Court ruling

Court ruling 'surprises' energy sector

Eddy Satriya Jakarta

Economic changes coupled with advances in new technology, the need to conduct good-governance practices, and intensifying pressure to reduce the central government's role have significantly brought new developments to the provision of public utilities and infrastructure in many developing countries.

Waves of deregulation, liberalization and privatization started in the 1980s have had an effect on decision makers in setting up their industries.

The energy sector in Indonesia has also progressed significantly in its reform through the issuance of new regulations. Oil and Gas Law No. 22/2001, Electricity Law No. 20/2002, and Geothermal Law No. 27/2003 were all promulgated after the economic crisis in 1997. The main themes of the new laws are improving the quality of services, abolishing monopoly, defining the new role of the government, and improving public- private partnerships in infrastructure provision. As a result, the energy sector is now ready to open up the domestic market and to redefine the government's role in the industry.

Therefore, it was like a clap of thunder overhead on Dec. 15, 2004, when the news regarding the dissolution of Electricity Law No 20/2002 reached all decision makers, investors and players in infrastructure who assembled in the National Development Planing Board's (Bappenas) hall on Jl. Taman Suropati, Central Jakarta.

The reason for the annulment is that some of the main articles -- article no. 16, 17, and 38 -- of the Electricity Law are against article 33 of the 1945 Constitution. Having the Electricity Law canceled means that the law is no longer effective and all of the contracts and commitments being prepared must be stopped. Thus, at the moment there is no law or basic regulation effectively in place for the electricity industry. Yet, some say that the annulment means that the old Electricity Law No. 15/1985 is the prevailing law. However, that is not automatically the case since the old law had already expired and the decree made by the Constitutional Court canceled Law No. 20/2002 but said nothing about Law No. 15/1985. In short, the annulment has caused a backlash and the virtual eclipse of the power industry. The industry may be led into an even darker tunnel, unless the government and related stakeholders make a quick move to fill the gap.

As a matter of fact, the enactment of Electricity Law No 20/2002 has already marked a new era in the country's power sector. A series of restructuring and reform steps have been taken accordingly. For example, the formulation of the so-termed Blueprint for Indonesia's Power Sector -- also known as Guidelines for the Development of the National Power Industry -- and the establishment of the Electricity Market Supervisory Board through Government Regulation No 53/2003 are among reform steps taken in the sector. In addition, good will for reform has been signaled by the resignation of the former director general of electricity and energy utilization as a member of the board of commissioners of state-owned electricity company PLN.

On the other hand, unfortunately, PLN has not fully recovered yet from the economic crisis. The fact that only half of the population is connected to the grid shows PLN's difficulty in expanding its services. Blackouts and brownouts in some areas outside of Java and Bali islands also indicate a lower grade of electricity services. The company's limited budget for new investment and the rehabilitation of power generators, and the price increases of crude and diesel oil has hampered PLN's activities significantly since about one third of its power generation is oil-fueled.

Other alternative for funding new investments in the system -- ranging from generation, transmission, and the distribution of the power to end-users -- are through foreign debt or loans. However, financing new projects through foreign loans has not been that easy for PLN. Most investors now seek government guarantees due to the poor track record of PLN., as many of its previous projects suffered long delays in the implementation stage.

The other way to improve the power supply service is through increasing the selling price to users. As the sole operator in the country, PLN -- through a government decision -- has successfully increased electricity charges over the last four years. Statistics show that price increases in the electricity tariff are much higher than those of other basic utilities, such as water supply and public transportation. In addition, power losses and inefficiency in management have worsened the overall performance of the power sector. All of these difficulties and the "wait-and-see" attitude of investors in the power sector have caused the deterioration of overall services.

Thus, we arrive at the question: How does this logic actually work? On one side, Electricity Law No. 20/2002 encourages the modernization of the sector through, among other things, redefining the government's role, gradually liberalizing the power sector that has been controlled by one party for decades, and by inviting private participation in the sector. The new Electricity Law has also freed PLN from constructing facilities and providing services in rural and remote areas. Article 7 of the law says that this task has now been transferred to both the central and regional administrations.

On the other hand, the cancellation of the law may throw the industry into uncertainty, which could lead to the deterioration of power supply services and worsen the investment climate at a national level. In other words, the cancellation of Electricity Law No. 20/2002 does not send out a positive signal ahead of the Infrastructure Summit.

The Constitutional Court has made its decision. Yet, we are aware that not all liberalization programs carried out across the world end as success stories. This is not a matter of "the Lexus and the Olive Tree" as underlined by Thomas L. Friedman. But, this is purely a question of which one is now the real enemy to the welfare of the Indonesian people from transition to transition: Monopoly or liberalization? Only time will tell.

The writer is a senior infrastructure economist, working for Bappenas. He can be reached at esatriya@bappenas.go.id.

2. Pro03 -- Paying for the past in 2005 1 x 30

Paying for the past in 2005

Joseph E. Stiglitz Project Syndicate

The beginning of each year is high season for economic forecasters. With few exceptions, Wall Street economists try to give as upbeat an interpretation as the data will allow: they want their clients to buy stocks, and gloom-and-doom forecasts do little to sell them. But even the salesmen are predicting a weaker American economy in 2005 than in 2004. I agree, and am actually on the pessimistic side: In 2005 we may begin to pay for past mistakes. The biggest global economic uncertainty is the price of oil.

Clearly, oil producers failed to anticipate the growth of demand in China -- so much for the wisdom and foresight of private markets. Supply-side problems in the Middle East (and Nigeria, Russia, and Venezuela) are also playing a role, while George W. Bush's misadventure in Iraq has brought further instability. While prices have fallen slightly from their peaks, OPEC has made it clear that it does intend to allow much of a further decline. High oil prices are a drain on America, Europe, Japan, and other oil-importing countries.

The effect is just like a huge tax that transfers wealth to the oil-exporting countries. America's oil import bill over the past year alone is estimated to have risen by around US$75 billion.If there were any assurance that prices would remain permanently above even $40 a barrel, alternative energy sources (including shale oil) would be developed. But we are now in the worst of all possible worlds -- prices so high that they damage the global economy, but uncertainty so severe that the investments needed to bring prices down are not being made.

Meanwhile, the world's central bankers have been trained to focus exclusively on inflation. Many will most likely recall how oil price increases in the 1970's fueled rapid inflation, and will want to show their resolve not to let it happen again. Interest rates will rise, and one economy after another will slow.The march towards higher interest rates has already begun in the United States, where the Federal Reserve is betting on a fundamental market asymmetry.

For the past three years, falling interest rates have been the engine of growth, as households took on more debt to refinance their mortgages and used some of the savings to consume. The Fed is hoping that all of this will not play out in reverse -- that higher interest rates will not dampen consumption. Hope may not be enough. American households are far deeper in debt today than four years ago, magnifying the potential adverse effects of rising interest rates.

Of course, American mortgage markets allow households to lock in the lower interest rates. But in economics, there is no such thing as a free lunch, and here the cost can be enormous: New home buyers will have to pay more, and thus will be less willing and able to pay as much. Real estate prices could well decline, with a strong likelihood, at the very least, of a slowdown in the rate of increase. This, too, will dampen demand. This is only one of the uncertainties facing the U.S. economy.

Clearly, some of the growth in 2004 (there is uncertainty about how much) was due to provisions that encouraged investment in that year -- when it mattered for electoral politics -- at the expense of 2005. Then there are America's huge fiscal and trade deficits, which not only jeopardize future American generations' well being, but represent a drag on the current U.S. economy (a trade deficit is a subtraction from aggregate demand). As one of my predecessors as Chair of the Council of Economic Advisers, Herb Stein, famously put it, "If something can't go on forever, it won't." But no one knows how, or when, it will all end.

Indeed, President Bush says that he intends to spend the political capital he earned during the election; the problem is, he appears intent on spending America's economic capital as well. His promises include partial privatization of social security and making his earlier tax cuts permanent, which, if adopted, will send the deficits soaring to record levels. What, exactly, this will do to business confidence and currency markets is anybody's guess, but it won't be pretty.

As a result, an even weaker dollar is a strong possibility, which will further undermine the European and Japanese economies. Moreover, America's gains will not balance Europe's losses: the uncertainty is bad for investment on both sides of the Atlantic, and if lack of confidence in the dollar leads to flight from American stocks and bonds, the U.S. economy could be weakened further.

Europe, for its part, is finally beginning to recognize the problems with its macro-economic institutions, particularly a stability pact that restricts the use of fiscal policy and a central bank that focuses only on inflation, not on jobs or growth. But there is a good chance that institutional reforms will not come fast enough to lift the economy in 2005. China -- and Asia more generally -- represents the bright spot on the horizon.

It may be too soon to be sure, but prospects for taming the excessive exuberance of a year ago appear good, bringing economic growth rates to sustainable levels that would be the envy of most other countries.By contrast, the world's other major economies will probably not begin performing up to potential in the next twelve months.

They are all caught between the problems of the present and the mistakes of the past: In Europe, between institutions designed to avoid inflation when the problem is growth and employment; in America, between massive household and government debt and the demands of fiscal and monetary policy; and everywhere, between America's failure to use the world's scarce natural resources wisely and its failure to achieve peace and stability in the Middle East.

The writer is Professor of Economics at Columbia University.

3. Strait -- Resolving differences in disaster's wake 1 x 30 JP/7/STRAIT

Ending spats in disaster's wake

Ooi Kee Beng The Straits Times Asia News Network Singapore

The best memorial to the thousands of victims of the Indian Ocean tsunami disaster will be for the politics of the region to change for the better because of the widespread suffering and through the international relief work that is now needed.

The longer political considerations are kept out of the picture, the easier it will be for the flow of aid to reach the survivors. Governments have now to act more as administrators than as guardians of narrow interests and ethnic prejudices.

The mass media of all nations now have an important role to play in discouraging politicians from reaping personal and strategic gains from this huge catastrophe.

The United Nations, governments over the world, and all sorts of international organizations are now raising and allocating funds and sending people and supplies into the region to rescue survivors, limit starvation and stop the spread of tropical diseases. In light of this, travel restrictions should be eased dramatically, and local expertise should cooperate fully with the generous armies of international aid workers that are now on the way. Much needs to be done, and even if we manage to fend off the very real threat of starvation and disease, the process of mourning and rebuilding will take months.

Closeness between the different nations can grow out of this, since no human agency or enemy was involved in the disaster.

This is a time of opportunity. Things have changed. This will be hard to recognize because it all happened so suddenly, and because we tend to think that politics is about principles and economics. But politics is just as much about emotions and how we deal with them. Right now, we are all mourning and, Insya Allah (God willing), we can make use of that to tear down walls and wash away barriers between us. For example, would any terrorist now dare to set off a bomb in the region; are not international tensions between Australia and South-east Asian nations now relaxed? If politicians can behave as statesmen would, then we can make the most out of this global disaster.

We may say that this is a temporary state of affairs, and things will return to how they were before Boxing Day, 2004. But that is how things always are. They return to their old state because we allow them to return to being the same. If we choose to recognize that things have changed, then we can change things. It is exactly this kind of horrendous event that can help us break karmic circles of hate.

The growing tension between Thailand and Malaysia over southern Thailand is now swept away by the destructive power of the tsunamis. Given the new scenario, Prime Minister Thaksin Shinawatra of Thailand can now rely for a while on goodwill from Thai citizens of all religions and even from the Malaysian government. With vision and statesmanship, it is not impossible for him to create an atmosphere for balanced negotiations with the Muslim separatists in the country's south.

Without doubt, the civil war between Buddhist Singalese and Hindu Tamils in Sri Lanka has a history that stretches back over centuries, as does Acehnese irredentism. To a large extent, old scores matter because we want them to matter. This merely leads to new scores that in turn also need to be remembered, ad infinitum. To paraphrase Mahatma Gandhi, an eye for an eye will indeed leave us all blind.

We must remain unwilling victims of nature, but surely we do not need to continue remaining victims of history.

The writer is a visiting research fellow at the Institute of Southeast Asian Studies.