The unpredictable regulatory environment in the Indonesian
mining sector is again surfacing as a major issue for domestic and
international mining companies operating in Indonesia. Senior
figures in Indonesia's minerals and energy ministry have
recently indicated that metal ore and concentrate exports have
ground to a halt since the imposition of the ban on ore shipments
on January 12.
While initially tabled as a blanket ban designed to bolster the
long-term domestic profitability of Indonesia's mining
industry, last-minute regulatory changes diluted the ban to allow
some industries to continue exporting unprocessed mineral
ore.
The reprieve was extended to copper, manganese, iron ore, lead,
and zinc concentrates, and it lowered the minimum processing
requirements prior to export. According to Energy and Mines
Minister Jero Wacik, 66 companies are allowed to continue to export
because they have satisfied government officials that investment in
local smelters is imminent.
However, considerable uncertainty remains regarding the future
operations of the country's hundreds of bauxite and nickel
miners, all of which require refinement prior to export.
Regulatory Background
The history of this regulation can be traced back to 2009.
Previously, contracts of works ("CoWs") between the
Indonesian government and a particular mining company lasted for a
period of 30 years. In 2009, CoWs were replaced by mining business
licenses (or Izin Usaha Pertambangan ("IUP"))
that cover exploration and production. While CoWs entered into
prior to 2009 are to be honored, albeit with some renegotiation of
terms, new licenses or renewals of CoWs are to be as IUPs. In
contrast to CoWs, IUPs are subject to changes in fiscal policy and
to reforms of the mining regulatory code.
In February 2012, the government announced further regulatory
changes. First, that majority or wholly foreign-owned companies
must surrender 51 percent of their shares to an "Indonesian
participant" after 10 years. The Indonesian government was to
have the right of first refusal, followed by state governments and
the Indonesian private sector. Many investors voiced concerns that
10 years was insufficient time to recoup the costs, let alone make
an adequate return because of the capital-intensive nature of
mining projects. Some argued that the regulatory change amounted to
a mandatory divestment of equity.
The second announcement in February 2012 concerned the ban on the
export of raw materials, with no certainty provided as to when it
would be implemented.Possible Consequences
The immediate effects of the ban saw a rise in the price of
nickel and the Indonesian rupiah. Further potential flow-on effects
include disruptions to supply agreements, shipping charters, and
trade agreements around the world, leading to instances of
"force majeure" notifications and subsequent disputes.
For example, Indonesia accounts for 15 percent of global nickel
supplies, with China one of its major customers for high-grade
laterite nickel, which is used in the production of stainless
steel. The flow-on effects of an increase in nickel prices and an
interruption to Chinese steel production could be significant for
the global construction and manufacturing sectors. The ban may also
give rise to claims by investors against Indonesia pursuant to
investment treaties.
Indonesia is a party to 63 bilateral investment treaties
("BITs") with countries all over the world, including
Australia, China, India, Korea, Malaysia, The Netherlands,
Singapore, and the UK. It is also a party to the ASEAN
Comprehensive Investment Agreement signed by Indonesia at the 14th
ASEAN Summit in February 2009. The number of investment treaties to
which Indonesia is a party suggests that there may be significant
scope for international investors to seek redress for any losses
caused by the export ban under the various dispute resolution
provisions of these treaties.
For example, pursuant to the BIT between Indonesia and China,
investors are protected from expropriation and "measures
having effect equivalent to nationalization" under Article VI.
Article IX relates to investor–state dispute resolution that
allows for ad hoc arbitration under the rules of the International
Center for Settlement of Investment Disputes. However, whether a
claim is available or not will depend, in part, on whether the
export ban can be construed as a measure having a nationalizing
effect. A potential claimant will need to review the provisions of
the relevant BIT and also the timing of the relevant investments in
Indonesia's mining industry and the laws and regulations
affecting the investment at the time.
Conclusion
It is important to note that despite the historical uncertainty
affecting the mining industry in Indonesia and exacerbated by this
recent ban, there has only ever been one mining investment-related
ICSID arbitration. It is too soon yet to determine whether the
numerous foreign investors affected by this ban feel that their
ongoing business interests are better served by finding
alternatives to investor–state arbitration.
In the meantime, the Indonesian Mineral Entrepreneurs Association
is planning challenges to the ban in the Supreme and Constitutional
Courts in Indonesia, while miners, laid off by the ban, have
already taken to the streets to protest the regulations. It is very
likely that the mining ban will become a significant feature of the
political discussions leading up to the elections later this year,
especially given its significant and immediate impact on government
revenue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.