GOVERNANCE IN MINERAL AND COAL MINING IN INDONESIA

DIRECTORATE GENERAL MINERAL AND COAL

MINISTRY OF ENERGY AND MINERAL RESOURCES

Ritz Carlton Hotel, November 28

^th

, 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

OUTLINE

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

GOVERNMENT FUNCTION

Shifting of Paradigm

Development of Natural Resources

Old Paradigm New Paradigm

Exploitative, Resources for

Revenue

Resources for Sustainable

Development: pro growth, pro job, pro

poor , pro environtment

Resource Management

6

Demand Driven

7

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”

I. BACKGROUND ⁽²⁾

I. BACKGROUND ⁽²⁾

II. GOVERNANCE CONCEPT AND STAKEHOLDERS IN MINING

8

9

CONCEPT OF GOVERNANCE

II. CONCEPT OF GOVERNANCE ⁽¹⁾ II. CONCEPT OF GOVERNANCE ⁽¹⁾

Governance in mineral resources development is defined as a system operating in accordance to the effective and efficient policy, law and regulation which inter-connects stakeholders with different functions for the benefit of people’s prosperity at large.

Every stakeholder must act and perform its

function in accordance to the principles of

transparency, responsibility,

accountability and fairness.

10

Oil and Gas Company Oil and Gas

Company

Investment Board Investment

Board

MDefence MDefence MTransport

MTransport

Police Police

MForest MForest

MJustice and Law MJustice and Law Nuclear

Agency Nuclear Agency

MEMR AS PRINCIPAL OF MINING LICENSE

_MPublic

Worker MPublic

Worker

MTrade MTrade MWorker MWorker Governor

Governor

Ministry of Communication

Ministry of Communication

MFinance MFinance

Regent Regent

MSpetial Planning 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

11

Resource development is designed to empowering local community and providing a fair return to

community based on principle:

 Equitable

 Efficient

 Sustainable

 Predictable

 Tranparent

II. CONCEPT OF GOVERNANCE ⁽²⁾

II. CONCEPT OF GOVERNANCE ⁽²⁾

III. CURRENT CONDITIONS

12

13

Demand for energy, materials, water and other key resources demand is likely to increase rapidly

Indonesia today…

…and in 2030

Source: McKinsey Global Institute, 2012

3.1 INDONESIAN OUTLOOK

14

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

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

N

O Type

RESOURCE S

(MILLION TON)

RESERVES (MILLION

TON) ORE METAL ORE METAL 1 Primary Gold 7,670

0.007 3,225 0.003 2 Bauxite 1,265 529.3 583 238 3 Nickel 3,565

52.2 1,168 22 4 Copper 17,526 106.2 3,126 28 5 Iron 712 401.8 66 40 6 Iron Sand 2,117 425.4 174 25 7 Manganese 15 6.3 4 3 8 Zinc 625 7.3 6 0.8 9 Tin 449 2.1 801 0.4 10 Silver 13,755

0.8 3,253 0.0

3.2 MINERAL RESOURCES AND RESERVE

15

RESOURCES : 120.5 Billion Ton RESERVES : 31.4 Billion Ton

Very High (> 7.100 kal/gr)

Very High (> 7.100 kal/gr)

Low (< 5.100 kal/gr)

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

16

3.4 INDONESIAN COAL AND PRODUCTION RANK

NO COMMODITY RESERVE PRODUCTIO N

LOCATION WORLD

RANK (PRODUC TION)

1 Coal 31,4

Billion Ton 421 Million

Ton Sumatera,

Kalimantan 6th

2 Tin 801 Million

Ton

88

Thousand Ton

Sumatera 2nd

3 Nickel 1,168

Million Ton

60 Million Ton

Sulawesi,

Maluku,Sumatera, Papua

2nd

4 Copper

(Metal) 28 Million

Ton 450

Thousand Ton

Papua, Maluku,

Nusa Tenggara 5th

5 Bauxite 583 Million

Ton 56 Million

Ton Kalimantan 5th

6 Gold (Metal) 0.003

Million Ton

59 Metric Ton

Kalimantan,

Sumatera, Maluku, Papua

7th

Indonesia has a world rank mineral and

energy resources, that can be used to

create benefit in the form of investment

opportunity, job, education, welfare, etc

17

No

. Commodity Unit 2009 2010 2011 2012 2013 2014^{Plan For} 2014^*

)

Plan For

2015 1. Copper

(Metal) 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. Nickel 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. Coal

Production 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 1^st, 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)

18

TYPE IUP CoW CCoW

Landrent/Dea drent

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

TAX/NON TAX OBLIGATION TARIFF

3.6 TYPE OF STATE REVENUE

19

3.7 CONTRIBUTION OF MINING SUB SECTOR TO NATIONAL DEVELOPMENT

STATE

REVENUE INVESTMENT

LOCAL

EMPLOYMENT COMMUNITY

DEVELOPMENT

MINI NG SUB SECT

OR MINI

NG SUB SECT

OR

MINING STILL AS ECONOMIC PRIMEMOV

ER

V. INDONESIAN MINING POLICY

20

21

- 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

REPUBLIC OF INDONESIA

GOVERNMENT

PROVINCE

- To provide on supporting development and and utilization of mineral resources

- To manage mineral resources across regency, 4 to 12 nautical miles, and that is not implemented by the County / City.

- To conduct training and research on mining REGENCY/CITY

• Regulating, Licensing, Supervising, controlling of Mining Activity

• To manage mineral resources in regency/city ECONOMY ACTORS

DECONCENTRATION

ECONOMIC RIGHT

MINING RIGHT

MINERAL RIGHT

Preamble and Article 33 of the Indonesia’s 1945 Constitution

Related Law and regulations:

Law No 32/2004;

Law 4/2009, etc.

POWER FROM PEOPLE

DECENTRALIZATION REGIONAL REGULATION

5.1 GOVERNMENT AUTHORITIES OF MINERAL AND

COAL MINING

22

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

23

SUBSTANCE TERM

1. Governme nt

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)

• Divestme nt

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

SUBSTANCE TERM

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)

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

25

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

26

5.6 MINING POLICY DIRECTION

1

2

3

4 5 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)

6

To maintain environmental sustainability through

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

28

1.

Products resulting from PROCESSING 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, after 3 (three) year period since issuance of this Minister Decree, can only 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

29

Beneficiation policy:

without more downstream activities, Indonesia will miss the opportunity to increase employment and profit margins on the value chain because of the absence of downstream processing industries.

Mining Smelti

ng Refinin

g End-

User

Concentrate Anodes Cathodes Various

Copper

Minin

g

Iron ore

• Ore dressing

• Agglomeration

• Iron making

• Steelmaking casting

• Hot forming

• Cold forming

Finished product Applications

Iron steel

Mining Smelting (upstream)

Refining (downstrea

m)

Nickel ore Nickel matte , Ferronickel

High grade nickel products

Nickel

Downstream Smelting

non-existing industry

Coal

Upgradin g

•Active carbon

•Coking coal

•Gasification

•Liquefaction Conversion

High-rank coal

Year 2014

Due date for adjustment to minimum beneficiation requirement

5.9 MINERAL AND COAL DOWNSTREAM

VI. ON GOING ACTIONS FOR IMPROVING MINING GOVERNANCE

30

31

1. Renegotiation of Mining Contract 2. Restructurisation of IUP

3. Encouraging downstream processing and refinery 4. Optimazing state revenue

5. Establishment of Mining Area

6.1 ON GOING ACTIONS MANDATED BY MINING LAW

No 4/2009

32

6.2 DEVELOPMENT OF MINERBA ONE MAP INDONESIA (MOMI)

1. NPWP 2. DATA

PRODUKSI DAN PENJUALAN 3. PNBP

MINERBA ONE MAP INDONESIA

1. NPWP

2. DATA PRODUKSI DAN PENJUALAN 3. PNBP

4. DATA JAMREK DAN PASCATAMBANG 5. REKOM ET/SPE

1. NPWP 2. DATA

PRODUKSI DAN PENJUALAN

NPWP

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 DITJEN

BEA CUKAI DITJEN

ANGGARAN

KEMENHUT

& LH PEMILIK

IUP/KK/P

KP2B _DITJEN

HUBLA

PEMDA

S I N G L E I D *)

INFORMASI UTAMA:

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

33

No Instansi

Mining License

License Approval Recomendation/

Certification Total of Mining License based on level of

Authority Mandatory Optional Mandatory Optional Mandatory Optional

1 MEMR Authority 3 6 8 7 2 0 26

2 MEMR Outhority +

Others Ministry 0 2 0 9 0 9 20

3 Other Ministry +

Local Goverment 11 9 1 1 3 0 25

TOTAL 14 17 9 17 5 9 71

PROP OSED

MEMR Authority MEMR Outhority + Others Ministry Other Ministry + Local Goverment

No Instansi

Mining License

License Approval Recomendation/

Certification Total of Mining License based on level of

Authority Mandatory Optional Mandatory Optional Mandatory Optional

1 MEMR Authority 4 12 24 13 2 1 56

2 MEMR Outhority +

Others Ministry 0 2 0 9 0 9 20

3 Other Ministry +

Local Goverment 11 9 1 1 3 0 25

TOTAL 15 23 25 23 5 10 101

EXISTI NG

Mining License and Approval Simplification

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 Increase Royalty

6.4 OPTIMALISATION OF STATE REVENUE

⁽¹⁾

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 Governance Improvement

6.4 OPTIMALISATION OF STATE REVENUE

⁽²⁾

36

1. Revision of Law No.4/2009 regarding mineral and coal mining adopting to Law No.23/2014 regarding loclal Government:

- Governor Authority;

- Regent and Mayor Authority

2. Minerba One Map Indonesia;

3. Revision of Government regulation No.9/2012 regarding royalty;

4. Empowering of Mining Inspector;

5. Increasing of Capacity Building Unit For Public Services (One Stop Services for Mining License, Online system for Royalty payment )

6. Assignment of officer (Custom, Port Authority, Local Government, and MEMR) at designated port to

ensure royalty payment before shipment (Real time monitoring for Trading Commodities)

7. Performing the function of Ministry of EMR as the Priniple in mining, meaning that related issues are coordinated and served by the ministry.

6.5 RECOMMENDATION

RECCOMMENDATION RECCOMMENDATION

1. Empowering and certifying competency of profession nad occupation in mining

2. Empowering and certifying mining services in mining

3. Socializing national standard of resource and reserve assessment , according to the international one.

4. Cooperation in resources development, establisment geology and mining data in border area

5. Enriching geology and mining, laws and regulation, investment data and information that has been developed by Asean Mineral and Coal Database.

Indonesia is the focal point of mineral database system.

6. Cooperation in establishing single mining cadastre and

mining tenament

VII. CLOSING REMARKS

38

39

1. Indonesia has mineral and coal resources and reserves that still prospective to be exploited in the future both in the upstream and the

downstream industry as well.

2. Obligation to increase added value

domestically and supporting regulations provide opportunity for establihsment of mineral processing and refining plant in Indonesia.

3. Indonesia still needs big investment to develop the potency on mineral and coal and

encourages all private investment from ASEAN countries, especially for mineral and coal

processing and refinery.

VII. CLOSING REMARKS

Thank You

www.minerba.esdm.go.id