HHR

printed matters

December 2011

Content : The New Currency Law In Indonesia ... 1 New Procurement Guideline of BP Migas ....... 4 The Cabotage Principles and its Implementation in Indonesia Subsequent to the Issuance of the Regulation of the Minister of Transportation Number 48 Year 2011 ...... 7

THE NEW CURRENCY LAW IN INDONESIA

By: Jenny Sadarangani (HHR Senior Associate)

I. INTRODUCTION The Indonesian government through its House of Representative has on 31 May 2011 enacted Law Number 7 of 2011 on Currency (Currency Law), which came into effect on 28 June 2011. The law focuses amongst others on the management of Rupiah bank notes and coins by Bank Indonesia, which covers activities such as printing, issuance, circulation and revocation. In the effort to implement transparency, the law has also imposed an obligation to Bank Indonesia to convey a periodical report to the House of Representatives on such management activities. Conversely, the issuance of the Currency Law has created a stir in the business activities in Indonesia due to the provision, which requires the use Rupiah for payment, settlement of obligations and other financial transactions, which take place in Indonesia. This requirement is apparently contrary to the governments effort in developing effective policy framework to promote foreign investment. II. PROVISIONS IN REVIEW The following are the provisions of the Currency Law relating to the matter of our review: Article 21 paragraph (1) of the Currency Law stipulates that Rupiah must be used in: a. each transaction which has payment purposes; b. the settlement of other obligations that must be fulfilled with the use of money; and/or c. other financial transactions which are carried out within the territory of the Republic of Indonesia An exemption to the above Article 21 paragraph (1) is set forth in Article 21 paragraph (2) of the Currency Law which stipulates that the use of Rupiah shall not apply to:

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a. certain transactions in the framework of implementing the government income and expense budget; b. grants to be given to or received from offshore sources; c. international trade transactions; d. foreign currency savings in a bank; or e. international financing transactions.

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In addition to the above Article 21, it is also essential to note the stipulation as set forth in Article 23 paragraph (1) of the Currency Law, whereby it is prohibited to refuse to accept Rupiah where the transfer of Rupiah is intended as a payment, or as a settlement of obligations that must be fulfilled in Rupiah and/or other financial transactions within the territory of the Republic of Indonesia, except when there is doubt as to the authenticity of the Rupiah. However, Article 23 paragraph (2) of the Currency Law provides that the prohibition as referred to in Article 23 paragraph (1) is exempted for payment or settlement of obligations made in foreign currency, which has been agreed in writing. The relevant articles of the Currency Law as elaborated above are seen as lacking in clarity and this may lead to various interpretations. The situation is also compounded by the imposition of an imprisonment for a maximum of 1 (one) year and a fine of IDR 200.000.000 (two hundred million Rupiah) for a breach of Article 21 and Article 23 of the Currency Law. III. REVIEW Following is our preliminary review, which may be subject to further adjustment once the implementing regulation has been issued. 1. The mandatory use of Rupiah applies only for the payment, settlement of obligations and other financial transactions, which are carried out in Indonesia. Based on Article 23 paragraph (2) of the Currency Law, it can be concluded that for so long as the parties have agreed in writing to have a contractual currency other than the Rupiah currency, these method of payment by using the currency other than the Rupiah is permitted.

However, to avoid any unnecessary possibility of any party to such contract nullifying the contract on the basis of non-compliance to the Currency Law, the parties may consider inserting a provision of applying an exchange rate, either by determining a certain exchange rate in the contract or by using an exchange rate which prevails on the day the payment or settlement of an obligation is to be made. Such currency clause should carefully be drafted and inserted in a writing contract.

2. We are of the view that the mandatory use of Rupiah as payment shall also apply to foreign investment companies (PMA) and foreign citizens who reside in Indonesia. For example, the payment of remuneration of a foreign individual who works and resides in Indonesia, and domestic trading Conversely, the issuance of the Currency Law has activities, shall created a stir in the business activities in Indonesia due be included to the provision which requires the use Rupiah for under the payment, settlement of monetary obligations and other mandatory use of Rupiah. financial transactions, which take place in Indonesia. 3. Exceptions to the use of Rupiah apply in the fields of international trade and financing transactions. The lawmakers did not address these exceptions clearly. We refer to the term international trade as the transfer of goods and/or services which requires cross border payment and transactions such as export and import; the payment for certain services may likely fall under this scope of transaction. On the other hand, it appears that foreign loans obtained from foreign banks, foreign legal entities or foreign financial institutions are considered as international financing transactions. Thus, payment or settlement of obligation for both international trade and financing transactions may remain to be made in foreign currency. 4. The Currency Law came into effect on 28 June 2011, therefore the mandatory use of Rupiah in payment for the settlement of obligations shall only apply to commercial contracts signed on or after 28 June 2011.

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In relation to the exception that Rupiah shall not be mandatory for payment or settlement of obligations, which has been agreed in writing to be made in foreign currency - we are of the view that this provision applies to contracts, which existed prior to 28 June 2011. Thus, such contracts will remain in place and will not be subject to the requirement as set forth in Article 23 paragraph (1) of the Currency Law. 5. On the current schedule, the implementing regulation is not due to be issued until 28 June 2012. Since it appears that the Currency Law will lead to additional uncertainty regarding transactions carried out in Indonesia, we hope that the relevant Indonesian authority will try to provide a clear meaning of the provisions of the Currency Law through the issuance of the implementing regulation. We believe this law creates confusion that our clients need to anticipate. We are aware that there are still issues which need further review and as such, we advise you to seek our immediate clarification should you have any questions in respect to this law.

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December 2011

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NEW PROCUREMENT GUIDELINES OF BP MIGAS

By: R. Aji Wibisono (HHR Lawyer)

I. INTRODUCTION Based on Government Regulation Number 42 of 2002 concerning the Executive Agency of the Oil and Gas Upstream Business Activities, Badan Pelaksana Minyak dan Gas Bumi (BP MIGAS), this agency is authorized to control and supervise the implementation of goods/service procurement in oil and gas upstream business activities. The issuance by BP MIGAS of Decision Letter Number: KEP-0003/BP00000/2011/SO has brought into effect the Second Book of 2nd Revision of Guidelines Procedures of Supply Chain Management of Cooperation Contract Contractor Number 007-REVISI-1/PTK/IX/2009 concerning the Implementation Guidelines of Goods/Service Procurement for All Cooperation Contract Contractors in the Scope of Upstream Oil and Gas Business Activities (hereinafter referred to as New Procurement Guidelines).

II. NEW PROCUREMENT GUIDELINES The Status The New Procurement Guidelines divide the types of business entities as follows: (i) National Companies, established under the Indonesian law which divided into Domestic Investment Companies and Foreign Investment Companies; (ii) the Foreign Companies, established under the laws of foreign countries. Domestic Investment Companies are National Companies with more than 50% (fifty percent) of their shares owned by an Individual Indonesian Citizen, the Republic of Indonesia, Regional Government, a State-Owned Enterprise, or a Regionally-Owned Enterprise.

The Price Preference Based on the Status of The Companies In goods procurement activities, the factory participant with the status of Domestic Investment Company with a Domestic Content Level of at least 25% (twenty five These purposes are percent), in addition to The main purposes of the New Procurement expected to give support the price preference and create the national given based on the Guidelines are to prioritize the use of domestic ability to compete in the Domestic Content Level, production and competence and to ensure that the national, regional and is given an additional implementation of work is conducted in the territory international level. preference based on its of the Republic of Indonesia status as a Domestic The provision in the Investment Company in New Procurement Guidelines is generally centered in the the amount of 2.5% (two point five percent). status of the supplier companies of goods/services and the Domestic Content Level (Tingkat Komponen Dalam In service procurement activities with a Domestic Negeri TKDN). The status and the Domestic Content Content Level commitment or Domestic Content Level Level are used as the basis for price preference which is combination of at least 30%, in addition to the price one of the comparison tools of the bidding price at the preference given based on the Domestic Content Level, evaluation price stage, for bidding which complies with there is given an additional preference based on Domestic the administrative and technical requirements. Investment Companies status as follows:

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(i) In the amount of 7.5% (seven point five percent), if: (a) The implementer of the contract is a Domestic Investment Company without conducting a consortium with a Foreign Investment Company and/or Foreign Companies; and (b) At least 50% (fifty percent) of Work Service is conducted by Domestic Investment Companies; and (c) At least 50% (fifty percent) of Work Service is undertake in the territory of the Republic of Indonesia. (ii) In the amount of 5% (five percent), if: (a) The implementer of the contract is a Domestic Investment Company which undertakes a consortium with a Foreign Investment Company and/or Foreign Company, and the Domestic Investment Company acts as the leader in such consortium; and (b) At least 50% (fifty percent) of Work Service is conducted by a Domestic Investment Company; and (c) At least 50% (fifty percent) of Work Service is undertaken in the territory of the Republic of Indonesia. Domestic Content Level The Domestic Content Level is the scale domestic content of goods/service or combination of goods and service, which is stated as a percentage. The new provision in the New Procurement Guidelines calculates the Domestic Content Level of the tools utilization service value in the chartering work implementation and other services as follows: (i) Domestic production tools and owned by a Domestic Investment Company or Indonesian Citizen - the utilization service value is calculated as 100% (one hundred percent) of domestic content. (ii) Foreign production tools and owned by a Domestic Investment Company or Indonesian Citizen, the

utilization service value is calculated as 100% (one hundred percent) of domestic content. (iii) Domestic production tools and owned by a National Company with more than 50% (fifty percent) of its shares owned by foreign citizens or foreign companies (including foreign companies which operate as the partner of a Domestic Investment Company in the form of a consortium or sub contractor of a Domestic Investment Company or act as the principal in the procurement of goods), the utilization service value is calculated as 75% (seventy five percent) of domestic content. (iv) Foreign production tools and owned by a National Company with more than 50% (fifty percent) of its shares owned by foreign citizens or foreign companies (includes foreign companies which operate as the partner of Domestic Investment Companies in the form of a consortium or sub contractor of Domestic Investment Companies or act as the principal in the procurement of goods), the utilization service value is calculated as 0% (zero percent) of domestic content. The Price Preference Based on the Domestic Content Level The Price preference is given if the Domestic Content Level of goods is at least 25% (twenty five percent) or promise/commitment to achieve of Domestic Content Level of service is at least 30% (thirty percent). Goods/service with the Domestic Content Level achievement of less than the abovementioned shall not be given a price preference based on the Domestic Content Level. In the activities of the procurement of goods and chartering services, the domestic production goods element shall be given a price preference based on the Domestic Content Level in the maximum of 15% (fifteen percent), which is proportionally calculated based on the achievement of the Domestic Content Level. In the activities of chartering service procurement, other services, consultation services, the domestic service element shall be given a price preference based on Domestic Content Level of a maximum 7.5% (seven

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point five percent), which is proportionally calculated based on the achievement commitment of the Domestic Content Level. Price Preference is Not Calculated Procurement is conducted without calculating the price preference in order to determine the bidding evaluation price, if: (i) The procurement is conducted with the direct appointment method; or (ii) It is believed that in Indonesia, there is no company that can produce goods with the specification and technical quality standard to meet the needs; or (iii) In order to provide half the need for goods which are impossible to be provided from domestic sources because production capacity in Indonesia is not enough to provide the needs in the required time; or (iv) The procurement has a maximum value of Rp. 1,000,000,000.00 (one billion Rupiah) or a maximum value of US$ 100,000.00 (one hundred thousand United States Dollar) which is not the result of package splitting, and it is not domestic production of goods procurement which is included in the compulsory use category. The New Procurement Guidelines are made to make Domestic Investment Companies significant business actors in the oil and gas upstream business activities. Domestic Investment Company status gives an advantage based on price preference that can be used in the evaluation price stage in order to determine a procurement-bidding winner. However, the price preference is only one of the elements used in order to determine a procurement-bidding winner and does not guarantee a victory in procurement-bidding activities. Therefore these New Procurement Guidelines will not immediately eliminate opportunities for other than the Domestic Investment Companies in procurement-bidding activities.

The Procurement for the Foreign Companies Foreign Companies may participate in import goods procurement activities with a value more than Rp. 25,000,000,000.00 (twenty five billion Rupiah) or more than US$ 2,500,000.00 (two million five hundred thousand United States Dollars), with an obligation to cooperate in the form of agency with Domestic Investment Companies or as a consortium partner. Such cooperation shall be set forth in an agreement and become a part of the bidding document and become one of the engagement elements in the procurement contract. Procurement of information technology software may conducted directly with Foreign Companies in foreign countries, prior to the approval of BP MIGAS, for: (i) Goods/services which are attached requirement of proprietary right; and with the

(ii) In Indonesia, there is no supplier of goods/services which acts as an agent or the representative or license owner, or the owner of the proprietary right is unwilling to appoint an agent or representative in Indonesia. Inconsultancy service procurement, Foreign Companies may participate if the value is more than Rp. 10,000,000,000.00 (ten billion Rupiah) or more than US$ 1,000,000.00 (one million United States Dollar) with an obligation to cooperate in the form of a consortium with a Domestic Investment Company or subcontract to a Domestic Investment Company which shall be set forth in an agreement and become a part of the bidding document and become one of the engagement elements in the procurement contract.

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The Cabotage Principles and its Implementation in Indonesia Subsequent to the Issuance of the Regulation of the Minister of Transportation Number 48 Year 2011 regarding the Procedures and Requirements for Granting Permission to Use Foreign Vessels for Other Activities Excluding Passenger and/or Cargo Transportation in the Domestic Sea Transportation Activities
By: Erin Diananita (HHR Lawyer)

As an archipelago country which 2/3 of its territory contains of water1, it is obvious that the water transportation is significantly crucial for the defense and the economic growth of Indonesia. As it has been realized that the water transportation has a significant role in connecting between regions, either nationally or internationally, therefore it is important to develop the potential and roles of water transportation, especially the sea transportation. Further such development in potential and roles of sea transportation is crucial to be carried out for supporting the national development as to increasing the welfare of the nation as well as to unifying the territory of the Republic of Indonesia.

Indonesia, shall bear the Indonesian flag and be operated by Indonesian citizens. The prohibition as set out in the Law 17/2008 and GR 20/2010 is being known as cabotage principle, which principle commenced as of the effectuation of Law 17/2008 on May 7th, 2008. Lack of Sufficient Vessel It is clearly stated above that the GR 20/2010 prohibits the usage of foreign vessels for any activities in carrying passengers and/or goods. However, on the other hand, it is undeniable that the usage of foreign flagged vessels is significantly essential, especially for supporting the mining activities of offshore oil and gas.

In view of the important and strategic role of the sea transportation, which dominates the lives of the people, The availability of the the existence of such vessels for the mining GR 22/2011 and RMT 48/2011 provide transportation is activities as mentioned controlled by the state exception or dispensation for foreign vessels above currently cannot be which implementation from the cabotage principle to participate in fulfilled by Indonesian and development are activities offshore Indonesia. flagged vessels, due to the carried out by the fact that the procurement government. of these vessels require a considerable amount of The realization of the said control by the government is investment, advance technology, and the number of such regulated in the shipping law of the Republic of vessels as well as the experts to operate the vessels are Indonesia. As publicly known, since the issuance of the very limited, while on the contrary the usage of those Law Number 17 Year 2008 regarding Shipping Law vessels is global in nature and unsustainable. (Law 17/2008), which is reinforced by the Government Since the occurrence of the lack of sufficient vessels, The Regulation of the Republic of Indonesia Number 20 Year implementation of cabotage principle could not be done 2010 regarding Water Transportation (GR 20/2010), consistently in exploration and exploitation of oil and gas foreign vessels are prohibited to carry any passengers in water territorial or offshore because there is no or not and/or goods between islands and between ports within enough supporting vessels for oil and gas operational in the territorial water of Indonesia. Every vessels which Indonesian flagged. sails and conducts shipping activities in the territory of
1

http://indomaritimeinstitute.org

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This lack of sufficient vessels condition will cause the disturbance of activities related to offshore oil and gas, which affect to national energy security and continuous national development. Such effect will further have adverse effect to the economic sector in Indonesia. The exception In the beginning of this year, the government of Indonesia issued the Government Regulation of the Republic of Indonesia Number 22 Year 2011 regarding Amendment to the Government Regulation Number 20 Year 2010 regarding Water Transportation (GR 22/2011). The government also issued the Regulation of the Minister of Transportation Number 48 Year 2011 regarding the Procedures and Requirements for Granting Permission To Use Foreign Vessels for Other Activities that do not Include Passenger and/or Cargo Transportation in the Domestic Sea Transportation Activities (RMT 48/2011), as its technical regulation. GR 22/2011 and RMT 48/2011 provide exception or dispensation for foreign vessels from the cabotage principle to participate in activities offshore Indonesia. The issuance of the regulation is expected to enable Indonesia to come out of the dilemmatic situation caused by the legislative demands and the demands from business communities in Indonesia's offshore oil and gas sector. GR 22/2011 has been issued on April 4th 2011 to allow certain types of foreign vessels for shipping activities such as: supporting activities for oil and gas survey, drilling, offshore construction, DSV for offshore construction, supporting offshore operations, dredging, and underwater salvage and works to operate in Indonesia. The abovementioned activities can only be carried out if the foreign vessels have met the following requirements: 1) Foreign vessels are allowed to conduct other activities excluding the transportation activities of passengers and/or goods in domestic sea transportation activities within Indonesian waters, provided that Indonesian flagged vessels are not available or are not sufficiently available.

2) Foreign vessels as mentioned in paragraph (1) are obligated to obtain permition from the Minister of Transportation of the Republic of Indonesia (Minister). The followings are the details of the activities that are not included in the transportation of passengers and/or goods in domestic sea transportation activities within Indonesian waters: 1. Survey of oil and gas, which includes: a. Seismic survey; b. Geophysical survey; and c. Geotechnical survey. 2. Drilling, which includes: a. b. c. d. e. jack up rig; semi submersible rig; deep water drill ship; tender assist rig; and swamp barge rig.

3. Offshore construction, which includes: a. derrick/crane, pipe/ cable/ Subsea Umbilical Riser Flexible (SURF) laying barge/ vessel; and b. Diving Support Vessel (DSV). 4. Supporting offshore operations, which includes: a. anchor handling tug supply vessel more than 5000 BHP with Dynamic Position (DP2/DP3); b. platform supply vessels; and c. Diving Support Vessel (DSV). 5. Dredging; which includes: a. drag-head suction hopper dredger; and b. trailing suction hopper dredger. 6. Salvage and underwater works, which includes: a. heavy floating crane; b. heavy crane barge; and c. survey salvage. The permit to use the foreign vessels is granted by the Minister subsequent to the compliance of the administrative requirements and it has been proven by the

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announcement of the auction that there has been an effort in procuring the Indonesian-flagged vessels. Pursuant to the RMT 48/2011, the permit to use the foreign vessels as reffered in Article 2 paragraph (2) will be granted by the Minister subsequent to the compliance of following administrative requirements: a. work plan that is accompanied by the time table and activities working area that has been marked by geographic coordinate; b. to own a charter party between national sea transportation company and foreign vessels owner as well as work agreement and/or Letter of Intent (LOl) from the employee; c. copy of Sea Transportation Business License (Surat Izin Usaha Perusahaan Angkutan Laut - SIUPAL); d. copy of Nationality certificate/vessels registration; e. copy of vessel safety and security Certificate; f. copy of Vessel Pollution prevention Certificate; g. copy of Vessel classification Certificate; h. copy of list of the vessel crew; and i. copy of safety management Certificate. This usage of foreign vessels permition will be given for maximum 3 (three) months and may be extended after an evaluation.

Based on the MRT 48/2011, the grace period for the usage of foreign-flagged vessels in the oil and gas activities in Indonesia are given as follows: Type of Activity Oil and gas survey Drilling Offshore construction DSV for offshore construction Supporting offshore operations Dredging Underwater Salvage and Works Time December 2014 December 2015 December 2013 December 2012 December 2012 December 2013 December 2013

Therefore, although it is prohibited, there is still a possibility for foreign-flagged vessels to be utilized in Indonesia, for so long the activity carried out by foreignflagged vessels is allowed and the implementation of such activity is carried out by national sea transportation company.

All articles and information in this Newsletter inevitably contain generalizations on the matters in question and should not be regarded as presenting definitive legal advice, nor is it intended to provide the reader with the substitution expert legal advice. The reader should be aware that the Indonesian laws are constantly changing from time to time and this article only reflects the prevailing laws and regulations, which are applicable at the time of writing. Therefore, any specific issues raised by reader in connection whit the relevant matter will require further legal consultation.

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