Constitutional Court Decision

The Constitutional Court has returned the authority to determine mining areas from the central government to local governments, mostly to the regencies.

The Court accepted a challenge by the Regent of East Kutai against provisions of the 2009 Mining Law which required the central government to merely "consult" with regencies over proposed mining areas. The Court found this to be unconstitutional and against the concept of regional autonomy, and declared that the authority to "determine" mining areas should rest with the regencies.

Background

Commencing in 1999, Indonesia enacted a series of laws concerning regional autonomy. The rationale behind regional autonomy was for certain legislative and fiscal powers to be granted to the provinces and regencies, and for the provinces and regencies to obtain a larger slice of revenue from their local resources, among other things.

One result of regional autonomy was regulations being enacted at the regency level that were in conflict with laws and regulations at the central level. This confusion affected the mining industry in particular. One of the aims of the 2009 Mining Law was to clarify the roles of the central government, provinces and regencies in the mining industry.

While authority to issue mining business permits (IUPs) was initially retained by the regency government (or the provincial government, where a concession area overlapped two regencies), a regulation introduced in February 2012 requires IUPs for companies with foreign shareholders (PMA companies) to be issued at the central government level.

This new Constitutional Court decision is at odds with the theme of the 2009 Mining Law of increased centralisation of authority for the mining industry.

Implications

The mining industry in Indonesia has been subject to considerable regulatory change in 2012 (please see our previous updates, " Mining in Indonesia - Supreme Court upholds challenge to metal ore export ban" and " New Indonesian mining regulations" for more details). The latest Constitutional Court decision was the fourth challenge to the 2009 Mining Law. Previous decisions of this Court had favoured local communities and small/medium mining enterprises.

The Court's decision will, at the very least, cause further confusion in the industry. While existing IUPs should not be affected by the decision, it is uncertain:

  • what criteria which regencies will apply in determining mining areas;
  • what impact the decision will have on the central Ministry of Energy and Mineral Resources (MEMR) issuing IUPs to PMA companies; and
  • whether the decision will affect the MEMR's current "Clean-and-Clear List" project, which requires MEMR confirmation in order for IUPs to be included on a list confirming no overlap with other concession areas, following input from the regencies.

The immediate next step is for the central government to issue a regulation on how the Constitutional Court decision will be implemented.

Under the 2009 Mining Law, all new mining areas are to be subject to tender or auction, with the procedures for these tenders and auctions to be further regulated. Since no implementing regulations have been issued, in practice a moratorium on issuing new IUPs is now in place, subject to some exemptions. Indeed, the full impact of the Constitutional Court decision may not become clear until new IUPs begin to be issued.

As for Contracts of Work and Coal Contracts of Work (COWs/CCOWs), which are gradually being phased out as existing contracts expire, the Constitutional Court rejected an application by the East Kutai Regent that authority relating to work for COWs/CCOWs be transferred from the central government to the regencies.

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