Indonesia’s Minister of Finance, in August 2011, issued a regulation (Minister of Finance Regulation No. 139/PMK.011/2011) that enables the issuance of a “business viability guarantee” letter in favour of certain independent power producer (“IPP”) projects being implemented under the Indonesian government’s second “fast track” power generation program. Eligibility for the guarantee letter is based on a proposal from PT PLN (Persero) (Indonesia’s state-owned electricity company and the offtaker under such projects) to the Minister of Finance, based on substantive and administrative requirements specified in the regulation. Geothermal IPPs are eligible for the guarantee letter if the IPP is established by the winner of the tender of a geothermal working area or the IPP entered into a Power Purchase Agreement (“PPA”) (commonly referred to in geothermal projects as an energy sales contract) with PLN prior to the enactment of Law No. 27 of 2003 on Geothermal, ie, those projects being implemented pursuant to a joint operation contract with PT Pertamina Geothermal Energy (a subsidiary of Indonesia’s state-owned oil company, PT Pertamina (Persero)). These requirements indicate that pre-existing geothermal projects are eligible for such guarantee letters. Projects other than geothermal IPPs are also eligible for the guarantee letter if the project has not yet been tendered by PLN or the project has been tendered and a winner has or has not been appointed, in each case prior to the regulation’s issuance. The regulation’s requirements indicate that nongeothermal projects that have advanced from the appointment of a winning bidder (eg, those with a signed PPA) after the regulation’s issuance are not eligible for such guarantee letters.
The “business viability guarantee” letter is to cover the risk of non-payment by PLN for amounts stated in a payment invoice in respect of the purchase of electricity issued by an IPP in accordance with the applicable PPA. The regulation does not clarify whether such a guarantee is intended to cover the risk of non-payment by PLN of amounts due on the PPA's termination (for example, in the event that PLN is required to purchase the project due to PLN’s non-remediable default). Additionally, the regulation provides that the risk of nonpayment only relates to invoices issued after the project has commenced commercial operation (until either the expiry of the PPA or some other date stipulated in the guarantee). Consequentially, coverage under the guarantee may not extend to invoices for electricity generated during the start-up and commissioning of the plant. The regulation does not provide further details regarding the form or content of the guarantee, except that it is to be set forth in a letter signed by the Minister of Finance and addressed to the IPP.
These guarantee letters are to become ineffective if the IPP fails to reach financial close (ie, signing of loan documents and initial drawdown) within 48 months of the issuance of the applicable guarantee letter, in the case of a geothermal IPP, and within 12 months of the issuance of the applicable guarantee letter, in the case of a non-geothermal IPP. There is no mechanism for these periods to be extended, and the guarantee letter is to be issued either simultaneously with or after the signing of the PPA. However, for an IPP being implemented in accordance with Indonesia’s public-private partnership (“PPP”) regulations – and therefore eligible for support from the Indonesia Infrastructure Guarantee Fund (“IIGF”) (described below) – the IPP would nevertheless be required to reach financial close within 12 months of the signing of the PPA (subject to extension of up to an additional 12 months by PLN, if the failure to reach financial close is not due to the IPP’s negligence), or risk termination of the PPA and forfeiture of the IPP's performance bond.
The availability of a “business viability guarantee” letter issued directly by the Indonesian government may significantly enhance the bankability of Indonesian IPP projects and contribute to their resurgence. Indonesia’s “first generation” of IPP projects – those implemented prior to the Asian Financial Crisis – benefited from a government support letter, signed by the Minister of Finance, which essentially provided that the Indonesian government would cause PLN to discharge its payment obligations under the PPA and would submit to international arbitration in the event of any dispute in relation to the support letter. Although these support letters did not constitute a guarantee of PLN’s payment obligations, they were perceived as indicating sufficient government support to make these early projects bankable and to provide a basis to involve the government in an arbitral dispute.
In more recent years, however, the Indonesian government has indicated reluctance to provide direct government support to IPP projects. In lieu of providing direct government support in favour of the private sector, in 2006, the government entered into the JBIC Umbrella Note of Mutual Understanding, an agreement with the Japanese Bank for International Cooperation (“JBIC”) intended to provide a basis for the Indonesian government's support of IPP projects benefiting from JBIC export credit support. More recently, the Indonesian government has established the IIGF, a stateowned enterprise intended to provide credit support for a ministry or agency of the central government, state-owned enterprise (such as PLN), regional government or regionowned enterprise that acts as a procuring party in connection with a PPP for infrastructure delivery. IPPs are also considered eligible for IIGF support. The first IIGF Guarantee Agreement (with the Indonesian government acting as coguarantor) was issued for the Central Java IPP project (2x1000MW) on 6 October 2011.
Although an IIGF guarantee does not provide direct recourse to the Indonesian government, the regulatory framework applicable to IIGF provides that for larger projects – those for which the IIGF’s capital is insufficient – the Indonesian government may act as a co-guarantor, with the IIGF acting as administrator of the joint guarantee. The “business viability guarantee” regulation, however, does not include any reference to IIGF, as administrator or otherwise. Consequently, this regulation may be intended to allow IIGF to focus on PPP projects in other infrastructure sectors, while the Ministry of Finance takes a more direct role in IPPs. However, if the “business viability guarantee” letter does not cover PLN’s payment obligations on a PPA’s termination, the continued involvement of IIGF (possibly acting with the government as co-guarantor) may be considered necessary in some cases. The Ministry of Finance’s risk management unit evaluates both proposals for the Indonesian government to act as a co-guarantor with IIGF and proposals for a “business viability guarantee” letter under the recent regulation.
Minister of Finance Regulation No. 139/PMK.011/2011 supersedes Minister of Finance Regulation 77/PMK.01/2011, which provided for a support letter to be addressed to PLN, rather than the IPP. Further information regarding the government’s second “fast track” power generation program is set forth in Presidential Regulation No. 4 of 2010 regarding Designation to PT Perusahaan Listrik Negara (Persero) to Carry Out Acceleration of Development of Electricity Generators that Utilize Renewable Energy, Coal and Natural Gas and Minister of Energy and Mineral Resources Regulation No. 15 of 2010 on List of Projects for the Acceleration of Development of Electricity Generation Using Renewable Energy, Coal and Gas and related Transmission.
