Electricity company's plight

Electricity company's plight

However one analyzes its financial condition, state
electricity company PLN is without a doubt broke. With current
assets of only Rp 9.7 trillion (US$1.02 billion) as of September
(latest data available) and Rp 77.3 trillion in debts, of which
Rp 47.3 trillion were short-term liabilities, including Rp 21.5
trillion maturing last month, the state utility company is
technically bankrupt. Yet the government and the House of
Representatives remain embroiled in protracted debates about ways
of resolving the company's huge debts.

More damaging was a recent threat by chief economics minister
Rizal Ramli to let PLN go bust, pointing out that the huge debt
problem was of the company's own making. Rizal said state
companies would never learn a lesson if the government intervened
to bail them out every time they defaulted on their debts.

PLN, like most other state companies in the country, is
certainly not a model of a well-managed enterprise. It is
notorious for its gross inefficiency and for often exorbitantly
marking up project costs. It also has its own share of corruption
and collusive practices, as discovered through a special audit by
Arthur Andersen two years ago.

It would be nonetheless unfair to place all the blame squarely
on the PLN management, notably the current one which was
appointed less than a year ago. As the audit also found, PLN,
like most other major state companies, had been used as a cash
cow by former president Soeharto's family members and cronies.
Government intervention inflated the costs of its procurement
contracts. Still more devastating, the company had been forced to
do business with dozens of private power generating companies
owned by politically well-connected investors under contracts
which were aimed at only benefiting the investors.

It was these politically directed dealings which were
primarily responsible for PLN's inefficiency. But the plunge of
the rupiah against the U.S. dollar in late 1997 was the last
straw. As the company's borrowings have mostly been in dollars
and 60 percent of its production costs are based on foreign
currencies, its debts have exploded to their current level. What
makes the problem even more complex is that PLN cannot set its
rates on the basis of market forces because they are set by the
government.

Therefore, prolonging the debate on who should be responsible
for resolving the PLN debt would be playing a game of
brinkmanship.

Further delay in resolving the PLN debt through either
rescheduling or debt-equity conversion arrangements could
eventually lead the country into a serious electricity crisis.
The government should be well aware that the systemic risks of a
massive power failure are equally devastating as those of bank
failure. But while the government has spent more than $65 billion
in taxpayers' money to bail out the banking industry, the
electricity sector has been left in a perilous situation.

Even now the seeds of a major crisis are being sown as PLN is
no longer capable of doing standard maintenance work, let alone
making new investments to improve or expand transmission and
distribution networks. As its creditworthiness has fallen way
below standard it no longer has access to new commercial credit
lines or the capital market.

It is needless to reiterate how vital electricity is to the
people, the economy. As the progress achieved over the past 30
years has made the economy and the people, even those in most
rural areas, more dependent on power, one cannot imagine the
social chaos and disruption of economic activities that would be
caused in the event of a major power blackout.

Potential new investors are also watching how the government
solves the PLN debt problem. They may continue to shun the
country even after the current political uncertainty ends if the
problem of the electricity monopoly is not settled once and for
all. PLN has warned that if construction of new power plants is
not started this year, the country may encounter a severe
electricity shortage in 2003.

Therefore, while negotiations with independent power producers
should be sped up to review their lopsided power sales contracts
with PLN, it is most urgent for the government and the House to
make a final decision on resolving PLN's huge debts.