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Indonesia’s State-Owned Power Company is Hemorrhaging Cash – And That’s OK

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Pacific Money | Economy | Southeast Asia

Indonesia’s State-Owned Power Company is Hemorrhaging Cash – And That’s OK

Rather than a ruthlessly efficient corporate entity, the Indonesian utility is best seen as a vital public service provider.

Indonesia’s State-Owned Power Company is Hemorrhaging Cash – And That’s OK
Credit: Flickr/Ya, saya inBaliTimur

Amid the economic malaise of COVID-19, Indonesia’s state-owned power company, Perusahaan Listrik Negara (PLN), reported a $2.8 billion loss in the first quarter of 2020.  The company’s profit fell by a staggering 96.5 percent in the first six months of the year, forcing cuts to operating costs and capital expenditures. It would appear that the utility, which owns and operates Indonesia’s entire national electricity grid, is in dire straits. But that’s not quite right. PLN has rarely ever been profitable without government aid, and the enormous losses it is taking now reflect not its health as a going business concern, but its true nature as a provider of an essential public service.

PLN has a monopoly on the transmission and distribution of electricity in Indonesia. There are no regional wholesale markets or distributors, which means PLN has total control over what the consumer ultimately pays. The utility also supplies about 70 percent of the system’s electricity generation, sourcing the remaining 30 percent from independent power plants.

PLN frequently purchases electricity from these private producers in dollars, even though it collects its revenue from customers in rupiah. When the rupiah loses value rapidly, as it did in March and April, this can create a mismatch in its foreign exchange exposure and lead to big losses. But that is just a symptom of a deeper structural irony, which is that PLN’s primary purpose is not to generate profits but to supply electricity to the people of Indonesia at reasonable prices.

In many years, PLN has only been able to maintain the veneer of profitability thanks to injections of state capital and subsidies from the government. These have been pared down somewhat in recent years, but the utility still depends on state cash to stay afloat, as operating expenses frequently exceed revenue. The interesting thing is that this is not altogether due to corporate mismanagement (although there is plenty of that to go around), but is more or less by design. The most important thing to the government of Indonesia, and its elected officials, is not that PLN be an efficient market maker; it is that the Indonesian people get access to cheap electricity.

This gets right to the heart of PLN’s dual function as an appendage of a state capitalist system. Is it meant to be an efficient corporate entity, maximizing shareholder value? Or is it meant to provide an essential and low-cost public service, while masquerading as a business so it can raise funds on capital markets? The Indonesian government would like to have it both ways, but the fact that PLN is currently – under orders from the government – providing 31 million of its most vulnerable customers with low or no-cost electricity during the pandemic at a large financial loss suggests its primary role is as a provider of a public good.

At first brush, PLN’s money-losing business plan might seem perplexing. The utility, if it keeps retail prices lower than its own costs of production, will never be profitable. But the state is willing to essentially socialize these losses in the interest of keeping electricity affordable for consumers. There are some obvious problems with such an arrangement, as the Ministry of Finance and PLN tend to dance around one another every year over how much money will come from public coffers (the state has budgeted 5 trillion rupiah for 2021, for instance), and this creates a lot of uncertainty which is deeply entangled with political bargaining.

But there is an internal logic to this arrangement, given some of the peculiarities of Indonesia’s political economy, and this has been cast into sharp relief by the pandemic. Indonesia has no comprehensive unemployment insurance, and due to poor record keeping and its unwieldy civil service, has struggled to get stimulus payments and social assistance out to the people who need them in a timely fashion. Yet while the bureaucracy lumbers into action to distribute billions of dollars in aid, PLN has already quietly been providing in-kind assistance to tens of millions of its customers through free or heavily discounted electricity for months.

From a neoclassical economic perspective, having PLN maintain an inefficient monopoly on the entire national electricity market is hard to parse. But in the Indonesian context it makes a certain kind of sense, as it allows the state, through a cocktail of market and socialized mechanisms, to ensure consumers have access to affordable electricity insulated from external shocks, like swings in production costs or during extraordinary times like the one we are currently living through. This means PLN is likely to continue losing money this year and next – and that’s OK.