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A due diligence shortcut for mining rights in Indonesia

November 2011 - Projects, Energy & Natural Resources . Legal Developments by Soewito Suhardiman Eddymurthy Kardono.

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Written by A. Supriyani Kardono

Investors looking to invest in Indonesia’s mining sector may feel a  bit more relieved now as a central database on mining rights in Indonesia has been developed by the Ministry of Energy and Mineral Resources (“MEMR”). The Directorate General of Minerals and Coal of the MEMR (“DGMC”) has compiled and reconciled data of all national mining business permits (locally known as Ijin Usaha Pertambangan or “IUP”).

By gathering and disseminating national data of IUPs, the MEMR aims to ensure coordination, verification and synchronization of IUPs issued by provincial governors, regents and mayors throughout Indonesia, to stimulate investment and increase state revenues. Prior to this initiative, Indonesia did not have an accessible central database on coal and mineral mining rights in Indonesia or integrated IUP data between the central and local governments.

This initiative was the result of the new Mining Law (Law No. 4 Year 2009 regarding Minerals and Coal) and several implementing regulations, specifically Government Regulation No. 22 of  2010 regarding Mining Areas and Government Regulation No. 23 of 2010 regarding the implementation of Mineral and Coal Commercial Mining Activities.

The reconciled data consists of IUPs categorized as “clear and clean” and “non clear and clean.” An IUP is considered “clear and clean” if it was validly issued prior to May 1, 2010 and if the IUP area is not subject to overlaps. The DGMC will further nationally announce with respect to the status of “non clear and clean” IUPs, once the missing information and requirements are completed and delivered to the DGMC. As of May 21, 2011, there were 8,475 IUPs reported to the DGMC, of which only 3,971 IUPs listed in the reconciled data are considered “clean and clear.” The remaining 4,504 IUPs are categorized as “non clear and clean”, subject to the finalization of the data collection.

What are the benefits of a central IUP database?

Ever since Indonesia began decentralizing power to the provincial and regional governments in the late 1990s, there has been significant confusion with regard to overlapping mining rights and it has been difficult to gather accurate information about a mining area from multiple levels of government. The central database is therefore a short cut resource for investors examining mining rights, aiding significantly in the due diligence of an IUP.

A typical due diligence of mining rights is initially conducted by obtaining and reviewing the maps from various ministries and government agencies. Maps obtained would describe whether the mining area in question overlaps with either other mining rights (mineral, hard rock or oil and gas), forest areas (protected forests or otherwise) or other surface rights or interests. The same review should be done at the local government level. Further, to ensure the accuracy of information, the investor should also investigate with the local offices of the MEMR, the Ministry of Forestry and the land office as well as a physical inspection of the mine site, the hauling road and any proposed jetty. Such a lengthy process can incur substantial time and costs. With the central database now available to the public, an IUP due diligence should be easier, less expensive and  less time-consuming.

Importantly, it also appears that the database may be used to prepare the maps of new mining areas that the government intends to issue in the near future, along with implementing regulations for the auction of these new mining areas as mandated by the Indonesian Mining Law.  The Mining Law requires a tender process for mining areas which will then followed by the issuance of IUPs by region, province or central government depending on the location of the mine for IUPs for Exploration, and on the location of the mine and mining facilities, including any ports, for IUPs for Production.

What are the risks for those not listed in the database?

There would appear to be a substantial risk that one’s mining area will not be marked as an area for which a KP (i.e. the old name for IUPs) that is pending conversion into IUP, or an IUP itself, has already been issued. This may result in further complications and additional overlapping, undoubtedly incurring more delays and costs on behalf of the KP or IUP holder. Therefore, it would appear to be in each IUP holder’s best interest to ensure their issued mining licenses are listed in the new database.  IUP holders should assist the provincial/regency/city government by registering in the database and completing the submission of IUP data to the DGMC.

What happens with “Non Clear and Clean” IUPs?

There remains substantial work to be done in collecting and finalizing the remaining information, and we understand that the MEMR will officially announce a progress report in the near future.  We note a progress report has yet to be issued since the first announcement was made on July 1, 2011.

What is the status of pending applications for the conversion of KP licenses to become IUPs?

There appear to be a significant number of KPs that are still pending for conversion. This is partly because each conversion requires additional reports, and partly due to delays on behalf of inexperienced local governments. KP holders are required to provide evidence of compliance with the outstanding deadrent and royalty payment obligations as well as on the implementation of their mining plan activities.  For those who intend to upgrade their exploration KP into a Production IUP, a comprehensive environmental impact study (AMDAL) as well as a feasibility study shall also be prepared and approved, in addition to the provision of a reclamation and post mining activity plans.


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