Indonesias renewables market expects more local bank involvement and
more commercial bank led-deals that do not rely so heavily on
export credit agencies (ECAs) political risk mitigation
Indonesia has seen record levels of foreign investment in energy and infrastructure
projects in recent years - so much so that the country's
infrastructure market has almost developed into an asset class
of its own, with hedge funds and private equity firms emerging
solely focused on the sector.
But foreign banks and export credit agencies have
traditionally dominated project financing in both sectors.
Domestic financial institutions have chosen largely not to get
Speaking at IFLR's 2012 Indonesia Forum, Asia Renewables'
managing director Edward McCartin said local banks had not got involved in project
finance deals as distinct from commercial banking deals where
the lending is to the parent on balance sheet.
have done project finance deals they have offered terms that
most sponsors would not agree to, he said.
would not see equity returns until all debt was paid, despite
internationally acceptable debt service coverage
The foreign banks have driven Indonesian project finance
development for two reasons, he said. Most deals involved ECA
support for foreign equipment, as there were no Indonesian
suppliers for the larger equipment, and a lack of expertise in
Instead local banks traditionally stayed in real estate
lending and commercial banking where they loaned to corporates
on a full balance sheet basis.
It is the choice of local banks to get involved in
project finance lending where the parent company is not
responsible for the debt but rather recourse is limited to the
project and its cash streams, he said.
banks operating in this space, are more like partners than
bankers in putting up 75% of the money into the deal, McCartin
As a result, they are going to know that deal almost as
well as you do," he said. "It's a very different mindset from
the traditional banker."
Gibson Dunn's Saptak Santra said Indonesian banks still
preferred to lend on a corporate level as opposed to providing
upfront financing for energy and infrastructure projects on a
recourse and non-recourse basis.
Local banks were also reticent to enter the secondary market
through project and infrastructure M&A, he said.
McCartin said there were banks trying to get their heads round
partnering on a transaction but its hard to compete
against the ECAs and foreign banks, he said. There
is a lot of liquidity offshore.
McCartin predicted commercial banks would begin to take more
risks upfront for construction in project finance transactions
perhaps through bond issuances or use of other capital markets
The third generation
first generation of Indonesian project finance transactions
were all ECA deals, he said. The second generation
were a mix of local banks and one off deals that did not really
We are moving into the third generation now being led by ECA and
domestic bank deals but hopefully moving into more commercial
bank led-deals that do not rely so heavily on ECA's political
risk mitigation elements, he said.
Indeed, McCartin believed more change would come. Structural
reforms were being undertaken, he said. But he warned they
would take time to effect real change.
In the meantime,
he advised anyone considering Indonesian investment to first
invest time and energy into building relationships with
Potential targets need to know you, they need to
understand you, they need to know how you're potentially going
to react and that takes time, he said.
Indonesia is enigma, but it's not going to change,
he said. Foreign investors need to work to understand the
place, and to understand the diversity of its culture and
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