Riau Natural Gas Power Project
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` Report and Recommendation of the President to the Board of Directors Project Number: 50182-001 November 2018 Proposed Loans, Partial Risk Guarantee, and Administration of Loan PT. Medco Ratch Power Riau Riau Natural Gas Power Project (Indonesia) This is an abbreviated version of the document approved by ADB's Board of Directors that excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy. CURRENCY EQUIVALENTS (as of 25 October 2018) Currency unit – rupiah (Rp) Rp1.00 = $0.000066 $1.00 = Rp15,202.00 ABBREVIATIONS ADB – Asian Development Bank CCGT – combined-cycle gas turbine EPC – engineering, procurement, and construction ESIA – environmental and social impact assessment IFC – International Finance Corporation IPP – independent power producer MEMR – Ministry of Energy and Mineral Resources PLN – Perusahaan Listrik Negara (national power utility) PPA – power purchase agreement PRG – partial risk guarantee RUPTL – Rencana Usaha Penyediaan Tenaga Listrik (National Electricity Business Plan) WEIGHTS AND MEASURES km – kilometer kV – kilo-volt m – meter MW – megawatt NOTE In this report, “$” refers to United States dollars. Vice-President Diwakar Gupta, Private Sector and Cofinancing Operations Director General Michael Barrow, Private Sector Operations Department (PSOD) Director Jackie B. Surtani, Infrastructure Finance Division 2, PSOD Team leader Kota Yasumura, Investment Specialist, PSOD Project advisor Yuichiro Yoi, Senior Investment Specialist, PSOD Team members Genevieve Abel, Principal Transaction Support Specialist (Integrity), PSOD Ian Bryson, Senior Safeguards Specialist, PSOD Dennis I. Eucogco, Senior Guarantees and Syndications Specialist, PSOD Kristy Harrison, Senior Safeguards Specialist, PSOD Manfred Kiefer, Senior Economist, PSOD Juan-Pablo Martinez-Molina, Investment Specialist, PSOD Nicholas Moller, Principal Counsel, Office of the General Counsel In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Project Identification and Description 1 B. Development Impacts, Outcome, and Outputs 3 C. Alignment with ADB Strategy and Operations 3 D. Project Cost and Financing Plan 4 E. Implementation Arrangements 4 F. Projected Financial and Economic Performance 5 III. THE PROPOSED ADB ASSISTANCE 5 A. The Assistance 5 B. Value Added by ADB Assistance 6 C. Risks 6 IV. POLICY COMPLIANCE 6 A. Safeguards and Social Dimensions 6 B. Anticorruption Policy 8 C. Investment Limitations 8 D. Assurances 9 V. RECOMMENDATION 9 APPENDIXES 1. Design and Monitoring Framework 10 2. List of Linked Documents 12 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 50182-001 Project Name Riau Natural Gas Power Project Department PSOD/PSIF2 /Division Country Indonesia Borrower qq PT. Medco Ratch Power Riau 2. Sector Subsector(s) ADB Financing ($ million)a Energy Conventional energy generation 70.00 77.90 Total . 0 qq 147 9 3. Strategic Agenda Subcomponents Climate Change Informationb Inclusive economic Pillar 2: Access to economic CO2 reduction (tons per annum) 375,000 growth (IEG) opportunities, including jobs, Climate Change impact on the Project Low made more inclusive Qq 4. Drivers of Change Components Gender Equity and Mainstreaming Partnerships (PAR) Commercial cofinancing Some gender elements (SGE) Official cofinancing Private Sector Private sector Promotion of private sector development (PSD) investment qq 5. Poverty and SDG Targeting Location Impact Geographic Targeting No Rural High Household Targeting No SDG Targeting Yes SDG Goals SDG7 qq 6. Nonsovereign Operation Risk Rating Obligor Name Final Project Rating Facility Risk Rating PT. Medco Ratch Power Riau 7. Safeguard Categorization Environment: A Involuntary Resettlement: B Indigenous Peoples: C Qq 8. Financing Modality and Sources Amount ($ million) ADB 70.00 Nonsovereign LIBOR Based Loan (Regular Loan): Ordinary capital resources 70.00 Cofinancing 152.00 Commercial Banks (Full ADB Administration) 82.00 International Finance Corporation (IFC) 50.00 Leading Asia’s Private Infrastructure Fund (LEAP) (Full ADB Administration) 20.00 Others c 71.00 Total 293.00 Currency of ADB Financing: USD a ADB’s proposed PRG will cover up to $77.90 million, i.e., 95% of the B loan for the commercial banks of up to $82.00 million. b The project reduces greenhouse gas emissions. However, it does not fall under the eligibility criteria for climate mitigation finance as defined by the joint multilateral development bank methodology on tracking climate finance, which notes that not all activities that reduce greenhouse gases in the short term are eligible to be counted towards climate mitigation finance. Accordingly, greenfield fossil fuel projects are excluded, and climate mitigation finance is considered zero. c Derived by deducting ADB financing, B loans and Cofinancing from Project Total Cost. Source: Asian Development Bank This document must only be generated in eOps. 09102018094717289799 Generated Date: 05-Nov-2018 11:20:33 AM I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed A loan of up to $70,000,000; (ii) a proposed B loan of up to $82,000,000; and (iii) a proposed partial risk guarantee (PRG) for the B loan covering up to $77,900,000 of principal plus interest and guarantee fees for the Riau Natural Gas Power Project in Indonesia. The report also describes the proposed administration of a loan of up to $20,000,000 to be provided by the Leading Asia’s Private Infrastructure Fund1 (LEAP), and if the Board approves the proposed loans and partial risk guarantee, I, acting under the authority delegated to me by the Board, approve the administration of the loan. 2. The proposed loans and PRG will support the construction of a 275-megawatt (MW) combined-cycle gas turbine (CCGT) power plant and ancillary infrastructure in Riau province in central Sumatra. The Asian Development Bank (ADB) invited and is working together with the International Finance Corporation (IFC) on its first joint project in Indonesia. Furthermore, ADB will also be providing its PRG product to commercial banks for the first time in Indonesia thereby significantly increasing our cofinancing relationships. This plant will contribute to the diversification of energy sources in the country and will also provide an affordable power generation source that could increase the penetration capacity of renewable energy sources in the Sumatra grid. II. THE PROJECT A. Project Identification and Description 1. Project Identification 3. Indonesia is the largest economy in Southeast Asia, with gross domestic product of about $1,015.4 billion (current United States dollars) in 2017.2 Economic growth averaged 5.0% during 2015–2017, but stronger growth is needed to drive poverty down and reverse high inequality.3 Growth remains below potential because of structural impediments such as deficient energy infrastructure. ADB estimates Indonesia’s infrastructure investment needs at $1.1 trillion for 2016– 2030, or $1.3 trillion if climate adaptation measures are included.4 Accelerating investment in affordable and sustainable energy is critical for achieving the country’s economic and social development goals. 4. The Ministry of Energy and Mineral Resources (MEMR) anticipates power demand to exceed current forecasts, resulting in a shortage that could undermine the country’s sustainable growth potential if not addressed adequately. Every year, the MEMR issues a rolling 10-year plan prepared by Perusahaan Listrik Negara (PLN), the national electric utility, to prioritize new power 1 Financing partner: Japan International Cooperation Agency (JICA). 2 International Monetary Fund. 2018. World Economic Outlook (WEO). Washington, DC. 3 The proportion of people living in poverty has declined by more than half, from 24% in 1999 to 10.1% in 2017, but remains high for a lower middle-income country. 4 ADB. 2017. Meeting Asia's Infrastructure Needs. Manila. 2 investments. The National Electricity Business Plan (RUPTL), 2018–20275 indicates that, during this period, 56 gigawatts will be added to PLN’s network.6 5. Supporting sustainable growth. The use of combined-cycle gas-fired power generation can improve the environmental sustainability of the current energy mix by displacing diesel and coal as fuels for electricity generation.7 Gas engines and turbines can respond more quickly than coal and diesel units and, therefore, are better suited to responding rapidly to load fluctuations. This, in turn, can enable greater use of intermittent renewable energy sources, such as wind and solar. The increased usage of natural gas will therefore help the government to reach the target of 23% power generation from renewable energy sources. 6. Increasing power affordability. PLN awarded the project to the sponsors through a competitive bidding process. The project will contribute to lowering the average power generation cost in Sumatra. The MEMR issued new regulations in January 2017 to set energy tariffs against the local and national grid cost of power generation.8 The cost of power generation is issued by the MEMR every year. The project’s tariff is well below the cost of power generation in the area,9