Does Indonesia even care about Palu?

With it’s power plant still unrepaired, where will Palu’s electricity come from?

Does Indonesia even care about Palu?

The major earthquake and succeeding tidal wave that hit Palu in late September 2018, killed possibly more than 5,000 people and destroyed its infrastructure, including its power plant. The area is a still a disaster zone, but is now largely off the radar. 

This is an election year. Oddly, both Prabowo Subianto and President Joko Widodo are more concerned about attracting votes in Java and Sumatra than in far-flung Central Sulawesi. This would be quite the opposite of a US or EU election approach where the candidates would be falling all over themselves to demonstrate which one could show the bigger concern for the devastated area. 

A main problem Palu is facing is electrification, and the behemoth monopoly of state-owned electricity company PLN stands clearly in the way. State owned monstrosities, also including Pertamina and PGN, are the tail that wag the dog of Indonesian politics, and create political fiefdoms unto themselves. 

The Palu power plant was destroyed by the tidal wave, leaving Palu dependent on electricity sent over from Poso, and on heavily polluting diesel electric generation sets. There are many private entities who seek to do public and private partnerships (PPP’s) with Palu to get the energy restored quickly, but this is not happening. There are some political reasons why, all with PLN involved of course. 

PLN has a current initiative to review 184 projects that include critical power plants, mostly in Java, to make sure they are built on time and their transmission lines and substations are all in order. Palu’s plant, however, was not on the list. Considering the list was drawn up prior to earthquake, it would be fair reason why it was not included. Nonetheless, even five months after the earthquake, while the list was slightly updated at the beginning of the year to include some Sulawesi plants, Palu is still not really included - it mentions a Palu 3 upgrade plant, out of 12 other Sulawesi plants. 

The point is there is a lackadaisical approach to all this, and Palu needs to be placed at the very top for immediate upgrade and rebuild. The obvious reason: it doesn’t matter. PLN has to look good for the upcoming election, and Java/Sumatra power plants are the key, not far flung regions that no one cares about. 

Another issue is the PPA, or purchase power agreement, whereby PLN agrees to buy the electricity produced by an investor at a fixed price for several years, to ensure the financial stability of the investment payback. To get private investors to commit to a disaster area with knocked out infrastructure, they need immediate incentives. That means a higher PPA to get them to take on the risks involved. PLN won’t budge. It wants to treat the situation in Palu as normative, namely, offering the same PPA that an investor could also get in Java or Batam. This is a ridiculous position to take. 

The only entities that will take that risk of investing in power plants in a disaster area are Chinese state-owned power companies, like State Grid or Chinese Communications Construction Group (CCCG) . Simply, because these companies are part of the Chinese government and the entity then becomes G2G, or a government-to-government transaction, namely an Indonesia state-owned company investing with a Chinese state-owned company, as PLN seeks to eventually own the plant. G2G of course flies in the face of what a real PPP is: a public and private partnership, not a “public and public” partnership. This is also clearly works against what President Widodo’s government and SOE minister Rini Soemarno have proclaimed they wanted: private investors. Chinese investment, which seems to be the default investor for all big Indonesia energy and infrastructure projects is not private. 

There are no private energy companies in China of a large magnitude, all are an extension of the Chinese government. This is an important fact, as if things go sour with the investment, the Chinese government, not a consortium of private investors, will lean on the Indonesian government to make things whole, just ask Sri Lanka, Ecuador, or Malaysia. 

Recently, Malaysia Prime Minister Mohammed Mahathir cancelled many Chinese invested infrastructure projects signed under his predecessor as usurious and potentially bankrupting Malaysia in the long term. 

Indonesia should take note of this, as Chinese investment in power and infrastructure has become an outsized slice of the economic development pie. When the debt issues come due, as they will, Indonesia may likely be on the hook for higher payments and concessions to China than if private, non-governmentally allied companies were used. Rumor has it that PLN is already in discussions with China about Palu, along the lines of Morowali. 

Finally, even if private investors could get a premium PPA from PLN, it wouldn’t carry significant weight as PLN has unilaterally cancelled PPA’s or adjusted them downwards in the past, burning investors (mostly in the case of renewable energy, which is more expensive to produce than cheap and heavily polluting  Chinese built power plants). 

In this case, a guarantee for the PPA should be backstopped by the Ministry of Finance, or its understudy, the Indonesia Infrastructure Guarantee Fund (IIGF) if any transmission lines or substation rebuilds are required, meaning that Indonesia will ultimately honor the PPA no matter what game PLN plays. 

That will definitely corral private investors. But IIGF also tends to be lethargic and avoid political controversy by not actively backstopping many projects. Better to let the Chinese SOEs do it - G2G, no mess and no muss. 

The leaders and candidates of Indonesia need to be clearly aware of the where the real disasters are and not let state-owned companies wag the dog, by giving lip service to rebuilding but not really understanding how its done. 

Palu is still badly hurting and has clearly fallen off the radar, nonetheless the mechanisms are there to make the situation right if correctly aligned. 


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