News Focus: INCREASE IN POWER RATES MAY DISCOURAGE REAL SECTOR By Andi Abdussalam

Jakarta, March 10 (ANTARA) - The government's plan to raise by 15 percent the basic power rate (TDL) will discourage the development of the real sector, reduce people's purchasing power and trigger inflation, observers say.

"An increase in the basic power rates will raise production cost and trigger inflation," Dean of the Economic Faculty of Padang State University (UNP), Prof Syamsul Amar said on Wednesday.

After all, what the people needed now from the government was improvement of its power supply services which were still disappointing. "How could PLN raise its power rate tariff while its services are still quite disappointing," Ansari Yamamah, executive director of Slokantara Institute, a social, political and economic affairs research institute, said.

The government is expected to submit a plan for a 15-percent rise in the basic power rate to the House of Representatives (DPR) next month. According to Director General of Electricity and Energy Utilization at the Energy and Mineral Resources Ministry J Purwono, his office is still discussing the plan in detail. "In April, we will discuss it with the DPR," he said.

Although the government plans to raise the power tariff, yet it will not do it in the first semester of this year. "The government may raise the power rate by 15 percent in July, 2010," Finance Minister Sri Mulynai Indrawati said.

The government will not raise the TDL in the first semester of this year because it sees that the economic recovery is still ongoing. Thus, the government's task is to maintain the purchasing power of the people.

"In essence, the government is willing to maintain the momentum of growth," the finance minister said.

The government's move to raise the electricity tariffs is however seen by observers as discouraging the growth of the real sector in the ASEAN-China Free Trade Area (ACFTA).

Prof. Samsyul said it would trigger inflation and discourage the development of the real sector. He said that now the average national inflation rate had reached 14 percent per annum and in certain cities the rate had been recorded at over 14 percent.

If the government raised the electricity tariff it would reduce the real income of the people. In the end, demand would go down and if this happened it would discourage the real sector.

Inflation would boost commodity price increases in the market. If commodity prices increase it will reduce people's purchasing power and the real sector would be affected, Syamsul said.

In terms of the competitive edge of domestic products, increase in the power rate would raise production cost, thus causing industries to face high production costs, particularly in the face of the free competition in ACFTA era.

"In the pre-ACFTA era, our industries are already facing difficulties, not to mention if their products are forced to compete with cheap products from China in the CAFTA era," Syamsul said.

He expressed concern that the increase in the power tariff rates would have a bad impact on domestic products. Domestic products were less able to compete in the ACFTA area. They would face difficulties in competing with the same goods but cheap ones from China.

Syamsul said consumers would not heed the countries of origin of products because what was important for them was low price. Actually, in the face of ACFTA the government should provide subsidy to businesses and reduce tariffs, not adversely increase the power rate tariffs.

With this consideration, he said, the government should carefully decided if it wanted to increase the electricity tariffs because the real sector at present was facing a heavy challenge. "In the present condition, the government should encourage industries so that they would be able to develop not adversely but a burden on them," he said.

He said that in term of moment, the government decision to raise the electricity tariff is not at the correct time because the willingness of PLN to raise its tariff was of course based on its business logic.

"With the present tariff rates, PLN feels it is losing. On the other hand, electricity is a high cost sector," he said.

Therefore, the government through PLN should seek cheap inputs by exploring new alternative power sources. At present, PLN is still developing PLTAs (hydro-power plants) whose costs are high.

PLTA projects are costly while the availability of water supply is not always guaranteed, therefore, during the dry spells power supply would decline. "At present, the government is looking for new electricity sources, for example, geothermal, which some time ago happened to be raised to the surface but now it has disappeared again from the public discourse," he said.

In the meantime, Ansari Yamamah, executive director of Slokantara Institute, said PLN's plan to raise its basic electricity rate by 15 percent is illogical. The ideal thing PLN should do first is to improve its services in supplying electricity for the people. Only if PLN's services are already good could its proposal to raise the tariff be accepted by the people.

"How could the price of a product be raised if its quality is not good," he said adding that customers so far had been disappointed by PLN's services as a result of frequent power outages. PLN needed to overcome all this first before it could raise its power tariff rates.

He suggested that PLN should replace its old equipment and find a new substitute technology for electricity supplies. "If need be, PLN should cooperate with foreign investors if it has no enough funds," he said.