Document o f The World Bank

____

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

Report No. 29905-ID

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$SO MILLION

TO THE

REPUBLIC OF INDONESIA

FOR A

DOMESTIC GAS MARKET DEVELOPMENT PROJECT

November 10,2005

Energy and Min ing Development Sector Unit Infrastructure Unit East Asia and Pacific Region

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CURRENCY EQUIVALENTS (Exchange Rate Effective - June 30,2004)

Currency unit = Indonesian Rupiah Rp. 8700 = US$1

FISCAL YEAR January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

AAA Analytical and advisory activity ADB Asian Development Bank AMDAL Analisis Mengenai Dampak Lingkungan Hidup

(Analysis o f Impacts on the Liv ing Environment)

bbl Barrel B P H MIGAS Badan Pengatur Hilir Minyak dan Gas

(Oil and Gas Downstream Regulatory Body) BPK Supreme Audit Board CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CNG Compressed natural gas COZe Carbon dioxide equivalent ComDev Community development CQS CR Current ratio D O Development objective DSCR Debt service coverage ratio ECO Enviroilmental coordinating office EIAR Environmental impact assessment report EIB European Investment Bank EIRR EMP Environmental Management Plan EO1 Expression o f Interest EPC Engineering, procurement, and construction FMR Financial monitoring report FO Fuel o i l FY Fiscal year GO1 Government o f Indonesia GPN General Procurement Notice IBRD International Bank for Reconstruction and

Development ICB International Competitive Bidding IFC International Finance Corporation IP Implementation progress IPO Initial public offering

Selection Based on Consultants' Qualifications

Economic internal rate o f return

I T JBIC km KPKN LPG mmBtu mmcfd M O E NCB NGO NPV O&M PDO PGN PIU P M C PSC QBS QCBS RFP ROR

RVP SBD SBU SCADA SFR SO2 SPN TA tcf TGI TOR TSP VAT

RP.

Information technology Japan Bank for International Cooperation Kilometer National Treasury Offices Liquefied petroleum gas Mi l l ion British thermal unit Mi l l ion cubic feet per day (gas) Ministry o f the Environment National competitive bidding Nongovernmental organization Net present value Operation and maintenance Project development objective PT Perusahaan Gas Negara (Persero) Tbk Project implementation unit Project management consultant Production-sharing contract Quality-Based Selection Quality- and Cost-Based Selection Request for Proposal Rate o f return Indonesian rupiah Regional Vice President Standard Bidding Documents Strategic Business Unit Supervisory Control and Data Acquisition Self- financing'ratio Sulfur dioxide Special Procurement Notice Technical assistance Tri l l ion cubic feet PT TRANSGASINDO Terms o f Reference Total suspended particulate Value added tax

Vice President: Jemal-ud-din Kassum Country Director: Andrew D. Steer

Task Team Leader: Noureddine Berrah Sector Manager: Junhui Wu

A .

B .

C .

D .

INDONESIA

Domestic Gas Market Development Project

CONTENTS

STRATEGIC CONTEXT AND RATIONALE ............................................................. 1 1 . COUNTRY AND SECTOR ISSUES ....................................................................................... 1

2 . RATIONALE FOR BANK INVOLVEMENT ........................................................................... 3

3 . HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES ............................... 3

PROJECT DESCRIPTION ............................................................................................. 4 1 . LENDING INSTRUMENT ................................................................................................... 4

2 . PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS ........................................... 4

3 . PROJECT COMPONENTS .................................................................................................. 4

4 . LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN ......................................... 6

5 . ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION .......................................... 6 IMPLEMENTATION ...................................................................................................... 7 1 . INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS ............................................... 7

2 . MONITORING AND EVALUATION OF OUTCOMES/RESULTS .............................................. 7

3 . SUSTAINABILITY ............................................................................................................ 8

4 . 5 .

CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS ............................................. 8

LOAN~REDIT c ~ N D ~ T ~ ~ N S AND COVENANTS ................................................................. 9

APPRAISAL SUMMARY ............................................................................................. 11 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 .

ECONOMIC AND FINANCIAL ANALYSES ........................................................................ 11

FINANCIAL ANALYSIS .................................................................................................. 11

TECHNICAL .................................................................................................................. 12

FIDUCIARY ................................................................................................................... 12

SOCIAL ......................................................................................................................... 13

ENVIRONMENT ............................................................................................................. 14

SAFEGUARD POLICIES .................................................................................................. 15 POLICY EXCEPTIONS AND READWESS .......................................................................... 15

FOR OFFIcI[AE USE ONLY

This document has a rest r ic ted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

ANNEXES

Annex 1:

Annex 2:

Annex 3:

Annex 4:

Annex 5:

Annex 6:

Annex 7:

Annex 8:

Annex 8(A):

Annex 8(B):

Annex 9:

Annex 10:

Annex 11:

Annex 12:

Annex 13:

Annex 14:

Annex 15:

Country and Sector or Program Background ........................................................ 17

Major Related Projects Financed b y the Bank andor other Agencies ................. 20

Results Framework and Monitoring ..................................................................... 22

Detailed Project Description ................................................................................. 26

Project Costs ......................................................................................................... 34

Implementation Arrangements .............................................................................. 36

Financial Management and Disbursement Arrangements .................................... 40

Procurement Arrangements .................................................................................. 49

Clarifications Relating To National Competitive Bidding (NCB) Procedures ..... 54

An tic ormp ti on P1 an ............................................................................................... 56

Economic and Financial Analyses ........................................................................ 62

Safeguard Policy Issues ........................................................................................ 75

Project Preparation and Supervision ..................................................................... 89

Documents in the Project Fi le ............................................................................... 90

Statement o f Loans and Credits ............................................................................ 9 1

Country at a Glance .............................................................................................. 93

Maps ...................................................................................................................... 95

MAPS

1.

2 . 3 . 4 .

Overall Project Coverage and Other PGN Infrastructure

Map o f Greater Jakarta Zone (Zone 1)

Map o f Banten Zone (Zone 2)

Map o f Karawang Zone (Zone 3)

INDONESIA

FY 2006 Annual $ 5.0 Cumulative 5.0

DOMESTIC GAS MARKET DEVELOPMENT PROJECT

2007 2008 2009 2010 201 1 20.0 20.0 20.0 10.0 5.0 25.0 45.0 65.0 75.0 80.0

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASEG Date: November 10,2005 Country Director: Andrew D. Steer Sectors: Oil and gas (100%) Sector Manager: Junhui Wu Themes: State enterprise restructuring and

privatization (P); Infrastructure services for private sector development (S) ; Population management and environmental health ( S ) Environmental screening category: A

Team Leader: Noureddine Berrah

Project ID: PO77175

Lending Instrument: Specific Investment Loan Safeguard screening cateeorv: S2 Full Assessment

Y Y Y

Project Financing Data El Loan 0 Credit 0 Grant 0 Guarantee 0 Other:

For Loans/Credi ts/O thers : Total Bank financing (US$m.): 80.00

DEVELOPMENT ~ ~~ I I I

Total: 32.40 I 89.90 122.30

Borrower: Republic of Indonesia

Responsible Agency: PT Perusahaan Gas Negara (Persero) Tbk. J1. K.H. Zainul Arifin No. 20 Jakarta, Indonesia, 11 140 Tel: (6221) 633-4838 Fax: (6221) 633-3080

Project implementation period: 2006-20 1 1 Expected effectiveness date: March 3 1, 2006 Expected closing date: March 3 1, 201 1

Does the project depart from the CAS in content or other significant respects? Ref. PAD A.3

nYes No

Does the project require any exceptions f rom Bank policies? Ref. PAD D. 8 Have these been approved by Bank management? [s approval for any policy exception sought from the Board?

OYes H N o OYes UNO OYes UNO

MYes UNO Does the project include any critical r isks rated “substantial” or “high”? Ref. PAD C.4 Does the project meet the Regional criteria for readiness for implementation? Ref. PAD 0 . 8 H Y e s UNO

Project development objective Ref. PAD B.2, Technical Annex 3 Natural gas utilization expanded and air pollutant emissions reduced in West Java.

Project description Ref. PAD B.3.a, Technical Annex 4 The project comprises two components:(a) Distribution Infrastructure Expansion to increase gas use in West Java and (b) Capacity Building to upgrade PGN’s capabilities in management, infrastructure planning, marketing, distribution system safety and integrity management, etc.

Which safeguard policies are triggered, i f any? Ref. PAD 0.6, Technical Annex 10 Environmental Assessment (OP/BP/GP 4.01) i s triggered

Significant, non-standard conditions, if any, for: Ref. PAD C.5

Board presentation: None

Loadcredit effectiveness: Dissemination o f Financial Management Manual

Covenants applicable to project implementation: None

A. S T R A T E G I C CONTEXT AND R A T I O N A L E

1. Country and Sector Issues

1.1. Indonesia’s proved reserves o f natural gas, estimated at more than 2.5 tr i l l ion cubic meters (about 90 trillion cubic feet), are among the largest in the region. In 2003, gas production amounted to about 87 bi l l ion cubic meters (about 3 tr i l l ion cubic feet), o f which 58 percent was exported, mainly to countries in the region.’ However, gas consumption by power and small and medium size industries as proportion o f total energy consumption i s among the lowest in the region. Until recently, the laws and regulations governing the hydrocarbon sector sanctioned the dominance o f PT Pertamina’s (Persero) and PT Perusahaan Gas Negara (Persero) Tbk (PGN). They also allowed the government to interfere in the sector in ways that inhibited efficient operation and limited participation o f the private sector. Many o f the issues the sector faced under the previous legislative framework have been addressed by the 2001 Oil and Gas Law and the 2004 implementation rules and regulations. The law and regulations created an environment conducive to the removal o f the barriers to competition and private sector entry and to the development o f the gas sector and the domestic gas market. However, the sector i s s t i l l facing the fol lowing interrelated issues that hamper the rapid development o f a domestic gas market (see Annex 1 for details).

0 The structure of gas pricing in Indonesia i s distorted and results in inefficient resource allocation. The price of natural gas in the domestic market i s below i t s economic and market value reducing producers’ interest in developing this abundant resource for domestic use. The negative economic impact o f this inadequate pricing system i s compounded by the subsidized prices o f petroleum products. The implementation of the new Oil and Gas L a w i s proceeding slowly because of delayed issuance of the implementation regulations. The law has provided the basis for a progressive liberalization o f the gas market. However, i t s implementation has been slow because o f the delayed issuance o f the implementing rules and regulations. The Bank engaged the government on this pressing issue and the implementation regulations were enacted on October 18, 2004 paving the way for effective implementation o f the law. PGN is not fully prepared to operate in the emerging competitive gas market.

Under the new Oil and Gas Law, the three major segments o f the o i l and gas industry (production, transmission and distribution) w i l l be unbundled, open access to network services w i l l be allowed and eventually, a competitive gas market w i l l be developed. T o face these challenges, PGN i s planning for (a) further restructuring including strategic partnership with private sector to increasingly meet new investment requirements f rom i t s financial resources and standings, a major objective assigned to i t by the government; and (b) strengthening i t s management and operational practices and corporate governance to be ready to operate in the future competitive market.

0 Production-sharing contracts (PSCs) are not conducive to gas development. More than 90 percent o f Indonesia’s o i l and gas i s produced by the private sector, mostly by international o i l companies. Private sector investment in the sector i s almost totally governed by PSCs. The fiscal and nonfiscal terms o f Indonesia’s PSCs are mostly in l ine

0

0

’ Statistics of DG MIGAS, provided by PGN.

1

with international practice. However, many existing contracts s t i l l do not have provisions for gas discoveries and therefore no predictable basis for forecasting the value to the producers o f possible gas discoveries for domestic markets.

0 The transmission and distribution infrastructure i s underdeveloped. The country’s transmission and distribution infrastructure i s underdeveloped and constrains the development and expanded utilization o f this economically and environmentally attractive fuel. Progress toward a competitive gas market, as envisaged by the new Oil and Gas Law, requires further development o f gas transmission and distribution systems.

1.2. The broad objectives o f the Government o f Indonesia’s (GOI’s) policy to reform the energy sector are: (a) efficiency and reliability; (b) transparency and competition; (c) minimization of the use of public funds; and (d) environmental soundness. GOI’s strategy with respect to the above gas sector issues includes the following:

0 Phasing out of the subsidies and rationalization of energy prices. The prices o f petroleum products in Indonesia are heavily subsidized. Prior to the recent increase in o i l prices, the GO1 has implemented phased increases in fuel prices that led to a reduction in fuel subsidies and more rational energy product prices. Fol lowing a Presidential Decree in December 2002, the subsidies for al l products-with the exception o f kerosene-were to be fully eliminated b y the end o f 2004. However, the recent unprecedented surge in o i l prices has again widened the gap between domestic prices and current international prices and increased the amount o f fuel subsidies. The new government remains fully committed to addressing the o i l product subsidy and gas pricing issues and to developing and implementing a rational gas pricing policy. Full removal of fuel subsidies w i l l require more time than earlier planned and substitution o f domestic gas for imported fuels w i l l contribute to resolving this issue and benefit the economy and the environment. Recently the GO1 increased o i l product prices between 9 and 25 percent which resulted in a weighted average increase o f 12.5 percent. Establishment of an appropriate legislative and regulatory framework. Many o f the sectoral issues have stemmed from the previous inadequate legislative framework governing the energy sector. In November 2001, the government enacted a new O i l and Gas Law. The law gave Indonesia i t s f i rs t modern legal framework to fundamentally reform the o i l and gas sector, through (a) the gradual development o f a competitive market; (b) the establishment of an implementing body for upstream activities and an independent regulatory agency for downstream activities; and (c) the unbundling o f the traditionally vertically integrated o i l and gas businesses. The issuance o f the implementing rules and regulations on October 18, 2004 wil l l ikely speed up the opening o f the o i l and gas sectors to competition and further private investments. Restructuring of the Gas Sector. PGN has already unbundled i t s key transmission activities f rom i t s distribution operation. I t associated wi th several strategic partners to create a gas transmission subsidiary, and listed, in December 2003, about 39 percent of i t s shares in the Jakarta and Surabaya stock exchange markets. Further restructuring o f PGN to allow greater private sector participation in i t s operation and preparation for future sales o f i t s shares and assets i s under way. Production-sharing contracts. The new law and regulations provide for a competitive environment under which all gas producers could have direct access to consumers. The

0

2

absence o f a provision for gas discovery in the existing contracts w i l l be resolved gradually, on a case-by-case basis.

2. Rationale for Bank Involvement

2.1. Bank involvement and assistance to PGN significantly contribute to adequate and effective implementation o f the sound legal framework and policies developed with Bank support during the preparation o f the project. During project implementation, the Bank w i l l continue the ongoing policy dialogue and cooperation with GO1 and PGN on deepening the reform o f the energy sector to ensure adequate implementation o f the recommendations of the analytical and advisory and technical assistance activities joint ly carried out to date. The project w i l l focus mainly on (a) designing and implementing an effective gas pricing pol icy and, (b) further restructuring o f PGN to bring i t s corporate structure in l ine wi th the new Oil and Gas Law. Appropriate policies in gas pricing and the restructuring of PGN must be addressed “to improve the climate for high quality investments” to develop gas use in the domestic market. The Bank’s involvement would also assure that these two issues are addressed in a timely manner to meet the market needs according to international best practice and the government reform objectives. This would pave the way to further opening o f the sector and attract private sector financing to meet the sizeable investment needs to develop it.

2.2. The development o f a comprehensive gas pricing framework in relation to the cost o f production, transmission and distribution o f gas w i l l improve the transparency o f payment and allocation o f the rent. The revenues generated by the development of natural gas f rom the f ield to the final users w i l l allow the government and the regulator to make informed decisions in setting prices, taking into account efficiency and equity.

2.3. The GO1 has secured US$500 mi l l ion f rom private investors to Pertamina for further field development and US$485 mi l l ion f rom the Japan Bank for International Cooperation (JBIC) to PGN for a transmission project to increase gas supply to West Java. However, the government and JBIC agree that additional investment alone i s not enough to develop the domestic gas market. The Bank’s strong global knowledge and experience would be instrumental in addressing long term pol icy issues to develop and sustain the domestic gas market, I t was agreed that the JBIC would rely on the Bank to address gas pricing issues to support i t s project.

3. Higher level Objectives to which the Project Contributes

3.1. The most recent full Country Assistance Strategy (CAS), approved by the Board on October 29, 2003 (Report No. 27108-IND), focuses on assistance to Indonesia to overcome the l o w rate o f investment and to improve the weak public service, two major impediments to reducing poverty. The objectives o f the proposed project are fully consistent with, and give substantial support to, two of the five areas identified as essential to raise investment and improve (energy) services: fostering a competitive private sector and expanding Indonesia’s infrastructure.

3.2. The development and implementation o f a rational gas pricing pol icy wi l l improve the efficiency o f gas utilization, increase transparency, and create a more attractive environment for private sector participation, and thereby increase investment in the supply and utilization o f

3

natural gas. The restructuring o f PGN i s essential to ease entry into the growing gas market and to increase private investment in the gas sector. I t w i l l align PGN’s corporate structure wi th the new law and recent regulations, and prepare i t to operate in a competitive environment.

3.3. The physical expansion o f the gas infrastructure under the proposed project w i l l have a significant impact on alleviating infrastructure bottlenecks in Indonesia and improving quality o f gas service in West Java. The project supports the reinforcement o f PGN’s distribution system to increase potential supply to about 550 mmcfd, more than three times PGN’s gas sales in the region.

B. PROJECT DESCRIPTION

1. Lending Instrument

1.1. The proposed project involves expansion o f the gas distribution system in West Java and capacity building activities for PGN during the project’s implementation period. Most o f the loan funds w i l l be used to procure goods for system expansion through International Competitive Bidding (ICB). Lending instruments such as SECAL and APL were considered but were rejected b y the GOI. Based on i t s past cooperation with the Wor ld Bank, PGN selected a Specific Investment Loan as the most appropriate lending instrument. The variable-rate single currency loan selected by PGN during appraisal was confirmed by the Indonesian Delegation during negotiations.

2. Project Development Objective and Key Indicators

2.1. The proposed project would expand the use o f natural gas in the West Java market. The objective i s to improve economic efficiency and reduce pollution by substituting gas for more expensive and more polluting fuels, such as diesel, fuel o i l and coal.

2.2. In addition, to achieve this objective efficiently and sustainably, PGN wil l carry out and prepare for implementation o f ongoing studies focusing on: (a) rationalization o f the natural gas pricing system to induce efficiency; and (b) restructuring o f PGN to meet the requirements o f the new law, ease market entry and increase private sector involvement. The major related projects financed by the Bank and other agencies are listed in Annex 2.

2.3.

a a a

a

3.

3.1.

The key performance indicators, presented in Annex 3, focus on the following:

An increase in utilization o f natural gas; The reduction of air pollutant emissions; Finalization of the gas pricing study and development and implementation o f a rational natural gas pricing pol icy according to a schedule acceptable to the Bank; and Finalization of the PGN’ s restructuring study and development and implementation o f a restructuring strategy according to a schedule acceptable to the Bank.

Project Components

The project, described in detail in Annex 4, comprises two components:

4

Distribution Infrastructure Expansion: This component to be implemented b y PGN includes: (i) construction o f class 300 steel pipelines 4-16 inches in diameter wi th a cumulative length o f about 185 km along with control valves and corrosion control facilities; (ii) construction o f class 150 steel pipelines o f 4 to 16 inches in diameter with a cumulative length o f about 71 km, along with control valves and corrosion control facilities; (iii) installation o f five off-take and two pressure regulation stations; (iv) installation o f about 210 customer metering and regulating stations; (v) installation o f a Supervisory Control and Data Acquisition (SCADA) system; and (vi) provision o f radio and telecommunications equipment, information technology (IT) support, and emergency response equipment. The total cost o f this component i s US$108.50 mi l l ion including contingencies and value added tax (VAT), wi th IBRD financing o f US$76.80 million. Capacity Building: This component, to be implemented by PGN, involves assistance to PGN in upgrading i t s capabilities and staff s k i l l s in financial management, infrastructure planning, gas marketing, gas utilization, distribution system safety and integrity management, and gas transmission and compression. The total cost o f this component i s US$6.20 million, wi th IBRD financing o f US$3.00 million.

The total cost o f the project i s provided in Annex 5.

3.2. project:

Three o f the issues mentioned in section A-1.1 w i l l be addressed under the proposed

Pricing. The Bank has provided funding to PGN under i t s power sector loan approved in June 2003 (Loan No. 4712-IND) to conduct a study to develop a gas pricing pol icy to: (i) establish sound pricing and regulatory principles compatible with the government’s reform and macroeconomic objectives to increase the market orientation o f the sector, foster competition where feasible and safeguard consumers f rom monopoly abuses; and (ii) develop detailed transitional arrangements for a phased implementation o f these principles in l ine wi th the implementing rules and regulations. The consultants for the study have been selected and the study i s expected to be completed on or before March 2006. The important findings o f the study w i l l be used by PGN to prepare a pricing policy framework and gas transmission and distribution pricing principles and methodologies to be submitted to the government and the Regulator for review and consideration for approval2; PGN Restructuring. PGN has taken several actions to initiate unbundling of i t s structure (consistent wi th the Bank’s recommendation in previous operations and the new Oil and Gas Law), to include strategic partners in i t s transmission operation, and to offer equity shares to the public through init ial public offering (PO). The Bank, under i t s power sector loan approved in June 2003 (Loan No. 4712-IND), i s providing assistance to PGN to study alternatives to further i t s restructuring and be prepared to operate in the future liberalized market envisioned by the new Oil and Gas Law. The consultants for

* The implementation of a rationalized pricing policy for most part falls under the purview o f the newly established regulatory body. PGN wi l l consult and closely coordinate with the regulatory body concerning the principles and implementation o f the new pricing policy. As part the Pricing Study, the consultants w i l l provide P G N with international experience on price setting, open access and other mechanisms to increase the market orientation o f the sector. The experience w i l l be shared and discussed with the regulatory body and should lead to informed decisions during the implementation o f the agreed pricing policy.

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the Restructuring Study have been selected, and the study i s expected to be completed before the end o f June 2006. The key findings o f the study w i l l be implemented under the proposed project, as part o f the policy conditions discussed and agreed with PGN and concerned government agencies; and

(c) Infrastructure. The proposed loan w i l l finance the expansion o f the gas distribution network. Although the amount o f the loan i s relatively small (US$80 million), the proposed project w i l l have a significant impact in helping to alleviate gas infrastructure bottlenecks in Indonesia. The Bank’s involvement in the project leveraged more than US$l .O bi l l ion o f investment. This investment w i l l expand substantially the gas infrastructure for development, transmission and distribution o f natural gas, wi th potential supply of up to 550 mmcfd, or three times of current gas sales o f PGN in the West Java region.

4. Lessons Learned and Reflected in the Project Design

4.1 The objectives o f the Bank’s previous gas distribution projects in Indonesia were to expand the physical network as well as to enhance the efficiency and the financial position o f the implementing agency, PGN. Although these objectives were successfully achieved, ex post reviews o f these projects stressed that gas pricing and further restructuring o f PGN should be addressed to accelerate the development o f the domestic gas market. The current project addresses these sectoral issues after the government passed the Oil and Gas L a w and related regulations that paved the way for further opening o f the sector to new entrants and for increasing i t s market orientation.

5. Alternatives Considered and Reasons for Rejection

5.1 preparation:

The fol lowing alternatives were sequentially considered during the project design and

“Without Project” Alternative. Prior to engaging in this important investment program, PGN considered a less aggressive strategy o f converting small industries and businesses to gas, which entailed l o w growth of the Banten-West Java gas market and no expansion o f i t s distribution system. The “without project” alternative has been rejected for three reasons: (a) the expansion o f the gas market was in l ine wi th the government energy strategy to develop the domestic gas market because o f i t s economic and environmental advantages over o i l products and coal; (b) a market scoping study showed a strong preference o f small industries and businesses for gas; and (c) expansion o f the gas market would sustain the growth and strengthen the financial situation o f the company and reduce the need for petroleum products subsidies. Choice of Gas Supply. T w o alternatives were considered for gas supply: gas fields in South Sumatra, or small onshore and offshore fields in West Java. An Asian Development Bank (ADB) study found that delivering gas f rom the South Sumatra fields to the West Java market was preferable to relying on closer but limited and more costly to develop fields in West Java onshore and offshore. The gas reserves in the South Sumatra fields have been formally certified by a reputable international company at a level o f 3.85 tcf in the Proven and Risk Adjusted categories. These reserves can supply up to 500

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mmcfd o f gas for at least 20 years. The option o f transmitting gas f rom South Sumatra to West Java was selected.

5.2 Expansion of the Distribution System. PGN considered alternatives for the expansion of i t s distribution system by taking into account (a) the capacity o f the existing system; (b) the location and demand o f potential consumers (demand nodes); (c) the quantities and input locations o f gas (supply nodes); and (d) severe constraints on the right o f way in highly urbanized areas. The latter reduced the number o f alternatives for expansion to two, mainly differentiated by the pipeline diameters along the same routes to satisfy a demand o f 500 mmcfd in the first case and a demand o f 800 mmcfd in the second case. The f i rs t option would have required further reinforcement o f the system after 5-7 years to meet the full potential demand o f 800 mmcfd by 2016. I t was rejected because i t was less cost effective and would have entailed greater temporary negative environmental and social impacts.

C. IMPLEMENTATION

1. Institutional and Implementation Arrangements

1.1. PGN w i l l be responsible for the implementation o f both components of the project. I t has established a project implementation unit (PIU) with overall responsibility for managing and coordinating al l aspects o f the project. The PIU w i l l be supported by PGN’s central departments.

1.2. Funds for this project w i l l be borrowed b y the Republic o f Indonesia and on-lent to PGN in the currency o f the loan, in l ine wi th current government pol icy and on the same terms and conditions plus an additional “administrative” fee not exceeding one percent (1%). A Subsidiary Loan Agreement i s expected to be finalized between the GO1 and PGN for this purpose, as a condition for loan effectiveness.

1.3. Financial management and disbursement arrangements, discussed and agreed wi th PGN, are detailed in Annex 7. Procurement arrangements, discussed and agreed with PGN, are detailed in Annex 8.

Institutional and implementation arrangements are provided in Annex 6.

1.4. Furthermore, PGN has agreed to hire (a) a project management consultant to assist in the design and engineering, procurement, construction supervision, inspection of materials and works, and testing and commissioning, as wel l as overall project management related to the distribution component; and (b) a long-term technical advisor to assist in customer conversion and connection, system integrity management and technical s k i l l development and enhancement.

2. Monitoring and Evaluation of Outcomes/Results

2.1. PGN maintains a statistical system with sufficient data to monitor most of the outcomes of the project such as gas sales and number o f consumers converted to gas. Major pollutant and greenhouse gas emissions w i l l be calculated according to a methodology agreed with PGN and summarized in Annex 3. Results indicators such as progress o f construction work and progress on the restructuring and pricing studies, w i l l be monitored b y the PIU and reported in periodic progress reports to be submitted to the Bank.

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3. Sustainability

Risk

3.1 PGN has taken several actions to ensure the sustainability o f the project by contracting gas supplies f r o m different sources, preparing a customer conversion and ramping-up program, and committing to the implementation of gas sector reforms (including rationalization o f gas pricing system) to ensure optimal use of resources and further opening o f the gas market. Appropriate measures to mitigate the minor social and environmental impacts associated with the proposed and l inked projects have been developed by PGN and agreed by the Bank. These w i l l ensure the social and environmental sustainability o f the project, the safety o f the workers, PGN staff and the population during the construction period and the operation o f the system.

Risk Minimization Measure I RiskRating

4. Critical Risks and Possible Controversial Aspects

To Project Development

expected. Gas supply lower than

Customer conversion slower than planned.

The objectives of energy price rationalization not achieved because of lack of government commitment

Inherent risks arising from weaknesses in country control environment and financial accountability systems. To Component Results a) Insufficient counterpart funds available. b) Construction not completed on time

c) Procurement delays

Overall Risk Rating Risk Rating - H (High), S

4.1. The project’s overall risk i s expected to be modest.

Objective The gas source for th is project i s estimated at total proven and risk-adjusted reserves of about N 3.85 tcf, which would be sufficient to maintain a supply of 500 mmcfd for at least 20 years. PGN has signed a 12-year gas purchase contract with Pertamina, the gas supplier, for 250 mmcfd, which could deplete only 1 tcf of the above-mentioned reserves. PGN also signed a contract with Conoco-Phillips for 400 mmcfd to increase supply to West Java.

department, and a gas sale ramp-up plan was prepared at the Bank’s request. According to the study, more than 500 industrial customers who were surveyed expressed interest in switching to gas. The demand of these customers i s more than 600 mmcfd. However, because a lead time of about 12 months i s required for consumer conversion, the Bank suggested, and PGN agreed, start customer preparation as soon as possible prior to project appraisal.

system, and phasing out subsidies on the prices of oil products. Actions already taken, especially the enactment of the implementing ru les and regulations in October 2004 and the important increase of oil products prices in 2005, are clear indications of the government’s commitment.

project specific measures such as enhanced financial reporting and additional payment validation procedures.

A study on development of the gas market has been undertaken by PGN’s marketing M

The government i s committed to reforming the energy sector, rationalizing the energy pricing M

Continue country dialogue to expedite public financial management reforms and introduce S

PGN has secured financing from the JBIC for the transmission pipelines. I t has enough cash

PGN has a demonstrated management capability to plan and implement large infrastructure

N

M from i t s recent IPO to cover the capital cost not financed by the Bank.

projects. The transmission component i s well prepared and its construction commenced in 2005. Preparation of the distribution component i s also progressing well. A project management consultant (PMC) i s being hired to help PGN prepare and manage the project, and construction will be outsourced to qualified engineering, procurement and construction (EPC) contractors.

time to procurement tasks and to speed up the hiring of the PMC.

(Substantial), M (Modest), N (Negligible or Low Risk)

A procurement committee has been established. PGN committed to assign a core team full M

M

4.2. The project i s not expected to face any controversial aspects.

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5. Loadcredit Conditions and Covenants

5.1, Concerning pricing, PGN shall:

(a) (i) Prepare a draft gas pricing framework based on the findings and recommendations o f the Gas Pricing Study carried out under the Java-Bali Power Sector Restructuring and Strengthening Project; (ii) not later than March 31, 2006, furnish to the Bank for i t s comments said draft gas pricing framework; and (iii) promptly after receipt o f said comments, finalize said draft, taking into account said comments, and submit i t to BPH M I G A S (downstream regulator) for review, amendment, i f needed and consideration in view o f adoption; and

(b) (i) Prepare draft methodology and implementation rules for transmission and distribution tar i f fs based on the findings and recommendations o f the Gas Pricing Study carried out under the Java-Bali Power Sector Restructuring and Strengthening Project; (ii) not later than September 30, 2006, furnish to the Bank for i t s comments said draft methodology and implementation rules for transmission and distribution tariffs; and (iii) promptly after receipt o f said comments, finalize said draft, taking into account said comments, and submit it to BPH MIGAS and other concerned authorities for review, amendment, i f needed, and consideration in view o f adoption.

5.2. Concerning the restructuring plan, PGN shall:

(c) (i) Prepare a draft set o f procedures and implementation plans for “Third Party Access” consistent with the regulations o f the Republic o f Indonesia No. 36 o f 2004 regarding downstream business activities o f o i l and natural gas, which draft set shall include a standard contract form to be entered into wi th al l users o f PGN’s transmission and distribution network; (ii) not later than December 31, 2005, furnish to the Bank for i t s comments said draft set o f procedures and implementation plans; and (iii) promptly after receipt of said comments, finalize and adopt said set of procedures and implementation plans, taking into account said comments

(d) (i) Prepare a draft time-bound restructuring plan based on the findings and recommendations o f the Restructuring Study carried out under the Java-Bali Power Sector Restructuring and Strengthening Project; (ii) not later than March 31, 2006, furnish to the Bank for i t s comments said draft plan; and (iii) promptly after receipt o f said comments, finalize said plan, taking into account said comments, and thereafter implement said plan in accordance wi th i t s terms.

5.3. Concerning the investment program, PGN shall:

(e) Review with the Bank annually, commencing September 30, 2005, i t s rolling three-year investment program, and thereafter take al l measures required to ensure a rational investment program.

5.4. Concerning the financial performance, PGN shall:

i t s average three-year capital expenditures. ( f ) Generate sufficient revenue f rom i t s internal sources equivalent to at least 25 percent o f

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(8) Demonstrate that a reasonable forecast o f i t s revenues and expenditures for each fiscal year would produce sufficient net revenue to be at least 1.5 times i t s estimated debt service requirements.

(h) No t incur any debt, if after the incurrence o f such debt the ratio o f debt to equity shall be greater than 75/25 during 2006-2009 and 70/30 thereafter.

5.5. shall:

Concerning the financial management issues and financial monitoring report, PGN

(i) Furnish to the Bank an FMR, in substance satisfactory to the Bank, on a quarterly basis. The f i rs t FMR shall be furnished to the Bank not later than 45 days after the first quarter after the effective date, and thereafter at quarterly intervals not later than 45 days after the end o f each quarter.

5.6. Concerning the audit and accounting, PGN shall:

(j) Have i t s annual financial statements duly audited by public accounting f i r m s appointed by i t s shareholders in shareholders’ general meetings, in accordance wi th the provisions o f i t s articles o f association and prevailing laws and regulations in Indonesia.

(k) Furnish to the Bank as soon as available, but in any case not later than six months after the end o f each fiscal year audited the following: a certified copy o f the audited financial statements of PGN audited by the above auditor, including the auditor’s opinion on such statements, and management letters issued by the statutory auditor. Such audited financial statements shall include appropriate disclosures in the notes appended thereto on the amounts of Bank funding utilized during the period under audit, and copies o f project related internal audit reports issued to i t s management by i t s internal audit department, as wel l as other financial information as the Bank shall deem necessary.

Concerning the environmental and social aspects, PGN shall:

(1) Undertake the implementation of the project in accordance wi th the project’s Environmental Management Plan, the Environmental Monitoring Plan, and the Land Acquisition and Resettlement Policy Framework, al l in a manner satisfactory to the Bank.

Concerning the project implementation unit, PGN shall: (m)Maintain until completion o f the project, a PIU, staffed wi th qualified and experienced

officers, and provided wi th adequate funds and other resources as shall be necessary to accomplish i t s objectives.

5.7.

5.8.

5.9. Concerning the monitoring project performance, PGN shall:

(n) Maintain policies and procedures adequate to enable i t to monitor and evaluate on an ongoing basis, in accordance wi th the indicators set forth in para. 2.3 under section B (Project Description) the project objective achievements.

(0) Prepare an annual report on the above monitoring results and review it wi th the Bank three months after completion o f each report.

5.10. Concerning the progress report, PGN shall:

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(p) Furnish to the Bank not later than March 31 in each year, commencing March 31, 2007, and until completion o f the project, annual progress reports on the implementation o f the project.

D. APPRAISAL SUMMARY

1. Economic and Financial Analyses

1.1. Cost Effectiveness. A least-cost study on expansion o f the gas distribution network in West Java was undertaken b y PGN during the project preparation. The study considered different scenarios and configurations o f the distribution system expansion to achieve the optimal expansion plan to meet the future gas demand in the region. The proposed project i s part o f the least-cost plan to expand the distribution system for West Java region to supply up to 800 mmcfd o f natural gas by 2015. This demonstrates the cost-effectiveness o f the project.

1.2. Cost-Benefit Analysis. In addition, a cost-benefit analysis (without considering environmental externalities) was carried out to estimate the economic internal rate o f return (EIRR) o f the proposed project. The EIRR was estimated at 20 percent, i f benefits were valued at prevailing tar i f fs (base case), and at 59 percent, i f benefits were valued at future market value of displaced fuels. Net present values (NPV) at 12 percent are US$169 mi l l ion in the first case and US$1,152 mi l l ion in the second case. Sensitivity and risk analyses were carried out to assess the robustness of the economic viability o f the project in relation to the major perceived risks, such as increase in investment cost, delay in construction, reduction in benefits, and slow progress in consumer conversions. The sensitivity and r i s k analyses indicate that changes in the important variables w i l l not fundamentally affect the economic viability o f the project. Details are provided in Annex 9.

2. Financial Analysis

2.1 Overall, PGN’ s financial position in the past has been sound, including during the regional financial crisis. PGN’s current financial position based on 2003 audited financial statements i s presented in Annex 9 and summarized below:

(a) Revenues and Expenditures. In 2003, PGN generated a total revenue o f US$425 million, comprising: (i) US$350 mi l l ion (82.4 percent o f the total revenue) f rom sales o f natural gas through i t s distribution networks; (ii) US$74 mi l l ion (17.4 percent o f the total revenue) f rom fees earned for gas transmission services; and (iii) less than US$500,000 (less than 0.2 percent o f the total revenue) f rom sales o f liquefied petroleum gas (LPG);

(b) Assets. PGN’s total assets in 2003 were about US$l.08 billion, including current assets o f US$418 million. Cash and cash equivalent represented 54 percent o f i t s current assets, and short-term investments represented an additional 19 percent. The large cash account was the result o f proceeds f rom the multilateral or bilateral loan borrowing, a US$ l50 mi l l ion Eurobond issue, and a December 2003 public offering o f about 39 percent o f i t s shares;

(c) Liabilities. PGN’s long-term debt in 2003 was about US$330 million, mostly consisting o f “two-step loans,” owed to the government for the funds borrowed f rom the ADB, JBIC, European Investment Bank (EIB), and Wor ld Bank for i t s capital expenditures; and

PGN’s Financial Performance and Current Financial Position.

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(d) Equity. PGN’s total equity in 2003 was about US$390 million.

2.2 PGN’s Future Finances. Under the new O i l and Gas Law, PGN lost i t s self-regulated quasi-monopoly on gas transmission and distribution and, as the market progressively opens, w i l l operate in an increasingly competitive market. The newly established Regulator w i l l determine and regulate the tariff for natural gas distribution and transmission services. Further, the new law allows direct access o f gas suppliers to consumers, creates a healthier environment for competition and provides for a more efficient operation o f the sector in the future. It, however, has the potential to increase competitive pressure on PGN and reduce i t s current prof i t margin. For this reason, PGN’s financial forecasts are based on mutually agreed assumptions about growth scenarios for natural gas demand, constraints on PGN’s planned investment program, and pressure on i t s expected profit margin for gas distribution and transportation activities. Table A9.6 (Annex 9) provides a summary forecast o f PGN’s financial performance for 2004-09, including estimated income statements, balance sheets, and cash f low statement. Initial, unaudited figures for 2004 indicate that PGN i s on track to achieve i t s development and financial objectives. Revenues increased b y more than 20 percent as expected through the sale of nearly 300 mmcfd o f gas and the transportation o f another 420 mmcfd. Consequently, PGN had an operating income o f US$113 million, total income before taxes o f US$74 million, and after taxes o f US$55 mil l ion. Going forward, PGN needs to monitor their expansion plans carefully so that any adverse changes can be quickly mitigated with adjustments in their expansion plans.

2.3 taking into account the critical areas that warrant closer monitoring o f PGN’s future finances.

The financial performance covenants described in C 5.4 (f), (g) and (h) were determined

3. Technical

3.1. The project has been designed and w i l l be built in accordance w i th international standards and best practice to assure adequate security o f supply, operational flexibility, and safety o f operations. I t w i l l be provided wi th modem facilities for gas f low and pressure control, gas dispatch, gas flow measurement, gas quality monitoring, corrosion protection, IT support, and radio and telecommunications instrumentation. 3.2. PGN has implemented two gas distribution projects wi th Bank support and two gas transmission projects with ADB financing. I t developed a reliable database o f material and construction costs, which i s being regularly updated. The project costs are considered realistic and take into account recent variation in and escalation o f prices o f goods and services. The physical and price contingencies are based on PGN’s experience and are similar to those found in other developing countries in the region.

3.3. distribution system safety and integrity management up to international standards.

4. Fiduciary

The capacity building component of the project w i l l upgrade PGN’s capabilities in

4.1. PGN became a partially public company fol lowing listing o f about 39 percent of i t s share in December 2003. The company has successfully completed a due diligence process o f i t s internal processes, including financial management processes, that i s normally associated wi th an PO. I t i s also subjected to the financial reporting and auditing discipline normally applied to

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publicly listed companies in Indonesia, which i s relatively more rigorous than those applied to state-owned enterprises or government agencies.

4.2. The financial management assessment for this project has concluded that overall, financial management r isks are moderate and that i t would be appropriate to accept the entity annual audited financial statements for Bank purposes, wi th appropriate disclosures on the use o f the Bank funds. T o mitigate r isks associated with this project, several measures have been suggested in an action plan agreed with PGN, including the adoption o f quarterly F M R s , external audits b y leading private sector accounting f i rms, and strengthened procedures for validating and approving payments to contractors. With the implementation o f this plan, the financial management arrangements for this project would be acceptable. Results o f the financial management assessment and agreed arrangements are provided in Annex 7.

4.3. A procurement capacity assessment has been carried out and concluded that PGN has adequate experience and capacity to carry out the procurement activities related to the proposed project. The procurement risk i s rated as “average.” However, given the size and complexity o f procurement packages, as well as the relatively tight implementation schedule, external assistance (part o f the project management consultant’s services) w i l l be provided to PGN during the entire procurement cycle, including preparation o f bidding documents, bid evaluation, and contract execution. A brief summary o f the procurement capacity assessment and more details on the procurement arrangements are provided in Annex 8 and the report i s available in the project files. Clarifications relating to National Competitive Bidding (NCB) providers and an anticomption plan are attached in Annexes 8(A) and 8(B).

5. Social

5.1. There wil l be no involuntary resettlement and no impact on indigenous people or cultural property under the project. The adverse environmental and social impacts o f the project are minor. The gas pipelines of the project w i l l be built primarily in largely urbanized or industrial areas, all alongside existing roads. Businesses, residents and other facilities along the roadsides could suffer some temporary (up to one day) disruption caused by construction activities. In addition, there could be increased risk o f pedestrian injury f rom traffic accidents during construction because of physical obstruction or removal o f walkways. T o minimize these disruptions, PGN has standard operating procedures and prevention and mitigation measures in place. I t also agreed to compensate any affected businesses for loss o f income according to the Land Acquisition and Resettlement Framework agreed with the Bank during project preparation, In addition, PGN has a strong commitment to social responsibility and has supported the communities along i t s transmission and distribution right-of-way. In 2002, a Master Plan for Community Development was drafted to provide corporate guidelines on community development (ComDev) programs. In conducting i t s ComDev program, PGN has worked closely with universities, nongovernmental organizations (NGOs), and local governments, These institutions w i l l help PGN assess local need and play important roles in project implementation and in monitoring social outcomes.

5.2. The proposed project w i l l expand the supply and utilization o f natural gas and further competition in the domestic energy market and stimulate small industry development. During the project construction period, short-term employment opportunities for local unskilled labors

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wil l be created, and the revenues o f local small businesses may increase temporarily, because of expenditures on the part o f construction workers. The project w i l l also create permanent jobs in the project areas.

5.3. Consultation with the public at the local level i s an important component o f Indonesia’s AMDAL (Analisis Mengenai Dampak Lingkungan Hidup) process. During the project preparation, PGN convened three public consultations in Jakarta and several consultations in project affected areas with representatives from most o f the stakeholder groups: government agencies, property owners, local businesses, NGOs and academia. During the project implementation, consultation w i l l be governed by the AMDAL and Environmental Management Plan (EMF) processes. Subcomponents o f the project wi l l be screened b y PGN’s project team with the support f rom the environmental coordinating office (ECO) in order to determine their status under Indonesia’s AMDAL requirements and the Wor ld Bank’s safeguard policies and procedures. For al l the subcomponents and activities to be conducted under the project, public consultation w i l l be further carried out at the local level in the subdistricts where the project activities w i l l take place, as required by Indonesia’s AMDAL process.

5.4. In general, the social project team o f the PIU w i l l be responsible for monitoring the project performance in terms o f social development outcomes. The project team leader w i l l receive copies o f quarterly and special reports on general construction progress and any construction problems that may affect the local environment and community. In addition, PGN’s ComDev programs and external institutions involved in the programs w i l l help the project team monitor the social development outcomes.

6. Environment

6.1. Based on the Environmental Impact Assessment Report (EIAR) prepared b y PGN wi th the assistance o f local and international consultants, the project (classified A because o f i t s link to the JBIC transmission project) i s not expected to have any significant impact on natural habitats, forests or protected or sensitive areas. None o f the impacts f rom the construction or operation o f the pipelines i s l ikely to be sustained or irreversible. The major negative environmental impacts w i l l be temporary interference with the traffic in the project area and some temporary air and water pollution, as wel l as the removal o f vegetation during the construction o f the project. None o f them, however, i s l ikely to be major, sustained or irreversible.

6.2. The proposed project w i l l provide important positive environmental benefits. Natural gas i s regarded as the “cleanest” fossil fuel, producing considerably lower amounts o f particulates or oxides o f carbon, nitrogen, sulfur, and other emissions per unit o f energy provided than other fossil fuels. Most o f the targeted consumers are currently using other fossil fuels. So ambient air quality should improve and, in some cases, the air quality within factories should improve, with direct health benefits for the workers. In addition, Indonesia’s greenhouse gas emissions w i l l be reduced.

6.3 The proposed project i s linked to a transmission project financed by the JBIC. Preparations for the construction o f the JBIC project are wel l under way wi th construction planned to commence in first quarter o f 2005. The EIAR was prepared and approved by the Ministry o f the Environment (MOE) in 1999. It has been discussed and approved b y the JBIC,

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and was disclosed to the public fol lowing the AMDAL and JBIC's disclosure procedures. The approval o f MOE was reconfirmed in December 2003, and copies o f the EIAR, the EMP and the minutes o f discussions held between the JBIC and PGN were provided to the Bank during the preparation o f the proposed project. The EIAR and the process are considered as adequate.

7. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) H 0 Natural Habitats (OPIBP 4.04) 0 H Pest Management (OP 4.09) 0 H Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) Involuntary Resettlement (OPIBP 4.12) 0 H Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OPIBP 4.36) 0 H Safety of Dams (OP/BP 4.37) 0 H Projects in Disputed Areas (OPIBPIGP 7.60)3 El Projects on International Waterways (OPIBP/GP 7.50) 0 El

0 H

0 H

8. Policy Exceptions and Readiness

8.1. exceptions.

The project i s in compliance with all Bank policies and procedures. There are no policy

8.2. The project meets the readiness criteria for implementation:

0 Institutional arrangements for project implementation (PGNPIU) are in place. International consultants (project management consultant and long-term technical collaborator) for project preparation and implementation have been appointed and contracts to be financed under the proposed project through retroactive financing are being negotiated;

0 The conceptual design i s completed. Detailed cost estimates are available. The project implementation plan including detailed schedules has been prepared and submitted to the Bank;

0 A procurement committee for the project has been established by PGN. A detailed procurement plan has been prepared and finalized during appraisal. The bidding process w i l l start once the project management consultant i s appointed; and

0 The Gas Pricing and Utilization Study and PGN Restructuring and Privatization Study are financed under the Bank Loan No. 4712-IND, and the first results are expected by December 2005 and February 2006 respectively.

By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas.

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Annex 1: Country and Sector or Program Background INDONESIA: Domestic Gas Market Development Project

Indonesia has one o f the largest natural gas reserves in East Asia, roughly 20 percent o f the region’s total. Estimates put the total proved reserves at about 2.56 tr i l l ion cubic meters. However, the domestic gas infrastructure i s remarkably underdeveloped. In fact, Indonesia’s gas consumption by power and small and medium size industries as proportion of total energy consumption i s among the lowest in the region.

This reality i s particularly relevant since the country’s o i l reserves are declining, and the environment i s deteriorating because o f the use o f petroleum products and coal to meet the country’s industrial and power sector needs. Given i t s ample gas resources, Indonesia can stem this depletion and degradation-thus gaining significant economic and environmental benefits- i f i t moves faster to develop i t s natural gas sector and to expand the supply and utilization o f this fuel for the domestic gas market.

Indonesia needs to address the main issues impeding the development o f the gas sector and prepare a coherent and sustainable gas sector strategy to increase the use of this fuel substantially in the country. The fol lowing briefly discusses the substance o f the issues facing the sector, the government’s strategy to address them, and the Bank’s interventions to help the government in i t s efforts.

Pricing

The flawed natural gas pricing structure i s the first and the most important obstacle to gas development. However, the gas pricing issue cannot be addressed in isolation f rom the major issue o f petroleum product pricing subsidization. Therefore, the government agreed to give priority to phasing out the subsidies o f petroleum product first, and then begin to address the gas pricing issues.

The prices o f petroleum products in Indonesia are significantly below the economic cost o f supply and thus are heavily subsidized. In fact, the domestic price o f several products i s even below the cost of production. The Bank, under the “Indonesia Oil and Gas Sector Study,” provided a detailed analysis and recommendations for phasing out the subsidies for the f ive important petroleum products, while at the same time protecting the poor and avoiding disruptive macroeconomic impacts.

Since 2001, the government has taken major steps to reduce these subsidies considerably. However, soaring o i l prices in late 2003 and 2004 negated a l l the progress made to date and the ballooning subsidies regained the attention o f the government and the country and are now considered as one of the highest priorities o f the new government. Promotion o f gas and the implementation of a rational gas pricing pol icy became a central part of the strategy to reduce reliance on o i l products and phase out subsidies to create a fiscal space for funding the development o f the lagging areas.

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Legal Framework

Many o f the o i l and gas sector issues in Indonesia stemmed from the legal framework, which was in place until the end o f 2002: (a) Pertamina had a supervisory function on the activities of the private companies operating in upstream segment o f the industry and was, at the same time, supposed to compete with them, entailing a clear conflict o f interest, and (b) i t enjoyed (and s t i l l does) a virtual monopoly over a huge market in downstream petroleum activities. These issues led to inefficient operation and non-optimal exploration and production o f o i l and gas. They heavily contributed to the slow development o f the gas domestic market. Indonesia clearly needed new and transparent Oil and Gas Law (and the associated regulations) to improve sector efficiency, to provide incentives for greater utilization o f gas in the domestic market and to provide incentives for greater participation o f the private sector in downstream activities.

With substantial inputs from the Bank and ADB, the government prepared a comprehensive draft law and implementing regulations in early 2000. The law, enacted in 2002, opened the sector to competition, increased transparency and provided incentives for further involvement o f the private sector.

The law explicitly eliminates the conflicting roles and functions o f Pertamina, by removing i t s supervisory functions and transfening these to an upstream supervisory agency. Pertamina’s monopoly has been eliminated although de facto i t s monopolistic position continues given i t s market dominance. However, i t w i l l need to improve i t s efficiency and compete wi th new entrants to keep a market share in the sector.

With respect to the gas sector, the new law provides for (a) third party access to the transmission and distribution pipelines (to the extent they are wi l l ing to pay the regulated tariff); and (b) a new regulatory body (BPH Migas) for al l downstream activities, including regulating the transport fees for transmission and distribution pipelines, the gas price for household and small commercial entities, and the open tendering for new transmission and distribution investment.

PGN Restructuring

Prior to the enactment o f the 2002 Law, Pertamina was the only upstream supplier o f gas for the domestic market-either from i t s own concession areas or, as the government’s sole agent, f rom the concession areas of other production-sharing contractors. Further, until 1998, Pertamina was also the only transporter o f gas. In 1999 the government authorized PGN to also transport gas to meet the increasing demand; particularly by the small to medium-size industrial consumers (Pertamina s t i l l continues to be the supplier to the large industries such as steel, fertilizer, power and cement). Under the new law, PGN wil l ultimately operate in a competitive environment, including allowing third party access to i t s transmission and distribution network, to provide gas producers direct access to consumers. PGN (a) began to unbundle i t s structure, both functionally and geographically, and (b) took several steps to secure private capital, including jo in ing with several strategic partners for i t s gas transportation business and listing about 39 percent o f i t s shares through an PO. However, to meet the law’s requirements, PGN needs to further i t s restructuring and increase the transparency o f the accounts o f i t s different subsidiaries to implement third party access, a prerequisite for the development o f a competitive gas market.

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Production-Sharing Contracts

More than 90 percent o f Indonesia’s o i l and gas i s produced by the private sector, mostly by international o i l companies, and governed by production sharing arrangements. Although the fiscal and nonfiscal terms o f Indonesia’s PSCs are comparable to PSCs in other countries, one issue i s that many existing contracts s t i l l have no provision for gas discovery and therefore no predictable basis for forecasting the value to the producers o f possible gas discoveries for the domestic market.

The government has not yet began to address the issues relating to the existing contracts, considering that any change in terms and condition o f the contracts need to b e mutually agreed. With respect to new contracts, provisions o f the new law and regulations aim at creating a competitive environment that provides producers direct access to consumers. The issue o f absence o f gas discovery provisions in the existing contracts can only be resolved gradually, and on a case-by-case basis.

Infrastructure

The issues discussed above hampered the development o f an adequate gas infrastructure and constrained the development o f the domestic gas market. Given the economic and environmental benefits o f gas and Indonesia’s declining o i l reserves, i t i s essential to expand the gas infrastructure. The government’s strategy fully supports market based expansion o f the gas infrastructure wi th greater involvement o f the private sector.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies INDONESIA: Domestic Gas Market Development Project

Table A2.1

Sector Issue

Bank-financed

Natural gas market development in Jakarta-Bogor (West Java) and in Medan (North Sumatra)

Natural gas market development in Surabaya and other towns in the vicinity (East Java)

Fuel subsidies, oil-gas legislative framework

Power sector restructuring and preparation o f domestic gas sector restructuring Other development agencies Gas sector regulatory environment

Natural gas market development

IPDO Ratings: H S (Highly Satisfactory),

Project

Gas Distribution Project (completed 7/1994)

Gas Utilization Project (completed 12/ 199 8)

Second Policy Reform Support Loan (completed 12/1999)

Java-Bali Power Sector Restructuring and Strengthening Project

Implementation Progress

(IP) H S

S

S

S

Development Objective

(DO) HS

S

S

S

ADB Gas Transmission and I Distribution Project JBIC South Sumatra to West I Java Gas Transmission Project I :Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

These projects are briefly reviewed as follows.

a. Gas Distribution Project (Ln. 2690-ZND) completed in July 1994 at a total cost of US$89 million. I t covered development of gas market and expansion of distribution infrastructure in the cities of Jakarta and Bogor in West Java and in Medan in North Sumatra, and PGN’ s institutional development. Zt was recognized as having been exceptional throughout the project cycle by the Operations Evaluation Department in its Annual Review of Evaluation Results, 1995. The performance covenants under the project were exceeded in all cases.

b. Gas Utilization Project (Ln. 3209-ZND) completed in December 1998 at a total cost of US$119 million. I t covered development o f gas market and expansion of distribution infrastructure in Surabaya and twelve other towns in i t s vicinity in East Java, and in Medan in North Sumatra in parallel with the upgrading of Indonesian expertise to manage this process. Until the onset of Asian financial crisis (July 1997), project implementation was rated as highly satisfactory. All targets were either achieved or

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surpassed. Thereafter, despite the crisis, the project was satisfactorily completed in December 1998.

c. Grissik-Duri Gas Transmission Project, with ADB support, completed in 1998 at a total cost o f US$530 million. I t consisted o f a 28 inch diameter, 536 km long high-pressure gas transmission pipeline from gas fields near Grissik in South Sumatra to the o i l fields near Duri in Central Sumatra, along with ancillary facilities, for the transport o f 300 mmcfd natural gas for enhanced o i l recovery at Duri. Despite the Asian financial crisis, the project was completed on schedule and within the estimated cost.

d. Grissik-Singapore Gas Export Pipeline Project, with ADB support, completed in 2003, at a total cost o f US$470 million. I t comprised a 28 inch diameter, 485 km long high- pressure gas transmission pipeline from gas fields in South Sumatra to a power station in Singapore, along with ancillary facilities, for the export o f 150 mmcfd natural gas. This project was also completed on schedule and within the estimated cost.

Lessons learned and reflected in project design

The objectives o f the Banks previous gas distribution projects in Indonesia were to expand the physical network as wel l as to enhance the efficiency and the financial position o f the implementing agency, PGN. Although these objectives were successfully achieved, ex post reviews o f these projects made it clear that the pricing o f natural gas, and the corporate structure o f PGN, also needed to be addressed in order to accelerate the development o f the domestic natural gas industry. The current project addresses these sectoral issues after the government passed the Oil and Gas Law paving the way for further opening o f the sector to new entrants and increasing i t s market orientation.

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Natural gas utilization expanded and air pollutant emssions reduced in West Java.

Component One: 1. West Java gas distribution network expanded

Component Two: Capacity Building of PGN 2. PGN restructured and its financial management, operation and planning capability strengthened.

3. Third Party Access 4. Rationalized gas pricing policy implemented.

ote: Estimates of Emis

Annex 3: Results Framework and Monitoring INDONESIA: Domestic Gas Market Development Project

Table A3.1: Results Framework

PGN’s gas sales in the region bmcfd):

Year 2004 2007 2010 Gassales 168 373 423 Cumulative number of consumers converted to gas: Year 2004 2007 2010 Number 0 95 120 Maior air Dollutant and greenhouse gas emissions reductions (1000 tons Der vear)

2004 2007 2010 so* 0 45 56 NO, 0 54 68 TSP 0 26 32 COze 0 1,323 1,653

Maior milestones of the distribution uroiect: Banten supply man line completed by October 2006; Banten reticulation mains completed by mid-2007;

Maior milestones for TA comuonents:

not later than June 20, 2006, PGN restructuring plan adopted Safety and Integrity Management System set up and operational by mid-2009 PGN’s capacity enhancement in targeted areas achieved by mid-2009 PGN’s gas transmission and distnbution operations further restructured before the end of the project.

not later than June 30, 2006, procedures and implementation plan of “Third Party Access”

not later than March 31,2006, the framework for an economic and efficiency pricing as adopted by PGN.

provided by the Gas Pricing Study under loan no 4712-IND wil l be developed by PGN and submitted to the Bank for comments.

the Ministry of Energy and Mining Resources for adoption.

transmission and distribution tariffs developed and submtted to the Bank for comments.

BPH Migas for consideration in view of adoption.

not later than June 30,2006, the framework (pricing policy) should be submitted by PGN

not later than September 30,2006, draft methodology and implementation rules for

not later than December 3 1, 2006, methodology and implementation ru les presented to

n Reduction Indicators.

22

e e

e

Natural gas i s the “cleanest” fuel among all the conventional fossil fuels. According to the market analysis by PGN, the gas supply from the proposed project will substitute for oil to be consumed mainly by industrial consumers in the project region. The emission reduction i s therefore estimated by the difference between the air pollutants from burning gas and oil. The simple and widely accepted method to calculate pollutant emissions i s to multiply emission coefficients o f pollutants by energy to be consumed. The emission coefficients of pollutants used here are from different sources as below:

SO2, NO,: Sasmojo et al, 1997, the “ALGAS Study Report for Indonesia”. TSP: Energy Technology Characterizations Handbook, US Department of Energy, 1983 C02: Revised 1996 IPCC Guideline Reference Manual.

1 Emission Type Oil Gas

SO2 (kg/mmBtu) 0.6464 0.0002

NO, (kg/mmBtu) 1.2009 0.4202

TSP (kg/mmBtu) 0.4100 0.0429

COZ (kg/mmBtu) 78.1459 59.1897

23

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25

Annex 4: Detailed Project Description INDONESIA: Domestic Gas Market Development Project

Background

PGN’s natural gas marketing and distribution operations in Banten and West Java account for about 50 percent of i t s gas sales. These operations are spread over six districts, namely, Banten (recently upgraded to province status), Jakarta, Bogor, Bekasi, Karawang and Cirebon. About 163 mmcfd natural gas i s being supplied by PGN to industrial, commercial and household consumers in these areas.

The distribution system spans urban and industrial areas from Cilegon in the west o f Banten to Purwakarta and Cirebon in the east o f West Java. I t comprises supply mains, feeder mains and distribution pipelines wi th a cumulative length o f 1575 km (840 km steel pipe and 735 km PE pipe); 9 off-take stations; 97 pressure regulation stations; and about 450 industrial meter stations, 850 commercial and 61,000 household meters installed at customers premises. About 30 percent o f the pipelines are more than 20 years old and about 50 percent are 10-20 years old.

The system i s designed for a pressure regime o f 16 bar/4 bar/O.l bar. (Household consumers are supplied through 0.1 bar pipelines.) I t i s provided with corrosion control, pressure and f low control, gas measurement and gas quality monitoring facilities. The gas control and dispatch i s handled manually. Given adequate supply and pressure, the system i s capable of distributing about 240 mmcfd natural gas.

The system receives about 100 mmcfd o f natural gas f rom Pertamina’s offshore and onshore fields in West Java, 55 mmcfd from BP’s fields offshore West Java and 10 m c f d from Ellipse’s onshore f ield in Jatirarangon in West Java. The gas f rom Pertamina and Ellipse fields i s supplied through a Pertamina owned and operated 24 inch diameter, 220 km long transmission l ine f rom Cilamaya to Krakatow. This pipeline runs through the middle o f the distribution system, offloading gas into the system at load locations. The input pressures have been as l ow as 50 percent o f the design level and, therefore, the system has not been operated at design level pressures. The gas f rom BP’s fields offshore West Java i s carried to the shore by subsea gathering lines, owned and operated b y BP, beaching at Muara Karang and connecting with PGN’s distribution system.

Natural gas utilization in Banten and West Java in 2004 i s about 705 mmcfd, o f which power generation accounts for 370 mmcfd, steel manufacturing for 65 mmcfd, fertilizer production for 57 mmcfd, cement for 26 mmcfd, petroleum refining for 17 mmcfd, general industries for 165 mmcfd, commercials and households for 3 mmcfd and compressed natural gas (CNG) for vehicles for 2 mmcfd. PGN supplies general industries, commercials, households and CNG stations (CNG stations are Pertamina customers, wi th gas carried by PGN), whereas the rest are supplied by Pertamina.

26

According to PGN’s surveys, the unmet demand of the existing consumers i s about 44 mmcfd, the demand o f consumers on the waiting list amounts to about 317 mmcfd, and the estimated demand of potential consumers i s about 297 mmcfd. The existing and potential demand (on fuel substitution basis) would amount to 826 mmcfd including about 168 mmcfd being supplied to existing consumers.

Earliest Likely

Delivery Producing

Producing

Before the sharp increase in oi l price experienced lately, the prices of industrial diesel o i l and fuel o i l were at about 75 percent of the world market levels. Thus the price o f natural gas for consumers in general industry, and depending on the type of the contract, was in the range of 65- 70 percent and 72-78 percent of the price of industrial diesel o i l and fuel o i l respectively. This advantage i s likely to increase with the elimination of subsidies.

Recipient

350 to Pertamina customers in West Java 250 to Pertamina customers in West Java

The reserves, deliverability and status of development of the fields supplying West Java in the medium term are summarized in Table A4.1.

Producing

August 2004

Table A4.1: Gas Reserves and Supplies

23 mmcfd to Pusri Fertilizer in Palembang, South Sumatra PGN 10

Location

On and offshore West Java Offshore West Java

Corridor Block South Sumatra Pagerdewa- Prabumulih South Sumatra Rimau Block South Sumatra

Jatirarangon West Java

Operator

Pertamina

BP

Conoco- Phillips

~

Pertamina

Medco

Ellipse Energy

Reserves tcf

P1 1.413 P2 0.658 P3 0.090 P1 0.816 P2 0.150 P3 0.400

P1P2 5.69 P3 7.19

P1 3.266 P2 0.779 P3 0.533

P1 1.0 P2 1.5 P3 2.2

P1 0.067 P2 0.017 P3 0.018

Plateau Rate

mmcfd 450 declining to 350 300 can increase to 350 550-750

250

120

40

Status of Development

Producing

Producing

Partly developed

Partly developed

Partly developed

Developed

I

27

On the basis o f contracts under operation and ongoing negotiations, the availability o f supply to PGN for i t s customers in Banten and West Java i s projected in Table A4.2.

Table A4.2:

A contract for 250 mmcfd supply f rom Pertamina’s fields in South Sumatra has been signed; i t i s due to commence in mid-2006. Pertamina i s preparing to develop these fields and PGN has commenced preparations for the construction o f a transmission pipeline f rom South Sumatra to West Java to carry this gas to PGN’s distribution system in West Java. Contracts for supplies f rom Pertamina fields in West Java and BP fields offshore West Java are expiring in 2011 and 2009, respectively. However, Medco has offered to supply 100 mmcfd from 2012 f rom i t s fields in South Sumatra, which w i l l be transported b y the South Sumatra-West Java transmission pipeline, BP has offered to supply 65 mmcfd from 2010 from i t s fields offshore West Java, and Ellipse has confirmed 30 mmcfd additional supplies f rom i t s fields in Jatirarangon in West Java; contracts for these supplies are being negotiated.

The project, formulated on the basis o f the above-mentioned demand and supplies, includes the following components: a) expansion o f PGN’s gas distribution infrastructure in Banten and West Java; and b) Technical Assistance (TA) to PGN to enhance i t s expertise in gas marketing, distribution and transmission. The project i s also l inked to a gas transmission project to bring gas from South Sumatra to West Java region financed by the JBIC.

Recently, PGN has entered into a contract wi th Conoco-Phillips for purchase o f 400 mmcfd gas from Corridor block in South Sumatra, to increase the supply and further develop the West Java gas market. I t s plans for transportation o f this gas f rom South Sumatra to West Java and supply to new consumers are being finalized. This contract ensures adequate supply to the West Java market up to 800 mmcfd.

28

A. Expansion of PGN’s gas distribution infrastructure in Banten and West Java

I t w i l l mainly support gas sales to industrial consumers in Banten and Jakarta-Bogor, which account for more than 60 percent of the demand in West Java. I t wi l l be a part of PGN’s overall plan for the expansion of i t s distribution infrastructure in West Java.

The expanded system wi l l receive gas supplies at Bojonegara, Muara Karang from Pertamina fields in South Sumatra and BP fields offshore West Java, respectively, and through Pertamina transmission pipeline in West Java. In addition, the gas from Bojonegara w i l l be carried into the distribution system as far as Serpong by a 24 inch diameter pipeline operating at 37 bar pressure. This would enable the distribution supply mains, emanating from the Bojonegara-Serpong pipeline to operate at 25 bar pressure, efficiently enhancing the system capability.

Pipelines w i l l be laid to bring additional gas supplies into the system, to augment the capability of sections where consumer demand has outstripped the distribution capacity, and to provide connections to new consumers. The expanded system wi l l operate at pressure regime o f 25 bad16 bar/4 barl0.l bar and, under certain conditions of input and output; i t w i l l have the capability to distribute about 600 mmcfd of natural gas.

The system wi l l be designed and built in accordance with international standards and best practices and i t w i l l be in full compliance with Indonesian national standard. I t w i l l be provided with modern facilities for gas pressure control, f low control and dispatch, corrosion control, gas flow measurement, gas quality monitoring, IT support, radio and telecommunication.

A computerized SCADA system wi l l be installed to monitor and control distribution system gas pressures and flows at the input points and at strategic locations, which w i l l enable efficient utilization of system capacity and wi l l enhance safety and reliability of operations,

A system safety and integrity management program wi l l be developed under the proposed project. I t w i l l include a) verification of compliance of the system with Indonesian national standard, b) planning and establishment of a database and IT system to assist in safety and integrity evaluation, c) risk assessment, and where warranted, identification and undertaking of mitigation measures.

System control and emergency response philosophy w i l l be reviewed to determinate and establish appropriate response arrangements. (See following section)

The main elements of the distribution system expansion plan are as follows:

Class 300 steel pipelines of 4 to 16 inch diameter of a cumulative length of about 184.7 km along with control valves, fittings and corrosion control facilities.

Class 150 steel pipelines of 4 to 16 inch diameter of a cumulative length of about 71.4 km along with control valves, fittings and corrosion control facilities.

Five off-take and two regulating stations.

29

0 210 customer metering and regulating stations.

0 SCADA for pressure and f low control, and monitoring.

0 Radio and telecommunications equipment, IT support and emergency response equipment.

B. Capacity Building of PGN

Skill Development

PGN’s origins are in gas distribution. I t s basic capability and expertise in distribution engineering was established through training and TA in the 1980s and 1990s under two Bank- funded projects. However, in recent years PGN has been heavily involved in the development o f transmission systems in Sumatra, delivering natural gas to Duri and exporting gas to Singapore. In this process, a significant number o f PGN’s experienced and senior staff have been converted to gas transmission planning and operations and transferred to the subsidiary company for the operation o f the transmission system. PGN, therefore, needs to replenish i t s expertise in distribution engineering, taking into account the new methodologies, tools and software to improve operational performance. PGN also plans to enhance i t s capabilities in transmission engineering and planning o f new transmission projects. Specifically, the proposed project aims at (a) enhancing PGN’ s expertise in infrastructure planning, gas marketing, gas utilization, distribution system safety and integrity management, gas transmission and compression operations, and (b) providing on-the-job and specialized training to enhance staff ski l ls . The areas involved are briefly outlined as follows.

Infrastructure Planning

(a) Modeling, design and optimization o f large scale distribution networks and transmission systems taking into consideration medium and long-term demand and supply projections, operational constraints, security o f supply and safety aspects; (b) distribution and transmission system control concepts and techniques; (c) selection o f appropriate software for pressure and f low analysis o f the distribution system; and (d) determination o f appropriate S C A D A and emergency response systems.

Gas Marketing

(a) Cost-benefit analysis o f large industrial customer conversion; (b) demand forecasting; (c) development o f market for off-peak hours and spot gas availability; (d) marketing o f gas for large industrial users, that is, power generation, fertilizer and cement manufacture, petrochemicals and cogeneration’ (e) contracting for the large-scale gas sale or purchase and for interruptible supply; and (0 managing marketing through outsourcing.

30

Gas Utilization

(a) Conversion t o gas firing (advice in selection and installation o f equipment); (b) combustion engineering, design and specification o f high-capacity gas burning and control equipment; (c) standby arrangements, for example, dual fuel firing equipment; (d) combined heat and power, and gas air conditioning systems; and (e) safety assurance and emergency response arrangements in gas utilization.

Distribution System Safety and Integrity Management

PGN i s planning to strengthen i t s capabilities in the areas o f system safety and integrity management. I t intends to make a number o f fundamental changes to i t s safety and integrity management system and introduce new methodologies and techniques to maintain the integrity o f existing and future assets throughout their design l i fe and beyond. The areas where strengthening i s required include the following:

Survey o f the distribution system to ascertain compliance wi th National Safety Standard and registration o f status wi th the Regulator.

Risk assessment and design and implementation of mitigation measures where prescriptive compliance cannot be achieved.

Clearance and registration o f above measures wi th the Regulator.

Monitoring techniques, risk assessment techniques and their application, defect assessment and repair methodologies.

Required organization to strengthen integrity management.

Design o f an appropriate safety and integrity management framework.

Planning and establishment o f an electronic database and IT system to assist in safety an integrity management.

Review and updating o f standard operating procedures including establishment o f compliance survey frequencies and risk assessment methodologies.

Review o f system control and emergency response philosophy, determination o f appropriate equipment and response arrangements.

Gas Transmission and Compression

This component would include: (a) operating policies, procedures, guidelines and manuals; (b) reliability centered maintenance procedures and schedules; (c) operation and Condition monitoring systems; (d) r isk assessment and mitigation measures; (e) IT systems to monitor performance; and (f) SCADA instrumentation system operation and maintenance (O&M) procedures.

31

Staff Skills Enhancement

PGN requested assistance to provide basic sk i l l s to new entrants, upgrade the s k i l l s o f existing staff in the company’s core businesses during the coming high growth years. Specifically, the training wil l be designed to meet PGN’s medium- and long-term requirements for the following:

0

0

0

0

0

Providing new entrants with a basic level o f knowledge and competency; Providing new entrants and existing staff wi th basic and advanced levels of knowledge and competency; Introducing the staff to the latest “best practice,” latest methods and tools to improve safety, integrity and efficiency o f operations; Ensuring that lack o f skilled human resources would not constrain the implementation and sound operation o f ongoing and future projects; and Developing PGN’s training capability to sustain this process and to minimize costs.

The s k i l l s are to be upgraded through on-the-job training, in-house and overseas courses and attachments wi th appropriate organizations.

Technical Collaboration

PGN intends to carry out the proposed capacity building program through a long-term collaboration wi th a suitably qualified organization. The proposed collaboration w i l l be characterized by a close involvement and cooperation between PGN and the Consultant to ensure that the needs and objectives o f PGN are met in a flexible manner within the program outlined and taking into account the actual requirements o f the PGN’s staff. Implementation schedules and procedures w i l l be developed throughout the duration o f the collaboration and w i l l be closely monitored.

Financial Capacity Building

Currently, the Finance Department includes about 40 professional staff, out o f which about 10 have master’s level MBA equivalent degrees. They intend to upgrade the s k i l l s o f the 10 master’s level staff as wel l as a select high potential group o f the remaining employees. PGN proposes the fol lowing broad themes for the financial TA component:

a. Executive Training. T o upgrade staff s k i l l s in budgeting, retailing, financial modeling, analysis, and forecasting; and, corporate finance, financial markets, and investor relations. Their aim i s to have staff gain applied sk i l l s in a short duration through intensive workshops related to the above subjects. PGN plans to have staff participate in overseas training programs as wel l as customized programs delivered in Indonesia;

b. Distance Learning. PGN also plans to utilize the many distance learning programs that are related to finance that can be accessed through the internet;

c. Technology Upgrade. PGN currently uses an Oracle based platform to handle basic financial activity and to integrate their various f ield offices. A critical bottleneck i s that ledgers such as billing and trade receivables are s t i l l mostly done manually, whereby

32

impeding the real time f low and analysis o f information. They plan to upgrade these systems as a part o f the TA component. PGN has assured the Bank that this proposal i s to address a short-term need, and w i l l not be in conflict with the current Bank financed study that i s under way to evaluate the overall information technology (IT) systems for PGN, to be implemented after their corporate restructuring; and

d. Advisory Support. PGN proposes to hire an in-house financial advisor to provide support during the next several years when their expansion plan w i l l be at i t s most critical stage and sound financial monitoring and management w i l l be very important.

The Bank project i s linked to the Japan Bank for International Cooperation (JBIC) gas transmission project from South Sumatra to Banten-West Java (US$485 million)

The system i s designed to receive natural gas at Pagerdewa in South Sumatra and transport i t b y a 70 bar, high-pressure pipeline to Bojonegara in Banten. I t w i l l have compression facilities at the inlet to boost the gas pressure f rom 30 bar to 70 bar. I t w i l l have a free f low carrying capacity o f 450 mmcfd, which could be enhanced to 550 mmcfd with on-line compression. From Bojonegara the gas w i l l be carried to Serpong b y a 37 bar trunk line, feeding the distribution system en route through farm taps and off-take stations. Initially, the system w i l l carry 250 mmcfd gases for PGN from Pertamina’s fields in South Sumatra to PGN’s distribution system in West Java. The system wil l comprise the following:

0 a 32 inch diameter, 270 km long steel pipeline f rom Pagerdewa to Labuhan Maringgai in South Sumatra;

a 32 inch diameter, 110 km long steel subsea pipeline f rom Labuhan Maringgai to Bojonegara in Banten;

gas compression facilities at Pagerdewa at the inlet to the transmission system;

a gas receiving terminal at Bojonegara with an init ial capacity o f 250 mmcfd; and

a 24 inch diameter, 70 km long trunk l ine f rom Bojonegara to Serpong near Jakarta.

0

0

0

0

Preparations for the construction o f this transmission system have commenced, i t i s expected to be completed by mid-2006.

33

Annex 5: Project Costs INDONESIA: Domestic Gas Market Development Project

Table A5.1 Components Local Foreign Total

US$ US$ US$ Project Cost by Component and/or Activity mil l ion mil l ion mil l ion

A. Infrastructure (a) Pipelines including corrosion control facilities 7.44 37.33 44.77 (b) Customer metering, regulating stations and service lines 5.29 13.63 18.92 (c) Offtake metering stations and regulation stations 0.98 8.00 8.98 (d) SCADNGas Management System 0.48 2.75 3.23

(f ) Inspection and certification 0.49 1.13 1.62 (e) Detailed engineering and site supervision 2.36 3.09 5.45

(g) Special tools & equipment 0.00 2.00 2.00

Subtotal

B. Technical Assistance (a) Long Terms Technical Collaboration Services (b) Skills Development (c) Financial Technical Assistance

Subtotal

C. Building and Land

Subtotal

Total Baseline Cost

Contingency Physical Contingencies Price Contingencies

Subtotal

V A T (10%)

17.04 67.93 84.97

0.50 3.00 3.50 0.20 1 s o 1.70 0.00 1 .oo 1 .oo 0.70 5.50 6.20

2.00 0.00 2.00

2.00 0.00 2.00

19.74 73.43 93.17

1.36 5.43 6.80 0.86 3.44 4.3 1 2.23 8.88 11.10

10.43 0.00 10.43

Total Project Costs / I 32.39 82.31 114.70 Interest during construction 7.40 7.40

Front-end fee 0.20 0.20 Total Financing Required 32.39 89.90 122.30

1/ Identifiable taxes and duties are US$10.4 mil l ion and the total project cost, net o f taxes, i s US$104.3 million. Therefore, the share o f project cost net o f taxes i s 90%.

34

Table A5.2: Financing Plan (US$ million)

7.40

0.00

0.00

0.00 7.40

0.20 0.20

0.00 0.00

42.30 80.00 122.30

Investment Component PGN IBRD I Total I Foreign 0.00 76.80 I 76.80 I Local 31.70 0.00 31.70 I Total 3 1.70 76.80 108.50 1

Capacity Building

Foreign

Local

Total

Interest During Construction

3.20 3.00

Foreign 7.40 I 0.00 7.40 I Local 0.00 0.00 0.00 I Total

Front-end Fee

Foreign

Local

Total 0.00 0.20 I 0.20 1 Total

Foreign 9.90 80.00 1 89.90 I Local 32.40 0.00 I 32.40 I Total

35

Annex 6: Implementation Arrangements

INDONESIA: Domestic Gas Market Development Project

PGN w i l l have the overall responsibility for the implementation of the project. Having successfully completed two Bank and one ADB financed gas infrastructure expansion projects, PGN has a demonstrated management capability to plan and implement large infrastructure projects. I t s strategy o f outsourcing project activities, as far as possible, has been time-tested and has enabled it to efficiently complete expansion projects without significant increase in staff. For the proposed project i t intends to fol low the same strategy.

The project implementation w i l l be managed b y a project implementation unit (PIU) with direct responsibility for the infrastructure expansion, customer attachment, gas sales ramp up and enhancement of distribution system safety and integrity management in West Java. The detailed planninghpecifications, preparation o f procurement documents, quality control, construction supervision, safety assurance, and progress monitoring w i l l be outsourced to a project management consultant (PMC); detailed engineering, procurement o f materials, as far as possible, and construction w i l l be outsourced to engineering, procurement, construction (EPC) contractors; certification o f materials and works w i l l be entrusted to independent inspectors; and technical collaboration with an appropriate organization w i l l be arranged to assist in enhancing PGN’s capabilities and s k i l l s in planning, engineering and generation activities (see Annex 4). Additionally, all procurement processing w i l l be overseen by a Procurement Committee comprising experienced staff o f PGN.

The detailed roles and responsibilities o f the organizations and entities involved are described below.

1. Project Implementation Unit: The PIU has been established specifically for the project by PGN Board of Directors Decree No. 0177OO.W12/UT/2004 dated September 27, 2004. I t i s located at the PGN head office in Jakarta and reports to the PGN’s Board o f Directors through the Director of Operations. The PIU’s overall responsibilities include coordination o f internal and external parties to ensure smooth project preparation and implementation including preparation o f the project implementation plan and schedule; coordination o f design, engineering, procurement, construction, environmental, social and customer attachment activities; preparation and implementation o f gas sales ramp up plans; enhancement o f distribution system safety and integrity management. I t w i l l also be responsible for monitoring implementation progress, reporting and evaluating project outputs and outcomes. At least ninety full and part time staff have been assigned to work for the PIU.

2. The PIU organizational structure i s given at the end o f this Annex. I t includes basically three levels o f management:

a. the PIU i s headed by a Project Coordinator, who w i l l oversee the overall project preparation, implementation and various controls. The project coordinator reports ‘to PGN’s Director o f Operations;

36

b. the head o f PIU w i l l be assisted b y five managers-Project Control Manager, Finance and Administration Manager, Project Manager, Procurement Manager and the General Manager S B U l (Strategic Business Unit 1). The Managers w i l l be supported by full and part time professionals to perform their respective responsibilities, while the General Manager S B U l w i l l deploy existing staff in the SBU to undertake customer connection and integrity management programs.

c. specific task managers have been appointed for construction and logistics, quality control and safety-health-environment-resettlement, administration and contract management, finance, procurement control, procurement administration, system safety and integrity management, customer connection, and so forth.

3 . Procurement Committee. A Procurement Committee has been established by PGN Board o f Directors Decree No. 010500.W91/UT/2004 dated June 8, 2004, comprising 20 members f rom various departments including planning and engineering, legal, accounting and budgeting, treasury, corporate review and business development, and project units. The committee, chaired by the Project Procurement Manager, w i l l be responsible for:

a. preparing procurement and bidding documents; b. developing evaluation criteria for prequalification and evaluation o f bids; c. providing clarifications on procurement and bidding documents including Request for

d. conducting public bid opening and preparing Minutes o f Bid Opening; e. evaluating submitted bids and preparing minutes o f evaluation and evaluation reports; f. liaising wi th PGN President Director about the bid evaluation process and contract

award recommendations; and g. contract award notification.

Proposals (RFPs) and TOR and preparing Minutes o f Clarifications;

In performing i t s duties, the Committee shall:

a. share the procurement and bidding schedule wi th relevant project managers; b. have support, as needed, from PGN’s department and staff to carry out i t s duties; c. have budgetary support f rom PGN.

4. Project Management Consultant. An external consulting firm wil l be hired through a competitive selection process to provide assistance in various aspects o f project management, including but not l imited to the following:

a. project design and engineering; b. preparation of bidding documents; assistance in bid evaluation, contract award and

finalization; c. construction supervision; quality control; cost control; schedule control; d. contract management; e. environmental management and social aspects; f. testing and commissioning; and g. training o f PGN staff in project management.

37

5. Engineering and Procurement and Construction (EPC) Contractors. Suitably qualified contractors w i l l be engaged through competitive selection for detailed engineering, procurement o f materials and equipment, and construction o f pipelines and stations.

6. Third Party Inspector. selection, for independent inspection and certification for goods and works.

7. Long-Term Technical Collaborator. A qualified international consulting firm w i l l be hired and retained throughout the project implementation period to provide, among others, the following services related to customer connection, gas transmission and distribution system integrity management, O&M, as well as s k i l l development or enhancement:

An external consultant w i l l be hired, through competitive

a.

b.

C.

d.

e.

f.

review o f system design and planning, and assessment of capabilities within the planning division and identification o f areas for strengthening; advice on gas marketing and utilization for large industrial users (such as power generation, fertilizer and cement manufacture, petrochemicals and cogeneration) covering: cost-benefit analysis for conversion to gas, technical solutions for conversion, selection and installation o f equipment, combustion engineering, design and specification o f high capacity gas burning and control equipment, standby arrangements (for example, dual fuel firing equipment), and safety assurance and emergency response arrangements in gas utilization; development and implementation o f an Operations and Integrity Management System (OMS) to ensure safety o f personnel and the public and to achieve target levels o f availability, through improved O&M practices; development of a system control philosophy and S C A D A system specification including software, hardware, instrumentation and telecommunication requirements. The SCADA system w i l l be procured under the project; provision of training, including an assessment o f the s k i l l needs o f the existing staf f and the design and implementation o f a comprehensive training program in gas distribution and transmission engineering and operations for efficient project implementation and subsequent system operation; advice and technology transfer to PGN to ensure the establishment o f the latest and most appropriate systems, methodologies, software and equipment for the efficient operation o f gas distribution and transmission assets and maintenance o f system safety and integrity for the design l i f e o f the infrastructure and beyond,

For further details see the project implementation plan in the project file.

38

PGN PIU Organization Chart

Notes:

Project Coordinator i s also coordinating the associated transmission lines (financed by JBIC); West Java Gas Distribution Optimization Team facilitates customer attachment; Project Control Manager i s in charge of project control, budget monitoring and control and project management information system; Finance and Administration Manager i s in charge of financial management, internal control, accounting, project documentation; Project Manager i s in charge of construction quality. He will be assisted by three managers plus two external consultants - a PMC for project management and construction supervision and a Third Party Inspector for factory inspection of goods and safety inspection; Procurement Manager will serve the Chairman of the PGN Procurement Committee for th is project and will also be assisted by PMC; SBU1-PGN’s Strategic Business Unit No. 1, a permanent unit responsible for sales and customer services for West Java region (covering the distribution network financed under the project); About 90 full- and part-time staff has been assigned to support various managers.

39

Annex 7: Financial Management and Disbursement Arrangements

INDONESIA: Domestic Gas Market Development Project

Overall Summary of Financial Management Assessment

The Financial Management assessment for this project was completed in April 2004, including an assessment o f financial management capacity at the implementing agency as well as an analysis o f financial management risks.

The Domestic Gas Market Development Project w i l l involve an expenditure o f US$122.30 million, o f which US$80.00 mi l l ion i s expected to be funded b y the Bank through a Specific Investment Loan. The project includes two main parts, the larger part (total size US$108.50 million) w i l l be for priority investments (including associated engineering, management and inspection services) in a gas distribution pipeline system for PT Perusahaan Gas Negara (Persero) Tbk. or (PGN), the partially state-owned gas utility, to help expand gas utilization in West Java; and the other part (amounting to US$6.20 mil l ion) comprises capacity building for PGN to support restructuring and institutional strengthening. Both components w i l l be implemented by PGN. I t i s anticipated that loans under this project w i l l be on-lent by the Republic o f Indonesia as Borrower to PGN under a subsidiary loan agreement.

PGN has been the recipient o f several loans from both the Bank and other bilateral and multilateral agencies, including ADB, Japan Bank for International Cooperation (JBIC) and European Investment Bank (EIB) in the past, and i s familiar wi th donor requirements wi th respect to financial managemente4 The most recent IBRD loan granted to PGN i s a small component embedded in the Java Bal i Power Sector Restructuring and Strengthening Project approved in 2003.

PGN was till recently a fu l ly state owned l imited l iabi l i ty company (Persero) and became a public company fol lowing i t s Ini t ial Public Offering in December 2003. PGN i s now about 40 percent owned by the investing public and 60 percent owned b y the GOI. The company has successfully completed a due diligence process of i t s internal business processes, including financial management processes, that are normally associated wi th init ial public offerings. I t w i l l also henceforth be subjected to financial reporting and auditing disciplines that are normally applied to publicly listed companies in Indonesia, and which are relatively more rigorous than those applied to state-owned enterprises or government agencies. This i s expected to have a beneficial impact on PGN’s financial management capacity, as was apparent during the financial management assessment carried out.

However, some weaknesses may arise specifically f rom the age and l imited capability o f the accounting system in use at PGN, and this may impact maintenance o f essential financial

The Gas Distribution Project (Loan 2690-IND) approved in May 1986 in the amount of US$34 million; the Gas Utilization Project (Loan 3209-IND) approved in July 1990 in the amount o f US$86 million; a PPF of US$2 million in August 1996 to prepare a new project but the project was dropped out; plus a US$6 million T A under Java-Bali Power Sector Restructuring and Strengthening Project (Loan 47 12-IND) approved in June 2003. Except for the US$6 million, which i s ongoing, all other loans have been closed.

40

controls in a decentralized setting, for instance with respect to controls over customer collections and bank reconciliation and procedures to validate payments. PGN may also be influenced to a degree by the weak control environment in Indonesia, as determined b y the Country Financial Accountability Assessment report (April 2001) completed b y the Bank, and the slow pace o f financial management reforms at this level.

Overall, financial management risks have been assessed as moderate. T o mitigate these r isks wi th respect to this project, several measures have been suggested in an action plan agreed with the Borrower, including the adoption o f quarterly F M R s , external audits by leading private sector accounting f i rms, and strengthened procedures for validating and approving payments to contractors for project activity. With the implementation o f this plan, the financial management arrangements for this project would be acceptable.

Project Organization proposed

PGN has established a project implementation unit (PIU) for the project at i t s head office in Jakarta. The PIU i s headed by a Project Coordinator to oversee the overall project implementation. The Project Coordinator i s assisted b y several managers-Project Manager, Procurement Manager, Project Control Manager, Finance and Administration Manager, and General Manager SBU1. Al l the managers w i l l be supported b y functional task managers plus other full and part time professionals, while the General Manager S B U l w i l l deploy the existing staff in the SBUl to undertake customer connection and integrity management program. The Project Coordinator w i l l act as a central contact wi th the Bank during the period o f project implementation, and w i l l report to PGN’s Director for Operations.

For project financial accounting, a project accounting unit w i l l be set up at the Jakarta Head Office. This unit w i l l be staffed by one full time experienced accounting personnel from within PGN. Processing of payments under this project w i l l be undertaken and approved by appropriate trained staff in the Head Office Treasury section that have prior experience in processing payment verification for PGN project activities financed by donors. Book keeping wil l be integrated with PGN’s existing accounting system, though F M R s required for this project w i l l be generated on stand alone applications by the Accounting and Budget Division.

Impact of Procurement Arrangements on Financial Management

A procurement capacity and risk assessment for this project has been completed and the risk has been assessed as “Average.” The procurement packaging has the fol lowing features that are relevant f rom the financial management perspective:

a. Works procured under this project, would include customer connection (installation) services. Four packages covering two geographical areas with an aggregate amount of about US$3.82 mi l l ion are expected to be procured through National Competitive Bidding (NCB) procedures.

b. Goods procured under this project (aggregate value US$74.06 mil l ion) wi l l comprise the largest expenditure category, and would include, supply and distribution o f mains, off- take and regulator stations, customer meter and regulating stations instruments for pressure and flow control and monitoring, Radio and telecom equipment, IT support and

41

emergency response equipment, as well as special tools and equipment for O&M. The goods w i l l also include the associated installation services. All packages wil l be procured through ICB procedures based on “supply and installation” arrangements, except for a few small contracts for O&M tools. I C B Contracts estimated to cost US$200,000 or above per contract and al l direct contracting (if any) w i l l be subject to prior review b y the Bank.

c. Consultant services are expected in the following areas: project management (including procurement services), third party inspection, and long-term technical collaboration, finance, and PGN staff s k i l l enhancement. All these services w i l l be provided by consulting f irms. Consultancy services w i l l total US$10.57 mil l ion. Those contracts wi th f i r m s estimated to cost at or above US$lOO,OOO per contract, al l Single Source contracts, and contracts with individuals above US$50,000 wil l be subject to prior review by the Bank.

Given the large size and nature o f individual packages l ikely for both goods and works, i t i s anticipated that a substantial part o f the fund flows may involve prior review o f procurement. Many packages would involve direct imports and hence w i l l involve Special Commitments, where there w i l l be an opportunity for scrutiny for supporting documents by the Bank prior to payment. Given PGN’s robust financial situation, the balance locally procured transactions would not require a Special Account, and such expenditure w i l l be reimbursed to PGN based on reimbursement applications approved by PGN Project Management and Ministry o f Finance.

Internal Controls and Risk Analysis

A detailed analysis of r i s k s arising from the country situation, the proposed project entity (PGN) and the specific project i s attached as Table A7.1. A summary o f the main findings follows.

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Table A7.1: Summary of Risk Analysis

Overall Inherent Risk

Risks 1 Assessment5 I Summaly Comments

Substantial

1 1. INHERENT COUNTRY RISK

Moderate

Moderate

Moderate

Public Sector Accounting

Auditing Arrangements

PGN f low o f funds operates a network o f commercial banks for i t s operations, and has a central treasury function. Budgeting system for operating revenues, expenditures and capital expenditure i s in place. Accounting s k i l l s and experience m ix at head office (Jakarta) i s adequate. Financial Accounting ahs so far used a 10-year-old computer system, not networked or integrated nationally. Accounting policies and procedures well documented. Stand-alone systems used in field offices. A modern and integrated Oracle based accounting package i s under implementation in year 2005. Accounting division i s also responsible to prepare and administer operating budgets.

Banking System

Moderate

Low

Moderate

Substantial

Substantial

Moderate

Independent internal audit function exists, reporting to President Director, and operates under an annual work program. PGN uses public auditing firm as auditor (Ernst and Young Indonesia), in line wi th capital market regulations. Audits are up-to- date. Auditors w i l l henceforth be appointed at shareholder meetings.

Moderate

CFAA diagnostic completed in 2001 rated country control environment as weak. White paper has been prepared by government to address issues. New Finance, Treasury and Audit laws passed b y Parliament but implementing regulations are yet to be issued. Minimal progress in implementing other C F A A recommendations. National accounting continues on a single entry basis with a semi manual system. Public sector accounting standards under development. Implementation o f these standards w i l l be taken up in the next few years. The Supreme Audit Board (BPK) now has legal mandate for audit as SAI. Institutional Development Plan for BPK under implementation. Banking sector restructuring under way. Central Bank now independent and responsible for supervision and regulation o f commercial banks.

1. Implementing Entity Organization

2. FundsFlow

3. Staffing

4. Accounting Policies and Procedures. Information systems. Reporting and monitoring.

5. Internal Audit

6. External Audit

OVERALL CONTROL RISK

Low Financial health o f PGN i s generally good and the outlook for the next few years i s good, following recent capital raising exercises. Solvency i s not a serious concern. PGN organization has been recently restructured. Implementation w i l l need to be managed carefully and may need time to stabilize routine functions.

Assessment scale: High, Substantial, Moderate, Low.

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Risks I Assessment 1 Brief Comment

of the organization not adequately supporting project financial management.

Mitigation

Project works imvlementation Risk of contracted project civil work and services not meeting required quantity and quality. ReceiDt o f vroiect goods Risk of goods received not meeting contracted specifications or quantities. Pavment validation Risk of the payment verification systems allowing erroneous payments.

Disbursements, Fund Flows Risk thatfundflows are not adequately authorized before being disbursed.

Project monitoring and revortinq Risk of lapses in implementation not being promptly identified. Accounting Risk offinancial transactions being recorded inaccurately, incompletely or not according to acceptable standards. Audit Risk of project audits not meeting acceptable auditing standards.

Substantial

Moderate

Low

Substantial

Moderate

Low

Moderate

Low

Risks arise from the pressures o f executing and accounting for a large capital expenditure plan in the next few years, estimated US$4.2 bi l l ion from 2004 to 2010. This risk applies for installation o f procured equipment.

PGN procedures provide for joint verification and testing o f procured goods.

Documentary support and trails under current procedures needs to be strengthened.

Procedures for Special Commitments (likely for more than 50% o f expenditure) are well established. PGN has prior project management experience.

Inaccuracies may arise because o f shortcomings in the old computer system.

Risk wi l l arise only if existing private sector auditors are replaced by those o f unacceptable quality.

Project accounting to be retained at head office in Jakarta, and full-time staff to be placed for this, suitably trained in preparation of F M R s and related Bank requirements. PIU to be managed b y a dedicated organization. External project management consultants to be hired to assist in contract management. Use o f turnkey contracts where possible.

Certificates o f Origin and Inspections w i l l be requested under Letters o f Credit imports.

More stringent documentary trails w i l l be required to support payments. All projects w i l l be processed at head office Treasury. Banking Letters o f Credit for imported goods w i l l be encouraged. Procedures to be agreed in project manual. All packages (except consultancies) are expected to be above prior review threshold. Preparation of withdrawal application would be decentralized to PGN. Quarterly reporting ( F M R s ) on project progress w i l l be implemented. Internal audit coverage o f project activities w i l l be requested.

Project financial accounting w i l l be integrated with PGN’s own accounting package. FMR reporting quarterly w i l l be generated on a stand-alone basis, but annual PGN financial statements w i l l be acceded. PGN i s likely to continue use ofprivate ~

sector for audit o f i t s own financial statements under local capital market regulations.

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Strengths and Weaknesses

The financial management organization for this project has the fol lowing strengths:

a. Accounting staff at Head Office in Jakarta i s experienced accountants with the s k i l l s needed to support project financial accounting. In year 2003 the Company made a global offering of equity shares in the Company. These shares are now listed on the Indonesian Stock Exchanges. The Company has also issued long term Guaranteed Notes that were listed on the Singapore Exchange in 2003. This exposure to the rigors of reporting to local (and international) capital markets w i l l be helpful in further strengthening PGN’s financial management capacity. The use o f F M R s as a basis for disbursements, and the use o f Direct Payments for large transactions that are subject to prior review, w i l l also facilitate better internal control b y allowing an integrated review of procurement, implementation, financial and disbursement information; and

b. The financial management organization at PGN has adequate segregation o f responsibilities, for instance between procurement, approval o f budgets, treasury management, collections and bookkeeping. Accounting systems, policies and procedures are also wel l documented.

The primary weakness that i s apparent relates to the semi manual accounting systems used by the Company. The computer system currently used for financial accounting (Foxpro software) i s a decade o ld technology. Many important accounting processes are therefore done outside the core accounting system with standalone applications, including management accounting, maintenance and reconciliation o f subsidiary ledgers, financial consolidation and preparation o f financial reports. I t i s apprehended that these limitations o f their accounting package w i l l weaken the exercise o f financial controls over operations. There is no costing system in operation, though occasionally stand-alone applications are done centrally using spreadsheet packages. However, we have been informed that a modern and integrated Oracle based accounting package i s under implementation in year 2005.

Fund flows and disbursement

The fund flow mechanisms proposed i s as follows:

a. Method. Funds for this project wi l l be on-lent to PGN by the GO1 as the Borrower. The terms and conditions for this on-lending w i l l be agreed wi th the Bank before negotiations, and w i l l be in the currency o f the loan, in l ine with current government policy. The on- lending terms are expected to be at nominal interest rates that are at or near local commercial borrowing rates. A Subsidiary Loan Agreement i s expected to be finalized between GO1 and PGN for this purpose, as a condition for loan effectiveness.

I t i s envisaged that payments for the procurement o f goods wi l l be made using Special Commitments and banking Letters o f Credit for al l imported goods where commercial practices for processing payments wi l l apply. For TA consultancies and locally procured packages, PGN w i l l prefinance and seek reimbursement f rom the Bank. Such

45

reimbursement applications w i l l be submitted by PGN through the National Treasury Offices (KPKN) after approval b y Ministry o f Finance in l ine with existing government regulations. A Special Account i s not considered necessary for this project.

b. Disbursements based on FMRs. I t i s envisaged that except for cases that require special commitments, applications for reimbursements f rom the Bank wil l be submitted quarterly to the Bank, and w i l l be supported b y approved quarterly mMRs in formats agreed with the Bank.

Project Financial Management Arrangements

Organization. For purposes o f project financial management the fol lowing staffing structure i s proposed:

a. Payment processing. Payments w i l l be initiated b y the PIU staff at Head Office. Payments w i l l be verified for payment by existing staff at Treasury department o f PGN Head Off ice under PGN’s existing administrative systems and procedures. Payment requests under Special Commitments for loan funded activities w i l l be authorized by Project Manager, validated by PGN Treasury and sent to Bank wi th full supporting documents.

b. Accounting. Data entry into the accounting system w i l l be undertaken b y existing staff at Head Office Accounting. Project Financial Accounting for purposes o f quarterly reporting w i l l be done by a full time senior staff, which w i l l have the task o f extracting relevant accounting information from the accounting system, preparing FMRs, preparing Reimbursement Applications and correlating information in financial, procurement and implementation reports in the F M R s . Staff in this position w i l l be wi th at least a graduate (S l ) degree in accounting and w i l l have at least 5 years prior experience in PGN. Suitable training w i l l be provided b y the Bank to the accounting staff in the preparation o f m s .

Accounting policies and procedures to be followed for project financial accounting w i l l be the same as those followed for PGN financial accounting, and w i l l essentially comprise Indonesian Accounting Standards consistently applied, wi th the exception that F M R s w i l l be based on cash- based accounting, not accrual based, so that these are consistent with records at Loan Administration at the Bank. Expenditure commitments w i l l however be monitored and f ixed assets acquired under this project w i l l be capitalized in PGN’s books. Further, procedures w i l l be specified and agreed with PGN management to strengthen ex ante controls over authorization o f payments based on an improved documentary trail, including independent evidence acceptable to the Bank o f work completed under project contracts, o f goods delivered in quantity and quality as contracted, and demonstrated evidence o f checks on full compliance with contracts.

Audit arrangements

Bank pol icy requires that auditors o f Bank financed projects are acceptable to the Bank. Fol lowing PGN’s privatization in year 2003, i t s audit arrangements are therefore subject to the capital market regulations in Indonesia, as mandated by the Capital Markets Supervisory Board

46

(Bapepam). PGN’s financial statements are currently audited by Ernst and Young Indonesia. Under this regime, so long as the company’s shares remain listed at the Stock Exchange, company auditors w i l l be appointed at Shareholders meetings each year under regulations governed by the local capital market regulations. Auditors so appointed are required by law to be private audit f i r m s that are licensed by the Ministry o f Finance and accredited with Bapepam. Such audited financial statements are now also required to be submitted to the BPK for their review. In this situation, i t i s proposed that the Bank accepts the existing arrangements for the appointment o f auditors by Company shareholders, subject to an assurance f rom PGN Management that so long as this project i s under implementation, the Bank i s given an opportunity to place before i t s management and shareholders the objections the Bank may have, if any, to the appointment of the selected auditors. The Bank w i l l also consider completing independent peer reviews of audit f i r m s appointed b y PGN to help determine their acceptability. I t i s further proposed that the annual audited financial statements o f PGN are accepted by the Bank as compliance with the financial management policy and loan covenants, provided that total expenditure under this project i s separately and adequately disclosed in the annual financial statements o f PGN. Project implementation controls w i l l be verified by the company’s Internal Audit Department. PGN w i l l also be required to submit to the Bank copies o f the management letters issued annually b y the external auditors, as wel l as the annual internal audit reports,

Entity financial statements of PGN (consolidated) with appropriate disclosures on use of Bank funds in the notes to accounts, audited by external auditors duly appointed by PGN Shareholders.

30th June of following year

I I - I

FMR: Reporting and Monitoring

T o facilitate project monitoring and control, a set o f F M R s w i l l be required f rom the project on a quarterly basis. These reports wi l l comprise information on procurement activity, implementation progress, sources and uses o f funds and a forecast o f funds required for the project. The detailed formats for these have been developed and agreed with the Bank. The first such reports w i l l be required to be submitted no later than 45 days after the end o f the first quarter after effectiveness, and thereafter every quarter not later than 45 days of the quarter-end. Disbursements w i l l also be report-based, as explained above.

Action Plan

The financial management arrangements as outlined herein are considered acceptable for the purposes o f the project, subject to the satisfactory completion o f the action plan summarized in Table A7.2.

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Table A7.2: Action Plan

1. Organizational Assign 1 accounting staff for project Finance arrangements accounting on a full time basis. (PGN) Director, PGN 2. Audit PGN Management undertaking that audit Finance

Before negotiations Before

3. Project implementation

Director, PGN

Project Director, PGN

negotiations

Before negotiations

Supervision arrangements

Specific supervision arrangements recommended for this project are the following:

a. Review o f quarterly FMRs, comprising procurement, physical progress and financial information w i l l be conducted quarterly joint ly wi th task team and wil l be an important supervisory step.

b. Review o f annual audited financial statements o f PGN to identify any accounting or accountability issues that may arise.

c. Achievement o f any financial covenants in financing agreements w i l l be monitored.

d. The Bank may occasionally conduct ex post procurement reviews and financial reviews o f the transactions under this project.

e. Review o f annual internal audit reports and external audit management letters, including follow up o f matters arising.

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Annex 8: Procurement Arrangements

INDONESIA: Domestic Gas Market Development Project

A. General

Procurement for the proposed project would be carried out in accordance with the Wor ld Bank’s Guidelines: Procurement under ZBRD Loans and IDA Credits dated M a y 2004; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated M a y 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan or Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan w i l l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement of Works. Works procured under this project would include customer connection (installation) services. The procurement w i l l be done using the Bank’s Standard Bidding Documents (SBD) for al l I C B and National SBD agreed with (or satisfactory to) the Bank. Four packages covering two geographical areas respectively (one for Banten and Greater Jakarta, and the other for Bekasi and Karawang) wi th an aggregate amount o f about US$3.97 mi l l ion are expected to be procured through N C B procedures.

Procurement of Goods. Goods procured under this project would include (a) supply and distribution mains of 4 inch to 16 inch diameter wi th a cumulative length o f around 256.1 km; (b) f ive off-take and two regulation stations; (c) 210 customer meter and regulation stations; (d) SCADA for pressure and f low control and monitoring; and (e) radio and telecom equipment, IT support and emergency response equipment, as wel l as special tools and equipment for O&M. The goods w i l l also include the associated installation services. All packages w i l l be procured through I C B procedures based on “supply and installation” arrangements, except for a few small contracts for O&M tools. The Bank’s SBD w i l l be used for al l ICB.

Procurement of Non-Consulting Services. Not expected.

Selection of Consultants. Consultant services are expected in the following areas: project management (including procurement services), third party inspection and long-term technical collaboration. N o short lists o f consultants are expected to be composed entirely of national consultants in accordance wi th the provisions o f paragraph 2.7 o f the Consultant Guidelines. All consultants w i l l be selected through Quality and Cost-Based Selection (QCBS) or Quality-Based Selection (QBS) procedures except for small training packages where Selection Based on Consultants’ Qualifications (CQS) procedures would be more appropriate.

All these services w i l l be provided by consulting f irms.

Operating Costs. N o operating costs w i l l be financed b y the Bank loan.

Others. Not expected.

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B. Assessment of the agency’s capacity to implement procurement

Procurement activities w i l l be carried out b y PGN. The PIU established for the project w i l l be staffed by at least 90 (full and part time) people. In addition, PGN has established a 20-member Procurement Committee (comprising managers and staff from all relevant departments, most o f them wi th practical international procurement experience acquired through previous Bank financed projects or training).

An assessment o f the capacity o f the Implementing Agency to carry out efficiently the procurement activities related to the project has been carried out by Bank procurement staff in accordance with relevant Bank procedures and guidelines and based on findings o f the preparation mission in December 2003 and preappraisal mission in April 2004. The assessment report i s available in the project files.

The main r isks associated with procurement for this project are identified as follows: (a) corruption and collusive practices-perceived to be a nation wide issue. Though no specific cases have been reported under PGN sponsored procurement, given the perceived high country risk and general weak procurement environment in Indonesia, the issue s t i l l warrants particular attention during the implementation o f this proposed project; and (b) tight implementation schedule and procurement delays. PGN has entered into a gas supply agreement under which PGN w i l l start to receive gas in end-2006 on a “take or pay” basis through the gas transmission pipeline to be built under JBIC financing. This agreement imposes a very tight implementation schedule on three subcomponents o f the gas distribution network to be financed by the Bank (the Banten distribution mainline, greater Jakarta distribution mainline, and the new off-take substation). Although it i s feasible to complete these subcomponents, every effort should be made b y PGN and relevant parties (including the Bank) to avoid any major delays in procurement and physical construction. Preparation o f the bidding documents i s on the critical path o f the procurement schedule.

Based on the following assessment, the overall project risk for procurement i s rated as “average:

a. PGN has received from the Bank 3 loans (including the ongoing US$6 mi l l ion TA component under the Java-Bali Power project), and several loans f rom ADB, JBIC and others under which procurement activities were carried out without major problems. PGN has extensive experience in international procurement and several o f i t s procurement staff has attended training sessions organized by the Bank and ADB.

b. An external consulting firm w i l l be hired to assist in project implementation and management, including preparation o f prequalification and bidding documents, bid evaluation, contract negotiation, contract management, cost-schedule-quality control.

c. The project i s a specific investment loan with a clearly defined scope. A sound procurement plan has been prepared (covering the entire project period) wi th detailed procurement and construction schedule. Most of the packages w i l l be based on a supply and installation (or EPC-engineering, procurement and construction) arrangement. Basically, all packages w i l l be procured under I C B and subject to Bank prior-review (including Regional Procurement Advisor and Operations Procurement Review

50

d.

e.

C.

Committee). There would be four N C B works packages (installation services). Consultant f i r m s w i l l be hired through QCBS or QBS with Bank prior review. Fol lowing the listing o f 39% o f i t s shares on stock exchanges in December 2003, PGN i s expected to have a more open disclosure policy and be subjected to higher scrutiny f rom i t s shareholders. Government interference in i t s business i s expected to be less than before. I ts accounts are audited by a reputable international firm; and There i s n o record or report on PGN for misuse o f funds under the Bank or other donor funded projects. Nonetheless, the overall perceived country r i s k in Indonesia i s high,

Procurement Plan

The Borrower, at preappraisal stage, developed a draft Procurement Plan for project implementation which provides the basis for procurement activities. The plan has been finalized by PGN and approved b y the Bank. The finalized plan i s available at PGN PIU and the Bank project’s file. I t w i l l also be available in the project’s database and in the Bank’s external website. The Procurement Plan w i l l be updated in agreement wi th the Bank annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

In addition to the prior review to be carried out f rom Bank offices, the capacity assessment of the Implementing Agency has recommended two supervision missions to visit the f ield to carry out post review o f procurement activities.

E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

Table A8.1 contains a l i s t o f contract Packages that w i l l be procured fol lowing ICB, N C B and Direct Contracting.

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Table A8.1

Prior ~

0211 7/06

4 Procure-

ment Method

1 IFB No.

9 Comments

(Description) ed Cost Bid-

Post)

ICB No No I 12/22/05

Prior 02/02/06 t Prior 03/02/06

Prior IFB-1

IFB-2

20.79 mainline

Distribution Mainline

Supply

Supply

Installation

Installation ICB

IFB-3 Offtake station I 8.98 ICB No No I Supply 82

Installation

No 1 No Supply Installation

SCADA and telecommunication

Procurement of pipes for service-lines

ICB

ICB

IFB-4.

IFB-5

IFB-6a

Prior 03/28/06

Prior 01/05/06

Prior 02/10/06

Supply only

Supply only

Supply only

ICB Metering & regulating stations (Banten)

IFB-6b ICB No Yes 1 02’10/06 Prior Metering & regulating

stations (Greater Jakarta & Karawang)

IFB-7 ICB/NCB/ Shopping

Consultant to define the

details; Multi-

contracts.

Special O&M tools & equipment

Prior 08/15/06

03/10/06 IFB-8a ~~

NCB I 1.23 Construction of Branch lines (Banten)

Small Works Contract

Small Works Contract

Small Works Contract

IFB-8b I 1’90

Construction of Branch lines (Greater Jakarta & Karawang)

NCB

No I No NCB No

No I Post 1 09/20/06 Customer installation (Banten)

Customer installation (Greater Jakarta & Karawang)

IFB-9a

IFB-9b NCB

No I No Post I 09/20/06

Small Works Contract

Note: ICB Contracts (goods) estimated to cost at or above US$200,000 per contract and al l Direct contracting (if any) w i l l be subject to prior review by the Bank. Works contracts estimated to cost at or above US$1.5 mil l ion per contract w i l l be subject to Bank prior review.

packages. Given the tight schedules for IFB;1,2, 3, retroactive financing arrangements have been agreed for these

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2. Consulting Services

1 2 Ref. Description of Assignment No.

1. Project management

2. Long term technical

consultant (PMC)

collaboration services

3. Third party inspection

4. Sk i l l enhancements

5. Financial TA

3 4 5 6 7 Estimated Selection Review by Expected Comments Cost ($'m) Method Bank Proposals

(Prior/ Submission Post) Date

5.45 QCBS Prior 02/07/05 Retroactive

3.50 QBS Prior 05/26/05 Retroactive

financing

financing

1.62 QCBS Prior 11/23/05 - 1.70 05/05/06 Not Bank

Financed

1 .oo 05/05/06 Not Bank Financed

b. Consultancy services estimated to cost at or above US$lOO,OOO per contract and all Single Source selection (if any) of consultants (firms), and US$50,000 for individuals (if any) wi l l be subject to prior review by the Bank.

Expenditure Category

1. Goods (including supply and installation)

2. Works 3. Consultant services

c. The project management and long-term technical collaboration consultants need to be engaged in advance of Bank loan approval and signing. I t was agreed during appraisal to request Board approval for retroactive financing.

Contract Value Procurement Method Contracts Subject to Prior Threshold (US$) Review (US$)

>=500,000 ICB >=200,000 >= 100,000 NCB < 100,000 Shopping

<5,000,000 NCB >= 1,500,000 >=200,000 QCBS, QBS >= 100,000 (firms) <200,000 CQS >=50,000 (individuals)

d. Shortlists comprising entirely national consultants: No short l i s ts of consultants are expected to comprise entirely national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. However, in the event this becomes necessary, the ceiling should be US$400,000 per contract.

Bank Prior Review Thresholds

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Annex 8 (A): Clarifications Relating To National Competitive Bidding (NCB) Procedures

INDONESIA: Domestic Gas Market Development Project

1. General

The procedures to be followed for NCB shall be those set forth in Presidential Decree No. 80/2003 o f the Republic o f Indonesia with the clarifications and modifications described in the following paragraphs required for compliance with the provisions o f the Guidelines for Procurement under ZBRD Loans and IDA Credits (the Guidelines).

2. Registration

a. Bidding shall not be restricted to preregistered firms. b. Where registration i s required, bidders: (i) shall be allowed a reasonable time to

complete the registration process; and (ii) shall not be denied registration for reasons unrelated to their capability and resources to successfully perform the contract, which shall be verified through post-qualification.

3. Pre-qualification

When prequalification shall be required for large or complex works (not for simple goods and works):

a. eligible bidders (both national and foreign) shall not be denied prequalification, and b. invitations to prequalify for bidding shall be advertised in at least one widely circulated

national daily newspaper a minimum o f 30 days prior to the deadline for the submission o f prequalification applications.

4. Joint Ventures

A bidder declared the lowest evaluated responsive bidder shall not be required to form a joint venture or to subcontract part o f work or part of the supply o f goods as a condition o f award o f the contract.

5. Preferences

a. No preference o f any kind shall be given to national bidders. b. Regulations issued by a sectoral ministry, provincial regulations and local regulations,

which restrict National Competitive Bidding (NCB) procedures to a class o f contractors or a class of suppliers shall not be applicable to procurement procedures under the Credit or the Loan.

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6.

a.

b.

C.

d.

7.

Advertising

Invitations to bid shall be advertised in at least one widely circulated national daily newspaper allowing a minimum of 30 days for the preparation and submission of bids and al lowing potential bidders to purchase bidding documents up to 24 hours prior the deadline for the submission o f bids. Bid documents shall be made available, by mai l or in person, to al l who are wi l l ing to pay the required fee. Bidders domiciled outside the area, district, or province o f the unit responsible for procurement shall be allowed to participate regardless o f the estimated value o f the contract. Foreign bidders shall not be precluded f rom bidding. I f a registration process i s required, a foreign firm declared the lowest evaluated bidder shall be given a reasonable opportunity for registering.

Bid Security

Bid security, at the bidder’s option, shall be in the form o f a letter o f credit or bank guarantee f rom a reputable bank.

8. Bid Opening and Bid Evaluation

a. Bids shall be opened in public, immediately after the deadline for submission o f bids, and if bids are invited in two envelopes, both envelopes (technical and price) shall be opened at the same time.

b. Evaluation of bids shall be made in strict adherence to the criteria declared in the bidding documents and contracts shall be awarded to the lowest evaluated bidder.

(c) Bidders shall not be eliminated f rom detailed evaluation on the basis o f minor, insubstantial deviations.

(d) N o bidder shall be rejected merely on the basis o f a comparison with the owner’s estimate and budget ceiling without the Association’s or Bank’s prior concurrence.

9. Rejection o f Bids

a. All bids shall not be rejected and new bids solicited without the Association’s or Bank’s prior concurrence.

b. When the number of responsive bids i s less than three, rebidding shall not be carried out without the Association’s or Bank’s prior concurrence.

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Annex 8(B): Anticorruption Plan INDONESIA: Domestic Gas Market Development Project

This Anticorruption Action Plan i s based on an examination o f the overall project cycle, to identify where corruption i s most l ikely to occur, and what mitigation measures are l ikely to be most effective. Because o f the nature o f the project, particular emphasis is given to procurement aspects. Potential r isks o f corruption are identified, and mitigation measures are identified below. Further details o f specific control systems are outlined in Annex 7 (Financial Management and Disbursement Arrangements) and Annex 8 (Procurement Arrangements). The project manual w i l l include more details concerning implementation o f the elements o f this plan, including relevant TORS.

Corruption Mapping

The corruption mapping matrix included below in this Action Plan identifies potential risks o f corruption and specifies appropriate mitigation measures agreed by the PGN.

Action Plan

Specific mitigation actions are presented in the Corruption Mapping Matrix. The fol lowing provides a summary:

(a) Enhanced Disclosure Provisions and Transparency. PGN w i l l establish a filing system to maintain al l the project related documents, including procurement documents, Whilst securing any information that must be kept confidential, the project w i l l ensure that a wide range o f important documents and information w i l l be made public in a timely fashion. The Wor ld Bank’s disclosure pol icy w i l l be followed. In order to increase public awareness o f the important measures, information concerning enhanced transparency and c iv i l society oversight w i l l be included in procurement advertisements. This w i l l include, but not be l imited to the following measures:

1. The PGN and the Wor ld Bank wil l each make publicly available, promptly after completion o f a midterm review o f a project carried out in accordance with this agreement, the midterm review report and the aide-memoire prepared for this purpose.

2. The PGN and the Wor ld Bank w i l l each make publicly available promptly after receipt audit reports (financial or otherwise, and including qualified audit reports) prepared in accordance with this agreement, and al l formal responses.

3. The PGN w i l l (and the Wor ld Bank can):

> make publicly available promptly after finalization all annual procurement plans and schedules, including all updates thereof;

> make available to any member o f the public promptly upon request al l bidding documents and requests for proposals issued in accordance with the procurement provisions o f this agreement, subject to payment o f a reasonable fee to cover the cost o f printing and delivery. In the case o f requests for proposals, the relevant

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documents w i l l only be made available after notification o f award to the successful firm. Each such document w i l l continue to be available until a year after completion of the contract entered into for the goods, works or services in question;

k make available to any member o f the public promptly upon request all short l i s ts of consultants and, in cases o f prequalification, l i s t s o f prequalified contractors and suppliers;

k disclose to al l bidders and parties submitting proposals fo r specific contracts, promptly after the notification o f award to the successful bidder or consultant, the summary o f the evaluation o f a l l bids and proposals for such proposed contracts. Information in these summaries w i l l be l imited to a l i s t o f bidders or consultants, a l l bid prices and financial proposals as read out at public openings for bids and financial proposals, bids and proposals declared non responsive (together with reason for such an assessment), the name o f winning bidder or consultant and the contract price. In the case o f the lowest evaluated responsive bidder i s not awarded the contract, a concise explanation shall be given concerning the justification for the selection. Such summaries w i l l be made available to the public, promptly upon request;

> allow representatives o f the end users of the goods or works being procured to attend the public bid openings, information concerning the selection process and TORS w i l l be included in the project manual;

> make publicly available and publish widely contract award information for all contracts for goods and works above USD100,OOO equivalent and al l contracts for consultants above USD 50,000 equivalent, promptly after such award; and

> make available, promptly upon request by any person or company, a l i s t o f all contracts awarded in the three months preceding the date o f such request in respect of a project, including the name o f the contractor or consultant, the contract amount, the number o f bidders or makers o f proposals, the procurement method followed and the purpose o f the contract.

It w i l l be mandatory to widely disclose salient contract award information.

The PGN already makes annual audit reports public, and wil l continue to do so in relation to this project.

(b) General Stakeholder Oversight. With listing o f roughly 40% o f i t s shares on the Indonesia stock market since December 2003, PGN i s subject to broad monitoring and scrutiny b y the general public. PGN employs an external independent auditor. As outlined in the Corruption Mapping Matrix, specific measures w i l l be taken to encourage representatives o f stakeholder groups to oversee important aspects o f the project. For example, invitations to observe the procurement process (such as bid opening and evaluation) wi l l be sent to carefully selected, independent organizations related to the sector, such as university faculties and other institutions. Though the primary role of these observers i s to observe the procurement process they may have a stronger technical capacity than the end-user representatives, therefore the PGN procurement team may

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decide ut i l ize them as a resource for technical advice. Information concerning the selection process and TORS o f these independent observers w i l l be included in the project manual.

All observers to the procurement process must agree to respect the confidentiality o f the process and must be free from problems related to conflict o f interests.

An Audit Committee w i l l function at PGN, in l ine with GO1 regulations. Review o f the project progress w i l l be included in the Audit Committee agenda.

(c) Mitigating Collusion, Fraud and Nepotism. Although opportunities for collusion and fraud may exist in any project, transparent and well-advertised procurement under the project with appropriate oversight w i l l greatly reduce such risks. Additional safeguard measures wil l be in place, including procurement and project management assistance as wel l as training b y an external consulting firm hired under the project.

External project management consultants w i l l be hired to assist in contract management and provide training to PGN staff, and there w i l l be third party inspection of goods and services delivered. Independent consultants w i l l sign o f f and certify progress before progress payments are made.

To reduce the likelihood of abuse s t i l l further, audits of international standard w i l l be held in accordance wi th current PGN practices.

(d) Complaints Handling Mechanism. The new Keppres 80/2003 provides comprehensive complaints handling procedures. These procedures wil l be strictly followed under the project. A complaints database w i l l be set up by PGN to monitor the response to complaints and follow up actions. Details concerning the complaints handling mechanisms to be employed are given in Attachment A.

(e) Sanctions and Remedies. Clear sanctions and remedies are an important f inal step in the effort to fight corruption. This program w i l l not tolerate corruption. When fraud and corruption in any aspect o f project implementation i s suspected, project management must immediately arrange an independent investigation. If the results o f the investigation confirm the occurrence o f fraud and corruption, administrative action w i l l be taken against any PGN staff who are involved. Further, i f the results of the investigation confirm third party involvement in fraud and corruption, then the parties involved, including consultants, contractors and vendors must be blacklisted by PGN. Cases must be reported to the Bank and also referred for criminal prosecution in accordance with government regulations. Substantiated allegation of a criminal offense must be reported to the police and other relevant authorities.

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TABLE AS (B).l CORRUPTION MAPPING MATRIX Corruption Mapping I Level of I Opportunity for I Mitigation Action

Medium

Area I Risk I Corruption Procurement Stage

Delay in preparation or issuance of bidding

Bidding document or RFPs and evaluation criteria shall be prepared based on Bank guideline.

Procurement Planning Packaging, cost estimates, procurement or consultant selection methods, scheduling

Low Packaging in favor of local suppliers

Procurement Notice would reduce (GPN), Special transparency and limit Procurement Notice competition (SPN), Request for Expression of

Mandatory review by the Bank o f Procurement Plan; packaging and procurement methods to be based on economy and efficiency. As currently planned, majority of procurement will be done through ICB. For the anticipated NCB packages (for installation services), the clarifications of NCB procedures following Keppres 8012003 to be acceptable to the Bank will be included in the Legal Agreement. Majority of procurement packages wil l be based on “supply and installation” arrangements with “prequalification.”

The Bank advertising procedures will be strictly followed; Advertisements will be published in two nationwide newspapers- one in English (Jakarta Post) and the other in Bahasa Indonesia.

Prequalification and Sl Prequalification

Consultant short listing

Bidding Process Bidding documents and Request for Proposals (RFPs)

*t listing Process Medium I Prequalification in

favor of the “preferred” contractors.

the “preferred’ consultants.

Prequalification document shall b e prepared based on the Bank guidelines. Clear and adequate qualification criteria defined in the prequalification documents and followed in evaluation. Bank prior review i s required for all prequalification evaluation reports. PGN will make available to public promptly upon request the list of prequalified contractors.

PGN to provide all the names who expressed interest, criteria and justifications for shortlisting, plus other supporting information. Bank review to ensure the shortlist i s reasonable and justified. PGN to make available to public promptly upon request the consultant shortlist.

documents or RFPs (which may indicate lack of capacity or poor institutional setup).

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Corruption Mapping Area

Bid or proposal evaluation and contract award recommendation

Risk Medium

Corruption Delay in evaluation process that would benefit exclusive bidders or consultants; Bid or proposal rejected for reasons unrelated to the capacity of bidders in carrying out the contract or services; False information provided by bidders or consultants.

Mitigation Action

Procurement Plan will include specific milestones for bid evaluation, which will be monitored by both PGN PIU and the Bank; External project management consultant will assist in bid evaluation; Bank would declare misprocurement for unjustified extension to bid validity; Bank will not issue no-objection to unjustified contract awards; Bank or GO1 disclosure procedures to be enforced. These include, inter alia: - make publicly available promptly after finalization all annual

- make available to any member of the public promptly upon procurement plans and schedules, including all updates thereof;

request all bidding documents and requests for proposals issued in accordance with the procurement provisions of th is agreement, subject to payment of a reasonable fee to cover the cost of printing and delivery. In the case of requests for proposals, the relevant documents will only be made available after notification of award to the successful firm. Each such document will continue to be available until a year after completion of the contract entered into for the goods, works or services in question;

- make available to any member of the public promptly upon request all short lists of consultants and, in cases of prequalification, l i s t s of prequalified contractors and suppliers;

specific contracts, promptly after the notification of award to the successful bidder or consultant, the summary of the evaluation of all bids and proposals for such proposed contracts. Information in these summaries will be limited to a l i s t of bidders or consultants, all bid prices and financial proposals as read out at public openings for bids and financial proposals, bids and proposals declared non responsive (together with reason for such an assessment), the name of winning bidder or consultant and the contract price. In the case of the lowest evaluated responsive bidder i s not awarded the contract, a concise explanation shall be given concerning the justification for the selection. Such summaries will be made available to the public, promptly upon request; - allow representatives of the end users of the goods or works being procured to attend the public bid openings;

- make publicly available and publish widely contract award information for all contracts for goods and works above USD100,OOO equivalent and all contracts for consultants above USD 50,000 equivalent, promptly after such award; and

- make available, promptly upon request by any person or company, a l i s t of all contracts awarded in the three months preceding the date of such request in respect of a project, including the name of the contractor or consultant, the contract amount, the number of bidders or makers of proposals, the procurement method followed and the purpose of the contract.

Bank or GO1 complaints handling and sanctions policies to be enforced. Substantiated allegation of a criminal offense must be

- disclose to all bidders and parties submitting proposals for

- reported to the police and other relevant authorities.

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Corruption Mapping Area

Contract negotiations and finalization

Overall procurement

Project Implementati Contract execution, supervision and audit

Level of Risk

Medium

Medium

Opportunity for Corruption

Contract “price” negotiations; Collusion and nepotism in awarding contract

Risk of kickbacks; collusive practices in contract awards; lower quality of goodskervices.

Medium Goods and services delivered at lower than specified quality or quantity; construction delays; cost overruns; kickbacks from contractors-suppliers- consultants to project staff.

L

Mitigation Action

0 Bank will require detailed explanations and justifications if final contract price differs from that proposed at the evaluation report;

0 Mandatory disclosure of contract award information.

0 Enhanced disclosure, complaints handling and sanctions or remedies as defined in Keppres 8012003;

0 Independent, external observers acceptable to the Bank will be invited by PGN to attend all important steps of the bidding process, including bid opening and evaluation. Though the primary role o f these observers i s to observe the procurement process they may have a stronger technical capacity than the end-user representatives, therefore the PGN procurement team may decide to utilize them as a resource for technical advice. Information concerning the selection process and TORS of these independent observers will be included in the project manual. Al l observers to the procurement process must agree to respect the confidentiality of the process and must be free from problems related to conflict of interest; Enhanced capacity for procurement and contract management (assistance by external consultants, training); Enhanced control system (internal and external): as a publicly listed company, PGN i s now subject to more scrutiny by stakeholders; Project management system includes cross-support and cross-checking mechanisms to reduce and minimize corruption opportunities; Enhanced Bank supervisions (almost all packages are subject to prior reviews).

External project management consultants to be hired to assist in contract management and provide training to PGN staff; Clear testing and acceptance procedures to be specified in the contracts and to be followed; Third party inspection of goods and services delivered; Internal and external auditors are in place; The project i s an integrated part of PGN’s ongoing priority investment which has a firm completion date; delays will cause “take or pay” penalties; PGN will be accountable to shareholders, including BPH Migas, for adhering to the Master Plan, including timely project completion at the expected quality and cost. The PGN and the World Bank wil l each make publicly available, promptly after completion of a midterm review of a project carried out in accordance with t h i s agreement, the midterm review report and the aide-memoire prepared for th is purpose. The PGN and the World Bank wil l each make publicly available promptly after receipt audit reports (financial or otherwise, and including qualified audit reports) prepared in accordance with this agreement, and a l l formal responses.

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Annex 9: Economic and Financial Analyses

INDONESIA: Domestic Gas Market Development Project

This annex provides the methodology, assumptions and results o f the cost-benefit analysis o f the project.

1. Cost-Effectiveness Analysis

During project preparation, a least-cost study was carried out b y PGN for the gas distribution network expansion in Banten, Greater Jakarta, Beksi, Karawang and Bogor o f West Java region, covering 2005-2015. The study i s based on detailed gas distribution network simulations for different scenarios and configuration of gas pipelines. I t considered (a) the capability of the existing systems; (b) the location and demand o f potential consumers (demand nodes); (c) the quantities and important locations o f gas supply (supply modes); and (d) severe constraints on rights-of-way in highly urbanized areas. In addition to the total system costs (both investment and operation costs), technical constraints, such as load factors, line-pack requirements, security o f supply, safety o f operation, minimum pressures and customer attachment to achieve required ramp-up rates in accordance with good industry practices were considered. The proposed project i s part o f the least-cost distribution system expansion plan for West Java region, to supply up to 800 mmcfd of natural gas by 2015. This demonstrates the cost-effectiveness o f the proposed project.

2. Cost Benefit Analysis

A cost-benefit analysis was also carried out to estimate the ERR o f the proposed project.

Economic Costs

The economic costs o f the project include (a) total investment costs for gas transmission pipelines (partly financed by the JBIC) and for gas distribution network (partly financed by the Bank); (b) O&M costs related to the transmission and distribution facilities; (c) expenditures for gas purchases; (d) cost associated with gas losses incurred during transmission and distribution, and (e) conversion investment costs to be undertaken by customers for fuel switching. All the costs exclude taxes and duties and financing costs. The conversion factor i s considered as 1.0 when estimating the economic costs f rom financial costs because the distortions in the exchange and wage rates in the overall costs are not significant enough to justify the use o f shadow prices. Detailed assumptions considered in the analyses are as follows:

The investment costs for the transmission and distribution components o f the project are estimated at US$408.79 mi l l ion and US$107.52 million, respectively, as shown in following tables; The annual incremental O&M costs are assumed to be 2 percent of the investment costs for transmission and distribution components of the project; Gas losses are assumed to be 2 percent of the annual quantity of gas received from producers;

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0 Under the gas purchase agreement between Pertamina and PGN, Pertamina w i l l sell the gas to PGN at the inlet o f the transmission line for US$2.00 per mmBtu for the first year, and the price i s indexed at 2.2 percent for the ensuing years. Although this reflects a financial cost, i t i s assumed to be the average incremental economic cost (AIC) o f the exploration, development and production, given the proximity o f this value to the AIC calculated for Indonesia as part of the Bank’s sector analytical work in 2000 (that is, US$1.90-2.25 per mmBtu). This gas purchase price w i l l be used to estimate the gas purchase costs for the project; and Customer conversion costs were estimated b y PGN at about US$10.3 million. 0

0.70 5.50 6.20 2.00 0.00 2.00 1.36 5.99 7.35 0.86 3.80 4.66

11.22 0.00 11.22 33.18 90.22 123.40

Table A9.1: Investment Cost of the Transmission Component

0.87

Item

1 .a

1 .n 0.00 5.44 0.70

10.41 50.68 21 .a 14.43 248

am 112a 39.84 612

33.43 7.40 4.12 0.00 0.03 0.03

11.66 15.83

113. 47. 7.

30. 12 4.

10. 50. 21. 26. 18.

- 1 .a 1 .a 1 .a 1 .a 1 .a 1 .a 1 .a 1 .a o.a 1 .a 0.01 1 .a

1.w 11293

1.77 6.12 0.00 30.43 5.44 7.40 0.70 4.12

10.41 0.00 0.00 0.00

21 .a 0.00 0.00 0.00 248 15.83

am 39.84 11395 47.92 7.83

30.43 1284 4.82

10.41 0.00

21 .w 0.03

i av

Table A9.2: Investment Costs of the Distribution Component

Components

A. Infrastructure B. Technical Assistance C. Building and Land D. Physical 08% E. Price Contingency F. VAT (10%) Total Project Cost

Note: The infrastructure ir

Economic Benefits

Financial Costs Conversion Local Foreign Total Factor

million) 17.04 74.93 91.97

1 .oo 1 .oo 1 .oo 0.00 0.00

tis table includes the section of distribution l ine to be finance

Economic Price Local Foreign Total

(million (million (million US$) US$) US$)

17.04 74.93 9 1.97

0.70 5.50 6.20 2.00 0.00 2.00 1.36 5.99 7.35 0.00 0.00 0.00 0.00 0.00 0.00

21.10 86.42 107.52 by JBIC (base cost o f US$7 million).

Benefits o f the project (cash f low from sales of gas by PGN) are estimated based on the assumption that the economic value o f gas i s equal to the future market prices o f o i l products to be replaced b y gas. O i l product prices are based on the Bank’s projection o f o i l price during appraisal at US$26 per bbl. Other benefits of the project, such as energy efficiency and product

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quality improvement due to switching f rom o i l products to gas, as well as environmental benefits o f substituting cleaner gas for o i l products, were not considered in the estimate. Detailed assumptions are as follows:

Base case Investment costs Delay in commissioning Reduction of project benefits Gas sales in f i rst five years

0 The volume o f gas sales: Although the carrying capacity o f the transmission i s 450 mmcfd and the capacity o f the distribution system i s 550 mmcfd, the evaluation o f the project benefits was based on the gas purchase agreement signed between PGN and Pertamina. According to the agreement, Pertamina w i l l supply gas to PGN beginning in June 2006 according to the fol lowing schedule: 150 mmJ3tu for the first year, 200 &tu for the second year and 250 mmI3tu f rom the third year up to 2018. I t i s assumed that after 2018, the gas supply w i l l remain at 250 mmcfd level and the price w i l l be the same as that in 2018. PGN has already secured other sources to supply the West Java market o f which about 160 mmcfd could be distributed b y the system expanded under the project. According to PGN’s gas market survey, the fossil fuels to be replaced by gas f rom the proposed project are fuel o i l (18 percent), automotive and industrial diesels (72 percent and 10 percent, respectively). The prices of fuel o i l and diesel are estimated at US$3.74 per &tu (fuel oil), US$6.23 per mmBtu (automotive diesel) and US$6.03 per mmJ3tu (industrial diesel) based on the Bank’s recent long-term forecast of crude o i l prices available at appraisal: US$26 per bbl.

Changes ERR (%) NPV (US$ million) n.a. 20.0 169.0

+30 (%) 13.4 37.8 1 year 16.1 99.4

-10 (%) 12.0 0.0 80% of base case 13.0 24.3

Economic Internal Rate of Return

The base case ERR i s estimated at 20 percent, i f benefits are valued at the current gas sales tariff, and 59 percent, if benefits are valued at future market prices o f displaced fuels, wi th an NPV at 12 percent o f US$169 mi l l ion in the f i rs t case and US$1,152 mi l l ion in the second cases shown in Table A9.4.

Sensitivity Analyses

Sensitivity analyses were carried out on the base case to further examine the robustness o f the economic viability of the project in relation to the major perceived risks, such as increase o f investment cost, delay in commissioning o f the project, reduction o f project benefits and slow progress o f consumer conversions. The sensitivity and risk analyses indicate that even in case o f important increase in investment cost, delay in commissioning and reduction in benefits, the EIRR remains higher than 12 percent, indicating the robustness o f the economic viability of the project. The major results o f the cost-benefit analysis are summarized in Table 9A.3.

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.P ~ ~ ~ ( r ) 0 + ~ ~ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~ ~ ~ . ~ 6 + o c t m c t o o o o o o o o o o o o o o o o o o

5 g g = 0 0 L C i 7

2 ~ 0 g ~ g o o o o o o o o o o o o o o o o o o ~ .- E 3 0 N ~ N 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~ Y I-

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fff

= o : ~ : o o o o o o o o o o o o o o o o o o ~ g 0 ~ 0 ~ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 o 0 0 0 ~ N 4 d

Risk Analysis

T o complement the above detednis t ic analysis, risk analyses have been carried out using a probabilistic approach to assess the impact o f the perceived risk factors that affect the economic return o f the project.

Four broad categories o f r i sks have been considered in the analyses:

0 Demand risk. Demand risk i s related to the slow sales ramp up. I t i s not perceived as a major risk factor in the long term because o f the l ow penetration rate o f gas among the industrial and commercial consumers in the market. However, a lower than expected sales ramp up rate during the first few years o f the operation o f the project could impact the economic viability o f the project. Cost risk. Higher-than-estimated project investment cost usually results f rom (a) higher equipment and materials prices: The major equipment and materials w i l l be procured through ICB. Prices could therefore be affected by market fluctuation; and/or (b) Construction cost overrun: Cost overrun during the construction period i s a common phenomenon for many infrastructure projects. I t s i s caused b y a number o f factors, in particular, delays in construction because o f interface problems between different contractors, unforeseen site conditions, and inadequate project management.

0 Project performance risk. Poor performance could be caused by (a) l ow reliability o f the pipelines and gas supplies and (b) inadequate maintenance and poor management. Both o f them would eventually reduce the output o f the project; therefore reduce the project’s benefits.

0

Based on the foregoing considerations and extensive sensitivity analyses, four variables have been selected as the crucial risk variables because o f the significant impact on the project economic viability. Table A9.5 presents the selected variables, the assumed value ranges and probability distributions attached to them based on past Bank experience.

The risk analysis was carried out wi th the Crystal Ba l l software, which uses Monte Carlo simulation technique. The spreadsheet employed for the risk analysis i s based on the base case cost-benefit analysis (see Table A9.4). The results, based on 5,000 simulations, are summarized in Table A9.6 and Figure A9.2.

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No. Variables Probability Changes Probability Distribution (YO)

The expected EIRR, based on weighted average of all simulated combinations, i s 19.9 percent and the probability of negative outcome i s nil, which shows that the results of the economic analysis i s robust.

Expected ERR Standard deviation Minimum Maximum Coefficient o f variation Probability o f negative outcome

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19.9 6.9 3.0

47.4 0.4 0.0

Figure A9.1

Risk Analysis

Risk Variables Report

80%

60%

40%

20%

0 Yo 0.8 0.9 1 1.1

50%- 40% 30% 20% 10% 0%

0.9 1 1.1 1.2 1.3

1 80%1 1

60%

40%

20%

0%

Risk Variable No. 1

Risk Variable No. 2

Risk Variable No. 3 Distribution Dela Probabilit distribution: DISCRETE

Risk Variable No. 4

40% 30% 20% 10% 0 Yo

! 0.6 0.7 0.8 0.9 1

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Figure A9.2

PGN’s Current Financial Position and Past Financial Performance

Revenues and Expenditures. In 2003, PGN generated a total revenue of US$425 mill ion (based on end-2003 exchange rate; US$1 = Rp 8,465), comprising (a) US$350 million from the sales of natural gas through i t s distribution networks, (b) US$74 mill ion from fees earned for transporting gas through transmission pipelines, and (c) less than half of a mill ion dollars from the sale of LPG. The cost of purchasing natural gas and LPG in 2003 was about US$231 million, representing 66 percent of the distribution revenue. The total operating expenditures (that is, transmission, distribution, general and administration) was about US$96 million, or about 23 percent of i t s total revenue. PGN’s income from operation was about US$98 million, i t s total income before tax was US$89 million and after tax US$62 million.

The revenues were generated from (a) selling an average of 250 mill ion cubic feet per day (mmcfd) of gas through i t s 6 distribution network in West Java, East Java and Sumatra, (b) transporting an average o f 306 mmcfd of gas through i t s three transmission pipelines, and (c) selling small volume of LPG. The average operating margin of gas sales through i t s distribution network in 2003 was about US$1.38 per -tu, and the average transportation fee charged was US$0.55 per &tu.

Assets. PGN’s total assets in 2003 were about US$l.08 billion, including a current asset of US$418 million. Cash and cash equivalent represented 54 percent of i t s current assets, and a short-term investment represented an additional 19 percent. The large cash account i s the result of the proceeds from the multilateral or bilateral loan borrowing, a US$150 mill ion Eurobond issue and a December 2003 public offering of about 39 percent of i t s shares. PGN has not revalued i t s assets because of significant tax implication o f revaluation. However, in 2003, i t revalued only that part of assets transferred to i t s wholly-owned subsidiary, the PT Transgasindo (TGI) .

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Liabilities. PGN’s long-term debts in 2003 was about US$330 million, mostly consisting o f “two-step loans,” owed to the government for the funds borrowed from the ADB, JBIC, EIB, and Wor ld Bank for i t s capital expenditures. In addition, PGN has issued two Euro bonds: (a) a US$ l50 mi l l ion in September 2003 (under regulation S), due in 2010 with an option to extend to 2013, and bearing an interest o f 7.5 percent; and (b) a US$125 mi l l ion in February 2004 (under 144A), due in 2011 with an option to extend to 2014, and bearing an interest o f 7.5 percent. Both notes were rated “B2” b y Moody’s.

Shareholders’ Equity. Prior to 2003, i t s authorized capital consisted of 800,000 shares wi th a nominal value of Rp 1 mi l l ion per share, o f which 200,000 had been issued and fully paid. In November 2003, the shareholders approved the increase the company’s authorized capital f rom Rp 800 bi l l ion to Rp 7 trill ion and the decrease o f the par value to 500 per share. Accordingly, 3.5 bi l l ion shares were fully paid. In December 2003, PGN received approval to sell about 38 percent o f i t s shares through public offering. The stocks were listed in Jakarta and Surabaya stock exchanges on December 15, 2003, at Rp 1,500 per share. PGN’s total equity in 2003 was about US$390 million.

PGN’s net cash f low amounted to US$65 mi l l ion f rom operation activities, and US$372 from financial transaction, the latter mostly resulting f rom proceeds o f borrowing, issue o f Euro bond and the PO. PGN had also spent about US$250 mi l l ion in 2003 toward i t s capital expenditures. PGN’s end-2003 cash stood at US$227 million, a net increase o f US$135 mi l l ion during 2002. Table A9.7 below provides a summary o f PGN’s income statement and balance sheets for 1999- 2003.

As shown above, the revenue from operation has been growing at about 15 percent per year, on average, during the period, reflecting both the increase in gas sales on average and in gas sale prices. The operating income has been growing on average at about 16 percent between 2000 and 2003. The net income before tax, however, has been fluctuating significantly as a result o f the fluctuation in “other” income and charges, particularly foreign exchange fluctuation.

The increase in current assets in 2002 and 2003 are largely the IPO and the bond issue (in 2003) despite the sale o f TGI (in 2002). The Work in Progress increased in 2002 because the Grissik- Singapore pipeline was s t i l l under construction, and the net fixed asset almost doubled in 2003 when this pipeline became operational. Current l iabi l i ty increased in 2002 because o f PGN’s obligation to the Grissik-Singapore pipeline contractors, and the long-term debts increased because o f the US$l50 bond issue.

During the past 5 years, PGN has maintained a healthy current ratio (ranging from 1.5 to 4.4, but mostly above 2), a solid rate o f return (ranging f rom 18 percent to 3 1 percent), and an acceptable debt service coverage ratio (ranging from 1.05 to 2.75 times).

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At the time o f appraisal, audited or consolidated financial information was unavailable for 2004.6 Therefore, preliminary year-end financial estimates from PGN were used to ensure that the overall financial performance trend remained as initially forecast for the year. PGN continued to expand their market as envisaged, and earned a total revenue o f US$512 mi l l ion (based on average 2004 exchange rate of US$1 = Rp 8,700), comprising (a) US$426 mi l l ion from sales o f natural gas f rom i t s distribution network, (b) US$86 mi l l ion f rom transporting gas through PGN pipelines. Unl ike in previous years, they did not have any income from the sale o f LPG since PGN dropped this business line. These revenues were generated largely by selling nearly 300 mmcfd o f gas, an increase o f 50 mmcfd from the previous year. The transmission revenue was generated by transporting 420 mmcfd, o f which nearly 80% was f rom Grissik to Duri in Northern Sumatara and the remainder to Singapore. The initial data indicate that PGN purchased a total o f US$274 mi l l ion in natural gas from suppliers, which makes up 64% o f distributional revenue. The operating expenses were US$119 million, which i s higher than init ial ly forecast but was offset by a 40% reduction in the expected foreign exchange loss. Consequently, PGN had an operating income of US$118 million, total income before taxes o f US$76 million, and after taxes of US$56 million.

PGN’s Future Finances

With the implementation o f the new Oil and Gas Law, PGN w i l l face major challenges because: (a) i t could loose i t s monopoly in the distribution segment; (b) i t w i l l gradually operate in a regulated competitive market; and (c) i t w i l l be required by law to provide third party access to i t s transmission distribution networks at regulated prices. Although the new law clearly creates a healthier environment for competition and provides for a more efficient operation o f the sector in future, i t has also the potential to negatively impact the level o f PGN’s profi t margin. Although i t i s not possible, at this stage, to assess the impact o f the pricing pol icy that w i l l be in effect in the future, a sensitivity analysis indicated that a reduction in the sales price o f gas by 5% w i l l s t i l l enable PGN to maintain a healthy financial structure. I f the price change was expanded to lo%, however, i t w i l l be difficult for PGN to comply with the Wor ld Bank loan covenants in some years.

Additionally, future competition can also curtail PGN’s ability to expand, especially at the pace that was initially envisaged b y the company. The Wor ld Bank and PGN worked closely to develop a l ow growth forecast, reducing the total investments f rom US$4.4 bi l l ion to PGN’s about US$2.2 bi l l ion f rom 2005 to 2010, or an average o f nearly US$365 mi l l ion per year (with an average o f approximately US$440 mi l l ion per year between 2005 and 2007). Under this scenario, PGN s t i l l expects to increase gas sales by 34% per year on average and stressed that i t has already enlisted enough customers for more than 50% o f their expected medium term gas supply. Nevertheless, PGN conducted sensitivity analyses by reducing sales by 10 and 30% and assessing the resulting financial implications. The results indicate that the financial situation remains robust and the company w i l l s t i l l be able to maintain financial viability and meet the Bank loan covenants during most o f the years. I f future sales are reduced by lo%, PGN would s t i l l (a) adequately service i t s debt and meet the loan covenant; (b) be able to finance at least

PGN audited financial statements were released just prior to Board presentation, and validates the overall direction of the company’s financial performance. There were only minor variations between the unaudited and audited financial figures.

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25% of i t s investments through internally generated sources; and (c) maintain a return on i t s assets that i s greater than 14% annually. A more substantial reduction o f 30% in sales w i l l s t i l l enable PGN to have a debt service coverage o f no less than 1.46 and a self financing ratio o f more than 25% except in the heaviest investment year (2006, when ratio i s 20%), and maintain a higher than 11% return on assets during all the period. Despite the robustness o f i t s financial situation, i t i s important that PGN management continues to carefully monitor the company’s financial performance and take necessary actions to maintain financial viability in the event the expected sales would not materialize.

Table A9.8 provides a summary of the forecast o f PGN’s future financial performance, including i t s estimated income statement, balance sheets and cash f low statement for 2004-2009.

After discussions with PGN and taking into account the critical areas that warrants closer monitoring wi th regard to PGN’s future finances, i t was agreed that the proposed loan would include the fol lowing financial covenants:

T o ensure satisfactory financial performance by PGN wi th respect to adequate level o f revenues generated, PGN would be expected to produce, for each fiscal year, sufficient funds f rom i t s internal sources equivalent to about 25 percent o f i t s average annual capital expenditures ;

To ensure a sound capital structure and a prudent strategy on long-term borrowing, before PGN incurs any new debt, i t would be required to demonstrate that a reasonable forecast o f i t s revenues and expenditures for each fiscal year would produce sufficient net revenue to be at least 1.5 times i t s estimated debt service requirements (including the new debt); and

T o ensure adequate capitalization o f the company, PGN i s not expected to incur any debt, if after the incurrence of such debt the ratio o f debt to equity shall be greater than 75/25 during 2005-2009 and 70/30 thereafter.

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Annex 10: Safeguard Policy Issues INDONESIA: Domestic Gas Market Development Project

The Environmental Impact Assessment Report (EIAR), prepared in 1998 before the project was postponed because o f the financial crisis, was updated in 2003 and approved by the Ministry o f the Environment (MOE) in December 2003. PGN provided the Bank with the EIAR, including an Executive Summary, as well as the letter o f approval from MOE. The EMP was also updated in 2003 and approved b y MOE. In July 2002, a public consultation was convened for the project in Jakarta. This consultative workshop was conducted with input from Wor ld Bank staff and consultants, and included participation o f central, regional and local governments, as wel l as NGOs and community organizations. In April-May 2004, PGN, with international consultant assistance, prepared a revised “Environmental and Social Impact Assessment and Environmental Management Plan (EIA-EMP)” in English language, which serves as the summary report for the Bank and public review.

An EMP has been developed based on the results o f the environmental impact assessment (EIA). I t identifies the important environmental impacts, and the procedures and measures to be taken to mitigate the adverse impacts. According to the EMP, PGN w i l l establish a PIU with overall responsibility for coordinating and managing the project, and an ECO to oversee and support the monitoring and mitigating activities. The ECO wil l serve as the core unit for environmental management and monitoring. I t s capacity w i l l be strengthened under the capacity building program for environmental management proposed in the EMP. These arrangements are regarded as adequate.

Attached i s the summary and introduction o f the Environmental Impact Assessment Report.

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EXECUTIVE SUMMARY

1. Introduction

This Environmental & Social Assessment / Environmental Management Plan (EINEMP) has been prepared by PT Perusahaan Gas Negara [PT PGN (Persero) Tbk]’ as part of its preparations for the proposed Domestic Gas Market Development Project with the World Bank.

Prior to the regional economic crisis, the Bank considered providing a loan to PGN for a transmission and distribution project to increase gas utilization in West Java. The original project design involved both construction of a transmission line from gas fields in South Sumatra to West Java and the extension of the gas distribution network in West Java. An Environmental Assessment Study for the then considered project was prepared by PGN. During the crisis, the project was postponed by the Bank and finally dropped.

By the time project discussions resumed in November 2001, the Japanese Bank for International Cooperation (JBIC) had agreed to finance the Sumatra-Java transmission pipeline. The Government then requested a World Bank loan to expand the West Java gas distribution system under the proposed Domestic Gas Market Development Project.

This summary synthesizes the full Environmental Impact Assessment (EIA) Report prepared by PGN based on detailed Indonesian environmental assessment analyses and studies, completed and approved by the AMDAL Commission (under the Ministry of Mining and Energy) in 1999 and updated and re-approved by the Central AMDAL Commission (under the Ministry of Environment) in November 2003. The EIA Report covers PGN’s gas distribution expansion plan in West Java partly financed by the Bank and complies with the World Bank’s environmental and social requirements (including operational policies on environmental and social safeguards).

2. The Project

The proposed project aims at expanding the supply and utilization of natural gas, the cleanest fossil fuel, in Indonesia’s domestic market to improve economic efficiency and reduce pollution resulting from the heavy reliance on fuel oil and diesel.

The project consists of: (i) a gas distribution component to expand gas utilization in BantenWest Java region, and (ii) a capacity building component to strengthen PGN’s (the project owner) financial, planning, engineering and management capability. The project is linked to a Japan Bank for International Cooperation (JBIC) financed gas transmission project to bring gas from South Sumatra to BantenWest Java region.

The distribution project comprises: (i) construction of class 300 steel pipelines of 4 to 16 inch diameter (about 186 km) along with control valves and corrosion control facilities; (ii) construction of class 150 pipelines of 4 to 16 inch diameter (about 71.4 km) along with control valves and corrosion control facilities; (iii) installation of five off-take and two pressure regulation stations; (iv) installation of around 21 0 customer metering and regulating stations; (v) installation

’ Referred to as PGN thereafter.

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of SCADA system; and (vi) provision of radio/telecommunication equipment, IT support and emergency response equipment.

The proposed Bank-financed project is linked to a JBIC financed transmission project. Project preparations are well underway with construction planned to commence in the second quarter of 2005. The EIA Report for the transmission project was prepared and approved by the AMDAL Commission in 1999. It has been discussed and approved by JBIC, and disclosed to the public following JBIC’s disclosure procedures. A social assessment report and a Resettlement Action Plan (RAP) were prepared in 1998 to comply with AMDAL procedures and JBIC’s requirements. The RAP was recently updated by PGN at JBIC’s request. And its implementation is underway.

3. Indonesia’s Environmental Legal and Institutional System - The AMDAL System

Indonesian EIA is widely known by its acronym, AMDAL - Analisis Mengenai Dampak Lingkungan Hidup (literally, “Analysis of Impacts on the Living Environment”). The Ministry of Environment (Kementrian Lingkungan Hidup, KLH - or LH) is responsible for national-level functions for environmental enforcement, including oversight of the AMDAL process. Regional Environmental Impact Management Agency (BAPEDAL - Badan Pengendalian Dampak Lingkungan Hidup) offices, directly as offices of local governments, have recently been given the principal role in AMDAL review and environmental management at the regional level.

The AMDAL Process

AMDAL requirements apply to most government and private sector projects. Carrying out an AMDAL study is the responsibility of the project developer or proponent, as are the mitigation and monitoring of the project’s impacts. The types of activities subject to AMDAL are specified most recently in the Ministry of Environment Decree Number 17/2001, Types of Business and/or Activity Plans that are Required to be Completed with the Environmental Impact Assessment.

A full AMDAL assessment involves a three-step process of studies and reports:

0

0

0

ANDAL (Analisis Dampak Lingkungan - Analysis of Environmental Impacts); RKL (Rencana Pengelolaan Lingkungan -Environmental Management Plan), and RPL (Rencana Pemantauan Lingkungan - Environmental Monitoring Plan).

From the perspective of a project developer, the AMDAL process involves up to seven steps:

0 project Identification screening

0 scoping, with Public Consultation 0 approval of the KA (TOR)-ANDAL 0 assessment, and preparation of the mitigation and monitoring plans 0 approval of the assessment, management, and monitoring plans 0 implementation, monitoring, and reporting.

Development activities that are unlikely to have significant or widespread environmental impacts* are subject to a less rigorous and specific set of AMDAL studiesg:

~ * Kepmen 481/PU/1996 defines those activities requiring UKL/UPL in the public works sector, for example, and there are similar decrees in other sectors.

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0 UKL (Upaya Pengelolaan Lingkungan -- Environmental Management Procedures), and UPL (Upaya Pemantauan Lingkungan -- Environmental Monitoring Procedures).

These procedures are not subject to evaluation by an AMDAL commission. The “less significant” environmental aspects of these projects are to be covered within the Standard Operating Procedures (SOPS) of the implementing agency.”

Decentralization of AMDAL Review and Approval

Law Number 22/1999 gave wide authority and responsibility to the Regions; they now must function on their own initiative to meet the interests of the local public and fulfill the potential of their region. The role of central government-the Ministry of Environment-is now only to give technical supervision, facilitate and promote, and set national standards related to environmental affairs, For AMDAL, the only projects subject to review at the national level are those involving defense and security, cut across more than one province, are in areas of dispute or borders with other countries, or that concern marine regions more than 12 miles from shore.

For full-fledged AMDAL studies - ANDAL-RPL-RKL - evaluation and approval are undertaken and provided by an Evaluator Committee or AMDAL Commission chaired by the Deputy Minister of Environment. Their work is guided by the Guidelines for AMDAL Document Evaluation, BAPEDAL Decree Number 2/2000. The AMDAL Commission draws upon the expertise of all concerned government agencies, public sector organizations, universities, NGOs and the private sector. Each BAPEDALDA has its own local AMDAL Commission, to review ANDAURKURPL studies under their jurisdiction (and not subject to review by the national AMDAL Commission) and supervise the implementation of the AMDAL during construction and operation of the projects.

According to BAPEDAL Decree Number 17/2001 (Types of Business andor Activity Plans that are Required to be Completed with the Environmental Impact Assessment),”construction of onshore gas transmission pipelines of 50 km or more in length and having a diameter of 20 inches or greater, and all offshore gas transmission pipelines, require an EIA. Therefore, the proposed project required a full AMDAL assessment (equivalent to full EA in line with Bank requirements and procedures of category A projects).

4. Baseline Data

The project region: The proposed distribution project would support construction of new pipelines and branch lines to extend PGN’s gas distribution system in West Java (Greater Jakarta, and Provinces of West Java and Banten). PGN’s existing distribution system in this region is readily divided into three Zones: Greater Jakarta ( l ) , Banten (2) and West Java (3). The proposed project will be implemented in these three zones which are in general heavily urbanized or industrialized. There are no protected areas, or critical natural habitat sites in the vicinity. The proposed distribution pipelines will follow existing national, provincial and district roads and will not cross any culturally or socially sensitive areas.

As set out in KEP-I2/MENLH/3/1994.

Kep. BAPEDAL, No. 09, Tahun 2000, Pedoman Penyusunan Analisis Mengenai Dampak Lingkungan Hidup. lo Ibid l1

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The climate, air quality and noise emission: West Java has a tropical climate. Temperature and relative humidity are fairly uniform throughout the year. The rainy season is from October to the end of April and the dry season is from May to September. In zone 1, the annual mean rainfall is about 1850 mm with the highest monthly value at 425 mm in January and the lowest at 47 mm in July. In zone 2, the annual mean rainfall is about 1725 mrn with highest monthly value at around 300 in February and the lowest value at 56 mm in August. In zone 3, the annual mean rainfall is 1809 mm with the highest monthly value at 371 mm in January and the lowest value at only 26.5 mm in August.

The air quality (S02, N02, CO, HC and dust) and noise level were measured in 1999 and re- measured in 2003. The results show that all the values of ambient air quality parameters measured meet the national standards in the project region. Noise emission levels were sometimes higher than the national standards during the busy traffic hours.

Geology, morphology, topography, soils and hydrology: Principal geological features in the project areas include:

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0

0

0

0

0

0

Volcanic sediment (zone 1 ): consisting of andesine, lava, breccias, volcanic breccias and tuffs; Alluvial sediments (in zone 2 and 3): consisting of swamp and river alluvial sediments, in the forms of hunks, pebbles, sand, clay, and organic materials; Banten tuffs (in zone 2): consisting of tuffs, pumices and tuffs sandstones; Bunning pinang basals (in zone 2): in the form of a basal diabasic texture; Flood plain sediments (zone 3): consisting of sandy clay and humic clay; Tuffs sandstone and conglomerates units (in zone 3): consisting of tuffs sandstones, conglomerates and breccias; and Citalang formation (in zone 3): consisting of conglomerates, sandstone and breccia.

In zone 1, the sloping is between 0 4 % with land elevation of 0 to 1 meter above see level. Morphology units in zone 2 are river and coastal alluvial plains, sloping between O-5percent with land elevation of 0 to 15 m above sea level. Land in zone 3 crossed by the proposed pipeline routes is relatively flat and in the type of flood sediment, with elevation ranging between 0 to 5 meters.

Typical soil types in the project areas include alluvial, latosol, podzolic and regosol soils, clay and other materials from volcanic eruption. Along road shoulders that will be used as the pipeline routes, the uppermost soil layer from 10 to 20 cm thickness typically consists of small stones. The second deeper layer from 40 to 50 cm thickness consists of soils, followed by a layer of ordered-stones of 20-30 cm thickness, and finally reaching the original soils in the deepest layer. Analysis of soil samples in the project region shows that soil erosion rates are all in the tolerate range.

Total numbers of water crossings on the proposed gas pipeline route are 10 in zone 1, 151 in zone 2 and 102 in zone 3. Most of the waterways to be crossed by the pipeline are streams with width below 3 meters (3 in zone 1, 82 in zone 2 and 55 in zone 3). Only 18 rivers are classified as “big rivers’’ (width above 10 meters). 7 of the big rivers are in zone 1 , 6 in zone 2 and 5 in zone 3. The rest are small rivers (with width between 3 and 10 meters) and irrigation canals. The discharges of those big rivers range from 2.5 to 9 cubic meterskecond and their mean depth ranges from 0.7 to 2 meters.

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Analysis of water samples in the project areas indicates that most of the parameters do not meet the highest water quality standards (class 1). Some, such as Total Suspended Solid (TSS) and Total Dissolved Solid (TDS) do not meet even lower quality standards (The Class II and Ill). Analysis also showed that there is no significant level of mercury in the study area and the highest values of lead were lower than the safe limit under class II and Ill standards. Analysis of water samples from zone 1 also indicated that surface water in the region contains higher level of Chloride (Cl), detergent, and BOD than national water standards. Chloride comes from natural abrasion along the body water, whereas high BOD level is caused by pollution from industrial wastes. People’s daily activities alongside the river using detergent are responsible for higher detergent level.

Biodiversity: A floristic survey along the proposed gas pipeline was conducted and 11 species were found, Most of them were shade or canopy-trees, planted in the sidewalks or on the shoulder of the roads. In the project area, roadside vegetation along the proposed gas pipeline route provides the only available habitat for wildlife. Accordingly, wildlife found in the area is limited and no protected species were found.

Benthic communities in the river crossings are potentially vulnerable to temporary disturbance during construction of the pipelines. Other aquatic biota like plankton, nekton, and fishes are unlikely to be affected by the construction or any wastewater flows from the project. In general, the habitat quality for benthos organisms in the project areas is poor. The water bodies in the area are characterized by strong currents, and hard substance.

Land use: Since the proposed distribution pipeline will be located along the shoulders of the existing roads, land use analysis focused on the land alongside the proposed pipeline routes. According to the updated survey carried out in 2003, major land uses in the project areas are 48% for settlements (27% for villages and 21 % for towns), 36% for industry, 14% for agriculture (including trees and crops) and 2% for tourism.

Social-economy, governance, culture: In zone 1, the proposed pipeline will pass through the districts of Kedep, Bekasi, Tegal Gede (south Jakarta), and Cakung, Cilincing (north Jakarta). The pipeline route in zone 2 will pass through the districts of Tangerang, Serang and Cilegon city, all of which are within the recently created Banten Province. For zone 3, the project passes through the districts of Karawang, Cikampek, and Punvakarta, which are part of West Java Province. The population density of villages in the project areas is usually over 400 people/km2. The dominant occupations of local people living near the project route are industrial workers, traders, private employees and civil servants in the town areas, and farmers in the countryside. Along the road side, a lot of people also work as owners and/or employees of stores, shops and semi-permanent kiosks.

The roads that the pipeline route follows include national-class roads (93.1 km), provincial class roads (106.3 km) and district class roads (49.2 km). At some points of the roads mostly along industrial estates, offices and trade centers, traffics are heavy, especially during the morning and evening “rush hours.”

5. Evaluation of Alternatives

The following alternatives were sequentially considered during the project design and preparation:

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Expansion of gas business versus “business as usual”: Prior to engaging in this important investment program, PGN considered to continue a business as usual approach entailing a less aggressive strategy of conversion to gas of small industries and businesses and therefore a low growth of the Banten-West Java gas market. The “business as usual approach” has been rejected for four reasons: (a) the expansion of the gas market was in line with the government energy strategy to develop the domestic gas market because of its economic and environmental advantages over oil products and coal; (b) a market scoping study showed a strong preference of small industries and businesses for gas; (c) expansion of the gas market would strengthen the financial situation of the company; and (d) without of the expansion of gas market, some energy consumers will continue to use oil and other “dirty” fossil fuels which will have more negative environmental impacts.

Choice of gas supply: Two alternatives were considered for gas supply: gas fields in South Sumatra or onshore and offshore small fields in West Java. An Asian Development Bank (ADB) study found that, delivering gas from the South Sumatra fields to the West Java market was preferable to relying on closer but limited and more costly to develop fields in West Java onshore and offshore. The gas reserves in South Sumatra fields have been formally certified by a reputable international company (D&M), which has issued certification indicating 3.85 tcf in the Proven and Risk Adjusted categories. This level of reserve could easily support up to 500 mmcfd of gas supply for the economic life of the proposed project (20 years). The option of transmitting gas from South Sumatra to West Java was selected.

Expansion of the distribution system: PGN considered alternatives for the expansion of its distribution system taking into accounts: (a) the capability of the existing system; (b) the locations and demand of the potential consumers (demand nodes); (c) the quantities and input locations of gas supply to the system (supply nodes); and (d) severe constraints on the right of way in highly urbanized areas. The latter reduced the number of alternatives for expansion to two, mainly differentiated by the pipeline diameters along the same routes to satisfy a demand of 500 mmcfd in the first case and a demand of 800 mmcfd in the second case. The first option would have required further reinforcement of the system after 5-7 years to meet the full potential demand of 800 mmcfd by 2016. It was rejected because it was less cost effective and would have entailed more temporary negative environmental and social impacts.

6. Likely Impacts and Mitigation Measures

Positive impacts: the project will provide important positive environmental benefits as shown in following table. In addition, Indonesia’s contributions to the global greenhouse gas emissions will be reduced.

Table 6.1 Likely Positive Impacts of the West Java Gas Distribution Expansion Traffic Soil Erosion

Air and Noise Pollution

Reductions in traffic of lorries and other vehicles delivering fuels to industries and other customers throughout the region, Construction is likely to help to stabilize drainages in some locations. Reductions in regional air emissions for all pollutants and greenhouse gases. Improved air quality within factories that convert to natural gas. Reduced dust and emissions from fuel delivery vehicles. Reductions in noise from traffic of lorries and other vehicles delivering fuels to industries and other customers throughout the region. There will be modest reductions in water use by fuel delivery vehicles and in maintenance of industrial combustion Water Pollution -y”,r.”-. ... Creation of short-term employment for local unskilled laborers during the construction and temporary Increase in cash flow to the local economy, particularly the informal sector, due to expenditures from construction workers. Some modest long-term employment opportunities. General reductions in fuel prices, improved industrial efficiency, and improved competitiveness of industry in the region, with on-going stimulation of business opportunity and development.

Socio- economic

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Negative impacts: there will also be some negative impacts from activities funded under the project as shown in following table. But none of the impacts identified and addressed in this assessment are likely to be major, sustained, or irreversible. Most of these impacts will occur during the construction phase only. All can be mitigated to some extent through good environmental planning and practices. All of the negative impacts can be mitigated satisfactorily by applying PGN’s established standard operating procedures (SOPS) for design, construction and operation as presented below.

Table 6.2 Likely Negative Impacts and Mitigation Measures of the West Java Gas Distribution Expansion during Construction Phase

time. This section must be backfilled within 24 hours, and backfilling must occur before the next section is opened. Contractors are required to maintain public safety and smooth traffic flow at project sites. Local traffic control authorities will be informed in advance. Temporary bridge will be in place when necessary. The public will be informed about the work schedule and The project will be mainly implemented in the dry season. Everv effort will be made in advance to check with local authorities

meters, buttemporary disruption of access from street to markets, businesses, factories, restaurants, residences will occur. Also, temporary increases in traffic for delivery of materials, and slow down of traffic in work areas will occur. At crossing points, there may also be some temporary interference with roads and railways.

Traffic

Other There is some risk during construction to existing Underground underground utility infrastructure, such as water Infrastructure supply and cables. will be by hand. Soil Erosion There is likely to be some storage, spillage, and

erosion of excavated soil on private land adjacent to the route. Potential release of hydrostatic testing water and waste solids generated during construction on private land adjacent to the route.

and itilities, and virtually all digging for the pipeline construction

The construction will be mainly conducted in dry season. If heavy rains occur during excavation, the trench and piled soil from it is to be covered with plastic tarps. During excavation along public roadways, removed soils will be placed into patch boxes. Proper compaction of the restored soil is monitored by PGN’s work site inspectors. Release of hydrostatic testing will be well managed according to PGN’s procedures. Excavation will be done by hand shoveling; The use of “patch boxes” for holding the excavated soil. Spray water on dry soil if necessary. The pipeline excavation and installation will not use motorized equipment, which could generate high levels of noise. The delivery by lorries of piping and construction materials will be twice each hour or less at any one location.

Construction will produce fugitive dust from topsoil removal, trench excavation and backfilling, and from storage of excavated soil adjacent to the excavated

Noise from construction -vehicles and equipment, materials loading and offloading, pipe cutting and welding, pipe stringing, etc. -- may cause nuisance wherever the pipeline passes near to homes and businesses. Rain and other of water from trenches may become contaminated with lubricants from vehicles and equipment that eventually flows into public drainage ways or directly to waterways. Water from pigging and hydrostatic testing is likely to be released to storm water drains in urban areas, or directly into waterways.

Air and Noise Pollution pipeline trench.

Water Pollution The project will be mainly implemented in dry season; All the hydrostatic testing will be conducted under PGN’s supervision. The point of water release will be controlled by temporary plastic draining pipes and the rate of water release will be controlled to minimize the impacts on receiving rivers; During the construction stage: (i) for small rivers (width of 4 0 m), an overhead crossing with an I-beam design will be used; and (ii) for big rivers (width >lorn), a steel bridge will be installed for holding and supporting the pipes. In addition, pipe bridges will be installed alongside with existing roads. Most of the excavated soil and other solid wastes will be back-filled on site. Excess soil and other solid wastes will be removed from the site in standard woody boxes. Permission will be obtained from local authorities or private landowners for disposal as landfill. Pigging process will be carefully managed to produce least amount of solid wastes.

Solid Waste Vegetation removal during site leveling and preparation Removal of concrete surfaces in urban and industrial areas Release of hydrostatic testing water may contain spent welding rods, mill cuttings, stones, and rubble.

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Socioeconomic Businesses are likely to suffer temporarily due to physical obstruction caused by construction activities. Increased risk of pedestrian injury from traffic accidents during construction due to physical obstruction or removal of walkways.

Construction will be carefully planned to minimize disturbance to the local businesses; Measurable losses and damages of local businesses caused by the project will be compensated; The contractors will be required to maintain public safety and smooth traffic by preparing and installing required signs; The contractors will also be required to coordinate with local authorities to maintain public safety.

Table 6.3 Likely Negative Impacts and Mitigation Measures of the West Java Gas Distribution Expansion during Operation

Likely Negative Impacts Mltigation Measures Durina ODeration, emissions from aenerators and The five off-take stations are isolated awav from human relea& of natural gas (predominantly methane [CH.,]) from offtake stations are very unlikely, but might

The odorizing plants will be in isolated locations, so Injection of THT (tetrahydrothiophene) to the gas is unlikely to cause any nuisance. Natural gas is flammable and explosive, so the operation of any natural gas pipeline poses risks. Safety risks can arise from: pipeline damage, with resulting release of natural gas; leakage through valves and flanges; leakage through fittings and regulators; and release of THT at the odorizing plant, including leakage from THT storage drums

habitation. Pipeline and offtake stations will be designed according to standards consistent with international practices to avoid leak There will be systems to detect and react to leaking rapidly.

During the course of project preparation, and distinct from the EA and EMP preparation, safety aspects of PGN's overall operations and specifically for the project have been jointly reviewed by Bank experts and PGN staff. The pipeline will be designed to ASME 831.8 Class 4 standard consistent with densely populated urban areas. The entire West Java gas distribution system is designed for compliance with the Indonesian Pipeline Standards, which is the equivalent of the American Society of Mechanical Engineers (ASME) Code B31.8 Gas Transmission and Distribution Systems (1 989 edition). PGN also uses the latest edition of the ASME code, supplemented by specifications and standards from the Institute of Gas Engineers and British Gas. In addition, PGN has established procedures and specifications covering construction, commissioning, operation

Air and Noise Pollution happen (very low probability).

Safety and Risks of Accident

7 . Environmental Management Plan

EMP Purpose and Objectives In accordance with the requirements of the World Bank's OP4.01 on Environmental Assessment, this Environmental Management Plan (EMP) has been prepared for the project. The purpose of the EMP is as follows:

0 Provide direction to owners, contractors, operators and environmental regulatory agencies on environmental protection measures that need to be implemented to eliminate or reduce environmental effects of construction and operation activities of the proposed project; Delineate the requirements for environmental monitoring and inspection activities of the project sites, including identification of the group or agency responsible for monitoring or inspection, type of monitoring or inspection to be undertaken, parameters to be tested, monitoring and inspection schedule, and reporting requirements; and Identify organizations or institutions responsible for managing the environmental program, which will ensure environmental protection measures are properly designed and implemented, undertake environmental monitoring, and prepare environmental reports for the project.

83

Institutional Roles and Responsibilities

PGN currently incorporates Indonesian EA procedures (AMDAL) into project planning and implementation wherever required. For the proposed project, PGN will establish a Project Implementation Unit (PIU) with overall responsibility for coordinating and managing the project, including environmental issues and an environmental coordinating office (ECO) to oversee and support the monitoring and mitigation activities is being developed at PGN’s central office in Jakarta. The ECO will serve as the core unit to be strengthened under the environmental management capacity building program proposed in the EMP.

During the project preparation stage, as the proposed project will pass through more than one provinces, its AMDAL process is overseen by the national level AMDAL committee chaired by the deputy minister of the Ministry of Environment and the Director of Environment of the Ministry of Environment is the secretary of the AMDAL committee.

During the construction stage, any issues of environmental and social compliance, monitoring, and reporting would continue to be under the authority of the PIU. The implementation of AMDAL will be contracted out to contractors. All contractors will be monitored to ensure full compliance with Indonesian legislation and the approved EIA (including EMP). PIU will report to provincial (level 1) and regional (level 2) BAPEDAL quarterly for the implementation of AMDAL of the subprojects carried out by contractors in the regions and the provinces.

Once construction is completed, responsibility for any continuing monitoring and reporting work is under the authority of the General Manager of the Strategic Business Unit 1 (SBUl) of PGN. Again, the General Manager of SBUl will report quarterly to the regional and provincial BAPEDAL for the implementation of AMDAL of the gas distribution system in the region and province. Monitoring

During the construction phase, impact monitoring and mitigation activities will be one of the primary responsibilities of Site Manager. He is based in the field, directly overseeing the contractors who are carrying out the excavation and pipe-laying work. He will also frequently meet with local government officials, and will be recognized as the primary contact should any complaints or issues arise. On a monthly basis, the Evaluation and Reporting Manager, under the Project Administration Manager, will visit each construction site to observe progress and assess any problems from a more central perspective. Possible environmental and social impacts to be monitored are listed in following table.

84

Table 7.1 Possible Environmental and Social Impacts to be Monitored During Construction

Traffic Congestion and Disruption: - excavation procedures - traffic flow and public safety - disruption of access to residents 8, businesses

Soil Erosion: - use of “patch boxes” for soil storage - proper back filling and compaction - proper disposal of excess soil - restoration to original conditions

Air Pollution: - incidence of fugitive dust problems

Noise: - noise levels to be measured in response to any public complaints

Disturbance to Other Underground Infrastructure: - excavation procedures

Water Pollution and Run-off: - controlled drainage of testing waters

Solid Wastes: - proper disposal of excess soil - proper disposal of other inorganic solid wastes - proper disposal of organic solid wastes

Socioeconomic Issues: - timely excavation to minimize losses of access to businesses - prompt and transparent resolution of claims for losses - prompt resolution of any incidents among personnel or between workers and the community.

After construction is completed, the pipeline will be operated by the West Java Strategic Business Unit primary on-going environmental concern is the risk of leakage, fire and/or explosion. PGN has well established sound design and safety monitoring systems based on inspections, preventive maintenance and emergency response preparedness. These will benefit from Bank support under the project.

Reporting

Reports based on the monitoring of construction under the project will also be the responsibility of the PIU. The Site Managers will report through the Construction Manager. Construction Manager will then evaluate the report and convey it to the Project Manager. The Project Manager will be responsible for submitting quarterly and special reports on general construction progress and any construction problems that may affect the local environment or community. These are required under the RPL, the Rencana Pernantauan Lingkungan - the Environmental Monitoring Plan. They are submitted to the Central AMDAL Committee, from where they are then circulated to local environmental officials. The Project Manager will share these reports with all members of the ECO, as well as with the World Bank. Actual preparation of the Project Manager’s reports will generally be done by the Evaluation and Reporting Manager.

85

In addition to the quarterly reports, prepared in Bahasa Indonesia in fulfillment of AMDAL reporting requirements, the PIU, with the support of the ECO will, prepare bi-annual environmental summary reports, to be submitted in English to the World Bank. This report would include:

0

a summary of significant mitigation measures, if any, undertaken during the previous six months; a description of any significant problems or successes in environmental mitigation during the period; and anticipated notable environmental or social events anticipated during the coming six months.

In addition to these environmental management reports, it should be noted that PGN has standard procedures for reporting on safety and emergency response incidents. These include:

0 incidenvaccident reporting; 0

0 gas escapes. response in the event of incidents/accidents; and

PGN compiles accidenthcident statistics on a monthly and annual basis. This information is submitted to Directorate General for Oil and Gas (Bahasa: Direktorat Jenderal Minyak dan Gas or Dirjen MIGAS). For the duration of the World Bank loan, these reports will be summarized and included in the bi-annual environmental reports submitted to the World Bank. Thus the basic outline of the bi-annual reports on environmental monitoring for the project will include:

Technical support to establish Environmental Coordinating Office (ECO)

In order to establish firmly the ECO’s capacity to support environmental efforts company-wide, a 5-year program of technical and capacity building support has been prepared by PGN as shown in following tables. The program will be fully funded by PGN.

86

Table 7.2 Training Program for ECO

Environmental Introduction for Executive and

SBU* = Strategic Business Unit Level B EIA certification is required for an EIA compiler and higher than level A. Level B certification is prerequisite for higher level training. The remain budget for Environmental Coordinating Office is expended for consultant (international and domestic), document procurement, and equipment (computer, etc)

87

Table 7.3 Training Schedule Year

1 1 2 1 3 1 5 No. Title

8. Public Consultation and Disclosure

Three public consultations were undertaken by PGN in July, September 2002 and April 2003. Participants included the heads of both provincial and regency-level environmental planning boards (Bapedal Tingkat I and II) as well as a cross section of regional and local representatives of stakeholder groups: government agencies, local people, local businesses, NGOs, and academics. Major issues discussed include the implementation of EIA, the coordination with relevant authorities, impacts of the project on local communities, interests of local communities, gas market development, customer service, and safety issues during the project operation stage, etc. The scope of the proposed project (including pipeline routing and proposed location for offtake) has never been revised since April 2003.

In addition, PGN also conducted the socialization with the local affected people in (a) Zone 1 (Greater Jakarta), which was held on September 28, 2004 at the Head of Bekasi District office; (b) Zone 2, on 13, 19, and 20 of August 2004 in Balaraja, Cikande, and Kramat Watu respectively: and (c) Zone 3, on September 29, 2004 at Wisma PGRl of Karawang.

Informal interviews of local people on the roadside in various sites along the project route were conducted in 2003. Some 21 YO of the respondents were supportive of the project and thought it ‘‘will be good for local development”. About 12% felt that such a project would create too many “negative” impacts (mainly traffic problems). About two thirds (67%) were neutral. Respondents strongly suggested that construction work should be performed as fast as possible, so as to minimize disturbance on traffic. The project also was announced and publicized in the local and national newspapers.

The next stage of consultation will occur during the final detailed design and planning that will follow confirmation of financing for the project through the loan agreement with the World Bank,

As indicated in the informal public surveys carried out during the preparation of this EIA, the general impacts and disturbances of public works projects are well known. In the next stage,

once the project is confirmed and specific customers and routes are confirmed, public consultations will be scheduled in the individual kecernatan (sub-districts) where the route would

pass.

88

Annex 11: Project Preparation and Supervision INDONESIA: Domestic Gas Market Development Project

Table A11.1: Project Schedule Planned Actual

PCN review 07/01/03 07/02/03 In i t ia l PID to PIC 11/15/03 11/18/03 Init ial ISDS to PIC 11/19/04 Appraisal 11/30/04 01/24/05 Negotiations 0610 1/05 10/24/05 Board approval 12/20/05 Planned date of effectiveness Planned date of mid-term review Planned closing date

0313 1/05 03/15/08 0313 111 1

Important institutions responsible for preparation of the project: The project has been prepared and wi l l be managed and operated by PGN.

Bank funds expended to date on project preparation: 1. Bank resources: US$458,416.02 2. Trust funds: - 3. Total: US$458,4 16.02

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$5,000 2. Estimated annual supervision cost: US$65,000

89

Annex 12: Documents in the Project Fi le

INDONESIA: Domestic Gas Market Development Project

1. 2. 3. 4. 5.

6.

7.

8. 9. 10. 11.

12. 13.

14.

15.

16. 17.

18. 19. 20. 21.

Procurement Capacity Assessment Report (PCAR) Procurement Plan Project Implementation Plan (PIP) Project Implementation Schedule PGN Board of Directors Decree No. 0177OO.W12/UT/2004 dated September 27, 2004 (for establishing the PIU) PGN Board of Directors Decree No. 0105OO.W91/UT/2004 dated June 8, 2004 (for establishing the Procurement Committee) PGN Board of Directors Decree No. 0245OO.W911/UT/2004 dated December 30,2004 (for establishing various task teams for the Bank financed studies and TA activities) Review of PGN's Gas Distribution Operations in Banten and West Java. Review of Safety Aspects in PGN's Banten and West Java Gas Distribution Expansion. Brief Geological Information on Gas Reserves for Banten and West Java. Brief on planned Gas Transmission System for Supply of Gas from South Sumatra Fields to Banten and West Java PGN's Gas Supply and Demand projections for Banten and West Java. PGN's Customer Surveys for Banten and West Java and Customer Attachment Plan under the Project Conceptual Design and Cost Estimate of PGN's Gas Distribution Infrastructure Expansion Plan for Banten and West Java Conceptual Design and Cost Estimate of PGN's Gas Distribution Infrastructure Expansion under the Project Terms of Reference for Project Management Consultant Terms of Reference for Long Term Technical Collaboration for Capacity Building o f PGN in gas marketing and utilization, transmission, compression, distribution; distribution system safety and integrity management; efficient operation of gas distribution and transmission assets; and upgrading of staff s k i l l s in these areas Terms of Reference for Third Party Inspection Services Maps of PGN's Banten and West Java Distribution System and Expansion Plans PGN's Financial Projection (2004-2009) PGN's Audited Financial Report (2003)

90

Annex 13: Statement of Loans and Credits INDONESIA: Domestic Gas Market Development Project

Difference between expected and actual

disbursements Original Amount in US$ Millions

PO97535

PO85133

PO95883 PO85374

PO76174 PO84583 PO71296 PO92019

PO78070

PO7 13 18

PO713 16 PO74290

PO64728

PO79 156

PO73772 PO63913 PO76271

PO59931

PO40578 PO73970 PO72852 PO6805 1

PO68949 PO49539

PO73025 PO40528 PO49545 PO59477 PO36049 PO41895

PO40196

PO40061 PO03993

2006

2005

2005 2005

2005 2005 2005 2005

2005

2004

2004 2004

2004

2003

2003 2003 2003

2003

2002 2002 2002 2001

2001 2001

2001 2001 2000 2000 1999 1999

1999

1998

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd

0.00 0.00 0.00 64.70 0.00 64.70 0.00 0.00 Community Recovery Through the KDP Govt Fin1 Mgt & Revenue Admin Project ID Reconstruction of Aceh Land Admin Pro ID-HIGHER EDUCATION ID-Initiatives for Local Govern. Reform ID-UPP3 ID-USDRP Kecmatan Development Project 3B Support for Poor and Disadvantaged Areas ID - Coral Reef Rehab and Management I1 ID - Coral Reef Rehab and Mgmt Prog I1 ID-E. IND REG TRANSPT 2 ID-LAND MANAGEMENT &POLICY DEVT PROJECT ID Third Kecamatan Development Project ID-Health Workforce & Services (PHP 3) ID-Java-Bali Pwr Sector & Strength

ID-Water Resources & Irr.Sector Mgt

ID-EAST. IND. REGIONAL TRANSF'T ID-GLOBAL DEV LEARNING (LIL) ID-UPP2 ID-GEF-W. JAVA ENVT MGMT ID-LIBRARY DEVELOPMENT

ID-PROVINCIAL HEALTH I1 ID-SECOND KECAMATAN DEVELOPMENT PROJECT ID-W. JAVA ENVMT MGMT ID-PROVINCIAL HEALTH I ID-WSSLIC I1 ID-EARLY CHILD DEVELOPMENT ID-SULAWESI BASIC EDUC. ID-SUMATRA BASIC EDUCUATION ID - BENGKULU REGIONAL DEVELOPMENT

ID-PPITA

Prog

PROJECT - LIL

55.00

0.00

50.00

14.50

67.30 45.00 80.00

69.00

0.00

33.20

200.00

32.80

45.50

31.10

141.00 17.10

45.00

200.00

2.66 29.50 0.00 0.00

63.20

208.90

11.70 0.00 0.00 21.50 47.90

54.50

20.50

5.00

0.00

30.00

15.00

7 1.40 0.00 80.00

35.00

0.00

23.00

0.00

32.80

45.50

74.50

0.00 0.00

25.00

0.00

0.00 70.50 0.00

4.15

40.00

111.30

5.75 38.00 77.40 0.00 15.90

20.10

0.00

0.00 0.00 0.00

0.00 28.50 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00 7.50 0.00

0.00 0.00 0.17

0.00 0.00 1 .oo 0.00 0.00 0.16

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.11 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 10.65 0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 5.00

59.99

25.50

79.19

28.97

137.15 45.00 156.11

102.94

7.02

5 1 .OO

173.00

59.38

83.05

97.00

137.46 13.14

71.21

50.30

1.68 77.15 2.05

0.57

80.23

61.60

7.68 18.63 48.26 1.33 12.26

0.48

4.66

3.33

0.00

0.00

0.00

0.00 0.23 48.97

0.00

0.35

-0.39

23.33

5.46

39.87

39.89

85.77 9.90

31.66

46.97

1.68 35.48 8.94

0.00

66.88

46.97

6.81 16.24 37.00 11.99 13.02

1.12

9.66

0.00

0.00

0.00

0.00 0.00 0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00 0.93

0.00

0.00

0.00

1.11 3.88 0.00 11.99 0.00

0.00

4.66

1998 ID-SUMATRA REGL RDS 234.00 0.00 0.00 0.00 50.00 7.23 57.23 0.89 PO03701 1995 ID ODS I- UMBRELLA 0.00 0.00 0.00 36.55 0.00 17.67 8.18 6.69

Overall results 1820.86 820.30 0.00 140.36 66.98 1783.61 653.55 30.15

91

INDONESIA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of U S Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Bank NISP 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 2003 1999

2004 2002 1989 1997 1989 1994 2003

2005 2005 2000 2002 2004 1997 1993 1996 2004 2005

1991 1995 1999 2001 2003 2004 1992 1996 1995 1997

2000 1998 1993 2004 1993 1997 2001 1995 2004 1997 2003 2001 2005 2004

BonaVista School Buana Bank ITCF LYON-MLF-Ibis Medan NP School P.T. Gawi PT A g o Muko PT Alumindo PT Astra PT Astra PT Astra PT Astra Otopart PT Astra Otopart PT Austindo N... PT Bank NISP PT Bank NISP PT Bank NISP PT Berlian PT Bina Danatama PT Bina Danatama PT Ecogreen PT Ecogeen PT Grahawita PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT Indo-Rama PT KIA Keramik PT KIA Keramik PT KIA Serpih PT Kalimantan PT Mako PT Mako PT Megaplast PT Nusantara PT Prakars (PAS) PT Samudera PT Sayap PT Sigma PT Viscose PT Viscose PT Wings SMM Sunson WOM Wilmar

Total Portfolio:

1 .oo 0.00

40.00 2.01 1.75

11.50 0.00 5.70 0.00 0.00 0.00 0.00

24.00 14.84 0.00 0.00

35.00 0.00 0.07 0.00

30.00 25.00 0.00 0.00 0.00 0.00

20.00 5.00

48.00 0.23 1.65 4.50

13.13 0.00 0.00 4.38 0.00

35.00 0.00 2.50 0.00

10.94 9.50 2.17 3.00

11.62 0.00

20.00

407.49

0.00 12.16 0.00 0.00 0.00 0.00 2.20 0.00 0.20 0.19 0.12 0.70 0.00 0.00 2.85 2.04 0.00 3.37 0.00 0.00 0.00 0.00 0.00 4.32 1.78 1.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.61 1.22 2.50 0.00 0.00 1.02 0.00 1.09 0.00 0.00 0.00 0.00 0.00

20.00 0.00

59.53

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.86 0.00 0.00 0.00 0.00 3.62 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

10.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

21.64

0.00 0.00 0.00 2.01 0.00 4.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.73 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00

53.49 49.50 0.00 0.00 0.00 0.00 7.90 9.02 0.00 0.00 0.00 5.83 0.00 0.00 0.00 7.35 0.00 0.00

148.48

1 .oo 0.00 0.00 2.01 0.00 5.35 0.00 5.70 0.00 0.00 0.00 0.00

24.00 1.84 0.00 0.00

35.00 0.00 0.07 0.00

30.00 10.00 0.00 0.00 0.00 0.00 0.33 4.88

14.00 0.23 1.65 4.50

13.13 0.00 0.00 4.38 0.00

35.00 0.00 2.50 0.00

10.94 2.00 2.17 0.00

11.62 0.00

20.00

242.30

0.00 12.16 0.00 0.00 0.00 0.00 2.20 0.00 0.20 0.19 0.12 0.70 0.00 0.00 2.85 2.04 0.00 0.02 0.00 0.00 0.00 0.00 0.00 4.32 1.78 1.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.61 0.79 2.50 0.00 0.00 1.02 0.00 1.09 0.00 0.00 0.00 0.00 0.00

19.93 0.00

55.68

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.83 0.00 0.00 0.00 0.00 3.62 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

10.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

21.61

0.00 0.00 0.00 2.01 0.00 4.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.73 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00

53.49 49.50 0.00 0.00 0.00 0.00 7.90 9.02 0.00 0.00 0.00 5.83 0.00 0.00 0.00 7.35 0.00 0.00

148.48

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

0.00 0.00 0.00 0.00 Total pending committment:

92

Annex 14: Country at a Glance

INDONESIA: Domestic Gas Market Development Project

(“A of GDP)

Indonesia at a dance 911 9/05

1984-94 199444 2003 (average annual growth) Agriculture 3.6 2.3 4.3 4.1

Manufacturing 11.2 3.4 5.3 6.2 Services 7.5 1.7 6.2 7.0

Household final consumption expenditure 5.4 3.7 4.5 4.3 General gov’t final consumption expenditure 5.0 2.3 10.0 1.9

Industry 9.3 2.3 4.0 3.9

Gross capital formation 10.8 -4.6 -4.8 30.6 Imports of goods and setvices 6.6 -0.5 2.7 24.9

POVERTY and SOCIAL

2004 Population, midyear (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1998-04

Population (%) Labor force (%)

Most recent estimate (latest year available, 1996-04) Poverty (“A of population below national poverty line) Urban population (% of total pOPUlatlOfl) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (%of children under3 Access to an improved water source (% of population) Literacy (“A of population age 15cJ Gross primaly enrollment (% of school-age copulation)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984

Growth of exports and Imports (X) ” 25

4 5

.= -Exports ‘-O-lmports

GDP (US$ billions) Gross capital formatiorVGDP Exports of goods and setvicedGDP Gross domestic savingdGDP Gross national savingsJGDP

Current account balancelGDP Interest paymentsIGDP Total debffGDP Total debt servicelexports Present value of debffGDP Present value of debffexports

87.6 26.8 25.6 30.3 24.7

-2.1 2.4

36.6 21.8

1984-94 1994-04 (average annual growth) GDP 7.3 2.0 GDP per capita 5.5 0.7 Exports of goods and services 8.6 2.1

I ndonesla

217.6 1,140 248.0

1.3 2.2

27 47 67 31 27 78 88

112 113 111

1994

176.9 31.1 26.5 32.2 29.9

-1.6 2.4

61.0 30.7

2003

4.9 3.5 8.2

East Asla & Pacific

1,870 1,280 2,389

0.9 1.1

41 70 32 15 78 90

113 113 112

2003

238.5 17.6 30.7 25.2 22.0

3.0 1.4

56.8 29.0 57.4

215.0

2004

5.1 3.7 8.5

Lower- mlddle- Income

2,430 1,580 3,847

1 .o 0.7

49 70 33 11 81 90

114 115 113

2004

257.6 22.8 30.9 28.7 23.8

1.2 1.5

54.1 34.0

2004-08

6.2 4.7

11.3

1 Development dlamond’

Life expectancy

GNI Gross per primary capita enrollment

I

Access to Improved water source

-Indonesia Lower-middie-income group

Economic ratios*

Trade

T

Indebtedness

-Indonesia - Lower-middle-income orouD

39.1 40.6 43.6 43.7 25 14.6 23.3 28.8 28.3 o

.25 38.2 42.1 40.5 40.9

Household final consumption expenditure 59.5 59.7 -GCF ‘ O I G D P General gov’t final consumption expenditure 10.1 8.1 8.0 8.2

imports of goods and setvices 22.1 25.4 23.0 26.9

93

Indonesia

PRICES and GOVERNMENT FINANCE

Domestic prlces (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surpluddeficit

TRADE

(US$ millions) Total exports (fob)

Fuel Rubber Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=100) Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ miiiions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, locaVUS5)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ miiiions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1984 1994

10.3 8.6 8.0 7.8

16.5 16.9 11.1 8.4 1.4 1.0

1984 1994

20,754 40,053 .. 9,694 .. 2,879 .. 17,020

13,882 31,983 .. 1,897 .. 2,425 .. 13,450

22 24 93

1984 1994

21,324 45,020 19,286 43,738 2,038 1,282

-4,061 -4,693 167 619

-1,856 -2,792

2,837 3,576 -981 -784

5,720 13,200 1,025.9 2,160.8

1984 1994

32,026 107,824 2,364 12,008

812 776

4,846 14,267 303 2,156

11 26

21 22 1,372 1,635 1,202 1,964

222 2,109 0 1,900

987 1,538 827 1,187 105 1,259 722 -73 209 923 513 -995

2003

6.6 4.7

16.7 7.5

-1.7

2003

61,058 13,700 2,737

19,660 32,551 3,121 7,664 7,100

97 103 93

2003

68,295 55,629 12,666

-6,123 709

7,252

-2,995 -4,257

36,170 8,577.1

2003

134,898 9,779

880

18,453 2,003

33

55 -891

-4,218 -597

1,130

584 408

1,294 -886 742

-1,628

2004

6.3 7.1

17.4 7.3

-1.0

2004

71,585 15,803 2,845

22,063 45,425 3,786

11,797 12,175

101 109 93

2004

89,783 79,116 10,667

-8,704 1,139

3,103

-3,079 -24

36,194 8,938.9

2004

139,330 8,943

996

31,505 1,938

35

28 -2,715 -1,868 1,023 2,043

682 659

1,390 -731 583

-1,314

Inflation (Oh) 1

99 W 01 02 03 04

-GDP deflator - D I C P I

Export and Import levels (US$ mill.)

80,000 T I

O4 I 98 99 W 01 02 03

Exports mn Imports

Current account balance to GDP (Oh)

1 98 99 00 01 02 03 04

Composltlon of 2004 debt (US$ mill.)

A: 8,943 1 G:22,100 E: 996

A . IBRD E - Bilateral B . IDA D. Other multilateral F. Private C . IMF G - Short-term

Development Economics 911 9/05

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Annex 15: Maps INDONESIA: Domestic Gas Market Development Project

95