Beware of Philippines-style electricity crisis

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 Indonesian Director
General of Electricity 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.