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

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.

PLN's pipeline of deals continues to flow

IJ Global is reporting that the Request for Proposal has been issued to bidders on PLN's Jawa 1 2x800MW gas-fired, combined-cycle power project. 

The procurement process was launched in May 2015 and, while, I understand, the issuance of the RFP was postponed, reaching issuance of RFP within 8 months isn't bad for a project of this magnitude.

IJ Global are also reporting that China Oceanwide, PJB and Shanghai Electric consortium is rumoured to be the preferred bidder for the Jawa 5 2x1000MW coal-fired project. 

According to this presentation on BKPM's website, tendered 7,600MW of capacity in 2015, and anticipates completing procurement for 37 projects, representing 14,887MW of capacity in 2016. 

PLN IPP Procurement division, Market Sounding: IPP Procurement in 2016 presentation. 8 December 2015. Presentation available here

As I wrote in my article in Prakarsa, Learning From Indonesian Best Practice: A Way Forward for Public Private Partnerships in Indonesia, PLN has figured out a model that can deliver a significant pipeline of projects that are attractive to private sector investors, delivered via transparent tender processes that maximise value for money.

Another critical thing that PLN has demonstrated is that this model is scalable. When pressed by Jokowi to deliver the 35,000MW program, PLN has shown an ability to dramatically accelerate their pipeline of projects being delivered to market.

When I worked in private advisory, I would typically have 2-3 meetings a month with people wanting a briefing on infrastructure investment opportunities in Indonesia. Usually these people had heard of the government's ambitious targets to get hundreds of billions of dollars of investment over short time periods. The meetings weren't usually very long, because there were literally no opportunities, other than trying to buy assets on the secondary market, or as service providers to SOEs, or infrastructure delivery ministries that were the only ones delivering projects!

Now, the message is very clear: go to PLN.

As I said in my Prakarsa paper, those proposing projects in other sectors are now in direct competition with PLN for investors' money. If they want to pull investors away from PLN, they should try to emulate their model, as it's clearly working.

I wonder how long it will be until our PPP pipeline looks like this*.

---

*Or even like the Philippines'.

The importance of disclosure in major infrastructure projects

I enjoyed this article by Marcos Siqueira, from the World Bank's Handshake Journal on public private partnerships, titled "What if we disclosed everything? Reactions to a radical proposal".

He sets out a really nice argument for transparency in public contracting, especially in developing countries that have governance concerns.

“The crude truth is that opaque PPP policies serve a lot of interests, but almost none of them benefit service users or taxpayers. Here are some of the key points on transparency in PPPs, from my perspective:

First, much of the developing world faces complex governance challenges. Fairness issues haunt the day-to-day life of procurement processes. PPPs are very big projects, subject to sophisticated risk allocation mechanisms, and governments do not always have the capacity to fully understand the consequences of the contracts, which only increases the level of illegitimate interests surrounding projects. Therefore, in my opinion, unfortunately opacity is the best way to protect those interests.

Second, opacity feeds inefficiency, even when no explicit governance issues are present. The long-term nature of PPP contracts make managers want to protect themselves. After all, valid information can be a very powerful tool for users to push for contractually determined service levels to be effectively delivered, and for the government to use its regulatory tools to monitor costs and quality. I understand why contract regulators and private sector infrastructure operators prefer that service users do not have adequate information: they feel less pressure.

Third, opacity stimulates opportunistic behaviors, both of government and of the private sector. I have noticed around the world that parties often enter into agreements knowing all too well they will break it (or try to change it) as soon as they can. Opacity helps keep watchdogs at a safe distance, and creates an adequate environment for discretionary changes to a contract that might push it away from its original objectives. So the more opaque the practices, the more difficult it is to enforce a contract in the long run.”

— Marcos Siqueira, What if we disclosed everything? Reactions to a radical proposal.

He goes on to say that "From my perspective, a full, radical, proactive transparency policy is the single best and least-expensive strategy to reduce the influence of those interests in the PPP project cycle. The transparency policy (see examples from PPPIRC) should include, at least, the unrestricted disclosure of:

• Unredacted contracts
• Associated financial deals
• Unredacted bids
• Unredacted amendments
• Performance reports
• Financial data of the project company
• Fiscal commitments and risks"

But this is far from something that World Bankers and international policy advisers like myself try and impose on developing countries alone. At least in my case, my home jurisdiction practices what I preach.

Since 2007, the Victorian Department of Treasury and Finance has been publishing project summaries of every PPP project they enter into. And, in many cases, they even publish the unredacted contracts, as suggested by Siqueira. 

If you are interested in seeing what a real project agreement looks like, I do recommend taking a look through some of the contracts on the Victorian websites. Interesting ones for me are the City Link Concession Deed, and the sale deeds of all of our old power plants; which incidentally, worked out pretty well for the government, given the disruptions created by rooftop solar, among other technological changes...

After you've had a look at the concession deeds, most of which are well over 100 pages, you'll appreciate the effort made in producing project summary documents, which lay out most of the relevant information from the agreements, plus a lot more relevant information in a much more reader-friendly way.

The Victorian Desalination Project is a nice case study that shows how a government goes through the process of confirming that the project is needed, and that the private option creates value relative to the public option. The project summary document reports it was estimated that the winning bidder's price saved the government almost a billion dollars in present value terms.

The State Government of Victoria, through Partnerships Victoria was at the vanguard of developing manuals and training materials that form a lot of what is considered "international best practice" in managing private participation in public service provision. In some cases, developing countries adopted what they understood to be "international best practice" without understanding that they lacked certain key capacities or institutions to implement them. A lack of regulatory capacity is one key constraint for developing countries in particular.

Indonesia is still a reasonable distance from the State Government of Victoria's model of transparency. If you google around, you can find some excerpted or redacted power purchase contracts for PLN, but not much else is publicly available. 

Like Siqueira, I struggle to see the public interest in keeping such contracts confidential. As he notes: "I have been challenged that there are legitimate commercial secrecy concerns that indicate the need to keep information away from the public’s eye. My view on this is that the same lack of transparency required to keep commercial secrecy also serves to hide fairness issues during procurement, protects inefficient organizations from scrutiny, and creates difficulties for contract enforcement."

While many have learnt the hard way to be wary of swallowing developed country best-practice whole, enhanced transparency is hard to argue against in almost any jurisdiction. Indeed, it is arguably more critical in places like Indonesia.

Belajar dari praktik terbaik di Indonesia: cara memajukan KPS di Indonesia

Indonesia Infrastructure Initiative (IndII) baru saja menerbitkan edisi Prakarsa terbaru. Dalam edisi tersebut ada sebuah karangan dari saya yang menunjukkan apa yang dapat kita pelajari dari PT PLN (Persero) untuk sukseskan agenda kerjasama pemerintah swasta (KPS) di infrastruktur di Indonesia.

Saya lampirkan karangan saya dibawah. Bagi mereka yang ingin membaca edisi Prakarsa secara keseluruhan, yang berfokus kepada keterlibatan sektor swasta dalam infrastruktur di Indonesia, lanjut saja ke situs IndII. Edisi Prakarsa dapat dibaca dalam Bahasa Inggris dan Bahasa Indonesia.

Learning From Indonesian Best Practice: A Way Forward for Public Private Partnerships in Indonesia

The Indonesia Infrastructure Initiative (IndII) just published their latest issue of  their journal Prakarsa, which includes an article I wrote on how those that want to see Indonesian PPP projects succeed need to learn from PLN's example.

I have embedded the article below, for those that want to read it here. For those that want to read the whole edition, focusing on private participation in infrastructure in Indonesia, please head to the IndII site, where you can read it in English or Indonesian.