ten things to know indonesia power projects

8/13/2019 Ten Things to Know Indonesia Power Projects

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Indonesian power projectsTen things to know

FINANCIAL INSTITUTIONSENERGY INFRASTRUCTURE, MINING AND COMMODITIES

TRANSPORT TECHNOLOGY AND INNOVATIONPHARMACEUTICALS AND LIFE SCIENCES


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Norton Rose Indonesian power projects ten things to know

1 Negative listThe Negative List (created pursuant to Presidential Regulation36 of 2010) imposes maximum limits of foreign ownershipfor various categories of business activity. 95 percentforeign ownership is permitted for power generation projectsabove 10 MW. The remaining five percent must be held byIndonesian entities or individuals. Power projects of 10 MWand smaller are reserved for Indonesian entities. However,we are aware of some instances where foreign investors havesuccessfully structured their participation in projects of lessthan 10 MW. A maximum of 95 percent foreign ownership isalso permitted in relation to geothermal drilling.

2 Procurement methodsPursuant to Law No. 30 of 2009 relating to the electricitysector, power generators are now permitted to sellelectricity to entities other than PLN, the state electricityutility. However, despite the change in law, most electricitygenerated in Indonesia is still either self-generation (captive)or sold to PLN.

PLN procures new independent power projects (IPPs) under afew different strategic programmes. The main one is the FastTrack II programme pursuant to Presidential Regulation No.4 of 2010 (as amended by Presidential Regulation No. 48 of2011) to Accelerate the Development of Renewable Energy,Coal and Gas Fired Power Plants. This programme consistsof 10,147 MW of new projects. There are 44 projects in totaland 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) Regulation2 of 2010 (as last amended by MEMR Regulation No. 1 of2012), sets out a list of these projects.

Some IPPs are procured under Indonesias Public PrivatePartnership (PPP) programme, pursuant to PresidentialRegulation No. 67 of 2005, (as last amended by PresidentialRegulation No. 56 of 2011). The first project to be procuredunder this programme was the 2,000 MW ultra-super criticalcoal-fired Central Java project.

PLN also procures IPPs outside of each of these twoprogrammes, and currently they include a variety of coalmine-mouth projects.

The procurement method has a bearing on the type ofincentives offered for the projects, including the availabilityof a government guarantee (discussed below).

3 Tender processNew energy projects can be procured under one of twodifferent tender processes - direct appointment or publicauction (see MEMR Regulation No. 1 of 2006 regardingprocedures for purchasing electricity and/or lease of gridfor the purpose of supply of power for public interest, asamended by MEMR Regulation No. 4 of 2007).

The direct appointment process is restricted to renewableprojects, purchase of excess power and situations wherethe 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 oftenused by PLN, than the public auction process.

Regardless of the two tender methods, PLN is obligedto comply with Presidential Decree No. 54 of 2010, (aslast amended by Presidential Regulation No. 35 of 2011)regarding guidelines for the implementation of procurementof goods and services to Government. This imposesobligations regarding public announcement, pre-qualificationof bidders, submission and evaluation of bids. Therefore, thetwo tender methods have many similarities.

Note that apart from a few localised and small scale feed-in tariff schemes, there are generally no feed-in tariffsin Indonesia. Under both tender methods, the key bidparameter is the price payable by PLN for the electricitygenerated.

Under the public tender process, the request for proposalsissued by PLN generally contains the draft form of PPA.Bidders are often given the opportunity to make submissionson the form of PPA before bid submission. By the time ofbid submission, however, bidders must accept the draft PPAwithout deviation. The winning bidder is expected to executethe PPA within one month of the date PLN confirms thewinning bid in its letter of intent.

The MEMR must approve the price payable for the electricity.

Indonesian power projects


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4 Power Purchase Agreement (PPA)PLN does not use one standard form PPA. Rather, the form ofthe PPA evolves from project to project, with most projectscontaining a generally similar risk allocation. Developersand lenders have become comfortable with the typical riskfeatures of the PPA which include:

Take-or-pay

Force majeure and change in law relief

Termination payments for PLN default and politicalforce majeure

International arbitration

Assignment to lenders is permitted

An agreed form of direct agreement between lendersand PLN.

Many terms of the PPA have become fairly standard andnon-negotiable. However, key areas for negotiation are:

Components of the termination payment

Deemed commissioning (and any grace period given to PLN)

Deemed dispatch payments (and any grace period givento PLN)

Triggering events for cost increases (including changein law)

Fuel cost pass-through.

5 LandLand acquisition is an important issue for power projects inIndonesia. PLN generally expects developers to acquire allof the land needed for the plant site and the transmissionlines needed to connect the plant to the nearest substation.It is not uncommon for the transmission corridor to be 20 to40 kms in length. PLN and lenders generally expect this landto be obtained and appropriate legal rights over that land tobe granted by the financial closing date. The process of landacquisition can often be one of the longest lead items in thedevelopment of an Indonesian power project.

Indonesian law broadly recognises two categories of landrights: unregistered land and registered land.

Numerous forms of unregistered land exist, the mostcommon being Adat (or native title) land. Given that nativetitle land is unregistered, it is often difficult to ascertain theidentity of the land owners. Disputes with respect to transfersof communally-held land are particularly common, whereone party has purported to represent the relevant communityand signed land transfer documents. Accordingly, it will becritical to establish who owns the Adat land and who canlegitimately and lawfully relinquish rights over it so that it canbe converted into registered land.

Three forms of registered land exist as follows:

Right of Ownership ( Hak Milik ). This is the closest form ofland title to the common law concept of freehold land. ARight of Ownership may be held by Indonesian nationalsonly, therefore this will not be possible for a foreign ownedproject company.

Right of Building ( Hak Guna Bangunan or HGB). A Rightof Building is for a term of 30 years, and may be held bya company, including a foreign-owned project company.This is the most popular form of land ownership for projectcompanies.

Right of Use ( Hak Pakai ). A Right of Use is for a term of 20years, and may be held by a company, including foreign-owned project companies.

As foreign owned companies cannot hold unregistered landor Rights of Ownership, land which is unregistered or in theform of Right of Ownership must first be converted into eithera Right of Building or a Right of Use. This can sometimes be alengthy (and expensive) process.


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6 ForestryThe location of a project is a key consideration in Indonesia.Not only does the developer have to consider the availability ofnearby substations and transmission facilities, but it also needsto consider the proximity of forests. Renewable energy projectssuch as geothermal and hydro projects are often located inforests raising special considerations for developers.

Indonesian law distinguishes between conservation forests,protected forests and production forests; the latter categorybeing forest areas having the main function of producing woodproducts. Power projects are permitted in production forestsand since 2010, are permitted in protected forests (underGovernment Regulation No. 24 of 2010 regarding Utilisation ofForest Area). Project developers, however, must obtain a ForestBorrow Permit ( Ijin Pinjam Pakai ) from the Ministry of Forestry

to borrow the forest area for this purpose.

The application process for a Forest Borrow Permitis complicated, requiring (among others) a Letter ofRecommendation to be issued by the Provincial Governor.We are aware of numerous instances where the issue of aForest Borrow Permit has been delayed, or blocked, due tothe reluctance (or refusal) of an authority to issue a Letterof Recommendation and that there is currently a significantbacklog of Forest Borrow Permit applications at the Ministryof Forestry.

Forest Borrow Permits are usually granted for a period of20 years and may be extended only with the consent of theMinistry of Forestry. Note that this period is less than theterm of a typical PPA at 25 or 30 years. They provide non-exclusive rights to carry out permitted activities in the forestbut do not allow the developer to take title in the land. Thepermit is revocable in situations where the permit holder hasbreached conditions relating to the permit. Such conditionstypically include obligations to replant forest where it hasbeen cut, to carry out forest protection and to pay fees for theutilisation of the forest land.

7 PermitsAn Indonesian power project is subject to an extensive listof permits from a variety of Government departments andministries. Project developers should be mindful of theextensive application and processing time associated withpermitting.

The main permits that a power project developer is requiredto obtain are:

Registration with the Investment Coordinating Board forthe establishment of the project company and InvestmentPrinciple 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 toprocure the land that is required for the project from a thirdparty (by way of sale and purchase or relinquishment) orfrom the state.

Electricity Business License ( izin Usaha PenyediaanTenaga Listrik or IUPTL)

Certificate of Operation Worthiness ( Sertifikat Laik Operasior SLO).

If a project company seeks finance from the internationallending community, it is likely to have to comply withestablished environmental standards such as the EquatorPrinciples or the IFC environmental standards. These raiserequirements beyond the remit of the AMDAL.


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8 ConstructionUnder Government Regulation No. 29 of 2000 regardingthe Implementation of Construction Services (as amendedby Government Regulation No. 59 of 2010), the projectcompany is required to carry out a public tender for onshoreconstruction work. There are few exceptions to the generalrule; one such exception is where the project involvescomplex works using new technology where there is only oneconstruction service provider able to supply such technology.A difficulty with this regulation is that it does not address thesituation where a shareholder of the project company intendsto carry out the onshore construction works.

Construction contracts in Indonesia are often split tomaximize tax benefits to the project company. The typicalengineering, procurement and construction (EPC) contract is

typically split into an offshore design and equipment supplycontract, an onshore civil erection, installation and testingcontract, and a wrap whereby the onshore and offshorecontractors confirm certain performance guarantees andjoint and several liability. Project developers should seekIndonesian tax advice when structuring their constructioncontracts in this fashion.

Indonesian local content regulation (Ministry of IndustryRegulation No. 54 of 2012 regarding guidelines of utilisationof domestic goods and or services), imposes obligations onthe project company to use Indonesian goods and services.There are some exceptions, for example, where meetingthose requirements are not as favourable to the projectcompany as procuring the goods and services from overseas,taking into account price, quantity, reliability etc.

Developers should also check relevant Minister of Industryregulations which may impose additional requirements onthe ownership of the construction company. For example,Ministry of Industry Regulation No. 54 of 2012 states thatconstruction of hydro projects smaller than 135 MW shouldbe undertaken by a national company.

9 Government guaranteesIn Indonesia the retail price of electricity is below PLNsaverage cost of generation leaving PLN with a deficit. TheMinistry of Finance (MoF) provides funding to PLN to bridgethe 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 confirmationfrom Government that the PSO will continue to be paid, sothat PLN will be in a position to meet its commitments underPPAs. However, Government support on this issue is now onlyavailable for projects falling within the Fast Track II or PPPprogrammes.

Such Government support is issued by the MoF and/or theIndonesian Infrastructure Guarantee Fund (IIGF). The IIGF wasestablished by the Indonesian Government in 2009 for the

purpose of providing guarantees for Government contractingagencies obligations under PPP infrastructure projects, ofwhich there are few power projects. The 2,000 MW CentralJava project is a notable exception and was issued with thefirst IIGF guarantee in 2011 (alongside an MoF guarantee).

Fundamental changes to the Indonesian practice regardingthese guarantees or support was introduced throughPresidential Regulation No 139 of 2011 on Procedures forProviding the Business Viability Guarantee to PLN for theDevelopment of Renewable Energy, Coal and Gas FiredPower Plants through the Cooperation with Private ElectricityDeveloper (Regulation 139) provides detail on the content ofthese guarantees.

A key point in Regulation 139 is that guarantees areonly available for Fast Track II projects. Unless the MoFacknowledges that a particular project falls within the scopeof the Umbrella Note of Mutual Understanding between theJapan Bank for International Cooperation (JBIC) and the MoF,there is no formal basis upon which projects outside of theFast Track II or PPP programmes can obtain a Governmentguarantee or support.

The term guarantee used in Regulation 139 is something ofa misnomer and should be construed as a form of supportundertaking. The guarantee is designed as a mechanism toensure that the MoF funds PLN in order for PLN to fulfill itspayment obligations to the IPP. Regulation 139 does notstate that the project company or its lenders have directrecourse to the MoF. Under the Indonesian Civil Code, theMoF support letter likely creates a primary legal obligation onthe MoF to procure performance by PLN. If it fails to do thisdamages are payable by the MoF to the project company.


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The guarantee covers PLNs payment obligations for thepurchase of power during the operation period of a projectonly. Whilst Regulation 139 suggests that the guaranteewill not cover termination payments by PLN under the PPAhowever, the first of the guarantees issued in 2012 doprovide such cover.

Support is not automatically granted to project companiesand projects wishing to benefit from the guarantee aresubject to an application process. The guarantee may beissued on or after signing of the PPA. Regulation 139 requiresthat the project benefiting from the guarantee must achievefinancial close within 12 months from the date of issue of theguarantee. Note, however, that the deadline for geothermalprojects has been extended to 48 months.

The guarantee is addressed to the project company (notlenders), but the project company is entitled to assign the

guarantee by way of security to the lenders. The MoF is willingto enter into a consent agreement with lenders relating to thesecurity interest.

10 Financing and taking securityDomestic and regional banks are taking a more active rolein financing Indonesian power projects. The refinancing ofIndonesias first hydro IPP in 2011, the Asahan project, is agood example of this.

However, Indonesian power projects have largely beenfinanced by international lenders with strong support fromexport credit agencies like JBIC and the Korea Export ImportBank (KEXIM). The financial closing of the 45 MW Wampuhydroelectric project in July 2012 is the most recent exampleof KEXIMs involvement, both as lender and as provider ofcover for the debt tranche provided by Sumitomo MitsuiBanking Corporation.

The extended political risk guarantee (EPRG) product offeredby JBIC and similar products offered by other export creditagencies have been instrumental in encouraging commerciallending in Indonesia. These products cover the political risksassociated with breach of contract by Government parties,expropriation/nationalisation, political violence and currencynon-convertibility.

In contrast to domestic or regional banks, the internationallenders have the advantage of access to a deeper liquiditypool and can offer longer tenors and cheaper debt, buthave the disadvantage of being more risk adverse and tendto carry out more detailed due diligence and impose moreextensive lending conditions.

An important issue for the choice of lenders is the availabilityof the Government guarantee. To date, the Governmentguarantee has been essential to the availability of exportcredit agency finance and cover.

Foreign investment companies suffer from structurallimitations in the form of debt-to-equity ratios which are setby the Indonesia Investment Coordinating Board (BKPM). Ifany funding exceeds the debt-to-equity ratio, approval mustbe given by BKPM.

The most common forms of security granted in the context ofa power project in Indonesia are:

a pledge or fiduciary security of the shares of theproject 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 beenentered into by the project company. These are referred toas Conditional Novation agreements. They fall short of afiduciary security but constitute a right on the part of thefinancier to take over the position of the project companyin the event that the project company is not able to pay (forexample, its EPC contractor).

Security granted by Indonesian companies (with someexceptions) must be registered at the Fiduciary RegistrationOffice (FRO), which gives the security holder priority overother creditors.


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Recent Indonesian power experience

Central Java 2000 MW coal-fired power plantAdvising International Finance Corporation and PLN on theBOT arrangements, coal supply, power purchase agreementand Government support for the 2000 MW Central Javaultra super critical power project. The power purchaseagreement was signed in 2011 and financial close isscheduled for 2012. Central Java is the first power projectto be procured under Indonesias PPP regulations and isthe first project to benefit from an Indonesia InfrastructureGuarantee Fund (IIGF) guarantee.

Wampu 45MW hydroelectric power plant, North SumatraActing for the sponsors, Korea Midland Power, PoscoEngineering and PT Mega Power Mandiri, on all aspects of thedevelopment and financing of the 3 x 15 MW run-of-the-riverhydroelectric project in North Sumatra. The project reached

financial close in July 2012 with debt sourced from KoreaEximbank and Sumitomo Mitsui Banking Corporation. Thisis the first Fast Track II project to reach financial close andthe first project to be financed with the benefit of a businessviability guarantee letter issued by the Ministry of Finance.

Asahan 180MW hydro-electric power plant, North SumatraAdvising the lenders on the US$ 340,000,000 refinancing ofthis 180 MW hydroelectric project, which is Indonesias firsthydroelectric independent power project. The project reachedfinancial close in 2011. The financing was sourced from asyndicate of Indonesian and Malaysian lenders led by PTBank Internasional Indonesia Tbk (BII), Maybank InvestmentBank Berhad and PT Bank Maybank Syariah Indonesia. Thefinancing comprised both conventional and Islamic financing,including a commodity murabahah, a term murabahah and aQard facility. The conventional facilities have both US Dollarand Indonesian Rupiah tranches.

Fast Track I programmeAdvising PLN on the finance arrangements for all foreigncurrency projects in the 10,000MW Fast Track I coal-firedpower project programme. Financing was sourced fromvarious Chinese export credit agencies and banks, as wellas 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 plantAdvising JBIC and KEXIM, as potential lenders to pre-qualifiedbidders for this project. Our role included carrying out adetailed risk analysis of the bid documents, including thepower purchase agreement. Ultimately, Japanese and Koreanconsortia did not participate in the bid process and theGenting led consortium was selected as preferred bidder.


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ten things to know indonesia power projects

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