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LESSONS:

Asian Development Bank Assistance to the Power Sector in Indonesia

sector: Energy | country: Indonesia

Despite the notable progress, the operational and financial performance of the executing agency (P.T. Perusanhaan Listrik Negara) and the sector still point to the need for continued effort in institutional strengthening and capacity building. The focus should clearly be on the evolution of a competent and independent regulatory body that respects the cost-recovery principle and allows tariffs to cover just and reasonable costs without getting entangled in the cumbersome and unpredictable political processes.

Policy-based program lending has been only moderately efficacious and financial assistance alone clearly had only a limited impact on the speed and scope of sector reform. Program loans need to be disbursed fast, but the implementation of stipulated policies relating to structural changes need a much longer time frame. This calls for new and imaginative lending modalities, such as hybrid loans with both project and policy implementation components (sector development programs) or a cluster of program loans each tied to implementation of key specific milestones of the sector reform.

The results of ADB’s operations reflect in large part the appropriateness of government policies. Until 1997, the government and the executing agency (P.T. Perusanhaan Listrik Negara) regularly prepared policy papers and power sector development plans to set objectives, identify investment program, and allocate resources. ADB operations were formulated in the light of such government policies and plans, reconciling them with ADB’s sector and lending policies through policy dialogue during country programming and project processing missions. This highlights the importance of policy dialogue in ADB operations. When ADB was unable to secure the government’s compliance of tariff-related obligations, it wisely refrained from further lending to the EA after 1995. Lending resumed only in 1999 in the policy-based program lending modality mainly to restructure the sector. Further lending is considered in the context of corrective action by the government in relation to power tariffs. This highlights the importance of a clear focus on implementation of agreed policies.

While the targets prescribed in ADB’s financial covenants had not often been reached, they have clearly helped the executing agency (P.T. Perusanhaan Listrik Negara) to press the government to move in the right direction. Thus during 1990-1997, the EA achieved positive and moderate returns on its revalued assets (3.5% to 6.2%), good debt service coverage ratios, and reasonable self-financing ratios (22% to 37%).This was also the period when the EA was being given larger sized loans (average size $295 million compared to $39 million in the earlier years). When the government appeared unresponsive to the timely cost-recovery needs of the sector and was willing to let the EA incur losses, ADB ceased to lend to the sector. This highlights that financial covenants could help move governments in the right direction, even if the exact targets are not often met. When this ceases to happen, there is no point in continuing to lend and repeating the same covenants.

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