The Paiton I and Karaha Bodas sagas

Kurtubi Member U.S. Association for Energy Economics (USAEE) American Economic Association (AEA) Jakarta

There are at least two cases of independent power producers (IPP) the settlement of which will be of great disadvantage to the public. First, the "settlement" agreed upon by state-owned power company Perusahaan Listrik Negara (PLN) and Paiton I to the effect that the tariff they have agreed on is US$ 4.93 cents/kwh.

It was later learned, however, that PLN would have to pay more than this tariff, which is yet to include PLN's payment to Paiton I to the amount of US$4 million/month for 30 years. Besides, the agreement also contains a take or pay clause with a capacity factor of 85 percent for a period of 40 years, instead of 30 years, something which it is next to impossible to realize. In the end, according to Dr. Nengah Sudja, an electricity expert, PLN will have to pay to Paiton I some $6.62 cents/kwh.

This real tariff of $6.62 cents/kwh is way above the tariffs set by similar power generating plants in other countries, such as coal steam-powered power plant in Malaysia ($3.19 cents/kwh) and Na Duong steam-powered power plant in Vietnam ($4.2 cents/kwh). It is even far higher than the tariff set by PLN- owned Suralaya steam-powered power plant in West Java (about $3.7 cents/kwh). Obviously, if this deal between PLN and Paiton I becomes a reference in settling other IPP cases, the settlement will disadvantage the people as it is the people that finally have to pay high for the inefficiency of the presence of private power for 40 years!

The second case is the urging of several parties "representing" the interest of Karaha Bodas Company (KBC) IPP so that Pertamina will immediately pay a fine of $261 million (plus the interest) as already ruled by the International Arbiter. KBC has made various efforts through various courts, such as the courts in New York, Texas, Delaware, Singapore and Hong Kong, to seek after Pertamina's assets and have them confiscated.

In Delaware, however, the court rejected the claim. Actually the government has allowed KBC to proceed with its Karaha Bodas geothermal power generating plant project, but KBC continues to seek after Pertamina's assets, especially those managed by a Trustee Agency in New York. (In the context of LNG export receipts, the funds are kept in a bank in the United States.) By virtue of Law No. 8/1971 and Law No. 9/1968, Pertamina's assets are separate from those owned by the government. Therefore, KBC's insistence that the funds managed by a Trustee in New York be confiscated is misplaced.

If Pertamina finally gives in to the pressures from various parties supporting the claim made by KBC, either from the government circles or from certain non-governmental organizations, and pays $261 million (plus the interest), just like the payment of $265 million it made in the case of PLP Dieng Patuha, the plight that the people have to suffer as a result of mismanagement by certain government officials has come full circle.

In fact, a close look at the process of operation of the KBC project - from KBC's first arrival in Indonesia, its claim that it had paid over $100 million, an amount considered excessive, and then a schedule to postpone opening the project and postpone again the project in line with the IMF's advice and, finally, the abandonment of nine wells highly hazardous to the locals living around their site - shows that the International Arbiter should not have penalized Pertamina with an obligation to pay a fine of $261 million to KBC.

To the Indonesian people, this ruling is very unfair so that it is only natural that Pertamina has fought hard to evade any execution. It is eventually the Indonesian people in general that will have to pay this fine through the electricity basic tariffs, isn't it? Therefore these efforts by Pertamina do not correlate with the entry of investors because in this regard Pertamina is simply exercising its right. Besides, investments depends largely on macro-economic and security factors.

Just like other power generating projects by IPPs, almost invariably connected with government officials' family members or cronies, this KBC project also reeks of corruption, collusion and nepotism. Unlike the practice in mineral resources projects the world over, KBC has entered the geothermal areas in Mount Karaha and Telaga Bodas areas in West Java not through a transparent process.

There is suspicion that this project is related to the family of a government official controlling 10 percent of the shares as a local partner. The U.S. laws, as set forth in the 1988 Foreign Corrupt Practice Act, prohibit a U.S. company from engaging in corruption or bribing officials or close relatives of the officials to facilitate the establishment of its projects outside the U.S.. Once a U.S. company is proven guilty of bribery, this is a crime violating the U.S. laws and also, certainly, those of the host country.

Nearly all private power projects involving foreign investors entail problems which in the end will be burdensome to the Indonesian people. These IPPs come with huge projects to generate power at a very high price. In the case of Paiton I and KBC, for example, in their Purchasing Power Agreement (PPA) of 1994, which contains a take or pay clause, it is stipulated that PLN must pay to Paiton I and KBC the price of US$8.46 cents/kwh, a highly embarrassing level of tariff. Today, although the government has "successfully" re-negotiated this matter, the amount that PLN is obliged to pay - $6.62 cents/kwh - is still very, very expensive compared with the tariff set by similar IPPS in Malaysia's Bunting geothermal power plant and Vietnam's Na Duong.

Ideally, a power company from a developed country comes to Indonesia with its sophisticated and superior technology and management so that the electricity it produces will be lower in price that the power produced by PLN, a company holding state's monopoly in power generation and often condemned and alleged as an inefficient company by international financial institutions.

The Asian Development Bank (ADB) has even openly, and without the slightest discomfort, has dictated to the Indonesian government immediate ratification of the power affairs bill as a precondition to the disbursement of its loan of US$ 180 million to Indonesia. With a loan of only $180 million, the comparative advantage of state-owned power company PLN to produce electricity at a low cost for its consumers throughout Indonesia must be sacrificed and obliterated by unbundling PLN into a number or smaller limited liability companies as required by the law on power affairs.

The two cases discussed above show that efforts to liberalize the national electricity sector needs evaluating pending a richer experience from other countries on this matter to ensure that electricity will not be made an object to make the biggest profit at the expense of the people in general.