Indonesian Constitutional Court amends mining law to empower local governments to decide new mining areas

In the latest of a string of important court decisions in the natural resources sector, the Constitutional Court of Indonesia has recently published a decision partially amending certain provisions of the Mining Law (Law No. 4 of 2009 regarding Mining). The effect of the decision is to give relevant regional governments, rather than the central government, the authority to determine which geographic areas are open for mining activities in Indonesia. The decision does not impact existing mining concessions which have been validly granted. David Dawborn, Haydn Dare, Mira Fadhya  and Irina Akentijeva provide some observations below.

On 22 November 2012, the Constitutional Court of Indonesia (the “Court”) issued a decision which partially amended several articles in the Mining Law on determination of new geographic areas open for mining activities. The amendment relates to the following articles of Mining Law:

Article 6(1)(e) and Article 9(2), which set out the authority for determining “Mining Area” (known by its Indonesian acronym “WP”), being geographic areas which have mineral and/or coal potential and in which mining activities can be carried out.

Articles 14(1) and (2), which set out the authority for determining “Mining Business Area” (known by its Indonesian acronym “WUP”), being geographic areas in respect of which geological data is available and which can, in principle, be auctioned off after being divided into concession blocks.

Article 17 which sets out the authority for determining “Mining Business Licence Area” (known by its Indonesian acronym “WIUP”), being the mining concession block over which an IUP licence can be granted.

All of the above provisions originally provided that WPs, WUPs and WIUPs would be determined by the central government “after consultation with the regional government”. However, in its ruling, the Court declared that these provisions are contrary to the Indonesian Constitution of 1945 unless the phrase “after consultation with the regional government” is interpreted as “after it is determined by the regional government”.

The effect of the Court’s ruling is that relevant regional governments will now have the right to determine which areas in their respective regional jurisdiction should constitute WP, WUP and WIUP and the matter would then further be “determined” by the central government.

Importantly, however, the Court dismissed the request to partially amend, and therefore upheld the validity of, Article 171(1) of the Mining Law which required holders of Contracts of Work and Coal Contract of Work to submit a plan of activities covering the entire contract area for approval to the central government within 1 year of Mining Law coming into force (i.e. by 12 January 2010). 

Implications for existing mining concessions

The Court’s decision does not have an impact on existing mining concessions, whether in the form of IUPs or Contracts of Work and Coal Contracts of Work, since the Court decision does not purport to give the above amendments retrospective effect.

In this context, it is also interesting to note that the request to amend Article 171(1) was rejected by the Court. This appears to reconfirm the position that administration and management of Contracts of Work and Coal Contracts of Work remains with the central government.

Implications for new concessions

The Court’s decision is likely to have a significant impact on the grant of new licences since the determination of WPs, WUPs and WIUPs would now need to be conducted, in the first instance, by regional governments and subsequently “determined” by the central government. This adds an additional layer of approvals and coordination between governments, which is likely to lead to further delays before grants of new concessions are possible.

Comments by the Regent of East Kutai, H. Isran Noor (who filed the application with the Court) after the publication of the Court’s decision seemed to suggest that the decision opens the way for regional governments to start granting new mining concessions. In fact, it is likely that one of the drivers behind the court application was the local government’s desire to try and free up the ability of the regional governments to grant new mining concessions. However, it is important to note that the Court’s decision simply changes the sequence and process for determination of WPs, WUPs and WIUPs and, further, that central government still has a role to play in this determination process. Until WPs, WUPs and WIUPs are determined, the fact remains that under the Mining Law there can be no awards of new mining concessions. The decision does not give regional governments the authority now simply to award new mining concessions.

Importantly also, the Court’s decision did not change the process for determination of State Reserve Areas and there remains considerable risk that determination of such areas will lead to prolonged disputes between the central and local governments. The Mining Law does not provide for a mechanism to resolve such disputes and it is likely that the Parliament may be required to step in to mediate such disputes.

Observations

Despite the fact that Mining Law has been in effect for over three years, there remains considerable uncertainty over the operation of some provisions of the Mining Law and several key aspects of the Mining Law (e.g. grant of new concessions, divestment obligations of foreign investors) require further detailed regulations to be issued.

Recent regulatory changes and a string of important recent court decisions affecting the natural resources sector, including the decision of the Constitutional Court casting doubt over the current structure of the PSC system in the oil and gas industry and BPMIGAS (please see our previous publication) and the Supreme Court decision which appears to have overturned the controversial recent ban on export of unprocessed minerals and ores (please see our previous publication) have created further uncertainty for foreign investors and this decision is likely to add to their concerns.

Further, recent statements from the Non-Government Organisations that filed the application for judicial review challenging the Oil & Gas Law indicate that they are also considering mounting a more extensive judicial review against the Mining Law.