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Economy

Indonesia power plant initiative hits snag

JAKARTA -- Dark clouds are already looming over the centerpiece of a gigantic infrastructure improvement initiative announced by the Indonesian government a year and a half ago.

Plans to build power generation plants with a combined output of 35,000 megawatts, positioned at the core of the initiative to spend 5,400 trillion rupiah ($413 billion) on infrastructure by 2019, have hit a snag due to successive cancellations and postponements of bids and delays in the procurement of land.

Although the government is stepping up efforts to lure investment, such as upgrading its repayment guarantee, skepticism about its ability to meet the power generation target is growing stronger.

In April, the state-owned power company Perusahaan Listrik Negara, or PLN, suddenly canceled a tender for a 2,000MW power plant in Java, one of the largest power generation facilities in Indonesia. A Chinese-Indonesian consortium, including an Indonesian state-owned construction company, and a major Japanese trading house were reported to be preparing bids.

PLN attributed the cancellation to a bungled bidding procedure, without offering details. It remains unknown when bidding will be reopened.

The bidding procedure was characterized by an extreme lack of transparency, and investors will shun Indonesia if the situation continues, said Supangkat Iwan Santoso, former head of the Independent Power Producers Association of Indonesia.

New power plants that began operating in or after 2015 had a total capacity of about 170MW, as of the end of June, less than 1% of the target for 2019. In addition, more than 80% of the land needed to lay electric power cables has yet to be purchased. Under the circumstances, it is impossible to meet the target for power generation, Santoso said.

For Indonesian President Joko Widodo, who is seeking to stimulate regional economies, improving power generation systems is a priority that cannot wait. His administration plans to meet rising demand for power consumption in Indonesia, which is forecast to double per person by 2025, while raising the domestic electrification rate -- or the rate of access to electricity -- to almost 100% from the current 88%.

Funding requirements for the target are estimated at 1,100 trillion rupiah, roughly equal to Indonesia's annual tax revenue. The government plans to finance 70% of the sum with investments from the private sector such as independent power producers, such as independent power producers. At an international conference in Jakarta in April 2015, Widodo called for investments from participants, promising them "incredible profits."

The power generation project got off to a strong start. PLN CEO Sofyan Basir, who was given the post because of the management skills he demonstrated at a state-owned bank, picked participants in the project one after another. He signed contracts with independent power producers and others to buy 17,300MW, half the targeted power output, in 2015 alone. He intended to conclude contracts by the middle of this year to cover the rest, according to a person involved in the project.

But the situation changed drastically early this year, due to the revelation that most projects were not ready to start as a result of delays in the procurement of land and fundraising.

The cancellations and postponements of bids became unavoidable to carefully assess the feasibility of projects, said an official concerned.

To turn the situation around, the government announced a decision this month to increase guarantees for payments and for bank loans. If payments are delayed, the government will cover them, a senior Finance Ministry official stressed, in an attempt to ease concern.

Widodo visits construction sites seeking to encourage builders to accelerate work. When he reshuffled his cabinet in late July, he replaced the energy and mineral resources minister, who was at odds with PLN.

Garibaldi Thohir, president and CEO of Adaro Energy -- a leading Indonesian coal mining company that has begun building a large thermal power plant in Java jointly with Japan's Electric Power Development and trading house Itochu after a delay of nearly four years -- remains bullish, saying now is the time to invest. But Indonesia will find it difficult to maintain investors' trust if project launches are delayed further.

Emerging economies have an abundance of attractive projects, said Julian Critchlow, a partner at leading U.S. business consulting firm Bain & Co. who advises global companies about utilities and alternative energy.

Widodo will mark two years in office in October. The administration's target of achieving 7% annual economic growth on the back of investment from abroad is coming to a crucial point.

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