Every year I make the same New Years’ resolution – wipe the slate clean and start as you mean to continue. The first part is easy, but how you continue from that positive start is often a lot more challenging.
Indonesia is attempting to “wipe the slate clean” by dropping the legal action against the country’s 27 independent power producers. It is probably the most important announcement since things started to go wrong in Asia following the crisis.
While many of the countries’ economies have made a remarkable recovery, the problems in Indonesia have continued to cast a long shadow, essentially damaging investor confidence in Asia as a whole.
Now as we enter a ‘new Millennium’ President Abdurrahman Wahid is looking to reform the country’s economy and improve investor climate. Solving the tariff dispute is a good place to start. PLN, Indonesia’s state electric utility has been attempting to renegotiate tariffs with the IPPs since the devaluation of the rupiah meant power from the IPPs was too expensive.
The whole situation was complicated by claims by PLN that it was made to sign unfavourable deals during former President Suharto’s rule – the most notable case being the contract with PT Paiton Energy Co. PLN charged that it was unfairly priced and based on elements of “corruption, collusion and nepotism”.
While the allegations are denied and there is no evidence to support them, it is not the first time corruption has been cited in developing countries. A recent survey by Transparency International, concluded that the practice of gaining contracts through bribery in developing world markets is most deeply ingrained in the construction, defence and power industries. You can view the survey at www.transparency.org and make of it what you will, but all too often we hear of bribery embroiled in politics. The ongoing scandal surrounding former German Chancellor, Helmut Kohl, and the Christian Democratic Union is yet another example.
To his credit Wahid is ready to cut through the red tape and has said that Indonesia would honour all contracts made by previous government. The lawsuit against Paiton attempted to void the power purchase agreement on account of inflated prices for the plant. Now Indonesia’s economics minister, Kwik Kian Gie says that Wahid believes the negotiating table is preferable to the courts in handling these disputes.
This is a positive start but it is just the beginning. Negotiations will be tough as the two sides are a long way from seeing eye-to-eye. Wahid is showing willingness but how far this willingness will stretch remains to be seen. The question is what price is he prepared to pay in order to bring money back into the country? Paiton Energy is contracted to receive $0.085/kWh while the government is hoping to get this down to $0.035/kWh. House members are concerned that the government will have to shoulder the cost of an electricity tariff difference of $1.26 billion for this year.
Another task for the government is to turnaround PLN. An independent audit of the company found it had lost an annual 5.56 trillion rupiah ($725m) through inefficient operation and investment.
The government has issued Decree No.166/1999 providing for a body responsible for the restructuring and rehabilitation of PLN. Former mines and energy minister, Kuntoro Mangkusubroto has been appointed as PLN’s new head following the resignation of Adhi Satriya. He has been told to sort out negotiations with the IPPs and has been given the task of increasing efficiency and making PLN operate on a commercial footing.
However, the president sees all of this as just the tip of the iceberg, “PLN is just peanuts. On the whole we want the investment climate to remain guaranteed”. Indonesia’s stance on the IPPs had pitted it against the US and other countries whose export credit agencies financed power projects. Now the country has announced a reform effort aimed at freeing up $5 billion of loans from the International Monetary Fund over the next three years and billions of dollars from other international lenders.
We will see how things work out. I have made my start to the new Year in a new premises – note the new address. Also note the radical new haircut. Let’s hope by the end of the year I have not reverted to a 70s-style Afro and that Indonesia’s problems are not just as big.