Thursday, 27 February 2020

Wrong Direction

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  • TEMPO.CO, Jakarta - But State-Owned Enterprises (SOEs) Minister Erick Thohir’s behest for the company to shift its business focus from power plant to only transmissions grid and distribution will not change things much.

    To date, PLN has suffered from crisis after crisis. Not only did its leadership keep getting nabbed in corruption cases, but the company was also at the brunt end of widespread criticism after a power failure of several hours that hit Jakarta and several parts of Java in early August.

    Internally, the electricity company’s cash flow often stumbles because state subsidies for electricity sales do not flow smoothly. Last year, the profit amounting to Rp11,575 trillion contained compensation arrears from the finance ministry amounting to Rp23.1 trillion.

    With its books in such a condition, PLN’s debts are becoming alarming. Until the first quarter of 2019, PLN’s debts had reached Rp394,18 trillion, an increase of 1.7 percent compared to the same period the year before. Rumors from two years back had it that the finance ministry had sent a letter to PLN’s CEO about the company’s default risk.

    All of these happened while in fact, capital investment into the company by the state appears to be sufficient. For the past four years, PLN had received state capital participation (PMN) at Rp35.1 trillion. This is the largest figure an SOE gets in comparison to other SOEs.

    The capital was much needed by the PLN to continue constructing power plants. Each year it had investment needs to expand this sector to the amount of Rp80-90 trillion. But Minister Erick Thohir’s request to change business directions will not improve PLN’s performance overnight.

    One of PLN’s major hindrances lies in the downstream: the company is compelled to sell electricity at tariffs determined by the government. Despite the core supply costs of power supply increasing by the year – this year alone it increased by some 9 percent – since 2017, the government has not increased the tariffs paid by end-users. And so, PLN’s debt arrears have continued to increase. Indeed there are government subsidies to cover the difference, but the decision on how large the amount lies in the hands of the House of Representatives.

    This is one of the reasons PLN thus far has decided to enter the upstream sector. Without the power plant business, PLN’s finance would be even more troubling. Undeniably, PLN’s involvement in this sector is not without its problems. Several private companies grumble about the joint-ventures offered by PLN. Simply because it is the sole purchaser of electricity, PLN often enforces an unbalanced scheme to its business partners.

    Whisperings about grease money also keep arising. Though later declared free of the charge, the former PLN CEO, Sofyan Basir, was nabbed by the Corruption Eradication Commission for suspected receipt of grease money to give the go-ahead for the Riau-1 Steam Power Plant installation in Sumatra.

    Neither has the government’s actions improved things much. The ministry for energy and mineral resources has a penchant for keeping things dark in relation to the annual general plan for power supply. Information on selecting bid winners to construct power generator plants are always shrouded in mystery.

    The fact that many of the private companies involved in this sector are also big companies with influential lobby and a powerful political network has made the matter even more complicated.

    Without transparent, above-board, and accountable due processes, it is very unclear whether an independent power producer (IPP) gets a contract to build a power plant because it submitted the best proposal or because of an influential figure behind the scenes. This is why the power purchase agreements (PPA) are often criticized as rent-seeking practices. A difference of only a mere few cents can provide huge untoward profits for the IPP.

    If transparency and accountability were better, it would be better to keep PLN’s involvement in the upstream sector. PLN’s involvement in the power supply business can encourage pricing in power supply agreed in PPAs to be more efficient.

    Instead of pulling itself away from the power supply business, breaking down PLN into several smaller companies could probably be a better solution. If it was less bloated, PLN in each region can respond to the need for a power grid construction and distribution costs that better reflect the region’s economic conditions.

    Seeking a solution to the tangle that is PLN needs careful thought and awareness. Indeed a short term solution is needed, but rethinking the strategic role PLN plays, in the long run, is no less urgent. For sure the state cannot let loose strategic enterprises in the hands of the private sector. A fair and open joint venture working scheme is needed that is mutually beneficial so that the public’s interest is also fulfilled satisfactorily.

    Read the Complete Story in this Week's Edition of Tempo English Magazine