The 35000 MW programme: overview of the programme’s structures, challenges and mitigation

BVGL is a government guarantee to ensure the PLN fullfills its financial obligations related to failure of payment and/or termination based of the power purchase agreement (PPA).

BVGL is granted by the MoF to the IPP company on a case-by-case basis. The PLN will propose to MoF together with its feasibility study, latest PPA draft, financial model, statement of the PLN, tender documents, risk and mitigation analysis, location permit or lend and borrow of forest area from Ministry of Forestation. The Risk Management Unit at the Fiscal Policy Body at the MoF will evaluate and analyse the project and its documentations, and give recommendation to the MoF. In practice, the MoF specifies in the BVGL the list of the PLN payment obligations under PPA. During the last four years, the regulation governing BVGL had undergone a number of revisions before issuance of MOF173/2014. Hence, now such guarantee will grant the project company direct contractual rights against the government, making it more useful to sponsors and their lenders.

PPP
Project implementation through the PPP route is considered to be the most challenging one. Generally, PPP is arranged by Presidential Regulation No. 38 of 2015 on Cooperation Between Government and Business Entities in Infrastructure Provision (PR 38/2015). According to PR 38/2015, PPP may be conducted through solicited and unsolicited projects. Solicited projects are infrastructure projects initiated by the government, while unsolicited projects are initiated by the private sector. The following is a scheme of PPP project for a solicited mechanism.

According to PR 38/2015, an unsolicited project can be initiated by a private entity under the conditions that: it can be integrated into a master plan in the relevant sector; it is economically and financially viable; and it has a project initiator with sufficient financial capacity to fund the project. The selection of private entity shall be conducted through a tender process. After the selection process, the Government Contracting Agency (GCA), as the chairman of the project, will issue a decree to determine the form of compensation to be provided to the project initiator. The forms of compensation may include: adding 10 percent to value of the total evaluated bid score; paying compensation for the feasibility study (FS) carried out by the investor in the event a project is cancelled or not implemented by the investor for whatever reason; and allowing the investor to change the tender if, according to the result of the open tender, there are better bids from other business entities (the ‘right to match’).

In the implementation of an IPP project under the PPP mechanism, PR 38/2015 stipulates that the GCA may provide a government guarantee (GG) in the form of financial responsibility through a particular GG mechanism. GG will be awarded by the MoF through the Indonesia Infrastructure Guarantee Fund (IIGF). This is a special body established to award infrastructure projects under PPP schemes. IIGF guarantees are based on a cooperation agreement.

BVGL is different to that explained above. While BVGL is awarded to cover IPP companies from non-fullfilment obligations by PLN, GG is financial compensation awarded by the MoF through IIGF to business entity through a risk allocation scheme. In order to receive GG, the GCA shall fulfill the following requirements:

• issue statement letter regarding validity of cooperation agreement; and
• provide written commitment to guarantor to:
  • perform its best effort in controlling, managing, or preventing, and reducing impact of infrastructure risk which is its responsibility in accordance with allocation of risk as agreed in the cooperation agreement during the validity of guarantee agreement;
  • fulfill recourse, as stipulated in the agreement with IIGF

Other facilities that may be obtained by private entities include government support. Pursuant to PR 38/2015. Government support will be provided in the form of financial support and/or other support awarded by GCA and/or MoF according to their authority. Financial support includes tax incentive, exemption from import duties and partial support for construction. Other support varies according to the nature of the project, such as licences.

Permits are still considered an issue although Indonesia has improved the climate through applying a national single window in processing permits through one stop service (OSS). This is because specific permits should be issued by certain authorities which are still reluctant to transfer their permit processing mandate to OSS.

Financially, the primary challenge is difficulties in reaching financial close. This is because financing power projects adopts project non-recourse financing where the lending bank is solely entitled to repayment from the profits of the project, not from other assets of the borrower. Accordingly, the financing institutions may require guarantee from the government to such risks involved. Yet, processing government guarantees involves a prolonged administrative process resulting in long processing time.

The last identified challenge is procurement of private entity to become the IPP company. Again, human resource capacity is the most critical issue. Government officials are only used to procuring regular work/services using government budget. The way investors are selected is, in some ways, different to that of regular procurement of work/services. In regular procurement, the detailed engineering design (DED) is prepared by the user, while in selection of investor, DED is prepared by the company. This is to transfer some risk to the investor as they will be in charge of the project development.

Summary – key considerations for actions
As already indicated, opportunities for investment in the power sector are currently wide open. Investment in this sector can be done through a number of routes, namely regular IPP, Fast Track II and PPP. In order to realise the programme, the government has taken a number of steps for improvement. Yet, challenges remain apparent.

Hence, if foreign investors wish to participate in the electricity sector, the first thing they need to pay attention to is regulations that arrange the limitations of foreign equity ownership in electricity business activity. The arrangement concerning restrictions on foreign capital is further regulated in PD 39/2014, specifically stating that the maximum foreign ownership for an entity that produces 1–10MW, is 49 percent. Meanwhile, foreign investors wishing to produce over 10MW can obtain a maximum of 95 percent. In the PPP mechanism, the foreign investor should have capital until 100 percent during the concession period. However, it should be noted that the power supply activities are closed to foreign investment for projects to produce less than 1 MW.

Power supply business activity can be carried out by a state owned enterprise, a region owned enterprise, private entities in the form of Indonesian legal entities, cooperatives and NGOs. Investors, especially foreign ones, may conduct their activity by establishing limited liability companies as stipulated in Law 25/2007. In addition, other procedures that shall be followed by the private entity are the establishment of business area as set out in the ESDM 28/2012, Electricity Supply Business License (IUPTL) as stipulated in the ESDM 35/2013 and RUPTL. IUTPL is awarded after fulfilling administrative, technical, and environmental requirements.