Opinion: Government expands scope of government guarantee for second fast track power projects
By: Hadiputranto, Hadinoto & Partners (www.hhp.co.id)
Tuesday, January 21 2014 - 11:21 AM WIB
History
In 2010, the President issued Presidential Decree No 4/2010 which assigned PLN to implement what has become to be known as the Second Fast Track Power Program - consisting largely of a number of coal, gas and renewable Independent Power Projects which are to be developed, financed, constructed and operated by private sector developers based on long term Power Purchase Agreements ("PPAs") entered into between the private developers and PLN.
In order to ensure the bankability of these privately financed projects which were solely dependent on PLN's long term ability to meet its payment obligations under the PPAs, the Government agreed to guarantee the "business viability" of PLN, with the Ministry of Finance tasked to implement the form of "business viability guarantee".
In 2011, the Minister of Finance issued its Regulation 139/PMK.011/2011 ("PMK139") setting out the form of business viability guarantee to be offered to private sector developers. It has been on the basis of PMK139 that a number of power projects have applied for and received Business Viability Guarantees from the Ministry of Finance (including Muara Laboh geothermal project, Rajabasa geothermal project, Wampu hydro project, Rantau Dedap geothermal project and the Sarulla geothermal project).
PMK225 has now revoked PMK139.
Key changes under PMK225
The important changes introduced under PMK225 are as follows:
? One of the major criticisms of PMK139 was that the scope of the PLN payment obligations under the PPA that were to be guaranteed was limited to "electricity purchase payments" which arose after the Commercial Operation Date of the power plant. Most notably, this meant that PLN's obligation to make very significant termination and buy-out payments (in the event of termination of the PPA due to PLN default or prolonged Government Force Majeure events) was not a payment obligation that could be covered by a Business Viability Guarantee issued under PMK139. In the early Business Viability Guarantees issued under PMK139, this termination and buy-out payment risk (which could not be covered under the guarantee framework of PMK139) was covered by the Ministry of Finance agreeing to ensure that, as part of the Ministry of Finance's statutory public service obligation funding commitments to PLN, the Ministry of Finance would ensure that PLN met any buy-out and termination payment obligations.
PMK225 now allows these PLN termination and buy-out payments to be included within the scope of the Business Viability Guarantee, irrespective of whether these termination and buy-out payments arise prior to or after the Commercial Operation Date. In this respect, PMK225 is a significant improvement over PMK139, however some concerns remain:
- PMK225 covers PLN payment obligations in respect of termination and buy-out due to "Political Risk" - which is given a definition under PMK225. The corresponding definition of "Political Force Majeure" under the express terms of the PPA is typically more detailed and exhaustive than the definition provided for in PMK225. It is hoped that despite this apparent limitation in PMK225, the Ministry of Finance takes a pragmatic approach and confirms that the scope of coverage under the Business Viability Guarantee will cover termination and buy-out as a result of "Political Force Majeure" events as defined in the PPA, rather than relying on a potentially more limited definition of "Political Risk" set out in PMK225.
- The other cause for termination and buy-out payments now covered by PMK225 is where the PPA is terminated due to "Non-Remediable Events" of PLN. Again, care must be taken by developers in drafting the terms of the PPA to ensure that, aside from any Political Force Majeure events, all other events or circumstances which, under the terms of the PPA, lead to PLN being obliged to buy-out the project, are caught within the PPA's definition of "Non-Remediable Events". If a particular termination event leading to PLN buy-out does not fall within "Political Force Majeure" or "Non-Remediable Events", then it is likely that the Ministry of Finance will refuse to include that provision in the list of relevant PPA provisions guaranteed by the Business Viability Guarantee.
- Whilst termination events leading to PLN's obligation to buy-out the project are covered, the PPA termination events leading to a situation where PLN has an option (not an obligation) to buy out the project are not covered. As an example, the PPA will typically provide that in the event of the developer's default under the PPA, PLN may terminate the PPA and PLN will thereafter have an option to buy-out the project for a prescribed price (typically the amount of the project finance debt outstanding at the time of termination). If PLN exercises this option, the payment obligation which then arises is not covered by PMK225. Developers should ensure that the terms of the PPA clearly provide that in the event of PLN exercising such an option to purchase, the transfer of ownership of the project from the developer to PLN only occurs at the time that the full option purchase price is paid by PLN to the developer (thereby removing any PLN payment default risk).
? In view of the continued delays experienced in obtaining forestry approvals for the development of power projects located within State forest area, PMK225 now requires the IPP developers to have obtained a forestry borrow and use (pinjam pakai) from the Minister of Forestry before the application for the Business Viability Guarantee is submitted to the Ministry of Finance.
This requirement is problematic. The time required by the Ministry of Forestry to process applications for pinjam pakai is significant (and can run in excess of 12 months). Accordingly, developers are unlikely to wish to start the development clock under the PPA without having the Business Viability Guarantee in hand. Accordingly, it is likely that this new requirement will delay the execution of PPAs by developers - i.e. developers and PLN will agree a final form of PPA (and potentially initial the PPA), developers will then seek to obtain a forestry approval, upon obtaining the forestry approval PLN will make the application to the Ministry of Finance for the issuance of the Business Viability Guarantee, and the PPA will be signed at the time of the issuance of the Business Viability Guarantee. Some developers may be willing to invest the time and cost in processing the forestry approval in parallel with the PPA finalisation with PLN (so that by the time the PPA is finalised, the pinjam pakai would also be in hand).
? PMK139 previously provided that the Business Viability Guarantee could be issued at the time of the PPA signing, or sometime thereafter. PMK225 now provides that the Business Viability Guarantee is to be issued only after the PPA is executed. Developers are unlikely to commit to spending money on development expenses (e.g. land acquisition, financing costs, exploration expenditure for geothermal projects etc) unless and until they are assured that a Business Viability Guarantee is in place - as without a Business Viability Guarantee, it may be difficult for developers to successfully obtain limited recourse international project finance from international financial institutions. In order to avoid a situation where the development clock has started under the PPA but the developers are unable to start activities due to the fact the Business Viability Guarantee has not yet been issued, developers may need to look to amend the PPA terms to expressly provide that the financial close deadline set out in the PPA (typically 12 months from PPA signing for non-geothermal projects, and 4 years from PPA signing for geothermal projects) does not commence until the Business Viability Guarantee is issued.
? Express provisions are now included for the grant of a Business Viability Guarantee to support an expansion of an existing power plant project. Some of the key requirements are:
- the expansion project must be at the same location as the existing project, and involve the use of common facilities;
- the shareholding in the power project company must be the same both prior to and after the expansion project is undertaken; and
- a separate PPA must be entered into in respect of the expansion (to ensure that the Business Viability Guarantee can clearly be defined to cover the expansion project only, not the existing project).
? Despite PMK139 being revoked, all existing Business Viability Guarantees issued under PMK139 remain valid until their expiry.
Conclusion
In summary, whilst there have been some further hurdles introduced as part of the application requirements for Business Viability Guarantees, the increased scope of PPA obligations that PMK225 now covers is a very positive step forward for IPP developers.
As with all such regulatory instruments, the devil will remain in the detail. Accordingly, we will wait to see how the Ministry of Finance translates the provisions of PMK225 into the terms of the first Business Viability Guarantee letter to be issued pursuant to PMK225.
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