2017 Project Finance Report: Indonesia

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Several projects reached financial close in 2016 using project financing.

The 2,000MW Central Java Power Plant Project finally reached financial close in the first semester of 2016, with co-financing from JBIC and several other banks, where JBIC provided political risk guarantee for the portion financed by private financial institutions.

Several infrastructure financing institutions, such as PT Sarana Multi Infrastructure (persero) and PT Indonesia Infrastructure Indonesia have also closed funding for several infrastructure projects. Some of the notable projects are the Fiber Optic Palapa Ring Projects, which are divided into three project packages covering the eastern, central and western package. The Palapa Ring project includes the newly introduced availability payment scheme.

Most of the financing techniques are still adopting the traditional project finance approach.

Several multilateral and international financial agencies such as International Finance Corporation, Asian Development Bank, and Japan International Cooperation Agreement have been very active in promoting foreign investment in large and strategic projects, with special attention to the energy, renewable and infrastructure sectors. The roles of these agencies are varied and include providing technical assistance to the government or contracting agency and making investments either by providing quasi-equity or senior debt funding.

PPP projects in Indonesia are generally regulated under Presidential Regulation 38 of 2015 on Cooperation between the Government and Business Entities in Infrastructure Provision. This regulation generally allows for greenfield and brownfield projects, although regulations for some sectors (such as ports, airports and railways) provide that brownfield projects are to be implemented through state-owned enterprises.

A concessionaire would generally be allowed to grant security interests in the project to its lenders (so long as the project assets are owned by the concessionaire), subject to consent from the government or relevant contracting authority. Security interests are not allowed to be created over state-owned assets or region-owned assets.

Foreign investment generally requires an approval from the Capital Investment Coordinating Board (BKPM) and the establishment of an Indonesian limited liability company. Investment in certain sectors such as upstream oil and gas, banking and construction services may also be made through the creation of a licensed permanent establishment.

The Negative List of Investment (most recently updated in 2016) identifies business sectors which are closed to foreign investment or open to foreign investment subject to conditions. These conditions may include participation of a domestic shareholder at a minimum ownership level, partnership requirements or special licensing requirements. Sectorial regulations may also stipulate restrictions on foreign investment.

Foreign investments may benefit from various fiscal incentives.

BKPM and other competent authorities may block a transaction that does not conform to applicable investment restrictions. The Commission for the Supervision of Business Competition (KPPU) may compel the unwinding of a transaction that has an anticompetitive effect. Indonesian courts are also able to invalidate transactions ab initio (as if they never occurred) on the basis that the terms of the transaction are contrary to the public order, although this is an exceptional remedy.

Payment of income or revenue by an Indonesian tax resident to a non-Indonesian tax resident, including payment of interest or dividends, would be subject to withholding tax at a rate of 20%. A lower rate may be applicable if there is a double tax agreement between Indonesia and the country of domicile of the payee. The payee would need to present a pro forma certificate of domicile to apply for such lower rate.

For purposes of overseeing foreign currency transfers, a purchaser of foreign currency equal to $100,000 or its equivalent is required to provide the bank with which it is transacting with a copy of the underlying transaction documents, providing a basis for the foreign currency payment, and other administrative documents.

A project company is generally allowed to open onshore and offshore foreign currency accounts. Bank Indonesia requires, however that any proceeds from export and loan withdrawals (some exceptions apply) must be received via onshore accounts in foreign exchange banks (bank devisa) appointed by Bank Indonesia.

Indonesia's Insurance Law generally requires that insurance businesses are only allowed to be performed by a licensed insurance company established under Indonesian law. A foreign insurance company could establish and operate an Indonesian insurance company subject to certain foreign investment restriction. The project company may procure insurance coverage from a foreign insurance company if the required insurance coverage is not available in the domestic insurance market.

Reinsurances by foreign reinsurance provider are quite common in the Indonesian market. Some reinsurance arrangements may have adopted the cut-through clauses; however the position of Indonesian law concerning this is not very clear.

An Indonesian person or entity may submit to a foreign jurisdiction, but Indonesian courts do not enforce judgments from foreign courts. Foreign court judgments may be considered as evidence in a new court proceeding in Indonesia.

Indonesian law is unclear as to the authority to waive sovereign immunity but it is generally accepted that sovereign immunity does not apply to acts in a commercial transaction under a private (jure gestionis) capacity. Government assets are immune from any form of seizure or encumbrance.

The choice of foreign laws (including English and New York law) could be recognised as a valid choice of law, as long as there there is a connection with the jurisdiction so chosen. This connection may be established in a number of ways, including the nationality of the parties to the contract, the object of the contract, or the place where the contract is to be performed.

Any award rendered by foreign arbitral tribunals would be recognised and enforced by the competent courts of Indonesia on the conditions that:

• the award is rendered in a country with which the Republic of Indonesia is bound by a treaty, either bilateral or multilateral, concerning the recognition and enforcement of international (foreign) arbitration awards;

• the award arises out of a dispute which is commercial in nature;

• the award is not contrary to public order;

• the award is registered with the clerk of the Central Jakarta District Court; and

• an exequatur (certification) from the chairman of the Central Jakarta District Court is obtained.

All the assets of the project company would be put as security. The types of security would depend on the types of assets. The typical security are likely to be:

• mortgage (hak tanggungan), which encumbers land, buildings, and other immovable properties;

• pledge (gadai), which encumbers movable property, which commonly include project company's bank accounts and each sponsor's shares in the project company (or intermediaries);

• fiducia security (jaminan fidusia), which encumbers movable property, certain immovable property, and intangible assets, which commonly include receivables, insurance proceeds, machinery and inventories; and

• hypothec (hipotik), which encumbers registered ships with a gross volume of 20 cubic metres or more.

In addition to the above, quasi-security may be provided in the form of powers of attorney or conditional assignments over the material contracts (for example power purchase agreements and any other project documents), among other arrangements.

In the context of project finance in infrastructure provision, the land would typically be owned by the government or the contracting party; in which case the land in question is not allowed to be encumbered.

Indonesian law does not provide a clear guidance on subordination of claims by contract. However, it has become an acceptable practice for sponsors and other junior creditors to enter into foreign law subordination deed or agreement with senior creditors.

For a mortgage, the security interest will be created upon registration of the mortgage deed with the applicable national land agency office. Creation of a second ranking mortgage is possible.

For fiduciary security, the security interest will be created upon registration of the fiduciary security deed with the relevant fiduciary registration office. In addition, for fiduciary security over intangible assets, to make the fiduciary security binding against the account debtor (the payer of the receivable), the account debtor must be notified of, and acknowledge, the creation of the fiduciary security. A filing with the fiduciary registration office will be invalid if the relevant property is already encumbered by another fiduciary security interest.

For a pledge, the pledge will be created after the signing of an instrument agreeing to the terms of the pledge (a deed or an agreement) and: in the case of tangible movable property, delivery of the property from the pledger to the pledgee or its agent; in the case of a bank account, notification to, and acknowledgement by, the bank where the bank account is located; and in the case of shares of a company, annotation of the pledge in the share register of the company.

For each of the security interests, the secured creditor holds a priority claim over the proceeds from the sale of the encumbered assets, subject to costs associated with foreclosure and taxes.

Fees, taxes and other charges include notarial fees, land deed officer's fees, nominal stamp duty and registration fees. Notarial fees are generally negotiable. For a mortgage, the land deed officer usually charges a percentage of the property value, although in some cases the fee may be negotiated.

Registration of fiduciary security interests and mortgages require the payment of registration fees based on the value of the security.

Fiduciary security interests may be granted in favour of a lender's representative or proxy. The position with respect to mortgages and pledges is not expressly stipulated by law but the use of an agent or proxy acting on a lender's behalf as security agent is generally accepted practice. Trusts are generally not recognised under Indonesian law. In practice, international financings commonly utilise an onshore security agent (usually an Indonesian bank), with the terms of the appointment governed by foreign (non-Indonesian) law.

All creditors' claims will be subject to a stay of 90 days following a bankruptcy declaration (the day on which the commercial court declares that the company is bankrupt). A creditor is not allowed to exercise its rights against the company's assets during the stay. The stay does not apply to creditors' claims secured by cash collateral and creditors' set-off rights.

Legally, a project lender (secured party) would have the right to immediately sell the encumbered assets through a public auction by an authorised auction house, without a court order. In practice, however, an auction house may be reluctant to execute the auction without a court order. A project lender would normally be expected to file an application for writ of enforcement with the relevant district court.

The enforcement may also be done by way of a private sale with the consent of the debtor, provided that there are no objections from any third parties. Consent of the debtor must be granted after default has occurred. With respect to mortgages and fiduciary security, the intention to hold a private sale must be notified to the relevant parties and published in printed media one month prior to the date the private sale is to be carried out.

Indonesia's Bankruptcy Law recognises the concept of curator (kurator) during bankruptcy proceedings. The role of receiver outside of bankruptcy proceedings (as is understood in commonwealth jurisdictions) is not recognised. Specifically for a mortgage, however, a mortgage deed may authorise the mortgagee to manage the encumbered assets based on court approval.

About the author
		Jardin Bahar Senior partner, Hermawan Juniarto Jakarta, Indonesia T: +62 21 2995 9057 E:jbahar@hermawanjuniarto.com W: www.hermawanjuniarto.com Jardin Bahar is an Indonesian qualified attorney, whose practice covers various corporate and transactional matters in Indonesia. He has strong capabilities in the area of project construction and finance. His in-depth knowledge of the Indonesian infrastructure regulatory framework (particularly relating to public-private partnerships) combined with his familiarity with international transaction practice has put him as the leading attorney in the infrastructure field in Indonesia. He has advised and been involved in several major infrastructure projects in Indonesia.

About the author

Gadis Dewi A Sari Counsel, Hermawan Juniarto Jakarta, Indonesia T: +62 21 2995 9057 E: gdasari@hermawanjuniarto.com W: www.hermawanjuniarto.com Gadis Sari is involved in infrastructure and banking and finance works. She has advised wide range of clients from governmental authorities and state-owned enterprises to private entities including international financial institutions and banks. During her early years with the firm she focused on infrastructure projects and regulatory works, where she gained her understanding of Indonesia's legal framework and business climate. She specialises in general banking and has experience acting for both lenders and borrowers on finance transactions including corporate lending, restructuring and project finance. She is also familiar with equity and mezzanine financing transactions. Her representative clients include Standard Chartered Bank Group, PT Sarana Multi Infrastruktur (Persero), PT Indonesia Infrastructure Finance and the International Finance Corporation (IFC).