Summary: Welcome to the latest edition of BLP’s quarterly update on legal developments in Indonesia. We have distilled the latest Indonesia news into this ‘speed read’. Please get in touch for more information.

1. New PPP Regulations Recognise Foreign Participation in Oil Refinery Projects

Pertamina Refinery Director Rachmad Hardadi views crude oil refining capacity as a critical part of the Indonesian government’s plan to reduce dependence on imported fuel. However, Indonesia’s Refinery Development Masterplan ("RDMP") will reportedly cost up to US$70 billion over the next 10 years, at least in part funded by the private sector. In a move aimed at welcoming foreign investment, new regulations permit co-operation with international organisations in early-stage PPP project development funding.

Our analysis summarises the key changes.

2. FiT Regime for Indonesian Biomass and Biogas Projects

A new regulation promoting biogas and biomass power projects through feed-in-tariffs ("FiTs") was issued by the Indonesian government on 4 August 2016 ("FiT Regulation") replacing the previous biomass/biogas Regulation No.27 of 2014.

The FiT Regulation sets out (i) the applicable FiT levels and (ii) the application procedure, for new and existing biogas and biomass projects in Indonesia – and flows out of the Governments’ drive to build 35GW of new power capacity by 2019.

Here are our key takeaways .

3. Indonesia’s Role in Belt and Road

President Xi’s Belt and Road policy continues to attract growing interest in Indonesia, further to the strong interest shown by investors at a “One Belt, One Road” seminar held on 18 November 2016 at Raffles Hotel in Jakarta. The event was hosted by BLP in association with Tusk Advisory, HKTDC and BritCham.

Dr. Nicholas Morris discussed the history of the Silk Road and the Maritime Silk Road, the use of Belt and Road as an organising concept for billions of dollars of Chinese investment, the importance of Belt and Road to the new world order and the need for pragmatism in the approach to legal, bureaucratic, cultural and linguistic differences of the constituent Belt and Road countries.

Speaker Marius Toime focussed on the legal and financing structures for Belt and Road investment into Indonesia. Speaker Kwanho Leung explained Hong Kong’s role as an intermediary between outbound Chinese investment and Indonesia (including as a provider of international expertise and finance).

Indonesia may benefit from Belt and Road initiatives such as Chinese technology transfer and infrastructure investment, and also capitalise on demographic advantages (such as labour force) for economic growth in partnership with China. The Maritime Silk Road accords well with President Jokowi’s domestic vision of the “Sea Toll”, founded on Indonesia’s strong maritime heritage.

The move towards greater co-operation between China and Indonesia will not be without speed bumps. However, we will watch with interest as the Belt and Road initiative continues to take shape and give rise to the development and financing of business opportunities in Indonesia and abroad.

The December 2016 edition of Belt and Road Insights contains an overview of key Belt and Road developments.

4. Tribunal Throws Out Churchill’s Claim for Expropriation of Coal Mining Licence

In a final award issued on 7 December 2016, a Tribunal convened pursuant to the ICSID Convention Rules has ruled that claims brought by the UK’s AIM-listed Churchill Mining Plc against Indonesia are inadmissible. This protracted claim for damages, which commenced back in 2012, arose out of the Indonesian government’s decision to revoke Churchill’s licenses to exploit coal reserves in East Kutai, Indonesia. The claims of Churchill’s subsidiary Planet Mining - which had been consolidated before the same Tribunal - suffered the same fate.

The Tribunal was swayed by the weight of evidence indicating that documents submitted to the Indonesian government, which were fundamental in securing the investment in the first place (and which included licences and letters from various levels of government), had been forged. Whilst there was no evidence explicitly linking Churchill with what the Tribunal found to be forgery, it was determined that in all likelihood the forgery was handled by someone or some entity working for or on behalf of Churchill’s local business partner.

It was ultimately found that Churchill’s due diligence exercises had been insufficient so as to eliminate the possibility that a local partner could forge the documents. Churchill’s due diligence was criticised in that it failed to account for the pervasive problem of corruption in the mining sector in Indonesia.

To add further insult to injury, Churchill and Planet Mining have been ordered to pay costs and arbitration fees amounting to almost US$9.5 million. Despite this, Churchill has suggested that it may seek annulment of the award.

Whilst this is unlikely to be last we hear in this legal saga, it must serve as a helpful reminder to investors seeking opportunities in emerging markets that thorough due diligence of any potential local partners is a crucial element of any strategy designed to protect the value of an investment. Acknowledging the risk of bribery and corruption and devising and installing adequate procedures to combat it are of paramount importance to avoid unsuitable local partners and such costly pitfalls further down the line.

For our previous coverage of this dispute, please refer to our updates in March 2013 and in September 2015.

5. Dual BANIs: Legal and Practical Considerations

Commercial parties intending to resolve their disputes through arbitral institutions in Indonesia have reached a potentially tricky juncture. BANI has been the go-to arbitration institution in Indonesia since it was established in 1977 and has enjoyed international recognition. However, on 8 September 2016, a new institution was launched, confusingly calling itself BANI Pembaharuan or the “Renewed BANI”.

Our article outlines the considerations for commercial parties with arbitration clauses referring disputes to BANI.