Public Private Partnership Step-In Rights: Do They Work?

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Public Private Partnership Step-In Rights: Do They Work?

A direct agreement can absorb weeks of negotiation, and the clause that takes most of it is usually step-in. Lenders want a right to intervene when the project company fails. The agency wants to keep control of an asset it will eventually own. What rarely reaches the credit committee is the empirical question: in a public private partnership, how often is it used?

This article walks the default-to-substitution sequence, sets out what Indonesian law gives a lender, and separates step-in from the two mechanisms it gets confused with, starting with what a public private partnership guarantee actually commits the government to.

In brief: Step-in rights are a lender’s contractual right, created through a direct agreement with the contracting authority, to intervene in or nominate a substitute for a defaulting project company before the cooperation agreement is terminated. In a public private partnership the purpose is to preserve the project, not to transfer ownership to the lender.

What are step-in rights in a public private partnership?

Step-in rights let a project’s lenders take over management of, or nominate a replacement for, the project company when a default threatens the underlying contract. They are created by agreement, not by statute. Their function is preventative: to buy time to cure a breach so that the contracting agency does not terminate.

The Global Infrastructure Hub describes the right as one for lenders to “step into the role of the Project Company to give it the opportunity to rectify the issues.” Step-in is not an acquisition. It is a right to intervene and repair.

Three separate remedies sit around a distressed KPBU (Kerja Sama Pemerintah dengan Badan Usaha, Indonesia’s public-private partnership scheme) project, and term sheets routinely blur them. Keeping them apart is the first discipline of reading the KPBU contract architecture these remedies operate inside.

Lender step-in and substitution. Held by lenders under the direct agreement, triggered by the project company’s default. It transfers no equity to the lender and repays no debt.
The agency’s termination and takeover right. Held by the PJPK (Penanggung Jawab Proyek Kerja Sama, the contracting government agency) under the KPBU agreement itself, triggered by an uncured default of the Badan Usaha Pelaksana (BUP, the implementing project company). It returns the asset to the government side, not to lenders.
The government guarantee. Responds to the agency’s own default or to specified government-side risks under the cooperation contract. The guarantor is not a party to the direct agreement, and the guarantee does not cure a sponsor’s commercial failure.

The direct agreement: the document that makes step-in possible

A direct agreement is a tripartite contract among the lenders, the contracting agency and the project company. Under it the agency undertakes not to terminate the cooperation agreement until lenders have had notice and an opportunity to cure. Without that undertaking, a lender’s step-in right binds nobody on the government side.

A lender’s security package reaches the project company’s shares, receivables and accounts. It does not reach the concession that generates the revenue, and that the agency can end.

A step-in right living only in the loan documents is a right against a borrower already failing.

The direct agreement binds the party with the power to stop the project. Beyond notice and forbearance, it commits the agency to deal with a lender nominee or an approved substitute. The World Bank’s PPP Legal Resource Center is the standard reference on lender issues of this kind.

A cure right that depends on lenders hearing of a default from the sponsor is worth far less than one obliging the agency to tell them directly.

What actually happens when the project company defaults

In standard international practice a defined default triggers notice to the contracting agency, then a standstill or cure period, then either lender intervention or the nomination of a substitute, which the agency must approve. If the cure succeeds the project continues. If it fails, the contract proceeds to termination and compensation.

Default event. The project company breaches a defined trigger under the KPBU cooperation agreement: a missed construction milestone, a payment default, an insolvency event.
Notice. Formal notice goes to the contracting agency, in the form and period the direct agreement prescribes.
Standstill or cure period. The agency holds off terminating while lenders exercise cure rights. Duration is negotiated project by project, and no general market standard was identified in this research.
Lender intervention or nomination. Lenders step in through a nominee, or propose a substitute entity to take over performance.
Approval of the substitute. The nominee must clear the agency’s eligibility assessment on nationality, track record, and technical and financial capacity.
Outcome. Either the default is cured and the project continues, or the agreement proceeds to termination and compensation on its own terms.

Can a foreign lender legally take over an Indonesian project company?

Not as a straightforward ownership transfer. Indonesian legal commentary characterises step-in as a conditional assignment (cessie), contractual rather than a registered security interest. Any substitute must clear the contracting agency’s approval on eligibility, nationality, track record, technical capability and financial standing, and sector foreign-ownership limits can narrow the field.

That mechanism is rooted in the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata), supported by powers of attorney and novation undertakings. The same commentary describes the approach as standard market practice and, in the same breath, as untested before Indonesian courts. A 2019 banking and finance practice guide called it contractual security open to challenge as circumventing the statutory security regime.

The framework regulation does not fill the gap. Perpres 38/2015, enacted 20 March 2015 and still in force as at September 2026, sets the KPBU framework but does not prescribe substitution or termination-compensation mechanics. Those live in the individual cooperation agreement, so two Indonesian KPBU projects can carry materially different step-in terms.

What offshore lenders assume	What Indonesian practice delivers
Step-in is a perfected security interest over the project company	A conditional assignment (cessie): contractual, not registered security, and untested before Indonesian courts
Any credible operator can be substituted in	The substitute must clear agency approval on nationality, track record and technical and financial capacity, with sector ownership limits a live constraint
The clause travels unchanged across jurisdictions	Indonesian security law (fidusia, hak tanggungan) has no equivalent for assigning a concession as security

Why step-in rights are negotiated hard and used almost never

The Global Infrastructure Hub reports that lender step-in events are not common in practice and that “the study has not found any example of substitution in the sample of 250 projects globally.” On that evidence the right earns its legal budget as a forbearance lever that keeps a contract alive, not as a transfer mechanism.

The mechanism is doing its job when it is not used: a credible cure right changes the agency’s behaviour at the moment of default.

And most failures are not at project-company level. Contractors fail far more often, and performance bonds and parent-company guarantees absorb that exposure well before anything reaches the direct agreement.

For Indonesia specifically, this research found no publicly documented instance of step-in or substitution being exercised on a KPBU project, as at September 2026. That is an absence of evidence rather than proof of absence: Indonesia’s deal count is a fraction of a 250-project global sample, and outcomes on individual projects are not routinely disclosed.

Spend the legal budget on cure periods long enough to be usable, on notice obligations running from the agency directly to lenders, and on a substitution consent standard not left to the agency’s absolute discretion. On municipal-scale schemes funded through creative financing, the tripartite machinery can be disproportionate to the exposure.

A government guarantee covering the agency’s own default is not a substitute for step-in, and step-in does not cure a sponsor’s commercial failure. The government-support architecture sits in a separate instrument, PMK 68/2024, effective 18 October 2024.

FAQ (Frequently Asked Questions)

What are lender step-in rights in a public private partnership?

They are a contractual right, set out in a direct agreement among lenders, the contracting authority and the project company, allowing lenders or their nominee to intervene in or substitute the project company before a default leads to termination. The Global Infrastructure Hub describes it as a device to prevent termination, not to transfer ownership to the lender.

Are step-in rights enforceable under Indonesian law?

They operate as contractual rights rather than a recognised statutory security, so enforceability rests on the direct agreement’s drafting and the agency’s cooperation rather than on a registered lien. Indonesian legal commentary notes that using assignment for security purposes is common but has not been tested before Indonesian courts.

What is the difference between lender step-in and the agency’s takeover right?

Lender step-in is a private-side remedy under the direct agreement, triggered by the project company’s default and aimed at curing it. The contracting agency’s termination-and-takeover right sits in the KPBU agreement itself, is triggered by an uncured default of the Badan Usaha Pelaksana, and returns the asset to the government side.

Have step-in rights ever been used on an Indonesian KPBU project?

No publicly documented instance of step-in or substitution being exercised on an Indonesian KPBU project was found in this research, as at September 2026. That reflects limited public disclosure of commercial outcomes as much as rarity, and should be read as absence of evidence rather than proof of absence.

Does a government guarantee replace a lender’s step-in rights?

No. A government guarantee under Indonesia’s infrastructure-guarantee framework, established by Perpres 78/2010, responds to the contracting agency’s own default or specified government-side risks under the cooperation contract. Lender step-in responds to the project company’s performance failure. They are separate mechanisms for separate failure modes.

Conclusion

Step-in rights deserve the negotiating attention they attract, though for a reason most term sheets do not state. Their value sits in forbearance, in the agency’s commitment to pause before terminating, not in a transfer the evidence suggests almost never happens. Read the notice and cure provisions before reading the substitution clause for comfort.

Private-side remedies work alongside the government-side instrument, not instead of it. PT Penjaminan Infrastruktur Indonesia (Persero), internationally known as the Indonesia Infrastructure Guarantee Fund (IIGF), is the only Indonesian state-owned enterprise mandated as Badan Usaha Penjaminan Infrastruktur under the Ministry of Finance to issue government guarantees for KPBU infrastructure projects: 61 projects, with project value above IDR 732 trillion, as at June 2026.

Readers tracing how these government guarantees are structured for public private partnership projects in Indonesia can start at ptpii.co.id.