Trade and Project Financing in Indonesia

A Hot Tip about Banking and Finance in Indonesia

Posted on: 3 Mar 2010

How Do I Get Paid (Methods of Payment)

U.S. firms exporting to Indonesia use a variety of payment methods depending on their relationship with the purchaser. Payment options for export transactions include letters of credit (L/C), cash in advance, wire transfer, cash on delivery and open account. Confirmed, irrevocable letters of credit, while imposing additional costs, minimize risks faced by the exporter. A Ministry of Trade regulation (No.1/M-DAG/PER/1/2009), effective March 5, 2009, will require the use of a letter of credit through a domestic foreign exchange bank for exports of specified commodity exports, including coffee, CPO, cocoa, rubber, and mining products. The Ministry is planning to issue additional implementing regulations to further clarify the new requirement.

 

How Does the Banking System Operate

The Indonesian banking system has consolidated significantly in the wake of the Asian financial crisis. As of end-2008, Indonesia had 126 commercial banks and 1,769 rural banks. Banks continue to dominate Indonesia’s financial system and as of end-2007, banks held 79 percent of total financial system assets. The 15 major banks contain 70 percent of bank assets. There are five state-owned banks: Bank Mandiri, Bank Negara Indonesia, Bank Raykat Indonesia, Bank Tabungan Negara, and Bank Ekspor Indonesia (BEI). Bank Indonesia (BI), the central bank of Indonesia and an independent state institution, regulates key aspects of the banking and financial system, including bank regulation and supervision. Indonesia is encouraging the development of Islamic banking and seeks to increase its share of total banking assets to over five percent. As of November 2008, Islamic banking institutions in Indonesia comprised less than two point one percent of total banking system assets. In October 2008, the government raised the Deposit Insurance Corp. (LPS) guarantee on bank deposits to Rp.2 billion (about US$180,000) from Rp.100 million. Only those accounts carrying interest rates equal to or below LPS maximum guaranteed reference rates are deemed eligible for LPS deposit guarantees. As of January 15, 2009, those rates were nine point five percent on rupiah deposits and three percent on dollar deposits.

 

State-owned Bank Ekspor Indonesia (BEI) provides competitive export financing and advisory and other exported related services. The export credit agency’s goal is to help promote access to worldwide markets for Indonesia’s export-related commodities, support Indonesia’s international trade, and improve Indonesian exporter competitiveness in global markets. In December 2008, Indonesia’s legislature approved a law to establish an Indonesian Export Financing Agency (LPEI), which will operate under the name of Indonesia Eximbank. LPEI will provide export-related financing, guarantees, insurance and consultancy services. LPEI is slated to begin operations within nine months of promulgation of this law. When LPEI commences operation, BEI will be dissolved and all assets, liabilities, legal rights and responsibilities will transfer to LPEI. BEI services include:

• Export Working Capital Guarantees: a guarantee for commercial banks providing export working capital financing to exporters;

• Letters of Credit (L/C): BEI provides L/C facilities to Indonesians who import raw materials, spare-parts, and machinery for export production;

• Standby Letters of Credit: BEI provides these facilities to exporters in breach of L/C agreements;

• Discount Export Bills: a financing facility allowing exports to receive immediate payment for their exports;

• Investment Loans: financing for new investment in machinery, procurement, building and infrastructure (including interest during construction) for export purposes;

• Working Capital Loans: financing facilities to provide working capital to exporters;

• Warehouse Receipt Financing: a facility that lends working capital to pay actual warehouse services;

• Trust Receipts: a financing facility for exporters to pay their L/C sight payment for imported/local goods procurement for export purposes;

• Advisory Services: in addition to providing export/import financing, BEI also provides advisory services to exporters. These services include: trade finance training for the banking sector and exporters; provision of technical assistance in setting up trade finance systems; policy and procedures training for the banking sector and other related export players; consultations on international trade rules; and provision of international trade policy advice to policy makers.

 

PT. Bank Ekspor Indonesia is located at Gedung Bursa Efek Jakarta, Tower II 8/F, Jl. Jend. Sudirman, Kav 52-53, Jakarta. Tel: +62 21 515 4638, Fax: +62 21 515 4639.

 

Foreign-Exchange Controls

Indonesia maintains an open capital account, but with some transaction limitations. Only authorized banks may carry out foreign trade related exchange operations. In November 2008, BI imposed a new requirement for the submission of evidence of underlying transactions to support the purchase of a foreign currency against the rupiah through banks exceeding $100,000 per month (regulation 10/28/PBI/2008). For foreign parties (foreign citizens and foreign legal entities), this regulation governed the purchase of foreign currency against the rupiah in spot transactions. BI regulation No. 7/14/PBI/2005, dated June 14, 2005 describes prohibitions and restrictions in conducting foreign exchange transactions with foreign counterparts. The limit on transaction amounts for commercial banks engaging in derivative transactions with foreign counterparts was lowered from $3 million to $1 million. This limit covers all types of transactions involving foreign exchange selling and purchasing against the rupiah, previously unrestricted. However, the restrictions will not apply if the derivative transactions are conducted for hedging purposes within the framework of an investment in Indonesia that will last for at least three months. The regulation also requires foreign or domestic currency lending to foreign counterparts to be conducted in the form of a syndicated loan that engages a prime bank (that is, commercial banks with a certain investment rating from a well know rating agency) as lead bank for the purpose of project financing in the real estate sector in Indonesia. The regulation fines a flat rate of 10 percent of the amount of the violating transaction. This is more stringent than under the previous regulation, which provided a fluctuating rate. BI hopes that the regulation will reduce foreign exchange movement that is not related to a genuine underlying purpose.

 

In line with anti-money laundering laws, Indonesia tightened its restrictions on the amount of cash that may be carried across its borders. Carrying more than Rp100 million (approx. US $9,000) in or out of Indonesia now requires prior approval from BI, and must be reported to the Director General of Customs and Excise (DGCE).

 

Project Financing

Indonesia has prioritized infrastructure development in its medium-term strategy, or Rencana Pembangunan Jangka Menengah (RPJM), and allocated increased resources to infrastructure projects in its 2008 and 2009 budgets. It is also receiving significant funding for a variety of infrastructure projects and other development priorities from multilateral development banks, primarily the World Bank and Asian Development Bank (ADB). American firms can participate in projects funded by these institutions. Information on projects and procedures is available through U.S. Commercial Service officers assigned to each multilateral development bank as well as commercial officers in individual countries.

 

World Bank

The World Bank Group is a multilateral lending agency consisting of five closely related institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Center for Settlement of Investment Disputes (ICSID). The World Bank provides concessional loans to developing countries to help reduce poverty and to finance investments that contribute to economic growth. (See Chapter XI for contact information.)

 

--The International Bank for Reconstruction and Development (IBRD) The IBRD provides funding for creditworthy developing countries with relatively high per capita income, as well as technical assistance and policy advice. Loans are made only to governments or to agencies that can obtain a government guarantee. The IBRD also provides partial risk or partial credit guarantees (with a counter-guarantee from their government) to private lenders on development projects. Opportunities exist for U.S. companies to supply goods and services in connection with these loans.

 

-- The International Development Association (IDA) provides assistance on concessional terms to the poorest developing countries that are not sufficiently creditworthy for IBRD financing. As a middle-income country, Indonesia has graduated from IDA. Its access to IDA ceased in June 2008.

 

As of end-June 2008, the World Bank’s active financing portfolio in Indonesia comprised 27 projects with total net commitments of over $2.9 billion. In late 2008, the Bank also approved two Development Policy Loans totaling $950 million (a $750 million loan to support government reform efforts to improve the investment climate, strengthen public financial management and governance and enhance policy alleviation and service delivery efforts, and a $200 million infrastructure development loan to increase the level and effectiveness of infrastructure financing by addressing financing directly provided by the national government, incentives for sub-national governments to improve infrastructure delivery, and the policy environment for private infrastructure investment).

 

World Bank support of Indonesia’s infrastructure priorities in its medium-term development strategy includes a substantial program of investment lending, including supporting development of strategic roads infrastructure, energy and water (utilities, sanitation, irrigation). In the energy sector, the Bank is assisting the State Power Company (PLN) to upgrade its transmission network to eliminate system bottlenecks and to improve its performance under the Java-Bali Power Sector Project and the State Gas Company (PGN) to expand its gas supply infrastructure to address supply shortfalls in Java through the Domestic Gas Market Development Project. The Bank is engaged in supporting water and solid waste management projects, in restructuring the state-owned water utilities (PDAMs); and providing assistance for physical investments in developing compost plants and landfill sites. In addition, a large community-based urban poverty program covering 236 local government and more than 6,500 districts has been developed so that more than 2.7 million households benefit from infrastructure activities. The program also supports improvement of urban service facilities for 13 urban local governments under the Urban Sector Development Reform Project. The World Bank also manages a $697 million Multi-Donor Trust Fund for Aceh and Nias for post-disaster reconstruction through a portfolio of 20 projects.

-- The International Finance Corporation (IFC) is an affiliate of the World Bank that provides project financing for private investment in developing countries. IFC offers long-term loans and equity investments, as well as other financing services. Unlike the IBRD and IDA, the IFC does not require government guarantees. IFC has a committed investment portfolio of $695 million in Indonesia, of which 57 percent is invested in financial markets projects, 24 percent in agribusiness and 17 percent in manufacturing. In FY07, IFC committed $278 million to seven projects in Indonesia. IFC expects to invest about $300 million annually in Indonesia in priority sectors of finance, infrastructure and commodity-based supply chains. U.S. companies seeking investment funds should contact the IFC directly.

 

-- The Multilateral Investment Guarantee Agency (MIGA) promotes the flow of foreign direct investment among member countries by insuring investments against non-commercial (political) risk and by providing promotional and advisory services to help member countries create an attractive investment climate. Indonesia is a member of MIGA. U.S. companies seeking investment guarantees should contact MIGA. .

Contact information for the World Bank and the U.S. Commercial Service Liaison staff at the bank is available in Chapter XI. An excellent resource for all the multilateral development banks is the Office of Multilateral Development Bank Operations at the Department of Commerce. Services offered include a newsletter, counseling center, referrals and business outreach.

 

Asian Development Bank

Indonesia was a founding member of the ADB in 1966 and, by the end of 2007, had received 291 loans amounting to $22.56 billion, and 491 technical assistance (TA) projects amounting to $253.66 million. Measured by loan approvals, Indonesia is ADB’s largest client, and its second largest recipient of TA support. Indonesia graduated from eligibility for Asian Development Fund resources at the end of 2008 and will be reclassified from January 1, 2009 as a borrower eligible for only ADB Ordinary Capital Resources. The ADB planning process allocated an overall OCR envelope of US$1.2 billion for sovereign operations during 2009-2011. ADB provides a mix of program loans to support policy and investment loans. Priority areas for project financing are consistent with the government’s medium-term strategy and include the following: infrastructure; energy; transport and communications; water, sanitation and waste management systems; education; and integrated water resource and flood management. Proposed lending products and services in 2009 include energy efficiency (rehabilitating equipment and optimizing energy flow through existing distribution networks) and metropolitan sanitation management (improving solid waste collection and treatment in large urban areas, including Medan, Makassar and Yogyakarta). ADB tenders are generally conducted based on international competitive bidding standards.

 

Islamic Development Bank

The Islamic Development Bank (IDB) seeks to foster the economic development and social progress of member countries and Muslim communities through participation in equity capital and grant loans for projects, as well as providing other types of financial assistance. The IDB has an active program in Indonesia.

 

The U.S. Export-Import Bank

The mission of the Export-Import Bank of the United States (Exim) is to assist in financing the export of U.S. goods and services to international markets. Ex-Im provides export credit insurance, loan guarantees and project and structured finance for U.S. exporters and foreign buyers of U.S. goods and services. On January 12, 2009, the Government of Indonesia enacted the new Aviation Law. The new law implements the provisions of the Cape Town Convention on International interests in mobile aircraft equipment. This treaty provides a system of registration and recovery that assures lenders protection of their interests. With the new legislation Exim will be able to proceed in financing aircraft sold and leased to Indonesian companies. Please refer to Exim’s “country limitation schedule (CLS)” for current program coverage in Indonesia.

 

Overseas Private Investment Corporation (OPIC)

The Overseas Private Investment Corporation plays an important role in helping U.S. firms reach expanding markets. OPIC assists American investors through four principal activities:

- financing of businesses through loans and loan guarantees;

- supporting private investment funds;

- insuring investments against a broad range of political risks; and

- engaging in outreach activities designed to inform the American business community of investment opportunities overseas.

 

Investors are urged to contact OPIC directly for up-to-date information concerning availability of OPIC services in Indonesia. Project financing is crucial in successfully capturing business in Indonesia, especially for engineering services, project management or “big-ticket” purchases. American companies often compete with third country companies offering concessionary financing through soft loans, so it is vital to offer the best financial terms commercially available. Grant assistance available through the Trade and Development Agency can be used to offset government financing offered by the Government of Japan, European Union members, and others.

 

 

 

Read the full market research report


Posted: 03 March 2010

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