Indonesia - Restrictions On The Use Of Proceeds From The Export Of Natural Resources And Implications For Offshore Lenders.
Legal News & Analysis - Asia Pacific - Indonesia - Energy & Project Finance - Regulatory & Compliance
4 February, 2019
The Indonesian Government recently announced its 16th Economic Policy Package (Paket Kebijakan Ekonomi ke-XVI) as a domestic response to the pressures of global economic developments, including pressure on the Indonesian Rupiah – a particularly sensitive issue in the lead-up to Indonesia’s parliamentary and presidential elections in April. In implementing this policy, on 10 January 2019 the Government issued Government Regulation No. 1 of 2019 on Export Proceeds from Natural Resources Development, Management and/or Processing Activities (“GR 1/2019”).
GR 1/2019 regulates the arrangements for the deposit and use of proceeds from the export of natural resources from Indonesia (“Natural Resources Export Proceeds”). As well as generally restraining natural resources exporters from freely utilizing their export proceeds, GR 1/2019 may have a significant impact on new and existing financing arrangements for Indonesian natural resources products.
In summary, GR 1/2019 states that exporters must deposit their Natural Resources Export Proceeds in a special dedicated bank account in Indonesia and can then only use those funds to meet certain payment obligations, evidenced by underlying supporting documents. GR 1/2019 does allow payments to be made to directly cover loan expenses. However, it is standard practice for international debt financings of Indonesian natural resources projects to use an offshore collection account (in the name of the borrower) to frequently (or automatically) sweep the export proceeds from the local Indonesian bank account. Debt financing payments and other expenses are then paid out from this account based on an agreed priority “waterfall.”
International financiers generally take significant comfort in their ability to be granted non-Indonesian law governed security over the offshore collection account. As expressly drafted, it appears that GR 1/2019 would not necessarily allow a borrower (which is an exporter of natural resources) to make such cash sweeps to an offshore collection account unless alternative contractual or structuring arrangements are put in place with the financiers.
There are no transitional provisions in GR 1/2019 exempting existing financing or offshore collection account arrangements. As a result, borrowers and lenders need to immediately start considering whether alternative payment mechanisms and security structures need to be put in place for existing financing arrangements which utilize offshore collection accounts.
Domestic Deposit of Natural Resources Export Proceeds
The new payment restrictions under GR 1/2019 are a step further than the on-shoring obligation for export proceeds. Even prior to the issuance of GR 1/2019, Natural Resources Export Proceeds – including proceeds from the sale of minerals, coal and oil as well as plantation, forestry and fishery products – had to be initially deposited in the Indonesian financial system.
Now, GR 1/2019 specifies that Natural Resources Export Proceeds must be deposited at a domestic foreign exchange bank in a special dedicated bank account. GR 1/2019 requires such deposits to be made no later than the end of the third month after the month the related customs declaration was registered.
Importantly, GR 1/2019 does not require the export proceeds deposited in the special dedicated domestic bank account to be converted to Indonesian Rupiah or to be retained in the bank account for a specific period of time. However, as discussed below, there are now significant restrictions on the use of such export proceeds.
In addition, if export proceeds are currently kept in escrow accounts, GR 1/2019 requires the relevant exporter to open (and transfer the relevant export proceeds to) an escrow account in a domestic foreign exchange bank by no later than 13 April 2019.
Restrictions on the Use of Natural Resources Export Proceeds
The most significant change introduced by GR 1/2019 is that Natural Resources Export Proceeds may only be used for the payment of:
- export duties and other export levies;
- profits/dividends; and/or
- other capital investment purposes as set out in the Indonesian Investment Law, including purchases of raw materials and technical services, investment financing, royalties, employee salaries, and other expenses.
The natural resources exporters are also required to provide sufficient supporting documents evidencing that the Natural Resources Export Proceeds will be used for the above purposes.
Notably, and as mentioned above, GR 1/2019 does not, on its face, appear to allow natural resources exporters to transfer the Natural Resources Export Proceeds into an offshore collection account in their name as part of their offshore financing arrangements. The utilization of offshore collection accounts will now require careful consideration in each case.
GR 1/2019 expressly imposes certain administrative sanctions if (among other things) a natural resources exporter fails to deposit the Natural Resources Export Proceeds into a special dedicated domestic bank account or utilizes the export proceeds for purposes not expressly permitted by GR 1/2019. These administrative sanctions may include fines, a prohibition on conducting exporting activities and/or revocation of the exporter’s underlying business licence.
We understand that Indonesia’s Ministry of Finance plans to issue further regulations implementing these administrative sanctions.
In practice, we expect that GR 1/2019 will be closely enforced by Bank Indonesia and the domestic foreign exchange banks being asked to transfer the funds to accounts abroad. These remitting banks may find themselves constrained in their ability to execute such transfers without first reviewing the supporting documents.
While we are continuing to monitor the interpretation, application and enforcement of GR 1/2019, all indications to date are that Bank Indonesia will seek to actively supervise and monitor the implementation of GR 1/2019. As a result, absent the grandfathering of existing financing arrangements that use offshore collection accounts, both the exporters of natural resources and their lenders will need to look carefully at introducing new contractual or structuring arrangements or alternative payment mechanisms and security structures to ensure compliance with GR 1/2019.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills