Indonesian government extends business viability guarantee program

In 2010, to spur the development of much needed power generation projects in Indonesia, the then-President [Susilo Bambang Yudhoyono] signed into effect Presidential Regulation 4/2010 (?Perpres 4/2010?), which provided that the Government would ?ensure the business viability of PT Perusahaan Listrik Negara (Persero) ("PLN")?, with the details of that Government support to be laid out by the Minister of Finance. The Ministry of Finance has since issued a series of regulations, the latest being Minister of Finance Regulation 173/PMK.011/2014, which laid out that the support would take the form of a Business Viability Guarantee Letter issued by the Government of Indonesia through the Minister of Finance under which the Government agrees to ensure that PLN meets its key payment obligations under the Power Purchase Agreements for projects which are listed on the Government?s 10,000MW Second Fast Track Program. The list of projects constituting the Second Fast Track Program was initially set in 2010 as an ambitious list of over 90 power generation projects, both PLN projects and Independent Power Projects (IPPs).

To give further focus to the desire of the Government to ensure that this program was in fact a ?fast? program, both Perpres 4/2010 and the Second Fast Track Program decrees set an expiry date for those regulations of 31 December 2014. However to-date, a large number of the Second Fast Track Program projects remain unrealised, and remain on the drawing board. The government has amended the list of projects several times, with the current list of power generation projects now totaling around 70.

In view of the continued financial stress the State-owned power utility, PLN, finds itself under as a result of its generation costs exceeding its tariff revenues, there was a concern that if the Government support program for these power projects fell away at the end of 2014, it was highly unlikely that these projects would attract the necessary international project financing necessary to take them from the drawing board to reality.

In response to these concerns, the Indonesian Government has taken the very positive step of extending the term of the Business Viability Guarantee Program and the Second Fast Track Program through to 31 December 2019. The continued availability of this Government back-stop of PLN?s payment obligations under PLN?s Power Purchase Agreements is a very strong signal to the market that, although the Government may have scored poorly in relation to the speed of rolling out the projects listed on the Second Fast Track Program, the Government remains fully committed to seeing these projects ultimately realised.

This recent extension of the Business Viability Guarantee Program, taken together with recent regulatory changes in relation to increases in tariff regimes for geothermal power projects and the fast-tracking of tariff approvals for certain IPP projects, lays a solid foundation for the Government to achieve its stated electrification ratio targets set in its recent 2015-2024 Electricity Supply Business Plan (Rencana Usaha Penyediaan Tenaga Listrik).

For further information please contact

Luke Devine
Foreign Legal Consultant
+62 21 2960 8600
luke.devine@bakernet.com

Kirana D. Sastrawijaya
Senior Associate
+62 21 2960 8541
kirana.d.sastrawijaya@bakernet.com

Anita Karina Sungkono
Associate
+62 21 2960 8613
anita.k.sungkono@bakernet.com

Hadiputranto, Hadinoto & Partners*
The Indonesia Stock Exchange
Building, Tower II, 21st Floor
Sudirman Central Business District
Jl. Jendral Sudirman Kav. 52-53
Jakarta 12190
Indonesia
www.hhp.co.id

Erik B?gin
Local Principal
+65 6434 2598
erik.begin@bakermckenzie.com

Kim Hock Ang
Senior Associate
+65 6434 2534
kimhock.ang@bakermckenzie.com

Baker & McKenzie.Wong & Leow*
8 Marina Boulevard
#05-01 Marina Bay Financial Centre
Tower 1
Singapore 018981
www.bakermckenzie.com/Singapore

*Hadiputranto, Hadinoto & Partners and Baker & McKenzie.Wong & Leow are member firms of Baker & McKenzie International.