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.