BP, World Bank discuss loan for Indonesian development: Report
Wednesday, March 12 2003 - 02:18 AM WIB
While the discussions are at an early stage, and no specific amounts for the loan have been decided yet, the possible World Bank loan would effectively be securitized by billions of dollars in expected tax revenue and royalty payments from BP's planned Tangguh natural-gas project, allowing Papua to begin to increase its spending on social-development programs well before the project comes on line.
"It's an idea at this stage. But I think it's a good idea," said Bert Hofman, the World Bank's chief economist in Jakarta. He added, however, that discussions with the government of Indonesia still need to be conducted to determine whether such a loan would fit with the government's plans to reduce its overall foreign borrowing over time.
BP's $2 billion Tangguh natural-gas project is Indonesia's largest new investment, and BP wants it to become a model commercial project in the developing world. But in seeking to bring social benefits to Papua -- Indonesia's least-developed province -- the company has been hampered by long project-development cycles and some setbacks related to supply contracts. Although construction is slated to begin next year, the company currently expects that the project isn't likely to begin generating significant revenue for Papua until approximately 2011.
Given that delay, an independent assessment of the Tangguh project commissioned by BP recommended last week that BP try to arrange a bridging loan for Papua so that local people begin to see substantive benefits from the project in the near future, and will thus be more inclined to support it. It added that such a move could be even more important in light of recent setbacks in negotiations with potential buyers, such as a decision last year by China's National Offshore Oil Corp. to accept a smaller amount of gas than BP had hoped to supply.
The assessment also argued that if funds are disbursed by an international lending institution, there can be more oversight to assure that they will actually be spent on the required facilities and "are not being wasted, or worse, diverted through ineffective or corrupt local governments."
In a statement, BP said it had explained to all affected parties that there could be some delays in getting revenue from its gas sales to local governments, and said a special loan might be a good response to the situation.
"BP agrees that an externally financed line of credit to Papua would bring many benefits. However, this is a decision between Papua and the government of Indonesia," the company said.
BP estimates that the project could generate some $12 billion in total revenue for central and Papua governments over the next 30 years. It has also noted that when revenues reach their peak, between 2011 and 2022, the government of Papua itself is likely to receive approximately $225 million annually, or more than Papua's current total budget of $190 million.
The World Bank has previously warned Indonesia to keep a tight control on borrowing by its newly empowered provincial governments, and not to issue new debt that is securitized by revenue streams generated by a variety of resource projects in the country.
But Hofman noted that the potential loan for Papua could be structured to work around those concerns. For one, all World Bank loans are made directly to the central government, which in turn would then hand over the proceeds to the provincial government of Papua. As a result, the loan would dodge concerns about unrestrained and uncontrolled borrowings by provincial governments.
Previous efforts by Indonesia to sell securitized debt in world markets were also viewed by the World Bank and other observers as a possible way for the country to avoid having to submit to the discipline of an International Monetary Fund program. But with the World Bank itself participating in a potential loan for Papua and Indonesia's IMF program due to end later this year in any case, such concerns would be substantively diminished. (*)