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.