with Josef Ullmer, President Director, PT. ANDRITZ HYDRO
As a global leader in hydraulic power generation, Andritz Hydro is a major proponent of the benefits that hydroelectric power can provide in increasing generating capacity in a clean and sustainable way. In this context, what have are you strategic objectives for Andritz Hydro in Indonesia?
Andritz is a leading Hydro company with 170 years of experience and is composed of some of the most familiar names in the business including ELIN, VOEST Alpine, GE Hydro, among many others. In fact, a little under 40% of the global hydroelectric installations make use of Andritz Hydro technologies.
In Indonesia, we also have a significant presence in the hydroelectric industry, with an installed base of more than 50% of existing installations, or about 2,600MW. In the past, our business was mainly conducted with the state utility company, PT PLN. However, given the recent legislative developments in the local mining sector which requires mining companies to process mineral raw materials within the country rather than exporting them in their raw state, we have increased our business activity to include private mining companies. Of course, when you consider that approximately 70% of the price of the final processed mineral product is composed of energy costs, it becomes paramount that the energy used by mining companies is produced in the cheapest possible manner, which undeniably is through hydro power. Naturally therefore, we have been working with the likes of VALE INCO and we are also exploring possibilities to work with other mining giants to help them fulfil the latest Indonesian legislation.
What does Indonesia represent for Andritz’s global revenues and what is the strategic importance of this market for you?
Indonesia boasts a technical and commercial hydro potential of 75,000MW and less than 5,000MW already installed. Of course, this represents significant opportunities for us here, particularly now with rising oil and coal prices, which are the traditional sources for power generation in Indonesia. When we talk about the 75,000MW hydro potential in Indonesia this excludes the country’s run-of-river capacity, and when we consider that this country has some of the world’s largest rivers, such as the Mahakam, then its true hydro capacity is exceptional. Therefore, not only has hydro power come to represent a clean and sustainable energy resource, but also a real and important option to provide electricity at an acceptable price range.
Moreover, it is becoming increasingly important in Indonesia to generate electricity using the least costly methods given ballooning power subsidies which are straining the state budget. In fact, the current electricity demand in Indonesia is around 15,000MW and is expected to grow to 20,000MW by 2015. One can easily imagine that this will heavily strain the state budget unless new and innovative initiatives are put into place to encourage local and international players to facilitate this growth using alternative and cheaper methods. Also, it is very clear that there cannot be any real economic growth in Indonesia unless this infrastructure problem is quickly addressed.
If we look at Andritz’s wide range of products and services in your portfolio, from compact hydro to large scale, provision of equipment and turbines and biofuel, which of these activities are you prioritizing in Indonesia?
In Indonesia, we are focusing mainly on the large green field developments of hydropower plants. Also, owing to our existing sizable fleet here, we are prioritizing large hydro rehabilitation projects and modernization methods. Moreover, we have also recently been very much active in the compact hydro sector which has taken off a year ago with the introduction of the automatic feed-in tariffs applicable to smaller projects below 10MW.
However, one drawback of this automatic feed-in tariff is that a lot of potential sites are being developed below their fullest potential. For instance, we have come along with some 20-30MW sites which employ the above mentioned automatic feed-in tariff and this basically represents a waste of resources.
Which of the projects that you are currently involved in, or have undertaken in the past, would you highlight as the flagship projects of Andritz Hydro in Indonesia?
Over the past 15 years, with the exception of two smaller plants, all of the major hydroelectric power plants have made use of our products and services. Of course it is therefore difficult to specify which particular one is our most beloved. Nonetheless, one of our flagship projects is the largest hydro project in Indonesia, the 1,000MW Cirata power plant. We were involved in the delivery of the electro-mechanical equipment, including eight Francis turbines, generators, valves, transformers, and control systems.
In addition to this, another one of the most interesting projects that we have been involved in is the Vale INCO Karebbe project. For Vale, this project was a world record in terms of speed of construction from the moment when the first load of concrete was poured up until its commissioning. Nothing in history has been done so far with such speed and without any major incidents.
More recently, we are currently in the building process of two projects in Indonesia; the Asahan project in Sumatra as well as the Perusahaan project, which are set to become a power house in the Aceh province.
Finally, there are also many fast approaching projects all over the archipelago which are of interest to us. For us, and of course the competition, this includes the upcoming and exciting Upper Cisokan which is set to become the first pump storage power plant in Indonesia.
Speaking with other hydroelectric power plant developers, they have highlighted land acquisition and environmental constraints as the main challenges facing the hydro sector in Indonesia. In your view, what would you say are the main challenges facing the Indonesian hydroelectric power sector today?
The main challenge facing the Indonesian hydro power industry is the lack of local champions who possess the appropriate skill sets. There is a lack of truly experienced local engineers who can provide the appropriate designs, as there is also a lack of local equipment suppliers. There is a severe shortage of local civil companies that are able to provide the required designs and to push the processes necessary to organize and implement a hydroelectric development.
Overall in Indonesia, hydro power has been considered a very viable, yet costly option and there is very little understanding of this industry. In the past, hydro power used to have to compete with $11 fuel prices for generation purposes, on top of which these prices were also further subsidised making them even cheaper. More recently, however, the situation has changed dramatically with global oil prices reaching much higher levels over $100 – $120. Performing a simple cost analysis, it is easy to see why the hydro power industry has not had the opportunity to develop in the past.
What do you think still needs to be done in terms of initiatives by the Indonesian government to foster the development of the local sector and attract greater investment?
Broadly speaking, one thing that can be done by the government to help develop the hydro industry is working towards addressing the capacity issues to create the local champions the industry needs. Of course, on the engineering skills side, this can be done through setting up new and improving already existing universities and technical high schools. Also, we would like to see an increase in the presence of internationally skilled engineers and technology through a greater presence of international corporations. I believe that with the creation and development of this business pipeline, sooner or later, you can expect to see the emergence of civil engineering companies which are eager and capable to push ahead with such projects and initiative to develop the sector. I think the key to this development of the industry lies in the nurturing of the required knowledge and expertise through the right incentive systems.
The mining sector provides us with an ideal example of how such incentives can enable the shift towards addressing the capacity issues and developing the knowledge and skill levels in the mining industry. I am of course referring to the key legislative development that requires the processing of the extracted mineral resources within the country before they are exported to international markets. This will naturally lead to the development of the project pipelines, creating the demand for the right knowledge and skills. This demand will in turn create the opportunities for people to seize, helping to quickly build and address the capacity issues within the sector.
In terms of attracting financial investments, we can look towards the geothermal sector to provide us with an example towards making this possible. As you may know, a significant portion of the risks involved in the development of geothermal projects lies in the exploratory stages; the government has mitigated this issue through setting up various funds and structures to issue financial guarantees to geothermal developers.
Moreover, hydro power projects tend to have the unfortunate quality of being located in rather remote areas as well as sometimes being located within production or protected forests where mining is allowed, but building dams or permanent infrastructures is not. This, of course, is not a very attractive option for potential investors and developers. Therefore, I believe it is also necessary and important to coordinate and streamline the various ministries and executing agencies which are responsible for issuing the required permits. This will have the effect of making the respective processes more transparent on the one hand, and also to align the regulations with the real potential of hydro sites. I believe all of this can be done in a pre-packaged solution to help and develop a smoother implementation of independent power producer projects.
Finally, I also think it would be very beneficial to educate the local banking sector that a hydro power plant is a long term, solid and profitable investment. In fact even if a hydro project doesn’t break even for as long as eight years it is still a solid low risk investment. In this regard a lot of education has to be directed towards the local community, banking sector and private equity because we are faced on a daily basis with projects boasting a return of 20-22% on sales, which in any other country or industry would immediately be picked up as a very profitable investment. As soon as the Indonesians enable a local system of credit horizon of 8-10 years I believe the infrastructure development will flourish. I am confident this can be done without foreign capital, and ultimately it must be done with local capital.
As the head of Andritz, what plans do you have to capitalize on Indonesia’s impressive hydropower potential?
I think over the next five years you can expect to see a further increase in oil prices, probably in the $150-$200 range and a domestic coal price of perhaps $85 per ton, or more, and an even higher export price. Ultimately this means that the government will not be able to maintain its current subsidy levels. With that, I believe that every drop of water will then be exploited for the generation of hydroelectric power because at that point in time, there will simply be no more options. Therefore, I think over the next five years, you will see a very strong push towards the development of the hydro sector in Indonesia.
Moreover, I believe the often heard argument that 80% of the population in Indonesia will be living of 5% of the land mass will change dramatically. This is correct at the moment as Java is the most densely populated area in the world. However, all the riches and natural resources in this country are not located only in Java, they are located in Sumatra, Kalimantan, Papua among other locations. Referring once again to the example of the local mining law development, which requires the local processing of mined mineral resources; this will have the effect of forcing these companies to take advantage of the abundant mineral resources available to them in their respective locations in order to source cheap and affordable energy for their processing purposes. This ultimately means that Indonesia will undergo a resource-based development in the near future.
Earlier you had mentioned that it was very difficult to find the right talent in Indonesia. How does Andritz Hydro attract qualified and talented employees to its operations and how do you retain your valued personnel?
It is interesting that you ask this question, because we are now beginning to see our first retirees leaving our company, which is clearly a testimony to their satisfaction in working for Andritz Hydro and their commitment to the company for the last 25 years. We are very proud to have an extremely low turnover and fluctuation rate. This might be due to our attractive compensation packages, which are certainly above the market average but not unreasonably so. The way I see it is that we pay a superior remuneration for superior performance. When I hear about our factories in India and China having a 20% fluctuation rate in their personnel, I am glad to know that we do not experience the same conditions here in Indonesia. Such a situation would be untenable, especially when you consider that this is a knowledge-based industry.
Further evidence to the quality and valued skills of our Indonesia employees is the fact that we constantly have between 300-400 Indonesian employees working on projects abroad. This is mostly for the installation and commissioning services of Andritz Hydro projects, but it also involves other clients all over the world, including the USA, China, the Middle East, Europe, Africa, Brazil and Venezuela.
The advantage of a skilled Indonesian labor force is that they are very hard-working and are overall pleasant to work with. Even though they are Muslim, and therefore have a religious duty to pray five times per day, they are still a lot more efficient than any of their Asian counterparts. Furthermore, we also notice that an Indonesian is always looking forward to return back home. Ultimately, this is a great advantage for us because hiring and training Indonesian personnel becomes a great investment in knowledge acquisition.
You had previously mentioned that dealing with Indonesian employees sometimes demands a lot of attention and patience. Given that you are a foreigner dealing with mostly an Indonesian workforce, how would you characterize your management style?
I don’t believe that a person’s nationality makes the difference in whether they are effective managers or not. My belief is that a skilled person does not have a nationality or color. At the end of the day the important thing is that a person be skilled.
Nonetheless, to be a successful manager in Indonesia there is great need to understand and respect the local culture.
Any last word of advice to foreign investors looking to enter the Indonesian power sector?
When you come to Indonesia, make sure that you find a capable local partner that knows the market very well and can help you maneuver the cultural specificities of this country. Make sure you do your homework, as you would do in any other market, and never expect that you can shortcut or circumvent any procedures. If you are able to do that with an honest commitment to the country, then I reassure you that in 99% of the cases you will build a successful business.