PROJECTS

Corporate Financial Strategy for Indonesia’s State Electricity Company, Indonesia

The problem

Perusahaan Listrik Negara—Indonesia’s national power company—is one of the world’s largest vertically integrated power utilities. It is engaged in one of the world’s largest electricity infrastructure development programs, requiring US$181 billion in investment over 10 years. However, the regulatory mechanism for the calculation of PLN’s maximum allowed revenue understated the revenue needed for PLN to raise the finance it required. Moreover, the split of the allowed revenue into consumer tariffs and the Public Service Obligation subsidy placed increasing burden on the budget, making the subsidy fiscally unsustainable. If PLN were not able to finance the required investment on its own balance sheet, the government, in addition to providing the PSO subsidy, would also be forced to fund some of the investment program directly, further compounding fiscal risks.

How we helped

Castalia developed a pathway to a sustainable capital structure addressing PLN’s financing constraints. We determined the revenue path required to enable PLN to finance the investment program as a viable stand-alone corporate entity and proposed a regulatory revenue formula that would ensure financial stability of the company. We then facilitated discussions between different stakeholders, including the Ministry of SOEs, the Ministry of Finance, PLN and the Ministry of Mines and Energy to arrive at a consensus position on how the required revenue would be shared between consumer tariffs and a sustainable subsidy. In addition, we showed how PLN can maximise the use of its balance sheet through a combination of asset recycling and contracting services from privately-owned and financed independent power producer and transmission providers.

Impact

Our analysis and consistent engagement with key stakeholders in the Indonesian electricity sector led to PLN and the Ministries of Energy, State Owned Enterprises and Finance being able to reach consensus on the required revenue path to enable PLN to finance its investment program while remaining financially viable as a stand-alone corporate entity within a fiscally sustainable Public Service Obligation subsidy.