Who benefits from MIGA’s sustainable loan guarantee for PLN?
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Sometimes bankers can be too smart for their own good. This is especially true when the market is distracted by misleading statements about the impact of sustainability and investors fail to read the fine print.
Indonesian state-owned electricity company PT Perusahaan Listrik Negara (PLN) began 2021 by proudly announcing that it has finalized a sustainable $ 500 million loan from a consortium of leading global banks, including Citibank, DBS, JP Morgan, Standard Chartered and SMBC – all of which count indebted PLN as a valued customer.
It even got the imprimatur of the World Bank Group’s multilateral investment guarantee.
(MIGA), which provided a guarantee to lenders to cover the risk if the state-owned PLN could not meet its repayment obligations. At first glance, this was a tailor-made loan that seemed like a welcome solution to PLN’s urgent cash needs.
The loan was also touted as a good way for PLN to start establishing its credentials in the green and sustainable finance market. PLN Chief Financial Officer Sinthya Roesly was quoted in the press as saying that “This step is a follow-up of PLN in achieving the sustainable finance framework … and is a real agenda for the transformation of PLN.”
Maybe PLN’s Roesly can be forgiven for engaging in some market rotation. PLN faces serious financial pressures, and affordable funding from all sources must be at the top of its agenda in 2021. MIGA’s cynicism is even more baffling. An analysis of this green loan makes it difficult to shake the impression that it was an opportunistic exercise in the green box.
Indeed, the indirect beneficiaries of the revenues are the six sponsors of renewable energy projects that have already been financed, in part, by the World Bank and two other development finance institutions, the Asian Development Bank (ADB) and the Bank. Japan for international cooperation. (JBIC).
It is no more and no less than an enhanced credit working capital facility designed to cover PLN’s “operating expenses” related to six projects that have already been fully funded.
MIGA’s documentation for the PLN loan describes a process in which they were approached by eight “potential lenders” to provide collateral covering up to $ 617.5 million of loan principal and future interest for a maximum term. five years. The purpose of the loan is to finance “short-term working capital expenditures” for renewable energy projects that feed the PLN. MIGA’s documentation for its board of directors says this guarantee is “in line with MIGA’s $ 6 billion Covid-19 response plan” which is intended to “help member countries deal with the global pandemic and its impacts ”. The loan is also intended to support “sustainable energy and universal access in Indonesia”.
Covid relief and clean energy are obviously worthy priorities, especially in a country like Indonesia, which has been hit very hard by the impacts of the pandemic. What is missing here is the careful structuring that would support tangible incentives for PLN to make real progress on the energy transition and deliver viable clean energy solutions to low-income communities in Indonesia.
First, the financial realities. It is no more and no less than a credit subsidized working capital facility designed to cover PLN’s “operational expenses” related to six projects that have already been fully funded. In other words, the funding will cover tariff and power purchase agreements for renewable energy projects that have already been completed and are likely already part of PLN’s operating budget. This means that the loan fails the additionality test. The funding does nothing to provide new incentives for PLN to accelerate the energy transition – or to address any of its existing operational challenges. It just means that PLN will benefit from an injection of cheap working capital to stay on top of its IPP payments – the clean and the dirty. This does not change the current or future generation mix of PLN. It just plugs a cash hole.
Second, it appears that MIGA chose to subsidize a loan to PLN which could be seen as a benefit to the World Bank Group.
Much like a green bond whose proceeds are intended to be earmarked for a specific project, the MIGA-backed green loan was specifically designed to provide working capital to finance payments for projects that have been funded in partly by the World Bank (MIGA’s parent company) and other development finance institutions (DFIs). Optically, this comes uncomfortably close to a type of self-operation that undermines the lofty goals cited in the project documentation. In this case, the major offshore PLN lenders, backed by the guarantee from MIGA, have done little more than provide working capital financing to PLN which will now be, in part, used to meet PLN’s financial commitments. to projects that are likely to meet debt repayment obligations to the World Bank, JBIC and AfDB.
The interest of DFIs in ensuring that their projects stay up to date – and achieve the expected return – is easy to understand. By providing credit enhancement to lenders, MIGA has lowered PLN’s financing costs and mitigated the risk that PLN will not pay the rates for its projects. This will allow DFIs to recycle capital, but it does not address the fundamental strategic challenges of PLN resulting from a decade of over-reliance on independent coal-fired power projects (IPP) with fixed capacity payment obligations. At a time when DFIs are expected to work with PLN to address fundamental operational and energy transition issues, it seems they have instead chosen to put a low cost band-aid to PLN’s financial woes.
Third, this deal does little to put PLN on the path to success in the sustainable finance market. Green bonds and sustainability loans are designed to channel funding to new sustainable projects and investments that will help businesses achieve tangible sustainability results. Governance – in the form of transparency and disclosure – is crucial to strengthen the credibility of issuers like PLN. MIGA must be well aware of the importance of these principles as an entity of the World Bank Group. Instead, the available documentation indicates little that MIGA appreciated the challenges PLN faces in building a sustainability record.
Major asset owners and asset managers have already expressed clear preferences for projects that provide additionality in the form of funding for low-carbon projects that would not have been funded otherwise. In addition, any form of project financing for a traditional green bond only gains credibility in the market when the issuer has demonstrated that the project commitments support a coherent energy transition plan and a credible sustainable financing framework. In the absence of a current electricity sector planning document or an updated nationally determined contribution, it is impossible for investors to assess the role of the six renewable energy projects in the production mix of PLN or if these projects have the desired positive environmental impacts.
PLN lenders were smart enough to know that a greenish label would appeal to the market. But given the importance of credit enhancement to PLN lenders, it is hard to imagine that MIGA could not have come up with a more credible set of incentives for PLN that would have a positive impact. Now is the time for innovation and high impact sustainable financing solutions, not smart packaging for a secured working capital loan that destroys market credibility.
Melissa Brown is Director of Energy Finance Studies for Asia at the Institute for Energy Economics and Financial Analysis