PLN needs electricity rate hike

By Faisal Harahap

JAKARTA (JP): The heatedly debated electricity rate increase could lead to a different perspective if we look into it from a different angle.

Critical statements were addressed against the government as well as PLN state electricity company regarding the determination of the rate base and its three-monthly adjustments, after Mines and Energy Minister I.B. Sudjana announced the new policy on Oct. 21, 1994. The rate adjustment is linked to inflation, rupiah depreciation, fuel prices and cost to PLN of electricity bought from private companies.

Based on those factors, rate would be raised at the average of 7.68 percent as of this month. That would be valid for a period of three months and would be continuously readjusted thereafter.

Legislators, businessmen, manufacturers, lecturers, newspaper editors, consumers and people on the streets had their share of opinion on the steps taken by the government to allow PLN undertake the rate adjustment.

There are people who opined that PLN should "go public" to get extra funding rather than increase the electricity tariffs. Alternatively, they argued, the Rp 240 billion (US$ 12 million) additional monthly revenues to be received from the rise in tariffs, could be obtained through a more efficient handling of the state company.

Hard-liners tried to point out that consumers would be paying the extra Rp 240 billion a month for the inefficiencies in PLN resulting from electricity loses and thefts, as well as unpaid bills. They described the rate adjustment as unfair, irrational, burdening the poor and would lead to higher inflation rate.

Some questioned the method of setting up the rate base and the calculation of the three-monthly adjustment, and urged for a review. Others tried to convince the public on the minor effect of the increase in electricity tariffs on the cost of manufactured goods, in view of the small portion of electricity in the structure of production costs. Some , however, were afraid that the psychological impact of the adjustment would result in a more than proportionate increase in the prices of manufactured goods.

But as some people see it, the Rp 240 billion additional monthly income may not be used to the full amount by PLN to finance new investments but to partly cope with its obligation to private companies. With the buying prices of electricity from private generators fixed in US dollar and the electricity prices fixed in the depreciating rupiah, PLN would need some compensation to fulfill its obligation.

The issue, according to this line of thinking, centered to a greater extent on how Indonesia could attract investments from abroad in power generation. Using Repelita VI as its guidelines, the government is determined to construct generating and transmission facilities capable of supplying 115.3 thousand GWh of electricity by the end of 1998/99 to meet the rising demands from industries and households.

About 67.8 percent of the electricity would go to industries and the rest to households and other purposes. Bearing in mind its significant role in the non-oil industries, non-oil exports, and employment, the government understandably puts high priority on these power projects.

President Soeharto said at the opening of the World Infrastructure Forum-Asia 1994 in Jakarta on Oct. 17, that Indonesia will spend more than Rp 100 trillion (US$ 50 billion) in the next five years on infrastructure alone.

Government funding would clearly be not enough to finance infrastructure projects such as toll roads, electricity, telecommunication, water supply and ports. Multilateral and bilateral donors would need ten years to provide the funds for the infrastructure projects, as the Consultative Group for Indonesia (CGI) could only pledge roughly US$ 5 billion annually.

The last alternative would be foreign investment through the so-called BOT (Build, Operate and Transfer) or the BOO (Build, Own and Operate) method.

Two stumbling blocks in agreeing a BOT or a BOO project in Indonesia are the issues of security in the availability of foreign exchange and security in the value of revenues received by the foreign investor. Foreign exchange availability is important for capital repatriation purposes while rate adjustment is needed to protect the investor from losses because he receives incomes in rupiah which unfortunately is depreciating.

The government is normally firm on the issue of foreign exchange because Indonesia pursues free foreign exchange system. With regard to rate adjustment, however, no investor receiving rupiah incomes would be willing to undertake a project unless he is provided with sufficient protection, which could be in the form of rate adjustment, pre-determined exchange rates or foreign-currency-denominated sales.

Indonesia is nearing the end of the first year of its Repelita VI but only one of the nine power projects with 2,950 MW capacity supposed to be implemented by the private sector is under construction.

There are good reasons to believe that the new rate policy is aimed at facilitating inflows of investments into the power generation through BOT or BOO schemes. It might be that the three-monthly adjustment system is a step to familiarize consumers with floating tariffs of electricity. If the test case proved to be successful, the road to BOT or BOO projects would be widely open.

While the arguments contained in this article should not be construed as defending PLN's inefficiency, all the headaches that stem from rate adjustment would not happen if we could manage to keep inflation low and the rupiah exchange rate stable.

The writer is a civil servant based in Jakarta.