Ten years after the Asian financial crisis slowed the last round of power development, a new wave of Indonesian power projects is moving towards financial close in the worst lending conditions for decades.

At the centre of the energy plan is the 10,000MW Fast Track electric power programme of plants to be owned by PT Perusahaan Listrik Negara (PLN), the state electricity company. In addition there are an additional 11,000MW of IPPs being considered by various sponsors.

Realistically a lower volume of power plants will actually get built over the next five years, but activity will nonetheless still be running at a high level. "There are three financings currently in the market, for Paiton 3, Cirebon, and Tanjung Jati B, and they are all club type deals rather than underwritten," comments a banker. "Pricing is something banks are still getting their heads around, but maybe it will be 100bps more than back in early 2007."

 "Indonesia has requirements for a sizeable number of new power plants, and some of these are at an advanced stage and are in the process of putting financing in place," comments Rajeev Kannan, Head of Structured Finance Asia Pacific at SMBC in Singapore. "Long dated deals in Indonesia will need ECA cover, and lenders are looking at ways to mitigate counterparty risks in offtake agreements," adds Kannan. "PLN is the offtaker in most large scale power projects, and there may be a letter of support to the ECAs provided by the Indonesian government."

Direct loans from lenders such as Japan Bank for International Cooperation (JBIC) will be at the centre of transactions, with the balance covered by various ECAs. Export-Import Bank of Korea is heavily involved, supporting companies such as Doosan Heavy Industries as EPC contractor. And Chinese EPC contractors are also playing a bigger role across south-east Asia, and Chinese ECA support is likely to grow in volume.

The key to kickstarting the power sector, after the lost years in the wake of the Asian financial crisis, is the Umbrella Note of Mutual Understanding (UNMU) signed between JBIC and the Indonesian government in September 2006. The UNMU covers IPP and PLN-owned projects that JBIC lends into, and affirms that the government is committed to enabling PLN to meet its financial obligations as a public entity. This general agreement takes the place of guarantees on specific projects.

However, as always the devil is in the detail, and with a number of projects moving towards financial close there have been some difficulties encountered, including with the Cirebon financing.

Cirebon problems

Last year Marubeni Corp signed a deal to build a 660MW IPP located in the Cirebon area of West Java, and supply electricity to PLN under a 30-year Power Purchase Agreement (PPA). Its partners are Korea Midland Power (Komipo), Indonesian company Tripatra Engineers and Constructors, and Korean company Samtan.

Total project costs are around $750 million, which makes it the largest Indonesian IPP since the Asian economic crisis. The project company is PT Cirebon Electric Power. At the time the PPA was signed in August 2007 Marubeni said that financial close was expected within one year, but given the financial markets crisis this has slipped.

JBIC and Kexim could provide up to two thirds of total debt via direct loans, with the balance in the form of covered bank debt.
One issue with Cirebon centres on the allocation of coal supply risk, where lenders typically want to see some sort of protection in the event of domestic coal supply disruption, including force majeur events such as natural disasters.

But long term power offtaker PLN is attempting to shift some of this fuel supply risk onto the project companies, and leave the IPP operators to come up with their own insurance or other mitigants against fuel related shortfalls in electricity production sold to PLN.

"PLN is saying to project sponsors, you can take that risk so go and sort that out with the coal supplier," comments one lawyer. "But that is a very difficult risk to ask project sponsors and lenders to take on projects that are essentially being built to exclusively supply PLN."

PLN owned projects should be easier to finance. In August PLN sent out a request for proposals (RFP) for a small $120 million ten-year project loan to fund the development of a coal fired steam power plant in Lampung, at the southern tip of Sumatra.

The facility will receive a full and unconditional guarantee from Indonesia's finance ministry, which will cover 85% of EPC contract costs. This is expected to be done as a club deal.

Domestic fuel source

In spite of the arguments about coal supply risk, it is a key advantage for Indonesia that its power plants are fuelled by huge domestic reserves of coal, which sidesteps the problem in many other jurisdictions of power plants being dependent upon dollar denominated imported oil and gas while producing local currency revenues.

As the World Bank has noted, a major element of the Indonesian government's energy policy is to promote the use of domestic coal to fuel power projects, alongside the export earnings from export of coal.

There has been some controversy within Indonesia about striking a balance between supplying coal for domestic electricity while also keeping up hard currency earnings as the world's largest exporter of thermal coal. The government policy is to export the more valuable high grade coal, while keeping lower grades for domestic usage.

One of the projects moving towards financial close is Paiton 3 located 150km southeast of Surabaya. On 4 August Mitsui announced that PT Paiton Energy signed a long term PPA with PLN for the expansion project (Paiton 3) at the Paiton complex in East Java.

PT Paiton Energy is 45% owned by IPM Eagle (a partnership between International Power plc and Mitsui), 36% directly by Mitsui, 14% by Tokyo Electric Power, and 5% PT BHP. Mitsui has been a major shareholder at Paiton since 1994 when the first phase of the project got underway.

PT Paiton will build, own and operate Paiton 3, and Mitsubishi Heavy Industries has signed a fixed price EPC contact to construct the 815MW coal fired plant. Total project cost is estimated at $1.4 billion.

Since the expansion project will use existing on site facilities such as the coal yard, coal conveyer and wastewater system, a reduction in capital costs is possible. Commercial operations are targeted for 2012.

Financial adviser is Bank of Tokyo Mitsubishi UFJ. Japan Bank for International Cooperation will be heavily involved, and financial close is expected in the first quarter of 2009. Lead arrangers include Mizuho, SMBC, Calyon and BNP Paribas.

Ghost of Paiton still lingers

It is often said that bank lenders have short memories, but nonetheless the problems that beset the original Paiton deal continue to cast a shadow over Indonesian project finance activity. Though financial close was back in 1995, the debt restructuring package was only completed in 2002, so it is a fairly recent event and many of the same bankers are working on the new Indonesian projects.

Paiton was at the centre of many problems with Indonesian project finance, with cronyism linked to the political elite alleged to have substantially increased the original project cost. The project was also unlucky, suffering simply from bad timing. Financial close was in 1995, and the facility came onstream in 1999 in the midst of the Asian financial crisis. Unable to repay its debts, Paiton had to restructure, which included delicate talks with ECAs with which it was anxious to preserve good relationships.

So the Indonesian power sector survived the crisis and left itself in a position to continue to attract debt and equity. New power generation capacity is of crucial importance to the government, which will not want to see foreign equity and debt dry up because of a Paiton repeat.

As a lawyer notes, after several years of reduced investment, demand is once again challenging the capacity of existing infrastructure in Asia, and we have entered a new phase of development and investment. And he views Chinese financial support as crucial, alongside support from Japan and Korea.

Chinese support?

"Chinese contractors and financial institutions are quickly coming up the learning curve," he says."The structures and financing packages employed by the regional heavyweight Japan Bank for International Cooperation (JBIC) and recently embraced by the Export-Import Bank of Korea (KEXIM) are increasingly being adopted by new participants, notably China Exim and Sinosure.

"Chinese firms supported by generous government-backed financing are making their presence felt throughout the region, with aggressively priced construction and supply contracts," he adds. "The project owners and developers in the Philippines, Thailand, Laos, Vietnam and Indonesia may be the immediate beneficiaries of China's appetite for growth."

Certainly in Indonesia, in 2008 the fundamentals still look good in spite of the great uncertainty over the direction of the global economy. Even in European jurisdictions that were once considered safe bets project lenders have to consider the political risk of arguments between Russia and gas importing countries resulting in fuel supplies being disrupted at some point in the life of a project.

So in spite of political risk, and the problems in the recent past with the Paiton financing, international bankers remain well disposed towards Indonesia. Once the current global liquidity crunch (hopefully) eases, and problems with credit committee clearance and Libor funding levels are resolved, covered commercial bank debt is likely to be available for Indonesian power projects.