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Domestic Market Obligation (DMO) And Its Role In Securing Domestic Coal Supply

DMO

Recently, the Ministry of Finance of the Republic of Indonesia (“MoF”) issued Regulation No. 17/PMK.02/2022 regarding Types and Tariffs of Non-Tax State Revenues (PNBP) for Urgent Matters in the Forms of Fines and Compensation Funds for Fulfilling Coal Domestic Market Obligation at the Ministry of Energy and Mineral Resources (“MR 17/2022”). MR 17/2022 is an implementing regulation supporting a policy issued by the Ministry of Energy and Mineral Resources of the Republic of Indonesia (“MEMR”) regarding Domestic Market Obligation (“DMO”).

 

We still remember that, on the last day of 2021, coal mining business actors were surprised by a policy issued by the Government of the Republic of Indonesia. This policy is related to the ban on coal exports issued by the Directorate General of Mineral and Coal (“DGMC”) of the MEMR through Letter Number B-1605/MB.05/DJB.B/2021 December 31, 2021, on Fulfillment of Coal Needs for General Electricity (“Letter 1605/2021”). This policy is a response to a letter issued by the State Electricity Company (Perusahaan Listrik Negara, “PLN”) (Persero) Number 77875/EPI.01.01/C01000000/2021-R dated December 31, 2021 (“Letter from PLN”). This Letter from PLN informs us that there has been a coal supply crisis and very low coal availability at the Steam Power Plants (Pembangkit Listrik Tenaga Uap, PLTU”) of the PLN Group and Independent Power Producers (“IPP”). 

 

This incident became a turning point that questioned the existence of policies to fulfill coal supply for domestic needs, or known as the DMO and its role in securing coal supply for domestic needs through policies and regulations issued by the Government of Indonesia through MEMR. The occurrence of the coal supply crisis and coal availability in 2021 clearly reminds the Government of Indonesia that the DMO policy is very important and needs special attention, considering that the incident has disrupted the operation of the PLTU which in turn has an impact on the national electricity system causing widespread blackouts. This incident eventually prompted the DGMC to issue Letter 1605 /2021 to secure domestic coal supply and to anticipate extreme weather in January and February 2022. 

 

A. Duties and Importance of DMO

Historically, the DMO policy was regulated under Law No. 4 of 2009 regarding Mineral and Coal Mining (“Law 4/2009”). The MEMR then issued Regulation of the MEMR Number 34 of 2009 on Prioritizing the Supply of Mineral and Coal Needs for Domestic Interest (“MR 34/2009”) as the implementing regulation of Law 4/2009. MR 34/2009 was later revoked by Regulation of the MEMR No. 25 of 2018 regarding Mineral and Coal Mining Business (“MR 25/2018”). MR 25/2018 is still valid even after the issuance of Law No. 3 of 2020 regarding Amendments to Law 4/2009 (“Law 3/2020”) and its implementing regulation i.e., Government Regulation No. 96 of 2021 regarding the Implementation of Mineral and Coal Mining Business Activities (“GR 96/2021”). 

 

In 2021, the MEMR issued Decree of the MEMR No. 139.K/HK.02/MEM.B/2021 regarding Fulfillment of Domestic Market Obligation (“Decree 139/2021”) as the implementing regulation of MR 25/2018. This regulation provides that the percentage of coal sales for DMO is 25% (twenty-five percent) of the approved Annual Work Plan and Budget (Rencana Kerja dan Anggaran Belanja, “RKAB”) in order to fulfill the demands of domestic power plants for industrial raw materials/fuels. DMO is mandatory for holders of the following mining permits: 

 

  1. Mining Business Permit for Coal Production Operation stage (Izin Usaha Pertambangan tahap Operasi Produksi, ”IUP OP”);
  2. Special Mining Business Permit for Coal Production Operation stage (Izin Usaha Pertambangan Khusus tahap Operasi Produksi, ”IUPK OP”);
  3. Coal Contract of Work for Production Operation stage (Perjanjian Karya Pengusahaan Pertambangan Batubara tahap Operasi Produksi, “PKP2B”); and
  4. Special Mining Business Permit as Continuation of PKP2B,

 

(Point 1 – 4 above are hereinafter referred to as the “Coal Mining Companies”).

 

In addition to the above provisions, Decree 139/2021 also regulates sanctions toward Coal Mining Companies that do not fulfill the DMO. As a commitment to achieve the target of the issuance of Decree 139/2021, in early January this year, the MEMR issued a new regulation regarding the imposition of fines and compensation funds. This regulation is made under the Decree of the Minister of Energy and Mineral Resources Number 13.K/HK.021/MEM.B/2022 on the ban on Coal Exports, and Guidelines for the Imposition of Fines and Compensation Fund for Fulfilling Domestic Market Obligation (“Decree 13/2022”).

 

DMO

B. DMO Provisions under Decree 13/2022

Decree 13/2022 regulates several provisions as a continuation of the regulations in Decree 139/2021, as follows:

 

  1. DMO Fulfillment Scheme
    Decree 13/2022 outlines the DMO fulfillment scheme, which is carried out through:

    • Direct Realization of DMO – carried out by Coal Mining Companies to their domestic end-users; and/or
    • Indirect Realization of DMO – carried out by Coal Mining Companies through the holders of Coal Transportation and Sales Permit (Izin Pengangkutan dan Penjualan Batubara, “IPP holders”). Through this scheme, the IPP holders must fulfill their sales contract with domestic end-users as the DMO fulfillment of the Coal Mining Companies.
    • If the Coal Mining Companies and the IPP holders (as partner of the Coal Mining Companies) do not have any domestic sales contract, or the coal does not meet domestic market specifications, the Coal Mining Companies must pay compensation funds.
  2. Imposition of Sanctions and the Calculation
    Coal Mining Companies that do not fulfill the minimum percentage of coal sales for DMO or do not fulfill domestic coal sales contract are subject to sanctions:

      • Ban on Coal Exports
        The ban on coal exports is imposed on Coal Mining Companies and the IPP holders until coal sales for DMO are fulfilled according to the percentage of sales or in accordance with sales contracts, except for those who do not have sales contracts with domestic coal users, or their coal does not meet domestic market specifications. The ban on coal exports is subject to the following provisions:

        • the ban on the coal exports is determined by the DGMC based on the fulfillment report of sales contracts from the domestic coal users clarified by the Coal Mining Companies and the IPP holders that have sales contracts with the domestic coal users;
        • the ban on coal exports is imposed on Coal Mining Companies through direct export and indirect export (through the IPP holders);
        • if based on the fulfillment report of sales contract issued by the domestic coal users that coal sales for DMO have been fulfilled and the fines have been  paid by the Coal Mining Companies and the IPP holders, the prohibition of the coal exports will be revoked by the DGMC;
        • the ban on the coal exports will be revoked by the DGMC if the Coal Mining Companies and the IPP holders submit a clarification report regarding the fulfillment of coal sales for DMO along with the proof of payment of fines to the DGMC,
      • Obligation to Pay Fines
        The following are provisions regarding fines regulated under Decree 13/2022 and MR 17/2022:

        No. Types of fine Tariff (USD) Formula
        1 fine for Coal Mining Companies  and the IPP holders that do not fulfill domestic coal needs for public-interest power plants Fine amounting to the price difference between the export selling price and the coal benchmark price for the coal supply of public-interest power plants (Domestic Market Obligation) multiplied by the export sales volume of coal in the amount of the unfulfilled coal sales for DMO of the Coal Mining Companies A x V
        2 fine for Coal Mining Companies  and the IPP holders that do not fulfill the domestic coal needs other than for public-interest power plants Fine amounting to the price difference between the export selling price and the coal benchmark price multiplied by the export sales volume of coal in the amount of the unfulfilled coal sales for DMO of the Coal Mining Companies  A x V

         

         Information:

        A : (Penalty rate (USD/ton) determined based on:

        1. the price difference between 1). the average selling price to foreign countries based on the quality specified in the sales contract at the Free on Board Vessel delivery point during the reporting period of coal fulfillment from domestic coal users and 2). the average coal benchmark price for the supply of electricity for the public interest based on the quality specified in the sales contract; or
        1. based on the price difference between 1). the average coal benchmark price based on the quality specified in the sales contract and 2). the average coal benchmark price for the supply of electricity for the public interest based on the quality specified in the sales contract in the event that the export selling price of coal is not available.
        V : Volume of coal supply shortage determined based on the sales contract fulfillment reports from domestic coal users, which has been clarified to Coal Mining Companies or the IPP holders.

         

        The payment of fines mentioned above uses the currency in accordance with the coal sales transaction. However, if the coal sales transaction uses the rupiah currency, the exchange rate adjustment will use the middle rate of Bank Indonesia on the date of the coal sales transaction.

         

      • Obligation to Pay Compensation FundsCompensation funds are imposed on the Coal Mining Companies that do not have sales contracts with domestic coal users, or their coal does not meet domestic market specification with the following formulationCompensation Fund = A x (P – R)Information:
        A : Compensation Rate (USD/ton) based on coal quality and changes in the reference coal price
        P : Coal Sales Obligation for Domestic Needs (tonnes) based on the percentage of coal sales obligation for domestic needs to the total coal production plan approved by the Government
        R : Realization of Coal Sales for Domestic Needs (ton)

         

        Further, the payment of fines and compensation funds mentioned above are carried out through the (Pendapatan Negara Bukan Pajak, PNBP”) Online Information System (“SIMPONI”) application based on the account code set no later than 30 (thirty) calendar days after the date of the first invoice for the fines or compensation funds.

         

  3. Administrative Sanctions
    Coal Mining Companies that do not fulfill their DMO obligation, especially the obligation to pay fines and/or compensation funds are subject to administrative sanctions in the form of:

    1. temporary suspension of all production operations, or a statement of negligence within a maximum period of 60 (sixty) calendar days if they do not pay the fine or compensation within 30 (thirty) days from the imposition of the fine or compensation as stated in the statement of fine or compensation payable submitted by the management agency; and
    2. revocation of mining permits owned by the Coal Mining Companies if coal producers do not carry out the obligation to pay the fine or compensation until the end of the temporary suspension period.Based on the above, the following are the illustration of the imposition of administrative sanctions in DMO:Payment period and compensation funds
  4. Report
    Determination of the realization of coal sales for DMO is based on the results of the evaluation of the monthly coal sales report submitted by the Coal Mining Companies, which is submitted no later than 10 (ten) calendar days after the end of each month. The coal sales report shall contain the following:

    1. information regarding coal direct sales realization to the domestic coal users; 
    2. information regarding coal indirect sales realization to the domestic coal users through the IPP holders;
    3. Bill of Lading; and
    4. coal sales documents.

    DMO

    C. Supervision of the Implementation of DMO

    In the earlier part, we have mentioned that the MoF has issued MR 17/2022 as the implementing regulation for the supervision of the implementation of DMO. Under MR 17/2022, fines and compensation funds are treated as part of official PNBP collected by the MEMR. In addition to the issuance of regulations, the Government of the Republic of Indonesia in carrying out the supervision of the implementation has launched a system called the Mineral and Coal Information System (“Sistem Informasi Mineral dan Batubara, SIMBARA”). SIMBARA was launched in early March by the MoF together with the MEMR, the Governor of Bank Indonesia, the Coordinating Ministry for Maritime Affairs and Investment and the Chair of the Corruption Eradication Commission. 

    SIMBARA is the result of collaboration between the MoF, the MEMR, the Ministry of Trade, the Ministry of Transportation and Bank Indonesia, which is supported and supervised by the Coordinating Ministry for Maritime Affairs and Investment, and the Corruption Eradication Commission. This collaboration responds to the need for an integrated system related to the management and supervision of mineral and coal. SIMBARA has various functions, as follows:

    1. validating proof of royalty payments, and if invalid data is found, the system will reject it;
    2. integrating systems and data from upstream to downstream starting from mining permits, sales plans, sales verification, PNBP payments, exports, and transportation/shipping as well as foreign exchange earnings from exports; and
    3. monitoring the fulfillment of coal sales of DMO through monitoring the flow of coals and the return of foreign exchange from exports to the state.

The issuance of the regulations and the launching of SIMBARA are expected to improve the supervision of the implementation of DMO in Indonesia.

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