VZCZCXRO0413
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2293/01 3540612
ZNR UUUUU ZZH
R 190612Z DEC 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 1017
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 2869
RUEHBY/AMEMBASSY CANBERRA 3429
RUEHBJ/AMEMBASSY BEIJING 5750
RUEHJS/AMCONSUL SURABAYA 2340
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 002293 
 
DEPT FOR EAP/MTS AND EB/ESC/IEC/ENR 
DOE FOR PI-32 CUTLER AND GILLESPIE 
COMMERCE FOR 4430/NADJMI AND 6930/HUEPER 
DEPT PASS USTR EHLERS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ENRG EINV PREL ID
SUBJECT: INDONESIA'S LEGISLATURE PASSES NEW MINING LAW 
 
JAKARTA 00002293  001.2 OF 002 
 
 
¶1. Summary.  On December 16, Indonesia's legislature (DPR) passed a 
new mining law that will promote domestic small and medium sized 
investments at the expense of large international mining companies. 
Bowing to opposition from the Ministry of Energy and Mineral 
Resources, the DPR agreed that the law will not force existing 
mining contracts of work (COW) to convert to mining licenses, 
although provisions remain that erode the sanctity of current 
contracts.  Industry reaction to the new bill has been almost 
universally negative, with trade groups predicting that uncertainty 
will increase, causing foreign investment to decrease.  The law also 
seeks to build local government capacity to oversee mining 
operations.  End Summary. 
 
------------------------- 
NO MORE CONTRACTS OF WORK 
------------------------- 
 
¶2. Policymakers have sought to revise Indonesia's 1967 Mining Law 
for some time, to reflect the new, decentralized governing 
structure.  In earlier versions of the new bill, legislators sought 
to eliminate existing contracts of work (COW) and replace them with 
mining licenses.  A COW defines a mining company's rights and 
obligations in all aspects of a mining operation - tax and fee 
obligations, royalties, concession size and duration, land use, 
construction of facilities, divestiture requirements, etc. - and it 
remains independent of Indonesia's overall tax and corporate laws 
for the duration of the COW.  In the system of mining licenses 
created in the new law, licenses give the right to mine in a defined 
area but leave the mining company subject to all changes in 
Indonesia's mining, tax, and corporate laws.  Legislators were 
unhappy with the prospect of a two-tier COW/licensing system for the 
duration of current COWs, many of which will remain valid for 
decades. 
 
¶3. The Ministry of Energy and Mineral Resources resisted the DPR's 
plans to convert COWs, and the President threatened to veto earlier 
versions of the proposed bill over this issue.  In the end, the DPR 
gave in and grandfathered existing COWs.  Nevertheless the 
legislation mandates undefined changes to "non-state-revenue" COW 
provisions to comply with the new law. 
 
-------------------------- 
NEGATIVE BUSINESS REACTION 
-------------------------- 
 
¶4. Business reaction to the new law has been negative.  Priyo 
Pribadi Soemarno, Executive Director of the Indonesian Mining 
Association (IMA), a business group that includes foreign and 
domestic mining companies, believes that it will further erode 
Indonesia's mining investment climate.  The new risks and 
limitations for mining companies that the law creates include: 
 
-- Government can cancel mining licenses, with little recourse from 
an affected company. 
-- Companies will be subject to all changes in royalties, taxes, 
fees, and corporate ownership.  Soemarno highlighted the fact that 
all levels of Indonesian government have reputations for frequently 
imposing new financial obligations on resource extraction 
companies. 
-- Foreign mining companies must begin a divestment program within 5 
years of production, even though Indonesia's investment laws allow 
foreign companies to own 100% of a mining operation.  Divestment 
problems have caused major challenges for a number of foreign mining 
companies in Indonesia, most recently Newmont. 
-- Concession areas are smaller than in the past, which works 
against the business plans of large companies such as Freeport, 
Newmont, and Rio Tinto. 
-- Companies can no longer export unprocessed ore, but must smelt it 
in-country.  Legislators hope this provision will spur new 
value-added industries, but industry analysts fear that this 
requirement may give local smelters monopoly-pricing powers. 
-- Mining companies are barred from hiring subsidiaries and 
affiliates for mining operations.  Companies must give preference to 
local and national companies when subcontracting, although local 
subsidiaries of international companies qualify as national 
companies. 
 
------------------ 
THERE IS AN UPSIDE 
------------------ 
 
 
JAKARTA 00002293  002.2 OF 002 
 
 
¶5. The law addresses local governments' lack of institutional 
capacity to manage licenses.  Provincial and regency governments 
have had the authority to issue mining licenses to domestic 
companies for several years, but previously there was no attempt to 
train these levels of government in contracting, management, or 
oversight of mines.  The new law obligates central government 
ministries to train local governments on a range of mining oversight 
issues, including safety, research, and environmental issues.  The 
law also states that central government ministries retain the 
primary authority to inspect mining operations, although they can 
delegate this right to local governments at their discretion. 
 
----------------------------- 
KEY PROVISIONS OF THE NEW LAW 
----------------------------- 
 
¶6. Types of Licenses 
-- Mining Permit (IUP): Awarded by central or local governments 
(governor, mayor, or regent) through tender. 
-- Special Mining Permit (IUPK): Awarded only by the central 
government through tender for mining regions designated as State 
Reserve Areas.  Only for coal, copper, lead, gold, iron, nickel, and 
bauxite. 
-- People's Mining Permit (IPR): Awarded by a mayor or regent, only 
for small-scale mining (currently unlicensed and considered 
illegal). 
 
¶7. License Duration 
-- IUP and IUPK: Exploration licenses are for 7 or 8 years. 
Production licenses are for 20 years for coal and metal, 10 years 
for precious stones, all with the option of two 10-year extensions. 
-- IPR: Production license is valid for 5 years, but extendable. 
 
¶8. Concession Size 
-- IUP and IUPK: Exploration concessions of 100,000 hectares (ha) 
for metal, 50,000 ha for coal.  Production concessions capped at 
25,000 ha for metal, 15,000 ha for coal. 
-- IPR: Individual license - 1 ha; group license - 5 ha; cooperative 
- 10 ha. 
 
¶9. Foreign Ownership: Foreign companies are allowed to own 100% of 
mining operations under Indonesia's investment law, but must begin 
an undefined divestment process within five years of production 
under the new mining law. 
 
¶10. Royalties:  All license holders must pay royalties, to be 
defined by regulation.  IUPK holders must additionally pay 10% of 
their production to the government - 4% central government, 1% 
provincial, 2.5% regency of production, 2.5% other regencies in the 
province. 
 
¶11. In-Country Processing: IUP and IUPK holders must refine their 
product inside Indonesia, whether by establishing their own smelters 
or using others.  COW holders have 5 years to comply with this 
requirement. 
 
¶12. Subcontracting: License-holders cannot subcontract to 
subsidiaries, and they must give preference to local or national 
mining service companies in their operations. 
 
¶13. Production Controls: The central government may set provincial 
production limits for certain commodities and mandate domestic 
market obligations. 
 
HUME