With two major LNG projects up for financing in the next 12 to 24 months, and fundraisings or refinancings in numerous other energy related sectors, Indonesia is back on the map as a target for Asian project finance business. Assuming political and economic stability, this is as it should be: ?Along with China, Indonesia has the potential to be the largest natural resource finance market in Asia,? says Bruce Macfarlane, senior vice president in the Integrated Energy and Infrastructure division at ABN Amro Singapore.

Nevertheless, given the scale of Indonesia's recent political and economic problems, the current focus for virtually all foreign banks is on energy ventures which can generate US dollar revenues, revenues which can be easily trapped in a trust or escrow account. ?Whatever Indonesian project is on the table, it's got to produce a commodity which can be sold internationally to get a substantial volume of off shore funds,? says Najeeb Haider, director at Citibank's Hong Kong project finance department.

LNG and oil developments are therefore in. Power sector deals, while not quite out, are being treated with considerable caution. ?It would be extremely difficult to do a new power project financing in Indonesia. At the moment Indonesian power sector transactions are limited to several high profile restructurings or refinancings,? notes a second Hong Kong-based banker.

If Indonesia's economy picks up this year, the difficulties of tapping foreign finance for power projects could leave the country with a serious electricity supply shortfall within a few years. ?PLN, the state electricity company, wants over $10 billion in foreign loans to build new generating plant and transmission. But it's going to take another couple of years of firm economic growth and very attractive internal rates of return for these projects before financiers are going to lend in significant volumes,? predicts the Hong Kong source.

That's not to say that purely domestic energy sector deals are all unbankable. ?Small deals could be done onshore,? thinks Macfarlane, as there is liquidity in the Indonesian financial markets. ?At the moment, up to the equivalent of about $100 million of project debt could be sourced through domestic bonds,? estimates the financier.

Foreign finance houses have set other conditions for new financings in the country: banks for the most part will only consider working with Indonesian sponsors who have at least a five- or six-year commercial history. ?Companies which have proven their mettle by withstanding the Asian crisis,? explains one source.

In general, the finance community is also looking for extra sponsor support and a greater proportion of project equity than with equivalent projects in countries such as China. But the exact mix of financing structure, corporate, limited or non-recourse will, naturally, depend on the characteristics of each project.

Political risk insurance won't be absolutely vital. ?For shorter tenors it might be possible to arrange a fundraising without PRI,? says Macfarlane. For longer term deals, over five years, or for substantial financings, over $100 million, some level of export credit or multilateral agency (MLA) support will be necessary, thinks the ABN Amro official. To what degree this support is needed is another question. ?There's probably a minimum ratio for Indonesian deals of 50:50, covered to uncovered, depending on the structure. Some financings will require 100% cover,? thinks the banker.

Just like the banks, MLAs are, once again, targeting energy developments in the country. Three apparently significant Indonesia-related MLA developments occurred recently. First, Japan has pledged to Jakarta (according, that is, to the Indonesian Minister of the Economy) that it will resume the financing of billions of US Dollars' worth of energy projects which were put on hold during the late 1990s (more on that below). Second, US government agencies are stepping up their activities in Indonesia, a shift connected with President Bush's promise of economic support for Indonesia, as the US looks for allies in its war on terrorism. Third, the Asian Development Bank (ADB) is considering disbursing between $1.15 billion and $1.2 billion in loans that were put on hold last year because the conditions for the loans had not yet been met.

Leading the way, the Overseas Private Investment Corporation (Opic) announced in February that it would provide support of up to $350 million in financing for two offshore oil and natural gas projects (in the Makassar Straits off East Kalimantan) sponsored by Unocal Corporation and Pertamina.

Opic's financing nearly single-handedly fulfills a 2001 joint initiative of Opic, the U.S. Export-Import Bank, and the US Trade and Development Agency to provide $400 million in loans and guarantees to finance US investments in Indonesia. OPIC is providing a $300 million loan to the first project, West Seno I. West Seno II, will receive a $50 million loan from OPIC.

Still up for grabs

Two upcoming oil and gas projects exciting considerable attention amongst bankers are the Tangguh LNG plant in the Papua province, a joint undertaking between Pertamina, BP Indonesia, British Gas, Mitsubishi Corp and Nisseki Mitsubishi Oil, and Pertamina and Total FinaElf's Train I project at the Badak plant in Bontang. Project Finance understands that Tangguh's sponsors have appointed IBJ as financial adviser for the financing, but Pertamina has not chosen a financial adviser for Train I at this stage. Senior sources at BP Indonesia say that financial commitments for the Tangguh project could be secured this year, but financiers are more skeptical. ?The scheme has great potential, however the sponsors still have quite a long way to go in successfully contracting out their volumes and in their discussions with the banks. At best I think we'll be looking at a financing next year,? says a Singapore-based source.

There is currently some confusion about which financing approach the sponsors will opt for. A second banking source suspects that the bulk of the financing (estimated funding need is about $2 billion) will be on a predominantly corporate rather than project basis at the start. ?A limited recourse facility could then kick in later,? adds the Singapore banker. But BP Indonesia sources say the company wants a limited recourse financing with as little corporate support as possible (a quite different strategy to the oil giant's heavily-supported SECCO deal in China).

In contrast, a financing for Train I is a real possibility in 2002, says Robert Johnson, director, project finance and advisory at SG in Hong Kong. This ninth train is the latest in a long line of expansion programmes for the plant. Train G was completed in 1997 and train H was completed in 1999 at which point the plant became the biggest LNG producer in the world. Limited recourse financing is highly likely for this project, say bankers.

Whatever the project in question, banks involved in the Indonesian market are out to reduce convertibility and transferability risks to almost zero. The key risk that remains is then a contractual one. Here the precedent in the Indonesian oil and gas sector is surprisingly good. ?In the project finance arena I am not aware of any instances where Indonesia has not honoured an existing production sharing contract,? says Macfarlane.

Geraint Hughes, a lawyer at Clifford Chance, Singapore, adds that legal practice in Indonesia has improved thanks to pressure from the World Bank in the aftermath of the Asian crisis. ?Foreign investors and creditors often complained of a lack of transparency in court rulings involving foreign interests and local Indonesian concerns,? says Hughes. ?A wholesale review of the legal process appears to have laid the foundations for a major improvement in this area. However, there have been limited recent cases to test the effectiveness of the new system.?

One recent legal change that has caused consternation is the redrafting of Indonesia's oil and gas law. Changes to the old law took effect in November last year. According to the new legislation, the government must restructure Pertamina's historic monopoly of the country's oil-and-gas sector, including the right to market LNG. Pertamina will become a limited liability company in early 2003, and its supervisory role of the country's oil and gas industry will be transferred to a special government body.

?The new law has introduced an element of uncertainty for the natural resources market,? says one banker. ?People are unclear about how transactions should be structured under the new framework, about where to go for approvals for new projects and Pertamina's eventual status as either a quasi-privatized or state-owned company. This in turn will affect such aspects of future projects as the tax treatment,? the source adds.

The problem lies not so much in what the law says, as in what it doesn't say. ?There's an absence of the detail necessary for foreign investors and lenders to be certain of the future legal and regulatory environment,? agrees Hughes. But Hughes is optimistic that the necessary clarity will emerge in the not too distant future. ?As the deregulation process progresses, the government will be required to focus on specific issues and, in doing so, the current vacuum of legislative detail will become filled,? the lawyer says. In doing so, the government will formulate policies, in many instances, on a case by case basis, until a set of detailed regulations is established. He adds, ?given that the sale of oil and gas abroad is the main dollar revenue for Indonesia, the government isn't likely to do anything which will discourage foreign investors in the sector.?

In one apparent reverse, market observers say that the government has just reaffirmed Pertamina's position as the sole marketer of LNG overseas. At the very least, says one financier, Pertamina will remain the marketing agency for LNG from the Arun plant in Aceh, the Badak plant and the planned Tangguh LNG plant. It remains unclear if the government will issue a special decree to maintain Pertamina's LNG marketing role.

Banks learn to play together

For the most part it is only Japanese and European banks who are looking at Indonesian oil and gas deals. Amongst the US banks, appetite is not there. ?That observation is partially true,? says Citibank's Najeeb Haider. ?Indonesian oil & gas will be predominantly a project finance market and apart from Citibank, US banks are no longer active in most Asian project finance arenas. However, we are marketing to Indonesian natural resource companies in Indonesia right now.?

Although the Japanese have traditionally been Indonesia's most important foreign bankers, European institutions are currently more aggressive than their Japanese counterparts, says one banker: ?That's really because the Japanese don't need to be. The Japanese banks will focus on deals with Japanese off-takers, or EPC contractors, or deals where there is a substantial commitment for support from Japanese MLAs.? ?The Japanese don't really need to look at clean deals in Indonesia,? agrees Macfarlane.

Bankers in Japan say that increased financial aid from the Japanese government to Indonesia is still an issue for discussion rather than a done deal, despite what the Indonesian government has said. Hiroaki Odajima, chief manager for natural resources in BTM's Tokyo office says, ?as far as I know, there are no concrete plans for more economic assistance.?

More state support from Japan does not imply more active participation in the market by Japanese bankers. ?Generally speaking, Japanese banks are still very cautious about Indonesia and will be very selective about which projects they are involved in,? adds Odajima.

Consolidation in the Japanese bank sector will lead to increased opportunities for other international financiers to get involved in Indonesian deals that have a strong Japanese sponsor or EPC component. As one European banker observes, only four Japanese banking groups now exist with a substantial commitment to foreign project lending.

The Tangguh project will be a case in point. Of the $1.6 billion needed to fund the venture, 60% to 70% will come from JBIC, the balance from commercial banks. The Japanese banking market will not want to fund all of the $500 to $650 million commercial debt needed. ?In fact, the consolidation of the Japanese banking market is helping to introduce a greater element of international cooperation in Indonesian project financings. There aren't likely to be many projects financed on a Japanese club basis,? says a European banker.