Investing in Indonesia's waste-to-energy sector

Investing in Indonesia's waste-to-energy sector

Building a WTE power plant requires a huge amount of funds to be invested,
but, with limited government funding available, other financing sources are
badly needed. Veronica Situmorang, Donke Kafi and David Harrison of DK &
Situmorang Lawyers explain the options.

The Indonesian government has expressed a strong desire to develop and
invest in renewable energy-especially from municipal solid waste.

Indonesia's population continuously shows significant growth. In 2015 the
population reached 255 million people. It had increased by more than 108
million people over the last 35 years. In terms of the economic condition of
the country, according to the Asian Development Bank, currently the growth
has reached 5.2% and is projected to reach 5.5% in 2017.

Those two factors will contribute towards increased consumption and the
generation of more waste. This will lead to further environmental, public
health and sanitation problems, as well as contributing to flooding.

In terms of the amount of waste produced, an article in the October 9, 2015
edition of the Jakarta Post estimated an average person in Indonesia
produces 700 grams of waste per day. With 250 million people, a staggering
175,000 tonnes of waste is produced each day, amounting to 64 million tonnes
per year. Taking into account the amount of waste involved, proper waste
management in every municipality is badly needed.

Currently, municipal solid waste (MSW) has to be disposed of in
government-run landfill or final disposal sites (TPAs). This waste has not
been processed in an advanced way with advanced technology such as
incinerator, thermal process, RDF etc. Not only would such advanced
technology will considerably help manage waste but also will generate
something else useful for community. Transforming waste to energy (WTE) is a
case in point. WTE technology can be a major contributor to both the needs
of proper waste management as well as contributing to overall electricity
needs in Indonesia-as currently Indonesia has targeted to reach 35,000MW of
electricity generation by 2019.

Building a WTE power plant requires a huge amount of funds to be invested.
Traditionally any infrastructure development is funded by the government
budget. However, the government budget alone is insufficient to make it
happen in Indonesia. According to a recent case study of the Indonesian
Planning Board (Bappenas) taking Bandung municipality as an example, Bandung
has a local budget of only Rp67 billion per year, while a WTE project based
on incinerator technology requires an investment of approximately Rp1,600
billion. Hence, other financing sources, such as from the private sector,
are badly needed.

Indonesia has just recently started developing municipal WTE facilities and
started inviting the private sector to get involved. Yet there are still
many challenges to be overcome, such as proper project preparation, setting
an appropriate regulatory environment, increasing the capacity of local
government, employing the correct technology, obtaining investment and
financing, securing feedstock and supply agreements, making the grid
connections and fixing the tipping fees to name just the major issues.

WTE development will not only help to clean up a city but also contribute to
ever-growing electricity needs. This article will provide a brief overview
on some fundamental legal aspects and ways of developing WTE power plants
through private investment in Indonesia.

Public-private partnership regime

One way to invite private participation to develop WTE power plant is
through a public-private partnership (PPP) mechanism. The PPP regime in
Indonesia is basically governed by Presidential Regulation No 38 of 2015 on
PPP (PR 38/2015). Yet, this regulation is not sole regulation to be
followed. Such development shall also comply with: 1) Sectoral Regulations
in Energy and Waste Management, 2) Inter-sectoral Regulations which govern
cross-cutting issues and 3) Regional/local regulations.

PPP projects are known to have two kinds of projects namely Solicited and
Unsolicited Projects. A solicited project is a government-led project and an
unsolicited project is private-led project.

In a solicited project, there are three project phases comprising: 1)
planning; 2) preparation; and 3) implementation.

The planning stage involves the identification and selection of potential
PPP projects-including a decision by the government on how a WTE project
would be funded. Once decided that a WTE project shall proceed under PPP
mechanism, the government will plan the budgeting activities.

The project preparation stage is intended to obtain an initial assessment of
the feasibility of the project (Pre-FS) and to set out the government
support and guarantee plan, the return of investment mechanism and the land
acquisition plan.

The project implementation stage involves several activities to draw up the
contractual arrangements required to move the project forward, including the
launching of a tender to select the private entity that will carry out the
project, the cooperation agreement and financial close.

In the case of an unsolicited project, such project can be initiated by a
private entity if the project:
can be integrated into a master plan in the relevant sector;
is economically and financially viable; and
has a project initiator with sufficient financial capacity to fund the
project.

The approval process begins with the appointment of a private entity as
Candidate for Project Initiator. Then the Project Initiator submits the
project feasibility document to the government.

PR 38/2015 states that private entities should be selected through open
tendering or directly appointed (applicable for both solicited and
unsolicited projects). In the case of unsolicited project, the government
may give compensation to the Project Initiator in any of the following
forms:
adding 10% to value of the total evaluated bid score;
paying compensation for the Feasibility Study (FS) carried out by the
Project Initiator in the event that the project is cancelled or not
implemented for whatever reason; or
allowing the Project Initiator to change the tender, if, according to the
result of the open tender, there are better bids from other business
entities (the "right to match").

WTE development acceleration regime

To accelerate WTE development, the government has issued Presidential
Regulations No. 18 of 2016 on acceleration of WTE development in seven
cities namely Jakarta, Tanggerang, Bandung, Semarang, Surakarta, Surabaya
and Makassar.

In order to develop the plan, the government contracting agency (GCA), which
is the head of the municipality, may assign its regional-owned enterprises
(BUMD) or enter into a cooperation with private entity through a direct
appointment.

The assigned BUMD or appointed private entity must fulfil the business
licensing requirements of power supply, but they will gain acceleration of
the process to be issued a direct investment permit on construction, where
the activity to begin the construction can be done simultaneously with the
arrangement of IMB and environmental permit.

According to this regime, the National Power Company (PLN) has been assigned
to offtake the electricity from WTE power plant. PLN shall sign the power
purchase agreement (PPA) within 35 working days from the date of assignment
to BUMD or appointment to private entity.

Cross cutting issues

Government guarantee

PR 38/2015 stipulates that a PPP project may qualify for a government
guarantee (GG). This guarantee is further governed by Presidential
Regulation No. 78 Year 2010 concerning Infrastructure Guarantee in a
Cooperation Project between the Government and a Private Entity through the
institution for providing Infrastructure Guarantee (PR 78/2010). In
addition, the GG is governed by the Regulation of the Minister of Finance
No. 260/PMK.011/2010 concerning guidelines for the implementation of
Infrastructure Guarantee in a Cooperation Project between the Government and
a Private Entity (MoFR 260/2010).

GG means a guarantee in the form of financial responsibility taken on by the
GCA through the guarantee agreement.

The GG is awarded by the MoF through the Indonesian Infrastructure Guarantee
Fund (IIGF). When implementing a GG award under PR 78/2010, the IIGF draws
up and signs a guarantee agreement with the private entity (the insured).
The regulation also stipulates that a minimum guarantee agreement should
contain the following provisions:
approval of the insurance cover by the guarantor and the insured;
the procedures for the implementation of the obligations of the guarantor to
the insured;
the dispute resolution procedures between the guarantor and the recipient;
and
The Law of Indonesia as the applicable law.

Government support

According to PR 38/2015, in addition to the GG, the government may also
provide support to the project, defined as any financial support and/or
others supports awarded by the GCA and/or MoF based on its authority, in
order to increase effectiveness and financial viability of a PPP project.

The form of financial support may include tax incentives, exemption from
import duties and partial support for construction. Relating specifically to
the form of partial support for construction, the government has enacted
Ministry of Finance Regulation No. 223/KM.011/2012 on Provision of
Feasibility Support by Funding Part of the Construction of Infrastructure
Project for Public Private Partnership Project on Infrastructure Provision
(MOFR 223/2012).

Government non-financial support may be provided in various ways depending
upon the nature of the project. In the case of WTE projects, the most
commonly sought type support required is licensing, though other forms of
support may also be needed.

Land acquisition

The requirement for land in the implementation of a PPP project is one of
most important issues. Whilst the GCA normally leaves the issue of land
acquisition to the private entity, PR 38/2015 makes the requirement for land
one of the obligations of
the GCA.

It should be noted that, under PR 38/2015, there is a provision for the cost
of land acquisition to be paid in advance by the GCA and then to be
reimbursed by the winning bidder. Accordingly, there is now an opportunity
for the private sector to fund land acquisition, with the cost of this being
repaid by the GCA through state or regional budget (APBN/APBD).

Tipping fees

The tipping fee is the amount of compensation paid by the
government/regional government to a party to manage municipal/regional waste
management activities. Hence, tipping fee can be said as one of the sources
of income in WTE business.

In accordance with Law 18/2008, the government and regional government is
obliged to finance waste management activities from APBN/APBD. While the law
18/2008 requires the regional government to provide a budget to manage its
waste, in particular in the form of the Tipping Fee, it has been found to be
the case that a number of municipalities will find it difficult to provide
the budget, given the limited overall budget at their disposal. In addition,
there is no such legal basis on how the tipping fee would be calculated.
Hence, determining the amount of tipping fees in the absence of a strong
legal basis would normally require parliamentary approval.

Offtake and feed-in tariff

According to MEMRR 44/2015, the PLN is obliged to offtake the electricity
produced from municipal waste sources. Furthermore, this regulation governs
the amount of feed-in tariff as follows:
through land-fill process, for the capacity up to 20MW, the price would be
US$16.55 for high and medium voltage and US$20.16 for low voltage; and
through thermal process, for high and medium voltage, for the capacity up to
20MW, the price is US$18.77, and for capacity higher than 20MW up to 50MW
the price is US$15.95 and capacity higher than 50MW the price is US$13.14.
Meanwhile for low voltage with capacity up to 20MW the price is US$22.43.

Permits and licensing

The long processes for permitting and licensing have been problems in
Indonesia for many years. As part of the government support for WTE
development, licensing support covers all licences or approvals granted by
the GCA for the implementation of infrastructure projects. In addition, the
GCA also provides assistance in processing licences required from other
relevant authorities, such as other ministries or agencies.

In the case of WTE project under acceleration regime (PR 18/2016), the
provisions for permits and licensing shall refer to the Presidential
Regulation No 03 of 2016 concerning National Strategic Project (PR 03/2016).


According to PR 03/2016, in order to start a National Strategic Project, the
private entity shall obtain the following licenses:
Principle license;
Location permit;
Environmental permits;
Forestry usage permits;
Construction permits; and/or
Fiscal/non fiscal facilities

Those licenses are submitted to the central one-stop service (PTSP Pusat).
The construction may commence when location permit, environmental permit and
construction permit have been obtained.

PTSP Pusat shall process the permits or licensing within five working days,
except for the following permits/licenses:
Environmental permits: 60 working days
Forest usage permit: 30 working days
Tax facility licenses: 28 working days

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Ref:
http://www.inhousecommunity.com/article.php?id=IJYRLW8-480RJ35-NNY3VRI-IQXPV
TT

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com