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Appendix 1

ABOUT THE AUTHORS

The Projects and

Construction Review

Law Business Research

Fourth Edition

Editor

Júlio César Bueno

The Projects and Construction Review

The Projects and Construction Review

Reproduced with permission from Law Business Research Ltd.This article was first published in The Projects and Construction Review - Edition 4

(published in July 2014 – editor Júlio César Bueno ).

For further information please emailNick.Barette@lbresearch.com

The Projects and

Construction Review

Fourth Edition

EditorJúlio César Bueno

Law Business Research Ltd

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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

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ACKNOWLEDGEMENTS

Acknowledgements

ii

LLS LUNGERICH LENZ SCHUHMACHER RECHTSANWÄLTE

MAPLES AND CALDER

MCCULLOUGH ROBERTSON LAWYERS

MILBANK, TWEED, HADLEY & MCCLOY LLP

MOLINA RÍOS ABOGADOS

PECKAR & ABRAMSON, PC

PINHEIRO NETO ADVOGADOS

PLESNER LAW FIRM

ROYAL INSTITUTION OF CHARTERED SURVEYORS

SHIN & KIM

SSEK LEGAL CONSULTANTS

STIBBE

THIRTY NINE ESSEX STREET CHAMBERS

VIEIRA DE ALMEIDA & ASSOCIADOS, SOCIEDADE DE ADVOGADOS, RL

WALDER WYSS LTD

ZHONG LUN LAW FIRM

iii

Editor’s Preface ..................................................................................................viiJúlio César Bueno

Chapter 1 INTERNATIONAL PROJECT FINANCE ..............................1Phillip Fletcher and Andrew Pendleton

Chapter 2 DISPUTE RESOLUTION IN CONSTRUCTION PROJECTS ...............................................................................13

Robert S Peckar and Denis Serkin

Chapter 3 RELATIONSHIP CONTRACTING ......................................23Doug Jones

Chapter 4 A GUIDE TO ALTERNATE PROJECT DELIVERY SYSTEMS .............................................................33

Maurice Masucci, Frank Giunta, and David Price

Chapter 5 STANDARDS FOR THE MEASUREMENT OF LAND AND BUILDINGS ................................................51

Alexander Aronsohn, Ben Elder and Marcia Ferrari

Chapter 6 THE NEED FOR INTERNATIONAL CONSTRUCTION MEASUREMENT STANDARDS .........69

Matthew Saunders and Alan Muse

Chapter 7 ARGENTINA ...........................................................................80Pedro Nicholson

Chapter 8 AUSTRALIA .............................................................................91Matt Bradbury, Kristen Podagiel, Hayden Bentley, Tim Hanmore, Emma Murray, Liam Davis, Meg Morgan and James Arklay

CONTENTS

iv

Contents

Chapter 9 AUSTRIA ...............................................................................105Alric A Ofenheimer and Michael Strenitz

Chapter 10 BELGIUM ..............................................................................118Rony Vermeersch and Diederik De Block

Chapter 11 BRAZIL ..................................................................................130Júlio César Bueno

Chapter 12 CANADA ...............................................................................152Ian Bendell, Andrew Burton, Bruce Darlington, Lana Finney, David Foulds, James Kelsall, Howard Krupat, Elizabeth Mayer and Mitchell Mostyn

Chapter 13 CHILE ....................................................................................167Victor Ríos and Carlos Molina

Chapter 14 CHINA ...................................................................................179Zhu Maoyuan and Zhang Jiong

Chapter 15 COLOMBIA...........................................................................194Carlos Umaña, María Luisa Porto, César Rodríguez and Juan Martín Estrada

Chapter 16 DENMARK ............................................................................208Peter Wengler-Jørgensen, Maygan Mike Lundgaarde and Daniel Hedegaard Nielsen

Chapter 17 FRANCE ................................................................................222Paul Lignières, Mark Barges, Pierre Guillot and Darko Adamovic

Chapter 18 GERMANY ............................................................................232Rouven F Bodenheimer and Claus H Lenz

Chapter 19 INDIA ....................................................................................244Dina Wadia and Divyanshu Pandey

v

Contents

Chapter 20 INDONESIA ..........................................................................258Darrell R Johnson, Ade B Adamy and Awang F Bahrin

Chapter 21 IRELAND...............................................................................272Conor Owens, Mary Dunne and Michael Kennedy

Chapter 22 ITALY .....................................................................................284Francesco Sanna, Anna Amprimo and Carolina Teresa Arroyo

Chapter 23 JAPAN ....................................................................................301Tetsuya Itoh, Reiji Takahashi and Tetsuro Motoyoshi

Chapter 24 KOREA ...................................................................................313Michael Chang, Sang-Hyun Lee and Seung-Gyu Yang

Chapter 25 MEXICO ................................................................................324Juan Carlos Serra and Francisco Javier González

Chapter 26 NETHERLANDS ..................................................................342Frédérique Jacobse, Zeeger de Jongh, Werner Runge and Arent van Wassenaer

Chapter 27 PORTUGAL ...........................................................................354Manuel Protásio, Teresa Empis Falcão and Frederico Quintela

Chapter 28 QATAR ...................................................................................368Andrew Jones, Zaher Nammour and Sarah Stewart

Chapter 29 SOUTH AFRICA ...................................................................381Anton Barnes-Webb, Rob Morson, Lido Fontana and Daryn Webb

Chapter 30 SPAIN .....................................................................................393José Guardo and Alejandro León

Chapter 31 SWITZERLAND ...................................................................406Thomas Mueller-Tschumi and Francis Nordmann

Contents

vi

Chapter 32 TURKEY ................................................................................417H Ercument Erdem

Chapter 33 UNITED ARAB EMIRATES .................................................429Dr Daniel Brawn

Chapter 34 UNITED KINGDOM ...........................................................443David Brynmor Thomas, Alexandra Bodnar and Rebecca Drake

Chapter 35 UNITED STATES .................................................................456Carolina Walther-Meade, Karen Wong, Henry Scott and Miguel Duran

Chapter 36 URUGUAY .............................................................................478Beatriz Spiess

Chapter 37 VENEZUELA.........................................................................490Pedro Ignacio Sosa Mendoza, Pedro Luis Planchart, Verónica Díaz Hernández and Rodrigo Moncho Stefani

Appendix 1 ABOUT THE AUTHORS .................................................... 503

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .. 537

Appendix 3 GLOSSARY OF TERMS ....................................................... 543

vii

EDITOR’S PREFACE

La meilleure façon d’être actuel, disait mon frère Daniel Villey, est de résister et de réagir contre les vices de son époque. Michel Villey, Critique de la pensée juridique moderne (Dalloz (Paris), 1976).

This book has been structured following years of debates and lectures promoted by the International Construction Law Committee of the International Bar Association (ICP), the American College of Construction Lawyers (ACCL), the Society of Construction Law (SCL), the Dispute Resolution Board Foundation (DRBF) and the American Bar Association’s Forum on the Construction Industry (ABA). All of these institutions and associations dedicated themselves to promoting an in-depth analysis of the most important issues related to projects and construction law practice and I thank their leaders and members for their important support in the preparation of this book.

Project financing and construction law are relatively young, highly specialised areas of legal practice. They are intrinsically functional and pragmatic and require the combination of a multitask group of professionals – owners, contractors, bankers, insurers, brokers, architects, engineers, geologists, surveyors, public authorities and lawyers – each bringing their own knowledge and perspective to the table. That is why I am very happy to present you non-lawyers’ chapters specifically prepared for the introductory part of this book: ‘The Need for International Construction Measurement Standards’ by Matthew Saunders and Alan Muse at the Royal Institution of Chartered Surveyors (RICS). Frank Giunta, Maurice Masucci and David Price, senior representatives from Hill International, offer us ‘A Guide to Alternate Project Delivery Systems’ and Alexander Aronsohn, Ben Elder and Marcia Ferrari, senior representatives from RICS demonstrate some innovative approaches to spatially enabling land administration and management.

These chapters provide further breadth to the variety already produced by Robert S Peckar (Peckar & Abramson), Douglas S Jones (Clayton Utz) and Phillip Fletcher (Milbank, Tweed, Hadley & McCloy LLP), three leading professionals and lecturers in the field of project finance and construction law. Despite living miles away from each other – in the heartlands of the United States (Bob), the United Kingdom (Phillip) and

Editor’s Preface

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Australia (Doug) – they have equally influenced the main players in project financing in dealing with the complex issues related to the development and implementation of projects, the negotiation of construction and engineering contracts and the challenges of crafting the perfect financing package.

I am also glad to say that we have contributions from two new jurisdictions in this year’s edition: Indonesia and Turkey. Although there is an increased perception that project financing and construction law are global issues, the local flavour offered by leading experts in 31 countries has shown us that in order to understand the world we must first make sense of what happens locally; to further advance our understanding of the law, we must resist the modern view (and vice?) that all that matters is global and what is regional is of no importance. Many thanks to all the authors and their law firms that graciously agreed to participate.

Finally, I dedicate this forth edition of The Projects and Construction Review to Dr Kris R Nielsen, PhD, JD, PMP, MRICS, MJSCE, and Dr Sérgio Alfredo Rosa da Silva, professor at the prestigious University of São Paulo Engineering School. Both passed away last year.

I had the honour of working with both of them and it was a remarkable and unique experience to learn how to deal with projects with a global and strategic perspective on risk management and best practices. They spent their career working towards bettering the construction industry and worked tirelessly to promote the areas of law and engineering with a view to their joint futures.1

Dr Nielsen and Dr Rosa da Silva will be greatly missed.I look forward to your comments and contributions for the forthcoming editions.

Júlio César BuenoPinheiro Neto AdvogadosSão PauloJuly 2014

1 Dr Nielsen co-edited and authored an important book entitled Managing Gigaprojects – From Those That Have Been There Done That, published by ASCE Press in October 2012, which is already considered a classic and a great reference for those working in the field. In the words of his beloved wife Dr Patricia Galloway: ‘Dr Nielsen was a global leader in helping contractors and owners to define what makes a successful project. He helped them examine their operations and how to address subjects like risk management, execution, project controls, value engineering, corporate strategy, construction law, dispute resolution, project sustainability, etc. While on assignments, he worked with his clients to help select younger members of their organisation, i.e., to mentor in how to achieve project success. Dr Nielsen derived great satisfaction in knowing there was a growing cadre of people who were learning and then practising their new-found skills while striving for project success.’ See www.pegasus-global.com/personnel/.

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Chapter 20

INDONESIA

Darrell R Johnson, Ade B Adamy and Awang F Bahrin1

I INTRODUCTION

Indonesia is one of the most attractive countries in Asia for foreign direct investment. With average annual GDP growth of over 6 per cent per annum for several years, and access to a population of over 250 million people, Indonesia has the largest economy in South East Asia. This growth, in conjunction with years of under-investment in infrastructure, has created a significant demand to develop this sector.

Investors interested in project finance transactions in Indonesia can enter the sector either through private-to-private or public-private partnership (PPP) schemes. Project finance in Indonesia is most common in the infrastructure sector. The sector holds promise for investors, with the government of Indonesia having announced plans for about US$35 billion in investments in infrastructure projects. But there are risks with these infrastructure projects, including the risk that they may never get off the ground for reasons related to financing and land acquisition difficulties. Investors interested in these projects are well advised to invest with eyes wide open and do their due diligence first.

II THE YEAR IN REVIEW

Project finance transactions and construction business activities have played an important role in the development of Indonesian infrastructure in recent years. Among the more recent projects, and certainly among the highest-profile, are public transportation projects in Jakarta, the traffic-clogged capital of Indonesia. PPP schemes have helped to finance and manage some of these projects and PPP is expected to play an increasingly important role in infrastructure development in Indonesia.

1 Darrell R Johnson is a senior foreign legal adviser, Ade B Adamy is a senior associate and Awang F Bahrin is an associate at SSEK Legal Consultants.

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In 2013, the Indonesian government completed the Bali Mandara Toll Road, a major project designed to ease traffic congestion in this popular tourist destination. The US$220 million project was financed by a state-owned company, PT Jasamarga Bali Tol. The 12.7-kilometre tolled causeway bridge stretches over the Gulf of Benoa and is expected to ease access to Ngurah Rai International Airport from the popular south Bali areas of Nusa Dua and Denpasar. The toll road opened in September 2013 and is the first toll road on the island, which draws about 3 million foreign tourists annually.

Certainly the highest-profile infrastructure project in Indonesia at this time is the Mass Rapid Transit (MRT) project in Jakarta. There is much media coverage and general discussion of the MRT because it is seen by some as the best hope for rescuing the Indonesian capital from the grinding traffic gridlock that has become such an everyday feature of Jakarta and a drag on the business and economic centre of the country. The Indonesian government and the Japanese government, through the Japan International Cooperation Agency (JICA), are financing the first line of the MRT, with JICA providing the Indonesian government a loan for the project. There have been numerous reports that the Indonesian government is exploring the possibility of cooperating with private investors in a PPP to finance a second line of the MRT.

Participation by private entities in infrastructure projects managed by the government is supported by Presidential Regulation No. 67 of 2005 Regarding Cooperation Between Government and Business Entities in the Provision of Infrastructure, which has been amended by Presidential Regulation No. 13 of 2010, Presidential Regulation No. 56 of 2011 and, lastly, by Presidential Regulation No. 66 of 2013 (collectively, PR 67/2005).

PR 67/2005 allows private entity participation in government infrastructure projects in the form of providing financing for such projects. The types of infrastructure projects open for PPP schemes under this regulation are as follows:a transportation infrastructure, covering the rendering of airport services, the

provision and rendering of seaport services, and railway facilities and infrastructure;b road infrastructure, covering toll roads and toll bridges;c irrigation infrastructure, covering raw water-carrying channels;d drinking water infrastructure, covering raw water collection buildings,

transmission networks, distribution networks, and drinking water processing installations;

e wastewater infrastructure, covering wastewater processing installations, collection networks and main networks, and garbage handling facilities, covering waste transportation and dump sites;

f telecommunications and informatics infrastructure, covering telecommunications networks and e-government infrastructure;

g electricity infrastructure, covering the development of geothermal power plants, and electricity transmission and distribution; and

h natural oil and gas infrastructure, covering natural oil and gas transmission and distribution.

Private entity participation in the above infrastructure projects will be in the form of cooperation with the government in one of two ways: by entering into a cooperation agreement with the government or by obtaining an undertaking licence issued by the

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government. The purpose of such cooperation is (1) to mobilise private funding for the project; (2) to improve the quality, quantity and efficiency of the infrastructure project through fair competition; and (3) to improve the quality of the management and maintenance of the project.

In the case of a cooperation agreement, the agreement must be valid until the project is completed or for a period agreed by both parties. Under PR 67/2005, the private entity has a period of 12 months to obtain and provide the financing for the project. With the 2013 amendment of PR 67/2005, the private entity can obtain a 12-month extension thereafter to secure financing for the project. If the 12-month extension has lapsed and the private entity still has not provided the financing for the project, the cooperation agreement will automatically be terminated and the performance bond issued for the project will be forfeited to the government.

The main issues for construction services in Indonesia involve the practical implementation of construction laws and regulations. Construction associations continue to play a gatekeeper role for multinationals that wish to engage in the sector. Such associations issue recommendations for companies that are going to engage in construction services, with such recommendations addressed to the Construction Services Development Institute (LPJK). The LPJK, pursuant to such recommendation, will issue a business entity certificate (SBU), which a company requires before it can obtain a construction business licence (IUJK).

This is a system that can be difficult to navigate, particularly for multinationals coming into Indonesia. Construction associations have the power to, for example, indirectly interfere in ongoing tenders or throw up roadblocks for companies in obtaining that all-important recommendation to the LPJK. Some of the main concerns for construction companies having foreign share ownership are as follows:

In the oil and gas sector, a construction association can overstep its authority, which is solely the issuance of a recommendation to the LPJK, and raise questions about whether a construction company with foreign share ownership qualifies for domestic company status. As stipulated in Minister of Energy and Mineral Resources Regulation No. 15 of 2013 Regarding the Use of Domestic Products for Upstream Oil and Gas Business Activities (MEMR Reg. 15), and also in the Decision of the Head of BPMIGAS No. KEP-0003/BP00000/2011/S0 dated 19 January 2011, regarding Book II Revision-II of Operational Guidelines on Supply Chain Management for Production Sharing Contractors, as amended (PTK 007), a construction company having foreign share ownership can be given domestic company status by fulfilling certain requirements set out in MEMR Reg. 15 and PTK 007.

Domestic company status is important in the oil and gas construction services sector because the government prioritises domestic company participation in the procurement of goods, construction implementation services, construction consultation services, and other services in the oil and gas industry. Foreign companies can only participate in such areas through a consortium with domestic companies and/or national companies. Under PTK 007, companies having domestic company status can obtain price preferences in a tender.

Construction associations can make it difficult for newly established construction companies having foreign share ownership to obtain an engineering-procurement-construction (EPC) certificate from the LPJK. A construction association may require

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a newly established construction company with foreign share ownership to have construction services experience for the past 10 years before it will issue a recommendation to the LPJK. A newly established construction services company will obviously not have such experience and a new company cannot use the experience of its shareholders to qualify. The result is that construction companies having foreign share ownership are at the moment virtually shut out from the EPC business in Indonesia.

The most recent legislation affecting infrastructure and construction projects is Presidential Regulation No. 39 of 2014 (the Negative List or DNI), which provides those business lines in Indonesia that are open, open with certain restrictions, or closed for foreign investment.

III DOCUMENTS AND TRANSACTIONAL STRUCTURES

i Transactional structures

The ownership structure for project finance in Indonesia will depend on the agreement with the government or the project owner. The parties are free to use any type of ownership model, but the most common ownership model for infrastructure projects such as building construction, public transportation and airport projects is the build-operate-transfer (BOT) model. The build-own-operate-transfer (BOOT) model is common in the power industry.

ii Documentation

The principal documentation for project finance transactions in Indonesia is similar to the documents used internationally, such as a loan agreement and security documents.

iii Delivery methods and standard forms

In Indonesia, the EPC contract is the most common type of contract for large projects, where construction consultation services and construction implementation services are integrated, allowing a construction services company to provide engineering, procurement and construction services concurrently. EPC is open only to construction services companies that have been licensed and certified as EPC contractors by the relevant government institutions.

With regard to construction contracts, Indonesian law recognises the principle of freedom of contract. This principle is explicitly stated in Article 1338 of the Indonesian Civil Code (the Civil Code). Article 1338 provides that parties to a contract are free to include any provisions they wish subject only to mandatory provisions of Indonesian law. The mandatory provisions of Indonesian law are that a contractual term must not violate Indonesian law, public policy or public order. Under the Indonesian Construction Law, the freedom of contract principle is recognised but the contract must at a minimum include the following:a names of the parties;b scope of work;c time period;d experts involved and their classification and qualifications;e rights and obligations of the contracting parties;

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f terms of payment; g dispute resolution process in the event of a breach of contract;h principle of force majeure; i obligations of parties in the event of a construction failure; j protections for workers; and k compliance with environmental laws and regulations.

International contracts such as FIDIC (International Federation of Consulting Engineers) contract templates are increasingly being seen in Indonesia. The provisions under FIDIC contracts are now being adopted in drafting construction contracts for most construction projects in which the funding is coming from international lending institutions such as the World Bank, the Asian Development Bank and JICA. However, most locally owned private construction services companies in Indonesia do not use the FIDIC contract model.

IV RISK ALLOCATION AND MANAGEMENT

i Management of risks

Investing in or lending funds for infrastructure and construction projects always entails risk. It is commonly recognised that the higher the risk, the higher the potential yield.

Like many developing countries, Indonesia presents investors a mix of attractive opportunities and potential risks for project finance transactions. Such risks, however, can be minimised by doing the necessary research and performing a thorough due diligence to uncover potential pitfalls, steps that some companies, investors and lenders skip, much to their disadvantage.

There are significant risks and issues associated with project finance projects that should be considered. These include corruption, the inability to acquire land, infrastructure shortfalls, natural disasters and ethnic and communal violence.

Such risks can affect the funding and financing of projects and the ability to commence commercial operations on time and within the stated cost. An effort must be made to manage these risks by including the necessary clauses in the relevant agreements. These include an anti-corruption clause (stating, for example, that no actions shall be taken that would violate the Foreign Corrupt Practices Act if the funding party is subject to such rules) and an insurance clause that would require one of the contracting parties to obtain insurance for force majeure events such as natural disasters or ethnic violence that could delay or force the cancellation of a project.

In the case of a cooperation agreement between the government and a private entity, PR 67/2005 provides that the risk in an infrastructure project will be managed based on the principle of risk allocation between the government institution that is a party to the cooperation agreement with the private entity and the private entity itself. This shall involve allocating the risk to the party that is most capable of managing such risk to guarantee the efficiency and effectiveness of the project. Such risk management allocation will be stipulated in the cooperation agreement.

In addition to such risk allocation, the Indonesian government will provide a government guarantee in the form of financial compensation. The Indonesian government

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is required to observe the principles of financial risk management and control of the state budget in the issuance of such a guarantee. The government guarantee is provided by the Minister of Finance through PT Penjaminan Infrastruktur Indonesia (PT PII), known as the Indonesian Infrastructure Guarantee Fund (IIGF), a state-owned business entity established to provide guarantees for infrastructure and PPP projects. Presidential Regulation No. 78 of 2010 Regarding Infrastructure Guarantee in Cooperation Projects between the Government and Private Entities conducted through an Infrastructure Guarantee Entity (PR 78/2010) provides one of the forms of corporate guarantee, the infrastructure guarantee. The infrastructure guarantee guarantees the financial obligation of the government institution as the responsible party for the cooperation project to pay financial compensation to the private entity for any infrastructure risks that are the responsibility of the government institution in accordance with the risk allocation stated in the cooperation agreement.

Under PR 67/2005, the government also provides government support in the form of fiscal contributions, licences, land acquisition, partial construction support, and other forms of support necessary for the project based on the prevailing laws and regulations and the authorisation of each government institution.

ii Limitation of liability

As discussed in Section III.iii, supra, the Indonesian Civil Code recognises the principle of freedom of contract, as provided in Article 1338. Parties are free to contractually agree to limit the liabilities of the parties to damages, particularly to indirect and consequential damages, including loss of business or profits, subject to the following conditions and exceptions:a An Indonesian court could refuse to enforce a limitation of liability provision for

damages that result from gross negligence or wilful misconduct. An Indonesian court could consider such a limitation of liability contrary to public policy for damages that result from gross negligence or wilful misconduct.

b An Indonesian court could set aside a limitation of liability provision if the party enforcing the limitation of liability did not negotiate or implement the contract in good faith. In its good faith analysis the court might consider the nature of the agreement, the expertise of the parties and the relationship of the parties, among other factors.

The Civil Code recognises force majeure under Article 1244 and Article 1245. However, the force majeure exclusions clause can be available and enforceable as long as the parties agree.

iii Political risks

The infrastructure risk guaranteed by an infrastructure guarantee under PR 78/2010 covers all events that may occur to the cooperation project during the effectiveness of the cooperation agreement that can negatively affect the investment of the private entity, including equity and loans from third parties. Such infrastructure risks are risks that can be controlled, managed or prevented from happening, or accepted by the government institution as the responsible party for the cooperation project, the risk factor from the

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government institution itself or the risk factor from a government institution other than the responsible party to the cooperation contract. This means that any political risk that is related to any event that may impact the project during the term of a cooperation agreement that negatively impacts the investment of the private entity shall be given a guarantee by PR 78/2010.

Aside from the government infrastructure guarantee noted above, Indonesia also recognises the role of the Multilateral Investment Guarantee Agency (MIGA) in providing political insurance to private entities in project finance transactions. Indonesia has ratified the Convention Establishing the MIGA under Presidential Decree No. 31 of 1986.

V SECURITY AND COLLATERAL

It is common in private project finance transactions in Indonesia for the lender to require that its investment be secured by a lien over collateral. Such liens are (1) fiduciary security (for moveable objects, either tangible or intangible, and certain immoveable objects that cannot be secured through mortgage, which is regulated under Law No. 42 of 1999); (2) pledges (for moveable objects, either tangible or intangible, which is regulated under the Civil Code); and (3) mortgages (for land and fixtures on the land, which is regulated under Law No. 4 of 1996).

With regard to security and contractual protections for PPP, as discussed in Section IV, supra, the form of security and contractual protection for investors in infrastructure project finance transactions with the government is the government guarantee.

As for ‘step-in’ rights, such measures are recognised in Indonesia for private-to-private project finance transactions but are uncommon for PPP projects. In PPP, a project is undertaken by a government institution as the responsible party and as such it would be impossible to have a government infrastructure project being taken over by a private lender.

VI BONDS AND INSURANCE

In general, performance bonds are the most common form of bonds used in project finance transactions in Indonesia.

Under Government Regulation No. 56 of 2011 Regarding Project Financing through the Issuance of State Sharia Securities (GR 56/2011), the government can issue State Sharia Securities (Surat Berharga Syariah Negara or SBSN) to finance infrastructure projects. The issuance of SBSN for the purpose of project financing shall only be carried out for infrastructure projects that already have an allocation in the state budget.

VII ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

Outside bankruptcy proceedings, there are several steps that may be taken by a project lender to enforce its rights as a secured party over its collateral. The first is negotiation and mediation outside the court proceedings with the debtor regarding the project

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lender’s right over the collateral. If such negotiation and mediation efforts fail, then the project lender may try to settle through general court proceedings due to a breach of contract by the debtor.

In the context of a bankruptcy proceeding, project lenders that are creditors with security rights such as pledges, fiduciary guarantees and mortgages may execute their rights as if the bankruptcy had not occurred. However, such execution rights are suspended for a period of no more than 90 days as of the date the bankruptcy petition is read. During the suspension period, the curator may use or sell the bankruptcy assets in the framework of continuing the debtor’s business, on the condition that the curator has already provided sufficient protection to secured creditors. The 90-day time frame ends by law if the bankruptcy ends earlier or at the time the insolvency period commences. Creditors whose rights have been suspended may submit a request to the curator for the lifting of the suspension or to change the terms of the suspension. If the curator rejects such request, the creditors may submit the same request to the supervisory judge. One day after the receipt of the request, the supervisory judge will order the curator to summon the creditors who submitted the request to be heard at a hearing and the supervisory judge will issue a decision no later than 10 days after such hearing. The supervisory judge may decide to lift or retain the suspension and/or confirm whether the bankrupt’s assets may be executed by the secured creditor.

After determination of insolvency, creditors with security rights have no more than two months to execute their respective rights. After that period, the curator may request that the assets be sold by the curator, without prejudice to the rights of the creditors to the sale proceeds.

With regard to the ‘clawback’ provisions of the Indonesian Bankruptcy Law, such law provides that transactions of a debtor prior to a declaration of bankruptcy can be overturned if such transactions are detrimental to creditors. The right of annulment of past transactions involving assets or property of the debtor is set forth in the Indonesian Bankruptcy Law. The act of annulling past transactions is sometimes referred to in Indonesia by the Latin expression actio pauliana. In the interest of enhancing the bankrupt’s assets for the benefit of creditors, any acts of a bankrupt debtor that harm creditors’ interests and that are undertaken within one year prior to the declaration of bankruptcy may be nullified upon application by any creditor to the supervisory judge. Such nullification may only be implemented if it can be proven that at the time of such act the debtor was aware or should have been aware that such act would cause loss to creditors, except if such acts were based upon an agreement or required by law.

Further, the payment of priority claims from the assets of a debtor will be first applied to, among others, court and auction costs, employee claims and taxes.

The Bankruptcy Law stipulates that only certain parties can file for bankruptcy proceedings against the following entities:a if the debtor is a bank, only the central bank, Bank Indonesia, can file for

bankruptcy proceedings against it;b if the debtor is a securities company, stock exchange, clearing and guarantee

institution, or depositary and settlement institution, only the Capital Market Supervisory Agency (Bapepam) can file for bankruptcy proceedings against it; and

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c if the debtor is an insurance company, reinsurance company, pension fund or state-owned company engaged in work for the public interest, only the Ministry of Finance can file for bankruptcy proceedings against such debtor.

With the formation of Otoritas Jasa Keuangan (OJK or the Financial Services Authority) under Law No. 21 of 2011, the supervisory duties of Bank Indonesia, Bapepam and the Ministry of Finance over the banking, capital markets, insurance and pension fund sectors have been transferred to the OJK.

Lastly, in Indonesia there is no process for seizing the assets of a project company other than through court proceedings.

VIII SOCIO-ENVIRONMENTAL ISSUES

i Licensing and permits

Under Law No. 2 of 2012 Regarding Land Procurement for Development for Public Interest and its implementing regulation, Presidential Regulation No. 71 of 2012, the Indonesian government has the authority to acquire land by giving just and proper compensation to the rightful party. The law also enables the government to cooperate with private entities to develop the procured land.

With regard to environmental issues, all businesses engaged in infrastructure projects that may potentially affect the environment must obtain an environmental permit in order to obtain a business licence to commence business activities. This requirement applies for infrastructure and construction projects.

Law No. 32 of 2009 Regarding Environmental Protection and Management (Law 31/2009) stipulates that before obtaining an environmental permit, certain types of businesses are required to prepare an Environmental Impact Analysis (AMDAL) or an Environmental Management Effort and Environmental Monitoring Efforts (UKL-UPL). An AMDAL is a study of potential significant impacts on the environment by a planned business or activity. The UKL-UPL is a document on the management and supervision of specific types of businesses or activities that do not have a significant impact on the environment. Businesses or activities that are not obligated to obtain an AMDAL must prepare a UKL-UPL.

ii Equator Principles

To our knowledge, no banks in Indonesia have adopted the Equator Principles. As a result, project finance transactions and construction contracts funded through banks in Indonesia are under no obligation to adopt the Equator Principles. There may be an exception if the project finance transaction is funded by overseas banks that have adopted the Equator Principles.

iii Responsibility of financial institutions

Financial institutions will be liable for their obligations under the relevant agreement. Under the Civil Code, all parties bound to an agreement are mandated to carry out their obligations as set out therein. In the event that one of the parties fails to do so and

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further causes damages, the other party suffering damages may lodge a claim of breach of contract before a court of law.

Another ground for lodging a civil claim is an allegation of an unlawful act (Perbuatan Melawan Hukum). The Civil Code allows a party suffering damages arising from any illegal act by another party to claim compensation. For this purpose, it is important to establish that such act is illegal or contrary to the prevailing law and that such act resulted in damages to another party.

IX PPP AND OTHER PUBLIC PROCUREMENT METHODS

i PPP

The Indonesian government is determined to promote and increase the development of infrastructure projects in Indonesia through PPP between the government and the private sector. As discussed above, PPP for the development of infrastructure projects in Indonesia is regulated under PR 67/2005 along with its implementing regulations. These include:a Ministry of National Development Planning/Head of National Development

Planning Agency Regulation No. 3 of 2009 Regarding Procedures for the Formulation of PPP Project List;

b Ministry of National Development Planning/Head of National Development Planning Agency Regulation No. 3 of 2012 Regarding General Guidelines on PPP in the Procurement of Infrastructure;

c Government Regulation No. 50 of 2007 Regarding Procedures for Regional Cooperation;

d Government Regulation No. 27 of 2014 Regarding Management of State/Regional Assets; and

e Coordinating Ministry of Economic Affairs Regulation No. 4 of 2006 Regarding Evaluation Methodology for PPP Infrastructure Projects that Require Government Support.

PPP in Indonesia is coordinated by the Ministry of National Development Planning/National Development Planning Agency (Bappenas). Any institutions that intend to engage in PPP must liaise with Bappenas to determine which projects are open for PPP schemes. In addition, the Ministry of Finance will make a recommendation for fiscal support of the project.

PPP is conducted through a cooperation agreement or undertaking licence as stipulated in PR 67/2005. A cooperation agreement is a written agreement between the government (i.e., the minister/head of institution or head of region) and a private entity for the supply of infrastructure. An undertaking licence is a business licence issued by the government to a private entity stipulated by general procurement.

The procurement process for PPP must be conducted through a general tender. The tender and procurement steps and procedures are regulated under PR 67/2005 and its amendments, as well as other Indonesian laws.

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ii Public procurement

By ‘public procurement’, we refer to the procurement of goods and services by the government of Indonesia and its political subdivisions and their respective ministries, agencies, boards, etc. using funds set out in a national or regional government budget to pay for the goods or services being procured, as well as procurement by state-owned entities generally.

The provisions governing procurement by the government generally are set out in Presidential Regulation No. 54 of 2010 Regarding Government Goods/Services Procurement (PR 54/2010), as amended by Presidential Regulation No. 35 of 2011 and lastly amended by Presidential Regulation No. 70 of 2012 (PR 70).

In addition to the foregoing regulations of general application, a number of ministries and most state-owned entities have their own procurement rules (Procurement Rules). Some of these Procurement Rules are publicly available while some are not. From our experience, these Procurement Rules are generally consistent with PR 54/2010 and its amendments, although some provisions of these Procurement Rules may be more stringent than or set out in greater detail than the corresponding provision in PR 54/2010 and its amendments. In addition, these Procurement Rules may contain provisions that are not contained in PR 54/2010 or its amendments. An example of this is PTK 007 and PR 67/2005.

Both PR 54/2010 and its amendments and the Procurement Rules are of general application to the government and the applicable ministry or state-owned entities.

X FOREIGN INVESTMENT AND CROSS-BORDER ISSUES

Foreign investors and entities may engage in lines of business in Indonesia related to infrastructure, such as construction services or infrastructure financing.

To engage in construction services in Indonesia, foreign investors must form a foreign construction services (BUJKA) representative office or a limited liability company with foreign share ownership (PMA Company). Foreign ownership in construction services companies under the new Negative List is still 67 per cent for construction implementation services and 55 per cent for construction consultation services. The Negative List no longer stipulates foreign ownership restrictions for EPC in the oil and gas sector. However, EPC construction work may fall under construction implementation services in the public works sector, which as stated above has a foreign ownership limitation of 67 per cent.

Further, please note that the following construction work is no longer open for foreign investment pursuant to the new Negative List, whether conducted through the EPC method or not: a onshore production installation for upstream oil and gas;b onshore pipelines installation;c horizontal/vertical tanks;d storage and marketing of onshore oil and gas installations;e design and engineering; andf technical inspection.

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Other construction work including EPC for construction platform work in the oil and gas sector is open for foreign investment subject to a maximum of 75 per cent and 49 per cent, respectively, for spherical tank and offshore pipeline installation.

Other than the above types of construction work in the oil and gas sector, construction work falls under public works construction services, in which foreign investment is permitted up to 67 per cent for construction implementation services and 55 per cent for construction consultation services.

Infrastructure financing companies have a foreign ownership restriction of 85 per cent, pursuant to Ministry of Finance Regulation No. 100/PMK.010/2009 of 2009 Regarding Infrastructure Funding Companies (MOF Regulation 100/2009).

If a foreign investor is going to set up a BUJKA representative office, then such foreign investor must obtain a BUJKA representative office licence from the Ministry of Public Works. The BUJKA representative office must conduct a joint operation with a 100 per cent Indonesian-owned construction services company (BUJK) to be able to conduct construction service activities in Indonesia.

To establish a PMA Company a foreign investor must have at least two shareholders in the proposed PMA Company and it must secure an investment principle licence from the Indonesian Capital Investment Coordinating Board (BKPM) and obtain approval for the company’s establishment from the Ministry of Law and Human Rights (MOLHR).

After the said BKPM principle licence and MOLHR approval have been obtained, the PMA Company will then need to obtain an SBU from the LPJK before obtaining an IUJK. The IUJK is the main licence for the PMA Company to engage in the construction services business in Indonesia. The BKPM issues the IUJK for PMA companies.

For infrastructure financing companies, after the entity has been established, it must obtain its business licence from the Ministry of Finance pursuant to MOF Regulation 100/2009.

i Removal of profits and investment

There are no foreign exchange controls in Indonesia, except for the physical transfer of Indonesian rupiah to and from Indonesia. Article 8 of Law No. 25 of 2007 Regarding Capital Investment (the Investment Law) allows investors to transfer assets to other parties, including profits, capital, interest, dividends and other income, as well as payments to expatriate workers, additional funds required for investment financing, funds to repay loans, royalties and other fees, funds from the sale and liquidation of investments, compensation upon acquisition, etc. These rights, however, do not preclude the government from collecting taxes on such transfers and from requiring reports of such transfers.

Pursuant to Law No. 7 of 2011 Regarding Currency (the Currency Law), the Indonesian rupiah must be used for payment of liabilities within Indonesia. However, an exemption exists if payment in a foreign currency has been agreed in writing. Further, under the provisions of the Currency Law, international project financing or international financing transactions are excluded from this obligation.

Local entities borrowing funds from foreign lenders are subject to reporting obligations under Bank Indonesia Regulation No. 14/21/PBI/2012 Regarding Foreign Exchange Reporting and related regulations.

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XI DISPUTE RESOLUTION

i Special jurisdiction

There are no special courts or tribunals specifically dealing with project finance transactions or construction contracts. When parties enter into an agreement they may choose the location and procedure for dispute resolution. Dispute resolution may be done through the Indonesian courts or through arbitration, whether local or foreign.

Usually, project finance transactions that involve the Indonesian government use the Indonesian courts for dispute resolution, with Indonesian law being the governing law. If the Indonesian government agrees to arbitration, it will typically insist on arbitration within Indonesia subject to the rules of the local arbitration association. It is possible to use the foreign counterparty’s country of origin for dispute resolution, if both parties agree to such stipulation. Foreign investors usually choose to settle disputes through arbitration proceedings. Foreign arbitration proceedings are generally preferred, with the Singapore International Arbitration Centre (SIAC) before the venue of choice for many foreign lenders and investors.

Foreign investors and lenders are generally advised to avoid the Indonesian courts because of the lack of legal certainty. Unfortunately, it is generally accepted public knowledge that corruption and bribery may influence court decisions, notwithstanding aggressive efforts by the government to address this issue in the courts and elsewhere.

Foreign court judgments are not recognised under Indonesian law because Indonesia is not a party to any treaty for the enforcement of foreign court judgments. Therefore, any dispute previously litigated in a foreign court would have to be re-litigated in the Indonesian courts. In the Indonesian legal proceedings, the foreign court judgment may only be accepted as evidence, at the discretion of the Indonesian court, and would be given such evidentiary weight as the Indonesian court deems appropriate under the circumstances.

ii Arbitration and ADR

As stated above, parties may agree to settle disputes through arbitration and they may also agree on the arbitration forum. Arbitration must be based on agreement among the parties, failing which the courts have jurisdiction over the parties to the dispute. Indonesia has a local arbitration body, the Indonesian National Arbitration Body (Badan Arbitrase Nasional Indonesia or BANI). BANI has its own rules and procedures for arbitrations, including the time frame in which arbitral tribunals have to render an award. Such rules are used in both domestic and international arbitrations taking place in Indonesia. Foreign parties are advised to ensure in their contracts that the arbitration will be conducted in the English language and the award issued in both the English and Indonesian languages.

Indonesia recognises the enforcement of foreign arbitral awards and is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

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XII OUTLOOK AND CONCLUSIONS

Project finance in Indonesia is not regulated under one specific law. Rather, a variety of laws and regulations, many specific to certain industries or types of transactions, serve to provide the regulatory framework for project finance transactions. The government seems to be mostly focused on the infrastructure sector, which can be seen from the issuance of PR 67/2005.

Foreign lenders and investors continue to fill a necessary and needed role in financing infrastructure and construction projects in Indonesia. There continues to be under-investment in this sector, however, and such situation is likely to continue until the government provides the level of legal certainty and security to attract more foreign lenders and investors to the infrastructure and construction sectors in Indonesia.

The 2014 legislative and presidential elections are likely to have a great impact on the development of project finance in Indonesia. It is to be seen how the new government will enhance the infrastructure and construction sectors. The hope is for positive developments that will result in significant growth in infrastructure and construction development, which in turn will provide a lift to the economy and positively impact the prosperity of the Indonesian people.

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Appendix 1

ABOUT THE AUTHORS

DARRELL R JOHNSONSSEK Legal ConsultantsDarrell R Johnson has resided in Indonesia for 37 years. Mr Johnson’s expertise includes Indonesian finance, construction, banking and capital markets law, foreign investment law, oil and gas law, mergers and acquisitions, insurance law and corporate and commercial law.

A 1966 honours graduate in political science from the University of Southern California and Cambridge University, Mr Johnson earned a 1969 JD degree from Stanford Law School. Mr Johnson is a member of the State Bar of California and has been admitted to practise before the US Supreme Court and the Federal District Court (Central District) of California.

Mr Johnson is a member of the Board of Governors of the American Chamber of Commerce in Indonesia. He was the founding member of the Board of Advisors and the principal coordinator of the ELIPS Project, Indonesia’s commercial law reform project from 1992–2000, the largest single country effort of its kind in the world.

Mr Johnson has been recognised as one of the leading project finance, energy, natural resources, capital markets, mergers and acquisitions, insurance and banking lawyers in Indonesia by independent legal publications including IFLR1000, Chambers and Partners, Legal 500 and The International Who’s Who of Business Lawyers.

ADE B ADAMYSSEK Legal ConsultantsAde B Adamy graduated in 2000 from the Faculty of Law of Padjadjaran University in Bandung. She attended the Academy of American and International Law in Dallas, Texas, in 2006.

Ms Adamy’s practice focuses on project finance, construction law, foreign investment and general corporate and commercial law. Since joining SSEK, she has been

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involved in numerous projects related to project finance, consumer goods, distribution, franchising, imports and the pharmaceutical industry. Ms Adamy’s experience includes representing a global pharmaceutical company in a case that was resolved through arbitration proceedings in Singapore. She has advised an oil and gas services company on various aspects of its operations in Indonesia, including general corporate matters, employment issues and issues related to shipping and the procurement of goods and services.

Ms Adamy is a member of the Association of Indonesian Legal Consultants.

AWANG F BAHRINSSEK Legal ConsultantsAwang F Bahrin graduated from Pelita Harapan University in 2008 with a Bachelor of Laws. He joined SSEK in 2011 and that same year earned his Master of Laws from Pelita Harapan. Prior to joining SSEK, Mr Awang was part of the internship programme at the Ministry of Foreign Affairs in Jakarta.

At SSEK, Mr Awang has been involved in numerous matters related to project finance, construction, energy and mining, mergers and acquisitions, foreign capital investment and general corporate law. His other areas of practice include litigation and international law.

Mr Awang was born in New York and raised in Germany and is fluent in English and German, in addition to his native Indonesian.

SSEK LEGAL CONSULTANTSMayapada Tower, 14th FloorJl. Jend. Sudirman Kav. 28Jakarta 12920IndonesiaTel: +62 21 521 2038 / +62 21 304 16700Fax: +62 21 521 2039darrelljohnson@ssek.comadeadamy@ssek.comawangbahrin@ssek.comwww.ssek.com