Renewable energy project developmenti Project finance transaction structuresTransactional structure
Project financing for the development and implementation of renewable energy projects is generally similar to those for other infrastructure projects. A typical project finance in Indonesia is structured through a combination of the sponsor's equity and senior debt secured by the entire project's assets, including cash flow, with limited recourse against the project's sponsors. The project company shall be in the form of an Indonesian limited liability company established especially to own and manage the project, and in most cases it is a joint venture between a local sponsor and an international sponsor who participate in the construction and management of the project.
As mentioned above, the BOOT scheme must be used for energy projects. Aside from BOOT, the build, own, operate model has also been used in the past for several geothermal and hydro projects. The project company will then enter into an electricity offtake agreement in the form of a PPA with PLN. During the PPA period, the project company will own all project assets and enter into all agreements relating to the project. Under the BOOT scheme, following the expiry of the PPA, termination of the PPA due to PLN's default or GFM, the project company shall be transferred to PLN. In the case of termination because of PLN defaulting or GFM, PLN is required to purchase the project according to a predetermined price structure: see Section III.ii.
Project finance lenders in Indonesia are mainly international commercial banks, multilateral development agencies such as the Asian Development Bank (ADB), and export credit agencies (ECAs) such as Korean Exim Bank, China Exim Bank and JBIC. Typically, ECAs from the international sponsor's jurisdiction will be involved in providing financing, particularly if the international sponsor is also the project's contractor. It is difficult for local banks to provide project financing because of their limited liquidity for long-term debt and the lack of a derivatives market.
In the past 10 years, PT Sarana Multi Infrastruktur (Persero) (SMI), a state-owned infrastructure financing company, and PT Indonesia Infrastructure Finance (IIF), a joint venture between the government (through SMI), ADB, International Finance Corporation, Deutsche Investitions-und-Entwicklungsgesellschaft and Sumitomo-Mitsubishi Banking Corporation, have also been actively providing project financing for infrastructure projects in Indonesia, including renewable energy projects. Both SMI and IIF were established by the government as part of its efforts to accelerate infrastructure developments by providing domestic finance in the form of debt and equity. In 2015, SMI was mandated by the government to manage the state budget allocated specifically to fund geothermal projects.DocumentationProject documents
Aside from the PPA, the key project documents in renewable energy projects typically include:
- engineering, procurement and construction (EPC) contracts;
- operation and maintenance (O&M) contracts;
- service agreements;
- government support agreements (if provided);
- sponsors' agreements;
- bank guarantees; and
- performance guarantees.
Construction contracts must be executed in compliance with the Construction Law, which, inter alia, sets out the minimum key terms of the contract and the mandatory use of the Indonesian language. Further, a tripartite converting agreement between an IPP, PLN and designated state-owned bank regulates the conversion of Indonesian rupiah payments for power purchased by PLN into US dollars at the prevailing exchange rate to comply with the mandatory use of the rupiah.Finance documents
In a typical project financing, the financing documents include:
- facility agreements;
- sponsor support agreements;
- inter-creditor agreements;
- direct agreements;
- hedging agreements; and
- security documents.
These are discussed in further detail below.
For transactions that combine different types of financial institutions or granted facilities, a common terms agreement is typically executed to govern the principal terms of the financing, with a separate facility agreement for each creditor or facility. Indonesian law does not provide for any standard form of financing documents (save for security documents in certain cases), and they will generally be in such a form as is acceptable to the market.
Security in project finance transactions in Indonesia covers all the project's assets owned by the project company. Certain assets used as special facilities for the project will be transferred to, owned and operated by PLN once constructed, and thus will not be included in the security package. The security taken by the lenders is generally as follows:
- a pledge over the shares in the IPP project company;
- a mortgage over immovable assets (i.e., land and buildings);
- fiducia security over movable assets, receivables derived from the PPA, insurance and reinsurance claims, and buildings or fixtures;
- a pledge over the project's accounts; and
- conditional novation over project documents, including the PPA, EPC agreements, O&M agreements, bank guarantees and performance guarantees.
In addition to this security, a lender will also usually require a direct agreement to be executed, to allow it to have step-in rights into the main project documents, so that the lender may replace a project company in the documents when it exercises its rights thereunder.Government support for the development of electricity infrastructurePublic–private partnerships
In early 2015, the government issued a regulation framework to boost public–private partnerships (PPPs) in the procurement and development of essential infrastructure projects in Indonesia. Under the new regulation, PR 38/2015, the number of sectors allowed to use PPPs has expanded from nine to 19, with the addition of, among others, renewable energy, water resources, waste management and energy conservation. Foreign and local investors are now allowed to participate in tender processes directly without establishing a company in Indonesia. Once an investor has been selected, it should establish a project company in Indonesia to implement and execute the PPP.
PR 38/2015 also addresses land procurement issues. PR 38/2015 makes land procurement the government's responsibility, and sets out a clearer procedure and timeline for investors. A tender process may not commence until the government obtains a site determination from the relevant provincial governor: thus, a project's site will be final from the outset. Under PR 38/2015, the government may now also place the land procurement process in the hands of a private sector partner to act on its behalf through a special power of attorney, which gives the private entity more room to operate.
Government guarantees for PPP projects have a key role to play in encouraging investment in the infrastructure sector. The government may now provide guarantees on political and sub-sovereign risks that can, for example, ensure the continuity of a PPP project despite a change in government, and assure the deliverables made by a regional public sector authority. The possibility of government support in the form of tax incentives and fiscal contributions should also help to improve the attractiveness of PPP projects, thereby potentially resulting in more competitive bids from the private sector. Partial financing and viability support for PPP projects of social interest and public benefit in relation to the construction of new infrastructure, or the operation and maintenance of infrastructure, should also help boost private investor interest.
PR 38/2015 provides greater assurances with respect to land procurement, and greater government support to make the sectors using PPPs more attractive to investors. However, very few renewable energy projects have been funded through PPPs to date. Pursuant to the 2018 PPP Handbook, 15 PPP projects were ready to be offered in 2018, but none of them were renewable energy projects.Business viability guarantee from the government for electricity infrastructure
In addition to government support and government guarantees for PPP projects, the government may issue a guarantee to investors for power generation projects. The government guarantee may include a business viability guarantee letter (BVGL).
BVGLs are granted to IPPs to secure PLN's financial obligations under a PPA, which consist of the payment of the electricity price and other payment obligations. PLN's financial obligation shall be limited to other payment obligations arising from the occurrence of political risks, such as government actions and inaction or a change in law, which must be borne by PLN, or any other PLN non-remediable event as stipulated in the PPA. BVGLs will be signed by the MOF and issued to IPPs with a copy going to PLN.
We understand from previous experience that the obligations of the government under a BVGL constitute obligations under Article 1316 of the Indonesian Civil Code. The clause is essentially an indemnity provision, allowing the indemnified party to claim for the indemnified amount directly from the indemnifying party. Thus, an IPP could make a claim directly against the government under a BVGL. However, MOF 130/2016 requires the payment to go to PLN first, rather than directly to an IPP. After PLN receives the amount, PLN should pay that amount to the relevant IPP; however, this system has yet to be implemented.ii Distributed and residential renewable energy
To achieve the government's commitment of 23 per cent utilisation of renewable energy, the MEMR encourages domestic households to adopt rooftop solar PV power systems. PLN customers who are interested in using solar-panel systems are required to follow the procedure set out under MEMR 49/2018: (1) application has to be made for the installation of a solar-panel system to the general manager of PLN, with copies to the Directorate General of Electricity and the Directorate General of New and Renewable Energy; (2) PLN then assesses the application; and (3) after approval is granted by PLN, customers may commence installation of the solar-panel system. Note that the installation of rooftop solar systems should only be undertaken by certified companies, which are those companies that have fulfilled the technical requirements set out by the MEMR and that have obtained (1) a business certificate from the Business Entity Certification Agency and (2) an Electricity Support Services Business Licence from the Directorate General of Electricity of the MEMR.
If the amount of electricity exported from the customer's solar-panel system is greater than the amount of electricity imported in the current month, the excess shall be collected and calculated as a deduction from the customer's electricity bill for the following month. The installation of rooftop solar PV equipment is also subject to the local content requirement (see Section V).