Sarulla Geothermal Power Project: Last lap challenges in the development process

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Lange, Katharina; Wermert, Stephen; Dula, Christopher
Singapore Management University
Project management; public-private partnerships; risk allocation; risk identification; commercial structure; shareholder relations; power sector; geothermal; infrastructure development; Asian Studies; Corporate Finance; Finance and Financial Management; International Business; Strategic Management Policy
case description
The case looks retrospectively at an integrated geothermal steam field and a 320.8 MW power project in North Medan, Indonesia which reached financial close on March 28, 2014 after a combined tender and development period of almost 10 years. A critical last stage of the project commenced on April 4, 2013, in which the project’s four shareholders finally concluded almost seven long years of negotiations with the Government of Indonesia counterparts to secure geothermal resource extraction concession rights and a long term power sales contract with the Central Government owned Electricity Company.On the morning of April 5, 2013, a key member of the combined shareholder finance team had only a half-day to prepare for an intense set of meetings with lead shareholder representatives. Their authorisation was needed for an immediate step-up of development cost funding of work toward achieving a financial close of US$1.16 billion of complicated multi-sourced limited recourse debt. A delay of close beyond the one year deadline would risk forfeiture of the project to the Government of Indonesia. Moreover, shareholders and management were acutely aware that the project’s very long development cycle resulted in increased costs, which served to tighten the internal rate of return reflected in the Project’s detailed cash flow projections. Besides, there were real concerns that the lender process would diminish returns further. However, the finance team was confident that they could secure the US$1.6 billion in aggregate binding commitments from both shareholders and lenders within a 365-day deadline. Was their confidence well founded and properly aligned with project risk and returns?The case illustrates the process of managing risks and returns of a project infrastructure developer with a hybrid project finance lending consortium, accommodating the commercial objectives of each member of a diverse investor and lender financing group within the overall project commercial structure, and illustrates the difficulties of altering fundamental risk allocation at a late stage in the project cycle.Students will be able to understand the challenges faced by a team handling multiple investors, accommodate the commercial objectives of each member of a diverse investor and lender-financing group and analyse shareholder risk.