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1074

JOSS :

Journal of Social Science

INVESTMENT PROJECT ANALYSIS OF EXTRA FACILITY BUSINESS MODEL

CASE STUDY: PT. PLN (PERSERO) RIAU AND RIAU ISLANDS DISTRIBUTION

UNITS

Silvia Iriani

, S. K. Wiryono

Master of Business Administration, School of Business and Management Institut Teknologi

Bandung, Indonesia

E-mail: [email protected]

, [email protected]

KEYWORDS

Extra Facilities,

Feasibility Study,

Internal Rate of

Return, Net Present

Value, Payback

Period, Profitability

Index.

ABSTRACT

The development of disruptive business and technology has the potential to

reduce the growth of electricity sales. The existence of "Indirect

competitors" who also take advantage of the use of assets that do business

in the electric vehicle ecosystem, companies providing solar PV rooftop

services, and the emergence of new business areas will be a challenge for

PLN. Companies must develop a business model strategy to ensure the

company's financial sustainability, which ultimately ensures the

sustainability of the electricity business in the future. Real improvements

are expected to help companies increase revenue, efficiency, and cost

effectiveness which can ultimately contribute to company revenue. Through

the Extra Facilities business model, as a form of service to meet changing

market tastes, sales strategies need to be implemented for customers who

have special standards and needs. In this regard, the author carried out an

analysis of the investment for connecting Extra Facility services to one of

the prospective PLN customers of the Riau and Riau Islands Distribution

Main Unit using a build-operate-transfer (BOT) scheme. The feasible

indicator that was being used was financial profitability, resulting in IDR.

6,914,249,547 NPV higher than zero. Moreover, this project also gives

certain commitment by generating 17.56% IRR > WACC with a payback

period of 4 years 8 months less than 10 years (based on the term of the

agreement). This indicator is financially feasible because the service fees

charged by PLN to customers can cover/reimburse the costs incurred in

providing these services, with an adequate rate of return/margin. Financially

feasible to conduct with the escalation of +15% and -15%, respectively for

sensitivity analysis, with several variables sensitive to changes in NPV

values such as changes in investment costs, incremental cashflow/revenue,

operating and maintenance costs, and changes in the loan portion. This

variable is also used as a reference in conducting scenario analysis and

Monte Carlo analysis with a mere 1.27% probability of a negative NPV. The

project has an estimated COD at the end of 2024.

INTRODUCTION

In the era of disruption that we live in today, changes occur so fast and unpredictable,

that many factors are difficult to control. Companies are required to have competent adaptive

Volume 2 Number 12 November 2023

p- ISSN 2963-1866- e-ISSN 2963-8909

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Case Study: Pt. Pln (Persero) Riau And Riau Islands Distribution

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and exploratory capabilities. Based on these challenges in the electricity business run by PT.

PLN (Persero), the company must develop a business strategy to ensure the financial

sustainability of the company which in turn is for the sustainability of the electricity business

for the future. Measures such as increasing sales through digital-based marketing strategies

to improve service to consumers, accelerating cash in for company operations and cash flow,

in accelerating connections to increase revenue are strategic steps for the company's financial

sustainability. This involves managing its financial resources in a way that ensures it can

continue to operate, meet its financial obligations, and achieve its objectives without relying

solely on short-term funding or unsustainable practices. For this reason, PLN as a company

with very large assets, must prepare a good planning program to obtain optimal benefits from

its assets. Awareness of PLN's business processes needs to be built as a business company

and not just an operation company. PLN must increase the growth of prospective/existing

customers to overcome the issue of non-subsidized customer revenue models (Reksono &

Rahim, 2023). It is hoped that this Extra Facility investment analysis model can become one

of PLN's future solutions for increasing its income (Bai et al., 2023).

PT. PLN (Persero) is a state-owned company engaged in the business of providing

electricity, starting from generation, transmission, distribution, and retail sales of electricity

(Adi, 2023). Throughout 77 years of journey, PT. PLN (Persero) is one of the companies

with the largest assets in Indonesia of Rp. 1.613 trillion (PT. PLN (Persero) Financial Report

2021 audited). Due to the wide scope of PLN's working area, in terms of electricity

distribution services, PLN divides the functions of its main unit into several main units spread

throughout Indonesia.

Increasing uncertainty in the business environment requires companies to increase

preparations to maintain business continuity. With the development of disruptive business

and technology (electrification of the economy, renewable energy, new technology, shifting

profit pools, and new competition) it has the potential to reduce electricity sales growth and

change electricity business patterns. PLN must look for other solutions to increase sales to

ensure sustainable company growth, such as high revenue growth and accelerated cash

inflow (cash is king). Real improvements are expected to help companies increase revenue

and cost effectiveness which can ultimately contribute to the company's financial

sustainability. Companies must look for new business solutions as additional facilities and

diversify their business to meet changing market tastes in sales strategies (beyond kWh)

(Chesbrough, 2011).

The research objective is to propose a business model using financial criteria in the

form of IRR and NPV to increase company revenue. The priority here is apart from PLN's

obligations as public service obligations and other mandatory work that must be carried out.

Investment analysis will be focused on business development by PLN collaborating

with subsidiaries, to meet the demands of prospective customers who require large

investment costs but have a limited budget. Through the calculation of the feasibility study,

a large rate of return (IRR> WACC) will be obtained, and positive future cash receipts

(NPV> 0).

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METHOD RESEARCH

This research uses primary and secondary data analysis. Secondary data is based on

data published by the company, namely the (Annual Report PT. PLN (Persero), 2022),

information from PT. PLN, presentation material from PT. PLN, and regulation from the

government. Other secondary data collection by looking for references to books and articles

related to case studies on the offered business model comes from libraries and the internet

that support theoretical analysis, business economics, as well as regulations and regulations

set by the government in the electricity sector.

Primary data is a collection of data derived from the results of meetings with several

prospective customers who require reliability, aesthetics, and special treatment for the

construction of electricity infrastructure which involves calculating the suitability of tariffs

regularly paid every month.

Research Design

Figure 1

Research Design

The challenge faced by PLN is managing the capital budget for preparing investment

work scenarios to generate good long-term returns. Business analysis is carried out both

internally and externally in this study, the project's financial feasibility study is then

calculated to generate good company returns, and most identified will use a quantitative

approach. For this study, the theoretical framework can be seen in Figure 4.

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RESULTS AND DISCUSSION

A feasible financial analysis is required to assess the feasibility of new business models

to increase revenue for the company (Teece, 2010). this value creation is doing business not as

usual. Beyond kwh is needed for business diversification. Feasible projects can be identified

using financial studies such as the internal rate of return (IRR), Net Present value (NPV), and

small payback period. A cash flow is projected and calculated using estimated revenue and

O&M cost of the new business model.

Project Cost Structure

To assess the feasibility of the project, two main components are evaluated: Capital Cost

and Operational cost (O&M cost). The following are the general assumptions used in financial

calculation carried out:

Table 1

General Assumption Financial calculation

Scheme

Bot

Build Operate Trasfer

Investement cost

16.196.272.000

IDR

O & M Cost (2% from investment)

323.925.440

IDR/Year

Depreciation

1.619.627.200

Capex/lime time

Interestrate

9,70%

RKAP PLN

Connecting power (kVA)

3.565

Adapt to customer requests

Minimum hour/month

400

Minimum customer usage hours,

negotiable with customer

Minimum energy (kWh/year)

16.632.000

Minimum energy as revenue

certainty for cost recovery agreed

with customer

Incremental cashflow or

revenue/year (IDR)

5.987.520.000

Based on average customer usage. In

this project 400 hour/month

Lime Time

10 Year

Negotiable with customer, in this

project we use 10 years

Inflation

3,6%

RKAP PLN

Government tax

22%

Tax Rate Idn

Equity project portation

50,0%

Debt Project Portation

50,0%

Capital Cost

Capital cost is associated with initial investment incurred by investors during the pre-

development and construction phase of the project. All costs incurred in extra facility services

will vary depending on the project being undertaken. In general, for this project, the capital

cost consists of the cost of procuring the main components, development services, and the

licensing process. This project is estimated to be completed within ten (10)-twelve (12) months.

the period starting 2023 to 2024.

Operational Cost

Operational Cost consists of Fixed cost as a B component, namely all process costs

related to preventive maintenance and operation expenses during the agreement process period

(in this project for 10 years).

Depreciation and Amortization

In this case, the depreciation of the infrastructure built is based on the year of the

agreement (in this project for 10 years) so the depreciation is calculated over 10 years.

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Taxes and Projected Cashflow

In this project, the ratio used refers to the subsidiary loan scheme to the parent company,

with the ratio used in the calculation being 50:50 in financial analysis, and amortization is not

calculated because the tangible assets are not registered. So only taxes and depreciation will

affect the cash flow calculation.

Cost Of Debt

Cost of debt is the percentage of fee payable by the firm to get loans, Cost of debt is

determined by the interest rate charged to the firm. In this research, the BOT business model

uses using same assumption of debt variables in long-term and short-term debt. The company

uses debt as a source of financing to support investment.

𝑟

𝑖

= 𝑟

𝑑

𝑥

(

1 − 𝑇

)

𝑟

𝑖

= 9,7% 𝑥

(

1 − 22%

)

= 7,57%

Table 2

Cost Of Debt

Variable

Value

Source

Interest Rate

9,70%

Based on RKAP PLN

Effective Tax Rate

22,00%

Cost Of Debt

7,57%

Cost Of Equity

The cost of equity is the required return that shareholder expect as compensation for

bearing the risk of their investment. The higher the risk of investment the higher the return

expected by the investor.

The cost of equity is calculated by using the Capital Asset Pricing Model (CAPM) which is

suitable for developing markets. The calculation can be determined by using the below adjusted

CAPM model.

Cost of Equity = Risk-Free Rate + Levered Beta x Equity Risk Premium

Table 3

Cost Of Equity

Variable

Value

Source

Levered

Beta

0,91

Risk Project. Slope revenue PLN&IHSG

Risk-free

rate

6.60%

IBPA Government 10Y-BOND yield

Equity

Risk

Premium

7,89%

Damodaran

(https://pages.stern.nyu.edu/adamodaran/New_ho

me_page/datafile/ctryprem.html)

Cost of equity 13,78%

The result of calculating the average Cost of Equity is 13,78% using the assumption of

Risk Project, IBPA, http://www.marketrisk-premia.com/id.html, and Damodaran

(https://pages.stern.nyu.edu).

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Weighted Average Cost of Capital

To calculate the weighted average cost of capital, we use the debt and equity portion to

reach WACC. WACC reflects the average future cost of funds over the long term as well

(Team, Wallstreetmojo, Ashish Kumar Srivastav, Dheeraj Vaidya, CFA, 2023).

WACC = Weight of Debt x Cost of Debt after tax + Weight of Equity x cost of equity

From the data cost of debt and cost of equity above could be summarized as follows:

Table 4

WACC

WACC Calculation

Waight

Cost

Weighted Cost

Cost Of Debt

(After Tax)

Calculated

50.0%

7,57%

3,78%

Cost Of Equity

Calculated

50,0%

13,78%

6,89%

WACC

10,67%

Net Present Value

One of the criteria used to analyze the project feasibility is Net Present Value, where the

future cash flow should be discounted to its present value using the WACC discount rate. Based

on the calculation, the NPV of the investment of the project is IDR 6.914.249.587, - (positive)

therefore it is feasible.

Internal Rate of Return (IRR)

The internal rate of return is the discount rate that makes the Net Present Value (NPV)

of all cash flows equal to zero in a discounted cash flow analysis. The IRR value is greater than

the discount rate, meaning that the project is profitable. Based on the calculation of the IRR

value of the BOT business model, it is 17,56% greater than the WACC, which is 10,67%.

Payback Period

The payback Period is the time needed to return the investment (break-even point = 0).

The faster the payback time, the smaller the risk and the more attractive the investment.

Conversely, the longer the return on investment, the greater the risk and the less attractive the

investment will be. Based on the calculation of the payback period, the resulting BOT scheme

is 4 years and 8 months under the installment period determined for 10 years. So, the break-

even point generated in this project is 5 years.

Profitability Index

The profitability index is a method of calculating the feasibility of a project by comparing

the total present value of the cash flow value with the investment value of the project.

Profitability Index = (Net Present Value + initial investment) / Initial Investment

Based on the calculation, the profitability index of the investment BOT scheme project is 1,427

greater than 1, so the project is profitable.

Sensitivity Analysis

Sensitivity analysis is calculated with the following parameter variations.

a. Investment Cost

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Investment costs increase due to increasing capital costs due to increases in material

prices, political and social stability, or the influence of exchange rates and national income.

Based on sensitivity analysis, a 15% increase in investment costs will cause the NPV to

decrease to IDR 3.353.397.200, - while the IRR is 12,62%. This value is still greater than

the WACC of 10,67%. So, the project is said to be feasible if the increase in investment

costs is 15%.

Table 5

Sensitivity Analysis in Investment

Invest

ment

Base

+5%

+10%

+15%

-5%

-10%

-15%

Investm

ent cost

(IDR)

16.196.27

2.000

17.005.08

5.600

17.815.89

9.200

18.625.71

2.800

15.386.45

8.400

14576.64

4.800

13.766.83

1.200

NPV

(IDR)

6.914.249.

557

5.727.298.

792

4.540.347.

996

3.353.397.

200

6.101.200.

383

9.288.151

.179

10.475.10

1.974

IRR

17,56%

15,80%

14,16%

12,62%

18,46%

21,52%

23,76%

b. Incremental Cashflow/Revenue

Incremental cash flow or revenue is based on the minimum customer energy calculation

(kilo-watt hours) x monthly sales rate set for the customer. In this project, the monthly

selling rate for Extra Facilities is IDR 360/kWh. Based on sensitivity analysis, the NPV was

obtained at IDR 2.502.010.217, - and IRR 12,05%, which still has the potential to be

profitable when income falls by 15%.

Table 6

Sensitivity Analysis in Incremental Cashflow

Incremental

cash flow

Base

+5%

+10%

+15%

-5%

-10%

-15%

Usage hour

400

420

440

460

380

360

340

NPV (IDR)

6.914.2

49.587

8.384.9

96.004

9.855.74

2.501

11.326.4

88.957

5.443.5

03.131

3.972.75

6.674

2,502.01

0.217

IRR

17,56%

19,32%

14,16%

12,62%

18,46%

21,52%

12,05%

c. Operation and Maintenance Cost

Operation and maintenance costs are 2%-3% of the investment value (in this project the

O&M cost limit is 2% x investment costs). For every 15% increase in operating and

maintenance costs, the NPV value will decrease to IDR 6.687.967.270, - and IRR 17,27%.

The project still has the potential to be profitable when operating and maintenance costs

increase by 15%.

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Table 7

Sensitivity Analysis in O&M Cost

Operation &

Maintenance

Base

+5%

+10%

+15%

-5%

-10%

-15%

O & M Cost

323.92

5.440

340.121

.712

356.317.

984

372.514.

256

307,729

.168

291.532.

896

275.336.

624

NPV (IDR)

6.914.2

49.587

6.838.8

22.148

6.763.39

4.709

6.687.96

7.270

6.989.6

77.026

7.065.10

4.466

7.140.53

1.905

IRR

17,56%

17,47%

17,37%

17,27%

17,66%

17,75%

17,85%

d. Changes in Loan Proportion

Based on sensitivity analysis when changing the funding proportion using 90% liability,

an increase in NPV was obtained to IDR 8.848.218.523, - and a decrease in IRR to 16,09%

with a Payback Period of 5 years and 0 months. This loan proportion limit still has the

potential to be profitable in the project even though there is a loan interest expense as a cost

of funds (tenor 5 years), but the payback period activity is slightly higher than the base case

and returns are decreasing.

Table 8

Sensitivity Analysis in Loan Promotion

Changes in

loan

proportions

Base

50%

60%

70%

90%

WACC

10,67%

10,05%

9,43%

819%

NPV (IDR)

6.914.249.587

7.356.009.497

7.824.395.919

8.948.218.523

IRR

17,56%

17,19%

16,82%

16.09%

Payback

period

4 year 8

month

4 year 10

month

4 year 9

month

4 year 10

month

5 year 0

month

From the sensitivity analysis in investment with a discount rate calculation of 10.67%,

the sensitivity level allowed is only sufficient for a 15% increase in investment costs, while if

the increase in investment exceeds 15% then the project is not feasible. The following is an

overview of the sensitivity analysis of the project.

Table 9

Sensitivity Analysis Recap

parameter

Base

investment

Incremental

cash flow

O & M Cost

Debt Portion

Variation

15%

-15%

15%

90%

IRR (%)

17.56%

12.62%

12.05%

17.27%

16.09

NPV (IDR)

6.914.249.587

3.353.397.200

2.502.010.217

6.687.967.270

8.848.218.523

Payback

period (Year)

4,66

5,583

5,75

4,75

Table 12 shows that in the case of variations in the parameters reviewing the project Extra

facilities for connecting potential customers remain potentially profitable.

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Figure 2

NPV Tornado Chart

Figure 3

IRR Sensitivity Tornado Chart

Risk Analysis (Monte Carlo Analysis)

Table 10

Descriptive Statistics

Min

(109.932.319.76)

Max

13.275.413.072,99

Mean

6.616.105.600,77

Standard deviation

2.960.043.781,84

Median

6.498.999.195,75

Kurtosis

(0,75)

Skewness

(0,05)

Prob NPV<0 (Worst Case)

1,27%

Based on Monte Carlo simulation, the minimum NPV is negative while the maximum is

at (IDR) 13.275.418.072, -. The mean NPV at (IDR) 6.616.105.600, - is slightly lower than the

base scenario. The negative value of kurtosis -0,75 indicates that data distribution has a lower

peak than normal distribution. The positive value of skewness at 0,05 indicates that indicating

that most of the distribution is in low values. This project has a probability when NPV (worst

case) is less than 1,27 % as such this risk probability needs to be considered by management.

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Figure 4

Monte Carlo Chart

Scenario Analysis

Table 11

Scenario Analysis

Parameter

Input Cell

Worst Case

Base Case

Best Case

Monte Carb

Simulation

Remarks

Operation &

Maintenance

(IDR)

307.231.075

372.514.256

323.925.440

275.336.624

307.231.075,00

Range

(85%115%

Incremental

cashflow/revenue

(IDR)

362,00

340,00

400,00

460,00

362,00

Range

(85%115%

Investment cost

(IDR)

18.492.020.310

18.625.712.800

16.196.272.000

13.766.831.200

18.492.020.310.00

Range

(85%115%

Debt portion (%)

39%

58%

50%

43%

39%

Range

(85%115%

NPV (Mio IDR)

1.655.535.678

(97.751.351)

6.748.765.464

13.595.282.27.8

IRR Project

10,73%

8,64%

17,38%

27,89%

PBP (Years)

6,66

4,66

3,42

0,92

1,33

1,91

Range Of NPV

IDR

13.693.033.629

Probability

0,93%

50,93%

0,01

Based on the analysis scenario above, the probability of the risk of the worst case

occurring is 0,93% with NPV <0 while IRR = 8,64% and the payback period is 6,66 years. If

the company runs according to the base case probability of occurrence of 50,93% then the NPV

is > 0, and the project IRR = 17.38% with a payback period of 4.66 years. If the best-case

condition occurs then the NPV is > 0, IRR = 27,89% while the payback period is 3,42 years.

Based on the scena(rio analysis above, it shows growth, which can offer financial benefits for

the company.

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Proposed Investment Strategy

The investment strategy can be carried out by either holding itself or handing it over to a

subsidiary company to manage the cooperation. If it is managed by a subsidiary, most

investment costs will be covered by the holding company's loan.

Risk Management

In this chapter, we would like to identify the risk that could undermine the objective of

the Extra Facilities Business Model. Based on Monte Carlo Analysis the probability of the

result NPV < 0 is 0,93%. However, of course, the result of the analysis cannot be fully used as

a reference and further mitigation needs to be carried out regarding the potential losses that

may be experienced. The risk could be identified based on the following risk, or the risk

management consists of three processes, which are identification, analysis, and mitigation. The

proposed risk management of the project is explained in Table 12.

Table 12

Proposed Risk Management of Extra Facility

Identification

Analysis

Evaluation ( Mitigation)

Cause

Impact

Incremental cash

flow (revenue)

Customer usage

decreases so that

operating hours

decrease

Income decreases which

will affect project

income/net income

Determining a binding

minimum target for

customer usage hours

during the contract period

Investment cost

Increasing cost of

capital due to

interest rate

polocies and

monetary

tightening in

major currency

coubtries

Increasing investment

cost

The funding side from

creditors during the

project period uses a fixed

interest rate scheme

issuing corporate

bonds/bonds to obtain

funding at lower costs

with interest and loan

payment tems adjusted to

the company’s

circumstances.

inflation

Conditions of

economic, social

and political in

stability

Increasing cost of

production

Monitoring project work

progress and placing

orders for main materials

in advance

Delay in project

execution

Delay in making

project decision,

delay in licensing

process, delay in

plant material

delivery,delay in

constraction and

custom issues

Decrease in project value

due to CoD delays has

material/revenue (time

value of money) and non-

material impacts

Online single submission

(OSS) application,

electronic consultancy,

standard tender

documents, setting

cooperation patterns for

severa, parties, e SCM

Monitor work projects

periodically with vendors

and impose fines on

vendors if delays accour

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Justification Of Implementation Plan

In this chapter, the author is aware of the latest issuance of Board of Director regulation

no 0049.P/DIR/2020 as service guidelines for using electricity with extra facilities by PT. PLN

(Persero). The purpose of this regulation is to provide a solution for customers who need extra

facilities, minimize potential sales loss in kwh caused by sensitive load outages on the

customer's side, as well as obtain additional potential sales from customers or potential

customers. The IRR for service offerings is at least 13% (thirteen percent). The amount of ROK

(risk overhead profit) for service offerings is at least 5% (five percent). The proposed IRR of

13% (minimum) and 15% (as initial calculation) and ROK 5% (minimum) and 7% (as initial

offer) is enough to provide an adequate profit margin for PLN so that customer requests for

extra facility services are worthy of being followed up.

As a rule, the component determined in a service solution is not the amount of the service

fee rate, but rather how to calculate the service fee which is reflected in the agreed IRR or

ROK. So, whatever the estimated costs incurred will provide information on the amount of

service costs by the approved IRR/ROK margin.

CONCLUSION

Realization of beyond kWh revenue did not reach the 2022 RKAP target, so to anticipate

potential opportunities and disruptions in technology, it is necessary to develop beyond kWh

Product and Business Innovation and the concept of developing derivative business products.

PLN answers the challenge of continuing to grow in serving customer needs by utilizing its

assets, infrastructure, and services that are spread all over the country. In line with the spirit of

transformation, PLN is innovating to provide comprehensive solutions for customers,

presenting new services based on the assets and resources that PLN has. Increasing electricity

revenue and beyond kWh through managing B2B Key Account relationships, industrial areas

and special economic zones, BUMN, government, and institutions which in turn can contribute

to the company's financial sustainability. For the development of extra facilities beyond kWh,

financial analysis is performed with some assumptions made to assess the feasibility of the new

business model from a perspective model of finance. In this project, the financial evaluation

uses base case calculation associated with the following method: (i) IRR on the project is

calculated from the outflow stream of investment versus the inflow stream of net profit. (ii)

Depreciation is assumed to use a double declining balance on a salvage basis. (iii) The monthly

installation is paid fixed price refers to the connected power and minimum on-time hours.

The feasible project can be identified if its interest rate of return (IRR) is above the

expected return Net present value (NPV) is positive and a small payback period to mitigate the

risk. A cash flow is projected and calculated using estimated revenue and O&M cost of the

equipment, the cost depends on the project being carried out and the project lifetime. The

feasible indicator that was used was financial profitability, resulting in IDR 6.914.249.587, -

NPV higher than 0. This project also gives certain commitment by generating 17,56% IRR on

the project with a 5-year payback period of less than 10 years (based on the agreement term of

the agreement). This indicator is financially feasible because the service fees that PLN applies

to customers can cover/recover the costs that arise in providing these services, at a sufficient

level of return/margin.

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Case Study: Pt. Pln (Persero) Riau And Riau Islands

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Sensitivity analysis of the change for installment price, cost, and effective interest rate

where it is still financially feasible to conduct with the escalation +15% respectively. Likewise,

incremental cash flow decreased by 15%, operating and maintenance costs increased by 15%,

and in terms of funding, changes in the loan proportion to 90% debt still provided profitable

potential for the project.

In analyzing project risks, scenario analysis involves assessing the impact of various

possible scenarios or future conditions on the results of a decision or project. Several risks can

still be controlled with existing internal controls and mitigated so that these risks can be

accepted. Meanwhile, for risks whose level of measurement is still high, a contingency plan

will be carried out so that the risk becomes an acceptable level. Overall, based on the scenario

analysis above, it shows growth that can provide financial benefits for the company.

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Silvia Iriani

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(2023)

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