ticular challenge. People from the United States, Japan and Indonesia had very different
approaches to business when they started to work together, but over time they grew to under-
stand each other. People were locked up in conference rooms and spent months in hotel
rooms. There were times when it seemed that the deal was not going to get done. Wood gives
a lot of the credit to the personality and perseverance of Bob Edgell, Executive Vice President
and Asia Pacific Division President of Edison Mission Energy.
The original deadline for closing the financing – 12 months from the time that the PPA
was signed – was unrealistic, given the precedent-setting nature of this transaction in
Indonesia. The time required for financial closing on most independent power projects in the
United States averages close to 18 months and the parties involved have the benefit of prior
experience with similar deals. Most PPAs in the United States have sunset dates between 24
and 36 months from PPA signing. The deadline would have been easier to meet if negotia-
tions for more of the contracts had been started while the PPA negotiations were under way.
Developments since 1996
Indonesia’s economy and credit rating
During most of 1997 Standard & Poor’s maintained a ‘BBB’ credit rating for the Republic of
Indonesia, based on the government’s long-term commitment to prudent fiscal management,
a political consensus in favour of market-oriented economic policies rooted in decades of
steady GDP growth, savings and investment rates of more than 30 per cent of GDP, and
steadily rising non-oil exports. The rating was constrained by heavy infrastructure needs; a
heavy, though favourably structured and declining net external debt burden of 140 per cent of
exports; a risk that eventual political transition from Suharto to his successor could slow an
ongoing economic reform process and an uneven trend toward increased transparency; and
weakness in the banking system.
In December 1997 Moody’s downgraded Indonesia’s foreign currency rating from
‘Baa3’ to ‘Ba1’ as a result of a greater than 50 per cent drop in the value of the rupiah and a
loss of investor confidence. The agency said that the depreciation of the rupiah put consider-
able stress on the corporate sector to meet its overseas debt payments and was likely to cre-
ate considerable stress on the banking system as well.
In January 1998 Standard & Poor’s downgraded Indonesia’s long-term foreign currency
rating from ‘BB’ to ‘B’ because of Indonesia’s deepening financial crisis and diminished
external payments flexibility, as a result of the government’s recent suspension of foreign cur-
rency debt servicing for troubled corporations. The agency said that Suharto’s credibility was
crumbling and that a clear plan for transfer of power was vital. The agency predicted that the
Indonesian economy would contract by more than 5 per cent in 1998 and that some 40 per
cent of bank loans would be nonperforming by the end of the year. It said that a comprehen-
sive solution to the private external debt overhang was essential for reviving economic activ-
ity and moderating social unrest.
In May 1998 Standard & Poor’s reduced Indonesia’s long-term foreign currency credit
rating from ‘B-’ to ‘C+’, reflecting the country’s deepening political crisis, which in turn was
eroding its ability to service its public-sector obligations, the increasing likelihood that
Suharto would leave office, and lack of clarity as to how a change of administration might
play out. At the same time, in downgrading several structured finance transactions Duff &
Phelps (now Fitch) noted the deteriorating creditworthiness of the Indonesian government as
POWER PLANT