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PDAM TIRTA DHARMA KOTA MALANG PRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL MARCH 2006 This publication was produced by Development Alternatives, Inc. for review by the United States Agency for International Development under Contract No. 497-M-00-05-00005-00

PDAM Tirta Dharma Kota Malang, PreFS

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PRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL MARCH 2006 This publication was produced by Development Alternatives, Inc. for review by the United States Agency for International Development under Contract No. 497-M-00-05-00005-00 Building office of Tirta Dharma Municipal Water Management Company. Photo Credit: Saiful Ely/ ESP Jakarta.

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Page 1: PDAM Tirta Dharma Kota Malang, PreFS

PDAM TIRTA DHARMA KOTA MALANG PRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL

MARCH 2006

This publication was produced by Development Alternatives, Inc. for review by the United States Agency for International Development under Contract No. 497-M-00-05-00005-00

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Photo Credit: Saiful Ely/ ESP Jakarta. Building office of Tirta Dharma Municipal Water Management Company.

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PDAM TIRTA DHARMA KOTA MALANG PRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL

Title: PDAM Tirta Dharma - Preliminary Financial

Feasibility Analysis of Investment Proposal.

Program, activity, or project number: Environmental Services Program,

DAI Project Number: 5300201.

Strategic objective number: SO No. 2, Higher Quality Basic Human Services Utilized (BHS).

Sponsoring USAID office and contract number: USAID/Indonesia,

Contract number: 497-M-00-05-00005-00.

Contractor name: DAI.

Date of publication: March 2006.

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TABLE OF CONTENTS

LIST OF TABLES ....................................................................................................................... II EXECUTIVE SUMMARY..........................................................................................................III 1. INTRODUCTION .............................................................................................................. 1 2. ANALYSIS OF HISTORICAL PERFORMANCE (2001-2005) ...................................... 3

2.1. PRODUCTION AND DEMAND ..................................................................................................................3 2.2. FINANCIAL PERFORMANCE .......................................................................................................................6

2.2.1. Revenues...........................................................................................................................................................6 2.2.2. Recurrent Costs...............................................................................................................................................6 2.2.3. Tariff...................................................................................................................................................................7 2.2.4. Accounts Receivable.......................................................................................................................................9 2.2.5. Inventory Management.............................................................................................................................. 10 2.2.6. Current Ratio and Cash Flow ................................................................................................................... 10

2.3. OUTSTANDING LOANS AND DEBT-SERVICE CAPACITY..................................................................... 10 3. BUDGET FOR 2006 ......................................................................................................... 12

3.1. WATER PRODUCTION AND DEMAND................................................................................................. 12 3.2. REVENUE AND EXPENSES ....................................................................................................................... 12 3.3. OTHER PERFORMANCE INDICATORS.................................................................................................... 13

4. INVESTMENT PROPOSAL............................................................................................ 14 4.1. PHYSICAL TARGETS AND COSTS........................................................................................................... 14 4.2. FINANCING PLAN................................................................................................................................... 15

5. HIGHLIGHTS OF THE FINANCIAL PROJECTION................................................... 17 5.1. ASSUMPTIONS ......................................................................................................................................... 17

5.1.1. Cost of Capital.............................................................................................................................................. 17 5.1.2. Projected Production and Demand ......................................................................................................... 17 5.1.3. Recurrent Costs............................................................................................................................................ 19 5.1.4. Tariff Analysis ............................................................................................................................................... 19

5.2. FEASIBILITY INDICATORS........................................................................................................................ 20 5.3. FINANCIAL RESULTS ............................................................................................................................... 20

5.3.1. Income Statement ....................................................................................................................................... 20 5.3.2. Sources and Applications of Funds ......................................................................................................... 21 5.3.3. Balance Sheet ............................................................................................................................................... 21

6. CONCLUSIONS AND RECOMMENDATIONS .......................................................... 23 6.1. CONCLUSIONS ....................................................................................................................................... 23 6.2. RECOMMENDATIONS ............................................................................................................................. 23

7. ANNEXES......................................................................................................................... 25 ANNEX A NOTES ON THE MEETING WITH PDAM KOTA MALANG (FEBRUARY 6-7, 2006). 26 ANNEX B NOTES ON VISIT TO PDAM KOTA MALANG (MARCH 6-7, 2006).............................. 30 ANNEX C SCHEDULE OF AMORTIZATION OF OUTSTANDING LOANS OF PDAM KOTA MALANG ............................................................................................................................................................. 34 ANNEX D INVESMENT PROGRAM OF PDAM KOTA MALANG ....................................................... 35 ANNEX E DETAILED DEMAND FORECAST........................................................................................................ 38 ANNEX F DETAILED INCOME STATEMENT ....................................................................................................... 39 ANNEX G DETAILED SOURCES AND APPLICATIONS OF FUNDS ................................................................... 40 ANNEX H DETAILED BALANCE SHEET PROJECTIONS ..................................................................................... 41

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LIST OF TABLES TABLE 0-1 BREAKDOWN OF INVESTMENT COST (IN RP MILLION, EXCEPT %).......................................................V TABLE 0-2 FINANCING PLAN AND INDICATIVE LOAN DISBURSEMENT SCHEDULE (IN RP MILLION, EXCEPT %) V TABLE 0-3 FEASIBILITY INDICATORS (WACC=14.9%)............................................................................................ VI TABLE 0-4 EXTRACT INCOME STATEMENT (IN RP MILLION, EXCEPT RATIOS)..................................................... VII TABLE 0-5 EXTRACT SOURCES AND APPLICATIONS OF FUNDS (IN RP MILLION, EXCEPT RATIOS) ................... VII TABLE 0-6 EXTRACT BALANCE SHEET (IN RP MILLION, EXCEPT RATIOS) ............................................................ VII TABLE 2-1 BREAKDOWN OF PRODUCTION AND DISTRIBUTION CAPACITY..........................................................4 TABLE 2-2 PRODUCTION CAPACITY, CAPACITY CONSTRAINTS AND WATER LOSSES .........................................4 TABLE 2-3 CONNECTION AND WATER DEMAND ....................................................................................................5 TABLE 2-4 PDAM UNIT COSTS (RP PER M3 OF WATER SOLD AT CONSTANT 2005 PRICES) .............................7 TABLE 2-5 COMPARISON OF OLD AND NEW TARIFFS .............................................................................................8 TABLE 2-6 HISTORICAL RELATIONSHIP OF TARIFF TO COST (PER M3 OF WATER SOLD AT CONSTANT 2005

PRICES) .................................................................................................................................................................9 TABLE 2-7 COLLECTION EFFICIENCIES..................................................................................................................... 10 TABLE 2-8 CURRENT RATIO AND CASH FLOW...................................................................................................... 10 TABLE 2-9 INDICATORS OF DEBT-SERVICE CAPACITY ........................................................................................... 11 TABLE 3-1 COMPARISON OF UNIT COST PER M3 OF WATER SOLD FOR 2005 AND 2006 (AT CURRENT

PRICES) .............................................................................................................................................................. 12 TABLE 4-1 SCHEDULE FOR INSTALLING NEW CONNECTIONS.............................................................................. 14 TABLE 4-2 COST OF INVESTMENT PROGRAM (IN RP MILLION)............................................................................. 15 TABLE 4-3 FINANCING PLAN AND INDICATIVE LOAN DISBURSEMENT SCHEDULE (IN RP MILLION) ................ 15 TABLE 4-4 AMORTIZATION SCHEDULE OF THE PROPOSED COMMERCIAL LOAN (IN RP MILLION) .................. 16 TABLE 5-1 WEIGHTED AVERAGE COST OF CAPITAL.............................................................................................. 17 TABLE 5-2 PROJECTED PRODUCTION CAPACITY, CAPACITY CONSTRAINTS AND WATER LOSSES.................. 18 TABLE 5-3 PROJECTED CONNECTIONS AND WATER DEMAND ........................................................................... 18 TABLE 5-4 ANALYSIS OF PROJECTED TARIFF (RP PER M3 OF WATER SOLD)........................................................ 19 TABLE 5-5 FEASIBILITY INDICATORS (WACC=14.9%).......................................................................................... 20 TABLE 5-6 SUMMARY INCOME STATEMENT (IN RP MILLION, EXCEPT RATIOS) ................................................... 21 TABLE 5-7 SUMMARY SOURCES AND APPLICATIONS OF FUNDS (IN RP MILLION, EXCEPT RATIOS) ................. 21 TABLE 5-8 SUMMARY BALANCE SHEET (IN RP MILLION, EXCEPT RATIOS)........................................................... 22

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EXECUTIVE SUMMARY

INTRODUCTION This report presents an assessment of the investment program of PDAM Kota Malang. Prepared under the auspices of the Environmental Services Program (ESP) funded by the United States Agency for International Development (USAID), it aims to ultimately serve as basis for mobilizing loans from the domestic commercial banking system to finance the implementation of the said investment program. For the foregoing purpose, a 20-year financial projection was prepared based on assumptions agreed upon with PDAM management, using the following references:

• Audited Financial Statements of PDAM Kota Malang for the years 2001 to 2004 • Un-audited results of operation in 2005 • Work Plan and Budget for 2006 • Corporate Plan (Rencana Pengembangan Usaha) 2005-2009.

ANALYSIS OF HISTORICAL PERFORMANCE (2001-2005) In 2005 PDAM Kota Malang had in its possession abstraction permits (surat ijin pengambilan air or SIPA) that would allow it to draw water up to 2,058 liters per second (l/sec) from 15 sources. Actual production in 2005 was 40.1 million m3, which translates to a production capacity of only 1,272.12 l/sec. The PDAM’s sources consist of 4.6% groundwater, 18.8% spring, and 76.6% surface water. By location, 68.9% of these are within the administrative boundaries of Kabupaten Malang, 19.4% in Kota Batu, and 11.7% in Kota Malang itself. As a consequence of limited supply, household consumption decreased from 134 liters per capita per day (lcd) in 2004 to only 121 lcd in 2005. Overall, total volume of water sales likewise contracted by 14% to 23.7 million m3 from 27.7 million m3 in 2004. Service is 24 hours in most of the coverage area. Non-revenue water (NRW) ranged between a low of almost 30% in 2003 to a high of 36% in 2001. Plant utilization factor reached 115% in 2005. Domestic coverage ratios in 2005 were 55% for the whole city and 81% for the designated service coverage area. Tariff revenues increased by a yearly average of 15.4%, reaching Rp 61,901 million by the end of 2005. Total connection fees averaged Rp 1,734 million per year for an average of a little over Rp 833 thousand paid by each new customer. Net income posted a respectable yearly average growth of over 14.2%. Based on un-audited figures, net income in 2005 amounts to Rp 11,741 million. Personnel cost accounted for the biggest share of operating expenses, averaging 28.6% of the total during the five-year period. Overhead, power, and maintenance materials had shares of 23.8%%, 20.6%, and 18.2% respectively. In real terms, recurrent costs increased by an average of 8.6% annually. Maintenance materials climbed at the fastest clip, at an average of 27.7% per year, followed by personnel at 17.0%. Overhead topped personnel cost by as much as 73.7% in 2001 before being reined in to average 98.9% during the five-year period under review.

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In real terms, weighted average tariff declined by 4% in 2002. It recovered, however, to post increases of 13% and 14% in 2003 and 2004. In 2005, the increase was even more significant at 51% for a weighted average tariff of Rp 2,606. Every year, weighted average tariff remained above that which is required for full-cost recovery as defined under the decree of the Minister of Home Affairs (Permendagri) No. 2/1998 (the sum of O&M, depreciation, and 10% return on net book value of assets). Accounts receivable had been increasing every year, from 47 days of sales in 2001 to 60 in 2004, but slightly declined to 59 days in 2005. Bad debts written off averaged 0.63% of water sales. Consumables inventory averaged at an almost negligible level of five days cover. Installation inventory was however in an inordinately excessive level of 1,018 days or almost three years cover. Current ratio improved each year and remained at a safe level, with the lowest experienced in 2001 at 1.5. Cash in terms of number of months of operating expenses, on the other hand, had always been on a precarious level, averaging 0.6 during the last five years. In 2005, outstanding loans totaled Rp 48,182 million consisting of the following: loan from the former Direktorat Dana Investasi (DDI), Rp 4,957 million; shortage in the payment to PT Sumber Kencana Perkasa for the construction of Wendit III production unit, Rp 16,505 million; and loan from Bank Negara Indonesia (BNI), Rp 26,719 million. The amortizations of all these loans are scheduled to be completed by the end of 2011. All through the years, the PDAM has been able to make timely payments on both principals and interests of the aforementioned loans as they fall due. The PDAM’s debt service coverage ratio remained at a quite safe level. Debt to total capitalization increased in 2005 to 59% from 40% in 2004.

BUDGET FOR 2006 The PDAM’s production capacity will increase to 1,475 l/sec with the full operation of the installed capacity in Wendit III of 240 l/sec. Actual production is projected at 44,849 m3 and the volume of water sales at 28,751 m3. NRW for the year is estimated at 37.6%. Plant utilization factor is expected to decline but will remain at a strained level of 110%. A total of 4,000 connections will be installed during the year. The total number of connections will thus increase to 87,071. Domestic coverage ratios will reach 57.5% for the whole city and 84.8% for the service area. Water revenues are forecast to increase by 18% over the 2005 level, reaching Rp 73,025 million. Average tariff at constant 2005 prices will decline by 1% to Rp 2,408, but will remain 108% of that which is required for full-cost recovery as defined under Permendagri 2/1998. Net income is forecast to decline by as much as 20.6% to Rp 9,316 million. The number of employees per 1,000 connections is assumed to fall below 6 as head count is reduced from 536 in 2005 to 516. In nominal terms, personnel and overhead are budgeted to decline by 6.4% and 11.1% respectively. These decreases are however more than offset by increases in other cost items: power by 10.0%, chemicals, by 80.7%, maintenance materials by 48.4%, and raw water by 207.7%. Overall, recurrent costs are budgeted to increase by 9.6%. Receivables will be cut from 65 days of sales to 55, through the strict enforcement of a disconnection policy on customers with just one month of unpaid water bill. Bad debts are

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likewise assumed to go down to 0.46% of water sales from 0.69% in 2005. The current ratio will be at 0.9. Cash will be at 0.4 month of operating expenses.

INVESTMENT PROPOSAL The PDAM’s medium-term investment program consists of three components: extension of the distribution network, construction of reservoirs, and installation of pumps. From 2006 to 2009, a total of 16,759 new connections are hoped to be generated, out of which 4,000 are already expected to be installed in 2006. The program will be implemented during the period 2007-2009. The base cost of the program amounts to Rp 45,701 million. At current prices, and including all contingencies, the investment program will cost a total of Rp 57,472 million. Table 0-1 Breakdown of Investment Cost (In Rp Million, Except %)

2007 2008 2009 Total % of Total

Procurement 4,340 4,531 7,131 16,001 27.8%

Civil Works 2,068 2,274 3,365 7,707 13.4%

New Connections 8,424 7,308 1,183 16,915 29.4%

Total Base Cost 16,685 15,877 13,139 45,701 79.5%

Total Current Cost, inc. Contingencies 19,951 20,033 17,488 57,472 100.0%

A loan from a domestic commercial bank is proposed to finance 70% or Rp 40,230 million of the total investment cost. The rest is to be covered by connection fees and the PDAM’s internal cash generation. Table 0-2 Financing Plan and Indicative Loan Disbursement Schedule (In Rp Million, Except %)

2007 2008 2009 Total % of Total

Project Loan Assumed 13,966 14,023 12,242 40,230 70.0%

Customer Connections 4,476 4,101 4,062 12,639 22.0%

PDAM/Other 1,509 1,909 1,185 4,602 8.0%

Total 19,951 20,033 17,488 57,472 100.0%

HIGHLIGHTS OF THE FINANCIAL PROJECTION The discussion focuses on the years 2007 up to 2013, the time slice that is considered critical as it corresponds to the period for implementing the investment program as well as for amortizing the PDAM’s outstanding loans and the proposed commercial loan. The cost of capital is computed based on the fund-sourcing mix. The commercial-loan portion will bear an interest of 17.0%. Customer contributions are assumed to be received by the PDAM as revenue and can therefore be considered as PDAM funds, which are expected to yield a return on equity of 10%. On this basis, the weighted average cost of capital (WACC) is 14.9%.

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Part of the proposed investment program is the installation of two additional pumps in Wendit III to bring the yield from this facility up to its designed capacity of 480 l/sec. Total production capacity, therefore, is projected to increase to 1,715.2 l/sec. NRW is at 34.0% in 2007, and is projected to gradually decline thereafter to settle at 28.0% from 2012 onward. Per capita consumption will be at 121 liters per day throughout the projection period. Unit consumption is forecast to first gradually increase to reach 27.1 m3 per month in 2011, after which it will again decline to settle at 26.8 m3 from 2016 onward. Domestic coverage ratio for the entire city will reach 65.0% in 2013 and will peak at 65.5% beginning 2022. The service coverage ratio, on the other hand, will be 96.0% in 2013 and will reach almost 98% during the last year of the projection period. Plant capacity utilization factor will range within a narrow band of 92% and 96%. The desired personnel-to-connection ratio of 5 per 1,000 is planned to be achieved in 2010 and will be maintained at this level for the rest of the projection period. Cost per employee is assumed to increase annually in real terms by 8.0% or about 13.5% in nominal terms. Annual increases in costs of power and chemicals in real terms are set at 15% or 20.5% in nominal terms up to 2010. Starting 2011, costs of these inputs are expected to move based on annual inflation rate. The cost of maintenance materials is pegged at 3% of net assets. Overhead cost as a proportion of personnel cost will be reduced to 85% by 2010. The cost of raw water posted in 2006 of Rp 143 per m3 at constant 2005 prices is maintained and is adjusted only for annual inflation. The PDAM is at present committed to maintaining the present practice of increasing tariff by 20% in nominal terms every two years. At this rate, weighted average tariff will be at full-cost recovery, except in 2010 when it will be marginally lower at 99% of the required level. The investment program is found to be feasible with a positive net present value (NPV) of Rp 12,326 million and a financial internal rate of return (FIRR) of 20.1%. The program remains feasible even assuming a 10% increase in investment and incremental O&M costs, but does not surmount the other sensitivity tests of a 10% reduction in incremental revenues or the postponement of the realization of these revenues by one year. Table 0-3 Feasibility Indicators (WACC=14.9%) NPV FIRR

Base Case 12,326 21.1%

10% Increase in Investment and O&M Costs 152 15.0%

10% Decrease in Incremental Revenues (1,080) 14.4%

One Year Delay in Incremental Revenues (8,028) 12.0%

The PDAM is projected to continue to generate net income after tax. Retained earnings will be positive throughout the projection period. Return on assets will range between 6% and 13%; return on equity will be between 10% and 31%.

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Table 0-4 Extract Income Statement (In Rp Million, Except Ratios) 2007 2008 2009 2010 2011 2012 2013

Total Operating Revenues 112,769 126,190 158,842 160,896 193,075 203,634 244,474

Operating Expenses 71,921 85,924 102,959 121,614 130,596 143,637 158,910

Income Tax 19,544 8,576 11,809 7,723 15,452 16,109 25,500

Net Income Loss 19,544 20,253 31,232 16,532 33,655 34,063 53,997

Retained Earnings 5,082 5,266 8,120 4,298 8,750 8,856 14,039

Return on Assets 13% 11% 13% 6% 11% 10% 13%

Return on Equity 31% 22% 23% 10% 16% 13% 16%

The PDAM will continue to enjoy positive annual cash flows. DSCR will remain at a safe and increasing level starting at 2.5 in 2007 and reaching 8.8 in 2013. Table 0-5 Extract Sources and Applications of Funds (In Rp Million, Except Ratios)

2007 2008 2009 2010 2011 2012 2013

Total Sources of Funds 61,346 69,695 86,377 60,080 75,707 84,717 112,951

Total Applications of Funds 45,557 53,166 56,888 50,719 38,006 40,300 35,411

Cash Increase (Decrease) 15,789 16,529 29,489 9,361 37,700 44,417 77,539

DSCR (Net Revenues) 2.5 3.2 3.3 2.0 3.5 5.5 8.8

Current ratio is projected to improve to 1.2 in 2007 and will remain at a safe level every year thereafter. The ratio of debt to total capitalization will sharply decline to 33% in 2007 and then to a mere 5% by 2011. A sharp increase in cash is foreseen, from 2.9 months of operating expenses in 2007 to 17.6 months in 2013. Table 0-6 Extract Balance Sheet (In Rp Million, Except Ratios)

2007 2008 2009 2010 2011 2012 2013

Current Assets 34,614 51,462 82,661 91,101 131,417 176,673 257,557

Net Fixed Assets 70,438 93,900 119,445 143,937 145,094 145,497 145,920

Total Assets 145,025 188,992 246,456 257,304 298,894 345,474 427,755

Current Liabilities 27,718 39,694 50,086 51,244 54,107 60,684 64,450

Long-Term Debt, Net 31,325 33,594 35,229 20,040 10,020

Total Liabilities 82,050 96,470 108,681 94,930 87,922 84,782 88,854

Total Equity and Liabilities

145,025 188,992 246,456 257,304 298,894 345,473 427,755

Current Ratio 1.2 1.3 1.7 1.8 2.4 2.9 4.0

Debt to Total Capitalization

33% 27% 20% 11% 5%

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CONCLUSIONS AND RECOMMENDATIONS From the foregoing discussions, the following conclusions can be derived:

• PDAM Kota Malang will be able to maintain a sound financial footing. • Production capacity will however continue to exert pressure on the PDAM’s

ability to achieve its performance targets. • In view of the foregoing, the proposed investment program becomes even

more urgent. • On the basis of the assumptions, the proposed investment program is

financially feasible. • The investment program is financially affordable to the PDAM.

The Following Recommendations are Offered:

• Implement measures to properly control installation inventory. • Formulate and implement an action plan for reducing overhead. • Take a more aggressive and proactive stance toward generating new

connections. • Conduct a comprehensive real demand survey. • Develop stronger coordination between the marketing and planning

departments. • Conduct a performance audit of existing production facilities. • Formulate a plan for utilizing excess cash most effectively. • Institute safeguards for ensuring the validity of the assumptions used in the

financial projection. • Institute of safeguards against the adverse scenarios used in the sensitivity

analysis of the investment program.

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1. INTRODUCTION This report presents an assessment of the investment program of PDAM Kota Malang. Prepared under the auspices of the Environmental Services Program (ESP) funded by the United States Agency for International Development (USAID), it aims to ultimately serve as basis for mobilizing loans from domestic commercial banking system to finance the implementation of the said investment program. The report uses as references the following:

• Audited Financial Statements of PDAM Kota Malang for the years 2001 to 2004

• Un-audited results of operation in 2005 • Work Plan and Budget for 2006 • Corporate Plan (Rencana Pengembangan Usaha) 2005-2009.

In addition, a visit was made to the PDAM offices during the third week of November 2005, during which discussions were held with officials from its finance and planning divisions. Interim results of operations in 2005 (up to the end of October) and the investment program for 2006-2009 were obtained. It was also learned that two parallel efforts were ongoing to improve the PDAM’s performance:

• A non-revenue water reduction program, which is likewise supported by ESP, focusing primarily on portions of the transmission and distribution system that were constructed during the Dutch colonial era (around the 1920s)

• The preparation of a distribution master plan, with the assistance of a local consulting firm, aimed at equalizing water pressure at all points of the PDAM’s service coverage area.

These parallel efforts are not covered in this analysis. The report examines how the investment program will affect the future operation of the water enterprise mainly from the financial standpoint. For this purpose, a 20-year financial projection was prepared. On 7 February 2006, the preliminary results of the financial projection were presented to PDAM management. In the discussion that followed, the assumptions underlying the projection were either confirmed or modified, with the overall conclusion that a revised projection will have to be prepared. The un-audited results of operation for 2005 and an updated investment program were obtained. The notes on the aforementioned presentation are presented as Annex A. In a subsequent presentation on 7 March 2006, the revised financial projection and analytical report were approved for finalization by the PDAM management. Notes on this presentation are presented in Annex B.

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The report can be divided essentially into the following parts:

• Historical performance of the PDAM from 2001 to 2005 • Work plan and budget for 2006 • Investment program for 2007-2009 • Highlights of the results of the financial projection, including indicators of the

feasibility of the investment program • Conclusions on the proposed investment program and recommendations on

the future operation of the water supply enterprise.

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2. ANALYSIS OF HISTORICAL PERFORMANCE (2001-2005)

In the presentation that follows, figures for 2001-2004 are based on the PDAM’s audited financial statements. Those for 2005 are based on the un-audited operating results made available by PDAM management.

2.1. PRODUCTION AND DEMAND In 2005 PDAM Kota Malang had in its possession abstraction permits (surat ijin pengambilan air or SIPA) that would allow it to draw water up to 2,058 liters per second (l/sec) from a total of 15 sources. Through the years, the PDAM installed production capacities to exploit such sources, the most recent of which is Wendit III with a rated capacity of 480 l/sec. Actual production in 2005 was around 40.1 million m3, which translates to a production capacity of only 1,272.12 l/sec. Wendit I and Wendit II remained the backbone of the PDAM’s production capacity with combined contribution of 62% of total production in 2005. These facilities are however old: Wendit I was installed in 1982 and Wendit II in 1992. Each had an original design capacity of 480 l/sec, but their yields, which could be reflective of the other production facilities as well, had deteriorated through the years to only 400 l/sec for Wendit I and 388 l/sec for Wendit II. Wendit III was completed in, and became operational only at the start of the last quarter of, 2005. Thus, its contribution to production was only an equivalent of 36.9 l/sec. At its present state, the facility can have a maximum yield of only 240 l/sec as only two of the required four pumps, each with a capacity of 120 l/sec, have been installed. Again based on actual production in 2005, the PDAM’s sources consist of 4.6% groundwater, 18.8% spring, and 76.6% surface water. By location, 68.9% of these are within the administrative boundaries of Kabupaten Malang, 19.4% in Kota Batu, and 11.7% in Kota Malang itself. A more detailed breakdown of PDAM Kota Malang’s production volume and capacity is presented in Table 2-1.

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Table 2-1 Breakdown of Production and Distribution Capacity

No. Name of Facility Production (m3)

Distribution (m3)

Type of Source Location Capacity

(l/sec) 1 Binangun Pipa Lama 2,817,454 2,676,581 Spring Kota Malang 89.34 2 Binangun Pipa Baru 4,712,685 4,477,051 Spring Kota Batu 149.44 3 Karangan 1,176,649 1,117,817 Surface water Kab Malang 37.31 4 Sumbersari 457,273 434,409 Surface water Kab Malang 14.50 5 Wendit I 12,604,053 11,973,850 Surface water Kab Malang 399.67 6 Wendit II 12,246,695 11,634,360 Surface water Kab Malang 388.34 7 Wendit III 1,164,240 1,106,028 Surface water Kab Malang 36.92 8 Banyuning 3,080,435 2,926,413 Surface water Kota Batu 97.68 9 Badut I 51,382 48,813 Groundwater Kota Malang 1.63 10 Badut II 454,425 431,704 Groundwater Kota Malang 14.41 11 Badut III 574,470 545,747 Groundwater Kota Malang 18.22 12 Sumbersari I 83,374 79,205 Groundwater Kota Malang 2.64 13 Sumbersari II Groundwater Kota Malang 0.00 14 Istana Dieng 510,466 484,943 Groundwater Kota Malang 16.19 15 TPA Supit Urang 183,825 174,634 Groundwater Kota Malang 5.83

Total 40,117,426 38,111,555 1,272.12 As a result of the foregoing supply limitation, household consumption decreased from 134 liters per capita per day (lcd) in 2004 to only 121 lcd in 2005. Overall, therefore, total volume of water sales likewise contracted by 14% to 23.7 million m3 from 27.7 million m3 in 2004. Service is 24 hours in most of the coverage area. For lack of reservoirs, however, water pressure is uneven, with connections nearest to or tapping main pipes getting steady supply. Non-revenue water (NRW) ranged between a low of almost 30% in 2003 to a high of 36% in 2001. Plant utilization factor reached 115% in 2005, a clear indication that additional production and distribution facilities are urgently needed. Data on the PDAM’s production capacity and related aspects are shown in Table 2. Table 2-2 Production Capacity, Capacity Constraints and Water Losses

2001 2002 2003 2004 2005 (Unaudited)

Production Capacity (l/sec) 1,514 1,514 1,514 1,558 1,272 Production Volume (m3/year) 38,926 38,953 39,573 40,731 40,117 Distribution Volume (m3/year) 36,980 37,005 37,594 38,694 38,112 Volume Sold to Consumers (m3/year) 24,964 26,365 27,722 27,731 23,749 Water Losses (%) 35.9% 32.3% 29.9% 31.9% 32.3% Ratio of Production to Consumption 1.56 1.48 1.43 1.47 1.69 Plant Utilization Factor 93.8% 93.8% 95.3% 95.3% 115.0%

Kota Malang had a total population in 2005 of 848 thousand with a projected annual growth rate of 1%. The service area population stood at 575 thousand with the same growth rate as that of the entire city’s.

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On average, connections have grown by a mere 2.5% annually since 2001, with the highest increase of 4.2% recorded in 2002. Toward the optimal utilization of the newly operational production capacity, the PDAM’s corporate plan targets 5,000 additional connections in 2005, 8,000 each in 2006 and 2007, 7,000 in 2008, and 5,000 in 2009. There is an ongoing distribution-network extension program to support this. In the budget for 2005, the target has been tempered to between 3,000 and 4, 000 new connections. By the end of the year, however, only 1,808 new connections have been generated. A PDAM official also related a case wherein a pipe-laying work, which had already been included in the 2005 budget and was ready for tender, had to be postponed as the required minimum number of connections could not be reached, even if this had already been lowered from 500 to 250 and then again to 150. Household connections represented nearly 94% of total connections and 85% of consumption in 2005. PDAM calculates its service coverage on the basis of 6 persons per household connection. Those with access to public taps and similar facilities are excluded in the computation inasmuch as, according to PDAM management, such facilities are already being phased out. On this basis, domestic coverage ratios in 2005 were 55% for the whole city and 81% for the designated service coverage area. The coverage ratios thus improved by only one percentage point for both the entire city and the designated service coverage area from the levels achieved in 2004. The designated service area is also nearing full saturation, indicating the necessity for the water supply enterprise to redirect its attention to other areas in its future extension/expansion programs. Domestic consumption increased continuously between 2001 and 2004, from 127 liters per capita per day (lcd) in 2001 to 137 lcd in 2004, but, as mentioned, declined to 121 lcd in 2005. Data pertaining to connection and water demand are presented in Table 2-3. Table 2-3 Connection and Water Demand

2001 2002 2003 2004 2005 (Un-audited)

Household Connections (No.) 71,063 73,525 74,510 76,174 77,854 Unit Consumption (lcd) 127 131 134 134 121 Non-Domestic Connections (No.) 2,219 2,857 2,910 3,024 3,141 Unit Consumption (m3/day) 1.2 1.3 2.0 1.7 2.9 Total Connections 75,302 78,450 79,466 81,263 83,071 Annual Change (No.) 3,148 1,016 1,797 1,808 Domestic Service Ratio-Kota Malang (%) 53.1% 54.1% 54.0% 54.4% 55.1% Domestic Service Ratio-Serv. Area (%) 80.9% 80.3% 80.4% 80.3% 81.4%

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2.2. FINANCIAL PERFORMANCE 2.2.1. REVENUES Tariff revenues increased by a meager 1.4% in 2002. Respectable double-digit increases were however achieved during the succeeding years for a yearly average growth of 15.4%. Tariff revenues reached Rp 61,901 million by the end of 2005, a 29.34% expansion over the 2004 level, as the reduction in the volume of water sales was more than offset by the tariff adjustment implemented starting April. Still, however, the figure was short of the forecast in the corporate plan of Rp 63,407 million. Total connection fees averaged Rp 1,734 million per year for an average of a little over Rp 833 thousand paid by each new customer. The PDAM had maintained profitable operations each year during the period under review. Net income declined, however, by as much as 28.1% in 2002 in spite of the tariff increase implemented in 2001. It recovered during the following years to post a respectable yearly average growth of 14.2% from 2001 to 2005. Based on un-audited figures, net income in 2005 amounts to Rp 11,741 million, or an improvement of 52.5% compared to what was reported in 2004. On the whole, the creditable profit performance in 2005 could be attributed to the aforementioned tariff increase. At the same time, however, the PDAM started to institute efficiency-improvement measures to control cost and improve revenue generation. Among the measures cited were: the shutdown of some water pumps during off-peak demand hours, the closer scrutiny of the results of meter reading, and the return to the warehouse of excess connection-installation materials for use in other new connections. In any case, each department head has been enjoined to come up with cost-cutting measures for his/her department. For ensuring sustained performance improvement over the long-term, regular training courses are conducted targeting all levels of the PDAM’s organizational hierarchy. The PDAM is also encouraging and subsidizing staff to attain higher educational levels: all elementary school graduates to finish junior high school and all assistant managers to pursue master’s degrees. The PDAM expects to already reap some of the benefits of the foregoing measures in 2006, while others will be realizable only in small and thus almost intangible increments, over the long term.

2.2.2. RECURRENT COSTS Personnel cost accounted for the biggest share of operating expenses, averaging 28.6% of the total during the five-year period. Overhead, power, and maintenance materials likewise had significant shares of 23.8%%, 20.6%, and 18.2% respectively. In real terms, recurrent costs had been increasing at an average rate of 8.6% annually. Maintenance materials climbed at the fastest clip, at an average of 27.7% per year, followed by personnel at 17.0%. Moderate increases were recorded for power, chemicals, and raw water at respectively 13.1%, 6.0%, and 10.6%. Of concern was overhead. Although registering an average yearly decline of 0.1%, it topped personnel cost by as much as 73.7% in 2001 before being reined in to average 98.9% during the five-year period under review, a proportion that is nonetheless way above the commonly accepted level of one-third or about 33% of personnel cost.

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The PDAM’s historical recurrent costs are shown in Table 2-4. Table 2-4 PDAM Unit Costs (Rp per m3 of Water Sold at Constant 2005 Prices)

2001 2002 2003 2004 2005

(Un-audited) % of Total

in 2005 Ave.

Inc./(Dec.)

Personnel 307 465 460 494 545 28.6% 17.0%

Power (Operational) 206 241 256 268 333 20.6% 13.1%

Chemicals 0 3 3 3 3 0.3% 6.0%

Maintenance Materials 96 92 94 114 219 18.2% 27.7%

Overhead 534 346 374 384 477 23.8% -0.1%

Raw Water 47 29 29 26 49 8.5% 10.6%

Total 1,190 1,175 1,215 1,290 1,626 100.0%

% Year-on-Year Change -1.24% 3.36% 6.17% 26.05% 8.58%

2.2.3. TARIFF As mentioned, tariff was adjusted effective 1 April 2005. A comparison of the old and new tariff structures is presented in Table 2-5.

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8

Table 2-5 Comparison of Old and New Tariffs OLD TARIFF (1 August 2001-

31 March 2005) NEW TARIFF (As of 1 April

2005) In Rp In Rp

% INCREASE TYPE OF CONNECTION/ CUSTOMER

0-10 m3 11-20 m3 >20 m3 0-10 m3 11-20

m3 >20 m3 0-10 m3 11-20 m3 >20 m3

IA Public water facilities 630 720 765 1,050 1,150 1,250 67% 60% 63% IB Social institutions 630 765 810 1,050 1,250 1,300 67% 63% 60%

GROUP I SOCIAL

IC Assoc., schools 630 810 900 1,050 1,300 1,600 67% 60% 78%

IIA Very low cost 900 1,400 2,000 1,300 2,050 2,900 44% 46% 45% IIB Low cost 1,100 1,500 2,250 1,600 2,150 3,250 45% 43% 44% IIC Middle- class 1,200 1,750 2,475 1,750 2,550 3,600 46% 46% 45% IID Along main roads, exclusive complexes 1,300 1,900 2,750 1,900 2,750 4,000 46% 45% 45%

GROUP II HOUSEHOLDS

IIE Mixed residential-business 1,500 2,000 3,850 2,150 2,900 5,550 43% 45% 44% IIIA Tertiary educational institutions 1,300 1,900 3,150 1,600 2,550 3,650 23% 34% 16% GROUP III

INSTITUTIONS IIIB Gov’t offices and hospitals 1,900 2,750 4,550 IVA Along tertiary roads 2,350 2,925 4,450 3,400 4,250 6,450 45% 45% 45% IVB Along secondary roads 3,950 4,450 5,625 5,700 6,450 8,150 44% 45% 45% IVC Along main roads 4,000 5,350 6,250 5,800 7,750 9,050 45% 45% 45%

GROUP IV COMM’L

IVD Big establish-ments 4,450 6,250 6,975 6,450 9,050 10,100 45% 45% 45% IVA Small to medium 5,300 5,800 7,450 7,650 8,400 10,750 44% 45% 44% GROUP V

INDUSTRY IV B Large 6,000 6,975 8,500 8,650 10,100 12,250 44% 45% 44%

Distance (km)

0-10 >10-20 >20 0-10 >10-20 >20

Group 1 28,800 30,600 34,200 42,000 46,000 50,000 46% 50% 46% Group 2 56,000 80,000 110,000 52,000 82,000 116,000 -7% 2% 5% Group 3 76,000 126,000 166,000 76,000 110,000 182,000 0% -13% 10% Group 4 117,000 158,000 178,000 136,000 170,000 258,000 16% 8% 45%

WATER TANK

Group 5 232,000 240,000 298,000 306,000 336,000 430,000 32% 40% 44% 0-50,000 M3 1,300

BULK WATER >50,000 M3 1,950

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A decree of the Minister of Home Affairs (Permendagri 2/1998) stipulates annual tariff adjustments to compensate for annual inflation, without the need for an approval from the local legislative council, plus a cyclical adjustment when significant additional investment is required. The methodology produces three types of tariff categories: • Biaya rendah (low cost), which recovers only O&M (including salaries) and overhead

costs • Biaya dasar (basic cost), which recovers biaya rendah plus debt service (principal and

interest) • Biaya penuh (full cost), which recovers biaya rendah plus depreciation on the economic

(useful) life factor applied against revalued fixed assets plus a 10% return on the book value of revalued assets.

No PDAM has however revalued its assets as under existing regulations any realized surplus is immediately taxable as capital gains. An alternative definition of full-cost is thus included here to mean the sum of O&M, debt service, and 10% return on equity. PDAM Kota Malang has maintained the practice of adjusting tariff every two years. This review, therefore, encompasses three adjustments, in the years 2001, 2003, and the latest in 2005. In real terms, weighted average tariff declined by 4% in 2002, causing the aforementioned plunge in net income by 28% and thus indicating the inadequacy of the tariff increase of the previous year. It recovered, however, to post increases of 13% and 14% in 2003 and 2004. In 2005, the increase was even more significant at 51%. Every year during the five-year period under review, weighted average tariff remained above that which is required for full-cost recovery, both as defined by Permendagri 2/1998 and under the alternative definition offered in this report. The relationship of tariff to cost from 2001 to 2005 is presented in Table 2-5. Table 2-6 Historical Relationship of Tariff to Cost (Per m3 of Water Sold at Constant 2005 Prices)

2001 2002 2003 2004 2005 (Un-audited)

Nominal Increase in Average Tariff (%) -4% 13% 14% 51% Weighted Average Tariff (Rp) 1,929 1,632 1,707 1,837 2,606 Low Cost Recovery Tariff (Rp) 1,200 1,185 1,225 1,304 1,644 Basic Cost Recovery Tariff (Rp) 1,250 1,226 1,262 1,338 1,767 Full Cost Recovery Tariff - Permendagri 2/1998) (Rp) 1,599 1,576 1,596 1,747 2,466

Extent of Full-Cost Recovery (%) 121% 104% 107% 105% 106% Full Cost Recovery - O&M+ Debt Service + 10% Equity) 1,374 1,330 1,363 1,445 1,906

Extent of Full-Cost Recovery (%) 140% 123% 125% 127% 137%

2.2.4. ACCOUNTS RECEIVABLE Accounts receivable had been increasing every year, from 47 days of sales in 2001 to 60 in 2004, but slightly declined to 59 days in 2005. Bad debts written off averaged 0.63% of water sales, as shown in Table 7.

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Table 2-7 Collection Efficiencies

2001 2002 2003 2004 2005 (Un-audited)

Days Accounts Receivable 47 57 57 60 59 Bad Debts as % of Water Sales 0.53% 0.57% 0.60% 0.76% 0.69%

2.2.5. INVENTORY MANAGEMENT PDAM keeps consumables on the current assets side of the balance sheet and classifies investment materials as long-term assets. The consumables inventory accounting is based on the FIFO system. This averaged at an almost negligible level of five days cover during the five-year period from 2001 to 2005. Installation inventory was however in an inordinately excessive level of 1,018 days or almost three years cover.

2.2.6. CURRENT RATIO AND CASH FLOW The PDAM’s current ratio has improved each year but only very slightly. It however remained at a safe level, with the lowest experienced in 2001 at 1.5. Cash, on the other hand, had always been on a precarious level, averaging only 0.6 month of operating expenses from 2001 to 2005, as shown in Table 2-8. Table 2-8 Current Ratio and Cash Flow

2001 2002 2003 2004 2005 (Un-audited)

Current Ratio 1.5 1.7 1.9 2.5 1.7 Cash = No. of Mo. of Operating Exp. 1.3 0.5 0.5 0.7 0.3

2.3. OUTSTANDING LOANS AND DEBT-SERVICE CAPACITY

In 2005, PDAM Kota Malang had total outstanding loans of Rp 48,182 million consisting of the following: • Loan from the former Direktorat Dana Investasi (DDI) of the Ministry of Finance under

contract No. RDA 60/DDI/1991 with an original amount of Rp 10,056 million. The loan had a payment term of 30 years, including a five-year grace, and an interest of 9% per annum. The balance in 2005 was Rp 4,957 million of which about Rp 3,685 million is principal and Rp 1,272 million, accumulated interest. The loan is expected to be fully repaid by 1 November 2011.

Shortage in the payment to PT Sumber Kencana Perkasa for the construction of Wendit III production facility amounting to Rp 19,245 million, for which the two parties agreed that the PDAM pays the amount in installment beginning December 2005 with an interest of 11% per annum. The said installment is scheduled to be completed by the end of 2008. The loan outstanding at the end of 2005 amounts to Rp 16,505 million.

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Loan from Bank Negara Indonesia (BNI) amounting to Rp 26,719 million with an interest rate of 15.5% per annum and a repayment period of 93 months, including 21 months of grace period. This loan is projected to be fully amortized by 2011. The loan was disbursed in two tranches, the first amounting to Rp 13,500 million, with the disbursement of the first made in 2004 and the other in 2005. The repayment of this loan will commence in 2006. From the notes to the financial statements accompanying the PDAM’s budgets for 2005 and 2006, the purpose for which this loan was contracted has not been clarified. It can be surmised, however, that it was for the construction of ancillary facilities for Wendit III. The schedules for amortizing PDAM’s outstanding loans are presented in Annex C. All through the years, the PDAM has been able to make timely payments on both principals and interests of the aforementioned loans as they fall due. The PDAM’s debt service coverage ratio remained at a quite safe level, although it declined from 16.8 in 2004 to 9.0 in 2005. The ratio of debt to total capitalization increased significantly in 2005 to 59% from 40% in 2004, as shown in Table 9. Table 2-9 Indicators of Debt-Service Capacity

2001 2002 2003 2004 2005 (Un-audited)

DSCR Based on Net Revenue 16.8 14.3 15.1 18.6 9.0 Debt to Total Capitalization 27% 24% 20% 40% 59%

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3. BUDGET FOR 2006

3.1. WATER PRODUCTION AND DEMAND The PDAM’s production capacity is planned to be increased to 1,475 l/sec with the full operation of the installed capacity in Wendit III of 240 l/sec. Actual production is projected at 44,849 m3 and the volume of water sales at 28,751 m3. NRW for the year is estimated at 37.6%, representing a deterioration of over five percentage points from the 2005 level. Plant utilization factor is expected to decline but will remain at a strained level of 110%. Based on the investment program prepared by the PDAM’s technical department, a total of 4,000 connections will be installed during the year. The total number of connections will thus increase to 87,071, about 93.7% of which will be for households. Domestic coverage ratios will thus reach 57.5% for the whole city and 84.8% for the service area.

3.2. REVENUE AND EXPENSES Water revenues are forecast to increase by 18% over the 2005 level, reaching Rp 73,025 million, as the tariff increase in 2005 is applied over the entire year. Average tariff at constant 2005 prices will decline by 1% to Rp 2,408. It will however remain 108% of that which is required for full-cost recovery as defined under Permendagri 2/1998. Net income is forecast to decline by as much as 20.6% to Rp 9,316 million. The number of employees per 1,000 connections is assumed to fall below 6 as head count is reduced from 536 in 2005 to 516. In nominal terms, personnel and overhead are budgeted to decline by 6.4% and 11.1% respectively. These decreases are however more than offset by increases in other cost items: power by 10.0%, chemicals, by 80.7%, maintenance materials by 48.4%, and most significantly raw water by 207.7%. Overall, therefore, recurrent costs are budgeted to increase by 9.6%. These increases signify the effects of the PDAM’s growing reliance on surface water, for which it has to pay a relatively high compensation and which has to be treated before distribution to customers. The PDAM’s budgeted cost figures for 2006 are shown in Table 3-1. Table 3-1 Comparison of Unit Cost Per m3 of Water Sold for 2005 and 2006 (At Current Prices)

2005 (Un-audited) 2006 (Budget) Increase/ (Decrease)

Personnel 545 510 (6.4%) Power (Operational) 333 366 10.0% Chemicals 3 6 80.7% Maintenance Materials 219 325 48.4% Overhead 477 424 (11.1%) Raw Water 49 151 207.7%

Total 1,626 1,782 9.6%

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3.3. OTHER PERFORMANCE INDICATORS The PDAM plans to improve its collection efficiency, with receivables being cut from 65 days of sales to 55, through the strict enforcement of its disconnection policy on customers with just one month of unpaid water bill. Bad debts are likewise assumed to go down to 0.46% of water sales from 0.69% in 2005. The current ratio will be at a dangerous level of 0.9. Cash will improve, but only very slightly, to 0.4 month of operating expenses, which is precisely the level assumed in the corporate plan. Indicators of debt servicing and carrying capacities will be maintained at safe levels, with DSCR at 1.5, or just equal to the statutory minimum, while debt in relation to total capitalization will decline to 43% from 59% in 2005.

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4. INVESTMENT PROPOSAL

4.1. PHYSICAL TARGETS AND COSTS The investment program consists basically of three components: extension of the distribution network by a total length of 126,113 m; construction of a total of eight reservoirs with combined capacity of 8,250 m3; and installation of four pumps with combined capacity of 395 l/sec. Based on the data made available by the PDAM’s technical planning department, a total of 18,523 connections are targeted for the five-year period from 2005 to 2009, a portion of which have already been installed in 2005. It is thus assumed that the remaining 16,759 new connections will be generated during the ensuing four years from 2006 to 2009, as indicated in Table 4-1. Table 4-1 Schedule for Installing New Connections

2006 2007 2008 2009 Yearly Increase 4,000 4,754 4,129 3,876 Cumulative 4,000 8,754 12,883 16,759

The investment program provided by the PDAM’s technical department, which includes physical targets and their corresponding costs, is provided in Annex D. Due to inadequate internal cash generation and in the absence of external sources of financing, the PDAM has decided to postpone the implementation of the program to 2007, without sacrificing its connection program. The implementation period has thus been shortened to three years, from 2007 to 2009, with the investment for 2006 carried over to the succeeding two years and its cost correspondingly reallocated. The base cost of the program is estimated to amount to Rp 45,701 million. At current prices, and including all contingencies, the investment program will cost a total of Rp 57,472 million. Procurement accounts for 27.8% or Rp 16,001 million and civil works for 13.4% or Rp 7,707 million. New connections will cost Rp 16,915 million or 29.4% of the total. The yearly breakdown of the investment program by cost component is presented in Table 4-2.

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Table 4-2 Cost of Investment Program (In Rp Million) 2007 2008 2009 Total % of Total Procurement 4,340 4,531 7,131 16,001 27.8% Procurement – Connections 5,892 5,114 887 11,893 20.7% Civil Works 2,068 2,274 3,365 7,707 13.4% Civil Works – Connections 2,532 2,194 296 5,022 8.7% Land Acquisition Design Supervision Administration 371 353 292 1,016 1.8% Taxes and Duties 1,483 1,411 1,168 4,062 7.1% Total, Base Prices 16,685 15,877 13,139 45,701 79.5% Physical Contingencies 972 929 767 2,668 4.6% Financial Contingencies 2,294 3,228 3,582 9,104 15.8% Total, Current Prices Incl. All Contingencies 19,951 20,033 17,488 57,472 100.0%

In addition, it is also assumed that the PDAM will implement a replacement program budgeted at 5.5% of the value of assets in operation and a sustained connection program over and above the foregoing three-year investment program that will generate 1,000 new connections per year from 2010 onward.

4.2. FINANCING PLAN A loan from a domestic commercial bank is proposed to finance 70% or Rp 40,230 million of the total investment cost. Terms of the loan are based on the most recent experience of PDAM Kota Malang in tapping a similar funding source. The repayment period is seven years, including a two-year grace. The interest rate has however been adjusted upward to 17% in view of the higher benchmark rate of 12.75% imposed by Bank of Indonesia during the later part of 2005 and which is expected to prevail in the foreseeable future. The disbursement of the loan is assumed to start in 2007 simultaneous with the start of the implementation of the investment program. The rest of the investment cost is assumed to be covered by customer contributions and the PDAM’s internal cash generation, as presented in Table 4-3. Table 4-3 Financing Plan and Indicative Loan Disbursement Schedule (In Rp Million) 2007 2008 2009 Total % of Total Project Loan Assumed 13,966 14,023 12,242 40,230 70.0% Customer Connections 4,476 4,101 4,062 12,639 22.0% PDAM/Other 1,509 1,909 1,185 4,602 8.0%

Total 19,951 20,033 17,488 57,472 100.0% Based on the assumed terms, the schedule for amortizing the loan is as presented in Table 4-4.

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Table 4-4 Amortization Schedule of the Proposed Commercial Loan (In Rp Million) 2007 2008 2009 2010 2011 2012 2013 Cumulative Disbursement 13,966 27,989 40,230 Amortization 8,046 8,046 8,046 8,046 8,046 Loan Balance 13,966 27,989 32,184 24,138 16,092 8,046 Commitment Fee + General Interest, unadjusted 1,187 3,566 5,115 4,787 3,420 2,052 684

Up-Front Charge Total Interest, adjusted 1,187 3,566 5,115 4,787 3,420 2,052 684 Accumulated Interest 1,187 3,566 5,115 Balance of Accumulated Interest 1,187 4,753 7,894 5,921 3,947 1,974

Repayment of Accumulated Interest 1,974 1,974 1,974 1,974 1,974

Total Amortization 15,134 14,807 13,439 12,071 10,704

In view of the longer implementation period (during which loan financing will be required) compared to the grace period, the loan may have to be packaged in at least two tranches with an amortization schedule established for each tranche.

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5. HIGHLIGHTS OF THE FINANCIAL PROJECTION

The discussion focuses on the years 2007 to 2013, the time slice that is considered critical as it corresponds to the period for implementing the investment program as well as for amortizing the PDAM’s existing loans and the proposed commercial loan.

5.1. ASSUMPTIONS

5.1.1. COST OF CAPITAL The cost of capital is computed based on the fund-sourcing mix presented in the financing plan. As mentioned, the commercial-loan portion will bear an interest of 17.0%. Customer contributions are assumed to be received by the PDAM as revenue and can therefore be considered as PDAM funds. PDAM funds are expected to yield a return on equity of 10%, which is consistent with the alternative definition of full-cost recovery discussed earlier. On this basis, the weighted average cost of capital (WACC) is 14.9%, as shown in Table 15. Table 5-1 Weighted Average Cost of Capital

Commercial Loan PDAM Funds Total

Weighting 70.00% 30.00% 100.0% Nominal Cost 17.00% 10.00% Weighted Component of WACC 11.90% 3.00% 14.90%

5.1.2. PROJECTED PRODUCTION AND DEMAND Part of the proposed investment program is the installation of two additional pumps in Wendit III to bring the yield from this facility up to its designed capacity of 480 l/sec. Total production capacity, therefore, is projected to increase to 1,715.2 l/sec or 240 l/sec more than the capacity in 2006 of 1,475.2 l/sec. NRW is at 34.0% in 2007, and is projected to gradually decline thereafter to settle at 28.0% from 2012 onward. As mentioned, the installation of new connections to be generated through the investment program will be completed by 2009. Thereafter, additional connections will be generated through the PDAM’s sustained connection program. Per capita consumption, as estimated by the PDAM’s management, will be at a relatively low 121 liters per day throughout the projection period. Unit consumption is forecast to first gradually increase to reach 27.1 m3 per month in 2011, after which it will again decline to settle at 26.8 m3 from 2016 onward. Domestic coverage ratio for the entire city will reach 65.0% in 2013 and will peak at 65.5% beginning 2022. The service coverage ratio, on the other hand, will be 96.0% in 2013 and will reach almost 98% during the last year of the projection period. There is thus ample room for system expansion within the city boundaries.

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Plant capacity utilization factor will range within a narrow band of 92% and 96% mainly because of the conservative assumption on consumption and the expectation of lower non-revenue water. At this level of plant capacity utilization, sales volume has to be held constant from 2010 onward, with supply to new connections basically taken away from existing ones. Supply will therefore remain at critical levels, with capacity of existing production and distribution facilities always in danger of being over utilized by an increase in demand and non-realization of NRW targets. The PDAM’s projected production, capacity constraints, and water losses are presented in Table 5-2. Table 5-2 Projected Production Capacity, Capacity Constraints and Water Losses

2007 2008 2009 2010 2011 2012 2013

Production Capacity (l/sec) 1,715 1,715 1,715 1,715 1,715 1,715 1,715 Production Volume (m3/year) 45,340 43,568 44,410 44,646 44,345 44,033 44,383

Distribution Volume (m3/year) 43,073 43,524 44,366 44,602 44,301 43,989 44,339

Volume Sold to Consumers (m3/year) 32,370 35,051 37,447 38,156 38,156 38,156 38,156

Water Losses (%) 34.0% 32.1% 31.2% 30.1% 29.1% 28.0% 28.0% Ratio of Production to Consumption 1.40 1.24 1.19 1.17 1.16 1.15 1.16

Plant Utilization Factor (%) 96.4% 92.6% 94.4% 94.9% 94.3% 93.6% 94.4% Data on projected connections and water demand until 2013 are in Table 5-3. Table 5-3 Projected Connections and Water Demand

2007 2008 2009 2010 2011 2012 2013

Household Connections (No.) 86,608 90,737 94,613 95,613 96,613 97,613 98,613

Unit Consumption (lcd) 121 121 121 121 121 121 121 Non-Domestic Connections (No.) 3,141 3,141 3,141 3,141 3,141 3,141 3,141

Unit Consumption (m3/day) 3.2 3.2 3.2 3.2 3.2 3.2 3.2

Total Connections 91,825 95,954 99,830 100,830

101,830

102,830

103,830

Annual Change (No.) 4,754 4,129 3,876 1,000 1,000 1,000 1,000 Domestic Service Ratio-Kota Malang (%) 60.3% 62.6% 64.7% 64.8% 64.8% 64.9% 65.0%

Domestic Service Ratio-Service Area (%) 88.9% 92.3% 95.4% 95.6% 95.7% 95.8% 96.0%

Details of the demand forecast are presented in Annex E.

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5.1.3. RECURRENT COSTS Assumptions on recurrent costs are as follows: • Personnel and personnel cost: The desired personnel-to-connection ratio of 5 per

1,000 is planned to be achieved in 2010 and will be maintained at this level for the rest of the projection period. Cost per employee is assumed to increase annually in real terms by 8.0% or about 13.5% in nominal terms.

• Power and chemicals: Distortions in the prices of power and chemicals are expected

to be gradually corrected during the next five years, or up to 2010, concurrent with the progressive elimination of government subsidies for petroleum-based fuel and electricity. Their prices are therefore anticipated to post significant real annual increases in the interim. Based on the results of operations for 2004 and 2005 and the budget for 2006, annual increases in costs of power and chemicals in real terms are set at 15% or 20.5% in nominal terms. Beginning 2011, costs of these inputs are expected to already reflect market prices and will therefore move based on annual inflation rate.

• Maintenance materials: These are assumed at 3% of net fixed assets, which is the

same as the average during the period 2001-2005. • Administration: These are defined as PDAM general and administrative expenses

minus wages, interest payments, bad debts allowances, and maintenance and depreciation costs related to general and administrative fixed assets. The proportion of this cost item to personnel cost will be reduced to 85% by 2010.

• Raw water. The cost of raw water posted in 2006 of Rp 143 per m3 at constant 2005

prices is maintained and is adjusted only for annual inflation.

5.1.4. TARIFF ANALYSIS The PDAM is at present committed to maintaining the present practice of increasing tariff by 20% in nominal terms every two years, with effect starting the seventh month of the year the tariff increase is approved. At this rate, weighted average tariff will always be at full-cost recovery, except in 2010 when it will be marginally lower at 99% of the required level as provided for in Permendagri 2/1998 and as alternatively defined in this report. The assumed yearly average tariff and those required for different levels of cost-recovery, as recognized under existing regulations, are presented in Table 5-4. Table 5-4 Analysis of Projected Tariff (Rp per m3 of Water Sold)

2007 2008 2009 2010 2011 2012 2013

Constant 2005 Prices

Assumed Weighted Average Tariff 2,430 2,303 2,489 2,359 2,549 2,416 2,611

Low Cost (O&M Expenses) 1,966 2,056 2,186 2,402 2,445 2,549 2,673

Basic Cost (PFCR MOHA Guideline) 2,408 2,368 2,557 2,834 2,803 2,763 2,853

Full Cost (Permendagri 2/1998) 2,590 2,729 2,946 3,171 3,279 3,437 3,669

Full Cost (O&M + Debt Service + 10% Equity) 2,580 2,590 2,850 3,155 3,198 3,226 3,423

Current Prices

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2007 2008 2009 2010 2011 2012 2013

Assumed Weighted Average Tariff 3,102 3,273 3,936 4,153 4,994 5,269 6,337

Nominal Increase of Assumed Tariff (%) 20% 5% 20% 5% 20% 5% 20%

Low Cost (O&M Expenses) 2,222 2,451 2,749 3,187 3,423 3,764 4,165

Basic Cost (PFCR MOHA Guideline) 2,721 2,823 3,216 3,760 3,923 4,081 4,445

Full Cost (Permendagri 2/1998) 2,927 3,253 3,705 4,207 4,590 5,076 5,716

Full Cost (O&M + Debt Service + 10% Equity) 2,915 3,087 3,584 4,186 4,476 4,764 5,333

Cost-Recovery Indicators

Extent of Full-Cost Recovery: Permendagri 2/1998 (%) 106% 101% 106% 99% 109% 104% 111%

Extent of Recovery: O&M + Debt Service + 10% Equity (%) 106% 106% 110% 99% 112% 111% 119%

5.2. FEASIBILITY INDICATORS Based on the foregoing assumptions, the investment program is found to be feasible with a positive net present value (NPV) of Rp 12,326 million and a financial internal rate of return (FIRR) of 20.1%, which is well above the hurdle rate. The program remains feasible even assuming a 10% increase in investment and incremental O&M costs. It does not surmount, however, the other sensitivity tests of a 10% reduction in incremental revenues or the postponement of the realization of these revenues by one year, for example because of implementation delays. The indicators of feasibility of the investment program under the base case and under certain adverse scenarios are shown in Table 5-5. Table 5-5 Feasibility Indicators (WACC=14.9%)

NPV FIRR Base Case 12,326 21.1% 10% Increase in Investment and O&M Costs 152 15.0% 10% Decrease in Incremental Revenues (1,080) 14.4% One Year Delay in Incremental Revenues (8,028) 12.0%

5.3. FINANCIAL RESULTS 5.3.1. INCOME STATEMENT The tariff and connection revenues are carried from the revenue calculation into the income statement by converting 2005 constant-price revenues into current prices through the application of the annual GDP inflator. A bad debts allowance of 0.6% is assumed for tariff revenues. Profits are taxed at the corporate rates currently prevailing in Indonesia. The PDAM is projected to continue to generate net income after tax. Similarly, retained earnings will be positive throughout the projection period. Return on assets will range between 6% and 13%; return on equity will be between 10% and 31%. A summary of the PDAM’s income statement for the period 2007-2013 is presented in Table 5-6. Detailed income statements are presented in Annex F.

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Table 5-6 Summary Income Statement (In Rp Million, Except Ratios) 2007 2008 2009 2010 2011 2012 2013 Tariff Revenues 100,414 114,710 147,391 158,445 190,562 201,043 241,794 Total Operating Revenues 112,769 126,190 158,842 160,896 193,075 203,634 244,474 Operating Expenses 71,921 85,924 102,959 121,614 130,596 143,637 158,910 Non-Operating Expenses 12,940 11,346 11,278 15,677 14,412 11,348 8,438 Net Profit Before Tax 27,908 28,920 44,605 23,605 48,066 48,649 77,126 Income Tax 19,544 8,576 11,809 7,723 15,452 16,109 25,500 Net Income Loss 19,544 20,253 31,232 16,532 33,655 34,063 53,997 Other Payments 14,463 14,987 23,112 12,234 24,905 25,207 39,958 Retained Earnings 5,082 5,266 8,120 4,298 8,750 8,856 14,039 Return on Assets 13% 11% 13% 6% 11% 10% 13% Return on Equity 31% 22% 23% 10% 16% 13% 16%

5.3.2. SOURCES AND APPLICATIONS OF FUNDS The PDAM will continue to enjoy positive annual cash flows throughout the projection period. DSCR will remain at a safe and increasing level starting at 2.5 in 2007 and reaching 8.8 in 2013. A summary of the sources and applications of funds is presented in Table 5-7, while the details are in Annex G. Table 5-7 Summary Sources and Applications of Funds (In Rp Million, Except Ratios) 2007 2008 2009 2010 2011 2012 2013 Gross Internal Cash Generation 41,070 41,356 57,882 42,903 66,614 66,207 94,216 Equity 5,124 10,749 11,139 17,178 9,093 18,510 18,735 Borrowing 15,153 17,589 17,356 Total Sources of Funds 61,346 69,695 86,377 60,080 75,707 84,717 112,951 Capital Expenditures 32,675 36,664 37,656 15,792 15,908 16,829 17,804 Debt Service 16,148 13,024 17,478 21,855 19,103 12,071 10,704 Operations -3,266 3,477 1,754 13,072 2,995 11,399 6,904 Total Applications of Funds 45,557 53,166 56,888 50,719 38,006 40,300 35,411 Cash Increase (Decrease) 15,789 16,529 29,489 9,361 37,700 44,417 77,539 DSCR (Net Revenues) 2.5 3.2 3.3 2.0 3.5 5.5 8.8

5.3.3. BALANCE SHEET Capital expenditures are forecast to be completed in 2009. All new investments are carried as work-in-progress in the year of expenditure and capitalized in the following year. Depreciation is calculated on the useful life basis for tariff purposes and at the fiscal rate for accounting purposes. Fixed assets are carried throughout the forecast at historical cost, as is the current PDAM practice. The provisions of the Decree of the Minister of Finance (KepMenKeu) No. 507/KMK/.04/1996 and other relevant pieces of legislation treat revaluation surpluses as capital gains, with the tax payable immediately. The PDAM is therefore not expected to consider revaluation of its fixed assets while this decree is still in effect. Capitalized interest

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and construction preliminaries and demobilization expenses are treated as deferred expenses and amortized at 10% per annum on the outstanding balance. Balance sheet projections assume 30-day accounts receivables, again due to the existing disconnection practice, and 30-day accounts payable. The inventory point for chemicals and maintenance materials is 30 days and for installation inventories, 70 days. After breaching the required minimum in 2006, the current ratio is projected to improve to 1.2 in 2007 and will remain at a safe level every year thereafter, reaching 4.0 in 2013. The ratio of debt to total capitalization will sharply decline to 33% in 2007 and then to a mere 5% by 2011 as the PDAM retires its outstanding long-term loans. A sharp increase in cash is foreseen, from 2.9 months of operating expenses in 2007 to 17.6 months in 2013. The highlights of the balance sheet are presented in Table 5-8. The detailed balance sheet projections are in Annex H. Table 5-8 Summary Balance Sheet (In Rp Million, Except Ratios)

2007 2008 2009 2010 2011 2012 2013 Cash and Deposit 17,680 34,209 63,698 73,060 110,760 155,177 232,717 Current Assets, net of Cash 16,934 17,253 18,962 18,042 20,657 21,496 24,841

Current Assets 34,614 51,462 82,661 91,101 131,417 176,673 257,557 Net Fixed Assets 70,438 93,900 119,445 143,937 145,094 145,497 145,920

Total Assets 145,025 188,992 246,456 257,304 298,894 345,474 427,755 Current Liabilities 27,718 39,694 50,086 51,244 54,107 60,684 64,450 Long-Term Debt, Net 31,325 33,594 35,229 20,040 10,020 Total Liabilities 82,050 96,470 108,681 94,930 87,922 84,782 88,854 Equity 62,975 92,522 137,775 162,374 210,972 260,692 338,901 Total Equity and Liabilities 145,025 188,992 246,456 257,304 298,894 345,473 427,755

Current Ratio 1.2 1.3 1.7 1.8 2.4 2.9 4.0 Debt to Total Capitalization 33% 27% 20% 11% 5%

No. of Days Accounts Receivable 43 39 35 30 30 30 30

Cash = No. of Months of Operating Exp. 2.9 4.8 7.4 7.2 10.2 13.0 17.6

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6. CONCLUSIONS AND RECOMMENDATIONS

6.1. CONCLUSIONS From the foregoing discussions, the following conclusions can be derived: • PDAM Kota Malang will be able to maintain a sound financial footing. Net

income will be generated each year of the 25-year projection period. Other financial indicators are likewise positive. Two aspects will need special attention, however: the excessively high installation inventory and overhead. Both have historically exceeded the accepted benchmarks.

• Without any significant improvement, production capacity will continue to

exert pressure on the PDAM’s ability to achieve its performance targets. The non-realization of NRW-reduction targets could very well put water revenue targets at risk. Limited supply could also give rise to customer dissatisfaction.

• In view of the existing limitations on production capacity, the proposed

investment program becomes even more urgent. The investment program includes, among others, the installation of additional pumps to bring up Wendit III to its full production potential.

• On the basis of the assumptions on costs and incremental revenues, the

proposed investment program is financially feasible. The financial feasibility assessment yields a positive NPV and an FIRR that exceeds the WACC.

• The investment program is financially affordable to the PDAM. While a

relatively high proportion of debt financing is assumed, the financial projection shows that the PDAM will be able to repay such debt with a room to spare for additional borrowing based on a DSCR that is consistently higher than the statutory minimum.

6.2. RECOMMENDATIONS The following recommendations are offered to ensure the validity of the foregoing conclusions: • Implement measures to properly control installation inventory. Perhaps a

proper beginning would be to analyze how this reached an excessive level of over 1,000 days cover in light of the assumed future levels of only 70 days. What this indicates is a gross failure of purchasing and inventory management policies, systems, and procedures. In anticipation of the issue that bankers may raise, the PDAM needs to state in more specific terms how it intends to achieve the aforementioned sharp reduction.

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• Formulate and implement an action plan for reducing overhead. Excessive level of overhead in relation to personnel cost could be an issue that prospective lenders may focus on and may require the PDAM to commit to a specific and time-bound reduction strategy.

• Take a more aggressive and proactive stance toward generating new

connections. The new connections are needed both for defraying a substantial part of the investment cost and for generating the assumed incremental revenues. Such a stance is a must in view of the ambitious targets set, at least during the next four years, compared to the PDAM’s track record in generating new connections.

• Conduct a comprehensive real demand survey. The results of the survey would

serve to validate the targets in the investment program and should be able to provide more realistic budgeting assumptions for the coming years.

• Develop stronger coordination between the marketing and planning

departments. The incident related earlier wherein a pipe-laying work had to be postponed because of the failure to generate the minimum number of connections, although anecdotal, is a clear indication of the functional discontinuity between the aforementioned departments. Had a market study or survey been made and the planning department took its results into account, the said incident could very well have been avoided.

• Conduct a performance audit of existing production facilities. The audit is

meant to focus on, among others, how to reduce the cost of operation and maintenance and how to increase the yields from these facilities. The results of the audit should then form the basis for formulating and subsequently implementing a rehabilitation and/or optimization program. The preparation of production master plan similar to and linking with the recently completed distribution master plan may also be contemplated.

• Formulate a plan for utilizing excess cash most effectively. The PDAM may be

faced in the immediate future with a problem of a different kind - that of having too much cash on its hands. One option is to reserve excess cash to finance the investments resulting from the NRW reduction program, the water distribution master plan, and/or the rehabilitation of existing production facilities.

• Institute safeguards for ensuring the validity of the assumptions used in the

financial projection. The local economy has been jolted recently by the partial withdrawal of fuel subsidies. As an aftermath of the recent increase in fuel prices, inflation has remained over 17%. Another threat is the ongoing discussion of an increase in electricity tariff. It is therefore necessary to revisit the assumptions underlying the projected levels of recurrent expenses, taking into account actual inflation data and the insights of PDAM management on how these will ultimately be reflected in the PDAM’s operating costs. Quite aside from being the main determinant of the feasibility of the investment programs, assumptions on tariff should automatically be adjusted in line with the projections on expenses.

• Institute safeguards against the adverse scenarios used in the sensitivity

analysis of the investment program. The sensitivity analysis showed that the investment program cannot withstand a 10% reduction in, or a one-year delay in the realization of, incremental revenues.

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7. ANNEXES ANNEX A NOTES ON THE MEETING WITH PDAM KOTA MALANG (FEBRUARY 6-7, 2006)

ANNEX B NOTES ON VISIT TO PDAM KOTA MALANG (MARCH 6-7, 2006)

ANNEX C SCHEDULE OF AMORTIZATION OF OUTSTANDING LOANSOF PDAM KOTA MALANG

ANNEX H DETAILED BALANCE SHEET PROJECTIONS ANNEX G DETAILED SOURCES AND APPLICATIONS OF FUNDS ANNEX F DETAILED INCOME STATEMENT ANNEX E DETAILED DEMAND FORECAST

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ANNEX A NOTES ON THE MEETING WITH PDAM KOTA MALANG (FEBRUARY 6-7, 2006) Date : February 6-7, 2006 Time : 8:30 – 10:30 AM Place : PDAM Kota Malang

BACKGROUND The Environmental Services Program (ESP) funded by the United States Agency for International Development (USAID) is currently assisting PDAM Kota Malang in mobilizing a commercial loan for financing the implementation of its medium-term investment program. Part of the assistance was the verification of the costs of the program’s various components, analysis of its feasibility, and assessment of how it will affect the future operations of the PDAM as a whole. A preliminary 20-year financial projection and a corresponding narrative analytical report were prepared and submitted, and were to be presented to PDAM management on Monday, February 6. During this day, however, members of the PDAM’s top and middle management had to attend the opening of a training course for unit heads held in the neighboring city of Batu and were available only starting at noontime. The presentation was thus postponed for the following day, and the day of February 6 was instead spent on discussions with the Director for Finance and Administration and the Assistant Manager for Financial Analysis. During these discussions, matters that are salient to the financial projection were brought up, and views of the aforementioned officials were again raised for confirmation during the presentation. Such views are included in these notes.

PURPOSE The purpose of the meeting was to present and discuss the results of the preliminary financial projection and to validate the assumptions used.

PARTICIPANTS The meeting was presided by the PDAM’s Managing Director and attended by the Technical Director and the Director for Finance and Administration, as well as all department managers and assistant managers. ESP was represented by Messrs. Nugroho and Ramon H. Hagad. The list of participants is in the Annex.

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ESP made a brief PowerPoint presentation of the highlights of the assessment of historical performance and the financial projection. This was followed by a discussion focusing on the issues raised during the presentation. ESP clarified that these issues were being raised not so much for its interest, but to prepare the PDAM in handling inquiries of prospective commercial-loan providers. A summary of the discussion follows. Results of Operations in 2005 and Budget for 2006 The year 2005 turned out to be another profitable year for the PDAM with net income, based on the un-audited financial statements, exceeding Rp 11 billion. ESP was furnished a copy of the un-audited financial statements as reference for the revision of the financial projection. The servicing of existing debts had however exerted strong pressure on cash flow, which is expected to linger up until 2006. Salaries were increased by 15% on average effective February 2006, which is anticipated to exert additional pressure on cash flow. As a result, personnel cost may exceed the amount already budgeted for 2006. Aside from this, however, the approved budget for 2006 remains valid. To control cost and improve revenue generation, the PDAM has instituted efficiency-improvement measures. Among the measures cited were: the shutdown of some water pumps during off-peak demand hours, the closer scrutiny of the results of meter reading, and the return to the warehouse of excess connection-installation materials for use in other new connections. In any case, each head is now being enjoined to come up with cost-cutting measures for his/her department. PDAM hopes that the savings realized from these measures could offset a significant portion of the salary increase. For ensuring sustained performance improvement over the long-term, regular training courses are conducted targeting all levels of the PDAM’s organizational hierarchy (the training course being conducted for unit heads mentioned earlier will be followed by another course for assistant managers). The PDAM is also encouraging and subsidizing staff to attain higher educational levels: all elementary school graduates to finish junior high school and all assistant managers to pursue master’s degrees. Investment Program The cost of the investment program as captured in the financial projection is deemed realistic. The estimated number of connections is however quite low. According to the planning department, the total number of new connections targeted for the four-year period 2006-2009 is 18,000 as opposed to 11,900 previously given to ESP and used in the financial projection. The PDAM’s assistant manager for technical planning promised to furnish ESP with the latest information to be sent by fax the day after the presentation. Because of the cash-flow pressure being experienced at present, which the PDAM foresees to ease up only in 2007, the ideal timing for the implementation of the investment program and for contracting a new loan to finance it is starting 2008. The investment program does not include those pertaining to the ESP-assisted NRW-reduction program and the implementation of the recently completed water distribution master plan. Assumptions for the Financial Projection Accounts receivables: 30 days of water sales since disconnection is now done on customers with just one month unpaid water bill. Current ratio: to be maintained at between 1.75 and 2 with excess cash channeled to routine investment. Cash: 2 to 3 months of operating expenses.

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New connections: almost 100% for households with those classified under social and institutions maintained at below 20, since these are now being reclassified under commercial or industry, and no significant growth is forecast for each of these categories. Average water consumption: 25-26 m3 per connection per month. Tariff: nominal increase of 20% every two years (although this can be adjusted based on preliminary results of the financial projection as in reality previous tariff increases averaged up to 40%). Proportion of personnel to number of connections: 6:1,000 up to 2008 and 5:1,000 beginning 2009 onward. Non-revenue water: 32%, as assumed in the financial projection, is deemed realistic. This can go down to 28% with the implementation of the ESP-assisted NRW-reduction program. The targets and costs pertaining to the program are however not yet available, and in their absence NRW will be maintained at 32%. Operating expenses: Personnel: 15% nominal increase every two years Power: 15% real increase or between 25% and 21% in nominal terms every year up to 2010, and at the rate of inflation every year thereafter Chemicals: at constant 2005 prices adjusted every year at the rate of inflation Administration: at the average proportion to personnel cost during the period 2001 to 2006 Raw water: Rp 25/m3 of water sold plus Rp 60/m3 of water sold compensation for water originating from sources within the territorial jurisdiction of Kabupaten Bogor (with percentage these sources account for in annual production used as well for volume of water sold in computing the yearly total amount of compensation). Watershed Conservation Fund The Rp 60/m3 compensation paid annually to Kabupaten Bogor is supposed to be for watershed conservation/protection. PDAM Kota Malang is however not involved in determining how this money is used.

CONCLUSIONS The following conclusions were arrived at during the meeting: The financial projection will need to be updated to reflect the actual results of 2005 operations and the budget for 2006, as well as the new assumptions agreed upon during the presentation. The PDAM will furnish ESP with the schedule for installing new connections during the years covered by the investment program. The PDAM will likewise furnish ESP with physical targets and costs of investments pertaining to NRW-reduction and the implementation of the water distribution master plan if the intention is to include these in the proposed investment program.

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FOLLOW-UP ACTIONS AND TENTATIVE SCHEDULE The following actions, with indicative dates of performance/completion were, agreed upon:

1. PDAM Kota Malang furnishes ESP with latest data on investment targets and costs as well as target new connections.

February 8-9, 2006

2. ESP revises the financial projection and analytical report. February 8-13, 2006

3. ESP submits the financial projection and analytical report. February 16, 2006

4. PDAM Kota Malang convenes a meeting with ESP to discuss the revised financial projection and analytical report.

February 27, 2006

5. ESP finalizes the financial projection and analytical report. February 28-March 1, 2006

6. ESP submits the final financial projection and analytical report. March 4, 2006

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ANNEX B NOTES ON VISIT TO PDAM KOTA MALANG (MARCH 6-7, 2006) Date : March 6-7, 2006 Time : 9:00 – 11:30 AM Place : PDAM Kota Malang

BACKGROUND The Environmental Services Program (ESP) funded by the United States Agency for International Development (USAID) is currently assisting PDAM Kota Malang in mobilizing a commercial loan for financing the implementation of its medium-term investment program. Part of the assistance was the verification of the costs of the program’s various components, analysis of its feasibility, and assessment of how it will affect the future operations of the PDAM as a whole. A preliminary 20-year financial projection and a corresponding narrative analytical report were prepared and submitted, and were presented to PDAM management Tuesday, February 7. During this presentation, assumptions underlying the financial projection and the analysis were either confirmed or modified with the overall conclusion that revised financial projection and analytical report will have to be prepared. ESP subsequently prepared revised financial projection and analytical report.

PURPOSE The purpose of the meeting was to present and discuss the results of the revised financial projection and analytical report and to secure approval from PDAM management for the finalization of the said outputs of the ongoing technical assistance.

FIRST DAY: MEETING WITH ASST. MANAGER FOR FINANCIAL ANALYSIS The presentation was originally scheduled for March 6, the first day of the visit. The Managing Director was however called for an emergency meeting with the local legislative council (DPRD). In consultation with the Director for Finance and Administration, the presentation was postponed for the following day, March 7. The first day was instead spent to discuss and verify certain elements of the financial projection with the Assistant Manager for Financial Analysis, as follows:

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Amortization of Long-Term Debt This was an issue raised in the analytical report. In the financial projection, the net long-term debt in the balance sheet, based on the amortization schedule provided in the PDAM’s Corporate Plan 2005-2009, does not zero out at the end of the amortization of existing as well as proposed loans in 2013, which means an overstatement of the loan balances during the prior years. An updated loan amortization schedule was obtained from the Assistant Manager for Financial Analysis, which provides for higher debt repayments for 2005 and 2006. On this basis, the financial projection was corrected. Basically, the effects were a lower loan balance in 2006, a lower net income for this year than that which has been projected in the annual budget in view of higher interest payments, and improved gearing (debt to total capitalization) ratios from 2006 onward. Water Production and Distribution The volume of water production, distribution, and sales all declined in 2005. Unit consumption of household connections also declined significantly, by almost 10%, from 134 liters per capita per day (lcd) to 121 lcd. The issue then was raised as to whether this was caused by a decline in demand or the PDAM’s supply limitation. The latter was especially baffling as the PDAM has a reported production capacity of 2,058 liters/second (l/sec) as of 2005 with the completion of the Wendit III production facility, which has a design capacity of 500 liters/second. On this basis, the PDAm’s plant utilization factor would only be 71% in 2005 and thus there should not have been a constraint on the supply side. The following clarifications were obtained:

• The 2,058 l/sec reported capacity actually represents the total of water abstraction permits (surat ijin pengambilan air or SIPA) now in the possession of the PDAM. The PDAM can draw this much water for as long as it has the necessary facilities.

• The existing production capacity was approximately equal to the production volumes of the PDAM’s 15 production facilities for 2005 converted to l/sec. One of the facilities was inactive.

• On the basis of the foregoing, the production capacity in 2005 was only 1,272.12 l/sec, a far cry from the reported 2,058 l/sec.

• Wendit III actually came into operation only during the last three months of 2005 and had a minuscule production contribution equivalent to 37 l/sec.

• Wendit III can draw water only up to a maximum of 480 l/sec, not 500 l/sec, as its four pumps each have a capacity of only 120 l/sec. Two of the pumps have already been installed, and the other two are included in the proposed investment program.

• For 2006, the assumption is that the production capacity for each of the existing facilities, except Wendit III, is already as its maximum. The increase would thus be provided by Wendit III with the full operation of its two installed pumps to yield 240 l/sec.

• Production capacity in 2006 would thus be 1,475 l/sec. • Production capacity from 2007 onward assumes the installation and operation of

two additional pumps in Wendit III to bring up its capacity to the maximum of 480 l/sec.

• Production capacity from 2007 onward would thus be 1,715.2 l/sec. • Wendit I and Wendit II remained the backbone of the PDAM’s production

capacity with combined contribution of 62% of the total production in 2005.

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These facilities are however old, with Wendit I constructed in 1982 and Wendit II in 1992.

• Both had original design capacities of 480 l/sec, but had deteriorated through the years to only 400 l/sec for Wendit I and 388 l/sec for Wendit II.

• The PDAM also suspects that O&M cost for the two aforementioned facilities, including repairs which have become more and more frequent, has increased significantly through the years.

A more detailed analysis of the PDAM’s production capacity is presented in the following table:

No. Name of

Production Facility

Type of Source Location

Production Volume in. 2005 (m3)

Production Capacity in 2005 (l/det)

Est. Prod’n Capacity in 2006 (l/det)

Est. Prod’n Capacity in 2007 (l/det)

1 Binangun Pipa Lama Spring Kota Malang 2,817,454 89.34 89.34 89.34

2 Binangun Pipa Baru Spring Kota Batu 4,712,685 149.44 149.44 149.44

3 Karangan Surface water Kab. Malang 1,176,649 37.31 37.31 37.31

4 Sumbersari Surface water Kab. Malang 457,273 14.50 14.50 14.50

5 Wendit I Surface water Kab. Malang 12,604,053 399.67 399.67 399.67

6 Wendit II Surface water Kab. Malang 12,246,695 388.34 388.34 388.34

7 Wendit III Surface water Kab. Malang 1,164,240 36.92 240.00 480.00

8 Banyuning Surface water Kota Batu 3,080,435 97.68 97.68 97.68

9 Badut I Groundwater Kota Malang 51,382 1.63 1.63 1.63

10 Badut II Groundwater Kota Malang 454,425 14.41 14.41 14.41

11 Badut III Groundwater Kota Malang 574,470 18.22 18.22 18.22

12 Sumbersari I Groundwater Kota Malang 83,374 2.64 2.64 2.64

13 Sumbersari II Groundwater Kota Malang 0 0.00 0.00 0.00

14 Istana Dieng Groundwater Kota Malang 510,466 16.19 16.19 16.19

15 TPA Supit Urang Groundwater Kota Malang 183,825 5.83 5.83 5.83

Total 40,117,426 1,272.12 1,475.20 1,715.20

On the basis of the foregoing production figures, the financial projection was revised with the following effects: The under-capacity utilization in 2005 and 2006 of 71% and 83% is reversed to over-capacity utilization of respectively 115% and 111%. For 2007 onward, capacity utilization will be in the neighborhood of 94% with full capacity utilization reached in 2020. In view of relatively low assumed per capita consumption of 121 liters per day and optimistic projected NRW of 28%, the recommendation of speeding up the generation of additional connections was stated with a strong caveat. Instead, the recommendation that PDAM considers installing additional capacity or rejuvenating existing ones was emphasized. The PowerPoint presentation was likewise revised accordingly.

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SECOND DAY: PRESENTATION As mentioned, the presentation was made on March 7, from 9:00 to 11:30 AM. Participants The meeting was presided by the PDAM’s Managing Director and attended by the Technical Director and the Director for Finance and Administration, as well as all department managers. ESP was represented by Ramon H. Hagad. Proceedings ESP made a brief PowerPoint presentation of the highlights of the revised financial projection. A summary of the ensuing discussion follows. Revised Assumptions The revised schedule of loan amortization is correct and should be used for the financial projection. A lower estimate of net income for 2006 because of higher interest payments was confirmed. The analysis of PDAM’s production capacity for 2005 and the resulting projected production capacities for 2006 and 2007 are fairly accurate. Investment Program The proposed investment program becomes even more urgent now in view of the critical production-capacity levels. The PDAM will also consider a detailed performance audit of its production facilities and come up with a rejuvenation/optimization program, especially for the old ones. At the same time, the PDAM will verify the costs of the proposed investment program and, if necessary, include the cost of a rejuvenation/optimization program before the proposed meeting with prospective lenders. Conclusions Notwithstanding the aforementioned verification of the investment program, the financial projection and analytical report, based on the presentation, can already be finalized. Refinements may however be integrated after the meeting with prospective lenders based on probable costs of borrowing.

FOLLOW-UP ACTIONS The following actions were agreed upon: ESP will initiate the meeting with prospective lenders based on a list of commercial banks that have already been vetted by USAID/DCA. In the meanwhile, the PDAM will firm up the components and costs of its proposed investment program and thus the amount of external financing it will need for implementing such program.

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RONMENTAL SERVICES PROGRAM WWW.ESP.OR.ID 34

ANNEX C SCHEDULE OF AMORTIZATION OF OUTSTANDING LOANS OF PDAM KOTA MALANG 2005 2006 2007 2008 2009 2010 2011 Loan from DDI Loan Balance 4,355 3,685 3,015 2,345 1,675 1,005 335 Amortization of Principal 670 670 670 670 670 670 335 Interest Payment 382 321 260 199 137 76 15 Repayment of Accumulated Interest 231 231 231 231 231 231 116

Loan from PT Sumber Kencana Perkasa

Loan Balance 17,505 16,500 10,500 4,500 Amortization of Principal 1,005 6,000 6,000 4,500 Interest Payment 637 1,985 1,118 271 Loan from BNI Loan Balance 26,719 26,719 22,719 18,319 13,919 9,519 4,719 Amortization of Principal 4,000 4,400 4,400 4,400 4,800 4,719 Interest Payment 4,153 3,470 2,753 2,020 1,270 479

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ANNEX D INVESMENT PROGRAM OF PDAM KOTA MALANG PENAMBAHAN JARINGAN PIPA

ESTIMASI JADWAL PEKERJAAN No. LOKASI VOLUME

BIAYA ( Rp.) 2005 2006 2007 2008 2009 KETERANGAN

A. KECAMATAN LOWOKWARU

Kelurahan Jatimulyo

1. Jl. Kenongo 2,650 m' 149,270,000.00 149,270,000.00

2. Jl. Vinolia 2,200 m' 145,910,000.00 145,910,000.00

Kelurahan Mojolangu

1. Jl. Simp. C. Panggung 3,325 m' 215,365,000.00 215,365,000.00

Kelurahan Tungulwulung

1. Jl. Akordion 4,005 m' 255,167,000.00 255,167,000.00

2. Jl. Pohpayung 14,250 m' 787,617,500.00 787,617,500.00

3. Jl. KH. Yusuf 5,375 m' 326,662,500.00 326,662,500.00

Kelurahan Tunjungsekar

1. Perum. Tunjung Sekar 7,620 m' 1,017,606,000.00 1,017,606,000.00

2. Jl. Ikan Tombro 3,525 m' 162,865,000.00 162,865,000.00

3. Jl. Simp. Piranha Atas 2,270 m' 87,621,000.00 87,621,000.00

4. Kampung Beringin 4,560 m' 323,122,000.00 323,122,000.00

B. KECAMATAN BLIMBING

Kelurahan Pandanwangi

1. Jl.Simp. Teluk Grajakan 2,493 m' 150,018,000.00 150,018,000.00 Proses SPK

2. Pandan Wangi 4,350 m' 235,825,000.00 235,825,000.00

C. KECAMATAN KEDUNG KANDANG

Kelurahan Sawojajar

1. Jl. D. Kerinci 650 m' 336,830,000.00 336,830,000.00

2. Jl. D. Paniai 357 m' 77,790,300.00 77,790,300.00

3. Jl. D Jonge 375 m' 49,870,100.00 49,870,100.00

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PENAMBAHAN JARINGAN PIPA

ESTIMASI JADWAL PEKERJAAN No. LOKASI VOLUME

BIAYA ( Rp.) 2005 2006 2007 2008 2009 KETERANGAN

Kel. Bumiayu - Kel. Arjowinangun

1. Jl. Kaparseh - Babatan 2,670 m' 350,289,000.00 350,289,000.00

2. Puskopad Bumiayu 2,675 m' 107,062,500.00 107,062,500.00

3. Arjowinangun 3,680 m' 230,959,000.00 230,959,000.00

Kel. Madyopuro - Lesanpuro – Kd. Kandang

1. Kel. Madyopuro - Lesanpuro - 18,235 m' 2,035,740,500.00 2,035,740,500.00

Kd. Kandang

2. Puri Cempaka Putih 3,750 m' 258,096,000.00 258,096,000.00

Kelurahan Tlogowaru

1. Kel. Tlogo Waru 3,450 m' 184,945,000.00 184,945,000.00

Kel. Lesanpuro - Kedung Kandang

1. Kel. Lesanpuro - Kd. Kandang ( Transmisi ) 5,106 m' 4,759,924,000.00 4,759,924,000.00

D. KECAMATAN SUKUN

Kel. Gadang - Kebonsari

1. Tandon Buring - Gadang IX 4,610 m' 1,204,519,000.00 1,204,519,000.00

2. Gadang IX - Kb. Agung 2,100 m' 280,770,000.00 280,770,000.00

3. Gadang - Satsuit Tubun - Kb. Agung 1,300 m' 47,220,000.00 47,220,000.00

Kelurahan Ciptomulyo

1. Kolonel Sugiono Gg II 835 m' 50,822,000.00 50,822,000.00

E. KABUPATEN MALANG

Kelurahan Mangliawan

1. Jabon 3,110 m' 136,859,000.00 136,859,000.00 Proses SPK

2. Kedoyo 953 m' 48,995,000.00 48,995,000.00 Proses SPK

3. Wendit Barat 8,419 m' 549,795,000.00 549,795,000.00 Sudah terpasang

4. Wendit Timur 2 lokasi 4,115 m' 214,652,000.00 214,652,000.00 Sudah terpasang

1. Pasar Gadang - Segaran 3,100 m' 205,336,000.00 205,336,000.00

Jumlah Pengembangan Jaringan 126,113 m' 14,987,523,400.00 4,047,804,505.00 1,783,140,906.00 1,686,447,007.00 674,474,508.00 6,795,666,509.00

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T A N D O N ESTIMASI BIAYA JADWAL PELAKSANAAN

No. LOKASI VOLUME ( Rp.) 2005 2006 2007 2008 2009

KETERANGAN

I. Mojolangu

1. Mojolangu IV 1,000 m3 1,900,000,000.00 1,900,000,000.00

2. Mojolangu V 1,000 m3 1,900,000,000.00 1,900,000,000.00

II. Dinoyo ( Tlogomas )

1. Dinoyo IV 1,000 m3 1,900,000,000.00 950,000,000.00 950,000,000.00 Sudah dimulai

III. Buring

1. Buring II 1,000 m3 1,900,000,000.00 950,000,000.00 950,000,000.00 Sudah dimulai

2. Buring III 1,000 m3 1,900,000,000.00 1,900,000,000.00

3. Buring IV 1,000 m3 1,900,000,000.00 1,900,000,000.00

IV. Betek

1. Betek II 1,500 m3 2,850,000,000.00 2,850,000,000.00

V. Bangkon

1. Bangkon I 750 m3 1,425,000,000.00 712,500,000.00 712,500,000.00 Sudah dimulai

Jumlah Tandon 15,675,000,000.00 2,612,500,000.00 2,612,500,000.00 1,900,000,000.00 3,800,000,000.00 4,750,000,000.00

P O M P A ESTIMASI BIAYA JADWAL PELAKSANAAN

No. LOKASI VOLUME ( Rp.) 2005 2006 2007 2008 2009

KETERANGAN

I. Wendit III 110 lt/dt 547,365,000.00 547,365,000.00

110 lt/dt 547,365,000.00 547,365,000.00

II. Mojolangu 100 lt/dt 530,134,000.00 530,134,000.00

75 lt/dt 452,369,000.00 452,369,000.00

Jumlah Pompa 2,077,233,000.00 - 530,134,000.00 999,734,000.00 547,365,000.00 -

Jumlah Tandon + Pompa 17,752,233,000.00 2,612,500,000.00 3,142,634,000.00 2,899,734,000.00 4,347,365,000.00 4,750,000,000.00

Jumlah Pengembangan Jaringan 14,987,523,400.00 4,047,804,505.00 1,783,140,906.00 1,686,447,007.00 674,474,508.00 6,795,666,509.00

T o t a l 32,739,756,400.00 6,660,304,505.00 4,925,774,906.00 4,586,181,007.00 5,021,839,508.00 11,545,666,509.00

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PDAM TIRTA DHARMA KOTA MALANGPRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL

ANNEX EDetailed Demand Forecast

PDAM KOTA MALANG No Asset Revaluati NEW PROJECTSMaximum Cash and PFC COMMITTED PROJECTS , Extension , New System , Extension , ExtensionWATER DEMAND AND PRODUCTION PROJECTIONS TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%NEW PROJECTS FUNDED BY OWN FUNDS ONLY 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025ALL OPERATIONS Audited Audited Audited Actual ForecastKABUPATEN POPULATION (000) 0.90% growth/year 803 815 827 840 847 855 862 870 878 886 894 902 910 918 927 935 943 952 960 969 978 986 995 1,004 1,013SERVICE AREA POPULATION (000) 0.90% growth/year 527 549 556 569 574 579 584 590 595 600 606 611 617 622 628 633 639 645 651 657 662 668 674 680 687POPULATION SERVED (000) 426 441 447 457 467 491 520 544 568 574 580 586 592 598 604 610 616 622 628 634 640 646 652 658 664POPULATION SERVED HC (000) 426 441 447 457 467 491 520 544 568 574 580 586 592 598 604 610 616 622 628 634 640 646 652 658 664% KABUPATEN POPULATION SERVED 53.1% 54.1% 54.0% 54.4% 55.1% 57.5% 60.3% 62.6% 64.7% 64.8% 64.8% 64.9% 65.0% 65.1% 65.2% 65.2% 65.3% 65.3% 65.4% 65.4% 65.4% 65.5% 65.5% 65.5% 65.5%% KABUPATEN POP. SERVED HC 53.1% 54.1% 54.0% 54.4% 55.1% 57.5% 60.3% 62.6% 64.7% 64.8% 64.8% 64.9% 65.0% 65.1% 65.2% 65.2% 65.3% 65.3% 65.4% 65.4% 65.4% 65.5% 65.5% 65.5% 65.5%% SERVICE AREA POPULATION SERVED 80.9% 80.3% 80.4% 80.3% 81.4% 84.8% 88.9% 92.3% 95.4% 95.6% 95.7% 95.8% 96.0% 96.1% 96.2% 96.3% 96.3% 96.4% 96.5% 96.5% 96.6% 96.6% 96.6% 96.6% 96.7%% SERVICE AREA POP. SERVED HC 80.9% 80.3% 80.4% 80.3% 81.4% 84.8% 88.9% 92.3% 95.4% 95.6% 95.7% 95.8% 96.0% 96.1% 96.2% 96.3% 96.3% 96.4% 96.5% 96.5% 96.6% 96.6% 96.6% 96.6% 96.7%AVAILABLE CONNECTIONS 2%Domestic 0.6% 93.72% 71,063 73,525 74,510 76,174 77,854 81,854 86,608 90,737 94,613 95,613 96,613 97,613 98,613 99,613 100,613 101,613 102,613 103,613 104,613 105,613 106,613 107,613 108,613 109,613 110,613Social 0.6% 1.97% 1,667 1,705 1,509 1,508 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634 1,634Services/Institutions 0.6% 0.53% 353 363 537 557 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442 442Commerce 0.6% 3.71% 2,171 2,808 2,864 2,978 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078 3,078Industry 0.6% 0.05% 48 48 45 44 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41 41Bulk Water 0.6% 0.03% 0 1 1 2 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 22 0.0% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Sub-total, Non-domestic 3.7% 2,219 2,857 2,910 3,024 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141 3,141Total 100.0% 75,302 78,450 79,466 81,263 83,071 87,071 91,825 95,954 99,830 100,830 101,830 102,830 103,830 104,830 105,830 106,830 107,830 108,830 109,830 110,830 111,830 112,830 113,830 114,830 115,830Increase in Service Connections 3,148 1,016 1,797 1,808 4,000 4,754 4,129 3,876 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000PERSONS PER CONNECTION Other Household 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0Very Poor Households 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0Public Tap 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100UNIT CONSUMPTION H'hold Demand Based On Income & Price ElasticitiesDomestic 127 131 134 134 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121Social 574 600 599 404 484 484 575 575 575 575 575 575 575 575 575 575 575 575 575 575 575 575 575 575 575Services/Institutions 130 93 75 92 80 94 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92 92Commerce 37 39 41 38 31 32 38 38 38 38 38 38 38 38 38 38 38 38 38 38 38 38 38 38 38Industry 68 84 81 63 62 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63Bulk Water #DIV/0! 0 57,041 20,931 8,302 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 8,553 #DIV/0! #DIV/0! #DIV/0! 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Sub-total, Non-domestic 27.6 28.0 29.1 28.4 27.2 26.8 27.1 27.0 26.8 27.1 27.1 27.0 27.0 26.9 26.9 26.8 26.8 26.7 26.7 26.7 26.6 26.6 26.5 26.5 26.5TotalDomestic 19,837 21,169 21,813 22,396 20,388 21,009 22,320 23,497 24,558 25,204 25,469 25,734 25,999 26,264 26,529 26,794 27,059 27,324 27,589 27,854 28,119 28,384 28,649 28,914 29,179Social 2,447 2,616 2,308 1,556 1,944 2,004 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399 2,399Services/Institutions 1,672 1,233 1,470 1,869 1,467 1,512 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483 1,483Commerce 969 1,300 1,404 1,374 1,132 1,166 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420 1,420Industry 39 49 44 33 30 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31 31Bulk Water 0 0 684 502 2,192 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 2,258 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Sub-total, Non-domestic 1,008 1,349 2,132 1,910 3,354 3,455 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709 3,709Total (CONTINUED) 24,964 26,365 27,722 27,730 27,153 27,980 29,912 31,089 32,149 32,795 33,060 33,325 33,590 33,855 34,120 34,385 34,650 34,915 35,180 35,445 35,710 35,975 36,240 36,505 36,770REQUIRED PRODUCTION/PURCHASES (000M3/YEAR)Production Losses (%) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%Distribution Losses (%) 32.5% 28.8% 26.3% 28.3% 28.8% 34.3% 30.6% 28.6% 27.5% 26.5% 25.4% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2%Total Losses (%) 35.9% 32.3% 29.9% 31.9% 32.3% 37.6% 34.0% 32.1% 31.2% 30.1% 29.1% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%Distribution Required (000m3/year) 36,980 37,005 37,594 38,695 37,888 39,043 41,738 43,381 44,861 45,762 46,132 46,502 46,871 47,241 47,611 47,981 48,350 48,720 49,090 49,460 49,830 50,199 50,569 50,939 51,309PDAM Distribution Capacity (000m3/year) 39,442 39,442 39,442 40,588 33,137 38,431 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678 44,678PDAM Production 38,926 38,953 39,573 40,731 40,117 44,849 45,340 43,568 44,410 44,646 44,345 44,033 44,383 44,734 45,084 45,434 45,784 46,134 46,484 46,834 47,185 47,535 47,885 48,235 48,585PDAM Distribution 36,980 37,005 37,594 38,694 38,112 42,607 43,073 43,524 44,366 44,602 44,301 43,989 44,339 44,689 45,039 45,388 45,738 46,088 46,438 46,788 47,137 47,487 47,837 48,187 48,537Volume purchased from Another PDAM 0 2004 Rp/m3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Volume sold to another PDAM 0 2004 Rp/m3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Net purchases (sales) from/to other PDAMs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Volume Sold to PDAM Consumers 24,964 26,365 27,722 27,731 23,749 28,313 32,370 35,051 37,447 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156% Connected Demand Satisfied 100% 100% 100% 100% 87% 101% 108% 113% 116% 116% 115% 114% 114% 113% 112% 111% 110% 109% 108% 108% 107% 106% 105% 105% 104%CAPACITY UTILISATIONPDAM Installed Production Capacity (Peak Hour in ltr/s 115% Existing, Not Used by WSSP 1514 1514 1514 1558 1272 1475 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 1715 Existing Used by WSSP Project 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Project Extensions 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0PDAM Installed Production Capacity (000m3/year) 1,514 1,514 1,514 1,558 1,272 1,475 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 1,715 Existing 41,518 41,518 41,518 42,724 34,882 40,454 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 47,030 Existing Used by WSSP Project 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Project Extensions 0 0 0 0 5 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0PDAM Plant Utilization Factor 93.8% 93.8% 95.3% 95.3% 115.0% 110.8% 96.4% 92.6% 94.4% 94.9% 94.3% 93.6% 94.4% 95.1% 95.9% 96.6% 97.4% 98.1% 98.8% 99.6% 100.3% 101.1% 101.8% 102.6% 103.3%R:\4. MUNICIPAL FINANCE\WATER UTILITIES\East Java\PDAM Kt. Mala 15/3/06 04:34 PM

ENVIRONMENTAL SERVICES PROGRAM WWW.ESP.OR.ID 38

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PDAM TIRTA DHARMA KOTA MALANGPRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL

ANNEX FDetailed Income Statement

PDAM KOTA MALANG No Asset Revaluati NEW PROJECTSMaximum Cash and PFC COMMITTED PROJECTS , Extension , New System , Extension , ExtensionWATER DEMAND AND PRODUCTION PROJECTIONS TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%Maximum Cash and PFC No Asset Revaluation TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%

TABLE B4 - PROFIT AND LOSS ACCOUNT 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025(CURRENT RP MILLION) Audited Audited Audited ActualNumber of Service Connections - '000 75.3 78.5 79.5 81.3 83.1 87.1 91.8 96.0 99.8 100.8 101.8 102.8 103.8 104.8 105.8 106.8 107.8 108.8 109.8 110.8 111.8 112.8 113.8 114.8 115.8Average Consumption - m3/conn/month 27.6 28.0 29.1 28.4 23.8 27.1 29.4 30.4 31.3 31.5 31.2 30.9 30.6 30.3 30.0 29.8 29.5 29.2 29.0 28.7 28.4 28.2 27.9 27.7 27.5Volume Sold - 000m3 24,964 26,365 27,722 27,731 23,749 28,313 32,370 35,051 37,447 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156 38,156% Unaccounted-for Water 36% 32% 30% 32% 32% 38% 34% 32% 31% 30% 29% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28%Water Produced - 000m3 38,926 38,953 39,573 40,731 40,117 44,849 45,340 43,568 44,410 44,646 44,345 44,033 44,383 44,734 45,084 45,434 45,784 46,134 46,484 46,834 47,185 47,535 47,885 48,235 48,585Average Tariff - Current Rp/M3 : 1,395 1,340 1,509 1,726 2,606 2,579 3,102 3,273 3,936 4,153 4,994 5,269 6,337 6,685 8,029 8,471 10,188 10,748 12,927 13,638 16,402 17,305 20,812 21,957 26,408Tariff Revenues 34,821 35,320 41,823 47,874 61,901 73,025 100,414 114,710 147,391 158,445 190,562 201,043 241,794 255,093 306,371 323,221 388,738 410,119 493,250 520,379 625,860 660,282 794,121 837,798 1,007,619Net Connection Fees 2,047 2,185 800 1,830 1,808 2,127 11,508 10,563 10,468 1,460 1,513 1,583 1,664 1,752 1,847 1,947 2,054 2,167 2,286 2,411 2,544 2,684 2,832 2,987 3,152Sales of water to other PDAMs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Other Operating Revenues 435 609 762 844 1,620 1,508 848 917 982 991 999 1,008 1,016 1,025 1,033 1,041 1,050 1,058 1,067 1,075 1,084 1,092 1,100 1,109 1,117Total Operating Revenues 37,303 38,115 43,386 50,547 65,328 76,660 112,769 126,190 158,842 160,896 193,075 203,634 244,474 257,870 309,251 326,210 391,842 413,344 496,603 523,865 629,487 664,058 798,053 841,894 1,011,888Personnel 5,546 10,068 11,269 12,883 12,936 14,434 20,280 23,925 28,073 31,173 35,824 41,165 47,299 54,343 62,432 71,720 82,384 94,628 108,685 124,822 143,346 164,608 189,014 217,024 249,171Power 3,714 5,217 6,274 6,988 7,909 10,373 22,125 27,896 35,369 42,662 44,753 46,936 49,847 52,937 56,216 59,695 63,387 67,305 71,462 75,872 80,552 85,517 90,784 96,372 102,299Chemical 0 62 63 86 79 169 338 442 575 705 740 776 824 875 929 987 1,048 1,112 1,181 1,254 1,331 1,413 1,501 1,593 1,691Maintenance Material 1,737 1,984 2,296 2,973 5,195 9,191 4,903 5,768 6,683 7,572 7,989 8,428 8,892 9,381 9,897 10,441 11,015 11,621 12,260 12,935 13,646 14,397 15,188 16,024 16,905Administration - General 9,632 7,483 9,153 10,019 11,323 12,002 16,781 20,171 24,077 28,446 32,689 37,563 43,160 49,588 56,969 65,445 75,176 86,349 99,176 113,901 130,804 150,207 172,477 198,036 227,371Bad Debts & Write Off 184 203 250 363 424 335 482 662 756 972 1,045 1,257 1,326 1,595 1,682 2,020 2,132 2,564 2,705 3,253 3,432 4,127 4,354 5,237 5,525Raw Water Purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Raw Water Retribution 852 619 710 666 1,168 4,284 7,012 7,059 7,426 10,084 7,557 7,512 7,563 7,613 13,287 14,110 14,982 15,908 16,891 17,933 19,040 20,213 21,458 22,779 24,180Total Operating Expenses 21,664 25,637 30,016 33,979 39,034 50,788 71,921 85,924 102,959 121,614 130,596 143,637 158,910 176,331 201,413 224,418 250,125 279,488 312,360 349,970 392,151 440,482 494,775 557,065 627,143Income (Loss) before Depreciation 15,639 12,478 13,370 16,569 26,294 25,872 40,848 40,266 55,883 39,282 62,478 59,997 85,564 81,539 107,838 101,792 141,717 133,856 184,243 173,895 237,337 223,576 303,278 284,829 384,746Depreciation 5.5% unrevalued assets 2,924 3,925 4,265 5,054 8,581 6,307 8,315 9,213 11,120 13,164 14,634 15,506 16,406 17,359 18,366 19,432 20,560 21,753 23,015 24,349 25,762 27,255 28,836 30,507 32,275Operating Income (Loss) 12,715 8,553 9,105 11,514 17,713 19,565 32,534 31,053 44,763 26,118 47,844 44,491 69,158 64,180 89,472 82,360 121,157 112,103 161,228 149,546 211,575 196,320 274,442 254,322 352,470Operational Interest 708 626 553 456 1,029 6,459 4,847 3,223 2,157 6,134 3,914 2,052 684 0 0 0 0 0 0 0 0 0 0 0 0Net Operating Income (Loss) 12,006 7,926 8,552 11,058 16,684 13,106 27,687 27,830 42,606 19,984 43,931 42,440 68,474 64,180 89,472 82,360 121,157 112,103 161,228 149,546 211,575 196,320 274,442 254,322 352,470Royalties 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Non-Operating Income (Loss) - Other (512) 380 245 155 64 484 221 1,090 1,999 3,621 4,136 6,209 8,652 12,917 17,722 24,400 31,006 40,472 49,929 63,064 76,235 94,115 112,079 136,052 160,156Before Tax Income 11,494 8,306 8,797 11,213 16,748 13,590 27,908 28,920 44,605 23,605 48,066 48,649 77,126 77,097 107,194 106,760 152,163 152,575 211,157 212,610 287,810 290,435 386,522 390,374 512,626Taxable Income After Losses Carried Forward (5 Years) 11,494 8,306 8,797 11,213 16,748 13,590 27,908 28,920 44,605 23,605 48,066 48,649 77,126 77,097 107,194 106,760 152,163 152,575 211,157 212,610 287,810 290,435 386,522 390,374 512,626Income Tax 3,504 2,560 2,732 3,515 5,007 4,273 8,364 8,667 13,373 7,073 14,411 14,586 23,129 23,120 32,149 32,019 45,640 45,764 63,338 63,774 86,334 87,122 115,948 117,103 153,779Net Income (Loss) 7,989 5,746 6,064 7,698 11,741 9,316 19,544 20,253 31,232 16,532 33,655 34,063 53,997 53,976 75,044 74,741 106,523 106,811 147,819 148,836 201,476 203,313 270,574 273,270 358,847 Staff Funds Share of Net Income 10.0% of net income 0 0 0 0 770 1,174 932 1,954 2,025 3,123 1,653 3,366 3,406 5,400 5,398 7,504 7,474 10,652 10,681 14,782 14,884 20,148 20,331 27,057 27,327 Kotamadya Share of Net Income 55.0% ditto 0 0 0 0 4,234 6,458 5,124 10,749 11,139 17,178 9,093 18,510 18,735 29,698 29,687 41,274 41,107 58,587 58,746 81,300 81,860 110,812 111,822 148,816 150,299 Payment to Staff Funds 90.0% of share 0 0 0 0 693 1,057 838 1,759 1,823 2,811 1,488 3,029 3,066 4,860 4,858 6,754 6,727 9,587 9,613 13,304 13,395 18,133 18,298 24,352 24,594 Payment to Kotamadya 0.0% of share 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0RATIOS AND COMPARATORS:Ave.Expenses per M3 Sold (Rp) 868 972 1,083 1,225 1,644 1,794 2,222 2,451 2,749 3,187 3,423 3,764 4,165 4,621 5,279 5,882 6,555 7,325 8,186 9,172 10,277 11,544 12,967 14,600 16,436Operating Ratio 66% 78% 79% 77% 73% 74% 71% 75% 72% 84% 75% 78% 72% 75% 71% 75% 69% 73% 68% 71% 66% 70% 66% 70% 65%Before Tax Income/Sales 33% 24% 21% 23% 27% 19% 28% 25% 30% 15% 25% 24% 32% 30% 35% 33% 39% 37% 43% 41% 46% 44% 49% 47% 51%Increases in Weighted Average Tariffs -4% 13% 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%Average Asset's Rate Base (Nom. Rp M.) 28,092 29,318 30,399 30,231 57,140 81,412 74,596 82,169 106,672 131,691 144,515 145,296 145,708 146,143 146,599 147,080 147,585 148,116 148,675 149,263 149,881 150,532 151,215 151,935 152,691Assets/Water Sales 0.81 0.83 0.73 0.63 0.92 1.11 0.74 0.72 0.72 0.83 0.76 0.72 0.60 0.57 0.48 0.46 0.38 0.36 0.30 0.29 0.24 0.23 0.19 0.18 0.15Operating Income/Assets 42.7% 27.0% 28.1% 36.6% 29.2% 16.1% 37.1% 33.9% 39.9% 15.2% 30.4% 29.2% 47.0% 43.9% 61.0% 56.0% 82.1% 75.7% 108.4% 100.2% 141.2% 130.4% 181.5% 167.4% 230.8%Before Tax Income/Assets 40.9% 28.3% 28.9% 37.1% 29.3% 16.7% 37.4% 35.2% 41.8% 17.9% 33.3% 33.5% 52.9% 52.8% 73.1% 72.6% 103.1% 103.0% 142.0% 142.4% 192.0% 192.9% 255.6% 256.9% 335.7%R:\4. MUNICIPAL FINANCE\WATER UTILITIES\East Java\PDAM Kt. Malan 15/3/06 04:34 PM

ENVIRONMENTAL SERVICES PROGRAM WWW.ESP.OR.ID 39

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PDAM TIRTA DHARMA KOTA MALANGPRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL

ANNEX GDetailed Sources and Applications of Funds

PDAM KOTA MALANG No Asset Revaluati NEW PROJECTSMaximum Cash and PFC COMMITTED PROJECTS , Extension , New System , Extension , ExtensionWATER DEMAND AND PRODUCTION PROJECTIONS TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%Maximum Cash and PFC TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20%

TABLE B5 - SOURCES AND APPLICATION OF FUNDS 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025(CURRENT RP MILLION) Audited Audited Audited ActualSOURCES OF FUNDS:Income before Depreciation and Interest 15,639 12,478 13,370 16,569 26,294 25,872 40,848 40,266 55,883 39,282 62,478 59,997 85,564 81,539 107,838 101,792 141,717 133,856 184,243 173,895 237,337 223,576 303,278 284,829 384,746Royalties 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Non-Operating Income (Loss) - Net (512) 380 245 155 64 484 221 1,090 1,999 3,621 4,136 6,209 8,652 12,917 17,722 24,400 31,006 40,472 49,929 63,064 76,235 94,115 112,079 136,052 160,156Gross Internal Cash Generation 15,126 12,857 13,615 16,723 26,358 26,356 41,070 41,356 57,882 42,903 66,614 66,207 94,216 94,455 125,560 126,192 172,723 174,327 234,172 236,959 313,572 317,690 415,357 420,881 544,901GOI Construction Grant 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0GOI Feasibility Study Grant 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0GOI Technical Assistance Grant (APBN) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0PPN Grant 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0RG Equity (Land) 0 0 0 0 0 0Other RG Equity/Advance 0 0 0 0 0 0Reinvestment by Kotamadya 0 0 0 0 4,234 6,458 5,124 10,749 11,139 17,178 9,093 18,510 18,735 29,698 29,687 41,274 41,107 58,587 58,746 81,300 81,860 110,812 111,822 148,816 150,299Total Equity 0 0 0 0 4,234 6,458 5,124 10,749 11,139 17,178 9,093 18,510 18,735 29,698 29,687 41,274 41,107 58,587 58,746 81,300 81,860 110,812 111,822 148,816 150,299Borrowing :Proposed Loan 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Committed Loan 0 0 0 0 13,966 14,023 12,242 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Ongoing Loans 9,641 0 (1,174) 12,278 29,310 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Interest Accumulated 0 0 0 0 0 0 1,187 3,566 5,115 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Total Borrowing 9,641 0 (1,174) 12,278 29,310 0 15,153 17,589 17,356 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0TOTAL SOURCES OF FUNDS 24,768 12,857 12,441 29,002 59,902 32,813 61,346 69,695 86,377 60,080 75,707 84,717 112,951 124,154 155,247 167,466 213,830 232,915 292,918 318,260 395,431 428,502 527,180 569,697 695,200APPLICATIONS OF FUNDS:Proposed WSSP Projects 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Committed/Other Projects 0 0 0 0 0 0 19,951 20,033 17,488 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Past Projects 0 5,280 4,807 22,198 44,341 6,625 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0PDAM Replacement/Connection Programme 0 0 0 0 1,085 10,885 11,538 13,065 15,053 15,792 15,908 16,829 17,804 18,834 19,925 21,078 22,297 23,588 24,952 26,396 27,922 29,537 31,245 33,051 34,962Master Plan 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Interest Accumulated 0 0 0 0 0 0 1,187 3,566 5,115 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Total Capital Expenditures 0 5,280 4,807 22,198 45,426 17,510 32,675 36,664 37,656 15,792 15,908 16,829 17,804 18,834 19,925 21,078 22,297 23,588 24,952 26,396 27,922 29,537 31,245 33,051 34,962Amortization of L/T Debt 901 901 901 901 1,907 10,901 11,301 9,801 15,321 15,721 15,190 10,020 10,020 0 0 0 0 0 0 0 0 0 0 0 0Operational Interest of L/T Debt 0 0 0 0 1,019 6,459 4,847 3,223 2,157 6,134 3,914 2,052 684 0 0 0 0 0 0 0 0 0 0 0 0Total Debt Service of L/T Debt 901 901 901 901 2,926 17,360 16,148 13,024 17,478 21,855 19,103 12,071 10,704 0 0 0 0 0 0 0 0 0 0 0 0Working Capital Needs 0 1,860 1,239 (85) 1,889 (101) (7,886) (6,137) (8,283) (2,610) (5,417) (5,738) (10,441) (9,554) (13,583) (11,940) (18,650) (16,904) (25,262) (22,917) (33,408) (30,321) (43,517) (39,472) (56,064)Other Assets/Liabil. Changes 0 2,559 2,832 (946) (2,127) (3,245) (492) (508) (453) (501) (149) (303) (307) (486) (486) (675) (673) (959) (961) (1,330) (1,340) (1,813) (1,830) (2,435) (2,459)Kotamadya Share of Net Income 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Other Profit Sharing 0 0 0 0 693 1,057 838 1,759 1,823 2,811 1,488 3,029 3,066 4,860 4,858 6,754 6,727 9,587 9,613 13,304 13,395 18,133 18,298 24,352 24,594Income Tax 0 3,504 2,560 2,732 3,515 5,007 4,273 8,364 8,667 13,373 7,073 14,411 14,586 23,129 23,120 32,149 32,019 45,640 45,764 63,338 63,774 86,334 87,122 115,948 117,103TOTAL APPLICATIONS OF FUNDS 901 14,105 12,341 24,800 52,321 37,588 45,557 53,166 56,888 50,719 38,006 40,300 35,411 36,783 33,834 47,365 41,720 60,952 54,106 78,791 70,344 101,869 91,318 131,443 118,136CASH INCREASE (DECREASE) 23,866 (1,247) 100 4,201 7,581 (4,775) 15,789 16,529 29,489 9,361 37,700 44,417 77,539 87,371 121,413 120,101 172,109 171,962 238,812 239,469 325,087 326,633 435,862 438,253 577,064Cash Balance, Begining (21,559) 2,308 1,060 1,160 1,931 918 1,891 17,680 34,209 63,698 73,060 110,760 155,177 232,717 320,087 441,500 561,601 733,711 905,673 1,144,485 1,383,954 1,709,041 2,035,674 2,471,536 2,909,789Cash Balance, Ending 2,308 1,060 1,160 2,031 918 1,891 17,680 34,209 63,698 73,060 110,760 155,177 232,717 320,087 441,500 561,601 733,711 905,673 1,144,485 1,383,954 1,709,041 2,035,674 2,471,536 2,909,789 3,486,853Minimum Cash Requirement 1,880 2,212 2,576 2,907 3,497 5,679 7,339 8,246 10,036 11,956 12,475 12,976 14,134 14,694 16,784 18,702 20,844 23,291 26,030 29,164 32,679 36,707 41,231 46,422 52,262DSCR (SLAP, Cash balance less minimum cash) 1.47 -0.28 -0.57 0.03 0.12 0.78 1.64 2.99 4.07 3.80 6.14 12.78 21.42 na na na na na na na na na na na naDSCR (ADB and Perpamsi, Net revenues) 16.78 14.27 15.11 18.55 9.01 1.52 2.54 3.18 3.31 1.96 3.49 5.48 8.80 na na na na na na na na na na na naDSCR (Cashflow ) 16.78 14.27 15.11 18.55 8.64 0.89 1.83 2.17 2.45 1.24 2.65 4.09 7.14 na na na na na na na na na na na naDSCR (BPKP, Net Income) 8.86 6.38 6.73 8.54 4.01 0.54 1.21 1.56 1.79 0.76 1.76 2.82 5.04 na na na na na na na na na na na naContribution to Investment na 76% 126% 64% 52% 73% 102% 97% 132% 159% 337% 364% 536% 564% 709% 670% 872% 829% 1057% 1007% 1264% 1206% 1495% 1426% 1751%Contr. to Investment, 3 Yr Average 154% 168% 37% 133% 83% 108% 98% 271% 293% 416% 492% 607% 414% 447% 502% 551% 614% 669% 739% 800% #REF! #REF! #REF!R:\4. 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PDAM TIRTA DHARMA KOTA MALANGPRELIMINARY FINANCIAL FEASIBILITY ANALYSIS OF INVESTMENT PROPOSAL

ANNEX HDetailed Balance Sheet Projections

PDAM KOTA MALANG No Asset Revaluati NEW PROJECTSMaximum Cash and PFC COMMITTED PROJECTS , Extension , New System , Extension , ExtensionWATER DEMAND AND PRODUCTION PROJECTIONS TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5%Maximum Cash and PFC TARIFF INCREASE 14% 51% -1% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5% 20% 5%

TABLE B6 - BALANCE SHEET No Asset Revaluation 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024(CURRENT RP MILLION) Audited Audited Audited ActualAssets in Operation reval after 2004 66,835 73,196 77,171 82,098 144,542 151,167 151,167 183,842 220,507 258,163 273,955 289,863 306,692 324,496 343,330 363,255 384,333 406,630 430,218 455,170 481,565 509,488 539,024 570,269Accumulated Depreciation 38,743 42,651 46,916 51,890 60,471 72,414 80,729 89,942 101,062 114,226 128,860 144,366 160,772 178,131 196,497 215,929 236,489 258,242 281,256 305,606 331,367 358,623 387,458 417,966Net Fixed Assets 28,092 30,544 30,254 30,208 84,071 78,753 70,438 93,900 119,445 143,937 145,094 145,497 145,920 146,365 146,833 147,326 147,844 148,389 148,962 149,564 150,198 150,865 151,566 152,303Work In Progress 1,080 0 832 18,103 0 0 32,675 36,664 37,656 15,792 15,908 16,829 17,804 18,834 19,925 21,078 22,297 23,588 24,952 26,396 27,922 29,537 31,245 33,051Cash + Deposits 2,308 1,060 1,160 2,031 1,018 1,891 17,680 34,209 63,698 73,060 110,760 155,177 232,717 320,087 441,500 561,601 733,711 905,673 1,144,485 1,383,954 1,709,041 2,035,674 2,471,536 2,909,789Accounts Receivable - Water 52 30 days=target 4,491 5,445 6,505 7,764 9,987 11,008 11,889 12,197 13,893 13,023 15,663 16,524 19,874 20,967 25,181 26,566 31,951 33,708 40,541 42,771 51,441 54,270 65,270 68,860Reserve of Bad Debts Provision, Water (94) (234) (365) (727) (544) (560) (40) (54) (62) (80) (86) (103) (109) (131) (138) (166) (175) (211) (222) (267) (282) (339) (358) (430)Past Connection Fees Put To Balance Sheet 1,066 751 1,139 1,031 2,965 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937 4,937Receivable - Credited New Connections (0) 0 79 91 96 48 24 12 6 3 2 1 0 0 0 0 0 0 0 0Inventories 5 5 days=target 13 39 31 32 43 52 68 82 98 113 120 126 133 140 148 157 165 174 184 194 205 217 229 241Other Receivable Piutang (Usaha) non-Air; Piutang Lain Lain 1,342 1,923 2,138 0 3,970 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Total Current Assets 9,125 8,983 10,609 10,131 17,439 17,328 34,614 51,462 82,661 91,101 131,417 176,673 257,557 346,003 471,630 593,095 770,589 944,282 1,189,925 1,431,589 1,765,341 2,094,758 2,541,614 2,983,397Installation Inventory 1,018 70 days=target 1,431 1,530 1,818 2,399 2,081 2,193 1,785 1,452 1,182 962 962 962 962 962 962 962 962 962 962 962 962 962 962 962Other Assets 2,938 4,261 4,714 4,082 5,847 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513 5,513TOTAL ASSETS 42,667 45,319 48,228 64,923 109,438 103,787 145,025 188,992 246,456 257,304 298,894 345,474 427,755 517,677 644,862 767,974 947,205 1,122,733 1,370,314 1,614,023 1,949,936 2,281,634 2,730,899 3,175,226Accounts Payable 21 30 days=target 949 1,597 1,424 202 2,715 1,884 4,205 5,041 6,093 7,354 7,704 8,319 9,065 9,895 11,285 12,384 13,612 14,983 16,518 18,238 20,168 22,335 24,773 27,518Other Payable 1,577 646 624 1,226 1,380 1,183 1,248 1,316 1,389 1,465 1,546 1,631 1,720 1,815 1,915 2,020 2,131 2,249 2,372 2,503 2,640 2,786 2,939 3,100Other Current Liabilities (Cust. Deposit) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Tax Payable 5 4 Turn Ov =Ta 2,190 1,719 2,200 1,556 5,321 5,467 12,464 18,015 26,884 27,236 34,838 40,714 53,665 63,369 79,676 91,776 114,472 131,618 162,052 185,313 225,319 256,111 308,031 348,127Current Matur.Long-Term Debt 1,274 1,278 1,293 1,127 712 11,301 9,801 15,321 15,721 15,190 10,020 10,020 0 0 0 0 0 0 0 0 0 0 0 0Total Current Liabilities 5,990 5,239 5,541 4,111 10,129 19,835 27,718 39,694 50,086 51,244 54,107 60,684 64,450 75,079 92,876 106,181 130,215 148,850 180,942 206,054 248,127 281,232 335,743 378,745Deferred Income 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Meter Reserve Fund 1,236 2,842 5,030 7,254 9,248 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028 11,028Other Liabilities 4,689 7,549 6,978 7,291 8,871 11,895 11,978 12,154 12,337 12,618 12,766 13,069 13,376 13,862 14,348 15,023 15,696 16,654 17,616 18,946 20,286 22,099 23,929 26,364Long Term-Debt - Net 8,367 7,201 6,012 18,457 48,182 25,974 31,325 33,594 35,229 20,040 10,020 0 0 0 0 0 0 0 0 0 0 0 0 0Total Liabilities 20,288 22,832 23,561 37,112 76,429 68,732 82,050 96,470 108,681 94,930 87,922 84,782 88,854 99,970 118,252 132,233 156,940 176,533 209,587 236,028 279,441 314,359 370,700 416,138Assets Revaluation Surplus 10 average age initial revaluation 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955 1,955Reserves + "Net" Retained Earnings 17,076 16,031 17,211 19,754 24,952 24,698 47,494 66,292 100,406 107,828 147,333 178,542 238,017 287,125 366,340 434,197 547,614 644,961 800,742 936,709 1,147,350 1,333,318 1,614,420 1,864,494Local Gov't Equity 2,809 3,962 4,962 5,562 5,562 7,862 12,986 23,736 34,875 52,052 61,145 79,655 98,390 128,088 157,775 199,050 240,157 298,745 357,491 438,791 520,651 631,462 743,285 892,100Central Gov't Equity (Inc'l Not Yet Handed Over) 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539 539Total Equity 22,379 22,487 24,667 27,811 33,009 35,055 62,975 92,522 137,775 162,374 210,972 260,692 338,901 417,707 526,610 635,741 790,265 946,200 1,160,727 1,377,995 1,670,495 1,967,274 2,360,198 2,759,088TOTAL EQUITY AND LIABILITIES 42,667 45,319 48,228 64,923 109,438 103,786 145,025 188,992 246,456 257,304 298,894 345,473 427,755 517,677 644,862 767,973 947,205 1,122,733 1,370,313 1,614,023 1,949,936 2,281,634 2,730,899 3,175,226Current Ratio 1.5 1.7 1.9 2.5 1.7 0.9 1.2 1.3 1.7 1.8 2.4 2.9 4.0 4.6 5.1 5.6 5.9 6.3 6.6 6.9 7.1 7.4 7.6 7.9Working Capital, exclud. cash 2,102 3,961 5,201 5,115 7,004 6,903 (983) (7,120) (15,403) (18,013) (23,430) (29,168) (39,609) (49,163) (62,746) (74,687) (93,337) (110,240) (135,502) (158,419) (191,826) (222,148) (265,665) (305,137)Debt Equity Ratio (70/30 = 233%) 43% 38% 30% 70% 148% 106% 65% 53% 37% 22% 9% 4% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Total Assets/Total Debt 3.0 2.8 3.4 2.4 1.9 2.1 2.7 3.1 3.9 5.4 9.1 15.0 32.0 37.3 44.9 51.1 60.3 67.4 77.8 85.2 96.1 103.2 114.1 120.4# Days Accounts Receivable 47 57 57 60 59 55 43 39 35 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30% Debt/(Net Fixed Assets +WIP) 0 28% 23% 41% 58% 47% 40% 37% 32% 22% 12% 6% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Cash = # Month Operating Expenses 1.3 0.5 0.5 0.7 0.3 0.4 2.9 4.8 7.4 7.2 10.2 13.0 17.6 21.8 26.3 30.0 35.2 38.9 44.0 47.5 52.3 55.5 59.9 62.7R:\4. 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