What the hell is going on in Nias between PLN and APR?

Last week APR Energy, a US-owned provider of electricity generation published the following open letter, indicating that they are intending to shutter their Nias plant, and pull out of the Indonesian market.

 Source: APR Energy

Source: APR Energy

My (unofficial) translation of the letter follows:

Open Letter to the People of Nias

Dear citizens and business owners of Nias;

Since 2013, APR Energy has worked to give You electricity supply that can be relied upon.

Unfortunately, PLN has not yet paid our invoices. That company has not respected its contract with us. But PLN continues to collect money from the people of Nias for the electricity that they use.

As a result of PLN’s actions, we cannot continue our operation in Nias—or anywhere in Indonesia. At the end of May, we will permanently close our generator with total capacity of 20 MW.

Although we will leave, we would like to protect the people of Nias and ensure that you can still get electricity. Because of that, we have offered to sell our generator in Nias to PLN.

Unfortunately, PLN has not yet responded to our offer.

Please understand that our decision to leave Nias has not been easily undertaken. We regret the consequences that will occur with the closing of our generator. But we are also a business that has employees that work so that they can support their families. If we are not paid, we cannot pay our employees, and they are our most important responsibility.

Because PLN has refused to pay our invoice and to respect their obligations under their contract with us, APR Energy has no choice but to leave Nias at the end of May.

Our regards,

John Campion
Head and Chief Executive Officer

It is difficult to get a straight chronology of the dispute from the media, but all sources agree that it started with a dispute between PLN and APR Energy over their diesel generation facilities serving the city of Medan. The gossip around the market is that PLN requested a significant discount on its existing contract, and APR Energy refused to provide it, so PLN stopped paying them. Following this, APR Energy pulled their generators out of Medan, and warned PLN that they would do the same in Nias if their invoices were not paid by 31 March 2016.

Despite the warnings, by the deadline, PLN had not paid. So, at midnight on Friday 1 April 2016, APR Energy stopped generating, and the island of Nias--home to almost 800,000 people--went black. The estimates of the outage vary, Kompas reports that it was total blackout for at least 2 days after which time, they mobilised 17 separate generators, which would only meet 26 percent of the estimated peak load. Some other sites put the timeline at 12  or 13 days! I want to repeat again that this is an island home to 800,000 people!

Finally, the dispute was resolved, and PLN paid APR Energy’s bill after a mediation process where the US Ambassador was reported as getting involved. Although, according to the letter, which is undated, but which I first saw circulating on Whatsapp, then in Indonesian language media on the 18th of May, APR Energy is still pulling out of the Indonesian market.

Why this matters

The Indonesian government is currently making a big effort to improve its investment climate, vowing to improve Indonesia’s ranking in the World Bank’s Doing Business Index from 109 out of 189, to number 40 by 2017.

I have previously given PLN kudos for, among other things, their track record as a reasonable contractual counterpart. Looking from the outside, it difficult to assign fault in the dispute, but contractual disputes resulting in 800,000 people spending days in the dark, then the company packing up and leaving the market in frustration aren’t something you see when things are going smoothly. At the very least, the process was exceptionally poorly managed by PLN.

Whatever precipitated this, I hope the President’s office, Ministry of Trade, and PLN management take a good look at this case study to make sure that we don’t see too many more stories like this.