Central Java Model Power Project
The Asian financial crisis of the late 1990s resulted in the termination of a number of private power projects in Indonesia under development in cooperation with the state owned electricity provider PT Perusahan Listrik Negara ("PLN") and halted investment in the private power sector of South East Asia's largest economy.
Over the past decade since the crisis, the Government of Indonesia has positioned Indonesia as an attractive investment destination and private investors have been encouraged to partner with the Government on infrastructure projects, such as toll roads, airports, drinking water and power generation. Despite this, however, private power investment remained stagnant and the country was increasingly facing an electricity supply crisis.
In 2008, SSEK began advising the International Finance Corporation ("IFC") in connection with the USD 3 billion Central Java Model Power Project for PLN. The main objective of the project is to upgrade all of the tender procedures and documentation, as well as the standard form Power Purchase Agreement, in line with international bankable standards, at the same time as actually implementing a large private power project. This work proceeded in parallel with the establishment of the Infrastructure Guarantee Fund and a suitable form of project guarantee by the Ministry of Finance Risk Management Unit which should promote private investment in Public/Private Projects (PPP) in Indonesia.
PLN decided to add a 2 x 1000 MV coal fired power plant to the grid in Central Java. The project was designated as the model for this new and innovative approach to PPP investment in Indonesia and the exemplar for private power projects in the future.
To encourage private investment in this project and future projects, PLN sought to refine its tender process and documentation to the highest international quality. PLN's pre-crisis Power Purchase Agreement ("PPA") did not adequately address the allocation of risks and other issues relating to bankability, making projects unattractive to lenders. The IFC, with the legal guidance of SSEK and international counsel Norton Rose, advised PLN on how to improve the process, documentation and creditworthiness of the project.
SSEK also advised the IFC for its client PLN on a wide variety of Indonesian legal issues regarding private sector investment in Indonesia's power sector including regulatory matters, corporate law, land acquisition, environmental laws, the Power Purchase Agreement and risk sharing arrangements, and issues related to the Infrastructure Guarantee Fund.
Not only was the project successfully realized, but the PPA and tender documentation for this project serves as a model for other private power projects in Indonesia. The Government of Indonesia is currently pursuing a crash-program between PLN and private investors to build power plants with a combined capacity of 10,000 MW valued at $8 billion dollars over the coming years.
The Government also successfully established PT Indonesia Infrastructure Finance with a number of multilateral lenders as shareholders to provide Rp 30 trillion in funding for infrastructure projects across the country. The fund acts as a source of finance for Indonesian infrastructure projects in situations where commercial banks are reluctant to provide loans due to the perceived high-risk nature of the projects. The aim is to attract foreign investors based on the security of financing from this fund and fulfill the government's goal of dramatically increasing private investment in Indonesia's infrastructure.
Our lead attorneys in the Central Java Model Power Project were Ira A. Eddymurthy, senior partner, and Richard D. Emmerson, a senior foreign legal advisor to SSEK since 1996.
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