Under a new regulation, government approval is now needed to change either the shareholders or management of Independent Power Producers (IPPs). Industry players are concerned.
On 14 July 2017, Indonesia’s Ministry of Energy and Mineral Resources (MEMR) issued Regulation No. 42 of 2017 on Supervision of Energy and Mineral Resource Business Activities (Regulation 42/2017). Regulation 42/2017 covers supervision of certain business activities in the energy and mineral resources sector, including electricity and geothermal power, oil and gas (upstream and downstream), coal and minerals. In this legal update, we look at how this new regulation impacts the energy sector.
Regulation 42/2017 applies to, among others, holders of an Electricity Supply Business License (Izin Usaha Penyediaan Tenaga Listrik or IUPTL), including IPPs. There are new requirements with respect to changes to the shareholders and management of IPPs.
Previously, any transfer of shares in an IPP only had to be notified to the MEMR’s Directorate General of Electricity (DGE) after approval is obtained from the buyer – in this case, state electricity company PT Perusahaan Listrik Negara (Persero) (PLN), in line with MEMR Regulation No. 10 of 2017 on Power Purchase Agreement Principles (Regulation 10/2017), issued back in January 2017.
However, with the issuance of Regulation 42/2017, any transfer of shares in an IPP by its shareholders now requires approval from the MEMR. To obtain this approval, the IPP will need to submit an application (supported by certain administrative and financial documents) to the DGE for evaluation. This evaluation becomes the basis for the MEMR to issue its approval or rejection within 14 business days after receiving the complete application. This MEMR approval is needed for further applications to the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) and Ministry of Law and Human Rights in line with the prevailing regulations.
Under the current model of Power Purchase Agreements (PPAs), approval from PLN is usually required for any transfer of shares in an IPP. This requirement is not superseded by the requirement to obtain approval from the MEMR under Regulation 42/2017, since approval from the buyer of electricity (which for IPPs means PLN) is one of the supporting documents needed to obtain MEMR approval. Therefore, the IPP will now need to obtain approval from both PLN and the MEMR.
As to the DGE notification requirement under Regulation 10/2017, Regulation 42/2017 is silent on whether notification to the DGE is still necessary for a transfer of shares in an IPP. Presumably, obtaining approval from the MEMR (through an application to the DGE) could also be considered as compliance by the IPP with the DGE notification requirement under Regulation 10/2017.
Similar to Regulation 10/2017, Regulation 42/2017 only permits a transfer of shares in an IPP once the power plant has reached ‘Commercial Operation Date’ (COD) (also usually required under the previous PPA model). An exception applies for a transfer to an affiliate of the project sponsor (ie one level below the sponsor) more than 90 percent of whose shares areowned by the sponsor. This requirement for the affiliate to be one level below the sponsor is newly introduced under Regulation 42/2017.
The previous PPA model provided similar provisions on transfers of shares in IPPs. Generally, sponsors are required to maintain their ownership, directly or indirectly, in the IPP up to a certain percentage for any transfer of shares taking place after the COD. A transfer of shares to an affiliate (defined as any person or entity controlling, controlled by or under common control of such person, while ‘control’ means direct or indirect ownership of more than 50% of the voting rights of a person) is implicitly permitted prior to the COD so long as the sponsors maintain a certain ownership percentage in the IPP. The MEMR appears to impose stricter provisions for transfers of shares by setting a higher ownership percentage for the sponsors in the definition of ‘affiliate’.
With the issuance of Regulation 42/2017, any change to the members of the Board of Directors or Board of Commissioners of an IPP is now also subject to approval from the MEMR. Similar to the approval for a transfer of shares mentioned above, the IPP will need to submit an application to the DGE (supported by certain administrative and financial documents), and the approval or rejection by the MEMR will be issued within 14 business days after receipt of the complete application.
This MEMR approval will also be the basis for further applications to BKPM and the Minister of Law and Human Rights (as applicable) in accordance with the prevailing regulations.
Although implementation remains unclear, Regulation 42/2017 imposes stricter requirements for any changes to the ownership and management of an IPP in Indonesia. This change is expected to enhance MEMR’s supervision of the energy and electricity sectors in Indonesia pursuant to Indonesia’s 1945 Constitution.
Objections have been raised by various business associations, along with requests to cancel Regulation 42/2017, since its provisions appear to go against the current drive towards deregulation and de-bureaucratisation. Nor has it been welcomed by businesses in the energy sector, which believe that the government’s role is to supervise rather than intervene in company management affairs. It has been reported that Indonesia’s President has raised similar concerns to the MEMR, and that the MEMR is now considering reviewing Regulation 42/2017.
For more information, please contact Benny Bernarto, Ibnu Hasan, or Valiska Nathania.