Irawati Hermawan and Jardin Bahar of Hermawan Juniarto assess the conditions and framework for project financings in Indonesia

1.1 What are the main project finance trends and developments recently seen in your jurisdiction?

Infrastructure financing is the most popular and developing area of project finance in our jurisdiction at the moment. Recognising the pressing need for infrastructure development, the Indonesian government has increased its focus on improving the regulatory environment and stimulating infrastructure spending.

Over the past five years, infrastructure spending has more than doubled, and more spending is expected over the next few years, with the removal of the fuel subsidy allowing reallocation of funds to infrastructure. Indonesia is one of the world's emerging markets. In the aftermath of the new government's policies, the investment and development in the infrastructure sectors is believed to have provided important growth for the country's economy. More than half of the bankers (59%) indicate that their banks have existing exposure to infrastructure financing.

In the view of those surveyed, it is thought that transportation and energy will be the key growth areas for infrastructure projects to be financed in 2015.

1.2 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction?

Project finance is a long-term method of financing large infrastructure and industrial projects, based on the projected cash flow of the finished project rather than the investors' own finances. Project finance structures usually involve a number of equity investors as well as a syndicate of banks who will provide loans for the project.

In developing countries such as Indonesia, the role of the export credit agency is to promote the implementation of national export financing, through financing, guarantees, insurance and consultancy services. This role is carried out by Indonesia Eximbank, a state-owned enterprise, which was established in 2009.

The World Bank and the Asian Development Bank have also played a major role in developing key players in infrastructure provision generally in Indonesia, by providing technical assistance and facilities to the government, financial institutions, and state-owned enterprises.

2.1 What types of security are usually seen in project finance transactions?

Generally, it is prohibited for government (both central and regional) assets to be encumbered by any means of security. Typically, the types of security seen in project finance are as follows:

mortgage (hak tanggungan), which may encumber land, buildings and other immovable property, or any land to be owned by the company which will be used as project land along with any immovable property;
pledge (gadai), which may encumber movable property that is physically delivered to the pledgee and intangible assets (for example, shares of a company or money on deposit in a collection bank account); and,
fiduciary security (jaminan fidusia), which may encumber movable property and certain types of immovable property that is 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).
In addition to the above, quasi-security may be provided in the form of powers of attorney or conditional assignments over the material contracts (ie, power purchase agreements, and any other project documents), among other arrangements.

2.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?

Indonesia does not recognise any particular regulatory framework for subordination loans. However, in practice what we typically see in the market is that the financing institutions require the borrower or the sponsor to provide them with a document evidencing the contractual agreement between the relevant parties to subordinate the junior loan.

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

For land mortgages, 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 and the issuance of the relevant fiduciary security certificates. In addition, for fiduciary security over intangible assets, to make the fiduciary security binding against the account debtor (the party who pays the receivables), 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 pledgor to the pledgee (or its agent);
in the case of a bank account, notification sent to, and acknowledged 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.

3.2 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 requires the payment of registration fees, based on the value of the security.

3.3 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/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 use an onshore security agent (usually an Indonesian bank), with the terms of the appointment governed by foreign (non-Indonesian) law.

4.1 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. Any specific regulations may also stipulate restrictions on foreign investment.

Foreign investments may benefit from various fiscal incentives.

4.2 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 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 public order (although this is an extraordinary remedy).

5.1 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 new court proceedings 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.

Under Indonesian law, government assets are immune from any form of seizure or encumbrance.

5.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?

Indonesian courts have not adopted a consistent approach to recognition of choice of foreign law clauses. There are some precedents where Indonesian courts have disregarded a choice of foreign law clause and have applied Indonesian law. We believe that the correct rule is that a choice of foreign law is legal, valid and binding if there is some connection with the chosen law and a choice of foreign law is not against public policy. In our opinion, a choice of foreign law for a cross-border loan transaction is not against public policy.

5.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?

Based on article 66 of Law No 30 of 1999 concerning alternative dispute resolution (Indonesia's Alternative Dispute Resolution Law), an international arbitral tribunal award can be recognised in the jurisdiction of Indonesia, if it satisfies the following conditions:

the international arbitral tribunal award is awarded by an arbiter or arbitral tribunal in a country that is bound by a treaty with Indonesia, either bilaterally or multilaterally, concerning the acknowledgment and enforcement of international arbitral tribunal awards;
the international arbitral tribunal award as referred to in paragraph (a) is limited in terms of the award as provided under Indonesian law as included in the scope of the trading law;
the international arbitral tribunal award as referred to in paragraph (a) can only be enforced in Indonesia to the extent that the award does not conflict with the general provisions on public order;
the international arbitral tribunal award can be enforced in Indonesia on receipt of an exequatur (confirmation) from the head of the Central Jakarta District Court; and,
the international arbitral tribunal award as referred to in paragraph (a) concerning the Republic of Indonesia as one of the parties to the dispute, can only be implemented after obtaining an exequatur from the Supreme Court of the Republic of Indonesia, which is subsequently transferred to the Central Jakarta District Court.
Furthermore, as stipulated under paragraph 1, article 67 of the Indonesia Alternative Dispute Resolution Law, an application to enforce an International Arbitral Awards can be carried out after the decision has been approved and registered by the arbitrator or attorney with the clerk of the Central Jakarta District Court.

6.1 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.

6.2 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?

Outside bankruptcy proceedings, there are several steps that may be taken by a project lender to enforce its rights as a secured party over its collateral. The first is negotiation and mediation with the debtor outside the court proceedings regarding the project lender's right over the collateral. If these negotiation and mediation efforts fail, then the project lender may try to settle through general court proceedings due to a breach of contract by the debtor.

Legally, a project lender (secured party) would have 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 would normally be expected to file an application for a writ of enforcement with the relevant district court. The process for obtaining a court order could 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 relevant parties must be notified of the intention to hold a private sale and details must published in printed media one month before the date the private sale is to be carried out.

6.3 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.

7.1 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) would be 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 this lower rate.

For purposes of overseeing foreign currency transfers, a purchaser of foreign currency of $100,000 or its equivalent 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.

7.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdiction?

A project company can establish and maintain onshore foreign currency accounts in Indonesia, with a variety documents requirement to be fulfilled according to Bank Indonesia regulation number 3/10/PBI/2001 regarding Application of Know-Your-Customer Principles, as amended and Bank Indonesia regulation number 11/28/PBI/2009 regarding Application of Anti-Money Laundering and Terrorism Funding Prevention Program for Bank. To the best of our knowledge, there is also no regulation prohibiting a company from establishing and maintaining offshore accounts in other jurisdictions.

8.1 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 No 38 of 2015 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 (eg, ports, airports and railways) provide that brownfield projects are to be implemented through state-owned enterprises.

8.2 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 must not be created over state-owned assets or region-owned assets.

Under Presidential Regulation number 38 of 2015 on Cooperation between the Government and a Business Entity in Infrastructure Provision, lenders for PPP projects have step-in rights in the event that the PPP company is declared in default as regards the facility agreement. The mechanism and procedure for this will be further regulated under a concession agreement between the government contracting agency and the PPP company, and also in the direct agreement between the government contracting agency and the relevant lender.

9.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?

Under the prevailing insurance laws and regulations in Indonesia, the object of insurance in Indonesia must be insured in Indonesia. However, as stipulated in article 2 of Government Regulation number 73 of 1992 on the Implementation of Insurance Business, as last amended by Government Regulation number 81 of 2008 (GR No. 73/1992) the insurance object in Indonesia may only be insured by an insurance company holding a business licence from the ministry of finance, except in the following circumstances:

there is no insurance company in Indonesia, either severally or jointly, capable of holding the insurance risk of the object;
there is no insurance company willing to cover insurance of the object; or,
the owner of the insurance object is not a citizen or legal entity of Indonesia.
9.2 Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?

Insurance laws and regulations are silent on whether cut-through clauses are effective, however, this practice is commonly seen in the market.


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Irawati Hermawan
Hermawan Juniarto

About the author
Irawati Hermawan received a law degree from Padjadjaran University in 1992 and a master's degree from University of Indonesia. She also qualified as a notary specialist in 1999 at Padjadjaran University. Irawati advises primarily on corporate and commercial matters, and is a well-known transaction lawyer for various types of commercial transactions. She has strong expertise in infrastructure, project finance, regulatory advice, public procurement and regional finance.

Her clients include PT Mass Rapid Transit Jakarta, PT Sarana Multi Infrastruktur (Persero), PT Pembangunan Jaya, PT Wijaya Karya (Persero) Tbk, Foster Wheeler Iberia SLU, Toyota Tsusho Corporation, and PT Indonesia Infrastructure Finance. She has also worked with several multilateral development banks, such as the Asian Development Bank (ADB) and the World Bank, and a number of internationally recognised consulting companies, including Boston Consulting Group, Mott Macdonald, AECOM and KPMG.


Jardin Bahar
Hermawan Juniarto

About the author
Jardin Bahar is an Indonesian qualified attorney, specialising in a variety of corporate and transactional matters in Indonesia. He particularly focuses on the areas of projects, 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, place him as a leading attorney in the infrastructure field in Indonesia. He has advised upon and been involved in numerous major infrastructure projects in Indonesia, including the Jakarta Mass Rapid Transit Project and the Soekarno Hatta International Airport Railway Project.

In banking and finance, he has advised on various corporate loan transactions, asset 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.