The sagas of Paiton I and Karaha Bodas

The sagas of Paiton I and Karaha Bodas

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

There are at least two independent power producer (IPP) cases 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 rate paid to Paiton will be US$4.93 cents/kwh.

It was later learned, however, that PLN will have to pay more
than this rate, which has yet to include PLN's payment to Paiton
I to the amount of $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 rate of $6.62 cents/kwh is way above the rates set
by similar power generating plants in other countries, such as a
coal steam-powered power plant in Malaysia ($3.19 cents/kwh) and
the Na Duong steam-powered power plant in Vietnam ($4.2
cents/kwh). It is also far higher than the rate set by the 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, these
settlements will disadvantage the public as it is the public who
will finally have to pay dearly for the presence of private power
over a period of 40 years!

The second case involves the urgings of several parties
"representing" the interests of the Karaha Bodas Company (KBC),
an IPP, for Pertamina to immediately pay a fine of $261 million
(plus interest) as already ruled by an international arbitrator.
KBC has made repeated efforts through various courts, such as the
courts in New York, Texas, Delaware, Singapore and Hong Kong, to
chase Pertamina 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 plant project, but KBC continues to chase
Pertamina assets, especially those managed by a trustee agency in
New York (in the case 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 the trustee in New York be confiscated is misplaced.

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

In fact, a close look at the history of the KBC project --
from KBC's first arrival in Indonesia, its claim that it had paid
out over $100 million, an amount considered excessive, the
postponed start-up of the project and further postponement in
line with the IMF's advice and, finally, the abandoning of 9
wells highly hazardous to the locals living around the site --
shows that the international arbitrator 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 should fight hard to avoid any
execution. It is eventually the Indonesian people in general who
will have to pay this fine through higher electricity charges.
Therefore, these efforts by Pertamina to protect itself do not
have anything to do with the entry of new investors as in this
regard Pertamina is simply exercising its rights. Besides,
investment depends largely on macroeconomic and security factors.

Just like other power generating projects developed by IPPs,
almost invariably connected with government officials' family
members or cronies, this KBC project also reeks of corruption,
collusion and nepotism. Unlike normal practice in mineral
resources' projects the world over, KBC has entered the
geothermal areas in Mount Karaha and Telaga Bodas in West Java
through a process that is far from transparent.

There are suspicions that the project is related to the family
of a government official controlling 10 percent of the shares as
the local partner. U.S. law, as set forth in the 1988 Foreign
Corrupt Practices Act, prohibits 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 U.S. law 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 public. These IPPs come here touting huge projects to
generate power at very high prices. In the case of Paiton I and
KBC, for example, in their Power Purchase Agreements (PPAs) of
1994, which contains a take-or-pay clause, it is stipulated that
PLN must pay to Paiton I and KBC a price of US$8.46 cents/kwh, a
level of charges that is highly embarrassing. Today, although the
government has "successfully" renegotiated this matter, the
amount that PLN is obliged to pay -- $6.62 cents/kwh -- is still
very, very expensive compared with the charges set by similar
IPPS in the case of Malaysia's Bunting geothermal power plant and
Vietnam's Na Duong.

Ideally, a power company from a developed country should come
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 a state
monopoly on power generation and often condemned as an
inefficient company by international financial institutions.

The Asian Development Bank (ADB) has even openly, and without
the slightest discomfort, dictated to the Indonesian government
that it immediately ratify the power affairs bill as a
precondition for the disbursement of a $180 million loan to
Indonesia. For a loan of only $180 million, the comparative
advantage of state-owned power company PLN in producing
electricity at low cost for its consumers throughout Indonesia
must be sacrificed and obliterated by unbundling PLN into a
number of 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 need more detailed evaluation so
as to ensure that electricity generation will not be made a slave
to the goal of maximizing profits at the expense of the public at
large.