Opinion:Tender Rules for Grant of New Mining Concessions Finally Issued

Key Points
? Regulation 28/2013 sets out the detailed requirements for those interested in obtaining an IUP (Mining Business Licence - Izin Usaha Pertambangan) over a new mining area. This fulfills one of the outstanding regulatory items needed before the tendering of new mining areas can begin;
? Regulation 28/2013 restricts foreign participation in tenders for mining areas to areas of above 5,000 hectares in size.

Details
At present, the vast majority of currently existing mining rights in the form of IUPs derive from conversions of pre-existing mining rights which existed prior to the introduction of Indonesia's current mining law (Law No 4 of 2009 on Minerals and Coal Mining - "Mining Law") on 12 January 2009. A small number of IUPs were issued as a result of pre-existing Contract of Work applications in process at the time the Mining Law was introduced in 2009.

To obtain an IUP over land which has not yet had a mining licence granted over it (or has had a mining licence granted over it which has been relinquished, revoked or expired) the Mining Law requires:
a) the area of land to be defined as a Mining Business Licence Area ("WIUP"- Wilayah Izin Usaha Pertambangan), being an area of land over which an IUP can be granted; and
b) the IUP to be granted to an applicant who has won a competitive tender for the relevant mining area (WIUP).

The process of defining new (and existing) mining areas (WIUP) has been ongoing for several years and, we understand, is nearly complete. Meanwhile, the Mining Law and Articles 19 and 61 of Government Regulation 23/2010 (as amended) both require implementing regulations to be issued to set out the details of the tender process. On 13 September 2013, Minister of Energy and Mineral Resources Regulation No. 28 of 2013 on Procedures of Tender of Mining Business Area and Special Mining Business Area For Coal and Metal Mineral Mining Business ("Reg 28/2013") was issued for this purpose.

Regulation 28/2013 sets out the detailed tender requirements for new mining areas (WIUP) as well as the requirements in respect of obtaining land over which an IUPK (Special Mining Business Licence - Izin Usaha Pertambangan Khusus) may be granted. An IUPK is a mining right prioritized to be granted to State-owned entities. In the case of an IUPK, a tender only occurs if more than one State-Owned or Regional Government owned entity is interested in the area. If none are interested, then there will be a tender for private business entities.

We highlight below some of the key principles set out in Reg 28/2013.

Limits on foreign investor participation
Reg 28/2013 lays out the type of tender participants that can participate in the tender for a WIUP and WIUPK. Which types of investors are able to participate in the tenders is determined based on whether or not it is a WIUP or WIUPK on offer, and in the case of a WIUP, the size of the WIUP being offered. The table below sets out the list of eligible tender participants:

WIUP			WIUPK
≤ 1,000 ha	1,001 - 5,000 ha	≥ 5,000 ha
Regional Government owned enterprise in the relevant area	State-Owned enterprise	State-Owned enterprise	State-Owned enterprise
National Private Business Entity in the relevant location	Regional Government owned enterprise	Regional Government owned enterprise	Regional Government owned enterprise
Cooperatives	National Private Business Entity	National Private Business Entity	private business entity
Individuals	Cooperatives	private business entity in the field of foreign capital investment	?
Commanditaire Venotschap (CV) (limited partnership)	?	?	?
Firm (Fa) (partnership)	?	?	?

Reg 28/2013 uses 3 relevant phrases when dealing with the types of eligible tender participants:
? "National Private Business Entity" (Badan Usaha Swasta Nasional) - defined as "a business entity which is a legal entity having its capital or shares 100% domestically owned";
? "private business entity" (badan usaha swasta) (not defined any further);
? "private business entity in the field of foreign capital investment" (badan usaha swasta dalam rangka penanaman modal asing);
? "Foreign Capital" (Modal Asing) - defined as "capital which is owned by foreign countries, citizens of foreign countries, foreign business entities, foreign legal entities and/or Indonesian legal entities where some or all of the capital is owned by foreign parties".

For mining areas (WIUP) exceeding 5,000 hectares it is clear that a "private business entity in the field of foreign capital investment" can participate. Accordingly, foreign investors, through an Indonesian-established foreign investment company (known as Foreign Capital Investment companies ? or Penanaman Modal Asing ("PMA") companies), may participate in these tenders.

For WIUP of 5,000 hectares or less, "private business entities in the field of foreign capital investment" are not entitled to participate. This would exclude a PMA company from participating. The definition of "National Private Business Entity" follows that used in the mining regulations in the context of the requirement to divest shares to Indonesians - namely it is an Indonesiancompany whose shares are 100% domestically owned.

With regard to tender for a WIUPK, Reg 28/2013 states that "private business entities" can participate in the tender. This term has no specific definition, but in our view a PMA company would fall within this definition, and accordingly PMA companies should be able to participate in tenders for WIUPK.

What is clear from the regulations is that a foreign entity cannot directly participate in a tender - i.e. a foreign entity must establish an Indonesian PMA entity in order to participate. In view of Indonesia's foreign investment regime requiring often substantial initial capitalization in order to establish a PMA company, the requirement for foreign investors to establish an Indonesian presence without any guarantee that their bid will be successful may be an administrative burden that causes some foreign investors to shy away from participating in any tenders.

Foreign ownership restrictions in the PMA company participating in a tender
Reg 28/2013 is silent on whether there is a need to have any Indonesian shareholding in a PMA company that is going to participate in a tender for a mining area; however (as noted in our previous Client Alert) foreign ownership in companies holding Exploration IUPs will become limited to a maximum of 75% as soon as they seek to change their shareholding after receiving the IUP (notwithstanding that this requirement conflicts with Article 97 of GR23/2010 (as amended)).

Accordingly, it may be the case that the Regional Governments, in putting together tender invitations, impose an initial limitation of 75% on foreign investment in any PMA company bidding for the relevant concession.

The Tender Process
Reg 28/2013 adds further detail to the tender framework touched upon in Government Regulation No. 23/2010 (as amended). The new regulation provides the required timeframes for almost all of every phase of the Tender process:

Announcement Required Time	Period	Announcement Media
Announcement re proposed tender of WIUP/WIUPK by the Minister/Governor/Bupati	3 months prior to the start of Tender process	1 print media with a local distribution area and/or 1 print media with national distribution area.
?	?	at the office of the ministry that administers governmental affairs in the mining and coal field or through website page.
?	?	at the office of the provincial governments and district/city governments that administers governmental affairs in the mining and coal field or through website page.
Pre-qualification announcement by the Tender Committee	At the start of Tender Process	1 print media having local distribution area and/or 1 print media having national distribution area.
?	?	at the office of the ministry that administers governmental affairs in the mining and coal field or through website page.
?	?	at the office of the provincial governments and district/city governments that administers governmental affairs in the mining and coal field or through website page.
Determination of qualified Tender Participant	7 working days after submission of Pre-qualification tender documents	at the relevant government office that holds the Tender process or through website page.
Determination of Tender Winner	5 working days after receiving report from Tender Committee	Not stated

Tender requirements
The actual tender is done by way of pre-qualification and then submission of bids by qualified tenderers. The pre-qualification is performed based on the bidders providing documents showing they meet the applicable administrative, technical and financial requirements set out in Reg 28/2013. Once bidders are pre-qualified, they may submit a financial bid.

Some of the more material qualification requirements include:
? the Indonesian company that is the bidding entity must have an authorized line of business of "mining" under its Articles of Association. For PMA companies, based on current policy of the Indonesian Capital Coordinating Board (BKPM), the initial share capital of the entity will need to be at least Rp5 billion (approx. US$450,000).
? the requirement to submit a Work Plan and Budget for the first four years of exploration;
? the requirement for bidders to place "seriousness" money equal to 10% of the value of the data compensation prescribed in the tender package, to be placed in cash in an Indonesian state-owned bank;
? a statement that if selected at the winning bidder, the bidder will pay the compensation value no later than 5 business days after the winner is announced.

The prequalification proposal is itself evaluated and given weightings of (i) 20% for the mining expertise of the bidder, (ii) 35% for the human resources capability of the bidder and (iii) 45% for the work program and budget put forward by the bidder.

Financial bid
A pre-qualified bidder submitting a financial bid is required to bid an amount of not less than the "data compensation" value or investment replacement cost that has been ascribed to the tender package by the Minister.

Evaluation criteria
In determining the winner of the bid, the weighting applied is 40% to the evaluation of the prequalification materials, and 60% to the financial bid amount.

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

Reggy Firmansyah
Associate
+ 62 21 2960 8570
reggy.firmansyah@bakernet.com

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