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Electricity Indonesia Privatization

Introduction.

Electricity is one of important need of the people and requirement of society fundamental, the government to hence have obligation to fulfill the requirement. However, condition of electricity in Indonesia recently show imbalance between supply and demand, between the ability of PLN as the State Own Enterprise (SOE) to fulfill requirement with level of request of market. As a result many people in Indonesia have not used electricity, from the data show that number of electrification in Indonesia only 58%. This condition one of the reason for need restructuring electricity sector in Indonesia.

Indonesia Constitution of 1945 (UUD 1945), the Article 33 mentioned that State is responsible in act of preparing proper health facilities and other public facilities. Public facilities mentioned in here included water supply, road, and electricity. In this Constitution enounce that electricity is one of the important sectors and crucial for the welfare of the people. That’s why providing electricity should be controlled by the State and to be used for maximum welfare to the people.

• Electricity Law and Regulation.

• Law No.15 of 1985 on Electricity.

In order to fulfill the obligation in providing electricity facilities, the government of Indonesia has enacted Law No.15 of 1985 on Electricity. According to this law, electricity has important role to increase prosperity of Indonesia people and also to support increasing economic activity, that why improvement of supply, demand and management of electricity needed in order to maintain its capacity with good quality.

There are two types of electricity businesses; providing in electricity business or core business included generation, transmission and distribution or retail and providing in supporting businesses. The core business, will be held by government by corporate states own enterprise which will act as authority holder of electricity businesses (PKUK). In this law is obvious that government did not want other company besides states own enterprise to enter in electricity businesses. It will lead to monopolistic structure in providing electricity in Indonesia.

• Business Competition in the Power Sector.

The crisis of economic in 1997 has brought a huge impact on the economy of Indonesia; the public sectors have been radically changed. The impact of crisis has pushed for restructuring and also privatization of State Own Enterprise (SOE). Privatization is known well as the process of transforming from government own companies into private companies.

From the privatization the government expected performance of SOE will improve, will increase the profit, improve efficiency, provide job opportunities for the people and also provide contribution to the National Budget. The privatization also will reduce the bureaucracy role in the public sector and develop the market of domestic investment. The process of privatization of SOE will take a long time period and must be prepared it with good planning. The government cannot carry out immediately to bargain the State Own Enterprise (SOE) to investors.

In order to increase and establish a conducive business climate through fair business competition, the government of Indonesia has enacted Law No.5 of 1999 in March of 1999, on prohibition of Monopolistic Practice and Unfair Business Competition. The objectives of this Law are creating effectiveness and efficiency in business activities and also preventing monopolistic practices.

• Law No.20 of 2002 on Electricity.

The energy sector such as electricity has also progressed significantly in its reform through issuance new regulation. In September of 2002, the government of Indonesia has enacted Law No.20 of 2002. The Indonesia Law No.20 of 2002 on Electricity replacing the Law No.15 of 1985. The new law introduces the spirit of more competition into the market, and reform the electricity industry from monopolistic structure into competition in the electric power market.

The objectives of Law No.20 of 2002 are defining the new role of the government, improving the quality of services, abolishing monopolistic practices, and also improving public private partnerships. As the result, the electricity sector is now ready to open up as competitive market. The economic benefit if electricity sector as competitive market are: (1) lower price and good quality; (2) improvement in quality of goods or services (3) producers maintain to cut their cost; (4) more variety and choice of goods or services (5) improvement in innovation.

The Law No.20 of 2002 on Electricity will transform from monopolistic structure into Single-Buyer Multi-Seller which private companies could involved in all line of electricity sector such as generation, transmission, distribution and retail. The unbundling system allows electricity supply activities come from separately by multiple different business companies. By unbundling system would create competitive market and expected to attract more foreign investor participate in the electricity sector.

• PLN-State Own Electricity Company.

PLN is a key industry player in Indonesia electricity market. PLN is major electricity Company in Indonesia. The major business activities are generation, transmission, distribution and retail across Indonesia. Since the economic crisis in Indonesia, IMF has forced the Indonesian government to privatize and transform themselves. PLN, therefore, needs to prepare themselves for the transformation. In order to be able to handle the transformation, competition within the market, PLN has to improve the operations and transform themselves to be more effective and efficient.

• Vision, Mission and Objectives.

PLN as a public utility company has a vision and mission that becomes the base of the strategic planning in the corporate planning strategies.

Vision:

To be acknowledged as an ever-growing, proficient and dependable world-class company, by emphasizing on its human resources potency.

Mission:

• To run the electricity business and other linked businesses, with commitment to the satisfaction of the customers, employees and shareholders.

• To create electric power as a media to improve the living quality of people.

• To bring electric power to be the drive of economy in the country.

• To run an environmentally friendly business.

PLN long-term objectives:

• The achievement of national electric rate that is in line with its economic value, giving a rate of return of 8% per year.

• The maintenance of the minimum level of electric power supply reserve for Java-Bali and solution for other critical areas outside Java-Bali.

• To place the company as a market leader in changing the business environment.

• PLN Problems

Under the Law No.15 of 1985 on Electricity, PLN the state electricity company is the sole player as monopoly in power sector. PLN manage electricity from production, transmission, distribution and retail. The private sector could invest only in electricity generation and may supply their electricity into PLN. PLN carries social and business mission, its mean PLN have responsibility provide electricity for all of people in Indonesia include in rural area but in another hand PLN should make profit in their business.

The economic crisis has a huge impact on the liquidity of PLN, and made limited ability to finance investments. PLN reached total losses amount Rp 9.1 trillion (US$1.4 billion) in 1998. The problem in PLN could indicate as follows:

• Selling price under production cost.

PLN might purchase electricity from Independent Power Producers (IPPs) with high price in foreign currency but sales in Rupiah. The devaluation of the Rupiah made PLN might to purchase electricity at $5-8 cents/kWh while the selling price is only $2-3 cents/kWh.

• Inability increases the selling price.

The government sets the price which PLN sells electricity in the country, at the present the government fail to increase PLN tariff because of strong refuse from public opposition, as the result the government should give a huge subsidy for PLN.

• Increasing fuel prices.

The major operational expense of PLN is fuel cost, while the composition almost 54% of total operational expenses. At the present the increase of global fuel prices very high that causes huge impact on cost production of PLN.

The impact of the problems cause PLN having financial difficulties with inability to increase selling price and decrease capability to invest in new project for build up capacity of power plant, build up capacity of transmission and develop customer services.

• Power Sector Restructuring.

The government of Indonesia has proposed privatization as alternative solution for PLN problems. In order to attract of foreign investors, restructuring of the electricity sector and also restructuring of PLN might be implemented. In 1998, the government of Indonesia proposed the Power Sector Restructuring Policy as a part of the economic strategy for crisis recovery program which is included electricity reform. In 1999, Asian Development Bank (ADB), International Monetary Fund (IMF) and World Bank prepared a loan to support the implementation of the electricity sector restructuring. The loan for proposed reforms amount $6-7 billion and the process will take period time from 1999-2001, and the end of program expected that the competitive market would actually start.

According to the Law No.20 of 2002, the first step proposed for Power Sector Restructuring is introduce to “unbundling” concept which PLN would divided into several companies such as power generation company, transmission company, distribution company and retail company.

Analysis the impact of “unbundling” concept:

• Political Factor

State Own Enterprise (SOE) is company that produce product that affecting livelihood of the people. According Indonesia constitution (Undang Undang Dasar 1945) article 33 clause 2, every products that could affecting livelihood of the Indonesian people are under government control. In this case, electricity is one of those products.

Based on this political consideration, we cannot unbundled the company, because it will effect the live of its customers and Indonesian people as a whole. By unbundling PLN, its means that we are opening the gate for others people to get in to this business and starting the competition. Our purpose is to find the way to solve PLN financial problems, if we open the gate for competition very early, PLN will not survive the competition.

The best way from political point of view is just stick into big giant company. In this way, they every region can help each other on financial by doing cross subsidization (profit area helps non profit area). Because there is no competition here, government can fix the electricity price according to the welfare of the people.

• Economic Factor

Income levels of Indonesian people were very differs cross area. As mention in political consideration above, if we unbundling PLN, we will open the gate for competition. On competition era, people will tend to pursue profitable area and leave the unprofitable area. This will cause a lot of Indonesia area back in to darkness because the electricity company in nonprofit area will collapse and for rural area is harder for them to get electricity because of the price will be very high.

Other economic factor that we also must consider is if PLN still sticks in one Big Company, investor cannot go to electricity business. If we benchmarking with another country like Singapore, the way they structure electricity business is very good. Singapore already applies Multi Buyer Multi Seller system, even though we know that the players of that businesses still link up to one entity. But still, with competition among them, they companies will tried to bring the best result and give more value to customers in this case Singapore’s people.

• Social Culture Factor

Most of the Indonesian people leave in rural area (village) and work in the farm as a farmer or a farm worker. Their income level and education level were very low. The government wants to increase their income level and education level by build infrastructure like road, school, telecommunication line, electricity and etc. To build electricity infrastructure in rural area, government must use its own enterprise because there is no investor that interesting in electricity retail business if the selling price is still very low.

• Technology Factor

Today’s technologies in electricity industry were growth very fast in term of its supporting technology which are measurement, protection, control and data management. For the basic technology such as power generation, transmission and distribution were not change so much for the last 20 years. In power generation the changed slightly more advance compared with changed transmission and distribution. Machine for power generation now is more efficient and environment friendly compared with those in old days.

In the world today, environment issues become global issues now, many countries included this issues on its trade agreement. Develop countries tend to avoid trade with country who not care to environment. Those make Indonesian government in hard position, because PLN doesn’t have budget to invest new power plan.

Base on technology factor, the best way for PLN is to lets go its domination in power generation business and let investor come in. PLN can buy electricity from them. Government worried if PLN lets go its domination in power generation and buy all the power from Independent Power Plan (IPP), the electricity price will gone up, because is not under government control anymore and PLN is on weak position for negotiation. It will affect the life of Indonesian people.

Base on the four factors that we analyze above, there are weaknesses and strengths in each way, whether if PLN stick to one company or divided in many small company (unbundled). The best ways is stick to one company and slowly open the gate for the competitions so PLN will not loose it competitive advantage and still have time to strengthen its weaknesses.

Step by step and gradually, PLN problems could manage and solve quiet well. PLN tariff have been increased smoothly and gradually since early year 2002. And the big achievement progress which is by year 2003, PLN have finished renegotiation process to reduce the power price purchase from $5-8 cents/kWh well below the $5 cents/kWh with all of the Independent Power Producers (IPPs). PLN could save amount $5.9 billion over the next 30 years based on the new agreement with the Independent Power Producers (IPPs).

• Annulment of the Law No.20 of 2002.

In December 2004, Indonesia‘s Constitutional Court announces annulled the Law No.20 of 2002 on Electricity and reenactment of the Law No.15 of 1985, based on arguments that the Law not in line with the Article 33 of the Indonesia Constitution of 1945 (UUD 1945). According to the Constitutional Court that electricity is vital and important to the people welfare then the electricity sector should remain under government control. The Constitutional Court also reminds that government of Indonesia should make draft a new electricity Law which is inline with the Indonesia Constitution of 1945.

According to the Minister of Energy, the impact of annulment the Law No.20 of 2002 will reduce the trust of investors for doing business of electricity sector in Indonesia. It is consider that Indonesia still needs investors to fulfill high demand in electricity. The government of Indonesia enacted Government Regulation No. 3 of 2005 which the objective of this regulation is to provide investor with legal certainty doing business in power sector before the New Law has enacted.

The impact of annulment the Law No.20 of 2002 for PLN that unbundling concept do not become to be applied and PLN still as a major player in the power sector. However, PLN has not recovered yet from the economic crisis; on the other hand demand of electricity still high as the consequence Indonesia have experienced a power crisis such as blackout since 2004. The government of Indonesia has set out a program as known the “10,000 MW Acceleration Program” which to expand capacity of generation power. The private sector can participate in this program by partnership with PLN through a loan foreign funding to the power project.

• Learned and Considerations.

What we learned?

• The implementing a program reform such as liberalization, privatization, unbundling system and restructuring to achieve full competition in power sector is a “complex process”.

• The new Law or regulation must be in line with Indonesia Constitution of 1945 (UUD 1945) as fundamental Law of State.

• The government should be aware before enacted the new Law or regulation that must be written and consider carefully and also must be implement able in order to attract new Investors.

• The annulment of the Law No.2 of 2002 may have negative signals for spirit of business competition, open market for foreign investment and may throw the power sector into uncertainty.

The Considerations.

• According to the Constitution of 1945 (UUD 1945), electricity is vital and important to the people welfare then the electricity sector should remain under government control. The private companies can participate in power sector by partnership with PLN through a loan foreign funding to the power project.

• PLN as the State Own Electricity Company should improve their performance and transform them selves to be more professional, effective and efficient.

References:

• Law of the Republic of Indonesia No.15/1985.

• Law of the Republic of Indonesia No.20/2002.

• The Article 33 of the Indonesia Constitution of 1945 (UUD 1945).

• Fabby Tumiwa, “Power Sector Restructuring in Indonesia: Viable Solution or Recipe for Disaster”.

• http://www.pln.co.id/

• http://www1.esdm.go.id/index.php?option=com_content&task=view&id=59&Itemid=94

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