Opinion: Government's illegal mining crackdown puts the breaks on coal trading licenses

Our previous Client Alert on Regulation of the Minister of Energy and Mineral Resources 32/2013 set out the very detailed and restrictive conditions under which onshore coal traders must operate. Notably, that regulation requires anyone (whether foreign or Indonesian) wishing to buy coal in the Indonesian territory (i.e., with a point of sale upstream from the FOB mother vessel delivery point) to obtain a special Mining Business License specifically for transportation and sale ("IUP-OP PP"), and the terms of that IUP-OP PP must specifically identify the source mines from which the coal will be acquired. This recent regulation has met with a lot of criticism from industry, who say that its voluminous approval requirements do not reflect the dynamic nature of Indonesian coal trading activities, and to comply with the letter of the Regulation would make it impossible for coal traders to operate in Indonesia.

The Government for its part has been unashamed in stating that requirements such as those laid out in Regulation 32 are aimed at stemming the trade of illegal coal in Indonesia (currently estimated at approximately 70 million tonnes). With the Government still unable to reconcile the coal production figures against the much higher coal export quantities, the Government is looking at implementing whatever measures it needs to reign in this illegal trading activity.

In furtherance of this Government policy, on 16 May 2014, the Director General of Mineral and Coal ("DGMC") issued Instruction No. 02 I/30/DJB/2014 regarding Suspension of Issuance of Coal Transportation and Trading Licenses for cross Province/Country Activities or within the Framework of Foreign Investment ("Instruction No. 02") to the Director of Coal Business Development, the Secretary General of Minerals and Coal and the officers at the Center of Information and Investment Services/RPPIT at the offices of the DGMC.

Whilst Instruction No. 02 is not (under the Indonesian legal hierarchy) a regulation which applies to coal traders directly, it is an instruction that is in effect binding on its Government addressees, and therefore has a very clear impact on coal traders. Briefly, Instruction No. 02 provides for suspension of the granting of coal transportation and trading licenses/IUP-OP PP for trading/transportation activities which are:
▪ cross-province;
▪ export sales; and
▪ carried out by applicants who are established within the framework of foreign investment (i.e. for PMA coal trading companies), for a period of 12 months as of the issuance of Instruction No. 02. Notably the instruction does not apply to inter-province or inter-regency trading activities, as the authority to issue licenses for these activities lies with provincial and regional governments, not the Central Government. However the bulk of the trading licenses that have been issued have been for export sales, and therefore this Instruction No. 2 will hit a significant part of the coal trading industry.

The abovementioned suspension is applicable for new applications for:
▪ coal transportation and trading licenses; and
▪ add-ons of cooperation/coal sources for pre-existing coal transportation and trading licenses, which are submitted after the issuance of Instruction No. 02. The suspension is not applicable for extensions of pre-existing coal transportation and trading licenses (presumably those licenses which only require a time extension, and not an extension of the source mines which supply the relevant trader) and applications which have been received prior to the issuance of Instruction No. 02. While no-one can criticize the Government's desire to eradicate the illegal coal mining trade, the industry is again questioning whether this blunt axe approach to dealing with such issues is the most appropriate way for the Government to proceed. Whether the moratorium will remain in place for 12 months or will be lifted early to re-open the coal trading market for business remains to be seen.

For further information please contact

Luke Devine
Foreign Legal Consultant
+62 21 2960 8600
luke.devine@bakernet.com

Norman Bissett
Foreign Legal Consultant
+62 21 2960 8678
norman.bissett@bakernet.com

Muhammad Karnova
Partner
+62 21 2960 8699
muhammad.karnova@bakernet.com

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