25 August, 2015
Since the start of this year, the Indonesian government has made moves to implement two pieces of legislation that are likely to have a significant impact on transactions in the mining sector. Unlike the previous rules and regulations much discussed in the sector that were sector specific and focussed on the more "core" mining activities, the recent changes focus on the funds flow and are driven by more generic concerns. The Ministry of Trade (MoT) has re-invigorated the requirement for payments for exports of commodities to be made by letters of credit and, more recently, the Bank of Indonesia (BI) has sought to implement the requirement for parties to use Indonesian Rupiah for domestic transactions.
Letters of credit
• MoT Regulation 4/2015 (effective 1 April 2015) requires that payment for export of specified commodities (including iron concentrate, nickel, silver, gold, copper, tin and coal) be arranged in the form of a letter of credit received through a licensed Foreign Exchange Bank.
• In addition, Regulation 4/2015 requires that the price stated in the letter of credit must be at least equal to the "global market price", although the regulation is silent on how the global market price is to be determined.
• This regulation met with considerable resistance in the sector both because of the short lead-in time for compliance and the impracticality of complying with the requirements, particularly in relation to long-term sales contracts and commodity trading where the letter of credit mechanism does not fit well within the payment structures commonly used.
• In response, the MoT issued Regulation 26/2015, which allows for a special postponement to be granted to companies that require additional time to comply with these requirements. The postponement may be granted by the MoT after receipt of a recommendation from the relevant ministry – in the case of mining commodities, from the Director General of Minerals and Coal (DGMC) on behalf of the Minister of Energy and Mineral Resources (MEMR). The requirements for obtaining the recommendation are set out in the DGOG Circular Letter from 7 April 2015, which requires the exporter to submit the following documents to DGOG:
• the sales contract between the exporter and the overseas buyer, which was entered into before 1 April 2015,
• an undertaking from the exporter to adjust its sales contract to comply with the Regulation 4/2015 within a certain period of time,
• copy of the exporter's registration as a Registered Exporter (Exportir Terdaftar) of Mineral Products, and
• a letter confirming that the above documents are true and accurate.
• Importantly, both the MoT and the DGMC appear to view the special postponement under Regulation 26/2015 as a temporary measure and, ultimately, exporters are still expected to comply with the letter of credit requirements.
• On 5 May 2015, the Vice President of Indonesia sent a letter to the MoT and the MEMR requesting that the sale of coal and mineral commodities be exempted from the letter of credit payment obligation. It is currently unclear whether this will lead to abandonment of the letter of credit requirements. However, at present, Regulation 4/2015 remains legally effective and exporters are expected to comply with its provisions; although, in practice, the implementation and enforcement of the requirements have been limited to date.
Indonesian Rupiah requirements
BI Regulation No. 17/3/PBI/2015 (as supplemented by the circular letter No. 17/11/DKSP, collectively BI Regulation 17) became effective from 31 March 2015 for cash transactions and 1 July 2015 for non-cash transactions. Under BI Regulation 17, all transactions conducted within the territory of Indonesia must be denominated and settled only in Indonesian Rupiah.
BI Regulation 17 provides a number of exemptions to this requirement, including the following exemptions which would be most relevant for the mining industry:
• international trade transactions (e.g. export or import of goods to or from Indonesian territory) – although the exemption will only apply to the actual trade activity and would not cover any additional activities ancillary to the trading activities, such as harbour charges, stevedoring services, temporary storage costs, etc.,
• international financing transactions (where either the provider or recipient of financing is domiciled overseas), and
• bank deposits denominated in foreign currency.
In addition to the exemptions listed above, non-cash transactions under agreements entered into prior to 1 July 2015 are grandfathered such that payments can be denominated and settled in foreign currency until the expiry of the current term of such agreements. However, any subsequent amendments or extensions as well as any supplemental or implementing agreements entered into after 1 July 2015 will not be grandfathered and, consequently, payments will need to be denominated and settled in Rupiah.
Importantly for the natural resources sector, BI has accepted that pricing formulas in sales contracts often refer to international benchmarks, which are published in US Dollars with a premium or discount amount applied. For the time being, BI is of the view that reference to the relevant benchmark price will be acceptable, provided that the premium / discount is stated in Rupiah and the settlement is required to be in Rupiah.
BI Regulation 17 does not, on its face, prohibit parties from adjusting the price stated in the contracts to reflect changes in exchange rates or allocating exchange rate risk as between the parties. Subject to further clarification from BI on this is issue, it appears therefore that parties could agree that the stated Rupiah price is determined by reference to an agreed Rupiah / US Dollar exchange rate, and that if the Rupiah / US Dollar exchange rate were to change (perhaps, by a material margin), the stated Rupiah price will be adjusted accordingly in accordance with the terms of the agreement.
The extent to which the BI Regulation 17 will be implemented and enforced remains to be seen.
Conclusion
Given the period of stronger headwinds in the global mining and commodity sector and in light of the importance of the mining sector to Indonesian economy – in terms of GDP, job-creation and development of the more remote regions of the country – many were hoping the new government would do more to help business get done. The previous period had seen the mining sector, and foreign investors in particular, grapple with a range of near existential challenges: extension of localisation obligations, renegotiation of Contracts of Work, complex rules on in-country processing and export of minerals, and a moratorium on grant of new trading licences. It is unfortunate that the recent changes highlighted above, generated by broader economic aims and the effect of past experiences, may create additional difficulties for the business and make it less nimble at a time when the sector would benefit from the opposite.
