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The government is set to privatize business in the electricity sector. Part of the reason is limited fund at its command to build new facility to match the fast growing demand.

The first move toward privatization, however, was tarnished with rampant corruption, collusion and nepotism (KKN) resulting in a big loss to the state-owned electric utility PLN. A former PLN president himself acknowledged that all contracts with independent power producers (IPP) were arranged by those holding political power. PLN officials were under pressure to put their signatures on the contract.

According to the PLN president, if all contracts have to be complied with and all IPP projects have been operational PLN will have an obligation to buy IPP power at a price of US$133.5 billion in 30 years.

In the past several months PLN has sought to renegotiate the IPP contracts as they are suspected of KKN and markup. The power price to be paid by PLN under the U.S. dollar-based Power Purchase Agreement (PPA) is too high especially with the soaring dollar against rupiah.

Chief economics minister Rizal Ramli has warned that investors (IPP) showing no good will to reduce the power price would be brought to court.

Principle policy of privatization

After so long enjoying the monopoly in the supply of electricity in the country, in 1989, the private sector was invited to join in line with a government regulation No. 10/1989. Private investors could operate in power production after securing Electric Power Business Permit (IUK). Based on the regulation, there were three institutions involved in the electricity sector.

* The Mines and Energy Ministry representing the government

* PLN as the authority in electric power sector (PKUK)

* Corporate/private company as IUK license holder (PIUK), which is allowed to generate power for own use called PIUKS or one producing power for public use called (PIUKU).

In order to encourage privatization, in 1992 a presidential decree No.37/1992 was issued opening the opportunity for the private sector to operate not only in power generating, but also in transmission and distribution sector.

Basically the inclusion of the private sector could be in the form of managing projects already planned by PLN (solicited projects) or projects proposed by the prospective contractors (unsolicited projects). In the ease of unsolicited projects, PLN will have to make evaluation first about the capacity and PLN's development plan in that area and the possibility of interconnection.

Presidential Decrees No. 37/1992 concerns:

* Scope of activities covering funding, construction, ownership and operation of power generating facility including transmission and distribution facilities.

* Priority for Build Operate and Own (BOO) scheme and the projects are treated as foreign investment (PMA) or domestic investment (PMDN) projects.

* License, issued by the government (IUKU) could cover only one business unit or a combination of several units such as power generating unit, transmission and distribution units. Power produced by the project is sold to PLN or consumers under a sales contract.

* The selling price of power, rent of transmission and distribution networks is in rupiah. The price could be adjusted in ease of changes in the cost components.

* No financial guarantee from the government.

* Equipment imported for power projects are exempted from import duty, and payment of value added tax (VAT) and luxury sales tax (PPnBM) is deterred. This regulation is arranged by the finance ministry.

* Following the government's energy policy

* Control over the implementation of private power development is in the hands of the Mines and Energy Ministry.

According to presidential decree, basically, development of private power projects is to cover shortage in supply from PLN, and not as substitute for PLN.

Government approves 27 IPPs

More than 50 domestic and multinational companies have sought to secure the IUKU license since the government allowed private investors to operate in the electricity sector. The figure was narrowed to 27 which were granted the IUKU license and signed the PPA with PLN.

However, the monetary crisis came in the way of implementing the big projects. The crisis forced the government to unilaterally review the project whether they were to be implemented as scheduled or they had to be shelved or postponed. The problem became a headache for PLN. If the big projects were to be carried out as scheduled it would suffer big losses as the prices under the PPA were based on dollar, while PLN sells its power in rupiah. Its buying prices from IPP became too high - as high as three times the production cost of PLN. The condition forced the government to seek renegotiation with the IPPs.

A former president of PLN acknowledged that PLN had a weak bargaining power when the contracts were signed. Most of the investors made a deal first with the government authorities, before the contracts were signed officially with PLN. PLN was forced under pressure of the authorities to sign the contracts on which they were not included in negotiations.

The 27 IPP projects would have a total generating capacity of 11,015 MW with a total investment of US$ 16.2 billion.

The 27 projects were strongly suspected of KKN especially as 14 of the projects were linked to the cronies or relatives of the president. Bambang Trihatmodjo, the owner of the Bimantara Group, and a son of former president Suharto, were involved in at least 4 of the projects including 500- MW PLTGU Pasuruan, 1,220-MW PLTGU Paiton II, 180-MW PLTA Asahan, and 450-MW PLTU Cilacap. His sister Siti Hardiyanti Rukmana had shares in 1,320-MW PLTU Tanjung Jati A and his brother in law Hasym S. Djojohadikusumo is a shareholder of the 1,230-MW PLTU Paiton I; his younger brother Tommy Soeharto is a shareholder of the 110-MW PLTP Wayang Windu. A number of known cronies of Soeharto such as Bob Hasan, Soedwikatmono, Ibrahim Risyad, and Salim also were shareholders of some of the projects. They formed business tieup with multinational companies such as Unocal, Siemens, Mitsubishi, California Energy and Sumitomo.


Performance of IPPs and rationalization

Among the 27 IPPs which have signed PPA with PLN, 8 are about to start operation and now holding renegotiations with PLN to have a Final Agreement (FA). PLN categorizes the 8 IPPs in Group I, which have one of the following status: 1) already in operation, 2), ready for operation 3) in the stage of testing & commissioning 4) to be continued under presidential decree No. 5/1998.

The 8 IPP projects are as follows:

Table - 2 IPPs in the category of entering operational status
 Name of project Management Capacity

PLTU Amurang PT Tenaga Listrik Amurang 110 MW
PLTU Paiton I PT Paiton Energi 1.230 Ww
PLTP Dieng PT Himpurna Cal Energy 60 MW
PLTP Wayang Windu PT Magma Nusantra 110 MW
PLTGU Sengkang PT Energy Sengkang 135 MW
PLTD Pare-Pare PT Makasara Power 60 MW
PLTU Paiton II PT Jawa Power 1.220 MW
PLTU Gunung Salak PT Unolocal Geothermal Ind 165 MW

 Name of project Location

PLTU Amurang Amurang, North Sulawesi
PLTU Paiton I Paiton, East Java
PLTP Dieng Dieng, Central Java
PLTP Wayang Windu Wayang Windu, West Java
PLTGU Sengkang Sengkang, South Sulawesi
PLTD Pare-Pare Pare-Pare, South Sulawesi
PLTU Paiton II Paiton, East Java
PLTU Gunung Salak Bogor, West Java

Source: PLN

Rationalization of the 8 projects is expected to reach the following phases in 2000.

Table - 3 Prediction of rationalization in 2000

PT. Energy Sengkang * Reaching Interim Agreement
(Sengkang) with objectives:
 * Coping with the PLN's payment
 difficulty as PLN could not
 meet its PPA commitment.
 Interim Agreement covers PLN's
 obligations to pay energy used
 in June, 1999/2000
 * Interim Agreement concerns
 interim payment until a long
 term solution is found on the
 power purchase.
 * Preventing Sengkang from
 default on its obligation to
 lenders as the Interim Agree-
 ment will enable Sengkang to
 pay loan interest due in
 October, 1999 and April 2000.
 * Long term solution is expected
 to be struck in 2000 namely
 commercial agreement on power
 price, terms & conditions of
 contract and schedule of

PT. Paiton Energy Co. * Negotiations at present are on
 (Paiton I) Interim Agreement covering:
 * Total electricity price is US
 cent 3.3/kWh consisting of
 fixed and variable costs, or
 with the fixed structure
 + variable (coal price in
 PLN contracts and O & M
 variable to follow standard
 * Payment during the Interim
 period must be in accordance
 with public accountability
 and affordability.
 * There is no TOP during the
 interim period
 * PLN will buy energy in
 accordance with merit order,
 that there will be no guaran-
 tee for certain dispatch
 * Payment during the interim
 period is full and there is
 no outstanding payment for
 long term agreement
 The interim period is up to
 December 31, 2000, and during
 the interim period negotia-
 tions on long term agreement
 will be conducted and a long
 term solution is expected to
 be found in 2000 namely com-
 mercial agreement on electri-
 city price, terms & condi-
 tions of contract and sche-
 dule of operation.

PT. Tenaga Listrik Amurang
 (Amurang) * Negotiations are on funding
PT. Tenaga Listrik Sibolga * A long term solution is
(Sibolga - A) expected to be found in 2000.
PT. HI Power Tubanan I * Preliminary agreement has been
(Tj. Jati - B) reached namely commercial
 agreement on power price, sche-
 dule of operation and terms &
 conditions of contract, among
 other things:
 * PLN's buy-out of PLTU Tan-
 jung Jati B at around US$
 1.15 billion, The asset
 became PLN's, and PPA for
 Tanjung Jati B & Tanjung
 Jari C is terminated.
 * Operation scheduled for
 1999/2000 was put off until
 2003 to be in harmony with
 supply and demand.
 * The Indonesian government
 asked for funding with Speci-
 al Yen Loan from the Japanese
 government. Sumitomo Corp.
 will help in seeking to
 secure the fund from the
 Japanese government.
 * Currently awaiting result of
 fund raising
 * Work started in Tanjung Jati
 B in 2000

PT. Unocal Geothermal * Negotiations are on Interim
Indonesia Agreement, and a long term
(salak 4.5,6) solution is expected to be
 found in 2000 namely commer-
 cial agreement on power
 price, terms & conditions of
 contract and schedule of

PT. Makassar Power * Currently negotiation are on
(pare-pare) Interim Agreement, and a long
 term solution is expected to be
 found in 2000 namely commercial
 agreement in power price, terms
 & conditions of contract and
 schedule of operation.

PT. Amoseas (Darajat) * In 2000, a long term solution
 is expected to be found namely
 commercial agreement on power
 price, terms & conditions of
 contract and schedule of

PT. Mandala Nusantara * Currently negotiation are on
(Wayang Windu) Interim Agreement, and a long
 term solution is expected to be
 found in 2000 namely commercial
 agreement on power price, terms
 & conditions of contracts and
 schedule of operation.

PT. Jawa Power (Paiton II) A long term solution is expected
 to found in 2000 namely
 commercial agreement on power
 price, terms & conditions of
 contract and schedule of

Source: PLN

Some of disputes between the investors and PLN were brought to court such as the Paiton 1 case over demand of PLN to revoke the PPA with its investor, PEC.

Recently PLN said it has refused to buy power from PLTU Paiton Swasta I in Probolinggo, East Java, although the project has been linked with the Java-Bali interconnection. The incident followed disagreement over price. The price under the old PPA swelled in term of rupiah as a result of the rupiah fall against the dollar. PLN, therefore, demand a slashing in the price to US$ 0.039 per kwh.

The government is seeking to free PLN from the take-or-pay commitment this year, before a long term solution is found.

Former PLN president Adhi Satrija has objected to the take-or-pay system as PLN had not yet needed power supplied by IPP. Adhi said PLN's take-or-pay obligation to PEC alone amounted to Rp1 billion per day for its two units of PLTU Paiton Swasta I (2x600 MW) now in operation. The take-or-pay obligation is around US$598 million per year,

PT Batu Hitam Perkasa, a local partner of PEC said PLN could not unilaterally stopped the purchase it already agreed upon in an interim agreement and letter of intent with the financer Export Credit Agency (ECA).

PLTU Paiton Swasta I is 42% owned by Edison Mission International, 11% by General Electric, 32% by Mitsui and 15% by Batu Hitam Perkasa, which is owned by Hashim Djojohadikusumo.

Under the interim agreement between PLN and Paiton Energy Company (PEC), PLN is to buy power generated by PLTU Paiton from March to December 2000 at a price of US$115 million.

The price is to be paid by installments by PLN as a fixed cost payment every months on variable prices averaging US$ 0.011 per kWh. The payment is fixed as PLN uses only 30%- 50% of the capacity of Paiton this year.

Now PLN and the Paiton I consortium are still engaged in negotiations on the price. Lenders of Paiton I include US Exim Bank, US Overseas Private Investment Corp (US OPIC), Hermes Agency from Germany, Swiss Export Risk Guarantee Agency and Japan's Ministry of International Trade and Industry (MITI).

PLN is also holding renegotations with other IPPs in the category of Group II which have the status of 1) not yet reaching financial closure; 2) category is postponed and restudied according to Presidential Decree No. 5/1998, 3) project not yet implemented or still in the early stage.

Rationalization phases expected to be reached in 2000 are as follows:

Table - 4 Predicted results of rationalization of projects in Group II
 Predicted result of rationalization in
 IPP companies 2000

PT. Asrigita Nusantara Agreement expected on project plan in
(Palembang Timur CCPP) 2000

PT. East Java Power Agreement expected on project plan in
(Pasuruan CCPP) 2000

PT. Cikarang Listrindo Agreement expected on project plan in
(Cikarang CCPP) 2000

PT. Daya Listrik Pratama Agreement expected on project plan in
(Cilegon CCPP) 2000

PT. Power Jawa Barat Agreement expected on project plan in
(Serang Coal PP) 2000

PT. Citra Kartika Daya Agreement expected on project plan in
(Cilacap Coal PP) 2000

PT. Tj. Jati A Power Co. Agreement expected on project plan in
(Tj. Jati A Coal PP) 2000

PT. Bajradaya Sentranusa Agreement expected on project plan in
(Asahan Hydro PP) 2000

PT. Tj. Jati A Power Co. Agreement expected on project plan in
(Tj. Jati A Coal PP) 2000

PT. Bajradaya Sentranusa Agreement expected on project plan in
(Asahan Hydro PP) 2000

PT. Latoka Bina Agreement expected on project plan in
(Kamojang Geothermal PP) 2000

PT. Yala Tekno Geothermal Agreement expected on project plan in
(Cibuni Geothermal PP) 2000

PT. Bali Energy Agreement expected on project plan in
(Bedugul Geothermal PP) 2000

Unocal North Sumatera Agreement expected on project plan in
(Sarulla Geotherma PP) 2000

PT. Dizamatra Powerindo Agreement expected on project plan in
(Sibayak Geotherma PP) 2000

PT. Hj Power Tubanan Agreement expected on project plan in
(Tj. Jati -C) 2000

Source: PLN

Under Kuntoro Mangkusubroto, PLN closed the purchase contract with PT Tanjung Jati Power Company for power from PLTU Tanjung Jati A freeing PLN from having to pay US$15.9 billion in 30 years. The contract was closed without PLN having to pay any compensation. PLN needed only to make a commitment that PT Tanjung Jati is to have the priority if PLN needs to build new project.

PLTU Tanjung jati A (2x60 MW) is owned by PT Tanjung Jati Power Company with shareholders including PT Bakrie Power (20%), National Power (30%), Tomen Corp. (30%) and PT Maharani Paramita, which is owned by Siti Hediati Harijadi Prabowo (20%). The project in Central Java was to be built at a cost of US$1.66 billion with a PPA of US$0.057 per kilowatt hour (kWh).Kuntoro said the agreement to cancell the contract was made in May, 2000.

Kuntoro said PLN had also made an agreement to revise the PLTP Darajat contract with Amoseas Indonesia Inc. Under the new agreement the price was reduced by 40% from US$ 0.045 to US$ 0.027 per kwh for steam and from US$ 0.69 to US$ 0.027 per kwh of power.

The PLTP project is owned by Chevron (39.95%), Texaco (39.95%) and PT Darajat Geothermal Indonesia (10.10%). The project is estimated to cost US$ 472 million.

PLN has also sought renegotiation with PT Himpuma California Energy, which has won a case in an international arbitration court against PLN, which unilaterally cancelled contract and PPA agreement over two power projects owned by the U.S. company. The arbitration court ruled that PLN has to pay US$ 572 million in compensation for the U.S. company.

Kuntoro said the government has agreed to pay US$ 290 million claimed by Overseas Private Investment Corp (OPIC), a U.S. government insurance company, which provide insurance protection for U.S. investment abroad including that of Cal Anergy. Finance Minister Prijadi, however, said the government has yet to make a final decision on the claim.

PLN is also facing similar claim from MIGA, an insurance company, which has paid US$15 million in insurance protection for Enron's investment in PLTGU Pasuruan.

Direction of Privatization Policy in the Future


The government wants to rationalize IPP program and expand opportunities for participation of the private sector. Paritipation is based on an open competition.

Expansion of private participation

Participation of private investors will be followed with the selling of shares of companies in Java responsible for power generations, transmission and distribution.

The planning regulation and competitive tenders will open opportunity for participation of the private sector. In Java and Bali all power projects will be offered through competitive tender. Outside Java, PLW will eb asked to offer participation for private investors, but PLW, which is responsible forpower projects outside Java and Bali, will remain under control of the government.

The focus of privatization, therefore, will be in Java and Bali. Various methods and mechanisms of privatization will be considered such as direct placement and Initial Public Offerings (IPOs). The option will depend on the economic condition.

Introducing competition

The government has decided to use the market mechanism in the electricity sector. The ultimate goal is to establish a fully competitive electric power market. But a number of obstacles including institutional obstacles have yet to be coped with. Tender competition, therefore, will be used before a fully competitive market is well established.

Transmission companies in Java are responsible for expansion of power generation and transmission until a fully competitive market is established expected in 2003. Before that year, all additional generating facilities will be provided through the process of competitive tender. Outside Java, the condition necessitates introduction of competition by phases.

Draft Law on Electricity

The government is currently preparing a draft law on electricity to replace the law passed in 1985.

There are many new points to be debated in the draft law such as:

* Scope of business in electricity sector includes power generation, power transmission, distribution and sales, bourse operation and system operation. Power bourse is a market system where supply and demand meet. System operation is a business controlling and responsible for the coordination of generating, transmission and distribution systems.

* Generation and sales of electric power is offered through competition system.

* In certain areas, where competition in power generation and sales could not yet been implemented, power procurement is made through integrated system.

* State-owned companies run transmission business.

* In areas where competition system has been adopted, sales of electric power from generating plants will be in bulk. Retail sales will be made through competition.

* Electricity business license will be issued by the Minister for supply between provinces, by governors for supply between regencies/cities, regents/mayors for supply between district areas.

The draft law could still be revised in the following phases.

Opportunity of Private Companies

PLN still offers to buy eletric power from private producers if the price is good.

Another factor is requirement. IF PLN is short of supply, it would buy supply from IPP. PLN said it would consider buying electric power from IPP at a price of US$ 0.04 per kwh.

The opportunity is wide open for new investors in the electricity sector. New investors could join with the existing producers or replacing a shareholder.

The restructuring plan by the government in the electricity sector will also open new opportunity for investors.
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Publication:Indonesian Commercial Newsletter
Article Type:Brief Article
Geographic Code:9INDO
Date:Dec 19, 2000
Next Article:1. SALT IMPORTS UP SHARPLY IN 1999.

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