil and gas, mineral, coal and geothermal) whose areas overlap with forestry timber concession areas that fall within any of the above categories.

How to determine whether a forest area falls under the above specifications?

To determine whether or not a particular area falls within a forestry timber concession area, a mining company can procure a forestry map from the Ministry of Forestry that shows data on any forestry use license which overlaps with the mining concession. The Ministry of Forestry search facilities will provide a clear picture of whether the restrictions triggered by the existence of an IUPHHK-RE have an impact on a mining company.

However, if the mining concession area overlaps with IUPHHK-HA or IUPHHK-HTI areas, the issue becomes a more challenging due diligence exercise.

Based on the applicable forestry regulations, the determination of buffer zones and protected areas within IUPHHK-HA or IUPHHK-HTI areas, and cultivation technique of the timber concession holder are stated in its 10-yearly Business Working Plan (Rencana Kerja Usaha/RKU) as approved by the Director General of Forestry Business Management of the Ministry of Forestry. Whilst an RKU can be amended, the parameters to determine the imposition of buffer zones and protected areas are set by regulation, and therefore we suspect no controversy would arise in determining the impact of these two factors on a mining project.

However, the position is different when trying to determine whether or not the mining project overlaps with the annual work areas stipulated in the RKT of the IUPHHK-HA or IUPHHK-HTI holder. Whilst the annual RKT is made based on the 10-year RKU, the exact area for cultivation is determined under the RKT. Just like RKUs, RKTs can be amended. The authority to approve RKTs lies with the relevant Head of Provincial Forestry Office. Issues may arise particularly since certain IUPHHK-HA and IUPHHK-HTI holders have the authority to approve their own RKTs (i.e., self approval). Add to that that these RKT documents are not generally publicly available.

Accordingly, these new restrictions, together with an apparent inability of mining companies to determine whether or not their mining projects are affected by certain of these restrictions, create even further uncertainty for investors in Indonesias natural resources sectors.

If the mining area falls under any of the specifications under the new provision, who will be affected?

• For projects where Pinjam Pakai for exploitation has been granted, the Pinjam Pakai will continue to be valid until it expires, and therefore the projects will remain unaffected.

• For projects where Pinjam Pakai for exploration has been granted, those exploration activities can continue until the Pinjam Pakai expires. However, these projects will not be able to obtain a Pinjam Pakai for exploitation activities (unless an In-Principle Approval has been granted and, as at 25 February 2013, all obligations under the In-Principle Approval have been fulfilled, as further discussed below).

• For projects where an In-Principle Approval has been granted and all obligations under the In-Principle Approval have been (as at 25 February 2013) fulfilled, the transitional provisions accommodate the issue of Pinjam Pakai for exploitation. For projects where an In-Principle Approval has been granted but not all obligations under the In-Principle Approval have been (as at 25 February 2013) fulfilled, unfortunately no similar transitional provisions exist. Thus, it would appear that the MOF will not issue a Pinjam Pakai.

• For projects where the existing Pinjam Pakai is due to expire and needs to be extended, it appears that no extension will be permitted (as P14 requires any extensions to comply with these new requirements).

For investors and lenders involved in projects over mining areas caught by these new regulations and where the Pinjam Pakai for exploitation activities has yet to be issued, we would recommend carrying out updated due diligence searches (to the extent possible, as noted above) to determine what increased risk arises from these new rules.

Other amended provisions

In addition to the new provisions discussed above, P14 brings into effect certain other changes, which include the following:

• A welcome change for mining companies is that the term of Pinjam Pakai for exploitation activities for mining will now match the term of the underlying mining licence. Prior to P14, the term was 5 years, which could be extended.

• Holders of Pinjam Pakai for exploitation for mineral and coal mining projects (i.e. excluding oil and gas and geothermal projects) whose Pinjam Pakai area borders a Conservation Forest are now obliged to make a 500 meters buffer zone from the boundary of the Conservation Forest. There was previously an internal policy of the MOF to consider this buffer zone factor in assessing Pinjam Pakai applications, but this has now been formalized as a positive obligation for holders of Pinjam Pakai for exploitation for mineral and coal mining projects.

For further information please contact:

Luke Devine
Foreign Legal Consultant
+62 21 515 4909

Norman Bissett
Foreign Legal Consultant
+62 21 515 5350

Muhammad Karnova
+62 21 515 4869

Nindya Novianty
+62 21 515 4901

Hadiputranto, Hadinoto & Partners
The Indonesia Stock Exchange
Building, Tower II, 21st Floor
Sudirman Central Business District
Jl. Jenderal Sudirman Kav. 52-53
Jakarta 12190
Tel: +62 21 515 5090/91/92/93
Fax: +62 21 515 4840/45/50/55

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