Indonesian limited liability companies – including state-owned enterprises (SOEs) – typically act as local sponsors, whereas foreign legal entities or companies act as foreign sponsors. They then form a local subsidiary that will act as the project’s investment vehicle.
Export credit agencies, multilateral agencies, commercial banks, and non-bank financial institutions (both local and foreign) typically act as lenders for project finance in Indonesia.
The main regulations concerning PPPs in Indonesia are:
Type of Infrastructure and Form of Co-operation
Types of infrastructure that can be developed with PPP schemes in Indonesia under PR 38/2015 are transportation infrastructure, road infrastructure, water resources and irrigation infrastructure, water supply infrastructure, centralised and local waste water management infrastructure systems, waste management infrastructure systems, telecommunications and informatics infrastructure, electricity infrastructure, oil and gas and renewable energy infrastructure, energy conservation infrastructure, urban facilities infrastructure, education facilities infrastructure, sports and arts facilities and infrastructure, zone infrastructure (eg, industrial zones), tourism infrastructure, health infrastructure, penitentiary infrastructure and public housing infrastructure.
PR 38/2015 also stipulates that PPPs may be conducted for infrastructure provision that comprises a combination of two or more types of infrastructure and may be partially financed by the government. Bappenas Regulation 7/2023 provides further elaboration on the combination of types of infrastructure projects in a PPP project as follows.
The GCAs of the relevant infrastructure that will be developed under a PPP scheme must sign a memorandum of understanding (MoU), which contains at least:
The MoU may also contain a dispute settlement mechanism.
The PPP scheme is conducted through a co-operation agreement (normally called a “PPP Agreement”) entered into between the GCA – which can be the Minister/head of institution/head of regional government or an SOE/regional-owned enterprise as provider or administrator of the infrastructure, based on the laws and regulations ‒ and the implementing business entity (IBE) appointed by the GCA through a tender process.
The PPP Agreement must specify, among other things, the project scope, the period of the partnership, an implementation/operation warranty, return of investment and the adjustment mechanism, rights and obligations (including risk allocation), performance standards, dispute resolution mechanism, and a supervision method. A PPP project can be identified, and the preparation of the project can be conducted, by either the GCA (“solicited project”) or the private sector (“unsolicited project”). Nevertheless, the appointment of the IBE for both solicited and unsolicited PPP projects must be by way of public and transparent bidding or tender.
PPP Phases
In brief, PPP schemes in Indonesia consist of four phases.
Planning
This phase is only required for solicited PPP projects and is predominantly done by the GCA. The GCA will identify the viable project from a list of projects proposed by the Indonesian government, conduct preliminary study (which covers, among other things, the form, scheme and source of financing) and public consultation.
Preparation
For solicited PPP projects, the preparation phase covers the formulation of the pre-feasibility study, the GCA’s implementation of supporting activities for the PPP project, and market sounding. The supporting activities that will be implemented by the GCA during this stage consist of, among others:
For unsolicited PPP projects, the preparation phase covers:
Transaction
The transaction phase covers project location determination, procurement of an IBE, the signing of a PPP Agreement, and the financial close of the project.
Management
Once the PPP Agreement has been signed and the IBE has been financed, the construction of the project will commence.
Solicited Versus Unsolicited PPP Projects
There are two ways to initiate PPP projects in Indonesia: solicited and unsolicited PPP projects. In Indonesia, solicited PPP projects are more common, whereby the GCA initiates the provision of infrastructure in co-operation with a private business entity (thus making it a solicited PPP). Although not as common as solicited PPP projects, it is still possible for a business entity (the “Initiator”) to propose a PPP initiative to the GCA (ie, an unsolicited PPP) for certain types of infrastructure, provided that such provision of infrastructure fulfils the following criteria:
In an unsolicited PPP, the Initiator must first submit a letter of intent along with the relevant supporting documents for the project to the GCA for its evaluation. These supporting documents include:
The GCA will then assess the submitted documents within 15 business days and will make a decision within seven business days following the completion of the assessment period. If during the evaluation period another business entity also submits a proposal the same project to the GCA, the GCA may also evaluate their proposal and notify the Initiator in case additional time for evaluation is required and the reason therefor. Should the GCA approve the proposal, it will instruct the Initiator to proceed with preparation of the feasibility study.
After the Initiator completes its feasibility study, it will submit the documents (along with relevant supporting documents) to the GCA for assessment. In preparing the feasibility study, the Initiator may include an application for government support in accordance with the provision of applicable law. The GCA should then make its assessment of the submitted feasibility study documents based on several criteria, including whether the project should not necessitate government support in the form of financial contribution. In assessing the documents, the GCA will undertake a public consultation and market research to gather input on the proposed PPP project. This assessment should be completed within 30 business days (and is extendable for another 30 business days) as of receipt of the documents. If the feasibility study is approved and the Initiator or the IBE has passed the qualification, the GCA will issue, among others:
In addition to the foregoing, there are several benefits/privileges (compensation) that may be given to the Initiator, as follows:
The form of the above-mentioned compensation must be clearly set out in the GCA’s approval.
Return of Investment for IBE
There are three types of return on investment (ROI) in PPP projects, which are:
Benefit of PPP
The following benefits may be available for a PPP project.
Non-recourse or limited recourse debt financing are predominantly opted for in project finance in Indonesia. The projects are typically financed by a combination of debt and equity (paid-up capital or shareholder loans). Debt-to-equity ratios vary depending on the sectors being financed, but it is typically at a ratio of 75:25. The debt portion is mostly funded by bank loans (offshore or onshore). Corporate bonds, project bonds, and securitisation of existing projects’ revenues are increasingly used to fund new infrastructure projects – for example, through the issuance of green bonds to fund sustainable projects.
The infrastructure, energy and industry sectors (such as smelting, electric cars, and batteries) are expected to continue to be more active in Indonesia in the coming year.
Type of Security Interest
Security interests in Indonesia are generally limited to those prescribed by Indonesian law. The form of security interests available under Indonesian law are:
In rem security interests are security interests that create preferential rights for the holder of the security even in bankruptcy.
According to strict legal interpretation in Indonesia, security interests under Indonesian law are limited to those described under the following laws and regulations:
There are no other (contractually crafted) instruments that can function as security; thus, parties do not have complete freedom to determine security interests contractually. However, notwithstanding questions of validity, this “contractual security” is documented in practice. Contractual security in the form of contractual arrangements (such as a conditional assignment or novation of contractual rights and obligations for security purposes or powers of attorney) may be deemed invalid by Indonesian courts in that they may be considered a circumvention of Indonesian security laws.
Assets Typically Subject to a Security Interest and the Corresponding Security Interest
The assets of an Indonesian debtor typically requested by creditors to be part of the security package and the respective security interest that can and would normally be taken over each asset are:
Creation and Perfection of Security Interest
The following summarises the creation and perfection process of in rem security interests in Indonesia.
Land mortgage (hak tanggungan)
A land mortgage is established through the signing of a mortgage deed in the Indonesian language before a land deed official where the land is located in Indonesia and registration with the E-Mortgage Deed Registration System. The land mortgage will be established and finalised once the electronic mortgage certificate (E-Certificate) is issued and the electronic land title certificate has reflected the mortgage creation. The E-Certificate will be sent to the mortgagee via email.
Under the E-Mortgage regime, each lender or creditor must initially register itself in the E-Mortgage Party Registration System prior to the registration of the mortgage deed in the E-Mortgage Deed Registration System. The online mortgage registration system is only written in Bahasa Indonesia. Registration of lenders or creditors with the system may be burdensome for offshore creditors or lenders and may take a significant amount of time to complete.
Generally, no regulatory approval or consent is required to establish a mortgage. However, in the event that the land title held by the project company is granted upon land with management rights held by the government, the establishment of a mortgage may require approval from the relevant government institution – depending on the underlying arrangement for the land co-operation or utilisation agreement entered into between the project company and the relevant government institution as the basis to apply for the land title.
Fiducia security
A fiducia security is established by entering into a written agreement and is signed before a notary to be made into a notarial deed form in the Indonesian language. The concept of a fiducia security results in a transfer of legal title from the transferor to the transferee under the condition that the legal title will automatically return to the transferor upon full repayment of the relevant debt of the transferor or debtor. The transferee’s ownership of the fiduciary secured assets lasts as long as the relevant debt of the transferor or debtor to the transferee remains outstanding. The parties may also agree that actual re-transfer by the transferee to the transferor will only take place upon full payment of the relevant debt.
The fiducia security agreement must be registered (online) at the Fiducia Registration Office within 30 days of the date of the fiduciary transfer agreement. The fiducia security becomes effective on the date of registration and, upon acceptance of the registration application, the fiduciary transferee will receive a fiduciary certificate issued by the Fiduciary Registration Office.
If within 30 days the fiducia security agreement is not registered, the parties must re-execute the fiducia security agreement. Other specific formalities (ie, notices and acknowledgements) are relevant for fiduciary security over receivables and fiduciary security over insurance proceeds.
Pledge
A pledge is established by a deed of pledge setting forth the particulars of the pledge, which can be executed in a notarial deed form or privately.
With regard to tangible assets, the requirement for the establishment of a pledge is that the pledged asset is physically transferred out of the possession of the pledgor. The right of pledge will be discharged when the pledged asset is no longer kept under the control of the creditor. As regards intangible movable assets, a notification must be made to whomever the assets or receivables would have to be paid.
With regard to a pledge of shares, the pledge must be registered in the shareholder register of the company. To create a pledge on listed shares, both the company and the Stock Administration Bureau must be notified of the pledge. This will be recorded in the shareholder register held by the Stock Administration Bureau. For blocked shares kept in the custody of the Indonesian Central Securities Depository (Kustodian Sentral Efek Indonesia, or KSEI), a confirmation letter will be issued by them certifying that the shares are pledged.
With regard to a pledge of a bank account, the relevant bank must be notified of and acknowledge the pledge. The acknowledgement also serves to evidence the bank’s agreement to the provisions set out in the notice. In practice, a pledge of a bank account is normally supported by the power of attorney to manage bank accounts. This power of attorney, however, does not create an in rem security interest.
Contractual security
For contractual security in the form of conditional assignment and assumption agreement, the assignor is required to notify and obtain acknowledgement from the counterparties under the relevant contracts.
Security Agent
A security agent is authorised to sign security documents, manage the secured assets and enforce security on behalf of the lenders. However, there are differing views in terms of land mortgage, as the law does not expressly acknowledge the taking of security by lenders as represented by security agent. Therefore, it is recommended that each lender be listed and registered as a mortgagee as well.
Indonesian security law does not recognise “floating charges” or other universal or similar security interest. In Indonesia, specific assets must be secured by a specific type of security.
Indonesian security can secure present and future assets of a company except for land mortgage. For fiducia security, however, the fiducia secured objects registered at the Fiducia Registration Office must be updated at the Fiduciary Registration Office.
Generally, registering collateral security interests such as fiducia security and land mortgage is associated with registration fees or charges and Non-Tax State Revenue (Penerimaan Negara Bukan Pajak, or PNBP) paid to the government. The PNBP tariff is subject to change from time to time.
The secured assets must be properly identified and listed in the security documents.
A company’s articles of association typically provides for the necessary internal approval(s) required to be obtained before the company can grant any security or guarantee. In the context of a third-party security or guarantee, however, the validity of any legal act performed by an Indonesian company may be contested for the want of corporate benefit and compliance with its objects and the purposes of its articles of association. There is uncertainty as to whether the issuance of a third-party guarantee or security by a company to secure the fulfilment of obligations of a third party can be regarded to be in furtherance of the objectives of the company (ultra vires doctrine) and, consequently, whether such guarantee or third-party security may be voidable or unenforceable under Indonesian law.
In determining whether the issuance of a third-party guarantee or security is in furtherance of the objectives of a third-party guarantor, it is important to consider the provisions of the articles of association of that third-party guarantor and whether that third-party guarantor derives certain commercial benefit from the transaction in respect of which the third-party guarantee is issued. Based on the ultra vires doctrine, the validity or enforceability can in principle only be challenged by that third-party guarantor itself – ie, arguably through:
By obtaining the written consent of all of the shareholders, the board of directors, and the commissioners of the third-party guarantor authorising that third-party guarantor to enter into a third-party guarantee or security and confirming that such transaction is in the interests of that third-party guarantor, those parties should not be able to successfully challenge the validity or enforceability of that third-party guarantee or security on the basis of the ultra vires doctrine.
In addition, it should be noted that:
For fiducia security, the lender could check for other liens on their collateral via the online website of the Fiducia Registration Office – noting that this is only possible for fiducia registration done after 5 March 2013, when the manual registration transitioned to online registration. For fiducia registration prior to 5 March 2013, manual checking is possible in theory but not in practice.
For land mortgage, the lender (with the company’s and notary’s assistance) could check through the relevant land office and obtain a statement letter confirming the land status.
No public registry is available for pledge of shares in a private company. Pledge of shares in a private company is recorded in the shareholder register of the relevant company and the lender typically asks for the latest shareholder register to confirm this. For pledge of shares in a public company, the lender could confirm this through the Stock Administration Bureau.
For pledge of bank accounts, no public registry is available.
Under Indonesian law, a security interest is accessory in nature and when the underlying claim is paid, expired or deemed null and void, the security interest also ceases to exist. However, typically, an Indonesian law release agreement is entered between the security agent and the obligors on the pay-off date. The release agreement would also set out additional steps that will be required to effect the release and discharge of the Indonesian security documents as follows.
A secured lender can enforce its collateral upon an event of default based on the underlying agreement. Security interest in Indonesia can be enforced by way of public auction or private sale. In the event of default, theoretically, secured lenders may sell the secured assets without any court decision. However, in practice, the state auction body sometimes still requires a court decision or order to be provided before it will proceed with a public auction. The state auction body may even refuse the application of a public auction sale if the party that wishes to execute the security could not provide a court decision or order for said auction.
For a pledge of shares, the enforcement may be subject to the following restrictions. The sale of pledged shares through enforcement of the pledge will be subject to restriction of the articles of association of the company whose shares have been pledged. The articles of association may stipulate that the sale of shares is subject to other shareholders’ right of first refusal or to prior approval of a general meeting of shareholders. In some cases, licences of the company may include restrictions on changes of control of the licence holders and thus these provisions must also be observed.
It should be possible for the security agent to directly enforce and obtain proceeds of the fiducia security over receivables, the fiducia security over insurance proceeds, the fiducia security over reinsurance proceeds, and the pledge of bank account.
A choice of a foreign law as the governing law of the contract and the submission to a foreign jurisdiction will be upheld in Indonesia except:
Foreign arbitral awards are enforceable under Indonesian law without re-examination of the merits and re-litigation of the matters to the extent that they are issued by an arbitrator or arbitral tribunal in a country that is also a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the “New York Convention”). The award needs to be registered at Central Jakarta District, with a writ of execution (known as an exequatur) from the chair of the Central Jakarta District Court or, where the award involves the government of Indonesia as one of the parties to the dispute, from the Supreme Court of Indonesia (through the Central Jakarta District Court).
Foreign court decisions are not enforceable within Indonesia. The judgment can be used as evidence in a retrial of the merits of the case ‒ albeit subject to the prevailing laws and regulations. Indonesia is not a party to any treaty, convention or bilateral agreement that recognises the enforcement of a foreign court judgment.
In general, there are no other matters that might impact a foreign lender’s ability to enforce its rights under a loan or security agreement. Previously, the Minister of Finance Regulation 213/PMK.06/2020 (the “MOF Regulation 213/2020”) requires a lender holding security that wishes to sell the assets by way of public auction (via Auction Service Office (Kantor Pelayanan Kekayaan Negara dan Lelang, or KPKNL), Auction House or Class II Auction Official Office) to obtain an Indonesian Tax Identification Number (Nomor Pokok Wajib Pajak, or NPWP).
However, such requirement has been revoked by the Minister of Finance Regulation 122/2023 on Auction Guidance (“MOF Regulation 122/2023”) and, as of 1 January 2024, an NPWP is only required for sellers who are required under Indonesian law to obtain an NPWP (ie, taxpayers under Indonesian law, which does not include foreign creditors or lenders). Nonetheless, in practice, the authors understand that – even though an NPWP is not required for foreign creditors or lenders – these creditors and lenders will need to obtain a statement letter from the tax office confirming that they are not taxpayers under Indonesian law.
In general, foreign lenders are not restricted from granting loans. However, foreign lenders are restricted from granting loans to Indonesian entities if such loans require security from the Indonesian government or the Bank Indonesia (or other state-owned banks) and result in any liabilities of the Indonesian government.
In general, the granting of security or guarantees to foreign lenders is not restricted or impeded. However, as mentioned in 2.5 Restrictions on the Grant of Security or Guarantees, it should be noted that:
Foreign direct investment is subject to restrictions or requirements that vary based on the line of business of the company – for example:
There are no restrictions on payments abroad or repatriation of capital by foreign investors. However, any transfer of foreign exchange to and from abroad by such person is subject to the reporting obligation to Bank Indonesia as regulated by Bank Indonesia regulations concerning the monitoring of the flow of foreign exchange activities and the reporting of foreign exchange activities other than offshore loans, as may be amended from time to time. Certain transactions of Indonesian rupiah have been restricted by the Bank Indonesia Regulation on the Money Market and Foreign Exchange Market, as may be amended from time to time, and its implementing regulation. Violation of these regulations is subject to administrative sanctions.
A project company may establish and maintain offshore foreign currency accounts.
The financing agreement is subject to the company’s report to:
The timing of such report is subject to the relevant regulations.
The financing or project agreements need to be prepared and signed in the Indonesian language (in addition to the foreign language) for compliance with the Indonesian language regulations and to ensure the validity and enforceability of such agreements.
Ownership of land requires a title over such land evidenced by the relevant title certificate. The different types of land title are:
Only right of use can be granted to foreigners, as well as foreign legal entities having a representative in Indonesia.
Natural resources cannot be owned by a private entity as they are controlled by the state ‒although such private entity may use natural resources based on the relevant permit. By way of example, a company may explore and exploit geothermal resources based on a geothermal business licence issued by the Minister of Energy and Mineral Resources.
Undertaking the business of ownership or operation of such assets requires licence(s) under the relevant regulations. It is not possible for a foreign entity to hold such a licence; it would need to be done through the establishment of a foreign investment company in Indonesia, which would apply for and be granted such licence.
The concept of security trust is not recognised in Indonesia. The common arrangement used in Indonesia is the concept of security agent as an alternative to security trust.
Methods of Subordination
The following methods of subordination are used.
The priority will be applicable in the insolvency/bankruptcy proceeding. Creditors that hold in rem security interest will have higher ranking than creditors that do not hold any in rem security interest. Generally, mortgages, pledges and fiduciary transfers or assignments are in rem security interests that are absolute and exclusive. They create preferential rights to the holder.
Typically, the project sponsors establish a special purpose vehicle – often in the form of an Indonesian limited liability company ‒ to oversee the development and operation of the project. This is known as the project company.
Typically, when it comes to debt restructuring, parties can engage in private negotiations regarding the unpaid debt as long as the company has not been officially declared bankrupt by a court. Nevertheless, the Indonesian Bankruptcy Law does offer a formal mechanism for corporate rescue known as the “suspension of payments” process. This process is applicable to all individuals and businesses with their registered address or place of operation in Indonesia.
Suspension of Payments
The process of suspension of payments begins when either the debtor or their creditors file a petition with the Commercial Court. This petition includes a proposal to repay some or all of the debt to both secured and unsecured creditors. The primary aim is to provide the debtor with an opportunity to reorganise the company, with the hope that it can continue operating and eventually satisfy the claims of its creditors. Following the submission of the petition, the Commercial Court grants the debtor provisional suspension of payments and appoints two key figures ‒ namely, an administrator and a supervisory judge. These individuals work alongside the debtor to oversee its financial affairs.
During this suspension period, the debtor retains the ability to manage and dispose of its assets, but always in collaboration with the appointed administrator. Importantly, the debtor is not obligated to make payments to unsecured creditors during this time, and secured creditors cannot enforce their security interests without the court’s approval. Additionally, the debtor has the option to present a proposed composition plan to all of its creditors.
First Creditors’ Meeting
Within 45 days of the provisional suspension of payments being granted, it is mandatory to convene a meeting of the creditors. During this meeting, secured and unsecured creditors have two options ‒ namely, either to:
In the event that the creditors do not reach an agreement, the debtor will be officially declared bankrupt.
Composition Plan Ratification
If the creditors give their approval to the plan, a written report must be submitted by the supervisory judge to the Commercial Court. The court then evaluates this report and listens to input from the administrator and creditors, who may have objections. The court is required to reject the plan if:
Once ratified, the composition plan becomes legally binding for all secured and unsecured creditors, except for those secured creditors who dissented. Dissenting secured creditors have the right to receive compensation from the debtor, calculated at the lower of either:
Post-ratification
After the plan is approved, the temporary suspension of payments comes to an end, and the administrator or receiver (as relevant) is released from their duties. The control of the debtor’s business and assets is then returned to the debtor, with any specific terms outlined in the plan still in effect.
A bankruptcy proceeding may affect the ability to enforce security during the “stay period”. The stay period is 90 days from the rendering of a bankruptcy declaration, and a maximum of 270 days from the rendering of a suspension of payments decision.
Preferential creditors would have a higher ranking with regard to proceeds arising from the bankruptcy asset’s liquidation, even though the assets might be part of a secured claim of a creditor. Claims for costs of foreclosure, costs incurred to protect the bankruptcy assets, claims from the government (including tax), and employees’ claims all have a higher ranking than a secured claim.
No entity is excluded from bankruptcy proceedings. However, certain financial institutions can only be the subject of a bankruptcy petition made by a relevant government institution. By way of example, insurance companies can only be petitioned by the Indonesian Financial Services Authority. The legislation applicable to them is Law No 40 of 2014 on Insurance.
Based on Law No 37 of 2004 on Bankruptcy and Suspension of Payments (the “Bankruptcy Law”), there are two types of court-sanctioned insolvency proceedings applicable to Indonesian limited liability companies: bankruptcy proceedings and suspension of payment proceedings.
When a bankruptcy estate is declared to be in a state of insolvency and the receiver decides to liquidate the bankruptcy estate for distribution to the creditors of the bankrupt debtor, a ranking will need to be applied.
The general rule on distributing the proceeds of a bankruptcy estate to unsecured creditors is one of equality, subject to the statutory priority rights of certain categories of creditors. Shareholders rank behind all creditors in the distribution of the proceeds of the bankrupt estate. Secured creditors may enforce their security rights as if there were no bankruptcy, subject to any applicable stay of enforcement. However, upon the request of the receiver or the preferred creditor having rank higher than the secured creditors, the relevant secured creditor must grant its portion from the proceeds of the enforcement of in rem security for the same amount as such preferred creditor’s claim.
In descending order, the ranking order of creditors under the bankruptcy is:
However, it should be noted that the foregoing priority order may not always be upheld strictly for specified and unspecified reasons.
The Indonesian Bankruptcy Law regulates nullification of preferential transfer transactions conducted by a borrower before its bankruptcy, if such transaction were considered detrimental to the creditors by the receiver. The receiver may nullify such transfer if:
If the preferential transfer transaction was carried out within one year prior to the borrower’s bankruptcy, provided that the transaction was not mandatory for the borrower and unless it could be proven otherwise, both the borrower and the third party with whom the act was performed are deemed to have known that the transaction was detrimental to the creditors if the transaction falls into one of the following three categories:
There is no provision under the Indonesian Bankruptcy Law that stipulates a specific period in which the preferential transfer claim can be made. However, a request for the nullification of a preferential transfer must be made by the receiver. The claim can be made only if the borrower has a receiver.
If the creditors find borrower’s assets that existed during the bankruptcy proceedings but are discovered only after the bankruptcy proceedings have been completed, the creditors may report such findings to the Commercial Court. The Commercial Court will then appoint a receiver to distribute such newly discovered assets to the creditors whose rights have not been satisfied in full.
No entity is exempted from bankruptcy proceedings. Nonetheless, specific financial institutions can only be the target of a bankruptcy petition if initiated by a relevant government agency. By way of example, insurance companies can solely be petitioned by the Indonesian Financial Services Authority. The applicable legislation is Law No 40 of 2014 on Insurance.
There are no limitations imposed on insurance policies for project assets issued or guaranteed by foreign insurance companies. Nevertheless, the income tax in Indonesia – set at 20% – applies to the payment of insurance premiums received by these foreign insurance companies.
If insurance policies for project assets are encumbered by a fiduciary security and the relevant insurance company acknowledges this security or assignment, then the payouts from these policies may be payable to foreign secured creditors. It is also typical for secured creditors to be listed as an insured through a banker’s clause under the insurance policy.
Payments made by the company to lenders under the financing agreements are subject to withholding tax in Indonesia unless the recipient is an Indonesian bank and/or an Indonesian branch of a foreign bank. If the recipient is a tax resident of a jurisdiction that has an effective tax treaty with Indonesia, it could get the benefit of a reduced withholding tax rate under the tax treaty.
Other than the registration fee for the security interest, as stated in 2.3 Registering Collateral Security Interests, all agreements entered in Indonesia or to be used in Indonesian territory are subject to Indonesian stamp duty. Currently, the nominal amount of Indonesian stamp duty is IDR10,000 for transactions of more than IDR5 million. Generally, stamp duty is due and payable at the time documents are executed.
Generally, parties can agree on the amount of interest that can be charged. In the absence of such agreement and to the extent Indonesian law applies, 6% per annum is the maximum interest rate that can be charged.
Usually, project agreements are governed by Indonesian law. However, certain project agreements – where the execution does not necessarily occur in Indonesia (ie, offshore supply contracts, offshore Engineering, Procurement or Construction (EPC) contracts or offshore or technical services agreements) – are typically governed by foreign law.
Financing agreements are generally governed by foreign law (commonly English or New York law), save for the Indonesian security documents, which must be governed by Indonesian law.
Indonesian security must be governed by Indonesian law. Specific project agreements, such as those for onshore construction, are legally mandated to be subject to Indonesian law.
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info@abnrlaw.com www.abnrlaw.comThe Evolution of Indonesia’s Project Financing Landscape
The project financing landscape in Indonesia continues to evolve, with a stronger emphasis on sustainability, regulatory improvements, and innovative financial structures. The market has seen a shift towards green energy projects, more defined local content requirements, and increased involvement from multilateral agencies. Despite global economic challenges, including rising interest rates, Indonesia’s focus on energy transition and infrastructure development has opened up new opportunities ‒ particularly in renewable energy, social impact projects, and digitalisation in financing mechanisms.
Rise of green and sustainable financing
Indonesia has experienced a significant rise in sustainable financing from 2018 to 2024. The Indonesian government issued more than USD9.5 billion in green, social, sustainable and other labelled (GSS+) bonds (United Nations Development Programme, 2024). In 2023 alone, sustainability-focused debt instruments in Indonesia reached INR13.6 trillion, and green bonds issuance accounted for the majority of sustainability bonds at INR12.9 trillion (Jakarta Globe, 2023). This highlights that much of the GSS+ bonds issued both by the government and private sector in Indonesia are primarily directed towards the energy sector.
The evolving policy landscape in Indonesia further underscores the urgent need for increased financing in green energy projects. The recently promulgated National Long-Term Development Plan 2025‒45, established under Law No 59 of 2024, sets out an energy transition plan in four phases:
Each phase outlines the measures towards renewable energy development, nuclear development, coal phase-out, electric vehicles, and many more. By way of example, the first phase focuses on limiting coal power plant development and on the preparation of regulations and institutions for nuclear power plants, whereas the second phase aims at retiring coal power plants and operating the first commercial nuclear power plant. Furthermore, to achieve 2045 Indonesia Gold, the National Long-Term Development Plan optimistically aims for a new and renewable energy mix of 70% by 2045.
As the national utility company, PLN (Perusahaan Listrik Negara) has committed to accelerating the energy transition and developing more renewable power plants as part of PLN’s National Electricity Supply Business Plan (Rencana Usaha Penyediaan Tenaga Listrik, or RUPTL). The current effective RUPTL for 2021–30, which is claimed as PLN’s greenest RUPTL thus far, has a significant focus on new and renewable power plants that are expected to contribute 20.9 GW (or 51.6% of the total development plan). To accelerate this, PLN intends to foster private sector participation by co-operating with the private sector in developing 56.3% of the 20.9 GW renewable energy projects outlined in the RUPTL.
Since 2021, PLN has implemented a green finance framework, recognising the importance of the issuance of green debt in facilitating PLN’s green transformation (PLN, 2021). The RUPTL also includes PLN’s commitment to utilising green debt for projects that deliver the environmental benefits of climate change mitigation, with a focus on renewable energy, energy efficiency, and clean transportation. Recent developments reveal that PLN has planned on the Accelerated Renewable Energy Development (ARED) scenario that is expected to be incorporated in the upcoming 2024–33 RUPTL. Under the ARED scenario, the renewable energy mix must reach 75% in Indonesia, which includes the development of renewable power plants, a smart and interconnected grid, and electrification in the transportation and household sector (CNBC, 2024).
Furthermore, Indonesia is currently revising the national energy policy, with aims to decarbonise the energy sector, reach emission peak in 2035, and reach net-zero emission by 2060 (CNBC Indonesia, 2024). With Indonesia’s ambitious climate targets and current policy development, there is substantial potential for future development in green and sustainable financing.
Energy transition financing and carbon market development
Indonesia has introduced carbon pricing mechanisms – including carbon trading, result-based payments, carbon levies, and other mechanisms determined by Minister of Environment and Forestry (MOEF) through Presidential Regulation No 98 of 2021 on Carbon Pricing for Achieving the Nationally Determined Contribution Target and Controlling Greenhouse Gas Emission in National Development (PR 98/2021) and its implementing regulations – with the goals of fully implementing carbon trading and expanding the carbon tax, depending on the readiness of the relevant sectors, by 2025. Minister of Energy and Mineral Resources Regulation No 16 of 2022 on the Procedures for Carbon Pricing Implementation for the Power Plant Subsector (MEMR Reg 16/2022) serves as the implementing regulation that focuses on the power plant subsector through:
There has been an increase in the financing of numerous projects aimed at contributing to achieve the Nationally Determined Contribution target by reducing greenhouse gas emissions by 29% by 2030 (and by up to 41% if carried out through international co-operation). By way of example, PT Sarana Multi Infrastruktur (Persero), a special mission vehicle under the Ministry of Finance, has financed 73 climate change-related projects amounting to INR24.6 billion (with project values of INR141.7 billion). Of these, 49 are expected to reduce greenhouse gas emissions up to 6.8 million metric tonnes of carbon dioxide equivalent and generate carbon credits equal to USD25 million.
Another notable example of renewable energy is the Japan Fund for Joint Crediting Mechanism (JFJCM) grant of USD10 million, disbursed by the Asian Development Bank (ADB) to PT Geo Dipa Energi for the Patuha Unit 2 Geothermal Power Plant. This marks the first project in Indonesia to receive this grant, which uses advanced technologies to reduce carbon emissions and accelerate the plant’s operation (PT Geo Dipa Energi (Persero), 2023). The project is expected to cut greenhouse gas emissions by 264,200 metric tonnes of carbon dioxide equivalent per year over a 20-year period, with the carbon credits being used to meet international carbon reduction commitments (Deputy VII, 2023).
The increase in carbon finance projects is not without its own hurdles. Typically, in projects funded by grants, the parties providing the grants intend to claim some of the carbon credits generated from the projects. However, the Indonesian carbon trading regulatory framework ‒ which only allows international carbon trading after the achievement of the Nationally Determined Contribution target for subsectors or sub-subsectors ‒ has been a challenge in transferring these carbon credits to international grant-makers, thereby hindering the process of these grant provision.
Along with carbon finance, energy transition financing is also drawing attention in Indonesia. Indonesia has initiated its energy transition in the electricity sector by increasing clean energy power plants and planning early retirement of 15 CFPPs, with a total capacity of 4.8 GW, by 2030 (Antaranews, 2023). To support Indonesia in accelerating this transition, the ADB is helping to establish a solid policy and regulatory framework for clean energy, improve sector governance, and ensure financial sustainability. The Cirebon-1 660 MW CFPP has been selected as a pilot project for coal phase-out, aiming to cease operations by 2035 (seven years earlier than 2042), with financial support from the ADB of around USD300 million (Katadata, 2023). At the 28th Conference of the Parties (COP28), Indonesia and the ADB signed a memorandum of understanding on the alignment of energy transition mechanisms (Antaranews, 2023), benchmarking the plan to speed up the early retirement project for decarbonisation. This initiative is vital for reducing emissions in order to combat climate change.
Currently, discussions are ongoing between PLN and the developer of Cirebon-1 660 MW CFPP with regard to new electricity sales and a purchase arrangement for the shortened operation period, as this requires a clearer and stronger legal framework (DW, 2024). The financial plan includes considerations for the impact on the plant’s employees, including compensation due to coal phase-out implementation. Further, to replace the power supply from Cirebon-1 660 MW CFPP, PLN will also need renewable power plants totalling 2,400 MW to maintain the electricity supply and electricity grid stability (Kumparan, 2024).
Local content requirements and regulatory shift
In July 2024, the government of Indonesia issued a series of regulations related to local content, which reform the governance of local content requirements for power project development in Indonesia. One of the most notable changes resulting from the issuance of these regulations is the shift in authority over local content thresholds for power projects from the Ministry of Industry (MoI) to the Minister of Energy and Mineral Resources Regulation (MEMR).
In addition, MEMR Reg 11/2024 also attempts to offer solutions for projects funded by government offshore loan/grants. Before, foreign investors and lenders often hesitated to provide financing for Indonesian projects, owing to difficulties in meeting local content requirements and discrepancies between Indonesian procurement regulations and loan or grant agreements. One report reveals that delays in the development of the Hululais geothermal power plant occurred because the Japan International Co-operation Agency (JICA), the lenders, decided not to proceed with the loan because the local content threshold requirements did not align with JICA’s procurement guidelines (Katadata, 2023).
However, Article 17 of MEMR Reg 11/2024 introduces a more flexible approach, where power projects funded by foreign loans or foreign grants are required to follow the requirements to comply with MEMR Reg 11/2024 (except if stipulated otherwise in the relevant loan or grant agreement). This flexibility applies under the condition that the project is intended to meet all or partial domestic electricity needs, with at least 50% of the loan/grant value originating from multilateral or bilateral creditors (development banks or financial institutions). This includes:
The reference to “business entities” herein remains open to interpretation as to whether it only includes those projects with a sovereign-direct or government two-step loans or grants to state-owned enterprises or whether it potentially includes projects in which private business entities secure grants or direct loans from multilateral or bilateral agencies that fulfil the requirements.
Sustainability-linked loans and sustainability-linked bonds
The increasing focus on sustainability and climate goals in Indonesia has brought sustainability-linked loans (SLLs) and sustainability-linked bonds (SLBs) to the forefront of project financing. These instruments are becoming key in aligning corporate financing with ESG targets, especially as Indonesia embarks on a major energy transition. Both SLLs and SLBs offer financial incentives tied to achieving specific sustainability performance targets (SPTs), encouraging companies to integrate sustainability into their core business operations.
SLLs are structured in such a way that loan terms, including interest rates, are linked to a borrower’s ability to meet predefined sustainability targets. Borrowers who meet their environmental or social goals can benefit from reduced interest rates, creating a strong incentive for sustainable business practices. This not only provides cost savings for businesses but also promotes sustainable development in key sectors such as energy.
On the other hand, SLBs offer a similar incentive structure but with more flexibility in how the proceeds are used. Whereas green bonds are dedicated to specific environmental projects, SLBs offer more flexibility, allowing issuers to use the proceeds for general corporate purposes while still being accountable for sustainability targets. The bond’s coupon rates are linked to the issuer’s progress in meeting sustainability Key Performance Indicators (KPIs), which makes SLBs attractive for companies looking to maintain broader financial flexibility while committing to sustainability performance.
Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan, or OJK) has played a pivotal role in shaping the regulatory environment. The issuance of OJK Regulation No 18 of 2023 on Issuance and Requirements for Sustainable Debt Securities and Sustainable Sukuk (POJK 18/2023) provides much-needed guidance for sustainable financing instruments. This regulation, which supersedes the previous regulation on green bonds, establishes specific criteria and standards for SLLs and SLBs. By promoting transparency and accountability, POJK 18/2023 aims to boost investor confidence in financing projects aligned with sustainability goals and the ESG framework.
These instruments are particularly relevant to Indonesia’s electricity sector, which faces growing pressure to reduce greenhouse gas emissions as part of the country’s energy transition. Borrowers of SLLs can secure more favourable loan terms by meeting sustainability KPIs, such as reducing greenhouse gas emissions, whereas SLB issuers may face financial penalties if they fail to meet agreed-upon targets. This direct link between sustainability performance and financial outcomes positions SLLs and SLBs as vital tools in advancing Indonesia’s climate and energy goals.
Introduction of TKBI (carbon, sustainability and investment taxonomy)
The Financial Services Authority launched the Taxonomy for Indonesian Sustainable Financing (Taksonomi untuk Keuangan Berkelanjutan Indonesia, or TKBI) in February 2024 to serve as a guideline aimed at increasing capital allocation and sustainable financing, thereby supporting Indonesia’s ambition to reach its net-zero emissions target by 2060. The TKBI classifies economic activities into three classifications ‒ namely, green, transition, or not meeting any classification ‒ to provide guidance for investors, developers, and stakeholders on investing or participating in projects that support Indonesia’s sustainable development goals.
The TKBI’s classification framework is based on the Indonesian Standard Business Field Classification (Klasifikasi Baku Lapangan Usaha Indonesia, or KBLI), which is used to identify the business licence required for each activity. The TKBI is intended to replace the Indonesian Green Taxonomy introduced in 2022 by providing classification of economic activities across the five primary sectors under Indonesia’s Nationally Determined Contribution ‒ namely, energy, agriculture, waste, forest and other land use (FOLU), and industrial process and production use (IPPU). However, the focus of the TKBI is currently limited to the energy sector, meaning that the 2022 Indonesian Green Taxonomy remains applicable in other sectors.
To ensure compatibility with international taxonomies, the TKBI was developed by referring to the Association of Southeast Asian Nations (ASEAN) Taxonomy for Sustainable Finance, which evaluates economic activities against:
One of the noteworthy aspects of the TKBI is that it covers energy sector activities that are not addressed in the earlier Indonesian Green Taxonomy, such as early termination of CFPPs, storage of electricity, conservation services/energy efficiency, and carbon capture and storage. Given that these activities currently lack specific KBLIs, they are classified under those existing KBLIs that are considered most relevant. By way of example:
This integration provides a clearer regulatory pathway for these activities, indicating that businesses involved in such areas can use the existing KBLIs and business licences to operate. This development is critical in facilitating the expansion of Indonesia’s sustainable development initiatives while aligning with international standards for sustainable finance.
Increased role of sovereign wealth funds and development banks
Indonesia has seen a significant rise in the involvement of its sovereign wealth fund, the Indonesia Investment Authority (INA), particularly in major infrastructure projects. INA plays a crucial role in mobilising and managing investments for infrastructure development, often in collaboration with development banks. This partnership aims to attract foreign direct investment and foster long-term growth in sectors critical to Indonesia’s economic development.
INA’s involvement extends to several high-profile infrastructure projects, including the development of toll roads, airports, and seaports. Notable examples include the Patimban Port project, which enhances Indonesia’s maritime connectivity, and the Jakarta-Cikampek II Elevated Toll Road, which improves transportation infrastructure in key industrial regions. By working closely with development banks such as the ADB and the World Bank, INA ensures that these projects are funded and executed efficiently, contributing to Indonesia’s infrastructure growth and economic resilience.
Additionally, INA is a key player in Indonesia’s energy transition efforts ‒ specifically, through its involvement in the Just Energy Transition Partnership (JETP) and the early retirement programme for CFPPs such as the Cirebon PLTU. In collaboration with development banks such as the ADB, INA is facilitating the financing and strategic execution of these programmes, which aim to accelerate the shift towards renewable energy and reduce Indonesia’s reliance on coal.
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