Benny Bernarto is a corporate and commercial partner at TNB & Partners, the associate office of Norton Rose Fulbright in Indonesia. His practice focuses on energy and natural resources, infrastructure, mergers and acquisitions, and foreign investment in Indonesia. Benny has extensive experience in infrastructure and power projects and the associated project financing. He is recognised by IFLR1000 as a highly regarded lawyer for energy and infrastructure (2013–2018).
Valiska Nathania is an associate at TNB & Partners in association with Norton Rose Fulbright Australia. Her main industry sectors are energy and infrastructure.
Valiska handles a wide range of corporate transactions, including project finance and mergers and acquisitions. She has particular expertise in the power and natural resources sectors, where she has advised on a number of project financings.
“It is generally agreed that infrastructure – and power in particular – has been the most active sector for project finance transactions in Indonesia over the past 20 years.”
GTDT: What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?
Benny Bernarto and Valiska Nathania: Indonesia is Southeast Asia’s largest economy and a vast equatorial archipelago of 17,000 islands extending 5,150km (3,200 miles) from the Pacific Ocean in the east to the Indian Ocean in the west. With a population of approximately 265 million people, Indonesia urgently needs to expedite the development of its infrastructure. Reliable power, water supply, roads, seaports and airports are the priorities of the Indonesian government as they are critical to the economy.
By way of background, in 2015, the government allocated 290 trillion rupiah (approximately US$22 billion) for infrastructure development, primarily to support the development and construction of 2,650km of roads, 1,000km of freeways, 2,159km of railways, 24 new seaports and 15 new airports, and to expand 59 existing seaports.
The significant emphasis on infrastructure investment, with the targets set out by the government of Indonesia (GOI) in the National Medium Term Development Plan (RPJM) for 2015 to 2019, and the strategic and priority infrastructure project pipeline (including the 35,000MW power plant programme introduced in 2014 and to be completed by 2019), show that the GOI is serious about boosting development of infrastructure and improving its quality.
The target investment needed to fund infrastructure projects under the 2015–2019 RPJM was set at 6,780 trillion rupiah. In the 2018 state budget, the GOI allocated 410.4 trillion rupiah for infrastructure development, up from 387.3 trillion rupiah in the 2017 budget. From this allocation, the Ministry of Public Works and Public Housing and the Ministry of Transport receive the biggest allocations – 104 trillion rupiah and 44 trillion rupiah, respectively.
Power projects, in particular those developed by independent power producers (IPPs), have tended to attract investors and lenders in the project finance sector. IPP projects, such as Paiton, Cirebon, Sarulla, Banten and Central Java, are just a few examples of power projects in Indonesia developed through project financing.
With the exception of Sarulla, which is a geothermal power plant, the above-mentioned power plants are large coal-fired power plants with a capacity of at least 600MW – for instance, the Paiton power plant complex has a maximum generating capacity of around 4,000MW.
However, project financing in Indonesia is still a developing market. This is particularly true because key infrastructure projects outside the power industry have only recently become open to private investment. In the past, infrastructure projects were generally owned or controlled by the government through the relevant state-owned enterprises (SOEs) and funded by the state, which limited the opportunities for infrastructure projects to adopt a project finance scheme.
Unfortunately, government programmes to develop some key infrastructure projects have been hindered by long delays caused by, among other things, a convoluted procurement process. This has led to both deficiencies in government-allocated infrastructure spending and difficulties in completing land acquisition. Other external factors have also affected project development, particularly the recent regional economic slowdown and falls in oil and commodity prices.
In response, since September 2015 the Indonesian government has unveiled 14 economic stimulus packages in its efforts to expedite infrastructure development. These packages aim to boost economic growth through deregulation, incentives for private sector investment, new policies to harmonise land utilisation, and enhancing the ease of doing business in Indonesia by both simplifying the processes and procedures to obtain permits and improving cost efficiency.
GTDT: In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?
BB & VN: It is generally agreed that infrastructure – and power in particular – has been the most active sector for project finance transactions in Indonesia over the past 20 years. In 2016 and 2017, several non-power infrastructure projects developed under a public–private partnership (PPP) scheme made good progress.
Indeed, a primary goal of the GOI over the past 10–15 years has been to expedite infrastructure development. Under the 2015–2019 plan and taking into account the 2018 state budget, infrastructure development was to be 40 per cent funded from the state budget, 22 per cent by SOEs and 38 per cent by the private sector.
Indonesia’s previous administration launched a Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) in 2011, with the intention of attracting investment and transforming Indonesia into one of the 10 largest economies by 2025.
Back in 2005 a new regulation had introduced PPPs to Indonesia – Presidential Regulation No. 67/2005, which was refined in 2015 by a further regulation. As a result, various PPP projects have been announced and tendered out by the government during the past 10 years.
In the electricity sector, the administration announced stage one of a fast-track programme in 2006. That was followed by a second stage in 2010. Each stage aimed to accelerate development of 10,000MW in power plant capacity (approximately 20GW in total).
With the current government’s emphasis on infrastructure development, the issuance of the new PPP regulations in 2015 was a key reform designed to correct the earlier paralysis and expedite development of infrastructure projects by introducing a more effective and efficient approach.
The most significant PPP projects in recent years include the 2x1,000MW Central Java coal-fired power plant, which despite many challenges was able to reach financial close in June 2016, with construction expected to be completed by 2019. This was the first PPP project developed for the power sector in Indonesia. It had faced long delays over four years owing to land acquisition and environmental issues. Using the PPP scheme, a government guarantee was provided by the Ministry of Finance and the Indonesian Infrastructure Guarantee Fund (IIGF).
The Palapa Ring project, Umbulan water supply system, and three toll road projects (Pandaan–Malang, Batang–Semarang, Balikpapan–Samarinda) are other notable infrastructure projects developed under the PPP scheme and receiving guarantees from IIGF in 2016 and 2017. Although not all of them obtained project financing, they did make use of availability payments and viability gap funding (VGF), in addition to the government guarantee from the IIGF.
The Palapa Ring project is one example of a project that received an availability payment from the GOI. This PPP broadband network project was spearheaded by the GOI to expand broadband penetration to remote areas of Indonesia. The project consists of three separate packages; dubbed West, Middle and East. It involves a vast undersea fibre-optic cable network stretching across 13,000km as well as an onshore network of nearly 22,000km. The western part was scheduled to be completed in the first quarter of 2018.
It is no surprise that the rollout of the 35,000MW plan has made Indonesia’s power sector the most active industry in the development of infrastructure projects. As a result, power sector project financing transactions should become more common. This is mostly being driven by project finance schemes used in the early generation of power projects developed by IPPs, such as Paiton, which created a precedent for the newer projects now being developed by the private sector.
A significant recent project finance deal (outside the PPP scheme) was the expansion of the Cirebon ultra-supercritical coal fired-power plant with an installed capacity of 1,000MW, which reached financial close in April 2017. Its total financing amounted to approximately US$1.74 billion. The project had to deal with environmental objections from the local community as well as revocation of one of its permits by the administrative court.
“In terms of project sponsors, project finance transactions in Indonesia are dominated by international developers, especially those from Japan and South Korea.”
GTDT: Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?
BB & VN: In terms of project sponsors, project finance transactions in Indonesia are dominated by international developers, especially those from Japan and South Korea – particularly in the power sector. Sponsors from these two countries are some of the most active, with several projects already in operation and expansion in process.
As for domestic sponsors, local energy companies are actively pursuing and developing power projects in Indonesia. These domestic sponsors mostly act as the Indonesian member of a sponsors’ consortium, in compliance with foreign investment rules in Indonesia requiring the involvement of local shareholders in project companies. However, a more recent development is for domestic sponsors to become lead members of these consortia.
Japanese and domestic sponsors are now involved in the development of most power projects, including the Sarulla, Cirebon and Central Java power projects.
The US$1.17 billion 330MW Sarulla geothermal power project is probably the first renewable project financed under limited recourse project finance to have closed, with the financing agreements signed with the Japan Bank for International Cooperation (JBIC) and the Asian Development Bank (ADB) as the lead structuring banks, and six commercial banks. That took more than 15 years to accomplish.
Meanwhile, the 2x1,000MW Central Java coal-fired power plant (a US$3.4 billion project), the 2,640MW Tanjung Jati B coal-fired power plant and the 1,000MW Cirebon power plant expansion are projects financed by loans from JBIC, several other Japanese banks, private financial institutions and Korea Exim Bank (in the case of Cirebon). Export credit agencies dominate the debt financing market for sponsors and project companies. Their extensive involvement in project financing in Indonesia is understandable for various reasons, including the need for the offshore supply of large equipment to develop the projects, since local suppliers are still unable to provide this.
The competitive pricing offered by export credit agencies and multilateral lending agencies is attractive to sponsors, even though the requirements that these agencies impose tend to be more stringent than those of commercial banks.
JBIC, ADB, Korea Eximbank and the International Finance Cooperation are some of the most active export credit agencies and multilateral lending agencies offering debt financing. Which export credit agencies are involved in a particular project is often determined by the identity of the primary project sponsors.
GTDT: What are the biggest challenges that your clients face when implementing projects in your jurisdiction?
BB & VN: The challenges vary, both when participating in project procurement and in implementing the project once awarded.
That being said, there is a general perception that land acquisition, and deficiencies in or absence of a regulatory framework for infrastructure project development (or a lack of consistency in its implementation) are the two biggest challenges faced in initiating and implementing projects in Indonesia.
Clients also need to consider certain other factors when planning and implementing projects:
- mechanisms and procedures for tendering;
- procurement procedures;
- finalisation of contractual arrangements;
- procedures, requirements and time frame to obtain the required licences and permits;
- coordination; and
- interaction between various authorities, including ministries, agencies and central, provincial and regional governments, whose role in the development of infrastructure has been growing since decentralisation in 2001.
Public consultation also plays an important role in project development, and the GOI has recognised this by incorporating public consultation into the PPP regulation (although only briefly). More detailed provisions will need to be set out in implementing regulations to ensure that public consultation takes into account public opinion on infrastructure projects.
Then there is the bankability of the project structure and project documents. The challenge for project sponsors is to present to lenders project contracts that are bankable. In some cases, the project structure and procurement documentation are in a form that is unfamiliar to international lenders.
The good news is that the government has not been idle. The Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) was established to resolve the bottlenecking of infrastructure projects, specifically to coordinate project delivery.
Although KPPIP has a limited mandate to handle only the priority projects set out by the government, we should expect substantial improvements in the near future, especially following the issuance of economic stimulus packages.
“Public consultation also plays an important role in project development, and the GOI has recognised this by incorporating public consultation into the PPP regulation.”
GTDT: Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?
BB & VN: As of September 2015, the GOI has introduced 14 economic stimulus packages. These packages aim to boost economic growth in Indonesia through deregulation and tax incentives, and by opening up space for foreign investment.
Various regulations have been and are expected to be issued to follow up these stimulus packages. Early in 2018, the Ministry of Energy and Mineral Resources (MEMR) initiated a policy of deregulation by revoking a number of regulations, including some in the electricity sector.
The latest PPP regulation covers a broader range of infrastructure projects than the previous one, which was limited to ‘common’ infrastructure such as transport, water resources, irrigation, oil and gas, electricity (including geothermal), telecommunications and waste management. That list has been expanded to include energy conservation, all other renewable energy forms, education, sport and art facilities, tourism, correctional facilities, healthcare and housing, among other things.
Further regulations will be needed to implement these additional types of infrastructure project, and we can expect them to be issued soon. KPPIP and the Ministry of National Development Planning (Bappenas) are two of the government authorities playing a key role in determining the priority projects and the type of funding and facilities available to them.
GTDT: What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?
BB & VN: With IPP projects being one of the most active sectors for project finance in Indonesia, export credit agencies and multilateral lending agencies are playing a major financing role. As noted earlier, the active involvement of export credit agencies is necessary because local suppliers have historically been unable to provide the large equipment needed for the projects. In the past, most large equipment had to be imported.
The negotiations on commercial terms and risk allocation are partially driven and influenced by the quality of the relationship between sponsors and lenders, and whether the project is entitled to fiscal support from the government (eg, VGF or a government guarantee). In an effort to achieve the targeted electrification ratio and to encourage efficient, fair and transparent electricity supply, in 2017 the Indonesian government through the MEMR introduced several changes to the energy regulations, covering:
- changes to ‘government force majeure’ risk allocation;
- efforts to improve electricity infrastructure;
- notification of IPP shareholding composition and management changes; and
- updated regulations on renewable energy for electricity.
Unfortunately, some of these regulations raised bankability concerns, in particular a regulation requiring that certain political risks be shared between PLN, as the state-owned electricity off-taker, and the project company or investor. Such risks had previously been allocated solely to PLN, as the party best able to manage the risk.
In response to concerns raised by stakeholders, business associations and power plant developers, the MEMR promptly amended this regulation to remove the provision on sharing certain political risks. Despite such amendments, issues remain concerning other provisions in the new regulation – including the absence of a deemed dispatch payment by PLN where government force majeure affects the ability of the project company to generate power.
GTDT: What are the major changes in activity levels or new trends you anticipate over the next year or so?
BB & VN: As mentioned earlier, the Indonesian government has earmarked nearly US$30 billion from the state budget for infrastructure development in 2018. However, since infrastructure development is still to be 40 percent funded from the state budget under the 2015–2019 plan, the government needs to explore other sources of infrastructure financing.
Accordingly, in 2017 Bappenas introduced a Non-State Budget Infrastructure Funding (PINA) scheme which makes use of long-term financing facilities from pension funds and government owned infrastructure financing companies such as PT Sarana Multi Infrastruktur (SMI) and IIF.
The pilot programme using the PINA scheme is the development of nine toll roads, five of them part of the Trans Java toll road managed by state-owned PT Waskita Toll Road. SMI and state pension fund PT TASPEN (Persero) will cover any equity funding shortfall in these projects. SMI is an SOE established to facilitate infrastructure financing, and to prepare and advise on Indonesian infrastructure projects. For 2018, the government is preparing a pipeline of 34 projects with a total value of US$25.8 billion under the PINA scheme to be offered to domestic and foreign investors. These projects include a toll road in North Sumatra, power projects to be developed by PLN subsidiaries, and airports, among other things.
The successful implementation of several PPP projects, the increase in the infrastructure budget, and the number of projects included in the PINA project pipeline are all promising signs for the future.
The Inside Track
What three things should a client consider when choosing counsel for a complex project financing?
- Legal counsel must be able to build good synergy among Indonesian and international legal counsel, other advisers of the client, and relevant government authorities.
- Counsel should have a good track record in assisting the sponsors in project finance projects.
- Counsel should have in-depth knowledge of the industry being financed.
What are the most important factors for a client to consider and address to successfully implement a project in your country?
Understanding which projects are in the pipeline, including knowing which are the priority projects of the government, the types of incentives available for the projects (eg, government guarantee), the procurement method being used, and the regulatory requirements for the particular project.
What was the most noteworthy deal that you have worked on recently and what features were of key interest?
We represented a consortium developing a gas-fired power plant to supply electricity to PLN as the off-taker. A key feature of this project was the gas supply and transport required by PLN, which meant that the parties had to develop sound risk-sharing arrangements acceptable to all concerned, including the lenders. The power purchase agreement with PLN has been executed and the client is now progressing to the financial close of the project.
Benny Bernarto and Valiska Nathania
TNB & Partners in association with Norton Rose Fulbright Australia