Opinion: Constitutional Court goes into bat for Regional Autonomy in mining sector

The following article is printed with permission from Hadiputranto, Hadinoto & Partners.(ed)

Not long after its recent decision reaffirming tight State control of the upstream oil and gas sector, the Constitutional Court has recently issued a decision finding in favour of Regional Government in relation to certain aspects of the 2009 Mining Law.

The Constitutional Court decision, handed down on 22 November 2012, has the effect of partially amending certain provisions of the Mining Law relating to the determination of which geographical areas are open for mining activities in Indonesia.

What has changed?

The 2009 Mining Law called for the Central Government to determine (after being coordinated with Regional Governments and after consultation with the Indonesian Parliament) Indonesia's "Mining Area" (known by its Indonesian acronym, WP), being the geographic areas in which mining activities could be carried out. As a sub-set of the WP, the Central Government was also required to determine (after being coordinated with Regional Governments and notified to the Indonesian Parliament) which parts of the WP would constitute "Mining Business Area" (or WUP), being areas which can be auctioned off and over which mining business licences could be granted to mining companies. Having determined the WUP, the Central Government was then tasked to divide the WUP up into actual concession blocks known as Mining Business Licence Areas (or WIUP), and determine the initial mineral type that should be attributed to that WIUP (again, after coordinating with Regional Governments). Having made those determinations, the Regional Governments were then left to run the auction processes for the WIUP for the stated mineral type.

The Constitutional Court decision in essence takes this right of determination out of the hands of the Central Government and puts it squarely in the hands of the Regional Governments. Accordingly, the Mining Law now provides:

? in respect of WP, the Regional Government first determines what, within its Regional Government area, should constitute WP and then the matter is further "determined" by the Central Government (after consultation with the Indonesian Parliament);

? in respect of WUP, the Regional Government first determines what is WUP, and then the matter "determined" by the Central Government (and notified to the Indonesian Parliament); and

? in respect of WIUP, the Regional Government determines the acreage and boundaries of (and arguably the type of mineral to be awarded under) the WIUP, and then the Central Government "determines" the area again.

What does it mean for existing mining projects?

The Constitutional Court's decision will not effect mining companies with existing mining business licences (IUPs) or Contracts of Work. Its impact relates solely to the granting of new concessions.

What does it mean for future mining projects?

1. Further delays in the ability to award new concessions

Since the passing of the 2009 Mining Law, the Central Government has been trying to finalise the WP (and the associated WUP and WIUP designations) so that the granting of new mining concessions can recommence. As the 2009 Mining Law provides that new mining concessions can only be granted over areas designated as WIUP, the delays in finalizing this mapping process has meant that no new concessions have been validly issued. The prolonged "Clean and Clear" process the Central Government has all been a part of trying to finalise these WP/WUP/WIUP maps. Now that the power to designate the relevant areas has been handed over to the Regional Governments, it may mean that there will be further delays in finalizing the maps (as the "top down" approach has been replaced with a "bottom up" one), thereby further delaying the re-opening of the mining sector to new concessions.

2. No change in the moratorium on new mining concessions

The Constitutional Court case merely changes the process by which the WP and WUP maps are determined, and how WIUP blocks are designed. The fact remains however that until these processes have completed their course, no new mining concessions can be awarded in Indonesia.

A lot of the drive behind the legal challenges mounted by Regional Governments against the 2009 Mining Law have been aimed at trying to free up the ability of Regional Governments to get on with the activities of awarding new concessions. Whilst this Constitutional Court decision is clearly a win for Regional Governments, it still does not give the Regional Governments the authority to commence issuing new mining concessions.

3. Tussles over WUP and State Reserve Areas

The 2009 Mining Law contemplates the Central Government being able to determine (with Indonesian Parliament approval) certain areas as "State Reserve Areas", meaning that coal and minerals in those areas are locked up and cannot be mined until such time as the Central Government (again, with the approval of Parliament) reopens them for mining. So there have been some concerns from both Regional Governments and investors that the Central Government may seek to lock up large areas of Indonesia as "State Reserve Areas", thereby depriving Regional Governments of concession area and the multiplier economic benefits that mining projects generate.

The Constitutional Court decision interestingly did not hand over the power to determine State Reserve Areas to Regional Governments. Accordingly, there is a real risk now of a conflict between a Regional Government wanting to determine an area as a WIUP area (i.e. allowing mining concessions to be granted), and the Central Government wanting to declare the same area as State Reserve Area (where no mining can be carried out). The Constitutional Court decision does not offer any guidance as to how such a conflict may be resolved, and it may be that the Indonesian Parliament will be required to get involved to mediate any issues.

4. Skewing the market away from foreign majors

When the 2009 Mining Law was passed, imposing maximum area limitations for exploration projects of 100,000 hectares for minerals and 50,000 hectares for coal, concern was expressed that the Parliament was sending a clear signal that smaller scale projects were going to be the future, rather than the large scale projects that many of the early foreign investors in Indonesia participated in (e.g. Freeport, KPC, Vale Inco).

The fact now that Regional Governments have been handed the power to determine the WIUP areas is likely to give rise to further skepticism from foreign majors, as Regional Governments may be tempted to divide up mining concessions into smaller areas so as to make them attractive to smaller local investors.

5. More certainty regarding prospective areas being included

One of the concerns that many investors had with the Central Government taking charge of putting together the WP was that as the Central Government was quite far removed from the "on the ground" conditions in the relevant Regional Government areas, there was a real risk that certain very prospective mining areas may not find their way onto the WP and WUP maps in the event of a lack of coordination or communication between Regional Governments and Central Government. Unless the relevant area was included in the WP and WUP map, no mining concession could be granted over that area (no matter how prospective).

Under this new arrangement, as it is the Regional Government that first determines whether a part of its Regional Government area should be opened for mining activity and therefore included on the WP and WUP maps, the risk of prospective areas not finding their way onto the map should be reduced.

The real interest in the Constitutional Court decision lies in the analysis of how the Regional Autonomy principles are being viewed in the context of the mining sector. Unlike the oil and gas sector, which has remained Centrally administered despite the advent of Regional Autonomy in 1999, the 2009 Mining Law very clearly devolved certain authorities and powers to Regional Government. However recent amendments to the mining regulations, including those passed in February 2012 which transfer back from Regional Government to Central Government the authority to issue IUPs where foreign investors are involved, have been seen as a clawing back of Regional Autonomy principles in the mining sector (perhaps as a reaction to the highprofile dispute between Churchill Mining and the Indonesian Government over the revocation of Churchill's IUP by a Regional Government). This Constitutional Court decision is, however, a clear win for Regional Autonomy.

With issues such as divestment, bans on the export of mineral ore and ongoing Contract of Work "renegotiation" still very topical, one suspects that the Constitutional Court is not yet done with the 2009 Mining Law.

For further information please contact

Luke D. Devine
Foreign Legal Consultant
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luke.devine@bakernet.com

Norman Bissett
Foreign Legal Consultant
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Muhammad Karnova
Partner
+62 21 515 4869
muhammad.karnova@bakernet.com

Liza Tantri
Associate
+62 21 515 5359
liza.tantri@bakernet.com

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