Paiton power politics

Paiton power politics

President Abdurrahman Wahid's decision to stop all legal
actions taken against independent power producers in an effort to
resolve commercial disputes with major multinational companies is
a welcome signal for foreign investors assessing the credibility
of the new Indonesian government.

By ending the lawsuit which sought to void a power-purchase
agreement between state-owned electricity company PLN and PT
Paiton Energy Co., a consortium led by subsidiaries of Edison
Mission Energy Co. and General Electric Co. of the United States
and Mitsui & Co. of Japan, Abdurrahman is telling the
international community that in good times or bad, Indonesia
honors the sanctity of its contracts.

Relations between PLN and its 27 independent power producers
(IPPs), entered into in the early 1990s as the country opened its
electricity sector to private investors in order to meet the
electricity needs of its booming economy, have been strained
since the economic crisis hit Indonesia in late 1997.
Particularly harmful was the crash of the rupiah, because power
prices were set in American dollars while PLN's revenue was fixed
in rupiah.

But the issue turned political after president Soeharto fell
from power in May, 1998. PLN, feeling as if it had been freed
from its political bondage, cried foul and alleged that most of
the local partners of the IPPs were Soeharto's family members and
cronies, who had secured contracts with the IPPs through
corruption, collusion and nepotism, known by the acronym KKN.

The IPPs were then pressured to renegotiate the terms of
their contracts under the threat of having the deals canceled.
Paiton Energy, the first major IPP to come on stream, is partly
owned by Hashim Djojohadikusumo, whose brother is married to one
of Soeharto's daughters. The project was considered not only the
most blatant case of KKN, but also the most uncooperative and
hence the first to be taken to court.

However, the confrontational stance taken by PLN and tacitly
endorsed by then president B.J. Habibie horrified foreign
investors, bankers and governments. Prominent banks and insurance
companies from five major countries jointly warned Indonesia in
July that a failure to honor its power contracts would have
disastrous implications for its economy, indicating it could lead
to a halt of government-to-government loans.

Another IPP, majority owned by MidAmerican Energy Holdings
Ltd. was also sued by PLN but the U.S. firm won the case, with
PLN ordered to pay more than US$570 million in damage. The
governments of the U.S. and Japan reportedly intervened to
amicably settle other disputes involving billions of dollars.

Abdurrahman apparently realized that the legal wrangling not
only increasingly pitted the Indonesian government against its
sovereign donors, notably the U.S. and Japan, whose export credit
agencies and insurance companies financed the power projects, but
also tainted the credibility of the Indonesian government in
honoring legally binding contracts.

However, PLN president Adhi Satriya and planning director
Hardiv Situmeang, who resigned on Monday in protest over the
President's ruling, also had a legitimate point in opposing the
majority of the deals with the IPPs. Honoring the original terms
of the contracts, which were largely forced on PLN, would bleed
the state company and the nation for decades as the power rates
they charged were prohibitively high.

But entering into litigations or simply canceling the deals
would drive foreign investors away from the country at a time
when foreign aid and investment is required to help lift
Indonesia from the economic crisis. After all, the sanctity of
contracts is what keeps an economy running.

Abdurrahman's decision certainly is designed to facilitate
out-of-court settlements that would help both parties salvage
something from this mess. For this goal to be realized, however,
both parties, notably the IPPs, must negotiate in good faith even
though the avenue of litigation has been closed. This requires
investors to understand the economic woes Indonesia is now facing
and PLN's huge power surplus resulting from lower than estimated
economic growth. The IPPs should also realize that power projects
are long-term investments. As Indonesia's economy begins to
recover, the IPPs will surely stand to reap the benefits as well.