20 May, 2013

The Special Working Unit for Upstream Oil and Gas Business Activities (“SKK MIGAS”) issued a Decision Letter on April 3, 2012, amending part of its guidelines dealing with local content and domestic company preferences (the “Amendment”) in the context of the procurement of goods and services. PTK 007 Rev. 2 has been issued by SKK MIGAS to all production sharing contractors.

We will focus on the domestic company preference. Under this preference, if a domestic company participates solely or as a leader of a consortium in a tender for an oil and gas project, its bid will be entitled to a pricing preference of 5 percent, meaning that if its bid is within 5 percent of the lowest bid, it will be awarded the tender, all other factors being equal.

Prior to the Amendment, the SKK Migas procurement rules provided that a domestic company was one that was owned 51 percent directly or indirectly by Indonesian shareholders. This requirement itself raised issues whether it unlawfully discriminated against companies formed under Indonesia’s Investment Law that were majority foreign-owned. The Investment Law requires that PMA companies (i.e., companies with foreign investment) be treated equally with companies owned by Indonesian nationals. At least one international business association has filed a protest with the Government of Indonesia about such discrimination.

The Amendment now imposes more stringent requirements to be classified as a domestic company. The minimum 51 percent Indonesian shareholding must consist of voting shares with dividend rights and two-thirds of its Board of Directors must be Indonesian nationals, one of whom must be the President Director and one of whom must be the Finance and Business Development Director.

The Indonesian Company Law permits non-voting shares, which the Amendment now disqualifies from preference consideration. Under the Indonesian Company Law, all shares are required to have dividend rights and thus all Indonesian companies must comply with this requirement in any case. The requirements imposed on the Board of Directors are new.

These rules apply immediately to all tenders unless the tender offer documents have already been submitted under the one or two envelope procurement method or unless a price offer has been submitted under the two-phase system. This latter exception means that if a bidder has already submitted the technical data for phase one, it must nonetheless conform to the new requirements if it has not yet filed its financial bid.

A company that violates these provisions is subject to disqualification from the tender and can be prohibited from future bids for one year with either that production sharing contractor or all production sharing contractors. It is also subject to a financial penalty if it performs the contract but is subsequently found to not qualify as a domestic company.

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