This case study was provided for business school students for illustration and discussion on project finance topic. The term “Project finance” can simply be define as a financing arrangement for an economically and independent project that uses everything that the project can offer as its collateral for assessing the risk and the basis of its return of investment.  This assessment can also be called as "limited recourse" financing because the capital provider are given only a limited recourse against the project borrower assets.

Furthermore, this financing assessment for a project differs with the traditional corporate finance concepts, whereby typically the lender will look to the strength of a company’s historical balance sheet to retrieve their funds back, as in a project loan the creditor will look almost solely toward the expected cash flows from the project for its repayment of the loan.

Project finance itself can be arranged in different structures/schemes in which one of these schemes is called as a Built-Operate-Transfer (“BOT”) arrangement.  This case of “PT. Indogas: BOT Project Financing” is an example of a BOT project financing arrangement that had been carried out for a gas infrastructure production facility in East Java, Indonesia.

The Krakatau Steel’s (Persero) management confronted a difficult task in obtaining new capital injection to increase the production target from its current capacity 2,5 MT to 5 MT by year 2013.

The options faced by management are whether KS issues new shares through Strategic Sale (SS) or Initial Public Offering (IPO) mechanism. In this case, both alternatives had their pros and cons. The strategic partner for Strategic Sale mechanism is offered aggressively by ArcelorMittal, foreign steel company, Luxemburg and Indian joint steel company.

The controversy strategic sale issue came to an end in 18 September 2008 when the Indonesia’s Legislator Body or DPR ruled out any strategic sale of KS ownership to foreign parties and that KS’s equity requirements for the planned expansion and enhancement of their facilities would be conducted through an Initial Public Offering (IPO) process.

The IPO of KS confronts a reality of market crash near the end of 2008. While time was an essence as the development project was expected to take 2-3 years, optimizing shareholder’s value by selecting the best choice of source of fund given the current markets was also important. Eventually, proposal from ArcelorMittal for Strategic Sale remains on the table.