with the four major agencies involved in the power plant financing US Exim; OPIC; Japan
Bank for International Cooperation (JBIC), which had replaced Jexim; and Nippon Export
and Investment Insurance (Nexi), which had replaced MITI. US Exim reportedly agreed to
take up to 75 per cent of the debt in its US$540 million term-loan tranche before the end of
the year. As explained above, US Exim originally had committed to that term loan as a take-
out for its construction loan. As a result of US Exim’s commitment, the commercial banks
participating in the Paiton 1 financing reportedly expected not to suffer any extension of
maturity or other ‘haircut’ (adverse changes in terms) to their original lending commitments.
Paiton 1 was expected to resume its principal and interest payments in early 2003.
Lessons learned as of 2003
In an economic crisis the value of a government support letter is diminished. Nonetheless, the
Indonesian government considered its support letter to be an important moral obligation that
it did not want to breach.
Contracts are of diminished value when a project participant can no longer afford to
abide by their terms. Nonetheless, the PPA provided a framework and set the boundaries for
several years of negotiations. The strength of that agreement, and the likelihood of litigation
and arbitration ultimately favouring Paiton Energy, were important restraints for PLN.
The involvement and active support of government lenders and ECAs was of significant
value in achieving consensual resolutions.
In the future, a lack of competitive bidding, and involvement by relatives and other close
associates of the head of state, should be viewed as danger signals.
One of the main factors in the sponsors’ ability to salvage a difficult situation was their
persistence, including their consistent, steadfast denial of corruption charges and their will-
ingness to explore other choices, such as extending the term of the contract, building new
power capacity and extending equity funding.
(^1) This case study is based on interviews with Jeffrey T. Wood, then Vice President in Chase Manhattan Bank’s glob-
al power and environmental group (now Managing Director of Global Project Finance at CS First Boston), as well
as a prospectus for the bonds, articles in the financial press and follow-up interviews on events since 1996, when
the original case study was written.
(^2) ‘Moody’s: Need Indonesian Economic Results Before Ratings Change’, Dow Jones International News, 9
November 1999.
(^3) Dow Jones International News, 7 August 2000.
(^4) Dow Jones Energy Service, 8 June 1998.
(^5) Dow Jones Energy Service, 8 June 1998.
(^6) Dow Jones Energy Service, 9 June 1998.
(^7) ‘PLN and Paiton Close to Reaching Long-term Accord’, Jakarta Post, 31 May 2001.
(^8) ‘Indonesia to Face Power Shortage in Two Years’, Jakarta Post,20 June 2001.
(^9) Lim, Sharon, ‘Interview: Indonesia PLN to Fight Darkness with New Rates’, Dow Jones International News, 2 July
2001.
(^10) ‘Indonesia’s Paiton Energy to Expand Generating Capacity’, Dow Jones International News, 5 February 2002.
(^11) Kurniawan, Moch N., ‘No Better Deal With Power Supplier: Minister’,Jakarta Post, 31 January 2002.
(^12) Lim, Sharon, ‘Interview: Indonesia to Raise Existing IPP Power Capacity’, Dow Jones Energy Service, 7 February
2002.
POWER PLANT