In March 2010, the Mitsui- and International Power-sponsored Paiton 3 IPP became the biggest IPP financing to close in Indonesia after the global financial crisis – and ushered in a new era of JBIC aid for Indonesia’s power sector.

The US$1.5 billion project had been in the works for some time, with the PPA signed in August 2008 – but the global financial crisis meant financial close would not take place until more than 18 months later [Transactions Database].

When it did, it marked a return to business for Indonesia’s IPP market – paving the way for more and bigger projects such as the 2,000MW Central Java IPP, currently in tender.

A chequered history

The IPP market in Indonesia had had a chequered history before Paiton 3. Before the financial crisis of 2007-9, Indonesia had been caught up in the storm of the Asian financial crisis of 1997 – which had seen the Tanjung Jati B project fall into the hands of its EPC contractor, Sumitomo.

However, Paiton 3 probably owes a debt of gratitude to Sumitomo’s success in financing and developing that project. In 2008, TJB reached financial close backed by JBIC and NEXI and a number of Japanese commercial banks – and was the first project to reach financial close under a new memorandum of understanding between JBIC and PLN, the Indonesian national utility.

Around the same time, Mitsui, International Power and Tokyo Electric Power (TEPCO) was signing the PPA on Paiton 3.

Though the deal was certainly delayed by the global financial crisis, it had the template of the Sumitomo deal to follow and JBIC’s increasing comfort in the jurisdiction of Indonesia.

The project

The Paiton 3 project comprises a single 815MW coal-fired unit, which will be located within the existing Paiton complex which currently houses two 615MW units - financed in 1995 with a US$900 million JBIC co-financing. Paiton 3 benefits from shared facilities such as the coal jetty, coal stockyard and waste water treatment plant.

All three generators are owned by the same consortium, as follows:

• Mitsui: 36 per cent
• IPM Eagle, an International Power-Mitsui 70:30 joint venture: 45 per cent
• Tokyo Electric Power Company (TEPCO): 14 per cent
• Batu Hitam Perkasa (local company): 5 per cent

The operating company, PT IPMOMI, is owned as follows:

• International Power: 59.5 per cent
• Mitsui: 25.5 per cent
• TEPCO: 15 per cent

The new unit will – according to EPC contractor Mitsubishi Heavy Industries (MHI) – will be the largest and most efficient coal-fired power plant in Indonesia when it starts commercial operation in 2012.

The Paiton power complex is around 150km south east of Surabaya, the provincial capital of East Java – and the new unit will aim to ease the region's increasingly tight electricity supply.

The power generated at the plant will be sold to PT PLN (Persero), Indonesia's state-owned power utility company, for 30 years based on a long-term power purchase agreement (PPA).

MHI's Nagasaki Shipyard & Machinery Works will manufacture and supply the steam turbine and boiler, while civil construction work will be undertaken by TOA Corporation of Japan.

The financing

The US$1,215 million lending package is being provided under the JBIC Overseas Investment Loan programme and includes a JBIC direct-lending portion and a commercial tranche with JBIC political risk guarantees.

The lending came as 17.5 year non-recourse loans denominated in US dollars and Japanese yen – one of the longest-dated power financings in Asia, though still leaving a considerable tail on the 30-year PPA.

JBIC lent the equivalent of US$729 million direct in a mixture of Dollars and Yen, and an eight-strong commercial bank club provided a US$486 million equivalent loan, covered by an extended political risk guarantee from JBIC.

The commercial lenders were:

• Bank of Tokyo-Mitsubishi UFJ
• BNP Paribas
• Crédit Agricole CIB
• ING
• HSBC
• Mizuho
• SMBC
• Sumitomo Trust and Banking Co

The total project cost is estimated at US$1,519 million, funded on an 80:20 debt-to-equity ratio with US$304 million contributed in equity.

The legal advisers on the deal were Skadden Arps to the project company, and Latham & Watkins to the lenders. Bank of Tokyo Mitsubishi was financial adviser to the sponsors.

At the same time as the Paiton 3 financing, another IPP project – Cirebon, led by Marubeni and Komipo of Korea – was also seeking a JBIC-backed financing package.

Cirebon led to a stand-off between JBIC and PT PLN, as the Indonesian government was reluctant to guarantee the utility’s obligations. The resolution of this dispute eventually opened the door to financial close on both Cirebon and Paiton 3.

Paiton and Cirebon were the first IPP financings to sign since an ‘umbrella note of mutual understanding’ was signed between JBIC and the Indonesian government – and, one month ahead of the two closes, the two parties agreed to hold regular meetings on how best to support IPP and geothermal generation in Indonesia.

Fast Track to the future

Indonesia continues to suffer power shortages – but is, according to a piece IJ published in June last year, “moving decisively to address the power shortage”, with IPPs at the forefront.

The government has implemented a ‘Fast Track’ programme, the first phase of which will add almost 10,000MW of capacity across 33 projects, largely implemented by Chinese contractors employed on an EPC basis, and funded largely through Chinese export finance and domestic loans.

The government is now pressing on with Fast Track phase 2, which, as Laurie Pearson of law firm Norton Rose writes, “differs from the first phase in that IPPs will have a more significant role. They are expected to participate in roughly half of the 70 projects.”

In addition to the Fast Track, Indonesia is also separately tendering a 2,000MW IPP in Central Java. The progress of this project has also been slowed by the question of governmental guarantees – but a lasting solution now appears to have been put in place, with the government setting up an Infrastructure Guarantee Fund to back project agreements, while ring-fencing the government’s risk.

Mitsui and International Power will again bid together for the project – up against five other consortia from Japan, Korea and China [Projects Database].

Conclusion

The success of the Paiton 3 financing took Indonesia a step closer to putting in place a replicable structure for IPPs in the future – though it appears the Central Java IPP will finally embody the fulfilment of that goal.

Nevertheless, Paiton signalled a return to project financing for Indonesia after the global financial crisis – and signalled a return to long-dated lending for the East Asian power sector.