Contributed By Assegaf Hamzah & Partners
Project finance is the most common structure used to finance infrastructure projects in Indonesia, this is because it involves off-balance sheet deals that do not affect the credit risks of the shareholders/sponsors/government; and ring-fences the risk to the project company only, not the entire business of the shareholders/sponsors. It is expected that project finance will continue to be the main structure for infrastructure projects in Indonesia, due to the issuance of new PPP Regulations in 2015 (as defined below in 1.3 Public-Private Partnership Transactions) that provide more incentives and government support to projects, and which will therefore provide more comfort to the lenders.
Project finance sponsors are the project company’s shareholders or the parent companies of said shareholders. Indonesian law requires foreign investors to establish a limited liability company in Indonesia prior to conducting any business there. The regulations also provide for certain limitations on foreign shareholding percentages based on the type of businesses. Consequently, multinational companies, investment funds and foreign state-owned companies that are looking to conduct business in Indonesia must establish a joint venture with Indonesian companies, which can be either private or state-owned companies. There are various types of lenders involved in project finance in Indonesia. Over the last ten years we have seen multilateral development banks (MDBs), such as the Asian Development Bank, financing sustainable infrastructure projects in Indonesia. In addition to MDBs, export-import banks, such as the China Export-Import Bank and the Korea Export-Import Bank, have also provided financing for projects where companies from China or Korea are acting as the sponsors for those projects, in most cases, in syndicated co-operation with international commercial banks.
Public private partnership is regulated by Presidential Regulation 38 of 2015 (PPP Regulation) which replaces Presidential Regulation 67 of 2005. The new PPP Regulation covers more sectors that can be developed under a public-private partnership than the previous regulation (ie, an expansion from eight sectors to 19) and regulates risk management so that it will be allocated to both the private and government side. A new form of government support is also introduced by the PPP Regulation whereby, in addition to tax incentives and government guarantees, a PPP project can also benefit from viability support in the form of a financial contribution granted by the Ministry of Finance to the PPP project. The financial support is mainly to cover construction costs and comes with certain conditions and limits. The government guarantee is provided through PT Penjaminan Infratruktur Indonesia (the Indonesian Infrastructure Guarantee Fund or IIGF), a state-owned company established under the Ministry of Finance in 2009, which is responsible for providing guarantees for PPP infrastructure projects against both government risk and the payment risk of the offtaker. IIGF has taken part in various PPP projects including roads and bridges, water treatment systems and satellite communications. PPP projects can be initiated by the government or private sectors, but the appointment must be made through an open tender process. A PPP project is also subject to the "negative investment list", which limits foreign shareholding/ownership in Indonesian companies in certain sectors, maximum foreign ownership in a power plant company is 95% for example.
The main obstacle to the development of a PPP project, or any project in Indonesia, is land acquisition. To minimise the risk of delay, the PPP Regulation makes the Government responsible for land acquisition and the Government has issued a revision to the Presidential Regulation on land acquisition for public purpose to accelerate this process.
The Minister of Energy and Mineral Resources issued Regulation 48 in 2017, which regulates, among other things, restrictions on the transfer of shares of mining companies, power plant companies and oil and gas companies. For instance, the shares of a project company holding an electricity business licence cannot be transferred until the commercial operation date of the project, unless that transfer is made to an affiliate of the existing shareholders. This restriction may affect the enforcement of a pledge of shares. Another issue to be considered when structuring a deal is the currency exchange risk. Law 7 of 2011 and Bank Indonesia Regulation 17/3/PBI/2015 mandate that the Indonesian rupiah (IDR) must be used in all transactions in Indonesia. Consequently, the project company will receive payment in IDR but the loan would be in US dollars (USD) and thus a mechanism should be put in place to eliminate the risks of exchange rate fluctuation.
The collateral provided to lenders in project finance deals in Indonesia consists of the movable and immovable assets of the project company and the sponsors’ shares in the project company. There are three types of security under Indonesian law: pledge, fiducia and hak tanggungan, which is similar to the land mortgage in other jurisdictions.
A pledge agreement is an accessory to the underlying obligation, so that if that obligation is extinguished, so will the pledge. A pledge is a proprietary right and follows the pledged object (droit de suite), granting the right, to the holder of the pledged object (the pledgee), to enforce the pledge against anyone who possesses the pledged object. The pledgee will be a preferred creditor and is entitled to be paid from the proceeds of the enforcement/sale of the pledged shares prior to the other creditors. When a loan is partially paid, the pledge over the pledged object will not be partially released.To create and perfect a pledge security, a tangible and movable pledged object will be delivered into the possession of the pledgee, while for an intangible and movable pledged object (such as shares in a public company), a notice of the pledge, to the party against whom the pledge will be enforced, will suffice to establish the pledge. A pledge is typically granted over shares and bank accounts and is effective upon registration in the shareholder's register book maintained by the project company (in the case of a pledge of shares in a non-public company), upon registration by the relevant Securities Administration Bureau (Biro Administrasi Efek), or upon acknowledgment of notice by the account bank in the case of a pledge of bank account. If a default occurs, the security may be enforced through public auction or private sale. There are conflicting views on whether a court order is required for the enforcement of a pledge of shares.
Fiducia is a type of security granted over movable assets, both tangible and intangible, and over fixed assets other than those regulated under hak tanggungan law. For the purposes of project finance, security granted over receivables, machinery and insurance proceeds will be made in the form of fiducia security. Fiducia security can be granted to more than one fiducia receiver, however, each of the fiducia receivers will have a pari passu ranking. This is also the case with a pledge in which a second ranking of security is not recognised, thus each of the pledgees will have a pari passu rank. The fiducia security is effective on the date of its registration at the Fiducia Registration Office (FRO) maintained by the Ministry of Law and Human Rights. If a default occurs, the security will be enforced through public auction and without a prior court order.
Hak tanggungan is a type of security granted over land (ie, similar to the concept of a mortgage), which can include buildings and any other fixtures attached to the land, and which depends on the agreement between the creditor and the borrower and/or the guarantor. Hak tanggungan gives the creditor a preferred right over the object of tak tanggungan in the event of the borrower’s default and insolvency.
To grant a hak tanggungan, the creditor and the borrower and/or guarantor shall execute a deed of hak tanggungan before the land deed official (pejabat pembuat akta tanah or PPAT) and register that deed with the National Land Office whose authority includes the jurisdiction where the land is located. The National Land Office then annotates the tak tanggungan in the relevant land register book and land certificate and issues a hak tanggungan certificate. The hak ttnggungan is effective on the date the hak ttnggungan is annotated in the land certificate. Enforcement shall be made through a public auction.
Indonesian law does not recognise the concept of floating charge over all present and future assets of a company. However, both pledge and fiducia can cover all present and future objects, such as shares, bank accounts, movable assets, receivables and insurance proceeds. For land and buildings, a new deed of hak tanggungan must be executed and registered at the relevant National Land Office if new land is obtained.
There are no registration costs for a pledge of shares or a pledge of bank accounts, as there is no formal registry maintained by the Government. For fiducia and hak tanggungan, there is a registration fee and a tax that must be paid to the FRO and the National Land Office, respectively.
Each item of a pledge or fiducia must be individually identified in the security documents. To avoid disputes in the future, it is a common practice to attach a schedule to the security documents that identifies each of the secured objects and requires the borrower/security grantor to update the list of secured objects periodically and register those updates to the relevant registry. For hak tanggungan, the mortgaged land must be individually identified in the mortgage deed.
Other than the principle that an object cannot be secured for the benefit of more than one loan/creditor, with the exception of land (where the concept of ranks in security is provided), there are no restrictions in connection with the granting of security or guarantees.
Fiducia and hak tanggungan are registered at institutions maintained by the Government, and should be searchable, allowing lenders to satisfy themselves with respect to the absence of other liens on their collateral. However, there is no assurance that these records are updated and accurate. In practice, lenders typically rely on the representations and warranties of their borrower/security providers.
A pledge is released by a notice from the pledgee (lenders) to the company or the bank and, particularly for shares of a non-public company, will be released when the annotation of pledge in the share register book is deleted.
Fiducia security is released by way of sending a request letter, and a notice of full payment and release from the lenders to the FRO. The release of fiducia security shall be evidenced by a notice issued by the FRO.
As for hak tanggungan, the lenders will send a request letter and a notice of full payment and release to the National Land Office, and that office will delete the hak tanggungan from the registry and annotate it in the relevant land certificate.
A secured lender can enforce its collateral upon default of the secured loan. It should be noted that a secured lender cannot automatically own the collateral. Enforcement is performed through private sale or public auction and the lender will receive proceeds from that enforcement to pay the loan. Any remaining proceeds must be returned to the borrower/security provider.
Recently there have been concerns surrounding the enforcement of a pledge of non-public company shares. Although a pledge of shares agreement may specify that the pledgee may enforce by way of a private sale, there remains an argument that it can only be done pursuant to a court order, otherwise it will be subject to a challenge. Further, the Indonesian Civil Code provides that the pledgee may enforce by way of an auction, however, many state auction offices, in which enforcement auctions must be carried out, have refused to organise an auction unless a court order is obtained, even though one is not required under the auction regulations.
Under Indonesian law, parties to an agreement are free to choose the laws which govern their agreements provided that the law chosen has sufficient relationship with the agreement, or to the parties to that agreement, and provided that the choice of law is not contrary to public order in Indonesia. Indonesian courts should recognise and honour this choice of law, however, Indonesian courts have occasionally applied Indonesian law, irrespective of the choice of foreign law by the parties to a contract, without specifically rendering the choice-of-law provision in that contract invalid.
A party to a contract can irrevocably submit to foreign jurisdiction or arbitration. However, the judgment of a non-Indonesian court will not be enforceable in the Republic of Indonesia, although that judgment could be admissible as non-conclusive evidence in proceedings on the underlying claim in an Indonesian court. A non-Indonesian judgment will be given the evidentiary weight the Indonesian court considers appropriate.
The judgment of a non-Indonesian court will not be enforceable in the Republic of Indonesia. The claimant must submit a new case to the Indonesian court to enforce such a judgment. A foreign arbitral award which meets the requirement of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, on the other hand, is enforceable without a retrial of the merits of the case, provided that the foreign arbitral award is issued by an arbitration body in a country bound under the New York Convention or other bilateral agreement with Indonesia. This is limited to awards which fall within the scope of Indonesian commercial law and do not contravene public order. A foreign arbitration award may be enforced in Indonesia after an exequatur (writ of execution) has been obtained from the Central Jakarta District Court.
The market practice is for lenders to appoint a security agent to sign the security documents and the security agent’s name will be recorded in the relevant security registry and certificates (ie, the shareholder's register book, the FRO and fiducia certificate, and the National Land Office and land certificate). It may become an issue, upon enforcement, that the lenders themselves do not have their names registered. To avoid this, the lender's name should also be registered, including in the event of a change of lenders.
Parties transacting in Indonesia are familiar with Law No 24 of 2009 on the National Flag, Language, Coat of Arms and Anthem (Language Law), which requires all agreements and memorandums of understanding (including term sheets and letters of intent) involving an Indonesian party to use the Indonesian language. From the outset, the Language Law raised alarm, not only due to the additional burden imposed on contracting parties, but also because of the uncertainties it creates. These uncertainties can be broadly categorised into three topics: timing, governing language and consequences of non-compliance.
Over time, the market has adopted a set of approaches to address these uncertainties. Now, ten years after its enactment, the implementing regulation of the Language Law has finally been issued under Presidential Regulation No 63 of 2019 on the Use of the Indonesian Language (Regulation). This affirms parties’ rights to agree on the governing language (which does not have to be Indonesian) of their agreement. Arguably, this choice must be recognised and honoured by the court.
Article 26(3) of the Regulation states that the native language of the foreign party, and/or English, is used as an equivalent version, or translation of the Indonesian version, in order for the parties to achieve a common understanding regarding the agreement.
A strict reading of the above provision would mean that an Indonesian version of the agreement must be prepared first, with a non-Indonesian or English version to follow. As the implementing regulation to the Language Law, the expectation was that the Regulation would finally offer some clarity on the consequences for non-compliance with the Language Law. However, no such clarity is provided in the Regulation. Arguably, concurrent signing of the Indonesian and the non-Indonesian/English versions of an agreement would resolve this flaw.
There is no restriction on foreign lenders granting loans to an Indonesian entity. However, the Indonesian borrower has the mandatory obligation to obtain approval from the Offshore Co-ordinating Loan Team (Pinjaman Komersial Luar Negeri or PKLN), if the loan is used for projects related to government or state-owned entities, as well as reporting obligations to Bank Indonesia (the central bank), the Ministry of Finance and the PKLN.
Security or guarantees can be granted to any lenders, including foreign lenders. There is no restriction or limitation. However, the lenders cannot automatically own the collateral upon enforcement. Enforcement is performed through private sale or public auction and the lender will receive the proceeds of that enforcement as loan payment. Any remaining proceeds must be returned to the borrower/security provider.
Foreign investment in Indonesia is regulated under Law 25 of 2007 (Investment Law). Each business shall be subject to the maximum foreign ownership rules or known as the negative investment list. The current negative investment list is governed under Presidential Regulation 44 of 2016. There are certain industries where foreign investment is limited or completely restricted. Foreign ownership of a power generation company, for example, is limited to 95%.
Foreign investors who wish to establish a business in Indonesia must incorporate a company under Indonesian law (not exceeding the maximum portion of foreign ownership applicable to the intended line of business) and, effective as of June 2018, all companies (including foreign investors that incorporate a company in Indonesia), must obtain licences through the online single submission (OSS) system managed by the Indonesian Investment Co-ordinating Board (known as the BKPM). Each company will be a assigned a business identification number (Nomor Induk Berusaha or NIB) which will be the basis on which it applies for a business licence and commercial or operational licences, depending on the company’s business line. The OSS system is an integrated system designed to simplify and ease the process of obtaining permits and licences. For example, a company does not have to submit various applications to various government department to obtain the permits and licences required. It can simply submit one application through the OSS system.
The Investment Law regulates that foreign investors have the right to transfer and repatriate foreign currency, which includes, among other things, the capital, profit, dividend, liquidation proceeds or compensation for acquisition or sale of assets. Further, Law 24 of 1999 also allows the free transfer of foreign exchange abroad provided that the entities that transfer the foreign exchange submit a monthly report to Bank Indonesia no later than the 15th day of each month.
There is no restriction on an Indonesian company maintaining a foreign currency account outside of Indonesia.
To be valid and enforceable, Indonesian law does not require that a financing or project agreement be registered or filed with any government authority. Although the borrower is required to report their offshore loan to Bank Indonesia, the Ministry of Finance and the PKLN, these reporting obligations do not affect the validity and enforceability of the financing or project document.
Certain security documents, on the other hand (ie, deeds of fiducia security and deeds of hak tanggungan), must be registered at the FRO and the National Land Office that has jurisdiction over the area where the mortgaged land is located, respectively. A pledge of shares in a non-public company must be registered in the shareholder's register book maintained by the relevant company, whereas pledge of shares in a public company must be registered at the relevant Security Administration Bureau.
The Indonesian Constitution of 1945, as amended, mandates that natural resources belongs to the state and shall be used for the benefit of its citizens. Consequently, no individual or entity, Indonesian or foreign, can have ownership over any natural resources.
To allows investors to take part in the development of natural resources, the Government issues licences, such as mining licences for coal and other minerals, or enters into a contracts with investors who will act as a contractor for the Government, such as the Production Sharing Contract for exploration and exploitation of upstream oil and gas resources. It should be noted that, except for upstream oil and gas activities; pursuant to the Investment Law, foreign investors may only engage in business activities in Indonesia by establishing a limited liability company in Indonesia.
A company can obtain rights to use land in Indonesia, known as the right to build (hak guna bangunan or HGB) and the right to cultivate (hak guna usaha or HGU). HGB holders can build on the relevant land for a maximum of 30 years (extendable for another 20 years) whereas an HGU is granted for plantation, farming, etc on a minimum of five hectares. The validity of an HGU varies from 25 to 35 years and can be extended for another 25 years.
The concept of ‘trust’ is recognised in Indonesian capital-market and banking regulations; however, it is not applicable to the role of a security agent.
A security agency can be created by means of a power of attorney whereby the lenders will be represented by the security agent for, among other things, the execution and registration of the security agreements and the distribution of proceeds from enforcement. The authority of the security agent is limited to actions specified in the power of attorney, typically in the facility or security agency agreement. On that basis, the authority of the security agent under the power of attorney may not be as broad as that of a trustee in common law jurisdictions. The power of attorney does not preclude the lender, as the 'real holder' of the authority, from taking action on its own account. Therefore, the agreement between the security agent and lenders may need to incorporate a no-action clause or a collective-action clause to ensure that no lender acts individually at the expense of the other lenders.
As the power of attorney does not grant any kind of ownership rights (either legal or beneficial) in respect of the security agent, there remains a clear line between the assets of the security agent, as the attorney in fact, and the assets of the lenders, as the principals. In the event of a bankruptcy of the security agent, assets controlled by the security agent (such as monies in the security agent’s account) resulting from the performance of its duties by the security agent under the security agreements will not be part of the bankruptcy estate.
Some of the gaps between the Indonesian regime of power of attorney and the common law regime of trust can be filled on a contractual basis under an intercreditor agreement and other related documents.
As explained, there are three types of securities acknowledged under Indonesian law, the pledge, fiducia security and hak tanggungan. From these type of securities, only hak tanggungan allows a collateral (land) to be secured for the benefit of more than one creditor/loan. Land can be encumbered with up to three ranks of hak tanggungan. Proceeds from enforcement will be paid to the creditor based on its rank and not based on proportionality (ie, a first rank creditor of hak tanggungan has the first right to receive payment, and the remaining proceeds will go to the second and third rank creditors). Neither a pledge nor fiducia security can be subordinated.
Pursuant to the Investment Law, to do business in Indonesia, foreign investors must establish a limited liability company in Indonesia. The exception to this rule is the upstream oil and gas business, which according to Law 22 of 2001 on Oil and Gas, can be performed by an entity established outside of Indonesia.
The concept of company reorganisation is similar to the "suspension of payment obligation" procedures in Indonesia (penundaan kewajiban pembayaran utang or PKPU). It is regulated under Law 37 of 2004. A company with at least one creditor can submit a claim for PKPU to the Commercial Court. If the claimant is a bank, only Bank Indonesia can submit such a claim. The creditor can also submit a PKPU claim if the loan is due and payable. The Commercial Court will declare a temporary PKPU, and the company and its creditors will discuss the settlement agreement between the temporary PKPU and the trial date. If a settlement is not reached, the Commercial Court will declare the company insolvent. The period allotted for negotiating a settlement agreement will not be longer than 270 days from the date the temporary PKPU is declared.
A perfected security in rem (eg, a pledge, fiduciary security, hypothec and hak tanggungan) should not be affected by bankruptcy proceedings. Lenders can enforce the secured objects independently without being subject to the ongoing bankruptcy proceedings, however, that their rights to enforce are stayed for a maximum period of 90 days as of the declaration of bankruptcy. Lenders that are secured by cash collateral or entitled to a set-off right can enforce their rights without being subject to such a stay period.
The same stay of enforcement also applies in the process of suspension of payment (penundaan kewajiban pembayaran utang or PKPU, which is similar to a moratorium), but for the entire period of suspension of payment. This is normally between 45 and 270 days after temporary suspension of payment is granted. If the secured lender participates in a suspension of payment, the enforcement of its rights may be subject to the settlement plan.
Lenders’ independent rights of enforcement will cease if they fail to enforce their security within two months of the date on which the security provider is deemed insolvent, at which point the secured assets will be liquidated by the receiver. “Insolvency” occurs when claims have been verified but the debtor does not propose a composition plan, a proposed composition plan is rejected, or the court denied the ratification of a composition; at which point the receiver will liquidate the estate in bankruptcy. While their priorities remain in place, the lenders must pay the bankruptcy costs on a pro-rata basis.
Claims under a guarantee are considered as unsecured claims which rank in pari passu with other unsecured claims, such that they will be verified and paid pro rata from bankruptcy liquidation proceeds.
Secured creditors will receive payment from the enforcement proceeds of their collateral, whereas other unsecured creditors will received pro rata payment from bankruptcy liquidation proceeds.
The lenders would be exposed to the risk of being unable to receive the full repayment of the loan, if a settlement is not reached or enforcement proceeds do not cover the loan.
There are no entities that are excluded from bankruptcy proceedings. However, for banks, only Bank Indonesia can submit a bankruptcy claim. For insurance companies, reinsurance companies, pension fund and state-owned entities serving a public purpose, only the Ministry of Finance can submit a bankruptcy claim; and for securities companies and other related capital market institutions, only the Financial Services Authority (Otoritas Jasa Keuangan or OJK) can submit a bankruptcy claim.
There are no restrictions, controls, fees and/or taxes on insurance policies over project assets. Nevertheless, OJK Regulation 14/POJK.05/2015 mandates that domestic insurance companies are required to reinsure their products with a domestic reinsurance company, except for worldwide insurance products or insurance products for multinational companies. If domestic reinsurance companies are unable to reinsure those products, then foreign reinsurance companies can reinsure them.
There is no restriction on payment of insurance policies to creditors, local or foreign.
Payments of interest made to lenders are subject to withholding tax, pursuant to Law 36 of 2008 on Income Tax, as amended. The payment of principal and other payments made to the lenders, including payments of proceeds from enforcement of guarantees or securities, are not subject to withholding tax
The loan provided to an Indonesian borrower, is not subject to any taxes, duties, charges or other tax considerations. There is a stamp duty that needs to be paid if the transaction document is going to be used in Indonesian courts, this duty is small.
We are not aware of any laws or regulations in Indonesia that limit the amount of interest that can be charged by banks.
The project agreements consist of the offtake agreements, engineering procurement and construction agreements, supply agreements, and operation and maintenance agreements. All offtake agreements are governed by Indonesian law, for example the power purchase agreement between an independent power producer and PT PLN (Persero), a state-owned company which is the sole offtaker of electricity and the main provider in Indonesia. EPC (engineering, procurement and construction) agreements are also mandatorily governed by Indonesian law, as regulated by Law 2 of 2017 on Construction Services.
The financing agreements are typically governed by English law, as most of the lenders in project finance are international commercial banks or multilateral development agencies. In very limited cases, we have seen other laws, such as New York law and Singapore law, governing the financing agreements.
All offtake or co-operation agreements between the project company and the client/employer/state-owned company/offtaker must be governed by Indonesian law. It is also a requirement that all security agreements covering items or collateral located in Indonesia must be governed by Indonesian law. The agreement on construction of projects which are located in Indonesia must also be governed by Indonesian law.