Beware of Philippines-style electricity crisis

By James Castle and Todd Callahan

JAKARTA (JP): In many ways Indonesian consumers are no different than consumers in other countries. From San Francisco to Jakarta it is a universal truth that no customers take pleasure in being asked to pay more. This is particularly true in the case of utility subsidies, which in many countries have become viewed as an entitlement and are thus difficult to roll back once they are in place.

The current debate over electricity prices in Indonesia is a good example. Those in favor of the average 17.5 percent price hike planned for July 1 report that Indonesia, now one of the most indebted countries in the world, can no longer afford to foot the bill for individual and business electricity users. Even after the July increase, annual subsidies for electricity will still amount to Rp 4.7 trillion.

Meanwhile, those opposed to the plan have sounded the alarm that such a move would worsen economic conditions, especially for the poor. Critics intent on mobilizing public opinion contend that inflation will rise, industries will close and workers will be retrenched. In general, the arguments in the domestic media repeat this refrain.

What has not been adequately covered, however, is the extent to which electricity prices are subsidized in Indonesia. Indeed, many people are unaware of the huge gap that exists between what they pay for power and the real market cost.

Others are unaware that Indonesian electricity tariffs have plunged to the lowest in the region since the onset of the Asian economic crisis. For instance, neighboring developing countries such as Thailand, Malaysia and the Philippines all charge much higher retail tariffs than Indonesia.

Even poor countries such as India and Pakistan, with lower average levels of personal income, pay far more for their power. The accompanying bar graph comparing retail tariff rates across Asia helps to put things in perspective. Although the data was published last year and the numbers are from 1998, it is worth noting that the overall comparisons remain valid.

Another poorly appreciated point is the consequences of a severe electricity shortage, which even PLN officials admit could occur by 2003 if new power development plans are not initiated soon. While the prospect of nationwide blackouts has been reported by the local press, none have laid out what this would actually mean for the country.

On this score, the extreme power crisis experienced in the Philippines between 1989 and 1993 provides a glimpse of what could happen in Indonesia if the right decisions are not made now to avert a disaster.

On a macro level, the impact of the electricity crisis on the Philippines economy was disastrous. According to Peter Wallace, president of the Philippines chapter of the Economist Intelligence Unit, manufacturing production declined by 30 percent during this period.

An Asian Development Bank (ADB) source also remarked that debilitating blackouts contributed to economic losses and unemployment estimated at US$600 million to US$800 million per year, which was equivalent to approximately 1.5 percent of gross domestic product (GDP). Indeed, insufficient power capacity was such a drain on the economy that it was one of the key reasons why GDP growth plunged from 6.2 percent in 1989 to negative 0.6 percent in 1991 and 0.3 percent in 1992.

On a micro level, what happened during this period is even more disturbing. Anecdotes from Filipino expatriates now working in Jakarta reveal that power rationing had to be practiced in Manila and industry associations such as the chamber of commerce actively coordinated with Meralco, the capital's electricity distributor, to apportion the available supply.

The National Power Corporation's (Napocor) generating deficits were so serious that power barges were even towed to Manila and connected to the grid. At the end of the day, many companies were simply forced to invest in their own generating capacity. Procter & Gamble, as an example, could not afford disruptions in its manufacturing lines, so it invested in expensive co- generation facilities to cope with the frequent interruptions in supply.

Great personal hardship was also inflicted on the Filipino people during the electricity crisis. At the height of the emergency in 1992 and 1993, blackouts became unbearable and sometimes lasted as long as eight to 10 hours. Frequent night- time cuts occurred, which had implications for crime and personal security. Traffic lights did not work, which made moving around more difficult than usual.

In desperation, affluent Filipinos often bought generators for their homes, and demand for such generators soared to such levels that waiting lists for some brands were as long as seven months. The noise produced by the generators created acrimony and friction between neighbors. The generators also served to illuminate the gap between society's haves and have-nots, both figuratively and literally. In wealthy areas of Manila akin to Jakarta's Pondok Indah and Menteng, it was not uncommon for the lights to be burning while less prosperous areas nearby were black or lit by lanterns.

The easing of the Philippines power crisis finally came in 1994 due to decisive leadership by former president Fidel Ramos. One of the first things he did was to coax congress into passing a law that gave him emergency powers to fast track the development of more electricity capacity. Slow bureaucratic processes were bypassed and the government focused its attention on building power plants that were fast to put up.

Electricity rates were also increased and enabling legislation was pushed through the system to encourage private sector participation in the power industry. As a result of these courageous decisions, eventually there was enough electricity supply to meet demand, albeit at a huge cost.

At a recent conference in Jakarta, the director general for electricity Luluk Sumiarso, shared his vision of an industry able to provide coverage for households, and industrial and commercial growth across the country. Privately, many industry insiders see little chance of this materializing until Indonesia's politicians are willing to make the tough decisions to fix the country's problems.

For Indonesia's sake, let us hope the July 1 rate increase goes ahead as planned and authorities begin to focus on the policies and actions necessary to ensure a stable power sector.

The writers are Technical Advisors at PT Jasawenang Citrasempurna, a subsidiary of the Castle Group in Jakarta.