Tue, 14 Nov 2000

Legal course sought over IPPs

JAKARTA (JP): The government might seek a court solution as an option to end disputes with independent power producers (IPPs) if the latter declined to show goodwill in reducing power prices, Coordinating Minister for the Economy Rizal Ramli said on Monday.

Rizal said that the other option for the government was not to take any action at all, letting the power projects rust and causing investors financial losses.

"If the investors do not show goodwill in lowering their prices, the government may bring (the problem) to court," he said in response to a question from a participant of a business conference.

He admitted that this was against the stance of the previous cabinet which had dropped the legal-course option.

"We want to resolve this problem immediately and amicably, but in return we want the investors to show goodwill by lowering their prices," he said.

Rizal said that the 30-year contracts with 27 IPPs would result in electricity bills totaling US$130 billion for the state electricity company Perusahaan Listrik Negara (PLN).

"This is a time bomb which must be resolved immediately," he added.

Rizal heads a ministerial team in charge of restructuring PLN.

Rizal said that four years ago when he was still an economic consultant, he had conducted a study which drew four conclusions:

First, there was an overestimation of domestic power demand made deliberately to justify the private power projects.

Second, the power projects were made based on nepotism, collusion, and fraudulent practices because most of the projects were given to the investors without an open tender process.

Third, the projects were overpriced by between 30-40 percent compared to international standards.

Fourth, the projects would send PLN into bankruptcy if the company had to pay all the bills.

The government signed 27 IPP contracts in the early 1990s to anticipate a higher demand for power as a result of the then robust economic growth.

But while construction was still underway, the economic crisis struck and forced then president Soeharto to halt several power plant projects.

During the crisis, power demand dropped and the rupiah fell sharply against the U.S. dollar, thus boosting the price of power sold by IPPs to PLN.

PLN, according to the contracts, is required to buy electricity from IPPs at an average of 6 U.S. cents per kWh (about Rp 546 at the current exchange rate), as compared to its average selling price of Rp 240 per kWh.

Indonesia has since been negotiating with the IPPs to reduce their U.S. dollar dominated prices for power sold to PLN.

There have been allegations that the cost of the power projects had been marked up which explains why the IPPs set their power price for PLN at an unusually high level.

Most of the projects involved politically well-connected businessmen including family members of Soeharto and their business cronies.

Out of the 27 IPPs only a handful have started producing power, including Paiton I, Paiton II, Tanjung Jati and the Darajat projects.

PLN had managed to reach a long-term agreement with PT Amoseas Indonesia, which operates the geothermal fired Darajat power plant in West Java.

Under the new agreement, PLN will buy power from Darajat at 2.72 cents per kWh instead of the contracted 4.54 cents per kWh.

PLN president Kuntoro Mangkusubroto said recently that PLN would save $277 million throughout the 30-year contract with Amoseas.

PLN is currently still continuing negotiation with the other IPPs.

PLN's first semester financial report showed losses surging to Rp 11.58 trillion from Rp 974 billion during the same period in 1999. The state company blamed its losses on the increasing costs of purchasing power from the IPPs.

PLN also had a total debt of around Rp 43 trillion. The company recently appealed to the government to bail out around Rp 21.5 trillion of its short-term debt.

But Rizal said late last week that the government would not make such a bailout because it would create a bad precedent for other indebted state enterprises. (rei)