How commercial power companies are wreaking havoc in developing countries

Saad Hasan :

From previous issue

It wasn’t only the investors’ capital that was looking for newer markets.

The rise of IPPs in developing countries came around the same time as power equipment manufacturers from rich countries were running out of orders in the mature markets of North America and Europe.

They needed new customers for their thermal power plants.

Big energy firms like General Electric, Foster Wheeler, Combusting Engineering, Japan’s Marubeni and Germany’s Siemens, which all provide electricity generation machinery and services, were vying for customers.

And all of them wanted to get a foothold in Southeast Asia’s biggest economy: Indonesia.

Looking eastward
On April 14, 2013, two FBI agents in plain clothes arrested Frederic Pierucci, a senior executive at the French industrial plant giant Alstom, at New York’s JFK airport.

Pierucci had arrived in the US from Singapore following a routine business trip. Now he was facing years in prison in a case of bribery involving a Tarahan Power Project in Indonesia.

Alstom was one of the world’s largest manufacturers of nuclear power plants. It was also a market leader in boilers, a key component of coal-fired power plants.

In the ’90s, Indonesia, which sits on massive coal reserves, had signed contracts for dozens of coal-fired power plants. For years, Alstom, General Electric, Mitsui and Chinese electricity equipment makers have competed for projects there.

Middlemen or consultants like Zahoor were key to getting deals.

They’d cosy up with powerful politicians and make a case for equipment manufacturers. Corruption was rife.

All of former President Suharto’s six children had stakes in power plants.

Alstom even set up a subsidiary in Switzerland for the purpose of making payments to ‘consultants’ who helped the company get access to politicians and win bids.

Even though Pierucci was never charged with taking bribes, he was accused of authorising payments to a middleman to help get contracts for Alstom.

After spending more than a year in prison, he was released in a plea bargain, which he later wrote in his book ‘American Trap’ was a ruse to bully the French firm to sell its power business to GE.

He didn’t respond to TRT World’s request for an interview.

His story offers a rare insight into the inner workings of power plant equipment suppliers and engineering firms.

US authorities have regularly targeted power companies from other countries, including Germany’s Siemens and Japan’s Hitachi, for violating the Foreign Corrupt Practices Act – a law that is applicable to any company that is, in some way, related to the US market.

“My question is, just how do these US companies go about securing business for the last fifty years without once getting their hands dirty? Admittedly, these companies have the backing of US diplomacy,” writes Pierucci in this book.

“In 2010, for example, GE was able to sell $3 billion worth of gas turbines to the Iraqi government by mutual agreement (i.e. without a tender bid) under abnormal conditions,” he notes.

In the past three decades, Indonesia has seen several rounds of IPP investments – each followed by concerns that too much electricity has been added to the grid.

Putra Adhiguna, a Jakarta-based analyst at the Institute for Energy Economics and Financial Analysis, says new power plants are built on assumptions that greater economic growth will spur energy demand as more factories are built and people spend money on electrical appliances.

“It’s hard to weed out which one is the real cause to add so much power to the system and whether it was purely based on government miscalculation of the economic growth,” he tells TRT World.

“But there’s also a possibility there are some vested interests that came in and wanted to build a lot of coal plants with 25-year guaranteed payments.”

The country’s state-run utility provider, PLN, has signed long-term contracts with IPPs.

As with the case of Ghana, PLN now has to pay millions of dollars to IPPs every month in capacity payments.

Many Indonesians grew up listening to stories about how former strongman Suharto and his relatives made billions of dollars with power projects like Paiton-1 in the 1990s.

But PLN still managed to sign contracts with new IPPs for 35,000 MW from 2015 onwards.

“I think the public does not have the technical understanding to comprehend what’s happening. But now we are seeing the effect stack up on the budget,” says Putra.

According to experts, contractual obligations with coal-fired power plants are hampering Indonesia’s efforts to transition to green energy.

Jakarta can only hope the IPPs do not become a financial burden as they have to debt-ridden Zambia.

Till debt do us apart
In November 2020, at the height of the Covid-19 pandemic, Zambia defaulted on its debt, becoming the first African country to do so.

Zambia refused to repay $42.5 million to its foreign bondholders, saying it needed the funds for its own healthcare system and to feed its people.

The case highlighted how greatly the pandemic pummelled low-income economies.

Zambia’s case became a key motivator for world leaders to kickstart talks about debt rescheduling for countries under distress.

Zambia currently owes more than $17 billion to multiple foreign creditors, which include investment funds like BlackRock and bilateral creditors like China.

What many people don’t know is that one of the reasons behind Zambia’s high debt burden is IPPs: more specifically, it owes $1.7 billion to only four IPPs.

IPPs in Zambia are a relatively new phenomenon. Before their arrival on the scene a few years ago, the private sector’s share in total electricity production was only around 5 percent; by 2015 it had reached 24 percent.

Like it had happened in other developing countries, private sector participation in electricity generation increased primarily because of the incentives the government offers to the IPPs.

For instance, the UK-based Great Lakes Africa Energy company, the majority stakeholder in the105 MW Nadola power plant, takes home a return of 25 percent.

IPPs in Zambia have tax incentives; they don’t pay levies on import of machinery; and the government has taken upon itself to build – for the IPPs, no less – high-voltage transmission lines, which travel long distances to bring electricity to major cities.

Under the contracts signed between Zambia and the IPPs, the government also takes upon itself the responsibility to supply fuel to the power plants.

Development Financial Institutions and foreign trained consultants want everyone to believe that IPPs can help pull people out of darkness.

“We needed private investment because of the inefficiencies in the public sector.

Public utilities can be quite inefficient in sub Saharan Africa,” says Johnstone Chikwanda, an energy expert who has served on Zambia’s Energy Regulation Board.

“We became aware that relying on public utility won’t help us electrify the country.”

The argument about public-sector utilities being poorly managed, loss-making entities is neither new nor unique to Zambia.

The World Bank and its army of consultants often highlight this point to make a case for privately-owned IPPs.

But in half of all European countries, the electricity grid still remains in public hands. In France, the biggest electricity producer is EDF, a state-owned company. Same is the case in Spain.

Even Chikwanda, who supports private sector participation in the electricity market, says the current IPP model is flawed.

“My recommendation is that we should revisit some of the obnoxious clauses in power purchase agreements not just in Zambia but everywhere else,” he says.

Renegotiations won’t be easy. Private power firms keep an army of lawyers on their payroll. The understaffed regulators struggle to keep up with all the technical know-how.

For fragile economies, time is running out.
This year, Pakistan is due to pay close to $5 billion in capacity payments. In Kenya, the government is struggling to come up with funds to pay IPPs.

And in Bangladesh, which last year marked the milestone of bringing electricity to every village, officials are regretting the decision of signing deals with so many IPPs.

“It is funny that our country has so much generation capacity, yet it is facing load shedding,” says Shafiqul Alam, a Dhaka-based energy analyst.

(Concluded)
(Saad Hasan is a staff writer
at TRT World).