BY GALEN ERICKSON
Galen Erickson is a Master of International Relations student specializing in International Economics and Finance. He works for an economic consulting firm in Washington DC focusing on energy policy and regulation. Galen previously worked at a government affairs consulting firm in Jakarta, Indonesia.
On November 15th, 2022, Indonesian President Joko Widodo and a group of nations led by the United States and Japan (“the International Partners Group”) announced a climate finance deal to help Indonesia curb its power sector’s reliance on coal and facilitate its transition to a carbon-free energy system.[1] This deal, formally known as the Just Energy Transition Partnership (JETP), includes a mixture of loans, grants, and investment from both public and private sources. Indonesia is also expected to implement policy changes to accelerate investment in renewable generation. Describing the JETP as a “landmark partnership” in its press release,[2] the White House outlined four main goals:
Achieve year-over-year reductions in power sector emissions by 2030;
Cap power sector emissions at 290 megatons of CO2 in 2030, about 20 percent less than the current baseline value of 357 megatons;
Achieve net zero emissions in Indonesia’s power sector by 2050, ten years earlier than the prior goal; and
Increase the share of renewable sources in Indonesia’s power generation to 34 percent by 2030, twice the level of total renewables output outlined in current plans.[3]
These goals, if realized, will mark an important step in cutting Indonesia’s emissions. JETP funding will play a critical role in the successful implementation of the deal: $10 billion will come from public sector sources while a group of banks – including Bank of America, HSBC, and Citigroup – will help coordinate another $10 billion. The funds will be disbursed over a three-to-five-year period. Concrete roadmaps for investment, financing and technical assistance will be developed by involved parties in the first half of 2023.[4]
The JETP’S plans and goals are ambitious, but one critical consideration is absent in the White House’s press release: the acknowledgement of U.S. involvement in a similarly large – but ultimately ineffective – initiative three decades ago. On November 16, 1994, President Bill Clinton watched as Indonesian and American companies signed $40 billion in business agreements within a single day.[5] Many of these agreements were signed by leading American firms such as General Electric and focused on developing and investing in Indonesia’s energy system to help power the rapidly growing Indonesian economy.[6] As the years passed, however, it became clear that these agreements were too expensive and were likely undercut by corruption. Given the involvement of many of the same public and private entities in the JETP, it is constructive to reexamine the 1990s power agreements and their pitfalls. Reviewing these historical deals provides four policy safeguards that representatives from both the IPG and the Indonesian government should implement to ensure the success of their present-day round of investment. These safeguards include:
Utilizing an open and competitive bidding process to select project partners
Prioritizing the experience and qualifications of bidders in undertaking similar renewable energy projects in emerging markets.
Involving relevant technical advisors at all steps of the procurement process.
Selecting only those Indonesian partners with experience or assets that can directly contribute to the construction and operation of renewable energy plants.
THE 1990s POWER AGREEMENTS
In the late 1980s, Perusahaan Listrik Negara (PLN), Indonesia’s state-owned electricity company, was ill-equipped to support the nation’s growing population and industrial base. PLN was in poor financial shape and unable to independently finance new power plants. PLN also could not easily access external financing from multilateral organizations as a consequence of the 1982 international debt crisis that led the World Bank and other multilateral organizations to terminate funding for state-owned electricity generation projects. This created an opportunity for private American companies to step in and finance new projects in Indonesia where financial returns were stronger than in the US.[7] From 1990 until 1997, PLN signed 26 agreements with private investors for power generation. These 1990s Power Agreements were to lead to more than 11 gigawatts of new capacity from an influx of over $13 billion in American capital.
THE STRUCTURE OF THE AGREEMENTS
The power projects were underpinned by power purchase agreements (PPA) that disproportionately shifted the risk burden to PLN. First, the contract terms set fixed formulas for future electricity prices at which PLN was obligated to buy electricity from private foreign-owned generators. This left PLN with little ability to negotiate for new or updated PPA prices in the later years of the contracts.[8] The PPAs also shifted currency risks to Indonesian government and state-owned enterprises, including PLN. If the rupiah devalued relative to the US dollar, Indonesian entities would need to make larger payments (in rupiah) to settle USD-denominated debts.[9] In addition to insurance from the U.S. Overseas Private Investment Corporation and the World Bank’s Multilateral Investment Guarantee Agency, various guarantees from the Indonesian government focused exclusively on mitigating risks to private investors and their lenders.[10] In doing so, the risk burden fell primarily on Indonesia.
HOW THE AGREEMENTS FELL APART
The Asian Financial Crisis in 1997 brought to light the weaknesses underlying Indonesia’s power agreements. When the crisis reached Indonesia, roughly 9,000 megawatts of generation capacity associated with the 1990s Power Agreements was either in ‘advanced planning’ or under ‘active construction’.[11] As the rupiah devalued against the US dollar, PLN struggled to pay for dollar-denominated electricity bills with its rupiah-based revenues, and it was also not the only Indonesian institution that battled headwinds.[12] The resignation of President Suharto in May 1998 ended his 32-year autocratic reign over Indonesia and opened the floodgate for criticism towards the expensive and unpopular PPAs.
Indonesia’s new leadership moved to either pause or renegotiate many of the projects. After five years of negotiations, the president of PLN announced in June 2003 that many private investors had agreed to sell electricity at a lower rate than in the initial PPAs, saving Indonesians an estimated $5.5 billion in national wealth. However, Indonesia also paid hundreds of millions of dollars in legal costs as well as reimbursements to the American Overseas Private Investment Corporation and the World Bank’s Multilateral Investment Guarantee Agency.[13] Seven of the original 26 power projects were simply terminated. The remaining 19 operated under renegotiated PPAs or were purchased outright by the Indonesian government or state-owned entities.[14]
LESSONS FOR THE JETP CLIMATE FINANCE DEAL
As the IPG and Indonesia finalize their plans for investments, financing, and technical assistance, they should consider four key lessons from the 1990s Power Agreements to ensure that the new JETP agreements guarantee affordable and reliable renewable energy.
The IPG and Indonesia should utilize an open and competitive bidding process to select project partners. The 1990s Power Agreements generally did not use competitive bidding.[15] The Wall Street Journal noted that nearly all the agreements were signed without a competitive bidding process, leading to high electricity prices. In many cases, relatives or friends of President Suharto were made “local partners” of American firms and received substantial financial stakes in the projects without contributing their own money. [16] Competitive bidding is common in the US and is increasingly popular as a way of procuring new renewable energy sources at competitive costs.[17] Utilizing competitive bidding would ensure that the $20 billion in JETP climate deal financing will be used as efficiently as possible.
As part of a competitive bidding process, the IPG and Indonesia should consider the experience and qualifications of bidders in undertaking renewable energy projects in emerging markets. Many American investors in the 1990 Power Agreements had little experience operating in Indonesia (or even outside of the United States), and had simply entered into these deals in search of quick profits.[18] Companies with tenuous ties to Indonesia were most likely to pursue arbitration, while those with stronger interests in Indonesia were willing to negotiate outside of a litigious setting.[19] The IPG and Indonesia should consider whether bidders have experience developing projects in Indonesia or in similar countries as a key requirement in the bidding process.
The IPG and Indonesia should include relevant technical advisors at every step of the procurement process. During the negotiations for the 1990s Power Agreements, officials from Indonesia’s Ministry of Finance were not involved in discussing the terms of investment until far too late in the process.[20] Had these officials been involved and given greater influence earlier, it is unlikely that PLN and the Indonesian government would have signed expensive, inflexible PPAs. The IPG and Indonesia should ensure that relevant technical advisors and decision-makers from the Indonesian government are included in the negotiations and that decision-making authority is clearly allocated among the appropriate ministries.
Investors should seek out Indonesian partners only if those partners have experience or assets that can directly contribute to the construction and operation of renewable energy plants. The 1990s Power Deals were plagued by corruption; only one of the 26 deals was able to avoid having a “politically influential” partner.[21] An examination of the Indonesian partners in the remaining 25 deals reveals an extensive list of family members and close associates of President Suharto. Individuals involved in these negotiations noted that a foreign company might give its Indonesian partner 5 to 10 percent of equity stake in return for little more than influence within the Suharto regime.[22] In order to prevent political influence from inhibiting the success of the JETP deal, the IPG and Indonesia should not require the involvement of local Indonesian partners unless those partners can make material contributions to the success of a project.
The 1990s Power Agreements are not an apples-to-apples comparison with the new JETP deal. For one, President Suharto is no longer in power. Indonesia has been a democracy for over two decades and is a rising star on the international stage, hosting the most recent G20 meetings and taking on a leading role in ASEAN. At the same time, the IPG and Indonesia will need to work mindfully towards avoiding the same pitfalls that befell the 1990s Power Agreements three decades ago. Press releases hailing the green finance deal as “groundbreaking” are exciting news, but the success of the JETP climate finance deal will only be realized through rigorous implementation.[23]
Photo credits: Getty Images
REFERENCES
[1] The New York Times, “Wealthy Nations Offer Indonesia $2B to Curb Coal,” November 15, 2022, available at: https://www.nytimes.com/2022/11/15/climate/indonesia-coal-agreement.html
[2] The White House, “Indonesia and International Partners Secure Groundbreaking Climate Targets and Associated Financing,” November 15, 2022, available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/15/indonesia-and-international-partners-secure-groundbreaking-climate-targets-and-associated-financing/.
[3] The White House, “Indonesia and International Partners Secure Groundbreaking Climate Targets and Associated Financing,” November 15, 2022, available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/15/indonesia-and-international-partners-secure-groundbreaking-climate-targets-and-associated-financing/.
[4] The White House, “Indonesia and International Partners Secure Groundbreaking Climate Targets and Associated Financing,” November 15, 2022, available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/15/indonesia-and-international-partners-secure-groundbreaking-climate-targets-and-associated-financing/.
[5] The Wall Street Journal, “Power Deals with Cuts for First Family in Indonesia are Coming Under Attack,” December 23, 1998, available at: https://www.wsj.com/articles/SB914304166127427500.
[6] The Wall Street Journal, “Power Deals with Cuts for First Family in Indonesia are Coming Under Attack,” December 23, 1998, available at: https://www.wsj.com/articles/SB914304166127427500.
[7] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, pages 343 and 344.
[8] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 344.
[9] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 344.
[10] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 346.
[11] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 342.
[12] The Wall Street Journal, “Edison Reaches Interim Agreement to Sell Electricity to Indonesia’s PLN,” March 3, 2000, available at: https://www.wsj.com/articles/SB952060552886378976.
[13] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 350.
[14] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 351.
[15] The Wall Street Journal, “Washington’s Tilt to Business Stirs a Backlash in Indonesia Defense of Suharto-Era Deals,” February 11, 2004, available at: https://www.wsj.com/articles/SB107646319554026444.
[16] The Wall Street Journal, “Washington’s Tilt to Business Stirs a Backlash in Indonesia Defense of Suharto-Era Deals,” February 11, 2004, available at: https://www.wsj.com/articles/SB107646319554026444.
[17] See, for example: Utility Dive, “Xcel’s record-low-price procurement highlights benefits of all-source competitive solicitations,” June 1, 2021, available at: https://www.utilitydive.com/news/xcels-record-low-price-procurement-highlights-benefits-of-all-source-compe/600240/.
[18] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 351.
[19] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 360.
[20] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 355.
[21] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 352.
[22] Wells, Louis T., “Private Power in Indonesia,” The Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007, page 353.
[23] The White House, “Indonesia and International Partners Secure Groundbreaking Climate Targets and Associated Financing,” November 15, 2022, available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/15/indonesia-and-international-partners-secure-groundbreaking-climate-targets-and-associated-financing/.