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Monday, 31 December 2012

Solar guys shine light on Islamic debt structures

Solar panel and heating installer The Solar Guys have been marketing its first Islamic bond – or sukuk – raising, due in the first half of 2013, to fund a 250MW solar power plant in Indonesia. Commercial director Dane Muldoon is not alone in Australia in being a novice in Islamic finance, let alone Islamic financing in an Asian market. He is sometimes caught off guard by how quickly things are moving for the family-owned Brisbane operation founded by his father and the connections of his joint venture partner at Mitabu Australia.
Rusydi Mitabu (known as Dody), director of Mitabu Australia, is the mastermind of the financing structure. The Solar Guys and Mitabu have formed a joint venture – SGI-Mitabu - to raise $500 million to build and finance the power plant.
“Just as an example,” Muldoon says. “I was saying to him, ‘you have told me we have this land allocation that’s been given to us by one of these [Indonesian] provinces. I asked him ‘where is this field, I want to know more about this field’. He says ‘you know I don’t know’. So he pulls out his mobile phone and rings the secretary of the governor of the province and says, where is that field again?”
Muldoon says Mitabu has a deep knowledge of Islamic finance structures. An Islamic scholar or sometimes a whole board of them are indispensable advisers for any company trying to tap Islamic finance. Mitabu also has the all important relationships with financiers and the right levels of government in Indonesia.
At a seemingly random meeting in Sydney he also discovered Mitabu was talking to microfinancers, which funnel private funds into development projects that might suit this project as it could bring electricity to some regions in Indonesia for the first time.
To avoid the Australian tax issues that have stymied Australian companies tapping Islamic finance they are raising the money via the Malaysian island of Labuan, which has been set up as tax-free to attract foreign capital.
“We like it because it is being treated as an offshore location for tax purposes and any corporate can raise sukuk in any currency so we won’t have a problem with a currency swap,” says Mitabu.
When raising capital offshore, companies typically face exchange rate risk, especially with recent volatility in the Australian dollar, unless they can raise the money in Australian dollars. Only a few companies can do this in selected markets.
The tax barriers in Australia to sukuk include state-based stamp duty and federal capital gains tax due to the transfer of assets into an out of special purpose vehicles under some sukuk structures to avoid the payment of interest, which is banned under Shariah law.
In SGI-Mitabu’s raising, investors will share ownership and profits with the joint venture in the form of rent instead of receiving interest. As in a normal debt raising, the venture uses Commonwealth government bond rates to price the issue as what they receive is in Australian dollars. Mitabu says pricing is the equivalent of somewhere between a 6 per cent and 7.5 per cent interest rate.
Initially SGI-Mitabu is raising about $100 million to fund the first 50 megawatts (MW). They are building it 50MW at a time because it is important to quickly build an income-producing asset, as investors don’t get a return until the asset they own begins making money.
“We expect to complete the first phase of the project in 10 months [of receiving finance],” says Mitabu. “You can start the project on 50MW. So you might produce 2MW in the first month and start paying the investor.”
Muldoon believes they are only just scratching the surface of the potential for their company in Indonesia. Demand for energy there is rising fast in tandem with a target of 25 per cent renewable energy by 2025 from 5 per cent now.
“250 MW – we could be doing that per annum for the next decade without a great deal of stress,” he says. “We’re talking to some provincial governments about undertaking our projects in their region and they are saying our own projected demand is hundreds of times higher [than this].”
Until recently solar was not a priority for the Indonesian government with abundant geothermal and hydro resources. But a big drop in solar panel prices globally is changing that.
“You have a big population base and a very high rate of industry growth, and simultaneously 25 per cent or so of their population don’t have electricity yet,” adds Muldoon.
“When you match those conditions with a couple of other facts, including that Indonesia is an archipelago of 14,000 islands that is not a good fit for a centralised power network, there is a real opportunity.

(Financial Review / 31 Dec 2012)

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