DumeNnt of

The World BankFOR OFFICIAL USE ONLY

aL/tf. -J;c.

Report No. P-4427-IND

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO USt226.O MILLION

TO THE REPUBLIC OF INDONESIA

FOR A

POWER TRANSMISSION AND DISTRIBUTION PROJECT

December 18, 1986

- - Tis document has a restricted distribution and may be used by recipients oniy in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Indonesia Rupiah (Rp)(As of September 1986)

US$1 a Rp 1,650Rp 100 = US$0.06061Rp 1 milLion = US$606.06

GOVERNMENT OF INDONESIA AND PLNFISCAL YEAR (BY)

April I-March 31

WEIGHTS AND MEASURES

1 metric ton = 1,000 kilograms (kg)1 liter (1) = 0.0063 barrels (bbl)1 kilometer (km) = 0.6215 miles (mi)1 kilovolt (kV) = 1,000 volts (v)1 megavolt-ampere (MVA) = 1,000 kilovolt-amperes (kVA)1 megawatt (MW) = 1,000 kilowatts (kW)1 gigawatt hour (GWh) 1 million kilowatt hours (kWh)

ABBREVIATIONS

BAKOREN - National Energy BoardBAPPENAS - National Development Planning BoardDCEP - Directorate-General of Electric Power, Hinistry of Mines

and EnergyJABOTABEK - Jakarta, Bogor, Tangerang and Bekasi areaLNG - Liquified Natural GasLPG - Liquified Petroleum GasLRMC - Long-Run Marginal CostMME - Ministry of Mines and EnergyPERTAMINA - National Oil and Gas CompanyPLN - National Electricity AuthorityROR - Financial Rate of ReturnSFR - Self-Financing Ratio

FOR OFFICIAL USE ONLY

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Loan and Project Summary

Borrower: Republic of Indonesia

Beneficiary: National Electricity Authority (PLN)

Amount: $226.0 million equivalent.

Terms: Repayable in 20 years, including 5 years of grace, at thestandard variable interest rate.

Onlending Terms: The proceeds of the loan would be onlent from the Govern-ment of Indonesia (GOI) to PLN for 20 years including agrace period of 5 years; the onlending rate would be equalto the Bank's standard variable interest rate plus no lessthan a quarter percent for administration charges. TheGovernment vould bear the foreign exchange risk.

ProjectDescription: The proposed project would support government objectives

to promote productive activities and to improve the wel-fare of the population through the provision of electricpower, and also to improve the economic and technicalefficiency of energy supply and use. In particular, theproposed project would: (a) expand transmission and sub-station facilities in Java to efficiently utilize theplanned addition to generating capacity during the periodfrom 1986187 to 1990/91; (b) extend distributionfacilities in the Jakarta, Tangerang, Bogor and Bekasiareas to supply electricity to industries, commercialconsumers and about 250,000 new residential consumers inurban and rural areas; (c) expand PLN's center for testingand certifying indigenous products and for researchingutility-oriented problems; and (d) provide consultingservices to (i) assist PLN's Engineering Services Center;(ii) continue the detailed engineering of a coal firedthermal power plant at Paiton in East Java; and(iii) define and implement measures to improve PLN'soperating efficiency.

Risks: The principal risk relates to possible delays in imple-menting the transmission and substations component of theproject because of difficulties in land acquisition.Advance action has been initiated by PLN to help preventsuch delays.

This document has a restricted distribution and may be usod by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Estimated Costs: Local Foreign Total…(US; million) ----

Transmission linesand substations 74.6 128.6 203.2

Distribution 17.5 62.1 79.6Testing and Research Center 1.0 5.0 6.0Consulting Services for:Paiton 1.0 4.0 5.0Engineering Services Center 2.0 8.0 10.0Efficiency improvement 1.0 2.0 3.0

Total Base Cost 97.1 209.7 306.8

Physical contingencies 7.4 16.2 23.6Price contingencies 21.5 14.3 35.8

Total Project Cost /a 126.0 240.2 366.2

Interest during construction - 20.0 20.0

Total Financing Required 126.0 260.2 386.2

Financing Plan: Local Foreign Total

Federal Republic of Germany - 14.2 14.2IERD - 226.0 226.0COI/PLN 126.0 20.0 146.0

Total 126.0 260.2 386.2

Estimated Disbursements: Bank FY 1988 1989 1990 1991 1992

Annual 11.0 60.0 75.0 64.0 16.0Cumulative 11.0 71.0 146.0 210.0 226.0

EconomicRate of Return: 17Z for PLN's investment program for Java for the period

1987 to 1991.

Staff Appraisal Report: No. 5491-IND dated December 17, 1986

Maps: IBRD 12453R6IBRD 17207R2

/a Identifiable taxes and duties are about US$9.7 million equivalent, andthe total project cost, net of tazes, is US$356.5 million equivalent.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICOF INDONESIA FOR THE POWER TRANSMISSION AND DISTRIBUTION PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of Indonesia for the equivalent of US$226.0 million to helpfinance the Power Transmission and Distribution Project. The loan would havea term of 20 years, including 5 years of grace, at the standard variableinterest rate.

PART I - THE ECONOMY

2. An economic report entitled "Indonesia: Adjusting to Lower OilRevenues" (No. 6201-IND, dated May 20, 1986) was distributed to the ExecutiveDirectors on May 27, 1986. Annex I gives selected economic data for thecountry.

Background

3. The Republic of Indonesia is a highly diverse country spread acrossan archipelago of more than 13,000 islands with a land area of about 2 mil-lion km . It has a population of over 158 million, growing at about 2.11p.a., and is the world's fifth most populous nation. The country has a diver-sified resource base, with plentiful primary energy resources, significantmineral deposits, large timber potential and a developed system of agricul-tural commodity production and export. A high proportion of these primaryresources are located on the less populated islands of Sumatra and Kalimantan,while two thirds of the population lives on Java, which has areas with some ofthe highest rural population densities in the world. About a quarter of thepopulation lives in urban areas, and the current rate of urban populationgrowth is about 4% p.a. The 1984 estimate of GNP per capita is UJ2540, whichplaces Indonesia at the lower end of the middle-income countries.-

Macroeconomic DeveLopments and Resource Management

4. During the 19709, the Indonesian economy grew at almost 8% p.a.This growth was associated with rapid increases in public expenditures, totalinvestment and savings. Following the turbulence of the mid-1960s, theGovernment of Indonesia (GOI) took effective action to restore macroeconomicstability, liberalize the economy, rehabilitate infrastructure, and provideincentives for domestic and foreign private investment. However, the dominantexternal influence was the huge expansion, and significant variability, inforeign exchange earnings from oil. Net earnings from oil and LNG exportsrose from US$0.6 billion in 1973/74 to US$10.6 billion in 1980/81, when the

1/ On the basis of the WorLd Bank's system of country classification andAtlas methodology for calculation of GNP.

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current account enjoyed a surplus of US$2.1 billion. Oil and LNG also prb-vided about 602 of budget revenues by 1980/81 and helped finance a sustainedincrease in demand. The pattern of expenditures helped foster diversifiedgrowth. Of particular note has been the support for agriculture throughinvestment in infrastructure and support services. This supported anagricultural growth rate of almost 4% p.a. and led to the recent achievementof self-sufficiency in rice. Manufacturing also enjoyed a high growth rateduring the 1970s (of about 14% p.a.), although this was from a very low baseand predominantly oriented towards the protected domestic market.

5. Over the past five years, the economy has been buffeted by unfavor-able external developments, especially for oil. Accordingly, the externalterms of trade deteriorated by more than 15% from 1981/82 to 1985/86. Inresponse, the Government acted decisively to stabilize the economy and providea basis for longer-term structural adjustment. Related measures included:(a) restraints on public investment and reductions in budget subsidies;(b) maintenance of a flexible exchange rate policy (following a major devaLua-tion in March 1983); (c) wide-ranging structural reforms in the taxation andfinancial systems; and (d) a major reorganization of customs, ports andshipping operations. These measures had a positive impact on the balance ofpayments, with the current account deficit reduced from US$7.2 billion (8.5%of GNP) in 1982/83 to an estimated US$1.7 billion (2.2% of CNP) in 1985/86.Domestic inflation was also reduced to less than 5% in 1985. However, thisstabilization process has involved a heavy cost in terms of lower investmentand growth. Since 1981, GDP growth has averaged only 2.6% p.a.; adjusting forpopulation growth and the terms of trade loss, per capita incomes havefallen. The industrial sector has been particularly hard hit, with low ratesof capacity utilization and emerging financial problems in many enterprises.

6. The economic outlook for Indonesia is dominated by the recentcollapse and uncertain prospects for world oil markets. Preliminary indica-tors are that Indonesia's net oil/LNG export earnings could fall by more than60% during 1986/87. Because of the cautious management strategy adopted bythe Government in recent years, Indonesia is better placed than most oilexporters to cushion the short-term impact of lower oil revenues. Externalreserves stand at over US$10 billion (equivalent to nine months of imports)and another US$2 billion is available in undrawn commercial credits. However,the Government is still legitimately concerned about the impact of a prolongedshortfall in oil revenues. Despite tight controls over public externalborrowing in recent years, the debt service ratio had reached 25% by 1985 andwill rise further (even without new borrowing) over the next few years. Thescope, therefore, for additional borrowing to cover the resource gap islimited. Instead, the Government has opted for further measures, to restrainaggregate demand and promote structural change in the economy. Already, anausterity budget has been announced for 1986/87, with total expenditurebudgeted to decline by 9% (24% for development expenditure). By itself, theaustere budget for 1986/87 would not have been sufficient to bring the currentaccount deficit down to manageable levels, nor to promote the necessarystructural adjustment in the economy. Therefore, faced with the prospect oflower oil prices over the medium term, the Covernment decided to devalue theRupiah by 31% (IMF method) on September 12. This adjustment is consideredappropriate in light of the projected loss of oil revenues and helped to pre-

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empt speculative capital outflows. With continued prudence and some recoveryin oil prices, the current account deficit could be brought back to less than3X of GNP over the next three years. However, economic performance wouldremain highly constrained, with CDP growth close to 2% p.a. and declining percapita incomes.

Policies for Growth and Adjustment

7. Indonesia's ability to achieve its goals of sustainable growth withequity will depend crucially on the skill with which it manages the transitionfrom oil dependency toward a more diversified, semi-industrial economy. Someof the elements of this strategy, including structural reforms in the taxationand financial systems, are already in place. The recent devaluation will alsohelp to improve Indonesia's competitiveness and promote non-oil exportdevelopment. However, successful adjustment will require continued action inthree key policy areas: management of the public investment program (andimprovements in the regulatory/policy environment for private investment),rationalization of the external trade regime and development of the financialsector.

8. The projected import constraint imposes serious limitations on therate at which Indonesia can undertake new investments over the next fewyears. At the same time, some reallocation of resources towards regionaldevelopment and the social sectors might be justified, in order to reduce theimport content of investment while still meeting the Covernment's equity andemployment objectives. It is therefore important that mechanisms are estab-lished to facilitate orderly and rational adjustments to the public investmentprogram. Possible options include preparation of multiyear expenditure plans(at least for the larger projects), identification of a core program of highpriority projects and strengthening of project appraisal/selection proce-dures. The Government is also considering ways to improve project implemen-tation, so that investment returns can be realized more promptly. Given thebudgetary constraints, it is expected that the private sector will be calledupon to play an increasingly important role in capital formation. To encou-rage this process, the Government recently announced simplifications ininvestment approval procedures and a major internal reorganization of theInvestment Coordinating Board. These measures were followed, in May 1986, bya package of regulatory refDrms to make Indonesia more attractive to foreigninvestors.

9. The recent decline in the price of oil has clearly demonstrated theimportance of reducing the economy's heavy dependence on a single source offoreign exchange and, more generally, the need to rationalize the externaltrade regime. The Government has set a target of doubling non-oil exports innominal terms over the next five years. This target should be attainableprovided that economic recovery in the industrial economies is sustained,Indonesia's access to those markets is not constrained by protectionistmeasures and, most importantly, Indonesia follows appropriate trade andexchange rate policies. In this context, the Government has introduced twoimportant policy reforms in 1986, aimed at reducing trade-relateddistortions. The first package of trade ref' ;is, designed to provide interna-tionally priced inputs to exporters, was announced on May 6. Under the

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scheme, "producer exporters" were given the option of importing their inputsfree from licensing restrictions and exempt from import duties. Preliminaryresults suggest that the scheme is being implemented efficiently and is highlyeffective in supporting exporters. The second package of trade reforms,designed to reduce import restrictions, improve industrial efficiency andpromote non-oil exports, was announced on October 25. As a result of theOctober 25 measures, import license restrictions have been removed on 166items and relaxed on 105 items for actual users and licensed agents.Together, these items account for 27% of all items and 44Z of total importvalue previously restricted to approved importers. Although agriculturalproducts and some important manufactured goods (e.g., steel, textiles andplastics) are excluded, the reform signals the Government's intention to shiftto tariffs as the primary instrument of import policy.

10. The Government's decision to move towards a more liberal financialenvironment raises a number of issues relating to resource mobilization,financial intermediation and credit allocation. Over the longer term, as thescope for subsidized credit is reduced, the banking system will have to playan increasingly important role in mobiLizing domestic resources. However,during the transition period, some potential conflicts between the resourcemobilization and credit allocation objectives could arise. For example, theincrease in deposit rates following the recent financial reforms, whileencouraging resource mobilization, has also led to high real lending rateswhich have tended to dampen investment and credit demand. This in turn mayrestrain economic activity. It is therefore important to find ways to reducethe high intermediation costs of banks. Consideration should also be given toother ways of mobilizing financial resources, including development of acapital market, expansion of the banking network (especially in rural areas)and selective relaxation of restrictions on private banks (combined withinciaased bank supervision).

Incomes, Employment and Human Development

11. Indonesia's physical, human and economic resources are very unevenlydistributed among its main regions. Java, for example, accounts for almost50% of Indonesia's GDP and 62% of its population, but only 7% of its landarea. Although all five of the country's main regions experienced rapid percapita growth in the 1970s, regional differences in output tended to widen.To a large extent, differences in performance are associated with the impor-tance of the mineral sector, particularly petroleum. However, there are twoimportant processes at work in Indonesia which enable the benefits of growthto be more evenly spread than indicated by output trends. The first of theseis migration. Between 1971 and 1980, 4.3 million people (or 16% of the natur-al increase in population) resettled permanently in provinces outside those oftheir birth. Approximately 1.7 million people moved from Java to the OtherIslands, of whom one million were resettled through the official transmigra-tion program. There has also been substantial rural-urban migration bothbetween and within provinces. The second process is the redistribution ofincome through the government budget. Regional variations in per capita con-sumption are much less pronounced than differences in per capita output. Thisis largely due to the impact of taxation on the oil sector.

12. An analysis of household expenditures indicates that Indonesia'srapid economic development has been accompanied by significant progress inreducing poverty. Between 1970 and 1980, the proportion of the populationliving in poverty declined from 57% to 40X; the decline was particularly rapidin the Other Islands and in urban areas. The core of the poverty problem con-tinues to be in rural Java, where landless laborers form a large, and possiblyrising, proportion of the population and where, for most of the 1970s, thereis little evidence of any rise in real agricultural wages. However, there wasa significant rise in real agricultural wages around 1980-81 associated withthe sharp increase in rice output and booming overall economic growth.Increases in rural nonagricultural and urban wages also occurred at thebeginning of the 1980s. Despite the slowdown in economic growth and stabili-zation measures since 1982, the limited available evidence suggests that wagesand incomes have held up, partly as a consequence of continued agriculturalgrowth.

13. In the future, the availability of productive employment will be akey determinant of income distribution. The labor force is expected to growat about 2.3% p.a. over the next decade, while economic growth will be lowerthan in the 1970s. The resultant squeeze in the labor market could lead tostagnant or declining labor income, especially in rural areas and the urbaninformal sector. Given the balance of payments constraint facing the country,Indonesia's employment outlook depends crucially on the pattern of economicgrowth, and in particular the extent of labor absorption in the commodity-producing sectors. Although over the long term the structural shift inemployment away from agriculture should continue, this sector will stillaccount for half or more of total employment and the growth in agriculturalincomes will be an important determinant of job opportunities elsewhere innonfarm activities. This will require continued priority to agriculture inthe form of supportive pricing and investment policy, with some shift inemphasis toward the Other Islands. On Java, attention will need to be paid toissues of agricultural diversification and the pace of mechanization. Withrespect to the industrial sector, the development of an efficient, relativelyexport-oriented pattern of production can also contribute to significant laborabsorption in the medium to long term, especially in Java; this will involve acontinuing major role for small-scale firms. If a favorable evolution of theemployment situation is to occur, there will also need to be an appropriatepattern of public expenditure and supportive policies for the urban informalsector; finally, the transmigration program can make a substantial contribu-tion, provided it is closely coordinated with complementary agriculturalinvestment programs, in tree crops, water resources and livestock development.

14. There has been substantial progress in extending the provision ofsocial services throughout the population. Universal enrollment in primaryeducation has been virtually achieved and the enrollment rate in secondaryschools is now about 35%. However, the weak educational base of the popula-tion continues to be a major obstacle to rapid economic development and asubstantial further expansion of secondary and tertiary education will benecessary as well as a major effort to raise the quality of the whole system.In the health sector, there has been a large expansion in facilities, notablyat the subdistrict level, but continued investment and an improvement inquality will be necessary to increase effectiveness. This will have to be

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complemented by a major expansion in water suppLy and sanitation if theimprovement in indices of mortality and morbidity during the 1970u is to bemaintained. By 1981, only 182 of the rural and 40% of the urban populationhad access to safe water, compared with government targets of 60% and 75%,respectively, for 1990.

External Capital FLows

15. The ongoing program of economic reforms should help to hold thecurrent account deficit to sustainable levels over the medium term, despitethe impact of lower oil revenues. Even so, continued resource transfers fromabroad wiLl be cssential to sustain modest GDP growth (2% p.a.) over the nextthree years. Staff projections indicate that new public medium- and long-term(lLT) borrowing will have to average about US$4.8 billion p.a. from 1986/87 to1988/89, including about US$2.4 billion p.a. of official development assis-tance and the balance from import-related credits and untied borrowing.Indonesia is well placed to arrange the necessary financing on reasonableterms; the Government's record of economic management is good and a comfort-able cushion of external reserves has been rebuilt over the past three years.

16. Total public debt outstanding at the end of 1985 is estimated atUS$28 billion, with an additional US$15 billion of undisbursed commitments.Of the total debt disbursed and outstanding, official assistance (includingnonconcessional multilateral aid) accounts for 48% and obligations at variableinterest rates for only 21%; there is no short-term public debt. The averagematurity of public MLT debt at the end of 1985 is estimated at 16 years. TheCovernment continues to manage its external debt quite prudently. Until 1981,Indonesia had succeeded in maintaining its public debt service ratio, based ongross exports, at below 10%. However, because of the sharp drop in oil exportreceipts over the past three years, the ratio rose to about 20% in 1985. Withthe projected levels and composition of borrowings and export earnings,Indonesiats public debt service ratio would rise to about 31% in 1986 and thengradually decline in later years. With private MLT debt included, the totaldebt service ratio would rise from 25% in 1985 to around 37% in 1986 and thendecline again.

PART II - BANK GROUP OPERATIONS IN INDONESIA

17. As of September 30, 1986, Indonesia had received 48 IDA creditstotalling US$908.10 million (less cancellations) and 113 Bank loans amountingto US$8,835.19 million (less cancellations). IFC commitments totalledUS$163.2 million. Annex II contains a summary of IDA credits, Bank loans andIFC investments as of September 30, 1986. The share of the Bank Group inIndonesia's public (disbursed) external debt outstanding at the end of 1985was 14.8%, and the share of debt service, 9.7%, compared with 14.5% and 8.8%,respectively, in 1984. From 1968 until 1974, alL lending to Indonesia wasmade through IDA. Due to the country's improved creditworthiness followingthe commodity and oil-price boom in 1973/74, the bulk of the Bank Group'slending in the remainder of the 1970s was through IBRD loans, with a modestamount of IDA lending being justified primarily an poverty grounds, as the percapita GNP was well below the IDA cutoff level. IDA lending was discontinuedin FY80. Given the critical importance of agriculture (including transmigra-

tion) for employment, food security and exports, over one third of Bank Group-assisted projects have bean in this sector. In addition, loans and creditshave been extended to virtually alt ocher sectors of the economy, includingtransportation, education, urban development, water supply, rural development,industrial development financing (including small-scale industry), power,telecommunications, population and nutrition, and technical assistance.

18. During Repelitas I (1969-74) and II (1974-79), and in line with theobjectives of these first two Five-Year Plans, a high proportion of Bank Grouplending was directed initially toward the rehabilitation and then the expan-sion of infrastrtucture and production facilities. Special attention was alsogiven to meeting the shortage of skilLed manpower and technical assistanceneeded for preinvestmenc studies and project execution. Repelica III (1979-84), published in early 1979, stressed the need for continued high growth andstability, but departed from previous plans by placing special emphasis onmore equitable income distribution and poverty alleviation. This focus, whichwas fully in line with the conclusions of the basic economic report, requiredgreater attention to employment generation (particularly in the industrialsector) and to improvements in basic public services. While Bank lending wasalready consistent with these objectives, increased emphasis has been given tothese priorities. However, the adverse economic developments that occurred inthe latter half of the plan period and the measures taken to address them, ledto a reshaping of development objectives for Repelita IV (1984-89). Theseemphasize restoring growth of incomes and employment while continuing finan-cial prudence, promoting structural change toward a more diversified economy,and maintaining efforts to improve income distribution and alleviate poverty.This shift in focus has underscored the need to follow through on reforms thathave already been initiaLed, seek increased efficiencies in the economy, mobi-lize domestic resources to finance needed investments and recurrent expendi-tures, and foster a policy environment conducive to the achievement ofrequired changes.

19. The Bank has geared its tending and economic work program to addressthese needs and to maintain a high level of resource transfer. The approachis to continue to emphasize the ongoing dialogue on economic policy that hasbeen a cornerstone of the Bank's relationship with the Government for manyyears, and to coordinate discussion of macroeconomic issues with advice oninstitutional and policy reform in important sectors and subsectors, coupledwith lending operations and technical assistance that meet priority needs andsupport institutional improvements in specific areas. Emphasis in economicwork is being given to trade and industrial issues, development of the finan-cial system, and public resource management. In the lending program, agricul-ture continues to receive the most attention. However, the program is broadlybased, and includes increasing emphasis on efficiency improvements in theinfrastructure sectors and on education and human resource development.Continued attention is being given to power and energy, where the Bank isconcentrating on policies to diversify Indonesia's energy base, rationalizepricing and improve sector planning. In transportation, the Bank is focussingon efficiency improvements in the maricime sector and on improving thenational network of highways and ruraL roads. In urban development and watersupply, lending is being directed toward establishment of appropriate sectorpolicies and institutional development aimed at strengthening local government

and regional enterprises, in order to minimize demands on the governmentbudget and decentralize the responsibility for addromuing basic needs. Inall, the Bank'u landing program is intended to contribute about 20% ofIndonesia's capital requirements during the next three years and is expedtedto be an important catalyst in attracting other funds. Whore possible, we areseeking also to widen the impact of Bank lending through technical nssistanco,am well am complementary investments and coordinated policy dialogue withother donors.

20. Implementation, as rflected by disbursements, hai,been steadily im-provig over the past three years. The disbursement ratio I has risen from15% 2' in FY84 to about 18.5% in FY86. Although this is not yot a satisfac-tory leveL, this improvement reflects the results of efforts which the Govern-ment and the Bank have been making to address key implementation problem are-as. These include budgeting and budget release procedures, procurement proce-dures, managerial capacity, limited capacity in the local consulting and con-tracting industries and land acquisition. Several special Bank missions haveaddressed various aspects of these problems and made recommendations, many ofwhich have been adopted by the Government. Seminars on procurement and dis-bursement procedures am welL as others which have addressed more broadly im-plementation problems of specific sectors have been held, in addition to regu-lar formal meetings between the Bank and the Government to review implementa-tion and disbursement performance and project and sector-specific problems.As a consequence of these joint initiatives, the Government has acted tostreamline some complex budgetary and financial procedures, improved itsinformation system, and instituted training programs in procedures and projectmanagement. In addition, a ministerial level committee responsible to thePresident has been established to monitor implementation performance, as wellas a ministerial committee on land acquisition. To continue to assist inalleviating the problems which persist, the Bank has been, and will be infuture, working with the implementation monitoring committee as well as onspecific problem areas agreed with the Government. Activities are alreadyunderway include: developing the consulting and contracting industries,improving budgeting and financial procedures, simplifying reimbursementprocedures, and strengthening management information systems for procurementand post-contract implementation monitoring.

PART III - THE ENERGY SECTOR AND ELECTRICITY SUBSECTOR

The Energy SectorEnergy Resources

21. Oil. Indonesia is richly endowed with energy resources includingoil, natural gas, coal, hydropower and geothermal energy. Oil and natural gas

2/ The ratio of actual disbursements during the fiscal year to thecumulative undisbursed amount at the beginning of the fiscal year.

3/ Excluding the Special Assistance Program (SAP) - related disbursementswhich added 2.8%.

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now account for almost all of total commercial energy consumption. Whileundiscovered oil reserves are estimated at 10-40 billion barrels, provenresources are about 9.5 billion barreLs. Production capability is about1.9 million barrels per day but the current production level is about 1.3 mil-lion barrels per day, due to OPEC production quotas.

22. Natural Gas. The estimated pr3ven remp.ning natural gas reserve asof January 1984 was about 80 trillion ft (TTC),- of which 901 is non-associ-

* ated and can be developed independently of oil. However, major reserves aregenerally located away from population and industrial centers. The Arun fieldin North Sumatra has 14 TCF and Natuma in the South China Sea has 41 TCF.About 5.0 TCF of reserves are proven in offshore Java of which about 2.6 TCFare in the East and 2.3 3CF are in the West. Production of natural gasreached 1,580 billion ft in 1985. Half of this was exported as liquifiednatural gas (LUG) to Japg7 from Arun and Badak. LNC production was about15 million tons in 1985.- Gas pipelines have been Laid to domestic steel andfertiLizer factories and domestic consumption is expected to increase by about8.01 per year.

23. Coal. Indonesia's coal reserves are believed to be as high as 20billion tons, mostly located in West and South Sumatra and Kalimantan. Whileproduction is currently about 530,000 tons per year, the Government hasplanned for major increases. Work started early in 1982 on a 3.0 million tonper year mine at Bukit Asam and on a 0.6 million ton per year mine at thenearby Muara Tiga coal field. Proven reserves in this area are over 400 mil-lion tons. The Government is also implementing a program to raise the coalproduction at n;fbilin in West Sumatra to 1.3 million tons per year, mainly forexport. In addition, in 1981, the Government entered into a number of produc-tion-sharing agreements with private foreign and Indonesian joint-venturecompanies for the exploration and exploitation of Kalimantan coal reserves.Coal reserves defined by these contractors and expected to be economicallyrecoverable, amount to about 1.0 billion tons. The South Sumatra andKalimantan coal has a potential for sustaining a large program of coal-firedpower generation in the country.

24. Hydropower. Indonesia's total hydroelectric resources are large butdevelopment is limited by their geographic distribution relative to demand.The largest hydroelectric resource potential (over 35% of the total) lies inIrian Jaya, where the demand is less than one percent of total domesticdemand, while Java, which accounts for 80Z of current consumption, has lessthan 10% of the total potential. Existing hydroelectric installationsaggregate to 2,028 MW; they are located in Java (1,235 MW), Sumatra (612 MW),and Sulawesi (181 NW). Schemes with an aggregate capacity of about 1,000 NWare currently under construction. The National Electricity Authority (PLN),assisted by Nippon Koei of Japan, has carried out a systematic countrywideresource survey, using funds from IBRD Loan 1365-IND, that has produced an

4/ 1 TCF of gas = 24.7 million tons of oil equivalent.

5/ 1 ton of LNG = 1.2 tons of oil equivalent.

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inventory of hydroelectric site,s. The survey is being followed up withvarious prefeasibility and feasibility studies of the promising hydroelectricsites. Prefeasibility studies o;7 21 such hydro schemes were financed underLoan 1365-IND. In addition, prefeasibility studies for 20 sites andfeasibility studies for 6 sites are being financed under Loan 2300-IND.

25. Geothermal. Surface manifestations of geothermal energy are foundon all islands except Kalimantan, but only a few sites have been investigatedand only one, Kamojang in West Java, has been developed. It is believed thatpotential reserves may approach 10,000 MW, distributed as follows: Java,5,500 MW; Sulawesi, 1,400 KW; Sumatra, 1,100 MW; and other islands,2,000 MW. The Government, in collaboration with the Government of NewZealand, initiated development of the Kamojang field in 1976. The first 30 MWgenerating set was commissioned for commercial operation in January 1983 andthe station will be expanded by 110 MW under the Twelfth Power Project (Loan2214-IND). Further development potential exists in Kamojang. In 1982,PERTAMINA (The National Oil and Gas Company) entered into a joint operationcontract with Union Geothermal, a subsidiary of Union Oil of California, fordevelopment of the Salak Field in West Java. A potential of 100-200 MW hasbeen proven by explorations. Also, PERTAMINA has explored geothermal fieldsat Dierng and Drajat in Java. The economic viability of developing thesefields is under study.

Institutions in the Energy Sector

26. The principal agency responsible for implementing government poLi-cies in the energy sector is the Ministry of Mines and Energy (MME). MME wasestablished in 1978 to coordinate all activities in the energy sector and tocontrol the three state enterprises responsible for the carrying out ofgovernment policies in the energy subsectors: PERTAMINA for oil and gas, P.N.BATUBARA for coal and PLN for electricity. Other ministries and agencies arealso involved in the sector; for example, the Ministry of Public Works isresponsible for hydropower resource surveys, the Ministry of Agricultureoversees forestry products, and the National Atomic Energy Commission isresponsible for nuclear development. To help facilitate appropriate coordina-tion of energy policy, the Government has established an interministerialNational Energy Board (BAKOREN) to oversee sectoral development. BAKOREN issupported by a technical committee (PTE) consisting of senior officials indifferent departments, chaired by the Director General of Electric Power andNew Energy (DCEP).

The Electricity Subsector

27. The electricity subsector is regulated by ME through the DirectorGeneral of Electric Power and New Energy. The subsector comprises: (a) PLN,the National Electricity Authority; (b) captive plants installed by privateparties for their own use; (c) some small municipal franchises; and (d) asmall number of cooperatives which were set up to provide electricity incertain rural areas remote from PLN supply systems. An electricity act waspassed in 1985 (Law No. 15), consolidating earlier decrees, which permitsprivate and cooperative franchise participation in the electricitysubsector. The DCEP is the chairman of the supervisory board which overseesPLN's operations and reviews PLN's investment plans, budgets and tariffs.

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PLN's Organization

28. PLN was established as a public corporation (Perum) under Presiden-tial Decree No. 18 of 1972, with responsibility for the generation, transmis-sion and distribution of electricity and the planning, construction and opera-tion of electricity supply facilities. PLN is managed by a board of directorsheaded by a President Director, who is appointed by the President and isaccountable to the Ministry of Mines and Energy. The President Director hasauthority for all day-to-day operations of PLN. The board currently includesfive other directors with functional responsibility, respectively, forplanning, construction, operations, finance and administration. Operationalresponsibility devolves to 17 regions, and responsibility for major construc-tion to 14 project managers. Also reporting to the board are several staffunits responsible for power research, education and training, and managementservices as well as an audit unit, called the Corporation Inspectorate, and aJava system operation and control unit. An engineering services unit wasadded in 1985.

PLN's Facilities

29. PLN is the dominant entity in the electricity subsector. In1985/86, it had 5,240 MW of installed generation capacity--1,680 MW of steam(oil-fired), 800 MW of steam (coal-fired), 930 MW of gas turbines, 740 MW ofdiesel, 1,060 MW of hydroelectric and 30 MW of geothermal. PLN also operatesover 11,600 km of transmission lines at 70, 150 and 500 kV and about 86,000 kmof distribution lines.

Sector Development issues, Objectives and Strategy

30. Since oil has been Indonesia's major export commodity, the majorthrust of the Government's energy policy has been to maintain the level ofexport earnings by diversifying domestic consumption away from oil toalternative and more economic energy resources such as coal, hydropower,geothermal and gas. The Government's strategy is to use the electricitysector as the principal agent for implementing this policy. The Government'sother major objectives are to increase the welfare of the population byincreasing the proportion of electrified households from the current low levelof about 14X to about 40Z over the next 10 years, and to support economicdevelopment through the supply of electricity to productive users in urban andrural areas. Extending the supply of electricity will also help to reduce oilconsumption by substituting electricity for kerosene and diesel oil inapplications where electricity is more economical. Currently, in support ofthese objectives, PLN has formulated a 10-year investment program amounting toabout US$15 billion equivalent.

Captive Generation

31. Due to nonavailability of electricity supply from the grid, a largenumber of industrial and commercial establishments produce electricity fortheir own use. The growth of this "captive" power was very rapid in the1970s, and their installed capacity is comparable to the generating capacityof PLN. Since the captive power generation is largely diesel-based and gener-

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ally more expensive than P1N's supply, government policy supports the replace-meat of uneconomic captive generation sources by PLN's supply as rapidly asPLN's grid can be extended to these sources, and to license new captive plantsonly when they are economically efficient or where PLN cannot supply.

Pricing

32. Following the increases in international oil prices in the 1970s,petroleum products in Indonesia were highly subsidized. However, the Covern-ment has moved rapidly to remove the subsidies in the past four years. Aftera total increase of about 225X since December 1981, the weighted average ofdomestic prices of petroleum fuels in September 1986 was slightly above theaverage international price, although the kerosene price remained at about 75%of the international level. Electricity prices have been increased by about130% since 1981, resulting in the current average price of about 96.0 Rp/kWh,which was equivalent to about USC8.5/kWh prior to the devaluation in September1986 and which now amounts to about USC5.8/kWh. Mainly because of the devalu-ation, adjustments are needed to fully reflect the long-run marginal cost ofsupply both in the level and structure of PLN's tariffs. The proposed projectwould address this need (para. 73).

Institutions and Manpower

33. Weak institutions and scarcity of trained manpower continue toconstrain rapid and efficient implementation of the energy strategy in spiteof the progress that has been achieved. In the electricity subsector, PLN hasmade considerable progress not only in achieving a rapid expansion (its salesgrew by over 300% in the 10-year period 1974/75 to 1984/85), but also inpreparing for an even larger program in the future. The Fourth Five-Year plan(1984/85 to 1988/89) had set a target of increasing PLN's sales by 15OX, fromabout 10,000 GWh in 1983/84 to about 25,000 GWh in 1988/89. These targetshave since been scaled down in view of the deteriorating economic environmentand financial constraints. The sales target for 1988/89 is now about19,000 GCh. To meet even this reduced goal, PLN needs to implement and oper-ate projects and systems of growing size and increasing technical and manager-ial complexity. PLN also needs to continuously enhance and improve its capa-bilities in all areas of management to manage such rapid growth. Specialemphasis on project management, engineering, finance and accounts, and man-power development are needed. Also, PLN needs to strengthen its capacity toefficiently operate and maintain the increasingly complex facilities currentlybeing constructed as well as those planned for the future.

Import Substitution

34. The electricity industry is capital intensive with high importrequirements. About 60% of PLN's total proposed investment in the 10-yearperiod from 1984/85 to 1993/94 is expected to be in foreign exchange and toamount to over US$10 billion equivalent. To help reduce the import content ofthe program, the Government has been promoting, inter alia, increased use oflocal consultants for engineering, and increased domestic manufacturing ofselected equipment. The implications of this policy for PLN are twofold.First, it needs to strengthen its engineering capability to supervise and

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guide the work of consultants, and secondly, it needs to develop its Testingand Research Center to undertake a program of product testing, quality controland guidance to local manufacturers, for the products for which it is adominant purchaser.

Bank Role and Strategy

35. The Bank has been actively involved in developing and implementingmost of the sectoral objectives described above. In 1981, the Bank carriedout a study of energy sector issues and prepared a report entitled"Indonesia: Issues and Options in the Energy Sector". The report confirmedthat alternatives for oil must be developed quickly for electricity generationand recommended that this strategy should be extended to other sectors such asindustry, transportation and households. It emphasized the need for efficientpricing, stronger institutions and manpower development as major objectives.In support of its ongoing dialogue with the Government on the pricing ofenergy products, the Bank prepared a report entitled "Indonesia: SelectedIssues of Energy Pricing Policy" in 1983. Actions of the Government on thepricing of petroleum products and electricity in the past three years have noweliminated net subsidies. In October 1984, the Bank carried out a detailedreview of PLN's investment program for the ten-year period from 1984/85 to1993/94. The findings supported the general direction of the plans but sug-gested a scaling down of the programs and some measures for improvinginvestment efficiency. These findings, which were accepted by the Government,were presented in the Bank report "Indonesia Power Sector Investment Review"in 1985. Also, a Bank mission studied the possible measures to improve theoperational efficiency of thermal and hydra plants and the maintenance ofdiesel plants, and presented its findings in a report entitled "Indonesia:Power Generation Efficiency Study" in 1986. The Government and PLN haveaccepted the recommendations of these reports. In addition, the Bank reviewedthe rural electrification program in Indonesia and presented its findings in areport in November 1986, entitled "Indonesia: Rural ElectrificationReview." An Energy Options Study is currently being carried out which willassist the Government in formulating a strategy for the development and use ofprimary fuels.

36. The Bank is also financing considerable technical assistance forinstitutional development in the energy sector, including support to PLN insuch important areas as project management, planning, power market survey,hydro survey, accounting, manpower development and training. Furthermore, inthe coal subsector, various steps are being initiated for institutional andmanpower development under two Bank-assisted projects: the Bukit Asam CoalMining Development and Transportation Project (Loan 2079-IND) and the CoalExpLoration Engineering Project (Loan 2153-IND). In the gas subsector, astudy on liquified petroleum gas (LPC) was financed under Credit 898-IND andan energy pricing study is being financed under a Bank loan for the GasDistribution Project (Loan 2690-IND).

37. The Bank's involvement with the electricity subsector in Indonesiahas gone through two distinct phases and has now entered the third and mostcrucial phase. In the first phase (1968-1977), the Bank's work was directedtowards creating an autonomous nationaL entity to deal with the sectoral

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problams and, after PLN's creation in 1972, to heln put in place proceduresand systems to manage and improve its then small-scale operations. In thesecond phase (1978-83), the primary thrust of the Bank's work has been toassist PLN to rapidly expand its supply facilities (sales increased 122Z inthe period) and, coupled with efforts to evolve integrated grids (particularlyin Java), to take full advantage of advanced technologies to reduce supplycosts. The fruits of this effort are expected to be reaped in the period1985-89 with the commissioning of large power plants at Suralaya (1,600 MW),Saguling (700 MW), and Cirata (500 MW), with an overlay of a 500-kV transmis-sion grid. The costs of electricity supply are expected to drop significantlyin real terms during this period. The current phase of the Bank's involvementis focused partly on contributing to the financing of Indonesia's massivepower programs to meet its development needs, and more so, to build on thefoundations laid in the second phase to transform PLN into a modern and matureutility like others in the region through a major emphasis on institutionalobjectives. These include greater financial autonomy, better operatingefficiencies, and improved engineering and research capabilities. Theproposed project addresses these concerns and would provide technicalassistance, inter alia, for the efficiency improvement measures. Suitableefficiency improvement measures have been agreed with PLN. Action plans havebeen formulated and their implementation would be monitored (paras. 53 and70).

Earlier Bank Group Operations and PLN's Performance

38. Since 1969, the Bank Group has provided US$2,083 million for powergeneration, transmission and distribution facilities through 14 separateprojects. Four distribution projects (Credits 165-IND and 334-IND, and Loans1259-IND and 2056-IND) rehabilitated and expanded distribution facilities inthe greater Jakarta area. Ten power projects (Credit 399-IND and Loans1127-IND, 1365-IND, 1513-IND, 1708-IND, 1872-IND, 1950-IND, 2214-IND, 2300-INDand 2443-IND) assisted PLN to expand electricity generation capacity in Java,to provide a strong all-Java 500-kV grid, to extend distribution facilities inJava, to reduce system transmission and distribution losses, and to introducea program of mini hydro development in Sumatra. Project Performance AuditReports (PPARs) on the first six projects (Credits 165-IND, 334-IND, 399-INDand Loans ll27-IND, 1259-IND, and 1365-IND) have been issued and the lessonslearned from these operations are being applied to subsequent operations.They relate mainly to the need for timely appointment of consultants, anddelays in procurement and constiuction.

39. PLN's implementation capacity has grown substantially since theBank's early association with it. All Bank-financed projects have been or arebeing implemented as desigrned and generally within the estimated cost.However, delays of the order of six months to two years in implementation havebeen experienced compared to the appraisal estimates. The growing size andcomplexity of the projects, coupled with cumbersome procedures for theappointment of consultants, award of contracts, opening of letters of credit,and budget approvals, have been responsible for most of the delays.Implementation schedules for Bank-financed projects, however, have generallybeen optimized to international standards with little slack to accommodate thedelays which can occur in a still-maturing utility like PLN. Moreover, steps

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are being taken at the entity and national level to streamline budgeting andprocurement procedures.

PART IV - THE PROJECT

40. Feasibility studies for the transmission expansion in Java werefunded under the Sixth Power Project (Loan 1365-IND) and were completed in1982. The feasibility studies for the expansion of distribution facilities inthe Jakarta, Bogor, Tangerang and Bekasi (Jabotabek) area were completed in1980, for the period up to 1990. PLN updated both these studies and presentedthem to the Bank in October 1984. Bank missions appraised the project inDecember 1984 and updated the appraisal in September l9B6. Negotiations wereheld in Washington from November 20 to November 24, 1986. The Indonesiandelegation was led by Dr. Arismunander, Director General of Electric Power andNew Energy, Ministry of Mines and Energy. A Staff Appraisal Report(No. 5491-IND) is being distributed separately. Supplementary project dataare given in Annex III.

Project Objectives and Scope

41. The proposed project would support the Government's objectives topromote productive activities and to improve the welfare of the populationthrough the provision of electric power, and also to improve the economic andtechnical efficiency of energy supply and use. The extension of the networkwould enable PLN to supply electricity to currently unelectrified areas toserve residential, commercial and industrial consumers. In Java, the waitinglists of industrial consumers alone amount to over 500 MW. Extension of PLN'ssupply would also reduce the growth of uneconomic captive generation and helpto reduce oil consumption. In addition, by ensuring that the investments intransmission and distribution during the next three to four years proceed atthe desired level, the project would help to reduce the cost of electricity byoptimizing the productivity of ongoing investments in generation projects.

42. The project would also help to further strengthen PLN. The projectwould improve PLN's engineering capability by providing technical assistancefor strengthening the new Engineering Services Center, and thereby promotemore efficient use of scarce engineering talent. PLN's Testing and ResearchCenter would also be equipped for an expanded role in the testing and certify-ing of indigenously produced equipment. In addition, the project would helpto strengthen PLN's financial position by ensuring continued attention tomeasures necessary to achieve this objective, including tariff adjustments andtechnical assistance for efficiency improvements. Finally, the project wouldsupport detailed engineering of the proposed coal-fired power plant at Paitonin East Java, which is the next important step in the Governmentts energydiversification strategy.

Rationale for Bank Involvement

43. The Bank strongly supports the Government's objectives in the powersector and has played a major role through 14 projects since 1969 in helpingto build PLN into an autonomous power utility capable of meeting the demandsimposed by a large and sustained investment program. At this juncture, givenIndonesia's tight resource constraints, the Bank considers it of particular

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importance to work with PLN to further improve its capacity to manage theexpanded system efficiently and to draw the greatest benefits possible fromboth the proposed expansion and PLN's existing assets.

Project Description

44. The proposed project would comprise:

(a) construction of 150-kV and 70-kV transmission lines and substationsin Java;

(b) construction of 20-kV and 220/380-V distribution facilities in theJakarta, Bogor, Tangerang and Bekasi areas (Jabotabek);

(c) equipment for PLN's Testing and Research Center; and

(d) consulting services for:

Ci) efficiency improvement measures;

(ii) engineering of the Paiton steam power plant in East Java; and

iii) development of PLN's Engineering Services Center.

45. Transmission and Distribution. In 1981, using funds from the SixthPower Project (Loan 1365-IND), Beca Worley International of New Zealandreviewed the development requirements for the transmission and distributionprogram for the period up to 1987. Their report, dated April 1982, identifiedadditional requirements which have resulted in several projects financed bythe Overseas Economic Cooperation Fund (Japan), the Federal Republic ofGermany, the Asian Development Bank, and export credits. PLN has carried outfurther studies to define the total required program of transmission andsubstation development in Java up to 1990, to match the ongoing program ofgenerating capacity additions in the same period, which amount to over 1,800MW. A review of the ongoing transmission projects with respect to therequired program has identified the balance of requirements for Java, whichare proposed for financing in this project.

46. The distribution component of the project covers the requirementsfor the expansion of distribution facilities in the Jakarta, Bogor, Tangerangand Bekasi (Jabotabek) areas up to the middle of 1990. The studies for iden-tifying these requirements were carried out by PLN, following up on thestudies carried out by SOFRELEC of France in 1979/80, to identify requirementsup to 1990.

47. The scope of the transmission lines component of the project, interms of physical construction, involves about 174 km of 150-kV lines, 229 kmof 70-kV lines and 49 km of 150-kV underground cables. The quantities ofsubstation equipment covered by the project include about 1,410 MVA ofstepdown transformers, materials [or 136 switching bays at 150 kV and 70 kV,393 units of 20-kV switchgear and 25 new substations. The distributioncomponent includes construction of about 1,406 km of 20-kV lines, 2,417 km of

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400-V lines, 1,505 stepdown substations and 254,000 service entrances. Toimprove the utilization of stepdown transformers at 150-kV and 70-kVsubstA'tions included in the project, PLN would carry out a comprehensivetransformer relocation program to suit the project impleir.etation schedule.

48. In view of the difficulties experienced in the past with the acqui-sition of land for substations and rights-of-way for the ctransmission lines,advance action has been initiated in this project. Out of chea 25 new sub-stations proposed to be constructed, Land has already bee! plirchllsed for10 locations. Acquisition of land for the remaining lcatioLns would becompleted by June 1988. Surveys and inventories for tran.mins.lou lines inEast and Central Java have been completed, while the remainit. slucetys andinventories would be completed by October 1987. Compensaa:ion For a;ll rights-of-way is scheduled to be completed by March 1988.

49. Due to long Lead times for procurement of transmLs; itol tines andsubstation equipment, PLN has encountered difficulties in respoatding quicklyto requests from industrial consumers for supply of power in arena requiringinstallation of new 150-kV or 70-kV substations. As a result, irndulstriessometimes find it necessary to purchase their own generating, equipNn.-nt, mostlydiesel plants, even though it may be uneconomic to do so. In order to respondto such situations, the project allows flexibility for PLN to meet urgentneeds for power supply to consumers at locations which may not be covered bythe currently envisaged list of substations. Moreover, the proposed transmis-sion Lines and substations in the project have been derived on the basis ofthe current expectation of demand growth in different areas in Java, whichcould change, requiring alteration to the physical plans for lines and substa-tions. PLN has already standardized the transmission lines and substationdesigns, which will permit changes in the program to be made without diffi-culty. The project cost estimate therefore provides physical contingencies of10% to permit variations in the required quantities of materials. PLN hasagreed to review annually, beginning December 31, 1987, the plan for substa-tions and transmission lines included in the project in order to identify anynecessary changes. PLN would subsequently reflect these changes in the planin a manner satisfactory to the Bank.

50. Testing and Research Center. PLN's Testing and Research Center isresponsible for the testing of electrical power equipment, including certi-fication of Local products and assistance to the power equipment industry, aswell as applied research on problems relevant to PLN's operations. Studieshave been carried out with French assistance to prepare a master plan for thedevelopment of the Center for the next 15 years. The project provides for apart of the funds needed for the first five-year period, primarily for thepurchase of additional equipment for existing laboratories, to enable them toaugment and modernize the test facilities.

51. Consulting Services. Funds for commencing the design and detailedengineering for a thermal power plant in East Java (at Paiton) were providedin the Eleventh and Thirteenth Power Projects (Loans 2056-iND and 2300-IND).Consultants have been appointed following Bank guidelines. They have nowcompleted the design work and specifications for turbine generators and steamgenerators, and other major components. The project would finance an exten-

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sion of their services for procurement, post contract engineering and con-tracts coordination work involving about 250 man-months of effort over about aone-year period starting in early 1987.

52. As agreed under the Fourteenth Power Project (Loan 2443-IND), PLNhas established an Engineering Services Center to integrate expertise andoptimize use of scarce manpower in project formulation, engineering and impLe-mentation. PLN has now proposed to employ the services of a consultingengineering firm to help in the development of the center. The proposedproject provides for such services, amounting to about 500 man-months spreadover a period of about three years. Terms of reference for the services andshortlist of consultants were agreed with the Bank and proposaLs from theconsultants have been received and are being evaLuated. The appointment ofconsultants is expected to be completed by March 31, 1987.

53. The project also provides for technical assistance to enable PLN toformulate in detail and carry out certain efficiency improvement measures(para. 70) including: (a) renovation of hydro-plants at Plengan, Ketenger,Lamajan and Jelok in Java; (b) improvement in the availability factor of theSuralaya coal-fired thermal plant; (c) improvement of the data base fordistribution systems, including detailed mapping; and (d) training. Theassistance may be in the form of individual experts or consulting firms to beselected in accordance with the Bank's guidelines. These would be carried outin 1987 and 1988 and would amount to about [50 man-months of consultantservices.

Project Cost and Financing Plan

54. The total cost of the project including the physical and price con-tingencies is estimated at about US$366.2 million equivalent, of which aboutUS$240.2 million (66%) is in foreign exchange. Costs are incLusive of taxesand duties estimated to be about $9.7 million. All costs are based onDecember 1986 prices and physical contingencies average about 7.7% of the basecost. The price contingencies, which amount to about 10.8% of the base costplus physical contingencies, are based on: (i) domestic inflation rates of 10%in 1987, 5% in 1988, and 3.5% in 1989 and thereafter; and (ii) internationalinflation rates of 3.0% in 1987, 1.0% p.a. in 1988-90, and 3.5% in 1991 andthereafter. Total financing required for the project is estimaLed atUS$386.2 million (including interest during construction of about US$20.0 mil-lion), of which about US$260.2 miLlion (67%) is in foreign exchange.

55. The proposed Bank loan of US$226.0 million would cover about 59% ofthe total financing requirements of the project, including 87% of the foreignexchange component. The Government and PLN are in the process of finalizingarrangements for financial assistance from the Government of the FederalRepublic of Germany to cover the foreign exchange cost, estimated at about$14.2 million, of goods and services required for the construction of trans-mission lines and substations in Central Java. The Bank Loan would beextended to the Government for 20 years, including five years of grace, at theBank's standard variable interest rate. The Government wouLd onlend theproceeds of the loan to PLN with the same amortization and grace periods at aninterest rate equal to the Bank's standard variable interest rate plus no less

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than a quarter percent for administration charges. The Government would bearthe foreign exchange risk. The onlending to PLN would be made under asubsidiary loan agreement, satisfactory to the Bank. The signing of thesubsidiary loan agreement would be a condition of loan effectiveness. TheGovernment and PLN would finance the local costs, including taxes and duties,and interest during construction.

Procurement and Disbursement

56. Except for concrete poles which would be procured by local competi-tive bidding, all equipment financed under the Bank loan would be procured byInternational Competitive Bidding (ICB) procedures in accordance with theBank's procurement guidelines. Qualifying domestic manufacturers wouldreceive a preference in bid evaluation of 15% of the CIF price or theapplicable import duty, whichever is lower. The Bank-financed items willinclude: (a) transmission towers, conductors, insulators, and accessories;(b) transformers; (c) 150 kV cables; (d) 150 kW, 70 kV and 20 kV switchgear,control cables and accessories; (e) substation equipment; (f) distributionmaterials; (g) concrete poles; and Ch) consulting services. Consultants wouldhe engaged in accordance with Bank guidelines. All bidding packages for goodsfinanced by the Bank and estimated to cost over US$1.0 million equivalentwould be subject to the Bank's prior review of procurement documents, which isexpected to cover all Bank-financed contracts.

57. The Bank loan would be disbursed against: (a) 100% of foreignexpenditures for directly imported equipment and materials; (b) 100% ofex-factory expenditures for locally manufactured items; (c) 70% of localexpenditures for other items procured locally (ex-shelf); (d) 80% of localexpenditures (ex-factory cost) for concrete poles; and (e) 80% of localexpenditures for the services of local consultants and 100% of foreignexpenditures for the services of other consultants. All disbursements wouldbe on the basis of full documentation. No disbursements would be made forexpenditures prior to loan signing. Loan disbursement is expected to becompleted by June 30, 1992. The disbursement period has been estimated takinginto account the advanced state of preparation of the project and the Bank'spast experience with similar projects.

Project Implementation

58. PLN would have overall responsibility for implementing the proj-ect. PLN has car.ied out the feasibility studies for the transmission linesand substations, completed most of the preliminary survey and design work, andprepared tender documents. Consultants have been selected for assisting PLNin tender evaluation, contract negotiations, post-contract engineering workand construction management of the project. The total work is divided betweenthree local consulting firms, each assisted by a foreign consultant. Thesearrangements have been accepted by the Bank and the work is being financedunder the Fourteenth Power Project (Loan 2h43-IND). The engineering and con-struction of the distribution component of the project would be carried out byPLN's own distribution staff. The staff in the Jabotabek area is alreadyimplementing the ongoing program for the expansion of the distribution network(under the Eleventh Power Project, Loan 2056-IND) and is sufficiently

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experienced for the proposed program. ALL procurement would be carried out byPLN's staff at its head office. Since there were considerable delays in theprocurement cycle in the Eleventh Power Project (Loan 2056-IND) and in theFourteenth Power Project (Loan 2443-IND), which resulted in delays inimplementation and disbursements, both the Government and PLN plan toimplement an action program to complete all contract awards by October 1987.

59. The construction of the transmission lines and substations is expec-ted to be completed by the end of 1991 and the distribution equipment isplanned to be installed by the middle of 1990. Project implementation isexpected to be completed in all respects by December 31, 1991.

Institutional Aspects

60. Over the past ten years, PLY has grown impressively to become thelargest utility in the country. Inevitably, such a rate of growth has beenattained at the cost of considerable strain on PLN's management. Key areas inwhich a need for strengthening has been recognized as a condition of main-taining the growth are planning, project management, management informationsystems, efficiency improvement, manpower development, and accounting andbudgeting.

61. In all of these areas appropriate technical assistance has beendevised in consultation with the Bank, and in most cases supported with Bankfunds. For its overall planning activities, PLN established a corporateplanning unit in 1981 and a market survey unit in 1982. The Government hasrecently set up a new planning directorate in MME which would establishprocedures to ensure coordination of the relevant agencies in providing policyguidance and in reviewing and approving the demand forecasts prepared by PLN'spower market survey group. PLN has also, as agreed in the context of pastprojects, begun to prepare a rolling ten-year financial forecast and financingplan based on its long-term investment program (para. 67). Both operationaland financial objectives were elaborated in PLN's five-year corporate plan,approved by its Board in November 1984. PLN's manpower development andplanning needs have been addressed under a number of Bank-supportedprojects. Of particular note is the Twelfth Power Project (Loan 2214-IND),which includes a major training component focussed on reorganizing and enlarg-ing PLN's manpower planning, training and personnel management functions formiddle- and lower-level staff. Special attention is also being given to thetraining needs of PLN's accounting and auditing staff.

62. In the project management area, the Eighth Power Project (Loan 1708-IND) included technical assistance which specifically addressed all aspects ofproject management. The recommended project cost and progress reportingsystem has been implemented. The Bank has also assisted PLN in developing anintegrated management information system, including improved accounting andfinancial management information systems. In all of these efforts, theassignment of local counterpart staff has been emphasized in order to ensurethe transfer of know-how and effective maintenance of the systems by localstaff once the systems are installed for operation. Finally, to strengthenPLN's engineering capabilities, as agreed under the Fourteenth Power Project(Loan 2443-IND), PLN has established an Engineering Services Center (para. 52)

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to unify project formulation, engineering, design, procurement and construc-tion monitoring. Thus, while much remains to be done in terms of institu-tional development, considerable programs is being made through a wide rangeof initiatives.

Long-Term Development Plan

63. PLN follows a practice of preparing a long-term development plan tocover the projected requirements of generation, transmission, distribution andother facilities. The latest plan, covering the development period 1985/86 to1993/94, shows generating capacity increasing from about 5,240 KW in 1985/86to over 10,000 MW in 1993/94. The major growth would be achieved by theconstruction of coal-fired thermal, hydro and geothermal plants, reducing theshare of oil-based electricity generation from the current level of about 66%to about 40% in 1993/94. It is a balanced program which support. a vital partof the Government's objective of reducing the domestic usage of oil. WhilePLN appears capable of implementing such a program, a major constraint maydevelop in mobilizing the required finances if the Indonesian economy does notimprove within the next two or three years.

64. In order to ensure soundness of the overall development program, theBank has made the following agreements with the Government and PLN, whichwould be continued under the proposed project: (i) the Covernment would reviewannually with the Bank and PLN, PLN's development plan and associatedfinancial forecast and financing plan, and would take appropriate measures tofacilitate PLN's access to required finance; (ii) the Government would,through PLN, review annually with the Bank, in particular, potential changesin the load growth for electric power on Java and any adjustment which may berequired in PLN's development plan to accommodate these changes; (iii) theGovernment and PLN would review annually with the Bank, PLN's proposedinvestment budget for the following year in order to enable the Bank toexpress its views on the priorities reflected in the budget and on the balanceamong the generation, transmission and distribution investment; and (iv) PLNwould prepare and furnish to the Bank annually for review its proposedcustomer connection program, and thereafter implement the program.

Financial Performance

65. Concurrent with PLN's incorporatLon in 1972, measures were takenwith the support of the Bank Croup to establish a sound financial basis forthe organization, and to eliminate the operating losses which were then beingincurred. This was achieved by 1976. During the period 1982/83 through1986/87. PLN is expected to have self-financed about 19X of its capitalinvestment program, mainly from depreciation and consumers' contributions.The government equity contribution accounts for about 35% of the program, andthe major source of funding has been borrowing, which corresponds to about 46%of the program. As a result of this mix of funding, PLN's debt/equity ratiois still low at about 40/60 estimated for 1986/87, and its debt servicecoverage ratio exceeds the required 1.5. Its latest balance sheet (1985186unaudited) shows a healthy current ratio of 2.1 and substantial liquidity.

- 22 -

66. Since May 1980, tariff. have been adjusted upwards four times, withthe last much adjustment being in March 1984. The magnitudes of these tariffadjustments have been inadequate to cover cost increases other than the oilprice impact on PLU's fuel bills, and they have also lagged behind the fuelprice .ncreaseu. PLN's not income, therefore, declined steadily after 1980/81and remained negative (on a revalued asuets basis) through 1985/86, and thistrend is expected to continue in 1986/87. Howeverp with depreciation,consumers' contributions, and lower than expected capital expenditures, PLNwas able to meet until 1985/86, the indicative targets of a solf-financingratio (SFR) required or projected under previous Bank inns. The Government,in the past, provided PLN with substantial funding, mainly in the form ofequity. Although PLN is authorized by its charter to borrow from local andforeign lenders and to issue its own obligations, the Covernment in practicesecures all foreign borrowings on behalf of PLN and bears all foreign exchangerisks. Due to growing budgetary constraints facing the Government, foreignborrowings through onlending arrangements have become increasingly import-ant. In addition, the Covernment is allowing PLY to borrow from government-owned banks at subsidized interest rates to finance its local cost investmentexpenditures.

67. Given the size of PLN's planned capital expenditures and theresource constraints faced by the country in the near term, PLN's long-termobjective is to minimize government equity funding, increase the level ofself-financing, and fill financing gaps by substantially increasing bothforeign and local borrowings. As agreed under earlier Bank loans, PLN hasbegun to prepare a rolling ten-year financial forecast based on its proposeddevelopment program and also a financing plan for the first five years, aspart of its corforate planning procedures. The financial forecast andfinancing plan ate adopted by PLN's Board and discissed with the Governmentand the Bank. These practices would be continued under the proposed project.

68. During the past three years, PLN has initiated various measures toimprove its operational efficiency and reduce costs. These measures, alongwith a 10% rRduction in July 1986 of the prices of industrial fuel oils (theimpact of which was offset partially by a simultaneous reduction of about 6%in the electricity tariff for industrial consumers), have helped to improvePLN's operating ratio. Its financial rate of return (ROR) is estimated to beabout 0.5Z in 1986/87, compared to -0.2% in 1985/86 and -0.9% in 1983/84. TheSFR for 1986/87 would, however, be at a level of about 15%, compared to 20% in1985/86 and 22% in 1983/84. This decline is mainly because debt servicepayments would absorb a larger share of the internally generated funds, asrepayments on some of the onlent foreign loans have now started. The improve-ment in PLN's operating ratio during the last 2-3 years, however, is marginal.PLN is not able to satisfy the revenue covenant adopted under the FourteenthPower Project (Loan 2443-IND) in 1984, which requires it to achieve a ROR ofnot less than 6% in 1985/86, and annual RORs of not less than 8% in the fiscalyears thereafter. For PLN to have achieved the covenanted RORs for 1985/86and 1986/87, tariffs would have to have been increased by about 13% at thebeginning of 1985/86, and by about 52 in 1986/87. The Government, however,did not permit any tariff increase, as it considered a tariff increase wouldhave reduced the pressure on PLN to improve its efficiency. The Governmentalso considered that PLN's financial performance needed to be evaluated in a

- 23 -

broader context because of the inherent differences among its regional opera-tions.

Financial Performance Monitoring

69. The Government, PLN and the Hank have reviewed jointly whether therevenue covenant currently applicable to PLM, is appropriate for PLN's opera-tions as a whole and whether PLN realistically can be expected to achieve the

* financial o',jectives underlying the covenant. PLN's operations in Java, whichaccount fvr about 801 of its total energy sales, are profitable. These opera-tions, vnich include Large central power stations which supply electricitythrough an interconnected grid system, are at a scale which is reaching alevel comparable to, and have conditions which are similar to, those prevail-ing in other large utilities in the region. By most standards, PLN's opera-tions in Java are considered well established and sufficiently commerciallyoriented to warrant their performance to be measured by normal utilityyardsticks. PLN's operations outside Java, however, differ substantially fromthose in Java, and are highly unprofitable. These are small-scale operationsbased largely on diesel which are dispersed over a large number of islands,and encompass over 600 separate power generation and supply networks. Thesenetworks have a high cost of energy generation. This, coupled with isolatedload centers, limited demand and high transmission and distribution losses,results in high overall energy supply costs. Moreover, PLN carries out at theGovernment's direction, both inside and outside Java, a variety of sociallyoriented operations, such as its rural electrification programs which are notof a coumercial nature. These noncommercial activities comprise a majorportion of PLN's operations outside Java and have a significant adverse impacton PLN's overaLl finances. PLN is not able to set a tariff outside Java whichis higher than in Java because the Government considers a countrywide uniformtariff to be desirable to meet social and regional development objectives.The Government and PLN, however, recognize that over a period of time theseoperations should become self-sustaining and eventually profitable.

70. As a means for improving its overall operating performance, PLN hasagreed to carry out, in consultation with the Bank, action plans: (a) for con-trolling and reducing system losses in its 1986/87 and thereafter; and (b) forefficiency improvements for all its operations, including detailed, monitor-able targets for its operations outside Java. These improvements are,however, not expected to alter significantly in the medium term the opera-tional differences between PLN's operations in Java and those outside Java.The Government, PLN and the Bank have therefore agreed that PLN should adoptseparate financial nerformance targets for the two types of operations, wherethe operations in Java would be expected to earn annual RORs commensurate withthe nature of these operations, and the operations outside Java wouldprogressively achieve a break-even situation within the next five years.Agreements have been reached that: (a) PLN would take all measures requiredto realize for its Java operations, no later than in 1988/89 and in eachfiscal year thereafter, an annual ROR of not less than 8%; and (b) PLN wouldtake all measures required with respect to its non-Java operations to producefor each fiscal year after 1989/90 total revenues equivalent to not Less thanthe sum of: (i) total operating expenses for non-Java operations; and (ii) theamount by which debt service requirements for non-Java operations exceed the

- 24 -

provision for depreciation. For the purpose of the ROR calculation, it wasagreed that PLN would carry out an annual revaluation of its assets from1986/87 onwards in a manner satisfactory to the Bank and that for both itsoperations in Java and outside Java, it would provide the Bank with separatedhistorical financial results (beginning with 1986/87) and forecasts on a proforma basis, but not separate audited financial statements. This arrangementis satisfactory.

Future Finances

71. The 8% ROR covenant for the operations in Java would be met in1988/89 when a tariff increase of about 251 is expected to be required at thebeginning of that year. Smaller annual tariff increases are expected to berequired in 1989/90 and 1990/91, to maintain the rate of return at a levelabove 8%. A tariff increase in 1987 is not considered practicable by theGovernment, as it is trying to contain inflation following the recent(September 1986) currency devaluation, and has declared its intention to main-tain the prices of essential commodities as well as to limit price increasesby state enterprises to the extent possible. Tbe break-even covenant for theonerations outside Java is projected to be met in 1990/91, with the tariffincreases projected during the period from 1988/89 to 1990/91, along with theimplementation of the action plan to improve the efficiency of operationsoutside Java (para. 70).

72. Achievement by PLN of an 8% ROR for its operations in Java wouldimprove its overall ROR from -0.2% in 1985/86 to a range of 5-7X from 1988/89to 1992193. In spite of such significant improvements in its rate of returnperformance, PLN's SFRs during the period 1987/88- 1990/91 are estimated toremain in the 16-21% range, but would gradually improve to about 29% in1992/93. PLN's annual capital expenditures (including interest duringconstruction) in 1990/91 are expected to be nearly three times the level in1985/86 when its SFR was about 20%. One of the reasons for the lack ofimprovement in the projected SFRs is the increase in the amount of investmentin Rupiah terms because of the September 1986 currency devaluation. However,PLN would finance an increasingly larger share of its investmenL program (55-70%) through local and foreign borrowings, and rely less on government contri-butions. On this basis, debt as a percentage of debt pius equity (excludingrtvaluation surplus) would rise from about 41% in 1986/87 to 56% in 1989/90and stabilize thereafter. The debt service coverage ratio would be about 1.6to 2.0 times for most of the years of this period. This projected performanceis satisfactory.

Power Tariffs

73. In 1979, the Government and PLN agreed under the Seventh PowerProject (Loan 1513-IND) that the tariff structure for electricity shouldreflect the long-run marginal cost (LRKC) as closely as possible; satisfactorychanges were implemented in May 1980. However, the tariff increases of 1980-83 resulted in some deviations from LRMC pricing. First, since these tariffincreases were effected entirely through energy charges without appropriateadjustments in demand charges, the fixed charges (demand charge) were lowrelative to the variable charges (energy charge). The Government and PLN have

- 25 -

already moved toward correcting this distortion in 1984 and it is expectedthat further progress would be made in the coming years. Second, the tariffchanges have resulted in a significant degree of cross-subsidy betweendifferent categories of consumers, with commercial and affluent residentialconsumers compensating for low tariffs for small residential consumers. Whileno major changes in the latter policies are foreseen, the Bank has advocatedcontinuing review of the situation, with no increase in the degree of cross-subsidy. The existing covenant requiring PLN to carry out an annual review ofits tariff level and review its LRMC periodically would continue under theproposed loan. PLN would review the results of the tariff level study withthe Government and the Bank before the end of each calrndar year.

Accounts Receivable

74. PLN's general consumer accounts receivable position has been kept atabout one and a half months of annual billings, which is satisfactory.Collections from government users, however, have not been as prompt. TheGovernment has been aware of the unsatisfactory payment performance of govern-ment users. In 1983, the MME issued instructions jointly with the Ministriesof Finance, Defense, and Home Affairs to expedite payments by government usersto PLN. Overdue government accounts receivable were reduced from over oneyear in 1981182 to about five months of billing in 1983/84. As a result ofcontinued efforts by the concerned ministries and PLN, the overdue governmentaccounts receivable were further reduced to about two months (62 days) ofbilling in 1985/86, and are currently less than two months (54 days) of bil-ling. An existing covenant, which requires that amounts owed to PLN by allgovernment users in aggregate not be overdue by more than two months of totalyearly billings for such users, would continue under the proposed project.

Insurance

75. PLN currently carries transit and marine insurance on equipment andmaterials in transit. Projects under construction are covered by thecontractor's all-risk and erection insurance. Fire and other hazards onassets in operation are still self-insured. In view of the geographicalspread of PLN's assets, any single loss would be relatively small by compari-son with total assets and operations, and this policy has been accepted by theBank. However, some very large-sized projects have recently been completedand others are now under implementation which would result in a greater con-centration of assats in certain locations than in the past. As agreed underthe Fourteenth Power Project (Loan 2443-IND), PLN has, with assistance from alocal insurance company, carried out a review of its insurance practices andrequirements. As a result of the review, PLN now recognizes the need to takeout commercial insurance for at least its major operating assets. The Govern-ment has approved, as a first step, PLN's plans to take out insurance forabout 30% of its high-risk assets, at Muara Karang and Suralaya thermal powerplants. PLN is continuing to review the question of the proportion of assetsto be insured by commercial agencies, versus that to be carried as self-insurance, and is expected to inform the Bank of its decision by March 31,1987.

- 26 -

Benefits and Risks

76. The project would provide support to the electricity subsectorthrough a crucial period of its growth and development (pars. 37). The tech-nical assistance components of the project, combined with ongoing efforts,would support PLN as it continues to move toward technical and financialmaturity. In addition, the project would help to extend the supply of elec-tricity in Java to residential, commercial and industrial consumers. About250,000 residential consumers who have no access to public power supply wouldbenefit, in addition to a large number of industrial and commercial consum-ers. The project would help to optimize the efficiency of ongoing investmentsin generation projects, by maintaining the balanced development of thenecessary transmission and distribution facilities.

77. In projects involving transmission and distribution networks whereit is difficult to assess the benefits attributable to the specific componentsof the expansion program and where the schemes represent an area and timeslice of a total development program, it is appropriate to evaluate theeconomic rate of return of the entire program. In the case of this project,the economic analysis of PLN's investment program in Java for the period 1987-1991, of which the current project is a part, was carried out.

78. The internal economic rate of return tIERR) for the investmentprogram in Java is estimated at 17%. It would fall to about 15% if theinvestment costs rose by 10% or if sales went down by 10%. The internalfinancial rate of return (IFRR), using revenue to PLN at the prevailing tariffas the benefit, is about 8%. This shows that the tariff is still somewhatbelow the cost of supply. If tariffs were increased by 20%, the IFRR wouldrise to about 11%.

79. The risk in the implementation of the transmission and substationprojects is primarily one of delay that may occur in the acquisition of landfor substations and rights-of-way for the construction of overhead lines. PLNhas already initiated advance action to avoid such delays. A satisfactoryaction plan for completing the acquisition to suit the project implementationschedule has been agreed with PLN and the Government. There are no unusualrisks in the implementation of the distribution component of the project.

Environmental Considerations

80. The transmission and distribution investments would be designed andcarried out in accordance with the current technological practices and areexpected to cause minimum disturbance to the environment. Also, PLY wouldcoordinate the routing of the lines and the land acquisition with localauthorities to reduce their adverse impact. No environmental hazards areforeseen.

- 27 -

PART V - RECOMMENDATIONS

81. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank and recommend that the Executive Directors approvethe proposed loan.

Barber B. ConablePresident

AttachmentsDecember 18, 1986Washington, D.C.

-28 - M I

IICOCIA - ECONOMC IISICATS Fe. I of 2

X ..... ...... ........... ....... 0 _ _. _.... _ _..

Plemn I 35".=2 IllIwIco (.1449low)

p..re Capita, i ISGO DOES3 .a.ooSi")

Annual *,-.t rats (1) (at eo.Ltent 1963 prig")

Aemur r"r %i, ..... ....... _..................................................... ...... ........ ............... ................ __.___....__._._(milIion UN ati Actuam ALo Proj.csod

lhdigtr 1,1113 1961 196i2 1655 1904 I S flft 3967 IC" 3two 3000 13

afltNAL ACCOLEIOre". dmatis pro.dut /s 63,076 7 4 -0.3 a a a 1 1 0 2 k 7 20 * a 5 1 43

Ariculture 19.4 4 a I71 I i a9 32 11 21 30 3 0 30

Industry 29.457 is -s.1 2.0 aA -33 -i 0 27 35 A* a; JI3or.iaea 32.152 12.1 7.4 *a a: a a0 a Io 25 35 40 50

Consumption W.TL2 117 2.1 -0 1 I0 30 -19I I2 L? 32 3a 49

.Ore I--o oten%t 2210? 32 9 0.3 10 * aa -i2 -12 3 -04 43 3? 53 63Eaport- of GS 21949 -9.5 -L0.0 14.5 4.6 -2 5 0 a 34 45 a0 27 13

teorts of 0WS 2i.7?3 ;0i a * -13.1 -10 2 -7r -16 3 -0a5 3 33 33 4a

Crms .astional s.i.p 37."6 41 7 -13.3 19.0 23 3 -21 13? 14 39 a6 45 2a

PrICES

COP doflator (1963.1001 62 5a 100 1OS 104 lO0 ii? 122 126 130 lil

Eahc,Og rate (RP Par Liss) 532 553 09 1025 111 1412

She,r of CDP at -orht pr.c.. ( A .. a.. go nnu i ,-cr-a (6)

(st eurrvnL Priico) /e (at eoeotAot 1963O pr.ca)- -- _.-_ -- ----- _ _- -- -..- --------- _ _ ---- -- ------ --- _ _ -- - --- ......... .. ........... _... ... _. .. .. _.........._.._._. . .

1470 l20s 19 t 1968 2090 1995 1970-75 ls18-0O ieeO-ma lw6-90 1990-95_~~~~~- - --- --- . . -- _._-- _______ ___.. ........ ------- - -- _-_ ....... ------

Cross dwaast.i product 100 100 1t0 100 iD0 10o a 7 4 3 6 24 3 9

Arcutul.ura 47 32 25 24 24 23 41 33 34 23 30 Industrir 36 3 41 35 as 34 130 96 aa 2 4 3OSir.ceo 35 3J 35 40 40 42 97 95 *6 2 3 5 e

C.u..Pt;_-- m9 10 71 70 57 as *' 02 34 a5 42Cropsu,n.satsot 14 20 23 25 22 24 163 122 50 -03I S E.Port m of CNFS 23 23 32 26 25 25 92 20 -12 '2 13

I-Port of OWF -16 -22 -2? -21 -17 -1I 22 1 1 0 - 5 -2 1 43

Crosn not. eanl so. nfo 9 1? 25 24 29 28 23 1 14 2 3 4 59 3 5

As S of COP

1970 ~~~~1075 1980 12GM

RELIC F l1hCCE lbCurrant r.a..o. 10 1 174 209 224

C.,rrnt esad,ture 5 4 9 I 11 e £5 3

Surpluo 1 6 7 5 90 73

Captal opsd.turo 5 0 11 3 12 1 10 2For-.qn *iane.s 3 5 3 3 I 2 0

1970-15 1411-40 1960-"5 1985-90 1090-45

T071 INDICATORS.... _.._..........

Arnnu 04D *ronth rate (5) 7 6 7 1 3 a 2 7 4 0

Annual tWp .r,so ta oro th rat () 5 I 4 7 1 2 0 6 I 9Annual .- ttgy counpti@ lgroath rote (3) 11 2 Li 0 N A N A N A

ICOR 2 2 3 3 79 9 2 5 9

Maro.nal mc ngo rots 0 48 0 26 0 23 0 63 0 25

lpportlt e tr 2 a 0 84 -0 42 -0 71 3 10

Vs At morkat pr-eslb C-nt.sl Coe-rn-t M1y. On fatal f ss' bass

ft At constant prc-. fC- 1980 onEput A. a -4 P e V e Ro-g.ol Off-Co

Ocoobor U1954

- 29 - II A - SALMCE OF e AWOETI * DtTL CAPITAL *Me OCT _

. ....................... ......... ,:............. ne It of, 2(LjS alIisn. at current poises)

Population i i1.52 m111lon (mid-l3)C psr CapitAa tlUS (160 seItwlsta

AC Eat. Projest.d.... .................................................... ... ....- ,............................ . ......................... .........

1962 1uS 5It 1264 1UB lgg 1q37 164 16ie l660 104S

6ALNMC OP PAWHID i s......................

1 bpot g.,306 19. 172 20,2921 20 ,9 36.312 34.300 37311 19.730 21.334 22,243 33,374(a) ail and LMI ({m-a) 16,42A 14,744 14.449 14.436 12. 51 6.27 .C45 10.60 l2.072 11,219 14,672(h) N*noll 4. 170 D. we 5*170 *we maw six *aua JU*42 e02ns emsN2 1u1i1(a) Nli ale5 a 472 575 IU3 s0 776 U7 1.I33 1,15U 1,eS

2 laperl 22Cm 2_,66 20,126 17,824 IS,16I 15.060 15.604 16.510 17.35, 10,619 26,i23(a) ail asetr 5.407 4,602 3.311 2,948 3.241 2.477 2.602 3,179 3.367 3.57T 5J360(h) Nono1 I laponta 14.581 15.624 14.248 12.705 11.010 10.42 10.661 11.067 11,575 12.134 17.665(c) Ws 2.617 2.218 2.042 2,374 2,290 2.120 2.250 2.314 2.385 2,463 3.367

3. Assures halance 424 (38667) l65 3,011 2.733 (760) 1,82 3.16 S. 777 4.046 6.7514. Factor ara.Icaa (3.206) (38.0) (4,52611 (5.0145) t4l7u (3.585) (4.364) (4.999) (4. O4) (5.106) (6.72'3

[a) "aslipta 1.673 L1.0t 666 we 743 669 799 7`6 744 666 63(2) Patoants (4.86) (4.729) (8,425) (6.0412 (8.512) (4. WS) (8.163) (5,7U9) (5.72) (3.778) (7,150)

5. Capital gants 67 ION 95 100 120 111 1o0 1bO 150 I2O 106. blanea gn currant * aeount (2.717) (P.162) (4.270) 11.846) (1.6943 (4.301) (2Q.82) (I M58) (1,066) £912) 1777. Dirct foreign in.eatasnt 142 312 143 245 2eo 250 325 425 49 562 1IJI3a. Pulilc N A LT lea 1.640 2.711 3.873 2,e6o0 1.160 8,23 2.157 1.122 1.004 927 75

. Ethor capital (not) (28S) 61o 1.qa3 (357) 949 637 (330) (WQ) (203) (356) (726)10. Changs in roar-s. (- inrease) 93 3.330 (I.669) (639) (515) 176 5am 442 (2343 (220) (659)II Hot official raarn- 6.35a 4 a .004 4.613 5.332 5.847 5.671 5 .26 4n719 4,653 5,113 7.76

la-aresa in anna. of noen;Iimoet.I NFS 4.4 2.0 L a 4.3 5.3 54 4 6 4.2 43 4 2 44

HeNs,rsnda Its.

Nat foreign mats of thehanliage arstsa lh 10.622 6,321 6,488 9.376 10.825 10.440 993,6 9,467 9.731 9,651 14.419

Total rm-r-a in renAiL Ofnonol ipor. * iFS 7 3 4 2 6 2 7.7 6.6 66 6.2 6 6 4 * a2

--OX ML CAPITAL AND OMT Ic

Gross Diahub,aaents 2.673 4.192 *,e96 3.645 8.524

Cncausi -ol Loan. 764 86" 60 S62 600

siHtarI1 716 so0 541 4*6 531IDA 69 73 60 54 Uatu- 6 6 a l 33

bononca... ioil Loas 1.6879 3.503 4.357 3.263 2,625

off. Cil .#eat erC, ts 170 II7 A" 404 122lo 32' SOS 45 772 736Othe, ultilatral 6S 122 Lao 185 166Pr..ata-aou. I.3 Q 2.334 3.220 3,944 1'698

E.tsrnal Dmb1 /4

D.bt outsnding A dirb. .4d 15,570 10e313 21.467 22.672 26,642Off.eisl.-ourea 10.059 11,113 12.034 12.824 2d.974

f which IBRD 1,306 1.735 2.123 2.793 3,375Prinata-acu,ca 5s,63 7.402 Q,649 10.049 21, 5B

Und.bsurssd debt 11U367 12.670 13,778 13.973 15.095

Dabt Seneca

otl a rw-ca payment. 2.047 2.246 2.548 3.251 A,.o9of h. ch IBR 146 207 254 316 420

I1.tdraat (994) (1.145) (1.255) C3,624) (21,654Panass ma 1 *.oorta / 8-2 12 1 12 0 46 176Total debt *.ric. rat,o /f 10 4 16 4 I 7 194 23 7

A-ra. Intarat Rat -ono- La .. n- C) a7 2 7 6 1 6 1 I

Ofhei-l-o.,-cs, 6 6.8 6 7 88 7 6Pri,ata-ao. . e. O4 9.5 a a 4a a

A-rao. "t-atu of Na. Loans (Ysara) 25.5 15.2 15-1 259 I s9

Official-urn. 20 5 20 6 22M3 20.9 217Prinata-aourc. 21 I 11 I 10 3 6 2 7 6

A. S Ofra outsanding at .ad of 1265aturi,y atruetuer of d.ht oLtatading --------- -------------------Hatunitian dud witin 8 Ja 3eNturitia due within 10 yasra U7

Interest trocts'. of d-b2 ostatandLngIntarast du. withia f.at ..sr, A 5

/a On an Aer I-to-Msrch fiacal Yaar baai.lb lnlqudes foreign -assaL of daoait asy b-nk- in addition to offic-ai raaor.n/c E-cludse nrnasts noneuaranta.d loans and LiC s-Panaion./d At and of period/a Oil saports traatd on gro. baia. EaPorts includa aar..csa Debt marnics aacluds r-PayarnLt of ayndcatsd loan- in 1985/f Inclvd.a pri-at nongua.antead loan..

Ebat Ass* and Pao;f.c Ragonal 0f' c.Uaeab-r 1QB6

- 30 - ANNEX II

Page 1 of 4 pages

THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1986) Ia

Loanl Amount (USs million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

Forty-one Loans and forty-five Credits fully disbursed 1,950.45 819.70 -

1578 1978 Tenth Irrigation 107.00 - 16.341604 1978 Nucleus Estate and Smallholders II 50.50 - 4.711653 1979 Third Urban Development 53.60 - 5.341707 1979 Transmigration II 54.00 - 28.141108 1979 Eighth Power 169.00 - 25.461709 1979 Second Water Supply 35.49 - 3.56946 1980 Yogyakarta Rural Development - 12.00 5.351751 1980 Nucleus Estate and Smallholders III 92.00 - 15.67995 1980 Fifteenth Irrigation - 37.40 3.77996 1980 National Agriculture Extension II - 39.00 14.491811 1980 Fourteenth Irrigation 116.00 - 28.321835 1980 Nucleus Estate and Smallholders IV 30.00 - 14.421840 1980 National Agricultural Research 35.00 - 31.321872 1980 Ninth Power 235.00 - 39.821898 1981 Smallholder Coconut Development 25.00 - 1.791904 1981 University Development 45.00 - 20.801950 1981 Tenth Power 250.00 - 7.161958 1981 Swamp Reclamation 22.00 - 9.891972 1981 Fourth Urban Development 43.00 - 17.332007 1981 Nucleus Estate and Smallholders V 134.00 - 75.072049 1982 Jakarta-Cikampek Highway 85.00 - 60.762056 1982 Eleventh Poser 170.00 - 30.472066 1982 Second Seeds 15.00 - 8.92

/a The status of the projects listed in Part A is described in a separate report onall Bank/IDA financial projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30 and October 31.

- 31 - ANNEX IIPage 2 of 4 pages

Loanl Amount (US$ million)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

t

2079 1982 Bukit Asam Coal Mining Development andTransport 183.70 - 48.49

2083 1982 Rural Roads Development 85.00 - 31.022101 1982 Second Teacher Training 79.59 - 54.112102 1982 Second Textbook 25.00 - 18.652118 1982 Sixteenth Irrigation 37.00 - 13.632119 1982 Seventeenth Irrigation (East Java 70.00 - 30.10

Province)2120 1982 National Fertilizer Distribution 40.09 - 3.462126 1982 Nucleus Estate and Smallholders VI 55.50 - 41.232153 1982 Coal Exploration Engineering 25.00 - 11.922214 1983 TweLfth Power 300.00 - 203.852232 1983 Nucleus Estate and Smallholders VII 138.90 - 130.352235 1983 Provincial Health 27.00 - 20.152236 1983 Jakarta Severage and Sanitation 22.40 - 18.442248 1983 Transmigration III 101.00 - 40.352258 1983 Public Works Manpower Development 30.00 - 22.352275 1983 East Java Water Supply 30.60 - 12.362277 1983 Fifth BAPINDO 208.90 - 117.412288 1983 Transmigration IV 63.50 - 58.162290 1983 Second Polytechnic 107.40 - 103.062300 1983 Thirteenth Power 279.00 - 144.312341 1984 Third Agricultural Training 63.30 - 42.392344 1984 Nucleus Estate and Smallholder Sugar 79.20 - 43.322355 1984 Second Non-Formal Education 43.00 - 30.412375 1984 Second Provincial Irrigation Dev. 89.00 - 44.762404 1984 Highway Betterment 240.00 - 138.162408 1984 Fifth Urban Development 39.25 - 30.872430 1984 Third Small Enterprise Development 204.65 - 27.202431 1984 Second Swamp Reclamation 65.00 - 60.332443 1984 Fourteenth Power 210.00 - 184.231950-1 1985 Supplemental Loan for Tenth Power

(1950-IND) 50.00 - 8.382472 1985 Secondary Education and Management

Training 78.00 - 72.87

-32 - ANNEX I}Page 3 of 4 pages

Loan/ Amount (US$ milLion)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

2474 1985 Upland Agriculture and Conservation 11.30 - 11.272494 1985 Smallholder Rubber Development II 131.00 - 130.982529 1985 Fourth Population 46.00 - 45.312542 1985 Second Health (Manpower Development) 39.00 - 38.662543 1985 Kedung Ombo Multipurpose Dam and

Irrigation i56.00 - 150.632547 1985 Second University Development 147.00 - 147.002560 1985 West Tarum Canal Improvement 43.40 - 43.012577 1985 National Ports Development 111.00 - 109.732578 1985 Transmigration V 160.00 - 159.562599 19R6 Science and Technology Training 93.00 - 88.902628 1986 Smallholder Cattle Development 32.00 - 31.742632 1986 Second East Java Water Supply 43.30 - 43.302636 1986 Second Nutrition and Community Health 33.40 - 31.972638 1986 Nusa Tenggara Agriculture Support 33.00 - 33.002649 1986 Central and West Java Irrigation 166.00 - 166.002690 1986 Gas Distribution la 34.00 - 34.002702 1986 Export Development /a 64.50 - 64.502705 1986 Manpower Development and Training 58.10 - 58.102717 1986 Highway Maintenance and Betterment 300.00 - 300.002725 1986 Housing Sector Loan /a 275.00 - 275.002748 1987 Third National Agricultural Extension 70.00 - 70.00

Total Bank loans and IDA credits 8,835.19 908.10

Of which has been repaid -671.36 -26.22

Total now outstanding 8,163.83 881.88

Amount sold to third party -57.56 -

Total now held by Bank and IDA /b 8,106.27 881.88

Total undisbursed /c 4317.20

/a Not yet effective.7i Prior to exchange adjustment.7- Includes loans not yet effective.

33 - ANNEX IIPage 4 of 4 pages

B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1986)

Fiscal Loan Equity Totalyear Obligor Type of business -- ([1$ million) --

1971 P.T. Semen Cibinong Cement 10.6 2.5 13.11971 P.T. Unitex Textiles 2.5 0.8 3.31971 P.T. Primatexco Indonesia Textiles 2.0 0.5 2.51971 P.T. Kabel Indonesia Cable 2.8 0.4 3.21972 P.T. Daralon Textile Mfg. Corp. Textiles 4.5 1.5 6.01973 P.T. Jakarta Int. Hotel Tourism. 9.8 1.6 11.41973 P.T. Semen Cibinong Cement 5.4 0.7 6.11974 P.T. Primatexco Indonesia Textiles 2.0 0.3 2.31974 P.T. Monsanto Pan Electronics 0.9 - 0.91974 P.T. PDFCI Dev. fin. co. - 0.5 0.51974 P.T. Ramaltex Textiles 2.4 0.6 3.01976 P.T. Semen Cibinong Cement 5.0 1.5 6.51976 P.T. Semen Cibinong Cement - 1.1 1.11977 P.T. Daralon Textile Mfg. Corp. Textiles 0.4 - 0.41977 P.T. Kamaltex Textiles 1.3 0.2 1.51979 P.T. Daralon Textiles 0.9 - 0.91980 P.T. Papan Sejahtera Capital market 4.0 1.2 5.21980 P.T. Indo American Industries Glass dinnerware il.1 0.9 12.01980 P.T. Semen Andalas Indonesia Cement and construc-

tion material 48.0 5.0 53.01982/5 P.T. Saseka Gelora Leasing Capital market 5.0 0.3 5.31984 - P.T. Semen Cibinong Cemenc 25.0 - 25.0

Total gross comitments 143.6 19.6 163.2

Less: sold or repaid and cancelled 116.7 8.1 124.8

Total held by IFC 26.9 11.5 38.4

34 - AENEX IIIPage 1

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Section r: Timetable of Key Events

(a) Time taken to prepare the project: One year

(b) Project prepared by: PLN

(c) First presented to the Bank: October 1984

(d) Departure of the Appraisal Mission: November 1984

(e) Postappraisal mission: September 1986

(f) Completion of negotiations: November 1986

(g) Planned Effectiveness: May 1987

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

(a) PLN would undertake a transformer relocation program (para. 47);

(b) PLN would acquire land for substations end rights-of-way for trans-mission lines in accordance with a satisfactory schedule (para. 48);

(c) PLN would review annually the transmission and substation plan,commencing December 31, 1987, to identify changes necessary, andsubsequently reflect the changes in the plan in a manner satis-factory to the Bank (para. 49);

(d) The execution of a subsidiary loan agreement between the Governmentand PLN would be a condition of effectiveness (para. 55);

(e) The Government and PLN would take all actions necessary to enabLePIN to achieve an 8% ROR for its Java operations by no later than1988/89 and thereafter (para. 70);

(f) PLN would take all actions necessary to achieve break-even in itsoperations outside Java by no later than 1989/90 (para. 70);

(g) A satisfactory action plan would be implemented by PLN forcontrolling and reducing transmission and distribution losses in1986/87 and thereafter (para. 70); and

(h) PLN would carry out, in consultation with the Bank, an action planfor efficiency improvements for all of its operations (para. 70).

ICn,, THAILAND ' 110 I V

'Z' Banda MobhI-"

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|-..c>-SINGAPOREJ * Tbnjung Pinang N A SdF F lf N

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S V 4M A r zf R A bagnungpnundon S 5OUV Hf R N .K A I 14 A IVrA N

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Tulukbaluuq, / Ujung F

/ JAKARTA

Sa-loW JAWA

- ,iluhiO cir" iw'umrong MADURA

Bandwqg ° Komo)ono 3

otgko to Suraboyo

Paitorp BAL1 SUMOAWA

JAWA oKakaf s, oewo? Slum

Denpaoar LOMbllO

*t aPd acsiI vbm n s S t a. of fle hrUflrA ndlA Wsniawulxr

-COena The naptuLm_w und Ills boazane hu wn ao - l p na aotnI Me Hd of The WbS fI NtW M IiNabld flimm Cnuzoflm mh'4utv* a.b of aww arfty or rw waiman or smeua of sugr be_wdws

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.- .. 4 INDONESIA

PHILIPPINES - - PLN GENERATING CAPACITIES BY REGIONS

C~ / .nMACH1 1D.-" w ~IAL,_I1W ZISOL.ALLID MW 0li,Nt WILA VAN NiMltts

S S - v-l Y WILAVAM BOUNOAIIS

S WILAVAM MtACQUAFITINInm - PD

,,, ., - - l dINMNATINAL NOUNDANhIE

\' ~~~~~~~~~~ ~~~~~~~~~~~/ *'1 hiM' ' l/ TOI 4311e

Menado I'.. d I I

S .A tAMAHfEA'A

Goronfolo / ~~~~~~~~Moafkwar,

* ~ ~ ~~~~~~~I /

I ~~~~~~~~~~~2ni ~~~~~~~~~~~~joyapurO* \ la.arUhSdF

'--ULAWESI y1 [' \\Fok X Nobre fR/A IV I AA )A4

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Vill ~~~~~~~~~~~~~~~~~~Kokonasu Aqats ! 3I.Pandon*n

'- - ~~~~~Boubou f

N

xi At ounr ombuo<

,~~~~ ~ ~~~~~~~~~ R o 0ol 200 3WO 400 SWt toSlobg.pu RMIEES

-: Susr aliipu 2 tt 00 3s000 . ,30 4y 0,0 500 toSLifIA ~~~KupongMIEo 30 00 2 0 30 600 !jI 60 790 500_IO

KILOMETERS

12r 125' 130' 135 140-

OCTOBER 1986

100' 1tr

SUMATERA

Kra&mIka Smtee

c Ra ngg/ id.b lu cI-

[c JJAIGXRTA i ran- ; > Rorsl~~~~~~~~biursX =_Iorlorny

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Rowulao_

toe' cn.9 R4hbumua, ~~~~~10b _

JAKARTA

t u farn An* o Prick Marunda

Ir pKaaridng SEMARANG t r

Nalogadung Int6 Sa p KudeauPalo ikmn SURABAYA

~t 5s; M PendakibUDem kClk« \1<~~~b Kelap. Pefrckimniat

S. Harbour SLaniang / Gralk|\ Ganul ankaua , Well

UngKran

Kr '

- / \ A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Mcra

IBRD 17207R2110@ 1|7* 114

INDONESIAPOWER TRANSMISSION AND DISTRIBUTION PROJECT

MAJOR POWER PLANTS AND MAIN TRANSMISSION LINESUNDER CONSTRUCTION

(COWMITTED FOR FUTURE PROPOSEDERISTINO COMPLETION BY 1917) DEVELOPMENT PROJECT

Tronsmission Lines;500 kV150 kV + 70 kV

* 111 Power Stations* 500 kV Substations* 0 * O150 kV 4- 70 kV Substations

XIV PLN's Wiloych Numbers6 Wiloych or Distribusi Headquarters

.. ..... PLN's Wiloyah Boundaries

SEMARANG J Rmai

P.k ' gm -I Ponin Tt SURABAYAStore

IAWA1 n * T

| I ! ,.s s ... ,.- c w solons toI S M,c. . 5v.

G Wcttmotebo _ . : /5 GrnModura PChO=lncg<ag~ Salailga°\BO b IS.pOng

Bkobck EAST JAWA

Vies W a. j Sa' o. xott_Pmwas II _

ono . t Wana.or.~~~~~~~~~~~~~~~~~ag

Paiton ~- -- ieubondo

110. no~~~~~~~~~~~~~VAr3 Bondo-we

Wmn&t Lunrajang

Ce)and\.

0 5IS 1O 150 KILOMETEltSW Mu I I --- tI

| 2 \ ~~~Suklxdlc 0 20 JO o0 80 100 MILES

t: ,:D'CE\- . BI

jp . - = ~~~~~~~~~~~~~~~~~~~~~~~~DEC EM13ER 19816

i.