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. 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

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I. BACKGROUND

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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 FUNCTIONGOVERNMENT FUNCTION

Shifting of ParadigmDevelopment 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

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Demand Driven

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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

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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.

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Oil and Gas Company

InvestmentBoard

MDefence

MTransport

Police

MForest

MJustice and Law

Nuclear Agency

MEMR AS PRINCIPAL OF MINING LICENSE

MPublic Worker

MTrade

MWorker

Governor

Ministry ofCommunication

MFinance

Regent

MSpetialPlanning

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

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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

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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

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Source : Geology Agency, MEMR, 2013

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

Titanium Precious Metal : Gold, Silver, PlatinumBase Metal : Zinc, Cupper, Tin, Lead, Mercury Light and Rare metal : Bauxite, Monasit

NO

Type

RESOURCES

(MILLION TON)

RESERVES (MILLION

TON)

OREMETA

LORE

METAL

1Primary Gold

7,670

0.0073,225

0.003

2Bauxite

1,265 529.3 583 238

3 Nickel 3,565

52.21,168 22

4 Copper17,52

6106.2 3,126 28

5 Iron 712 401.8 66 40

6Iron Sand

2,117 425.4 174 25

7Manganese

15 6.3 4 3

8 Zinc 625 7.3 6 0.89 Tin 449 2.1 801 0.4

10 Silver13,75

5 0.8

3,253 0.0

3.2 MINERAL RESOURCES AND RESERVE

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RESOURCES : 120.5 Billion TonRESERVES : 31.4 Billion Ton

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

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3.4 INDONESIAN COAL AND PRODUCTION RANK

NO COMMODITY RESERVE PRODUCTION

LOCATION WORLD RANK (PRODUCTION)

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

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No. Commodity Unit 2009 2010 2011 201

2 2013Plan For

20142014*

)

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 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)

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TYPE IUP CoW CCoW

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 calorieUnderground :2, 4, 6% based on calorieMetals 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 TARIFFTAX/NON TAX OBLIGATION TARIFF

3.6 TYPE OF STATE REVENUE

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3.7 CONTRIBUTION OF MINING SUB SECTOR TO NATIONAL DEVELOPMENT

STATE REVENUE INVESTMENT

LOCAL EMPLOYMENT

COMMUNITY DEVELOPMENT

MINING SUB SECTOR

MINING STILL AS

ECONOMIC PRIMEMOV

ER

V. INDONESIAN MINING POLICY

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- 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

MIN

ING

RIG

HT

MINERAL RIGHT

Preamble andArticle 33 of the Indonesia’s 1945 Constitution

Related Law and regulations:Law No 32/2004; Law 4/2009, etc.

POWER FROM PEOPLE

DEC

EN

TR

ALI

ZATIO

N

REG

ION

AL R

EG

ULA

TIO

N

5.1 GOVERNMENT AUTHORITIES OF MINERAL AND COAL MINING

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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

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SUBSTANCE TERM

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

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 Protection8. 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

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SINKRONIZATION OF CENTRAL AND

LOCAL GOVERNMENT

RENEGOTIATING OF CONTRACT (CoW,

CCoW)

VALUE ADDED/ DOWN STREAM PROCESSING

MINING LICENSE SIMPLIFICATION

OPTIMALIZATIONOF STATE REVENUE

5.5 GOVERNMENT REFORM (NAWA CITA) OF JOKOWI-JK

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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

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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

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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 Smelting

Refining

End-User

Concentrate Anodes Cathodes Various

Copper

Mining

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 oreNickel matte ,

FerronickelHigh grade nickel

products

Nickel

Downstream Smelting

non-existing industry

Coal

Upgrading

•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

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1. Renegotiation of Mining Contract2. Restructurisation of IUP3. Encouraging downstream processing and refinery4. Optimazing state revenue5. Establishment of Mining Area

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

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6.2 DEVELOPMENT OF MINERBA ONE MAP INDONESIA (MOMI)

1. NPWP2. DATA

PRODUKSI DAN PENJUALAN

3. PNBP

MINERBA ONE MAP INDONESIA

1. NPWP2. DATA PRODUKSI DAN PENJUALAN3. PNBP4. DATA JAMREK DAN PASCATAMBANG5. REKOM ET/SPE

1. NPWP2. DATA

PRODUKSI DAN PENJUALAN

NPWP

1.TERMINAL KHUSUS

2.NPWP3.REKOM ET4.PENJUALAN

REKOMENDASI ET/SPE

1. NPWP2. 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

DITJENDAGLU

DITJEN PAJAK

DITJENBEA CUKAI

DITJEN ANGGARAN

KEMENHUT & LH

PEMILIK IUP/KK/P

KP2B DITJENHUBLA

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

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No Instansi

Mining License

License ApprovalRecomendation/

CertificationTotal of Mining License

based on level of AuthorityMandatory Optional Mandatory Optional Mandatory Optional

1 MEMR Authority 3 6 8 7 2 0 26

2MEMR Outhority + Others Ministry 0 2 0 9 0 9 20

3Other Ministry + Local Goverment 11 9 1 1 3 0 25

TOTAL 14 17 9 17 5 9 71

PROPOSED

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

No Instansi

Mining License

License ApprovalRecomendation/

CertificationTotal of Mining License

based on level of AuthorityMandatory Optional Mandatory Optional Mandatory Optional

1 MEMR Authority 4 12 24 13 2 1 56

2MEMR Outhority + Others Ministry 0 2 0 9 0 9 20

3Other Ministry + Local Goverment 11 9 1 1 3 0 25

TOTAL 15 23 25 23 5 10 101

EXISTING

Mining License and Approval Simplification6.3 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 paymentb. Reconciliation of Production, Selling and Royaltyc. 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)

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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

RECCOMMENDATIONRECCOMMENDATION

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

2. Empowering and certifying mining services in mining3. 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 area5. 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

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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

www.minerba.esdm.go.id