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PLN has recently issued an invitation for prequalification of developers interested in participating in future renewable Independent Power Projects in Indonesia. A copy of the PLN announcement is attached at the end of this Legal Update.
The recently passed Minister of Energy and Mineral Resources Regulation No 50/2017 (“Regulation 50”) requires PLN to carry out a “direct selection” process for the purposes of awarding IPPs for the following renewable energy technologies:
“Direct selection” means that PLN is required to carry out a limited tender process with a minimum of two bidders to award the relevant project (as opposed to running a full tender, open to anyone interested to participate). So the question that has lingered since the passing of Regulation 50 is – how does PLN define the category of developers who can participate in this “limited tender”? It appears that this new announcement by PLN is aimed at defining the “limited tender” group. So we would expect that any developer who successfully passes this prequalification process and is therefore registered on the “List of Selected Providers” will be entitled to participate in future limited tenders for awarding renewable projects. It follows that those developers that are not on the List of Selected Providers will not be entitled to participate in the limited tender.
In the limited tender processes (commonly referred to as “beauty parades”) historically run by PLN (e.g., the early Java 5 project, the award of rights to do an expansion at the Paiton power facility in East Java), the number of invited bidders were a very small number (i.e., less than 10). It would appear that this current process is going to result in a very large number of invited bidders for future projects. Accordingly in practice, the running of future tenders for awarding these renewable projects will look more like a full tender process amongst dozens of bidders, than a beauty parade amongst a handful of bidders.
The announcement covers solar PV projects, hybrid energy projects, wind projects, biomass biogas projects, municipal waste projects and tidal projects. Accordingly, the renewable projects not covered by this procurement process include geothermal projects or hydro (whether large scale or mini hydro projects).
In this respect, the current call for prequalification does not align neatly with the provisions of Regulation 50:
The PLN announcement does clearly contemplate that foreign entities (from countries with diplomatic relations with Indonesia) can participate. As per the usual PLN procurement process, we would expect that once PLN initiates a limited tender for a particular project, developers who are on the List of Selected Providers will be able to participate in that tender process (along with a local partner to meet any mandatory Indonesian ownership requirements). If the developer is successful in winning the bid, then the foreign developer and its selected local partner will then proceed to establish an Indonesian project company, which will then sign the Power Purchase Agreement with PLN.
On the issue of whether both the foreign partner and the local partner need to be on the List of Selected Providers, we would expect that the terms of the limited tender documents would only require the lead member of the bidding consortium to be from the List of Selected Providers, with the additional consortium members only needing to meet the criteria laid out in the tender package itself. So, for example, if a foreign investor was looking to participate in the tender for a new 50MW wind project (where 95% foreign ownership is permitted), we would expect that the tender package would only require that the foreign partner be registered on the List of Selected Providers (and there would not be a requirement for the selected local partner to also be registered, although the local partner may need to pass the other prequalification criteria set out in the tender documents such as credit rating and the like).
The announcement calls for experience in developing, constructing and/or operating renewable energy plants that have successfully been in operation for at least one year. As is often the case, the entity that actually has that expertise is a special purpose project entity located in the jurisdiction in which the relevant project is located. For example, if a developer has a solar project that is in operation in India, the actual legal entity that has that experience is the Indian project special purpose company. So does that mean that the Indian project company must apply for the prequalification for the future Indonesian projects? PLN’s approach has typically been that a parent company can rely on the experience of its operating subsidiary in order to meet these technical prequalification requirements. So if the Indian solar project company is ultimately owned by a large multinational developer based in (say) Singapore, then that Singapore entity can submit the prequalification application, relying on its subsidiary’s experience.
We would expect that as and when PLN puts together a limited tender bid package for a particular project, PLN will be requiring further criteria to be met by bidders who are included on the List of Selected Providers. These criteria typically involve a combination of administrative, financial and technical criteria such as bidders having a certain credit rating granted by one of the recognised rating agencies and meeting certain minimum historical EBITDA thresholds to demonstrate that the bidders have the means to fund the equity portion of the project. So we would expect that there will be a second round of more detailed prequalification requirements in the individual bid packages that are subsequently put together by PLN.
The ability of PLN to directly appoint developers (particularly those developers that have some form of pre-existing contractual relationship with PLN at the time Regulation 50 was introduced) remains somewhat unclear. The fact remains that the Government Regulation relating to the electricity sector (which rank higher in the hierarchy of laws in Indonesia) expressly provide that PLN is permitted to directly appoint renewable developers to implement IPP (without any form of tender process, whether limited or otherwise). Yet Regulation 50 does call on PLN to carry out limited tenders for all renewables except geothermal and municipal waste to energy.
With hydro projects being excluded from this current prequalification process, it appears that PLN is still considering whether to proceed with hydro projects on the basis of direct appointment (as a limited tender does not make a lot of sense for site-specific hydro). So it will be interesting to see whether PLN continues to pursue direct appointment projects outside the limited tender framework.
It is very encouraging for renewable developers to see PLN getting down to the business of implementing a procurement framework for renewables in a manner consistent with the recent regulatory reforms pushed through by the Indonesian Government. If the level of interest seen in the recent Sumatera solar PV tenders was any indication, we would expect to see a large number of developers apply to have their names included on the List of Selected Providers.
Below is the PLN invitation advertisement:
Source: Media Indonesia, 13th October 2017.
Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 13th October 2017
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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