Jardin Bahar and Justin Patrick of Hermawan Juniarto outline Indonesia's project financing framework

SECTION 1 – Collateral/security

1.1 What types of collateral/security are available?

Collateral and security available includes:

  • mortgage (hak tanggungan), which encumbers land, buildings and other immovable properties;
  • pledge (gadai), which encumebrs movable property that is physically delivered to the pledgee and intangible assets (for example, shares of a company or monies on deposit in a bank account);
  • fiduciary security (jaminan fidusia), which encumbers movable property and certain immovable properties that are not eligible to be encumbered by a mortgage (which, in each case, may remain in the possession of the grantor), and intangible assets (for example, receivables, insurance proceeds and intellectual property rights);
  • security over movable goods described in a warehouse receipt (a document issued by a warehouse manager evidencing the ownership of eligible goods stored in a warehouse);
  • hypothec (hipotik), which encumbers registered ships with a gross volume of 20 cubic metres or more; and
  • international interests in certain airframe, aircraft engines and helicopters, which are encumbered by a security agreement, title reservation agreement, or leasing agreement (governed by foreign or Indonesian law).

In addition, quasi-security may be provided in the form of powers of attorney or conditional novations of contracts, among other contractual arrangements.

SECTION 2 – Perfection and priority

2.1 How is a security interest in each type of collateral perfected and how is its priority established?

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 payor 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: (i) in the case of tangible movable property, delivery of the property from the pledgor to the pledgee (or its agent); (ii) in the case of a bank account, notification to, and acknowledgement by, the bank where the bank account is located; and (iii) 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.

2.2 How can a creditor assure itself as to the absence of liens with priority to the creditor's lien?

For land rights, a creditor may procure a title and lien search, by a licensed land deed officer, at the applicable national land agency office. Conducting the search requires the original title certificate and a power of attorney from the land right holder.

For movable properties, a creditor may procure a search, by a licensed notary, at the fiduciary registration office in the location where the asset owner is domiciled, although such searches are not frequently carried out in practice. The search may require several days of manual review of physical records, and results may not be reliable. (An electronic filing system was recently introduced, and this may facilitate more accurate searches).

The absence of a pledge over shares can be confirmed by review of the share register of the company that has issued the shares. It is not possible to confirm the absence of a pledge over other types of assets.

2.3 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?

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.

2.4 May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party?

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.

SECTION 3 – Foreign investment and ownership restrictions

3.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?

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 2014) identifies business sectors which are closed to foreign investment or open to foreign investment subject to conditions. Conditions may include participation of a domestic shareholder at a minimum ownership level, partnership requirements or special licensing requirements. Sectoral regulations may also stipulate restrictions on foreign investment.

Foreign investments may benefit from various fiscal incentives.

3.2 Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Indonesia is party to numerous bilateral and multilateral treaties to promote investment and trade. These treaties do not provide a basis for relief from restrictions under domestic law (although there are some cases where domestic law provisions have been amended to conform with treaty provisions). In 2014, the Indonesian Government announced its intention to terminate existing bilateral investment treaties. Although provisions vary, Indonesia's bilateral investment treaties generally provide that treaty protection is only available for investments that have been approved by the Government of Indonesia in accordance with applicable law.

3.3 Can a government authority block or unwind a transaction involving foreign investors after it has closed for strategic/national security or other reasons?

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 anti-competitive 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).

SECTION 4 – Documentation formalities and government approvals

4.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

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 on the authority to waive sovereign immunity, but it's generally accepted that sovereign immunity does not apply to acts in a commercial transaction under a private (jure gestionis) capacity. Under Indonesian law, government assets are imune from any form of seizure or encumbrance.

4.2 What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority?

Relevant government agencies include:

  • Sector regulators, such as the Ministry of Transportation, the Ministry of Energy and Mineral Resources, the Toll Road Authority (BPJT), the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas), and the Authority for Downstream Oil and Gas Business Activities (BPH Migas). These sector regulators authorise and monitor business activities and, in some cases, award projects and approve tariffs;
  • The Ministry of Finance, which regulates direct fiscal support (viability gap funding), government guarantees, tax incentives, and the utilisation of state-owned assets;
  • The Capital Investment Coordinating Board (BKPM), which approves and monitors the implementation of foreign investments.

Various other regulatory bodies at the national and regional level will be involved in particular aspects of a project (such as land usage, forest area usage, environmental impact, water usage and discharge, and road usage).

Planning agencies, such as the National Development Planning Agency of Indonesia (BAPPENAS), also play a key role in developing potential projects.

4.3 What government approvals are required in relation to environmental concerns for typical project finance transactions? What fees and other charges apply?

Indonesia's Environmental Law requires companies with business activities that have an environmental impact to complete an environmental impact assessment, known as an AMDAL. The State Minister of Environmental Affairs has specified categories of business activities that require preparation of an AMDAL. Business activities that do not require an AMDAL require either documentation of environmental management efforts and environmental monitoring efforts (known as UKL and UPL) or delivery of a Letter of Undertaking of Environmental Management and Monitoring (SPPL).

The Environmental Law provides that, as a prerequisite for the issuance of a business or activity permit, the applicant must complete an AMDAL, UKL or UPL, and obtain an environmental licence. Some other environmental permits may also be required, for example, permits for the handling, storage or transportation of hazardous waste (as necessary).

Additionally, a business may be required to obtain a nuisance permit (hinder ordonnantie or izin gangguan), under which periodic retribution must be paid to the regional government.

SECTION 5 – Bankruptcy proceedings

5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?

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.

5.2 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?

Indonesia does not recognise the appointment of a receiver (as the role is understood in commonwealth jurisdictions) outside of bankruptcy proceedings. Specifically for a mortgage, however, a mortgage deed may authorise the mortgagee to manage the encumbered assets based on court approval. Enforcement outside of court proceedings is further described under section 5.3.

5.3 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral/security?

Legally, a project lender (secured party) has the right to immediately sell the encumbered assets through a public auction by a licensed 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 is normally expected to file an application for writ of enforcement with the relevant district court. The process for obtaining a court order can take three to six months, assuming that there is no challenge from the debtor or any other interested parties.

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.

SECTION 6 – Foreign exchange, remittances and repatriation

6.1 What, if any, are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

Payment of income or revenue by an Indonesian tax resident to a non-Indonesian tax resident (including payment of interest or dividends) is subject to withholding tax at a rate of 20%. A lower rate may be applicable if there is a double tax avoidance 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 is required to provide the bank with which it is transacting a copy of the underlying transaction documents (providing a basis for the foreign currency payment) and other administrative documents.

6.2 Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

Indonesian companies are generally required to receive any export proceeds or disbursements of offshore loans through an onshore account in a foreign exchange bank. Failure to comply with this requirement results in monetary sanctions by Bank Indonesia (the central bank).

There is no specific requirement for foreign earnings to be converted into local currency. The Currency Law, however, imposes mandatory use of Indonesian rupiah for all transactions conducted within Indonesia. This covers payment and settlement of all domestic commercial transactions and obligations, but excludes: transactions related to the state budget; grants given by or to a foreign state; international commercial transactions; bank deposits denominated in foreign currencies; and international finance transactions.

6.3 What, if any, tax or other incentives are provided preferentially to foreign investors or creditors? What, if any, taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

The Investment Law allows for certain incentives, known as investment facilities, to foreign investors. These facilities include: income tax relief; exemption from, or reduction of, import duties over certain goods, machinery or raw materials; exemption from, or suspension of, value added tax on import; accelerated depreciation or amortisation; and, dispensation of land and building tax in certain areas. Other fiscal incentive programmes are available, depending on the sector.

See section 6.1 on withholding tax on remittance. See section 2.3 for fees relating to securities.

SECTION 7 – Public private partnerships

7.1 Is there a public private partnership act or similar statute authorising PPPs and are both greenfield and brownfield PPP projects permitted?

PPP projects in Indonesia are generally regulated under Presidential Regulation 67 of 2005 on Cooperation between the Government and a Business Entity in Infrastructure Provision, as amended. 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.

7.2 May a concessionaire grant security interest in the project to its lenders and, if so, is consent of the government or contracting authority required?

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.

7.3 Are government guaranties or other payment obligations of the government or contracting authority subject to appropriations or other periodic authorisations?

State ministries are only allowed to make fiscal commitments within the budget approved in the annual state budget. State ministries are allowed to make multi-year commitments for the procurement of goods or services with approval from the Minister of Finance.

The Minister of Finance has authority to approve direct fiscal support (in the form of viability gap funding) and government guarantees for certain PPP projects, which approval will be granted in advance of project implementation. No other periodic authorisations are required.

7.4 May the government or contracting authority unilaterally amend or terminate a concession?

Under the PPP regime, a concession would be granted through a cooperation agreement which stipulates the rights and obligations of each party, including the risk allocation of the project. The Government or contracting authority is not allowed to amend or terminate a concession unilaterally unless expressly permitted to do so in the cooperation agreement.

SECTION 8 – National update

8.1 In no more than 250 words, please describe any relevant project finance developments within your jurisdiction. This can include noteworthy projects, new structures or techniques.

Over the past five years, the Government has focused on developing various incentives and facilities for PPP projects. Some notable developments include:

  • promulgation of Law 2 of 2012 on Land Procurement in the Public Interest, which provides a procedure for compulsory acquisition of land rights to be used for public infrastructure;
  • development of a government guarantee framework and establishment of the Indonesia Infrastructure Guarantee Fund; and
  • development of governmental direct fiscal support through viability gap funding.

In May 2014, the Sarulla geothermal power plant project reached financial close with a total estimated project value of $1.6 billion. The project will consist of a 330MW power plant, and the first phase is anticipated to reach commercial operation in 2016.

Reportedly, the Donggi Senoro liquefied natural gas (LNG) project is approaching financial close and is expected to commence production in mid-2015.

The Central Java coal-fired power plant project is Indonesia's most advanced PPP project, currently at the stage of land acquisition, and is the first project to receive a guarantee from the Indonesia Infrastructure Guarantee Fund.

There are various other PPP projects in the pipeline, including: the Bandar Lampung water supply project; the Soekarno Hatta Airport rail link project; Sumsel 9 and 10 coal-fired mine mouth projects; the Bandung waste-to-energy project; and the Central Kalimantan coal railway project. All are at various stages of preparation or procurement.

 

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Jardin Bahar
Hermawan Juniarto
Jakarta

About the author

Jardin Bahar is an Indonesian qualified attorney. His practice areas cover various corporate and transactional matters in Indonesia, with a focus on project construction and finance. His in-depth knowledge of Indonesian infrastructure regulatory frameworks (particularly relating to public private partnerships) combined with his familiarity with international transaction practice, means he is a leading attorney in infrastructure in Indonesia. Bahar has advised on and been involved in several major infrastructure projects in Indonesia, such as the Jakarta Mass Rapid Transit project and the Soekarno Hatta International Airport railway project.

In banking and finance practice, Bahar has advised on various corporate loan transactions, assets finance and project finance transactions. His representative clients include Standard Chartered Bank Group, ANZ Bank Group, PT Sarana Multi Infrastruktur (Persero), PT Indonesia Infrastructure Finance, OCBC Group, and International Finance Corporation.

 

Justin Patrick
Hermawan Juniarto
Jakarta

About the author

Justin Patrick is a foreign legal advisor. He has a background in advising sponsors, contractors, lenders and other institutions in the natural resources, power, infrastructure and other sectors on project, asset-based and corporate financing, project development (including public private partnerships), corporate transactions and commercial agreements. Before joining Hermawan Juniarto, Patrick was an attorney in Hogan Lovells’ Singapore office, where he was a member of the firm’s international infrastructure and project finance group. He has been a regular speaker on various regulatory issues in Indonesia and speaks Bahasa Indonesia.