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Lesson Learn from the Reform Indonesia Power Sector

Fabby Tumiwa Institute for Essential Services Reform Presented at International Conference on Establishing Dialogue on Fuel and Energy Sector Transparency Initiative
Bishkek, 26-27 September 2011

INDONESIA

Indonesia Electricity Sector at Glance (1)

13,466 islands, 1.9 mil sq meter Population: 237.6 million (2010) GNI/capita: $ 2500 (2010) Poverty headcount ratio: 13.3% (2010) CO2 emission/capita: 1.7 (2007) Electrification ratio: 65% (est, 2010)

Indonesia Electricity Sector at Glance (2)

Electric Power Law in 2009 marked the change of power industry structure, end the special status of the state-owned company - PLN.
Further liberalize the power sector. New industrial structure, mix of vertical integrated and unbundled monopoly model. Shared responsibility and decentralized authority to local government (district and provincial level). Regional electricity tariff as alternative to the uniformed national electricity tariff.

Indonesia Electricity Sector at Glance (3)

PLN dominates electricity sector
National-wide coverage Vertically integrated company: generation, transmission & distribution 40,000 employee 27,000 MW Installed capacity (as 2010) + Purchasing energy from IPP (~ 3000 MW) 40 million customers 170 GWh total energy production, and 147 GWh energy sold Annual expenditure: ~US$ 18 billion

Governance Challenges
Electricity Industry is political subject.
Indonesia constitution regard electricity as vital and strategic to the state Regulated and controlled by the state.

Regulated Model prone to corruption, and utility become target of political interest.
Political, social, economic interest vs. Commercial interest; Governance of the management is seriously compromised.

Historical Development of Power Sector in Indonesia

1882 1942: Dutch electricity companies set-up and provide electricity services to consumers in some major cities 1945: Dutch LWBs was taking over and establishment of Ministry of Public Work and Power of Republic of Indonesia 1945 1956: Nationalization of foreign gas and power utilities 1965: gas and power utilities were separated, creation electric power utility company (Perum PLN) and natural gas company. 1972: PLN has given task to electrify the entire country, with monopolist status.

Historical Development of Power Sector in Indonesia

1985: New Electricity Law, starting deregulation and liberalization of Indonesia power sector, open-up for IPPs (first reform) 1990-1997: the emerging of IPPs, PLN act as single buyer. 1995: Corporatization of PLN, separating asset and unit under a vertical-integrated structure: generation, transmission, distribution (second reform); 1998 2002: Power Sector Reform, intend to do full liberalization, privatization develop competitive market for electricity, enactment of new law on electricity (No. 20/2002) (third reform) 2004: the annulment of the Electricity Law No. 20/2002 by the Constitutional Court. 2006 2009: development of new electricity law, enacted in 2009 (Law No. 30/2009).

Electricity Sector Reform (ESR) in Indonesia (1)

ESR evolves since 1980s. A major structural ESR designed since early 1990s by World Bank and development donor agencies (such USAID).
Driving by larger industrial deregulation attempt in 1980s Main objective to end the monopoly of state-owned electric utility, introducing market-oriented industrial structure, creation of electricity market, facilitation for private investment.

ESR getting more momentum after the economic crisis in 1997

economic stabilization loans from WB and IMF string attached to the conditionality to do reform (deregulation and privatization) of electricity and oil and gas sector. Asian Development Bank (ADB) and USAID assisted the policy formulation for the Power Sector Reform (PSR) and drafted the draft of the law.

Electricity Sector Reform (ESR) in Indonesia (2)

Element of Proposed Reform (1998 White Paper and Electricity Law No. 20/2002):
Separation of PLNs asset in Java-Bali and non-Java Bali.
Java & Bali system accounted of 75% of energy sold by PLN and more mature infrastructure.

Unbundling of the PLN into generation, transmission and distribution companies;

Later, privatization of unbundled companies.

Separation of Government policy-making and regulatory function for electricity sector.

Establishment of electricity market regulatory body.

Establishment of electricity market (power pool) in Java-Bali system. Rationalization of Independent Power Producers (IPP).

Estimated cost to complete the overall reform program was estimated around US$ 4-5 billion.

Electricity Sector Reform (ESR) in Indonesia (3)

Civil Society Organization and Labor Union took the 2002 Electricity Law to the Constitutional Court in 2003.
The Electricity Law were revoked by the Constitutional Court in 2004, practically ending the Electricity Sector Restructuring Program.

Why Civil Society opposing the 2002 Power Sector Reform (PSR)?
Externally driven by IFIs and Western Donor Institutions that is seen as the instrument to serve capitalist interests. The Reform package perceived as a program that only promote and facilitate private interest and very narrow to the financial issue of the sector, instead of taking into account a wider public interest. The reform package missed to address the need to secure the electricity service provision for the people that is affordable and reliable. State responsibility vs. Private profit

Why Civil Society opposing the 2002 Power Sector Reform (PSR)?
The design of PSR and the formulation of 2002 Law were lack with civil society and consumer participation in the first place. Process did not well communicate, information and document were hard to obtain; Impact of reform did not well assessed and properly addressed in the proposed electricity law.

Failing Reform
Government failed to define and implement PSR the electricity law revoked by the Constitutional Court:
The Electricity Law is passed without sufficient public consultation or taking into account public concern. Doubt over the implementation of the electricity law to address concern over electricity supply. Failed to establish independent regulatory body to oversight PLN and private utilities. Electricity subsidy remaining high in the last 5 years ( average about $ 6 to 8 billion/year). Despite the Electricity Law intends to stripped PLNs monopoly power, in practice PLN has given more role (i.e. purchase renewable electricity from small-hydro and geothermal).

Lesson Learn of Designing and Implementing the Electricity Sector Reform (1)
Electricity sector reform is a complex matter.
Require wider institutional reform before overall electricity reform take place.

Defining the definition and scope of Electricity Sector Reform

Citizen-oriented electricity sector reform Reform should not always ended up in privatization and increasing in electricity tariff. Reform shall be contextualized in the situation of countries (political, economic development, state of electricity industry, etc). Assessing impact, cost, and unintended consequences

Lesson Learn of Designing and Implementing the Electricity Sector Reform (2)
Address civil society and consumer concerns/issues since the beginning while developing the reform agenda.
Creating platform and process for public participation and mechanism for consultation. Require strong and knowledgeable civil society organizations to be participated effectively.

Conclusion
Power sector is critical and important in developing countries context and subject to political struggle. Indonesia PSR failure caused by many factors, in addition to the complexity of the reform itself. Power Sector Reform requires wide-range reform in energy sector and public sector. Creating a platform for dialogue, clear and transparent mechanism for public consultation is a prerequisite condition toward a citizenoriented power sector reform.

fabby@iesr.or.id website: www.iesr-indonesia.org

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