In December 1997 Moody’s downgraded three Indonesian IPPs – Paiton Energy, CE
Indonesia (owned by affiliates of California Energy) and DSPL (owned by affiliates of
Unocal and PT Nusamba Geothermal) – from ‘Baa3’ to ‘Ba1’, and in January 1998 it further
downgraded them to ‘B2’ following similar downgrades of the Indonesia foreign currency
ceiling. The agency noted that the electricity tariffs that PLN was paying to the IPPs had
become significantly higher than the tariffs that it charged to consumers. Whereas there
would be increased regulatory pressure for the IPPs to reduce their tariffs to levels closer to
PLN’s retail tariffs, Moody’s thought that PLN’s willingness to adjust those tariffs to a level
that more accurately reflected the cost of new generating capacity would be a critical com-
ponent in the long-term success of Indonesia’s IPP programme.
In March 1998 Standard & Poor’s downgraded its ratings on Paiton Energy and three
other IPPs from ‘B’ to ‘CCC’, following a downgrade in Indonesia’s foreign currency rating
to ‘B-’. The agency noted that PLN did not have the liquidity to pay electricity invoices in
full and in US dollars, as required in the PPAs for currently operating IPP projects as well as
those scheduled to start operating in the near future. With inflation running close to 40 per
cent, the government was unlikely to allow PLN to raise its retail electricity rates high enough
to help the utility honour its hard-currency obligations. Further, as the Indonesian economy
continued to contract, possibly by as much as 5 per cent in 1998, unemployment would rise,
real incomes would fall and demand for electricity would fall, creating increased revenue
pressure for PLN. The agency was sceptical about the ability of a new cabinet appointed by
President Suharto to implement reforms in the financial, electricity and energy sectors, and
noted that projects under construction could face completion difficulties as a result of the
country’s macroeconomic problems and deteriorating social environment. Offsetting these
risk factors, Standard & Poor’s noted that construction of the Paiton project remained on
schedule; no disruptions in drawdowns for the construction loans were expected; capitalised
interest would protect Paiton Energy’s lenders during construction; and the debt-service
reserve fund would provide another six months’ protection during operations.
In June 1998 Suzanne Smith, director of infrastructure ratings at Standard & Poor’s in
Hong Kong, noted that while no IPP yet had missed a payment from PLN: ‘we think there is
mounting pressure on these projects to get renegotiated because the economic fundamentals
have shifted and have put the government and PLN in an impossible situation’.^4
She continued to assume that Paiton Energy’s two 660 MW generators would start oper-
ations in early 1999. In the opinion of a lawyer interviewed by Dow Jones, neither side had
an interest in seeking arbitration because the result would be damage to Indonesia’s reputa-
tion among foreign investors and lower dollar returns for the IPPs than they could achieve
through negotiation. He therefore concluded that the renegotiation of contracts was inevitable
and thought that the project sponsors might seek extensions in the terms of their contracts in
return for reduced electricity tariffs.^5
Later in June 1998 PLN unilaterally cancelled its power purchase contract with PT
Cikarang Listrindo, an IPP owned by a cousin of Suharto. PLN’s president, Djiteng Marsudi,
said that he was ready to face a lawsuit as a result of this action and might take similar
actions against other IPPs that refused to renegotiate contracts to ease the financial pressure
on his company.^6
In September 1998 Moody’s downgraded its rating on Paiton Energy to ‘Caa2’, and its
ratings on DSPL and CE Indonesia to ‘Ca’. The agency was prompted to review the ratings
of these three Indonesian IPPs by the failure of PLN and Pertamina, the state-owned oil and
PAITON 1, INDONESIA