Sarulla Geothermal Power Project: Last Lap Challenges in the Development Process

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 in March, 2014 after a combined tender and development period of almost 10 years. A critical last stage of the project commenced in April, 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.

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. The finance team was confident that they could secure 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 and illustrates the difficulties of altering fundamental risk allocation at a late stage in the project cycle. The case is suitable for advanced undergraduate classes in finance, and postgraduate classes related to project financing.

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