The Green Prosperity Project, the biggest project under the Millennium Challenge Account-Indonesia (MCA-Indonesia), supports the Indonesian government’s commitment to reduce carbon emissions and promote sustainable economic growth.
MCA-Indonesia was formed to manage the Compact Grant — a main pillar of the Comprehensive Partnership between the governments of the US and Indonesia — which was signed in November 2013. Amounting to $600 million, the grant aimed to reduce poverty through economic growth, and was the largest US commitment in the last 30 years in Indonesia. About 50 percent of the grant money was allocated for the Green Prosperity Project, which housed the public private people partnership (4P) pilot projects.
Following Compact Grant Agreement’s five-year implementation period, MCA-Indonesia was dissolved on April 2, 2018. AmCham Indonesia sat down with Verania Andria, Associate Director for Community-based Renewable Energy, to find out more about the 4P model in Indonesia’s energy sector.
Prior to joining MCA-Indonesia in June 2016, Verania managed programs for the renewable energy and climate change portfolio at the United Nations Development Program (UNDP) for seven years. She joined MCA-Indonesia because she saw an opportunity for implementation, starting from designing an innovative model through the construction of the projects, for off-grid renewable energy.
AmCham Indonesia: Tell me a little bit about the 4P partnership model. How did it evolve from the 3P model? Could you tell me how MCA-Indonesia applied the 4P model in the Indonesian energy sector?
Verania: The concept of 4P is often socialized in terms of the involvement of the targeted local community in development projects. Several civil society organizations have already proposed to adopt the 4P model with a focus that is still limited to the importance of prior informed consent and the involvement of the local community in implementation.
This is rather different from what we mean by the 4P model at MCA-Indonesia. We explored ways to ensure community involvement in the project and reduce investment risks. The community is also involved in the professional management of the project post construction. This is different from the 3P model, in which the project is usually handed-over to the private sector with some community members trained and recruited as staff. The 4P model that we introduced here requires community ownership of the business through collaboration with the committed private sector (ie the grantee) in terms of managing the business. And then, there is a government grant, which is the public component.
The 4P model entails sharing investment costs and risks in the management of the project between the public, the private sector and the people. The risks are shared, because a component of the partnership takes the form of stock ownership of a special purposed vehicle (SPV) to operate a built power plant. The community picked a number of representatives to sit on the board of shareholders of the company as a majority shareholder, while our grantee will be a minority shareholder. Therefore, the assets belong to both. If the management quality is low, the risk is shared and the people cannot just blame the private company when the enterprise provides low quality services. The people will also bear the risks associated with operating the enterprise. So, if something disastrous happens to the company that decreases the value of the assets, this burden will also be shouldered together.
In our projects, 96 percent of the funding comes from the public component, that is, the MCA-Indonesia grant. The other 4 percent comes from the private sector and the people. This is how the investment cost is shared. The people’s contribution can take various forms, such as land donation for the construction of the power plant.
This is in contrast to the common practice of renewable energy projects that usually receive 100 percent grant money, which is possible partly due to the small scale of the project — capacity under 200 kilowatts (kW). Our 4P projects are usually medium scale, ranging between 300 kW and 3 megawatts (MW) in energy generation capacity. This type of project is more attractive to the private sector, because of the [larger] size of the market. However, we cannot expect the private sector to shoulder all costs, because the capital requirements are high, due to reasons such as remoteness of the area and the low buying power of the customers. These factors necessitate gap funding in the form of a government grant that will allow the sustainability of the business operation.
The 96-to-4 percent investment ratio was obtained through rapid assessment, considering the project scale, the costs involved and the contribution of all stakeholders. We went with such a generous rough estimate, partly because we want this project to succeed. Moving forward, it would be good to reduce the ratio and that is something we are studying.
The business operation should be self-sustainable; the proceeds collected from the electricity sales have to cover the operational costs of the SPV. The 96 percent goes to the construction, the organizational capacity building and preparedness, technical managerial training, environmental and social safeguards, to obtain permits, and to stimulate productive economic activities that will utilize electricity within the community.
The target is not only to produce electricity for household consumption. We also look at existing productive economic activities for potential added value. To do so, we explored the possibility of diversifying clients, not necessarily catering to commercial clients, but to support the local community in general. We identified existing economic activities in the community and then looked for ways to stimulate technology utilization in those activities through electrification. Let me give you the examples of cashew nuts and boatmakers. Usually, boatmakers use diesel generators in production. But with the project, now boatmakers can use electricity instead. Boatmakers are thus potential clients. Cashew nuts are usually dried under the sun, but now we can help them adopt a technology that would allow them to dry cashew nuts using electricity. It is expected that the improved local economy will increase electricity purchasing capacity of the communities that will sustain the SPV business as utility company.
There are five projects in which we applied the 4P model. In Karampuang, Mamuju, West Sulawesi, we built a solar power plant of 600 kW capacity. In East Sumba, we have a solar power plant distributed into clusters with a total capacity to generate 500 kW of electricity. We have another solar power plant of 1.2 mW electricity generation capacity in Berau. In Mentawai we have a bamboo-fired biomass power plant of 700 kW electricity generation capacity. In Tomia Island, Wakatobi, Southeast Sulawesi, we also have a solar power plant capable of producing up to 800 kW of electricity. In four of the five projects we built solar power plants for a reason. We had planned to build hydropower plants, but due to time constraints, there was a high risk that the construction would not be completed by the Compact end date of April 2. It became a high-risk investment, and we decided to build solar power plants instead.
We received 95 project proposals, which were narrowed down to 18 at the project preparation phase. The number was further reduced to seven at the engineering design stage, and finally we had five that passed all the filters and were allowed to continue with construction. The locations and communities were chosen by the grantees; they justified their choices at the proposal stage. Most of them were focused on the twenty-four priority regencies — as determined by BAPPENAS [the National development Planning Agency] — with whose local governments we have already signed memorandums of understanding.
There’s a lot of room for innovating within the framework of this grant. We do not just follow strict rules that have been laid out previously. The companies are assessed through a monthly report, and based on the long-term goal and conditions on the ground. We adjust the design as we go, according to the needs of the local community. It’s not merely about providing electricity or building a power plant. We always go back to the long-term mission, which is to increase the income of the targeted community.
How does the 4P model accelerate sustainable access to electricity, viability and affordability?
One of the premises that we are dealing with is that when the SPV is managed only by the people, lack of technical and managerial capacity becomes a primary challenge. With shared management between the people and the private sector, it is hoped that the model will be more sustainable.
Another premise is that the project is not economically attractive. With public investment [through the grant] helping to lower costs, it is possible to set electricity prices at a more affordable level. Without the grant, the private company will set a price by considering the return on investment calculation as the main factor. To illustrate, with the grant, the electricity can be sold at Rp 1,460 per kWh. But without the grant, the electricity needs to be sold at Rp 5,000 per kWh. The price difference is huge.
In terms of viability, from the private stakeholder’s perspective, projects with the 4P partnership model are more promising, and thus appealing, than those adopting the 3P model, because the huge capital investment is shared among more stakeholders. It will also be easier for the private sector to take a loan for such projects, since the investment risk in the project is shared.
How do you measure the success of the projects? What are the challenges in implementing the 4P model?
There are four key performance indicators that we used to measure the success of the projects: 1) the capacity and performance of the power plant to produce electricity as planned; 2) the SPV has a strong legal basis, is financially sustainable, and is able to provide good services to customers; 3) diversification of household incomes, which translate into an increase in their disposable income; and 4) environmental impacts and female empowerment or gender equity.
When we opened the bidding process, we did not specify that the grantee had to be a company. It can be a university, a consortium, etc. What is important is for them to have the experience and technical qualifications in developing renewable energy. But after the first screening, all that were left were private companies. Given that private developers of renewable energy made up our grantees, the first challenge lies in the fact that although they have the technical engineering capability, our grant requires them to manage the SPV. The grantees usually expect to leave after the construction of the power plant is completed, but we asked them to stay for at least two years in the joint management of the SPV. Our hope is for the private sector, which possesses the managerial and technical capacity, to help professionalize the management of the SPV. In this way, capacity building for the people can happen through learning by doing. The incentive for the private sector is to be a minority shareholder [ie holding max 49 percent of company stock] for staying for at least two years there. But, at the same time, what this means for the private sector is that they need to put in place trained human resources, and have a vision and development plan.
And then there is a challenge from the people’s side. The people are used to the mindset that everything — the assets — is provided, after which they will select among themselves the operators of the company. But the scale of our project is not small. The five projects range from 500 kW to 1.2 mW in electricity generation capacity. As such, we cannot rely on the technical capacity that only a small number of operators can provide. The challenge lies in selecting the individuals to fill the managerial positions in the company. This was facilitated by our grantee. We set aside funding for such facilitation, which was then used to figure out ways to identify qualified candidates for those managerial positions in a transparent manner. This was a challenge especially since qualified human resources are scarce, but at the end of the day, young entrepreneurs from the village emerged.
In terms of regulation, the challenge lies in obtaining the necessary permits. In order to obtain the permits as a utility company, the SPV has to go through a complicated process, including filing requests, and being assessed on whether they are capable to provide such services as requested. But once the permit is issued, the company owns the business area and is protected from the intervention of other businesses for 20 years. The electricity is sold to the consumers in a pre-paid manner, so there is a lower risk of default when collecting payment from consumers.
Imagine the following scenario. The people invested nothing [since the funding comes from the grant], but the private company invested in the project, and then suddenly the state electricity company [PLN] expands into our area, in which we have no operating permit — of course we will lose to PLN. Thus, it was important that we obtain those business permits, because this way we can ensure some protection for the investment that our grantee made. We eliminated the uncertainty that PLN might one day kick us out of the region.
Permits proved difficult and in the five locations, we did not successfully obtain the necessary permits for two projects, because PLN was too close to the region chosen. In the beginning, PLN did not exist in our target villages, but because President Jokowi mandated 100 percent rural electrification, PLN expanded to include operation in those villages. As such, we changed our business model to accommodate this surprise. Instead of SPVs selling the electricity directly to the people, they get a permit as an independent power producer (IPP) and sell electricity to PLN, which will then sell the electricity to the people. This is another feasible model and entails lower risks, because the SPV has a power purchasing agreement with PLN.
Private investors were required to stay for two years. Did any of them decide to stay longer?
Many of them did, actually, because they see this project as an initial investment that opens the door for them to future projects, through which they can harness the region’s potential for development. With the connections that they made with the local government, they see a scale-up opportunity for more, diversified businesses.
For instance, in Karampuang, our grantee saw the opportunity for ecotourism and agribusiness development. Because they see that it was hard for the local community to obtain food — they have to travel far away everyday to obtain food from Mamuju — because there is a scarcity of shops that sell food, they wanted to build a minimart in the region. This is a form of business diversification that I mentioned earlier.
Another example is our project site in Wakatobi, on Tomia Island, which is a tourism destination. As such, electricity demand will increase with tourism development. Our grantee identified a potential for scaling-up their electricity business to cater to the increase in demand. Their generation capacity is currently at 800 kW, but they might even invest more to expand the capacity.
This is in line with the spirit of the 4P model, which is to bring private investors into unappealing places.
What is the reception of local communities and local governments toward these projects? Any recommendations on how the government could widen participation opportunities for other players to make the 4P model work?
Local communities were initially flabbergasted at the fact that we gave 49 percent of the company’s shares to the private sector. It took time to change their mindset, but nowadays they understand the purpose of doing so.
Local governments are skeptical in the beginning about the private sector getting such a big portion of the company’s shares, despite the fact that the private sector does not make a significant investment, since most of the money comes from the government grant. So we had to explain that this is to incentivize the private sector to go in there and help build the region’s capacity, and that this can also create future opportunities for more private investment in the region.
The local government often asked why we did not give the grant to a regional owned enterprise [BUMD] instead. We explained that if the said BUMD has the capacity as a renewable energy developer, then there is no reason why we cannot do that. But if they do not have the capacity, then there is no added value to the project. This is why we invited the private sector instead. We also told them that BUMDs could operate in the ecotourism sector and then partner with our SPV for electricity supply. Local governments are now very welcoming of our project.
The government should create a partnership scheme between private and public that creates opportunities for smaller scale renewable energy projects, especially off-grid ones. We do not have such a scheme for electricity infrastructure projects yet — but we already have one for water infrastructure and another for road construction. If you look at India today, it had a 3P scheme for minigrid and off-grid electricity projects. It has increased the electrification rate drastically within two years. Nowadays, because there is already a substantial market for such electricity generation, the government’s investment in such projects is almost nonexistent. The industry then becomes fully governed by the market. The difference lies in the fact that we have PLN, and India does not [ie it is a decentralized sector]. But I think we can still learn from the regulation scheme that allows the renewable energy sector, especially the minigrid subsector, to become one of the sectors in which the public-private partnership can be implemented.
How can the 4P model be applied to other sectors? What are the key factors crucial to the success of reproducing the 4P model in other sectors?
Prior to going in, we have to ensure that the sector targeted is public service oriented and the project should cater to basic needs, such as energy, water, housing, food, and public infrastructure. Then there are two factors to pay attention to. Basically, there must be government funding; and then second, the targeted community should be underprivileged in less developed regions.
For the first factor, there needs to be a public fund [grant] which is used as a viability gap fund. Because the nature of the project renders it uneconomical commercially, public funds must be injected to lower the investment cost. In this case, MCA-Indonesia played such a role, but if MCA-Indonesia is dissolved, then it should become the government’s role to ensure the 4P model is implemented smoothly at the systemic level.
Second is regarding the targeted community and location, because if the private sector [grantee] struggles in securing the necessary permits, then no one would want to invest. There needs to be a location that is clean and clear — each area designated either for public-private partnership or for PLN. It is easier to target small islands, because there is a clear physical boundary, and because it is rather costly for PLN to expand there, since it would have to build its grid under the sea. Right now, the regulation does not allow for two different enterprises to provide electricity services within a region. Just imagine that your targeted villages are neighboring villages where PLN is already operating — things may get complicated quickly, because PLN might want to expand into your targeted area, since there needs to be continuity in the grid it is building.
