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Indonesian power projects
Ten things to know
Indonesian power projects
1 Negative list
The Negative List (created pursuant to Presidential Regulation
36 of 2010) imposes maximum limits of foreign ownership
for various categories of business activity. 95 percent
foreign ownership is permitted for power generation projects
above 10 MW. The remaining five percent must be held by
Indonesian entities or individuals. Power projects of 10 MW
and smaller are reserved for Indonesian entities. However,
we are aware of some instances where foreign investors have
successfully structured their participation in projects of less
than 10 MW. A maximum of 95 percent foreign ownership is
also permitted in relation to geothermal drilling.
New energy projects can be procured under one of two
different tender processes - direct appointment or public
auction (see MEMR Regulation No. 1 of 2006 regarding
procedures for purchasing electricity and/or lease of grid
for the purpose of supply of power for public interest, as
amended by MEMR Regulation No. 4 of 2007).
Procurement methods
Pursuant to Law No. 30 of 2009 relating to the electricity
sector, power generators are now permitted to sell
electricity to entities other than PLN, the state electricity
utility. However, despite the change in law, most electricity
generated in Indonesia is still either self-generation (captive)
or sold to PLN.
PLN procures new independent power projects (IPPs) under a
few different strategic programmes. The main one is the Fast
Track II programme pursuant to Presidential Regulation No.
4 of 2010 (as amended by Presidential Regulation No. 48 of
2011) to Accelerate the Development of Renewable Energy,
Coal and Gas Fired Power Plants. This programme consists
of 10,147 MW of new projects. There are 44 projects in total
and 3,097 MW of new capacity has been reserved for IPPs,
consisting of coal, gas, geothermal and hydro technologies.
Ministry of Energy and Mineral Resources (MEMR) Regulation
2 of 2010 (as last amended by MEMR Regulation No. 1 of
2012), sets out a list of these projects.
Some IPPs are procured under Indonesias Public Private
Partnership (PPP) programme, pursuant to Presidential
Regulation No. 67 of 2005, (as last amended by Presidential
Regulation No. 56 of 2011). The first project to be procured
under this programme was the 2,000 MW ultra-super critical
coal-fired Central Java project.
PLN also procures IPPs outside of each of these two
programmes, and currently they include a variety of coal
mine-mouth projects.
The procurement method has a bearing on the type of
incentives offered for the projects, including the availability
of a government guarantee (discussed below).
Norton Rose Group Indonesian power projects ten things to know
Tender process
The direct appointment process is restricted to renewable
projects, purchase of excess power and situations where
the local power system is in critical condition. In addition,
the direct appointment must be approved by the MEMR.
Accordingly, the direct appointment process is less often
used by PLN, than the public auction process.
Regardless of the two tender methods, PLN is obliged
to comply with Presidential Decree No. 54 of 2010, (as
last amended by Presidential Regulation No. 35 of 2011)
regarding guidelines for the implementation of procurement
of goods and services to Government. This imposes
obligations regarding public announcement, pre-qualification
of bidders, submission and evaluation of bids. Therefore, the
two tender methods have many similarities.
Note that apart from a few localised and small scale feedin tariff schemes, there are generally no feed-in tariffs
in Indonesia. Under both tender methods, the key bid
parameter is the price payable by PLN for the electricity
generated.
Under the public tender process, the request for proposals
issued by PLN generally contains the draft form of PPA.
Bidders are often given the opportunity to make submissions
on the form of PPA before bid submission. By the time of
bid submission, however, bidders must accept the draft PPA
without deviation. The winning bidder is expected to execute
the PPA within one month of the date PLN confirms the
winning bid in its letter of intent.
The MEMR must approve the price payable for the electricity.
Power Purchase Agreement (PPA)
PLN does not use one standard form PPA. Rather, the form of
the PPA evolves from project to project, with most projects
containing a generally similar risk allocation. Developers
and lenders have become comfortable with the typical risk
features of the PPA which include:
Take-or-pay
Force majeure and change in law relief
Termination payments for PLN default and political
force majeure
International arbitration
Land
Land acquisition is an important issue for power projects in
Indonesia. PLN generally expects developers to acquire all
of the land needed for the plant site and the transmission
lines needed to connect the plant to the nearest substation.
It is not uncommon for the transmission corridor to be 20 to
40 kms in length. PLN and lenders generally expect this land
to be obtained and appropriate legal rights over that land to
be granted by the financial closing date. The process of land
acquisition can often be one of the longest lead items in the
development of an Indonesian power project.
Indonesian law broadly recognises two categories of land
rights: unregistered land and registered land.
Components of the termination payment
Numerous forms of unregistered land exist, the most
common being Adat (or native title) land. Given that native
title land is unregistered, it is often difficult to ascertain the
identity of the land owners. Disputes with respect to transfers
of communally-held land are particularly common, where
one party has purported to represent the relevant community
and signed land transfer documents. Accordingly, it will be
critical to establish who owns the Adat land and who can
legitimately and lawfully relinquish rights over it so that it can
be converted into registered land.
Deemed commissioning (and any grace period given to PLN)
Three forms of registered land exist. The most common are:
Deemed dispatch payments (and any grace period given
to PLN)
Right of Ownership (Hak Milik). This is the closest form of
land title to the common law concept of freehold land. A
Right of Ownership may be held by Indonesian nationals
only, therefore this will not be possible for a foreign owned
project company.
Assignment to lenders is permitted
An agreed form of direct agreement between lenders
and PLN.
Many terms of the PPA have become fairly standard and
non-negotiable. However, key areas for negotiation are:
Triggering events for cost increases (including change
in law)
Fuel cost pass-through.
Right of Building (Hak Guna Bangunan or HGB). A Right
of Building is for a term of 30 years, and may be held by
a company, including a foreign-owned project company.
This is the most popular form of land ownership for project
companies.
Right of Use (Hak Pakai). A Right of Use is for a term of 20
years, and may be held by a company, including foreignowned project companies.
As foreign owned companies cannot hold unregistered land
or Rights of Ownership, land which is unregistered or in the
form of Right of Ownership must first be converted into either
a Right of Building or a Right of Use. This can sometimes be a
lengthy (and expensive) process.
Norton Rose Group Indonesian power projects ten things to know
Forestry
The location of a project is a key consideration in Indonesia.
Not only does the developer have to consider the availability of
nearby substations and transmission facilities, but it also needs
to consider the proximity of forests. Renewable energy projects
such as geothermal and hydro projects are often located in
forests raising special considerations for developers.
Indonesian law distinguishes between conservation forests,
protected forests and production forests; the latter category
being forest areas having the main function of producing wood
products. Power projects are permitted in production forests
and since 2010, are permitted in protected forests (under
Government Regulation No. 24 of 2010 regarding Utilisation of
Forest Area). Project developers, however, must obtain a Forest
Borrow Permit (Ijin Pinjam Pakai) from the Ministry of Forestry
to borrow the forest area for this purpose.
The application process for a Forest Borrow Permit
is complicated, requiring (among others) a Letter of
Recommendation to be issued by the Provincial Governor.
We are aware of numerous instances where the issue of a
Forest Borrow Permit has been delayed, or blocked, due to
the reluctance (or refusal) of an authority to issue a Letter
of Recommendation and that there is currently a significant
backlog of Forest Borrow Permit applications at the Ministry
of Forestry.
Forest Borrow Permits are usually granted for a period of
20 years and may be extended only with the consent of the
Ministry of Forestry. Note that this period is less than the
term of a typical PPA at 25 or 30 years. They provide nonexclusive rights to carry out permitted activities in the forest
but do not allow the developer to take title in the land. The
permit is revocable in situations where the permit holder has
breached conditions relating to the permit. Such conditions
typically include obligations to replant forest where it has
been cut, to carry out forest protection and to pay fees for the
utilisation of the forest land.
Norton Rose Group Indonesian power projects ten things to know
Permits
An Indonesian power project is subject to an extensive list
of permits from a variety of Government departments and
ministries. Project developers should be mindful of the
extensive application and processing time associated with
permitting.
The main permits that a power project developer is required
to obtain are:
Registration with the Investment Coordinating Board for
the establishment of the project company and Investment
Principal License
Business License or Izin Usaha
Approval of the environmental impact assessments or
Analisis Mengenai Dampak Lingkungan (AMDAL)
Location Permit (Izin Lokasi), which allows the Company to
procure the land that is required for the project from a third
party (by way of sale and purchase or relinquishment) or
from the state.
Electricity Business License (izin Usaha Penyediaan
Tenaga Listrik or IUPTL)
Certificate of Operation Worthiness (Sertifikat Laik Operasi
or SLO).
If a project company seeks finance from the international
lending community, it is likely to have to comply with
established environmental standards such as the Equator
Principles or the IFC environmental standards. These raise
requirements beyond the remit of the AMDAL.
Construction
Government guarantees
Under Government Regulation No. 29 of 2000 regarding
the Implementation of Construction Services (as amended
by Government Regulation No. 59 of 2010), the project
company is required to carry out a public tender for onshore
construction work. There are few exceptions to the general
rule; one such exception is where the project involves
complex works using new technology where there is only one
construction service provider able to supply such technology.
A difficulty with this regulation is that it does not address the
situation where a shareholder of the project company intends
to carry out the onshore construction works.
In Indonesia the retail price of electricity is below PLNs
average cost of generation leaving PLN with a deficit. The
Ministry of Finance (MoF) provides funding to PLN to bridge
the gap, which is referred to as the Public Services Obligation
(PSO). Given that the PSO is critical to PLNs solvency,
developers and lenders have in the past sought confirmation
from Government that the PSO will continue to be paid, so
that PLN will be in a position to meet its commitments under
PPAs. However, Government support on this issue is now only
available for projects failing within the Fast Track II or PPP
programmes.
Construction contracts in Indonesia are often split to
maximize tax benefits to the project company. The typical
engineering, procurement and construction (EPC) contract is
typically split into an offshore design and equipment supply
contract, an onshore civil erection, installation and testing
contract, and a wrap whereby the onshore and offshore
contractors confirm certain performance guarantees and
joint and several liability. Project developers should seek
Indonesian tax advice when structuring their construction
contracts in this fashion.
Such Government support is issued by the MoF and/or the
Indonesian Infrastructure Guarantee Fund (IIGF). The IIGF was
established by the Indonesian Government in 2009 for the
purpose of providing guarantees for Government contracting
agencies obligations under PPP infrastructure projects, of
which there are few power projects. The 2,000 MW Central
Java project is a notable exception and was issued with the
first IIGF guarantee in 2011 (alongside an MoF guarantee).
Indonesian local content regulation (Ministry of Industry
Regulation No. 54 of 2012 regarding guidelines of utilisation
of domestic goods and or services), imposes obligations on
the project company to use Indonesian goods and services.
There are some exceptions, for example, where meeting
those requirements are not as favourable to the project
company as procuring the goods and services from overseas,
taking into account price, quantity, reliability etc.
Developers should also check relevant Minister of Industry
regulations which may impose additional requirements on
the ownership of the construction company. For example,
Ministry of Industry Regulation No. 54 of 2012 states that
construction of hydro projects smaller than 135 MW should
be undertaken by a national company.
Fundamental changes to the Indonesian practice regarding
these guarantees or support was introduced through
Presidential Regulation No 139 of 2011 on Procedures for
Providing the Business Viability Guarantee to PLN for the
Development of Renewable Energy, Coal and Gas Fried
Power Plants through the Cooperation with Private Electricity
Developer (Regulation 139) provides detail on the content of
these guarantees.
A key point in Regulation 139 is that guarantees are
only available for Fast Track II projects. Unless the MoF
acknowledges that a particular project falls within the scope
of the Umbrella Note of Mutual Understanding between the
Japan Bank for International Cooperation (JBIC) and the MoF,
there is no formal basis upon which projects outside of the
Fast Track II or PPP programmes can obtain a Government
guarantee or support.
The term guarantee used in Regulation 139 is something of
a misnomer and should be construed as a form of support
undertaking. The guarantee is designed as a mechanism to
ensure that the MoF funds PLN in order for PLN to fulfill its
payment obligations to the IPP. Regulation 139 does not
state that the project company or its lenders have direct
recourse to the MoF. Under the Indonesian Civil Code the
MoF support letter likely creates a primary legal obligation on
the MoF to procure performance by PLN. If it fails to do this
damages were payable by the MoF to the project company.
Norton Rose Group Indonesian power projects ten things to know
The guarantee covers PLNs payment obligations for the
purchase of power during the operation period of a project
only. Whilst Regulation 139 suggests that the guarantee will
not cover termination payments by PLN under the PPA, the
first of the guarantees issued in 2012 do provide such cover.
Support is not automatically granted to project companies
and projects wishing to benefit from the guarantee are
subject to an application process. The guarantee may be
issued on or after signing of the PPA. Regulation 139 requires
that the project benefiting from the guarantee must achieve
financial close within 12 months from the date of issue of the
guarantee. Note, however, that the deadline for geothermal
projects has been extended to 48 months.
The guarantee is addressed to the project company (not
lenders), but the project company is entitled to assign the
guarantee by way of security to the lenders. The MoF is willing
to enter into a consent agreement with lenders relating to the
security interest.
10
Financing and taking security
Domestic and regional banks are taking a more active role
in financing Indonesian power projects. The refinancing of
Indonesias first hydro IPP in 2011, the Asahan project, is a
good example of this.
However, Indonesian power projects have largely been
financed by international lenders with strong support from
export credit agencies like JBIC and the Korea Export Import
Bank (KEXIM). The financial closing of the 45 MW Wampu
hydroelectric project in July 2012 is the most recent example
of KEXIMs involvement, both as lender and as provider of
cover for the debt tranche provided by Sumitomo Mitsui
Banking Corporation.
The extended political risk guarantee (EPRG) product offered
by JBIC and similar products offered by other export credit
agencies have been instrumental in encouraging commercial
lending in Indonesia. These products cover the political risks
associated with breach of contract by Government parties,
expropriation/nationalisation, political violence and currency
non-convertibility.
In contrast to domestic or regional banks the international
lenders have the advantage of access to a deeper liquidity
pool and can offer longer tenors and cheaper debt, but
have the disadvantage of being more risk adverse and tend
to carry out more detailed due diligence and impose more
extensive lending conditions.
Norton Rose Group Indonesian power projects ten things to know
An important issue for the choice of lenders is the availability
of the Government guarantee. To date, the Government
guarantee has been essential to the availability of export
credit agency finance and cover.
Foreign investment companies suffer from structural
limitations in the form of debt-to-equity ratios which are set
by the Indonesia Investment Coordinating Board (BKBM). If
any funding exceeds the debt-to-equity ratio, approval must
be given by BKPM.
The most common forms of security granted in the context of
a power project in Indonesia are:
a pledge or fiduciary security of the shares of the
project company
fiduciary securities over fixed assets and insurance (with
some limitations)
account charges over offshore bank accounts
step-in rights with respect to contracts which have been
entered into by the project company. These are referred to
as Conditional Novation agreements. They fall short of a
fiduciary security but constitute a right on the part of the
financier to take over the position of the project company
in the event that the project company is not able to pay (for
example, its EPC contractor).
Security granted by Indonesian companies (with some
exceptions) must be registered at the Fiduciary Registration
Office (FRO), which gives the security holder priority over
other creditors.
Recent Indonesian power experience
Central Java 2000 MW coal-fired power plant
Advising International Finance Corporation and PLN on the
BOT arrangements, coal supply, power purchase agreement
and Government support for the 2000 MW Central Java
ultra super critical power project. The power purchase
agreement was signed in 2011 and financial close is
scheduled for 2012. Central Java is the first power project
to be procured under Indonesias PPP regulations and is
the first project to benefit from an Indonesia Infrastructure
Guarantee Fund (IIGF) guarantee.
Wampu 45MW hydroelectric power plant, North Sumatra
Acting for the sponsors, Korea Midland Power, Posco
Engineering and PT Mega Power Mandiri, on all aspects of the
development and financing of the 3 x 15 MW run-of-the-river
hydroelectric project in North Sumatra. The project reached
financial close in July 2012 with debt sourced from Korea
Eximbank and Sumitomo Mitsui Banking Corporation. This
is the first Fast Track II project to reach financial close and
the first project to be financed with the benefit of a business
viability guarantee letter issued by the Ministry of Finance.
Asahan 180MW hydro-electric power plant, North Sumatra
Advising the lenders on the US$ 340,000,000 refinancing of
this 180 MW hydroelectric project, which is Indonesias first
hydroelectric independent power project. The project reached
financial close in 2011. The financing was sourced from a
syndicate of Indonesian and Malaysian lenders led by PT
Bank Internasional Indonesia Tbk (BII), Maybank Investment
Bank Berhad and PT Bank Maybank Syariah Indonesia. The
financing comprised both conventional and Islamic financing,
including a commodity murabahah, a term murabahah and a
Qard facility. The conventional facilities have both US Dollar
and Indonesian Rupiah tranches.
Fast Track I programme
Advising PLN on the finance arrangements for all foreign
currency projects in the 10,000MW Fast Track I coal-fired
power project programme. Financing was sourced from
various Chinese export credit agencies and banks, as well
as Indonesian banks. The projects included:
Paiton 660 MW
Rembang 600 MW
Indramayu 900 MW
Suralaya 625 MW
Teluk Naga 3 x 315 MW
Pelabuhan Ratu 3 x 350MW
Aceh 2 x 110 MW
Pacitan 2 x 350 MW
Adipala 1 x 600/700 MW
Sumbar 2x100/150 MW
Sengkang 135 MW
Banten 660MW coal-fired power plant
Advising JBIC and KEXIM, as potential lenders to pre-qualified
bidders for this project. Our role included carrying out a
detailed risk analysis of the bid documents, including the
power purchase agreement. Ultimately, Japanese and Korean
consortia did not participate in the bid process and the
Genting led consortium was selected as preferred bidder.
Norton Rose Group Indonesian power projects ten things to know
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