International -- Intl' Business: INDONESIA
THIS POWER DEAL REALLY PACKS A PUNCH (int'l edition)
It was the icing on the cake for Robert M. Edgell, executive vice-president of Mission Energy Co. In late June, a syndicate of 36 banks led by Chase Manhattan ponied up $1.8 billion in financing for the first privately owned and operated power plant in Indonesia. Edgell and his company head a consortium that has been chasing the power project since 1991. They finally signed the $2.5 billion contract 16 months ago, after grueling negotiations in smoke-filled rooms in Jakarta. Now, they have the money lined up to make it a reality.
In cracking the Indonesian market, Edgell and his partners have drawn up a blueprint for the privatization of the country's power industry. They had to. The potential market is lush, with Indonesia expected to spend $24.1 billion on power projects over the next four years. But when it came to letting foreigners into a state-run industry, the country came up short on ground rules for privatization. Called Paiton Energy Co., the consortium, which also includes General Electric, Mitsui, and Indonesian coal producer Batu Hitam Perkasa, has filled that gap by persuading the Indonesians to adopt rules common to the U.S. and other major countries.
The deal represents a major victory for Indonesia. China, the Philippines, and Vietnam are all competing for what little capital there is to go around. Besides the bank syndicate, the project also has the support of the U.S. and Japanese export-import banks and the U.S. Overseas Private Investment Corp. More such deals are necessary. The country needs the additional power if it is to convert its economy from reliance on oil exports to one based on manufacturing goods for export.
The push started in 1991, when Indonesia asked for bids on the first phase of a power plant, to be built in Paiton, East Java. Eventually, Indonesia wants the facility to produce 4,000 megawatts, making it one of the largest power plants in the world. Besides Mission Energy, which is an affiliate of Southern California Edison Co., other bidders included Westinghouse, Intercontinental Electric, and the Bimantara Group of President Suharto's son, Bambang Trihatmodjo. Bimantara seemed to have the inside track, but talks continued with Edgell. His group finally won by convincing the Indonesians that the project needed to be acceptable to foreign bankers.
Indeed, the 300-page contract that the Indonesians signed is based mostly on U.S. federal and state laws governing the power business. Beyond that, the Indonesian government is providing a major hedge against currency risks. When 1,230 megawatts of power start flowing from two GE coal-fired turbines to Java's electric grid in 1998, the consortium will be paid 71/2 cents per kilowatt hour. Under the 30-year contract, the electricity is priced in constant 1998 dollars, although the Indonesian rupiah depreciates by about 5% a year.
Other power companies are trying to plug into Indonesia. Hopewell Holdings of Hong Kong, PowerGen of Britain, and Europe's ABB Asea Brown Boveri are using Paiton's blueprint to negotiate deals. "I should have gotten a copyright on it," says Edgell. Paiton spent more than $10 million on legal fees to negotiate its deal.
MANY CONDITIONS. But Paiton's competitors might not get the same terms after all. Some Indonesian officials have come to suspect that the contract may have been a little too sweet for the consortium. In addition to the government absorbing foreign exchange losses, the contract also allowed the private investor to terminate the contract up to one year after signing, just in case the financing fell through. "It has a lot of conditions that put the government in a weak position," says Hardiono, head of price analysis at the Directorate-General of Electricity.
Paiton is in Indonesia for the duration and is on good terms with the Suharto family. The Bimantara Group will build two units in the next phase of the Paiton plant's development. And an in-law of Suharto, Hashim Djojohadikusumo, owns 15% of the Paiton consortium through Batu Hitam Perkasa, which happens to be the plant's coal supplier. It always helps to have political connections, especially now that Suharto is courting foreign investors.Michael Shari in Jakarta