Denial and crisis in the nation's power system

Denial and crisis in the nation's power system

Wimar Witoelar, Public Communications Specialist, Jakarta

We are not talking about terrorism here. Nor are we talking
about the Indosat controversy. They are unrelated events but both
contribute to the chronic crisis that sends Indonesia deeper and
deeper into an abyss of economic woe.

Both reflect common behavioral patterns of denial which
creates a crisis out of every problem. Denial of the potential of
terror made it easier for mad bombers to operate. Denial of
lurking suspicions toward privatization makes it easy for
politicians to capitalize on lack of transparency. Government
officials' dismissive attitude towards honest concerns of a
public are worsened by denial of reservations on the introduction
of foreign capital.

Today the public spotlight is not highlighting the electricity
crisis. But denial of the crisis makes it easier for disruptive
behavior in the politics of the nation's power management.

Denial of the state's economic insolvency makes it difficult
to explain the necessity of reducing subsidies. And while power
shortage is not in today's headlines, it will pop up anytime
there is a blackout and whenever grumbling about tariffs cross a
threshold level.

The police and the public and the international community are
working hand in hand to solve the Bali bombing mystery; hopefully
it is not too late. The Indosat case is sending tempers through
the roof as opportunism runs amok.

Fortunately in the power crisis, the situation is not as
dramatic. But it is certainly critical. Past policies have
resulted in a problem of supply and demand in electrical power.
We have increasing power demand going hand in hand with
insufficient electricity generation, transmission and
distribution. Now the solution to that problem is made difficult
because of public ignorance.

There is widespread unwillingness on a large part of the
public to pay a tariff that covers system costs because most
people are not used to paying for electricity. Actually an equal
number of people know that the solution lies in accepting a
sufficient electricity tariff.

But popular sentiment is difficult to rally behind measures of
financial prudency. The grasshopper's dance is much more enticing
than the ant's drudgery. If we could persuade people to work
together in finding an equitable tariff it will enable generation
supply to meet growing demand, and create feasibility of
expanding the transmission and distribution infrastructure.

Actually there is some good news. Indonesia is in fact ahead
of plans on electricity traffic recovery, according to the
Ministry for Energy and Mineral Resources. The plan is to achieve
a tariff of 7 US cents/kWh by 2005, and we are now at around of 6
US cents/ kWh.

This is based on a base figure of 3 US cents per kWh in 2000.
Economic considerations require a tariff of 7 US cents /kWh but
social political considerations (i.e. public acceptance) have
made the government decide to achieve that figure by 2005 instead
of forcing the issue too early.

Actually the economics of power are not that difficult to
understand. You need a certain amount of money to invest in power
generation, transmission and distribution and that money has to
be recovered. There are only two ways to recover the investment,
tariff revenues or subsidies.

In the past, the government has always subsidized heavily.
Most people in Indonesia have known no other kind of tariffs than
heavily subsidized ones. Electricity has always been cheap for
the consumer but expensive to the nation.

And because perception of price is largely based on what you
are used to, any price increase is seen as outrageous for a
commodity, which most people see as something the state is
obliged to provide for free, basically.

As we get our reality check on the need to finance electricity
without burdening everyone, we happen to be in a financial
crisis, which is almost surrealistic.

The costs of financing are really prohibitive today. According
to OECD sources, Indonesia belongs in category 6 on a scale of 1
(lowest risk) to 7 (highest risk), less risky only than Cambodia
and riskier than Bangladesh, Papua New Guinea and the
Philippines.

The unfortunate implication is that higher risk means higher
costs, which need to be added to the interest rate. For a
sovereign loan with a 12-year repayment the fee as a percentage
of the debt is 17.89 percent for Indonesia compared with 3.56
percent for Malaysia and 6.17 percent for Thailand.

Why are the costs so high for Indonesia? The general answer is
that ours is a high-cost economy. The total inefficiency of any
production process is exacerbated by externalities, which impose
heavy burdens on any cost structure in Indonesia.

In international finance, the cost of capital is high because
of the poor country credit rating provided by agencies such as
Moody's and Standard & Poor's. Indonesia's track record is marked
by political and economic uncertainty, bureaucratic inefficiency
and a dangerous record of not honoring international arbitration.
Hence to attract investment, Indonesia must face the fact that
higher costs equal higher tariffs.

This is then the bottom line in the power sector. We are in a
country of higher costs, we have an unfortunate supply and demand
situation, we have a country risk that command high premiums. All
in all, the realities have to be met. Denial is self-defeating.
And when we overcome denial in issues of electrical power, then
we will be on the way to a resolution of the electricity crisis.