Public-Private Partnership Stories Indonesia: Central Java IPP Photo © janumedia/Flickr The demand for electricity in Indonesia has grown quickly in the last decade. Fac- ing 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 capacity. 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 in this project, which will use 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 facil- ity, 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 $3.5 billion in investment. The project was the first to be implemented under the country’s new PPP and guarantee regula- tions, laying the groundwork for future private infrastructure projects. The agree- ment was signed in October 2011. The plant is expected to start operations in 2016. This series provides an overview of public-private partnership stories in various infrastructure sectors, The project was implemented with the financial support of DevCo, a multi-donor facility affiliated with the where IFC was the lead advisor. Private Infrastructure Development Group. DevCo provides critical financial support for important infra- IFC Advisory Services in structure transactions in the poorest countries, helping boost economic growth and combat poverty. DevCo Public-Private Partnerships is funded by the UK’s Department for International Development (DFID), the Austrian Development 2121 Pennsylvania Ave. NW Agency, the Dutch Ministry of Foreign Affairs, the Swedish International Development Agency, and IFC. Washington D.C. 20433 ifc.org/ppp BACKGROUND minimum of 40 years). IFC also proposed a risk allocation structure Indonesia’s economic recovery following Asian financial crisis in 1997 in the PPA to maximize bankability of the IPP while minimizing the led to a large increase in the demand for power, both for industrial risks to PLN. and residential use. In 2005, demand for electricity was expected to Since the government sets retail electricity tariffs and PLN receives grow by over eight percent per year. The government of Indonesia state subsidies, a guarantee scheme was required to manage offtaker estimated that $31.4 billion in investments would be required to meet payment risk for the IPP. The government introduced a new the country’s power needs by 2013. guarantee scheme with participation from the IIGF and supported In response, the government sought to dramatically increase power by revised regulations. generation capacity in the country, in part by encouraging private IIGF and the government, acting through the Ministry of Finance, sector investment. But issues with risk allocation and government provided a guarantee to the project to cover payment defaults and support to backstop the single offtaker’s payment obligations resulted termination payments under required buyout scenarios. This was in very few financial closings. Furthermore, PLN, the state-owned executed through a single guarantee agreement supported by recourse energy corporation responsible for most of the country’s power agreements to provide for reimbursement by PLN for claims made generation, transmission and distribution, had suffered financial under the guarantee. difficulties in the Asian currency crisis of the late 1990s and had been unable to make payments to independent power producers (IPPs). BIDDING In 2005, the government organized the Indonesia Infrastructure Interest in the project was strong, with about 30 firms expressing Summit to encourage the use of public-private partnerships (PPPs) interest and [15] requesting pre-qualification documents. Seven in infrastructure, and identified the Central Java IPP, a proposed consortia were pre-qualified based on their technical and financial 2,000MW greenfield coal-fired power plant, as one of ten model strength. infrastructure projects. Of these, four consortia—Itochu (Japan), J-Power (Japan), Shenhua (China), and Guangdong Yudean (China) —submitted IFC’S ROLE bids in April 2011. The winner, a consortium between J-Power, IFC provided advice to the PLN to structure and implement a PPP Itochu Corporation and Indonesia’s Adaro Power, was the lowest to find a private-sector investor through a transparent, competitive bidder for the price of electricity among those who met administrative tender process in a difficult business environment. IFC’s input and technical criteria. The consortium was awarded included the following: the project in June 2011. • Thorough technical, legal, environmental and financial The project agreements, including the PPA and the Guarantee due diligence to identify key transaction issues; Agreement for the Central Java IPP project, were signed in • Coordinating with and supporting the government on October 2011. developing a risk management and guarantee frameworks for the power sector; EXPECTED POST-TENDER RESULTS • Preparing and supporting negotiations for the power purchase agree- ment (PPA) and related agreements to efficiently allocate risk; • The project will bring improved electricity services • Addressing technical issues, which included supercritical and to 7.5 million people in Java, the most densely ultra-supercritical technology, system planning and stability populated island in Indonesia. and environmental standards; • Upon financial close, the investment will mobilize • Working with key stakeholders to revise PPP and guarantee $3.5 billion in foreign direct investment (both legislation; debt and equity). • Supporting the bidding process through closing. • The project contributes to the Indonesian government’s policy to rapidly expand power generating and transmission capacity. As a neutral broker, IFC worked with key stakeholders, including the PLN, the National Development Planning Agency (BAPPENAS), • The guarantee mechanism and revised PPP the Ministry of Finance, and the newly-established Indonesia regulations will pave the way for future PPPs Infrastructure Guarantee Fund (IIGF) and qualified potential in infrastructure in Indonesia, bringing much- investors to structure a bankable transaction. needed investment to the sector. 01/2012 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 to PLN, which will run it for the remainder of its useful life (a