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Corruption

Publicly Guaranteed Corruption
Corrupt Power Projects and the Responsibility of Export Credit Agencies in Indonesia

The Burden of Corruption

Corruption not only controlled which company won certain orders, it also allowed suppliers to bill excessive prices. In addition, the country saw the implementation of projects that there was no need for.

Up to the mid-nineties, the electricity board PLN built and operated all the power plants. As with Muara Tawar, corruption forced PLN – and indirectly the Indonesian government – to overpay their projects and unnecessarily increased their debt. Corruption also rendered private power plants more expensive. The Indonesian national audit commission and an advisor to the presi­dent of PLN estimate that corrupt contracts increased the cost for Paiton I plant by USD 600 to 1000 million. After all, at a price of USD 2.5 million, the plant cost more than double the Tanjung Jati B plant, which is of practically equal size (and cost USD 1.15 billion).

However, by means of lopsided power purchase agreements, private operators succeeded in shifting the excessive cost to PLN and therefore to society. Paiton is a typical example of this mechanism. In an extensive report, the Asian Wall Street Journal informed on December 24th, 1998, about the price negotiations between the Paiton I consortium and the PLN delegation. PLN tried to insist on market prices for electricity. Top government officials, however, forced the agency to accept the utterly unusual and exorbitant purchasing tariff of 8.6 US cent/kWh. "It was a presidential decision", commented Nengah Sudja, a former head of research of PLN, in the Asian Wall Street Journal. "Everybody knew it was nepotism, but we couldn't do anything about it." And Djiteng Marsudi, president of PLN between 1995 and 1998, said in more general terms: "The power companies dictated terms to us because they had Indonesia's first family behind them. Resisting them was like suicide."

The Paiton I project proved to be even costlier for Indonesia because foreign contractors quickly used its lopsided power purchase agreement as a model for further contracts. And due to a very questionable and detrimential Presidential decree, Indonesia continued accepting unsollicited proposals for further IPPs. So power projects were not commissioned based on the actual needs of the country, but based on the political clout of foreign companies and their domestic partners to get unfavourable contracts accepted by PLN.

At least since 1993, the World Bank had been increasingly concerned about the development of the Indonesian power sector. In 1994, the Bank warned that the Indonesian government should „urgently reject the time schedule and the tariffs of all private projects“, or else „they would run the risk of inevitable and major increases in the cost of electricity” [quoted from Der Spiegel, English translation of the German source]. In several other public documents and letters to the Indonesian government, the financial institution also warned that the intransparent decision-making process would lead to unwarranted projects and unfavourable contracts. According to an observer, the foreign governments and contractors, when confronted with the World Bank’s con­cerns, simply argued that after all, the questionable contracts were backed by the Indonesian government.

Private power plants usually sell electricity at 5-6 US cents/kWh. In early June 2000, ABB an­nounced their intention to introduce wind energy plants to the market which will produce at a price of approximately 4 cents/kWh. The IPPs’ tariffs in Indonesia amount to 5.5 – 9.8 cents. A study by Deutsche Bank concludes that, in Indonesia, private power is some 30 percent more expensive than in the rest of the world. High electricity tariffs of this order are in no way justified, as Indonesia, at least in the central grid, doesn’t need the power generated by IPPs. For more than ten years, the country has been generating more electricity than it consumes. An energy advisor to the Indonesian government recommended in the early nineties to build small-scale, flexible geothermal and combined-cycle plants instead of commissioning large-scale projects like Paiton. What’s more, the power transmission network has been and still is leaking „like a sieve“ according to the Asian Wall Street Journal. So revamping the grid would be more cost-efficient by far. When the representative of the US Exim Bank visited Indonesia, several experts of the government and PLN pointed out to her that the country did not need Paiton I. But the plant was built nevertheless, and equipped with a contract that committed the government to purchase the over-priced electricity over the next 30 years.

The ERG-funded Sengkang power plant has also been provided a government purchasing guarantee for a duration of 20 years. The electricity tariff of 6.7 US cents has (as in the case of other IPPs) to be paid to over 90 percent in USD, and not in local currency. When, in the course of the Asian economic crisis, the Indonesian rupiah slumped, PLN did not even in the remote distribution network on the island of Sulawesi buy power from Sengkang, but purchased from cheaper diesel power plants instead. Likewise, the PLN-owned Grati geothermal power plant, which produces power at 4.5 cents, had to cut back production because PLN was forced to buy private power at a much higher rate from the Paiton I plant.

PLN representatives argue that their utility does not need the electricity from Sengkang. Other observers believe that on Sulawesi – as opposed to Java – there is no power surplus and that the construction of the Sengkang power plant was therefore justified. The purchasing guarantee, however, obliges PLN to pay 400 billion rupiah in the year 2000 (almost CHF 100 million) for Sengkang power either way.

In 1998, PLN had an output capacity of 14,000 megawatt. Even without the economic crisis, this would be enough to meet Indonesia’s entire demand. Additionally, since 1994, PLN has entered into contracts with 27 IPPs, making available an additional output capacity of 11,000 megawatt. In September 1997, the government decided that only ten out of these 27 private power plants (with a total capacity of 4730 megawatt) should be further pursued. Three of these – among them Paiton I und Sengkang – have already started production, and six further IPPs would be able to do so. These plants represent an enormous strain on the state budget. Had the contracts agreed upon been fulfilled, PLN would have had to spend 7.0 percent in 1997 and 10.1 percent in 1998 of the entire operating budget for private power (according to data of the US embassy in Jakarta). The exchange rate of 6000 rupiah against the US Dollar would drive this percentage up to 49.9 percent in 2000 - for power which the country does not even need.

PLN is considered to be inefficient. Under pressure from the International Monetary Fund, the Indonesian government had the power utility audited by Arthur Andersen consultants, who put the potential in efficiency improvement at an annual USD 720 million. As a comparison, the un­necessary purchasing agreements with the IPPs cost PLN USD 3 billion in the current year. The ERG project Sengkang alone accounts for power supplies of a value of USD 67 million in 2000. In the financial year 1999, PLN should have serviced its debt with an amount of USD 1.46 billion. In 1997, 40.0 percent of the agency’s debt were with the World Bank, 26.4 percent with the Asian Development Bank, 8.8 percent each with the German KfW and the Japanese JEXIM, 3.1 percent with the Swiss banks and 2,0 percent with the US Exim Bank.

The electricity tariff in Indonesia stands at an average 3 US cents/kWh. Private power provided by the IPPs, for which PLN is to pay 5.5 to 9.8 cents, has to be heavily subsidised by the gov­ernment. In May 1998, in the midst of the economic crises, PLN tried to raise the electricity tar­iffs. Due to heavy protest by the population, the authorities were forced to back down and largely cancel the price hikes. Industrial consumers have also made it clear that they would not accept tariff increases. “Sooner or later, PLN will definitely go bankrupt”, Indonesia’s Tempo magazine concluded in September 2000.

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