Power and people: The need for improved transparency

Harry Su ,  Researcher   |  Wed, 07/23/2008 10:53 AM  |  Business

Indonesia is facing its worst power shortage, with provinces experiencing severe electricity rationing. A visit to Kalimantan revealed that rotational blackouts are occurring practically every other day.

In Sangata, a sub-district in eastern Kalimantan, we discovered people waking up before dawn to queue for gasoline, which they would purchase for Rp 22,000 per liter (US$9.10 per gallon), or 124 percent more expensive than gasoline prices in the United States.

Such is the extent of the power shortage in Indonesia. Fortunately, for us living in Jakarta, the barometer for the country's stability, this problem is not allowed to surface.

It is worth noting that in addition to being an important driver and a reflection of Indonesia's economic development, the power sector also plays significant social and political roles.

Its provision of uniform electricity to consumers throughout the archipelago has, at least in the past, symbolized the government's commitment to social equity within the archipelago. To maintain this stability is crucial in our view, particularly in what could be a fragile period ahead of the 2009 elections.

The current power predicament raises the question of whether Indonesia or, more specifically, state electricity company PT PLN is truly experiencing this "sudden" capacity constraint as they claim to be or whether they are simply plagued by a cash crunch due to current high oil prices?

Meanwhile, PLN has projected its 2008 fuel consumption will increase to 10.06 million kiloliters, outstripping the 8.9 million kiloliter quota set in the revised 2008 state budget.

Whatever the problem, the public requires transparency -- for without transparency problems will not be solved.

How much exactly are Indonesian households charged per kilowatt hour? According to PLN's web site, it is 4.3 US cents per kilowatt hour, but this is based on 2003 data.

It is hard to believe that Indonesian consumers are really paying this low amount. A point in case would be a recent complaint from a colleague who worked in the Bahana fixed income department whose June 2008 electricity bill "suddenly" jumped 25 percent from Rp 300,000 per month to Rp 400,000 for the same usage. Transparency please.

These sudden power shortages would be easier to accept were Indonesia's economy experiencing a book like China's has in the past few years.

When the current administration took the reigns in 2004, the expected average GDP growth was 6.6 percent, which would reach 7.6 percent in 2009. The likely outcome will be an average of just 5.6 percent for the 2004 to 2008 period. Thus, we do not buy that industrial growth should be seen as the culprit for the current electricity scarcity.

The electricity shortage could also spell bad news for the Indonesian coal sector. In China, Beijing recently had to resort to imposing price controls on thermal coal purchased directly from mines. This coal price control system is likely to be enacted in Indonesia soon in our view.

Additionally, the emerging power shortages will have adverse implications for both inflation and growth going forward.

Problems in Indonesia's power sector could indicate that inflation would remain entrenched in the economy as PLN would like to implement some 30 to 80 percent electricity tariffs for industrial users, which account for some 41 percent of total electricity usage in Indonesia, based on the Central Statistics Agency's 2006 data.

This power shortage will also have a negative spillover effect on foreign direct investment (FDI), forcing foreign companies, particularly those in energy-intensive sectors, to cancel or delay investment plans.

Given that Indonesia's average electricity tariff is already one of the most expensive in the region (please see chart for details), PLN's plan to further raise electricity tariffs will undoubtedly result in fleeing FDI. Finally, we believe some SMEs will probably go out of business as a result of such drastic electricity tariff hikes.

In our view, the most important issue is that the government get to the bottom of PLN's operations -- this crisis demands a thorough audit of not only PLN but also Pertamina.

With the 10,000 watt coal-fired power plant project to be completed in 2010, why should PLN raise its electricity tariff to able subscribers when the production cost of electricity generation using coal is just 6.5 US cents?

Questions on efficiencies, mark-ups, misappropriation and reforms must be wholly answered, and the Indonesian people should demand nothing less. Additionally, the government should rise to the challenge of creating a new independent regulatory body to govern the electricity market, and concurrently promote private participation in the sector.

It is obvious that the process of reform in the electric power sector had not progressed far in the past decade, revealing limitations on the leadership of both the government as well as international donor agencies in this arena.

It is in this spirit that the Indonesian people must demand transparency in the power sector.

The writer is the head of research at Bahana Securities

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