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he Finance Ministry under Bambang Brodjonegoro is ultimately responsible for guaranteeing the electrification expansion projects of the Energy and Mineral Resources Ministry and state-owned PLN, getting to Indonesia'€™s 35Gw proposed expansion from 2016-2019. The expansion is bifurcated into two levels: Independent Power Producers (IPPs) and PLN, with the IPPs expected to contribute upward of 25Gw toward the overall electrification expansion.

Most of these projects will be coal-fired, LNG or combined-cycle, unfortunately and contribute further to Indonesia'€™s carbon-emission footprint. A few will try to harness Indonesia'€™s vast geothermal and perhaps even hydropower resources, but these will be more complicated and require even further foreign capital investment.

As a rule, the cheaper the plant to build, the dirtier the emissions. The more '€œclean technology'€ is used, the more costly these projects will be with potential overruns.

Nonetheless, cheap or costly, dirty or clean, most of the tranches and investments for these power plants will be in US dollar loans for the technology and equipment, most of which will be imported, whether it be Henan Power from China for coal-fired power plants, GE for combined-cycle from the US or ABB of Sweden for geothermal power, US dollars, which are scarce and expensive right now, not just for Indonesia but for the world, will be required.

With the US Federal Reserve expected to raise interest rates later this year, the dollar could get prohibitively expensive to pay back.

If borrowings are going to be in dollars and with Indonesia at many crossroads (environmental, political, financial, etc.) it can no longer be business as usual.

Change will start with recognition of new paradigms for bringing Indonesia forward.

Environmental concerns mean lowering emissions with cleaner (and more costly) technology, political concerns mean people will want a bigger say in their energy policy and its costs, financial concerns mean the rupiah is a challenged currency right now.

New paradigms mean new covenants, new covenants mean new policies. New policies mean changing old policies, so the government cannot afford to guarantee bad or even borderline energy projects or projects of questionable value.

It is highly doubtful under the old playbook that energy projects developed on a purely turnkey or contractual basis that hold foreign content, services and know-how in escrow (hidden from locals) will truly benefit Indonesian society going forward. No Asian country has ever progressed without developing endogenous (in-house) capability toward that progression, the differences are stark, consider the Asian Tigers versus the also-rans: Korea v. Sri Lanka, Singapore v. Bangladesh and Taiwan v. Myanmar.

These economies have insisted on know-how transfer and capability upgrades on their terms, the other countries have been '€˜recipients'€™ of the technology and know-how, largely on the investors'€™ terms, with payments demanded in US dollars, and governmental (sovereign) guarantees implicit before going forward.

All of the energy initiatives toward the 35Gw electrification expansion have one central theme above all others to entice IPP participation: making sure the government will back their investment, mostly due to political risks.

They want sovereign risks guaranteed (government-ensured '€œcertainty'€ past the entities of the Energy and Mineral Resources Ministry and PLN, namely the Finance Ministry) The reality though, is much of this may be flogging a dead horse, many countries today have all sorts of '€œpolitical risks'€ not just Indonesia.

Sovereign guarantees can also fortify project malfeasance and bad decisions, and the bane of all big project decisions: '€œcost overruns'€.

A '€œcredit event'€ is when a bond or loan issue defaults, meaning bills cannot be paid. This is playing out in Russia and many Eastern European economies right now where loans were made in Swiss francs for all sorts of things, but with the collapse of local currencies, such as the ruble in Russia, repaying in francs has become nearly catastrophic, simply because people in those countries don'€™t earn francs: they earn rubles, forint, zloty or lev. Would it be any different from Indonesia servicing long-term debt payments in dollars when they have a rupiah income?

Here is the core of the issue and a way to stop playing the viability/ guarantee game at Indonesia'€™s expense.

First, begin to develop localized capability not only to assess and evaluate the projects, but also to get local people to actively manage them by placing developmental rubrics (outcomes) into the investment contracts at tender. That means empowered know-how transfer.

Second, and here is an idea for change, amplifying the financial policy: have guarantees by the Finance Ministry of any IPP electrification expansion in rupiah, at today'€™s rates, (not a '€˜forward rate'€™ years down the road that Wall Street or the IMF defines in an office not even in Indonesia). Why this? Money defines the investment. Some new toll road projects in Kalimantan and Sulawesi have in fact been financed in rupiah, but economies of scale and capital markets have dictated the scope and in the big picture they are small economic risks.

In today'€™s case, however, with a rising dollar and Indonesian citizens'€™ real standards of living and their future on the line, all sides need to '€œgain share'€. This means foreign investors must have a defined societal stake in the game by helping the rupiah, not just an arm'€™s length transaction.

If their bond and loan issues are in the rupiah, they are also sharing the risk. It is not one-sided. It is simply too risky for the Finance Ministry to guarantee projects in dollars right now. Consider Russia again.

If this sounds too idealistic, consider the Chinese yuan. Bond subscriptions are already being offered in that currency, even though it is still technically an inconvertible currency, which the rupiah is not. China eventually wants to float its currency as a reserve currency.

But this all started with the Chinese investment policy of transferring technology, then transferring know-how and today, transferring currency. It was a step-by-step process, but it has aided China'€™s economic and infrastructure development immensely. Even with financing in the yuan, there has been no shortage of investors trying to get into the Chinese market; it is all about economies of scale.

Indonesia simply cannot afford the downside of infrastructure guarantees with all the implied risks and potential cost overruns if the rupiah continues to weaken. The ideal of attracting further foreign investment must be carefully weighed against longer term economic consequences.

Consider that if the massive infrastructure investments are in the rupiah it will have the desired macro-economic effect of shoring up the currency on world markets (as '€œcurrency flight'€ will not be as convenient if debts are denominated in the rupiah).

The enticement for IPP foreign investors would be to have prioritization of any project consideration by PLN or the energy ministry if they are willing to finance in the rupiah. Then the Finance Ministry can guarantee certainty, each side willing to meet the other half-way, a new playbook is then created.
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The writer is an associate professor and public policy adviser.