Ben Shorten and Jean-Louis Neves Mandelli,
Shearman & Sterling
SECTION 1: Market overview
1.1 Please provide an overview of the project finance
market in your jurisdiction.
The largest project finance market in the region in recent
years has been Indonesia. While there has continued to be
significant activity, including some high-profile closings such
as the Tanjung Jati B IPP, the Cirebon 2 IPP and the $2.75
billion Paiton bond and loan refinancing, investors have been
more cautious in relation to new Indonesian projects due to the
numerous regulatory and policy changes introduced in 2017. A
similar lack of regulatory certainty has also affected the
progress of investment in Vietnam. 2017 has, however, seen the
rise of new markets such as Bangladesh and Myanmar, with
landmark closings in each of them.
A key development this year has been the spectacular rise of
interest in LNG to power projects (ie IPPs using LNG as fuel),
especially with floating storage and regasification units
(FSRUs). As well as the Jawa 1 IPP in Indonesia, there are
currently LNG to power schemes contemplated in Bangladesh,
Myanmar and the Philippines (to name a few).
1.2 What is the composition of the market in terms of the
types of active lending institutions and has this been
As it is still challenging for commercial lenders to provide
uncovered loans in most regional jurisdictions, development
finance institutions (DFIs) and export credit agencies (ECA)s
have continued to play a key role in mobilising financing.
DFIs have been especially active in newer project finance
markets such as Myanmar and Bangladesh. For instance, the IFC,
CDC, Clifford Capital and Japan International Cooperation
Agency (Jica) provided financing to the Sirajganj 4 IPP in
Bangladesh. On the multilateral front, the IFC and Asian
Development Bank (ADB) are continuing to increase their focus
on mobilising third party financing in deal financings and on
offering local currency financings. The recently established
Asian Infrastructure Investment Bank (AIIB) is also
increasingly active in project financings across the
On the ECA front, Japanese and Korean ECAs continue to play
a key role in major infrastructure financings in the region
(both through direct loans and political risk cover). Chinese
ECAs are increasingly active.
The involvement of the bond market through the Paiton
refinancing has been a major development (see below).
1.3 Please describe any major current projects or
initiatives that are influencing activity.
On the regulatory front, the regulatory and policy changes
introduced recently in Indonesia are probably the most talked
about development of 2017. This is partly due to the huge
potential of the market but also due to the nature, extent and
frequency of the changes. Tens of regulations have been passed
this year, some revising regulations introduced earlier in the
year, affecting key issues such as tariffs (now often
benchmarked to local average power generation prices), risk
allocation (including on grid and political risk) and transfer
rights (including with respect to lender rights on
enforcement). The new non-state budget infrastructure funding
structure (Pina) introduced by the Indonesian government
(discussed further below) has also brought about a dramatic
change in the structure of Indonesian infrastructure
Current LNG market developments, as well as the shift away
from coal IPPs by a number of stakeholders, have led to
tremendous interest in LNG regasification projects (especially
FSRUs) and LNG to power IPPs both in gas producing countries
such as Indonesia and Myanmar and in gas importing countries
such as Bangladesh. The Jawa 1 LNG to power IPP, the power
purchase agreement (PPA) for which was signed earlier this
year, is the first of its kind in this region and was a
watershed project for the development of LNG to power.
Governments across the region continue to champion renewable
energy, in particular solar, wind and run of the river hydro,
albeit with varying degrees of success. For example, although
the Vietnamese government introduced new regulations on wind
and solar IPPs and PPAs in 2017, the market view is that there
are still key bankability issues. In Myanmar, the government is
working with DFIs, developers and advisors to facilitate the
development of its huge hydropower potential by developing a
standard set of commercial documentation.
Other key projects which will influence activity in the
region include the Singapore-KL high speed rail project and the
$28 billion Refinery and Petrochemical Integrated Development
(Rapid) project, which Shearman & Sterling is advising
SECTION 2: Transaction structures
2.1 Please review some recent notable transactions
involving your market and outline any interesting aspects in
Paiton bond and loan refinancing –
It included two bond tranches of $2 billion in total and was
the first investment-grade, and the largest amortising,
international bond for an infrastructure project in Asia since
Jawa 1 LNG-to-power IPP – This
will be the first LNG to power project to be developed in the
region. It will include a dedicated FSRU offshore receiving
Sirajganj 4 IPP – This was the
first project financed IPP in Bangladesh to involve foreign
sponsors and the largest foreign investment in the country for
a number of years.
2.2 What might the projects above mean for the market and
have you noted other noteworthy developments in the way project
finance transactions are being structured for a) energy
projects and b) infrastructure development?
The Paiton Refinancing has been a major development in the
regional project financing market and could potentially trigger
a wave of refinancings (and possibly financings) involving
bonds in the region.
The Jawa 1 LNG to Power IPP could pave the way for the
development and financing of other LNG to power projects across
the region, setting the benchmark for future projects.
The Sirajganj 4 IPP has triggered an unprecedented wave of
foreign investment interest in Bangladesh, including in LNG,
conventional and renewable power.
SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies that
govern project financing in your jurisdiction.
No jurisdiction in this region has triggered as much
discussion around its regulatory and policy changes this year
In the energy sector, policies are developed by the Ministry
of Energy and Mineral Resources (MEMR). Depending on the
project, the PPP Regulations issued by Presidential Regulation
in 2015 may also apply. Foreign investors will typically
require investment approvals from the Investment Coordination
Board (BKPM) and, in respect of foreign debt financing
arrangements, Team for Coordination of the Management of
Offshore Commercial Loans (PKLN).
3.2 Have there been any recent changes to regulations or
regulators that may impact the finance structuring in terms of
guarantee and security regimes, local currency rules and
foreign investment restrictions?
Yes. In Indonesia, under Regulation 48 of 2017 (replacing an
earlier Regulation), it is only possible to transfer shares in
an IPP project company pre-commercial operation to a 90% owned
affiliate of the transferring shareholder. There is no carve
out for share transfers by lenders in case of enforcement. It
is therefore not possible for lenders to enforce their onshore
share security over the project company's shares. Depending on
the identity of the shareholder, a number of structures may be
available to address this issue.
Furthermore, under Indonesian law, the recent Currency Law
requires the payment of all PPA tariffs in rupiah, exposing
projects to currency risk, given their financing tends to be in
US dollars. We helped develop a package of contractual
mitigants which addresses the risk of inconvertibility of
rupiah into US dollars (which has been accepted by the Japan
Bank for International Cooperation (JBIC), Korea Trade
Insurance Corporation (K-sure) and other similar institutions)
and which has been applied in projects.
With respect to foreign investment restrictions, the
Indonesian Government's new Pina initiative involves a
structure for IPPs whereby state-owned monopoly off-taker PLN's
subsidiary is a 51% shareholder in the IPP and takes the lead
on the operation of the IPP. This raises a number of questions,
including how to overcome restrictions on the grant of typical
security interest over the IPP's assets under the terms of the
World Bank's loans to Indonesia and how to grant effective
share security to lenders.
3.3 Please describe the regime governing renewable energy
Indonesia's renewable energy regime was reformed in 2017
under MEMR Regulations 12 and 50. They imposed new rules on
renewable energy tariffs and the contracting regimes applicable
to different types of renewable energy projects. Under
Regulation 12, renewable energy tariffs were capped by
reference to the average cost of generating power in each local
area (Generating BPP). The applicable cap will either be
Generating BPP, if Generating BPP for the area is less or equal
to national average (ie Java, Sumatra and Bali); or 85% of
Generating BPP if Generating BPP for the area is above national
average (i.e., other provinces). As a result of concerns around
this cap being too low, to allow for the development of
renewable energy capacity (especially in areas where prices are
already equal or lower than national average), MEMR Regulation
50 was introduced to allow a bilateral negotiation of tariffs
in these areas.
Under the new regulatory regime, solar and wind projects
will be subject to a tender process based on capacity stated as
being available in PLN's electricity supply business plan.
Other renewable energy projects are either subject to a
reference price or direct selection process.
3.4 Does your jurisdiction have incentive schemes in place
for various types of energy or infrastructure project
Yes. These may include regulatory exemptions and tax
3.5 Are there any rules, legislation or policy frameworks
under discussion that may impact project finance in your
We would expect the terms on which the Pina projects will be
developed to impact projects to be developed under that
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the project finance market in your
A key pitfall is often underestimating the intricacies of
the local bureaucracies and the practical difficulties that may
arise in obtaining permits (even where the local government has
committed to provide these contractually).
4.2 What measures should be taken to best prepare for your
Consult with local counsel and international advisors with
experience of dealing with the realities of project financing
in that jurisdiction sufficiently early in the project
SECTION 5: Practical considerations
5.1 How established is the legislative framework and
authorities that govern public-private partnerships (PPP) and
where have PPP structures most successfully been applied?
Most jurisdictions in the region have developed PPP
regulations/legislation. The extent to which these are used (or
have been successful in) the development of infrastructure
project varies significantly.
Countries such as Bangladesh, which has a comprehensive and
consistent PPP regime, are starting to reap the benefits of
this regime, with an overall year-on-year increase in PPP
projects with foreign sponsor participation between 2014-2016.
Contrast this with Vietnam, where inconsistencies and frequent
changes to the PPP regime resulted in no new PPP project with
foreign sponsors in 2016.
5.2 What are the key considerations relating to foreign
investment into projects as regards insurance and tax
Political risk insurance tends to be required by most
lenders in the region (whether from ECAs, multilaterals or the
private sector). Some developers also take out political risk
insurance in respect of their equity investment.
Withholding tax on dividends and shareholder loan interest
is often a key structuring consideration for foreign investors.
5.3 Are there any specific issues creditors should be
mindful of regarding a bankruptcy and restructuring
In civil law countries such as Indonesia there may be
restrictions on the ability of secured lenders to foreclose on
assets and dispose of them through a private sale. The
involvement of local courts in insolvency proceedings can also
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months in the
project development and financing sector and how do you expect
legal practice to respond?
We expect to see increased activity in the LNG to power
sector as well as a continued strong renewable projects
pipeline. In terms of jurisdictions, we would expect Bangladesh
and Myanmar to be very active in 2018. There are a number of
projects in Indonesia which will be looking to achieve
financial close next year (such as Jawa 1); it is difficult to
foresee how investors and lenders will react to the new Pina
structure. This may lead to delays in the development of new
projects while solutions are developed to address the
On the oil and gas front, given current LNG oversupply in
the market, we would expect demand for LNG regasification (and
particularly FSRUs) to remain high. As the first floating LNG
liquefaction plant has been successfully financed (Coral South
in Mozambique), there may be potential for these types of
projects to be developed in this region also.
Partner, Shearman & Sterling
T: +65 6230 8907
Ben Shorten is a partner in the firm's Singapore
office, where he practices in the area of international
project development and finance, with a particular
focus on power & water and oil & gas projects.
He has nearly 20 years of experience advising on
financings and project financings, including many which
have been named Deal of the Year.
Jean-Louis Neves Mandelli
Senior associate, Shearman &
T: +65 6230 3834
Jean-Louis Neves Mandelli is a senior associate in
the project development & finance group based in
Singapore. He has experience advising on international
project development and financing, including in the oil
and gas and power sectors.