This project represent significant inward investment by shareholders and international lenders backed by US, German, UK, and Japanese export credit facilities. Electricity prices remaining at low level, below the market level with considerable degree of cross subsidy between different customers. The fact that PLN is experiencing such difficulties before the major IPPs come on stream illustrate that the problems are structural and not caused by the IPP programme. Power Sector Reform Whilst the severity of the current problems is evident, there are nevertheless a number of underlying reasons why PLN can recover from its position and a strategy has already been set out in the recent White Paper Policy Paper from the Ministry of Mines and Energy. PLN's market volume should significantly increase over the next few years, as power sector is restructured.
Diesel fuel is largely a dollar cost and sold at subsidised prices.
As part of overall economic recovery programme, it is likely that the government will move away from subsidising diesel. This factor, together with an assumption that PLN is able to continue its programme of new connection to customers, points to substantial new capacity being required over the next few years for the Java-Bali system, particularly efficient plant using indigenous fuel. The policy paper recently issued by the Ministry recognised the need for this and has outlined a system that will allow for tariff reform progressively over the next few years. The exchange rates problems are clearly outside PLN immediate control, but are a situation which appears to be stabilising, and which the Government is addressing. The policy paper also made clear the Government intention to privatise PLN and the need, therefore for PLN to restructure its balance sheet.