16 September 1999: Excessive confidence casts a pall over Indonesian state electricity utility: Payment disputes are affecting many big names in the power industry, as well as powerful creditors

Rarely has over-confidence been this costly. Perusahaan Listrik Negara, Indonesia's state-owned electricity utility, predicted up to 15 per cent annual growth in demand for electricity; foreign power producers agreed unusually expensive contracts, awarded without competitive bidding and dependent on political cronies rather than legal guarantees. The result is a mess almost as bad as Indonesia's highly publicised banking problems. Although difficulties with electric utilities have received less attention than banking in the Asian crisis, PLN's problems are an acute version of those that have occurred across the region. World Bank officials say they must be solved if there is to be full recovery from the crisis.

PLN has 50 per cent more capacity than it needs on the main grid of Java and Bali, not counting 27 independent power producers (IPPs), some of which hold take-or-pay guarantees. It is saddled with some Dollars 5bn (Pounds 3bn) in debt, which tripled in rupiah terms after the exchange rate fell, not counting power purchase contracts. The utility calculates it will owe almost Dollars 1bn a year just to Paiton I and II, two IPPs that have started production.

Adding to its troubles, PLN sells electricity at an average of Rp220 (Pounds 0.02) per kWh while its own production costs approximate Rp340, as some 60 per cent of costs are in dollars. The government has ruled out price increases for fear of upsetting Indonesia's restless poor.

As a result, PLN reported Dollars 1.07bn in losses for 1998 and was forced to pay its suppliers at an artificial exchange rate of Rp2,450 per dollar, a third of the going rate. Edison Mission Energy, Mitsui, General Electric and an associate of former President Suharto say their Paiton I plant has not been paid at all for an invoice due on August 15.

Edison has threatened to sue for Dollars 4bn in damages unless PLN pays or starts negotiating by September 20, joining two smaller US producers suing PLN and the government for breach of contract.

The claim bodes ill for Paiton II, which is backed by Siemens of Germany, PowerGen of the UK and a son of Suharto. Its first unit is due to issue an initial invoice to the utility.

The payment disputes affect a host of big names in the power industry, as well as powerful creditors such as the US and Japanese export agencies, which may well balk at lending to Indonesian state companies once one has defaulted. Edison has sent in high-profile lobbyists such as Warren Christopher, former US secretary of state.

Jakarta has agreed to take on PLN's debts to the World Bank and other multilateral lenders but, facing a public debt larger than its gross domestic product, the government has balked at taking over PLN's commercial debt and negotiations with the IPPs.

Nor should it, according to officials at the International Monetary Fund, World Bank and agencies advising the government.

"The reality is that they are trying to screw money out of a poor country for electricity which is unwanted, overpriced and agreed under 'unclear' circumstances," said one foreign government adviser. "The government has not given any guarantee to PLN or the IPPs."

All this helps explain the defiant tone of PLN's president director, Adhi Satriya, who last month accused private power producers of making "a world-class mark-up" in charges to PLN.

Mr Satriya threatened to cancel deals and sue Paiton I and II if he could find evidence of corruption in the awarding of contracts. Edison insisted its rate was similar to those charged by competitors in Thailand and the Philippines, save for an added charge to pay for extra expenditures on infrastructure near the plant.

PLN wants the IPPs to charge less, start selling later than planned and forgo the take-or-pay clauses that guarantee them income for 30 years. Mr Satriya said PLN planned to shift to competitive tenders, in which units of PLN and private producers would compete for access to the grid. "If the project is efficient, then the project is financially viable by itself," he told the FT. "Then it does not need additional guarantees or take-or-pay commitments."

The IPPs are loath to lose this guarantee but Mr Satriya said PLN was amenable to a transition in which the IPPs would compete but have guaranteed income for 10 years.

PLN has rejected a suggestion by Paiton I to defer earnings and pool production with a PLN plant nearby, and dismissed suggestions of compensation in the form of additional investment opportunities.

Instead Mr Satriya embraced an offer by Sumitomo to complete the Dollars 1.77bn Tanjung Jati B power plant by 2003, a delay of four years from its original due date, and sell it to PLN rather than charge for power. He said he had applied for a Dollars 1.15bn soft loan from the Japanese government, arguing that this arrangement would save PLN Dollars 312m a year. Japan has yet to decide whether it would fund such a project.

The Financial Times

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