Indonesia - Energy - Impact of electricity privatisation and liberalisation

David Hall
Date published: 
Jul 2010

Indonesia’s electricity sector was nationalised after independence as an integrated public system known as PLN (Perusahaan Listrik Negara-Djakarta).  In 1992 the former dictator, president Suharto, with the encouragement of the World Bank, introduced private sector participation through building independent power plants (IPPs).  

The IPPs were set up by multinational energy companies from the USA, UK and elsewhere. In most cases, they formed joint ventures with companies owned by cronies of the Suharto government. They were all given long-term power purchase agreements, under which PLN undertook to purchase 80 per cent of plant capacity for a minimum of  30 years. This corrupt process produced e agreements which provided for 50% more capacity than Indonesia actually needed, at priceswell in excess of PLN’s selling price to consumers. Because these prices were set in US dollars, the currency collapse of 1998 made these contracts utterly unaffordable, so PLN faced bankruptcy.

After the fall of Suharto in 1998, PLN wanted to cancel the agreements as corrupt and illegitimate, but this was resisted by the multinationals, strongly supported by their governments, and by the development banks, which insisted on renegotiation as a condition for future loans.

  • A corruption trial of USA multinational Edison over an agreement with Suharto cronies was dropped, at the request of the USA ambassador
  • Where PLN tried to reject the contracts, the multinationals pursued arbitration cases and won hundreds of millions of dollars in compensationclaims against PLN
  • The companies also collected compensation from ‘political risk’ insurance: the World Bank’s insurance agency, the Multilateral Investment Guarantee Agency (MIGA), paid $15m to Enron on account of a power project that was cancelled before it was even built. MIGA then insisted that the Indonesian government had to reimburse them the $15m, and refused to insure business in Indonesia until the money was paid. 
  • The Wall Street Journal quotes the chief  political adviser at the US embassy in the 1996-99 period as saying: “"protecting the interests of major investors and creditors was at the center of the table in everything we did….. Concerns about human rights, democracy, corruption  never made it onto the table at all."

Even after doubling the price charged to consumers, the renegotiated deals still left PLN with a deficit of $2.5 billion per year for 30 years. The cost of the corrupt PPAs is thus still carried entirely by Indonesians, who not only compensated the multinationals for the profits that they have lost, but also pay much higher prices for their electricity.

The ADB and the World Bank then intervened even more directly, by drafting a new law to privatise and liberalise the electricity industry. It was passed in 2002 by the Indonesian parliament , after the ADB made the legislation a condition  of a $200million loan. The law was however strongly resisted, and the electricity workers union successfully challenged the law in the country’s new Constitutional Court. In December 2004, the court annulled the law, declaring that it breached key elements of Indonesia’s constitution. Despite this, the parliament passed another bill in 2009, providing for privatisation and liberalisation; it has again been strongly opposed, and again the union has taken a case to the Constitutional Court to challenge the law.

Sources and further reading