Asia Times: Southeast Asia


	June 22, 2002	atimes.com

Southeast Asia

Under the volcano: Indonesia's electricity woes
By Bill Guerin

JAKARTA - Two thousand meters above sea level in the scenic but still active Gunung Telagabodas volcanic complex in the West Java mountains, steam-heated warm and hot springs (with temperatures close to boiling point), mud pools and old lava streams define the boundaries of a stalled geothermal power project started by state-owned oil and gas company Pertamina and independent power firm PT Karaha Bodas Co (KBC) eight years ago.

On September 20, 1997, just after the onset of the Asian financial crisis, the Indonesian government issued a ministerial decree that forced Pertamina to postpone the project, along with dozens of other power-plant and infrastructure projects, with the proviso that they could be brought back to life in better economic circumstances.

The latest developments, however, may mean that Pertamina has to hand over US$261 million to KBC, a Cayman Islands-based company primarily owned by US companies Florida Power & Light (40.5 percent) and New York-based Caithness Energy (40.5 percent), Tomen Corporation-Japan (9 percent) with local partner PT Sumarah Daya Sakti.

Two Asian courts last month confirmed the validity of a $261 million award for damages and lost profits set by an international arbitrage tribunal in Switzerland 18 months ago. A Singapore court on May 29 then froze the local assets of Pertamina and payments owed to it from Shell Eastern Trading, Bank of America, BNP Paribas, and Pertamina Energy Services. A few days earlier a Hong Kong court started a process to seize Pertamina's shares in three local companies - Tugu Insurance, Pertamina Energy Trading and Korea Indonesia Petroleum - and the money they owe Pertamina, with the money to be handed over to Karaha.

Pertamina has done its level best to avoid paying these debts and is now contesting the Hong Kong decision in court. Pertamina may try to get the legal battle moved back to the Jakarta arena and thus free from the mostly open, transparent, and fair mechanisms that determine commercial court litigation outside of Indonesia.

Pertamina president Baihaki Hakim has filed reports with the Indonesian police complaining of "KKN" (corruption, collusion and nepotism) issues arising from the 10 percent shares held by the local partners who are linked to Tantyo Sudharmono, the son of Suharto's former vice president Sudharmono.

Analysts say the project, with eight exploration wells each costing about $4 million based on international costing, was heavily marked up, and should have cost about $32 million, not $100 million.

Pertamina, hugely profitable, could well afford to pay but Perusahaan Listrik Negara (PLN), the state power utility, has been in dire straits since the plunge of the rupiah against the US dollar in late 1997. Most of its borrowing and its costs are in dollars, while its revenues are in the rupiah, which is only now beginning to show a modest recovery.

The world's largest financial institutions have poured millions of dollars into independent power producers (IPPs) to help develop Indonesia's power sector. Prior to the meltdown in 1997 the power supply sector in Indonesia was developed through deals made through high level political lobbying and a government-enforced "local partner" condition.

In the early 1990s, PLN signed power-purchase agreements for 27 power-plant projects, which were backed by foreign funds, to cope with an expected surge in demand. These contracts were all with consortiums of international energy companies and former president Suharto's family members and friends. Some of these are on stream and others were suspended by the government in 1997 and 1998 as retrenchment measures to cope with the monetary crisis. A string of disputes with the IPPs and endless arbitration proceedings have left the government out of pocket.

Djiteng Marsudi, president director of PLN at the time many similar contracts were being set up, is on record as saying he was forced to sign the contracts. He recalls being instructed to go to Hanover, Germany, as part of president Suharto's entourage on a 1995 visit. There he was ordered to attend the contract-signing ceremony, a prestigious occasion witnessed by senior government officials from Germany and Indonesia, as well as chancellor Helmut Kohl and Suharto himself.

Another massive power deal, Paiton II Probolinggo, in East Java, was signed by yet another president director of PLN, Zuhal, and witnessed by Suharto and US president Bill Clinton, who was then visiting Indonesia for an Asia Pacific Economic Cooperation (APEC) conference.

Yet another IPP contract has cost Indonesia dearly, with the government last year finally agreeing to pay $260 million to the US state-insurance firm Overseas Private Investment Corp (OPIC) as compensation for the suspension of the Patuha and Dieng geothermal power projects owned by US firm CalEnergy.

Since the crisis, PLN, facing total payments to these IPPs of $133 billion over 30 years under the original power-purchase contracts, has been trying to renegotiate with those IPPs that are generating power in a bid to lower the price of their power, while fighting legal action by others.

Pertamina seems set on confronting the International Monetary Fund (IMF), with Hakim accusing the agency of washing its hands in the dispute. The IMF turned down a request to testify on the project's suspension at a New York court that heard the dispute. Pertamina is trying to convince the US judges that the suspension of the project was a matter of force majeure (superior force).

Hakim is also busy lobbying the Indonesian House of Representatives Commission VIII for energy and mineral resources, trying to convince them that the government should sue the IMF for "not having the goodwill to help the country recover from the crisis".

The IMF, on the other hand, insists that the suspension was the government's decision, notwithstanding the widespread suspicion that there had been pressure from the Fund at the time of the first ever Letter of Intent (LoI) signed with the government on October 31, 1997.

Coincidentally, the IMF will convene next week to decide on the disbursement of the next tranche, $340 million, of a three-year $5 billion loan for Indonesia, after last week's signing of the sixth LoI.

The government has encouraged renegotiation of the IPP contracts and several have been settled. Karaha Bodas, however, as with some other IPPs, opted to take the termination of their contracts to international arbitration.

The government said last month that the compensation would be paid for the sake of protecting Indonesia's reputation and foreign assets, but no money has changed hands yet as it now wants to settle the issue by one of two options. KBC gets a chance to resume the project but if the company refuses, the second option is that Jakarta will hand the project over to another investor willing to continue the project and settle the KBC claim.

The government has admitted, however, that, if need be, it will lend funds to Pertamina to continue on its own.

The chairman of the Indonesian Geothermal Association, Herman Daniel Ibrahim, has pointed out the huge potential of geothermal power to overcome the power shortages.

There are enough warning signs for the government. Rotating power cuts are under way in 28 provinces outside of Java and a severe power crisis is likely if no new power plants are started soon. PLN estimates that nationwide demand is returning to its pre-crisis level of 12 percent growth a year.

US and European investors may still be willing to re-enter the electricity sector, which will be open to competition as soon as the draft Electricity Law passes into law but the Chinese are on the case with at least one China-based power company planning to build a power plant in North Sumatra. The Chinese power-plant technology is little different from that of the West but is decidedly cheaper.

Energy and Mineral Resources Minister Purnomo Yusgiantoro has said Pertamina should seek an out-of-court settlement with Karaha, as he sees a danger that Pertamina accounts containing funds derived from production-sharing contracts with Pertamina's major US partners such as Chevron Texaco, Unocal and ExxonMobil could be at risk if Karaha can rampage through Pertamina assets to recoup its lost investment.

Some responsibility for the mess lies squarely on PLN's own shoulders on account of past gross inefficiency and internal collusion and corruption in connection with the exorbitant project markups. Arguably, PLN officials involved had little choice, in view of the immense political and actual power wielded by the Suharto family. PLN was only one of many cash cows for the Suharto family and its cronies. Notwithstanding this, PLN is certainly guilty of deliberately overestimating domestic power demand then to justify the private power projects.

Either way Indonesia will be the loser. Refusal to hand over money from arbitration decisions will deter foreign investors, as will any moves to allow Karaha to take funds from Pertamina's US partners. KBC could hardly be blamed for taking the money (and profit) and leaving the Java volcano to smolder on.

Indonesia risks some degree of economic isolation if it ignores the interests of the creditors behind these IPPs, who, in funding Indonesia's private power sector, are also very important donors to Indonesia.

Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti said this week that the government would allow the IPPs to resume their projects this year, to help stem a power crisis that is rapidly looming for the main island of Java.

Dorodjatun told a hearing with Commission VIII that as PLN had no money to build power plants, the government might give a greater role to private sector firms in the electricity sector.

"In many countries, electricity is managed by state-owned companies or the government. But now, electricity should be in the hands of the private sector," he said.

There are palpable dangers now of major power blackouts, leading to social unrest or worse and a disruption of the economy. Thirty years of successful development under Suharto means that electricity is even more vital now to the community. Not just the industrial sector, but home industries and small factories, even in the most rural areas, depend on power. Blackouts and rising costs will hit them hard.

The disputes between PLN and the IPPs over contracts must be resolved sooner rather than later. Any prolonged stalemate damages the bankability of PLN in the eyes of the world's financial community and denies them access to new commercial credit lines or the capital market.

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