Indonesia: Bring On The Megawatts
In June, when Siemens (SI ) Power Generation Group won a contract to build a $269 million power plant near Jakarta, investors could be forgiven a painful twinge of déjà vu. The pact was the first of a recent flurry of deals by multinationals to explore for new natural-gas fields and to build or expand power stations. It recalled a flood of similar contracts in the mid-'90s, when foreign companies swarmed into Indonesia to provide electricity to its growing, power-hungry economy. That gold rush ended in disaster with the Asian financial crisis and the downfall of the Suharto regime, when local utilities could not pay their dollar-denominated debts. By conservative estimates, more than $1 billion was lost.
This time, the foreigners are working hard to protect themselves. They are insisting, for instance, that monopoly state-owned electrical utility PLN pay them the cost of building new power plants up front; in the earlier wave, the foreigners covered the costs of the plants out of their own pockets. And they are demanding guarantees that PLN will pay for its gas -- something it failed to do in 1998 after the rupiah plummeted, swelling its dollar-denominated gas bills. Today, "PLN's financial position is highly vulnerable to fuel-price volatility and exchange-rate risks," warns Erly Witoyo of Standard & Poor's in Singapore. PLN denies it is a poor credit risk.
Indonesia can't afford to alienate foreign energy companies a second time. With demand for electricity growing at 7% a year, the country could face brownouts unless PLN brings 1,000 megawatts of new capacity online annually -- which will require at least $2 billion a year in new investment. Jakarta must do whatever it can to get the contracts signed, says Hans W. Vriens, managing director of Apco Indonesia, the local office of a Washington (D.C.) lobbying firm. "The government has no choice."
Plant Financing is changing, too. While Siemens owns half of an older facility, the new plant near Jakarta is being built by a Siemens-led consortium but will be owned by PLN. "It's a PLN project, using PLN funds," says Luluk Sumiarso, director-general for electricity and energy development at the Mines & Energy Ministry. And Sumitomo Corp. of Japan agreed to resume construction of a $1.6 billion, 1,320-Mw power plant on Java only after PLN agreed to lease the plant once it is completed and assume responsibility for its financing.
A month after the Siemens deal was announced, BP (BP ), Conoco-Philips (COP ), Santos (STOSY ) of Australia, and two Indonesian private-sector oil companies signed agreements to supply PLN with $11.72 billion worth of gas from Indonesian fields over the next two decades. The foreigners, though, want PLN to issue so-called standby letters of credit -- effectively setting aside hundreds of millions of dollars in cash -- to guarantee payment for the gas. "We take investment risks, geological risks, and even political risks, but we don't normally take customer-credit risks," says Tim Newton, president of the Indonesian operation of Santos Ltd.
PLN is balking at the tough terms, saying that tying up so much capital would make it hard to borrow the money it needs to expand its generating capacity, and force it to raise electricity prices. "This is one problem that cannot be solved so far," says Tonny Agus Mulyantono, a PLN deputy director. If it can, though, Indonesia's energy and power sectors may be ready take off again. And this time, the ride might not be quite so bumpy.
By Michael Shari in Singapore