On September 30 2009, the Minister of Energy and Mineral Resources (the MEMR) in Indonesia issued Regulation No. 28 of 2009 regarding Mining Service Business (PerMen 28/2009). PerMen 28/2009 implements certain provisions of Law No. 4 of 2009 regarding Mineral and Coal Mining (the New Indonesian Mining Law) related to mining service business activities. To an extent, PerMen 28/2009 redefines certain mining service business activities and practices that have been implemented in the Indonesian mining sector, such as:
- mining companies now have to undertake on their own certain coal/mineral extraction and loading activities, which have been traditionally contracted out to mining contractors;
- local and national mining contractors are now given preferential treatment in securing mining service contracts, compared to foreign-owned mining contractors; and
- there are stricter requirements for a mining company using subsidiary/affiliated mining contractors.
Actual mining company activities
PerMen 28/2009 still allows a large number of mining activities to be contracted out to mining contractors. However, certain mining activities – namely coal/mineral extraction (which arguably includes blasting activities at the coal/mineral seam) and loading – will have to be undertaken by mining companies themselves. This has, to an extent, given rise to a number of concerns to both mining companies and mining contractors. For mining companies, the obligation to undertake coal/mineral extraction and loading means that they will have to procure their own mining equipment and make available the related manpower and expertise to undertake those activities. For mining contractors, the obligation for mining companies to undertake their own coal/mineral extraction and loading means that a portion of their revenue will be lost.
A number of alternatives have been considered and discussed by Indonesian mining stakeholders in order to deal with the above-mentioned matters. One of these is to have the mining contractors supply related equipment for coal/mineral extraction and loading activities on a ‘dry-lease’ basis. Effectively, mining contractors lease out to mining companies the relevant equipment (whether on a fully maintained basis or otherwise) that will be used for coal/mineral extraction and loading activities. Manpower would be excluded from such an arrangement because, if supplied, it would appear in substance that the lease arrangement was no different from an actual mining service contract arrangement – the latter being prohibited under PerMen 28/2009. The mining companies would have to provide and make available their own manpower to undertake the actual coal/mineral extraction and loading activities.
Clearly, there will be concerns on how to implement the abovementioned separation of mining activities. This is particularly the case with coordination, health and safety and liability issues, which may not be easily defined and need to be appropriately arranged and structured so as to avoid unnecessary interruption to the production of the mines.
Local, national and foreign (other) contractors
The New Indonesian Mining Law provides that local and national mining contractors must use local and national contractors. PerMen 28/2009 provides the following definitions:
- ‘Local contractor’: a service company in the form of an Indonesian legal or non-legal entity, which is established in a certain municipality/regency/province, whose entire capital originates domestically (Indonesia) and has activities only within the municipality/regency/province in which it is established;
- ‘National contractor’: a service company in the form of an Indonesian legal entity, whose entire capital originates domestically (Indonesia) and has activities within or outside the territory of the Republic of Indonesia; and
- ‘Other (foreign) contractor’: an Indonesian legal entity whose capital is partly or entirely owned by foreign parties.
One of the most hotly-debated matters during the preparation of PerMen 28/2009 was how to implement the preferential treatment/right of local and national contractors. Based on PerMen 28/2009, if a mining company wishes to engage ‘other/foreign’ contractors, it will have to initially make a newspaper announcement (related to the mining service contract) and there would have to be no local and/or national contractors who were financially and technically capable of undertaking the work and meeting the requirements set out by the mining company. The overall process of electing foreign contractors (including determination of capability) must be fair, transparent and reasonable.
It is interesting to note that PerMen 28/2009 does not specifically use the term ‘tender’ for the purpose of electing other/foreign contractors. This is unlike in certain PerMen 28/2009 provisions relating to the appointment of subsidiary/affiliated contractors where the term ‘tender’ is used.
If ‘other/foreign’ contractors are appointed, PerMen 28/2009 requires that those contractors subcontract part of the contracted work (from the mining companies) to appropriately competent local contractors. However, it is still unclear what the scope of that subcontracted work should be, given that the requirement is qualified by the need for a competency test. As a comparison, an earlier draft of PerMen 28/2009 required at least 30% of the contract value to be subcontracted, but this requirement was no longer stipulated in the final text of the version of PerMen 28/2009 that was issued. Accordingly, any part of the work scope (even a very small component e.g. subcontracting maintenance work, or the supply of spare parts) would meet the obligations under PerMen 28/2009.
Use of subsidiary/affiliated contractors
Consistent with the New Indonesian Mining Law, PerMen 28/2009 expressly prohibits the use of subsidiary and/or affiliated contractors, unless with the prior written consent of the MEMR’s Director General of Minerals, Coal and Geothermal (DGMCG). One of the main drivers for the Indonesian government’s prohibition of the use of subsidiary/affiliated contractors is the desire to stop the transfer pricing practice carried out for many years by some Indonesian mining companies.
Based on PerMen 28/2009, mining activities undertaken within a mining company’s mining area can be contracted out to subsidiary/affiliated contractors, provided that:
- a competitive tender process (where non-affiliated contractors are given the opportunity to bid for the work) has been undertaken;
- the mining company provides a guarantee that no transfer pricing will take place; and
- the company secures prior written approval from the DGMCG.
PerMen 28/2009 provides that the subsidiaries and/or affiliates that are subject to PerMen 28/2009 include all business entities of which the mining company has direct share ownership.
It is interesting to note that the term ‘direct ownership’, as mentioned above, indirectly provides some flexibility in structuring the ownership of the mining contractor vis-à-vis mining companies within the same group. In addition, it is also interesting to note that under PerMen 28/2009, only activities undertaken within the ‘mining area’ are subject to prohibition on subsidiary/affiliated contractor mining service contracts. Normally, the term ‘mining area’ is defined as an area which is delineated by the coordinates of the mining concession only.
In light of the above:
- such activities undertaken outside the ‘mining area’ – such as barging, marketing and back-office functions – can still be contracted out to subsidiary and/or affiliated contractors; and
- depending on how the subsidiary/affiliated contractor’s share-ownership is structured vis-à-vis the mining company, such activities undertaken inside the ‘mining area’ – such as overburden removal, transportation within the mining area, crushing/processing/stockpiling where the crusher/processing plant/stockpile is inside the mining area – cannot be contracted out to the subsidiary/affiliated contractors unless with the prior written approval of the DGMCG.
Non-core mining activities
PerMen 28/2009 provides for the detailed categorisation of mining service businesses, save for the Non-Core Mining Service Business category. There is no detailed explanation on what activities would fall within this category, but using a literal interpretation it would include any service provided to a mining company (for example, legal and accounting services).
However, given that the obligations of the mining contractors and providers of Non-Core Mining Service Business are similar (e.g. as to health and safety, environmental, and technical matters of the mine) – as set out in Articles 23 to 26 of PerMen 28/2009 – Non-Core Mining Service Business should be categorised as activities related directly to the actual operation of the mine. In such circumstances, there is a ‘genuine’ interest for the government/MEMR to regulate and ensure that health and safety, environmental and technical matters of the mine compliance of Non-Core Mining Service Business providers are met and fulfilled. Accordingly, we would expect that activities such as rental of heavy equipment and the like would fall within the scope of Non-Core Mining Service Business; whereas activities such as provision of accounting or audit services to mining companies would fall outside (and not be regulated at all under PerMen 28/2009).
IUJP and SKT
Based on PerMen 28/2009, mining contractors and providers of Non-Core Mining Service Businesses are required to have a Mining Service Business License (Ijin Usaha Jasa Pertambangan, or IUJP) and Registered Statement Letter (Surat Keterangan Terdaftar, or SKT), respectively. IUJPs and SKTs are valid for a maximum period of three years and may be extended prior to their respective expiry dates. The MEMR, the Governor, the Mayor and/or the Regent may issue the IUJPs/SKTs based on their respective levels of authority.
Restructuring of KP-contractor investment structure
PerMen 28/2009 provides that IUJP/SKT holders will, among other things, not act as mining concession holders and sell mining materials. In addition, PerMen 28/2009 stipulates that mining companies must not receive any fees as a result of the mining activities undertaken by the mining contractors. Clearly, these provisions confirm that previous practices – where mining contractors, in reality, act as if they were the mining concession holders, who in turn act as ‘sleeping partners’ (quite often investing no money in the project and merely receiving a royalty from the mining contractor) – can no longer be implemented, and any such existing arrangements need to be restructured.
Transitional provisions – grandfathering of existing contracts
PerMen 28/2009 provides that mining companies (KP holders, CCoW holders and CoW holders) ‘that have used mining service companies’ based on the laws and regulations in force prior to September 30 2009 must, by September 30, adjust to the requirements of PerMen 28/2009. Accordingly, the key element of the grandfathering provision is the prior use of mining service companies.
To the extent that the mining services company/contractor wishes to enter into a new contractual relationship with a mining company – with which it did not have a contractual relationship as at September 30 – the resulting mining services contract must comply with the provisions of PerMen 28/2009 (for example, the scope of services should not include the provision of mining services relating to mineral/coal extraction and loading, and the tender/newspaper announcement process if that contractor falls within the category of ‘other/foreign’ contractor).
For further information, please contact:
Hadiputranto, Hadinoto & Partners
The Indonesia Stock Exchange Building, Tower II, 21st Floor
Sudirman Central Business District
Jalan Jendral Sudirman Kav 52-53
Jakarta 12190, Indonesia
Tel: +62 21 5155090
Fax: +62 21 5154840
Luke Devine
luke.devine@bakernet.com
Daniel Ginting
daniel.ginting@bakernet.com
Muhammad Karnova
muhammad.karnova@bakernet.com