Indonesia: More relaxed supervision in energy and mineral resources sector

Indonesia: More relaxed supervision in energy and mineral resources sector

In August 2017 a new regulation came into effect which moderates the
government's supervision of the energy and mining industries. The regulation
revises procedures relevant to operators and investors in oil and gas,
electricity, mineral and coal, geothermal and biodiesel businesses. It also
introduces new requirements regarding changes to boards of directors and
boards of commissioners and the transfer of shares.

On August 3 2017 the minister of energy and mineral resources enacted
Regulation 48/2017 on the supervision of business activities in the energy
and mineral resources sector, which revoked the short-lived Regulation
42/2017 on the same subject. Regulation 48/2017 took immediate effect and
partially revokes the following regulations:

Regulation 10/1981 on the guidelines and requirements for cooperation under
joint operation contracts between Pertamina and contractors in the
implementation of operation of geothermal resources - to the extent that it
regulates the transfer of rights and obligations of contractors to third
parties that are conducted outside of the Indonesian stock exchange.

Regulation 10/2017 on the power sale and purchase agreements - to the extent
that it regulates the transfer of rights over shares.

Regulation 48/2017 also revokes:

Regulation 26/2016 on the procurement and utilisation of biofuel in the form
of biodiesel for the purposes of financing by the Palm Oil Plantation Fund
Management Agency; and

Regulation 34/2017 on licensing in mineral and coal mining.

Like its predecessor Regulation 42/2017, Regulation 48/2017 applies to all
industries in the energy and mineral resources sector, including upstream
and downstream oil and gas, coal and mineral mining and production,
geothermal, biodiesel and electricity production (including electricity from
renewable sources). In a press release the minister explained that the aim
of Regulation 48/2017 is to accommodate the interests of investors and
prevent any hindrance to investment. While the previous Regulation 42/2017
imposed obligations on companies in the oil and gas sectors to obtain prior
approval over changes to the board of directors and board of commissioners,
and restricted share transfers in the downstream oil and gas industry,
Regulation 48/2017 replaces these requirements with an obligation to report
these changes only to the minister. Regulation 48/2017 makes no change to
the requirements that Regulation 42/2017 introduced for companies in the
mining sector to obtain approval for changes to the board of directors and
board of commissioners, or for share transfers.

Regulation 48/2017 redefines some controversial requirements in the
electricity industry under Regulation 42/2017 with respect to:

changes to the board of directors and board of commissioners - Regulation
42/2017 previously imposed the obligation to seek approval from the minister
for such changes; and

the transfer of shares of geothermal and non-geothermal independent power
producers (IPPs) - Regulation 42/2017 previously imposed the obligation to
seek approval for such changes, where Regulation 10/2017 provided an earlier
iteration of this obligation to notify the minister in the event of transfer
of shares.

Key issues

Regulation 48/2017 requires non-geothermal IPPs to:

obtain written approval from the purchaser (the state-owned electricity
company, Perusahaan Listrik Negara (PLN)) for the transfer of shares before
the commercial operation date; and

notify the minister in the event of the transfer of shares before the
commercial operation date, and of changes to the board of directors and
board of commissioners.

Lenders should be aware of the effects of Regulation 48/2017 with respect to
security over shares in IPPs. In the event an IPP goes into default before
the commercial operation date, any transfer of shares will require approval
from PLN. If the transfer goes ahead it must be reported to the minister.
This should not hinder any enforcement of security by the lenders because,
in a typical project finance structure, PLN will provide consent over the
transfer of shares in advance.

Non-geothermal IPPs will be exempt from the above requirements if they:

hold an electricity supply licence;
sell to PLN; and
use a geothermal electricity power supply.

Non-geothermal IPPs

General requirements for transfer of shares The following provisions appear
to be material to the transfer of shares of non-geothermal IPPs:

Non-geothermal IPPs must obtain approval from PLN to transfer shares before
the commercial operation date and subsequently notify the minister no later
than five business days from the date that the Ministry of Law and Human
Rights provides approval of the articles of association.

Before the commercial operation date, non-geothermal IPPs could transfer
shares only to affiliated parties whose shares were more than 90% owned by
an equity financier or sponsor. Further, the affiliate must be one level
below the sponsor (ie, a direct subsidiary of the sponsor).
Regulation 48/2017 does not define the term 'sponsor'. However, during
discussions with officials from the Directorate General of Electricity under
the Ministry of Energy and Mineral Resources with respect to Regulation
42/2017, officials explained that a 'sponsor' is a direct shareholder of the
IPP. This interpretation applies equally to Regulation 48/2017. As such, the
first restriction above does not seem to apply to transfers made to parties
above the IPP's direct shareholders. By implication, the restriction of the
changes of control in the IPP before the commercial operation date may not
be achieved in practice, considering that - in a typical IPP structure - the
IPP is a special purpose vehicle in which the actual controlling shareholder
will be one (or more) levels above the direct shareholders.

It is unclear under Regulation 48/2017 whether the requirements to notify
the Ministry of Energy and Mineral Resources of the transfer of shares also
apply to enforcing a pledge of shares before the commercial operation date.
However, in the absence of an explicit exemption, it seems that such
enforcements will require notification.

Regulation 48/2017 does not seem to require notification to or approval from
the minister for the transfer of shares after the commercial operation date,
including in the context of enforcing a pledge of shares. As such, it seems
that share transfers under Regulation 48/2017 will require only PLN
approval, which is already the case under sponsor agreements.

Effect of restrictions on transfer of shares Regulation 48/2017 does not
address the effect that the transfer of shares provisions will have with
respect to IPPs which have already signed a power purchase agreement and
sponsor 4 agreement (in larger power projects) with PLN. However, according
to Directorate General of Electricity officials:

Regulation 48/2017 will apply to all IPPs, including IPPs of existing power
projects (at any capacity, including small to medium-capacity power
projects). That is, there is no provision for the grandfathering of IPP
projects under the new Regulation 48/2017 regime; and

the provisions under Regulation 48/2017, including those relating to the
transfer of shares, will prevail where there is a conflict with the sponsor
agreement. However, this cannot be assumed to apply to provisions under a
sponsor agreement that are stricter than those under Regulation 48/2017.

In larger power projects, most if not all sponsor agreements provide more
stringent terms with respect to the transfer of shares after the commercial
operation date, including that:

transfers can be conducted only after specified periods following the
commercial operation date;
transfers will require a public offering; and
the sponsor(s) or existing shareholder(s) must maintain a certain level of
ownership in the IPP until full repayment of the senior loan.
Regulation 48/2017 is more lenient with respect to the transfer of shares
after the commercial operation date - the regulation permits the sponsor(s)
or direct shareholder(s) to transfer shares to any third party after the
commercial operation date, without the need to obtain prior approval from
PLN or the Ministry of Energy and Mineral Resources. This suggests the
following:

New IPPs that have not yet signed a power purchase agreement or sponsor
agreement may benefit from the more lenient requirements under Regulation
48/2017 with respect to the transfer of shares. However, this is not certain
as PLN may require sponsor agreements for new IPPs to include the same terms
as would have been required before Regulation 48/2017.
For existing IPPs which have signed a sponsor agreement, Regulation 48/2017
imposes additional obligations to notify the Ministry of Energy and Mineral
Resources. Existing IPPs must also comply with (likely stricter)
requirements under their sponsor agreement.
Changes to the composition of boards Under Regulation 48/2017,
non-geothermal IPPs must notify the Ministry of Energy and Mineral Resources
of any changes to the membership of the board of directors and board of
commissioners within five working days of providing notification of these
changes to the Ministry of Law and Human Rights. These requirements are less
stringent and easier to implement than those under Regulation 48/2017, which
imposed an additional obligation for an IPP to obtain a recommendation from
PLN for all changes before notifying the relevant ministry.

Geothermal IPPs

Transfer of shares The existing Geothermal Law (21/2014) indicates that a
geothermal IPP may conduct share transfers on the Indonesian Stock Exchange
after it has completed its exploration phase, subject to receiving approval
from the Ministry of Energy and Mineral Resources. However, this requirement
is unclear, and the law appears to allow a geothermal IPP to transfer shares
only by way of public trading or transfer.

In contrast, the now-revoked Regulation 42/2017 required geothermal IPPs to
submit a broad range of documentation to the Ministry of Energy and Mineral
Resources in order to obtain approval for the transfer of shares. The
required documentation extended beyond matters that would be relevant to
public trading and included a report on the identity of transferee(s).
Because such reports would be relevant only to a private sale, Regulation
42/2017 indicated that it may permit geothermal IPPs to transfer shares to
private purchasers, as well as through public trade.

Regulation 48/2017 clarifies matters by distinguishing the formal
requirements for the transfer of shares by way of public trading from those
relating to transfer through private sale. Regulation 48/2017 also covers
geothermal concession holders, joint operation contractors and geothermal
resources permit holders.

The wording of the Geothermal Law and Regulation 48/2017 suggests that
geothermal IPPs cannot transfer their shares before completion of the
exploration phase.

Public trading Regulation 48/2017 provides that geothermal IPPs may transfer
shares on the stock exchange once the exploration phase is complete, subject
to the minister's approval. Regulation 48/2017 states that the minister must
approve such share transfers before the initial public offering or the
transfer of share ownership is recorded on the stock exchange. The director
general of new renewable energy and energy conservation has clarified that
the minister's approval will be required before a geothermal IPP's initial
public offering, as well as before the transfer of ownership is recorded on
the stock exchange for all secondary offerings and rights issuances.

Approval The Ministry of Energy and Mineral Resources will issue its
approval or rejection to a geothermal IPP for the transfer of shares through
public trade within 14 business days after receiving all required
documentation.

Private sale For transfer of shares conducted privately once the exploration
phase is complete, geothermal IPPs need not obtain prior approval from the
minister. However, geothermal IPPs must notify the minister of the transfer
within five business days from the date of providing notice to, or obtaining
approval from, the Ministry of Law and Human Rights.

Change of board members Geothermal IPPs must notify the minister of any
changes to the membership of the board of directors and board of
commissioners within five business days from the date of providing notice of
the change to the Ministry of Law and Human Rights.

Comment

Regulation 48/2017 is considerably more investor friendly than Regulation
42/2017, which imposed stringent obligations with respect to the transfer of
shares and changes to the board of directors and board of commissioners of
non-geothermal and geothermal IPPs. The previous requirement for both
non-geothermal and geothermal IPPs to obtain minister approval for any
transfer of shares (before and after the commercial operation date), which
would likely cause difficulty in practice, now applies only to geothermal
IPPs for share transfers after the exploration phase and only to transfers
made through public trading. Regulation 48/2017 drops the requirement for
all IPPs to obtain minister approval for changes of the board of directors
and board of commissioners, requiring IPPs to report these changes only to
the minister. The regulation applies to a broad sweep of Indonesia's energy
and mineral resources industries and is therefore an important development
for new and existing companies.

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com




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