GOVERNANCE IN MINERAL AND COAL MINING in INDONESIA

DIRECTORATE GENERAL MINERAL AND COALMINISTRY OF ENERGY AND MINERAL RESOURCES Ritz Carlton Hotel, November 28th, 2014 GOVERNANCE IN MINERAL AND COAL MINING IN INDONESIA Dr.. Government

DIRECTORATE GENERAL MINERAL AND COAL

MINISTRY OF ENERGY AND MINERAL RESOURCES

Ritz Carlton Hotel, November 28th, 2014

GOVERNANCE IN MINERAL AND

COAL MINING

IN INDONESIA

Dr R Sukhyar (Director General of Mineral and Coal)

Panelist on Launching of Regional Framework on

Extractive Industries Government

I BACKGROUND

II GOVERNANCE CONCEPT IN MINERAL RESOURCES

DEVELOPMENT

III CURRENT CONDITION

IV INDONESIAN MINING POLICY

V INVESTMENT OPPORTUNITY

VI CLOSING REMARKS

2

I BACKGROUND

3

CONSTITUTION OF THE REPUBLIC OF

INDONESIA IN1945

ARTICLE 33 PARAGRAPH (3):

Land and water and the natural riches

contained therein controlled by the state

and used for the people's welfare.

• Policy setting

• Regulating

• Licensing

• Supervising

• Overseeing and monitoring

In the context with the execution of mineral right of the State, the Government has functions as follows

GOVERNMENT FUNCTION

Shifting of Paradigm Development of Natural Resources

Exploitative, Resources for

Revenue

Resources for Sustainable Development: pro growth, pro job, pro

poor , pro environtment

Resource Management

6

Demand Driven

Sumber : Suslick & Machado, 2001; Shields & Solar, 2006)

MINERAL ISSUES, EVOLUTION PRECESS AND CONCERN ON

SUSTAINABLE DEVELOPMENT

“Mining activity must be in line with sustainable

development principle”

II GOVERNANCE CONCEPT AND STAKEHOLDERS IN MINING

8

CONCEPT OF GOVERNANCE

Governance in mineral res ources development

is defined as a s ys tem operating in accordance

reg ulation which inter-connects s takeholders with different functions for the benefit of

Every stakeholder must act and perform its function

in accordance to the principles of trans parency,

Oil and Gas Company

Investment Board

Nuclear Agency

Ministry of Communication

MFinance

Regent

MSpetial Planning

Continuous Improvement if MEMR

as Principle of Mining License:

1 Streamlining approvals

2 Strong coordination among agencies, government up hold the MEMR as the

principal

3 Simplification of procedures in

Bureaucracy.

4 Government effort for simplification of the mining license

5 Increase entrepreneur’s awareness through a variety of regulations

MINING STAKEHOLDER IN INDONESIA

III CURRENT CONDITIONS

12

De mand fo r e ne rgy, mate rials , wate r and o the r ke y

re s o urc e s de mand is like ly to inc re as e rapidly

Indone s ia

to day…

…and in 2030

Source: McKinsey Global Institute, 2012

3.1 INDONESIAN OUTLOOK

Source : Geology Agency, MEMR, 2013

Ferro and Associates : Fe, Nickel, Cobalt, Chromit , Mangan, Molibdenum,

Titanium Precious Metal : Gold, Silver, Platinum Base Metal : Zinc, Cupper, Tin, Lead, Mercury

Light and Rare metal : Bauxite, Monasit

NO Type

RESOURCES (MILLION TON)

RESERVES (MILLION TON) ORE META L ORE METAL

1 Primary Gold 7,670

0.007 3,225

0.003

High (6.100 - 7.100 kal/gr) Medium (5.100 - 6.100 kal/gr)

Source : Geology Agency, MEMR, 2013

3.3 COAL RESOURCES AND RESERVE

3.4 INDONESIAN COAL AND PRODUCTION RANK

RANK (PRODUCTI ON)

Million Ton

60 Million Ton

Sulawesi, Maluku,Sumatera, Papua

Kalimantan, Sumatera, Maluku, Papua

7th

Indones ia has a world rank mineral and energy res ources , that can be us ed to create benefit in

the form of inves tment opportunity, job,

education, welfare, etc

No Commodity Unit 2009 2010 2011 2012 2013 Plan For

2014 2014*)

Plan For 2015

1 Co ppe r (Me tal) Thousand

Ton 999 878 543 448 450 640 166 311,8

2 Gold Ton 104 104 76 75 59 87 26 75

3 Tin Thousand

Ton 60 48 42 95 88 88 10,8 70

4 Nic ke l Ore Million Ton 6 7 32 41 60 3,5 3,8 4,2

5 Bauxite Million Ton 5 16 39 30 56 1 2,8 4,3

6 Iron Ore Million Ton 5 4 12 10 19 7 1,1 6,4

7. Co al Produc tion Million Ton 254 275 353 407 421 397 346 425

a Coal Export Million Ton 198 210 287 340 349 302 263,5 301,75

b Coal For DMO Million Ton 56 65 66 67 72 95 82,5 123,25

Note:

*) : - Realization up to Semester 1st, 2014

- Realization for Nickel Ore and Bauxite on January 2014

- Mineral production Plan for 2015 already include metals as refining and processing results

**) : Realization of Coal Production until the end of October 2014

3.5 COAL AND MINERAL PRODUCTION (2009-2014)

Landrent/Deadrent 1, 2, or 4 USD/ha based on phase

operation

2 – 4 USD/Ha (prevailing) 2 - 4 USD/Ha (prevailing)

Royalty Open pit : 3,5, or 7% based on calorie

Underground :2, 4, 6% based on calorie

Metals vary from 1-4%

3- 5 % (prevailing) 13,5 % (naildown)

Corporate Tax 25% 25-45% (naildown) 25-45% (naildown)

Note :

• Prevailing based on Government Regulation No 9/2012

• Naildown based on Contract

• CoW : Contract of Work (KK)

• CCoW : Coal Contract of Work (PKP2B)

TAX/NON TAX OBLIGATION TARIFF 3.6 TYPE OF STATE REVENUE

MINING

S TILL AS ECONOMIC PRIMEMOVE

R

V INDONESIAN MINING POLICY

20

- To determine policies, guidelines, standards, procedures and criteria

- To supervise implementation of autonomy policy

- To manage Mineral Resources

- To develop and arrange internasional cooperation/aggrement

- To conduct training and research on mining

Related Law and regulations: Law No 32/2004; Law 4/2009, etc POWER FROM PEOPLE

1. Article 33 Indonesia Constitution 1945:

Verse (1) The economy shall be organized as a common endeavour based upon the principle of the family

system

Verse (2) Branches of production which are important for the State and which affect the life of most people

shall be controlled by the State.\

Ayat (3) Land and water and the natural riches contained therein shall be controlled by the State and shall

be made use of for the people welfare

2. Article 169 Law No 4 Year 2009:

a. CoW and CCoW thhat already exist prior to the effectiveness of this Law shall remain valid until the contracts/agreements expire

b. The terms that are stated by articles of CoW adn CCoW as intended by point (a) shall be adjusted at the latest 1 (one) year of the promulgation of this Law, with the exception of state revenue

c. Exception of state revenues as intended by point (b) shall be an effort to increase state revenue

Elucidation of Article 169 (b) : All articles that are contained in CoW and CCoW must be adjusted to the Law

5.2 LEGAL STANDING

1 Government Position Mining permission given through tender by local government after area designated by

Minister

2 Business Actor Position Business entities is under the control of the government, omitting mining contract system.

3 Enterprise:

• Form Mining License (IUP, IPR & IUPK)

(Contract of Work and CCoW- Coall contract

to be Licence after contract ends)

• Tenure:

operation period

20 years (can be extended 2 x 10 years)

• Divestment obligation After 5 years of production, Minimum required to divest 51% (integrated smelter 40% and

undergroung mining 30%)

• Area For pre-production stage :

•IUP Metallic Mineral max 100.000 ha, (Foreign Enterprise, min Auction 5.000 ha) cat: PP 28/2013 minimal lelang PMA 5.000 ha

•IUP Non-Metallic Mineral Max 25.000 ha

•IUP Coal max 50.000 ha (Foreign Enterprise, min Auction 5.000 ha),

•IUP Rocks max 5.000 ha

3 Enterprise (cont)):

• Area For production stage:

•IUP Metallic Mineral max 25.000 ha, (Foreign Enterprise, min Auction 5.000 ha)

•IUP Non-Metallic Mineral max 5.000 ha

•IUP Coal max 15.000 ha, (Foreign Enterprise, min Auction 5.000 ha)

•IUP Rocks max 1.000 ha

• Processing & Refining Required

4 Resource Management • Must manage properly

• Increased value added in the country

• Prioritization of Domestic Needs

5 Sanction to the licensor Sanction available

6 Regional authority

7 Environment Protection

8 CSR, Right of community

Reduced, the Minister set working area

5.4 MINING ENTERPRISE REGULATION

GOVERNANCE IN MINING (LAW NO 4/20009)

1 GOOD GOVERNMENT GOVERNANCE

- Clarity in power and authority division between the national government and regional government either province and regency/mayor

- Open system of cadastre and tenament

- Transparant resource management and open mining and geology data

- Fair and transparent licensing system

- Put sanction to the authorities who do not comply the the law and regulation

- Supervise, oversee and monitoring performance of local government in mining

- Supervise, oversee and minitor mining companies

- Provide guidance to people’s mining

2 GOOD CORPORATE GOVERNANCE

- Comply to law and regulation, and good mining practices

- CSR and community development

- Apply the use of local content

- Regular reporting

- Protect environment, environment assessment, land reclamation and post mining

- Provide public, employee and installation safety and health

- Conservation

- Value added

SINKRONIZATION

OF CENTRAL AND

LOCAL GOVERNMENT

RENEGOTIATING OF CONTRACT (CoW, CCoW)

VALUE ADDED/

DOWN STREAM PROCESSING

MINING LICENSE SIMPLIFICATION

OPTIMALIZATION

OF STATE REVENUE

5.5 GOVERNMENT REFORM (NAWA CITA) OF JOKOWI-JK

POLICY DIRECTION

Provide certainty and transparency in the activities of mining (Mining Law supporting regulations, sanctions violations, etc.)

Implement fulfillment priority of coal for domestic needs

To encourage the increase of investment and revenue

To encourage the development of value added products of mining commodity (eg processing, refining, local content, local expenditure, labor and CSR)

environmental management and monitoring (including reclamation and post-mining)

To implement supervision and guidance

1 Ore / raw material can not be exported

2 Holders of IUP Operation Production of mineral (metal, non-metal, and rocks) may export a certain amount of processing product that have met the minimum limit processing

3 Holders of Contract of Works who have been doing refining works can sell abroad a number of its processing products

4 Processing products of metallic mineral that can still be sold abroad, namely copper concentrates, iron concentrates, iron sand concentrate / pellets, manganese concentrate, lead concentrate and zinc concentrate However, these kind of commoditities can only be sold abroad until refining facility is completed -

no later than three (3) years from the promulgation of this Regulation

5 Minimum quality of processing and refining has been actively consulted with universities, research institutions, and business associations, as well as relevant ministries and agencies The minimum quality has been written in the Minister of Energy and Mineral Resources No 1 of 2014 on Added Value Through Mineral Processing and Refining Mineral in the country

6 Other mineral commodities, such as: tin, nickel, bauxite, gold and silver can only

be sold abroad after the refining It should be born in mind that those minerals have been refined well before the Law 4 of 2009 issuance

5.7 MINERAL POLICY AFTER GOVERNMENT REGULATION 1/2014

27

1.Products resulting from PROCES S ING METALLIC MINERAL that can be exported are: copper concentrate, iron concentrate, iron sand

concentrate/pellet, manganese concentrate,lead concentarte and zinc

concentrate

2.Metallic mineral commodity such as tin, nickel, bauxite, gold, silver, and chromium ONLY can be exported after HAS BEEN REFINED

3.Regulate minimum quality of processing and refining (Attachment 1 :

Metallic Mineral Commodity, Attachment 2 : Non-metallic Mineral

Commodity, Attachment 3 : Aggregate/Stone Commodity).

4.Contract of Work Holders, Metallic Mining Licence Holders which are in the production stage, afte r 3 (thre e ) ye ar pe rio d since issuance of this Minister Decree, c an o nly export products that have been refined in

accordance with minimum quality of refining as stated in this Minister

Decree.

5.8 MINISTER of EMR DECREE NO.1 YEAR 2014

Mining Mining Smelting Refining End-User

Mining (upstream) Smelting (downstream) Refining

29

Be ne fic iatio n policy:

without more downstre am activitie s, Indonesia will m iss the opportunity to incre ase

em ployme nt and profit m argins on the value chain be cause of the abs ence of downs tre am proce ssing industrie s.

Co nc e ntrate Ano de s Catho de s Vario us

Due date fo r adjus tme nt to minimum

be ne fic iatio n re quire me nt

5.9 MINERAL AND COAL DOWNSTREAM

VI ON GOING ACTIONS FOR IMPROVING MINING GOVERNANCE

30

1 Renegotiation of Mining Contract

6.1 ON GOING ACTIONS MANDATED BY MINING LAW No 4/2009

1.TERMINAL KHUSUS 2.NPWP 3.REKOM ET 4.PENJUALAN

REKOMENDASI ET/SPE

1 NPWP

2 REKOM ET

*) IDENTITAS TUNGGAL UNTUK SUATU WILAYAH IUP (WIUP) TERDIRI DARI 16 DIGIT YANG DIGUNAKAN SEBAGAI KODE ACUAN SUATU WIUP DALAM INTEGRASI DATA LINTAS SEKTORAL ANTAR K/L

DITJEN DAGLU

DITJEN PAJAK BEA CUKAI DITJEN

DITJEN ANGGARAN

KEMENHUT

& LH

PEMILIK IUP/KK/P

NAMA PERUSAHAAN, KABUPATEN/KOTA/PROVINSI, NOMOR DAN TAHUN SK, LUAS WILAYAH, TAHAPAN KEGIATAN, KOMODITAS,

TANGGAL SK, STATUS C&C, NOMOR SERTIFIKAT C&C, SINGLE ID

I N F O R M A S I T A M B A H A N

M E T O D E P E N C A R I A N

Mining License License Approval Recomendation/ Certification Total of Mining License

based on level of Authority

Mandatory Optional Mandatory Optional Mandatory Optional

PROPO SED

Mining License License Approval Recomendation/ Certification Total of Mining License

based on level of Authority

Mandatory Optional Mandatory Optional Mandatory Optional

EXISTI NG

Mining Lic e ns e and Appro val S implific atio n

6.3 LICENSING REFORM

1 Increasing royalty tariff on mineral and coal:

a For Contract of Work (mineral) in according to Government Regulation No 9 Year 2012 from Copper 3,75%; Gold 1%; and Silver 1% increase become Copper 4%; Gold 3,75%; and Silver perak 3,25%

b Royalty of nickel matte from 0,9% become 2% and nickel metal from 0,7% become 1,5% Royalty tarrif will be increased according to increasing of metal price

c Planning to increase Coal rolaty from Mining Licence Holder based on quality of products and type of operation:

− Under ground minng: calory below 5.100 k.kl/kg from 3% become 5%, quality 5.100 – 6.100 k.kal/kg from 5% become 7% dand quality above 6.100 k.kal/kg from 7% become 9%

− Open pit mining: quality below 5.100 k.kl/kg from 3% become 7%, quallity 5.100 – 6.100 k.kal/kg from 5% become 9% and quality above 6.100 k.kal/kg from 7% become 13,5%

2 Increasing mineral and coal value adde to increase price and royalty

6.4.1 Effort to Inc re as e Royalty

1 Establishment of benchmark price for mineral and coal to avoid transfer of pricing

2 Increasing cooperation with relevant institutions (Local Government, Government Auditor (BPKP), State Auditor (BPK), Ministry of Trade, Ministry of Finance) for:

a Auditing fulfillment of royalty payment

b Reconciliation of Production, Selling and Royalty

c Data and information sharing among relevant institutions regarding export data (Ministry of Trade, Ministry of Transportaion, and Custom).

3 Production and trading control:

d To maintain competitive price of commodity;

e Trading house for mineral and coal (exampel: Inatin for Tin).

4 Payment of royalty before shipment.

5 Integraton of data and informastion (Minerba One Map of Indonesia/MOMI).

6 Establishment of Export Port, mainly for Coal

7 Improvement of Role of Surveyor

8 Sanction for decreasing and delaying of royalty payment.

6.4.2 Gove rnanc e Improve me nt