22 November, 2015
Navigating the challenges
Opportunities in Indonesian project finance abound – but there are key challenges for foreign investors and sponsors to understand and manage.
The Indonesian project finance market should be booming. With $450 billion of investment required to fund its infrastructure plans for the five years to 2019, including six new refineries, 35,000MW of electricity capacity and 15 airports, there’s a massive task to be done – but not enough government revenue to finance it.
So the opportunity is ripe for foreign direct investment – and Indonesia has been clear it is open for business. At the World Economic Forum President Joko Widodo extended a strong invitation for investors to come to Indonesia, and the government’s stated goal to be one of the 10 major world economies by 2025 – articulated in its Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) – has a strong focus on infrastructure development.
For Indonesia, attracting foreign direct investment (FDI) is critical to building its much-needed capacity.
“With the Indonesian government strongly advocating for more FDI, it’s critical for potential sponsors, lenders and investors to think about both the scope of the opportunities and some of the specific challenges and complexities involved in project financing in this region,” comments Rob Palmer, Partner with Ashurst LLP’s Asia dispute resolution team.
A strong PPP framework
It’s encouraging that Indonesia has built a strong framework for private-public partnership delivery of economic infrastructure. Three key state-owned entities are involved on the financing side – PT Sarana Multi Infrastruktur (PT SMI) is wholly owned by the government, while PT Indonesia Infrastructure Finance (PT IIF) is a private enterprise jointly funded by the government, the Asian Development Bank (ADB), the International Finance Corporation and two private financing institutions.
PT Penjamin Infrastruktur Indonesia (PT PII) is another government-owned entity created to issue guarantees against the political risk involved in PPPs. It is the government’s representative for appraising infrastructure projects, structuring guarantees and processing claims.
The Ministry of Finance has also established a Viability Gap Fund to increase the financial viability of projects through additional capital.
Managing uncertainty
Despite the opportunities, there are some key challenges to be understood and managed. Chief among these are some major regulatory hurdles.
Land acquisition
Land acquisition remains a vexed issue in Indonesia. The construction of a 2 x 1,000 megawatt coal-fired power plant in Java is a case in point. Originally slated for construction to start in February, the plant is an ongoing headache for President Widodo, with farmers refusing to give up their land for the project. In 2012 the Indonesia parliament passed the Land Acquisition Law to help streamline the acquisition process, but it’s still a problematic area. Comments Ratih Nawangsari, Partner at Oentoeng Suria & Partners in Jakarta: “Even though the regulations are in place, there are practical challenges to implement this in practice and this can be a real roadblock to development. Foreign investors need to be aware that the process of dealing with local landowners/community can still be difficult, in spite of the regulations.”
Language Law
The so-called “Language Law” is another key issue – and a risk that foreign investors face. Under Law No. 24/2009 all contracts involving Indonesian parties need to be translated into and executed in Bahasa Indonesia. The Indonesian court appears to be taking this seriously – voiding a loan agreement in 2013 because it was not translated. “It can be quite challenging to have good quality translations, or capable translators in that matter, for complex project finance documentation,” notes Nawangsari. “All project participants need to be aware of this and source the right support to ensure this is done accurately and to the right standard. If not managed properly, procuring translation can be a logistical issue as well, as lengthy document translation would take time to complete and review. Therefore this must be taken into consideration when preparing the timetable for the project.”
Coordination between government institutions
More generally, there is also a perceived lack of coordination between government institutions, particularly when issuing new policy/regulations. Says Nawangsari:
“When new policies are introduced, the intention within the business community is usually to comply, but typically full compliance cannot be achieved straight away because the implementing details are not clear – and when you then try to get the relevant clarification, you don’t always get an answer.”
This tends to create uncertainty – which is certainly problematic for large project finance transactions, particularly in complex sectors such as power. “It creates a vacuum – you often have to wait for a long time for clarification and this can hold projects up significantly,” she adds.
For example, regulations around using Indonesian Rupiah in all onshore transactions created real stress and uncertainty around implementation, particularly for sectors that typically transact in USD. “In the oil and gas sector, for example, switching currencies to IDR is difficult if not impossible for certain type of transactions. The Government were made aware of the issues that this is creating and subsequently reacted to concerns within the industry – however a considerable amount of time has passed before the required clarifications emerged.”
Navigating the court system
With a ranking of 107 on Transparency International’s Corruption Perception Index, the international index that charts perceptions of corruption, there are still clearly some issues with how the Indonesian environment is considered as a place to do business. Arbitration is often used as an alternative to the Indonesian Court system, but foreign participants remain fearful of perceived difficulties inherent in enforcement of arbitration awards. “Arbitration does not necessarily provide a solution to the difficulties of litigating in Indonesia,” comments Palmer. “Although it’s rare to see the Indonesian court refusing to enforce an international arbitration award, parallel litigation is common and lengthy delays can result. Execution can also be very problematic.”
An additional concern for foreign investors and sponsors is Indonesia’s announcement that it will allow its existing bilateral investment treaties to expire. There is some suggestion that Indonesia will replace these treaties with a new standard form, but nothing has been clarified. Comments Palmer: “In terms of existing projects, concerns may not be so great as most bilateral agreements have sunset provisions.” New investors coming into Indonesia can structure around one of the treaties with a longer shelf life or take advantage of a multi lateral agreement. “But the problem is one of perception,” he says.
While there are indeed challenges to project financing in Indonesia, steps can be taken to manage and mitigate them. Comments Nawangsari: “Due diligence is key as to local partner, project and governmental enthusiasm for such project.”
A ‘self help’ approach is also advised, where potential investor and sponsors put together a comprehensive risk matrix that takes into account Indonesia’s unique political and judicial culture and the enforcement risks. “Ensuring the relevant provisions are all included in contracts is vital, as is assessing up front where cashflows are going, what access you have to the relevant assets when it comes to enforcement and being very diligent on regulatory compliance,” Nawangsari says.
For further information, please contact:
Ipop Nawangsari, Partner, Ashurst
ratih.nawangsari@ashurst.com
