SMI seeks project readiness
Project readiness is Sarana Multi Infrastruktur’s biggest challenge in Indonesia says President-Director Emma Sri Martini. By Hamisah Samad.
To see the full digital edition of the PFI Asia Best Practice Report 2014, please click here.
To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org
Indonesia’s PT Sarana Multi Infrastruktur (SMI) should have won many accolades for putting in place many standards in the infrastructure procurement process in the country in just five short years following its inception, but getting its showcase public-private partnership undertakings off the ground remains a formidable challenge.
“Financing is not the main issue; investors are always ready. The biggest challenge is project readiness,” Emma Sri Martini, president-director of PT SMI, told Project Finance International in a telephone interview.
Indeed, its flagship PPP showcase – the US$4bn 2,000MW Central Java Power Plant – has yet to take off notwithstanding that the project agreements, including the 25-year power purchase agreement (PPA), were signed with Perusahaan Listrik Negara in 2011.
“The project is waiting for financial close and waiting for a small piece of land that has yet to be acquired,” Martini said.
Indeed, a group of lenders has already been lined up to fund the project – Aozora Bank, Bank of Tokyo Mitsubishi-UFJ, DBS Bank, Mizuho Corporate Bank, Norinchukin Bank, OCBC Bank, Resona Bank, SGCIB, Sumitomo Mitsui Banking Corp and Sumitomo Mitsui Trust Bank, as well as Japan Bank for International Cooperation. SMBC is also the financial adviser.
However, until the piece of land that is intended for the project site is acquired, the banks are unwilling to commit financing.
The project was scheduled to achieve financial close 12 months from the date of the signing of the PPA. That date has been pushed back twice and the project proponents will now have until October 2014 to complete the financial close, making it 36 months since the PPA signing.
Won by a consortium comprising Adaro Energy, Itochu Corp and J-Power, the project is to be located in Pemalang in Central Java Province. The project, which is structured on a 25-year build, own, operate and transfer (BOOT) basis, will utilise supercritical boiler or ultra-supercritical boiler technology, the first of its type in the country. Under this arrangement, the operator will transfer the plant to PLN, which will run it for the remainder of its useful life. In addition to the plant itself, the sponsors will also build the associated 500kV transmission line and substation, which will be transferred to PLN as a special facility.
The Central Java Power Plant, which has been dubbed by the IFC as one of its success PPP stories, once completed, will provide improved electricity services to 7.5m people in Java, the most densely populated island in Indonesia. It should also pave the way for future PPPs in infrastructure in Indonesia, bringing much needed investment to the sector, according to the IFC, which has been appointed as the project advisor by SMI.
Nonetheless, the technical co-ordination of the project is complicated by the many layers of sponsors involved, said Martini.
International best practice
SMI, established on February 26 2009, is to act as a catalyst in the acceleration of Indonesia’s infrastructure development by attracting both domestic and international investments. It is also to promote public-private partnerships schemes and introduce international best practices in developing the country’s infrastructure.
It was to support labour-intensive infrastructure projects with high social and economic impacts; environmentally friendly; contributes to the reduction of carbon emissions; and will ultimately lead to the alleviation of poverty in a country that has a huge income gap.
According to the IFC, Indonesia needs to spend a staggering US$150bn on infrastructure development over the next five years but the government could only finance 30% of the cost. Hence, the rest will have to come from the private sector.
SMI was appointed by the Minister of Finance in May 2011 to facilitate the preparation of two showcase PPP projects – the Soekarno Hatta International Airport Railway (SHIA Rail) and the Umbulan Water Supply Project.
The SHIA Railway is to connect the international airport to Manggarai in downtown Jakarta, while the Umbulan water supply project is to supply 4,000 litres of bulk water per second from the Umbulan spring to Pasuruan, Sidoarjo, Surabaya and Gresik regencies in East Java, through the development of a pumping system and a 106km transmission system.
SMI was tasked with providing advisory to the government contracting agencies; the Ministry of Transportation in the case of the Soekarno Hatta–Manggarai Railway; and the provincial government of East Java for the Umbulan water supply project. SMI is to be involved and present at every phase of the project procurement process – preparation of pre-feasibility study, coming out with PPP guidelines in accordance with the presidential PPP decree; market sounding activities; preparation of tender documents; tendering process and providing support towards the realisation of financial close of the projects.
The lack of PPP knowledge and the big gap between international PPP standards and local common practices were issues that needed to be overcome, Martini said. To undertake the voluminous tasks, SMI first set up a technical team headed by a project manager.
“The main strategy for the assignment was to procure internationally reputable consultants in an effort to ensure that project preparation and transaction were carried out in accordance with international best practices,” Martini said.
Umbulan water supply project
Expected to cost US$255m to construct, the UWS PPP project preparation facility agreement was first signed on November 25 2011 between the governor of East Java and SMI. SMI also signed a co-operation agreement with IFC, which acted as a transaction adviser.
IFC’s external consultants were Mott MacDonald acting as technical adviser and Norton Rose as international legal adviser, while ABNR acted as national legal adviser. The multi-stakeholders in the project – Ministry of Finance, Ministry of Public Works, East Java Provincial Government, five local governments and five local water utility companies – pose a challenge.
The project also had to go through a land acquisition process. The Governor of East Java has also submitted a Government Support (Viability Gap Fund) Request Letter to the Minister of Finance. Approval of VGF support from the Minister of Finance will become a pre-condition to finalise the Request for Proposal (RFP) document.
SHIA Airport Rail PPP
The SHIA Airport Rail preparation facility agreement was signed on November 10 2011 between the Ministry of Transportation and SMI, following which PT AECOM was appointed as the pre-feasibility study consultant on March 28 2012. Initial submission of due diligence report was made on April 30 2012, which was then finalised and submitted to the GCA on June 15 2012. A workshop to discuss due diligence results with related stakeholders was held on May 16 2012.
Reports on passenger travel demand and evaluation of alternatives and recommendations were made on August 6 2012 and submitted to the GCA on September 28 2012. Two stakeholders’ workshops to discuss on alignment selection criteria and assessment results were held on June 12 2012 and September 11 2012 respectively.
In view of the lengthy government procurement processes, it is no surprise that SMI has proposed that Indonesia develops a special law governing PPP infrastructure development projects. Martini told a local daily that the law was to bind the commitment of the central and the local governments in realising infrastructure projects despite a change in government. Such provisions will be reassuring to investors in the Indonesian infrastructure sector, she said.
Following the PPP assignments, and the need to speed up procurement and project preparedness, SMI had to broaden its scope to include financing of projects, Martini said.
It sources and develops alternative sources of funding – be it mezzanine finance, debt or equity – by working with all stakeholders of a project. To improve on an infrastructure project’s bankability, SMI would assist in a project development from its early stages, Martini said.
SMI today tackles project procurements and infrastructure development from four angles – financing and investment; advisory and project development and third project preparedness, Martini said. It has also recently added risk management, finance and support directorate.
“This is a clear testament of our expanding presence in Indonesia’s infrastructure sector, from providing financing services during the early years to adding project preparation and advisory services,” Martini said.
Today, it provides funding to various infrastructure projects – toll roads and bridges, transportation, water supply projects, oil and gas, telecommunications, waste-water and waste management, electricity, and irrigation and water-ways.
In announcing its business results for 2013, Martini said SMI’s total financing commitment also grew significantly by 101.5% from Rp2,222bn a year earlier to Rp4,477bn in 2013, with total disbursements reaching Rp3,087bn, an increase of 158.11% from Rp1,196bn in 2012.
It has since 2009 committed a total of Rp5,347bn in loans to fund infrastructure projects worth Rp38,768bn covering various infrastructure sectors – electricity, toll roads and toll bridges, drinking water, seaport, and other sectors across the nation.
Fitch Ratings in 2013 upgraded SMI’s national long-term rating to AA+(idn) with a stable outlook and issued a comparative international rating (BBB–/stable), reflecting the company’s positive performance and outlook, as well as its strategic importance within the country’s infrastructure sector.
“Such ratings would certainly allow us to expand our fund base to support the company’s future growth,” Martini said.
Last year, SMI secured a US$50m loan facility to be used in projects requiring US dollar-denominated financing. This is the company’s first step in leveraging PT SMI’s healthy financial standing to tap into alternative funding sources, Martini said.
The Umbulan and the airport rail are ready for investors and construction is due to begin next year following financial close, SMI told local media last week.