Paiton 1 Power Station Project in Indonesia
Project cost and funding mix
Mawhinney (2008) states that the $ 2.6 bn 1300 MW Paiton I Power Station in Indonesia was a leading private finance project possibility in 1994. The project is 40% owned by a subsidiary of Edison Mission Energy, 32.5% by Mitsui & Co., Ltd., 12.5% by a limited partnership affiliated with and managed by General Electric Capital Corporation, and 15% through a loan to PT Batu Hitam Perkasa.
According to Paiton (2003), $ 700 m of the total cost was provided through equity from the four partners. $ 506 million was provided by the Japan Bank for International Cooperation (JBIC), $ 508 million – by the Export-Import Bank of the United States (Ex-Im Bank), and US $ 200 Million – by Overseas Private Investment Corporation (OPIC). $ 338 million were covered by NEXXI political risk insurance, and the bond issue totaled $ 180 million.
Demand, supply, and risks
According to About Us (n.d.), the company produces about 13,500 GW of electricity per year, which is about 10% of Java’s annual electricity consumption.
In terms of risks, excellent management of the complex coordination process was required to achieve consensus among the highly diverse parties to the project. Mawhinney (2008) notes that many skeptics argued that this was too large a project for a private enterprise and pointed to difficulties in raising funds. Nonetheless, international banks reacted positively, with about $ 2 billion backed by American, Japanese, and European banks.
Moreover, the Power Purchase Agreed Agreement (PPA) was based on a tariff that fluctuated with any price change. Accordingly, if the exchange rate or the cost of crude fuel increased, then the costs to the client would increase without the developer being significantly affected. However, potential concessionaires were given only six months to conform on all funding; otherwise, they would have to renegotiate the PPA. An equally significant risk was the growing macroeconomic crisis in Indonesia.
Initial problems with the project and final restructuring
According to Kong (n.d.), funding for the project was discontinued in 1995 with a total debt package of US $ 1.8 billion. It was initially planned that fixed assets would begin to depreciate in November 1999. However, due to the Indonesian macroeconomic crisis and its impact on electricity demand in Indonesia, cash flow was below initial forecasts. Thus, the parties entered into negotiations on restructuring. The $ 1.8 billion non-recourse debt restructuring process for the project began formally in October 2001. It was based on the fundamental principle that there would be no reduction in debt or equity. The proposal for the project to lenders provided an extension of the original maturity date of the agency tranches by two years and for the agencies to revise their interest rates to the current level. As a result of negotiations, all agencies agreed to the commercial terms of the debt restructuring, and on October 8, 2002, the deal was presented to commercial banks. The restructuring was completed on February 14, 2003, with the entry of US EXIM.
Kong (n.d.) affirms that a significant achievement in debt restructuring has been applying the concept of risk-sharing to commercial banks. As a result, US EXIM acquired 75% or $ 381 million (US EXIM A tranche) from the US EXIM construction site for $ 508 million, resulting in a residual exposure of commercial banks to $ 127 million (US EXIM B tranche). It was one hundred cents in dollar earnings at 75% risk. The residual risk of commercial banks was divided proportionally among the 36 banks of the syndicate. Paiton (2003) notes that the project achieved a sustainable long-term restructuring solution for all parties: no fundamental reductions in the cost of debt or capital; and a sustainable tariff for the long-term stability of contracts. This restructuring is a pioneering example of consensus-based restructuring of project debt without recourse through equitable burden-sharing among the critical project parties with a clear intention to achieve stakeholder restructuring goals.
About Us. (n.d.). Nusantara Regas.
Kong, Y. (n.d.). PT Paiton Energy: A case study in renegotiation [PDF document].
Mawhinney, M. (2008). International Construction. Wiley.
Paiton. (2003). IJGlobal.
Yuliyanti, D. (2001). Project finance for independent power producers in developing countries: the Paiton I project generation project in Indonesia [Master’s thesis, Massachusetts Institute of Technology]. Massachusetts Institute of Technology.