Payment by Letter of Credit for Exports From Indonesia

From 1 April 2015, under a new regulation issued by the Indonesian Minister of Trade, exports of certain commodities from Indonesia, including crude oil, condensates, liquefied natural gas (LNG) and certain minerals such as iron ore, gold, nickel, copper and coal must be paid for by way of a letter of credit (L/C). The funds from the L/C must be paid into an account with a foreign exchange bank located in Indonesia.

Sellers and Buyers should review payment terms under off-take agreements and agree any necessary amendments to ensure exports can continue in compliance with the regulation and the relevant off-take agreement.

The regulation will also impact project financing arrangements, where the terms of financing documentation require payment under off-take agreements directly into overseas bank accounts. Sellers should review financing documentation and agree any necessary amendments or waivers with lenders and other stakeholders.

Overview and Scope

The Indonesian Minister of Trade (MOT) has issued Regulation No. 04/M-DAG/PER/1/2015 on the Provision of the Use of Letter of Credit for Export of Certain Commodities (MOT L/C Regulation), which requires that from 1 April 2015:

• the export of certain commodities from Indonesia must be paid for by way of an L/C, with the price of the commodities as set out in the L/C being at least equivalent to the global market price at the time (though how this is to be determined is unclear); and
• that the proceeds from the L/C be paid into an account held with a foreign exchange bank located in Indonesia._¹

The Minister of Trade has indicated that the rationale for introduction of the regulation is largely to increase export earnings and, at the same time, provide a mechanism to ensure accurate export records are maintained, particularly in relation to the sale of natural resources._² In addition, the MOT L/C Regulation will also help ensure compliance with Bank Indonesia Regulation Number 13/20/PBI/2011 (BI Regulation)_³ , which requires that proceeds from the export of commodities from Indonesia be paid into accounts held with foreign exchange banks located in Indonesia.

The MOT L/C Regulation applies to the export of a wide range of commodities from Indonesia. The appendix to the regulation sets out a list of the commodities that fall within the scope of the regulation._⁴

The list includes crude oil, condensates, LNG and compressed natural gas (CNG), together with certain minerals such as iron ore, gold, nickel and copper, and coal in various processed and unprocessed forms. Notably, natural gas (in other forms) is not listed in the appendix, which suggests that pipeline exports of natural gas from Indonesia are not affected by the regulation. In any event, it is likely to be practically difficult to survey exports of natural gas via pipeline on a continual basis, unlike commodities which are exported on a cargo-by-cargo basis.

The MOT L/C Regulation provides that goods that do not meet the requirement for payment by L/C will not be exported.

On the same day as the MOT L/C Regulation was issued, the Minister of Trade also issued Regulation No. 03/M-DAG/PER/1/2015 on Export and Import of Oil, Gas and Other Types of Fuel (MOT Export Regulation), which introduces the requirement for an exporter of crude oil, condensates, LNG and CNG or other listed forms of fuel (but, notably, not minerals) to obtain a report from a surveyor (certified by the Minister of Trade) in respect of each cargo of the relevant goods to be exported from Indonesia at the departure port. The MOT Export Regulation provides that the surveyor's report is, among other things, a prerequisite to the exporter's customs clearance for each relevant cargo. The MOT L/C Regulation separately provides that the surveyor must verify, and expressly confirm, that payment for the relevant cargo is made by L/C before the survey report is issued.

Accordingly, it appears that the MOT Export Regulation and MOT L/C Regulation are intended to work together with regard to the survey and customs clearance of cargoes. The regulations together establish the survey report requirement as a mechanism to enforce the use of L/C as a payment method for exports in accordance with the MOT L/C Regulation, by preventing the export of goods to which the MOT Export Regulation applies unless compliance with the MOT L/C Regulation can be verified. Exporters of goods not affected by the MOT Export Regulation (for example, coal and other minerals) should similarly consider the interaction of existing export regulation with the requirements set out in the MOT L/C Regulation.

In addition to the MOT Export Regulation and other existing regulation governing export of natural resources, it may be that further regulations will be implemented in the future, as contemplated by the MOT L/C Regulation, to clarify and confirm the consequences of non-compliance under the MOT L/C Regulation.

Interestingly, the MOT L/C Regulation does not prescribe which of the parties must obtain an L/C, providing simply that the export (note, not the purchase) of the relevant commodities "must use the L/C payment method". Provided that the export involves the use of an L/C, the export may proceed.

We are not aware of any current or proposed exceptions to the broad application of the regulation, which will cover existing and future resources projects that export the named commodities from Indonesia.

Implications of the new regulation

Some implications of the MOT L/C Regulation may include:

Change in payment terms

Unless an off-take agreement already provides for payment by an L/C, Sellers and Buyers will need to agree amendments to the payment terms under their off-take agreements to ensure compliance with the regulation. Whether Sellers under existing off-take agreements are able to require Buyers to obtain an L/C will depend on the payment terms of their off-take agreements, and whether there are any provisions, such as change in law clauses, which can be applied to the changed circumstances to ensure the contract continues. Otherwise, the matter will have to be the subject of negotiation between the parties to agree necessary amendments to the payment terms.

Cost

The costs associated with obtaining and maintaining a letter of credit facility will either increase the cost associated with a cargo to the Buyer, or decrease the Seller's associated profit margin. Whether these costs can be shared between the Buyer and Seller will be subject to any existing payment terms or other contractual provisions set out in the off-take agreement (such as change in law or "hardship" provisions), or otherwise, the outcome of negotiation between the parties.

Impact on project finance arrangements

Many financing arrangements of commodity-related projects in Indonesia, such as LNG projects, require payment under off-take agreements to be made directly into foreign bank accounts (for example, under trustee borrower scheme (TBS) financings). Sellers with repayment commitments under project financing arrangements will need to ensure that amendments are agreed with lenders and other stakeholders to ensure compliance with both the regulation and their financing documentation.

Borrowers may already be familiar with these requirements in relation to payment for exports to be made into foreign exchange bank accounts in Indonesia, which were first introduced by the BI Regulation. However, unlike the BI Regulation, which provided a lead time of 12 months, the MOT L/C Regulation comes into effect on 1 April 2015, less than three months from issue, and so must be implemented in a relatively short time period.

Next Steps for Sellers and Buyers

Both Sellers and Buyers should review the terms of any existing off-take agreements, take steps to agree any necessary amendments to payment terms and implement a letter of credit payment arrangements, in order to ensure that sale and purchase of relevant commodities can continue in accordance with the new regulation.

_Notes

_{^1.The MOT L/C Regulation requires payment by L/C into a local foreign exchange bank. The MOT L/C Regulation provides that a foreign exchange bank is a bank that has obtained approval from competent authorities to undertake banking activities in foreign exchange. On this basis, a local foreign exchange bank may include branch offices of foreign banks in Indonesia with approval to do banking in foreign exchange, but will exclude overseas branch offices of Indonesian banks (for example, the Singapore branch of an Indonesian bank).}

_{^2. http://www.thejakartapost.com/news/2015/01/16/lc-required-exports-key-commodities.html}

_{^3. The BI Regulation was issued on 30 September 2011, and was subsequently amended most recently by Bank Indonesia Regulation Number 16/10/PBI/2014 dated 14 May 2014.}

_{^4. Please contact us if you would like to receive a copy of the appendix setting out all commodities which fall within the scope of the regulation.}