When PLN tendered the 2x 1,000MW Java 7 independent power producer (IPP) project in early December there was some speculation about whether it would ever get off the ground. This was due to the absence of any guarantee for PLN’s obligations under the power purchase agreement (PPA).
PLN has struggled to shake off its reputation as a poor credit risk since defaulting during the Asian financial crisis in the late 1990s. The fact that it also relies on government subsidies to compensate for the difference between the cost of generation and the cost of electricity to consumers, further hurts its standing.
To date there has been only one IPP project to reach financial close without some form of government guarantee: the 660MW Banten project. This was, in many respects, an unusual project because of the sponsor and lender makeup and is difficult to compare with Java 7 because of the difference in size.
In spite of these early misgivings, PLN pulled in several bids for the project earlier this year and seven consortia are understood to have submitted binding offers at the end of September. The competition among bidders is extremely fierce and will come down to a capital shootout between the bidders.
Guarantee or no guarantee
In spite of a change in law in 2009 liberalising Indonesia’s electricity market, PLN remains the offtaker for nearly all power projects aside from captive power plants. The Indonesian government has traditionally provided bidders for IPP projects with comfort in the form of a guarantee.
While this has traditionally taken the form of a guarantee from the Ministry of Finance (MOF), the Indonesian government has sought to slowly wean bidders off an on-demand guarantee from MOF through the introduction of more formal mechanisms for providing guarantees.
The two most commonly cited examples are the Indonesian Infrastructure Guarantee Fund (IIGF), an organisation introduced by the Indonesian government in 2009 to provide guarantees for PPP projects, and the business viability guarantee letter (BVGL), which was introduced in 2011.
The introduction of the BVGL caused a bit of a stir since it was interpreted that termination payments would no longer be covered. However this has not proven to be the case and the BVGL has been successfully used on several IPP projects, including the recent Sarulla geothermal and Asahan hydropower projects.
Banking on Banten
The Banten project is the only deal to reach financial close so far without a government guarantee. Genting closed the financing in November 2013, which comprised a $504 million 11.5-year loan from four commercial banks, $200 million in 17-year debt from Malaysia Ex-Im, and $268 million in equity.
The four banks on the deal were:
The deal is unlikely to offer a template for Java 7. Genting closed the financing with strong sponsor support in the form of contingent equity and did so with an unusually small bank group. Whether this same structure could be replicated for a much larger project like Java 7 is unlikely.
Harbin Electric International was the engineering, procurement and construction contractor for Banten. Because a Chinese contractor was working on the project, Genting sought support from China Exim Bank (Chexim) and Sinosure for the financing. It was was rebuffed in its efforts because of the absence of the government guarantee.
For Java 7 the inclusion of a number of Chinese bidders among the shortlisted parties has raised the prospect that Chinese lenders may relax their approach. The seven consortia that submitted bids for the project were:
- Genting and CDIC China
- Huadian Power International
- Huaneng, CNTIC and Wijaya Karya
- Ratchaburi, Banpu, and ITM
- Shenergy and CNEEC
- YTL International
Malaysia’s YTL is the sole bidder to submit an offer without having a Chinese developer as one of its consortium members, although Sino Hydro is the EPC contractor for its bid, which raises the likelihood that it will be able to tap Chinese funding if its bid is successful.
The absence of any Japanese or Korean bidders, traditionally the most active players in IPP bidding in Southeast Asia, is also worth noting. Developers from both countries eschewed bidding for the Java 7 project due to the absence of any government guarantee.
The absence of Japanese developers from the bidding process was widely expected, as the Japan Bank for International Cooperation (JBIC) has been quite vocal about its unwillingness to support PLN projects without an offtake guarantee.
That Koreans firms do not feature on the shortlist is more surprising, since both Korea Trade Insurance Corporation (K-Sure) and Korea Exim Bank have been less critical. A consortium comprising Kepco, Tenaga and Samsung was rumoured to be bidding, but did not make it to the final bid stage.
PLN should be satisfied with the number of bidders that have made it through to the bidding stage however. PLN had asked bidders to submit proposals on 28 October but brought the deadline forward a month, an indication of its confidence in the state of competition for the project.
Supporters of PLN often point to the fact that the state-owned utility regularly taps the capital markets as evidence that banks and similar institutions should be willing to accept uncovered PLN risk. This may not be completely fair but the competition for Java 7 indicates that it could be a watershed moment.