Resources nationalism is not confined to Africa . In 2009, the Indonesian Parliament passed a new Mining Law (Law No. 4 of 2009 on Mineral and Coal Mining). In addition to replacing the established "Contract of Work" system1 with a permitting (IUP 2 ) system, the Mining Law has two aspects which have caused a dampening effect on foreign investment in the resources sector. These are: export of unprocessed minerals after 12 January 2014 is prohibited, requiring mining companies to process and refine their product in Indonesia accelerated divestment requirement, under which foreign shareholders in companies holding a mining production permit are required to divest shares to achieve majority Indonesian ownership within 10 years from the commencement of commercial production. The Mining Law deliberately left some important aspects to be dealt with by way of Ministerial Regulations and included a number of internal inconsistencies or apparent contradictions, which have required elucidation by Ministerial Regulations. In each case, the two principles referred to above have recently been the subject of clarifying Ministerial or Presidential regulations, which are discussed below. Value Adding Requirement The Mining Law requires all mineral ores to be processed in Indonesia before being exported. Under the law, raw ores and semi-processed minerals with purity levels below the Government's threshold can no longer be exported after 12 January 2014 . However, it became apparent in late 2013 that, despite five years lead time, very few if any Indonesian miners had arranged compliance with the obligation to set up processing plants to process their ore to the required standard set by the Government. Given the importance of mining to the economy, both in terms of exports and employment, the Government sought the consent of Parliament to amend the Mining Law to extend the time for compliance with this processing requirement but the Parliament did not agree. Faced with a prospect of the country's commodity export trade grinding to a halt, unemployment in the sector (during an election year) and a black hole in the State budget, the Government has implemented a two tier solution. This is outlined below. Tier One Solution Under Government Regulation No. 1 of 2014 re Increase of Mineral Value Added Through Domestic Processing & Refining (GR 1/2014), the purity threshold for many minerals (excluding nickel, bauxite, chromium, gold, silver and tin for which smelting capacity exists) has been significantly reduced, on a temporary basis for a period of three years, to permit those minerals to continue to be exported in semi-processed form by companies which have evidenced an intention to set up their own processing facilities. For example, GR 1/2014 specifies the following (probably temporarily) reduced minimum required levels of purity: Mineral Previous purity requirement GR 1/2014 requirement Copper 99% 15% Iron Ore 80 – 88% 62% Lead 99.85% 57% Zinc 90% 52% Manganese Various 49% Titanium 94% 56 – 58% Ilmenite 98% 56% Tier Two Solution Under Ministry of Finance Regulation No .6 of 2014 re Determination of Export Goods that are subject to Export Duty and the Export Duty Tariff (MoFR 6/2014), to encourage companies to progress their plans for processing plants, semi-processed minerals will be subject to an export duty during the period of the reduced thresholds, at a progressive rate commencing at 25% (for copper concentrates) and 20% for other specified concentrates and increasing to 60% after three years. In order to discourage massive exports of raw minerals before the export ban came into force, Indonesia has charged an export duty of 20% on ore exports since 20123. Discussion The effect of these reductions is, in many instances, to permit existing miners to continue exporting semi-processed minerals at their current level of purity for the time being. The reduction is effected by Government Regulation and so could be amended at any time by another Government Regulation issued by the President. The Government's intention is to give mining companies more time to build and commission processing plants. Whether this intention will be realised remains to be seen. GR1/2014 and MoFR 6/2014 apply to all mining companies, whether the mining company holds an IUP or a Contract of Work. It remains to be seen what will be the outcome where the terms of a Contract of Work (which remains valid and binding but are required to be adjusted to comply with the 2009 Mining Law) are inconsistent with the new Regulations. There are a number of inconsistencies and uncertainties to be worked through, reflecting the last minute compromise nature of the new regulations. Additionally, the Trade Ministry and the Energy and Mineral Resources Ministry have announced a new export regime, requiring from 3 February 2014 for all mineral exporters to: be registered at the Trade Ministry undergo pre-shipment verification that the exporter has met the processing level set by the Energy and Mineral Resources Ministry for exporters of processed minerals (copper, iron and manganese concentrates, but not refined products, such as nickel matte and ferro nickel) to obtain export permits from the Trade Ministry to ship their products overseas. Limits on Foreign Ownership The Mining Law provided that mining for minerals and coal in Indonesia was a permitted area of foreign investment, subject to an obligation on the foreign shareholder to progressively divest its shareholding to a minority stake over time. This obligation was elucidated in two Ministerial Regulations, most recently in September 2013 , under Regulation 27 of 2013. Previously, Regulation 23 of 2010 had provided that initially a company holding a production IUP could be 100% foreign-owned, but that foreign shareholder had to progressively divest shares, from the date of commencement of production, to procure a minimum: 20% local ownership by year six 30% local ownership by year seven 37% local ownership by year eight 44% local ownership by year nine 51% local ownership by year 10. These limits still apply, unless by the end of year five, the minimum local ownership threshold has already been achieved (permitting a private sale). However, Regulation 27 of 2013 went further. In the context that most IUPs historically had been held by 100% domestically-owned Indonesian companies, the Regulation provided that, where such a company changes its status to permit foreign shareholdings (ie to become a "PMA"4 company) or ownership of foreign shares in a PMA company changes hands, the maximum permitted foreign shareholding in the PMA company is to be only: 75% (subject to divestment, as above) for a company holding an exploration IUP 49% for a company holding a production IUP. This has the effect of accelerating the local ownership requirement if a foreign owner seeks to sell its interest before the sixth year of production and inhibiting sales by foreign investors of interests in operating mines (although a change of ownership of an offshore holding company will not trigger the provision). For example, if a foreign company holding an exploration IUP has 80% ownership, and wishes to sell its shares to another foreign company, the maximum foreign ownership would be restricted to 75% – the extra 5% would need to be sold to qualifying Indonesians. If the IUP were a production IUP, the maximum foreign ownership that an incoming foreign investor could acquire in the company holding the IUP would be only 49%. Floating the company on the Indonesian Stock Exchange does not satisfy the divestment requirement to sell to local participants. There are number of practical issues associated with the divestment/local ownership requirement. The shares must be offered in a mandated order of priority: first to central, provincial and regional governments, each of which require the approval of their respective legislative bodies to approve the acquisition if they do not take up the offer, to state-owned or regional-owned enterprises, by tender if they do not take up the offer, to private Indonesian parties, by tender. This process is likely to cause delay and add cost and will not necessarily give the foreign investor the best economic outcome. The transfer price is a mandated "appraisal price", based on historic net cost rather than discounted future value or market value. This price acts as a "cap" on the price a Government body must pay and as a "floor" price for other approved buyers. The foreign shareholder is therefore unlikely to achieve substantial return on its investment other than cost-recovery (less depreciation and amortisation). Consent is required from BKPM (Investment Coordinating Board) and the Minister of Energy and Mineral Resources for a transfer of shares in a foreign investment mining company. It remains unclear the extent to which these Regulations apply to the quite different divestment requirements under ongoing Contracts of Work. Even though the Mining Law provides that these ongoing contracts are to be aligned with the new law, Contract of Work holders are likely to take the position that the existing provisions are contractually agreed and binding on the Government.
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