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“Oh dear what can the matter be?”

“Oh dear what can the matter be?”

Junior Isles,

Managing Editor

“Johnny jumped around on deck as the flames from below gave him blisters. As they rose they scorched his trousers so now he wears his sister`s.” Don`t worry if you do not recognize it. It`s not a piece by any of the famous poets – just a Christmas cracker-type `joke` which cost me five pence at a school fund raising summer fair. It did not make me laugh much, but Johnny`s ingenuity in a crisis did draw a smile.

Like `Johnny` many power plant developers and equipment manufacturers got burned by the Asian crisis. Whether they come out of the crisis with new look trousers or no trousers at all will depend on how they can adapt to overcome market difficulties.

There is no doubt that Asia will return. But how? is almost just as interesting as when?

Forget Pakistan, India and China for now – they were largely unaffected by the downturn and have their own set of structural, political and bureaucratic problems.

In southeast Asia, however, the general feeling is that Thailand, Taiwan and South Korea will recover first. The Philippines is also looking promising with plans in place for restructuring.

Indonesia, one of the other formerly buoyant markets, however, is in a state of “suspended animation”. With a new government about to be put in place, it will be some time before things return to normal there. “Funds will not come back to Indonesia for some time,” said Gary Wigmore of law firm Milbank, Tweed, Hadley & McCloy. “Prices of assets are so low, vulture capital funds are coming back. Long term debt funds typically follow 12-14 months later,” he added.

Although IPPs in the country are in limbo there is still a glimmer of hope in the near term. “The CalEnergy arbitration award was good news. It was judged that PLN was wrong to cancel the project and awarded $570m to the developer. It sends out a message that Indonesia does have a law,” commented Wigmore.

Such comforting news will not be in store for all IPPs, however. Wigmore noted: “It will be impossible to accept power from Paiton 1 and 2. There will have to be some kind of accommodation on both sides. It`s hard to see how the government will make any major concessions conceding liability.”

“Accommodation” on both sides is exactly what is needed. It will be interesting to see how Indonesia`s plan to bail out Tanjung Jati B works out. The Indonesian government has asked the Japanese Overseas Economic Fund to consider a long-term loan for the half complete project being led by Hopewell and Sumitomo. If the plan is successful, it could break the deadlock between state utility PLN (Perusahaan Listrik Negara) and the 26 IPPs it has told it cannot afford their power.

According to reports, Sumitomo, which is Tanjung Jati B`s main contractor and provided $400 million in bridging finance, offered to obtain low interest loans from Japanese export credit agencies if PLN would buy Tanjung Jati B from Hopewell at a discount price.

Such a deal is unheard of and would not sit well with the US Exim Bank. US Exim Bank finances a number of the large power projects and the deal would put pressure on it to ease its stance that contracts are binding and unnegotiable. The fact is: all `contracts` are negotiable when there are few options. And sometimes a little flexibilty from all sides is all that is needed to move things forward.

Like all great fighters, the Asian market will be back and how it looks when it returns is just as important as the timing of the return. Hopefully it will be a new look market without the grey areas and pitfalls that were so characteristic of many countries in the region.

Joseph Anderson of law firm, Morrison and Foerster commented: “We will see slow, long term expansion while countries sort themselves out. Structural problems had been masked by the boom. In many countries there are problems with the legal and regulatory framework and there is often a lack of professional management. Solving these problems is a healthy aspect of the crisis.”

When the crisis is over, the smart players will have learned new skills and will be back – like Johnny with new trousers and all. For the not so smart, we will probably be singing: “Oh dear what can the matter be? Johnny`s not home from the fair”.

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