Projects are expected to cost US$70 billion.
If Indonesia wants its ambitious 35 GW power capacity addition plan to succeed, then it needs to clean up its act when it comes to providing funding options for utilities and independent power producers (IPPs). Despite high investor interest, appropriate access to capital and inconsistencies in government policy post a significant stumbling block which can hinder the success of Indonesia’s steep capacity addition target.
“Great potential projects are happening under the 35 GW program, but there are quite a few difficulties as well,” says Gilles Pascual, Partner, Infrastrusture, Ernst & Young, speaking at the recently-concluded Asian Power Utility Forum in Jakarta. “Coordination is key to make such a large program happen. You need all stakeholders in the room—you need the government side, you need PLN [Perusahaan Listrik Negara], you need to have investors, and you need to have lenders.”
One of the biggest challenges to Indonesia’s 35 GW plan is access to funding. Although both foreign and domestic investors are extremely keen to take part in the capacity addition plan, they are hindered by challenges including inconsistent government support for projects, lack of assurance regarding rupiah foreign exchange rates, and the absence of alternative funding solutions such as an active bond market.
“There are different forms of government support for PLN obligations. There’s the BVGL [Business Viability Guarantee Letter], the PPP guarantee letter…it varies from deal to deal. There is no consistency. And that is something that the investors are still trying to get comfortable with,” Pascual says. “You have different investors for different deals. If you have BVGL or PPP guarantee, the entire investor universe will be comfortable. For a deal without a guarantee, not all investors will be comfortable to take on the risk,” he adds.
In recent tenders, PLN had taken the view that they will pay using the Indonesian rupiah. Although deals will still be indexed to the US dollar, payments will be made solely using the local currency. As a result, projects run the risk of losing investors who are used to closing deals using the greenback.
“Investors need to get comfortable that once they get this massive amount of rupiah, in a single day they can go to the market and exchange it in US dollar at roughly the same rate without leakage, without losing on the exchange rate,” he says.
“The rupiah is freely convertible, it’s freely transferable, the FX market every single day is in the hundreds of millions of dollars. There is no reason in my view that investors can’t get comfortable with this. But they are currently talking to banks trying to understand how the FX market works to see if that is something they can work with,” he notes.
Domestic funding key to growth
To resolve these funding issues, Pascual says that the government should work on strengthening its domestic financing framework, particularly because funding for power projects is being dominated by local banks using local currency. There are very few markets left for international banks to do financing. Over the last 20 years international banks’ share of the pie has shrunk considerably, Pascual says.
“Domestic currency, domestic financing is the right solution and will resolve these issues. A domestic bank doesn’t need BVGL. PLN is the government, whether you have a guarantee or not. Risk assessment for international banks is different, but for a local bank, PLN is the government. So you are resolving the level of support from the government, you are resolving the US dollar to rupiah conversion,” he says.
Pascual also advocates a revival of Indonesia’s power bond market to provide expanded funding options for projects. He notes that though the first IPP in Indonesia in 1995 was financed by a bond, only two bonds have been issued since then.
“Bond investors don’t care whether there is a guarantee or not. They don’t care whether there is a BVGL or a PPP or government support. They just look at the credit rating and invest. This makes it a lot easier to finance projects for developers,” he said.
However, the power purchase agreements (PPAs) and requests for proposals (RFPs) that PLN issues are not conducive for the development of a bond market.
“There are a lot of constraints in the PPA about financing and re-financing, and around the rules of what developers need to prove at the time of bid when it comes to certainty of financing. When you do a bond, you can’t provide the same certainty in the same way a bank can provide support by issuing letters,” he says.
Pascual urged policymakers to seriously consider reviving bond financing for power projects, as it is unlikely that 35 GW worth of power projects—which is expected to amount to a staggering US$70 billion—can rely on a single funding method in coming years.
“We need to expand the universe of capital that we can tap. The bond market is out there and very keen on Indonesian risk. Bond is a great solution for refinancing. So I would like the bond market to become one of three solutions for the financing of IPPs,” he says.
Access to funding is not the only issue which Indonesia needs to grapple with. For instance, access to land is also a big issue for developers, as well as discrepancies in gas supply and inadequate bid preparation timelines.
When the launch of the land acquisition law in recent years, lawyers reckoned that it will take two years on average to complete a land acquisition deal in Indonesia. However, PLN proved in 2015 that it is possible to complete land acquisition deals in just months rather than years—showing that the law can work if used properly and effectively.
“The law is extremely powerful if it is used properly. The law is working, and land acquisition is becoming less of a focus particularly for investors,” he says.
Meanwhile, discrepancies in gas supply also need to be resolved if the 35 GW plan is to succeed.
“Developers can take the risk with the assurance that there is huge demand in Indonesia and PLN will be able to dispatch; but lenders will not be willing to take this risk. There are however ways to resolve this issue, with proper coordination between PLN, developers and lenders. Coordination in gas supply is crucial for the success of RFPs,” he says.
Another little-known issue which needs urgent attention is extremely tight bid preparation timelines from PLN. Pascual says that developers and bankers cannot prepare properly for bids because of PLN’s vague and often squeezed project timelines. For instance, PLN does not release a detailed schedule of requests for proposal (RFPs) in the pipeline, and often releases project details at such tight schedules that leaves developers with little option to contact investors and lenders.
“It is impossible in 45 days for an investor to develop an EPC solution and talk to banks. Developers are in the dark. They do not know what technology is required,” he notes.
To resolve this issue, Pascual says that PLN needs to come up with specific information about projects and provide longer timelines for developers and investors.
Despite these challenges, Pascual says that there is a bright future ahead for Indonesia’s 35 GW power capacity addition plan.
“There’s no magic solution, but years ago when I first came to Indonesia I learned this beautiful word, sama-sama. And I think together, sama-sama, we can make it happen. Everyone is here, everyone is keen, and the solutions are not rocket science. If we work through the constraints, there are solutions,” he says.
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