Special report: Indonesia
13 August 2012 | By Yun Kriegler
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As Indonesia develops its creaking infrastructure to spur even faster economic growth it will attract increasing interest from businesses, banks and law firms
While Indonesia continues to produce attractive legal work in its robust natural resources and mining industry, growing attention is being paid to its infrastructure sector as the country issues new regulations to encourage investment in PPP projects.
If you have a meeting in downtown Jakarta the chances are one of the parties will be late. It is not strictly a matter of punctuality, more the challenge of getting through the traffic in the world’s largest city without a metro. On a bad day it can take hours to travel a couple of miles, so understanding the concept of what locals call ‘rubber time’ is essential.
A lack of up-to-date public transportation systems in Indonesia and, more broadly, a lack of modern infrastructure, has not discouraged international investors and their law firms from wanting to do business in the largest economy in the Association of Southeast Asian Nations (Asean).
Although Indonesia is yet to allow foreign firms to open offices on the ground the legal sector is relatively open. Foreign lawyers can practise in association with Indonesian firms in a 4:1 ratio, up to a maximum of five foreign lawyers.
Since 2011 a raft of international firms have entered into association with local firms. Hogan Lovells’ association with five-partner Hermawan Juniarto is the latest example. Linklaters has also gained a foothold via its Australian ally Allens, which has a long-term association with Jakarta firm Widyawan & Partners.
“While traditional markets are struggling Indonesia is charging along,” says Luke Devine, foreign legal counsel at Hadiputranto, Hadinoto & Partners, a member of Baker & McKenzie’s network. “International firms started to look around for an engine of growth some years ago and some have finally taken notice of the Indonesian market.
“It’s a huge country with a big domestic market, rich natural resources and a tremendous need for investment in infrastructure. The next 10 years will be a golden decade.”
The opportunities are not limited to international firms with an association with local counterparts. Many firms have picked up work out of their Singapore offices, less than a two-hour flight from Jakarta.
Berwin Leighton Paisner is a case in point. The firm’s Singapore office, opened in 2007, has been involved in Indonesia-related projects. According to corporate partner Ken Cheung, 70 per cent of the transactions and cases the Singapore office handles have an Indonesia component.
“Indonesia is a bright spot in the region,” Cheung says. “It offers the large, complex deals international firms like to advise on. Big projects generally require international investment and bank loans, and the investment flow often goes through Singapore so a lot of the legal work can be done out of here.”
There is no doubt that Indonesia’s growth momentum is drawing in international lawyers, but living and travelling in the country can be thrilling, to put it politely. Poor infrastructure is even blamed for holding back growth. The government has now pledged to accelerate infrastructure development with the launch of its Master Plan for the Acceleration and Expansion of the Indonesian Economy (MP3EI).
Under the plan, projects have been initiated such as airports, seaports, toll roads, railway systems and power plants. The private sector, including foreign investors, will be given a big role. It is estimated that Indonesia’s investment need for infrastructure in the next few years is more than $200bn (£128bn) and a third will be funded by the private sector.
A number of regulations aimed at improving the PPP scheme for infrastructure projects have been issued by the government. For example, it will provide a guarantee for big projects through the Indonesia Infrastructure Guarantee Fund, set up in May 2010 to mitigate against things such as contractual and political risk.
Power and glory
Separately, Indonesia’s finance minister will issue a “business viability guarantee” in favour of certain power projects under a fast-track power generation programme.
Lawyers expect the improved investment environment to spur activity in infrastructure.
“Despite concerns around onshore regulatory uncertainty over the mining industry there is high global demand for oil, gas and commodities,” says Devine. “This sector has been powering on for a decade while investment in infrastructure has not progressed as fast due to sensitivity around affordability. With a more attractive legal and fiscal framework, more projects will come through and more money will be invested.”
Recently, Devine and his team helped two internationally financed geothermal independent power producer (IPP) projects, Muara Laboh and Rajabasa, obtain Ministry of Finance guarantees covering state electricity company PLN’s payment obligations under power purchase agreements (PPAs).
“These projects are landmark renewable energy deals and the PPAs we developed formed the model PPA to be used by PLN in future, ” Devine relates.
Although corruption is still seen as a barrier to investment Indonesia, which has recovered strongly after the 1997 Asia financial crisis, is poised to become one of world’s top 10 economies by 2025.