COW Amendment – a brief look.

The ESDM has recently issued a 30+ page proposed Amendment for the remaining COW holders to sign. Many parts of the original COW agreement shall remain intact, while other parts are amended, delated and replaced. It is assumed the main contents of this Amendment document is the same for each COW holder. A brief review of an English version of the Amendment has been looked at, but without the associated original COW agreement. Some of the changes appear to go well beyond the original 6 points designated by the ESDM to be the “only” aspects for negotiation. The comments below refer to some of my concerns to find a win-win Amendment. I am sure each of the COW companies may have their own list of concerns to develop a better and workable Amendment.

 Improvements.

There are some new aspects that seem to make improvements on the earlier negotiation stance of the ESDM. One example is; - The proposed COW amendment recently issued by the ESDM claims to be an amendment to the original COW, and not a conversion to a IUPK. The Amendment of Contract of Work (hereinafter reffered to as ”Amendment”) hereto, is drawn up in Jakarta on... Herein we can see the ESDM acknowledges the sanctity of the Contract, and therein withdraws from its earlier position/ obligation to promptly convert all COW’s to IUPK’s.

 Inconsistency with present ESDM policy.

The Amendment calls for 8 copies of monthly, quarterly and annual reports to be submitted to the Minister. The monthly and quarterly reports shall be submitted in 8 (eight) copies to the Minister.... The monthly and quarterly reports shall be submitted in 8 (eight) copies to the Minister.... This appears to be inconsistent with the Ministers recent public calls for all reports to be submitted digitally, and to avoid paper copies altogether.

Unfortunately, this amendment refers to the mining law 4/2009 as the bases for the amendment, rather than the cooperation clause within the COW enabling revisions, and therefore creates some uncertainty that could cause future legal challenges to the amendment. Whereas under the provision of Article 169 of Law No. 4 Year 2009 on Mineral and Coal Mining (hereinafter referred to as ”Mining Law”), the government has determined adjustments to certain matters in connection with the Agreement. Perhaps further certainty could be incorporated by refereeing to both the Law 4/2009 and the COW clause on amendments, and to adjust the wording to a more cooperative format such as … the Government and the Company have agreed to adjust certain matters…?

The present 31 December signing deadline set by the ESDM seems to be contrary to this agreement. The Parties agree to further discuss the Amendment to the Agreement at a later date if there are provisions that are still not in accordance to the applicable laws and regulations. Thus, any such issue over an applicable law can lead to further time to discuss. Perhaps the COW agreement clause that specifies the bases for amendments is such an applicable law?

The ESDM seems to be missing an opportunity to incorporate some of the concepts planned to be implemented across the mining sector in 2018. In particular the EITI supported Beneficial Ownership program, and referring to the KCMI or other professional code for all reporting of resources and reserves (Ministry & all public reports) etc.

Typing /translation error?

There seems to be some form of typing / translation error wherein the Amendment refers to registered subcontractors, instead of Company? If the equipment and the materials are not re-exported within a specified time when the goods are imported, including any extension thereof, then the registered subcontractors are obligated to pay the Import Duty, Value Added Tax (VAT), Income Tax of Article 22…

Further clarity required.

 ·      The concept of “domestic capital” seems to be poorly defined. “Domestic investment" means investment activity to conduct business in the territory of the Republic of Indonesia by a domestic investor using domestic capital. Does this mean domestic banks, bonds, or other financial instruments are excluded in providing funds if part of these financiers capital is sourced from overseas? Does this mean funding from the IDX is excluded? Does this mean advance payments for coal / mine exports as a source of development funding are now excluded?

·      The new section on marketing has a number of poorly defined terms “laws and regulations” are not capitalized, and thus have no clear definition. The term “agreed” is poorly defined, agreed by who? And how is such agreement reached? The Government gives the right to the Company to export its product obtained from the operation under this Agreement, which the implementation follows the provisions of the laws and regulations. The Company shall prioritize the fulfillment the needs of the domestic market from the products, in line with the provisions of the Company’s export sales contract that have been agreed for its products. Marketing is a core element of any business, and so this aspect needs to be very clearly laid out.

·       The Amendment concerning import premiums may need to be cross checked against international trade agreements, for example the ASEAN free trade agreement, or have exclusion provisions within the agreement. The local goods cannot be obtained on the basis of time, cost and quality competitive, provided that the purpose of comparing the import cost and the goods cost which produced and manufactured in Indonesia (excluding the Value Added Tax), a premium is not greater than 12.5% (twelve point five percent) will be added the cost of importing.

Core Financial Issue.

There is a clear shift away from predictable government fees and taxes towards the uncertainty of “related changes, additions and/or replacements”. This is applied to Land-rent, production levy, income tax, export duty, excise, PBB, Regional taxes and regional retribution, general administrative levies and imposts, transfer of title fees (shipping etc), and any kinds of obligations that arise hereafter relating to levies, contributions, charges or fees, duties, or other taxes levied or imposed. This would seem to be a critical part of the Amendment, wherein the ESDM can comply with the KPK’s determination to increase state income, but equally undermines business confidence in the mining sector. The exploration and mining industry is not like other factories, that can move from district to district or move outside of Indonesia altogether. Mining is fixed related to where the ore is found in the ground. Exploration and mining is well known as a “high risk” style of business, wherein high returns are required to justify the exploration and investment risk. Not all mining ventures are the same, while some surficial deposits of bauxite, nickel or even some coal deposits may allow fast development, other deposits, typically gold and base metals, may take tens of years to discover and several years to construct. Exploration and mining typically need many years to develop and more years to just to reach a return on investment. Often these sites are in frontier areas, that brings development to remote parts of Indonesia. It is in consideration of this fixed and high-risk nature of the industry that long term fixed stability in regulations, and the fixed financial criteria for investment and operation needs the Government to cooperate with “fixed” fees and taxes over a long period.

Working together.

The article on Default states the company must pay such fees and taxes within 30 days of receiving a warning letter, then late payment fines may apply, and that such fines are not considered as operational costs. This leaves little room for the Company to confirm or clarify the nature of such fees claimed by the Government.

The following kind of open one-sided statements would send shocks down any reasonable business entity. The Government will give a written notice to the Company if any assessment of the Company's performance materially does not fulfill its obligations in this paragraph. The Parties will discuss the Government’s assessment and the Company agrees to make improvements in regards to non-compliance as referred to in this Agreement as soon as possible, in accordance to the applicable laws and regulations. Governments are driven by political motives, whereas companies are driven by profit motives. The two parties need to work together to achieve a win-win for the Indonesian people. By comparison, I don’t think the Government would agree to include the wording “the Government agrees to adjust its assessment…”?

Conclusion.

It is clear one of the driving motivations of the Government is to increase its financial take from the mining operations. However, mining companies need to maintain a level of profitability to survive. Without finding the right compromise, these two objectives can only be met if the reserves are ‘high graded”. We saw this when the coal price dropped, resulting in lower strip ratios for the companies to survive, and we see it in the nickel industry today. These proposed amendments will drive the gold, and all other industries, to shrink their reserves and mine life will be shortened. The people of Indonesia will lose the long term secure mining industry for a quick money grab by the Governments.

This Amendment does contain some elements to indicate the ESDM has moved its earlier position towards one that is more acceptable to industry. It would seem most of the outstanding COW companies have not signed this Amendment by the ESDM’s target date of the 31 December 2017. This may reflect the COW companies resolve to find a workable agreement, but may push the ESDM into a conciliatory or confrontation position.

Let’s hope the upside to these drawn out negotiations is that teams within the various Ministries learn what regulations are required to support a viable mining industry, and transfer that knowledge into the future revised mining law.