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.