Indonesia’s project finance needs today are immense. As part of its masterplan to make the nation one of the world’s largest economies by 2025, the government has announced major infrastructure plans for the five years to 2019, including six new refineries, 35,000MW of electricity capacity and 15 airports. But all this development will need capital. “Indonesia will need some $450 billion in funds to finance massive infrastructure development for the period up to 2019,” says Noor Meurling, senior foreign legal consultant at Jakarta law firm DNFP, which operates in association with Hogan Lovells. “The government has acknowledged, however, that in the period up to 2019 it will not be able to fulfill Indonesia’s funding needs and that a significant amount of the funding gap is expected to be fulfilled through cooperation with the private sector using the public private partnership (PPP) scheme.”

Meurling notes that despite the high priority placed by the government on infrastructure development through PPP projects, there have been few successful examples of PPPs to date.

However, the power sector has seen a fair bit of interest. “The Banten coal fired power plant and the Sarulla geothermal power plant having managed to achieve financial close and, the government announcement of plans for the 35,000MW plant easily make the power sector the most active in infrastructure development to date,” she says. “It is understood that as of the first quarter of 2016 alone, state-owned electricity company PLN had contracted with private sector providers to meet nearly half its annual target.”

HURDLES

Despite revised law and regulations to speed up infrastructure projects, many investors still encounter various issues and difficulties, such as the acquisition of land for the projects, complicated procurement procedures, and the lack of coordination between ministries, says Emir Nurmansyah, partner with Ali Budiardjo, Nugroho, Reksodiputro (ABNR).

“Conflicting regulations also present problems in Indonesia,” he adds. Aston Goad, counsel with Hogan Lovells Lee & Lee in Singapore, elaborates. “Complex land acquisition procedures continue to plague the PPP progress in Indonesia – despite implementing regulations having been issued bringing the maximum time for land acquisition process in public projects down to 583 days,” he says. “Coordination in respect of projects coming within several ministerial jurisdictions, while resolvable, is tedious and time consuming.”

Obtaining permits continues to be a big hurdle for investors despite efforts made to reduce the number of permits required, including the “one-stop shop” service within the Indonesian capital investment board (BKPM), notes Goad.

“The Language Law and the Currency Law are also issues relevant to foreign investors and must be factored into the transactional and operational aspects of a project,” he says.

DISPUTES

Chalid Heyder, a partner with DNFP, says that generally, foreign investors view the Indonesian court system as weak in enforcement, and unable provide legal certainty. However, the court system is improving, according to Nurmansyah.

“There may be some issues which need to be addressed with respect to integrity of judges, but certain judges are well known for their integrity in deciding cases,” he says. “The courts have also improved the recruitment system for judges, and offer considerably higher salaries.” 

Arbitration outside Indonesia is often used as an alternative to the Indonesian court system, says Heyder. “While there remain concerns over difficulties of enforcing arbitration awards in Indonesia, refusal by an Indonesian court to enforce a foreign arbitration award is, not that common without proper legal grounds,” he says. “Nevertheless, there are issues of long delays or parallel litigation aimed typically at getting both parties to the table for settlement discussions.”