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Project Finance

Project FinanceContributing editorsPhillip Fletcher and Aled Davies

2017

Project Finance 2017Contributing editors

Phillip Fletcher and Aled DaviesMilbank, Tweed, Hadley & McCloy LLP

PublisherGideon Robertongideon.roberton@lbresearch.com

SubscriptionsSophie Palliersubscriptions@gettingthedealthrough.com

Senior business development managersAlan Leealan.lee@gettingthedealthrough.com

Adam Sargentadam.sargent@gettingthedealthrough.com

Dan Whitedan.white@gettingthedealthrough.com

Published byLaw Business Research Ltd87 Lancaster RoadLondon, W11 1QQ, UKTel: +44 20 3708 4199Fax: +44 20 7229 6910

© Law Business Research Ltd 2016No photocopying without a CLA licence.First published 2oo7Tenth editionISSN 1755-974X

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of August 2016, be advised that this is a developing area.

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LawBusinessResearch

CONTENTS

2 Getting the Deal Through – Project Finance 2017

Overview 5Phillip Fletcher and Aled DaviesMilbank, Tweed, Hadley & McCloy LLP

The US PPP market’s growing pains 8Ivan E Mattei and Armando Rivera JacoboDebevoise & Plimpton LLP

Angola 10Catarina Levy Osório and Irina Neves FerreiraAngola Legal Circle Advogados

Brazil 16Fabrizio de Oliveira Sasdelli and Felipe Eluf CreazzoLobo & de Rizzo Advogados

Cambodia 23Martin Desautels and Sambo LyDFDL

Canada 28Alison R Manzer and Charles NewmanCassels Brock & Blackwell LLP

China 34Andrew Ruff and Claude JiangShearman & Sterling LLP

Colombia 40Bernardo P Cárdenas Martínez, Catalina Pinilla and Angela BotíaDentons Cardenas & Cardenas

Dominican Republic 47Fabio J Guzmán-Saladín, Alfredo A Guzmán-Saladín and Alberto Reyes BáezGuzmán Ariza

England & Wales 53Andrew Petry and Rose-Anna DaukesSimmons & Simmons LLP

Hungary 62Zoltán Varga and Balázs BaranyaiNagy és Trócsányi

India 69Jatin AnejaShardul Amarchand Mangaldas & Co

Indonesia 75Emalia Achmadi, Robert Reid and Denia IsetiantiSoemadipradja & Taher

Japan 85Naoaki Eguchi, Gavin Raftery and Yasuhisa TakatoriBaker & McKenzie (Gaikokuho Joint Enterprise)

Kyrgyzstan 91Saodat Shakirova and Omurgul BalpanovaARTE Law Firm

Laos 97Walter Heiser, Senesakoune Sihanouvong and Agnès CouriolDFDL

Mexico 103Rogelio López-Velarde and Amanda ValdezDentons Lopez Velarde SC

Mozambique 110Fernanda LopesFernanda Lopes & Associados

Myanmar 115Jaime Casanova, James Finch and Bernard CobarrubiasDFDL

Netherlands 121Marieke Driessen, Andrea Chao and Camilla MolinoSimmons & Simmons LLP

Nigeria 128Fred Onuobia, Oluwatoyin Nathaniel and Okechukwu J OkoroG Elias & Co

Panama 133Erika Villarreal ZoritaAnzola Robles & Asociados

Portugal 140Teresa Empis Falcão and Ana Luís de SousaVieira de Almeida & Associados, Sociedade de Advogados, SP RL

Slovenia 145Andrej Andrić, Blaž Merčun and Sašo JovčićOdvetniška družba Andrić o.p. – d.o.o.

South Africa 150Eric le Grange, Kim Eichorn, Innes Du Preez and Calyb SoekoeENSafrica

Sweden 159Peter Dyer and Andreas LindströmFoyen Advokatfirma

Switzerland 164Thiemo Sturny and Stefan ScherrerStaiger, Schwald & Partner Ltd

Thailand 169David Doran and Kraisorn RueangkulDFDL

United States 177Ivan E Mattei and Armando Rivera JacoboDebevoise & Plimpton LLP

Vietnam 182Hoang Phong Anh and Kristy NewbyDFDL

Zambia 187Eustace Ng’omaChibesakunda & Co Advocates

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IndonesiaEmalia Achmadi, Robert Reid and Denia IsetiantiSoemadipradja & Taher

Creating collateral security packages

1 What types of collateral and security interests are available?Under Indonesian law, land, moveable property, fixtures, receivables, securities (including shares) and certain after-acquired assets are among the objects that can be used as collateral for the recognised types of secu-rity referred to below. There is no recognised security instrument available to take security over operating rights or concessions, entire enterprises, or contractual or leasehold rights.

For project finance transactions, the primary security interests that can be taken over applicable collateral are as follows.

MortgageA mortgage is a security regulated under Law No. 4 of 1996 on Rights to Mortgage Land and Fixtures on Land. It is possible to have more than one debt secured by a single mortgage and multiple mortgages may be given by a debtor to secure a single debt. Mortgages can be granted over certain types of rights over land, the most common of which in project financing would include the ‘right to own’, the ‘right to cultivate’, the ‘right to build’ and the ‘right to use’. Mortgages may also encumber fixtures on land.

Fiduciary securityA fiduciary security is a security interest regulated under Law No. 42 of 1999 on Fiduciary Securities.

Moveable and certain immoveable assets (excluding land, aircraft and vessels above 20 cubic metres), both tangible and intangible, can be secured under an instrument of fiduciary security. The types of assets that can be secured by a fiduciary security include:• equipment, machinery, stock, inventory and other unencumbered

goods that can be owned and transferred;• receivables;• buildings and fixtures on land, which are not able to be encumbered by

mortgage rights and remain under the control of the fiduciary grantor (which would include apartment units constructed upon land based on a ‘right to use’); and

• insurance proceeds.

Title to the collateral subject to an instrument of fiduciary security is transferred on a fiduciary basis to the secured party (fiduciary grantee or creditor), while the debtor or fiduciary grantor is allowed to remain in pos-session of the collateral. Title will be automatically returned to the debtor by operation of law upon full repayment of the underlying debt.

Objects of a fiduciary security do not need to be in existence at the time of execution of a fiduciary security; they can be acquired by the fidu-ciary grantor at a later date.

PledgeThe main regulations governing pledges are contained in the Indonesian Civil Code (ICC).

A pledge is an interest granted by an owner over moveable property (tangible and intangible) to a creditor as security for a debt.

Moveable property that can be pledged includes bank accounts in the form of time deposits and certain financial instruments (including shares and securities such as government bonds and Bank Indonesia (BI) cer-tificates). A pledge is a possessory security in that the moveable property

secured by the pledge must be under the physical possession of the pledgee or a mutually agreed third party.

2 How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

There are different requirements to be fulfilled to perfect each type of collateral. Parallel debt clauses under a trust structure are not recognised in Indonesia, but contractual arrangements governing the relationship between the lenders and an appointed security agent (who can be the named holder and administrator of the security on behalf of the lenders) are recognised.

MortgageThe mortgagor and mortgagee must sign a mortgage deed in a prescribed form before an authorised land deed official. The deed of mortgage must then be registered with the relevant land office no later than seven days after the mortgage deed has been signed. The priority right of the mort-gagee (project creditor) comes into existence on the date that the relevant land office has registered the mortgage in the land register maintained by the land office.

The mortgage deed must be made in the Indonesian language and must satisfy several statutory requirements, including containing details of the name, identity and place of domicile of the mortgagor and mortgagee(s), specific reference to the debt secured by the object of the mortgage, the secured amount and a detailed description of the object of mortgage.

Fees of the land deed official are negotiable, but in practice tend to be around 0.1 per cent of the total amount secured depending on the location of the object of the mortgage and the amount secured. Registration fees range between 50,000 and 50 million rupiah on a fixed sliding scale.

Upon registration of a mortgage, the relevant land office will issue a mortgage certificate to the mortgagee as evidence of its security rights over the object of the mortgage. The holder of a mortgage certificate will be granted priority to receive the proceeds following the enforcement of the mortgage.

If there is more than one project creditor as mortgagee, an agent may be appointed by such mortgagees to act on their behalf, but in practice each mortgagee should be named in the mortgage deed and also named in the mortgage certificate.

Fiduciary securityA fiduciary security instrument is required to be drawn up in a notarial deed in the Indonesian language and contain certain information, includ-ing the identity of the fiduciary security grantor and grantees, details of the underlying agreement that is being secured by the fiduciary security, details of the fiduciary security object, the secured amount and the value of the fiduciary security object (relevant information). In practice, an English version of the fiduciary security deed can also be prepared and attached to the deed.

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The Ministry of Law and Human Rights (MoLHR) has an online sys-tem for fiduciary security registration, whereby the fiduciary security grantee (or its proxy, the applicant) may register the fiduciary security electronically at the Legal Entity Administration System website. To date, only Indonesian notaries are given access to register fiduciary securities on the website.

The fiduciary security deed must be electronically registered within a maximum of 30 days of the date of execution. In order to register a fidu-ciary security, the notary must enter the details of the fiduciary security onto the website. Upon entry of the details onto the website, the applicant can then make payment for the registration at the designated tax payment bank, known as ‘Bank Persepsi’.

Once payment has been made for the registration, the fiduciary secu-rity will be electronically registered and the applicant can then print the registration certificate, which is electronically signed by the relevant fidu-ciary security registration officer.

From the date of effectiveness of the fiduciary security, being the date on which the fiduciary security is electronically registered, the fiduci-ary security grantee will have a priority right over unsecured creditors to receive payment of its claims from proceeds of the sale of assets secured under the fiduciary security following a default.

If there is more than one project creditor as a fiduciary security grantee, an agent may be appointed by such grantees to act on their behalf, but each grantee must be named in the fiduciary security deed and also named in the fiduciary registration certificate. The same object cannot be secured under more than one fiduciary security. The relationship between the fiduciary security grantees themselves and the agent would normally be governed by a private security agency agreement.

Fees charged by a notary to draw up a fiduciary security deed are based on the following rates:• a maximum of 2.5 per cent of the underlying asset value for assets val-

ued up to 100 million rupiah;• a maximum of 1.5 per cent of the underlying asset value for assets val-

ued between 100 million rupiah and 1 billion rupiah; and• a maximum of 1 per cent of the underlying asset value for assets valued

at above 1 billion rupiah.

The registration fee is between 50,000 rupiah and 12.8 million rupiah, depending on the secured value.

PledgeThe law does not require any specific form for a pledge of collateral, although the terms of the pledge are usually set out in a notarial deed. In practice, a deed of pledge can be prepared in bilingual form (both Indonesian and English). As stated above, the pledgor must part with physical possession of the moveable property, which must move from the pledgor to the pledgee or an agreed third party. Unlike a mortgage or fidu-ciary security, there is no specific registration procedure for pledges (with the exception of pledges over shares, as elaborated upon below).

A pledge can also be taken over intangible moveable property (eg, time deposits, receivables, shares and other securities). Such a pledge is established by delivery of a notice to the person or entity against whom the pledge is to be enforced. For example, in the case of shares, a notice of pledge must be given to the company that issued the shares to instruct the company to register the pledge in the shareholders’ register. In the case of receivables, a notice of pledge would need to be sent to each receiva-bles debtor, and in the case of a pledge over a time deposit, the practice is for the pledgor and pledgee to send a notice of pledge to the relevant bank requesting that the bank deposit be effectively blocked.

Evidence of ownership of pledged intangible property, such as share certificates, certificates of time deposit and certificates of ownership of securities, must be delivered to the pledgee.

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

MortgageA creditor who intends to become a mortgagee may check with the land office having jurisdiction over the place where the land is located to ascer-tain whether there are any existing mortgages over the land. To be able to carry out this process, the creditor would need to bring the original land certificate to the land office. As such, the cooperation of the mortgagor would normally be required.

Fiduciary securitySearches can be conducted at the Fiduciary Registration Office (FRO), both online and manually, to check whether there are any already existing registered fiduciary securities. The person conducting the search needs to have the fiduciary certificate number (which was generated when the origi-nal registration was made), details of the secured goods, the name of the fiduciary security grantee or the name of the fiduciary security grantor.

As at the end of June 2016, our research indicated that the inter-nal records of the FRO were being reorganised, so that the information available online will only pick up fiduciary securities registered from March 2013 up to the present time. The only way to carry out a search for fiduciary securities registered before March 2013 is by a manual search at the FRO, involving a line by line review of all fiduciary registrations going back to 2000. The manual search process is particularly time- consuming since there is no keyword search facility. Based on our experi-ence, a manual search may take a number of weeks to complete and is not reliable because of internal inadequacies regarding the registration pro-cess and the potential for human error.

PledgeAs noted above, pledges are not registrable. However, in relation to the existence of any pledge of shares in an unlisted company, a creditor should always check the relevant company’s shareholders’ register to see if the shares have already been pledged to a third party. For a pledge over listed shares, the creditor should request evidence of any pledge over such shares from the Indonesian Central Securities Depository through the rel-evant pledgor.

4 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?

MortgageThe first mortgagee has the legal right to sell by way of public auction the mortgaged property upon the occurrence of an event of default under the principal agreement, and to use the proceeds to repay all outstanding amounts that are due and payable.

In theory at least, the holder of a first mortgage has an immediately executable right and may enforce its security (by selling the mortgaged property through public auction) without having to obtain a court order (fiat executie). However, in practice, some auction houses may require an order from the relevant district court to enforce the mortgage. There is no prohibition on any project creditor attending a public auction and bidding for the mortgaged property. Such a right to bid is, however, limited by the fact that, as a general rule, foreign entities are not permitted to purchase real property in Indonesia.

In the case of execution of a mortgage, the law on mortgages allows a mortgagor and a mortgagee to agree to a private sale of the mortgaged property, subject to certain conditions, including: the mortgagor and mort-gagee must agree after the occurrence of the default to carry out the pri-vate sale that will result in the highest price being obtained for the benefit of both parties; the intention to carry out a private sale must be commu-nicated to the relevant parties and published in certain newspapers; and there must be no objection to the sale by any relevant party (eg, an objec-tion by a second or later mortgagee).

The procedure to obtain a court order for foreclosure on the secured mortgaged property and for the auction to be conducted could take approx-imately three to six months to complete, as long as the foreclosure has not been challenged in the court by an opposing claim filed by the debtor. Such opposition claims could tie the proceedings up for a number of years until a final and binding judgment has been obtained.

A creditor or mortgagee is entitled to the proceeds of the sale of the secured property and to apply the proceeds against the debt owing to the creditor or mortgagee. After applying the amount of the proceeds against the debt, any surplus must be returned to the debtor or mortgagor (owner of the collateral), subject to the rights of any second or later mortgagee. If the proceeds are less than the amount of the debt, then the debtor con-tinues to be obligated to pay the balance to the creditor, whose status will automatically change into that of unsecured creditor, unless the creditor holds other collateral.

Fiduciary securityAs with mortgages, the law on fiduciary security provides that the holder of a fiduciary security has an immediately executable title to the secured

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assets (executorial title). Therefore, upon default by the debtor, the fiduci-ary holder or creditor is (in theory at least) entitled to carry out foreclosure. In practice, the foreclosure process will usually require the mortgagee to commence proceedings in the relevant district court to obtain a court order (fiat executie) to enforce its rights over the secured assets.

As with foreclosure of mortgages, the procedure to obtain a court order for foreclosure of property subject to a fiduciary security and for the auction to be conducted could take approximately three to six months to complete, subject to an opposition claim filed in the court by the debtor, which could tie up proceedings for a number of years. There is no prohibi-tion on any project creditor attending a public auction and bidding for the property secured under a fiduciary security, subject to the restrictions on foreign parties owning real property in Indonesia.

A creditor or holder of a fiduciary security is entitled to the proceeds of the sale of the secured property and to apply the proceeds against the debt owing to the creditor or holder of the fiduciary security. After applying the proceeds against the debt, any surplus must be returned to the debtor or granter of the fiduciary security (owner of the collateral). If the proceeds are less than the debt, then the debtor continues to be obligated to pay the balance to the creditor, whose status will automatically change into that of unsecured creditor, unless the creditor holds other collateral.

Following termination of a fiduciary security (eg, when the relevant debt has been settled), such termination must be reported to the MoLHR within 14 days as of the effective date of the termination.

PledgeA pledgee (security holder) is not permitted to appropriate the pledged property to itself upon an event of default of the pledgor, and any provision in a pledge agreement to the contrary is invalid.

The ICC provides that unless the parties otherwise agree, the pledged property may either be sold in public ‘in accordance with local custom’ or in a manner determined by the court.

If pledged property is to be sold in public, it has generally been inter-preted to mean a sale by public auction through a registered auction house. The proceeds, less the costs of enforcement and the sale, can be used to repay the outstanding debt owed to the security holder. Generally, the security holder would be entitled to participate in the auction process.

Although the ICC does not require the security holder to obtain a court order (fiat executie) before it enforces a pledge over the pledged property, in practice most auction houses would require a court order before they would be prepared to proceed with the auction process (as is the case with foreclosure of mortgaged property and property subject to a fiduciary secu-rity). (Please see the response on the timing to obtain a court order and complete the auction process in the above sections on mortgages and fidu-ciary securities, which are also applicable to pledges.)

Auction fees and statutory taxes are payable in respect of a success-ful auction of both immoveable and moveable property, depending on the value of the relevant property.

5 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? Are there any preference periods, clawback rights or other preferential creditors’ rights (eg, tax debts, employees’ claims) with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

Bankruptcy in Indonesia is under the jurisdiction of the Commercial Court. If the Commercial Court accepts a bankruptcy petition in respect of a debtor project company, the Court will appoint a receiver to settle such a company’s debts, under the supervision of a supervisory judge. Except for assets that have been encumbered as collateral to secured creditors, all assets owned by the debtor project company are available to the receiver to satisfy the claims of unsecured creditors.

The rights of secured creditors are protected in the case of bankruptcy of the project company. In principle, before a bankruptcy declaration is granted, a secured creditor can execute its rights over its security as if there were no bankruptcy proceedings. However, any foreclosure by secured creditors must be deferred for up to 90 days from the date of a bankruptcy declaration by the Commercial Court, which must be issued within 60 days of submission of the bankruptcy petition (unless an application for suspension of payments is filed, as detailed further below).

At the end of the 90-day period, secured creditors can exercise their rights to enforce their security within two months of the occurrence of insolvency, which is deemed to occur if no composition plan is offered to the creditors, the composition plan is rejected (by the vote of the unsecured creditors) or such a composition plan is not ratified by the Commercial Court, regardless of the approval of unsecured creditors.

Indonesian law provides for the debtor to work out a court- supervised composition plan or settlement between the creditors in the period between the court granting a ‘provisional suspension of payments’ for a maximum of 45 days and subsequently a ‘permanent suspension of payments’, which is a maximum of 270 days from the date on which the provisional suspension of payments is granted by the court. If creditors have filed a bankruptcy petition, the debtor can file for a suspension of pay-ments at the first bankruptcy hearing. If the secured and unsecured credi-tors vote in favour of a composition plan in accordance with the relevant statutory percentages, it will be binding on all the creditors, if ratified by the Commercial Court.

If the requisite vote of the secured and unsecured creditors for a com-position plan is not obtained within the relevant statutory period, or such period is not extended, then the debtor project company will be declared bankrupt and will be in a state of insolvency. Secured creditors must exer-cise their rights of foreclosure within two months after the debtor project company is deemed to be insolvent.

Essentially, Indonesian law does not discriminate between foreign creditors’ claims against a bankrupt project company and the claims of domestic creditors. However, in some sectors only the relevant regulatory authority has the capacity to file a bankruptcy petition against a project company. These sectors include: banks, where the authorised regulator is the BI; insurance companies, pension funds and certain state-owned enterprises, where the Minister of Finance has the statutory authority to file a bankruptcy petition; and in the case of a securities house, where the Financial Services Authority (OJK) has the statutory authority to com-mence bankruptcy proceedings.

Indonesian legislation provides for preference periods and clawback rights. The general rule is that past transactions involving the bankrupt project company’s assets can be overturned if it can be proven that at the time of the transaction, the company and the relevant third party were aware (or should have been aware) that losses to the company’s creditors would result from the consummation of such a transaction. Legal acts con-ducted by the project company within one year before the declaration of bankruptcy and that were not actually required to be undertaken by the project company, causing losses to the creditors, are deemed to be prefer-ential transactions and can be overturned.

Indonesian law provides for conservatory attachment orders in respect of property, which can be applied for as part of a claim against a bankrupt project company.

The payment of priority claims in a bankruptcy is regulated under the ICC and the relevant tax laws, whereby the payment of court and auction costs and payment of taxes rank above payments to secured creditors in the case of the successful foreclosure of secured property.

Foreign exchange and withholding tax issues

6 What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

Based on the prevailing BI regulations, the purchase of foreign currency against rupiah between a foreign exchange bank and domestic or for-eign customers through a spot transaction in excess of US$25,000 (or the equivalent in another foreign currency) per month per customer can only be made based on an underlying transaction agreement. The transfer of rupiah overseas by Indonesian banks is prohibited.

Monetary limits are also regulated by the BI on foreign currency exchange transactions between foreign-exchange banks and domestic or foreign customers involving derivatives (including swaps, options and forward transactions), before an underlying transaction agreement will be required.

The Indonesian Currency Law, passed in 2011, requires the use of rupiah in the following transactions in Indonesia:• all transactions for the purposes of payment;• settlement of other monetary obligations; and• other monetary transactions.

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However, certain transactions are exempt from the requirement to use rupiah, including:• certain transactions in relation to the implementation of the

state budget;• receipt or extension of offshore grants;• international commercial transactions;• foreign currency deposits in banks; and• international financing transactions (offshore loans).

Anyone (payer or recipient) found violating the Currency Law may receive a jail term of up to one year and a fine of up to 200 million rupiah.

On 31 March 2015, the BI issued Regulation No.17/3/PBI/2015 on the Obligation to Use Rupiah within the Territory of the Republic of Indonesia (BI Regulation 17/3). Subsequently, on 1 June 2015 the BI issued a further implementing regulation, BI Circular Letter No. 17/11/DKSP (BI Regulation 17/11) (BI Regulation 17/3 and BI Regulation 17/11 are referred to as the New Currency Regulations).

The New Currency Regulations:• follow the Currency Law and provide further, tighter regulations

on the requirement to use rupiah for financial transactions within Indonesia and aim to limit the available exemptions;

• now introduce details (including examples, in some cases) for each exemption under the Currency Law;

• explicitly state that the obligation to use rupiah includes cash as well as non-cash transactions;

• require all businesses to only use rupiah to quote prices for their goods and services, prohibiting the use of foreign currency for such pur-poses; and

• provide a transitional provision that states that written agreements for non-cash transactions using foreign currency that were made before 1 July 2015 will remain effective until they expire, but that for cash transactions, any written agreements signed after 31 March 2015 must use rupiah.

The BI also provides guidelines on its website in the form of ‘Frequently Asked Questions’, containing various examples relating to the New Currency Regulations.

7 What 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?

There are no restrictions on the remittance of foreign currency overseas. However, if a remittance of an amount above US$10,000, or its equivalent in other foreign currency, is carried out through a bank, a report must be made by the bank based on the information received from the customer. The customer is required to provide the bank with the information on the remitter and the beneficiary of the funds, the financial relationship between the remitter and the beneficiary and the purpose of the remittance.

Withholding tax of 20 per cent is applicable to payments of dividends and interest payments (including premiums, discounts and guarantee fees) to offshore parties, subject to the benefit that any foreign investor or credi-tor may have under a relevant tax treaty.

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

There are no requirements for project companies to repatriate their earn-ings derived from their business activities in Indonesia. Based on the Indonesian Investment Law (as defined below), investors in Indonesia may repatriate in foreign currency their capital, earnings, bank interest, dividends, loan repayment funds, divestment revenues and revenues from sales of assets (among other categories of income). The right to repatriate earnings in foreign currency under the Indonesian Investment Law would be recognised under the exceptions to the New Currency Regulations.

9 May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Generally, project companies are allowed to open and maintain foreign currency accounts both locally and with offshore banks.

However, there is a requirement (originally imposed by BP Migas, and now by its successor, SKK Migas) for all oil and gas contractors to use domestic banks for their banking transactional needs.

Although there are no restrictions or limitations on the repatriation or use of project companies’ earnings derived from their business activities in Indonesia (see question 8), regulations passed in 2014 impose a require-ment to use accounts in Indonesian banks, including Indonesian branches of offshore banks (foreign exchange banks), to receive any export proceeds and certain types of offshore loans (including non-revolving loans).

Foreign investment issues

10 What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Foreign investment in Indonesia in project companies is governed under Law No. 25 of 2007 on Capital Investment (the Investment Law) and can only be made through the establishment of, or investment in, a limited liability (PT) company, which must first obtain an in-principle permit from the Investment Coordinating Board (BKPM). For certain lines of business (eg, mining, oil and gas, plantations, education, etc) the recommenda-tion of the relevant supervising government institution must be obtained before the BKPM will grant an in-principle permit.

Under a BKPM regulation issued in 2015, the general requirements for the minimum amount of investment capital to be made in a foreign invest-ment company must be more than 10 billion rupiah (or its equivalent in US dollars), excluding land and buildings. A minimum of 2.5 billion rupiah (or its equivalent in US dollars) issued share capital is required, while each shareholder must have a minimum investment of 10 million rupiah (or its equivalent in US dollars).

For any business expansion, the BKPM would generally require addi-tional investment in the amount of more than 10 billion rupiah (through equity or equity and loan capital) for each additional business activity.

Foreign investors who wish to invest in Indonesia must comply with a regulation (Negative List) that lists specific lines of business in Indonesia that are closed to foreign investment or open to foreign investment sub-ject to conditions (one common condition is that a local party must hold a minimum percentage interest in the foreign investment company). In theory, any lines of business not on the Negative List are open to 100 per cent foreign ownership. In reality, however, foreign investment in lines of business that are not on the Negative List are often subject to specific laws, regulations and policies imposed by ministries or agencies in relation to specific activities or industries.

The restrictions under the Investment Law and the Negative List relat-ing to foreign investment in Indonesian companies are also applicable to potential foreign investors or foreign creditors who bid for shares in a pro-ject company at an auction in the case of foreclosure. There are no bilateral investment treaties or international treaties that may afford relief from the above foreign investment and ownership restrictions. However, the con-ditions restricting foreign investment set out in any newer Negative List do not apply to any foreign investment limited liability company that has already obtained its relevant BKPM approval in compliance with an earlier Negative List (grandfathering).

Under the most recently issued 2016 Negative List, the maximum for-eign ownership allowed during a public-private partnership (PPP) conces-sion period for:• a power plant producing at least 10MW is 100 per cent (previously

95 per cent); and• electricity transmission and distribution is 100 per cent (previously

95 per cent).

With respect to a PPP for managing port facilities and providing certain port services, the maximum foreign ownership allowed is 49 per cent upon a ‘Special Licence’ being obtained from the Ministry of Transportation (previously 49 per cent foreign ownership was permitted without any need for a ‘Special Licence’ or 95 per cent foreign ownership was permitted dur-ing a PPP concession period).

Taxation of foreign investment in Indonesia is a dynamic and special-ist field. Accordingly, specialist advice should always be sought on taxation liabilities and how best to minimise them and obtain available concessions. Benefits may also be available under tax treaties entered into by Indonesia

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to reduce withholding tax payable on such items as interest, dividends, royalties and branch profits to residents of tax treaty countries.

11 What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

According to the relevant insurance laws and regulations, local insurance of objects located within Indonesia is not required only if it can be estab-lished that no Indonesian insurance company:• has enough capacity to bear insurance risks for the objects con-

cerned; or• is willing to cover the objects concerned.

If either of the above exceptions applies, insurance coverage can be given by foreign insurance companies. We are not aware of any specific fees or taxes on insurance policies over project assets provided or guaranteed by a foreign insurance company.

Reinsurance support from foreign reinsurance companies can be provided to local general insurance companies if reinsurance support from local reinsurers is unavailable, and certain statutory conditions are satisfied.

Foreign reinsurers must have a rating of at least BBB or equivalent by an international qualified credit rating agency. In addition, evidence that the reinsurance support from local reinsurers is not available must be sub-mitted to the OJK.

It is common practice for foreign secured creditors to be permitted to be named as loss payees or as beneficiaries of the insured under insurance contracts. It is also common practice for creditors to require a separate fiduciary security over insurance proceeds to which the project company may become entitled.

12 What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Foreign workers, including directors and commissioners, may only be employed to work in Indonesia after having obtained a work permit from the Minister of Manpower. A company wishing to employ foreign workers must obtain approval for an Expatriate Utilisation Plan (RPTKA) from the Director General of Manpower Development and Placement, which must set out the numbers, positions and other details of all of its proposed for-eign workers. The application to obtain an RPTKA may now be submitted through the online system of the Ministry of Manpower.

As a general rule, a foreign worker may only be employed in Indonesia by one company (however, foreign directors and foreign commissioners may be appointed to act for more than one company) and for a fixed period of time, which can be subsequently extended. The term of engagement of a foreign worker may not exceed the term stated in the foreign worker’s work permit. Certain sectors have separate manpower regulations that impose additional restrictions on positions, maximum term and other require-ments for foreign workers, including in the mining sector.

The company employing a foreign worker is required to pay a ‘skill development fund’ of approximately US$100 each month for every expa-triate, which must be made in advance, covering a certain period. The rel-evant regulations also require an employer who employs a foreign worker to identify a suitably qualified Indonesian worker who will be a ‘trainee’ of the foreign worker, so that the foreign worker may train and transfer knowledge to such an Indonesian worker during the course of employ-ment. However, these requirements are not applicable to foreign directors and commissioners.

Other restrictions on foreign workers include:• prohibition on holding any position that deals with personnel or

human resources;• minimum requirement of five years’ higher education or relevant

experience for the foreign worker’s position in Indonesia; and• registration with the Social Security Organising Agency (applicable

to foreign workers who have been working for at least six consecutive months in Indonesia).

Following the issuance of the New Currency Regulations, employ-ment agreements that use foreign currency (non-cash) as the currency of payment will remain valid until they expire, but only if signed before 1 July 2015. The New Currency Regulations would appear to indicate that any employment agreement made, amended or renewed after 1 July 2015 is

required to use rupiah as the currency of payment. However, according to a Circular Letter issued by the BI soon after the New Currency Regulations, this requirement (to use rupiah as the currency of payment) does not apply to the salary of employees who have been seconded to Indonesia by an off-shore company, as long as the salary of the relevant seconded employee is paid by the offshore company.

13 What restrictions exist on the importation of project equipment?

Equipment imported for a project is subject to the relevant importation regulations and import duties, as applicable. Subject to the fulfilment of certain conditions, foreign investment project companies established under the Investment Law may receive dispensation from the obligation to pay import taxes on the importation of project equipment that is not avail-able in the domestic market.

Project equipment that has been subject to import duty relief may only be transferred to third parties following the satisfaction of the requirements set out in the relevant regulations (which can include obtaining approval from the relevant government authority and evidence of payment of the relevant taxes on the project equipment). Under the government procure-ment rules and rules applicable to certain sectors, project equipment may be required to comply with local content requirements and preference may be required to be given to local suppliers. In addition, according to recent Regulations passed by the Ministry of Trade (2015) and the Ministry of Industry (2016), certain ‘direct-user companies’ (and other limited catego-ries of companies) are permitted to import various types of second-hand capital goods for the purpose of their production activities in Indonesia, subject to obtaining specific licences and recommendations.

14 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?

The Investment Law stipulates that the Indonesian government will only nationalise or take over investors’ rights of ownership in accordance with law. However, if the Indonesian government does nationalise or take over an investor’s rights of ownership, it will compensate the relevant investor based on the market price as determined by an internationally used method.

Fiscal treatment of foreign investment

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

The Investment Law provides that the Indonesian government may grant certain facilities to foreign investors who make an investment in Indonesia in the form of a limited liability company. Such facilities may be granted through the BKPM licensing process only for investments that meet vari-ous criteria, which can include that the investment will engage a significant number of Indonesian workers or the investment company has the ability to transfer technology or to carry out infrastructure construction.

The facilities available to foreign investors established under the Investment Law regime include:• income tax relief, for a certain period;• exemption from, or reduction of, import duty on the import of capital

goods, machinery or production equipment that cannot be domesti-cally produced;

• exemption from, or reduction of, import duty on raw materials or com-ponents for production, for a certain period;

• exemption from, or suspension of, value added tax on the import of capital goods, machinery or production equipment that cannot be domestically produced, for a certain period;

• accelerated depreciation or amortisation; and• dispensation of land and buildings tax, in certain sectors, areas,

regions or zones.

The Investment Law also provides for additional facilities such as corpo-rate income tax relief for pioneer businesses and customs duty relief or exemptions for ongoing investment involving the replacement of capital machinery or other capital goods. The above fiscal facilities will be granted

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based on a national industry policy adopted by the government from time to time.

The latest facilities granted by the government as of 2015 are tax holidays for new pioneer businesses and tax allowances for certain busi-ness sectors (eg, utilisation of geothermal energy, particularly in relation to examination, drilling and conversion of geothermal energy into elec-tricity). While these new facilities are not exclusively provided to foreign investors (since they are available to domestic investors as well), they are primarily intended to attract more foreign investment.

Government Regulation No. 69 of 2015 has enabled importers involved in the national transportation industry to now credit their input VAT for certain goods and services relating to national transportation, including waterborne vessels, aircraft and trains (and their spare parts), as well as services covering their leasing, maintenance and repair.

No specific taxes apply for the purpose of effectiveness of loans, mort-gages or other security documents. However, stamp duty and various reg-istration fees may be applicable (see question 2).

Government authorities

16 What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

The relevant government agencies or departments with authority over typical project sectors are, among others:• the Ministry of Energy and Mineral Resources (MEMR) for projects in

energy, mining, geothermal energy and electricity;• SKK Migas for projects in oil and gas upstream activities (formerly,

BP Migas);• BPH Migas for projects in downstream oil and gas activities;• the Ministry of Telecommunications and Information Technology for

projects in the telecommunications sector;• the Ministry of Public Works and Housing and the Ministry of

Transportation, as appropriate, for projects in the infrastructure sector;• the Ministry for the Environment and Forestry (MoEF) for any projects

that require environmental licences;• the National Development Planning Agency (Bappenas) as the coordi-

nator and facilitator for general development planning activities;• the BI for offshore loan reporting compliance;• the BKPM for the establishment of a foreign investment project com-

pany; and• relevant regional governments.

In general, the nature of the above government agencies’ authority is mainly as regulator and supervisor of activities carried out in the relevant sector, including project activities. Accordingly, project companies are required to comply with the guidelines and regulations issued from time to time by these relevant government agencies.

State ownership in the above sectors is based on the Indonesian Constitution. On this basis, the state’s position to control various strategic project finance activities is executed through these government agencies regulating and overseeing the management of such projects, as well as establishing companies that can have direct commercial interests in such projects, including PT PLN (Persero) for electricity.

Regulation of natural resources

17 Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

Essentially, the state has title to all natural resources within Indonesia. Article 33, paragraph 3 of the 1945 Indonesian Constitution states that ‘the land, water and natural riches contained therein are controlled by the gov-ernment and shall be used for the greatest benefit of the people’. This prin-ciple is reflected in various statutory laws, including the Mining, Oil and Gas and Forestry Laws. Under these laws and their implementing regula-tions, the government may provide opportunities for private parties (both domestic and foreign) to acquire rights to access natural resources by way of obtaining a licence or entering into a production-sharing contract (PSC) with the government.

With the relevant licence or PSC, private parties (both domestic and foreign) may carry out exploration and exploitation activities and gain benefits from the natural resources. These rights are subject to various

regulatory obligations, which may include dead rent, domestic market obligations, concession fees, royalties, national and regional taxes and regional levies as required by the prevailing regulations.

Upon satisfaction of all relevant regulatory obligations by the licence holder or PSC party, title to extract natural resources can be passed to the licence holder or PSC party.

18 What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

The main mining licences available under Law No. 4 of 2009 on Mineral and Coal Mining (Mining Law) are:• mining business licences, which are the most common mining licences

to be granted to investors (known as IUPs); and• special mining business licences, which are licences to be granted over

state reserve areas (being areas that have been declared reserved due to national strategic interest) (known as IUPKs).

Both IUP and IUPK licences are issued in two stages: the exploration stage and the production–operation stage. The Mining Law requires IUP and IUPK holders to pay state and regional revenues. State revenue con-sists of tax and non-tax revenues. Payable non-tax revenues include dead rent, exploration and production royalties, and compensation for data and information.

The rates of exploration royalties and production royalties vary based on the type and scale of the mining project, production level and com-modity price. An additional royalty of 10 per cent of net profits applies to production–operation IUPK companies commencing at the time of pro-duction. The central government is entitled to 4 per cent of the royalty and 6 per cent will be shared between the relevant regional governments.

IUP and IUPK holders will be subject to corporate income tax at the prevailing rate. Delivery of goods and services in Indonesia is also subject to value added tax of 10 per cent, except for those goods and services that are exempted under the prevailing regulations.

Mining entities are also required to withhold tax on offshore payments of dividends, interest, royalties and on most types of services.

The concept of payment of royalties does not apply to the upstream oil and gas sector. For the oil and gas sector, the government receives tax revenue and non-tax revenue, the latter being calculated on the basis of net profit sharing of the oil and gas production in accordance with the PSC entered into between the government and the relevant oil and gas company.

19 What restrictions, fees or taxes exist on the export of natural resources?

Restrictions, fees and taxes on the export of natural resources are deter-mined by the nature of the specific commodities and the relevant imple-menting regulations. Export tax, administration and services fees are generally payable, but each sector has different limitations and restrictions regarding export requirements.

Domestic market obligations (DMO)In the mining sector, export of minerals and coal is subject to regulations governing DMO issued by the Minister of Energy and Mineral Resources, which require specific mining companies to sell a certain minimum per-centage of their mineral and coal production to domestic users. To date, the Minister of Energy and Mineral Resources has only regulated that cer-tain coal mining companies comply with the DMO requirement, requiring such companies to submit quarterly reports confirming their compliance with the DMO.

Administrative penalties for mining companies that fail to comply with the DMO may result in the reduction of up to 50 per cent of annual mineral and coal production for those mining companies. Administrative penalties may also be imposed on domestic purchasers of minerals or coal that fail to purchase their allocated DMO quantity of minerals or coal, resulting in a reduction of up to 50 per cent of the total annual mineral and coal alloca-tions for such domestic purchasers.

Restrictions on export of raw minerals and ore/processing and refining requirementMining companies are also subject to restrictions on the export of unpro-cessed or unrefined mining products. Under the Mining Law, a produc-tion–operation IUP or IUPK mining company is obliged to add value to its mining products either by processing and refining the products itself

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or engaging a company that holds a specific production–operation IUP licence for processing and refining to carry out such activities.

The processing and refining requirement under the Mining Law is further implemented in (among others) the following (the Processing and Refining Regulations):• MEMR Regulation No. 1 of 2014, as last amended by MEMR

Regulation No. 8 of 2015, which set out the minimum levels of process-ing (increasing mineral or rock quality) and refining (increasing metal mineral quality through the process of extraction and further refining to increase purity) for specific metal minerals (the Minimum Levels Regulation); and

• MEMR Regulation No. 5 of 2016, which sets out the procedure to obtain a recommendation from MEMR for the export of processed and refined minerals.

The framework established by the Processing and Refining Regulations is essentially as set out below:• the export ban on raw minerals and ore is effective, with certain lim-

ited exceptions;• copper, iron ore, ilmenite, lead, manganese and zinc concentrates may

be exported without being fully refined to the minimum levels until 10 January 2017 (permitted metal minerals), provided the mining com-pany meets the Minimum Levels Regulation and also secures a recom-mendation from DGMC and the Minister of Trade’s export approval;

• export duty is imposed on permitted metal minerals, with a tax rate increasing progressively from 2014 (20 to 25 per cent) until the second half of 2016 (60 per cent); and

• nickel, bauxite, tin, gold, silver and chromium must be fully refined before export, so the export ban continues to apply to these metal minerals.

From 10 January 2017, the permitted metal minerals must comply with the Minimum Levels Regulation in order to be exported. However, recent media reports indicate that the government is reconsidering whether to enforce the export ban in relation to such metal minerals in 2017.

By imposing an export ban on raw minerals and ore, and requiring domestic processing and refining, the government intended to:• stimulate the growth of a local processing industry (including the

ambitious, if not unrealistic, construction of smelters by metal min-ing companies);

• move toward the export of higher value processed and refined mining products, with an anticipated increase in domestic revenues; and

• boost job creation in the domestic processing sector.

The above intentions of the government have, to a large extent, not been realised, and the export ban, together with the requirement to build smelt-ers, have been highly controversial.

Benchmark pricingThe Mining Law provides that a benchmark selling price will be estab-lished for long-term coal sales contracts. Minister of Energy and Mineral Resources Regulation No. 17 of 2010 on Mineral and Coal Benchmarking (MEMR Regulation No. 17 of 2010) provides the relevant provisions on benchmarking obligations and practices, key provisions of which include:• mineral and coal producers are obliged to sell minerals and coal based

on a regulated benchmark price, whether for domestic or export sales. The benchmark pricing obligation applies to all minerals and coal sales to third parties, spot sales and sales by way of long-term contracts; and

• administrative penalties will be imposed on mining companies that fail to comply with the provisions of MEMR Regulation No. 17 of 2010.

To date, benchmark prices have only been provided for certain grades of coal. In June 2016, the reference coal price was US$51.81 per metric ton, according to media reports.

Legal issues of general application

20 What government approvals are required for typical project finance transactions? What fees and other charges apply?

Project financing in Indonesia is typically carried out by offshore loans being obtained by a limited liability project company established in Indonesia. If foreign investors have an equity interest in the project company, the project company must generally be a foreign investment

company, which must be registered with and licensed by the BKPM. In addition, the articles of association of a foreign investment project com-pany must be approved by the MoLHR.

Approvals, recommendations, licences or consents from the relevant technical ministries and government institutions (both national and regional) may be required in accordance with the regulations that apply to each project sector. In the case of certain state-owned companies, the approval of the Offshore Commercial Loan Team (PKLN Team) may also be required in respect of offshore loans to such companies.

Administrative fees to obtain the above approvals, recommenda-tions, licences or consents may be applicable, subject to the relevant laws and regulations.

21 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

Reporting and filing requirements will be applicable to project finance transactions since they are likely to involve the project company becoming indebted to offshore finance providers. According to the relevant BI regula-tions, before an offshore loan with a term of over one year can be entered into by a project company, the project company must first submit an off-shore loan plan to the BI that sets out certain details of the offshore loan, including a risk-management analysis. BI regulation No.16/21/PBI/2014 on the Implementation of Prudential Principles in Management of Offshore Debt of Non-Bank Corporations (BI Regulation 16/21) as amended by BI Regulation No. 18/4/PBI/2016, requires companies that are not banks that have offshore debt in a foreign currency to adopt certain prudential princi-ples, including compliance with a minimum hedging ratio, liquidity ratio and credit rating.

A project company with an offshore loan must also submit several reports to the BI (plus supporting documents) with regard to the man-agement of its offshore loans as part of the implementation of pruden-tial principles.

A debtor who fails to submit an offshore loan withdrawal report or is late in submitting the report will be subject to administrative sanctions, which may include fines.

Offshore loans must also be reported to the PKLN Team and the Fiscal Analysis Agency of the Ministry of Finance and regular reporting to these institutions must be maintained. The approval of the PKLN Team may also be required, particularly for any offshore loan arrangements that involve state-owned companies as borrowers.

Certain documents must be prepared in notarial deed form by Indonesian notaries, for which fees will be payable. If submitted to a court, a notarial deed offers prima facie evidence of certain elements of the agreement between the parties, including the identities, authority and sig-nature of the signing parties and compliance with Indonesian law.

Any instrument (or any other document to be submitted to an Indonesian court) must be stamped with a nominal duty stamp (currently 6,000 rupiah per instrument) and, if the instrument or document is in a language other than Indonesian, such an instrument or document must be translated by a sworn translator.

Law No. 24 of 2009 on the Flag, Language, State Symbol and National Anthem (Law No. 24) requires, among other matters, that any agreement involving a state institution, Indonesian government institution, private entity or citizen must be made in the Indonesian language. However, Law No. 24 also contemplates that agreements can be made in bilingual form (that is, Indonesian and a foreign language).

Law No. 24 is inconclusive in that it does not specify whether agree-ments involving an Indonesian party, and which are not made in the Indonesian language, are invalid or unenforceable. To date there have been no implementing regulations to clarify this particular issue, so there remains some degree of uncertainty. However, the Indonesian Supreme Court handed down a decision on 31 August 2015 in which it found that an agreement between an Indonesian company and a foreign company was null and void for the main reason that there was no Indonesian language version at the time the agreement was signed. Accordingly, the present view of many practitioners is that bilingual versions of all relevant project documents should be signed. Unfortunately, obtaining ‘legal’ standard translations of project documents in the Indonesian language is typically very time-consuming and costly.

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22 How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

Agreements to arbitrate are recognised under the ICC and Law No. 30 of 1999 on Arbitration and Alternative Dispute Resolution (Arbitration Law). This applies to both domestic and international arbitration agreements. However, only disputes of a commercial nature and that concern rights that, according to law, are ‘fully controlled by the parties to the dispute’ can be arbitrated. In practice, tort claims in Indonesia would not usually be considered to be arbitrable disputes because of the nature of tort claims since they are not based on a specific agreement between parties.

The Arbitration Law also provides that where the parties have agreed to arbitrate, the district courts (as courts of first instance) do not have juris-diction to hear the dispute.

Indonesia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, foreign arbitral awards granted in signatory countries are enforceable in Indonesia upon application to the Central Jakarta District Court for an exe-quatur (enforcement order), provided that such awards are not contrary to ‘the public order’ of Indonesia.

If a party to a foreign award is the Indonesian government then an application for exequatur must be made to the Supreme Court.

Domestic arbitral awards must be registered with the relevant district court within 30 days of the award’s issuance. No such time limit applies to foreign awards.

There are instances where the prevailing laws require disputes to be settled by way of arbitration. For example, the Indonesian Mining Law requires that any dispute relating to a mining permit must be settled in either a domestic court or by domestic arbitration. The government of Indonesia will usually request that domestic arbitration be the relevant dispute settlement mechanism in its contracts.

Indonesia ratified the ICSID Convention in 1968. To protect foreign investment in Indonesia, the government has entered into a number of bilateral investment treaties (BITs) with developed countries, under which disputes are referred to ICSID. The government has expressed its intention to terminate (or not renew) all of its BITs. To date, Indonesia’s BITs with the Netherlands, Malaysia and Singapore have terminated.

23 Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

Generally, the parties’ choice of law (including foreign law) in an agree-ment will be recognised by the Indonesian courts as a valid choice of law

provided that there is sufficient connection between the chosen law and the subject matter of, or parties to, the agreement. However, foreign law cannot be chosen if it is contrary to mandatory provisions of Indonesian law, such as agreements regarding security over Indonesian assets, which must be governed by Indonesian law.

As a general proposition, project agreements typically tend to be gov-erned by domestic law, whereas financing agreements tend to be governed by the laws of England and Wales, New York or Singapore.

In certain industries, such as mining and oil and gas, the indus-try regulators will insist that the chosen law for the relevant contracts is Indonesian law.

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

Contractual provisions involving submission by the parties to a foreign jurisdiction are generally effective and enforceable under Indonesian law, as long as the foreign court accepts such jurisdiction. The utility of such contractual provisions may, however, be limited because foreign judg-ments are not directly enforceable in the Indonesian courts. If a party wishes to enforce a foreign judgment against assets located in Indonesia, new proceedings would need to be initiated in the Indonesian courts. The claimant would be able to submit the foreign judgment as evidence in such proceedings and the court has discretion to determine whatever weight it attaches to the foreign judgment.

The waiver of sovereign immunity under Indonesian law is not clearly regulated. However, civil and administrative claims may be brought against the Indonesian government (both central and regional) and its institutions. Sovereign immunity applies only to preclude the enforcement of certain remedies against ‘public’ assets and property of the government, such as the enforcement of attachment and seizure orders over such assets and property.

Environmental, health and safety laws

25 What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

Environmental control and management issues are regulated through the relevant laws and regulations issued by the MoEF and the rel-evant regional governments. As an umbrella, Law No. 32 of 2009 on Environmental Protection and Management (the Environmental Law) applies to all businesses in Indonesia. The MoEF and the relevant regional governments are responsible for issuing implementing regulations to the Environmental Law.

Under the Environmental Law, an environmental impact analysis (AMDAL) study must be undertaken in relation to an entity’s proposed activities that may have a significant impact on the environment before they are carried out. The objectives of an AMDAL study are to analyse any

Update and trends

Presidential Regulation 3 of 2016 on the Acceleration of Strategic National Projects (SNPs) (PR 3/2016) was issued on 12 January 2016, while Presidential Regulation 4 of 2016 on the Acceleration of Power Projects (PPs) (PR 4/2016) was issued on 19 January 2016. Both aim to speed up the delivery of projects key to President Joko Widodo’s pledge to close Indonesia’s significant infrastructure gap.

PR 3/2016 applies to 225 SNPs, including the:• Serang-Panimbang Toll Road in Banten;• Trans-Maluku Road;• Jakarta-Bandung High-Speed Railway;• Jakarta Mass Rapid Transit System;• Jakarta, Bogor, Depok and Bekasi Integrated Light Rail

Transit System;• Soekarno-Hatta International Airport (Terminal 3) in Banten;• Kuala Tanjung International Harbor in North Sumatra; and• Cikarang-Bekasi-Java Sea Inland Waterways System in Jakarta.

To streamline SNP licensing, PR 3/2016 enlarges the role of both the central and local BKPM online registration system through its ‘one-stop shop’ system (PTSP). A private entity seeking to act as an SNP principal must apply to the relevant PTSP for an in-principle licence (IPL). The relevant PTSP must issue the IPL within one day of receiving a com-plete application.

PR 3/2016 provides that the Ministry of Finance (MOF) will provide a central government guarantee (CGG) to an SNP principal if:• the SNP is to be executed as a public-private partnership (PPP)

under Presidential Regulation 38 of 2015; and• there is any central government policy (including a law, regulation

or agency practice) that affects, or is reasonably anticipated to affect, the SNP’s viability.

The CGG scheme may mean the MoF will bear much of the financial risk associated with the SNP (which would otherwise be borne by the SNP principal). However the precise scope of any CGG remains unclear.

While PR 3/2016 and PR 4/2016 evidence the government’s ongo-ing efforts to quicken and improve infrastructure development, there are a number of outstanding issues. At this stage, it is unclear whether the list of SNPs is realistic or, indeed, whether it will change over time. It should also be noted that some of the SNPs are already underway, and it is unclear how they may benefit from PR 3/2016. This lack of certainty will not be ignored by those closely monitoring the government’s efforts to make real progress in infrastructure prior to fresh presidential elec-tions in 2019.

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impact of the planned activities, any efforts to manage that environmental impact, as well as to monitor environmental management.

A company that carries on business activities in an industrial estate could be relieved of its obligation to obtain AMDAL approval if the owner of the industrial estate has already obtained AMDAL approval.

If the proposed activities for an entity do not require the company to obtain an AMDAL (as determined under the relevant provisions of the Environmental Law), then the entity must prepare environmental docu-ments known as‘Environmental Management Efforts – Environmental Monitoring Efforts’ (UKL-UPL).

Following the issuance of an AMDAL (or a UKL-UPL), the Environmental Law requires that the relevant entity conducting the activi-ties must also obtain an ‘environmental permit’. The AMDAL or UKL-UPL and the environmental permit then serve as the prerequisites for the issuance of relevant business licences required for the operations of the relevant entity. The environmental permit may be granted by the MoEF, Governor, Regent or Mayor, as applicable.

The relevant government agencies for specific sectors may have their own legislation relating to the protection and management of the environ-ment. However, such legislation usually addresses issues that are technical and specific to the respective sectors. Significantly, such legislation must not contravene the provisions of the Environmental Law.

Apart from Law No. 1 of 1970 on Work Safety, which sets out the gen-eral provisions on occupational health and safety, each different business sector has its own regulations on occupational health and safety. Such regulations may set out the procedures for certain work to be carried out or may regulate the necessary certifications that must be obtained before carrying out certain work.

Project companies

26 What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

The principal business structure of a project company is the limited liability company structure.

In the oil and gas sector and for public works, Indonesian law rec-ognises that business can be conducted by way of an unincorporated joint venture, which may be entered into between a foreign entity and an Indonesian government representative.

For the purpose of financing projects, project companies usually obtain the necessary funds from bank loans as well as capital injection by issuance of equity stakes, either by private or public placement. Project companies may also seek financing from infrastructure financing companies, which are established solely for the purpose of providing financing and other ser-vices to project companies to support infrastructure projects.

Also available as a source of financing is PT Indonesia Infrastructure Finance (PTIIF), which was officially launched on 9 August 2009 as part of the government’s commitment to accelerate infrastructure devel-opment. PTIIF is funded by the Indonesian government (through PT Sarana Multi Infrastruktur (Persero)), the Asian Development Bank, the International Finance Corporation and the government of Germany. The

government also launched PT Penjamin Infrastruktur Indonesia (PTPII) to provide guarantees in order to improve the creditworthiness of infrastruc-ture projects.

Public-private partnership legislation

27 Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

Under newly issued PPP regulations, infrastructure projects can be com-pleted as PPPs in 19 sectors (previously only eight sectors), including waste water management, local or centralised; waste management; energy con-servation; municipal government; regional government; education; sports and arts; tourism; health; correction establishments; and public housing. Further, infrastructure projects can now be completed as PPPs across more than one sector. For example, a PPP project can be established to complete a water storage and irrigation and drinking water supply project. The actual implementation of infrastructure projects will be subject to the laws and regulations applicable to the relevant sector.

Unlike the previous regime, a business entity (referred to in question 26) may now initiate a PPP if the infrastructure project is technically inte-grated with an infrastructure master plan in the relevant sector, the PPP project is economically and financially feasible, and the relevant business entity is able to finance the PPP. A government institution may now desig-nate a business entity as a partner in a PPP project through an auction or by direct appointment.

PPP – limitations

28 What, if any, are the practical and legal limitations on PPP transactions?

A PPP transaction can only be carried out by either an agreement or con-cession. If the PPP transaction is carried out by way of an agreement, a number of provisions are required to be included in the agreement, such as the scope and duration of the project, performance guarantees (if any), rel-evant tariffs and the mechanisms for tariff adjustments, standards for per-formance, and regulation of the transfer of shares prior to commencement of commercial operations. Within 12 months of the signing of the agree-ment, the project company must obtain the required financing to complete the project. If the 12-month deadline expires, the relevant government con-tracting agency may extend the deadline for six months, provided the fail-ure to obtain finance was not because of the project company’s negligence. Failure to obtain financing within 18 months of signing the agreement will result in the government contracting agency being able to execute the available warranties.

Even though there is a Land Procurement Law and various imple-menting regulations, one of the challenges for infrastructure projects that require significant land is the ability of the project to obtain the required land within the scheduled time frame and within the budgeted price. Further limitations may exist under the laws and regulations that apply to the relevant sector.

Emalia Achmadi emalia_achmadi@soemath.com Robert Reid robert_reid@soemath.com Denia Isetianti denia_isetianti@soemath.com

Wisma GKBI, Level 9JL Jend Sudirman No. 28Jakarta 10210Indonesia

Tel: +62 21 574 0088Fax: +62 21 574 0068www.soemath.com

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PPP – transactions

29 What have been the most significant PPP transactions completed to date in your jurisdiction?

We are not aware of any PPP transaction having been completed.The first PPP was entered into in 2011, when a project company owned

by a consortium consisting of J-Power, Adaro and Itochu signed a PPP project to build, own, operate and transfer a 2000MW coal-fired power plant in Central Java, which included a guarantee given to the relevant project company by PTPII. Media reports indicate that this PPP has been delayed by land procurement difficulties, but that financial closing was recently achieved.

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