Success Stories public-private partnerships This series provides an overview of successful public-private partnerships in various infrastructure sectors, where IFC was the lead advisor. IFC Advisory Services in Public-Private Partnerships 2121 Pennsylvania Ave. NW Power Washington D.C. 20433 Photo © janumedia/Flickr ifc.org/ppp 68388 Indonesia: Central Java IPP The demand for electricity in Indonesia has grown quickly in the last decade. Facing greater consumption by industry, increasing residential demand, and a push to bring electricity to rural areas, the government aims to dramatically expand power generation and transmission capac- ity. In 2005, it designated a proposed new coal-fired power plant in Central Java as a top priority and moved to implement new regulations to attract private investment. IFC was transaction advisor to PT Perusa- haan Listrik Negara (PLN) in this project, which will boost capacity us- ing the cleanest commercial coal-fired generation technology available. A consortium consisting of J-Power, Itochu Corporation and Adaro Power won the bid for a 25-year contract to build, own, operate and transfer the new facility, which will use ultra-super critical technology. The project includes a 2,000 MW power plant and transmission facilities which are expected to improve access to electricity to 7.5 million people and mobilize over $3 billion in investment. The project was the first to be implemented under the country’s new PPP and guarantee regulations, laying the groundwork for future private infrastructure projects. The plant is expected to start operations in 2016. Devco provided a technical assistance grant for IFC’s advisory work. Devco, a multi-donor program affiliated with the Private Infrastructure Development Group, is funded by the United Kingdom’s Department for International Development, the Dutch Ministry of Foreign Affairs, the Swedish International Development Agency, and the Austrian Development Agency. BACKGROUND to PLN, which will run it for the remainder of its useful life (a Indonesia’s economic recovery following Asian financial crisis in 1997 minimum of 40 years). IFC also proposed a risk allocation structure led to a large increase in the demand for power, both for industrial in the PPA to maximize bankability of the IPP while minimizing the and residential use. In 2005, demand for electricity was expected to risks to PLN. grow by over eight percent per year. The government of Indonesia Since the government sets retail electricity tariffs and PLN receives estimated that $31.4 billion in investments would be required to meet state subsidies, a guarantee scheme was required to manage offtaker the country’s power needs by 2013. payment risk for the IPP. The government introduced a new In response, the government sought to dramatically increase power guarantee scheme with participation from the IIGF and supported generation capacity in the country, in part by encouraging private by revised regulations. sector investment. But issues with risk allocation and government IIGF and the government, acting through the Ministry of Finance, support to backstop the single offtaker’s payment obligations resulted provided a guarantee to the project to cover payment defaults and in very few financial closings. Furthermore, PLN, the state-owned termination payments under required buyout scenarios. This was energy corporation responsible for most of the country’s power executed through a single guarantee agreement supported by recourse generation, transmission and distribution, had suffered financial agreements to provide for reimbursement by PLN for claims made difficulties in the Asian currency crisis of the late 1990s and had been under the guarantee. unable to make payments to independent power producers (IPPs). In 2005, the government organized the Indonesia Infrastructure BIDDING Summit to encourage the use of public-private partnerships (PPPs) Interest in the project was strong, with about 30 firms expressing in infrastructure, and identified the Central Java IPP, a proposed interest and [15] requesting pre-qualification documents. Seven 2,000MW greenfield coal-fired power plant, as one of ten model consortia were pre-qualified based on their technical and financial infrastructure projects. strength. Of these, four consortia—Marubeni (Japan), J-Power (Japan), IFC’S ROLE Shenhua (China), and Guangdong Yudean (China) —submitted IFC provided advice to the PLN to structure and implement a PPP bids in April 2011. The winner, a consortium between J-Power, to find a private-sector investor through a transparent, competitive Itochu Corporation and Indonesia’s Adaro Power, was the lowest tender process in a difficult business environment. IFC’s input bidder for the price of electricity among those who met administrative included the following: and technical criteria. The consortium was awarded • Thorough technical, legal, environmental and financial the project in June 2011. due diligence to identify key transaction issues; The project agreements, including the PPA and the Guarantee • Coordinating with and supporting the government on Agreement for the Central Java IPP project, were signed in developing a risk management and guarantee frameworks October 2011. for the power sector; • Marketing the project to potential investors; • Preparing and supporting negotiations for the power purchase POST-TENDER RESULTS agreement (PPA) and related agreements to efficiently allocate • The project will bring improved electricity services risk; to 7.5 million people in Java, the most densely • Addressing technical issues, which included supercritical and populated island in Indonesia. ultra-supercritical technology, system planning and stability • Upon financial close, the investment will mobilize and environmental standards; over $3 billion in foreign direct investment (both • Working with key stakeholders to revise PPP and guarantee debt and equity). legislation; • The project contributes to the Indonesian • Supporting the bidding process through closing. government’s policy to rapidly expand power generating and transmission capacity. • The guarantee mechanism and revised PPP As a neutral broker, IFC worked with key stakeholders, including regulations will pave the way for future PPPs the PLN, the National Development Planning Agency (BAPPENAS), in infrastructure in Indonesia, bringing much- the Ministry of Finance, and the newly-established Indonesia needed investment to the sector. Infrastructure Guarantee Fund (IIGF) and qualified potential investors to structure a bankable transaction. TRANSACTION STRUCTURE IFC recommended structuring the transaction as a 25-year build, own, operate and transfer (BOOT) project. Under this arrangement, at the end of the contract period, the operator will transfer the plant 1/2012