Out-Law Analysis | 27 Aug 2015 | 5:10 pm | 3 min. read
Companies are assuming that already-issued guidance gives them a six month reprieve before they must comply with new currency rules but they should not act until clearer guidance is published.
Companies are concerned about a new requirement to use the Indonesian Rupiah for domestic transactions, amid contradictory statements from the government about how this will be applied.
The Bank of Indonesia (BI) announced a new regulation earlier this year requiring domestic transactions to be in Rupiah from 1 July. It followed that announcement with a circular and a list of 'frequently asked questions' that aimed to clear up which companies the rule would apply to. These were then followed, once the regulation came into effect, by a press release from the Ministry of Energy and Mineral Resources (MEMR) and open consultation sessions run by BI.
Unfortunately, each of these communications has to some extent contradicted the others, and it is very hard to identify how the regulation will affect the many foreign energy, mining and oil and gas companies operating in the country.
The circular issued on 1 June 2015 listed three exemptions to the Rupiah requirement: a 'strategic' infrastructure exemption; a case by case exemption; and an existing contract exemption.
Under strategic infrastructure, the BI listed transportation. including ports, rail and airports, road, irrigation, clean water, sanitation, telecommunications and IT, power and oil and gas projects.
Even those projects that do fit within one of the exemptions will only do so if they are certified by the central or regional government to be a 'strategic' project and are granted express approval by BI.
For case by case exemptions, BI will consider whether the Rupiah requirement would require fundamental changes to business systems, processes and undertakings or threaten the business' survival, and whether the business has a significant impact on national economic growth. It will also look at the level of past compliance with other BI regulations, the letter said.
This is very unclear and it has been hard for companies to tell whether the changes they need to implement are "fundamental", and whether they will be able to persuade BI that their business is at risk. Some companies may also be hit by the need to show past compliance with regulations given the complex web of laws that already exists.
The third exemption, for existing contracts, is also hard to pin down. It seems that any agreement entered into before 1 July 2015 may be exempt - but that any variations or contract extensions, however small, made to such agreements could lead to them losing this exemption.
BI frequently asked questions (FAQs)
The list of FAQs was released by BI alongside the circular, supposedly to clear up any questions raised by the circular letter. However, it may raise more questions than it answers, by contradicting much of what the letter said.
While the letter itself should probably be given the most weight in deciding what is the correct interpretation, and the FAQs used for guidance only, the exemptions remain unclear.
Energy and mining department statement
A press release by MEMR on 1 July, the day the regulation took effect, stated that special treatment would apply for energy, mining and oil and gas companies following agreements made with the BI. However, the statement caused further confusion by dividing transactions by these companies into three categories, each of which would gain different concessions.
Category one transactions include those which 'can' immediately comply with the Rupiah requirement, while category two transactions need 'some time' and category three is those where is it 'fundamentally' difficult to comply.
Companies undertaking category one transactions will be given six months to comply, while category two transactions have an indefinite period to do so. Category three transactions appear to be exempt.
Needless to say, it may be hard to determine which category a transaction falls into without consultation with MEMR and, ultimately, BI.
BI open consultation
At subsequent consultations run by the BI following implementation of the new regulation, the BI undermined the MEMR press release by saying that BI has only agreed to special treatment for oil and gas companies, not for mining or energy companies. This would be based on a case by case application made on behalf of oil and gas companies operating in the country.
Foreign investors and contractors may be advised to make applications for case by case exemptions for transactions and projects currently under negotiation that may be caught by the Rupiah requirement, although this is likely to be a time consuming process.
There is hope that the BI may further relax or even reverse the Rupiah requirement following debate among government minsters about the potential impact of the ban on the broader economy. With up to 15% of daily transactions in Indonesia denominated in US dollars, the Rupiah-only rule could increase the cost of company borrowing, with borrowing costs for Rupiah higher than for US dollars, and discourage spending by international companies.
In the meantime, while the debate and confusion continues, infrastructure and energy companies with existing or potential business interests in Indonesia should proceed, as always, with caution.
Kate Terry is an infrastructure expert at Pinsent Masons, the law firm behind Out-Law.com.