New Export Regulations: The Re-Emergence of Resource Nationalism?

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By: Hadiputranto, Hadinoto & Partners (www.hhp.co.id)

Headlines

Under regulations issued on 11 January 2017: 
▪ Exports of certain amounts of mineral concentrates may continue for a further five years, with permission for exports monitored at least every six months and tied closely to the progress of physical construction of domestic processing and refining facilities.
▪ Contract of Work holders who produce mineral ores are forced to convert their Contracts of Work into IUPKs (licences) or else they will be prohibited from exporting mineral concentrates.
▪ Every producing mine in Indonesia (whether under a Contract of Work or IUP) must become at least 51% Indonesian owned – the exceptions which previously allowed foreign control of underground mines and mines with processing and refining facilities have been scrapped.

The Regulations

The following regulations were issued: 
▪ Government Regulation Number 1 of 2017 on the Fourth Amendment to Government Regulation Number 23 of 2010 on the Activities of Mineral and Coal Mining ("GR1/2017");
▪ Regulation of the Minister of Energy and Mineral Resources Number 5 of 2017 on Increasing Added Value Through Domestic Processing and Refining of Minerals ("PERMEN5/2017");
▪ Regulation of the Minister of Energy and Mineral Resources Number 6 of 2017 on Procedures and Requirements to Obtain Recommendations for Export Sale of Minerals Resulting from Processing and Refining ("PERMEN6/2017").

Exports, Domestic Processing and Refining IUP or IUPK holders are given an extra five years from 11 January 2017 during which they may export approved quantities of processed material, provided they have demonstrated sufficient progress with construction of domestic processing and refining facilities.

Approval for export of concentrates is granted by the Ministry of Trade based on a recommendation from the Minister of Energy and Mineral Resources on a yearly basis but reviewed every six months.

The regime is as follows: 
▪ There are specified minimum domestic processing and refining requirements for various types of metal minerals, non-metallic minerals and certain rocks.
▪ While processing and refining facilities are being constructed to meet these requirements, certain approved quantities of processed materials (which have not been refined to the level required) can be exported by IUP and IUPK holders - but not Contract of Work holders- for a period of five years from 11 January 2017. There are special rules for nickel and bauxite.
▪ The approval to export is given by the Minister of Trade after receiving a recommendation from the Minister of Energy and Mineral Resources. The pre-requisites for obtaining a recommendation include submitting independently verified plans for construction of processing and refining facilities (amongst other things) and progress evaluations. The recommendation is valid for one year (with subsequent extensions available). The extensions depend on an evaluation of the progress of construction of the facilities.
▪ The evaluation of the progress of construction is made by the Director General of Minerals and Coal every six months (or at any other time) and if the company is unable to demonstrate the achievement of 90% of its scheduled rate of progress the export approval recommendation will be revoked.
▪ Export duties will be payable in connection with the export of the processed material.
▪ In addition to the requirement to process or refine metal minerals, non-metallic minerals and certain rocks, by-products of processing and refining are also required to be further processed and refined domestically to meet minimum specified requirements (for example, gold and silver produced as a by-product of the processing and refining of lead and zinc must also be processed and refined and there are requirements for the minimum domestic processing of anode slimes from copper production).
▪ Processing and refining can be done in cooperation with other IUP and IUPK holders as well as holders of specific IUPs for Processing and Refining (stand-alone facilities). This can be done by way of buying and selling ore or on a tolling basis. The plans for doing so must be submitted to the Minister of Energy and Mineral Resources (or Governor) for approval.
▪ Ministerial approval is required if a processing or refining facility is to process or refine ores imported from overseas.

Forced Conversion of Contracts of Work into IUPKs
Contract of Work holders cannot obtain approval for ongoing export sales of concentrates and other processed, but non-refined minerals as it is a precondition under the regulations that to obtain approval a Contract of Work holder must have converted its Contract of Work into an IUPK (these requirements were foreshadowed in one or two drafts of the new Mining Law1).

However, we note that there appears to be an exception in relation to anode slimes, provided they are sufficiently processed.

Although the regulations suggest that a Contract of Work holder has the option to apply for a conversion, the result of the regulations is likely to be that a Contract of Work holder that is not refining 100% of its export production has no option but to apply for conversion. This may be regarded by Contract of Work holders as a breach or repudiation of their Contract of Work and/or a form of duress. Effectively, the Contract of Work holder is being forced to give up its contractual rights. There is little legal basis for such a requirement as Law No 4 of 2009 on Minerals and Coal Mining ("Mining Law") has no requirement or process to convert Contracts of Work into IUPKs and, in fact, upholds their validity until their expiry. In addition, there are many provisions in the Mining Law related to IUPKs which do not sit well with the rights currently held by Contract of Work holders.

When issuing GR1/2017, the Government seems to have omitted to include a conversion process in GR1/2017, leaving it instead to the lower level ministerial regulations. Even if such a conversion process had been specified in GR1/2017, it would still appear to conflict with provisions in the Mining Law which require IUPKs to be granted to private entities on the basis of a tender, making it liable to be challenged in the Supreme Court.

It remains to be seen how COW holders will react to these changes—this is particularly the case as a number of them may have previously entered into MOUs or Amendment Agreements related to their existing COWs prior to the issuance of this new set of regulations.

Clearly, having the concession in the form of an IUPK would mean that certain "nailed down" provisions which the mining companies previously had under their COWs would no longer be applicable and thus these concessions will be subject to any changes to the laws / regulations generally applicable to IUP / IUPK holders which occur from time to time.

Divestment
Formerly, mining companies in production were required to limit foreign ownership to 49%, except where such companies were carrying out underground mining activities, in which case foreign owners were entitled to hold up to 70% of the shares of such company (for companies carrying out smelting activities, the applicable foreign ownership limitation was 60%).

The new divestment requirements will ultimately cause all foreign investors to lose the majority stake in the mines they have invested in—regardless of whether they are carrying out underground mining or smelting activities. Consequently, the divestment has now reverted back to an earlier scheme, and is the same for all IUP, IUPK, COW and CCOW holders. The amount of shareholding required to be held by Indonesian participants is as follows:
▪ in the sixth year of production, 20%
▪ in the seventh year of production, 30%
▪ in the eight year of production, 37%
▪ in the ninth year of production, 44%
▪ in the tenth year of production, 51%

Other changes include: 
▪ The time that production is measured from is the issuance of the IUP / IUPK rather than actual production (meaning that construction time is counted). Consequently shares to be divested must be offered within 90 days after five years from the grant of the IUP/IUPK (the precise timing for Contract of Work holders is unclear).
▪ The shares to be divested must still be offered in this order: (1) to the Central Government; (2) to Provincial / Regional Governments; (3) to State-owned Companies and Regional-owned Companies and only then to (4) private entities. However, there are no longer express response times required for when the shares are offered, meaning that each participant at each step of the process could delay matters (and potentially dilute shareholder value pending any such transfer).
▪ IPOed shares of a mining company held by foreign investors will no longer be deemed to be held by domestic participants.
▪ Provisions which formerly stated that divestment does not apply to holders of an IUP specially for Processing and Refining have been deleted. However, the revised article refers to the timing from the "mining production stage", which suggests that there may not be a direct intention to impose a divestment regime on owners of processing and refining facilities; however it does leave the question open.

There is some grey area in interpretation as to whether this new divestment regime applies immediately to COW and CCOW holders (who have been in production for more than five years) or whether they may have up to a further five years to comply.

The price to be paid for the shares to be divested has not been specified in GR1/2017, meaning that the current ministerial regulations still apply (meaning that only sunk costs, not fair market value, is payable where the divestment shares are taken up directly by the Government (as opposed to Government-owned companies/national companies)).

These new divestment requirements can be seen as a hardening of the Governments stance on foreign investment in the mining sector. The previous understanding that underground mining projects (due to their technical complexity and the high level of investment needed) could have foreign control has been removed. If the Government (Central, Provincial or Regional) or State-owned or Regional-owned Companies exercise their preferential right to take up the shares to be divested (rather than private Indonesian entities), the result may be a largely national/nationalized Indonesian mining industry.

In this connection, it remains to be seen what scope there will be for ongoing private investment to support some of these government/state-owned company equity participations.

Extensions to IUPs And IUPKs
The regulations extend the period in which an application for extension of an IUP or IUPK can be made. This has changed from being, at the earliest, two years before expiry and, at the latest, six months before expiry to being, at the earliest, five years before expiry and, at the latest, one year before expiry.

These changes do not apply to Contract of Work holders.

For further information please contact

Muhammad Karnova
Partner
+62 21 2960 8699
muhammad.karnova@bakernet.com

Reggy Firmansyah
Senior Associate
+62 21 2960 8570
reggy.firmansyah@bakernet.com

Hadiputranto, Hadinoto & Partners
The Indonesia Stock Exchange Building, 
Tower II, 21st Floor
Sudirman Central Business District
Jl. Jendral Sudirman Kav. 52-53
Jakarta 12190
Indonesia
www.hhp.co.id
Tel: +62 21 2960 8888
Fax: +62 21 2960 8999

Posted by : admin [ 17/01/2017 18:09:00 ]