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Document of The World Bank
FOR o m c u USE ONLY
Report No: 254144”
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF US$141 MILLION
TO THE
REPUBLIC OF INDONESIA
FOR A
JAVA-BAL1 POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT
June 4,2003
Energy and Mining Sector Unit East Asia and Pacific Region
This document has a restricted dfstribntion and may be used by ncipientr only in the performance of their official duties Its contenb may not otherwise be disclosed without World Bank aathorizatioa
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CURRENCY EQUIVALENTS
(Exchange Rate Effective as of December 3 1,2002)
Currency Unit = Indonesia Rupiah (Rp) Rp = US$0.0001121
US$1 = 8,917.5
FISCAL YEAR Govemment of Indonesia -- January 1 - December 3 1
ABBREVIATIONS AND ACRONYMS ADB AMDAL ANDAL ATAM CIS DGEEU DSM EIRR EMP EMSA ERP GO1 ICB IDC IP IPO IPP IRP I T JBIC KEIII LARPF LNG LRMC MIGAS MOU NPV P3B PET PGN PIU PJB PLN PPA PTDII RKL/RPL UKLNPL USAID
Asian Development Bank Analysis of Impacts on the Living Environment Environmental Impact Analysis Automatic Tariff Adjustment Mechanism Customer Information System Directorate General of Electricity and Energy Utilization Demand Side Management Economic Intemal Rate of Return Environmental Management Plan Electricity Market Supervisory Agency Enterprise Resource Planning Govemment of Indonesia Intemational Competitive Bidding Interest During Construction Subsidiary generating company of PLN (Jakarta) Initial Public Offering Independent Power Producer Integrated Resource Planning Information Technology Japan Bank for Intemational Cooperation Export-credit loan package 111 Land Acquisition and Resettlement Policy Framework Liquefied Natural Gas Longmn Marginal Cost Directorate General of Oil and Gas Memorandum of Understanding Net Present Value PLN’s Java-Bali Ttransmission System Business Unit Project Environmental Team Indonesia’s State oi l and gas company Project Implementation Unit Subsidiary generating company of PLN (Surabaya) Indonesia’s State power company Power Purchase Agreement Second Power Transmission and Distribution Project Environmental ManagementlMonitoring Plan Environmental Managemenmonitoring Procedures United States Agency for Intemational Development
Vice President: Jemal-ud-din Kassum
Acting Sector Director: Mohammad Farhandi Task Team Leader: Mohammad Farhandi
Country Director: Andrew Steer
FOR OFFICIAL USE ONLY
INDONESIA JAVA-BAL1 POWER SECTOR RESTRUCTURING AND STRENGTHENING PROJECT
CONTENTS
A. Project Development Objective
1. Project development objective 2. Key performance indicators
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Main sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices
C. Project Description Summary
1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements
Page
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2 3 8
11 12 13 13
D. Project Rationale
. 1. Project alternatives considered and reasons for rejection 15 17 17 18 19
2. Major related projects financed by the Bank and/or other development agencies 3. Lessons learned and reflected in the project design
5. Value added of Bank support in this project 4. Indications of borrower commitment and ownership
E. Summary Project Analysis
1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies
A .
20 20 22 22 24 26 28
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
F. Sustainability and Risks
1. Sustainability 2. Critical r isks 3. Possible controversial aspects
G. Main Conditions
1. Effectiveness Condition 2. Other
H. Readiness for Implementation
I. Compliance with Bank Policies
Annexes
Annex 1: Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary Annex 5: Financial Summary Annex 6: (A) Procurement Arrangements
(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance Annex 11: PLN's Restructuring Program Annex 12: (A) Brief Summary o f Environmental and Social Assessment and Management Plan
(B) Brief Summary o f Land Acquisition and Resettlement Policy Framework
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34 37 44 45 50 60 66 82 83 84 86 88 98
MAP(S) IBRD 32213
INDONESIA Java-Bali Power Sector Restructuring and Strengthening Project
Project Appraisal Document East Asia and Pacific Region
EASEG
Date: June 2,2003 sector Director: Mohammad Farhandi Zountry Director: Andrew Steer Project ID: PO63913 privatization (P) Lending Instrument: Specific Investment Loan (SIL)
Team Leader: M. Farhandi Sector(s): Power (97%), O i l and gas (3%) Theme(s): State enterprisehank restructuring and
[XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Amount (US$m): $141 Borrower Rationale for Choice of Loan Terms Available on File: Proposed Terms (IBRD): Variable-Spread Loan (VSL)
Yes
Grace period (years): 5 Commitment fee: 0.75%
Years to maturity: 20 Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize f rom Loan Proceeds
BORROWER 57.08 I 13.56 I 70.64
Borrower: REPUBLIC OF INDONESIA Responsible agency: P L N AND PGN PT PLN (Persero) Address: J1. Trunojoyo Blok MI/135, Jakarta 12160, Indonesia Contact Person: Mochamad Nuh (Project Director) Tel: (62-21)-725-1234 Fax: (62-21)-720-4929 Other Agency(ies): PT PGN (Persero) Address: J1. Zainul Arifin No. 20, Jakarta 11 140, Indonesia Contact Person: Djoko Pramono (Finance Director) Tel: (62-21)-633-4838 Fax: (62-2 1)-633- 1303
Emai 1: moc h-nuh 0 pln .co. id
Email: [email protected]
Estimated Disbursements ( Bank FY/US$m):
Annual1 21.15 I 56.40 1 35.25 I 14.10 1 7.05 1 7.05 I I I 77.55 I 112.80 I 126.90 I 133.95 I 141.00 I
Project implementation period: 5 years Expected effectiveness date: 09/30/2003 Expected closing date: 12/3 1/2008
caPAo*m e.” b.*m iam
A. Project Development Objective
1. Project development objective: (see Annex 1)
The development objective o f the Project i s to improve the performance o f the power sector on Java-Bali by: (a) supporting the State power company (PLN) to implement i t s financial and corporate restructuring plan, and to strengthen key elements o f the Java-Bali electricity supply system; and (b) assisting the State gas company (PGN) to prepare the groundwork for restructuring i t s gas transmission and distribution operations, given the importance o f natural gas for power generation.
This objective i s to be achieved through the provision o f Bank financing toward priority investments and technical assistance for PLN, and technical assistance for PGN. In particular, project components for PLN will: (i) support PLN’s financial and corporate restructuring, b y providing technical assistance and b y enhancing the company’s information systems capabilities; (ii) achieve greater utilization o f existing generation capacity on East Java, b y relieving constraints in the bulk transmission grid; (iii) improve the reliability o f existing generation supply at the P L N and independent power producer (IPP) geothermal power plants on West Java, b y strengthening the associated local transmission system; and (iv) improve the reliability o f power supply at various locations throughout Java and Bali, b y strengthening and debottlenechng local transmission and subtransmission networks. Technical assistance to PGN w i l l enhance i t s capabilities for expanding gas utilization on Java.
2. Key performance indicators: (see Annex 1)
The key performance indicators o f the project are: (i) the establishment o f independent distribution, transmission and generation successor companies f rom PLN’s operations on Java-Bali; (ii) improvements in PLN’s rate o f return on revalued net fixed assets; (iii) increased dispatch capability o f generation units at the Paiton, Grati and Gresik complexes on East Java; (iv) reduced substation percentage loadings at Mandirancan, Krian, and Klaten 500kV substations on Java; (v) reduced substation percentage loadings at key 150kV substations throughout Java-Bali; and (vi) improved voltages at key 150kV substations in southeastern Java. In addition, PGN should have completed the documentation outlining the framework and implementation plans for: (i) unbundling i t s transmission and distribution functions to create an appropriate corporate structure; (ii) preparing for an IPO or some other form o f private equity participation of part o f i t s distribution operations; (iii) and attracting a strategic partner for i t s transmission operations.
B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 24608-IND Date of latest CAS discussion: 09/16/02
The proposed Project, included in the FY03 Indonesia lending program, i s consistent with the most recent CAS Progress Report (No 24608-IND). This Project i s the first o f the two Specific Sector Loans (i.e., the Power project for FY03 and the Gas project for FY04), and as such, primarily relates to the power sector. The resolution o f several issues during FY02, including on-lending guidelines and the Government’s decision to go ahead with the proposed Power project (for about $140 mill ion instead o f $100 mill ion originally envisaged), has resulted in a larger program in FY03. Moreover, the Government i s on the verge o f meeting the high case triggers, which lends further support to the upward lending trend. The main reasons for increase in the loan amount o f the Power project are the need for Bank to help with additional financing for (a) PLN’s Enterprise Resource Planning (ERP) system to support i t s restructuring, which i s central to the development objective o f the Project; and (ii) expansion o f 115kV system to address additional localized constraints in power supply, and thus preempt future power
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interruption.
The Project supports the objective in the CAS o f sustaining economic recovery and promoting broad-based growth through assistance to the GO1 to: 0
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address infrastructural bottlenecks in power, by providing direct investment lending for the removal o f key power system delivery constraints on Java-Bali; restructure sector entities, by (a) supporting the implementation o f PLNs corporate restructuring through technical assistance and by providing direct investment lending for upgrading information systems, and (b) providing technical assistance (TA) to assess how PGNs operations can be restructured; mobilize co-financing for infrastructure needs, emphasizing equity investments, by (a) supporting the restructuring o f P L N and PGN, and (b) providing TA to evaluate options for greater private sector participation in the gas sector; phase out price subsidies and remove price distortions, by providing TA to develop a rational domestic gas pricing strategy.
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2. Main sector issues and Government strategy:
Sector Background and Issues. The GO1 and the Bank have been discussing the key policy issues in the wider energy sector over the past few years-namely the need for: (i) revising the policy and legislative frameworks o f the power and hydrocarbon (Le., o i l and gas) sectors: (ii) rationalizing the prices o f energy products, and gradually phasing out the substantial subsidies for petroleum products and electricity; (iii) implementing the fundamental restructuring o f the key sector entities-namely the State power company (PLN), the State gas transportation and distribution company (PGN), and the State o i l (and gas) company (Pertamina); (iv) rationalizing the country’s independent power producer (IPP) program; (v) removing constraints to the development o f the domestic natural gas industry; and (vi) improving urban air quality, b y promoting the use o f cleaner fuels (including natural gas). A detailed analysis o f the issues, and options for addressing them, have been presented in Bank-prepared or supported studies, including: the Background Papers to the Power Sector Restructuring Workshop o f August 1998; the Indonesia - Oi l and Gas Sector Study (Report No. 205 12-IND) o f June 2000; a confidential report o f June 2000 on Indonesia’s IPP program; the Indonesia - Energy Sector Assistance Strategy FYOI-03; and the report Indonesia -Review of Electricity Supply and Demand on Java-Bali: a Framework for Prioritizing System Investments o f June 2001.
While the East Asian financial crisis had wide-ranging impacts on Indonesia’s economy, it had a more profound impact on Indonesia’s power sector than on those of other countries in the region. The substantial devaluation of the Rupiah caused by the crisis transformed P L N from a moderately profitable company into one unable to meet i t s obligations for foreign currency-denominated debt service payments, fuel costs, and power purchases from private independent power producers (IPPs). The crisis also exposed shortcomings in the sector’s governance structure which were already present prior to the crisis-particularly in terms o f PLN’s monopolistic organization, and the absence o f competitiveness and transparency in Indonesia’s IPP program (which primarily depended on unsolicited proposals). In addition, the lack o f funds flowing into the broader energy sector since the crisis means that there i s a urgent need for both substantial investment in new electricity infrastructure and rehabilitation o f existing power assets, as well as investment in the upstream infrastructure used to supply fuel for power generation, particularly natural gas.
Key Achievements to Date in the Power Sector. P L N was established under Government Regulation 18/1972 as a Perum (Le. government company), and the Electricity Act (Law No. 15/1985) assigned P L N both the right and obligation to supply power throughout Indonesia. Although in theory this law allowed
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private sector participation in the sector, i t was not until Presidential Decree 37/1992 that Indonesia’s IPP program become a reality. In 1994, under Government Regulation 23/1994, P L N was converted from a Perum to a Persero (a limited liability corporation), and in 1995, two generation subsidiaries on Java-Bali were established (currently named Indonesia Power and PJB). Despite the difficult political and economic environment the country has been facing since the regional crisis, a number o f notable steps have already been taken by the GO1 to resolve some o f the key problems in the power sector that were reinforced by this legal and regulatory framework and exacerbated by the crisis.
Issuance of the Power Sector Restructuring Policy. The f i rs t publicly-launched Power Sector Restructuring Policy to provide a blueprint for the de-monopolization of the sector was issued by the Government in August 1998-prepared with assistance from the Bank, ADB and USAID. This Policy outlined that the key objectives for restructuring the sector were: restoration o f financial viability; competition; transparency; and more efficient private sector participation (Annex 11). The Policy recognized that, while power system operations in many areas outside Java w i l l require GO1 support for the foreseeable future, the electricity system on Java-Bali i s relatively well-developed, and over the medium to longer term can potentially be transformed into a commercially-viable and financially-independent operation. Transitional steps involved the geographical unbundling o f PLN’s outside Java operations f rom those on Java-Bali, which would in turn be functionally unbundled into Java-Bali generation, transmission and distribution units or successor companies. A new law with implementing regulations would allow for the establishment o f a fu l ly competitive multi-buyedmulti-seller power market on Java-Bali, via an intermediate transitional single buyer stage (with the option o f establishing a parallel bilateral contracts market), a l l to be governed b y an independent regulatory agency. In support o f the implementation o f this Policy, the Bank and ADB agreed to focus on complementary areas o f restructuring activities. ADB provided the Government with program and technical assistance loans (co-financed with JBIC) to deal with sectoral aspects o f reform, such as preparing the init ial drafts o f the new Electricity Law, implementing regulations, and market rules, while the Bank’s focus was on the financial and corporate restructuring o f PLN. Passage of the 2002 Electricity Law. The new Electricity Law envisaged by the 1998 Policy was eventually passed in September 2002. While i t s key objectives and outcomes remain broadly the same, the Law does differ in some important respects f rom the Policy, notably in that i t provides l itt le detail in regard to transitional provisions, or to the financing mechanisms for public service obligations and residual subsidies. Nevertheless, the Law does potentially pave the way for a competitive power market operation (at least on Java-Bali) over the medium to long term, as long as effective implementing rules and regulations in support o f the L a w are promulgated. Within five years o f the Law going into force, at least one region must be designated for competition in generation, and principles o f unbundling and transmission/distribution open access w i l l apply in al l regions designated by the Government as competitive (with competition possible down to the low voltage consumer level). Within one year o f the enactment o f the Law, a new regulatory body-the Electricity Market Supervisory Agency (EMSA)-must be established, and i t i s charged with issuing the market rules and industry codes governing competitive regions. In non-competitive off-grid areas, local and regional governments w i l l play a greater role in the sector, having authority to issue licenses for electricity supply functions and to regulate prices, whereas in non-competitive areas connected to the national transmission grid, the Government w i l l continue to play the role o f regulator and licensor (Annex 11). In addition to preparing the groundwork for the establishment o f EMSA, the Directorate General for Electricity and Energy Utilization (DGEEU) has already drafted the majority o f supporting regulations, rules, and codes. Design and Implementation of PLN’s Financial and Corporate Restructuring Program. A major Bank-funded technical assistance (TA) contract for supporting PLN to design and begin implementing i t s financial and corporate restructuring program commenced in M a y 2001, and the bulk of this work was completed in late 2002. (The final report was submitted in March 2003). Recommendations on financial restructuring have contributed to the recent improvement in PLN’s
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finances (see below), and recommendations on corporate restructuring have provided the basic plan for the new organizational design, j ob descriptions, business procedures and performance indicators across PLN’s head office, as well as i t s generation, transmission and distribution subsidiaries and business units (Annex 11). However, the passage of the new Law has required that some o f the recommendations o f the TA be reviewed for consistency. Nevertheless, the key objectives and final outcomes o f the 1998 Policy are s t i l l valid and achievable, although there w i l l be delays to some aspects o f the implementation program, pending the establishment of EMSA, and the issuance by both the Government and EMSA o f the new regulatory framework. Increases in the Power Tariz. Following a number o f unsystematic tariff increases during 2000 and 2001, the GO1 agreed in principle-with endorsement f rom the DPR-that power tariffs would reach pre-crisis levels b y 2005 (Le., US7 centskwh). For 2002 and 2003, specific approval for increases o f 6% per quarter has been given, which means that as o f December 2002, PLN’s average revenue level i s about US5.3c/kWh, more than twice the level immediately after the crisis. Presidential Decree 89/2002 outlines per quarter tariff increases for 2003, which put tariffs on track for reaching US6.8ckWh by the end o f 2003. Debt Restructuring for PLN. In June 2001, the GO1 approved the conversion o f Rp29 tri l l ion o f PLN’s overdue interest (plus fines) to equity, and the unpaid principal of Rp5 tri l l ion was converted to a new 20 year loan. New Borrowing by PLN. Following the crisis, the GO1 froze new lending for PLN, partly as the result o f a reluctance to take on new exposures, but also over concerns that PLN’s system expansion plan was sound, wi th individual projects carefully prioritized and estimated costs soundly based. However, in June 2002, a limited Cabinet meeting agreed that PLN could proceed with discussions relating to 16 loans from multilateral and bilateral sources already in the pipeline (amounting to an envelope o f US$804 million), including the Bank’s proposed Project, and two loans which have since been approved b y ADB’s Board in December 2002. Payment of Targeted Subsidies for the Poorest Electricity Consumers. In December 2001, the GO1 paid Rp6.7 tri l l ion to PLN in order to cover three years (1999-2001) o f “targeted’ subsidies relating to the costs o f supplying PLN’s lowest consumption customers. Moreover, in October 2002, the GO1 formalized the future provision o f targeted subsidies to PLN for consumers with a connection capacity o f up to 450VA. Renegotiation of ZPP Contracts. P L N has now successfully renegotiated or closed out about 18 o f the 27 pre-crisis PPAs, and has reached agreement on the payment o f arrears to those IPPs with currently-operating power plants-amounting to about 3,100MW.
Short Term and Long Term Challenges Facing the Power Sector. Notwithstanding these significant achievements, Indonesia’s power sector s t i l l faces a number o f crucial short and long term challenges. As the Bank has been indicating to the GO1 for the past 24 months or so-init ially through the submission o f i t s June 2001 report on the Java-Bali power supply/demand balance, and reinforced through subsequent correspondence from the Bank as well as ongoing sector dialogue-over the short to medium term, the key challenge i s that o f burgeoning power shortages, because secure operation o f the power system, particularly on Java-Bali, i s vital to the entire Indonesian economy. Already, areas outside Java have been experiencing frequent power supply interruptions, and this situation i s likely to extend to the crucial Java-Bali power system over the next three years. The GO1 therefore needs to support P L N in mitigating the risk of power shortages. In addition, given the long lead times associated with major power infrastructure projects, the GO1 needs to take further actions in the short term to ensure that, in the medium to longer term, the viability o f the sector i s secured. These actions include helping to (a) continue restoring PLN’s financial viability, (b) attract the private sector to reinvest in the power sector, (c) secure supplies o f natural gas for power generation, and (d) manage the decentralization o f electricity supply*
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Mitigating the Risk of Power Shortages. Before the regional crisis, the main concern was the prospect of a significant oversupply o f power generation, given that 11,000MW of new capacity was included in the IPP program (10,OOOMW o f which was intended for Java-Bali). Nevertheless, only 3,000MW of IPP capacity ended up being commissioned in the Java-Bali system. An additional power station on Java i s under construction-the Tanjung Jati B plant (1,32OMW)-but i t s f i r s t unit i s unlikely to be commissioned before 2006. On the other hand, demand for electricity on Java-Bali continues to be robust, despite the fallout from the crisis. After substantial efforts b y the GO1 and PLN to secure funding for new generation-which the Bank supported by presenting i t s analysis o f the need for additional generation capacity to donor partners-the Japan Bank for International Cooperation (JBIC) agreed at the January 2003 C G I Meeting to support the repowering o f the Muara Karang plant, as well as an extension to the Muara Tawar plant, both in the Jakarta area. These projects would add 420MW and 225MW to the Java-Bali system respectively. In addition, P L N has already received bids for about 600MW of fast track gas turbine plant (also at the Muara Karang site), and these should be commissioned before 2006. Nevertheless, 2004 and 2005 w i l l remain critical years for PLN in operating the Java-Bali system.
Hence, the Bank has advised the GO1 that i t needs to: (i) resolve outstanding financing issues relating to the Tanjung Jati B plant, the transmission line required to evacuate power f rom Tanjung Jati B into the Java-Bali bulk transmission grid, and the completion o f the southern section o f the Java-Bali grid; (ii) take into account that P L N has little alternative except to control the rate at which new customers are connected until the fast track gas turbines and other planned generation capacity can be commissioned; and (iii) finalize plans for securing financing for the additional generating capacity which w i l l be required in the medium to longer term-particularly the proposed capacity additions at Muara Karang and Muara Tawar, as well as Tanjung Priok-and ensure that natural gas supplies w i l l be secured for these gas-fired combined cycle plants. Furthermore, the Bank has encouraged P L N to continue: (i) maintaining and improving the availability and reliability o f existing power generation capacity, in particular by rehabilitating Units 1-4 at the Suralaya coal-fired plant (given that these 1,600MW are crucial for providing base load in the Java-Bali system); (ii) prioritizing new customer connections; and (iii) carefully managing electricity demand growth through integrated resource planning (IRP) initiatives. P L N has already begun implementing an IRP program o f supply and demand side management measures that includes: (i) increasing peak power tariffs relative to off-peak tariffs; (ii) offering interruptible tariffs to large consumers, as well as buyback tariffs f rom customers with their own captive power plants; and (iii) promoting the replacement o f existing commercial, household and street lighting with high efficiency bulbs.
Restoring PLN’s Financial Viability. As i s discussed below, the private sector i s unlikely to play a major role in Indonesia’s power sector for the next several years. Therefore, during the transition period until the introduction of competition, PLN w i l l s t i l l have a key investment role to play in the sector. Yet, despite the actions already taken to support PLN, the company’s current financial position s t i l l l i m i t s i t s ability to undertake that role. Even under a strictly limited rate o f electricity sales growth, P L N s t i l l needs to undertake a significant capital expenditure program. Moreover, apart f rom the impact o f the removal o f fuel subsidies on PLN’s operating expenditures, fuel costs are also set to increase significantly unless the company can secure new supplies o f natural gas. This i s because P L N w i l l be forced to run gas-fired units on considerably more expensive o i l (see below).
Therefore, to restore PLN’s creditworthiness and ability to raise financing itself, the Bank has advised the Government to: (i) continue to increase power tariffs, aiming for-at a minimum-a positive rate o f return on PLN’s revalued assets by 2004; (ii) reintroduce the Automatic Tariff Adjustment Mechanism (ATAM) to minimize PLN’s exposure to foreign exchange and fuel price fluctuation r isks; (iii) provide
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approval for borrowing commensurate with PLN’s realistic capital expenditure program, over the short term until PLN’s financial health i s restored: (iv) explore options for reducing PLN’s capital gains tax burden from asset revaluation; (v) agree on a policy for the secure supply o f natural gas, coal and geothermal steam to PLN; and (vi) provide P L N with subsidies for any public service obligations imposed on i t s operations.
Attracting the Private Sector to Invest in the Power Sector. The new Electricity Law implicit ly acknowledges that, even if P L N were in a strong financial position, i t would be untenable for the company to provide the substantial levels o f new investment in generation, transmission and distribution required over the long term on i t s own, or to remain in i t s currently monopolistic form. As such, greater private sector participation wi l l be required to satisfy much o f the country’s future power supply needs. However, substantial new private investment i s unlikely to come to the sector before the next 5-6 years. Apart f rom Indonesia’s poor investment climate overall (which w i l l itself not be improved by the prospect o f power shortages), there i s a global concern regarding investment in the energy sector, stemming in part f rom the failure o f energy companies such as Enron. At present, even those existing IPP sponsors wi th successfully renegotiated contracts w i l l find i t difficult to convince lenders to support the expansion o f existing proven power projects without the provision of a government guarantee. Consequently, the groundwork needs to be laid now to ensure that new private power projects are able to come onstream even within this timeframe. Hence, although the passage o f the new Electricity L a w i s an important first step, the Bank has advised the GO1 to press on with: (i) promptly issuing implementing regulations: (ii) establishing and providing the new Supervisory Agency for the power sector with resources commensurate with i t s roles and responsibilities; and (iii) resolving the remaining issues associated with the existing IPP program.
Securing Supplies of Natural Gas for Power Generation. The existing gas supply contracts for PLN’s gas-fired plants on West Java terminate in 2004, and although the contracts relating to PLN’s East Java plants run until 2011, available gas i s declining at a rapid rate, with some units already switching to oil. Moreover, the viability of most current proposals for repowering or extending existing plants, or for constructing new combined-cycle plants, are dependent on the availability o f natural gas as a fuel. While Indonesia has substantial gas reserves, some o f which are on Java, the best long term prospects for supporting expanded gas utilization on Java-both for power generation and industrial purposes-appear to be by pipeline f rom fields in South Sumatra andor East Kalimantan, and LNG from the Tangguh field in West Papua. PGN would clearly be a key player in any significant gas transmission project, and discussions between PGN, JBIC, and the GOI, on the South Sumatera to West Java pipeline are already almost completed and the government o f Japan has committed to the project. However, to deal with the challenges o f implementing such major infrastructure projects-and to comply with the October 2001 Oil and Gas Law, which has clarified PGN’s role and future structure-PGN needs to restructure i t s operations by ful ly unbundling transmission from distribution, and to seek private sector financing and expertise in both i t s distribution and transmission functions. In addition, a key issue remains the need for a rationalized gas pricing structure, the lack o f which w i l l continue to act as a significant impediment to the expansion o f the domestic natural gas industry. These are areas for which PGN has asked the Bank’s assistance as part o f the proposed project.
Managing the Decentralization of Electricity Supply. Implementation o f the new Electricity Law w i l l transfer significant responsibilities for power supply to provincial governments, kabupatens, private companies, and even community-based cooperatives, since some licenses w i l l be able to be issued by local mayors (or governors). Therefore, these bodies w i l l have a crucial role in expanding access to electricity in poorer and remote regions. Consequently, the GO1 w i l l need to: (i) issue clear regulations under the new Law to outline how various financing mechanisms can be used to support decentralized
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power provision in those areas where i t i s uneconomic for PLN, or i t s successor companies, to extend the existing national transmission grid; and (ii) determine how the substantial needs for institutional strengthening, which w i l l be required by those agencies with new responsibilities under the Law, can be met.
3. Sector issues to be addressed by the project and strategic choices:
I t i s not realistic to address all the above outstanding sector issues within the context o f a single operation. The current progress on the various issues, the level o f GO1 commitment, the Bank‘s comparative advantage and the existing involvement o f other donors (ADB, JBIC, USAID), as well as the amount o f additional analytical work required before some issues can be adequately addressed, have led to the decision to prepare a specific investment loan (SIL) operation, focusing primarily on: (i) supporting the implementation of PLN’s financial and corporate restructuring; (ii) preparing PGN for restructuring and partial privatization; and (iii) strengthening the power system on Java-Bali. The Project w i l l contain technical assistance components and conditionalities in support o f actions on these issues, as well as investment components for PLN.
For instance, while issues relating to Pertamina’s role and functions continue to be a major unresolved challenge for the energy sector as a whole (not least in terms of possible implications for domestic gas sector restructuring), additional analytical work i s required to assess alternatives for reforming Pertamina in a fundamental way-including the formation o f several true subsidiaries, as well as the initiation o f a major divestiture and/or partial privatization program. However, such analysis would only be effective with the co-operation o f Pertamina itself, a situation which currently i s not the case.
Power Sector Restructuring. Implementation of the GOI’s 1998 Power Sector Restructuring Policy has been supported by ADB, USAID, and the Bank. ADB (with co-financing from JBIC o f US$400 million) provided the GO1 with a program loan o f US$380 million, and a technical assistance loan o f US$20 mill ion to the Directorate General o f Electricity and Energy Utilization (DGEEU) in order to deal with the sectoral aspects of restructuring-particularly the initial drafting o f the new Electricity Law and associated regulations, as well as the market rules governing the creation o f a competitive electricity market. (USAID has been providing ongoing capacity building support to the Ministry o f Mines and Energy). While the Bank worked closely with ADB in providing feedback on the init ial drafts o f the Electricity Law, i t was agreed that the Bank’s subsequent focus be on the financial and corporate restructuring o f PLN. As such, the Bank (under the Second Power Transmission and Distribution Project) financed the technical assistance (TA) required to help P L N design and begin implementing i t s corporate restructuring program, and the bulk of this work was completed in late 2002 (Annex 11).
However, the passage o f the Electricity Law, and the yet-to-be promulgated implementing rules and regulations, w i l l require that some o f the recommendations o f this work be reviewed for consistency, and modified accordingly. Nevertheless, notwithstanding some differences between the 1998 Policy (which was the basis for Bank TA) and the 2002 Law, many o f the TA recommendations relating to PLN’s new organizational design, j ob descriptions, business procedures, and performance indicators, s t i l l remain valid. Consequently, the Bank considers that-on balance-the key objectives and final outcomes o f the 1998 Power Sector Restructuring Policy are s t i l l valid and achievable, although there w i l l be delays to some aspects o f the implementation program, pending the establishment o f the new regulator-namely the Electricity Market Supervisory Agency (EMSA)-and the issuance by both Government and E M S A o f the new regulatory framework.
To comply with the Law’s requirement that competitive regions must be functionally unbundled, PLN must continue preparing to spin o f f i t s Java-Bali operations as independent successor companies.
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Initially, P L N can press on with carrying out i t s restructuring implementation plan as applicable to i t s existing subsidiaries and business units. Effective implementation o f subsequent steps, however, w i l l require key implementing regulations to be in place, and market rules and industry codes to have been issued b y EMSA. Once EMSA finalizes the new market rules, transmission charging methodology and open access tariffs, as well as decisions relating to generation market power, P L N can proceed with fu l ly unbundling i t s Java-Bali operations. This w i l l firstly involve the creation of four (or more)-subject to E M S A approval-new generation subsidiaries f rom Indonesia Power and PJB. In addition, five independent distribution companies and an independent transmission company w i l l be created from PLN’s operations on Java-Bali. All o f these new Java-Bali companies w i l l initially be established as subsidiaries under the P L N holding company, with a target date o f the end o f 2006. These companies w i l l subsequently be spun-off as independent companies before such time as the Government designates the Java-Bali system as competitive, which (by Law) must occur before the end o f September 2007. These measures w i l l be supported in the new Project through conditionalities and technical assistance. In addition, a key element o f PLN’s restructuring plan i s the further measures needed to improve PLN’s financial position, and these measures w i l l also be underpinned by financial covenants in the loan (Section G.).
The loan w i l l also include partial financing for the enhanced information systems capabilities needed by PLN to support the implementation o f i t s corporate restructuring program, notably a pilot rollout o f an Enterprise Resource Planning (ERP) System for core financial, materials management, human resources management and asset management. P L N w i l l itself-through a jo int venture arrangement (consistent with the company’s overall new IT Strategy)-finance the init ial rollout o f new customer information systems (CIS). (ADB intends to provide complementary financing for the development o f the information systems required to implement the competitive wholesale electricity market).
Power System Strengthening. While the new Electricity Law provides l itt le guidance on the transitional steps required to introduce competition in electricity supply, i t does outline a number o f realistic pre-conditions which must be met before competition can be designated for a particular region, including: (a) there should be competition in the supply o f primary energy, meaning that fuels used for power generation should receive no subsidies; (b) power tariffs must reach cost recovery plus a reasonable level o f profit; and (c) adequate generation reserves and an unconstrained transmission network should be present. The GO1 has been taking active measures to address the f i rs t two pre-conditions for competition, yet bottlenecks remain in the existing transmission system which would make i t diff icult to introduce a power market, even i f there were no prospect o f power shortages caused b y an insufficient level o f generation reserves.
Over the past few years, the Bank and ADB have taken a similar position in deciding not to become involved in the direct financing o f large-scale power generation plants in Indonesia. On the other hand, JBIC has become involved in the partially-completed Tanjung Jati B plant in Central Java (for which construction was halted as the result o f the crisis), and has recently committed to repowering and extending two existing plants near Jakarta (Muara Tawar and Muara Karang). While the Bank w i l l continue to explore options to support the GO1 in working with PLN to transparently and competitively bring new generation on-line in order to mitigate the risk o f power shortages, i t i s not intended that the currently-proposed Project include any generation components, and therefore the Project w i l l not directly address the most critical issue currently facing PLN-namely, the looming shortfall in generation capacity. Nevertheless, the Project w i l l contribute to alleviating actual and potential shortfalls in the overall electricity supply and demand balance on Java-Bali. The Project w i l l ensure greater utilization o f existing generation capacity on East Java by relieving bottlenecks in the bulk transmission grid, and w i l l also improve the reliability o f existing generation supply at PLN and IPP geothermal power plants on
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West Java by strengthening the associated local subtransmission system. In addition, the Project w i l l include technical assistance for reviewing the design o f the proposed Upper Cisokan pumped storage hydro plant, which in the longer term, would provide complementary and efficient pealung service to gas-fired plant. Given the long lead time o f constructing hydro projects, i t i s timely to undertake such a review at the present time.
Apart f rom the need to undertake investments which w i l l support greater utilization and more secure operation o f existing generation in the Java system, there has been chronic underinvestment in al l elements o f the Java-Bali power system over the past few years. Even i f sufficient investments in generation capacity are made to restore an adequate system reserve margin on Java-Bali, unless existing substation capacity i s expanded at many locations throughout Java and Bali, localized electricity demand growth w i l l be severely constrained over the medium term. But o f immediate concern i s the fact that many existing transmissionhubtransmission lines and substations are already experiencing very high loading and/or extremely poor voltage, thus placing the security o f many localized parts o f the Java-Bali power system at risk. Consequently, significant investment to strengthen the system b y uprating existing lines and expanding existing substations would be required even if demand were to remain constant, and the Project directly supports PLN’s efforts in this regard, as does ADB’s complementary Power Transmission Improvement Sector Project (approved in December 2002). The Project focuses on the Java-Bali power system given the relative importance of i t s secure operation to the overall Indonesian economy, and i t s relative state o f readiness to make the transition to a commercially-viable and competitive operation. Furthermore, while the Bank has not undertaken recent analytical work on the outside Java power system, ADB has just approved a new loan to PLN for critical investment needs in the Outer Islands.
Preparation for Domestic Natural Gas Sector Restructuring. To take full advantage o f the economic and environmental benefits o f the greater utilization of domestic gas, the infrastructure constraints also need to be addressed. However, additional analytical work i s required to ensure that the sources o f natural gas supply are sufficient to meet demand (particularly for power generation), as well as to assess in which sectors the focus o f future gas market development should be. While ADB are providing technical assistance to MIGAS to prepare a gas development plan, and USTDA i s working with PGN on the feasibility o f bringing gas to Java from East Kalimantan, these studies do not address the question o f gas pricing in depth, and consequently the economic utilization o f gas. Therefore, the Project w i l l include complementary TA to PGN for a gas pricing study. In addition, the Ministry o f State Owned Enterprises’ SOE Masterplan for 2002-2006 refers to the intent to proceed with the further privatization o f PGN through the sale of interests in subsidiary companies, but provides no details. Consequently, the Project w i l l include TA to prepare PGN for the restructuring and unbundling o f i t s operations (particularly transmission from distribution) as well as for increasing private equity in the domestic gas sector, by identifying additional strategic partners for gas transmission, and by preparing for a limited IPO for gas distribution. I t i s envisaged that the implementation o f the framework developed through this preparatory work w i l l be supported under a new S I L to PGN in FY04.
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C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown) :
Component 1 - Power System Strengthening (500kV Transmission Svstem)
The Project w i l l support PLN’s initiatives to (a) achieve greater utilization o f existing generation capacity on Java-Bali, (b) improve the security o f supply to the cities o f Cirebon and Surabaya, and (c) debottleneck local interconnections between bulk transmission and subtransmission levels, by: (i) expanding existing 500kV substations; and (ii) installing new 500kV circuit breakers. Total cost o f this component i s US$69.8 mill ion (including contingencies and VAT), with IBRD financing o f US$50.0 million.
Component 2 - Power System Strengthening (150kV Subtransmission System)
The Project w i l l support PLN’s initiatives to (a) provide a level o f security commensurate with the existing and potential PLN and P P geothermal generation capacity evacuated through the West Java 150kV subtransmission network near Bandung, (b) improve security o f supply to Surabaya, and (c) relieve multiple localized overloading and voltage problems at subtransmission level-via PLN’s 150/70kV and 150/20kV transformer replacement and substation expansion program-by: (i) uprating existing 150kV subtransmission lines: (ii) expanding existing 150kV substations; and (iii) installing 150kV circuit breakers. Total cost of this component i s US$90.4 mi l l ion (including contingencies and VAT), with IBRD financing o f US$60.1 million.
Component 3 - P L N Enterprise Resource Planning System
The Project w i l l support P L N to implement a pilot rollout o f the company’s Enterprise Resource Planning (ERP) information system. The focus o f this pilot w i l l be core financial, materials management, human resources management and asset management in P L N Pusat and three representative subsidiary business units. This component w i l l help to facilitate PLN’s corporate and financial restructuring. Total cost o f this component i s US$26.0 million, with IBRD financing o f US$20.0 million. Activities under this component that are undertaken after appraisal completion (using IBRD procurement procedures), w i l l be eligible for retroactive financing under the loan.
Component 4 - PLN Restructuring and Institutional Strengthening (Technical Assistance)
The Project w i l l also support PLN’s restructuring program-as well as i t s institutional strengthening initiatives-through technical assistance for: (i) finalizing an action plan for the business reorganization and corporate restructuring o f P L N (; (ii) facilitating the implementation o f that Plan: and (iii) strengthening PLN’s core capacity for environmental and social management. (Consultancy services for items (i) and (iii) wi l l be financed b y PLN). IBRD financing o f item (ii) i s $2 million. Additional TA (IBRD financing $1.5 million) w i l l be provided to PLN for reviewing the detailed design and cost estimate o f the Upper Cisokan pump storage generating plant on Java. Total cost o f this component i s US$4.5 million, with IBRD financing o f US$3.5 million.
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Component 5 - PGN Restructuring and Institutional Strengthening (Technical Assistance)
The Project w i l l support PGN’s restructuring and institutional strengthening initiatives, through technical assistance for: (i) gas utilization and pricing; (ii) PGN corporate restructuring (including the preparation o f an information systems framework); (iii) PGN gas distribution IPO; (iv) PGN gas transmission strategic partner; and (v) PGN capacity building and training. Total cost of this component i s US$6 million, wi th IBRD financing of US$6 million.
90.39 26.00 4.50 6.00
2. 150kV Transmission Network 3. Enterprise Resource Planning (ERP) System 4. PLN Technical Assistance 5. PGN Technical Assistance
42.7 60.08 42.6 12.3 20 * 00 14.2 2.1 3.50 2.5 2.8 6.00 4.3
Total Project Costs Interest during construction
196.67 92.9 139.59 99.0 13.56 6.4 0.00 0.0
I Front-end fee I 1.41 I 0.7 I 1.41 I 1.0 I Total Financing Required 1 21 1.64 1 100.0 I 141.00 I 100.0 I
2. Key policy and institutional reforms supported by the project:
The Project w i l l support the GO1 in implementing key power sector reforms, as underpinned b y the 2002 Electricity Law. In particular, a key understanding under the loan w i l l be the commitment o f the GO1 to promulgating those key implementing regulations under the new Electricity Law that are needed for the creation a competitive electricity market on Java-Bali-namely those relating to further provisions on: (i) the Electricity Market Supervisory Agency (EMSA); (ii) the prohibition o f market domination; (iii) retail and open access tariffs; (iv) mechanisms and payment amounts relating to ancillary services; and (v) Electricity Supply Business Licenses and Operating Licenses. In parallel, P L N agreed to undertake i t s corporate restructuring program in a manner acceptable to the Bank and consistent with the implementing regulations to be promulgated b y the Government under the new Electricity Law, as well as with the market rules and industry codes to be issued by EMSA. Key milestones in the action plan include: (i) the finalization o f the plan for the business reorganization and corporate restructuring o f PLN; (ii) the establishment o f four (or more) generation corporate subsidiaries on Java-Bali f rom the existing subsidiaries o f Indonesia Power and PJB, subject to the approval o f EMSA; (iii) the establishment o f PLN’s transmission and distribution subsidiaries into corporate subsidiaries; and (iv) the subsequent establishment o f independent successor generation, transmission and distribution companies on Java-Bali (Annex 11).
Agreement was also reached with GO1 to support PLN’s improved financial viability, in particular through the re-introduction o f an automatic power tariff adjustment mechanism until such time as the electricity price i s set by the market (Annex 5). The Project also provides partial financing toward: (i) transmission debottlenecking and improved generation security within the Java-Bali power system, both pre-requisites for the introduction o f a competitive electricity market; and (ii) the information systems required to support the ongoing financial and corporate restructuring o f PLN.
The Project w i l l also support the GO1 in paving the way for the implementation o f key reforms in the domestic natural gas sector-notably, the corporate restructuring and unbundling o f PGN, greater private
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sector participation in both PGN’s gas transmission and distribution operations, as well as the establishment o f a rational natural gas pricing policy. These reforms in the domestic gas sector w i l l in tum support the greater utilization o f natural gas for power generation on Java-Bali. Technical assistance w i l l also be provided to PGN for the capacity building required to enable the company to undertake such major changes.
3. Benefits and target population:
The restructuring o f PLN’s operations on Java-Bali in line with the Electricity Law, and the physical investments under the loan, w i l l a l l contribute to the improved performance o f the electricity sector on Java-Bali. Investments in the Java-Bali transmission and subtransmission system w i l l improve: (i) overall and localized system efficiency, through less expensive generation dispatch, reduced losses and extended asset lifetimes; (ii) overall and localized system security, through lessened likelihood o f power outages due to an increase in generation reserve margin and expanded localized transmission/subtransmission; (iii) and localized system quality, through improved voltage levels-particularly important for industrial consumers o f electricity, and thus for the wider macroeconomic. Furthermore, even if sufficient investments in generation capacity are made to restore an adequate system reserve margin on Java-Bali, unless existing substation capacity i s expanded at many locations throughout Java and Bali, localized electricity demand growth w i l l be capped. Investments in information systems for PLN w i l l support the improved efficiency of PLN’s operations, and act as a catalyst for unbundling o f the company. This w i l l in tum allow the introduction o f competition, thus placing downward pressure on costs, benefiting al l electricity consumers on Java and Bali.
The blueprint for restructuring PGN w i l l pave the way for increased domestic utilization o f natural gas, thus leading to significant economic and environmental benefits for all group o f consumers.
4. Institutional and implementation arrangements:
Implementation Period. The Project w i l l be implemented over five years.
Executing Agencies. The executing agencies for the Project w i l l be P L N and PGN. P L N w i l l be responsible for implementing Components 1-4, and PGN for Component 5 (para. C-1).
Project Implementation. Within PLN, three units w i l l have responsibilities for project implementation, they are: the Project Implementation Unit (PIU), P L N Project Java-Bali (PLN Proyek Induk Pembanglut dan Jaringan Jawa Bal i and Nusra), and PLN’s Java-Bali Transmission Business Unit (P3B). The P IU was established on September 18, 2002 b y P L N President Director Decree No. 134.K/OlO/DIR/2002 specifically for this Project. I t i s located at P L N head office in Jakarta and responsible to the President Director. Staffing includes one project director (full-time), assisted by five activity managers-respectively for procurement, environment/social and community development, supervision and monitoring, engineering and IT-plus an additional 20 part-time professional staff. A small PIU i s established within PGN to coordinate i t s technical assistance components. (Also see Section E.4.2).
Reporting, Monitoring and Evaluation Arrangements. The main tasks associated with monitoring and reporting during the implementation process w i l l be carried out by PLN Project Java-Bali, while the responsibility o f coordination among all the parties concerned lies with the PIU. A Master Implementation Schedule w i l l be prepared by PIU, which should comprise several modules covering site preparation, environmental management, procurement, design, supply, construction, test and commissioning. PLN Project Java-Bali w i l l be required to prepare detailed schedules for site survey and preparation, and to work out with each contractor/supplier a schedule covering equipment design, manufacturing, shipping and delivery, construction and installation, test and commissioning, in line with
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the master schedule. The purpose of these scheduling activities i s to provide a continual assessment not only on the predicted completion date but also o f where schedule slippages are occurring so that remedial action can be taken in a timely manner.
The P IU w i l l prepare Project Progress Reports on a quarterly basis. Such reports w i l l cover al l aspects related to project implementation, including but not limited to: project implementation status, progress made in the last quarter, procurement, construction, installation, schedule and cost control, issues/problems and actions. Progress and status o f implementing the Environmental Management Plan (EMP) and the Land Acquisition and Resettlement Policy Framework (LARPF) w i l l also be included in the quarterly reports. Upon completion o f the Project, a completion report w i l l be prepared to assess the achievement o f project objectives, to assess the project design and implementation experience, to draw lessons learned, and to prepare plans for project operation.
Accounting, Financial Reporting and Auditing Arrangements. A financial management assessment o f P L N was conducted by a Bank financial management specialist during the pre-appraisal mission in September 2002. (Given the relatively small size o f PGN’s portion o f the loan, comprising only a few TA activities which w i l l a l l subject to the Bank prior-review, the financial management capacity assessment has focused on P L N as the primary implementing agency). As a part o f this assessment, an evaluation was conducted o f the r isks inherent in the choice o f P L N as primary project implementing entity, as well as specific r isks arising from the proposed project design and implementation arrangements. In addition, consideration was given to the overall control environment in the country, as determined b y the Country Financial Accountability Assessment Report, a diagnostic study undertaken by the Bank in the year 2001.
The financial management assessment has concluded that while the overall country risks were substantial, arising f rom the continued weaknesses in public expenditure management, r isks arising f rom PLN as a project entity were rated moderate. PLN’s long prior experience in managing donor funds for their projects and the company’s exposure to local capital market accounting and auditing regulations arising out of the public issue o f bonds imparts some strengths to i t s financial management capacity. However, some weaknesses remain in accounting systems and payment validation procedures. Measures have been proposed to mitigate these r isks for purposes o f this Project.
Currently PLN’s financial accounts are audited b y a private sector accounting firm, Prasetio Utomo (previously the local affiliate o f Andersen). This firm has recently merged with the local affiliate o f Ernst & Young, public accountants. I t has been proposed that the Andersen-Emst & Young merged entity w i l l also be appointed as the auditor for project financial accounts. N o incremental cost for this w i l l be charged to the loan. The expenditure at PGN, being relatively small, w i l l also be audited by the same auditor so that consolidated project accounts can be audited and presented. More details o f the financial management assessment, as well as on accounting, financial reporting and auditing arrangements, are provided in Annex 6B.
Disbursement Arrangements. I t i s proposed that about 85% o f the project expenditure w i l l be on goods that are likely to be subject to prior review procedures, and w i l l involve direct payments or special commitments. Some smaller payments would be reimbursed by the Bank to PLN at consolidated amounts of at least $200,000 per withdrawal application. A Special Account w i l l not be required for this project.
The Ministry o f Finance w i l l on-lend the funds associated with Components 1-4 to PLN, and the funds associated with Component 5 to PGN. This w i l l be achieved through Subsidiary Loan Agreements,
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which would pass on all r isks and costs-including foreign exchange risk-incurred by the Government to PLN and PGN, on terms agreed with the Bank. More details of disbursement arrangements are provided in Annex 6B.
D. Project Rationale 1, Project alternatives considered and reasons for rejection:
The original project design-which reached Concept Review stage in November 2000-was for a hybrid-SECAL operation, given the perceived need o f the Government at that time for budgetary support, with physical components relating to both the power and domestic gas sectors. When the need for a balance-of-payments component reduced, the operation was reformulated as an APL. However, the importance o f the power sector issues, and the state o f readiness o f the power sector components as opposed to those intended for the domestic gas sector, led to the GO1 deciding to narrow the scope o f the operation to a Specific Investment Loan (SIL) focusing on the power sector.
The Project w i l l finance critically needed investments for strengthening the electricity supply system on Java-Bali, as well as investments in the information systems needed to support PLN’s financial and corporate restructuring. The Project i s intended to extend the support already being provided b y the Bank under the Second Power Transmission and Distribution project to help P L N implement i t s financial and corporate restructuring program. B y reaching agreements with the Government and P L N on key actions needed to be taken over the short to medium term, the Project w i l l help to restore PLN’s financial viability and result in an appropriately-designed corporate structure consistent with the new Electricity Law.
The proposed financing amount i s relatively minimal in the context o f the sector’s overall investment needs, involving only the most urgently-needed transmission and subtransmission investments for strengthening the existing power delivery system, based on the current level o f generation capacity and irrespective o f the completion time o f the remaining components o f the transmission system. Nevertheless, with looming generation shortfalls in the short to medium term, the existing electricity delivery system needs to be more effectively utilized, with measures taken to maintain and improve current levels o f system reliability and service quality. Furthermore, over the medium to longer term, a competitive power market with increased private sector participation w i l l not be able to be introduced even in a restructured power sector, should constraints and bottlenecks s t i l l exist in the bulk transmission network. On the other hand, even once an adequate generation reserve margin i s restored and geographic transmission constraints have been removed, numerous localized constraints w i l l s t i l l remain between transmission and subtransmission levels, and between subtransmission and distribution levels, unless actions are taken now to begin debottleneclung such constraints.
The choice o f the Project’s physical subcomponents was made after a full assessment o f the Java-Bali supply and demand balance, along with PLN’s corresponding investment program, in conjunction with other donors. Subcomponents were chosen based on their ability to: (i) achieve greater utilization o f existing generation capacity on East Java, by relieving constraints in the bulk transmission grid; (ii) improve the reliability o f existing generation supply at the West Java P L N and IPP geothermal power plants, b y strengthening the associated local transmission system: and (iii) improve the reliability and quality o f power supply at various poorly-performing locations throughout Java and Bali, b y strengthening and debottlenecking local subtransmission networks-in turn allowing for increased localized demand growth. All o f the selected subcomponents are incremental investments that w i l l provide more cost effective improvements in supply efficiency, reliability and quality than would be the case with constructing entirely new lines and substations.
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Not undertaking these investments would result in continued system bottlenecks and inefficiencies, in tum creating an artificial demand for new power generation capacity, which-if such capacity were constructed-would be constrained by the same bottlenecks. One alternative might be to utilize the same level of funds on demand side measures. However, the Java-Bali system has suffered from chronic underinvestment for the past 5-6 years, and the level o f system loadings in many localized areas are far in excess o f levels which could be efficiently mitigated by local demand side initiatives. Nevertheless, P L N i s not neglecting the demand side, having already initiated a comprehensive Integrated Resource Planning (IRP) Program o f both supply-side and demand-side measures, including: (i) increasing peak power tariffs relative to off-peak tariffs; (ii) offering interruptible tariffs to large consumers, as well as buyback tariffs from customers with their own captive power plants; and (iii) promoting the replacement o f existing street lighting with high efficiency bulbs. (This Program i s being supported through grant financing from USAID).
The feasibility o f financing rehabilitation needs o f existing power plant in the Java-Bali system, particular for the Suralaya coal-fired plant was also assessed. Given the capacity o f the Suralaya coal-fired plant and i t s importance to the Java-Bali power system (almost 20% o f capacity, located close to Jakarta), maintaining plant availability i s o f paramount importance. However, this option was rejected b y PLN, as including a rehabilitation o f Suralaya in the scope would delay the Project because more detailed feasibility studies s t i l l need to be undertaken.
As for the proposed support to PLN’s information systems renewal program, PLN’s existing IT hardware and software i s outdated, fragmented and geared to i t s present monolithic structure. Upgrading information systems i s a prerequisite for effective implementation o f corporate (and financial) restructuring, and for improving management and operational efficiencies.
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2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).
~ Sector Issue
Ban k-financed PLN financial/corporate restructuring; transmission/distribution system development Natural gas market development
I
(PGN)
Fuel and power subsidy removal, oil/gas/power legislative framework Other development agencies Power sector legislative framework and competitive market rules (DGEEU)
Power development on Java-Bali, and competitive market software (PLN)
Power development on Java - 500kV southern loop (PLN) Power development in selected outer islands (PLN)
Demand side management initiatives on Java-Bali (PLN) Natural gas market development (PGN)
Gas development study
Project
Second Power Transmission and Distribution Project (closed Mar 2003) Gas Utilization Project (completed 12/98) Domestic Gas Sector Restructuring Project (proposed for FY04) Second Policy Reform Support Loan (completed 12/99)
ADB/JBIC - Power Sector Restructuring Program and Technical Assistance Loans (completed 2002) ADB - Power Transmission Improvement Sector Project (approved Dec 2002) JBIC (ongoing)
ADB - Renewable Energy Development Project (approved Dec 2002) USAID
JBIC - South Sumatra/West Java Gas Transmission Project (planned) ADB TA (ongoing)
I I IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), H l
Latest Supervision (PSR) Ratings
(Ban k-fj nance Implementation
Progress (IP)
S
S
Highly Unsatisf:
srojicts only) Development
Objective (DO)
S
S
S
ory)
3. Lessons learned and reflected in the project design:
I t should be pointed out that many of the lessons learned with respect to past experience in Indonesia were gained under an environment characterized b y sustained rapid growth and social stability. The situation i s now very different. Nonetheless, the following lessons learned are considered likely to be relevant.
0 The Government has in the past shown flexibility in accepting tough policy conditions, but less commitment to their implementation.
0 Financial covenants need to be relevant and achievable, and in line with reasonable assessments o f
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implementing agency financial performance. Appropriate performance indicators and monitoring are essential. Attention needs to be given to accurate cost estimates and on application of contingencies, as well as to availability o f counterpart funding.
Based on the Bank’s experience in Indonesia and in the region, particular attention was paid to: Ensuring simple and transparent project design, not dependent on any related components financed by other donors. Adopting realistic implementation and disbursement schedules. Preparing a detailed procurement plan, involving a relatively small number o f packages under single responsibility contracts. Providing a small set of focused but realistic loan conditionalities, particularly with regard to financial covenants. Ensuring that key Government commitments have been undertaken prior to loan negotiations (e.g. increases in power tariffs). Establishing a strong and well staffed P IU with full responsibility for coordination and management o f the Project, and a Project Environment Team (PET) for coordinating and overseeing al l aspects o f the Environmental Management Plan (EMP) and Land Acquisition and Resettlement Policy Framework. The Project w i l l also provide close supervision o f PLNs own capacity building program for implementing the institutional strengthening aspects o f the Project’s EMP.
4. Indications of borrower commitment and ownership:
The Project has been included in the l i s t o f priority projects in the sector. In June 2002, a limited Cabinet meeting agreed that P L N could proceed with discussions relating to 16 loans from multilateral and bilateral sources already in the pipeline (amounting to an envelope o f US$804 million) including specifically for this project. In addition, despite the difficult political and economic environment the country has been facing over the past several years, a number o f notable steps have already been taken b y the Government and P L N to address some o f the sector issues and demonstrate commitment to the Proiect (see also B-2). ” .
Electricity Law. .The new Electricity Law was passed on September 23, 2002, potentially paving the way for a competitive power market operation (at least on Java-Bali) over the medium to long term. In addition to preparing the groundwork for the establishment o f the new regulatory agency (EMSA), the Directorate General for Electricity and Energy Utilization (DGEEU) has already drafted the majority of supporting regulations, rules, and codes. Notably, DGEEU recently issued i t s blueprint for implementing the Electricity Law over the period 2003-2010. PLN’s Restructuring Program. In May 2001, P L N engaged Bank-financed consultants to design i t s restructuring implementation program, and the new organizational design, job descriptions and performance indicators have been approved for implementation b y PLN’s Board o f Commissioners. In addition, P L N initiated a wide-ranging efficiency drive initiative, following up on the findings o f the special audit o f PLN undertaken in 1999 (Annex 11). Financial Restructuring Measures. In parallel, the GO1 has already taken steps to improve PLN’s financial position, through the approval in June 2001 o f the conversion o f Rp29 tri l l ion o f PLN’s overdue interest (plus fines) to equity, and the unpaid principal o f Rp5 tri l l ion was converted to a new 20 year loan. Also, in December 2001, the Government paid Rp6.7 tri l l ion to P L N in order to cover three years o f “targeted” subsidies relating to the costs o f supplying PLN’s lowest consumption customers. Significantly, the Government has agreed in principle that power tariffs w i l l reach pre-crisis levels b y 2005 (i.e., US7 centskwh), permitted P L N to increase tariffs b y 6% on average per quarter during 2002, and confirmed power tariff increases for 2003 that w i l l result in an average tariff o f about US6.8cikWh. Finally, P L N has now successfully renegotiated or closed out the
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majority o f power purchase agreements (PPAs) entered into prior to the crisis, and has reached agreement on the payment o f arrears to those IPPs with currently-operating power plants. Establishment of Project Implementation Unit (PIU) and Preparation of Bidding Documents. PLN's PIU was established on September 18, 2002 b y P L N President Director Decree No. 134.WOlO/DIR/2002 specifically for this Project, and the preparation o f bidding documents began shortly afterward.
5. Value added of Bank support in this project:
The most important value added o f the Banks participation in this project i s :
(a) I t s continuing involvement in Indonesia's power sector to ensure that PLN's financial and corporate restructuring plan i s effectively introduced, given that the Banks last operation in the sector closed in March. Based on this involvement--the first operation since the crisis-- the Bank i s sending an important signal to the international community that significant progress has been made b y the GO1 and P L N in resolving sectoral issues (such as passing the Electricity Law, regularly increasing the tariff and resolving the IPP issue) and that the time i s right to resume badly needed private investments in the sector , In this context, the Bank i s cooperating with the ADB and JBIC, which are also sending the same message (through already approved loans). The fact that PLN has achieved i t s present level o f financial viability (with Government help), and developed a plan for a rational corporate structure, would probably not have been accomplished without the Banks active involvement. Yet, further Bank oversight i s required i f some o f the most critical restructuring outcomes are to be achieved. Indeed, the Bank's resumption o f lending to P L N has already encouraged other donors to help that agency meet i t s huge investment needs, and w i l l also contribute to renewed confidence for the private sector's participation in the sector.
(b) Its involvement in the domestic gas sector (via PGN), helping develop a rational gas pricing structure and restructuring PGN, since these reforms could not be achieved without the Bank's technical assistance and support (to implement the TA). Such restructuring i s crucial to pave the way for the private sector to re-enter this subsector, so that gas requirements for power generation and industry can be met.
These two areas o f value added should be assessed in the context o f the enormous importance o f the energy sector to the economy, the critical issues facing the sector, and the fact that prospects for successful outcomes are likely to be significantly enhanced b y the Banks involvement in addressing them. The required analytical work for the energy sector that has already been performed suggests that dialogue undertaken through AAA alone would not provide a level o f Bank attention sufficient to: (a) provide much support to P L N (or PGN) in implementing (and designing) their restructuring programs, particularly in terms of actions intended to restore PLN's financial viability; or (b) be a credible donor partner. For example, JBIC expects the Bank to address pricing and structural issues in the domestic gas sector in such a way that would support i t s proposed South Sumatra-West Java Gas Transmission project. B y the same token, ADB i s expecting the Bank to continue supervising and monitoring the implementation of PLNs corporate and financial restructuring activities, which complement ADB's sectoral restructuring activities.
Some o f the other important value added contributions are:
0
0
0
The Bank w i l l bring i t s international uti l i ty experience to bear in overseeing the introduction and procurement o f PLNs information systems. The Bank w i l l supervise PLNs program to strengthen i t s institutional capacity for environmental and social management (as outlined in the Project's EMP), thus imparting substantial s k i l l s to PLN staff. The technical assistance component relating to the domestic gas sector builds on a solid record o f
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two successful prior projects with PGN, and prepares the way for a new lending operation with PGN that would include equally important TA. The market-sounding of international gas utilities to determine private sector interest in Indonesia’s downstream gas business has revealed a strong preference for Bank participation in the domestic gas sector, as i t would reduce the potential investors’ perception o f political r isks and offer a sound analysis o f policy issues
E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)
1. Economic (see Annex 4): Cost benefit NPV=US$34.4 million; ERR = 14.6 % (see Annex 4)
0 Cost effectiveness 0 Other (specify) Benefits that have been quantified for the economic analysis include: (i) the value o f the forecasted incremental demand growth with and without PLN’s 500kV and 150kV substation expansion program (which i s primarily intended to debottleneck the Java-Bali power system between transmission and subtransmission levels, and between subtransmission and distribution levels); and (ii) the avoided cost o f generation associated with relieving the (400MW) east-west Java power transfer constraint in the 500kV transmission system.
All parameters chosen for the analysis are conservative. Moreover, a number o f significant benefits have not been quantified, notably those associated with: (i) reduced system losses; (ii) improved voltages; (iii) extended transformer lifetimes: and (iv) fewer localized planned and unplanned system outages. In addition, at a significant proportion o f the substations included in PLN’s 150kV substation expansion program, existing transformers w i l l be replaced b y a new one with a larger capacity, rather than simply adding a new transformer. Replaced transformers can be relocated for utilization elsewhere in the system. However, the benefits o f re-utilizing such transformers-net o f relocation and reinstallation costs-have also not been quantified.
The economic viability o f the Project was tested for key project risks, and found to be robust. Details o f the economic analysis are provided in Annex 4.
2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4)
PLN’s Historical Financial Performance. Solvency remains a critical issue for PLN. This i s symptomatic o f the fallout f rom the 1997 Asia financial crisis, and the collapse o f the Rupiah from a stable level o f around Rp 2,450 to US$1 in July 1997, to a low o f Rp 15,500 to US$1 in June 1998. Average tariff fe l l to equivalent o f about US2.6 centskWh in 1998. Since the financial crisis began, PLNs accumulated losses as o f the end o f 2002 amounted to Rp47 tri l l ion (about US$5.3 billion). In 2002, the ROR was also negative (-4%), because average revenue was s t i l l equivalent to about US4.5-5.0 cents/kWh, compared to US7centskWh in 1996. Debt service coverage in 2002 was only 0.6 times (s t i l l substantial improvement over 2001, which was 0.1 times). PLN’s consolidated financial operating results (1998-2002) are provided in Table 1 o f Annex 5, indicating that financial performance for this period was well short o f the minimum rate o f return (ROR) target agreed with the Bank o f 8%.
Recent Gradual Improvements in Financial Position. Although PLNs finances continued to be precarious including in 2002, but as the result o f several actions the year 2002 was a “turn-around“ year
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for PLNs finances, showing gradual improvement during 2002. First, the GO1 took actions in 2001 to convert some o f PLN’s debt to equity, and to reschedule some o f i t s other debts. Namely, the GO1 provided considerable debt relief to P L N by converting (i) unpaid principal o f Rp5.2 trill ion to a new long-term (20 year) loan, and (ii) overdue interest of Rp29 tri l l ion to equity. Second, GO1 injected some Rp 6.7 tri l l ion as the “targeted” cash subsidies at the end o f 2001, covering targeted subsidies for 1999-2001. Third, there was a major asset revaluation in 2002, increasing the value o f PLNs fixed assets b y Rpl 10 trillion. Finally, and more important, PLN’s financial performance continued to improve as a result o f the Government’s implementation o f several tariff increases, with average revenue in the last quarter o f 2002 reaching about US5.3ckWh-more than twice the lowest post-crisis level. As the result o f these actions, PLN’s total equity increased substantially. The debt-equity ratio improved to about 30:70 (compared to 60:40 in 2001). With regard to i t s debts, although the long term debts decreased in 2001, i t increased again in 2002 because o f increase in IPP pay-off obligations. In 2002, agreement on a repayment schedule for arrears to IPPs was reached with al l operating IPPs (PLN’s current liabilities o f about Rp19 tri l l ion at the end o f 2001 included about Rp16 tri l l ion related to arrears due for power purchases from operating IPPs). .
PLN’s Financial Projections. Despite the relative stability o f PLN’s finances over the past year or so, i t s recovery w i l l be fragile and dependent on the continuance o f a stable exchange rate, international fuel prices and the pace o f fuel subsidy removal, PLN’s ability to meet i t s critical investment needs, inflation, and continued economic growth and political stability in Indonesia. PLN’s financial projections (2003-2010) and related assumptions are provided in Tables 2.1 and 2.2 o f Annex 5. The forecasts are based on the recent revaluation o f gross fixed assets and corresponding depreciations, as well as reflecting the recent agreements with IPPs on lower renegotiated purchase prices and on repayment o f arrears. Average tariffs are assumed to increase at 6% per quarter, or by about 30% during 2003--which i s not an unrealistic assumption given that so far all planned tariff increases have been implemented. The forecast also assumes that the GO1 w i l l continue to provide the targeted subsidies, although i t i s assumed that the fuel subsidies w i l l be gradually phased out.
In the context o f these assumptions--and barring any unexpected development--PLN can achieve a positive rate o f return on revalued net fixed assets in 2004. After 2005, i t would not, however, be reasonable to expect PLN to achieve an 8% return before 2010, due to the adverse social impact on poorer consumers and the political difficulty the GO1 w i l l have in approving tariffs beyond US7ckWh. Therefore, i t would be more reasonable to expect a gradual but continued recovery by PLN, based on ROR targets o f say 2.5% in 2004,4% in 2005, 5% in 2006, and 6% in 2007. As such, debt service w i l l be covered 2.5 times in 2003, and improve sharply thereafter. Liquidity w i l l be largely restored with the resolution o f arrears owing to IPPs. And, P L N would thus be able to meet i t s obligations, including for fuel purchases, IPP payments and debt service in a timely fashion. Accordingly a key loan conditionality which was agreed during negotiations i s for the GO1 to support PLN in implementing key elements o f i t s Financial Restructuring Plan, in order that P L N can meet these targets in ROR and in DSCR (Section G).
Nonetheless, and as discussed before, this recovery w i l l be fragile and dependent on several factors, and therefore the resumption of an automatic tariff adjustment mechanism (ATAM) for fuel, power purchases and exchange rate changes becomes an essential step that must be taken b y GOI. The ATAM wi l l be needed to ensure that PLN’s financial recovery i s not disrupted by any unexpected increase in i t s costs that cannot be passed on to consumers. As such, the re-introduction o f the ATAM in 2006 was agreed with GO1 during negotiations as a loan conditionality.
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3. Technical: Physical components o f the Project have been selected based on an extensive review o f PLN's investment program for Java-Bali, as outlined in the Bank Report "Indonesia - Review o f Electricity Supply and Demand on Java-Bali: a Framework for Prioritizing System Investments" o f June 2001 (updated March 2003). These components are incremental investments, being primarily extensions to existing substations and uprating o f existing lines, and well within the capabilities o f PLN's engineering design staff. For the information systems components, PLNs overall IT Strategy was prepared with the assistance o f Bank-financed consultants. Therefore, the technical design of the Project i s considered to be sound.
4. Institutional:
4.1 Executing agencies:
The executing agencies are P L N and PGN.
4.2 Project management:
P L N has a very long history of doing business with the Bank. Since 1970, the Bank has granted 25 loans and 3 credits to PLN with an aggregate amount o f US$5.1 bil l ion equivalent, financing projects o f power generation, transmission, distribution, as well as various lunds o f technical assistance activities such as feasibility and technical studies, institutional development, capacity building, environmental management, financial management, policy studies, and restructuring. As an institution, P L N i s very familiar wi th the Bank's procurement guidelines and standard bidding documents, requirements for financial management, and environmental and social safeguard policies. Similarly, PGN has had two previous loans from the Bank, with the most recent one closed in 1998.
Within PLN, three agencies w i l l have responsibilities for project implementation, they are: the Project Implementation Unit (PIU), P L N Project Java-Bali (PLN Proyek Induk Pembangkit dan Jaringan Jawa Bal i and Nusra), and PLN's Java-Bali Transmission Business Unit (P3B). The PKJ was established on September 18, 2002, by P L N President Director Decree No. 134.K/OlO/DIR/2002 specifically for this Project. I t i s located at P L N head office in Jakarta and responsible to the President Director. Staffing include one project director (full-time), assisted by five activity managers--respectively for procurement, environment/social, supervision and monitoring, engineering and IT--plus an additional at least 20 part-time professional staff.
The PIU's responsibilities include: coordinating with the Bank project team on preparation and subsequent implementation o f the project; coordinating between PLN units and other domestic parties for a smooth preparation and implementation o f the project; preparing implementation plans and schedules, coordinating procurement, design and engineering, environmental/social aspects plus compensation (if any); monitoring project implementation progress; and evaluating the project outputs and outcomes. P L N Project Java-Bali w i l l be responsible for managing the actual physical construction and ensuring achievement o f the designed project targets. P3B w i l l be responsible for operation and maintenance of the facilities completed under the project. I t w i l l also play a role during project implementation by providing assistance in site survey, preparation o f bidding documents, post evaluation, etc.
In addition to the above players, the following agencies are also involved in the project implementation with specific responsibilities for quality control: (i) PLN JE wi l l serve a role o f design review engineer, to review and approval technical documents/drawings to be provided by the contractors/suppliers; (ii) P L N Project Java-Bali w i l l be responsible for construction supervision. To this end, i t s responsibilities would include but not limited to the following: tendering process and init ial contract negotiations; on site
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supervision of construction; monitoring and control o f implementation schedule; monitoring and control o f project costbudget; negotiations and settlement of contractor claims. The Bank w i l l review the bidding documents prior to their issuance.
PGN has established a P I U in January 2003 to implement a South Sumatera to West Java Gas Transmission Project to be financed b y JBIC and the Bank in FY04. I t i s agreed that this P IU (through i t s Deputy Project Coordinator) w i l l also coordinate implementation o f the TA activities under the proposed Project. In addition, PGN w i l l set up some four Implementation Teams in due course in line with the implementation schedule, to serve as counterpart teams o f the respective consultants for various TA activities.
4.3 Procurement issues:
The latest Country Procurement Assessment Report (CPAR) for Indonesia i s Report No. 21823-IND, dated February 10, 2001.
The Project includes two parts, one part i s to be implemented by PLN, and the other part i s to be implemented by PGN. Given that the PGN part i s very small, including only a few TA activities (accounting for less than 3% o f the total project cost) which w i l l a l l be subject to the Bank’s prior-review, the procurement capacity assessment has focused mainly on PLN. Nevertheless, a brief assessment on PGN i s also provided in the Procurement Capacity Assessment Report (PCAR). The assessment was carried out in line with the Bank requirements, and based on the findings o f the preappraisal mission in September 2002 and updated during the appraisal mission in March 2003. A brief summary o f the assessment i s provided below and a detailed discussion i s included in Annex 6(A).
As mentioned in Section 4.2 above, both PLN and PGN have a long history o f doing business with the Bank, and are very familiar with the Bank procurement guidelines and standard bidding documents.
However, as a part o f PLN’s decentralization program, i t s central procurement unit (that was responsible for procurement under the Bank financed projects) was abolished in 2000 and most o f the experienced procurement staff were reassigned to positions not directly related to procurement. Although a position o f VP o f Procurement was created at the Head Office, i t s mandates focused more on policy and guidance; the actual procurement work for projects financed by international institutions has been delegated to PLN’s Project Units at various regions (including the Java-Bali Project Unit who w i l l be responsible for implementation of the Bank financed project). While these regional Project Units are familiar with the GO1 procurement regulations and procedures, they have not had direct experience with ICB so far. T o mitigate any possible r isks associated with this inexperience and to ensure successful implementation o f the project, the following actions have been taken or agreed to be taken:
e P L N has set up at i t s head office a project implementation unit (PIU).
e P L N has set up a Procurement Committee, comprising 9-1 1 members f rom the Java-Bali Project Unit as well as f rom P L N Head Office. At least 3 members have previous experience with ICB, including one senior procurement specialist, who has extensive experience with Bank financed procurement (from preparation o f bidding documents to the entire bidding process) and i s very familiar with the Bank guidelines and procedures, H e i s appointed the Deputy Chairman and w i l l guide the procurement committee through the bidding process.
e PGN has set up a Consultant Selection Committee, to be responsible for selection o f consultants following the Bank guidelines and procedures. The committee w i l l include PGN
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staff who has previous experience with Bank guidelines.
The Bank has provided a procurement training program from April 23-24, 2003. At least 27 staff f rom P L N and PGN attended the training. More training would be provided as necessary during the course o f project implementation.
Although PLN’ s Java-Bali Project Unit may be relatively inexperienced with ICB, the overall risk associated with the procurement i s assessed as average because: (a) a number o f PLN P I U staff have extensive experience with ICB, and the P I U has been playing and w i l l continue to play an active role in the procurement process; (b) procurement under previous Bank financed projects for P L N and PGN has been generally successful; (c) there are r isk mitigation measures in place, as mentioned above; (d) al l goods contracts w i l l be subject to ICB procedures and Bank prior review; and (e) adequate arrangements are in place for implementation o f PGN’s TA component.
4.4 Financial management issues:
Given the relatively small size of PGNs portion o f the loan, comprising only a few TA activities which w i l l a l l be subject to the Banks prior-review, the financial management capacity assessment has focused on P L N as the primary implementing agency. This assessment was carried out in line with Bank requirements and based on the findings of the preappraisal mission in September 2002.
P L N has a long history o f prior experience in managing donor funds for i t s projects. P L N has been the recipient o f numerous financial assistance from both the Bank and other donors (including ADB) in the past, and as such i s familiar with donor requirements with respect to financial management. In addition, over the last decade, P L N has obtained debt funds from the local capital markets through the public issue o f bonds, and by virtue o f this has been subjected to financial reporting and auditing disciplines that are normally applied to publicly-listed companies in Indonesia, and which are relatively more rigorous than those applied to State-owned enterprises. T o some degree, this has had a beneficial impact on PLN’s financial management capacity, as was apparent during the financial management assessment. However, some weaknesses have been observed specifically with respect to the age and limited capability o f the accounting system in use at PLN, and the maintenance of essential financial controls in a decentralized setting nationwide, for instance with respect to controls over customer collections and bank reconciliation and procedures to validate payments. P L N i s expected to be influenced to a degree b y the weak control environment in Indonesia, as determined b y the most recent Country Financial Accountability Assessment Report o f April 2001 completed by the Bank.
Overall, financial management r isks have been assessed as moderate. T o mitigate these risks with respect to this Project, several measures have been proposed (Annex 6B), including the adoption o f quarterly Financial Monitoring Reports, external audits b y leading private sector accounting firms, and strengthened procedures for validating and approving payments to contractors for project activities.
5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and E M P preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.
An Environmental & Social Assessment and Management Plan (EMP) for the Project has been prepared by PLN, with assistance from international environmentalhocial consultants supported by Indonesian counterparts(Annex 12A). The Wor ld Bank Group’s safeguard policies on social and environmental issues were fully considered and addressed during preparation o f the EMP (and during Project preparation). The E M P outlines provisions to ensure compliance with safeguard policies during project implementation, and a draft was discussed at a stakeholder consultation meeting in Surabaya (see E.5.4
Environmental Category: B (Partial Assessment)
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below). Specific policies and procedures applicable to any land acquisition and compensation which may arise during the course of project implementation are addressed in the EMP, but have also been collated in a stand alone Land Acquisition and Resettlement Policy Framework (Annex 12B). The E M P and the Land Acquisition and Resettlement Policy Framework w i l l be publicly-disclosed at the Bank's InfoShop and at PLN's Head Office in Jakarta prior to appraisal.
The EMP indicates that adverse environmental and social impacts o f a l l o f the Project's planned physical subcomponents w i l l be minor, and easily manageable b y means o f good engineering, construction and communication practice. The proposed activities consist o f replacing or uprating the conductors on existing transmission lines and expanding existing substations. For all subprojects as currently envisaged in the Project, no new transmission lines are included; therefore there w i l l be no associated need for land acquisition or resettlement, and no dwellings, enterprises, or buildings w i l l be adversely affected. There are no polychlorinated biphenyls (PCBs) involved, and there w i l l be only limited increases in exposure to electromagnetic fields (EMF). Principal concerns relate to traffic control during rewiring, disposal o f old equipment, coordination o f activities with other departments, and public information and relations with communities where the subcomponents would occur. Therefore, the Project has been rated as a category B project.
5.2 What are the main features of the E M P and are they adequate'?
The EMP covers: subproject screening; procedures and responsibilities for preparation, review, and approval o f Indonesia's environmental impact assessment documentation, namely ANDAL/RKL/RPL and UKLAJPL; institutional responsibilities for monitoring and enforcing implementation o f RKWRPL and UKLAJPL recommendations: requirements and approaches for training programs, and other necessary institutional strengthening. PLN's established procedures for designing, constructing, and maintaining transmission lines are summarized in i t s 1996 General Policy Concerning the Establishment of Overhead Transmission Lines, and this has been incorporated into the Project's EMP. The General Policy addresses public participation, land acquisition, compensation and rehabilitation o f property, and general mitigation measures. This Policy has previously been reviewed and approved b y the World Bank, and provides adequate guidance for activities planned under the Project.
5.3 For Category A and B projects, timeline and status of EA: Date o f receipt of final draft: January 3 1,2003
5.4 H o w have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted?
Environmental issues are those associated with the expansion o f existing substations and uprating o f existing transmission and subtransmission lines. Only one component (the Perak-Ujung line o f 5km in length) involves new transmission towers, and these w i l l be along an existing right-of-way (ROW). Stakeholders in that particular instance include the Surabaya Port Authority and a naval base o f the Indonesian Navy, and stakeholders for other components are landholders along existing rights-of-way.
Consequently, the draft EMP, and specific issues associated with the Perak-Ujung line, were discussed during a public consultation session held in Surabaya in July 2002. The consultation was held at the municipal level, with representatives f rom most of the stakeholder groups: government agencies, landholders, local business, community organizations, and academics. This meeting provides a model for consultations that may be conducted in the future for this (and other) project activities.
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5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?
In September 2002, P L N established a Project Implementation Unit (PIU) to oversee implementation o f the Project, under PLN's Directorate o f Operations. Subcomponents wil l be implemented as field operations, under the respective business units. The P I U w i l l provide overall coordination, monitoring, and review functions. A Project Environmental Team (PET) operates under the PIU. As a subgroup o f this PIU, the PET w i l l oversee and coordinate all aspects o f the E M P and the Land Acquisition and Resettlement Policy Framework. The PET w i l l work under the direction o f the leader o f the PIU, and i t s members include: the Vice President for Environment; a senior environmental specialist f rom the Directorate o f Operations; a member o f the Public Relations Team; a member o f the Committee on Hydro Power and Transmission Environmental Management; and a member o f the Engineering Center.
The PET'S team leader should receive copies o f a l l Project-related progress and other reports that may be required under the AMDAL process, and share them with all members o f the PET. Monitoring w i l l be used to measure successes, challenges, and problems in meeting mitigation targets during implementation o f the Project. In addition to the AMDAL reports, which are to be submitted as required to Indonesian agencies, the PET w i l l prepare, every six months, an environmental summary report. This report would briefly describe: (i) a l i s t o f new subcomponents developed or approved for implementation, and the categorization o f their likely environmental impact; (ii) a summary o f progress o f any AMDAL studies in progress; (iii) summary o f significant mitigation measures, if any, undertaken during the previous six months; (iv) a description o f any significant problems or successes in environmental mitigation during the period; and (v) identification o f any notable environmental or social events anticipated during the coming six months.
6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.
The achievement o f the Project's development objectives w i l l result in social benefits stemming from the improved efficiency, reliability and quality o f electricity supply throughout many parts o f Java and Bal i (Section C3). Under the Second Power Transmission and Distribution Project, P L N established a framework for land acquisition and resettlement in accordance with (1995) World Bank standards. The policy and guidelines are contained in the General Policy Concerning the Establishment of Overhead Transmission Lines, and this has been incorporated into the new stand alone Land Acquisition and Resettlement Policy Framework for the Project (and also the EMP). For al l subprojects as currently envisaged in the Project, there w i l l be no need for land acquisition or resettlement. However, any land acquisition and compensation which might arise for subprojects to be prepared during project implementation w i l l be undertaken in accordance with the Project's Land Acquisition and Resettlement Policy Framework. Land Acquisition and Resettlement Action Plans consistent with this Policy Framework w i l l be submitted b y PLN to the Bank for approval after specific planning information on each subproject becomes available.
6.2 Participatory Approach: How are key stakeholders participating in the project?
A public consultation session on the draft E M P has already been held. During project implementation, subcomponents wi l l be screened by PLNs Project Environmental Team (PET)-part o f the Project Implementation Unit (PIU)-in order to determine their status under Indonesia's AMDAL requirements and World Bank safeguard policies and procedures. For al l subcomponents and activities l ikely to be conducted under the Project, the Indonesia's AMDAL requirements equal or exceed the World Bank Safeguards in rigor, and consultation wi th the public at the local level in the kecematan (sub-districts) where the subcomponent activities w i l l take place, i s an important component o f Indonesia's AMDAL
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process.
6.3 H o w does the project involve consultations or collaboration with NGOs or other c iv i l society organizations ‘1
As noted above, consultation with the public at the local level i s an important component o f the AMDAL process. During the preparation o f the draft EMP for the Project, PLN convened a public consultation in Surabaya with representatives from most o f the stakeholder groups: government agencies, landholders, local business, and community organizations, and academics. During project implementation consultation w i l l be governed by the E M P and Land Acquisition and Resettlement Policy Framework, which indicates that PLN survey teams w i l l provide site-specific maps describing physical impacts and project needs. Prior to any land acquisition, if required, P L N w i l l conduct a public consultation and information campaign to inform the people o f the Project and to absorb their views on impacts, concerns, compensation procedures, resettlement options, and project activities. If necessary, consultation programs can be assisted b y qualified independent entity (Le. university), who can provide informal door-to-door interviews to get reliable information and to establish close communication between the project and affected people.
6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?
The Project w i l l also include a sustained, life-of-project program effort to develop the environmental and social safeguard capabilities o f PLN, i t s strategic business units and successor companies. This Environmental Management Development component w i l l include a combination o f technical assistance, information management, training-of-trainers, and short and long-term training. Tasks w i l l be organized in three Task Clusters, matching the three objectives for the component: (i) Project Monitoring and Support; (ii) AMDAL, International EIA, and Public Consultation Strengthening and Support; and (iii) Environmental Management Systems and Training. This technical assistance component i s defined as part o f the Project scope and w i l l thus be monitored closely by the Bank during project supervision missions.
6.5 H o w w i l l the project monitor performance in terms o f social development outcomes?
As outlined in the Land Acquisition and Resettlement Policy Framework, monitoring for the Project w i l l be under the authority o f the PET. The PET’S team leader should receive copies o f a l l Project-related progress and other reports that may be required under the AMDAL process, and share them with al l members o f the PET. Monitoring w i l l be used to measure successes, challenges, and problems in meeting mitigation targets during implementation o f the Project.
In addition to the AMDAL reports, which are to be submitted as required to Indonesian agencies, the PET w i l l prepare, every six months, an environmental summary report. This report would briefly describe: (i) a l i s t o f new subcomponents developed or approved for implementation, and the categorization o f their l ikely environmental impact; (ii) a summary o f progress o f any AMDAL studies in progress; (iii) summary o f significant mitigation measures, if any, undertaken during the previous six months, including issues relating to land acquisition and compensation; (iv) a description o f any significant problems or successes in environmental mitigation during the period; and (v) identification o f any notable environmental or social events anticipated during the coming six months.
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7. Safeguard Policies:
Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)*
0 Yes No 0 Yes NO
7.2 Describe provisions made b y the project to ensure compliance with applicable safeguard policies.
0 0
For Environmental Assessment, see Part E, Section 5. For Involuntary Resettlement, see Part E, Section 6.
F. Sustainability and Risks 1. Sustainability:
Key issues important to the sustainability o f the Project are intended to be addressed through conditionalities under the loan, in particular those requiring the Government to promulgate key implementing regulations under the Electricity Law and to support the restoration of PLN's financial viability, as well as those requiring P L N to unbundle i t s operations on Java-Bali in preparation for the introduction o f a competitive electricity market.
In addition, the sustainability o f the Project i s dependent on the mitigation o f the critical r isks below, and also on the Government's commitment to: agree on a policy for the secure supply o f natural gas and coal to PLN; and relieve the pressure on P L N to connect new consumers until new generation capacity can be commissioned on Java-Bali. Further, a key issue w i l l be the capacity o f the new regulatory agency-the Electricity Market Supervisory Agency-to put in place a clear set o f market rules and industry codes allowing the introduction o f a competitive electricity market on Java-Bali that i s effective, efficient, and attracts transparent private sector participation.
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2. Critical Risks (reflecting the failure o f ciitical assumptions found in the fourth column o f Annex 1):
Risk Rating
S
M
M
M
N
M
M
S , M (Modest Risk),
Risk From Outputs to Objective Insufficient new power generation comes onstream in the Java-Bali system to restore adequate reserve margin
Inadequate performance o f existing generation plant in the Java-Bali system (particularly Suralaya) Power tariffs not increased sufficiently to allow P L N to make a reasonable profit High political/public/staff resistance to restructuring o f PLN
Insufficient funds available for complementary Java-Bali power delivery system debottlenecking From Components to Outputs Insufficient counterpart funds available
Risk Mitigation Measure
JBIC has already committed to implement new (and partially-completed) generation projects; P L N i s also planning to add 600 MW new generation capacity. P L N i s implementing an aggressive IRP program Indonesia Power have agreed to undertake a feasibility study for rehabilitating Suralaya Units 1-4 DPR has committed to increase power tariffs to 7clkWh by 2005 A change management initiative and public awareness campaign have already been prepared for PLN by Bank-financed consultants ADB has initiated another project with P L N to cover those Java-Bali debottleneckmg investments not financed under the current loan
Government has committed to power tariff increases sufficient to cover PLN's costs Physical component price estimates based on past experience (with contingencies included), and IT component scoped by Bank-financed international consultants
N(Negligib1e or Low Risk)
Cost o f transmission and ERP investments within budget
Overall Risk Rating
Risk Rating - H (High Risk), S (Substantial Ris
3. Possible Controversial Aspects:
None
G. Main Loan Conditions 1. Effectiveness Condition
(a) PGN:
that the PGN Subsidiary Loan Agreement has been executed on behalf o f the Borrower and
(b) that the P L N Subsidiary Loan Agreement has been executed on behalf o f the Borrower and PLN;
(c) Financial Monitoring Reports under the Project;
that PLN has created new accounting codes, acceptable to the Bank, for purposes o f generating
(d) acceptable to the Bank;
that staff of PGN have completed accounting and Financial Monitoring Report training,
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(e) acceptable to the Bank;
that staff o f P L N have completed accounting and Financial Monitoring Report training,
( f ) payments under PLN part of the Project; and
that PLN has adopted procedures, acceptable to the Bank, for verification and authorization of
(g) activity plan.
that PLN has issued instructions for Project Implementation to be included in PLNs annual audit
[Loan Agreement, Article VI, Section 6.01(a-g)]
2. Other [classify according to covenant types used in the Legal Agreements.]
Agreements reached with the Borrower during negotiations
The Borrower shall, not later than January 1, 2006, establish and thereafter maintain an automatic power tariff adjustment mechanism, acceptable to the Bank, applicable to regulated tariffs [Loan Agreement, Section 3.041. The Borrower shall, b y March 31,2005, exchange views with the Bank on the Borrower’s broad policy framework relating to the energy sector [Loan Agreement, Section 3.051.
0
Agreements reached with PLN during negotiations
0 P L N shall obtain the Banks prior approval for each proposed substation extension [PLN Project Agreement, Schedule 2 (4)].
Corporate Restructuring 0 PLN w i l l prepare and furnish to the Bank, not later than December 31, 2003, for the Bank’s review
and comment, a detailed time-bound action plan (the Plan) for the business reorganization and corporate restructuring o f PLN and, thereafter, carry out the Plan taking into account the Bank’s comments thereon, if any [PLN Project Agreement, Schedule 2 (5)]. PLN w i l l complete, not later than December 31, 2006, the restructuring o f PLN’s existing Java-Bali generation subsidiaries, Indonesia Power and PJB, into four or more new generation corporate subsidiaries, and the separation o f PLN’s transmission and distribution business units for Java-Bali into corporate subsidiaries, in accordance with the Plan [PLN Project Agreement, Schedule 2 (5a & b)l*
0 P L N w i l l establish, not later than September 30, 2007, independent successor generation, transmission and distribution companies f rom PLN’s operations in Java-Bali, in accordance with the Plan [PLN Project Agreement, Schedule 2 (5c)l.
0
Financial Performance P L N shall take a l l measures necessary so that PLN and i t s subsidiaries achieve a rate o f return on revalued net f ixed assets o f at least 2.5% in 2004,4% in 2005, 5% in 2006, and 6% in 2007 and thereafter [PLN Project Agreement, Section 4.03 (a)]. P L N shall undertake not to incur any additional debt without the agreement o f the Bank unless a reasonable forecast o f PLN’s internal sources o f funds for each year during the term o f debt to be incurred shall be at least 1.5 times i t s projected consolidated debt service requirements [PLN Project Agreement, Section 4.04 (a)]. P L N shall, at least every three years, commencing for i t s fiscal year ending December 31, 2005,
0
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revalue i t s f ixed assets in accordance with sound and consistent methods o f valuation, acceptable to the Bank [PLN Project Agreement, Section 4.051.
Environment and Social Asuects e PLN shall undertake project implementation in accordance with the Project's Environmental
Management Plan, and the Land Acquisition and Resettlement Policy Framework, in a manner satisfactory to the Bank [PLN Project Agreement, Schedule 2 (3)].
Monitoring, Review and Reporting e P L N shall, b y October 15 in each year, commencing October 15,2004, and until completion o f the
Project, furnish to the Bank for comments PLNs annual power development and investment program, and, shall, thereafter, carry out such program taking into account the comments of the Bank, if any [PLN Project Agreement, Schedule 2 (6)]. PLN shall, by December 1 in each year, commencing December 1,2003, and until completion o f the Project, furnish to the Bank for comments PLNs ten-year financing plan and forecasts, and shall, thereafter, revise such plans and forecasts taking into account the Banks comments, i f any [PLN Project Agreement, Schedule 2 (7)].
e
P L N shall:
ongoing basis, in accordance with the indicators set forth in Schedule 3 o f the P L N Project Agreement, the carrying out o f Part A of the Project and the achievement o f the objectives thereof [PLN Project Agreement, Schedule 2, 8(a)];
(a) maintain policies and procedures adequate to enable i t to monitor and evaluate on an
(b) prepare, under terms o f reference satisfactory to the Bank, and furnish to the Bank, not later than January 15, April 15, July 15, and October 15 of each year, commencing January 15,2004, and until completion o f the Project, quarterly progress reports on the implementation o f Part A part o f the Project [PLN Project Agreement, Schedule 2, 8 (b)] ;
(c) prepare, under terms o f reference satisfactory to the Bank, and furnish to the Bank, on or about December 3 1 or each year, commencing December 3 1, 2004, a report integrating the results o f the monitoring and evaluation activities performed pursuant to paragraph (a) o f this Section, on the progress achieved in the carrying out o f PLN part of the Project during the period preceding the date o f said report and setting out the measures recommended to ensure the efficient carrying out o f P L N part o f the Project and the achievement o f the objectives thereof during the period following such date [PLN Project Agreement, Schedule 2, 8(c)]; and
(d) review with the Bank, b y March 31 in each year, commencing March 31, 2005, or such later date as the Bank shall request, the report referred to in paragraph (c) above, and thereafter, take al l measures required to ensure the efficient completion o f Part A o f the Project and the achievement o f the objectives thereof, based on the conclusions and recommendations o f the said report and the Bank's views on the matter [PLN Project Agreement, Schedule 2 (8 d)].
e PLN shall prepare, on the basis of guidelines acceptable to the Bank, and furnish to the Bank not later than six (6) months after the Closing Date, or such later date as may be agreed, for this purpose between the Bank and PLN, a plan designed to ensure the continued achievement o f the Project's objectives; and (ii) afford the Bank a reasonable opportunity to exchange views with PLN on said plan [(PLN Project Agreement, Section 2.03 (b)]. PLN shall maintain until completion o f the Project, the P L N Project Implementation Unit, responsible for the coordination o f the implementation o f PLN part o f the Project, headed by a qualified and experienced officer, said Unit to be provided at a l l times with adequate funds and other
e
-31 -
resources and staffed b y qualified and experienced personnel in adequate numbers as shall be necessary to accomplish i t s objectives [(PLN Project Agreement, Schedule 2 (l)], PLN shall maintain until completion of the Project, the P L N Project Java-Bali Unit, responsible for the monitoring of the implementation of P L N part of the Project, headed b y a qualified and experienced officer, said Unit to be provided at a l l times with adequate funds and other resources and staffed b y qualified and experienced personnel in adequate numbers as shall be necessary to accomplish i t s objectives [(PLN Project Agreement, Schedule 2 (2)].
0
AccountsIAudits P L N shall appoint independent auditors-acceptable to the Bank-and make audit reports available to the Bank within six months after the close o f each fiscal year [(PLN Project Agreement, Section 4.01 (b)].
Agreements reached with PGN during negotiations
0 PGN shall, by December 31 in each year, commencing December 31,2003, and until completion o f the Project, prepare and furnish to the Bank for comments, the proposed annual training program and timetable for the forthcoming year and, thereafter, taking into account the Banks comments, carry out such training program [PGN Project Agreement, Schedule 2 (l)].
Monitoring. Review and Reporting 0 PGN shall: (i) carry out satisfactory procedures for monitoring the progress o f the Project [(PGN
Project Agreement, Schedule 2, 2 (a)]; and (ii) submit to the Bank quarterly progress reports ten days after the end o f each calendar quarter, and annual integrated reports on or about December 3 1 o f each year and review the annual integrated reports with the Bank by March 3 1, each year [(PGN Project Agreement, Schedule 2,2 (b, c, d)].
AccountsIAudits PGN shall use independent auditors-acceptable to the Bank-and make audit reports available to the Bank within six months after the close o f each fiscal year [(PGN Project Agreement, Section 4.01 @)I.
H. Readiness for Implementation 1. a) The engineering design documents for the first year's activities are complete and ready for the
[7 1. b) Not applicable. start o f project implementation.
2. The procurement documents for the first year's activities are complete and ready for the start o f project implementation.
quality. 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory
c] 4. The following items are laclung and are discussed under loan conditions (Section G):
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I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies.
0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.
-7, &&+ - M. Farhandi Mohammad Farhandi Andrew Steer Team Leader Sector Director Country Director
- 3 3 -
Annex 1: Project Design Summary INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
. . I- ".
Hierarchy of ObJoctkei kctor-related CAS Goal: lustain economic recovery and iromote broad-based growth by: i) addressing infrastructure ottlenecks; (ii) restructuring ector entities; (iii) mobilizing o-financing for infrastructure leeds, emphasizing equity nvestments; and (iv) phasing out lrice subsidies and distortions
'roject Development 3bjective: To improve the performance of he power sector on Java-Bali by: a) supporting PLN to implement ts financial and corporate estructuring program and to itrengthen key elements of the 'ava-Bali electricity supply iystem; and (b) assisting PGN to repare the groundwork for estructuring i ts operations, given he importance of natural gas for )ewer generation
kctor Indicators: 0 Electrification ratio gains 0 Return of private sector
investment in power sector 0 Progress on restructuring
Pertamina, PLN, PGN 0 Rationalized Pricing
Structure.
htcome I impact idicators: 0 Establishment of PLN's
independent generation, distribution and transmission successor companies on Java-Bali
0 Improvements in PLNs rate of return.
0 Natural Gas Pricing and PGNs restructuring and partial privatization studies completed
0 Increased dispatch capability of generation units in East Java
0 Reduced substation loadings at key Java-Bali 500kV and 150kV substations
0 Improved voltages at key 150kV substations in southeastem Java
0 Ih4FLOIS 0 Bank Public Expenditure
Reviews and Sector Reports 0 CAS discussions and reviews 0 ADBNSAID sector reports
'roject reports:
0 Quarterly progress reports 0 Supervision mission reports 0 Evaluation mission reports 0 Consultants' interim and
final reports
from Goal to Bank Mission) 0 Political turmoil, regional
demands for independence, increase in nationalist sentiments, and intemationakegional impacts all at manageable levels
0 Administrative capacity and government leadership sufficient
0 Energy sector reforms and investments ease a major bottleneck to economic growth, thereby facilitating poverty alleviation
:from Objective to Goal)
0 Public awareness of need for energy product price rationalization improved
0 Fuel and power prices fully ' rationalized and increased to allow removal of energy subsidies
rationalized 0 PLN financing gap met by
intemational community
0 IPP program fully
i
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Component: 1. New 500kV Java-Bali power delivery investment components operating to appropriate degree
2. New 150kV Java-Bali power delivery investment components operating to appropriate degree
3. P L N business processes improved
4. Contracts relating to establishment o f PLNs Java-Bali subsidiaries prepared and capacity for environmental and social management improved
5. Gas pricing study completed and PGN prepared for restructuring, IPO and strategic partner
htput Indicators:
0 Implementation milestones and commissioning dates o f 500kV substation expansions
0 Implementation milestones and commissioning dates of 150kV substation expansions and uprated lines
0 Implementation milestones and commission date o f initial ERP rollout
0 Progress on P L N TA, and institutional strengthening targets, including unbundling PLNs functions
0 Progress on T A studies for PGN
'reject reports:
0 PLN PIU project management reports
0 PLN PIU project management reports
0 PLN I T reports
0 PLN TA-funded consultants reports and PET reports
0 TA-funded consultants reports
from Outputs to Objective)
0 Low political/public/staff resistance to restructuring o f P L N
0 Sufficient new power generation comes onstream in the Java-Bali system to restore adequate reserve margin
sufficiently to allow PLN to make a reasonable profit
0 Sufficient funds available for complementary Java-Bali power delivery system debottlenecking
0 Power tariffs increased
0 Adequate performance o f existing generation plant in the Java-Bali system (particularly Suralaya)
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iub-components: . 500kV Transmission System
. 150kV Transmission System
. ERPSystem
. P L N Technical Assistance
. PGN Technical Assistance
nputs: (budget for each :omponent)
US$69.8 rmllion
US$90.4 million
US$26.0 million
US$4.5 mill ion US$6.0 mill ion
Data Collection Strategy - Voject reports:
0 PIU progress reports
0 PLN progress and audit reports
0 PGN progress and audit
0 Supervision reports reports
Critical Assumptions - G m Components to )utputs) 0 Sufficient counterpart funds
available 0 Cost o f transmission and
ERP investments within budget
0 Effective PIUs in P L N and PGN
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Annex 2: Detailed Project Description INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Introduction: the Java-Bali Electric Power System
The Java-Bali transmission system comprises a 500kV backbone overlaying a regional 150kV subtransmission network. (The 500kV system i s shown schematically on the geographical map at the back o f this PAD). The 500kV network i s a relatively new system, constructed in the 1980s and 1990s predominantly comprising a two circuit line running from the east to the west o f northern Java. The 500kV network runs in parallel with the 150kV network. I t i s largely radial in nature, and w i l l remain this way until a southern 500kV transmission route-completing a 500kV double circuit transmission loop around most of Java-is fully commissioned. Major generation capacity i s mostly installed close to the northern section o f the 500kV system.
Northern 500 kV Transmission Route and Key Generation Plants. Starting f rom the power generation complex o f Paiton in East Java-comprising 800MW and 2,450MW o f P L N and IPP-owned coal-fired capacity respectively-and passing Grati operdcombined cycle generating plant (760MW), the northern section o f the 500kV transmission system runs northwards to Krian substation, west o f the city of Surabaya, where the line interconnects with two circuits f rom the Gresik gas-fired opedcombined cycle complex (2,240MW). Two circuits then run westwards to Semarang where at Ungaran substation, a single circuit line commissioned in December 2000 runs south to the new Klaten (or Pedan) substation, near the city o f Yogyakarta. From Ungaran, two single circuit lines run westwards to Cirebon and then to the city o f Bandung. At Cirebon, one o f the circuits loops into the substation o f Mandirancan but the other circuit bypasses it. From Bandung a double circuit line runs to the hydro power station o f Saguling (700MW). Here one double circuit l ine heads towards the hydro power station at Cirata (1,008MW) and then feeds the areas east of Jakarta via a substation at Cibatu, before connecting to the Muara Tawar operdcombined cycle plant (900MW). From Saguling, a second double circuit line runs to Cibinong to supply substations at Bekasi, Gandul and Kembangan which supply areas in and around Jakarta. Three circuits run to the coal-fired power station at Suralaya (3,400MW) and the substation at Cilegon, f rom Gandul and Cibinong. Other key generation plants connected into the northern section o f the 500kV loop include: the gadoil-fired complexes at Muara Karang (1,210MW) and Tanjung Priok (1,430MW) near Jakarta; and Tambaklorok (1,330MW) oil-fired complex near Semarang.
Southern 500kV Transmission Route. A new southern section o f the 500kV transmission loop system i s under construction to connect the east and west ends of Java via the south coast. This connection w i l l firm up the capacity for bulk power transfer between the two ends o f Java and w i l l also support the presently heavily loaded parts o f the 150kV network supplying demand along the south coast. The southern section o f the 500kV loop runs from the Paiton complex through a proposed new substation site at Kediri, to the already-commissioned Klaten substation, where i t connects with the existing 500kV line coming from Ungaran substation on the northern section o f the loop. From Klaten, the southern section continues west to Depok III-a proposed new substation south o f Jakarta-via a proposed new substation at Tasikmalaya. The transmission segments f rom Kedir i to Klaten, and from Paiton to Kediri, are completed, and were both financed by the Bank under the Second Power Transmission and Distribution Project (Loan 3978-IND). However, only one circuit of the Paiton-Kediri-Klaten line i s currently able to be energized at 500kV, because the Kediri substation i s not yet commissioned. The line f rom Klaten to Depok via Tasikmalaya i s currently under construction with financing from JBIC. L i ke Kediri, the substations at Kediri, Tasikmalaya and Depok are not yet complete. Kedir i and Tasikmalaya substations are financed under the KED export-credit package, and have been subjected to major delays because the Government requested P L N to renegotiate the associated contracts. Depok substation i s to be financed
- 37 -
by JBIC. However, the substation location has not yet been finalized, as associated issues o f land acquisition have not yet been resolved. At the time o f Board presentation o f the Second Power Transmission and Distribution Project (January 1996), i t was expected that the entire southern section of the 500kV loop would be completed in the year 2000. Current estimates would suggest that a more realistic target i s now late 2005 at the earliest.
150kV Subtransmission System. The 150 kV network i s generally older than the 500kV, much more extensive and significantly meshed in nature. In some areas, i t overlays a 70kV network that i s gradually being replaced. Some parts o f the 150kV network experience low voltages, although on the south coast the network voltage wi l l be raised upon completion o f the 500kV southern route. The West Java PLN and P P geothermal power plants (Le., Darajat, Kamojang, Wayang Windu and Salak, totaling 705MW), and the Dieng geothermal plant (60MW) in Central Java, are all connected directly into the 150kV system. On Bali, the transmission system comprises a 150kV meshed network that i s connected to the 150kV network in East Java via two undersea cable circuits with a combined capacity o f 220MW. P L N has preliminary proposals to eventually connect Bal i to Java at 500kV. Installed generating capacity on Bal i i s 335MW.
PLN Power Svstem Strenutheninu Components By Component:
Project Component 1 - US$69.79 million
1). 500kV Transmission System
Background. PLN w i l l continue to be unable to fully dispatch existing generation capacity on Java-Bali in an adequately secure manner-including the 1,320MW Tanjung Jati B plant, once commissioned-until all elements o f the southern section o f the 500kV transmission loop are eventually completed. However, in the interim, P L N are planning to provide some relief o f the remaining constraints in the bulk transmission system in two stages. The f i r s t stage involves expediting the energization o f the second circuit f rom Paiton-Kediri-Klaten, by relocating the two 5OOMVA transformers at the completed (but isolated) Surabaya-Selatan 500kV substation to Kedir i and Klaten substations respectively. However, this means that replacement transformers at Surabaya-Selatan w i l l need to be installed by the time the new Grati-Surabaya-Selatan 500kV transmission line-required to energize the Surabaya Selatan substation-is commissioned. Upon commissioning o f the relocated Kedir i and Klaten transformers, at least an estimated 200MW more power w i l l be able to be dispatched from the constrained Paiton/GresiWGrati generation complexes. (Consequently, the load at Kedir i substation i s expected to immediately reach 80% loading, meaning that a second transformer w i l l be required within a short period). In addition, these actions w i l l also relieve the highly loaded Kr ian 500kV substation near Surabaya, and dramatically improve voltage levels in southeast Java (which in many areas fall below acceptable levels at peak, and even off-peak, times). Nevertheless, the entire constraint on the PaitonlGresiWGrati complexes cannot be relieved due to stability l i m i t s in the bulk transmission system between Ungaran and Mandirancan. Hence, the second stage o f relieving the transmission constraints involves installing a second SOOMVA transformer at the Mandirancan 500kV substation near Cirebon, and making associated network reconfigurations. In any event, a second transformer at Mandirancan i s required to provide more secure supply to Cirebon, because the city i s currently only supplied by a single transformer, and a failure o f this transformer would require extensive load shedding in the Cirebon area.
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Subcomponent Description. To support PLN’s initiatives to (a) achieve greater utilization o f existing generation capacity on Java-Bali, (b) improve the security o f supply to the cities o f Cirebon and Surabaya, (c) debottleneck local interconnections between bulk transmission and subtransmission levels; and (d) replenish essential stocks o f associated equipment, the Project w i l l provide financing toward the following subcomponents.
Subcomponent 1. I - 500kV Substation Expansion. This subcomponent comprises: (i) installing an additional 5OOMVA 500/150kV transformer, with associated circuit breakers, transformer bay and c iv i l construction, at Mandirancan substation in West Java; (ii) installing an additional 5OOMVA 500/150kV transformer, wi th associated circuit breakers, transformer bay and c iv i l construction, at New Kedir i substation in East Java; (iii) installing two SOOMVA 500/150kV transformers at Surabaya Selatan substation in East Java; and (iv) procuring two additional 166MVA 5001150kV single phase transformers. Subcomponent 1.2 - 500kV Circuit Breakers. This subcomponent comprises installing three SF6 500kV circuit breakers at Bandung Selatan, Ungaran and Gandul substations.
0
Project Component 2 - US$90.39 million
2). 150kV Transmission System
Background. PLN and IPP geothermal units operating at Darajat, Kamojang and Wayang Windu in West Java are currently connected into the Java-Bali grid via a 150kV subtransmission line running between Bandung Selatan and Ciamis substations. To provide a level o f security commensurate with the existing generation capacity evacuated through this part o f the West Java subtransmission network, P L N needs to uprate this line, and to add a second circuit connecting the Wayang Windu plant into the local subtransmission grid. (The proposed design i s sufficient to allow for later expansion o f the existing plants, as i s provided under the PPAs for the IPP plants).
While the most critical issues facing P L N in operating the Java-Bali system over the medium term are the need for adding new-or securing the availability o f existing-generation capacity, and completing the bulk transmission system, resolving these mismatches in the overall supply/demand balance w i l l not relieve all the short or medium term bottlenecks experienced in localized parts o f the power delivery system. Apart f rom the above-mentioned requirements at both transmission and subtransmission level, even under PLN’s Limited Demand Forecast there are numerous requirements for small-scale 150kV, 70kV and 20kV subtransmission investments, due to existing and future localized overloading and reduced voltage levels. Some subprojects are already covered by renegotiated KEIII contracts, and others under ADB’s Power Transmission Improvement Sector Project. Moreover, since many other subprojects require 100% local content, PLN intends to finance these investments out o f i t s own budget. Nevertheless, even after talung account o f these investments, a large number o f existing 150/70kV and 150/20 kV transformers at substations throughout Java and Bal i s t i l l require replacement with larger units. Additionally, new transformers need to be added to enhance the capacities o f many substations and enable the increasing load demands to be accommodated. Many o f these substations already do not have an adequate level of security to be able to maintain supply during an outage event. Other substations have dual transformers, but these could overload if one o f the transformers were not available. Associated with this need to replace transformers and extend substations i s the need to replace numerous 150 kV circuit breakers, also due to overloading. This circuit breaker replacement program i s also important because the safety o f this equipment cannot be assured i f i t has insufficient fault rating, placing staff and the public at r i s k o f injury, and i t can increase the risk o f lost supply to consumers.
In addition to this general program o f transformer replacement and substation expansion, the 5km 70kV transmission line f rom Perak to Ujung needs to be uprated to 150kV, in order to provide greater security
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o f supply to the city o f Surabaya. This subproject w i l l complement the planned works associated with the new Surabaya Selatan 500kV substation.
Subcomponent Description. To support PLN’s initiatives to (a) provide a level o f security commensurate wi th the existing and potential PLN and IPP geothermal generation capacity evacuated through the West Java 150kV subtransmission network near Bandung, (b) improve security of supply to Surabaya, and (c) relieve multiple localized overloading and voltage problems at subtransmission level, via PLN’s 150/70kV and 150/20kV transformer replacement and substation expansion program, the Project w i l l provide financing toward the following subcomponents.
Subcomponent 2.1 - 150kV Subtransmission Lines. This subcomponent comprises: (i) uprating the voltage from 70kV to 150kV o f a 5km l ine f rom Perak to Ujung in East Java including the provision o f conductors, insulators and fitting, and related accessories; (ii) uprating the capacity of a 126km 150kV line f rom Bandung Selatan to Ciamis via Kamojang and Darajat in West Java including the provision o f conductors, insulators and fittings, and related accessories; and (iii) making a double phi second circuit for the 20km 150kV line for Wayang Windu incomer and connected to the Bandung Selatan-Kamoj ang subtransmission line, including the provision of conductors, insulators and fittings, and related accessories. Subcomponent 2.2 - l5OkV Substation Extensions. This subcomponent comprises: (i) installing a 100MVA 150/70kV interbus transformers at each o f Cibinong and Manisrejo/Banaran substations, or similar subprojects; and (ii) various subprojects throughout Java and Bal i to be determined during project implementation, involving the addition or replacement o f 30MVA or 6 0 M V A 150/20kV transformers, wi th associated switchgear, c iv i l construction and transformer bay(s) where required. Subcomponent 2.3 - 150kV Circuit Breakers. This subcomponent comprises replacing 28 150kV circuit breakers throughout the Java-Bali 150kV subtransmission network.
Special Requirements. The short planning horizon for subprojects under subcomponent 2.2 associated with PLN’s transformer replacement and substation expansion program could mean that, by the time financing i s secured, PLN might have already taken measures to relieve the most urgent bottlenecks, and hence different candidate projects would have become the new highest priority. (If existing transformers that are replaced have adequate l i fe remaining, then these can be transported for use elsewhere in the system). A small number o f substations have a low utilization and i t may be possible for some transformers f rom these to be relocated to places with greater need. P L N w i l l seek the Bank’s no objection prior to the implementation o f each subproject, and provide evidence that the implementation i s consistent with the Project’s objectives, Environmental Management Plan, Land Acquisition and Resettlement Policy Framework, and can be completed within the Project implementation period.
PLN Enterprise Resource Plannina Component
Project Component 3 - US$26.00 million
3). Information Technology (Enterprise Resource Planning System)
Background. Under the Second Power Transmission and Distribution (PTDII) Project (Ln. 3978-IND), the Bank provided technical assistance (TA) support to P L N for corporate and financial restructuring, in line with the Government’s Power Sector Restructuring Policy o f August 1998. As part of a much broader scope, that TA assignment was intended to provide recommendations on the improvements in PLN’s information technology (IT) capabilities needed to support the company’s overall restructuring program. As a result o f the work performed through that TA, PLN finalized updating i t s IT Strategy in August 2002 to be consistent wi th i t s ongoing restructuring program (in the context o f recent sector
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developments, such as the passage o f the 2002 Electricity Law), as well as to current technology. In addition, more detailed recommendations on implementing this Strategy have been produced. Key aspects o f implementing PLN’s IT Strategy involve roll ing out a Customer Information Systems (CIS) at distribution units, intended to be financed through a joint venture or outsourcing arrangement, as well as an organization-wide Enterprise Resource Planning (ERP) system.
Subcomponent Description. To support the implementation o f PLN’s financial and corporate restructuring program, the Project w i l l include partial financing for PLN’s improved information systems capabilities as follows. e Subcomponent 3 - Enterprise Resource Planning (ERP) System. This subcomponent comprises
implementing a pilot rollout o f the company’s Enterprise Resource Planning (ERP) system. The focus of this pilot w i l l be Core Financials, Materials Management, Human Resources Management and Asset Management in P L N Pusat and three representative subsidiary business units. P L N has already engaged consultants to prepare technical requirements and bid documents using Bank standard documents, and the scope of work for this PLN-financed activity has been agreed to with the Bank. Activities under this component that are undertaken after appraisal completion (using BRD procurement procedures), w i l l be eligible for retroactive financing under the 1oan.in at least one o f PLN’s business units, involving ERP software licenses along with related hardware (i.e., servers and local/wide area networks) and consulting services.
PLN Restructurinq and Institutional Strenqthenina ComDonent
Project Component 4 - US$4.50 million
4). PLN Technical Assistance
Background. a) PLN‘s Corporate and Financial Restructuring. A major Bank-funded technical assistance (TA) contract for supporting P L N to design and begin implementing i t s financial and corporate restructuring program commenced in M a y 2001, and the bulk o f this work was completed in late 2002 (with the final report presented in March 2003). Recommendations on corporate restructuring have provided the basic plan for the new organizational design, j ob descriptions, business procedures and performance indicators across PLN’s head office, as well as i t s generation, transmission and distribution subsidiaries and business units. However, the passage o f the new Law has required that some of the recommendations of the TA be reviewed for consistency, and once DGEEU’s new sectoral blueprint for implementing the Electricity L a w has been finalized, PLN w i l l need to issue i t s own correspondingly updated Plan for corporate restructuring, and then proceed with i t s implementation.
b) Environmental Capacity Building. Under past Bank loans, substantial institutional strengthening support has been provided to PLN to build i t s capacity for environmental management and assessment. However, partly in response to the Government’s regional autonomy policy, most o f this capacity was disbanded and devolved to regional business units and subsidiaries. Nevertheless, as indicated in the Project’s Environmental Management Plan (EMP), P L N recognizes that intemational best practice for power utilities i s to retain a central corporate role for: policy and standard setting, coordination, quality control, monitoring, knowledge management, training and reporting. Hence, PLN intends to re-establish such a role at corporate level, relating-at a minimum-to core environment, health and safety activities, but potentially extending to broader activities such as community issues and sustainability.
c) Upper Cisokan Feasibility Study. The development of the Upper Cisokan Pumped Storage plant i s part o f PLN’s least cost expansion plan for providing peaking capacity to the interconnected Java-Bali system
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in the 2008-2010 timeframe. There are both static and dynamic benefits associated with the operation o f a pumped storage plant including peaking and hot reserve capacity, black start capability and frequency control, as well as improved dynamic system response to disturbances. A feasibility study for the project, including the preliminary environmental impact assessment (EIA), was finalized in 1995. The detailed design including a Social Acceptance Assessment (SAA) for the project was finalized in March 2002. However, P L N needs to carry out a supplementary study to enhance the detailed design and review o f cost estimates, in order to proceed with the implementation program o f the project effectively and efficiently.
Subcomponent Description. To support P L N to (a) finalize and implement i t s corporate restructuring plan, and implement the institutional aspects o f i t s Environmental Management Plan, and (b) proceed further with preparation for the Upper Cisokan Pumped Storage plant, the Project w i l l include the following subcomponents.
e Subcomponent 4. I - Corporate Restructuring and EMP Implementation. This subcomponent comprises TA for: (i) finalizing the Plan for the business reorganization and corporate restructuring o f PLN; (ii) facilitating the implementation o f that Plan; and (iii) strengthening PLN’s core capacity for environmental and social management. Consultancy services for items (i) and (iii) wi l l be financed b y PLN. Subcomponent 4.2 - Upper Cisokan Pumped Storage Plant Review. This subcomponent comprises TA to assist PLN in reviewing the existing design o f slope stability at the Upper Cisokan reservoir, topographical and geological surveys, access road detail design, 500kV T/L study, test grouting, as well as environmental assessment and resettlement action plans that have been undertaken for the project. I t also includes a review o f the cost estimates o f the project as determined in the feasibility study and detailed design.
PGN Restructurinrr and Institutional Strenrrtheninn ComDonent
Project Component 5 - US$S.OO million
5). PGN Technical Assistance
Background. The new Oil and Gas Law clarifies the future role and structure o f the State Gas Company (PGN). However, based on studies conducted under Bank financing and TAs under previous Bank operations, PGN has already created three regional strategic business units for gas distribution, and established a transmission subsidiary for the Grissik-Duri pipeline in Sumatra, which i s now proposed to be partially privatized with PGN holding 60% o f the equity. Notwithstanding these positive steps, a key sector issue remains the need for a rationalized gas pricing structure, the lack o f which w i l l continue to act as a major impediment to the expansion o f the domestic natural gas industry in Indonesia. Furthermore, PGN intends taking i t s restructuring deeper, by fully unbundling i t s transmission and distribution functions, creating an appropriate corporate structure, preparing for an IPO o f part o f i t s distribution operations, and establishing the framework for attracting the private sector/strategic partner to help finance PGN’s huge future investment needs in the gas sector. T o meet the future challenges which w i l l result f rom a substantial increase in utilization o f natural gas in the country, PGN i s also planning to strengthen i t s capacity in financial, technical, commercial, economic and environmental areas, by undertaking related training needs.
Subcomponent Description. T o support PGN’s restructuring and institutional strengthening program, the Project w i l l include a number o f technical assistance components for PGN as follows. e Subcomponent 5.1 - Gas Utilization and Pricing. This subcomponent comprises TA for developing
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a rationalized gas pricing policy. Subcomponent 5.2 - PGN Corporate Restructuring, Gas Distribution IPO, and Gas Transmission Strategic Partner. This subcomponent comprises TA for: (i) supporting PGN’s unbundling and corporate restructuring (including the preparation o f an information systems framework); (ii) preparing for an IPO for a share o f PGN’s distribution activities; and (iii) preparing for the involvement o f a strategic partner in PGN’s transmission operations. Subcomponent 5.3 - PGN Capacity Building and Training. This subcomponent comprises TA for PGN business transformation consistent with the deregulated market environment under the new Oil and Gas Law, through capacity building and training.
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Annex 3: Estimated Project Costs INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Civil Works 1 Goods (including associated installation services) I Information Technology (ERP System) Consultant Services to PLN
1 Consultant Services to PGN Miscellaneous
I Total Proiect Cost;
5OOkV Transmission System 150kV Transmission System Enterprise Resources Planning (ERP) System Technical Assistance to P L N Technical Assistance to PGN rota1 Baseline Cost Physical Contingencies Price Contingencies
I Interest during construction I I 13.56 I 13.56
16.19 24.62 8.00 1.30 1 .oo
51.11 2.04 7.13
0.00 37.48 8.00 1.30 1 .oo
12.50 60.28
45.06 54.03 18.00 3.20 5 .OO
125.29 4.95 6.15
0.00 110.19 18.00 3.20 5.00 0.00
136.39
61.25 78.65 26.00 4.50 6.00
176.40 6.99
13.28 Total Project Costs’ 60.28 136.39 196.67
Interest during construction 13.56 13.56 Front-end fee 1.41 1.41
Total Financing Required 60.28 151.36 211.64
0.00 147.67 26.00 4.50 6.00
12.50 196.67
1.41 I 1.41 I Front-end fee I Total Financing Required I 60.28 I 151.36 I 211.64 I
1 Identifiable taxes and duties are 14.56 (lJS$m) and the total project cost, net of taxes, i s 197.08 (USSm). Therefore, the project cost sharing ratio i s
71.54% of total project cost net of taxes.
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Annex 4: Cost Benefit Analysis Summary INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Introduction: Bottlenecks in the Java-Bali Transmission System
The non-completion o f the southern section o f the 500kV Java transmission loop constrains the east-west transfer o f power within Java. Major load centers are in the Jakarta area and the rest o f West Java, yet significant generation capacity exists in East Java, particularly at the Gresik and Paiton complexes (Annex 2). This constraint-which i s complicated by the fact that i t comprises both a capacity and a stability limit-means that coal-fired and gas-fired units at Paiton and Gresik cannot be dispatched at full capacity simultaneously under peak or off-peak conditions, both (a) increasing system-wide fuel costs, because relatively more expensive oil-fired (and older) plants in West Java must be operated to meet electricity demand; and (b) further reducing generation reserve margin at a time when Java-Bali i s facing generation shortages. PLN estimate that the east-west Java transfer reduces the system reserve margin by 400MW.
Apart f rom such horizontal (i.e., geographic) constraints in the Java transmission system, there are also vertical (Le., inter-voltage) constraints throughout Java and Bali. The substantial lack o f investment in the transmission system since the regional crisis has resulted in many localized constraints or “bottlenecks” throughout the Java-Bali power system at the substations which convert the electricity voltage from one level to another. (Problematic substations are considered those where the peak demand o f i t s power transformers exceeds 80% o f the combined transformers’ maximum rated capacity). Transmission to subtransmission constraints exist at 500kV substations, particularly in East Java; constraints exist within the subtransmission system at substations with 150/70kV interbus transformers; and there are also constraints between the subtransmission and distribution networks at numerous 150kV, 70kV, and 20kV substations throughout Java and Bali.
Consequently, even if sufficient investments in generation capacity are made to restore an adequate system reserve margin on Java-Bali, unless existing substation capacity is expanded at many locations throughout Java and Bali, localized electricity demand growth will be capped. Although PLN’s Integrated Resource Planning (IPP) initiatives-comprising both supply and demand side measures-will be one facet o f addressing the problem, P L N has no option but to engage in a program o f substation expansion, otherwise the company w i l l be forced to engage in aggressive load shedding or to curtail the numbers of new consumer connections. Moreover, PLN’s program o f substation expansion does not only involve purchasing and installing new transformers at existing substations, but-consistent with good network asset management practices-also involves relocating already-installed, but underutilized, transformers throughout the network.
Summary of Benefits and Costs: CostLBenefit Analysis of 500kV Subcomponents
At 500kV level, the related subcomponents o f the Java-Bali Power Sector Restructuring and Strengthening Project are part of a package o f measures designed b y P L N to alleviate both the east-west Java power transfer problem, and the key bottlenecks between transmission and subtransmission levels, particularly in East Java. These measures involve: (i) Surabaya-Selatan substation to Kedir i and Klaten substations respectively, so that (a) the second circuit o f the Paiton-Kediri-Klaten line can be energized, thus reducing the east-west transfer constraint by
relocating the two existing 5OOMVA transformers at the completed (but isolated)
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200MW, and (b) demand growth in the southern part o f East Java be met; (ii) be loaded higher than 80% upon commissioning; (iii) malung associated network reconfigurations, in order to (a) remove the remaining 200MW east-west transfer constraint, and (b) meet demand growth for the city o f Cirebon; (iv) the new Grati-Surabaya-Selatan 500kV transmission line
installing a second 5OOMVA transformer at Kediri, given that the relocated f irst transformer w i l l
installing a second 5OOMVA transformer at the Mandirancan substation near Cirebon, and
installing new transformers at the Surabaya Selatan substation in time for the commissioning o f
All these measures w i l l also relieve the highly-loaded Krian substation to some extent, thus contributing further to the alleviation o f localized network constraints that limit electricity demand growth in the city of Surabaya-Indonesia’s second largest city.
The economic costbenefit analysis o f the Project’s 500kV subcomponents i s therefore undertaken for this entire package o f measures. On the costs side are al l the costs (net o f I D C and VAT) o f the Project 500kV subcomponents, plus: transformer relocation costs to Kediri and Klaten; the cost o f the Grati-Surabaya-Selatan line; and the cost o f uprating the Perak-Ujung 150kV line (also financed under the Project), as this i s an integral part o f relieving transmission constraints in the Surabaya area. On the benefits side i s the possible incremental demand growth with and without the proposed measures, and the avoided cost o f generation achieved b y relieving the 400MW east-west transfer constraint.
Key assumptions are as follows:
to restore adequate system reserve margin (Section F.2, and Annex 1) i s considered to hold. Nevertheless, demand growth i s s t i l l considered constrained by the realistic time frame for installing any new generation capacity. Consequently, demand growth rates are based on PLN’ s combined l imi tedlow demand scenario. This scenario recognizes the limitations on possible demand growth given existing and planned installed capacity-for instance, peak demand growth for 2005 i s set at zero percent. Using a “constrained’ forecast i s a conservative approach for such an economic analysis, because clearly there i s l ikely to be substantial suppressed demand due to long waiting l i s t s for consumer connection. Past PLN’s planning period (ending in 2010), peak demand growth i s estimated at a modest 5 6 % per annum.
based only on the four hour peak period loadings, for a power factor o f 0.85, at Klaten, Kediri, Mandirancan, and (partially) Surabaya Selatan, substations. There w i l l be some load rebalancing between Krian and Paiton substations once Surabaya Selatan i s commissioned. T o be conservative, the benefits attributable to reduced loadings at Krian, Paiton and one o f the Surabaya Selatan transformers, have not been included.
based on the estimated difference between the LRMC at the 500/150kV busbar and the LRMC at the generation busbar. The most recent estimates o f LRMCs for the Java-Bali system were undertaken in a 1999 study for ADB. Given that major investment s t i l l remains to be made in the 500kV system, a value o f US$O.O04/kWh would seem to be a conservative estimate for this difference. Unlike the substations, the existing capacities o f subtransmission and distribution lines are in most cases sufficient to meet the expected medium-term demand growth. However, valuing the economic benefits o f the transmission and subtransmission components using the difference in L R M C between voltage levels means that any distribution (or generation) investment-should i t be required to support such demand growth-can be ignored in the analysis.
an integral part o f the long-term development of the 500kV loop system, and w i l l contribute to more
0 Demand Growth: The critical assumption that sufficient new power generation comes onstream
e Incremental Energy: Incremental energy (between with and without the 500kV investments) i s
0 Valuation of Incremental Energy: The value of incremental energy for the 500kV investments i s
0 Avoided Cost of Generation: The measures taken to relieve the east-west transfer constraint are
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efficient dispatch o f generation over the long term. However, to be conservative, only the very short term benefits o f avoided generation cost are included in the analysis, (i.e., from mid-2005 until mid-2006), after which time the remainder o f the southern 500kV loop should have been commissioned. P L N estimates the avoided cost of generation at 175Rp/kWh, based on coal-fired plants displacing oil-fired plants. (The exchange rate i s assumed to be Rp9000:US$).
for shadow exchange rate or shadow wage rate; capital investment costs predominantly occur f rom 2003-2005 followed b y a project economic l i fe o f 20 years; and net present values (NPV) are based on a discount rate o f 10%.
e Additional Assumptions: All costs are expressed in constant 2002 prices, making no adjustment
The analysis i s particularly conservative because, while marginally higher transmission/ subtransmission operation and maintenance costs have been ignored, there are considerable additional benefits associated with the package o f measures which have not been quantified, including: (i) reduced system losses; (ii) improved voltages; (iii) extended transformer lifetimes; and (iv) fewer localized planned and unplanned system outages. Furthermore, the approach taken does not account for the benefit value o f unserved energy (on a consumer willingness-to-pay basis), which would likely be considerably higher than the LRMC values used in the analysis.
T o contrast some o f these additional benefits with the US$O.O04/kWh value attributed to incremental energy, a 1996 study b y the Bank on the economic consequences of power supply inadequacy in Indonesia estimated that the average cost o f industrial power outages was in the order o f US$0.83/kWh. Of this amount, about 40% represented product and equipment spoilage and damage, 32% are costs related to adjustment costs, including backup generation (i.e., captive power), with the remainder accounting for foregone profit, idle factor costs, process restart costs, and costs related to overtime wages. Although this value i s probably an overestimate in Indonesia’s post-crisis economy-as a significant proportion o f the cost i s Rupiah-indexed-it s t i l l s places the relative cost o f outages in some perspective.
Results o f the analysis are provided in Table 1. The NET of the 500kV power transmission strengthening component i s US$23.3 million, with a corresponding EIRR o f 20.6%.
Cost/Benefit Analysis of 150kV Subcomponents
At 150kV level, the related subcomponents o f the Project are intended to: (i) similarly allow increased demand to be met at numerous localized sites throughout Java and Bali; and (ii) provide a level o f security commensurate with the existing and potential West Java geothermal generation capacity evacuated through the 150kV subtransmission network near Bandung (375MW).
On the costs side are the al l the costs (net o f I D C and VAT) o f the Project’s 150/70kV and 150/20kV subcomponents, with the exception o f the Perak-Ujung subcomponent, which i s considered an integral part o f the above 500kV measures. For simplicity, the costs o f the Bandung-Ciamis line uprating and the Wayang Windu incomer subcomponents are considered to be an integrated part o f the 150kV subtransmission measures. While the costs o f these subcomponents are included, no benefits due to improved system security are included, in order to be consistent with the 500kV analysis. (Nevertheless, benefits associated with reduced outages in the southeastern Bandung area are likely to be substantial). On the benefits side i s the possible incremental demand growth with and without the proposed measures.
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The same assumptions are used as above for the 500kV investments, although the incremental energy i s associated with the expansion o f 38 substations, and i s valued slightly higher-at US$O.O06/kWh. (For comparison, the Bank’s 1996 study calculated the L R M C between the 500kV and 150kV busbars at US$O.O077/kWh). Again, the analysis i s conservative because all the same unquantified benefits which apply at 500kV level also apply at 150kV. In addition, at a significant proportion o f the 38 substations included in PLN’s 150kV substation expansion program, existing transformers w i l l be replaced by a new one with a larger capacity, rather than simply adding a new transformer. Replaced transformers can be relocated for utilization elsewhere in the system. The benefits of re-utilizing such transformers-net o f relocation and reinstallation costs-would likely also be significant, but have not been estimated.
Again, results o f the analysis are provided in Table 1. The NPV o f the 150kV power transmission strengthening component i s US$11.1 million, with a corresponding ERR o f 12.1%. Combining the costs and benefits o f both the 500kV and 150kV power system strengthening components results in an overall NPV o f US$34.3 million, with a corresponding overall EIRR o f 14.6%.
Sensitivity analysis / Switching values of critical items: A sensitivity analysis was performed for some key parameters. A delay o f subcomponent commissioning by two years would decrease the overall EIRR to 13.1%. Shifting the demand growth path by two years (meaning that there would be no growth in peak demand from 2005-2007) would reduce the ERR to 11.8%. A 20% increase in project costs would reduce the EIRR to 11.8%.
Other parameters are more appropriately considered in terms o f the switching values at which the ERR would drop below 10%. The estimated avoided costs attributable to improved generation dispatch would have to reduce b y 87.5% in order to reduce the EIRR to lo%, and as noted above these benefits are l ikely to be significantly underestimated, rather than overestimated. The switching value for the 150kV LRMC estimate i s a reduction o f 57%, and the switching value for the power factor i s 0.53.
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Table 1: Economic Analysis for 500kV and 150kV Physical Components
0 0 0 0
53 253 500 738 931
1136 1353 1583 1827 2043 2269 2506 2756 3018 3293 3293 3293 3293
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
24 274 536 811 811 811 811
0 0.0 0 0.0 0 0.0 0 0.0
53 0.2 253 1.0 500 2.0 738 3.0 931 3.7
1136 4.5 1353 5.4 1583 6.3 1827 7.3 2043 8.2 2269 9.1 2482 9.9 2482 9.9 2482 9.9 2482 9.9 2482 9.9 2482 9.9 2482 9.9
0. 0.
27. 27. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0 0 0 0 0 0 0 0
0 0 0 0
230 632
1126 1605 1992 2370 2370 2370 2370 2370 2370 2370 2370 2370 2370 2370 2370 2370
0.c 5.7 6.1 11.1 0.C 28.3 30.7 58.! 0.C 22.3 24.5 46.! 0.0 1.4 3.8
I 6.8 9.6
12.0 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2 14.2
3581 7314 1099 4941 2482 9.9 0.d 2370 14.4
NET BENEFITS OOkV 15OkV Total
-5.7 -28.3
4.9 27.3 0.2 1.0 2.0 3.0 3.7 4.5 5.4 6.3 7.3 8.2 9.1 9.9 9.9 9.9 9.9 9.9 9.9 9.9
-6.1 -11.1 -30.7 -58.' -24.5 -19.1
0.0 27.. 1.4 1.1 3.8 4.1 6.8 8.: 9.6 12.1
12.0 15. 14.2 18. 14.2 19. 14.2 20. 14.2 21. 14.2 22. 14.2 23. 14.2 24. 14.2 24. 14.2 24. 14.2 24. 14.2 24. 14.2 24. 14.2 24.
Npv 23.3 11.1 34.
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Annex 5: Financial Summary INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Historical Financial Performance
1. credits amounting to about US$5.1 bil l ion over the last 30 or so years. The last Bank loan to PLN was made in 1996 for the Second Power Transmission and Distribution Project (Loan 3978-IND). Prior to crisis PLNs finances were reasonably sound with tariff being close to U S $ 7 centskWh and i t s operating income sufficient to provide a financial rate o f return o f almost 7%. About mid-1997, Indonesia was plunged into financial chaos during the Asia financial crisis and the currency (Rupiah) collapsed from a stable level o f around Rp 2,450 to US$1 in July 1997, to a low o f Rp 15,500 to US$1 in June 1998. The collapse in the currency was the single main factor that lead to a major deterioration in PLN's finances over the following three to four years (1998-2001). This was highlighted b y substantial operating losses, negative rates o f return and inability to meet i t s operating costs and debt service obligations. Average tariffs fell to the equivalent o f about US 2.6 cents in 1998. PLN operating costs rose dramatically undermining i t s solvency and liquidity. Power tariffs were increased marginally in 1998 and then in an effort to cushion the impact o f the crisis on consumers further increases were deferred until 2000. Further, the GO1 suspended the automatic tariff adjustment process that had enabled P L N to pass on increases in costs o f fuel, power purchases and debt service to i t s consumers.
Financial Performance of PLN. PLN has been the beneficiary o f 25 Bank loans and 3 IDA
2. Sales growth (1998-2002) f e l l sharply f rom 15.5% in 1997 to 7.2% in 1998, but recovered somewhat in 2000 to 11% and in 2001 to 6.7%. Nevertheless, during this period P L N managed to connect about 6.2 mill ion new customers. About 65% o f these new connections were on Java-Bali. However, many o f these customers were small low-income consumers, who impose high supply costs on PLN. GO1 i s providing targeted subsidies to P L N for some o f such consumers with supply below 450VA, which offsets a portion o f PLN's costs o f supplying them. Over the last 2 years, these have amounted to Rp 10.8 trillion.
3. losses as o f the end o f 2002 amounting to Rp 47 tri l l ion or about US$5.3 billion. PLN's consolidated financial operating results (1998-2002) are provided in Table 1. However, as the result o f actions taken by the GO1 (below), the deterioration has been halted and PLN made a small net profit in 2001-its first since 1996-although this was obtained by including in i t s income Rp 6.7 trill ion in "targeted" subsidies paid by GOI. The rate of return in 2002 became negative again (-4.0%), but this was partly explained b y the higher fuel costs and partly by higher depreciation based on revaluation o f PLN's fixed assets. On the revenue side, despite higher kWh sales (up 6.7%) and higher tariffs (averaging 442 RpkWh), the average revenue per kwh (as at December 3 1,2002) was s t i l l low; being equivalent to about U S $ 5 centskWh, compared to about U S $ 7 centskWh in 1996. However, though performance in 2002 appears not to have improved, the year 2002 was a "turn-around" year for PLN finances, and PLN would have shown a healthy improvement in i t s profits except for the revaluation of fixed assets.
Almost 5 years has elapsed since the financial crisis began, during which PLN accumulated
4. of PLNs fixed assets in 2002, enabled GOI's equity in PLN to increase substantially. Long term debts were reduced to Rp 40 trillion, about half o f which i s Rupiah-indexed. The Debt Equity Ratio (debt to debt+equity) improved to about 30:70.
Financial Condition of PLN. GOI's financial restructuring actions in 2001 and the revaluation
5. IPPs. During 2002, about Rp 6.8 tri l l ion has been written o f f following agreements reached with about 6
P L N owed at the end o f 2001, about Rp 16 tri l l ion for arrears due for power purchases from
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IPPs The GO1 provided considerable debt relief to P L N in 2001 by converting unpaid principal o f Rp 5.2 tri l l ion to a new long-term loan and overdue interest o f Rp 29 trill ion to equity. I t also injected the previously mentioned targeted cash subsidies at the end of 2001 o f Rp 6.7 trillion. Nonetheless, solvency i s a critical issue for P L N with current liabilities exceeding current assets by a factor o f more than 2.5: 1. Recent agreements on settlement o f arrears with IPPs are an important step in the restoration o f PLN’s financial health. Fortunately, overdue electricity accounts are not a current problem for PLN. The average age o f unpaid bills i s about 37 days. This indicates that PLN’s management o f electricity receivables i s satisfactory.
6. financial restructuring o f PLN since 1997 have been the following:
Chronology of Financial Restructuring Actions. The principal GO1 actions to support the
1999. A Presidential Team (IPP Contract Rationalization Team) was appointed to renegotiate the private power (IPP) contracts. There were 7 IPPs in operation at the end o f 2001 with installed capacity o f about 3000MW. Under a March, 2002 Presidential Decree. the construction o f 15 IPPs, postponed b y Presidential Decree in 2000, were approved to continue. October 2000. PLN White Paper Immediate Consequences and Critical Issues for Decision - Their Consequences for the Indonesian Economy was presented to the GOI. This recommended (i) reorganization o f PLN’s capital structure b y rescheduling o f two-step loans from GOI, on which P L N had not paid debt service since 1998; (ii) renegotiation of Power Purchase Agreements with IPPs and GO1 funding to cover current commitments; (iii) tariff increases to reflect economic value o f electricity, with tariffs raised to the equivalent o f US 7 cents/kWh by the end o f 2005; (iv) revenue support through the creation of a Social Electricity Development Fund (SEDF); (v) reduction in the price o f natural gas f rom Pertamina; (vi) taxation exemption from capital gains tax (estimated at Rp 10 trillion) arising f rom revaluation o f assets, and VAT o f 10% which was planned to be introduced in 2001 for fuel prices and power purchases from IPPs. February 2001. PLN’s detailed restructuring proposals were submitted to the Ministry o f Finance. These included: (i) debt restructuring b y conversion o f Rp 29 tri l l ion in unpaid interest and penalties to equity, and refinancing o f unpaid principal on these loans o f Rp 5.3 tri l l ion through a new 20-year loan; (ii) tariff increases; (iii) GO1 targeted subsidies for serving low income consumers; (iv) revaluation o f f ixed assets; and (v) reductions in costs. May 2001. Price Waterhouse Coopers (PwC) commenced a TA financed under the Banks Second Power Transmission and Distribution loan to assist PLN’s financial and corporate restructuring. Work commenced M a y 2001 and concluded in March 2003. June 2001. GO1 approved PLN’s financial restructuring, comprising debt restructuring converting Rp 29 trill ion o f overdue interest plus fines to equity (1998-2000). The unpaid principal o f Rp 5.3 tri l l ion was converted to a new 20-year loan. Tariff increases were approved in principle to reach the equivalent o f US 7 centskWh b y 2005 (i.e. pre-crisis levels). December 2001. GO1 paid “targeted” subsidies to PLN for consumers with less than 400 amp service using less than 30 kWh a month. Targeted subsidies paid to PLN in 2001 amounted to Rp 6.7 tri l l ion covering 3 years (1999-2001). The GO1 approved tariff increases o f 6% on average per quarter for 2002. March 2002. Price Waterhouse Coopers (PwC) prepared a “Future Debt Capacity” study to assess for M O F the ability o f PLN to absorb new debt f rom 2002-2006. This report concluded that P L N could incur new debt o f Rp 75 tri l l ion (about US $8 billion) i f PLN achieves an 8% rate o f return on revalued assets in 2005. September 2002. A new Electricity Law was enacted on September 4,2002 aimed to encourage competition and private investment in the sector. This w i l l lead to the establishment o f a regulatory body within a year to monitor the market and enforce the market rules. A competitive market for generation w i l l be established within 5 years.
- 5 1 -
0
0
0
0
0
0
0
0
0
0
9.
December 2002. The GO1 approved tariff increases o f 6% on average per quarter for 2003.
7. PLN’s financial statements for year ended December 31, 2001. This was the f i rs t time this firm has audited PLN’s accounts. An unqualified opinion was given. Based on discussions with the auditors o f their staffing, audit procedures and the management letters exchanged with PLN, this firm i s considered to have adequate competent and experienced audit staff to undertake annual audits o f PLN’s accounts. Praseto, Utomo & Co has recently linked up with the international partnership of Ernst and Young and i s expected to continue to conduct PLN’s annual audit. From 2002, P L N i s required b y local regulations governing public corporations to provide audited accounts by March 3 1, one month earlier than in previous years.
Key Financial Issues
8. Financial Restructuring Plan summarizing financial recovery actions taken to date and recommending further steps that could be taken to restore PLN’s financial health. The objective o f preparing this plan was to seek GO1 agreement to those steps. I t included recommendations for the GO1 to approve:
Audit and Financial Reporting. Andersen’s local subsidiary Praseto, Utomo & Co audited
Financial Restructuring Plan. PLN, with assistance from Bank-funded consultants, prepared a
further specific tariff increases in 2003 and 2004 to achieve pre-crisis levels o f 7 centskWh b y 2005, and an 8% rate o f return on revalued net f ixed assets:
phasing out of uniform tariffs and the elimination of cross subsidies between Java-Bali and Outer Islands; (Le.: adoption of a regional tariff policy);
M O F approval for additional borrowing by P L N including two step loans from GO1 required to meet i t s investment program requirements to 2005;
maintenance o f GO1 targeted subsidies for rural consumers after 2004 especially now that the previously proposed Social Electricity Development Fund (SEDF) has not been included in the Electricity Law;
actions by GO1 to attract IPP investors back to Indonesia; including resolution o f all existing disputes with IPPs:
implementing regulations under the new Electricity Law to encourage new IPP investment;
clarification o f GOI’s domestic gas policy with respect to future gas supplies for power generation; critical to reducing cost o f supply and reducing use o f oil.
GOI’s proposed tax and dividend policy for an unbundled PLN post 2005.
approval for PLN to pay capital gains tax over 5 years on the surplus arising f rom revaluation o f i t s fixed assets.
reinstatement of the automatic tariff adjustment mechanism, suspended in 1997.
Revaluation of Fixed Assets. PLN has revalued i t s fixed assets, increasing their recorded value b y about Rp 11 1 trill ion in 2002, basically to reflect the impact o f the 1997 devaluation o f the Rupiah. This w i l l enable tariff increases and improve PLN’s internal funding. The revaluation i s based on a
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study, prepared b y Electrowatt (Switzerland) in 1998, and then updated in 2000 b y Sukafindo (Indonesia). The revaluation method was based on replacement costs after allowing for depreciation. Capital gains taxes o f Rp 17.3 tri l l ion on the revaluation o f PLN’s fixed assets are being paid in equal annual installments over 5 years commencing in 2002. These payments include penalty interest o f 2% monthly, arising f rom deferred payment.
10. objective o f reaching the equivalent o f U S $ 7 cents by 2005. These would restore PLN’s average tariff to pre-1997 crisis levels. After economic tariffs are achieved, GO1 propose that the automatic tariff adjustment mechanism (suspended following the 1997 crisis) w i l l be re-instated. In pursuance o f this decision, GO1 approved specific tariff increases for 2002 and 2003 of 6% per quarter. At the end o f 2003 average tariffs w i l l be close to the equivalent o f US$6.1 cents/kWh.
Electricity Tariffs. In 2001, tariff increases were approved in principle by the GOI, with the
11. This i s likely to encourage more efficient use o f electricity and curtail consumption. In view o f PLN’s extremely limited generating capacity, the VAT could help to avoid disruption o f supply due to a shortage o f generation.
In 2003, GO1 intends to implement a 10% VAT for consumers with loads above 2,200 Watts.
12. Power Development and Financing. PLN’s capital expenditure program (2003-2010) i s based on a low growth scenario. Under the low growth scenario, PLN’s sales would be limited by i t s available generating capacity during 2003-2006. Sales growth would increase about 6.5% in 2003 and then slow down between 2004 and 2005 from 4.2% to about 2.5%. Then if Tanjung Jati B were commissioned by 2006, sales would recover increasing by 5%-6% annually. Thereafter, if new IPP generation can be provided, sales growth would improve further by about 7.6% per annum through 2010.
13. include price escalation o f 6% for local costs and 2.6% for foreign costs. In addition, IDC, VAT of 10% and 2.5% for import duties are included. The estimates are based on expectations that PLN w i l l be able to obtain most o f i t s new generation requirements f rom IPPs. During the period 2008-2010, P L N plans to purchase an additional 6,000MW o f capacity f rom new IPPs and this w i l l result in a significant reduction in i t s investment in new generation plant; already substantially halted prior to 1997. Apart f rom Tanjung Jati B, PLN’s next major generation investments are timed for commissioning in 2007 (1,850MW at M. Karang Repowering/M. Tawar Extension and Tanjung Priok Extension). ,
PLN’s capital investments (2003-2010) are estimated to require US$13.2 billion. These costs
14. GO1 has already notionally approved proposed P L N borrowings in mid-2002 amounting to $804 mill ion including the proposed loans from World Bank and ADB (which have since been approved by ADB’s Board). These loans w i l l provide the first significant borrowing for PLN since 1997. The loans approved comprise:
World Bank - Java-Bali Power Sector Restructuring and Strengthening Project $120 mill ion ADB - Renewable Energy Development Project $195 mill ion ADB - Power Transmission Improvement Project $149 mill ion China Soft loan/Export credits - Labuhan Angin Steam Plant $170 mill ion Other - Export CreditdJBIC $170 mill ion
15. GO1 equity and budget contributions would be maintained to support expansion of supply to low income consumers in rural areas but these would be a declining source o f funds for PLN. Over the next 8 years, they would amount to Rp 9.5 tri l l ion or about US$l. lb i l l ion.
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Financial Prospects
16. Table 2.2. The forecasts are based on revaluation o f gross fixed assets and depreciation f rom 2002. The resulting higher depreciation reflects the changed value o f PLN’s assets resulting f rom devaluation o f the Rupiah. PLN’s profits w i l l be lower and this w i l l facilitate continuing increases in tariffs. The forecasts also reflect the recent agreements with IPPs on lower purchase prices and on repayment o f arrears. However, fuel subsidies, which were to have been phased out in accordance with GO1 directives, are assumed to continue as long as international o i l prices remain high. For the purposes o f the forecasts, i t has been assumed P L N w i l l pay for fuel based on international o i l prices o f $20.50 per bbl. This i s the current basis for PLN’s fuel costs. Exchange rates are assumed to be fixed at US$ 1 = Rp. 9,000.
PLN’s financial projections (2003-2010) and related assumptions are provided in Table 2.1 and
17. revenue per kWh sold to about US$6.8 cents by 2004. Thereafter, small increases o f about 5.5% have been included for 2005 and 2006, which would take rates to about US$7.2 cents in 2005 and to US$7.6 cents in 2006 respectively. The forecasts show that P L N can become profitable f rom 2004 with GO1 continuing to provide targeted subsidies for rural consumers. Rates o f return would rise progressively f rom about 4% in 2004 to 6.8% in 2010.
Average tariffs w i l l increase about 23% during 2003 and 13% in 2004. This w i l l bring average
18. creditworthiness making i t capable o f servicing new loans and meeting new power purchase obligations to IPPs. This recovery w i l l be fragile and dependent on continuance o f stable exchange rates, international fuel prices, inflation and continued economic growth in Indonesia. Resumption o f automatic tariff adjustments for fuel, power purchases and exchange rate changes i s an important measure needed to ensure that PLN’s financial recovery i s not disrupted b y any unexpected increase in i t s costs that cannot be passed on to consumers
The financial performance, discussed above, would be sufficient to restore PLN’s
19. and increases in tariffs. The revaluation o f f ixed assets and the GOI’s actions to afford debt relief to P L N have increased PLN’s debt equity ratio f rom 67/33 in 1999 to 31/69 in 2002. Debt service w i l l be covered 0.60 times in 2002 and improve sharply thereafter. Liquidity would be largely restored by 2004 with resolution o f arrears owing to IPPs. Prompt collection o f electricity bills w i l l help sustain this improvement. P L N should, looking forward, be able to meet i t s obligations especially for fuel purchases, IPP payments and debt service in a timely fashion. In effect, P L N w i l l have a healthy balance sheet and be sufficiently creditworthy to incur new debt.
PLN has begun with the support o f GO1 to restore i t s profitability driven by debt restructuring
20. continued if competitive markets are to be created. PLN should not be expected to subsidize low-income customers. GO1 w i l l begin to receive substantial corporate profits tax f rom 2005 and this would enable GO1 to fund targeted subsidies.
PLN, however, needs to continue tariff increases through 2004. Targeted subsidies need to be
21. Bank loans to meeting four financial covenants:
Appropriateness of Financial Covenants. The GO1 and PLN are committed under ongoing
Annual Financial Performance - minimum 8% Rate o f Return on revalued net fixed assets (Rate o f Return Covenant).
0 Debt Limitation - requiring GOYPLN to consult with the Bank prior to incurring new debt whenever
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i t s internal sources o f funds are insufficient to cover i t s projected debt service at least 1.5 times (Debt Service Covenant).
0 Formal annual reviews o f PLN’s investment plans, financial forecasts, financing plans and proposed GO1 support for PLN’s investment program (Review o f Financial Forecasts Covenant).
0 Annual review o f PLN’s L R M C sought b y October 31 each year (Tariff Structure Covenant).
22. P L N has had a positive rate of return was in 1996 when i t s rate o f return was about 7%. Under previous loans, ROR was supposed to be based on revalued net f ixed assets but in practice, the fixed assets were not revalued. N o w that a revaluation has been completed, i t w i l l have a very significant impact on PLN’s cash f low once a positive ROR i s achieved. In fact, if an 8% return i s to be achieved, i t very quickly provides a cash f low well in excess o f PLN’s needs, particularly given PLNs assumption that i t w i l l rely on the private sector to develop power generation facilities. As a result, an 8% ROR on PLN’s revalued assets i s too high a target for the next 415 years, and a lower ROR should be considered, in line with PLNs financing needs and talung due consideration o f the burden higher rates w i l l have on 1ndonesia;s low income consumers.
Since 1997, PLN has fallen well short o f the agreed 8% rate o f return target. In fact, the last time
23. revalued net f ixed assets before 2004/2005. Further, even after 2005, i t would not be reasonable to expect PLN to achieve an 8% return due to the adverse social impact on poorer consumers and the political difficulty i t w i l l have raising tariffs beyond 7 cents/kWh. I t would be more reasonable to expect a continued and gradual recovery by PLN. At negotiations, the Bank and GO1 agreed that the GO1 w i l l support, through tariff increases and other measures, to ensure P L N and i t s subsidiaries to achieve ROR on revalued net f ixed assets o f at least 2.5% in 2004, 4% in 2005, 5% in 2006 and 6% in 2007. After 2007, the covenant should be reviewed and adjusted taking account o f sector structure and progress in establishing a competitive market for Java-Bali. B y this time, separate tariffs may have been established for regions outside Java-Bali and the latter may be benefiting f rom the unbundling of tariffs.
Using realistic assumptions, i t would appear that P L N cannot achieve a positive rate o f return on
24. cover its projected debt service obligations at least 1.5 times. P L N has not been able to meet i t s debt service obligations since 1997 and GO1 has provided considerable debt relief and debt restructuring through conversion o f interest and debt to equity. As a result o f these actions, PLN i s now expected to be able to meet this covenant f rom 2003. At negotiations, GO1 and P L N agreed to retain the existing undertalung o f at least 1.5 times debt service and not incur any additional debt unless a reasonable forecast o f PLN’s internal sources o f funds for each year during the term o f the debt to be incurred shall be at least 1.5 times i t s projected consolidated debt service requirements.
PLN’s new borrowing had been limited while i t s internal sources o f funds were not sufficient to
25. Annual review o f PLN’s L R M C was sought by October 31 each year but not provided in recent years in the light o f PLN’s financial situation. I t would be not appropriate to seek continuation o f the annual review o f LRMC. P L N no longer uses LRMC, in line with current trends in the power sector in most other countries pursuing power market reforms, but instead structures i t s tariffs to meet demand-side management and i t s financing objectives.
26. Sensitivity to Alternative Scenarios. During the appraisal, the Bank examined the robustness o f PLN’s financial outlook based on varying exchange rates o f Rp 10,000 and Rp 8,000. These showed that PLN could s t i l l achieve positive financial rates o f return (3.2% in 2004 and increasing to 4.2% in 2010) i f exchange rates were to fa l l to Rp 10,000 to US$1. If exchange rates were to rise to Rp 8,000, the
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rates o f return could improve substantially ranging (4.7% in 2004 and increasing to 9.9% in 2010). These variations appear reasonable and PLN should be able to maintain i t s financial recovery if they eventuated. Scenarios assuming fuel and power purchases are based on higher international crude o i l prices o f $25/bbl, $30/bbl and $35/bbl were also considered. I t was found that if fuel purchase costs rise to $25/bbl or higher, while exchange rates fe l l to Rp 10,000, PLN's financial performance would be adversely affected and rates o f return would be negative. If higher fuel prices and exchange rates firmed to Rp 8000, financial rates o f return would be lower but s t i l l positive. These tests show that PLN's financial performance i s most sensitive to falling exchange rates and higher fuel prices. T o ensure that PLN can manage this risk, the Bank agreed with the government to reintroduce an automatic power tariff adjustment mechanism, acceptable to the Bank by no later than 2006.
Proposed Financial Conditionalities
27. Accordingly, at negotiations the Bank and the GO1 agreed to: (i) reintroduce an automatic power tariff adjustment mechanism-acceptable to the Bank-before January 1, 2006, or sooner i f the tariff reaches to "economic" level, and maintain i t s operation until such time as tariffs become governed b y the introduction o f a competitive market mechanism; (ii) revalue PLNs fixed assets periodically in accordance with sound and consistently maintained methods o f valuation satisfactory to the Bank; and (iii) undertake any additional measures needed to allow PLN to achieve i t s rate o f return and debt service covenants.
28. so that PLN and i t s subsidiaries achieve a rate o f return on revalued net f ixed assets o f at least 2.5% in 2004,4% in 2005, 5% in 2006 and 6% in 2007 (and after 2007, the covenant shall be reviewed with the Bank and adjusted takmg account o f sector structure and progress in establishing a competitive generation market for Java-Bali); (ii) undertake not to incur any additional debt without the agreement o f the Bank unless a reasonable forecast o f PLN's internal sources o f funds for each year during the term o f debt to be incurred shall be at least 1.5 times i t s projected consolidated debt service requirements; (iii) submit i t s ten year financing plans and forecasts to the Bank for i t s review by December 1 o f each year: and (iv) appoint independent auditors-acceptable to the Bank-and make audit reports available to the Bank within six months after the close o f each fiscal year.
At negotiations the Bank also reached an agreement with PLN to: (i) take al l measures necessary
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Table 1: Summary of PLN’s Financial Operating Results, FY98-02
December 31
Income Statement
Revenues Operating Expenses Operating Income Net Income
Balance Sheet Fixed Assets Current Assets Other Assets Total Assets
Equity Deferred Liabilities Long-term Liabilities Current Liabilities Total Liabilities
Financial Ratios
% Rate o f Return
Operating Ratio Self-Financing Ratio Debt Service Cover Debt Equity Ratio
1998
15,966 16,809 (843) (9,546)
65,686 6,985 1,789 74,460
22,095 4,272 30,259 17,834 74,460
(1.8) 105 nil 0.3 58/42
1999
15,997 21,503 (5,506) ( 1 1,368)
65,300 6,457 1,462 73,219
12,693 4,890 25,914 29,722 73,219
(10.7)
134 nil
67/33
2000
22,557 27,216 (4,659) (24,611)
66,868 8,741 2,394 78,003
18,625 5,672 31,818 21,888 78,003
(8.9) 121 nil
63/27
200 1
35,360 3 1,939 3,421 180
65,388 11,363 3,156 79,907
19,198 6,523 29,916 24,270 79,907
6.2
90 nil 0.1 61/39
2002
44,635 51,359 (6,724) (1,537)
184,005 10,155 5,077 199,237
130,117 3,812 39,720 25,588 199,237
(4.0) 115 nil 0.6 3 1/69
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Table 2.1: Main Assumptions for Financial Projections
2003 - Electricity Sales 96,027 9% Increase 6.5 N o of customers (Mls.) 31.8 Average Revenuekwh 544 9% Increase 23 U S Cen tskWh (equiv.) 6.0 Exchange Rate 9000 9000
- 2004 2005 2006 2007 2008 2009 2010 100,084 102,532 108,504 114,620 123,321 132,680 142,753 4.2 2.5 5.8 5.6 7.6 7.6 7.6 32.8 33.8 35.6 37.0 38.5 40.1 41.7 613 648 684 684 684 684 684 13 6 6 6.8 7.2 7.6 7.6 7.6 7.6 7.6 9000 9000 9000 9000 9000 9000
Fuel Prices (Based on Crude Oil price of $20.5/bbl. C o a l R P k g . 234 234 234 234 234 234 234 234 GeothermalRpkWh 330 330 330 330 330 330 330 330 N. Gas (US$/MSCF) 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 High Speed Dsl (RP/ltr) 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 Industrial D s l (RP/ltr) 1,650 1,650 1,650 1,650 1,650 1,650 1,650 1,650 Heavy Fue l (RP/ltr) 1,560 1,560 1,560 1,560 1,560 1,560 1,560 1,560
Fuel ConsumDtion (Million) HSD (liters) 5,624 5,236 5,130 2,655 2,889 3,076 3,277 MFO (liters) 1,432 1,337 975 649 680 714 691 Natural Gas (MSCF) 220 213 188 325 293 280 257 Coal (Kilogram) 15,180 15,841 16,234 16,561 16,700 16,579 16,138 Geothermal 2,683 2,915 2,961 2,994 3,030 3,068 3,109
IPP Purchases (GWh) 22,022 22,209 31,419 36,637 48,754 60,507 73,030
Cost of IPP Purchases
Other Assumptions:
10,332 10,359 14,648 16,232 20,921 25,601 30,281
Tariff Increases: 2003: 22.9% ; 2004: 12.7%, 2005 5.7% & 2006 5.6% Automatic tariff adjustment suspended during the financial crisis wi l l be reinstated in 2006. Average cost o f power purchases i s about U S 5.2 centskWh in 2004, declining progressively to U S 4.2 centskWh in 2010. Tanjung Jati B (1,320 M W ) wi l l be operating in 2006 - cost o f power i s estimated to about 5.3 centskwh. Maintenance o f Fixed Assets estimated at 3% of Average Gross Fixed Assets. Depreciation based on existing rates. Revaluation of Net Fixed Assets implemented in 2002 creating a revaluation surplus o f Rp 11 1 Trillion. Capital Gains Tax o f Rp. 17.3 trillion including interest wi l l be paid over 5 years commencing 2003. Investment in new power plants, transmission and distribution includes escalation at the following rates: (i) Local Escalation: 6% per annum, (ii) Foreign Escalation: 2.6% per annum. New PPs providing 6000MW of new capacity between 2007-2010. Proposed new borrowings are assumed to have a 5-year grace period, with interest o f 8% per annum and repayments over 15 years. Targeted subsidies wi l l be: RP 4.5 trillion in 2003, Rp 6.1 trillion in 2004, and Rp 3.7 trillion in 2005, Rp 2.2 trillion in 2006 Corporate tax wil l be based on 31% of Net Income. Dividends-assumed to commence once P L N i s profitable-at 5 % of net income after tax. Social FundlEmployee BonusiTraining - 4% of net income after tax.
Income Statement Revenues Operating Expenses Operating Income Net Income
Funds Statement Internal Sources GO1 Contributions Borrowings Local Bonds Total Sources o f Funds
Capital Expenditure Debt Service Working Capital Total Applications o f Funds
Balance Sheet Net Fixed Assets Work in Progress Current Assets Other Assets Total Assets
Equity Consumer Contributions Long-term Liabilities Current Liabilities Total Liabilities
Financial Ratios % Rate of Return Operating Ratio Self-Financing Ratio Debt Service Cover Debt Equity (Ratio Debt + Equity)
Table 2.2: PLN’s Financial Projections (2003-2010) (In Billions of Rupiah)
2003 2004 2005 2006 2007 2008 2009 2010
57,596 68,375 71,040 77,403 79,456 85,482 91,964 98,939 59,349 60,277 61,250 66,198 68,179 74,381 80,466 86,396 (1,753) 8,098 9,790 11,205 11,277 11,101 11,498 12,543 (4,856) 3,117 4,364 5,514 7,040 7,111 7,450 8,422
13,595 24,128 34,374 28,937 31,555 33,625 43,029 54,091 2,151 1,776 1,615 766 805 805 805 805 1,452 74 1,274 2,743 900 18,098 25,978 37,263 32,446 32,360 34,430 43,834 54,896
10,045 15,687 15,659 12,729 16,055 14,864 14,880 13,082 5,513 6,241 6,149 5,751 5,891 4,089 4,006 3,674 2,540 4,050 15,455 13,966 10,414 15,477 24,948 38,140
18,098 25,978 37,263 32,446 32,360 34.430 43,834 54,896
163,597 159,891 160,216 153,988 149,520 138,488 127,829 123,451 15,145 18,665 17,352 18,801 21,135 28,179 34,416 31,972 7,365 20,418 13,124 14,133 16,065 25,535 35,931 50,057 8,323 8,406 8,490 8,575 8,660 8,748 8,834 8,923 194,430 207,380 199,182 195,497 195,380 200,950 207,010 214,403
126,973 133,252 138,950 144,580 151,670 158,022 164,813 172,815 3,577 3,631 3,684 3,775 3,861 3,944 4,022 4,094 36,882 42,603 36,460 33,697 32,655 31,665 30,794 31,450 26,998 27,894 20,088 13,445 7,194 7,319 7,381 6,044 194,430 207,380 199,182 195,497 195,380 200,950 207,010 214,403
(1.10) 4.0 4.8 5.4 5.2 5.3 6.0 6.8 103 88 86 86 86 87 88 87 14 158 82 75 105 164 227 344 2.5 3.9 4.3 5.0 5.4 7.7 8.3 9.5 33/67 34/66 28/72 24/76 20180 20180 18/82 17/83
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Annex 6(A): Procurement Arrangements INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Procurement
Summary of Procurement Capacity Assessment
1. There w i l l be two implementing agencies under the Project: the state power company (PLN) and the state gas company (PGN); both are fully state owned limited liability companies. P L N w i l l be the main implementing agency responsible for project components with costs accounting for 97% o f the total estimated project cost, while PGN w i l l be responsible for a TA component with cost accounting for the balance 3%. Therefore the procurement capacity assessment has focused mainly on PLN. Nevertheless, a brief assessment on PGN i s also provided in the Procurement Capacity Assessment Report (PCAR). The assessment was carried out in line with the Bank requirements, and based on the findings o f the preappraisal mission in September 2002 and updated during the appraisal mission in March 2003.
2. P L N has a very long history of doing business with the Bank. Since 1970, the Bank has granted 25 loans and 3 credits to P L N with an aggregate amount of US$5.1 bil l ion equivalent, financing projects o f power generation, transmission, distribution, as well as various kinds o f technical assistance activities such as feasibility and technical studies, institutional development, capacity building, environmental management, financial management, policy studies, and restructuring. PGN has also received two loans from the Bank to finance gas distribution and utilization projects. Both implementing agencies are very familiar with the Bank procurement guidelines and standard bidding documents.
3. responsible for procurement under the Bank financed projects) was abolished in 2000 and most o f the experienced procurement staff were reassigned to positions not directly related to procurement. Although a position o f VP o f Procurement was created at the Head Office, i t s mandate focuses more on policy and guidance; the actual procurement work for projects financed b y international institutions has been delegated to PLN’s Project Units at various regions (including the Java-Bali Project Unit who w i l l be responsible for implementation of the Bank financed project). While these regional Project Units are familiar with the GO1 procurement regulations and procedures, they have not had direct experience with ICB so far. T o mitigate any possible r isks associated with this inexperience and to ensure successful implementation of the project, the following actions have been taken or agreed to be taken:
However, as a part o f PLN’s decentralization program, i t s central procurement unit (that was
0 P L N has set up at i t s head office a project implementation unit (PIU). The unit i s headed b y a Project Director and assisted b y managers covering all aspects related to project implementation, including procurement; environmental, resettlement and community development; supervision and reporting; engineering; as well as ERP (Enterprise Resources Planning, an IT system). The procurement manager i s jointly performed by the VP o f Procurement at P L N head office and the General Manager o f the Java-Bali Project Unit. The PIU, staffed with at least 24 professionals, has been playing and w i l l continue to play an active role in the procurement process. The PIU reports to PLN’s Board of Director through Director o f Transmission & Distribution.
0 PLN has set up a Procurement Committee, comprising 9-1 1 members f rom the Java-Bali Project Unit as well as f rom PLN Head Office. At least 3 members have previous experience with ICB, including one senior procurement specialist, who has extensive experience with Bank financed procurement (from preparation of bidding documents to the entire bidding
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process) and i s very familiar with the Bank guidelines and procedures. H e i s appointed the Deputy Chairman and w i l l guide the procurement committee through the bidding process.
0 PGN has established a P I U in January 2003 to implement a South Sumatera to West Java Gas Transmission Project to be financed by JBIC. I t i s agreed that this PIU (through i t s Deputy Project Coordinator) w i l l also coordinate implementation o f the TA activities under the proposed Project.
PGN has set up a Consultant Selection Committee in May 2003, to be responsible for selection o f consultants following the Bank guidelines and procedures. The committee w i l l include PGN staff who has previous experience with Bank guidelines.
0 PGN w i l l set up some four Implementation Teams in due course in line with the implementation schedule, to serve as counterpart teams o f the respective consultants for various TA activities.
0 The Bank has provided a procurement training program from April 23-24, 2003. At least 27 staff f rom PLN and PGN attended the training. More training would be provided as necessary during the course o f project implementation.
4. Overall, PLN’s Java-Bali Project Unit i s relatively inexperienced with ICB. Nevertheless, the overall risk associated with the procurement i s assessed as average because: (a) a number o f PLN PIU staff have extensive experience with ICB, and the P IU has been playing and w i l l continue to play an active role in the procurement process; (b) procurement under previous Bank financed projects for P L N and PGN has been generally successful; (c) there are risk mitigation measures in place, as mentioned above; (d) all goods contracts w i l l be subject to ICB procedures and Bank prior review; and (e) adequate arrangements are in place for implementation o f PGN’s TA component.
Procurement Arrangements
5. and materials, such as power transformers, conductors and circuit breakers, plus associated installation services; (b) IT system for enterprise resource planning (ERP) including software, hardware and implementation service; and (c) consultant services for TA activities including studies, restructuring plans, capacity buildings, as well as training. Domestic resources (PLN budget) w i l l be used to fund preparation works, engineering and design cost, any compensation associated with the physical investments, as well as other local costs.
Expenditure Items for Bank Financing: The Bank loan w i l l be used to finance: (a) equipment
6. Bank loan w i l l be procured in accordance with the Bank Guidelines (“Guidelines - Procurement under IBRD Loans and IDA Credits”, January 1995, revised in January and August 1996, September 1997 and January 1999; and “Guidelines for Selection and Employment o f Consultants b y World Bank Borrowers”, January 1997, revised in September 1997, January 1999, and M a y 2002).
Application of Bank Guidelines: All goods and consultant services to be financed under the
7. Application of Bank SBDs: Various types o f Bank standard bidding documents (SBD) shall be used in preparation o f the bidding documents. For procurement o f goods based on supply and installation arrangements, the Bank SBD for Supply and Installation o f Plant and Equipment (November 1997, Revised January 1999, and March 2002) shall be used. For other procurement o f goods, the Bank SBD for Procurement o f Goods (January 1995, Revised March 2000, January 2001, and March 2002)
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shall be used. For IT procurement, the Bank SBD for Supply and Installation o f Information Systems (single-stage or two-stage) shall be used. The Bank Standard Bid Evaluation Forms for Procurement o f Goods and Works (April 1996) shall be used in bid evaluation and preparation of the bid evaluation report.
8. Revised April 1998, July 1999, and March 2002) shall be used. In evaluation o f the proposals following QCBS and QBS, the Bank Sample Form o f Evaluation Report for Selection o f Consultants (October 1999) shall be used.
For employment of consultants, the Bank’s Standard Request for Proposals (dated July 1997,
9. qualified domestic manufacturers o f goods would be eligible for a margin of preference o f 15 percent o f the Cost, Insurance and Freight (CIF) price or the actual customs duty, whichever i s lower.
Application of Domestic Preference: In evaluation o f the bids following ICB procedures,
10. or more shall be advertised in accordance with the procedures applicable to large contracts under paragraph 2.8 o f the Bank’s Procurement Guidelines. Advertisements for a l l contracts for consulting firms shall be published in a national newspapedgazette, and those inviting expressions o f interest for consultancy contracts o f US$200,000 or more shall also be published in Development Business according to the procedures applicable to large-value contracts under paragraph 2.5 o f the Bank‘s Guidelines for Selection of Consultants. In addition, a General Procurement Notice (GPN) has been published in UNDB Issue No. 604 on April 16,2003; i t shall be updated on an annual basis.
Advertising: The invitation to bid for each contract estimated to cost US$10 mill ion equivalent
11. Table A.
Project Cost: The estimated project cost b y procurement arrangements are summarized in
12. Procurement Methods and Contract Types
0 Goods (total estimated cost i s $147.7 mi l l ion including contingencies and VAT, o f which the Bank loan covers $1 10.1 million): All goods to be financed by the Bank loan under the power transmission system components w i l l be procured through ICB procedures, based on supply and installation arrangements (except one case where supply only contract w i l l be used). Procurement packages for goods with estimated costs are presented in Table Al .
0 I T Systems (total estimated cost i s $26.0 million; o f which the Bank loan covers $20.0 million): The ERP system w i l l be subject to complex IT procurement and ICB procedures. Procurement packages with estimated costs are presented in Table A2.
0 Consultant Services (total estimated cost i s $10.5 million, o f which the Bank loan covers $9.5 million): All consultant services w i l l be subject to QCBS or QBS procedures except those that cost less than $100,000 per contract for which CQ procedures would be more practicable (up to an aggregate amount o f $0.7 million, including $0.2 mill ion for P L N and $0.5 mi l l ion for PGN). The consultant assignments with cost estimates are summarized in Table A3.
13. review o f bidding documents, bid evaluation reports (contract award recommendations) shall be carried out for all contracts o f US$500,000 per contract or more under ICB procedures. According to the current procurement packaging, such prior review would cover al l goods and IT contracts.
Prior Review Thresholds (Table B). For procurement o f goods and IT systems, Bank prior
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14. estimates, technical evaluation and contract award recommendations, as well as draft final contracts, shall be required for al l consultant contracts with an estimated cost o f US$200,000 or more. Such prior review would cover at least 90 percent o f a l l consultants contracts to be financed by the Bank. Selective post-review w i l l apply to other contracts during supervision missions based on a ratio o f one out three. Based on the current plan, no individual consultants are expected to be hired. No shortlists are expected to comprise entirely national consultants.
For consultant services, Bank prior review o f the RFP (including TOR and shortlist), cost
I
15. Procurement Supervision Plan. Field based supervision o f procurement work w i l l be conducted as part o f the regular project supervision missions, which are expected to be fielded every six months.
Procurement Method I
Procurement methods (Table A)
Expenditure Category 1. Goods
Table A: Project Costs by Procurement Arrangements (US$ mill ion equivalent)
ICB NCB Other N.B.F. Total Cost 147.67 147.67
ko ta l I 173.37 I - I 25.47 I 12.80 I 211.64 I I I I I
(130.09) [ I (10.91) I I (141.00) 1/ 2/
Figures in parenthesis are the amounts to be financed by the Bank loan. All costs include contingencies and VAT as applicable. Includes consulting services and training.
3/ N.B.F. -Not BankFinanced. -
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Table Al : Procurement Packaging for Goods
IFB-2A
IFB-2B
I IFB-1 I 500kV substations (West Java & Jakarta) 1 34.90 I ICB I S&I
150kV substations (West Java & Jakarta) 15.91 ICB S&I
150kV substations (West Java &Jakarta) 16.67 ICB S&I
IFB-3B
IFB-4
IFBJ
I IFB-3A I 150kV transmission lines (West Java & Jakarta) I 14.63 I ICB ~ I ~ G I 1 150kV transmission lines (West Java & Jakarta) 9.65 ICB Supply
500kV substations (East & Central Java) 3 1.95 ICB S&I
150kV substations (East Java & Bali) 22.24 ICB S&I
Total
I IFB-6 I 150kV transmission lines (East Java & Bali) I 1.72 1 ICB I ~ S&I- 1 147.67
3.
(a) S&I - Supply & Installation. (b) Estimated costs include contingencies and VAT
Hardware 5.20 ICB Complex IT
Table A2: Procurement Packaging for IT Systems
Total
I 1. I Preparation services I 0.30 1 N A I NBF I
26.00
Software licensing, implementation service, and 1 2* 1 training
IT institutional capacity building I 4. I ~~
1.00 I QBS, CQ 1 Multi- ~ 1 contracts
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Table A3: Consultant Services
4. I 3. I Upper Cisokan feasibility study review I 1.50 I QCBS I I
EMP implementation 0.50 NBF
PLN Subtotal 4.50
2.
3.
4.
I PGN Component I I I I
Gas distribution IPO 2.00 QCBS
Gas transmission strategic partner 1 .oo QCBS
Gas utilization and pricing study 1 .oo QCBS
1 1. 1 Corporate restructuring (including IT framework) I 0.50 1 QCBS I I
Expenditure Category
1. Goods (including IT system)
2. Consultant services (including IT services)
Contract Value Procurement Contracts Subject to Threshold (US$) Method Prior Review (US$)
>=200,000 ICB >=500,000 (about $153 million in
aggregate) >=200,000 QCBS >=200,000
100,000 - <200,000 QBS (about $9 million in < 100,000 CQ aggregate)
1 5. I Institutional capacity building I 0.50 1 QCBS I I I 6. 1 Training
I I PGNSubtotal I 6.00 I I I I I GrandTotal I 10.50 I I I
Note: QCBS -Quality and Cost Based Selection; QBS - Quality Based Selection; CQ - Selection Based on Consultants’ Qualifications.
Table B: Thresholds for Procurement Methods and WB Prior Review
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Annex 6(B): Financial Management and Disbursement Arrangements INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Financial Management
1. Summary of the Financial Management Assessment 1. The Java-Bali Power Sector Restructuring and Strengthening (JBPSRS) Project wi l l involve an expenditure of US$211.6 million, of which US$141.0 million i s expected to be funded by a loan from the Bank. The project includes two main parts, the larger part i s for priority investments for PLN (the State Power Utility) and to be implemented by PLN, and the other part comprises technical assistance for PGN (the State Gas Utility) and i s to be implemented by PGN. The project components for PLN will: 0 achieve greater utilization of existing generation capacity on East Java, by relieving constraints in the
bulk transmission gnd;
0 improve the reliability of existing generation supply at PLN and independent power producer (PP) geothermal power plants on West Java, by strengthening the associated local transmission system;
0 improve the reliability of power supply at various locations throughout Java and Bali, by strengthening local transmission and sub-transmission networks and removing system bottlenecks; and
0 support PLN’ s financial and corporate restructuring, by enhancing the company’s information technology capabilities.
Technical assistance to PGN wil l enhance i t s capabilities for expanding gas utilization on Java, particularly for use in power generation.
2. Given the relatively small size of PGN’s portion, comprising only a few TA activities which wi l l all subject to the Bank prior-review, the financial management capacity assessment has focused on PLN as the primary implementing agency. This assessment was carried out in line with the Bank requirements and based on the findings of the preappraisal mission in September 2002. A brief summary of the assessment i s provided below.
3. PLN has been the recipient of numerous financial assistance from both the Bank and other donors (including ADB) in the past, and as such i s familiar with donor requirements with respect to procurement and financial management. Since 1970, the Bank has granted 25 loans and 3 credits to PLN with an aggregate amount of US$5.1 billion equivalent, financing projects of power generation, transmission, distribution, as well as various kinds of technical assistance. In addition, over the last decade, PLN has obtained debt funds from the local capital markets through the public issue of bonds, and by virtue of this has been subjected to financial reporting and auditing disciplines that are normally applied to publicly listed companies in Indonesia, and which are relatively more rigorous than those applied to State-owned enterprises. To some degree, this has had a beneficial impact on PLN’s financial management capacity, as was apparent during the financial management assessment carried out during a mission in September 2002.
4. However, some weaknesses have been observed specifically with respect to the age and limited capability of the accounting system in use at PLN, and the maintenance of essential financial controls in a decentralized setting nationwide, for instance with respect to controls over customer collections and bank reconciliation and procedures to validate payments. PLN i s expected to be influenced to a degree by the weak control environment in Indonesia, as determined by the Country Financial Accountability
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Assessment report (April 2001) completed by the Bank.
5. with respect to this project, several measures have been proposed, including the adoption o f quarterly Financial Monitoring Reports, external audits by leading private sector accounting f i rms, and strengthened procedures for validating and approving payments to contractors for project activity.
Overall, financial management risks have been assessed as moderate. T o mitigate these risks
Summary Project Description
6. implemented through a Specific Investment Loan (SIL), and supports PLN’s medium term investment program for Java-Bali. The project’s main components are designed primarily to relieve constraints in PLN’s transmission system so that P L N can continue to fully dispatch its generation capacity in an adequately secure manner. This includes connecting new generating capacity to the bulk transmission and sub transmission systems, and strengthening local transmission systems by providing for capital expenditure to debottleneck local interconnections between bulk transmission and sub-transmission systems. The project also provides financing to help improve PLN’ s Information Technology capabilities for roll ing out an ERP system at one or two business units, and technical assistance to improve PLN’s capacity in the areas o f environment and social assessment to facilitate completion o f P L N s restructuring plan, and to review the design o f a pumped storage power plant.
The Java-Bali Power Sector Restructuring and Strengthening (JBPSRS) Project i s intended to be
7. Project Financing. The total project cost (including contingencies, IDC and fees) would be up to US$211.6 million. Financing i s expected to come from the proposed Bank loan up to $141.0 mill ion and the balance from P L N budget. Given PLN’s current financial position (see Financial Due Diligence Report), the mission has proposed that the Bank would cover 100% o f the foreign cost (FC) and 0 % of the local cost (LC) for the transmission network components, 80% o f total cost for the ERP system component, and 100% o f total cost o f a l l TA activities, while P L N budget covers the balance o f the LC, plus 100% o f the VAT and IDC, as well as the commitment fee on the Bank loan. The front-end fee (1% o f the Bank loan amount) i s payable at loan effectiveness and has been included in the Bank loan (at the choice o f the Borrower). Based on the above arrangements, the Bank loan would cover about 67% o f the total financing required, while PLN budget would cover the balance.
Project Organization Proposed
8. I t was agreed that P L N would establish a Project Implementation Unit (PIU) for the Project at Head Office, and this was established in September 2002. The P I U i s headed by a Project Director to oversee, monitor, coordinate, and report on project implementation progress. The Project Director i s assisted by five separate managers with respective responsibilities in the areas o f procurement; environmenthocial and community development; supervision and reporting, engineering, and IT. Adequate support staff (professional and secretarial) w i l l be put in place to assist the Project Director and managers. The Project Director w i l l act as a central contact with the Bank during the period o f project implementation, and w i l l report to PLN’ s Director for Transmission and Distribution.
9. Office. This unit w i l l be staffed by two full time experienced accounting personnel f rom within Central Accounts, and the essential book keeping w i l l be integrated with the existing “Magic” accounting software currently in use. Processing of payments under this project w i l l be undertaken and approved by appropriate trained staff in the Head Office Treasury section, who have prior experience in processing payment verification for PLN project activities financed b y donors. Financial Monitoring Reports w i l l be generated by the Accounting Department, for which suitable training w i l l be provided by the Bank.
For project financial accounting, a project accounting unit w i l l be set up at the Jakarta Head
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10. systems, and w i l l be submitted to PGN Central Accounts for preparation of consolidated project financial statements, and Financial Management Reports.
The technical assistance component for PGN w i l l be accounted for by PGN under stand alone
Impact of Procurement Arrangements on Financial Management
11. following features that are relevant f rom the financial management perspective:
The procurement packaging i s summarized in Annex 6(A) above. The packaging has the
a) A significant 85% o f the project expenditure has been budgeted for purchase and installation of goods and equipment such as transformers, switchgears and circuit breakers. These equipment are likely to be imported.
b) The TA components w i l l aggregate US$10.5 million. c) I t i s anticipated that al l the packages for Goods w i l l be procured through ICB procedures as defined
under the Bank procurement guidelines, on a supply and installation basis, except one package, to be based on supply only arrangement.
d) All packages are likely to be above prior review thresholds.
12. the fund flows w i l l involve direct payments and special commitments. Some smaller payments would be reimbursed by the Bank to PLN at consolidated amounts of at least $200,000 per withdrawal application. A Special Account w i l l not be required for this project.
Given the large size and nature o f individual packages, i t i s anticipated that a substantial part o f
Internal Controls and Risk Analysis
13. and the specific project i s attached as Table 1. A summary o f the main findings i s as follows:
A detailed analysis o f r i sks arising f rom the country situation, the proposed project entity (PLN)
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Table 1: Risk Assessment
Risks
Inherent Country Risk Budgetary procedures
Public Sector Accounting
Auditing Arrangements
Banking System
Overall Inherent Risk Control Risk - Entity
specific (PLN) 1. Implementing Entity Organization
2, Funds Flow
3. Staffing
4. Accounting Policies and Procedures. Information systems. Reporting and monitoring.
5. Internal Audit
6. External Audit
Overall Control Risk
Assessment
Substantial
Substantial
Moderate
Moderate
Substantial
Substantial
Moderate
Moderate
Moderate
Moderate
Low
Moderate
Summary Comments ~~~~
See detailed comments attached.
CFAA diagnostic completed in 2001 rated country control environment as weak. White paper has been prepared by Government to address issues. New laws yet to be passed by Parliament. Minimal progress in implementation o f CFAA recommendations. National accounting continues on a single entry basis with a semi- manual system. Public expenditure accounting standards not yet
~~
BPK now has legal mandate for audit as S A I . Institutional Development Plan for BPK under implementation. Banking sector restructuring under way. Central Bank now independent.
See detailed comments attached.
Financial health o f PLN has been substantially weakened in the aftermath o f the economic crisis. (see separate due diligence report). Solvency i s a serious concern. Plan for comprehensive restructuring of PLN organization i s ready and likely to be implemented soon. Implementation wi l l need to be managed carefully and may need time to stabilize routine functions. PLN operates a nation-wide network o f commercial banks for i t s operations, and has a central treasury function. However, issues in completing bank reconciliation at decentralized units have frequently been reported in audit management letters. Accounts s k i l l s and experience mix at head Office (Jakarta) i s adequate. Financial Accounting uses a 10 year old computer system, not networked or integrated nationally. Accounting policies & procedures well documented. Stand-alone systems used in field offices. Separate division responsible to prepare and administer operating budgets. Independent internal audit function, though profile o f auditors i s predominantly from non-accounting background. PLN uses public auditing firm as auditor (Andersen’s local affiliate), in line with capital market regulations. Audits are up-to-date.
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Internal Control Area
the organization not adequately supporting project financial management.
P S T e i t works implementation Risk of contracted requirements for project civil work and services not being met in quantity and quality terms Receipt o f Project goods Risk of goods received not meeting contracted specifications or quantities.
Pavment Validation Risk of the payment verijication systems allowing erroneous payments.
Risk that fundflows are not adequately authorized before being disbursed.
Project Monitoring and Reporting Risk of lapses in implementation not being promptly identified. Accounting Risk offinancial transactions being recorded inaccurately, incompletely or not according to acceptable standards.
Risk of project audits not meeting acceptable auditing standards.
Assessment
Moderate
Low
Low
Substantial
Moderate
Moderate
Moderate
Low
Brief Comment
Risks arise from imminent change in organization under an approved re- structuring plan. Risk applies only for installation o f procured equipment.
PLN procedures provide for joint verification and testing o f procured goods. Documentary trails under current procedures needs to be strengthened.
Procedures for direct payments (likely for 85% o f procurement) and reimbursements based on summary sheets are well established. PLN has prior project management experience. Full time Project Director to head PIU. Inaccuracies may arise due to weaknesses in computer system, incorrect accounting coding or book keeping delays. Risk w i l l arise only if auditors for PLN, PGN for project financial statements are not independent or not acceptable to the Bank
Note: 1 = Assessment scale High, Substantial, Moderate, Low
Mitigation
Project Accounting to be retained at H O in Jakarta, and full time staff to be placed for this, suitably trained in preparation o f FMRs and related Bank requirements. P IU to be headed by a full time Project Director. Implementation progress wi l l be monitored quarterly under F M R s . Contracts w i l l be for supply and installation.
Contracts wi l l integrate supply and installation. Quarterly monitoring in FMRs. Certificates o f Origin and Inspections wi l l be requested under Letters o f credit imports.
More stringent documentary trails wi l l be required to support payments. A l l P L N project payments wi l l be processed at PLN HO Treasury. Banking Letters o f Credit for imported goods wil l be used. PGN payments wi l l be validated at PGN prior to payment. A l l packages are expected to be above prior review threshold. Reimbursement applications w i l l be prepared by P L N and PGN respectively.
Quarterly reporting on project progress w i l l be implemented. Internal audit coverage o f project activities w i l l be requested.
Quarterly financial reports wi l l include reconciliation to Bank transactions on a quarterly basis. Financial accounting w i l l be integrated with PLN’s own accounting package. Accounting by PGN for their sub- component wi l l be separately undertaken at PGN. PLN and PGN wil l be requested to use a public accounting firm acceptable to the Bank for audit o f project financial statements.
14. T h i s above analysis i s supplemented by an analysis of financial management risks that arise f rom
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the project design and proposed implementation arrangements. These are detailed in Table 2 attached, and the mitigation steps proposed are summarized below.
1 A. Country Issues Budgetary procedures
Table 2: Financial Management Risk Assessment
public Sector Accounting
Auditing Arrangements
~ Banking System
I
ng in a Time o f Change Report” (No. 19845 IND March CFAA has classified the control environment in the
vemment drafted a set of three new laws to provide the basis for of the Public Expenditure Management systems in the country,
State Finance, State Treasury and State Finance Accountability
r y of Finance to guide the process for reviewing the draft hite Paper addresses many o f the recommendations made i t
te Paper. The revision o f one of these laws, State Finance, i s ed to be completed and the revised law submitted for
have so far been prepared o f the secondary laws I regulations d complete the regulatory picture.
The due process for issue o f such standards has commenced. (of MOF) i s also working towards a plan to introduce
ernment agencies and activities nationally, including those ertaken by the regional governments. The Bank has also provided a
limplementation. bhe country’s Central bank now has institutional independence. The loderate
ountry’s commercial banks continue a slow progress in completing and consolidation. The merger o f 4 former state-owned
anks into a new bank (Bank Mandiri) and the consolidation o f several rivate banks has helped stabilize this sector. Financial health of many rivate banks continues to be of some concern, with CAR’S s t i l l at low
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+ Project Entity
I
2. Accounting Capacity: Staffing and organization
3. Funds Flow
4. Accounting policies & procedures; information systems; reporting and monitoring.
5. Internal Audit
lsingle digit levels, lower than where the Central Bank would like them tc
ost 5 years have elapsed since the financial crisis began and PLN’s
1 amounting to Rp 46 trillion or about US$5.1 billion. i s a critical issue for PLN with current liabilities exceeding sets by a factor o f more than 2: 1. The company continues to
in 2001 with the help o f subsidies from the Central Government. PLN’s accumulated losses have been due largely to unwillingness o f GO1 to increase tariffs sufficiently following the 1997 devaluation o f the Rupiah . PLN owed (current liabilities) about Rp 19 trillion at the end o f 2001,
ver, a financial restructuring plan has recently been completed by ltants (PWC), summarizing financial recovery actions taken to datt
tails on the financial condition of PLN are contained
ical support available in Indonesia. unting policies are documented in a manual, but this i s also about I
any follows Indonesian USGAAP and IAS
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6. External Audit Arrangements
L o w PLN financial statements for 2001 were audited by Prasetio Utomo, a large public accounting firm and the local affiliate o f Andersen. The audit report was issued within 3 months o f the year-end, and had an unqualified opinion. A separate management letter was also issued to raise some matters on internal controls. Audits done by Prasetio Utomo follow Indonesian Auditing Standards. Prasetio Utomo has recently merged with Ernst & Young in Indonesia, and i s possibly the largest auditing practice in Indonesia. No arrears in audited financial statements Since PLN has publicly issued bonds in the Indonesian capital markets, i t i s required by law to publicly disclose i t s annual audited financial statements within a period o f 4 months from the year end.
Project Spec$c Risks'
1. Organization Structure
(The risk of the Project Organization not adequatel; supporting project activity and related financial management).
2. Completion of Project work & services
(Risk of the actual project implementation not meeting the requirements contracted and paid for)
3. Receipt of Project Goods
(Risk of goodspaid for not meeting contracted quantities or specifications)
4. Payment validation
(Risk of erroneous payments, or payments not warranted by or in excess oj value of work done)
lexperience in Bank projects. ICivil work wil l be required only as part \All equipment wil l be -0 w
Assessment
doderate
Comments Proposed Risk Mitigatior Measures
Risks arise from the imminent change in Project Accounting to be the PLN organization, as part of the retained at HO (Jakarta), ful restructuring exercise currently being time staf f to be placed, implemented. I t s i s apprehended that this suitably trained in change wi l l disrupt implementation and preparation o f F M R s and accounting support to the project in the related Bank requirements. early stages. Project office at Semarang has prior
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-0 w
hbstantial
o f installation of procured goods. P L N procured on a turnkey basis internal procedures prescribe a Berita covering supply and Acara (certified minutes) to be prepared installation. Quarterly for all civil work, to be used to support monitoring of contract payment requests. PLN staff has deliveries wil l be done considerable prior experience in project through FMRs. implementation, both funded internally and by donors. PLN internal procedures prescribe a Berita Acara (certified minutes) to be prepared for all goods received, to be used to support payment requests. PLN staff has considerable prior experience in project implementation, both funded internally and by donors Current payment verification and Procedures wil l be validation systems rely on reports o f prescribed to require direct checking done by field staff (Berita and independent Acara). Other independent documents to documentary evidence to bt establish validity were generally not furnished to P L N Treasury attached to payment vouchers, and to verify completion before procedures for a clear documentary trail payments are released to were not consistently followed. This third parties. Use o f bankin increases the risk o f collusion not being Letters o f Credit for import
Quarterly monitoring of contract deliveries wi l l be done through F M R s .
i. Disbursements and Tund flows
Risk of unauthorized iisbursements from Special kcount)
i. Project monitoring and aeporting
The risk of lapses in projec mplementation not being romp fly ident8ed and ,eported.)
1. Accounting
The risk of incorrect inancial reporting due to nappropriate accounting policies, standards and practices)
1. External Audit
The risk of audit of project inancial transactions and iccounts not meeting icceptable standards)
discovered ex-ante. wi l l be used. For PGN component, payments wil l
GN. PLNPGN w
ct payments or special rement, physical and financial
ements, preparation rawal Applications
rogress wi l l be closely
system proposed for the project wi l l be integrated with PLN’s existing accounting system.
ged with PLN’s and ‘s external auditors.
ired to commit to use of
nancial statements.
Notes: 1. These are risks inherent in the Project, arising from the Project design and implementation arrangements.
Rating scale: High, Substantial, Moderate, Low.
Strengths and Weaknesses
15. The financial management organization for this project has the following strengths.
a. Accounting; staff at Head Office in Jakarta are experienced accountants with the required slul ls, and wi l l be in a position to support project financial accounting. Prior exposure to the rigors of reporting to
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local capital markets i s helpful. The use o f Financial Monitoring Reports as a basis for disbursements, and the use o f Direct Payments for large transactions that are subject to prior review, w i l l also facilitate better intemal control by allowing an integrated review o f procurement, implementation, financial and disbursement information.
b. The financial management organization at P L N has adequate segregation o f responsibilities, for instance between procurement, approval of budgets, treasury management, collections and book keeping. Accounting systems, policies and procedures are also well documented and are available to al l f ield accounting units. T h i s i s positive f rom an intemal controls point of view.
16. the design o f financial management systems for this project, as discussed below.
The primary weaknesses that are apparent are as follows. These weaknesses w i l l be addressed in
a. PLN’s treasurv and cash management systems show some weaknesses, as indicated by the incidence o f inadequate bank reconciliation in some regional offices and weak control over cash collections, as reported in management letters issued by extemal auditors. N o such weaknesses were however seen in the Head Office systems. Keeping this in mind, the funds f low system for this project have been designed to make maximum use o f Head Office systems.
b. Accounting systems are semi-manual. The computer system i s very old (1992 vintage) and not networked with the regions. Consolidation work i s therefore very arduous. This i s l ikely to weaken the central exercise o f financial controls from Head Office. There i s no costing system in operation, though occasionally stand alone applications are done centrally using spreadsheet packages.
c. Impact o f changes in organization. The current organization in the accounting and financial departments are l ikely to undergo substantial change in the coming months, possibly even before project activity starts, as the corporate restructuring plan that has been prepared gets implemented, T h i s w i l l increase financial management risks in the interim period, as control systems tend to be exposed when major changes take place in duties and responsibilities.
Fund Flows and Disbursement
17. The fund f low mechanisms proposed i s as follows:
a) Method. Funds for this project are expected to be on-lent to PLN and PGN respectively by the Govemment o f Indonesia as the Borrower. The terms and conditions for this on-lending w i l l be agreed with the Bank before negotiations, and w i l l be in the currency o f the loan, in line with current Govemment policy. The interest rates and the commitment charges w i l l be at the same rate as the Govemment loan payable to the Bank. A subsidiary loan agreement i s expected to be finalized between GO1 and PLNPGN for this purpose. I t i s envisaged that payments for the procurement o f goods w i l l be made using Special Commitments and banlung Letters o f Credit for a l l imported goods, where commercial practices for processing payments w i l l apply. For Technical Assistance packages, comprising 6 packages. PLN or PGN, as the case may be, w i l l pay the contractors in the first instance and seek periodical reimbursements f rom the Bank.
b) Disbursements based on Statements o f Expenditure (SOE). I t i s envisaged that except for cases that require direct payments or special commitments, disbursements w i l l be based on SOE procedures. T h i s w i l l apply mainly to the TA packages as stated above.
c) Special Account. Given the nature o f procurement packages, a Special Account facility i s not considered necessary for this project.
- 75 -
A f low chart o f proposed fund flow procedures i s attached as Table 3.
Project Financial Management Arrangements
18. proposed:
Organization. For purposes of project financial management the following staffing structure i s
a) Payment processing: To be undertaken b y existing staff at Treasury department of P L N Head Office and PGN respectively. This w i l l help mitigate some o f the r isks arising f rom weak payment processing systems at PLN offices elsewhere.
b) Accounting: Data entry into the accounting system w i l l be undertaken by existing staff at Head Office Accounting. Project Financial Accounting unit w i l l comprise a team o f 2 full time senior staff, who w i l l have the task o f extracting relevant accounting information f rom the accounting system, preparing F M R s , reconciling bank statements, preparing Withdrawal Applications and correlating information in financial, procurement and implementation reports in the FMRs. Staff in these positions w i l l be with at least S1 local degrees in accounting and w i l l have at least 5 years prior experience in PLN. Suitable training w i l l be provided by the Bank to the accounting staff in the preparation o f FMRs.
19. Accounting policies and procedures to be followed for project financial accounting w i l l be the same as those followed for PLN financial accounting, and w i l l essentially comprise Indonesian Accounting Standards consistently applied, with the exception that FMRs w i l l be based on cash-based accounting, and not accrual based. Expenditure commitments w i l l however be monitored, and fixed assets acquired under this project w i l l be capitalized in PLN’s books. Further, procedures w i l l be specified and agreed with PLN management to strengthen ex-ante controls over authorization o f payments based on an improved documentary trail, including independent evidence acceptable to the Bank o f work completed under project contracts, o f goods delivered in quantity and quality as contracted, and demonstrated evidence o f checks on full compliance with contracts. PGN wi l l maintain their own accounting records for the TA expenditure incurred by them.
2. Audit Arrangements 20. In the other on-going project financed by the Bank, Loan 3978 (Second Power Transmission and Distribution) audited financial statements o f the company are required to be submitted to the Bank within 6 months. This covenant has been met b y PLN for this loan.
21. Although PLN i s a State-owned enterprise wholly owned b y the Government, PLN’s financial statements are currently audited by Prasetio Utomo, the local affiliate o f Andersen. This i s done to comply with local capital market regulations following the issue o f bonds to the public over the last 10 years. Though the bonds that are currently outstanding were expected to be fully redeemed in 2002, i t was proposed that P L N continue the use of respectable public accounting f i rms such as Andersen as i t s auditors so long as the project i s under implementation. PLN management has however advised that under current law, as a state-owned enterprise, PLN i s required to have their corporate financial statements audited b y BPK, the country’s Supreme Audit Board. This arrangement i s acceptable to the Bank. PLN w i l l also be asked to submit to the Bank copies o f the management letters received from their external auditors, as wel l as the annual internal audit reports. I t i s further proposed that a public accounting firm acceptable to the Bank i s appointed to audit the financial statements related to this project, at both PLN and PGN. Project implementation at P L N w i l l be verified b y the company’s Internal Audit Department. The Terms o f Reference for the audit o f Project Financial Accounts was agreed during negotiations.
- 76 -
FMR Reporting and Monitoring
22. A set o f Financial Monitoring Reports w i l l be required from each Project Implementation Unit on a quarterly basis. These reports w i l l comprise information on procurement activity, implementation progress, sources and uses of funds. The detailed formats for these have been developed before negotiations. The first such reports w i l l be required to be submitted no later than 60 days after the end o f the first quarter after effectiveness, and thereafter every quarter within 60 days of the quarter-end.
Action Plan
23. The next steps and action plan are summarized below.
Issue
arrangements
Action required Assign 2 accounting staff for project accounting on a full time basis. (PLN)
Staff to be designated at PGN. Bank to be given opportunity to review implementation plan for PLN corporate restructuring to the extent i t affects Treasury and Accounting Divisions. New Accounting codes to help generate information for FMRs to be programmed into the Magic System, and tested at PLN.
Accounting and FMR training at be imparted to staff o f PLN & PGN
Responsibility Finance Director, PLN
Finance Director, PGN
Finance Director, P L N
Head o f Accounting Division, PLN Jakarta.
Head o f Accounting, PGN
Due Date Done before negotiations
Done before negotiations
Done before negotiations
Before loan effectiveness [6.01 (c>l
Before loan effectiveness i6.01 (d)l r6.01 (e)l
- 77 -
Issue 3. Audit
-
4. Payment Validation
5. Project Implementation
6. Disbursement
Action required TOR for audit o f project financial statements to be agreed.
Appointment o f public accounting firm as external auditor to be confirmed to Bank.
Undertaking that audited financial statements and audit management letters would be submitted to Bank annually.
Modified procedures for verification and authorization o f payments for project activity to be agreed with Bank. Formats for FMRs to be agreed with Project Management. Written instruction to Internal Audit Department to include project implementation in i t s activity plan every year. Annual internal audit reports for P L N to be submitted to the Bank during the project implementation period. Terms for on-lending to PLN / PGN to be ameed.
Responsibility Finance Director, PLN
Finance Director, PLN
Finance Director, PLN
Head o f Treasury Division, PLN
Project Director, P L N & PGN
President Director, P L N
Finance Director, PLN Finance Director PGN
Due Date Agreed before negotiation
Done before negotiations, and annually thereafter.
Agreed before negotiations, and annually thereafter.
Before Loan Effectiveness [6.01 (01
Agreed before negotiations
Before Loan Effectiveness L6.01 (g>l
Agreed
Supervision Arrangements
24. Specific supervision arrangements recommended for this project are the following: a). Review of FMRs, comprising procurement, physical progress and financial information w i l l be conducted quarterly and w i l l be a key supervision step. b). Review of annual audited financial statements o f PLN to determine the financial health o f PLN. Achievement o f specified financial covenants w i l l be monitored. PLN’s external audit reports, management letters and internal audit management letters w i l l also be reviewed.
- 78 -
Table 3: Proposed Fund Flow & Accounting Procedures
1 Signed p r a x " n t conhacts received
2 Inplemntatim repcrts (Benta h) received, filed with aim shipping damnab, proof of &liveryand d f i c a t e of csigin. Catified by Roject Site officer, Project D m t w
3 Gmhactlr invaces mived.
4 F'apnt Request (SPF'J saially n u " and issued suppated with invoices, contracts, inplerrentation repots and dher independent d a m "
5 P a p n t Request sent to PILI office
approved by Roj. Lk., returned 1 TreaSUry.
6 SPP verified and approved by P I N Treanvy Head
7 a Validated P a p n t muest (SPP) to KPKN-fmkanandforccun~ fund
7 b Ftu direct papnts, SPP with suppcating d m n t s to Wank , copy to PLN
8 SPMissued F'apnt released to cimmtu
9 Copy SPM to HO Acmnts fa baking in Roject Acmnts.
10 Qarterly FMRs subnitted to Ba& verified, approved
1 1 Wi thhwl Applicatim prepared by F'D T~asurj, submitted to Bank with copies ofrelevant S M .
12 BankreimbursesSpecialAcccunt
13 Special Account statemat copy and WP sent to .&xomts for m i l i a t i o n
nplemen- PIUJakarta HO KPKN Contractw PLNHO Special WoridBank itition sites Treasury Treawry Puxunts Acct.DGB
mice
b
- 79 -
3. Disbursement Arrangements
The Bank loan w i l l be disbursed as follows: (a) for contracts under the transmission components - 100 percent o f the foreign expenditures for directly imported equipment and materials quoted on a CIF basis; 100 percent of local expenditures ex-factory for locally manufactured items; (b) for contracts under the ERP component - 80 percent o f the contract value; and (c) for consultant services and training - 100 percent o f the contract value.
The estimated annual disbursement schedule i s shown in the Project Financing Data on page 1 o f this PAD. The disbursements are expected to be completed in five years from 2003 to 2008.
Retroactive financing in an aggregated amount o f $10 million, or 7 percent o f the loan amount, would be provided for anticipated expenditures (for any advanced contracts under the ERP system component) incurred after March 21,2003 (the end of the Bank appraisal mission) and before the signing o f the loan.
Allocation of loan proceeds (Table C)
- 80 -
Table C: Allocation of Loan Proceeds
Category
Goods under Part A of the Project, including installation
Information technology equipment under Part A of the Project, including installation
Consultants’ Services & training under
(a) Part A. 4 (a) of the Project
(b) Under Part A. 4 (b) of the Project
(c) Under Part B of the Project
Front-end fee
(a) Under Part A of the Project
(b) Under Part B of the Project
Unallocated
(a) Under Part A of the Project
Total
Part A - P L N components Part B - PGN component
Amount of the Loan Allocated
102,000,000 (US$)
20,000,000
2,000,000
1,500,000
6,000,000
1,350,000
60,000
8,090,000
141,000,000
70 of Expenditures to be Financed
100% of foreign expenditures and 100% of local expenditures (ex-
factory cost)
80%
100%
100%
Amount due under Section 2.04 of this Agreement
Special account: No Special Account w i l l be required.
-81 -
Annex 7: Project Processing Schedule INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
First Bank mission (identification)
Appraisal mission departure 0 1/24/2000 0 1/24/2000 03/01/2002 03/07/2003
I Negotiations I 04/30/2003 I 05/26/2003 I
Name Mohammad Farhandi
I Planned Date of Effectiveness I 09/30/2003 I I
Speciality Task Team Leader
Prepared by: Government of Indonesia, PT PLN (Persero), PT PGN (Persero)
Note: Project was changed from a SECAL to an APL at Concept Review (November 2000), and, subsequently, from an AF'L to a S I L in November 2001.
Preparation assistance: New Zealand Consultant Trust Funds to Bank (TF038697, US$35,000; TF040475, US$35,000; and TF030399; US$59,340)
Kurt Schenk Yuling Zhou Thomas Walton Farida Zaituni Ramesh Sivapathasundram Rajiv Sondhi Karin Nordlander Yogana Prasta David Hawes* Calum Gunn" Peter Cordukes" John Cranston" Carla Sarmiento Perry Radford Laszlo Lovei Clifford Garstang"
Power Engineer / Procurement Specialist Procurement / Implementation Specialist Project Safeguards Specialist Environment / Social Specialist Information Technology Specialist Financial Management Specialist Legal Counsel Disbursement Officer Country Liaison Energy Specialist Financial Assessment Specialist Information Technology Specialist Program Assistant Program Assistant Peer Reviewer Peer Reviewer
* Indicates consultant hired by the Bank
- 82 -
Annex 8: Documents in the Project File* INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
A. Project Implementation Plan Draft Project Implementation Plan (December 2002)
B. Bank Staff Assessments
Detailed Project Assessments from Identification, Preparation and Pre-Appraisal Missions
World Bank (1996) Indonesia - Economic Consequences of Power Supply Inadequacy (Report No.
World Bank (2000) Indonesia -Oil and Gas Sector Study (Report No. 20512 of June 2000) World Bank (2001) Indonesia -Review of Electricity Supply and Demand on Java-Bali: a Framework
World Bank (2001) Indonesia-Energy Sector Assistance Strategy FYOI-03
15623-IND, of June 1996)
for Prioritizing System Investments, June 200 1
C. Other
Financial Management Questionnaire (Annex A) - duly completed for PLN. Hagler Bailly (1999) Indonesia Electricity Tariff Rationalization Study, Report prepared for the Asian
Meritec Ltd. (2001) Review of PLN's Demand Forecast and Investment Programme for Java-Bali,
Meritec Ltd. (2002) Technical and Economic Assessment of Medium Term Power Supply Options for
PLN (2000) PLN: Immediate and Critical Issues for Decision - Their Consequences for Indonesia's
PLN (2002) IT Strategic Planning, October 2002 Prasetio Utomo (Andersen), Jakarta, Analysis of Audit management letter for 200 1 Price Waterhouse Coopers (2003) PLN Corporate and Financial Restructuring Project, Final Report,
Development Bank (TA 2633-INO), May 1999
Report prepared for the World Bank (TF040475), March 2001
Bali, Report prepared for the World Bank (TF038697), July 2002
Economy, October 2000
Report prepared for PLN, March 2003
*Including electronic files
- 83 -
Annex 9: Statement of Loans and Credits INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
01-June-2003 Difference between expected
and actual disbursements' Original Amount in US$ Millions
Project ID FY Purpose IERD IDA GEF Cancel. Undisb. Orig Frm Rev'd 2002 ID-Eastern Indonesia Region Transport 200 00 0.00 0.00 0 00 160.11 27.44 0.00 PO40578
PO72852 PO73970 PO49539 PO40528
PO66051 PO66949 PO73025 PO49545 PO59477
PO59930 PO56074 PO55821 PO36049 PO40196 PO63732 PO03967 PO41 895
PO641 18 PO39644 PO40061 PO03993 PO40062 PO48715
PO36958 PO38048 PO42540 PO41894 PO03987 PO03700 PO36047
PO40195 PO49051 PO04028 PO04006 PO0401 1
PO37097 PO0401 6
2002 ID-URBAN POVERTY I/ 2002 ID-GLOBAL DEV LEARNING (LIL) 2001 ID-PROVINCIAL HEALTH I1 2001 iD-W. JAVA ENVMT MGMT 2001 ID-GEF-W. JAVA ENVT MGMT 2001 ID-LIBRARY DEVELOPMENT PROJECT - LlL 2001 ID-SECOND KECAMATAN DEVELOPMENT PROJ 2000 ID-PROVINCIAL HEALTH I
2000 ID-WSSLIC I1
2000 DECNT. AGRICULTURAUFORESTRY EXTENSI 1999 ID-MUNICIPAL INNOVS 1999 ID-URBAN POVERTY 1999 ID-EARLY CHILD DEVELOPMENT 1999 ID-SUMATRA BASiC EDUCUATiON 1999 ID-CORPORATE RESTRUCTRG 1999 ID-FIFTH HEALTH PROJECT 1999 ID-SULAWESI BASiC EDUC. 1999 WATSAL 1998 ID-W. JAVA BASIC EDUCATION 1998 BENGKULU REGIONAL DEVELOPMENT 1998 ID-SUMATRA REGL RDS 1996 CORAL REEF MGMT REHA
1996 Indonesia - IlDP 1998 ID-SAFE MOTHERHOOD 1996 CORAL REEF MGM REHAB 1997 ID-IODINE DEF. CONTROL 1997 ID-SUMATRA SECONDARY EDUCATION 1997 ID-CENTRAL INDONESIA SEC. EDU.
1997 ID-Solar Home System 1997 ID-BAL1 URBAN INFRA.
1997 ID-QUALITY OF UNDERGRADUATE EDUC (QUE 1997 BEPEKA AUDIT MODERNIZATION PROJECT
1997 ID-Railway Efficiency 1996 NUSA TENGGARA DEV. 1996 SULAWESI AGRi AREA
1996 ID-E.JAVA SEC.EDUC. 1996 ID-Strategic Urban Rds
29 50 2 66
63 20 11 70
0 00 0 00
208 90 0 00 0 00
1300 5 00 0 00
21 50 54 50 31 50 44 70 47 90
300 00 10350 20 50
234 00 0 00
34 50
42 50 6 90
28 50 96 00
104 00 0 00
11000 71 20 1640
10500 27 00
26 80 99 00 66 90
70 50 0 00
40 00 5 75 0 00
4 15 111 30 38 00 77 40 5 00
0 00 10000
0 00 20 10 0 00 0 00
15 93 0 00 0 00 0 00 0 00 0 00
0 00
0 00 0 00 0 00 0 00
0 00 0 00 0 00 0 00
0 00 0 00
0 00 0 00
0 00 0 00
0 00
0 00 0 00 0 00 2 54 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 4 10 0 00 0 00 4 10 0 00 0 00 0 00
24 30 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00
0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00
0 00 1065 0 00
24 50 5 00
0 00 0 00 3 76 5 00
50 00 0 00 6 50 9 15 0 00 9 70 0 23 0 00
1025 36 03
9 89 0 90
47 33 4 90 3 70 3 63
10 00
10574 2 63
100 15 16 97
2 68 3 97
306 50 28 51
87 02 9 25 0 92
23 16 4 07
32 02 117
1709 37 67
15000 24 88 11 36 50 35 0 94 6 78 9 15 2 46 3 63
1522 27 98
7 85 15 81 12 52 6 76
34 37 0 17
1 28 20 47
0 95
4 72
0 95 34 00 6 02 2 76 2 02
-17 90 11 93
-9 28 2 86
0 92 24 61 14 42 20 29 25 67 1903 31 85
15000 -7 52
13 10 88 02 0 86
1528 16 97 2 46
13 33 1545 27 98
20 15 43 91 19 88 7 66
81 69 5 07 4 76
24 11
10 95
0 00 000 0 00 0 00 0 00 000 0 00 0 00 0 00 0 00 0 92 4 33
14 42
0 00 0 32 0 00 0 00
50 00 0 00 7 22
20 28 154 6 78
11 30 1 43
10 63
0 00 0 00 3 29
19 85 10 19
6 76 5 51 0 17
0 36 0 00
-2 28
Total: 2246.76 488.13 35.04 253.13 1322.54 736.45 132.67
- 84 -
INDONESIA STATEMENT OF IFC's
Held and Disbursed Portfolio 0 1-June-2003
In Millions U S Dollars
Committed Disbursed IFC IFC
FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 1994 1991 1988 1997 1989 1997 198919 1/94 1997 1993196 1995 1997100 1997
1995 1991 199019 1193195199101 1992194196 1995 1997 1997100 1998 1993 1996 1993 1997 200 1 1992195 1997 1997 1994 1991 1980187 200 1
Dianlia KDLC Bali
Manulife PT AdeS Alfindo PT Agro Muko PT Alumindo PT Astra PT Astra Graphia PT BBL Dharmala PT Bakrie Pipe PT Bank NISP PT Berlian PT Grahawita PT Indaci PT Indo-Rama PT KIA Keramik PT KIA Serpih PT Kalimantan PT Mako PT Megaplast PT Nusantara PT Pramindo Ikat PT Samudera PT Sayap PT Sigma PT Viscose PT Wings PTAstra Otopart Prudential Asia SEAVI Indonesia Semen Andalas Sunson
LYON-MLF-Ibis
4.00 0.00 2.01 0.00 0.00 0.00
13.16 0.00 0.00
11.29 33.57 5.00 7.42 2.16 0.00 0.00
16.51 15.00 20.00 0.00 7.00 7.63
25.00 0.00 7.50 0.00
20.31 6.51 0.00 0.00 0.00 0.00
12.41
0.00 1.72 0.00 0.32 6.98 2.20 0.00 5.82 2.00 0.00 0.00 0.00
20.00 0.00 0.00 0.00 0.00 0.00
15.00 1.32 2.50 0.00 3.94 5.00 0.00 3.00 0.00 0.00 1.07 2.24 1.26 0.00 0.00
1 .oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 1.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00
25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 2.01 0.00 0.00 0.00
10.00 0.00 0.00
21.34 0.00 0.00
18.72 0.00 0.00 0.00
53.49 49.50 5.22 0.00 0.00 5.93
36.18 0.00 6.00 0.00
23.33 6.40 0.00 0.00 0.00 0.00 7.87
0.00 0.00 0.00 1.72 2.01 0.00 0.00 0.32 0.00 6.98 0.00 2.20
13.16 0.00 0.00 5.82 0.00 2.00
11.29 0.00 33.57 0.00 5.00 0.00 7.42 16.65 2.16 0.00 0.00 0.00 0.00 0.00
16.51 0.00 15.00 0.00 20.00 15.00 0.00 0.79 7.00 2.50 7.63 0.00
25.00 3.94 0.00 5.00 7.50 0.00 0.00 3.00
20.31 0.00 6.51 0.00 0.00 1.07 0.00 2.24 0.00 1.26 0.00 0.00
12.41 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.97 0.00 0.00 1.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00
25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 2.01 0.00 0.00 0.00
10.00 0.00 0.00
21.34 0.00 0.00
18.72 0.00 0.00 0.00
53.49 49.50 5.22 0.00 0.00 5.93
36.18 0.00 6.00 0.00
23.33 6.40 0.00 0.00 0.00 0.00 7.87
Total Portfolio: 216.48 74.37 32.44 245.99 212.48 70.49 31.41 245.99
Approvals Pending Commitment
FY Approval Company Loan Equity Quasi Partic 2001 PT BLT I1 12.00 0.00 0.00 0.00 2002 Wings Oil Palm 11.50 0.00 0.00 10.00 2002 NISP R I 0.00 0.00 3.64 0.00 1993 PT INDORAMA SWAP 10.00 0.00 0.00 0.00 2002 ManulifePrincipl 0.00 0.00 0.04 0.00
Total Pending Commitment: 33.50 0.00 3.68 10.00
- 85 -
Annex 10: Country at a Glance INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Economic ratios'
POVERTY and SOCIAL Indonesia
I
2002 Population, mid-year (millions) GNI per capita (Aflas method, US$) GNI (Atlas method, US$ billions)
Average annual growth, 199642
Population I"/.) Labor force ("A)
Most recent estimate (latest year avallabie, 199642) Poverty ("7 of population below national poverty line) Urban population p? of total population) Life expectancy at birth (years) Infant mortality (per 7,000 live births) Child malnutrition ("7 of children under.5) Access to an improved water source ("7 ofpopulafion) Illiteracy ("7 ofpopulation age 75+) Gross primary enrollment I"? of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1982
GDP (US$ billions) 94.7 Gross domestic investmenffGDP 27.8 Exports of goods and servicedGDP 25.3 Gross domestic savingdGDP 29.0 Gross national savingdGDP
Current account balance/GDP -5.6 Interest paymentdGDP 1.6 Total debt/GDP 26.5 Total debt service/exports Present value of debffGDP Present value of debffexports
1982-92 1992-02 (average annual growth) GDP 6.9 2.5 GDP per capita 5.0 0.9 EXDO~~S of aoods and services 6.9 3.1
Indebtedness
216.7 690
149.9
1.6 2.5
16 43 66 39 34 76 12
108 110 106
1992
139.1 30.5 27.9 33.4 29.4
-2.0 2.7
63.3
2001
3.4 1.9 1.9
I
East Asia & Pacific
1,826 900
1,649
1.1 1.3
37 69 36 12 74 14
107 106 106
2001
141.3 21 .8 42.3 29.2 26.9
4.9 4.2
94.7 43.8
2002
3.7 2.2
Low- income
2,511 430
1,069
1.9 2.3
31 59 76
76 37 96
103 88
2002
172.9 20.2 35.4 27.1 23.4
4.2 2.7
75.1 49.7
200206
4.1 2.9
-1.2 5.5
Development diamond*
Life expectancy
-
GNI Gross per + --i primary capita enrollment
I
1.
Access to improved water source
* - -Indonesia Low-income group
Economic ratios'
Trade
T savings ~omestlc +t+y+ Investment
Indebtedness
a, c
Indonesia a d -
STRUCTURE of the ECONOMY
(56 of GDP) Agriculture Industry
Services
Private consumption General government consumption Imports of goods and services
Manufacturing
(average annual growth) Agriculture industry
Services
Private consumption General government consumption Gross domestic investment Imports of aoods and services
Manufacturing
1982
23.9 37.9 11.9 38.2
59.5 11.5 24.1
1982-92
3.8 9.2
12.6 6.5
4.6 4.9 9.0 3.0
1992
17.5 36.3 19.1 46.3
57.8 8.8
25.0
199202
1.6 3.2 4.7 2.3
5.0 0.4 -0.6 1.9
2001
17.0 45.6 25.0 37.5
63.0 7.8
34.9
2001
1 .o 3.3 4.1 4.6
4.4 9.0 7.7 8.1
2002
17.5 44.5 25.0 38.1
64.7 8.2
26.5
2002
1.7 3.7 4.0 4.4
4.7 12.8 -0.2 -8.3
1 Growth of Investment and GDP (Oh) 1 20 -
0
-20
-40
Growth of exports and imports ('h) L 140 -
-Exports -O-lmpons I Note 2002 data are preliminary estimates. Group data are through 2001 *The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.
- 86 -
Zndonesia PRICES and GOVERNMENT FINANCE
Domestic prices (99 change) Consumer prices Implicit GDP deflator
Government finance (?A of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit
TRADE
(US$ mi//ions) Total exports (fob)
Fuel Estate crop
Manufactures Total imports (cif)
Food Fuel and energy Capital goods
Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)
BALANCE of PAYMENTS
(US$ millions) Exports of goods and services Imports of goods and services Resource balance
Net income Net current transfers
Current account balance
Financing items (net) Changes in net reserves
Memo: Reserves including gold (US$ millions) Conversion rate (DEC, lccal/US$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ millions) Total debt outstanding and disbursed
IBRD IDA
Total debt service IBRD IDA
Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity
World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers
1982 1992
.. 7.6 6.1 5.4
.. 17.2
.. -3.6
1982 1992
.. 33,796
.. 10,671
.. 684
.. 14,224
.. 26,774
.. 1,274
.. 2,104
.. 11,700
86 77
.. 112
1902 1992
20,251 37,187 22,716 34,874 -2,465 2,313
-2,993 -5,664 134 571
-5,324 -2,780
3,471 4,850 1,853 -2,070
661.4 2,029.9
1982 1992
25,133 88,002 1,735 10,640
707 814
8
583 82
501 133
207 1,515 22
,003 692 31 1 845
366 -533
2001
11.5 10.8
20.7 0.1
-2.4
2001
57,364 12,648
872 22,275 34,669 2,497 5,523 9,050
27 20
135
2001
62,779 50,180 12,599
-8,143 2,444
6,900
-8,278 1,378
27,890 10,260.9
2001
133,744 1 1,435
722
29,056 1,753
32
0 1,334
-13,590
0
645 585 853
-268 932
-1,200
2002
11.9 7.2
18.6 0.7
-1.7
2002
57,342 11,549 1,200
19,263 34,823 2,581 6,100 8,388
28 20
142
2002
62,751 51,048 11,703
-6,508 2,067
7,262
-3,707 -3,555
31,445 9,311.2
2002
129,793 10,728
794
32,335 1,896
34
0 -1,436
-1 1,479
0
103 41 9
1,065 -646 865
-1,511
97 98 99 00 01 02 - *’* *GDP deflator - D ’ C P I
Export and Import levels (US$ mill.)
75,000 I 50 000
25 000
i o
O2 I 1 96 97 98 99 00 01
EXpOrtS Imports I
Current account balance to GDP (“A)
/ 6 r
Composition of 2002 debt (US$ mill.)
G 20029 A
A - IBRD B - IDA D -Other multilateral F - Private C . IMF
E - Bilateral
G - Short-term
ueveiopmenr monomics 4lUW
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Additional Annex 11 : PLN’s Restructuring Program INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
Introduction
Up until late 2002, the Electricity Act (Law No. 1511985) defined the legal framework for Indonesia’s electricity sector. Under this Act, PLN-a Perum (Le. government company) established under Government Regulation 1811972-had both the right and obligation to supply power in Indonesia. The 1985 Electricity Act permitted the establishment o f private power producers, distributors and licensees, but-with the exception o f captive power for self-generation-private provision o f power did not become a reality until after the issuance o f Presidential Decree 37/1992. This Decree specifically authorizes private sector participation under Build-Own-Operate (BOO) schemes, and permits cooperatives and other legal entities to generate, transmit and distribute power for public use.
Under Government Regulation 23/1994, PLN was converted from a Perum to a Persero (a limited liability corporation), and two generation subsidiaries on Java-Bali were then established in 1995, around the time o f the appraisal of the Bank’s most recent loan to P L N (i.e., the Second Power Transmission and Distribution Project, Loan 3978-IND). Currently, Indonesia Power i s PLN’s generation subsidiary operating out o f Jakarta, and PJB i s PLN’s generation subsidiary with i t s head office based in Surabaya. PLN also has a vertically-integrated subsidiary on the island o f Batam. Up until March 2003, PLN’s senior management team, termed the Board o f Directors, comprised five Directors-Human Resources and Organization, Marketing and Distribution, Operations, Planning, and Finance-under the President Director. In March 2003, the roles o f the five Directors were redefined, and now comprise: Finance, Transmission and Distribution, Generation and Primary Fuels, Marketing and Commercial, and Human Resources Development and Organization. This Board of Directors i s accountable to the shareholders’ representative-namely the Minister o f State Owned Enterprises-through a shareholder appointed Board o f Commissioners.
The Government’s Power Sector Restructuring Policy of 1998
Background Analytical W o r k and Donor Support. Two major Bank-funded studies on regulation and private power were completed for Indonesia in late 1996. These examined options for the future power sector structure and recommended the adoption o f a single buyer market for a 5-10 year period. This work was followed b y a set o f key Bank-funded post-crisis analytical pieces-covering comparative power sector reform internationally, electricity market design for Java-Bali, Indonesia-wide electricity tariff issues, and captive power-leading to the development of the GOI’s f i rs t interministerially-approved and publicly-launched Power Sector Restructuring Policy. 1998 Indonesia Power Sector Reform Workshop Background Papers comprised the following reports: (i) Power Sector Reform: Global Lessons and Implications for Indonesia; (ii) Competition in the Bulk Power Market: a Proposal for Java-Bali; (iii) Averting Bankruptcy and Enabling Reform: Tariff Issues in Indonesia’s Electricity Sector; and (iv) Captive Power in Indonesia: Historical Development, Present Status and Future Role. The Bank-as well as ADB and USAID-assisted the Government to prepare, as well as present and discuss (at a partly Bank-funded workshop) the draft o f this Policy, which was officially launched by the Government in August 1998, and subsequently issued as a Ministerial Decree.
The Bank’s
Sector Vision, Objectives and Reform Target Areas. The Policy paper envisages a world-class power sector able to provide high-quality, reliable service with increasing levels o f efficiency. The objectives o f the Policy are (a) the restoration o f the sector’s financial viability, (b) competition, (c) transparency,
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and (d) more efficient private sector participation. There are six areas targeted for reform, namely: (i) industry restructuring and unbundling: (ii) the introduction o f competition; (iii) tariff-setting, cost recovery, and the removal o f subsidies; (iv) rationalization and subsequent expansion o f private sector participation; (v) the redefinition o f the Government’s role; and (vi) revising and strengthening the legal and regulatory framework.
Geographic Unbundling of PLN. The Policy envisaged the unbundling o f PLN geographically, to allow the distinct separation o f PLN’s potentially commercial operations in Java-Bali f rom those operations s t i l l requiring direct Government support over the longer term (outside Java-Bali). A regional electricity company comprising all o f PLN’s assets outside Java-Bali would be established, and subsidies for electricity development outside Java-Bali would be channeled through a Social Electricity Development Fund (SEDF) until such time as those operations could become wholly (or partially) commercially viable and financially independent. However, any subsidies intended to directly support the utilization o f electricity (or o f fuel) by the poor, whether outside Java-Bali or on Java-Bali, would be made explicit and transparent as a distinctly separate line item in the Government’s budget.
Functional Unbundling of PLN within Java-Bali. Further, the Policy intended PLN’s operations on Java-Bali to be additionally unbundled by function-namely, transmission, distribution; and generation-to allow the transition to a competitive multi-buyedmulti-seller (MBMS) market for operations on Java-Bali over the medium term, and in preparation for eventual full or partial privatization. The existing functions in PLN’s transmission and dispatch unit (P3B) would be transferred to a new Java-Bali transmission company, and the four existing distribution units on Java-Jakarta, West Java, Central Java and East Java-to four distribution and retail subsidiaries. In addition, i t was proposed that a separate Bal i distributionhetail subsidiary be created f rom one o f the existing regional units (Wilayah XI). The existing Java-Bali generation subsidiaries-Indonesia Power and PJB-would be further split up in such a manner as to ensure effective competition.
Introduction of Competition. As an interim step to full competition-which required the 1985 Electricity Law to be amended or replaced-the Policy proposed first establishing a Single Buyer Market (SBM) on Java-Bali. However, there were other justifications for not moving directly to an M B M S market. Even i f the legal and regulatory constraints were to be removed, other constraints also needed-and many s t i l l need-to be addressed, namely: (i) transmission bottlenecks reduce the potential for competition by limiting flexibility in dispatch, and b y detrimentally impacting the reliability o f supply; (ii) gas supply take-or-pay contracts and unliberalized fuel markets make i t difficult for generators to compete effectively; (iii) the new distribution companies would have a lack o f experience in competitive market trading, and their creditworthiness would be weak; (iv) the level and structure o f post-crisis power tariffs was uneconomic and distorted; (v) the post-crisis independent power producer (IPP) program needed rationalizing; and (vi) the Java-Bali system i s dominated b y a single plant with the potential to exert significant market power (i.e., Suralaya). Nevertheless, the drawbacks inherent in a S B M were recognized, and Bank-funded analysis work that fed into the design o f the Policy recommended a S B M design that would address many of the typical problems associated with such a market model. The relevant study proposed that competition could possibly be introduced gradually alongside the S B M through the later introduction o f a parallel contracts market, although i t was acknowledged that such a step might unnecessarily complicate the transition process. These recommendations were incorporated into the Policy.
Initial Implementation of the Policy. The Government’s init ial step to implement i t s Power Sector Restructuring Policy was to establish, under Presidential Decree 139/1998, a cross-Ministerial Steering Committee to oversee PLN’s restructuring program, as well as to oversee the rationalization o f
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Indonesia’s IPP program. Also, in December 1998, the GO1 held an internal workshop to develop the implementation framework and schedule for the Policy. During this meeting, a few changes were made to the transitional measures proposed in the Policy, notably the concept o f an interim P L N holding company to foster the institutional and financial capacity o f the various subsidiaries before being spun off as independent entities. (Consequently, the notion of a distinct regional electricity company for outside Java-Bali was shelved). Following the implementation workshop, the Minister of Energy and Mineral Resources established a team to oversee the implementation o f the needed legal and regulatory reforms, including the drafting of a new electricity law and implementing regulations. In support o f the implementation o f the Policy, the Bank and ADB agreed to focus on complementary areas of restructuring activities. ADB provided the Government with a program loan of US$380 mill ion and a technical assistance loan o f US$20 mill ion (with co-financing from JBIC o f US$400 million) to deal with sectoral aspects o f reform, such as preparing the init ial drafts o f the new Electricity Law and implementing regulations, including the market rules governing the creation of the Single Buyer and M B M S markets. While the Bank worked closely with ADB in providing feedback on the init ial drafts o f the Electricity Law, the Bank’s subsequent focus was on the financial and corporate restructuring o f PLN, b y helping P L N to prepare the detailed design o f i t s restructuring implementation plan.
Status of PLN’s Financial and Corporate Restructuring Program
Corporate and Financial Restructuring T A Assignment. PLN’s ongoing financial and corporate restructuring program has been supported by technical assistance (TA) provided under the Bank’s Second Power Transmission and Distribution (PTDII) Project (Ln. 3978-IND). The financial and corporate restructuring TA assignment was intended to assist P L N to start restructuring i t s operations and prepare for the establishment o f the Single Buyer Market on Java-Bali, in line with the transitional measures o f the 1998 Power Sector Restructuring Policy. As was broadly described in the TA Contract’s Description o f Services, key deliverables o f the Consultant under the assignment originally included: ( i ) the detailed implementation plan for PLN’s corporate restructuring and organizational unbundling, along with defined roles and business interactions between subsidiaries, strategic business units (SBUs) and the PLN holding company, as well as performance criteria for the new operating entities; (ii) recommended financial restructuring measures to assist P L N in restoring i t s financial viability during the transition period, as well as recommendations on possible mechanisms for the proposed Social Electricity Development Fund (SEDF); (iii) recommendations on the improvements in PLN’s information technology (IT) capabilities needed to support the restructuring program; (iv) cost accounting policy and general procedures manuals; (v) a review o f PLN’s business practices and efficiency improvement plans, in order to provide recommendations for further improvements applicable to the new industry structure; (vi) assistance to P L N to establish the Single Buyer Market and to prepare the associated new contracts and licenses; (vii) an elaboration of private sector participation and privatization options; (viii) a change management strategy and program; and (ix) an external communications strategy and program.
Inception Report Stage. The TA assignment got underway in April 2001. In November o f that year, the Bank reviewed the assignment’s Inception Report, and met with PLN’s Board o f Directors to discuss progress with the restructuring program. At that time, P L N informed the Bank that: (i) implementation o f i t s financial and corporate restructuring program had the full support o f PLN management; (ii) management was clear on the nature and timing o f the key decisions which need to be made, and the activities which need to be undertaken; (iii) the Consultant had been provided with a strong counterpart team within P L N for giving input to the implementation process; (iv) P L N was working with the Consultant to ensure broad-based support for the exercise f rom shareholders, stakeholders and staff; and (v) some important decisions had already been made-in parallel with, and in anticipation of, work being performed b y Government on preparing the sector’s legal and regulatory framework. While the Bank
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endorsed the init ial findings and recommendations o f the Consultant, the Bank also requested that the Consultant provide P L N with strong analytical support to justify proposed options and recommended solutions, in order that PLN’s Board o f Directors and Board of Commissioners could make well-informed decisions, and successfully socialize the implementation o f those decisions.
Interim and Final Report Stages. Socializing some of the Consultant’s recommendations (particularly with P L N staff) proved-at least initially-to be a complex and time-consuming task. Therefore, the closing date o f the PTDII project was extended from the end o f May 2002 to the end o f March 2003, in order to allow the Consultant’s work to be completed with Bank-financing. Subsequently, the Consultant’s Interim Report o f June 2002 was received and reviewed by the Bank. While the bulk o f the Consultant’s work was completed by September 2002, the Final Report was presented in March 2003. The PTDI I loan was extended in order to allow the completion o f this Final Report, based on understandings reached with PLN relating to i t s overall financial and corporate restructuring program, in particular that PLN-with assistance from the Consultant-should: (i) prepare a brief but comprehensive Financial Restructuring Plan suitable for presentation to senior levels o f the Government o f Indonesia; and (ii) finalize the updating o f the organization’s Information Technology (IT) Strategy. PLN’s draft Financial Restructuring Plan was completed in September 2002, and i t s revised IT Strategy was finalized the following month.
Restructuring Organization and Project Management. Work under the TA assignment was organized around four broad workstreams: market mechanisms and commercial arrangements; corporate restructuring and organization development; financial restructuring and privatization; as well as project management and change management. Within this overall framework, seven joint project working groups were established during the inception and design phases o f the assignment, comprising P L N and Consultant core and expert advisory teams for: (i) Market and Commercial; (ii) Corporate Restructuring; (iii) Financial Restructuring; (iv) FinanciaVMarket Modeling; (v) Privatization; (vi) Communication; and (vii) Efficiency Drive and Information Technology (IT). In addition, a joint Project Management team was established, with every team reporting to a Steering Committee comprising all members o f PLN’s Board o f Directors, but with the Director o f Finance and the Director o f Human Resources and Organization serving as the key client representatives. P L N i s currently worlung to realign and refocus i t s own design phase worlung groups and the Project Management team into a central restructuring implementation unit for PLN. This unit w i l l manage the continued implementation o f key organizational changes.
Market and Commercial Arrangements. At inception stage, the Consultant outlined the recommended market vision for PLN. This was agreed to b y PLN’s Board in December 2001, recognizing that this would be dependent on external factors, in particular on: (i) the passage o f the proposed new Electricity Law; (ii) the promulgation o f associated implementing rules and regulations and industry codes (i.e., the grid code, tariff code, and planning and competitive tendering code); and (iii) the establishment o f the proposed new regulatory agency for the sector. Consequently, decisions by P L N on the number o f generation companies on Java-Bali, as well as on the overall contractual framework, have been pending. The Consultant conducted a workshop with PLN in March 2002 to discuss the draft contracts and license framework, and formally submitted a Contract and License Report to PLN in June 2002, but no further progress has been made on this aspect o f restructuring implementation, given that finalization o f this aspect o f the Consultant’s assignment required the implementing regulations to be promulgated under the new Electricity Law. Nevertheless, the Consultant’s recommendation that the Single Buyer and System Planning be located at P L N Head Office was agreed to b y PLN’s Board in November 2001, and that PLN set up an internal “shadow” single buyer market in order to build i t s capabilities in preparation for a later market arrangements. In support o f this, the Consultant provided PLN with an outline o f the pre- and
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post-dispatch procedures. Furthermore, the Consultant completed the preparation o f a uniform definition o f distribution and retail activities, required for accounting separation.
Recommendations for New Generation Companies on Java-Bali. In the TA Inception Report, the Consultant recommended that four generation companies (i.e., Gencos) on Java-Bali-formed b y splitting each o f PLN’s existing Java-Bali generation subsidiaries (Indonesia Power and PJB) into two companies, after some minor asset swapping-would result in the best balance of the various objectives for the unbundling process. This recommendation was supported b y follow-up analytical work. Namely: Modelling of the Indonesia Electric System: Results and Summary (November, 2001), and PLN Generation Company Structure Report (January 2002). Subsequently, in May 2002, P L N instructed the Consultant to proceed with the financial modeling work based on the assumption that four Gencos would be the outcome o f unbundling, although without swapping any assets between Indonesia Power and PJB. The Bank and the Consultant both agreed that not engaging in such swaps would be unlikely to have a significant impact on the efficiency o f either the power system or the future electricity market.
Corporate Restructuring, Change Management and Communications. Based on recommendations in the Inception Report, PLN’s Board agreed-in principle-to the Consultant’s proposals for the new Head Office organizational structure in November 2001. In addition, the Consultant prepared an HR strategy review, performance measures and a communications plan. Since then, the Consultant prepared the detailed organizational design and implementation plan for Head Office (including the selection criteria for staff at levels 1-3), the generating subsidiaries, the Java-Bali transmission unit, distribution business units, strategic business units (SBUs) outside Java-Bali (i-e., the Wilayahs), and shared support services. Consequently, after some revisions in light o f the passage o f the Electricity Law in the September 2002 (see below), PLN’ s Board of Commissioners approved this blueprint for PLN’s corporate restructuring, and has pressed forward with implementing the restructuring program. A key step has been redefining the roles o f PLN’s Board o f Directors to prepare for functionally unbundling the company’s Java-Bali operations, and b y evaluating-along with the Ministry of State Owned Enterprises-new candidates for the Director positions. The new Board o f Directors was appointed in early March 2003, and candidates for the new Deputy Director positions are currently being sought.
Efficiency Drive Program. As part o f the inception stage, the Consultant reviewed PLN’s ongoing Efficiency Drive Program and recommended a number o f priority areas for further efficiency improvements, notably: (i) strengthening the capital expenditure process: (ii) improving the maintenance effectiveness o f the distribution business units: and (iii) assisting P L N to understand the strategic implications o f i t s procurement processes. P L N requested that, o f these three areas, the Consultant focus on capital expenditure, and also to provide a brief review o f PLN’s demand side management (DSM) initiatives (which the Consultant did). Subsequently, the Consultant has presented to P L N the Status Report - Total Maintenance Contract (TMC) Review (March 2002), and reviewed PLN’s capital expenditure prioritization process. PLN’s Efficiency Drive Program continues to be a useful initiative involving all levels o f the organization and provides a vehicle for socializing the need for restructuring.
Information Technology (IT). Building on the init ial findings in the Inception Report, the Consultant submitted i t s comprehensive findings on IT to P L N in i t s report PLN - Information Technology Recommendations (November 2001). The Consultant also submitted White Papers to P L N on IT Shared Services (January 2002), IT Governance and Organization Architecture (March 2002), and Conceptual Application Architecture (May 2002), al l serving as inputs to PLN’s revision o f i t s 1996 IT Strategy. Subsequently, PLN aligned the revised version o f this earlier lT Strategy to the ongoing restructuring o f PLN, as well as to current technology, and this Strategy was finalized in October 2002, following review by the Bank. In addition, P L N prepared a TOR for consultants to help P L N issue the Request for
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Information (RFI) and Request for Proposals (RFP) packages for i t s Enterprise Resource Planning (ERP) system-encompassing management and financial management activities such as accounting and budgeting, as wel l as asset, materials and operations management. In addition, PLN have prepared a TOR for the consultancy services required to put together the RFP package for init ial Customer Information Systems (CIS) implementation at one business unit. The Bank provided i t s comments on all these TORS as part o f a further independent consultant’s review of PLN’s IT implementation plans, a review completed at the end o f March 2003.
Financial Modeling and Private Sector Participation. The TA Consultant presented init ial findings and recommendations for PLN’s financial restructuring in the Inception Report and proposed upgrading PLN’s financial projections model. The Consultant completed this new financial model for preparing financial projections for the unbundled companies and SBUs, and PLN staff are beginning to become familiar with i t s use. The Consultant also prepared Cost Accounting Manuals for pilot implementation at the Java-Bali transmission unit (P3B), the West Java Distribution Unit, and Indonesia Power. In addition, the Consultant presented P L N with the report Private Sector Participation in the Power Sector of Indonesia - Selected Approaches for PLN (April 2002), and a report on possible Social Electricity Development Fund (SEDF) mechanisms.
PLN’s Financial Restructuring Plan. In October 2000, P L N presented the GO1 with a White Paper entitled PLN: Immediate and Critical Issues for Decision - Their Consequences for Indonesia’s Economy. As i s discussed in Annex 5, this Paper provided the impetus for a number o f measures undertaken b y the Government to improve PLN’s financial health. Subsequently, in March 2002, the TA Consultant prepared a Future Debt Capacity Study to assist PLN in making i t s case to the Ministry o f Finance (MOF) that the company can absorb additional debt f rom multilaterals, as well as f rom other lenders, and the Bank reviewed this study. (This study can been seen as crucial to the Cabinet’s agreement in June 2002 to allow new borrowing for PLN). As a result of these two earlier papers, the Bank suggested that P L N prepare another White Paper in the form o f a Financial Restructuring Plan, summarizing financial restructuring actions taken to date and their impacts, but highlighting in particular what further actions s t i l l need to be taken. P L N (with assistance from the TA Consultant) began preparation o f this Plan, and the Bank provided i t s comments throughout the preparation process. The assumptions underpinning the financial projections presented in the Paper were reviewed in depth b y the Bank in September 2002. As a result o f this review, the Bank requested that P L N change a number o f assumptions relating to energy sales, capital expenditure and fuel consumption, to more closely align the financial modeling work with PLN’s actual medium t e r m investment program (see Annex 5).
The 2002 Electricity Law
Passage of the Law. The political instability under the Wahid presidency impacted the implementation o f the sectoral agenda outlined in the 1998 Power Sector Restructuring Policy. Slow initial progress with IPP renegotiations, and resistance to power tariff increases, also impacted the planned implementation schedule. The draft Electricity Law was not submitted to the DPR until January 2001, and was subsequently subjected to multiple revisions at select committee level. Nevertheless, DPR approval o f the bill was obtained in early September 2002. The new L a w abolishes PLN’s monopoly over distribution and i t s role as the single buyer o f a l l power produced by private generators, and i t permits producers to sell directly to consumers under certain conditions. A new regulatory agency-the Electricity Market Supervisory Agency (EMSA), reporting to the President-is to be set up within one year o f the Law’s passage. Competition in generation i s to be introduced within five years, wi th competition extended to retail level when E M S A deems that circumstances permit.
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Implementing Regulations, Rules and Plans. The passage o f the Law i s important as a useful statement o f principles that eliminates the prolonged uncertainty surrounding the direction o f institutional reforms for the sector. However, as i s typical with much Indonesian legislation, the Law leaves many details to be defined in the implementing rules and regulations, which have yet to be promulgated. New Government regulations referenced in the Law include further provisions on: (i) the Electricity Market Supervisory Agency; (ii) the prohibition o f market domination; (iii) retail and open access tariffs; (iv) mechanisms and payment amounts relating to ancillary services; (v) the determination and collection o f levies on existing transmission and distribution facilities for the development o f similar facilities in underdeveloped areas; (vi) Electricity Supply Business Licenses (for generation, transmission, distribution, retailing, system operation, and market operation) as well as Operating Licenses (for self-generation); (vii) Electricity Supporting Business Licenses (relating to supporting industries and services, such as consulting, construction, installation, testing and instrumentation); (viii) compensation for land acquisition; (ix) the sale o f electricity between countries; (x) electricity safety; and (xi) other issues o f general guidance and supervision for the electricity sector, including environmental protection. The designation o f regions to apply competition w i l l also be achieved through Government regulation. Apart f rom regulations, the Government i s also required to prepare a National Electricity General Master Plan (EGMP), taking into account relevant Regional EGMPs prepared by Regional governments, themselves al l subject to guidelines on such plans to be prepared by the Minister responsible for the electricity sector. The market rules and transmission grid code applying to regions designated as competitive, are al l to be promulgated b y the EMSA.
Transition to Competition. A five year phase-in period has been adopted for the introduction o f the key reforms, at the end o f which Government i s to have designated at least one region for competition in generation (at a minimum). The Law outlines a l i s t o f pre-conditions which have to be met prior to market opening in any region. These include the requirements that: (i) end-use electricity tariffs have reached cost recovery plus a reasonable profit; (ii) there i s competition in primary energy sources, implying the full removal o f fuel subsidies; (iii) the condition o f the system allows the application o f competition, namely that adequate generation reserves exist and the transmission network i s unconstrained; (iv) the rules required for the introduction o f competition have been prepared; and (v) the hardware, software and system infrastructure are in place to allow market operation and transaction settlement. In addition, the Law indicates that enterprises engaged in competition should do so on a level playing field, and that EMSA has the final word on any additional criteria which might apply. Operating licenses for captive power plants (Le., self-generation) w i l l be issued by Regents, Mayors, Governors, or the Minister, depending on the location o f the installation facilities, and additional business supply licenses can be provided to holders of operating licenses for selling any excess power. (In competitive areas this authority w i l l be vested in EMSA).
Competitive Areas. Principles o f unbundling and transmission/distribution open access w i l l apply in regions designated b y the Government as competitive. Generation, transmission, distribution, electricity retailing at high voltage (HV) and medium voltage (MV) levels (to be handled b y electricity sales agents), electricity retailing at low voltage (LV) levels (handled b y electricity sales enterprises, or electricity sales agents i f approved by EMSA), market operation, and system operation, are al l intended to be undertaken b y different entities (which include State, Regional, private, or cooperative enterprises), and Electricity Supply Business Licenses for each o f these activities are to be issued by EMSA. (However, distribution and retailing at LV level can be undertaken by the same entity as long as separate accounts are maintained). Transmission and distribution are not to be subject to competition, as they are deemed natural monopolies, and State enterprises have the right o f f i rs t refusal for transmission and distribution development. Transmission, distribution and LV retailing w i l l all occur within “worlung areas” to be designated b y the EMSA, while H V M V retailing and generation are required to be
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competitive. Consequently, although the EMSA i s to determine the transmission/distribution open access charges, and the retail tariffs for LV consumers, the EMSA would only set HV/MV prices in the event i t concludes that competition can only be implemented in generation. Retailers w i l l be able to purchase bilaterally f rom generators, as well as from the wholesale electricity market. The system and market operators are to be financed jointly b y enterprises transacting in the wholesale market, and various provisions on their ownership and staffing w i l l be determined by the EMSA. The EMSA also has the discretion to decide that system and market operation, or transmission and systedmarket operation, are not ready to be separated, in which case the bundled activities are to be undertaken b y a single State enterprise.
Non-Competitive Areas. In non-competitive areas, the licensing authority for off-grid supply i s vested in Regents, Mayors and/or Governors, depending on the cross-boundary nature o f the relevant activities, in accordance with Regional EGMPs. The Minister issues licenses related to facilities connected to the National Transmission Grid (which the Government i s to define), as well as cross-provincial activities, in accordance with the National EGMP. For al l electricity supply activities in non-competitive areas, these can be undertaken in a vertically-integrated manner, and the right o f f i rs t refusal goes to a State enterprise. Electricity tariffs w i l l be set b y national or regional government.
Impact of the Electricity L a w on PLN’s Restructuring Implementation Plan
The 2002 Law and the 1998 Policy. The key objectives and final outcomes o f the Government’s 1998 Power Sector Restructuring Policy remain generally consistent with the 2002 Electricity Law. The Law’s elucidation explicitly highlights that the Law serves as the foundation and reference for the restructuring o f the electricity sector, so that business management in the sector can be undertaken in a more efficient, transparent, and competitive manner. In particular, the Law envisages competition as only being realizable in those regions having a functionally unbundled sector, and where there i s open access to the transmission and distribution networks for all players. Competition w i l l be possible even down to LV level, as the Law gives E M S A the authority to allow electricity sales agents to supply LV consumers within the worhng area o f an electricity sales enterprise. With respect to private investment, the Law’s requirement that State enterprises be given the right o f first refusal for transmission and distribution does not preclude significant private sector participation even i f such enterprises accept (for example, the State enterprise for telecommunications, PT Telkom, i s now around 48% privately owned, and listed on the NYSE and the LSE). Nevertheless, the Law does differ in a number o f respects from the 1998 Policy, thus impacting the implementation plan for PLN’s financial and corporate restructuring program. Apart f rom the changed implementation timetable, the most notable differences relate to the omissions in the Law. For instance, the Social Electricity Development Fund i s no longer established under the new Law-although i t was in the original draft submitted to the DPR-and thus financing mechanisms for subsidies and public service obligations w i l l remain undefined until the relevant implementing regulation i s issued. Further, there i s a lack o f articulation concerning the transitional measures-such as any explicit reference to a single buyer market, which was included in the original draft-during the transformation to a fully competitive market.
Implications of the L a w for PLN’s Restructuring Program. Clearly, the passage o f the Electricity Law, and the yet-to-be promulgated implementing rules and regulations, w i l l require that some o f the recommendations o f the restructuring TA be reviewed for consistency, and modified accordingly. Nevertheless, notwithstanding the differences between the 1998 Policy and the 2002 Law, many recommendations in the TA relating to PLN’s new organizational design, j ob descriptions, business procedures, and performance indicators, sti l l remain valid. Consequently, the Bank considers that-on balance-the key objectives and final outcomes o f the 1998 Power Sector Restructuring Policy are s t i l l
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achievable, although there w i l l be delays to some aspects of the implementation program, pending the establishment o f EMSA, and the issuance by both Government and EMSA o f the new regulatory framework. Already, in addition to preparing the groundwork for the establishment o f the EMSA, the Directorate General for Electricity and Energy Utilization (DGEEU) has already drafted the majority o f supporting regulations, rules, and codes. Notably, in early March 2003, DGEEU issued i t s draft blueprint for implementing the Electricity Law over the period 2003-2010, and-following stakeholder consultation-finalized this document b y the end o f April 2003. Subsequently, PLN w i l l issue i t s own correspondingly updated Plan for restructuring, targeted for the end o f December 2003. In addition, once the implementing regulations, rules and codes have been issued, further refinements w i l l likely be required, although DGEEU has already circulated drafts o f these documents to P L N in order to minimize the prospect o f significant changes.
Further Implementation of PLN’s Restructuring Program
Key Implementation Measures. Although the Law does not indicate that the regions encompassed b y the Java-Bali system w i l l be the first to be designated as competitive, in i t s sectoral blueprint, DGEEU has made i t clear that the Java-Bali system w i l l be designated as competitive before September 2007. Consequently, to comply with the Law’s requirement that competitive regions must be largely functionally unbundled, P L N must continue preparing to spin o f f i t s Java-Bali operations as independent successor companies. Initially, P L N can press on with implementing i t s new organizational design and business processes, as outlined in i t s restructuring implementation plan already approved by the Board o f Commissioners, and begin roll ing out the new information systems required to allow the existing Java-Bali subsidiaries and business units to be established as efficient independent entities. Effective implementation o f subsequent steps, however, w i l l require key implementing regulations to be in place, and market rules and industry codes to have been issued b y the yet-to-be-established regulatory agency, EMSA. Once E M S A finalizes the new market rules, transmission charging methodology and open access tariffs, and decisions relating to generation market power, PLN can proceed with fully unbundling i t s Java-Bali operations. This w i l l firstly involve the creation o f four (or more)-subject to E M S A approval-new generation subsidiaries f rom Indonesia Power and PJB. In addition, five independent distribution companies and an independent transmission company w i l l be created from PLN’s operations on Java-Bali. All o f these new Java-Bali companies w i l l init ially be established as subsidiaries under the P L N holding company, with a target date o f the end o f 2006. These companies w i l l subsequently be spun-off as independent companies before such time as the Government designates the Java-Bali system as competitive, which (by Law) must occur before the end o f September 2007. The distribution companies w i l l maintain separate accounts for distribution and retailing activities.
Proposed Loan Conditionalities. I t i s intended that these measures w i l l be supported in the new Project through conditionalities in the loan. At negotiations the Bank and PLN agreed for PLN to continue i t s corporate restructuring program in a manner acceptable to the Bank and consistent with the implementing regulations to be promulgated b y the Government under the new Electricity Law, as well as with the market rules and industry codes to be issued by EMSA. This shall include: (i) preparing and furnishing to the Bank, not later than December 31,2003, for the Bank’s review and comment, a detailed time-bound action plan (the Plan) for the business reorganization and corporate restructuring o f P L N and, thereafter, carrying out the Plan taking into account the Bank’s comments; (ii) completing-not later than December 3 1,2006-the restructuring of PLN’s existing Java-Bali generation subsidiaries, Indonesia Power and PJB, into four or more new generation corporate subsidiaries, and the separation o f PLN’s transmission and distribution business units for Java-Bali into corporate subsidiaries, in accordance with the Plan; and (iii) establishing-not later than September 30,2007-independent successor generation, transmission and distribution companies f rom PLN’s operations in Java-Bali, also in accordance with the
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Plan. In parallel, during negotiations the Bank and the government reached to an understanding that the Govemment w i l l promulgate: (i) b y September 30, 2003, the Electricity Market Supervisory Agency regulations; and (ii) by September 30,2004, other implementing regulations relating to the prohibition o f market domination, retail and open access tariffs, mechanisms and payment amounts relating to ancillary services, and Electricity Supply Business Licenses and Operating Licenses.
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Additional Annex 12(A) Environmental and Social Assessment and Management Plan INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
1. Introduction
The combined Environmental and Social Assessment and Environmental Management Plan (EMF) was prepared b y PT Perusahaan Listrik Negara (PT P L N Persero) with consultant support provided by the World Bank as part of joint preparations for the proposed Java-Bali Power Sector Restructuring and Strengthening (JBPSRS) Project. A summary of the main issues i s presented here. The complete E M P i s found in the Project files
The loan would provide financing for a range o f critical projects under PLN’s Limited Scenario (2002-2006) for Java-Bali. Major types o f subproject activities covered b y the loan package include:
0 Relieving Constraints in the Bulk Transmission System, which w i l l improve power supply to the Cirebon area and to the southern part o f Central Java,
0 Improving Availability and Security of Generation Capacity, by improving the transmission system from the geothermal power plants at Wayang Windu, Kamojang and Drajat in West Java;
0 Strengthening Local Transmission and Subtransmission Systems, including in Cirebon, Surabaya, Bandung, and Bali.
2. Likely Impacts
Adverse environmental and social impacts of all of the planned subprojects are likely to range from minor to negligible. The proposed activities consist o f replacing or uprating the conductors on existing transmission lines and expanding existing substations. For all subprojects as currently envisaged in the Project, PLN already owns or has access rights to all of the land involved; therefore there w i l l be no associated need for land acquisition or resettlement, and no dwellings, enterprises, or buildings w i l l be adversely affected. However, any land acquisition and compensation which may arise for subprojects to be prepared during project implementation w i l l be undertaken in accordance with the Project’s Land Acquisition and Resettlement Policy Framework. There are no polychlorinated biphenyls (PCB’s) involved, and there w i l l be only limited increases in exposure to electromagnetic fields (EMF). Principal concerns relate to traffic control during rewiring, disposal o f o ld equipment, coordination o f activities with other departments, and public information and relations with communities where the subprojects would occur.
3. Environmental Management Plan
The JBPSRS Project has been categorized under World Bank environmental guidelines as a Category B, or low impact, project. As a Category B Project, a full E M P i s not normally required. However, since under current regulation by Mmistry o f Environment Decree No. 17/2001 requires an AMDAL study for every 150 kV transmission project, then P L N w i l l carry out an EM, even though i t i s l ikely that these subprojects w i l l only have minor impacts.
P L N has established a Project Implementation Unit (PIU) with overall responsibility for coordination and management of the project, under the Director’s Decree No. 134.WOlO/DIR/2002, dated 18 September 2002. There i s a Project Environmental Team (PET) under the P IU that w i l l oversee and coordinate al l aspects o f this EMP, as well as the Land Acquisition and Resettlement Policy Framework. Subprojects w i l l
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be implemented as field operations, under the respective operational units. The PET w i l l work under the direction o f the leader o f the PIU. The creation of a corporate CHESS (Comunity/Health/.Environment/Systems/ Sustainability) Group i s proposed. The Director o f that group would also be represented on the PET. The CHESS Group would be available to provide technical support, training, and monitoring support as needed.
Relations between the project management team, PLN management, and the World Bank and the government are shown below.
Project Organization for Implementation of EMP
Investment Program
Screening of Subprojects
The PET will have the on-going task of environmental screening of any additional subprojects or activities to be funded under the project. For al l o f the subprojects as presently defined, the World Bank environmental category would be B. However, under Indonesian AMDAL criteria, there are three subprojects which require an AMDAL study (Perak-Ujung, Bandung Selatan-Kamoj ang-Daraj at-Ciamis, and W. Windu Incomer). The PET needs to confirm that for any changes or additions to the proposed subprojects, an appropriate review i s conducted to ensure that any associated impacts are consistent wi th the World Bank’s Environmental Category rating o f B.
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A M D A L Assessments.
The PET will oversee any needed A M D A L studies in collaboration with the implementing PLN project operations units. If either ANDAL-RKL-RPL or UKL-UPL are needed, the PET w i l l review the terms o f reference, and provide advice and support to the implementing unit. The PET w i l l also review the results o f any such studies to ensure that they are satisfactorily completed and ready for submission to the relevant AMDAL Commission.
Public Consultation.
Public consultation with affected communities i s now required in the screening and TOR preparation of A M D A L studies, and the affected public are represented in the A M D A L Commissions that review the ANDAL/RPL/RKL studies. During the preparation o f this assessment, P L N convened a public consultation in Surabaya concerning the planned Perak-Ujung transmission line uprating project. This meeting (as reported in Annex D o f the main E M P in the Project files) provides a model for consultations that may be conducted in the future for this (and other) project activities. In addition, the Ministry o f Environment with World Bank support i s preparing guidelines for public consultation under the AMDAL process.
Mitigation of Impacts
PLN’s established procedures for designing, constructing, and maintaining transmission lines are summarized in its General Policy Concerning the Establishment of Overhead Transmission Lines (included as Annex E in the main EMP report in the Project files) and have been incorporated into this EMP. The General Policy addresses public participation, compensation and rehabilitation o f property, and general mitigation measures. This policy has previously been reviewed and approved b y the Wor ld Bank. The existing General Policy provides adequate guidance for activities planned under the JBPSRS Project. But the General Policy i s in need o f updating and expansion in scope. This could be done during implementation o f the project’s Environmental Management Development Component. Specific policies and procedures applicable to any land acquisition and compensation which may arise during the course o f project implementation are addressed in the General Policy and this EMP, but have also been collated in a stand alone Land Acquisition and Resettlement Policy Framework (as i s required under World Bank Safeguard Policies and Procedures).
Monitoring and Reporting
Environmental monitoring for the JBPSRS Project will be under the authority of the PET. The PET’S team leader should receive copies o f a l l progress and other reports required under the AMDAL process, and share them with all members o f the PET.
In addition to the AMDAL reports, which are to be submitted as required to Indonesian agencies, the PET w i l l prepare, every six months, an environmental summary report. This report w i l l be submitted in English to the World Bank environmental officer in Jakarta, and copied to the Bank’s project manager. This report would briefly describe:
0
0
a l i s t o f new subprojects developed or approved for implementation, and the categorization o f their l ikely environmental impact; a summary o f progress o f any AMDAL studies in progress; a summary o f significant mitigation measures, if any, undertaken during the previous six months;
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a description o f any significant problems or successes in environmental mitigation during the period; and identification o f any notable environmental or social events anticipated during the coming six months.
4. Institutional Strengthening
In the mid-l980s, P L N maintained an Environmental Committee, and the newly created Engineering Group included an environmental specialist group, which had responsibility for PLN’s obligations to meet national and other environmental regulations.
In 1995, PLN’s Environment Division (DIVLING) was established under the Directorate o f Operations. A World Bank loan funded an 18-month capacity building program to “strengthen PLN’s environmental management capabilities” in 1997-98. Several guidelines and procedures were established
In October 2001, the Environment Division was dissolved, and most environmental management responsibilities were devolved to field operation units, in accord with corporate-wide decentralization.
In the future, PLN i s to function as a central holding company for a number of subsidiaries and business units. Each o f these groups w i l l need to comply with AMDAL requirements and Indonesian environmental standards. P L N not only needs to strengthen the capabilities o f these individual units, i t needs to provide clear corporate leadership for environmental excellence in the Indonesian electric power industry. If i t fails to do so, i t risks losing the confidence o f the Indonesian public, o f international financial institutions and other investors, o f communities and individuals who may be affected b y specific projects, and o f the Ministry o f Environment and o f local governments who must approve i t s plans and monitor their implementation.
The JBPSRS project includes a 5-year Environmental Management Development (EMD) Program. This EMD component w i l l include a combination o f technical assistance, information technology, and training:
0 JBPSRS Project Monitoring and Support; AMDAL, International EIA, and Public Consultation Strengthening and Support; and Environmental Management Systems and Training.
Harmonization of Environmental Procedures
PLN has received loans and funding support from the World Bank, and from the Asian Development Bank (ADB) and the Japanese Bank for International Cooperation (JBIC). Each o f these international financial institutions (IFI) has their own distinct set o f environmental regulations and requirements for project lending. As a result, P L N approaches each new IFI-supported project and i t s concomitant environmental and social assessment and mitigation procedures on an ad hoc basis.
In recent years, Indonesian AMDAL requirements have also become more comprehensive. With the decentralization of governance generally, oversight o f the AMDAL process has also been decentralized. AMDAL reviews are now conducted and decided at the local level, with participation o f local stakeholder representatives. In addition, under the recent AMDAL revisions, public consultations are required. Generally speakmg, the AMDAL requirements are as comprehensive and rigorous as those o f the IFIS, sometimes more so.
I t would seem to be to everyone’s advantage if all of the principal IFIs were to accept that Indonesia’s
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A M D A L procedures provide a satisfactorily high standard of environmental assessment process. I f the IFIS were to recognize and accept this principle, i t would simplify the environmental planning, assessment, implementation, and reporting requirements for P L N and i t s business units. O f course, quality assurance for preparation o f AMDAL reports, as well as performance o f mitigation measures o f any environmental management plan, must be an on-going process.
Annex 12 (B) Land Acquisition and Resettlement Policy Framework INDONESIA: Java-Bali Power Sector Restructuring and Strengthening Project
1. Introduction
This Land Acquisition and Resettlement Policy Framework has been prepared by PT Perusahaan Listrik Negara (PT P L N Persero) with consultant support provided b y the World Bank as part o f joint preparations for the proposed Java-Bali Power Sector Restructuring and Strengthening (JBPSRS) Project. I t i s a companion document to PLN’s Environmental & Social Assessment and Management Plan for the Project.
The loan would provide financing for a range o f critical projects under PLN’s Limited Scenario (2002-2006) for Java-Bali. Major types o f subproject activities covered b y the loan package include:
0 Relieving Constraints in the Bulk Transmission System, which w i l l improve power supply to the Cirebon area and to the southern part o f Central Java,
0 Improving Availability and Security of Generation Capacity, b y improving the transmission system from the geothermal power plants at Wayang Windu, Kamojang and Darajat in West Java;
0 Strengthening Local Transmission and Subtransmission Systems, including in Cirebon, Surabaya, Bandung, and Bali.
2. Likely Impacts
Adverse environmental and social impacts of all of the planned subprojects are likely to range from minor to negligible. The proposed activities consist o f replacing or uprating the conductors on existing transmission lines and expanding existing substations. For all subprojects as currently envisaged in the Project, PLN already owns or has access rights to al l o f the land involved; therefore there w i l l be no associated need for land acquisition or resettlement, and n o dwellings, enterprises, or buildings w i l l be adversely affected. However, any land acquisition and compensation which may arise for subprojects to be prepared during project implementation w i l l be undertaken in accordance with this Land Acquisition and Resettlement Policy Framework. Land Acquisition and Resettlement Action Plans consistent with this Policy Framework w i l l be submitted b y PLN to the Bank for approval after specific planning information on each subproject becomes available.
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3. Land Acquisition and Resettlement Policy Framework
Organizational Arrangements
The Project Environmental Team (PET) wi l l oversee and coordinate all aspects of the Project’s Environmental Management Plan, including any issues relating to land acquisition, compensation and resettlement as outlined in this Land Acquisition and Resettlement Framework. PLN has established a Project Implementation Unit (PIU) with overall responsibility for coordination and management o f the project, and the Project Environmental Team (PET) w i l l work under the direction o f the leader o f the PIU. Relations between the project management team, PLN management, and the World Bank and the government are shown below.
Project Organization for Implementation of Land Acquisition and Resettlement Policy Framework
World Bank
ava-Bali Medium Ter
AMDAL Assessments.
The PET wil l oversee any needed AMDAL studies in collaboration with the implementing PLN project operations units. Since under current regulation by Ministry o f Environment Decree No. 17/2001 requires an AMDAL study for every 150 kV transmission project, then P L N w i l l carry out an EM, even though i t i s likely that these subprojects w i l l only have minor impacts. If either ANDAL-RKL-RPL or UKL-UPL are needed, the PET w i l l review the terms o f reference, and provide advice and support to the implementing unit. The PET w i l l also review the results of any such studies to ensure that they are satisfactorily completed and ready for submission to the relevant AMDAL Commission.
Public Consultation
Public consultation with affected communities i s now required in the screening and TOR preparation
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of A M D A L studies, and the affected public are represented in the A M D A L Commissions that review the ANDAL/RPL/RKL studies. During the preparation o f the JBPSRS Project’s EMP, P L N convened a public consultation in Surabaya concerning the planned Perak-Ujung transmission line uprating project. This meeting (refer to Annex D of the main LARPF report in the Project Files) provides a model for consultations that may be conducted in the future for this (and other) project activities. In addition, the Ministry o f Environment with World Bank support i s preparing guidelines for public consultation under the AMDAL process.
PLN’s Policies and Procedures for Land Acquisition, Compensation and Resettlement
PLN’s established procedures for designing, constructing, and maintaining transmission lines are summarized in its General Policy Concerning the Establishment of Overhead Transmission Lines, which has been incorporated into the Project’s EMP and this Land Acquisition and Resettlement Policy Framework. The General Policy addresses public participation, resettlement, land acquisition, compensation and rehabilitation o f property, and general mitigation measures. This policy has previously been reviewed and approved by the World Bank. The existing General Policy provides adequate guidance for activities planned under the JBPSRS Project. PLN’s detailed policies and procedures in the General Policy applicable to land acquisition, compensation, and resettlement are provided in Annex E (in the main LARPF report in Project files).
Monitoring and Reporting
Environmental monitoring for the JBPSRS Project will be under the authority of the PET. The PET’S team leader should receive copies of a l l progress and other reports required under the AMDAL process, and share them with all members o f the PET. In addition to the AMDAL reports, which are to be submitted as required to Indonesian agencies, the PET w i l l prepare, every six months, an environmental summary report. This report w i l l be submitted in English to the World Bank environmental officer in Jakarta, and copied to the Bank’s project manager. This report would briefly describe:
0
0
a l i s t of new subprojects developed or approved for implementation, and the categorization o f their likely environmental impact; a summary of progress o f any AMDAL studies in progress; a summary of significant mitigation measures, if any, undertaken during the previous six months (including details o f any land acquisition and compensation): a description o f any significant problems or successes in environmental mitigation during the period; and identification of any notable environmental or social events anticipated during the coming six months.
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Karawang
Bogor
JAKARTASerang
Tangerang
Bandung
Cirebon
Tegal Pekalongan
BatangKendal
Semarang
Yogyakarta
Surabaya
Jepara
PatiKudus
Tuban
Bojonegoro
Salatiga
Bantul
Sleman
Mojokerto
Gresik
PasuruanProbolinggo
Bondowoso
Situbondo
Banyuwangi
IBRD 32213
APRIL 2003
6°
8°
108° 110° 112°
114°
6°
8°
108° 110° 112° 114°106°
106°
10°10°
PHILIPPINESTHAILAND
MALAYSIAMALAYSIA
BRUNEI
PAPU
AN
EW G
UIN
EA
A U S T R A L I A
Jakarta
SU
MA
T ER
A
K A L I M A N TA N
J A W A
SULAWESISERAM
IRIAN JAYA
FLORES
TIMOR-LESTE
South ChinaSea P A C I F I C O C E A N
I N D I A N O C E A N
Java Sea
SINGAPORE
I N D O N E S I A
Area of map
I N D O N E S I A
JAVA-BALI POWER SECTOR RESTRUCTURINGAND STRENGTHENING PROJECT
0 50 100 150 KILOMETERS
I N D I A N O C E A N
This map was produced by theMap Design Unit of The World Bank.The boundaries, colors, denominationsand any other information shown onthis map do not imply, on the part ofThe World Bank Group, any judgmenton the legal status of any territory, orany endorsement or acceptance ofsuch boundaries.
BALI
Madura Island
J a v a S e a
JAWA BARAT
D.K.I.JAKARTA
JAWA TENGAH
B A L I
D.I. YOGYAKARTA
JAWA
TIMUR
SUMATERA
SURALAYA SCPP
CILEGON
DEPOK III
GANDULBEKASI
CIBINONG
CAWANG
KEMBANGAN
BALARAYA
M. TAWAR CCPP
CIBATU
CIRATA HEPP
SAGULINGHEPP
BANDUNG SELATAN
CIREBONMANDIRANCAN
TASIKMALAYA
TANJUNG JATI B SCPP
UNGARAN
KLATEN
PAITONSCPP
GRATI CCPP
SURABAYA SELATAN
GRESIK CCPP
KRIAN
KEDIRI
POWER STATIONS
500 kV TRANSMISSION LINES
500 kV SUBSTATIONS
PROVINCE (PROPINSI) CAPITALS
NATIONAL CAPITAL
PROVINCE (PROPINSI) BOUNDARIES
EXISTINGASSOCIATED
OF IPPONGOING
COMMITTEDPLANNEDPROJECTUPGRADE
