Posted on 25 Apr 2014
Consumer prices may soon be headed upwards following the announcement that certain sectors may be paying up to two-thirds more for electricity from next month.
The government has decided to raise the tariff for exchange-listed companies in medium-scale industries — classified as I3 consumers — by 38.9 percent, while the tariff for large-scale industries — classified as I4 consumers — will rise by 64.7 percent.
According to a Energy and Mineral Resources Ministry decree, these two types of electricity consumers will see tariffs increase beginning May 1.
Ade Sudrajad, the chairman of the Indonesia Textile Association (API), said the government’s decision reflects a tendency to take shortcuts to solve ongoing infrastructure problems.
“It’s very obvious. The government doesn’t care about the condition of the business community. What we see now is a race to be the first to raise tariffs,” he said.
The government though points out that I4 consumers are currently enjoying around Rp 4.9 trillion ($431 million), and I3 consumers about Rp 13 trillion, in public money in the form of electricity subsidies.
Ade, a veteran in the textile industry, said that the decision would create a domino effect, hurting industries from upstream to downstream.
“For textile products, we will see around 10-15 percent price increases. Other industries may raise their selling price by 30 percent. The question is: does consumer spending power increase that sharply?,” he said.
By industry type, the I3 category would cover 11,129 companies, but it is limited to those 371 companies listed on the Indonesia Stock Exchange, creating an incentive against going public.
Meanwhile, the I4 category covers 61 industries, including cement and tobacco companies, but likewise only listed firms.
The tariff increases will be implemented in four increments this year. After the first hike on May 1, there will be further three increases every two months, on July 1, Sept. 1 and Nov. 1.
For I3 consumers this means there will be four increases of 8.6 percent (cumulatively), so in total the rise will be 38.9 percent. For I4 consumers, the increases will be 13.3 percent at each occasion, on the same schedule.
Ade complained that government’s move undermined its purported campaign to improve domestic industry competitiveness. Companies operating in Indonesia are pressured from all sides, he said.
“Raising electricity tariffs clearly reduces competitiveness. It pushes up production costs. I think the business community is already at its peak level of frustration,” he said.
Ade said companies were already coping with higher costs for labor and fuel, and fluctuations in the exchange rate for the rupiah. Add to those the country’s chronic problems of poor infrastructure, legal uncertainty, illegal fees and overlapping regulations and authorities, he said, and it seemed doing business was becoming increasingly untenable.
“So, the bottom line is: we have to cut costs again. How? Job termination? I am worried this will push some industries to leave the country,” said Ade, suggesting that investors may move operations to neighboring countries such as Vietnam, which offer lower wage costs.
Erwin Aksa, chief executive at Makassar-based conglomerate Bosowa, said the government’s decision was burdening companies.
For big energy users like steel- and cement-makers, electricity costs make up around 20 percent to 25 percent of spending, he said.
Erwin called on state utility company Perusahaan Listrik Negara (PLN) to improve efficiency.
“They could achieve cost control by using more gas-fired or coal fired power plants. Currently, costly diesel generators are still in use [by PLN]. That’s not efficient,” said the businessman, who is also a deputy chairman for small and medium enterprises at the Indonesian Chamber of Commerce and Industry (Kadin).
Asked whether the electricity hike would trigger companies to move facilities out of the country, Erwin didn’t share Ade’s pessimism. “I don’t think so. The market is huge here,” he said.
Ismail Mandry, deputy chairman at the Indonesia Iron and Steel Industry Association, said the government should increase the electricity price over three years, not all in one year.
“Our industry only processes raw materials into intermediary goods. If doing so is not economical, we will stop, and just import it,” said Ismail.
The local steel industry typically produces intermediary goods like hot rolled coil, used in automotive and electronics goods.
