New ‘piggy back’ scheme introduced for the development of electric power infrastructure



In Indonesia, the provision of electric power is the responsibility of the government, delegated to a state-owned entity, PT Perusahaan Listrik Negara (Persero) (PLN). Under the current applicable law, PLN is responsible for the provision of electric power within its business area – the whole of Indonesia, unless determined otherwise by the Ministry of Energy and Mineral Resources. PLN is therefore seen as the single off-taker and is in charge of the procurement of electric power through the development and operation of its own power plants or through Independent Power Producers (IPP).

One of the most the important requirements of a potential investor in an IPP is the availability of a government guarantee of PLN’s financial obligations as the single off-taker. Under Presidential Regulation No. 4 of 2016 on the Acceleration of the Development of Electric Power Infrastructure – as amended by Presidential Regulation No. 14 of 2017 – the government provides business viability guarantees (BVGL) for power plant projects in Indonesia. On 24 August 2016, the Minister of Finance (MOF) issued MOF Regulation No. 130 of 2016 on The Procedure for Granting Government Guarantees for the Acceleration of the Development of Electric Power Infrastructure. However, it appears that the government is now reluctant to issue BVGLs.

In addition to a BVGL, another form of a government guarantee is available. Namely, a Guarantee Agreement, if the IPP project is considered a public-private partnership (PPP) project. So far, only one project has entered into a Guarantee Agreement with PT Penjaminan Infrastruktur Indonesia, the Indonesian Infrastructure Guarantee Fund (IIGF) and the MOF, which is the 2,000MW coal-fired Central Java Project. However, we understand that IIGF and MOF are also reluctant to participate in this government guarantee scheme for an IPP project under a PPP due the long delay in financially closing a previous project.

The lack of government guarantees for IPP projects will of course put off potential investors, as without a government guarantee they can no longer rely on the Indonesian government to cover PLN’s financial obligations. Since the level of PLN’s financial obligation under a Power Purchase Agreement (PPA) can be substantial – including the deemed capacity payment, and a termination payment to sponsors which can be in the billions of US dollars depending on the size and type of project – PLN’s ability to comply with its financial obligations is crucial for sponsors, as well as lenders.

To overcome this problem, PLN has come up with a new ‘joint cooperation’ scheme or ‘piggy back’ scheme under which one of PLN’s subsidiaries is a shareholder in the IPP company. These subsidiaries are PT Indonesia Power, PT Pembangkitan Jawa-Bali or PT Pembangkitan Jawa-Bali Investasi. One of the ideas behind this, among others, is to share the risk among sponsors, so that PLN’s subsidiary will also have to bear the risk of PLN not complying with its financial obligations under a PPA.

Another aim is to have procurement conducted through a direct selection instead of an open tender. Presidential Regulation No. 6 of 2016 – as amended by Presidential Regulation No. 14 of 2017 on the Acceleration of Electric Power Infrastructure – allows PLN to appoint a subsidiary in which PLN directly or indirectly holds at least 51 percent shares to develop electric power infrastructure.

The ‘piggy back’ scheme has been proposed by PLN for mine-mouth power plant IPP projects it has tendered, whereby PLN through its subsidiaries will hold at least 51 percent of shares in the project company (IPP company) while its actual capital investment is only 10 percent. The remaining capital must come from the private sponsors without PLN having to incur any debt.

Under the traditional IPP Scheme and the current Investment Negative List, foreign share ownership in an IPP company is allowed up to 95 percent. In practice, and in our experience, sponsors want to maximise foreign share ownership in an IPP company, as they will likely want to cooperate with other sponsors to co-fund the project so that more than one sponsor may be involved in one IPP company.

In the case of the piggy back scheme, if through its subsidiary PLN holds 51 percent of the shares in the IPP company, the other sponsors can only jointly hold the remaining 49 percent. This is a significant limitation for a sponsor seeking a partnership with other sponsors in a project.

The other significant issue is on the financing of the project. Although through a subsidiary PLN will hold at least 51 percent of the shares in the IPP company, PLN’s actual capital investment will only be 10 percent. This means that the sponsor must cover the capital investment of PLN’s remaining 41 percent shareholding in the IPP company. This will require the sponsor to seek third-party financing. However, since the bankability of this type of scheme has not yet been truly tested, in our experience, third-party lenders may be reluctant to participate. Therefore, this ‘joint cooperation’ scheme creates an additional challenge for sponsors who seek financing from lenders and other sponsors to help co-fund the project. It thus remains unclear how this scheme will work.

Although investors’ interest in the electric power sector remains high, new greenfield projects are slowing down as investors adopt a ‘wait and see’ policy for greater certainty in the electricity business investment climate.


Rahayu Ningsih Hoed is a partner and Dirgantara Adi Nugroho is a senior associate at Makarim & Taira S. Ms Hoed can be contacted by email: Mr Nugroho can be contacted by email:

© Financier Worldwide


Rahayu Ningsih Hoed and Dirgantara Adi Nugroho

Makarim & Taira S.

©2001-2019 Financier Worldwide Ltd. All rights reserved.