Mining under the New Indonesian Regional Governance Law

Late last year, the House of Representatives enacted Law No. 23 of 2014 on Regional Governance, as lastly amended by Law No. 9 of 2015 (“2014 Regional Law”), which in principal aims to redefine relations and authorities between the Central Government and Regional Governments as previously provided under Law No. 32 of 2004 on Regional Governance as lastly amended by Law No. 12 of 2008 (“2004 Regional Law”).

In contrast to the 2004 Regional Law, the 2014 Regional Law is attached with a lengthy appendix which details the authorities held the different levels of government in various sectors, including among others:

  1. Education, health, social and cultural, and environment matters;
  2. Public works and spatial planning, as well as land, housing, residential area matters;
  3. Public tranquility and order, and general public protection;
  4. Manpower;
  5. Women empowerment and child protection, and community and village empowerment;
  6. Food;
  7. Population administration and civil registry, and population control and family planning;
  8. Transportation;
  9. Communication and informatics;
  10. Cooperatives, and micro, small and medium enterprises;
  11. Investment;
  12. Youth and sports;
  13. Statistics;
  14. Marine and fishery affairs;
  15. Tourism;
  16. Agriculture;
  17. Forestry;
  18. Energy and mineral resources;
  19. Trade and industry; and
  20. Transmigration

Considering the extensive scope of the 2014 Regional Law, only provisions of relevance to mining will be elaborated below, which will provide alongside comparisons with the currently prevailing provisions in the mining sector under Law No. 4 of 2009 on Mineral and Coal Mining (“2009 Mining Law”).

Significant Change

There is a significant change between the authorities of the Central Government and Regional Governments under the 2014 Regional when compared to the 2009 Mining Law. The most significant difference is the removal of authorities of Regency and City Governments, which is undoubtedly in contrast to the 2009 Mining Law.

In regard to mining areas, Regency and City Governments are authorized to determine Communal Mining Areas (Wilayah Pertambangan Rakyat) and Mining Business License Areas (Wilayah Izin Usaha Pertambangan) for non-metallic minerals and rocks within their jurisdiction or 4 miles from their coastline (if any). Under the 2014 Regional Law, the authority in determining Communal Mining Areas was transferred to the Central Government, whereas the authority to determine Mining Business License Areas shifted to Provincial Governments.

The authorities of Regency and City Governments to issue licenses in the mining sector were also transferred to Provincial Governments by the 2014 Regional Governance Law. These include the authority to issue Mining Business Licenses (Izin Usaha Pertambangan), Production Operations Mining Business Licenses (Izin Usaha Pertambangan Operasi Produksi), Communal Mining Licenses (Izin Pertambangan Rakyat), and Mining Service Business Licenses (Izin Usaha Jasa Pertambangan) and Registration Certificates (Surat Keterangan Terdaftar) for mining service companies.

These changes are considered to be in legal effect on the enforcement date of the 2014 Regional Law, considering that Article 407 of the 2014 Regional Law stipulates all laws and regulations of direct relevance to Regional Governments are required to be adjusted and to conform to the provisions contained under the 2014 Regional Law.

Confusion and Issues

The extensive changes introduced by the 2014 Regional Law has caused confusion and issues for both the government and private parties in the mining sector. There are Regency and City Governments that continue to process applications which are under their authority based on the 2009 Mining Law (instead of complying with the 2014 Regional Law), and there are those that refuse to process any sort of document related to the mining sector until clarifications are provided by the Central Government.

Consequently, mining companies are stuck in the middle, especially those that are under the jurisdiction of a Regency or City Government. Hypothetically, if the Regency or City Government is still accepting applications and issuing licenses in the mining sector, these official documents that are issued after the enactment of the 2014 Regional Law could prove to be invalid as they were issued without authority.

Mandatory reports, which are typically included as an obligation to a licensing in the mining sector, submitted to Regency and City Governments could also be proven at fault considering that the 2014 Regional Law stipulates that the implementation of government affairs in the mining sector is only divided between the Central Government and Provincial Governments, which could arguably include receiving mandatory reports from mining companies.

Issues also inevitably arise if the Regency or City Government is reluctant to process documents, and receive reports and applications in the mining sector after the enactment of the 2014 Regional Law.

Considering that the licensing authorities of Regency and City Governments are transferred to Provincial Governments, the most logical step that can be taken is to approach the appropriate Provincial Government to process license applications.

However, in accordance with Article 404 of the 2014 Regional Law, personnel, funding, archived documents, and facilities and infrastructures must first be transferred from Regency and City Governments to Provincial Governments.

Such is unmanageable without a procedure to do so that is to be determined by the Minister of Energy and Mineral Resources, which will contain guidelines for different levels of government to implement the so-called concurrent government affairs in the mining sector.

Without the transfer of personnel, funding, archived documents, and facilities and infrastructures from Regency and City Governments to Provincial Governments, Provincial Governments are unable or unwilling to process documents in the mining sector because they either lack the resources to do so or do not have the required documents from the respective Regency and City Governments in their jurisdiction to process applications in the mining sector.

In summary, the main issue of the 2014 Regional Law is which level of government should be approached in regard to the authorities previously held by Regency and City Governments under the 2009 Mining Law as mentioned above.

Transitional Measures by the Government

In an attempt to provide a solution for this confusion and abovementioned issues, the Director General of Minerals and Coal have clarified in a letter to the Minister of Energy and Mineral Resources (hereinafter referred to as the “Letter”) that Regency and City Governments should be authorized to continue processing applications and documents that were submitted before the enforcement date of the 2014 Regional Law, namely 2 October 2014. The respective Regency or City Government is authorized to execute and issue licenses if the application was submitted before 2 October 2014.

In addition, the Director General of Minerals and Coal also proposed in the Letter that Regency and City Governments should maintain the authority to issue technical recommendations required in the issuance of a Mining Business License that are located in their jurisdiction. Other than issuing technical recommendations, Regency and City Governments should also retain their supervisory authority over all licenses that they have issued prior to the 2014 Regional Law.

Furthermore, the Director General of Minerals and Coal also affirmed in the Letter that after the enforcement date of the 2014 Regional Law, all applications and documents should be filed in accordance with the authorities of the Central Government and Provincial Governments stipulated under the 2014 Regional Law.

These solutions proposed by the Director General of Minerals and Coal, however, do not provide an adequate answer if both the Regency or City Government and Provincial Government are reluctant to accept a document or process an application. Such a condition is further aggravated if the Regency or City Government refuses to submit to the Provincial Government the necessary documents for the issuance of, for example, a Mining Business License.

Violating Fair and Equitable Treatment of Foreign Investors

In relation to the cross-border element of foreign investments, another plausible option is available for foreign investors in tackling the issues brought about by the enactment of the 2014 Regional Law. As mentioned, the changes made by the 2014 Regional Law to the Indonesian mining regulatory framework has instigated considerable delay and uncertainty in the processing and submission of documents, including license applications and reports. This could violate the so-called legitimate expectations of foreign investors that are protected in numerous bilateral investment treaties concluded by Indonesia with other countries, such as Australia, China, Germany and Singapore.

The protection of legitimate expectations is contained under the provision which obligate the parties to the respective bilateral investment treaty to ensure fair and equitable treatment for investments within their jurisdiction.

As decided by the tribunal of the International Center for Settlement of Investment Disputes (“ICSID”) in Tecmed v. Mexico, the provision regarding fair and equitable treatment under the bilateral investment treaty between Spain and Mexico to “require the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment,” which also includes an expectation of foreign investors for the host country to “act in a consistent manner.”

The changes introduced by the 2014 Regional Law, as well as the lack of transition measures by the government, could violate the rights of foreign investors in the mining sector which are protected under the fair and equitable clause of bilateral investment treaties between Indonesia and other countries. As apparent under rulings of the ICSID, inconsistencies between regulatory and policy instruments, are taken into account when considering a possible violation of legitimate expectations, especially considering that both the 2014 Regional Law and the 2009 Mining Law are both still in force and effect, and that they are both inconsistent with each other notwithstanding the overruling provision contained under the 2014 Regional Law as mentioned above.

Incorporated into the obligation to render fair and equitable treatment to investors is the duty of the host country to maintain a stable regulatory framework. In Enron v. Argentina, the tribunal held that a “key element of fair and equitable treatment is the requirement of a stable framework for the investment.” Changes introduced by the 2014 Regional Law could also violate this obligation of states in relation to ensuring that they maintain a stable regulatory framework for investments, considering that the 2014 Regional Law was introduced approximately 5 years after the 2009 Mining Law was enacted.

The abovementioned basis can be grounds for a foreign investor in filing for an international arbitration against the Indonesian government in accordance with the dispute settlement mechanism provided under the respective bilateral investment treaty.

 


PHOTO CREDITS

Featured image is “Excavator Attachments” by Alexander Banner


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