On 1 April 2015, the MOT issued Regulation 26/2015 which permits a special postponement of the Regulation 4/2015 requirement for payment by L/C in certain circumstances. This Briefing aims to explain some of the more unusual characteristics of Regulations 4/2015 and 26/2015 and considers the potential implications of these Regulations on certain Indonesian exporters and their overseas buyers.
Regulation 4: mandatory payment by L/C
Originally announced in the start of January 2015, the MOT’s controversial Regulation 4 requires Indonesian exporters to arrange for payment by L/C when exporting the following natural resource products:
- Mineral products: iron concentrate, nickel, silver, gold, bronze and tin.
- Coal products: briquettes, agglomerated coal, and lignite.
- Oil and gas products: crude oil and liquefied natural gas (LNG).
- Crude palm oil including crude palm kernel oil.
Regulation 4/2015 was met with considerable criticism, specifically from the Indonesian oil and gas industry, who expressed concerns that its implementation date of 1 April 2015 set too short a timeframe for sellers to comply with the requirement. Regulation 4/2015, the industry argued, would require sellers to renegotiate both their long- term sales contracts and financing arrangements, the latter of which often would involve complex covenant packages, account controls or security structures. Considering that failure to comply with Regulation 4/2015 could result in products not being exported and, potentially, a halt in production, the risk for such companies was great.
Regulation 26/2015: requirements for special postponement
The recent Regulation 26/2015 aims to address these concerns by providing for a special postponement to be granted to companies which require additional time to comply with the Regulation 4/2015. The special postponement under Regulation 26/2015 will be granted by the MOT after receiving a recommendation by the relevant ministry. In order to obtain the special postponement, exporters must submit the following additional documents:
- The contract between the exporter and its overseas buyer in relation to Certain Products which had been agreed prior to the enactment of Regulation 4/2015 and utilises a payment method other than L/C.
- An undertaking by the exporter to adjust its contract to satisfy the Regulation 4/2015 within a certain period of time.
- A letter, with a stamp duty affixed on it, affirming that the documents in points (a) and (b) above are true and correct.
In addition, the Director General of Coal and Mineral’s circulation letter dated 7 April 2015 sets out a further requirement for the exporters of coal and mineral products seeking a special postponement of the Regulation 4/2015. The circulation letter provides that, in order to obtain a recommendation from the Minister of Energy and Mineral Resources, exporters of coal and mineral products must first present the Ministry with all three of the abovementioned documents, as well as a copy of the Exportir Terdaftar (ET) – Mineral Products, before applying directly to the MOT.
Exporters who have been granted a special postponement of the Regulation 4/2015 may be subject to post-audits by a team selected by the MOT. It should be noted that exporters whose post-audit results are inaccurate may be subject to a penalty and their postponement will be revoked.
Regulation 26/2015 leaves open one controversial aspect of the Regulation 4/2015, which is the requirement that the price stated in the L/C must be at least the same as the world market price. As oil and gas products sold from Indonesia are generally sold pursuant to long-term contracts, it is likely that the sale price under these contracts would be lower than the world pricing. Regulation 4/2015, therefore, might require these exporters to make upwards price adjustments that their buyers may not be willing to accept. LNG exporters in particular face the additional difficulty of not having a single world market price for LNG, and therefore it remains to be seen how this rule will work in that context. This will also leave certain ambiguity and questions for exporters in the mining sector, especially in relation to long-term offtake contracts whereby the payment of the offtake is made by the financier or “offtaker” advancing the prepayment or loan facilities to the sellers.