World Bank Documentdocuments.worldbank.org/curated/en/373641468254071045/pdf/multi... · US$1.00 Rupiah (Rp) 625 Rp 100 US$0.16 ... Perusahaan Jawatan Kereta Api, the state railway

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3581-IND

STAFF APPRAISAL REPORT

INDONESIA

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT

December 9, 1981

Industrial Projects DepartmentEast Asia & Pacific Projects Department

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

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CURRENCY EQUIVALENTS

US$1.00 Rupiah (Rp) 625Rp 100 US$0.16Rp 1 million = US$1,600

UNITS AND EQUIVALENTS

1 metric ton (t) = 1,000 kilograms or 2,204 pounds1 metric ton per year (tpy) 1,000 kilograms per year1 kilocalorie (kcal) = 3.97 British thermal units (BTU)1 kilometer (km) = 0.6215 miles1 ton of coal equivalent (tce) = one metric ton of coal with a calorific value

of 7,000 kcal/kg.1 megawatt (MW) = 1,000,000 watts (W)1 hectare (ha) = 2.471 acres

PRINCIPAL ABBREVIATIONS AND ACRONYMS

ADB - Asian Development Bank

BAHTERA - P. T. (Persero) Pelayaran Bahtera Adhiguna,a Government bulk products shipping corporation

BAMCO - Bukit Asam Mine Constructors, Project ManagementConsultant for the mine component

BAPPENAS - National Planning Agency of IndonesiaCIDA - Canadian International Development AgencyCPCS - Canadian Pacific Consulting ServicesEDC - Export Development Corporation, CanadaESS - Eksplotasi Sumatera Selatan, the Southern Sumatra

operational unit of PJKAKfW - Kreditanstalt fuer WiederaufbauKP5BA - Kelompok Pelakusara Proyek Pengembangan Pertambangan

dan Pengangkutan Batubara Bukit Asam, an Indonesianproject organization for the Engineering Phase of the Project

MCD - Marine Consultants and DesignersMCS - Joint Venture of Montreal Engineering, Canadian

Pacific Railways and Swan WoosterMKI - Morrison-Knudson International Company, Inc.PERTAMINA - Indonesia State Oil and Natural Gas EntityPJKA - Perusahaan Jawatan Kereta Api, the state railway of IndonesiaPLN - Perusahaan Umum Listrik Negara, the state electric power

company of IndonesiaPNTB - Perusahaan Negara Tambang Batubara,

the state coal agency of IndonesiaPOKKORLAK - Kelompok Koordinasi Pelaksana Proyek Pengembangan Pertambangan

dan Pengangkutan Batubara Bukit Asam, the IndonesianCoordination Organization for Project Implementation

PTBA - P. T. (Persero) Tambang Batubara Bukit Asam,the newly-created coal mining company

PT PANN - P. T. (Persero) Pengembangan Armada NiagaNasional, the national fleet development corporation

RC - Rheinbraun Consulting, GmbHREPELITA - Five-Year Development Plan of Indonesiatpy - metric tons per yeartkm - ton-kilometers

INDONESIA FISCAL YEAR

April-March; i.e., FY 1981 covers the period April 1, 1981 - March 31, 1982

Industrial Projects Department/East Asia & Pacific Projects DepartmentDecember 1981

INDONESIA FOR OFFICIAL USE ONLY

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. INTRODUCTION .............................................. 1

II. THE PROJECT SECTORS ........................................ 1

A. Energy Resources, Consumption and Sector Strategy .... 11. Development Strategy ............................. 22. Institutional Framework ......................... 23. Oil ............................................. 24. Natural Gas ..................................... 35. Hydro ........................................... 36. Geothermal ...................................... 37. Coal ............................................ 3

B. The Power Sector ..................................... 5.1. PLN and The Role of the Sector in the Economy ... 52. PLN's Development Plan, including Suralaya

Power Generation ................................ 6C. The Transport Sector ..... ....................... 7

1. General ......................................... 72. Railways ........................................ 83. Maritime ........................................ 8

III. THE PROJECT ................................................ 9

A. Project Objectives ................................... 9B. Project Formulation ................................... 10

1. The Suralaya Power Scheme ....................... 102. Bukit Asam Coal Deposit ......................... 103. Project Preparation - Bukit Asam Engineering Loan 114. Major Design Alternatives ....................... 12

C. Project Description ............. .. .................. 131. Bukit Asam Mine ................................. 132. Muara Tiga Mine ................................. 173. Mining Community ................................ 174. Railway and Communications System .... ........... 185. Tarahan Terminal ................................ 206. The Ship ........................................ 227. Kertapati Terminal .............................. 238. Environmental Considerations ..... ............... 249. Coal Exploration Program ........................ 25

D. Project Execution and Implementation , .. . . 261. Executing Entities .............................. 262. Overall Project Coordination ..... ............... 313. Project Management and Operational Assistance

for Project Components .......................... 314. Project Implementation Schedule .... ............. 35

This report was prepared by Messrs. B. Stenberg and E. P. Rodriguez and Mrs. J.Wright of the Industrial Projects Department; and Messrs. G. Bain, E. Ohlundand L. Siegel of the Transport Division, East Asia and Pacific ProjectsDepartment.

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

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Page No.

IV. CAPITAL COSTS, FINANCING AND PROCUREMENT ....... .. .......... 38

A. Capital Costs ...... ................................... 38B. Financing Plan .... ...................... 42C. Procurement ................ .......................... 44D. Allocation and Disbursement of the Bank Loan.. 45

V. THE MARKET FOR INDONESIAN STEAM COAL AND ANTHRACITE 46

A. World Market Situation and Prospect .46B. The Market and MarketJing of Indonesian Coal ... 48

1. Demand/Supply Prospects . .. 482. The Market for Bukit Asam Steam Coal . .48

3. The Market for Bukit Asam Anthracite . .494. Marketing of Bukit Asam Coal. 495. Coal Pricing Pol:Lcy . .50

VI. FINANCIAL ANALYSIS ... 52

A. Contractual Arrangements . . .52B. PT Bukit Asam ... 53

1. Coal Pricing and Revenue Projections . .532. Operating Costs .. 543. Financial Projections .. 56

C. PJKA-ESS ... 58D. Financial Rates of Return and Sensitivity Tests 59E. Major Risks ... 61

VII. ECONOMIC ANALYSIS .62

A. Economic Rate of Return .. 62B. Foreign Exchange Benefits . .63C. Institution Building. 63D. Employment and Other Social Benefits . .64

VIII. AGREEMENTS REACHED AND RECOMMENDATIONS .64

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CHARTS

3-1 Overall Project Implementation Organization3-2 Organizational Structure of Railway Project Management3-3 Project Implementation Schedule3-4 Project Critical Path Schedule

ANNEXES

3-1 The Project Entities - Detailed Description3-2 Muara Tiga - Detailed Description3-3 Railway Component - Detailed Organization Chart for Project Management3-4 PT PANN - Past Financial Results

4-1 Detailed Capital Cost Estimates (by Component)4-2 Consolidated Working Capital Schedules--PTBA and PJKA/ESS4-3 Disbursement Schedule for Bank Loan

5 International Market for Steam Coal and Anthracite

6-1 PTBA--Assumptions for Financial Projections6-2 PTBA--Coal Production, Sales and Revenues, FY1981-946-3 PTBA-Consolidated Income Statement, FY1981-946-4 PTBA--Consolidated Sources and Application of Funds, 1981-946-5 PTBA--Consolidated Balance Sheet, FY 1981-946-6 Financial Rate of Return -- Assumptions and Calculation6-7 Railway Component: Assumptions for Financial and Economic

Rates of Return7 Economic Rate of Return--Assumptions and Calculation

MAP

IBRD No. 13232R-1 - Indonesia and Project Location

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SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE

Reference Title, Date and Authors

A. General 1. Milestone 3 - Selected Systems ReportOctober 1979 by MCS Consultants

2. Milestone 3 - Selected Systems Report-AddendumNovember 1979 by MCS Consultants

3. Milestone 3 - Selected Systems Report-AddendumNo. 2 Cost Review ExerciseTerminal and Shipping System for5 mtpy Training, January 1980 byMCS Consultants

4. Milestone 6 - Final Report for Phase IJuly-August 1980 by MCSConsultants

B. Mine 1. Re-evaluation of Cost Estimation of AB-StudyJanuary 1980 by Rheinbraun Consulting

2. Milestone 6 - Coal Mine SystemJuly 1980 by RheinbraunConsulting

3. Milestone 5 Report - Accounting SystemsMay 1980 by PT PamintoriConsultants

C. Townsite 1. Planning of Workers Settlement for Bukit AsamCoal Mining Plant by the Center of PlanningStudies, Institute of Technology, Bandung,Indonesia

D. Terminals 1. Tarahan Terminal Prequalification ReportJune 1980 by MCS Cconsultants

2. Tarahan Terminal Tender Documentsby MCS Consultants

E. Railway 1. Selective Railway Operating Statistics for ESS 1973-80prepared by PJKA 1981

2. INDONESIA: Bukit Asam Coal Project - Selection ofTransport Route, April 23, 1981, AEPTR

3. INDONESIA: Bukit Asam Coal Project - Selection ofAxle Load, AEPTR

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F. Shipping 1. Marine Transportation Alternatives -Preliminary June 20, 1979, by MarineConsultant and Designers

2. Transportation Study of 4 mtpy SeaTransportation and Suralaya Terminal,November 1979 by MCS Consultants

3. Study of Five Marine TransportationAlternatives Selected from June 1979.Milestone 3 Report, September 7, 1979,by Marine Consultants and Designers

4. Survey of Bulk Carriers for use asSubstitutes for Specialized Self-Unloader,January 8, 1980, by Marine Consultants andDesigners

5. Survey of Bulk Carriers to Carry 40,000 CDWTof Coal for Use as Substitutes for SpecializedSelf-Unloader, Undated, by Marine Consultantsand Designers

6. Bukit Asam Coal Transport Study1976 by E. G. Frankel

7. Appraisal of PT Bahtera AdhigunaDecember 19, 1980 by PT PANN

8. Indonesia: Bukit Asam Project--Selectionof Transport Route, Office Memoranda

G. International Coal Market

1. Coal Resources, World Energy Conference (1977)

2. Steam Coal to the Year 2000, International Energy Agency (1978)

3. Coal--Bridge to the Future, World Coal Study (1980)

4. The Growth of Steam Coal Trade 1980-90, H.P. Drewry (1980)

5. 1981 Coking Coal Manual (Including Thermal Coal and Anthracite),Tex (1981)

6. An Analysis of Current and Projected Coal Import Requirementsof Major Prospective Consuming Countries for Australiam Steamingand Coking Coal (Draft Report, 1981)

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7. Interim Report of the Interagency Coal Export Task Force, USDepartment of Energy (January, 1981)

8. International Coal Trade, The Markets, The Prospects, Coal Weekand Coal Week International (1981)

9. Coal Export Strategy Study, OECD (1979)

10. The Outlook for Coal ... Promises, Promises, The Energy Bureau (1980)

11. World Steam Coal Service, Z:Lnder Neris (1981)

12. Symposium on World Coal Prospects, United Nations (1979)

H. Contracts (Proposals and/or Agreements)

1. Mine: BAMCO Project Management ContractBechtel Teclnical Assistance Service Contract

2. Townsite: PT Encona Project Management Contract

3. Railway: CPCS Project Management/OperationalAssistance Contract

4. Tarahan Terminal: MCS Owner's Engineer Contract

5. Ship: MCD Engineering Contract

6. Project Monitoring: MCS Monitoring Group Contract

I. Detailed Cost/Benefit Streams for the Rate of Return Calculation

I. INTRODUCTION

1.01 The Government of Indonesia has requested a Bank loan of US$185million equivalent to finance a portion of the foreign exchange component fora coal mining development and transport project. The proposed Project wouldproduce about 3.0 million tons of coal per year from the Bukit Asam mine atTanjung Enim in South Sumatra of which 2.4 million tons per year (tpy) would betransported by railway and sea to the Suralaya electric power station on WestJava, 1/ 0.4 million tpy supplied to a mine mouth power plant and the remaining0.2 million tpy used by local cement plants and other domestic users. TheProject would be executed by three Government-owned companies: P. T. (Persero)Tambang Batubara Bukit Asam (PTBA--a Government-owned coal mining company),Perusahaan Jawatan Kereta Api (PJKA--the State Railway) and P. T. (Persero)Pengembangan Armada Niaga Nasional (PT PANN--the national shipping developmentcorporation). In addition, Bank financing is made available under the Projectto initiate and fund the first tranche for a US$45 million expanded coalexploration program in South Sumatra and Kalimantan. The Project forms part ofIndonesia-s national development strategy to diversify the country's largelymono-energy economy by increasing the use of coal and other oil substitutes inthe energy sector. The mining/transport Project was prepared under a Bank-financed Engineering loan (Loan S-9 IND--US$10.0 million, signed on May 19,1978).

1.02 The mine and railway components of the Project were appraised inOctober 1980 by Messrs. L. H. Cash (Chief), B. Stenberg, and E. Rodriguezof IPD; Messrs. E. Ohlund and L. Seigel of AEPTR; and Mr. C. Wardell (Con-sultant). The shipping component was appraised by Mr. G. Bain of AEPTR inDecember 1980. A post-appraisal mission consisting of Messrs B. Stenberg(Mission leader), E. Ohlund, E. Rodriguez and J.-C. Crochet and Mrs. J.Wright was carried out in June/July 1981. Loan negotiations were held inWashington in November, 1981.

II. THE PROJECT SECTORS

A. Energy Resources, Consumption and Sector Strategy

2.01 Indonesia is endowed with abundant energy resources and has as yetunderdeveloped natural gas, coal, hydroelectric power and geothermal resources.Prior to independence in 1945, the country relied to a large extent on coaland hydroelectric energy for its commercial energy; subsequently, the avail-ability and exploitation of indigenous oil have led Indonesia to develop apetroleum-based energy sector rather than to exploit other available energyresources. Recently, however, with the greatly increased opportunity cost ofusing indigenous oil, the Government has formulated a strategy of developingalternative energy sources.

1/ Suralaya power generation development is being financed under Ln 1708-IND (the Eighth Power Project, signed June 1, 1979--US$180 million),and Ln 1872-IND (the Ninth Power Project, signed June 13, 1980--US$250million).

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1. Development Strategy

2.02 The basic policy objectives of the Government in the energy sector,as broadly outlined in Repelita III are: (i) intensification of energyresource development and expansion of processing facilities; (ii) gradualshift from a mono-energy to a poly-energy economy (primarily based on coal andnatural gas); (iii) improved efficiency of conversion and utilization; and(iv) expansion of research programs. While Repelita III recognizes therole of energy pricing and fiscal policy in regulating and directing energyconsumption as well as in stimulating exploration and development of energysources, specific policy measures designed to meet these needs are not con-tained in the Plan. Detailed demand projections and costing of alternativedevelopment strategies are also lacking. The Bank is carrying out an inten-sive dialogue with the Government on these matters on the basis of an energyassessment report dated August 1981.

2. Institutional Framework

2.03 In May 1978, as part of a general reorganization of Government depart-ments, the Ministry of Mines and Energy (MME) was established to coordinateall activities in the energy sector. The Ministry has overall responsibilityfor mining, oil, natural gas and electricity. It controls the state enter-prises responsible for the execution of Government policies in the respectiveenergy sub-sectors: the oil and natural gas entity (PERTAMINA); the coalagency, PNTB; and the public power utility, PLN. To facilitate coordinationof energy planning and policy, the Government also established an Interdepart-mental Technical Committee on Energy Resources and charged it with developingenergy plans and policies; the Chairman and Vice-Chairman of the latterCommittee are the MME's Directors-General of Oil and Gas and of ElectricPower, respectively. The Ministry further formed a Permanent Committee forEnergy Studies to assess energy technologies, deal with day-to-day energyproblems and prepare long-term projections for demand and supply. Recentlya ministerial-level National Energy Board was formed, with the Minister ofMines and Energy as Chairman, to review the proposals of the Technical Commit-tee, to establish the Government's energy policy and to give specific implemen-tation instructions to the ministries concerned.

3. Oil

2.04 Total oil reserves are estimated at about 50 billion barrels,but reserves in the proven category have remained at 10-15 billion barrelssince 1970. Since January 1978, the Government has introduced importantincentives that have spurred exploration by concession holders. As a result,production, currently about 1.6 million barrels per day, is expected toincrease to about 1.8 million per day in five years. On the other hand,domestic consumption of oil--which equalled about 20% of Indonesia's crude oilproduction in 1979--will continue to increase such that the net exportablesurplus, in absolute terms, is not expected to grow and may even decline.This is an important factor behind the Government's decision to adopt a policyof developing other indigenous energy sources such as natural gas, hydro-electricity, geothermal steam and coal for internal consumption.

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4. Natural Gas

2.05 Natural gas reserves are about 34 trillion ft , of which 5 tril-lion ft represent gas associated iith oil production. Current domesticconsumption is about 80 billion ft per year. Pipelines have recently beenlaid to major industries such as steel and fertilizer factories and consumptionis expected to increase at about 15% annually during the next five years.Following agreement with Japan a few years ago, exports of natural gas inliquid form (LNG) have begun. A study of natural gas utilization fundedunder Credit 451-IND 1/ will help determine both the potential usage ofnatural gas in Indonesia and the amount of resources available.

5. Hydro

2.06 The country has a hydroelectric potential of nearly 31,000 MW, ofwhich only about 2% is being used. The Government proposes to develop over1,000 MW of hydroelectric generating capacity in Java by 1987. In particular,the 700 MW Saguling hydropower project was identified in the Java SystemDevelopment Study funded by Credit 399-IND. 2/ This project is now beingimplemented under the Tenth Power Project. Detailed engineering and designfor the next hydropower project in Java, the Cirata project, also constitutesa part of the Tenth Power Project. Development of the Asahan River in NorthSumatra, with a capacity of 600 MW, for use by an aluminum smelter is also inprogress. Rapid development of other hydro resources is constrained by thelack of demand for electricity in islands having large hydroelectric potential(Irian Jaya, Kalimantan, Sulawesi). Investigations of potential sites in thepopulous islands (Java, Sumatra) are being accelerated.

6. Geothermal

2.07 Indonesia has substantial geothermal energy potential and about 900MW of generating capacity have already been proven. The fields are close tothe main population centers in Java and Sulawesi. A 30 MW plant with a futureplanned capacity of 90 MW is being constructed by the state electricitygenerating organization (PLN) at Kamojung in West Java. A further projectsponsored by Pertamina with an initial estimated capacity of 110 MW in GunungSalak, West Java, is being considered by IFC.

7. Coal

2.08 Reserves. Hundreds of coal occurrences are known to exist on theislands of Sumatra, Kalimantan, Sulawesi, Java, Timor and in Irian Jaya.Substantial exploration work, however, has only been undertaken in Sumatrawhere about 80% of all of Indonesia's geological coal resources are estimated

1/ Fourth Technical Assistance Project, Credit 451-IND, signed January 2,1974--US$5.0 million.

2/ West Java Thermal Power Project (Power III), approved June 1973--US$46 million.

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to be. Due to different criteria used in estimates made by different sourcesand the scarcity of reliable exploraltion data, resource figures vary consider-ably and none of these can be considered to be reliable. The official WEC 1/figure is 3,723 million tce 2/ (equa:L to about 6,515 million tons, assuming aheating value of 4,000 kcal/Tg) whilea the Ministry of Mines and Energy quotesa figure of 17,200 million tce, the majority being lignitic coal. Provenreserves can be estimated at some 225 million tons in Sumatra (Ombilin,Bukit Asam and North West Bangko). All other coal-bearing areas in Indonesiamust be classified as terra incognita with respect to reliable reserve figures.Nevertheless judged by its geologicaL formations, the country's coal resourcepotential is substantial.

2.09 Production and Consumption. Local coal production in Indonesia hasbeen ongoing for centuries; however, organized coal mining did not beginuntil the early 1900s, when private Dutch interests became involved in thesector. The industry increased steadlily in Sumatra and Kalimantan to a peakproduction of 2.0 million tons in 1941, but thereafter heavy competition fromcheaper oil drastically reduced domestic demand for coal to a low of 150,000tpy in the early seventies. Following the oil crisis interest in coal wasrenewed and rehabilitation measures increased production to 304,000 tpy in1980, of which 161,000 tpy came from Bukit Asam and 143,000 tpy from Ombilin asshown in the following table. Current mining operations, which remain heavilysubsidized since the sixties, are discussed in further detail in Chapter IV.

Development of Coal Production in Indonesia, 1939-80('000 tons)

MinesYear Ombilin Bukit Asam Others Total

1940 558 848 575 2,0011966 101 185 34 3201970 77 91 4 1721978 87 177 - 2641979 92 186 - 2781980 143 161 - 304

Most of the coal production is consumed domestically for mine power gen-eration, cement production, railway operation and tin mining and smeltingoperations. During 1977-80, about 20,000 tons of steam coal have been exportedannually to South East Asian countries through international trading companies,at a loss of about US$25 per ton. Exports of anthracite to Singapore, Malaysia,and Taiwan, totalling 40,000 tons in 1979, yields a small profit.

2.10 Since nationalization in 1958, Indonesia's coal production andmarketing was the responsibility of a state coal agency, PN Tambang Batubara(PNTB) operating unprofitably under the supervision of the Ministry of Mines

1/ World Energy Conference 1977.

2| Ton of coal equivalent equal to 1 metric ton of coal with a calorificvalue of 7,000 kcal/kg.

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and Energy (Annex 3-1, paras. 1-15). A new company, PT Tambang Batubara BukitAsam (PTBA), was created in December 1980, to implement the proposed Projectand carry out exploration in the Bukit Asam area, leaving PNTB to operate theOmbilin mine and pursue exploration and pre-investment work in other areas;To fulfill these mandates, the organization, staff and financial resources ofboth PTBA and PNTB will have to be substantially strengthened.

2.11 Development Plans. In 1976, a Presidential Instruction that aimedat the maximum possible utilization of coal for future domestic electric powergeneration and industrial usage was issued (paras. 2.01-2.02). Repelita III(i.e., the Third Five-Year Plan) gives first priority to the development of amore balanced domestic energy production, encouraging the development of coalfor internal consumption wherever technically and economically feasible.To date, efforts to do so have resulted in (i) the proposed Bukit Asam mineexpansion/Suralaya power plant project; (ii) coal reserve exploration in theOmbilin basin, and ini:iation of a US$100 million rehabilitation program forthe Ombilin mines to increase output to 500,000 tpy primarily for regionalcement and power plant consumption, and (iii) an invitation to foreign companiesto explore and exploit the coal deposits in Kalimantan for export and domesticconsumption. PNTB has been negotiating production sharing agreements with ARGO,UTAH, Rio Tinto, AGIP and CONSOL to undertake coal exploration and eventualdevelopment in Kalimantan, four of these were signed in mid-1981. Thesecontracts allow the foreign partners 5 years to undertake exploration andfeasibility studies prior to an investment decision followed by a minimum of3 years to bring a mine in production. Thus, under realistic assumptionscoal from Kalimantan cannot be expected to be available in significantquantities before 1990. While the production sharing contracts are designedfor export, PNTB has reserved its right to buy all output at market prices.

2.12 As domestic demand for coal is estimated to reach about 10 milliontpy by 1990, it is now urgent to accelerate coal exploration and pre-investmentwork for a number of well-known promising areas in Sumatra. These areas hadbeen explored during the 1974-78 period by Shell Mijnbouw, a Dutch subsidiaryof Shell, under a production sharing agreement with PNTB. After spending aboutUS$50 million and establishing about 100 million tons of measured reserves and500 million tons of indicated reserves, Shell returned the concession. It hadbecome apparent that coal quality and mining/transport cost to Japan could notcompete with Australian and South African coal. The Government unsuccessfullyrequested Shell to consider mining coal for domestic consumption.

2.13 A Bank mission visited Indonesia in June 1981 to explore with theGovernment its plans to intensify coal exploration and preinvestment work andthe institution building which would be required in order to execute an accele-rated coal exploration production program with emphasis on the former Shellconcession in South Sumatra and promising areas in Kalimantan not covered byproduction sharing agreements with private partners. As a result of thesediscussions, the scope of work for a comprehensive Coal Exploration Programwas identified, which the Bank appraised in late October 1981. Thisprogram will require US$45 million for detailed exploration and feasibilitystudy work in South Sumatra and preliminary exploration in Kalimantan. Detailsare given in paras. 3.59-3.61.

B. The Power Sector

1. PLN and the Role of the Sector in the Economy

2.14 Institutionally, the power sector consists of the DirectorateGeneral of Electric Power, in the Ministry of Mines and Energy, and PLN,

which is statutorily responsible for all public sector power generation,transmission and distribution and some municipal franchises. PLN came intobeing in 1961 when three Dutch-owned electricity utility companies werenationalized, but commenced effective operations only in 1972, when its newcharter gave it legal status as an autonomous entity with exclusive responsi-bility for electricity supply in the country and when adequate foreignfinancing became available for its expansion programs. 1/ Through 1976,captive power plants--largely linked to industrial enterprises--grew rapidly,but since then PLN has begun to fulfill its role as the main electricitysupplier. PLN's decision to reduce its excessive connection charges has beena major factor in this development. In FY1979, PLN's KWh (kilowatt hour)sales registered a 21.6% increase, the most significant annual increase sofar, and PLN expects to sustain an average annual growth rate of about 20%through FY1986. Hence the share of captive generation, which is presentlyabout 40% in the total market, is expected to decline to about 25% by FY1986.

2.15 Despite PLN's progress since 1976, the per capita consumption ofelectricity in Indonesia as a whole is still extremely low at about 76 KWhin FY1981, compared to other Asian countries. Indonesia-s population has lowaccess to electricity due to a lack of distribution systems and generatingfacilities. Only about 6% of households are connected in the country andthis figure varies from 9.6% in Java, 5.0% in Kalimantan, 4.3% in Sumatra,4.2% in Sulawesi; 4.6% in Irian Jaya, to 2-3% in the other islands.

2. PLN's Development Plan, including Suralaya Power Generation

2.16 General. PLN has prepared a development plan for power in Indonesiathat envisages an increase in installed generating capacity from about2,000 MW in FY1979 to over 7,300 MW in FY1987. Consistent with the overallGovernment policy of expansion and diversification, the objectives of PLN'sdevelopment plan are to: (i) optimize energy resources utilization bysubstituting use of oil by coal, hydro and geothermal resources for powergeneration, and by reducing the use of fuel-inefficient installations; (ii)realize economies of scale through larger-sized installations; (iii) achieveoperational economy by coordinating the utilization of plants through inter-connected operations; and (iv) provide acceptable standards on reliability ofsupply. PLN-s estimated investment for generation, transmission and distri-bution to meet the development plan from FY1980 to FY1989 is US$11.0 billionequivalent, in end-1979 prices, with a foreign exchange component of US$7.0billion equivalent. The expenditure is planned to be phased over a nine-yearperiod, increasing from US$0.6 billion in FY1980 to an average of US$1.5billion in FY1987 and thereafter. The Government has made appropriatebudgetary provisions in Repelita III to cover the period up to FY1984.

2.17 The investment program covers the country according to two geogra-phically divided plans: one for the island of Java and another for territoriesoutside Java. Except for Sulawesi and Bali, PLN's development plan for theterritories outside Java is still being formulated and Java continues to be

1/ The Association and the Bank have made ten credits and loans for powergeneration and transmission to Indonesia since 1968, amounting toUS$1,389 million in total.

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the focus of power sector development in Indonesia. In FY1979, Java, with 63%of Indonesia's population (85 million out of 135 million), accounted for 80%of PLN's electricity sales. PLN plans to increase installed generatingcapacity in Java from 1,547 MW in FY1979 to 4,609 MW by FY1987, an annualgrowth rate of 14.6%, while generating capacity in all other territories isplanned to increase from 622 MW to 2,740 MW over the same period (19.4%annually).

2.18 Suralaya Power Generation. The Suralaya power generation project,at the western tip of Java, plays a key role in PLN's overall development planfor Java. The Suralaya power plant is planned to have an ultimate installedgenerating capacity of 3,100 MW, consisting of 4 x 400 MW and 3 x 500 MWunits. In line with Government policy, the Suralaya power plant will usecoal. The first stage of development consists of the installation of: (i)2 x 400 MW dual-fired (coal-oil) thermal generating sets (Suralaya I and II);(ii) facilities for coal reception, handling and storage, ash disposal,cooling seawater intake and discharge facilities, and fresh water supply;and (iii) associated extra high voltage (EHV) transmission works of 500 KVcapacity over 725 circuit-kms. This stage is being implemented in two phases,one for each unit, which are covered by Bank Loans 1708-IND and 1872-IND(para. 1.01), respectively, and co-financed with ADB and export financingsources. The subsequent stages would extend the EHV network to Surabaya inEast Java, and eventually increase capacity to 3,100 MW.

2.19 In parallel, the Government is developing the Bukit Asam coal mineunder the proposed Project in order to supply 2.4 million tons of coal annuallyto Suralaya I and II, now scheduled to come on stream in October 1984 andJuly 1985, respectively. It later plans to expand coal production levels inSouth Sumatra and Kalimantan to supply about 12.0 million tons of coal annuallywhen the Suralaya power plant reaches its ultimate capacity of 3,100 MW. Thisobjective is reflected in the Government's effort to initiate pre-investmentwork for a second or third coal mine in South Sumatra (see para. 2.13),and to provide for the appropriate basic infrastructure under the Project.

C. The Transport Sector

1. General

2.20 Road transport accounts for the majority of all passenger andfreight (except oil) movements in Indonesia; Java, which comprises only 7%of Indonesia's land area, accounts for 35% of all roads. However, othermodes do compete with and/or substitute for road transport in many places,including railways, river traffic, aviation and even pipelines. Inter-islandshipping is important given Indonesia's archipelago nature. Between 1972 and1978, passenger and freight traffic on scheduled airlines increased by nearly20% per year. Railways and shipping are becoming carriers of bulk commoditiesas Indonesia is expanding plantation crops (such as palm oil), building newindustries (such as fertilizer and cement), and planning expansion of miningactivities, particularly coal. Thus, transport modes are becoming morespecialized.

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2. Railways

2.21 Railways are mainly confirLed to two islands: about 4,700 km oftrack on Java and 2,000 km on Sumatra. The railways suffered from the declinein exports in the 1950s and 1960s and were allowed to deteriorate. Limitedrehabilitation took place under the First Five-Year Plan (1969/70-1973/74);and, as a result, freight traffic increased to over 1,100 million ton-kilometers(tkm) in 1974. It declined again to a low of about 700 million tkm in 1976,but has thereafter gone back up to about 1,100 million tkm in 1979. Passengertraffic grew only slightly from 1974-76 but has since grown more rapidlyand reached about 5,600 million passenger-kms in 1979.

2.22 The railways' disappointing performance up to 1976 reflects a numberof factors, including delays in rehabilitation of its assets and in improvingits operations, excessive numbers of personnel, and weaknesses in the competi-tive position of some services, particularly on Java. The comprehensiveprogram of modernization and rehabilitation that formed the basis of theBank's Railway Project 1/ was not carried out in accordance with the originalschedule. Nevertheless, some improvements in operations have been seenrecently. A Development Plan for the 1979-88 period emphasizes the marketingof rail services based on realistic traffic projections, improved maintenanceof permanent way and rolling stock, and operation of larger and more reliabletrains. The railway will continiue to play an important economic role inspecific areas and services, such as long-distance movements of passengersand bulk commodities on Java, and transport of coal in South Sumatra.

3. Maritime

2.23 About two-thirds of the deadweight tonnage of the Indonesian domes-tic shipping fleet has been used in the petroleum trade. Another quartercorresponds to the ships used by companies in the Regular Liner Services(RLS) that carry about half of the inter-island seaborne dry cargo movemeris.Much of the remainder of the fleet is specialized vessels for offshore oiloperations and for carrying commodities such as salt, fertilizer and lumber.Rehabilitation of part of the RLS was carried out under the First ShippingProject. 2/ Provision of additional and some replacement vessels is underwayunder a Second Shipping Project. 3/ Studies leading to preparation of anintegrated maritime project are being financed under the Second Shipping Loanand will include ships, small port improvement, training, and provision ofshipping services to remote areas. In addition, the initial design of shipsfor this proposed Project is also being financed from the Second Shipping Loan.

2.24 The country has about 300 registered ports scattered over thearchipelago, but only a few ports handle the bulk of the traffic. In 1974,

1/ First Railway Project. Loan 1005-IND, signed June 14, 1974--US$48million. For past PJKA project implementation performance see ProjectPerformance Audit Report, March, 1981.

2/ First Shipping Project. Credit 318-IND, signed June 28, 1972--US$8.5 million.

3/ Second Shipping Project. Credit 1250-IND, signed May 20, 1976--US$54.0 million.

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only 16 ports each handled more than 0.5 million tons of domestic and foreigntraffic, and eight of these were primarily petroleum or lumber ports.

2.25 The Government has been emphasizing port rehabilitation works andimproved port operations to overcome serious congestion under the FirstFive-Year Plan. Longer-term expansion needs were also studied in a series ofmaster plans and port loans by the Bank Group and other lenders. 1/ Portprojects have also included continued technical assistance and other measuresto improve customs procedures and port management, particularly cargo handling,maintenance and accounting. It is anticipated that further expansion of theTanjung Priok port will be undertaken under Repelita III as a component ofthe maritime project now under preparation (para. 2.23) and provision forengineering this expansion, and for other project preparation activities, isincluded in a forthcoming National Fertilizer Distribution Project.

III. THE PROJECT

A. Project Objectives

3.01 Growth of domestic demand for oil in Indonesia is now outpacingincreases in oil production, and oil exports are showing a declining trend.Urgent steps must therefore be taken to increase levels of investment in thedevelopment of other energy sources in order to ensure continued and, ifpossible, increased petroleum export earnings. Through the PresidentialInstruction issued in 1976, Indonesia is now committed to an increased use ofcoal as a substitute for oil in order to maximize export earnings from oil.The Presidential Budget Speech in 1977 reinforced this commitment by statingthat coal would be used in thermal power generation wherever possible and eco-nomically justified.

3.02 The Project is a first step in this direction and it will:

(a) raise the current production capacity of the Bukit Asammine of about 150,000 tons of coal per year to about 3 mil-lion tpy, predominantly to feed the first two units of theSuralaya power plant development in West Java; and

(b) initiate an accelerated coal exploration program in Indonesia.The exploration program would delineate additional coalreserves and provide the Government with a series of pre-feasibility and feasibility studies that would facilitateand accelerate development of two to three new mines in SouthSumatra. These mines would provide coal for thermal power gene-ration, first, for the next phase of the Suralaya power plantdevelopment scheduled for commissioning in 1988/89, and, second,for the Tuban power plant development in East Java scheduled for1990/91.

1/ Tanjung Priok Port Project. Loan 1337-IND, US$32.0 million.

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B. Project Formulation

1. The Suralaya Power Scheme

3.03 The Suralaya Power Scheme waLs identified by the comprehensiveJava System Development Study, financed through Credit 399-IND 1/ and carriedout by Preece, Carden and Rider (UK) in 1975-76. It will ultimately havean installed electrical generating capacity of 3,100 MW. The scheme hasbeen subdivided to reduce annual financing commitments; Stage I and II,for a combined 800 MW, are now being implemented under Loans 1708-IND and1872-IND, respectively. 2/ In order to enhance phasing with coal development,the thermal units are designed to burn oil and/or coal (dual-fired).

3.04 The selection of the Suralaya site in West Java was thoroughlyreviewed by the Japanese in feasibility studies prepared in 1977. MONENCOof Canada in another feasibility study for which Loan 1127-IND 3/ providedfinancing, confirmed that the Suralaya site is the most feasible location,both technically and economically. Among the major technical constraints forthe plant to be at or near the Bukit Asam mine site was the fact that sufficientcooling water for the first phase of the Suralaya Power Plant Development,800 MW, was not available, not to mention the ultimate plant with a capacity of3,100 MW. Having the plant located on. the sea-coast of Sumatra, where of coursesufficient cooling water is available, would not only require rail transport ofthe coal but also a transmission cable across the Sunda Strait to Java, inaddition to the 500 KV lines required to connect it with Jakarta and CentralJava distribution grids. A submerged cable across the Sunda Strait, in lieu ofsea transport of coal across the Strait was found to be a much more expensiveproposition, apart from the question of the reliability of the submarine cableand its effect on the total system operation, considering the possible seismicactivities in the area.

2. Bukit Asam Coal Deposit

3.05 In 1976, the Bank was requested by the Indonesian Government toassist with the preparation of a project to mine and transport coal froman expanded Bukit Asam mine in South Sumatra to the Suralaya Power Develop-ment. Initially, about 2.5 million tons of coal annually were envisaged,thus substituting for about 9 million barrels of oil per year. The Bukit Asamcoal field was at that time, and still is, the best-explored coal deposit inIndonesia with reserves of coal, suitable for power generation and otherindustrial usage, in excess of 100 million tons--more than sufficient toprovide coal to the first stages of the Suralaya Scheme for at least 30 years.The choice by the Indonesian Government to study a possible expansion ofthe Bukit Asam mine to meet increasing domestic coal demands was appropriate,

1/ Third Power Project. Credit 399-IND, signed June 22, 1973--US$46 million.

2/ Eighth Power Project. Ln 1708-IND, signed June 1, 1979--U$180 million, and Ninth Power Project, signed June 13, 1980--US$250 million.

3/ Fourth Power Project. Loan 1127-IND, signed June 17, 1975--US$41million.

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particularly in light of the potential for additional coal development in thearea, as indicated by Shell Mijnbouw's of the Netherlands substantial explora-tion program in South Sumatra in the mid-l970s.

3. Project Preparation - Bukit Asam Engineering Loan

3.06 In 1976-77, the Government of Indonesia undertook a number ofstudies to define the coal reserves more precisely and to select the idealmine and transport configuration for the Bukit Asam mine expansion. How-ever, major issues relating to the determination of coal reserves and coalquality variations, the selection of mining system, the preparation of amining plan and the selection of an optimal transport configuration were yetunresolved. Consequently, it was agreed with the Indonesian Government, thatadditional work was required to resolve these issues and to prepare compre-hensive optimization and feasibility studies. This work was financed underEngineering Loan S-9 IND (signed May 9, 1978, US$10.0 million) and the finalfeasibility report, the Milestone 6 Report, was submitted in July-August 1980.

3.07 Under that Engineering Loan, consulting contracts were signed withMCS Consultants (a joint venture of Montreal Engineering Company, Ltd.;Canadian Pacific Consulting Services, Ltd.; and Swan Wooster EngineeringCompany, Ltd. of Canada) for overall Project analysis and for detailedstudies on the railway, terminal and townsite components. Engineeringstudies and cost estimates on the mine system were subcontracted by MCS toRheinbraun Consulting GmbH (FR Germany) and marine systems studies and designwere subcontracted to Marine Consultants and Designers (MCD) of USA/Canada.About 10% of civil engineering work and the review of the accounting set-up were subcontracted locally to IEC (Indonesian Engineering Consortium)and PT Pamintori, respectively. Bechtel (US) was technical advisor forKP5BA, the Indonesian Project Management Organization. After initial delaysin signing contracts, KP5BA implemented this phase of the Project on time,effectively coordinating the work with the various Government entitiesinvolved (PNTB, the State Coal Agency; PJKA, the State Railway; and PANN,the national fleet development corporation).

3.08 In addition to defining the technical, institutional and cost aspectsof the Project components, the Project analysis included (i) a general assess-ment of existing training facilities and the personnel situation in Indonesia,particularly in South Sumatra, (ii) definition of general training and personnelrequirements and, consequently, (iii) recommendation of training programs (paras.3.24-3.28, 3.41-3.43, 3.49-3.50, 3.55, 3.78, 3.80 and 3.84) that are consideredadequate by the Government and the Bank.

3.09 As Project preparation progressed, the Government decided with Bankstaff agreement that execution of the various project subsystems, and theirownership and operation, would be the responsibility of the respective Govern-ment entities (PTBA, PJKA, PANN/Bahtera), instead of creating a super agencyfor the purpose. This approach is justified as the Project is seen as a firststage of a series of coal development and related infrastructure projects andthus, strengthening of functional entities is of vital long-term importance.However, when adopting such a decentralized framework, overall coordination ofthe different Project components becomes critical and is addressed in detailbelow (paras. 3.81-3.82).

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4. Major Design Alternatives

3.10 Mining System. The major task during mine engineering was to selectthe optimal open pit mining system taking into consideration the specificconditions at Bukit Asam. Overburden material/coal characteristics, incombination with prevailing difficult climatic condition, had major impacts onthe system selection. Four alternatives--combining shovels, rigid frame aswell as articulated trucks, scrapers, bucket wheel excavators (BWE), conveyorbelts and waste material spreaders in different configurations--were evaluatedtechnically and economically. The Government selected a BWE mining systemwith the Bank approving the choice. The BWE system was considered to be lessvulnerable to the climatic conditions, had a levelized 1/ operating cost/tonof coal that was about 9% less than the second best alternative, and equalinitial capital costs. Other factors in favor of the BWE system are: (i)some of the current personnel in the mine are familiar with BWE operations(the mine was operated 1957-75 with the BWE mining method), and (ii) the BWEmining system will not require the heavy periodical reinvestment (every 5-6years), that is characteristic of truck and shovel systems.

3.11 Railway route selection. In the selection of the appropriatetransport configuration, two alternative route systems were considered:(a) the Eastern route by rail to Kertapati and then by barge from Palembangvia the Musi River and by sea to Suralaya, and (b) the Southern route by railto Panjang and then by ship across the Sunda Strait to Suralaya. In examiningthese alternatives, both the initial 2.5 million tpy and the planned 5.6million tpy capacities were considered. After a thorough study of the capitaland operating cost estimates as well as the risks inherent to each route, thestaff endorsed the Government's decision to proceed with the Southern routefor the Project. In particular, although the economic cost/benefit analysispoints to the Eastern route at a 2.5 million tpy capacity, the Southern routeis favored when larger coal volumes are considered, as are projected to resultfrom the coal exploration program and subsequent mine developments in SouthSumatra by 1988. In either case the quantifiable advantage/disadvantage arewithin the margin of error of the underlying cost estimates. As the degree ofconfidence associated with cost estimates for the Eastern route is considerablyless (within 15-25%) than that for the Southern route (within 10-15%), due tothe substantial difference in the amount of engineering undertaken on the tworoutes, the desirability of the Southern route is most likely underestimated.This analysis is documented in the Project file.

3.12 Apart from pure cost considerations, the arguments for the Southernroute are reinforced by uncertainties about navigation in the Musi riverand the length of the Eastern sea route. It has been assumed that rivernavigation is feasible without complication or further cost, but this un-proven assumption would have to be verified. Also, with a 560 km sea journeyfor barges, there is a greater risk of loss of equipment or navigationaldelays on the Eastern route than for the Southern route where the sea routeis only 100 km.

1/ Levelized cost is equal to the present value of the costs divided by thepresent value of the physical benefits and is used for comparison ofalternatives only.

13

3.13 Axle load decisior. Iwo track standard alternatives, one allowing18-ton axle load and the other 13 tons, were examined. The analysis (in theProject File) leads to the choice of the 18-ton axle load alternative, whichdoes require strengthening of bridges but, on the other hand, would reduceinvestments in motive power and rolling stock and operating costs.

C. Project Description

1. Bukit Asam Mine

3.14 The mining component of the Project consists of an expansion of theexisting coal mine at Bukit Asam. Based on the known average heating value of5,200 kcal/kg for Bukit Asam coal, the first phase of the Suralaya power plantdevelopment (Suralaya Units I and II) will require about 2.4 million tpy. Anadditional 400,000 tpy will be required for a new 2 x 65 MW coal-fired powerplant to be built adjacent to the mine. Including the demand of other currentconsumers of Bukit Asam steam coal a total mine output of 3.0 million tpy isenvisaged. A minor tonnage (115,000 tons) of anthracite will also be mined inthe future from the southern part of the deposit. As sufficient small-scalemining equipment exists at Bukit Asam, this operation is not part of theProject.

3.15 Coal reserves amounting to 124 million tons have been proven in thefour A and B seams (technically, the Al, A2, B1 and B2 seams) in the so-calledTABA concession. Additional coal reserves are available in the underlying Cseam but neither the quantity nor the quality is presently classifiable asproven reserves. The mineable reserves in the A and B seams are sufficientto supply Suralaya Units I and II for 30 years. To improve current knowledgeof coal quality in the A and B seams, and to prove the potential reserves inthe C seam, further drilling will be undertaken as part of the Project. Adecision to mine the C seam can be postponed until 1997, when a decision onback-filling of overburden material into the pit must be made.

3.16 The mine will consist of an open pit operation employing a bucketwheel excavator (BWE) mining system. A BWE system is a device for efficientbulk handling; and, when topography and physical overburden and coal character-istics allow its application, as is the case for this mine, the system issuperior to any other mining system in terms of productivity and costs.Annual coal production of 3.0 million tons will require overburden removalduring the first 5 years of Bukit Asam operations of about 17 million bankcubic meters per year. Overburden removal requirements for the remaining 25years of the mine life will average about 9 million bank cubic meters peryear. It is envisaged that five bucket wheel excavators are required, eachcapable of excavating 4 million bank cubic meters of material (coal andoverburden) annually. Both coal and waste are to be transported from themining face by means of belt wagons and an extensive (30 km) belt conveyorsystem to either the coal crushing facilities or the waste dumps. At thewaste dumps, two spreaders with a capacity of 5,000 tph each will dump thewaste according to a carefully worked out waste disposal plan, in order toreduce the risk of dumpslides and to minimize the environmental impact.Additional land outside the existing concession boundary will be required forthe waste dump, and land acquisition is in progress. The coal will be conveyedto stockpiles with a total capacity of 250,000 tons in the vicinity of a trainloading station. The stockpiled coal will be reclaimed, loaded on conveyorbelts and transported to the train loading station.

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3.17 Due to the relatively few mining faces and the fact that a majorpart of the belt conveyor system consists of installations that have to befixed in their proper locations from the very start-up of the mine, a detailedmining plan covering the lifetime of the mine had to be worked out. Deviationsfrom such a plan could delay coal release and prevent the mine from supplyingcoal at the required rate. However, the layout of the mine will allow forcertain flexibility since equipment movement between different mining benchesis possible, and adequate stockpiles will enable the mine to cope with antici-pated production disturbances caused by local conditions such as heavy rains.

3.18 Based on statistics covering a 30-year period, the average annualprecipitation in the area is 3,147 mm with an average of 162 days per yearwith rainfall. Even during the dry season, the number of days per month withsome rainfall averages 8. Consequently, a substantial effort has been made bythe consultants when engineering and designing the final pit slopes, thedrainage systems and pump-station capacities in order to prevent the floodingof working areas and slope failures. Slopes in the mine are designed with aslope angle of 17 degrees, which is considered to be a safe slope. Theoverall waste dump slopes are 8 degrees, which is equal to the slope angles ofexisting stable waste dumps with similar material. The possible effect of-seismic activity in the area has also been considered when planning the openpit as well as designing the buildings for support facilities.

3.19 Scheduled working hours are calculated on a 7-day week and 3-shiftday basis, less 11 National Holidays and one shift each Friday (Moslemholiday). The effective operating hours are the scheduled working hours lesstime lost due to scheduled maintenance (1 shift per week), bad weather (heavyrainfall) general maintenance and repair (breakdowns) conveyor shifting/equip-ment maneuvering and an allowance for unexpected standstills in the rathercomplicated BWE-conveyor-spreader systems. Of scheduled working hours, 47%equal to 3,800 hours per year, has been used when calculating equipmentcapacities and required mine output. The effective operating hours areconsidered to be conservative and a certain spare capacity is available.

3.20 In addition to the basic mine layout described above, the miningcomponent includes:

(i) construction of access and service roads, preparation of benches anddrainage ditches, levelling of waste dumps and in-pit cleaning by afleet of track dozers, rubber-tired loaders, road graders, trucksand scrapers;

(ii) provision of cranes, trucks and pick-ups for speedy response toequipment breakdowns and routine preventive maintenance by workshoppersonnel;

(iii) construction of a new workshop with facilities such as a weldingshop, vulcanization shop, mechanical shop, machine shop, electricalshop and equipment service bays;

(iv) construction of a new warehouse, including an outdoor storage area;

(v) construction of an office building for maintenance and minesupervisors, including a training center at the mine (the existing

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office will be renovated and administrative and planningpersonnel will be housed there);

(vi) construction of two overhead 30-kV high-tension power lines fromthe boundary of the mining area to a number of substations anddistribution points. From there, a distribution network will bebuilt to supply power to all electrical equipment facilities.Some switchgear and transformers will be mobile and follow theadvance of the mining faces. Total installed drive power will beabout 40 MW; and

(vii) installation of a communications system, radio and telephone,to facilitate proper supervision and maintenance/repair withinthe mining area. A center for centralized control and supervisionof the BWE and conveyor operations will be established.

3.21 French bilateral financing has been arranged for the constructionof a 2 x 65 MW mine mouth power plant (MMP) and a 150-kV transmission line toPalembang, to be engineered and constructed by Sofrelec, a French consultingfirm. Though not part of the Project, this MMP will supply electricity forthe mine as well as be a user of coal, amounting to 400,000 tpy by FY1985,when the MMP is expected to be completed. Until then, PLN is responsible forinterim power supply (IPS) to the mine during the initial period of operation(para. 3.99).

3.22 About 2,950 people, consisting of 2,780 laborers, 35 junior staffand administrative personnel and 35 senior staff, such as engineers andmanagement personnel, will be required to operate the mine by the end of1986 (one year after mine start-up). PTBA currently-employs about 1,250people in Bukit Asam; the balance of 1,700 new employees will be recruited,primarily from South Sumatra. A survey made by MCS (para. 3.08) has indicatedthat there is a large supply of candidates available to fill lower-levelskilled and semi-skilled jobs in the technical areas required for this Project.Because PTBA is an independent entity it is anticipated that it will be ableto recruit graduate engineers and other entities have had no problems inrecruiting and relocating engineers to Sumatra provided satisfactory salaries,housing and other fringe benefits are available. As part of the Project PTBAwill provide competitive salaries and other benefits and should therefore beable to attract and retain required personnel.

3.23 Because of the substantial number of new recruits and the need tointroduce new skills as well as upgrade the skills of existing employees atall levels, the Project includes a significant training component for PTBA.The objectives of the program are two-fold: (i) to improve and strengthenPTBA's management, mine operations, and maintenance activities and (ii) toprovide for efficient overall operations in the future. Although certaintraining facilities and courses are available, no significant training hasbeen undertaken in recent years due to lack of funds and materials. Nation-ally, graduates are few from the formal technical training available atthe Senior High School level where courses in mechanical and electricalengineering are offered, and most of the graduates have received no practicaltraining at all due to lack of facilities. Informal training on the job,although existing, cannot close the gap and meet the skill requirement of theindustry.

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3.24 A three-year training program, starting in 1982, will be undertakenin PTBA by the Project Management Consultants. BAMCO (discussed in detail inpara. 3.841). This will prepare new and current personnel to supervise overallmine operations and to operate and miaintain the bucket wheel system. It isestimated that some 2,000 employees (1,500 new employees and 500 currentemployees) will require some type of training in Indonesia. This local train-ing program will focus on approximately 100 individual skill areas includingboth managerial and technical requirements, and will be accomplished by meansof: (i) specialized training programs consisting of classroom instruction (ina new training center to be constructed at the minesite), student workshop andon-the-job training; (ii) maintenance and operator training by equipment sup-pliers during erection and initial operation; and (iii) other training, interalia, mine safety and blasting technics) in existing Indonesian institutions.

3.25 In the implementation of this Program, BAMCO, under its contract,will develop both classroom and on-the-job training materials, equipmentmanuals, performance standards, course objectives, training schedules, andevaluation criteria, with a view towards enabling Bukit Asam staff to be self-sufficient in operating and maintaining the mine and in providing training toall levels of future mineworkers. The precise content and number of classesto be offered will be further defined once BAMCO has fully assessed thesignificant strengths and weaknesses of the readily available pool of manpowernear Tanjung Enim. This work, which will be included in BAMCO's inceptionreport, is expected to be completed in January 1982, according to the BAMCO con-tract, at which time it will be subaitted to the Bank for review and approval.

3.26 In addition to local training, under the program twelve carefullyselected senior mine personnel will be sent to Germany for intensive trainingat the Rheinbraun Training Center and the Brown Coal Mining School to acquireskills in mining engineering, mine planning, mechanical and electrical engineer-ing, dewatering technics and surveying. The six-month program consists of216 hours of classroom teaching and 672 hours of on-the-job training. Thecurriculum has been reviewed by the Bank and found adequate. The trainedindividuals will be expected to stay with PTBA for a minimum of 5 years aftertraining.

3.27 BAMCO is well qualified to undertake this training program, havingsuccessfully done so in other mining projects elsewhere in developing coun-tries (e.g., India, Turkey). The total cost of the training program is esti-mated to be US$6.6 million (US$4.4 million local and US$2.2 million foreign,including 184 man-months of expatriate staff at an average cost of US$11,700per man-month). A new training center will be established, consisting of 5classrooms, electrical and mechanical shops (in total about 1,750 squaremeters) at a cost of US$972,000 (of which equipment costs are US$261,000).

3.28 Operational assistance during the initial years of mine operationwill be provided by BAMCO through a local counterpart staffing system contract,covering, inter alia, mine planning, mine supervision and maintenance planningand supervision. BAMCO is obligated to provide operational assistance underthe present contracts. A detailed proposal is to be submitted for Bank review12 months before operational acceptance of the mine system and a contracticceptable to the Bank should be eiEfective prior to the mine subsystemacceptance (para. 3.85).

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2. Muara Tiga Mine

3.29 In addition to the principal mine development described in paras.3.14-3.28 above, the project consists of the development of the small MuaraTiga deposit located immediately west of the proposed Bukit Asam mine. TheMuara Tiga mine will during the period 1982-1987 replace steam coal productionfrom the currently operated Air Laya mine (which will be closed down) as wellas make up for possible production shortfalls from the Bukit Asam mine duringthe initial years of operation (para. 3.96). Annex 3-2 gives a description ofthe deposit, the envisaged mining plan and transportation modes and estimatesof related operating and capital costs.

3.30 The mine development entails construction of a 3,000-meter longmain haulage road and a water diversion channel, including drainage ditchesto protect the proposed mining area from flooding during heavy rains. The12 meterwide main haulage road will connect the mining area with the trainloading station in the current PTBA coal yard. A service shop and a smallsite office will be built.

3.31 Mining will start in the North (A-B seam outcrops) area whichwill be mined with a method similar to conventional strip mining. The centralarea will be mined with standard open pit benching. Coal will be loaded bytrack- and wheel-loaders into 20-ton off-highway articulated trucks and trans-ported out of the mine to a stockyard for reloading into 7-ton trucks whichwill haul the coal to the train loading station. As soon as the Bukit Asamcoal loading system is operational in 1984, Suralaya coal will be transportedto that system's distribution point and handled in the same way as the BukitAsam coal. Coal for other customers will continue to be handled through theexisting PTBA yard. Overburden material will be dumped in selected locationswhich would not interfere with possible future mining on a larger scale.

3. Mining Community

3.32 PTBA today owns about 1,300 houses in the community of Tanjung Enim.About 300 of those are occupied by retired employees. Considering the rela-tively poor condition of existing houses (1,200 out of 1,300 houses arejudged to be inhabitable by 1985), it is, at present, estimated that about2,500 new houses, ranging in size from 40 to 100 square meters, and dormitoriesfor abour 300 people are required over an 8-year period. It is also envisagedthat roads, drainage and electrical distribution system including street lightsfor the new residential areas will be constructed. A water supply systemincluding main lines, a water purification plant and pumping facilities, aswell as new sewerage facilities, will be built. Service facilities, includinga new hospital (200 beds), a new school (1,000 students), and new recreationalfacilities (club house and cinema, sports field, tennis courts), will beconstructed. The existing swimming pool will be renovated. Additional spacewill be reserved for religious facilities and small-scale commercial activities.

3.33 It is recognized, by PTBA as well as by the Bank, that the size andproposed standards of the townsite expansion, as presently envisaged, might beexcessive. Also the impact of the Project on urban areas along the rail routeand at the terminal requires further analysis. As first priority, therefore,PTBA in collaboration with the Indonesian authorities responsible for regionaland urban development and using appropriate consultants will:

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(i) estimate the potential growth of associated industrial andcommercial activity in the communities assocated with therail and terminals; and undertake an urban impact study todeal with the potential problem of squatters in Tanjung Enimand along the rail/terminal areas;

(ii) propose appropriate institutional and administrativearrangements for integrating the PTBA financed houses andinfrastructure in the existing towns;

(iii) clarify the responsibilities for payment of capital andrecurrent costs for the mining town and establish chargesfor services rendered, and

(iv) in light of the results of these studies, review the scopeand design of the mining community.

Specifically, it was agreed during negotiations that PTBA will carry out orcommission a detailed urban impact situdy for Tanjung Enim to be carried outbefore the mining community layout is finalized. The implementation schedule(Chart 3-3) on page 37 allows for an additional 6 months to complete thispreparatory work, which is considered adequate.

4. Railway and Communications System

3.34 The railway component of the Project includes the following mainphysical elements:

(a) upgrading of track and bridges on the existing 405 km TanjungEnim-Muara Enim-Perabumulih-Panjang section to allow 18-tonaxle loads (para. 3.14);

(b) construction of a new 800-m rail line from the existing railway linenear Tanjung Enim to the mine site train loading station and a new6.5-km rail line from the existing line at Panjang to the terminalsite at Tarahan North;

(c) provision of new sidings and extension of existing sidings atstations needed for running 40-car coal trains;

(d) upgrading of the signalling system;

(e) provision of 15 new 1,500--hp diesel locomotives, 264 coal wagons andtwo auxiliary cranes and rehabilitation of 135 existing coal wagons;

(f) extension of motive power and rolling stock repair facilities; and

(g) establishment of the telecommunication system needed to linkthe mine, railway, terminals and shipping functions andthe internal system needed for the railway.

In addition to these, a railway traiLning program will be undertaken, asdescribed in para. 3.38.

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3.35 The upgrading of track includes: (i) about 178 km of track renewalwith 54 kg/m rails and concrete sleepers; (ii) about 71 km of rail renewalwith 42.5 kg/m rails and replacement of defective sleepers; (iii) increasingof the number of 3sleepers per km from 1,500 to 1,666; and (iv) ballast renewal(about 500,000 m ).

3.36 The bridge rehabilitation program includes: (i) replacement of 71steel spans (2-20 m) with reinforced spans; (ii) rep'lacement of 8 steel spans(25-60 m) with steel-concrete spans; (iii) reinforcement of 72 steel spans(12-60 m); and (iv) repair of piers and abutments.

3.37 The railway extensions include earth works, bridges and otherstructure and track. The upgrading of signalling includes completion of anon-going program for installation of a mechanical signalling system, includinginterlocking on the entire Tanjung Enim-Panjang section.

3.38 The new locomotives will be ballasted to 18-ton axle loads andequipped with dynamic braking and multiple unit control. The coal wagons fortransport of Suralaya coal will be of solid-bottom type, equipped with arotary coupler at one end for rotary dumping at the terminal and carry anet load of 52 tons.

3.39 The additional railroad equipment required to handle the 2.5 milliontpy of coal for Suralaya will not warrant construction of new servicing andmaintenance facilities. Repair facilities will be established in the existingworkshop at Lahat and the inspection and running maintenance will be per-formed in the existing shed in Tanjung Karang. The workshop at Lahat, whichpresently is equipped to service and overhaul steam locomotives and to over-haul all types of wagons, will be remodelled to do all heavy repairs andoverhaul works on motive power and rolling stock. The Tanjung Karang shed,which despite inadequate facilities is presently overhauling and servicingdiesel locomotives and servicing passenger and freight cars, will be remodelledto carry out proper servicing of motive power and rolling stock.

3.40 The proposed telecommunication system consists of: (i) a UHFterrestial point-to-point radio relay system running from Lahat to Kertapatiand from Perabumulih to Tanjung Karang, principally adjacent to the PJKA railline. From Tanjung Karang it is extended to Radja Basa on the southerntip of Sumatra and to Suralaya on Java; (ii) a telephone system consisting of afully integrated network of electronic private automatic branch exchanges(EPABX) at ten places with access to the Perumtel network at six places;(iii) a trackside communication network for PJKA consisting of a dispatcher tostation system, a point-to-train radio system and a station-to-station system;(iv) a message-switching network, including external telex connections, toprovide communications between PJKA central office in Kertapati and sixteenPJKA points plus the Tarahan and Suralaya terminals; and (v) VHF radio systemsfor internal radio communications for the mine, railway terminals and ship-to-shore. Operation of the system will be the responsibility of PJKA and PTBA.

3.41 The railway training program that will be undertaken by CanadianPacific Consulting Services (CPCS), which will provide managerial and technicalservices to PJKA throughout the project implementation period (para. 3.91),will be related to the movement of coal and the skills and personnel requiredto perform this, however, other traffic will to some extent benefit from theimproved skills. The training plans are based on the following basic principles:

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(a) to make extensive use of existing local educational institutions;

(b) to make use of existing PJKA training facilities, and, when theseare inadequate, to plan new facilities which can be used forfuture system wide training;

(c) where practical, to adapt existing PJKA training courses tomeet the needs of the Bukit Asam Project; and

(d to extensively utilize PJKA personnel as instructors.

3.42 The scope of the training program is summarized in the followingtable:

ESS--Proposed Railway Training Program

Track, Bridges Telecom-Buildings Operations Mechanical munications Total

Total number of trainees 180 531 1028 126 1865Number of courses 24 42 109 39 214Group size 10-20 10-35 6-30 15-30 6-35Av. length of course (weeks) 2.5 2 25 13 16Number of participants 377 1107 1355 629 3468Man-months of instructors:Expatriates 123 21 117 209 470Local 118 66 192 300 666

Estimated Costs: (US$000):Equipment 63 40 1,159 1,444 2,706InstructorsExpatriates 882 161 874 1,527 3,444Local 314 116 315 1,290 2,035

Trainees 111 322 2,594 903 3,930Miscellaneous costs 32 44 8 - 84Total 1,402 683 4,950 5,164 12,199

Average man-months costfor expatriate instructors 7,170 7,670 7,470 7,310 7,330

3.43 As part of its project management contract, CPCS will provide sub-stantial operational assistance in track and bridge maintenance, train opera-tion and telecommunication maintenance. During operation, the Bank, theGovernment and PJKA will periodically review the level and efficiency of coaltransport. Agreement was reached that if this transport is not being carriedout in a timely and efficient manner, PJKA will promptly take action to correctthe situation which may include a contract for operational assistance.

5. Tarahan Terminal

3.44 After a consideration of five sites in the area, Tarahan North, about6.5 km south of the existing railhead at Panjang on Lampung Bay in SouthernSumatra, has been selected as the terminal site. Selection of the Projectsite was based on considerations of accessibility, water depth, wave regime

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and wind direction. The present site is on a natural beach, underlain withcoral, lying between an existing road and the water. With a realignment ofthe road, already underway, sufficient land and beach area can be reserved forthe terminal without affecting the village of Sorampok which is on the landside of that part of the road not subject to realignment. Steep cliffs behindthe village constrain the area, determine the route to be followed by the road,and provide a flat plain on which the future extension of the railway fromPanjang must be located. The site is bounded on the north by land owned by awood processing plant.

3.45 While the terminal has been designed for an initial volume of 2.5 mil-lion tpy, the railway facilities, in the form of loop track, are sufficient toprovide space to handle future volumes of up to 12.0 million tpy. The initialworks will, however, be sufficient only for the initial volume. Adequate soiltests have been undertaken on land and at the pier site to ensure that thesite is acceptable. Areas of sand adequate for the preparation of the sitehave been located nearby, and hydrographic studies have not revealed anynavigational problems. Topographical studies have also been completed.

3.46 The terminal's design consists of a railway car dumper with an un-loading capacity of 3,000 tph. Coal reception and take-away conveyor facilities,with a capacity of 3,200 tph, will crush the coal; and conveyor belts anda fixed stacker will stockpile the crushed coal above two reclaim hopperslocated at ground level. The stockpile will have 15,000 tons of activestorage and 45,000 tons of compacted storage. These amounts are derived froma system-wide stockpile optimization study. Provision is made at the primarycrusher to direct future larger volumes of coal (e.g., for later stages of theSuralaya or Tuban power developments) to much larger stockpiling facilities,to be served by mobile stackers or combined stacker/reclaimers. When thisexpansion takes place, the facilities proposed for the 2.5 tpy volume willbecome the emergency stacking and reclaiming system.

3.47 Coal will be reclaimed from the stockpile for ship loading bya combination of gravity flow through the reclaim hoppers and flow createdby three large bulldozers pushing coal to the reclaim hoppers. This systemis expected to provide, over the average distance the bulldozers will operate,a coal flow at a peak rate of about 2,000 tph, sufficient to load ships at anaverage of 1,150 tph. This method of coal reclaim is used for ship loading ina number of coal terminals in other parts of the world, one of which has beeninspected by Bank staff, and is expected to be satisfactory.

3.48 Reclaimed coal will be sent by conveyor belts to secondary coalcrushing facilities consisting of, initially, three units each of 1,100 tphcapacity (two operational, one stand-by). After secondary crushing, the coalwill be sent to the travelling ship loader, which is designed to load theProject ship at an average rate of 1,150 tph. Provision is made for theshiploader to load at a future average rate of 2,000 tph, so that only minoralterations will need to be made when the volume rises above 2.5 million tpy.The coal loading pier, aligned to the underwater contours so as to permitapproach of a loaded Project ship from either direction, will stand in 12 m ofwater. While the Project ship will require only 7 m of water, the possibilitycan arise that, in the event of damage to the ship, emergency ships would haveto be used. After a survey was made of the world fleet of ships carryingtheir own coal unloading gear, it was decided that provision should be made

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for the 12 m depth sufficient to accommodate up to a 40,000 dwt ship thatwould be loaded fully with 30,000 tons of coal.

3.49 A decision has been taken to construct the Tarahan terminal on aturn-key basis as this is viewed as the most efficient method for construction.In the instructions to bidders for the Tarahan turn-key contract, as preparedby MCS and approved by the Bank, bidders are required to submit proposals forrecruitment procedures and for training programs during the start-up period ofthe Project. As the terminal is to be completely new operation and almost allof its personnel will have to be recruited, a comprehensive training programfor all levels of personnel is crucial. It is envisaged that 4 trainingprograms will be conducted: (i) a plant-wide operations orientation, andspecific working-level courses on terminal (ii) administration, (iii) operationand (iv) maintenance. In addition, basic skills courses will be offered. Theproposed training program will be reviewed by the Bank once the turn-key bidderis selected (early 1982).

3.50 The successful bidder will be contractually obligated to proposean operational assistance program--for varying levels of personnel--for thefirst five years of terminal operations. A detailed scope of work for thisproposal was prepared by MCS and approved by the Bank, and the proposal isexpected to be submitted to the Bank for review in early 1982. A preliminarycost estimate for the terminal training program is US$2 million (50:50local and foreign). Operational assistance costs are estimated at US$1.6million (totally foreign). This is reasonable considering the scope of workenvisaged.

6. The Ship

3.51 The ship selected as the Project ship is a self-unloading bulkcarrier of about 9,200 dwt. The selection was made after careful considerationof: (i) the rate of consumption of coal by the power plant and the appropriatestockpile volumes to be held at the mine, the loading terminal and at Suralaya;(ii) the ship loading and unloading rates and the cost of the associatedmaterials-handling equipment; and (iii) the unloading facilities required.Selection of a type of ship similar to those used on the US East Coast, theGreat Lakes, and the Caribbean for the coal and bulk products trades andinvolving short runs, high-speed unloading, and low-cost shore facilitieswill further extend Indonesian shipping operations into self-unloading shipoperations, already well and successfully developed for fertilizer distribution.

3.52 Due to the very short run of about 60 nautical miles between Tarahanand Suralaya, the unloading speed, and the operational regime proposed, theship has substantial over-capacity in the early start-up stages of the Projectbut will be fully utilized at 2.5 million tpy. It is expected that subsequentexpansion of the Suralaya plant, requiring an additional 3.0 million tpy ofcoal, will be carried out within four years of Project completion. At suchtime as it is decided to proceed with this expansion, a decision will have tobe made whether to duplicate the shipping system or to increase the size ofthe next ship to about 22,000 dwt cargo capacity.

3.53 During the period prior to authorization of construction of SuralayaUnit III, there will only be one ship to supply the coal. However both UnitsI and II are dual-fired coal-oil and the power station is equipped with fuel

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tanks and an oil receiving pier, Thus, the first response to an interruptionin coal suplies will be to draw-down coal inventories, which are to be main-tained at 30 days supply, followed by use of oil A major interruption ofcoal supply--whether due to the unavailability of the ship or because ofproblems at the mine or on the railway--could be dealt with by unloading coalusing any of a large number of bulk carriers of the world fleet which arebetween 20,000 dwt and 40,000 dwt, built prior to 1962, and equipped withunloading cranes. 1/ The choice of using such ships or of firing with oilin an emergency would be made in the light of the relative delivered andunloaded costs of oil and coal at the time. No technical need exists foran emergency coal reception pier in the early years of the Project becauseoil-firing is possible, although at a much higher cost than that estimated forimported coal.

3.54 By the time Unit III begins generating, a second coal ship will be inservice. However, as Unit III and the subsequent units will be only coal-fired,the possibility of an interruption of supplies on account of accidents ordisasters at the mine or on the railway cannot be ignored. In order to dealwith this possibility, PLN has decided to build a coal reception pier atSuralaya. This will be available throughout the entire Project period andcould, therefore, be utilized in the early years if such a course were con-sidered desirable. 2/

3.55 The consultant contract for assisting in implementation of theshipping component (discussed in detail in para. 3.91) will include a trainingcomponent. Training supervision costs will involve 35-man-months of consultanttime at an average-cost of US$9,300 per man-month to accomplish 89 man-monthsof training of Indonesian shipping staff of PANN and Bahtera. The ship designcontract will be financed in part from Bank Loan 1250-IND (para. 2.23) so itcan start expeditiously. The balance will be financed from the proposed loan.

7. Kertapati Terminal

3.56 It is proposed to retain the coal terminal at Kertapati, on theMusi River upstream of Palembang, for shipment of steam coal destined for tinprocessing facilities and any anthracite exports. Rehabilitation of theKertapati terminal, under the Project, will ensure that local steam coal andanthracite sales will be separated from the Suralaya coal. The rehabilitationof the terminal will include:

(a) repairs to berth structure and installation of a fendering system;

1/ A study was carried out, based on data obtained from Lloyds' Registerof Shipping, Data Center, which showed 601 vessels meeting criteriasuitable for substitute or emergency ships.

2/ In the later years of the Project, when coal intake will be above 5.5million tons per year, special arrangements will have to be made forimported coal reception. A variety of alternative coal import procedures,including unloading bulk carriers into the self-unloading ships could beconsidered.

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(b) new equipment for train uniloading, reclaiming from stockpiles andbarge-loading will be procured and installed;

(c) all belt conveyors will be replaced and a new weigh scale willbe installed;

(d) workshops, pumphouses and office buildings will be repaired;

(v) electrical installations will be refurbished; and

(vi) new workshop machinery such as a drill press, overheadcrane, welding equipment, hydraulic jacks and miscellaneoushand tools will be procur(ed and installed.

The estimated total rehabilitation cost is US$4.1 million in March 1981 prices.

8. Environmental Considerations

3.57 Mine. Adequate monitoring of the ambient environment will beundertaken during construction (BAMCO), as well as operations (PTBA), to ensurethat damage to aquatic resources is minimized. Findings of significantlyabove-ambient contaminant levels wiLl lead to modifications of construction/operations to eliminate or lessen any potential danger. Ditches to divertuncontaminated surface waters around disturbed areas will be provided. Con-taminated surface waters will be diverted into sedimentation ponds for necessarytreatment. Run-off water quality will be monitored frequently to ensure thatthe water meets World Bank guidelines for pollutant levels.

3.58 Most land within the mine area is dissected peneplain of low agri-cultural capability, presently covered by rough pasture and scrubland.Of the total land area of 3,743 ha. estimated to be disturbed by the miningsystem over a 30-year period, approximately 37% will be returned to produc-tive agriculture. Due to the large volume of waste material returned to theopen pit during the later stages of mine life, waste disposal areas willbe minimized and, once mining is complete, utilization of the open pit forboth agriculture and aquaculture will be possible. Mine reclamation, due to thecharacter of most wastes, is limited to dryland agriculture in flat to gentlysloping areas and the establishment of grasses on dump slopes and pit benchesfor erosion control and stabilization. An allowance has been included in theProject operating costs for this purpose, amounting to (in 1981 US$) USlO/tonof coal from first coal production through FY1995 and US254/ton of coal there-after. This is considered adequate to provide for and finance the necessaryenvironmental precautions.

3.59 During negotiations, agreement was reached that PTBA shall: (a)prepare guidelines before the completion of the Project, satisfactory to theBank, on water pollution controls and levels in the mine site and port areas;(b) monitor such pollution and take all necessary steps to ensure that therequirements of the guidelines are followed; and (c) before the completionof the Project, prepare and furnish to the Bank for review a land reclamationplan for the Bukit Asam mining area, and carry out the land reclamation activi-ties in accordance with such plan.

25 -

3.60 Transport and Terminals. The potential environmental effects of thetransport of coal by rai iand sea are judged to ba insignificant. At theTarahan Terminal, adequate dust suppression measures are included in theterminal design, and proper mitigating measures will be undertaken to minimizethe potential danger to water quality and marine life as a result of construc-tion work. Rehabilitation of the existing Kertapati Terminal facilities willnot only have no adverse impact on the environment, but improve the presentuncontrolled situation. It was agreed during negotiations that PTBA will carryout or cause to be carried out an environmental impact study of the terminals.

9. Coal Exploration Program

3.61 The Coal Exploration Program discussed with the Government, PTBA,PNTB and relevant institutions will consist of coal exploration in the mostpotentially-favorable areas relinquished by Shell in 1978/79 in South Sumatra.A number of areas for additional exploration in Kalimantan are also beingconsidered. As far as South Sumatra is concerned, full feasibility studieswill be prepared in relation to the coal reserves at North West Banko and atMaura Tiga which are considered the coal areas most likely to have immediatepotential. Additional drilling will be undertaken in surrounding Shell-relinquished areas including Air Lawai, Arahan, Suban Jeriji and Central/South/South East Banko. As far as the feasibility studies at N.W. Banko andMaura Tiga are concerned, considerable exploration has previously been under-taken and the Project will complete drilling necessary to (i) classify coalreserves into the proven category and (ii) improve uncertainties about coalquality considerably. The prefeasibility studies will involve a less inten-sive drilling and coal testing campaign aimed at establishing the location ofadditional high-potential coal areas.

3.62 Coal Exploration Program activities will include:

(i) provision of 5 (five) drill rigs to undertake exploration;

(ii) provision of additional coal and geotechnical laboratorytesting equipment:

(iii) a drilling program involving approximately 250 boreholesin South Sumatra with a total metreage of approximately25,000 m and preliminary field surveys and explanation inKalimantan;

(iv) provision of technical assistance (consultants) to reviewprevious exploration results; plan, supervise and analyze projectexploration; prepare feasibility/prefeasibility studies; andsupervise drilling campaigns undertaken by MCTD.

3.63 The Exploration Program is estimated to cost US$45.0 million in total,of which US$27.0 constitutes the foreign currency component. The Program,appraised in October/November 1981, will be executed by a Project Team underthe coordination of the Directorate of Mines in the Ministry of Mines andEnergy. Under the Project, an initial US$5.0 million will be made available aspart of the Bank loan, to finance down payments for equipment and technicalassistance in order to initiate immediately the urgent Program. During negotia-tions, the Government agreed to employ consultants, satisfactory to the Bank,to assist it in carrying out the Exploration Program.

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D. Project Execution and Implementation

3.64 The Government decided with Bank staff agreement (para. 3.09) toentrust Project execution and operation to the operating entities, PTBA, PJKAand PANN, with project management, training and operational assistance providedby specialized consultants at the various levels. Chart 3-1 provides anoverview of the Project implementation organization. Annex 3-1 describes theexecuting entities, respectively, in some detail, including their organizationalstructures, present facilities, and past financial performance.

1. Executing Entities

3.65 PT Bukit Asam--Mine, Townsite and Terminals. Through 1980, allcoal mining activities in Indonesia were managed by a state coal enterprise,PNTB, under the supervision of the Director General of Mines of the Ministryof Mines and Energy. PNTB was created in 1968 through a merger of threeautonomous mining companies formerly operated by Dutch interests. Two minesare in operation at present, the Ombilin mine in West Sumatra and the BukitAsam mine, whose expansion is the object of the Project. In addition tomanaging the two mines, PNTB initiated and supervised, from its head office inJakarta, the feasibility work to expand both mines, a production-sharingagreement with Shell Minjbouw (para. 2.12), and negotiations for production-sharing contracts in Kalimantan with five foreign consortia.

3.66 The existing open pit mine at Bukit Asam presently employs some 1,250workers. Its steam coal production has been declining from 864,000 tons in 1941,the maximum ever achieved, to 107,600 tons in 1980. In addition to steam coal,anthracitic coal is produced from the Suban pit located within the Bukit Asamconcession. The table shows 1976-80 coal production from the Bukit Asam mine:

Bukit Asam Coal Production, 1976-80(000 tons)

Year Steam Coal Anthracite Total

1976 104.4 18.3 122.71977 117.1 32.5 149.61978 126.5 50.6 177.11979 122.6 63.7 186.31980 107.6 53.6 161.2

The PNTB operation has been characterized by low productivity, old equipmentand poor maintenance of its physical assets. When production declined,PNTB was prevented, for social reasons, from adjusting the number of employeesto an adequate level and had to retain all employees. Thus, the company isheavily overstaffed. As a result, PNTB has had high production costs necessi-tating heavy subsidization by the Indonesian Government.

3.67 As the Government plans to accelerate coal development in Ombilinand Kalimantan and PNTB has limited management staff, the Government decidedupon the Bank's recommendation to set up a separate enterprise to manage theBukit Asam concession and associated facilities. Consequently, PerusahaanTersero Tambang Batubara Bukit Asam, PTBA, was created by Presidential Decreeon December 15, 1980. PTBA is a share company, presently wholly owned by the

- 27 - Chart 3-1

INDONESIABUKIT ASAM COAL MINING AND TRANSPORT PROJECT

Overall Project Implementation Organization Chart

Mnistry miistry Mnistry ofof BAPPENAS of Minecs} Bank of Transp ort

Fin.nce &, Energy nndonesi Comm,,,.a

r …… - -STEERING COMMITTEE - --------

I IH3 IlI Monitoring Group POKKORLI

ir- - ----- --- I l~ I

Adlinor _ PTBAPJKA PT PANN

| Otrector l l Di~~~~~~rector | Minsrg | . | ~~~~Coal Transpor

Project Manager Projec' Manager Kertapa Project Manager Projeager Manager Owner's E og.

PMC 'PMC T Block A Block 8BAMCO PT ENCONA Contractor PJKA

I Suppliers g l Suppliers | | Suppliers and | f Suppliers l l Sappliers l [ i| & Contractors g | & Contractors | | Contractorst | | & Contractors | | & Contractors |t o Ship Builderrs

LEGEND:Line Responsibility

_ _ _ Progress, Cost and Schedule Information Flow_ _ _* Flow of Project Directives

Member of Steering Committee

PMC Project Management Consultant

Industrial Projects Department/East Asia and PacificProjects Department World Bank - 22674D.ceabesr 19gl

- 28 -

Government. Under the Project, PTBA will own, implement and operate theexisting and expanded Bukit Asam mine and supporting facilities, as well as theKertapati and Tarahan terminals. PTBA will participate in the explorationeffort in South Sumatra under the proposed Coal Exploration Project.

3.68 PTBA's offices, while initially in Jakarta, will be located at TanjungEnim close to the mine within a year of the start of Project implementation(mid-1982). To facilitate execution of PTBA Project subsystem components(mine, mine community, Kertapati term:Lnal, Tarahan terminal), a project manage-ment unit is being set up within the Company; each subsystem will have asubsystem project manager responsible to the Director of Mining (mine andtownship) and the Director of Transport (terminals) reporting to the PresidentDirector. These organizational relationships, as well as the relationship ofthe PTBA to POKKORLAK, the overall coordinating agency, are summarized in Chart3-1. Past performance and present mine facilities are discussed in Annex 3-1.

3.69 The Government has appointed an experienced engineer as PresidentDirector of PTBA. All other Directors (Transport, Mining, Finance and Adminis-tration) have been associated with the Project since its inception and shouldbe in a position to manage the Project successfully with the technical assis-tance contemplated and discussed in paras. 3.85-3.86.

3.70 As one of the steps in forming PTBA, the Government has askedconsultants (PT Pamintori, in association with Coopers and Lybrand Services)to review the accounting systems used by PNTB and, where necessary, to developnew or revised systems for the new Company. While the consultants have iudgedthe existing PNTB financial accounting system capable of being revised to meetthe requirements of the expanded Bukit Asam operation, they recommended develop-ment of a new management accounting system for use in controlling cost andperformance PTBA. As part of the PMC contract, BAMCO will design the managementaccounting system, emphasizing cost control. PT Pamintori will be employedunder a contract acceptable to the Bank to define the financial accountingsystem and assist PTBA to install and implement both the financial and manage-ment accounting systems. During negotiations agreement was reached that PTBAshall: (i) adopt and put in place a financial and management accounting systemsatisfactory to the Bank, to be fully in operation by April 1, 1984; (ii) haveits accounts and financial statements for each fiscal year audited by indepen-dent auditors acceptable to the Bank; (iii) furnish to the Bank as soon aspossible, and not later than six months after the end of each fiscal year,certified copies of its financial statements and the auditors' report. Theaudit will be undertaken by an independent auditor acceptable to the Bank.

3.71 The Indonesian State Railway. Implementation of the railway andtelecommunications component of the Project will be executed by the EksplotasiSumatera Selaban ESS), the South Sumatra Region of the Indonesian StateRailway, Perusahaan Jawatan Kereta Api (PJKA). This agency is described inmore detail in paras. 17-30 of Annex 3-1. PJKA is a Government agencyunder the Ministry of Communications. Responsibility for the day-to-daymanagement of PJKA rests with the Chief Director, who reports to the Ministerthrough the Director General of Land Transport. At the PJKA headquarters inBandung, West Java, the Chief Director, supported by five functional departmentdirectors (personnel, finance, traffic and commerce, fixed installation,mechanical engineering and signalling and telecommunications), supervises six

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Regions (eksplotasi)--three in Java and three in Sumatra, including ESS.Decision making is largely concentrated at PJKA headquarters, and the RegionalDirectors, who rank below the department directors in Bandung, have relativelylimited authority.

3.72 As shown in Annex 3-1, PJKA-s overall management function suffersfrom a shortage of experienced staff in the middle and lower ranges, parti-cularly in the Regions. Training facilities and training are in principleadequate for existing operations, and programs to improve training are on-going. A comprehensive training program is required for new and upgradedskills needed to carry out the Project. With an "active" staff of about3,500 1/ ESS operational efficiency is low, although some improvements haveoccurred since 1976 (for details see Annex 3-1).

3.73 Despite an 86% increase in passenger traffic (passenger-km) duringthe 1976-79 period, ESS's financial performance was consistently weak withonly limited operating cash surpluses in FY1976 and FY1979 and substantialoperating deficits. ESS-s disappointing financial experience in these yearscan be largely explained by the Government's failure to increase tariffssufficiently to offset increases in operating expenses. During the 1976-79period, freight and passenger tariffs increased an average of only 30%, whileworking expenses increased about 70% due primarily to inflation.

3.74 Presently, PJKA's accounting system is centralized with the resultthat separate cash flow and balance sheet data for ESS and the other eksplo-tasis are not available. In response to this deficiency, consultants, (S.Parman & Co.--Indonesia, associated with Coopers & Lybrand) devised a completelynew accounting system which has been approved by the Government and PJKA. Thenew accounting system provides for separate accounts and financial statementsin each of the eksplotasis. To facilitate the introduction of the accountingsystem to ESS, modifications to the system were recently developed to permitthe separation of coal and non-coal costing data. The consultants are proceed-ing with the implementation of the accounting system for ESS. The Projectincludes financing for the final stage of implementation, to be carried out byconsultants in accordance with terms of reference acceptable to the Bank.During negotiations, the Government and PJKA agreed to introduce and operatethe aforementioned accounting system in ESS not later than the start of FY1983so as to allow identification and control of coal and non-coal cost data forappropriate tariff calculation.

3.75 Annual audits are performed by the Government's Office of Audits.Due to staff limitations on the part of the Government auditors, and the stateof PJKA's accounting records, the audits have been seriously delayed. However,under the Project, this difficulty is being addressed through the implementationof the new accounting system (para. 3.74) which will result in timely annualaccounts for ESS. In addition, the Government Auditors will give specialpriority to ESS's annual audits. Accordingly, PJKA has agreed that commencingin FY83 ESS's annual accounts will be audited by independent auditors accept-able to the Bank and the audit reports will be submitted to the Bank nolater than six months after the end of each fiscal year.

1/ Besides the "active" staff, ESS has about 600 "non-active" employees onits payroll who have been discharged but are being paid about 80% offull pay.

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3.76 The Shipowner-PT Pengembangan Armada Niaga Nasional (PT PANN).PT PANN is the national fleet development corporation and will be the executingagency for the marine aspect of the Project. It is owned by the Governmentand by its long-term credit bank, BAPINDO. Organized in May 1974 to acquireand lease or sell ships on time payment, PT PANN now owns 41 ships (81,158 tonstotal capacity) at an acquisition cost: of Rp 31,000 million (US$49.6 million).PANN has received funds from Norwegian aid and from the Bank under the SecondShipping Project (para. 2.23) which is now almost entirely committed and over69% disbursed.

3.77 PANN's operations are governed by a "Policy Statement" which canonly be altered with the Bank's agreement. Each sub-loan is appraised by PANNand this appraisal must be agreed to lby the Bank prior to release of funds.PANN is well managed and profitable. The State Auditor's audit for 1979 anddraft audit for 1980 have been received and reveal a satisfactory position.Past Financial Statements for PT Pann are given in Annex 3-4.

3.78 To deal with a situation in which neither PLN nor PTBA have anyexperience with bulk coal shipping, it has been agreed that PANN acquire thecoal ship required under the Project and lease it to a qualified operator onterms and conditions acceptable to the Bank; PANN has already appraised theproposed operator, P. T. Pelayaran Bahtera Adhiguna, which the Bank hasconfirmed would be acceptable. Acting according to the procedures found towork well for the Second Shipping Project, PANN will, after the appraisal hasbeen accepted by the Bank and the ship has been constructed, lease it to theoperator. This lease will contain clauses, related to the main coal salecontract, enabling PANN to transfer the lease to a substitute operator if theselected operator does not perform according to its time-charter with PTBA.Thus the operational obligations, corntained in the time-charter, will beseparated from the ownership by PANN. Adequate training of Bahtera staff, tobe carried out with the assistance of PANN's consultants (MCD), is includedin the conditions of the lease (para. 3.91). During negotiations the Banknoted that a lease structure that ensured a yield of about 10% in real termsover the life of the lease would be acceptable.

3.79 The Ship Operator-PT Pelayaran Bahtera Adhiguna (Bahtera). Bahterawas formed in 1971 as a Government shipping corporation to undertake ocean-going general-cargo and bulk trades and to undertake domestic tug and bargeoperations. The company now owns and operates eight ships, of which six,ranging in size from 2,400 dwt to 8,000 dwt, carry logs and general cargo onthe Japan and Taiwan routes, and two, each of 1,665 dwt, operate on inter-island trades. Eight tugs and 10 barges are leased, but this business isdeclining. The proposed coal ship will increase the operational fleet by9,200 dwt to a total of 48,200 dwt.

3.80 Bahtera has 244 sea-going and 416 shore staff. The latter carry outcargo and general ship agency and forwarding functions. The sea-going staffare adequately trained and operate ships on international and domestic voyages.The technical and accounting departments are also acceptable but improvementsare required in management information procedures. To deal with this and toimprove Bahtera's shipping operations, PANN has included in its proposed leaseof the Project ship an agreement whereby Bahtera will retain consultants toaudit its 1978, 1979 and 1980 accounts and upgrade its financial and managementpractices, receive training in self-unloading ship operations aboard shipssimilar to the Project ship and upgrading in navigation, radar use, engineeringand maintenance. Much of this training will benefit all of Bahtera's operations.

- 31 -

2. Overall Project Coordination

3.81 As illustrated in Chart 3-1 on page 27, the highest policy-makinglevel, a Government Steering Committee formed at the start of Phase I of theProject (preparation), will continue its role of: (i) ensuring inter-systempolicy coordination for the Project; (ii) coordinating the overall scheduleand policy with PLN; and (iii) resolving critical Project issues which cannotbe resolved at a lower level. The Steering Committee consists of the Director-General or senior officials of the Ministries of Mines and Energy; Transporta-tion, Communication and Tourism; and Finance; the national planning agency,BAPPENAS; Bank Indonesia; and PLN. Given the nature of its membership, theSteering Committee is not expected to be involved with operational Projectmatters, but to provide the overall guidance and mandates necessary for therespective entities to carry out their portion of the Project.

3.82 A Government coordinating group, POKKORLAK, has been established to(i) coordinate and monitor overall Project costs, budgets, schedules andplans; (ii) resolve matters arising from interphasing of the different sub-systems; and (iii) resolve common day-to-day operating problems, essentiallytaking over the Project coordination role of KP5BA. POKKORLAK consists of thePresident Directors of PTBA, PJKA and PANN, a Permanent Secretary and 7Indonesian professionals as well as support staff on a full-time basis. TheChairman of KP5BA in implementation of Phase I has been appointed PermanentSecretary of POKKORLAK. The Permanent Secretary and his staff are to besupported by a project monitoring consultant. The Bank has approved terms ofreference for this consultant who is to analyze and coordinate overall costcontrol, scheduling and deviation problems. MCS has been selected with Bankagreement to provide these services and the contract was signedin October 1981. The President Directors of the respective entities will besupported in the monthly POKKORLAK meetings, as required, by their respectivesubsystem managers. Chairmanship of POKKORLAK will rotate among the threedirectors on a six-month basis. During negotiations the Government confirmedthat sufficient funds will be made available to POKKORLAK, in accordancewith its budgetary procedures, in a timely manner, and that POKKORLAK shallbe ensured the necessary facilities, services and staff to carry out itsobjective and specific functions.

3. Project Management and Operational Assistance for Project Components

3.83 Mine System. Detailed mine design, detailed engineering of supportfacilities, procurement, supervision of construction, erection and commission-ing of all mining operations will be the responsibility of a project managementconsultant (PMC) who will also undertake training of the mine management andworkers. BAMCO--Bukit Asam Mining constructors, a joint venture of RheinbraunConsulting (RC) of Germany and Morrison-Knudsen, International Company, Inc.(MKI) of the U.S.--has been selected as PMC for the mine on terms of referencesatisfactory to the Bank. BAMCO's services will be terminated upon commission-ing of the last bucket wheel system. The average man-month rate for BAMCO,including fees, subsistence expenses, etc., is US$9,100 per man-month. Con-sidering the long experience of Rheinbraun in bucket wheel mine design,training and operation and Morrison-Knudsen-s experience as an internationalcontractor in Indonesia, BAMCO is well qualified to provide the management,training and operational assistance services for the mine. BAMCO-s selectionis acceptable to the Bank; the BAMCO contract was signed on August 12, 1981and became effective in November 1981.

- 32 -

3.84 Under the negotiated BAMCO contract, BAMCO or Rheinbraun Consulting(RC) is to provide operational assistance for a 5-year period. BAMCO willsubmit the detailed plan for trainirng and operation assistance 3 months aftereffectiveness of their contract, i.e., about February 1982. BAMCO or RC iscommitted to conclude an operational assistance contract not later than 6months prior to the final acceptance of the BWE-system. During negotiationsit was agreed that PTBA shall, at least 12 months before the operationalacceptance of the first mining subsystem, furnish to the Bank for its reviewand approval a draft contract to provide operational assistance during theinitial years of mine operation, and ensure that such contract is effectiveprior to the operational acceptance of the mine system. In view of the signifi-cant period before Project completion and the substantial training included inthe Project, it was also agreed that a final decision on the length of theinitial period of operational assistance to be incorporated in the contractwould be made at the time the draft contract is reviewed by the Bank.

3.85 To supervise its consultants, and organize adequately internaldecision making for the project PTBA has created a Project Management Unit,headed by an experienced Project Director. As detailed in Chart 3-1, threeProject Managers - Project Manager-Mine, Project Manager-Townsite and ProjectManager-Terminals report to him. The project managers of each component havereceived adequate internal staffing and will have the assistance of a fewspecialized expatriate advisors called Technical Advisors.

3.86 The terms of reference for the Technical Advisors have been agreedwith the Bank; and PTBA has concluded a contract with Bechtel IndonesiaIncorporated, a subsidiary of BechteL (US) (para. 3.07). A senior technicaladvisor, with experience in the implementation of large-scale industrialprojects will be allocated full-time to the PTBA office to advise the PTBAmanagement on overall project matters. In addition, the contract provides forTechnical Services Advisors, available on a when-required basis, to advise PTBAon matters including but not limited to bucket-wheel excavator design, procure-ment, mine development (Muara Tiga), construction, operation and training. Theaverage man-month rate including fees, subsistance, expenses, allowances,travel, etc., is estimated not to exceed US$12,000. The contracts will extendthe services through mine commissioning in 1985 reflecting the varying needs ofindividual specialities during this period.

3.87 During the construction period temporary camp facilities to houseforeign and local construction workers will be essential. During negotiationsthe Bank emphasized the urgent need for PTBA to finalize arrangements forproper facilities. Local consultants and the senior engineering advisorsare reviewing the matter, and it was agreed that PTBA shall furnish to theBank, by April 1, 1982, an action plan satisfactory to the Bank for theprovision of housing and infrastructure for all personnel involved in theimplementation of the mine component.

3.88 Townsite and Social Infrastructure. The townsite development willbe implemented by PTBA using local contractors, with a local engineering firm,PT Encona, acting as PMC for the townsite. In Phase I of the Project, PTEncona acted as a sub-contractor to MCS for the conceptual engineering anddesign of the envisaged townsite and social infrastructure (para. 3.30). Theconstruction of the townsite and related facilities is not on the Project

- 33 -

schedule½s critical path. Nevertheless, the contract with PT ENCONA, accept-able to the Bank, should be effective not later than May 1982. PT ENCONA'sscope of work will reflect the results of the urban impact study outlined inpara. 3.30.

3.89 Terminals. Both construction of the new Tarahan Terminal and theupgrading of the Kertapati Terminal will be implemented under the respon-sibility of PTBA. The former manager of the existing Bukit Asam mine has beenappointed Director of Coal Transport and will be responsible for rehabilitationof the Kertapati Terminal and the implementation of the Tarahan Terminal; inthe latter case, he will be supervising the terminal Project Manager. TheTarahan Terminal will be constructed under a turn-key contract by one of fourCanadian firms that have been prequalified. MCS has been selected, on termsand conditions satisfactory to the Bank, to supervise the contract and to actas Owner's Engineer to PTBA. MCS is well qualified for this in view of thepast experience of the partners. MCS services as Owner-s Engineer for Tarahanare estimated at 145 man-months at US$11,300/man-month (January 1981 prices,including contingencies, fees, etc.), evenly distributed over 1982-84.The upgrading of the Kertapati Terminal will be entirely the responsibilityof the PTBA project organization, with no outside assistance besides localcivil/mechanical/erection contractors. If technical assistance and adviseshould be required, MCS, having personnel located in the PTBA offices, couldprovide such services on an ad-hoc basis.

3.90. Railway. The Indonesian Government has created a special entity,called KP3BAKA, to be responsible for the execution of the railway project.KP3BAKA will be assisted by a project management consultant, Canadian PacificConsulting Services Ltd. (CPCS). The CPCS contract, which is acceptable tothe Bank, was signed on October 21, 1981. The terms of references for KP3BAKAas well as its organization and staffing of key positions are acceptable to theBank. Chart 3-2 below summarizes the organization. The works are divided intotwo blocks. Block A, for which CPCS is assigned overall responsibility,includes: (i) operational plans for the construction period; (ii) renewal andupgrading of existing track; (iii) construction of new track and bridges; (iv)telecommunications; (v) training, and (vi) operational assistance. Block B,for which KP3BAKA is responsible, assisted by CPCS advisors, includes: (i)procurement for the whole railway component; (ii) renewal and upgrading ofexisting bridges; (iii) upgrading of signalling system, (iv) buildings; and (v)locomotives, rolling stock and workshop equipment. Annex 3-3 gives a moredetailed organization chart for KP3BAKA. CPCS services outlined above areestimated to cost about US$34.2 million for 220 man-months of expatriates and2,612 man-months of Indonesian staff. The total cost per man-month is aboutUS$9,200 for expatriates and about US$5.300 for Indonesian support staff.

3.91 The Ship. The ship will be purchased by PANN following design andconstruction supervision by Marine Consultants and Designers (MCD) of USA/Canada.The qualifications and terms and conditions of MCD employment are acceptableto the Bank and the contract with MCD has been signed. The design, constructionsupervision and delivery supervision for the ship will involve 116 man-monthsof work at an average cost, including allowances, of US$9,500 per man-month.The MCD contract also includes a training component (para 3.56). The training

- 34 - CHART 3-2

INDWESIA

BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORT PROJECT

ORGANIZATIONAL STRUCTURE OF RAILWAY PROJECT MANAGEMENT

[CChtef Director

PJKA

1CP3 BAKA[Project Manager

KP3 BAKAProject Control CPCS Project Secretary

CPCS Personnel _ Project Director KP3 BAKA Personnelassisted by assisted byKP3 BAKA Personnel CPCS Advisors

Block A Work Block B Work

(CPCS Responsibility) (KP3 BAKA Responsibility)

CPCS Personnel KP3 BAKA Personnelassisted by assisted byKP3 BAKA Personnel CPCS Advisore

Industrial Projects Department/East Asiaand Pacific Projects DepartmentDecember 1981

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included covers design and trade-off studies, plans checking, construction,operations, maintenance, voyage accounting, safety and navigation.

4. Project Implementation Schedule

3.92 Project preparation is well advanced. Phase I works--basic systemselections, preliminary and preparation of capital and operating engineering,cost estimates, coal production schedule, staffing plan, training programs andprocurement documents--are now complete. Contract proposals for Phase II,detailed engineering and implementation, and project monitoring work have beensigned. Bids for the Tarahan Terminal turn-key contract were opened July 31,1981, and suppliers/contractors for major procurement packages for the miningcomponent have been prequalified (para. 4.18).

3.93 Agreement on a realistic Project implementation schedule has beena key problem during appraisal. During the post-appraisal mission in June/July1981, a revised schedule--based on realistic assumptions regarding approvaldelays during procurement and a realistic mine production build-up--was pre-pared, discussed, and agreed to by all parties concerned. This schedule ispresented in Chart 3-3 on page 36 and forms the basis for the financial andeconomic evaluation of the Project. Chart 3-4 on page 37 details the Projectcritical path. Some float exists in the terminal and shipping components andwill be adjusted after all Project Management contracts are effective. Train-ing programs will be implemented in phase with overall Project schedule andfuture operation should not suffer from lack of trained personnel.

3.94 Procurement delays. On the critical path of Project completionis the process of internal Government approvals from tender documents tocontracts and opening of letters of credit. Specifically, on the criticalpath are approvals by the Kepres 20 Team. The Steering Committee proposesthat special attention will be given to ensure that the internal approvalprocess proceeds inma timely fashion. 2-4 months were considered a reasonabletimeframe for obtaining Kepres 20 approval. To ensure that the schedule canbe met in practice, an early warning system will be adopted, whereby POKKORLAKwill inform the Steering Committee, the relevant Project entities and the Bankwhenever (i) bid evaluations have not been completed within 6 weeks after bidclosing or the bid award has not been made within 6 weeks after bid evaluation;or (ii) a contract has not been finally approved and signed within 6 weeksafter bid award. This system will apply to all procurement items, whetherBank financed or not. The implementation schedule provides for 6 monthsbetween receipt of bids to contract effectiveness.

3.95 Production Build up. The first bucket wheel excavator (BWE) will bein production by end-October 1984-36 months after the decision to proceedwith Project implementation--all BWE mining systems will be commissionednine months later, and full production capacity will be reached by 1987.While BAMCO expects to reach full mine output capacity already in early 1986after 18 months of installing the first BWE a gradual production build upduring a 3-year period is considered more realistic and such a slower learningcurve has been assumed for all schedules and projections in this report.

3.96 The first thermal unit at Suralaya power plant is now scheduled tostart up in October 1984 with the second unit starting 9 months later, inJuly 1985. This schedule, in combination with the above slow production

- 36 - CHART 3-3

BUKIT ASAM COAL MINING AND TRANSPORT PROJECTPROJECT IMPLEMENTATION SCHEDULE

Calendar Year 1982 1983 1984 1985 1986 1S67 1998

Months 5 10 1S 20 25 30 35 40 45 50 55 60 685 70 75 80

MINE

Main Mining Equipmet * I * - - A V_ QBCoal H;ndling System I

Power Distribution System 4 -_ _

Control & Communications Systm .I

Civil Works

In Pit Support Equipment - B r - _

Mine Service Facilities -_ 5 ._ _

RAILWAY OC

Track Etensions ------- * _

Track Rehabilitation _ 4 r.

Bridge Impnroament I

Workhhop Improewemnt -_ t ._

Signalling - - -V

Motie Power amd Rolling Stock _ . . - _ -

Telecommunication. -4 V - - - -

TARAHAN TERMINAL ITumkey)l D

SHI1P 8

KERTAPATI TERMINAL I V 0A

TOWNSITE -V A* - - - -

TRIAINING _| _____

OPERATIONAL ASSISTANCE Maximum dr.;tion 5 years

Coal Production eWE- I- - __

Systen,s. I1000 ons 6 _ 4 1.123 78

Wast Production EWE-Systemsn 1000 Ml 960 5235 rt;2i | 1420 | 152i

LEGEND~ - OA Start of Coal Mming

* Bid lnvitation O B Operational acceptance of EWE-Systtmv Bid Closing 0 C Railaay trenspont capacity 2.5 MTY0 Bid Ealuoation Complte 0 0 Coal ta, be receivedv Contract Approvud/Award 0 E Ship ready for teat loading

Industrial Project& DepartmentSeptember 19B1 World Bonk - 23076

- 37 -

CHART 3-4


PROJECT CRITICAL PATH SCHEDULE

Cal,nder Year 1982 1983 1984 1985 1986 1957

Monts _ 5 10 1-' 20 125 30 135 140 45 -5 55 s0

MINE MAIN EQlUIPMENT

Tendering - Award

Detailed Design 0 -0

Fabrication-

Delivery to Site

Erection

Start-up First System 41 I __ _ __O_

All Syttoms in Operetion i I P ON _

MINE CIVIL WORKS

Site Prperation Tendering - Awend 0I - - -

Conttruction _ i

Structums/Buildings: Tendering -Awrd A r Id

Construction

RIAILWAY'

Track Extension O -

Track Reabilitation 0 . . _ l

Bridge Improvement

TARAHAN TERMINAL

Tendering - Award

Design - Construction O -- _ _ _-

Ready to Receiv" Coal :

Reody to Ship Coal

Deuign

Tendering - Award

Construction

Ship Trials

LEGENDo Start of Activityo Activity Complete

_ _ _ Flout

Industrial Projcts DepartnmantOctober 1981 World Bsnk - 2336

- 38 -

build-up during the first years of mine operation which is more realistic thanthe one anticipated by the consultants, implies that the Bukit Asam mine willnot be able to meet the Suralaya demand until early 1987. To respond to thissituation and ensure an adequate coal supply as soon as Suralaya is commissioned,PTBA will mine the small 4 million ton deposit at Muara Tiga located adjacentto Bukit Asam. The scope and cost of exploiting Muara Tiga is described inparas. 3.29-3.31 and Annex 3-2. PTBA agreed to establish an action plan forthe gradual exploitation of the Muara Tiga coal deposits and review progressunder the plan annually with the Government and the Bank. Annual review ofMuara Tiga production and investment is needed to synchronize output withactual coal demand and potential Bukit Asam output during 1983-87 in consulta-tion with the Government and the Bank.

3.97 While the railway should have no problem to complete rehabilitationworks to ensure movements of relatively small tonnages in FY84, certain trackrehabilitation, bridge improvement and signaling/telecommunications for therailway, are on the critical path for the required transport to Tarahan of2.4 million tpy, planned to be reached in November 1985.

3.98 The schedule is also contingent on having a firm minimum of 20 MWelectrical power available by October 1984. Since the first unit of thecoal-fired mine mouth power plant, 2 x 65 MW, will not be commissioned untillate 1985, an interim power supply has to be provided by PLN in addition to theconstruction power to be provided under the Project. PLN intends to constructa diesel power plant, 4 x 6 MW, in the vicinity of the mine. During negotia-tions the Government agreed to take all necessary action to ensure a firmand steady interim power supply for mining operations.

3.99 Finally, the schedule is contingent on the timely acquisition of landfor the mine waste dump area, the mine community, railway extensions andsidings, and the Tarahan Terminal. The schedules for land acquisition for eachProject component were reviewed in detail during the negotiations. The scheduleproposed by GOI was acceptable to the Bank. Specifically, for the railway thelocal Governments-s decrees for assuring land requirements were issued by theGovernor of South Sumatra on April 8, 1981 and by the Governor of Lampung onAugust 29, 1981. For the Tarahan terminal all land has been acquired. Forthe mining site, the townsite expansion and the Kertapati terminal land acqui-sition is in progress. Applications for land acquisition have been. submittedto the Governor of South Sumatra, surveying has commenced and all land willbe acquired by September 1982 for the mining site and Kertapati terminal,and December 1982 for the townsitie. During negotiations the Government and theProject entities agreed to take all action necessary to acquire as and whenneeded all such land, and to inform the Bank, in a timely manner, that suchland is available for the Project.

IV. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT

A. Capital Costs

4.01 As summarized below, the total financing required for the Bukit AsamProject is US$1,336 million, of which US$821 million, or 61%, is in foreignexchange. Including allowances for physica'l and price contingencies, US$589million (44%) will be needed for the mine system, US$88 million (7%) for themine community, US$89 million (7%) for the terminals, US$297 million (22%) forthe railway, and US$34 million (3%') for the shipping component. A more detailedbreakdown of the capital cost estimates for each component is given in Annex 4-1.

- 39 -

Indonesia--Bukit Asam Coal Mining and Transport ProjectCapital Cost Estimates (1981 Base Cost Estimate)

--- Rupiah billions--- - …-----US$ million------Local Foreign Total Local Foreign Total %

Mine SystemCivil Works, Equipment, Erection,

Insurance 49.7 147.7 197.4 79.5 236.3 315.8 (38.5)Engineering/Project Management 10.0 24.6 34.7 16.1 39.4 55.5 (6.8)Training & Operational Assistance 5.7 11.6 17.4 9.2 18.6 27.8 (3.4)Preoperating & Start-up 19.7 8.9 28.6 31.5 14.3 45.8 (5.5)

Subtotal 85.2 192.8 278.0 136.3 308.6 444.9 (54.2)

Muara Tiga Development 2.4 7.1 9.5 3.8 11.4 15.2 (1.9)

Mine TownsiteCivil Works, Equipment, Erection,Insurance 21.6 7.1 28.7 34.5 11.4 45.9 (5.6)

Engineering/Project Management 2.7 0.3 3.0 4.3 0.5 4.8 (0.6)Training & Operational Assistance - - - - 0.1 0.1 ( -)Preoperating & Start-up 0.6 - 0.6 1.0 - 1.0 (0.1)

Subtotal 24.9 7.4 32.3 39.8 12.0 51.8 (6.3)

Kertapati TerminalCivil Works, Equipment, Erection,Insurance 0.7 1.5 2.2 1.1 2.4 3.5 (0.4)

Engineering/Project Management - 0.3 0.3 - 0.5 0.5 (0.1)Subtotal 0.7 1.8 2.5 1.1 2.9 4.0 (0.5)

Tarahan TerminalCivil Works, Equipment, Erection,Insurance 8.9 18.0 26.8 14.2 28.7 42.9 (5.2)

Engineering/Project Management 1.5 4.8 6.3 2.4 7.7 10.1 (1.2)Training & Operational Assistance 0.6 1.6 2.2 1.0 2.6 3.6 (0.5)Preoperating & Start-up 0.8 0.1 1.0 1.4 0.2 1.6 (0.2)

Subtotal 11.8 24.5 36.3 19.0 39.2 58.2 (7.1)

Railway/CommunicationsCivil Works, Equipment, Erection,Insurance 27.7 67.7 95.4 44.2 108.4 152.6 (18.6)

Engineering/Project Management 5.4 10.7 16.1 8.7 17.1 25.8 (3.1)Training & Operational Assistance 5.6 6.4 12.0 9.0 10.2 19.2 (2.3)Preoperating & Start-up(inc. Accounting System) 11.0 0.7 11.7 17.6 1.1 18.7 (2.3)

Subtotal 49.7 85.5 135.2 79.5 136.8 216.3 (26.3)

ShipVessel, Insurance 0.4 12.4 12.8 0.6 19.9 20.5 (2.5)Engineering/Project Management - 1.1 1.1 - 1.8 1.8 (0.2)Training & Operational Assistance 0.2 0.4 0.6 0.3 0.7 1.0 (0.1)Preoperating & Start-up 0.3 0.1 0.4 0.5 0.1 0.6 (0-1)

Subtotal 0.9 i4.0 14.9 1.4 22.5 23.9 (2.9)

Project MonitoringPOKKORLAK 1.2 - 1.2 2.0 - 2.0 (0.2)Consultant Services 0.9 2.0 2.9 1.4 3.2 4.6 (0.6)

Subtotal 2.1 2.0 4.1 3.4 3.2 6.6 (0.8)

TOTAL BASE COST 177.8 335.4 513.2 284.3 536.6 820.9(100.0)

Physical Contingencies 27.7 23.1 50.8 44.3 37.0 81.3Price Escalation 73.6 64.9 138.5 117.8 103.9 221.7

TOTAL PROJECT COST 279.0 423.4 702.4 446.4 677.5 1,123.9

Refinancing of S-9 IND Loan - 6.3 6.3 - 10.0 10.0Incremental Working Capital 25.8 5.3 31.1 41.3 8.4 49.7Interest During Construction a, 17.1 78.1 95.2 27.3 125.0 152.3

TOTAL FINANCING REQUIREMENTSBUKIT ASAM PROJECT 321.9 513.1 835.0 515.0 820.9 1,335.9

a/ Includes IDC through FY 1985. Foreign portion includes IDC on long-term loans,based on actual lending terms. Local portion includes differential betweenactual terms and on-lending rate, plus IDC on Government debt.

- 40 -

4.02 The capital cost estimates are based on the Phase I consultants'reports of August 1980, revised to reflect the agreed Project implementationschedule (Chart 3-3, page 36). Cost estimates were prepared by RheinbraunConsulting for the mine system, and by MCS and its subcontractors (MCD and PTEncona) for all other components. The estimates also include preoperatingexpenses and interest during construction through FY85, pro-rated overburdenremoval cost through FY86, and incremental working capital requirements andcapital expenditures for the mining community through FY87. BAMCO and MCShave been requested to update these estimates to reflect 1981 prices, whichthey have agreed to do as soon as the PMC contracts are effective. In theinterim, Bank staff undertook spot checks of major equipment suppliers todetermine whether the revised cost estimates, as escalated by an overallinflation rate to 1981 US$, are in line with current market rates. Based onthe results of this survey, no significant changes are indicated.

4.03 It has been assumed that the Project will be exempt from all importand custom duties for the first 10 years of the Project, as provided for underGovernment Regulation No. 21 (1976) on Taxation and Other Levies on MiningExploitation of Non-Oil and Natural Gas. PTBA has applied to the Governnment'simporting authority to be officially qualified for this exemption.

4.04 Physical contingency allowances average 11% of total base costand are detailed as follows:

Physical Contingencies(% of Base Capital Cost)

Local Foreign

Mine 20% 5%Mine Townsite 10% -Railroad 20% 10%Tarahan Terminal

Civil Works 25% 25%Equipment 20% 10-20%

Kertapati Terminal 15% -Ship 25% 10-20%

The respective contingencies reflect the degree of completion of design/engineering work, e.g. for mine equipment, which is already fully specified, a5% allowance is considered appropriate.

4.05 Price escalation allowances have been added to the base capital andphysical contingency estimates as follows:

Price Contingencies

Year Local Foreign

1981 18% 9.0%1982 14% 8.5%1983 10% 7.5%1984 10% 7.5%1985 10% 7.5%1986 onwards 10% 6.0%

- 41

These rates are in line with the latest Bank assumptions on Indonesian andworld-wide inflationary trends. 1/

4.06 Total engineering and project management costs are estimated atUS$130 million or 10% of total capital costs, of which US$84 million isin foreign exchange. This is in line with expenditures for similar projects.Training programs for all components will cost US$30 million (US$12 millionin foreign exchange) and operational assistance for a 5-year period has beenestimated at US$35 million. Costs of the staff within PTBA, ESS and POKKORLAKworking on the Project are estimated to total US$29 million.

4.07 The estimated total increase in working capital of US$50 millionconsists of US$38 million for PTBA and US$12 million for PJKA/ESS; theyare based on financial projections and pricing assumptions discussed inChapter VI and include incremental needs until full system capacity is reachedin FY1987. Details are given in Annex 4-2.

4.08 Interest during construction or. long-term debt has been estimated atUS$152 million through FY1985. This includes the interest fees as on-lent bythe Government to the entities (i.e., 13.5% p.a. or actual interest rate ifhigher). The total cost has been calculated on the basis of the financing planoutlined in para. 4.10 and loan disbursements commencing in the second quarterof 1982.

4.09 The total capital cost for the mine component, excluding priceescalation, working capital and interest during construction, is about US$148per annual ton of coal in 1981 terms. In addition, the equivalent cost forthe delivery infrastructure (rail, terminals, ship) is about US$100 per annualton in 1981 terms. Depending on the type of deposit, location and infra-structure needs, it has been estimated that new coal mines in LDCs require (in1981 terms) investment costs averaging US$60-120 per annual ton capacity, andinfrastructure needs averaging an additional US860-120 per annual ton capacity.The relatively high investment cost for the Bukit Asam mine component is dueto (i) low annual effective operating hours because of severe climaticconditions, with heavy rainfalls causing material handling difficulties; (ii)the large size of the Air Laya pit, with rather flat final pit slopes (17degrees) and long waste material transportation distances to the waste dumps;(iii) the the multi-seam nature of the deposit; and (iv) the need forsubstantial system support investments within the minesite itself, transport,and social infrastructure. This cost is acceptable, however, particularlybecause this Project is only the first step in the development of an expandedcoal production capacity in South Sumatra, for which--except for additionialmining system investments--all necessary minesite infrastructure will beprovided under this Project to allow an eventual throughput of up to 9-12million tpy of coal. The cost of the delivery infrastructure is in linewith similar needs elsewhere and allows for a doubling of capacity at thelow incremental investment cost of about US$20/ton in 1981 terms. While theBukit Asam deposit is not competitive for steam coal exports for quality and

cost reasons, it is presently the lowest-cost coal development in Indonesiaand is cost competitive with imported alternative fuels.

1/ Considering the indicated divergence between expected local and foreigninflation rates, a devaluation during the project implementation periodcannot be excluded. In case of a 25% devaluation by 1983, the govern-ment's commitment to finance foreign exchange not covered by foreignloans would require additional funding of about US$40 million.

- 42 -

B. Financing Plan

4.10 The financing plan for the Project is summarized as follows:

Financing Plan - Bukit Asam Coal Mining Development and Transportation Project

A. Government Contributions to: US$ million %- PTBA

as new equity 439.6 32.9as long-term loan 86.7 6.5

- PJKA (as budget) 167.1 12.5- PANN (as new equity) 8.8 0.7- POKKORLAK (as budget) 8.6 0.6- Interest during construction a/ 34.3 2.6

Subtotal 745.1 55.8

B. Internally Generated Cash:- PTBA 21.6 1.6

C. Long-Term Debt b/- IBRD c/ 180.0 13.5- EDC/CTIDA 133.0 9.9- KfW 48.0 3.6- Netherlands 2.5 0.2- Export Credits and Other 205.7 15.4

Subtotal 569.2 42.6Total Financing 1,335.9 100.0

a/ IDC on portions of foreign loans passed on as new equity on budget alloca-tions to the Project entities.

b/ Of the total. long-term debt of US$569 million, US$143 million will begiven as a budget allocation to PJKA, and US$11 million as equity to PANN.The rest, with the exception of US$10 million for refinancing Loan S-9IND, will be on-lent by the Government (US$386 million to PTBA, US$20million to PANN) at 13.5% p.a. or actual interest cost, whichever ishigher.

c/ Excluding US$5.0 million for proposed Coal Exploration project.

Foreign loans are being sought to cover direct foreign exchange, except forthe foreign exchange components of preoperating and start-up costs, incrementalworking capital requirements and interest during construction, which will befinanced by the Government. The Government has also agreed to fund all localcost and indirect foreign exchange. As usual in Indonesia, the Governmentcarries the foreign exchange risk on all foreign loans.

4.11 Co-financing by the Bank, KfW, and EDC/CIDA will be on the basisof parallel financing. The Bank loan would finance the foreign exchangecosts of (i) a portion of the mining equipment and (ii) the engineering,project management and monitoring, training and technical assistance for allcomponents as further detailed in para. 4.22, and, in addition, would refinanceEngineering Loan S-9 IND. The EDC/CIDA loan will finance foreign exchangecosts of the turn-key contract for the Tarahan terminal, and equipment, civilworks and erection of the railway/communications system, except for the portionof the signalling sub-system to be financed by the Dutch and possibly a smallrailway package that would be procured through limited international competitive

- 43 -

bidding were sufficient EDC/CIDA funds unavailable at the time of tendering.The KfW loan will finance parts of the bucket wheel system for the miningsystem.

4.12 The table below summarizes the expected terms of long-term debtfinancing of the Project:

Long-Term Debt Financing Terms

IBRD EDC CIDA KfW Dutch

Amount (US$) 180.0 a/ 100.0 33.0 48.0 2.5Interest Rate (%) 11.6 9.0 0 2 2.5Repayment Period (years) 20 10 50 30 30Grace Period (years) 5 3 10 10 8Commitment Fee (%) 0.75 0.50 0 0.25 0

a/ Excluding US$5 million for coal exploration.

For the remaining debt financing of US$206 million, export financing will besought during tendering. Considering the type of procurement items (ship,conveyors, mining equipment), availability of financing on export credit termsshould pose no problem. During negotiations, the Government agreed thatto the extent that such export financing is not forthcoming in the amounts ortiming required for timely Project implementation, the Government will providethe necessary foreign exchange and local funds.

4.13 Considering the Project risks, the Project will be financed on a50:50 debt-equity basis for PTBA. This implies that US$440 million will bepaid in as equity by the Government during the FY81-86 period. Appropriateportions of the Bank loan and EDC/CIDA funds, the KfW credit and exportcredits will be on-lent to PTBA at not less than 13.5% p.a. (or the actualinterest rate for export credits if higher) for fifteen years including 5years of grace.

4.14 The 50:50 debt:equity structure that was previously agreed withPT PANN under the Second Shipping Project (para. 2.23) is also proposed foradoption in this loan, implying a Government equity contribution and loan ofUS$20 million each, the latter on-lent to PT PANN at the same on-lending rateas for PTBA, i.e., 13.5% interest p.a. for 15 years, including 5 years' grace.Finalization of on-lending agreements to PTBA and PT PANN satisfactory to theBank will be a condition of loan effectiveness.

4.15 Of the PJKA financing requirement for the Project of US$310 million,US$143 million will be raised through foreign loans (IBRD--US$31 million;EDC/CIDA--US$90 million; Dutch US$2.5 million; export credits--US$20 million).As PJKA is a Government Department, these loans and all remaining funds willbe appropriated through annual budget allocations.,

4.16 Timely Project implementation will hinge on the availability andadequacy of Government contributions to the Project entities. The Governmenthas shown its commitment to the Project by providing interim financing andbudget allocations for FY1981 of US$48.5 million in foreign exchange andUS$18.7 million in local currency for the entities involved. This should beadequate until loan financing becomes available in mid-1982. During negotia-tions, the Government confirmed that it will provide in the future (i) thenecessary yearly budget allocations for PJKA and POKKORLAK, and (ii) equity

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or loan contributions for PTBA and PANN to meet the Project's requirements in atimely manner. Further, the Government will provide the necessary local orforeign funds to complete the Project and to cover any possible cost overruns.

C. Procurement

4.17 Procurement for all Bank-financed equipment items will followInternational Competitive Bidding (ICB) procedures according to the Bank'sprocurement guidelines. Procurement of items financed by EDC/CIDA, the Dutchand KfW will follow the respective procurement procedures of these institu-tions. Efficient procurement procedures will be followed for the remainingBukit Asam items to ensure reasonable prices.

4.18 Preparation of procurement documentation is well underway:

(a) for the mine, advertisement and prequalification have beencompleted for all packages and prequalified suppliers approvedby the Bank. Tender documents for long lead time items(bucket wheel, coal handling system, power distribution, andcontrol and communication systems) have been approved by theBank and have been sent out in early December.

(b) for the railroad, technical descriptions of equipment areavailable, methodology and scope of track and bridge workshave been defined and bid packages identified. Remainingwork, for engineering and finalizing bid documents andinviting bids, is expected to take 6-9 months aftereffectiveness of the contract with CPCS (December, 1981);

(c) for the Tarahan terminal tender documents have been approvedby the Bank and invitations to bid were sent to four prequalifiedsuppliers on March 16, 1981, were opened on July 31, 1981, andbid evaluation has started; and

(d) detailed engineering for the townsite and Kertapati terminalhas to await effectiveness of the contracts with PT ENCONA andMCS, respectively. Tendering for these components is notexpected before mid-1982.

The first orders for major mining equipment and the Tarahan terminal areexpected to be placed in mid-1982.

4.19 Responsibility for procurement and contracting lies with the threeexecuting entities PTBA, PJKA and PANN. They will be assisted in prepara-tion of tender documents, bid evaluation and contract negotiations by theirrespective Project Management Consultants, BAMCO, CPCS and MCD. The earlywarning system described in para. 3.94 should help to minimize delays duringthe procurement process.

4.20 Based on present packaging by BAMCO of Bank-financed items for mineequipment and machinery, no small packages are foreseen. However, if afterreview of bid packaging, particularly for warehouse and workshop equipment andmachinery, small procurement items will result, limited international tendering 1/will be used for items up to $300,000) and local prudent shopping for items upto $50,000. In any case, the total amount of packages procured under prudentshopping and/or limited international shopping should not exceed $3.0 million.

1/ Minimum of 4 bids from three different countries.

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4.21 Contract Review. All Bank-financed bidding packages estimated tocost over US$300,000 equivalent for goods would be subject to the Bank'sprior review of procurement documentation resulting in a coverage of about 95%of the total estimated value and 11 out of an estimated total of 15 packagesof goods contracts. The balance of contracts would be subject to post reviewby the Bank after contract award and before disbursement.

D. Allocation and Disbursement of the Bank Loan

4.22 The Bank loan of US$185 million will finance goods and services asshown in the table below, including US$5 million to start coal explorationwork under the proposed Coal Exploration Project. Since effectiveness of themajor engineering and project management contracts is necessary to start offthe activities on the critical path in the implementation schedule and sincesuch effectiveness requires some initial downpayments, it is recommended thatretroactive financing be allowed to cover the downpayments after October 1,1981, estimated not to exceed US$9 million.

Allocation of the Bank Loan(US$ millions)

Loan Allocation % of ExpenditureAmount % to be financed

A. Bukit Asam Project

Engineering/Project Management/Training/Operational Assistance

Mine - Technical Advisors 1.6 0.9 ) 100% of- Project Management Consultant 39.0 21.1 ) foreign- Operational Assistance (18 months) 5.5 2.9 ) expenditures

Railway- Local Consultants 0.2 0.1 100%- Project Management Consultant 22.8 12.3 )

Tarahan Terminal - Owner's Engineer 1.6 0.9 )Ship - Engineering/Training 2.0 1.1 )Project Monitoring Consultant 3.0 1.6 )

Sub-total 75.7 40.9 )) 100%

Mine Equipment/Machinery/Erection )Coal Handling System 8.2 4.4 ) ofPower Distribution 13.2 7.1 )Control and Communication 4.1 2.2 ) foreignAuxiliary Mining Equipment 11.8 6.4 )Drill Rigs 1.8 1.0 ) expendi-Warehouse and Storage Area Equipment 1.5 0.8 )Workshop Equipment and Machinery 10.5 5.7 ) tures

Sub-total 51.1 27.6 )

Unallocated 43.2 23.4

Total Bukit Asam Project 170.0 91.9

B. Refinancing of S-9 Loan 10.0 5.4 100%

C. Coal Exploration/Engineering 5.0 2.7 100% of foreignexpenditures

Total IBRD Financing 185.0 100.0

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4.23 As shown above, US$75.7 million or 41% of the Bank loan is expectedto finance engineering/project management/training and operational assistanceservices. This is in line with the Bank's lending strategy in Indonesia, andfor mining projects in general, where alternative financing on reasonable termscan be attracted and the Bank ought to play a catalytic role. Further, Bankfinancing of the various Project management and technical assistance contractswould ensure involvement in all phases of the Project.

4.24 The Project as defined in Chapter III is expected to be completed inDecember 1986 and the loan fully disbursed by the third quarter of fiscal year1987 (Annex 4-3). The disbursement schedule is shorter than the average profile.This is warranted by the composition of loan concentrating on services and mineequipment which are drawn down in the early part of Project imlementation.

V. THE MARKET FOR INDONESIAN STEAM COAL AND ANTHRACITE

A. World Market Situation and Prospects

5.01 This section presents a brief overview of the future prospects forthe international coal market as background for the discussion of the marketfor Bukit Asam coal (paras. 5.10-5.25). A more detailed account of the worldmarket situation is givern in Annex 5. Further material is available in theProject File, including the various market-related reports and documentslisted in para. G, page vi.

5.02 Technically and economically recoverable world coal reserves areestimated at 636 billion tons of coal equivalent (tce), 1/ about 230 years ofpresent coal consumption. World coal production for 1980 was estimatedat about 3.1 billion tce, accounting for just under 30% of commercial worldprimary energy production. Only 8% of world coal production was traded, ofwhich three quarters was metallurgical coal. Thus, internationally tradedsteam coal accounts for only 2% of world coal production, i.e. an internationalsteam coal market is only now being built up.

5.03 Price competitiveness with oil and security of supply are expectedto stimulate coal production over the next two decades primarily in developedcountries and coal would provide 40% or more of incremental world primaryenergy supplies in the 1990s. Coal production is projected to increase from3.1 billion tce in 1980 to 4.9 billion tce in 1990 (4.3% annual average growth1980-90) and subsequently to 6.3 billion tce in 2000 (3.0% annual averagegrowth 1990-2000). Coal's renewed price competitiveness with oil is alsoexpected to result in increased use and importation of steam coal by energyimporting countries in Europe and the Far East in the 1980s and 1990s. Recentstudies indicate a possible range of steam coal trade of 150-180 million tcein 1990 and 270-650 million tce in 2000. The higher end of the range would belargely the result of substantially higher imports by six countries--France,FR Germany, Italy, Japan, Korea and Taiwan--and would be supplied by increased

1/ One ton of coal equivalent (tce) = 1 metric ton of coal with acalorific value of 7,000 kcal/kg.

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exports from major exporters such as the United States, Australia, SouthAfrica and Canada.

5.04 Steam Coal. From 1974-80, international thermal coal prices asmeasured in real terms on an fob basis remained fairly constant, whereas crudeoil prices increased by a factor of four during the same period. Followingthe 1979/80 oil price hikes, thermal coal import requirements increasedsharply; as a result, market conditions tightened very much and 1980 fobprices increased by 20% in real terms, to US$37-41 per tce in 1981. On adelivered basis, steam coal prices are now US$50-60 per tce, cif Japan, andUS$60-65 cif Europe compared with oil at US$170-180 per tce.

5.05 Though coal production costs are not likely to increase much inreal terms in the forthcoming decade, the rising costs of competitive fuelsand of new infrastructure--including transportation facilities to increasecoal supplies--are likely to push coal prices up in real terms. The extentof these increases over the coming two decades will depend primarily oncoal's demand/supply balance. Following the 20% real price increase forsteam coal in 1980 coal demand is expected to strengthen further up to themid-eighties and reflected in real price increases of 1-3% p.a. For thepurpose of projections, it is assumed that coal prices will increase by 1.5%annually in real terms until 1985. The rate between 1985 and 1995 could beanywhere from 0% to 4%, depending on the actual supply/demand situation andprice increases for alternative fuels; a real increase of 2% annually in realterms between 1985 and 1995, with a constant price thereafter, has beenassumed. Results of various market projections are given in Annex 5, paras.12-18.

5.06 Steam coal contracts have involved relatively small coal quantitiesin the past (generally 250-500,000 tons annually for three to five years). Itis expected, however, that future thermal coal contracts will have to providefor larger quantities over longer periods-e.g., 1-3 million tpy for 10-15years--to facilitate the large volume of coal trade anticipated and commitmentsto new power plants.

5.07 Anthracite Coal. World reserves of anthracite are estimated at 20billion tons, about one hundred times present annual production of 200 milliontons. Anthracite provides clean, continuous heat and is well suited for usein household heating and cooking, electric power generation, metal processingand, blended with coking coal, for coke manufacture. Anthracite productionhas tended to decline in industrial countries but increase in centrallyplanned economics (CPEs) in the past two decades.

5.08 In the international anthracite market, prices declined over theperiod 1950 to 1974 as anthracite was substituted by more convenient andcheaper energy sources. However, this trend has now reversed, and Japaneseanthracite importers have experienced price increases of 45% during 1976-80.The quoted average 1981 fob price for People's Republic of China contractsis US$65. Historically, Indonesian anthracite prices have failed to keep pacewith the overall anthracite market. In early 1981, PTBA has successfullyincreased anthracite prices in new contracts to US$65/ton fob Kertapati, whichis in line with prices being received elsewhere in the market.

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B. The Market and Marketing of Indonesian Coal

1. Demand/Supply Prospects

5.09 Following the 1976 Presidential Instruction (para. 2.09), steamcoal demand in Indonesia has been closely linked to PLN's expansion plans.Steam coal demand for power generation is expected to total 7.5-9.0 milliontpy by 1990 (based on 2 x 400 MW plants at Suralaya, 2 x 65 MW mine mouthplants at Tanjung Enim, and 1,400 MW to be developed at Suralaya and/or a newlocation in East Java) and taking into account known variations in coalquality; and 12-15 million tpy by 1995 (based on additional 3 x 500 MW unitsat Suralaya or in East Java). Steam coal and anthracite demand for industrialuse--i.e., for tin and nickel processing, and cement and brick manufacture--are expected to reach 1 million tpy by 1990 and 1.5-2 million tpy by 1995.

5.10 Projected coal demand in Indonesia can be met by either domesticcoal production from existing or new mines or imports, primarily from Australia.When the Bukit Asam project reaches full capacity in 1987 and Ombilin isrehabilitated, total domestic coal production will total about 3.5-4.0 milliontpy. Thus, whether the 1990 coal demand of about 10 million tpy can be metfrom domestic sources will depend on the urgency with which the Government andthe private partners to the production sharing agreements pursue the explorationand pre-investment programs discussed in paras. 2.11 and 3.61-3.63. Underrealistic assumptions it should be possible (i) to commission a second 3 milliontpy open pit mine in South Sumatra in 1987/88, and (ii) to produce 1-3 milliontpy from new mine developments by foreign companies in Kalimantan. As thesesupply prospects do meet only 80-90% of forecast 1990 coal demand, importedsteam coal from Australia remains an important competitive source of coal forIndonesian users. The Government is considering importation at least for themedium term and to meet peak demand. As a result, the Suralaya harbor facil-ities include a coal pier for imports and discussions are underway to determinethe appropriate transshipment system.

2. The Market for Bukit Asam Steam Coal

5.11 As for many coal mines with captive markets, the Project does notface significant market or marketing risks because most of its output will bebought by two customers (PLN and PT Semen Baturaja, a cement company), account-ing for 2.95 million tpy or 95% of fu:Ll capacity. Demand for Bukit Asam steamcoal is expected to develop as follows:

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Bukit Asam--Projected Steam Coal Demand, FY1984-88(million tons)

Fiscal Year 1984 1985 1986 1987 1988

PLNSuralaya I & II 1.04 2.14 2.45 2.45 2.45Mine Mouth Plant 0.04 0.15 0.40 0.40 0.40

Subtotal 1.08 2.29 2.85 2.85 2.85

PT Semen Baturaja 0.08 0.08 0.08 0.08 0.10Bangka 0.04 0.04 0.04 0.04 0.04PJKA 0.02 0.02 - - -Others 0.06 0.06 0.06 0.06 0.06

Total Steam Coal Demand 1.28 2.49 3.03 3.03 3.05

3. The Market for Bukit Asam Anthracite

5.12 The domestic market for anthracite comprises mainly the two miningcompanies PT Aneka Tambang (other minerals, including nickel) and PT TambangTimah (tin). Utility companies and trading firms in Singapore, Hong Kong,Taiwan and Malaysia constitute the current export market. Contracted volumes--predominantly export volumes--have increased significantly in recent years, asshown in the table below.

Indonesia--PNTB's Anthracite Contract Volumes, 1977-80(000 tons)

1977 1978 1979 1980

Domestic Market 29.0 22.0 19.2 29.4Export Market 1.9 15.0 62.0 49.3

Total 30.9 37.0 81.2 78.7

Due to limited production capacity, PNTB has rarely been able to meet contrac-tual demands, has signed only short-term (one-year) contracts, and has con-stantly been forced to decline requests for larger amounts and new contracts.However, it is expected that PTBA will be able to increase its anthraciteproduction to about 115,000 tons by 1984 and that production levels willremain constant thereafter.

4. Marketing of Bukit Asam Coal

5.13 At present, the small administrative staff of PNTB, handles themarketing of Indonesian coal. Domestic contracts are signed for one-yearperiods for run-of-mine coal, i.e., without quality specifications, premiumsor penalties. Deliveries are arranged fob or cif as required by the client,

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with payments based on letter of credit. While domestic prices are agreedannually with consumers and approved by the Ministry of Mines and Energy,export prices are set competitively by the trading houses purchasing BukitAsam coal fob.

5.14 Due to the small quantities of coal produced at present, PNTBand PTBA staff have little experience in drawing up and negotiating long-term marketing arrangements as envisaged for the Project (para. 6.01). TheIndonesian law firm of Mochtar, Karuwin & Komar (MKK) has therefore beenengaged to advise PTBA on all new sales contracts. PTBA has submitted forthe Bank's review draft contracts with PLN specifying the principle for saleof coal to Suralaya and the mine mouth power plant. The signing by PTBA andPLN of a Letter of Intent satisfactory to the Bank for such a coal salescontract is a condition of loan effectiveness.

5.15 To ensure that PTBA takes adequate advantage of market developmentsfor anthracite and any uncommitted steam coal output, PTBA has established thenucleus for a Marketing Division to follow domestic coal demand, export/importtrends, coal contract conditions, and price developments. PTBA intends toprepare periodically a detailed market analysis of potential--particularlydomestic--markets for PTBA coal.

5. Coal Pricing Policy

5.16 Domestic coal prices charged by PNTB are discussed with the Ministryof Mines and Energy when annual contracts are submitted for approval. The1979/80 realized unit coal prices averaged: (i) US$17.25 per ton of steamcoal (fob) Boom Baru, i.e., transshipped via Kertapati on barges on the MusiRiver; (ii) US$26.90 per ton of anthracite (fob) Kertapati for local users; and(iii) US$36.10 per ton of anthracite (fob) Kertapati for export. As railtariffs from Tangjung Enim to Kertapati averaged only US$3.0/ton and shippingcharges from Kertapati to Boom Baru aLveraged about US$5.0/ton, local anthracitesales and foreign steam coal prices have been subsidized at US$18-25 per tonduring the period. In late 1981, the Ministry agreed to a coal price increasefor 1982 to US$32.0 per ton, or about 70% of domestic oil prices.

5.17 There is agreement between the Government and the Bank that one ofthe objectives of the Project is to put Indonesian coal production and,in particular, the Bukit Asam operation on a sound economic/financial basisand to eliminate subsidies. This issue is, however, complicated by the factthat domestic oil prices continue to be subsidized and potential users ofBukit Asam coal are reluctant to pay more for domestic coal than for oil.Following the major domestic oil price increase of June 1980, oil prices inIndonesia, as compared with world market prices, are as follows:

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Oil Prices: Comparison of Indonesian Domestic and World Prices

Indonesian Domestic Price World Price a/(Rp/liter) (US$/ton) (US$/ton)

Kerosene 37.5 69.6 366.6High-speed diesel 52.5 97.4 331.9Bunker C b/ 45.0 83.5 234.0

a/ Fob price, Far East market.b/ Used in power generation, such as at Suralaya.

Accordingly, for coal prices to be equivalent to 1981 domestic Bunker Cprices, Bukit Asam coal should be priced at US$35.6 per ton at Suralaya in1981 terms, 1/ and at US$99.6 to be equivalent to world market Bunker C price.

5.18 As Indonesian oil is of high quality, only limited quantities(about 6%) are used domestically for power generation, but it is exported andlower quality crude oil imported from the Gulf states. PERTAMINA, the Stateoil and natural gas entity, buys Bunker C for about US$235 per ton cif andsells it to PLN at Rp 52,200 (US$83.5) per ton. The oil subsidy is thusreflected in (i) the balance of payment in the form of foreign exchange costof importing oil at the world market prices, and (ii) PERTAMINA's profit andloss account in the form of a loss of US$146.5 for each ton of oil sold toPLN. The use of coal instead of oil priced cheaper than coal, therefore,implies:

(a) foreign exchange savings on the macro-economic level;

(b) increased profits by PERTAMINA; but

(c) cost reduction to PLN and other users only when thedomestic, subsidized oil price is above the agreed priceof coal equivalent supplied by the Bukit Asam operation.

5.19 Agreement has been reached between the Government and the Bank aspart of their general economic policy dialogue that domestic oil subsidies--in particular for large-scale users--should be phased out gradually. Althoughthe Bukit Asam mining operation is scheduled to come on stream only in FY1984/85 and to reach full production in FY1987, it is uncertain to what degreedomestic oil price subsidies will be eliminated by that time.

1/ One ton equivalent to 1,160 liters; one ton of Bunker C at 18,600 BTU/lb,average Bukit Asam coal of 5,500 net kcal/kg equivalent to 9,900 BTU/lband assuming a factor of 0.8 to account for additional investments forcoal firing at Suralaya.

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Therefore, agreement was reached during negotiations that domestic coalprices, and in particular, PTBA coal prices to PLN, for the Suralaya plantbe set at a price which will cover all production costs including overheadand administration costs, handling costs, land and sea transportation costsand insurance and produce an annual return to PTBA on revalued assets acquiredfor the Project of not less than 13%, provided such price would not be (i)higher than the long-term contract price for steam coal in the world marketadjusted for coal quality and accounting for transportation and handling coststo Suralaya or (ii) lower than 80% of such contract prices.

VI. FINANCIAL ANALYSIS

A. Contractual Arrangements

6.01 The financial analysis is based on certain contractual arrangementsto be agreed among the Project entities as follows:

(i) Coal purchase agreements between PTBA and PLN for coaldeliveries unloaded at Suralaya and to the mine mouth plan;

(ii) a railway transport agreement between PJKA and PTBA;

(iii) a long-term ship charter and operating agreement betweenPTBA and Bahtera (with PT PANN as co-signer); and

(iv) a bareboat charter agreement between BAHTERA and PT PANN.

6.02 The coal purchase agreemenit is the principal contractual arrangement.While a Ministerial Decree from the Ministry of Mines and Energy will obligatePTBA to produce and sell coal to PLN and PLN to purchase coal from PTBA foruse at Suralaya and the mine mouth plant, the coal purchase agreementwill establish the contract conditions. These will specify, inter alia, (i)annual quantities to be produced and sold; (ii) characteristics and standardspecifications of the coal to be delivered; (iii) delivery and receipt schedules;(iv) point of delivery; (v) method of weight measurement; (vi) sampling andanalysis procedures; (vii) method of payment, and (viii) conditions of forcemajeure. The contract, backed by a Ministerial Decree, will also establishthe coal pricing mechanism, to be used as from the time of Bukit Asam start-Up(see paras. 5.19 and 6.07). During negotiations the Government agreed toensure signing of such a contract acceptable to the Bank by PTBA and PLN.

6.03 The railway transport agreement, as well as that for ship transport,is based on PTBA's retaining ownership of the coal until it is delivered atSuralaya. As presently drafted, the transport contract between PJKA and PTBAis comprised of 2 documents: a Head Agreement and an Execution Agreement.Together, the documents establish: (i) the intent of the parties to requireand provide the transport of coal; (ii) the mechanism for calculating tariffsfor Suralaya and non-Suralaya coal; and (iii) the scope OF PJKA's responsibilityto transport the coal, as well as standard contract conditions as outlined in

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the coal purchase agreement. During negotiations PTBA and PJKA agreed toenter into such a coal transport contract, satisfactory to the Bank.

6.04 The shipping contract between PTBA and Bahtera/PANN will followstandard time charter contracts.

B. PT Bukit Asam

1. Coal Pricing and Revenue Projections

6.05 The sales price of Bukit Asam coal for Suralaya will be set, asagreed during negotiations, at a price which will cover all production costsincluding overhead and administration costs, handling costs, land and seatransportation costs and insurance and produce an annual return to PTBA onnet revalued assets acquired for the Project of not more than 13%, subjectto the condition that such price shall not be (i) higher than the long termcontract world market price for steam coal adjusted for coal quality anddelivered to Suralaya, or (ii) lower than 80% of such contract price.

6.06 Detailed calculations comparing this "cost plus" formula withopportunity cost of importing and delivering steam coal to Suralaya show thatthe price established on the basis of 13% annual return on PTBA's net revaluedassets exceeds the opportunity cost price for the first 14 years of productionuntil 1998 1/ on the basis of the price assumptions reviewed above. Thefinancial projections which are estimated for the 1982-94 period, therefore,project PTBA's sales revenues:

(a) for shipments to Suralaya based on the opportunitycost price of importing steam coal;

(b) for domestic sales of steam coal to the mine mouth powerplant and other users based on US$32 per ton in 1981 termsuntil the start up of the Bukit Asam mine in 1984 and theopportunity cost price of importing coal adjusted by inlandtransport and handling cost thereafter;

(c) for local anthracite sales based on the Far East marketprice of US$60/ton for Tanjung Enim (US$65/ton fob Kertapati).As explained in Annex 5, it is assumed that this price will riseat 3% p.a. in real terms. While this may be a conservativeestimate of anthracite-s expected price growth rate, given thesmall coal volumes involved, this pricing assumption will notimpact significantly on projections of PTBA's financial performance.

6.07 The most competitive long-term steam coal contract for Indonesia,i.e., the opportunity cost price, should now and in the foreseeable futurebe based on importing coal from Australia. At present, long-term contractsfor steam coal from Australia (average quality coal of 6,700 kcal/kg) wereavailable at fob A$47/ton (US$54/ton). These contracts include semi-annualprice adjustment clauses, whereby escalation of mine operating costs are passedon to the customer, together with all actual tariff increases for railway and

1/ Not including initial production and start-up phase.

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terminal/port handling charges. Further, the contracts foresee renegotiationof the base price every two years to take into account changes in generalmarket conditions, but at no time will the price be lower than the agreed-uponbase price. The market analysis (Annex 5) indicates that steam coal prices inthe Far East are likely to increase by 1.5% p.a. in real term through FY85, 2%p.a. from FY85 through FY94 and remain constant thereafter.

6.08 The equivalent price for lower-quality Bukit Asam steam coal comparableto a US$54/ton fob Australia world market price would be US$44/ton. Addingabout US$13/ton in 1981 terms for shipment l/ from Australia to Suralaya, thedelivered price in mid-FY1981 terms--or the long-term opportunity cost ofimporting coal for Suralaya--is estimated at US$57/ton. Based on a recentmarket survey, it has been assumed for purposes of these financial projectionsthat shipping costs will increase at 4% p.a. in real terms until 1990, andunloading costs will remain constant in real terms.

6.09 The above pricing assumptions result in a projected sales price ofBukit Asam coal fas Suralaya of US$57/ton in 1981 real terms and US$44/tonf.o.r. Tanjung Enim. By time of full production in FY1987 real term pricesshould have increased to US$63/ton fas Suralaya and US$49/ton f.o.r. TanjungEnim.

2. Operating Costs

6.10 Mine. Operating costs for the new mine system were developed inMarch 1980 prices by Rheinbraun Consulting and have been revised according tothe Project implementation schedule given in Chart 3-3. Estimates of MuaraTiga operating costs are given in Annex 3-2. Operating costs for anthracite inthe Suban Pit through 1990, and for a PTBA representative office in Jakartaand administrative offices at Tanjung Enim, are based on PTBA's proforma budget.

6.11 For the new mine, operating costs include costs for overburden andwaste removal, mining, and coal handling are estimated to fluctuate fromyear to year, mainly as a function of stripping activity and conveying dis-tance. The coal production schedule calls for considerable variations inannual volumes of waste removal--particularly in the early years--because ofsignificant changes in the topography as the mining fronts move forward. The;average waste conveying distance will decrease in FY1997 due to the changefrom an outside dump to a dump inside the mined-out part of the pit. Theoperating costs also reflect very steep increases in manpower requirementsbetween FY1982 and FY1986, thereafter rising to a peak requirement of 2,950employees by FY1990.

6.12 The table below gives estimated operating costs for the Projectmine until FY1994.

1/ US$13/ton reflects long term shipping and unloading cost assuming appro-priate facilities are being constructed at Suralaya. Actual cost up tothe time of completing such facilities has been estimated at US$22/ton(Annex 6-6) in 1981 terms.

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PTBA--Bukit Asam Mine Operating Costs, FY1984/94(mid-FY1981 US$ per ton)

Fiscal Year 1984 1985 1986 1987 1989 1991 1994

Labor 17.1 19.3 5.9 3.3 3.0 3.0 2.9Materials/Supplies 41.1 47.2 20.0 10.5 10.3 10.8 10.2Fuel 13.7 6.7 0.5 0.2 0.2 0.2 0.2

Total 71.9 73.3 26.5 14.2 13.6 14.1 13.4

- of which capitalizedoverburden removal (51.3) (53.3) (12.5) ( -) ( -) ( -) ( -)

The mine operating cost of about US$14 per ton of steam coal at full produc-tion of 3.0 million tpy is reasonable, given the special characteristics ofthe coal deposit, and in line with similar open pit mines worldwide.

6.13 Townsite. PTBA-s average annual costs for maintenance for .he minetownsite and social infrastructure have been estimated at US$1.2 million.This assumes minimum maintenance expenses (1% of initial capital cost peryear) for single family housing, site work and sports grounds, and normaloperation and maintenance (10% of initial capital cost per year) on dormitoriesand utilities (electricity, water supply). These expenses must be considereda part of wages and salary expenditures.

6.14 Tarahan Terminal. Average annual operating costs for the newterminal were estimated by MCS, based on a projected staff of 91 peopleand on labor rates and maintenance costs obtained from similar operations inIndonesia. A 10% allowance was made for contingencies, with the followingestimated annual operating cost:

PTBA--Average Annual Operating Costs for Tarahan Terminal(mid-FY1981 US$)

US$000 US$/ton % Total

Labor 403 0.165 20Materials/Supplies 1,475 0.604 75Fuel 97 0.040 5

Total 1,975 0.809 100

6.15 Kertapati Terminal. Average annual operating costs for the Kertapatiterminal at a throughput of 115,000 tpy of anthracite and 98,000 tpy of steamcoal are estimated by MCS to be as follows:

PTBA--Average Annual Operating Costs for Kertapati Terminal(mid-FY1981 US$)

US$000 US$/ton % Total

Labor 336 1.577 46Materials/Supplies 395 1.855 53Fuel 8 0.038 1

Total 739 3.470 100

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6.16 Shipping Costs and PT PANN Charges. The provision of shippingservices by PT PANN and PT Bahtera Adhiguna are based on an agreement withPTBA and a lease agreement between PT PANN and Bahtera Adhiguna. In linewith provisions under shipping Credit 1250-IND, PT PANN will lease the shipto Bahtera Adhiguna at a base price that is amortized over 15 years and willyield an annual return on revalued net fixed assets of 13.0%; this should inturn yield an internal rate of return of about 10% in real terms over thelife of the Project. In addition, the Lease Agreement provides for paymentof estimated and mutually agreed annua]L operating expenses of Bahtera Adhigunaas well as actual fuel expenditures. Average annual cost to PTBA of coalshipment to Suralaya are estimated as follows:

Average Annual Shipping Cost(mid--FY81 US$)

US$000 US$ton % Total

PT PANN Charter 6.53 2.67 85Bahtera Adhiguna

Fuel 0.53 0.22 7Other Operating Cost 0.59 0.24 8

Sub-Total 1.12 0.46 15Total 7.65 3.13 100

3. Financial Projections

6.17 Detailed financial projections for PTBA have been prepared based onassumptions given in Annex 6-1. The projections are presented in Annexes 6-2to 6-5. The projections have been prepared on an Indonesian fiscal year basisin current Rupiah terms and assume throughout an exchange rate of Rp 625 =US$1. As PTBA sells f.a.s. Suralaya to PLN, rail and sea transport tariffscharged by PJKA and PANN/Bahtera are shown at full cost in PTBA's incomestatement.

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PTBA--Summary of Financial Projections(Rps billion--current terms)

Fiscal Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1992

Production(000 tons)Steam Coal 200 400 730 1,195 2,360 3,040 3,040 3,040 3,040 3,040

Sales Revenue 7.0 9.5 48.1 63.4 123.8 174.8 184.9 205.2 218.1 255.4

Total OperatingExpenses 6.8 11.6 37.2 47.3 65.5 107.5 120.0 129.3 140.3 165.4

Depreciation 1.7 2.7 3.3 23.2 23.0 26.1 27.1 25.7 26.9 27.9Operating Income(Loss) (1.6) (4.8) 7.6 (7.1) 35.3 41.2 37.8 50.2 51.0 62.1

Interest Expense - - - - 38.4 36.3 33.9 31.3 28.4 21.4

Net Income (Loss)Before Taxes (1.6) (4.9) 7.6 (7.1) (3.0) 4.9 3.9 18.8 22.6 40.6

Net Income (Loss)After Taxes (1.6) (4.9) 4.9 (7.1) (3.0) 3.2 2.5 12.2 14.7 22.4

Internal CashGeneration 1.7 2.7 8.2 16.1 20.0 29.3 29.6 37.9 41.6 50.3

Cash Surplus (Loss) 0.1 - 9.7 19.8 (1.0) (24.3) (9.3) 2.2 10.0 15.2

Current Ratio 7.8 9.6 5.8 10.3 1.9 1.3 1.1 1.2 1.4 2.0Debt Service Coverage n.a. n.a. n.a. n.a. 1.5 1.3 1.3 1.3 1.4 1.4

(times)L-D Debt:Total Equity29:71 36:64 47:53 51:49 53:47 51:49 50:50 46:54 43:57 33:67

6.18 During the past decade, the Government subsidized the Bukit Asamoperation at a rate of US$2-3 million per year for operating losses andUS$2-10 million per year for replacement investments. The objective of theProject is to transform PTBA to a financially viable and non-subsidizedenterprise. The Government's intention to double present coal prices f.o.r.Tanjung Enim to about US$32/ton in 1981 terms is a first step in this direction.As illustrated above, PTBA must be expected to show losses of up to Rp 7.1billion per year until 1986. These losses are partly due to still-subsidizedcoal prices during FY1982-83 and PTBA's high production cost during the start-upperiod while coal prices are related to the long-term opportunity cost ofimporting coal.

6.19 The above projections also assume that direct budget allocationsare made to finance the Muara Tiga crash program estimated to cost aboutUS$15.2 million in 1981 terms for a production level of 750,000 tpy. Asactual investments for Muara Tiga can be phased to adjust to changes in theProject completion date for both the Project and the Suralaya plant, agreementwas reached during negotiations with the Government and PTBA on preparation andannual review of an action plan for Muara Tiga exploitation and the timelyprovision of funds (para. 3.94).

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6.20 Under the agreed pricing policies, PTBA should start realizingincreasing profits as soon as 3.0 million tpy output is reached in 1987. Thecash flow will still be tight during the 1987-89 period as loan repaymentsstart in 1987 and initial interest burden remains high. This is illustratedby a debt/service coverage of 1.2-1.4. 1/ During negotiations, agreement wasreached with the Government that, except as the Bank shall otherwise agree,PTBA shall from the Completion Date 2/ and thereafter (i) maintain a debt:equity ratio of not more than 60:40;7(ii) not incur any debt, other than formoney borrowed for financing the Project, unless a debt service coverageratio (including the debt to be incurred) of not less than 1.3 is maintained;and (iii) maintain a current ratio of at least 1.3 and, until the CompletionDate; (iv) not undertake non-Project investments exceeding in the aggregateUS$20 million per year without the prior review of the Bank.

C. PJKA-ESS

6.21 Objective. The considerable investments in fixed assets, trainingand technical assistance for the railway component are needed to ensureefficient movement of coal to Tarahan and Kertapati. At the same time, theseinvestments will rehabilitate the entire ESS network. During negotiations, theGovernment and PJKA agreed to take all measures necessary to ensure efficientcoal movements on the ESS system and establish all management and financialcontrols necessary to ensure adequate cost control and tariff calculation forcoal and non-coal traffic.

6.22 As a basis for such a commitment, training, operational assistanceand the introduction/operation of an agreed-upon accounting system by April1983 is foreseen as part of the Project (para. 3.74). Further, ESS shouldobtain sufficient funds to cover its working capital needs and to respondpromptly to any emergency repair needed for efficient coal movements. Accor-dingly, PJKA agreed that ESS will maintain (i) a minimum operating inventorylevel of six months supply of material for normal maintenance of fixed instal-lation and rolling stock and three months of fuel starting FY1984 and (ii) cashbalances and short-term deposits of at least 16% of the prior year's workingexpenses.

1/ In case of a 25% devaluation during project implementation and peggingof domestic coal prices to prices of imported coal, PTBA would beable to achieve a first small profit already in 1985 and a 1.5 debt/equity ratio by 1986. The Government expects to reinvest any surpluscash generated in the course of devaluation in developing new minesin South Sumatra and/or ensuring appropriate distribution of dividends.

2/ The Completion Date is defined as the date when (i) physical constructionof all of the facilities included in the Project has been completed; (ii)for a continuous period of twelve months, the mine has produced at least2.4 million tons per year of coal meeting the Suralaya specifications;(iii) the transport system included in the Project has carried at least2.0 million tons per year; and (iv) PTBA hs a long-term debt:equityratio of at least 60:40.

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6.23 Tariffs are regulated by Government, although recently PJKA hasbeen permitted to negotiate rates for bulk freight. As the rail investmentfor the Bukit Asam coal is related to a commercial venture, the incremental,internal rate of return in real terms on the rail component should be comparableto the return on the project as a whole and in any case not less than 10%. Toachieve such an internal rate fo return over the life of the Project wouldrequire a 13% yearly return on revalued assets. Accordingly, PJKA has agreedto set coal tariffs to enable ESS to achieve an annual return on revaluedproject assets of not less than 13%. The resulting tariff averages US$15/tonin 1981 terms as detailed below:

ESS--Average Transfer Price for Suralaya Coal(mid-FY1981 US$ per ton)

Transfer Price Component Amount % Total

Capital Cost 13.73 89Operating Costs

Labor 0.30 2Fuel and Materials 0.59 4Telecommunications 0.79 5

Subtotal 1.68 11

Total Transfer Price 15.41 100

The percent contributions of each of the operating and capital cost elementsdepicted above remains fairly stable over the life of the Project.

D. Financial Rates of Return and Sensitivity Tests

6.24 The incremental financial rate of return for the Project has beencalculated in real terms. As the Project helps rehabilitate the entire ESSrail system, prepares the ground for further mine expansions in South Sumatraand builds up PTBA's capacity to develop and operate additional mines, theincremental financial rate of return depends to a large extent on the methodo-logy of allocating the total or a portion of the cost to this Project. Theincremental financial rate of return calculations are based on the cost andbenefit streams elaborated in Annex 6-1 to Annex 6-5 for the rail, mine,terminal and sea transport components. Capital costs also include the US$10.5million financing for Engineering studies under earlier Bank loans. Inaddition, Annexes 6-6 and 6-7 define and detail the cost benefit streams forthe mine system and railway, respectively, for (i) the "with" and "without"cases for the incremental calculations and (ii) the development and operationof a second 3.0 million tpy mine in South Sumatra coming on stream in 1988.

6.25 Based on these assumptions (i) the incremental financial return ofthe integrated mine/transport project is 11.7%, assuming the Project describedhere, i.e. 3.0 million tpy output of which 2.4 million tpy shipped to Suralaya;(ii) the incremental financial rate of return is 14.5% assuming that a new 3.0million tpy mine is brought on stream by 1988.

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6.26 Sensitivity Tests. The incremental financial return are, in particu-lar, sensitive to changes in revenues and Project delays:

(a) Revenues

Were revenues to drop by 10% during the entire life ofthe Project, the incremental financial rate of return woulddecline to 10.2%. Were revenues to drop by 10% during thefirst five years of production only, the incremental rate ofreturn would still be 11.0%. The likelihood of this eventis primarily related to the Government's effort to set pricesat an appropriate level and not so much to market risks orproduction/transport difficulties. As Muara Tiga providesback-up production capacity, a 10% drop in output duringthe first five years of Bukit Asam production could be counter-balanced by increased production from other mining areas atTanjung Enim. As for the railroad, sufficient capacity existsduring the early years (1984/85) and bottlenecks may onlyoccur by 1986.

(b) Delays

In case all Project components were delayed by one year andno coal were shipped during that period, the return wouldfall to 10.3%. This is a highly unlikely event, as coalproduction at Muara Tiga would proceed independently from theBukit Asam schedule and the ESS rail system can provide aminimum of services even under extreme conditions. Therefore,as more realistic events--(i) assuming that the Bukit Asam mineis delayed by one year allowing shipping of only 750,000 tpyfrom Muara Tiga, the rate of return will fall 10.5%; (ii)assuming a delay of railway completion of one year, allowingtransport of up to 1.5 million tpy on the existing system 1/,the incremental rate of return will still be about 11.0%. If theSuralaya power plant were delayed by one year, certain Projectinvestments would be phased and Muara Tiga production minimized.The Project's return is then likely to fall to about 11.0%.depending on investment phasing.

6.27 Should the capital and operating cost both increase by 10%, the rateof return would be 10.3%. The incremental financial return is estimated tostill reach 10% if capital costs increased by 10%, the operating cost increasedby 10% during the first five years, and if the rail and mine componentsslipped by 12 months during the procurement period.

6.28 The timing of a second mine in South Sumatra is, important for theProject's return. Considering the proven reserves in the former Shell con-cession and the preinvestment work which will be initiated by the coal

1/ Assuming that the rail link to Tarahan, the 18-ton coal cars and theterminal at Tarahan are completed. All these components are not onthe critical path.

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Exploration Loan, 1988 is a realistic target. If, however, the second minein south Sumatra were to come on stream only in 1991, and require substantialadditional railroad investments on the order of $100 million in 1981 terms(over and above those detailed in Annex 6-6), the incremental financial returnwould be 13%, instead of 14.5% considered as realistic base case.

E. Major Risks

6.29 The Project faces relatively few technical risks. The miningsystem, the railway rehabilitation and the terminal facilities are well-knowntechnologies and Project preparation/engineering undertaken to date limit thetechnical surprises which can be expected. Also, the Project includes ampleprovision for operational assistance during start-up and the first years ofoperation. This should provide the entities with the necessary support todeal with unforeseen technical problems.

6.30 As to marketing risks, the Bukit Asam plant is a captive supplier ofcoal to Suralaya, Baturaja and other local customers. As during the initialyears, the Bukit Asam production will be supplemented by Muara Tiga coal, acertain flexibility exists to adjust to demand. Therefore, the Project foreseesthat any investments and production targets for Muara Tiga will be reviewed onan annual basis before commitments are made. A major delay in the Suralayapower plant and Mine Mouth plant completion could crucially affect PTBA's andESS's schedules and cash flow. Close coordination between PTBA/POKKORLAK andPLN is foreseen.

6.31 The principal risk facing this Project is the possibility of delaysin project completion over and above the realistic assumptions which havebeen incorporated in the existing implementation schedule (Chart 3-3). Majordelays which might occur would either be due to (i) problems in overallProject coordination, (ii) delays in procurement approval required by theGovernment and the entities, or (iii) insufficient or untimely availability ofequity financing/budget allocations to complete the Project.

6.32 Project Coordination and Management Problems are possible becauseof: (i) the complexity of the Project, (ii) the relative inexperience oflocal staff in undertaking a Project of this complexity or scope, and (iii)the decentralized (entity) level at which the Project is to be managed. Inanticipation of these problems, a major part of the Bank's project preparationand appraisal activity has been spent discussing organizational safeguardsagainst inadequate Project coordination and management. At the overall Projectlevel, the responsibilities, staffing and operating procedures of both theSteering Committee (para. 4.04) and POKKORIAK (paras. 4.05-4.07) have beenreviewed with the Government in detail. At the entity level, the terms ofreference of the Project Management Consultant (PMC) for each component havebeen carefully specified and reviewed, and, in addition to the PMC contracts,both Owner's Engineer and operational assistance contracts between PTBA,PJKA/ESS and PANN and respective consultant firms are included and are beingfinanced by the Bank. These contracts have been specified to ensure: (i)effective provision of project management services, and (ii) strengthening ofthe Indonesian entities through transfer of managerial know-how to Indonesiancounterpart staff in the Project management organization.

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6.33 The potential for procurement approval delays has been a major sourceof concern during Project preparation. Such delays will be minimized ifseveral steps agreed on during appraisal are carried out during Project imple-mentation. These include: (i) POKKORLAK exercising its responsibility foradministering an "early warning system", and (ii) the Government acting on itsassurances that approvals will be given within a reasonable timeframe.

6.34 While the risks of delays aLnd the importance of continuous coordina-tion between all parties involved should not be minimized, it must be recog-nized that the mine/transport system has a certain amount of flexibilityto respond to delays of one or the other component without threatening theoverall functioning of the Project. First, if the Bukit Asam mine does notreach the production build-up established now or its commissioning is delayedby one to two years, Muara Tiga production will be able to take its place andproduce the quantities presently scheduled for the first two years of BukitAsam output. Second, in case the railway component is not completed asnow envisaged, quantities of up to 1.5 million tons could still be movedon the railroad, thereby minimizing the direct financial effect on PTBA'sand the Project's overall viability. Third, as to the ship, emergencyarrangements can be made and facilities are provided under the Project toensure transfer of coal from the Tarahan terminal to Suralaya.

VII. ECONOMIC ANALYSIS

7.01 The Project is an important step in the implementation of theGovernment's policy objective to diversify Indonesia's mono-energy economythrough the development of coal and other indigenous oil substitutes fordomestic consumption wherever technically and economically feasible. Thebenefits accruing from the development of the Bukit Asam mine and relatedtransport infrastructure are substantial and include: (i) increased poten-tial foreign exchange earnings through oil substitution in thermal powergeneration; (ii) institution building in the entities which will undertakeIndonesia's proposed accelerated coal exploration/exploitation program; and(iii) increased employment opportunities in South Sumatra.

A. Economic Rate of Return

7.02 The incremental rate of return of the Project has been calculatedin real terms using the detailed assuimptions outlined in Annex 7. The coststreams used for the financial analysis in the "with" and "without" cases havebeen, in particular, adjusted to (i) exclude all taxes (import taxes, duties,income taxes); and (ii) include all subsidies (e.g., on fuel, electricity).No shadow pricing of labor or foreign exchange has been applied, in line withthe practice in other Indonesian projects. The provision of housing andsocial infrastructure has been carried at full economic cost without quantify-ing the resulting economic benefits.

7.03 As to the benefit stream, ithe price to be used for the economicanalysis is the opportunity cost of Lmporting alternative fuels, i.e., eithercoal from Australia or Bunker C. Economic rates of return have been calculatedfor both alternatives, i.e.

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(a) the opportunity cost of importing equivalent coal in 1981is US$44/ton fob Australia, plus short-term shipping andunloading cost (fas) of US$22/ton through 1985 when permanentcoal receiving installations at Suralaya could be completed.After 1985, the long-term shipping/unloading component wouldamount to US$13/ton in 1981 terms. It has been assumed thatfob Australian coal prices will increase at 1.5% p.a. until1985, 2% p.a. until 1995 and remain constant thereafter; theshipping component is assumed to increase by 4.1% p.a. until1990;

(b) the opportunity cost of importing Bunker C or using Indonesianoil is about US$35/barrel fas Suralaya in 1981. In line withthe World Bank's Commodity Projections, a 1.2% p.a. real termgrowth has been assumed for 1981/82 and 2.6% p.a. thereafter.

7.04 The incremental economic rate of return for the project is (a)12.2% using coal from Australia as alternative fuel; and (b) 21% using BunkerC as alternative fuel.

7.05 Sensitivity Tests. In case international steam coal prices do notincrease in real terms during the entire life of the Project (a most unlikelyevent), the incremental rate of return would fall to 10.4%. In case coalprices increase by 1% p.a. only, this return would still be 11.6%. The "coalbased" incremental economic rate of return would still be 10% if the Projectwere delayed by one year, operating and capital cost increased by 10% p.a.,and international coal prices only increased by 1% p.a. in real terms until1995.

7.06 Assuming a second 3.0 million tpy mine would come on stream, basedon the assumptions outlined in para. 6.25, the "coal based" incrementaleconomic rate of return would increase to about 16%.

B. Foreign Exchange Benefits

7.07 The Project provides significant foreign exchange benefits toIndonesia. In most of Indonesia's present thermal power generation, oil isused to fire the power plant. This oil is not Indonesian oil; rather, becauseof Indonesian oil's relatively high quality vis-a-vis other oil available inthe South East Asian region, Indonesia exports its domestically-produced oiland imports lower-quality Bunker C to be used in power generation. To theextent that coal is used in lieu of oil, average annual incremental foreignexchange benefits have been estimated at US$125 million in 1981 real terms.

C. Institution Building

7.08 One of the major benefits of the Project is the institution buildingit facilitates. As this Project is only a first step in a series of coaland related infrastructure development activities which the Government hopesto undertake, the experience gained during the preparation and implementationof this Project will enhance the implementation of subsequent coal develop-ment plans. Of particular significance is the transfer of technology andmanagerial/financial strengthening, which will occur at the working level

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of the entities undertaking the Project through the training programs andoperational assistance included in each of the Project components.

D. Employment and Other Social Benefits

7.09 Employment. The Project is expected to provide increased employmentopportunities in PTBA. Of the approximately 2,950 people who will be neededto operate the mine, about 1,700 new employees will be recruited locally nearTanjung Enim. It is expected that additional recruits from South Sumatra willbe hired at Tarahan as well.

7.10 Training. The Project includes a major training component (para.5.45) to prepare personnel for mine and railway supervision and systemmaintenance activities. This program will run from FY1981 through the thirdyear of operations. In addition to tlhe Project benefits which this trainingwill provide, it is expected that the program will provide external benefitsthrough skilled labor leaving the Project upon completion of the trainingprogram.

7.11 Housing and Other Social Benefits. The townsite component of theProject (paras. 5.12-5.14) will provide housing for about 1,585 families aswell as dormitories for 300 people. Water, Sewerage and electrical facilitieswill be upgraded and new roads will be constructed. Under the Project, a newhospital, school and recreational facilities will also be constructed andmaintained.

VIII. AGREEMENTS REACHED AND RECOMMENDATIONS

8.01 During negotiations, agreements were reached:

(a) With the Government:

(i) to review in detail the leasing arrangements for PT PANN.A lease structure that ensured a yield of about 10% inreal terms over the life of the lease would be acceptableto the Bank (para. 3.78);

(ii) to ensure proper staffing of POKKORLAK (para. 3.82);

(iii) to carry out its plan to ensure a firm and steady interimpower supply from PLN for mine operations (para. 3.99);

(iv) to take all necessary actions to acquire as and whenneeded all land and land rights required for carryingout the Project, and to inform the Bank in a timelymanner of such land acquisition (para. 3.100);

(v) to ensure timely and sufficient funds to cover theexpenditures required for the Project, including

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(1) the necessary yearly budget allocations for PJKAand POKKORLAK;

(2) equity contributions for PTBA and PANN to meet theProject's requirements, and

(3) the necessary local and foreign funds to completethe Project and to cover any possible cost overruns(para. 4.16);

(vi) to set the price of PTBA coal delivered to Suralaya such thatit covers all production costs including overhead and adminis-tration costs, handling costs, land and sea transportationcosts and insurance, and produces an annual return to PTBA onrevalued net assets acquired for the Project of not less than13%, so long as such price would not be higher than thelong-term contract price for equivalent steam coal in theworld market plus transportation and handling costs toSuralaya, or lower than 80% of such contract price (para.5.19 and 6.06);

(vii) to ensure that a coal sales contract, satisfactory tothe Bank, for Bukit Asam coal delivered to Suralaya and themine mouth power plant, is signed by PTBA and PLN;

(viii) to provide the necessary funds for the Muara Tiga investment(para. 6.19);

(ix) to employ consultants, satisfactory to the Bank, to assist incarrying out the proposed Exploration Program (para. 3.64).

(b) With PTBA:

(i) to undertake an urban impact study with respect to the miningcommunity before finalizing the community and social infra-structure layout (para. 3.33);

(ii) to undertake an environmental impact study of the Tarahan andKertapati terminals (para. 3.59);

(iii) to prepare, before Project completion, guidelines satisfactoryto the Bank on water pollution controls and levels in themine site and port areas; to monitor such pollution and takeall necessary steps to ensure that the requirements of theguidelines are followed; also before Project completion, toprepare and furnish to the Bank for review a land reclamationplan for the Bukit Asam mining area; and to carry out thethe land reclamation activities in accordance with such plan(para. 3.60);

(iv) to adopt and operate a financial and management accountingsystem satisfactory to the Bank by April 1, 1984, and to

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furnish the Bank with annual financial statements auditedby an independent auditor acceptable to the Bank, not laterthan six months after the end of each fiscal year (para. 3.70);

(v) to employ the following consultants and experts, satisfactoryto the Bank: Project Management Consultants for implementa-tion of the mine component (para. 3.83), a senior TechnicalAdvisor for PTBA-managed Project components (para. 3.86), anOwner's Engineer for the terminals (para. 3.89), and a ProjectManagement Consultant for the mining community development(para. 3.89);

(vi) to furnish to the Bank for its review and approval, at least12 months before the operational acceptance of the first miningsubsystem, a draft contract to provide operational assistanceduring the initial years of mine operation, and to have such acontract effective prior to the operational acceptance of thesubsystem (para. 3.84);

(vii) to furnish to the Bank, by April 1, 1982 an action plan satis-factory to the Bank for the provision of housing and infras-sturcture for all personnel involved in the implementation ofthe mine component (para. 3.87);

(viii) to establish an action plan for the gradual exploitation of theMuara Tiga coal deposit and review progress under the planannually with the Government and the Bank (para. 3.96);

(ix) to conclude acquisition of all land required for the miningsite, the mining community site and the Kertapati rehabilitationin a timely manner (para. 3.100);

(x) to enter into a coal transport contract with PJKA, satisfactoryto the Bank (para. 6.03);

(xi) from the Completion Date and thereafter (a) to maintain amaximum debt:equity ratio of 60:40, (b) not to incur any debt,other than for money borrowed for the Project, unless a debtservice coverage ratio (including the debt to be covered) ofnot less than 1.3 is maintained, and (c) to maintain a minimumcurrent ratio of 1.3 (para. 6.20); and

(xii) until the Completion Date, not to undertake non-Project invest-ments or incur new debt exceeding in the aggregate US$20 millionper year without prior review by the Bank (para. 6.20).

(c) With PJKA:

(i) to promptly take action to ensure that coal transport is beingcarried out in a timely and efficient manner (para. 3.4.3);

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(ii) to introduce and operate an accounting system in ESS not laterthan FY1983 (para. 3.74);

(iii) to furnish the Bank with annual financial statements auditedby an independent auditor acceptable to the Bank not laterthan six months after the end of each fiscal year (para.3.75);

(iv) to take all measures necessary to ensure efficient coal movementsand adequate financial/cost control for appropriate tariffcalculations (para. 6.21);

(v) to ensure that commencing in FY1984 ESS will maintain (1) ade-quate inventories of materials and fuel and (2) cash balancesand short-term deposits of at least 16% of the prior year'sworking expenses (para. 6.22); and

(vi) to set rail tariffs for coal transport in order to achieve anannual return on revalued Project assets of 13% (para. 6.23).

8.02 The following are conditions of loan effectiveness:

(i) execution of subsidiary loan agreements between the Govern-ment and PTBA and PT PANN, respectively (para. 4.14); and

(ii) signature by PTBA and PLN of a Letter of Intent, satis-factory to the Bank, for the coal sales contract (para. 5.14).

8.03 Subject to the foregoing commitments and agreements, the Projectprovides a sound basis for a Bank loan to the Government of Indonesia ofUS$185 million for a period of 20 years, including 5 years of grace. Retro-active financing of up to US$9 million is recommended.

Industrial Projects Department/East Asia and Pacific Projects Department

December, 1981

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INDONESIA--Bukit Asam Coal Mining Development and Transportation Project

The Executing Agencies

A. PT Bukit Asam--Mine, Townsite and Terminals

1. Background and Ownership

1. Through 1980, all coal mining activities in Indonesia were managedby a state coal enterprise, PNTB, under the supervision of the DirectorGeneral of Mines of the Ministry of Mines and Energy. PNTB was created in1968 through a merger of three autonomous mining companies formerly operatedby Dutch interests. Two mines are in operation at present, the Ombilin minein West Sumatra and the Bukit Asam mine, whose expansion is the object of theProject. In addition to managing the two mines, PNTB initiated and supervised,from its head office in Jakarta, the feasibility work to expand both mines, aproduction-sharing agreement with Shell Mijnbouw 1/, and negotiations forproduction-sharing contracts in Kalimantan with five foreign consortia.

2. The existing open pit mine at Bukit Asam presently employs some1,250 workers. Its steam coal production has been declining from 864,000 tonsin 1941, the maximum ever achieved, to 107,600 tons in 1980. In addition tosteam coal, anthracitic coal is produced from the Suban pit located within theBukit Asam concession. The table below shows 1976-80 coal production from theBukit Asam mine:

Bukit Asam Coal Production, 1976-80('000 tons)

Year Steam Coal Anthracite Total

1976 104.4 18.3 122.71977 117.1 32.5 149.61978 126.5 50.6 177.11979 122.6 63.7 186.31980 107.6 53.6 161.2

3. PNTB has been characterized by low productivity and poor maintenanceof its physical assets, caused primarily by overstaffing and lack of demand.As a result, PNTB has had high production costs, necessitating heavy subsidiza-tion by the Indonesian Government. The Ombilin mine operation, which in 1980produced 57% of PNTB steam coal but accounted for 65% of its operating losses,is further plagued by expensive and complicated underground mining techniques.

4. As the Government plans to accelerate coal development in Ombilinand Kalimantan and PNTB has limited management staff, the Government decidedupon the Bank's recommendation to set up a separate Government enterprise tomanage the Bukit Asam concession and associated facilities. Consequently,

1/ A Dutch subsidiary of Shell Company.

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ANNEX 3-1Page 2 of 11

Perusahaan Tersero Tambang Batubara Bukit Asam, PTBA, was created by Presiden-tial Decree on December 15, 1980. Under the Project, PTBA will own, implementand operate the existing and expanded Bukit Asam mine and supporting facili-ties, as well as the Kertapati and Tarahan terminals. PTBA will also beresponsible for undertaking exploration in the South Sumatra region under theproposed Coal Exploration Project.

2. Organization and Management

5. Indonesian companies are organized with a Board of Supervisors and aManagement Board. The Direksi, the Management Board of PTBA, reports to aSupervisory Board (Dewan Komisaris), chaired by the Minister of Finance. Itincludes members from the Department of Finance, the Ministry of Mines andEnergy and the state planning agency, BAPPENAS, and the Company-s PresidentDirector. The members of both Boards are appointed by the Minister of Financewith the recommendation of the Minister of Mines and Energy. PTBA's offices,while initially in Jakarta, will be located at Tanjung Enim close to the minewithin a year of the start of project implementation (mid-1982). To facili-tate execution of PTBA Project subsystem components (mine, townsite, Kertapatiterminal, Tarahan terminal), a project management organization is being set upwithin the Company; each subsystem will have a subsystem manager responsibleto an overall project manager reporting to the President Director. Theseorganizational relationships are summarized in the chart below.


PERUSAHAAN TERSERO TAMBANG BATUBARA BUKIT ASAM (PTBA)ORGANIZATION CHART

|Supemsrvitr

Eonlorat,on M~~~~~.st.nt ~P'ojact MM.",g P-j.ot M. .0,' M.aeOw ,. PoctMmr .l.t

Ma,ket,.q n~~~~~~~~~~i,. Towneite csigMn Egn. aea

Managment ManagemenConsul,. Connnoltnt-Cnrco

industrial Pojet Dep,n-t/East A.i. and PaciMi Proc. |Dte rtn t World Bank - 23071J.ly 1981

*- 70 -


6. The Government has appointed an experienced engineer as PresidentDirector of PTBA. All other Directors Technical, Planning and Development,Finance, Administration) have been associated with the Project since itsinception and should be in a position to manage the Project successfully withthe technical assistance to be provided under the Project.

3. Present Facilities

7. Mine. The Bukit Asam coal mine is located at Tanjung Enim, SouthSumatra, approximately 160 km SW of the Port of Palembang. The mine propertyto be developed lies west of Tanjung Enim and covers an area of about 3,000hectares. A road and a railway link the mine area to Palembang and also tothe port of Panjang on the Sunda Strait 400 km south by rail. The present AirLaya pit was opened in 1942 and has undergone several phases of mechanization.Currently, steam coal from the pit is being mined by truck/shovel methods andtransported out of the pit on a conveyor belt system. Waste is removed bymeans of truck/shovel or scrapers. At the adjacent Suban Pit, anthracite isbeing mined mostly by quasi-manual methods.

8. Existing heavy-duty equipment at the Bukit Asam mine includes:six Cat 621B scrapers, seven dozers, one grader, one road roller, three 35-tonWabco trucks, three Cat 977 excavators, three shovels including one modernhydraulic O&K machine, 300 half-ton coal cars, two 250-HP steam locomotivesfor shunting and 13 mine railway locomotives. Also, five 100-HP electricpumps and seven diesel pumps for mine drainage are operational. Existing minesupport facilities include: an equipment workshop; two 9.8-NW coal-firedpower stations; an auxiliary 1-MW diesel generator; a 6-kV overhead powerdistribution line; and a coal washing plant currently used only as a screeningplant. There is a fairly old central workshop, responsible for ordering andmaintaining parts, which suffers badly from inadequate or over-complicatedprocedures.

9. 3The Air Laya aid Suban pit operations have planned capacities of575,000 m and 175,000 m of overburden removal, respectively, per year.It is estimated that of the average monthly scraper fleet availability of 543working hours, around 21% is lost due to rain, 17% due to non-utilization, and19% due to maintenance and repairs.

10. The company also owns and operates associated infrastructure facil-ities for its 1,250 full-time employees. Some facilities are outmoded; othersrequire repair or replacement. Of the 1,300 company houses, approximately 950are occupied by active PTBA employees and their families, the rest by retiredpersonnel. Supporting infrastructure includes water, light and power, androadways; and community facilities include: a 200-bed hospital, one elementaryand two junior-high schools, a mosque, a church, sports facilities, a theatreand a community hall. 1/

1/ The existing townsite, Tanjung Enim, has been the subject of a reportundertaken under Phase I of the Project entitled, "Planning of Workers'Settlement for Bukit Asam Coal Mining Plant", by the Center of PlanningStudies, Institute of Technology, Bandung.

- /1 -


11. Kertapati Coal Terminal. In the late 1950s and early 1960s, Indonesiadeveloped a modern coal handling system with German aid primarily designed tosupply steam coal for locomotive use throughout Java and Sumatra based onmoving coal from Bukit Asam by rail to a new terminal at Kertapati, therailhead, on the Musi River upstream from Palembang. This system had a designcapacity of 1.0 million tpy; however, because of the subsequent steady declinein demand for coal (due to phasing out of steam locomotives) and inflation,declining revenues and increasing costs resulted in poor maintenance and theterminal and its associated infrastructure fell into a state of advanceddisrepair.

12. The existing terminal occupies an area of 7.5 ha with 450 m frontageon the south bank of the Musi River. In recent years the terminal has handledvarying amounts of coal (from 126,000 tons in 1978 to 80,000 tons in 1979)with shipments being made by barges, nearly all of which are unloaded intoocean-going ships anchored below the Ampera bridge that crosses the Musi Riverbetween the terminal and the harbor. This is an expensive means of loadingcoal, but the lift section of the bridge is inoperable and has preventedthe passage of ships for many years. While the mechanism might be repaired,there is some doubt that the structure-s alignment and stability would permitthe central span to be lifted. As the bridge is the main axis for crossingthe Musi River in east Sumatra, it is very heavily travelled; and greatopposition would be registered to any suggestion that it be made operable,both because of traffic disruption and the danger that any accident in thepassage of loaded ships downstream could damage or collapse it.

4. Past Financial Performance

13. The Bukit Asam operation has been treated as a distinct cost centerof PNTB. Its financial performance over the 1975-80 period is summarizedbelow:

- 72 -


PNTB--Historic Financial Performance of Bukit Asam Mine, 1975-80(US$ million) a/

Calendar Year 1975 1976 1977 1978 1979 1980

Coal Production (tons)Steam Coal 123,217 104,431 117,069 126,485 122,645 107,581Anthracite 7,076 18,328 32,538 50,485 63,420 53,579

Coal Sales (tons)Steam Coal 67,567 55,143 65,486 57,352 44,954 85,733Anthracite 6,462 17,055 24,261 36,290 62,309 78,735

Average Contract Price(US$/ton) b/Steam Coal n.a. n.a. 22.43 22.00 17.25 16.94Anthracite n.a. n.a. 34.91 33.50 35.04 35.35

Sales Revenues 1.13 1.66 2.15 2.76 3.35 4.73

Cost of Goods Sold 2.18 2.69 3.06 3.33 3.17 5.24

Gross Margin (1.05) (1.03) (0.91) (0.57) (0.18) (0.51)

Operating Income (1.15) (1.24) (1.29) (1.00) (0.91) (0.21)Other Income 0.13 0.16 0.20 0.20 0.15 0.10

Net Profit (1.02) (1.08) (1.09) (0.80) (0.76) 0.11

Net Cash Generation (0.97) (0.84) (0.71) (0.37) 0.36 -

Cost of Goods Sold/ton 29.45 37.26 34.10 35.56 29.55 31.85

a/ Converted from actual rupiah data using Rp 415 = US$1 from FY75-78 and forFY79, Rp 502 = US$1 (April to October at Rp 415 and November to March atRp 625 per US$1). Totals may not add due to rounding.

b/ FOB Kertapati. Actual realized prices were lower than average contractedprices.

c/ Not applicable. All debt, per se is incurred by PNTB's Head Office andis not charged to the operating units. Even so, the ensuing debt:equityratio does not reflect the degree to which PNTB is subsidized by theGovernment.

- 73 -


14. The Bukit Asam mine has been operating at a loss over the years.Net revenues before depreciation were negative until 1978; in 1979 the smallsurplus was insignificant compared to the allowance for depreciation. Pastoperating losses have been covered by government subsidies. Periodic additionsof machinery and equipment were financed from various sources listed underlong-term debt on the PNTB balance sheet; these included the Ministry ofFinance, Ministry of Mines, Pertamina, Bank Dagang Negara, Bank Indonesia andPelita funds. The share of the Bukit Asam Unit in these liabilities, net ofaccumulated operating losses, was about US$10 million at the end of 1980.

15. Steam coal has been sold well below international prices; and onlythe favorable development of anthracite sales appears to have sustainedPNTB's operations on a cash basis in recent years. A production capacity (anddemand) on a scale of at least 2.0 million tpy, supported by reasonable coalprices, is required to turn the Bukit Asam mine into a self-sufficient opera-tion, independent of Government subsidies. The Project is designed to achievethis objective for the mine, both by achieving economies of scale and throughcontractual arrangements for prices, reflecting the true economic price ofcoal. Without the Project, no significant improvement is seen possible forthe Bukit Asam operation. Its presently stagnant steam coal market, in theabsence of a power generation plant or existing industrial consumers that arecapable of burning coal, has caused a threefold increase in inventories, whichnow account for 50% of current assets. Though rising, the volume of anthracitesales, which are profitable on a unit basis, is too small to compensate forthe steam coal losses.

B. The Indonesian State Railway

1. Organization

16. Perusahaan Jawatan Kereta Api/Eksplotasi Sumatera Selatan (PJKA/ESS),the Indonesian State Railway, is a Government agency under the Ministry ofCommunications. Responsibility for the day-to-day management of PJKA restswith the Chief Director, who reports to the Minister through the DirectorGeneral of Land Transport. At its headquarters in Bandung, West Java, theChief Director is supported by five department directors (personnel, finance,traffic and commerce, fixed installation, mechanical engineering and signallingand telecommunications) and supervises six Regions (eksplotasi)--three in Javaand three in Sumatra--and 15 subdivisions of technical staff (inspeksi). Theorganizational chart of PJKA and the Explotasi South Sumatra (ESS) under whichthe Bukit Asam project falls, is given below:

74 -ANNEX 3-1

INDONESIA 7 f 11BUKIT ASAM MINING AND TRANSPORT PROJECT Page o

PERUSAHAAN JAWATAN KERETA API (PJKA)Organization Chart

ChitfDirector

Planning Trfaicnh i g AuitOffice Office Oficic

l~ ~ ~~~ ~eea Lea St_e &. Pul

Personnel | Finance Trffic Fixed. Inst Mechan. EngiDepartment | Depevmenr Deartment OsptDrment Deparment

I West Sav g Central Java | EastJvaot Surnater West Sumater|Rgion tETB) Reion iETHI Region (ETRS Region IESU) Region i8)1 REgitn SS)

Jakarta Seining Surabay. Regional Director

Divrision Division Division Divsio Telecom. Division

Operating Fixed |nst. Signalling &lnspekss 2Inspeksis lInspeks.s Telecom. Inps.

| Stations Seksis l l Drepots Seksa.

Industrial Projects Department/East Asia endPacific Projects DepartmentMarch 1981 World Bank - 22673

*Eksplotasi Sumatera Salatan

17. Decision making is largely concentrated at the headquarters, and theregional directors, who rank below the department directors in Bandung, haverather limited authority. This is accentuated by the fact that the eksplotasiand inspeksi chiefs usually seek guidance from the functional departments atthe headquarters rather than from the regional director.

- 75 -


2. Management, Staff, Training

18. The top management of PJKA is generally adequate; however, theoverall management function suffers from: (i) shortage of experienced staffin the middle and lower ranges (particularly in the regions); (ii) lack of anadequate management information system; and (iii) an inadequate accountingsystem.

19. The number of active staff employed by PJKA has decreased from63,500 in 1966 to about 47,000 in 1979. For ESS, the corresponding numberswere about 4,500 and 3,500. Besides the active staff, PJKA has about 10,000"non-active" employees on its payroll who have been discharged for politicalreasons but are being paid about 80% of full pay. Of this "non-active"staff, about 600 are in ESS.

20. Existing training facilities include (i) a staff college in Bandungfor management training; (ii) training schools in Bandung and Jogjakarta,Central Java, for general railway training; and (iii) limited facilities inthe workshops in Jogjakarta and Mangarrai (near Jakarta) for mechanicaltraining. A comprehensive training program for permanent way staff has beencarried out in Java under the First Railway Project 1/, and a program forworkshop apprentice training is underway. Training facilities and trainingare in principle adequate for existing operations. A comprehensive trainingprogram is required for new and upgraded skills needed to carry out theProject.

3. ESS Railway Facilities, Traffic and Operations

21. The ESS network totals 639 km of lines and is shaped like a modified"T" (Map). In the north, an east-west line runs some 304 km from Kertapati inthe east to Lubuklinggau in the west. Connecting this line at Perabumulih, 78km west of Kertapati, a second line runs south for 322 km to Panjang. FromMuara Enim, 74 km west of Perabumulih, there is a 13-km branch line to thecoal mining community of Tanjung Enim, where the Bukit Asam coal mine issituated. Most of the lines (about 346 km) are laid with 42.5 kg/m rails ofgood quality, while remaining sections (about 178 km) have 37.0 kg/m rails ofmixed quality or 25.0 kg/m (about 115 km) of poor quality. All main-linetracks have wooden sleepers and crushed stone ballasts, both of generallypoor quality. There are about 160 bridges (total length about 3,000 m), ofwhich about 130 bridges (2,450 m) are cn the Tanjung Enim-Panjang section.Track maintenance is inadequate for existing traffic, and there are a largenumber of speed restrictions due to poor track conditions.

22. The motive power and rolling stock fleet consists of 35 steamlocomotives, 21 diesel locomotives, 127 passenger cars and about 1,090 freightcars (of which about 100 are privately owned). Major overhaul and repair ofsteam locomotives, passenger cars and freight cars are carried out in the

1/ First Railway Project, Loan 1005-IND, signed June 14, 1974--US$48.0million.

- 76 -


Lahat workshop while all diesel locomotives are repaired and maintained in theTanjung Karang running shed, where passenger and freight cars are also serviced.There are also running sheds in Kertapati servicing locomotives, passengercars and freight cars, and in Tanjung Enim servicing steam locomotive andfreight cars. All maintenance facilities are of low quality and, in parti-cular, the Tanjung Karang shop is inadequate for its purposes.

23. Passenger traffic has increased rapidly (from about 200 millionpassenger-km in 1975 to about 430 million in 1980), while freight traffic(except for a drop in 1976) has remained stable at about 130 million net tkmuntil 1979 and then increasing to about 160 million tkm in 1980. Trafficforecasts for the period FY81-96 are given below.

83 sAum CAS!1 I9S0/8¶.1995/96

783 Slesteitt 6 tw> Au9tultsttt ee~Pas& -K __g! o 7nK (MllSc) Freai?t 'Not ^o.-n- (MLIIl'on)

Slesal lest lv11M) Coi to Otner latura)G OUcer Total (XL12ea) Cal t Othsr latur"Aj Other Tz:arches sCool 7raneerts CndtLtzet 'r!!fht teehee Cosl Trsn2o=rte Codlt±es ?,el

257111 (cItteal) £ -40 1580/61 X518 - 33 49 180 112 471 * 33 27 253 2::1531/32 - 34 - 45 S22 191 34 495 230 3 12 I40 K1521S S97 330 6 122 207 705 519 791 56 12 15 T1121393/11 767 751 43 11 224 1120 345 1O2 63 1S2 13713191/IS 135 1026 70 112 24 452 s 1026 70 I22 177 13811515/16 aS 1026 78 112 243 lS 10 1031 78 112 in 139'1951/87 "8 1026 U2 215 287 1110 531 I02 83 215 135 51:IM1 U2S 18s n3 215 9 1716 767 1s a n35 217 1t.2599/54 1585 1821 03 573 18 17 a S5 Mn. m e 2us 25 U759

MCS consultants suggested a continuing steep increase in passenger traffic andalso substantial increases in freight traffic. In the appraisal, a moreconservative increase has been assumed for freight traffic other than coal andfor commodities to and from the Baturaja cement plant. The difference betweenthe two forecasts is summarized in the following table.

ESS--Projected Annual Traffic Growth (%)

Freight other than CoalPassengers and Baturaja Transports

Years Ending March 31 MCS Appraisal MCS Appraisal

1981-82 13.6 5.0 8.5 8.11982-83 10.0 5.0 8.3 4.01983-84 10.0 5.0 8.2 4.01984-85 10.0 5.0 8.9 4.01985-86 6.0 5.0 8.6 4.01986-87 6.0 5.0 8.3 4.01987-88 6.0 5.0 8.0 4.0

- 77 -


24. ESS operational performance can be summarized as follows: (i)overall efficiency, measured in traffic units per employee, is very low;however substantial improvements have occurred since 1976; (ii) while passengertrain loading (1980 average was about 330 passengers) is reasonably good,freight train loading is very poor (average about 120 net tons); (iii) theavailability of rolling stock is as follows: for diesel locomotives it hasdropped from about 90% in 1975-78 to about 76% in 1980, for passenger cars ithas remained low at 50-60% and for freight cars it has declined from 93% in1974 to 39% in 1980; and (iv) the utilization of diesel line locomotives,measured in annual distance covered per available unit, has declined from about190,000 km in 1975 to 150,000 km in 1980. For freight cars and passenger carsthe utilization has improved during the last three years.

4. ESS Past Financial Performance, Accounting and Audit

25. The profit and loss statements for fiscal years 1976-79 are sum-marized below:

ESS Financial Performance, FY1976-79(Rupiah millions)

Year Ended March 31, 1976 1977 1978 1979

Operating Revenue 2,658 2,883 3,368 4,688

Less: Working Expenses 2,595 3,230 3,632 4,387Depreciation 448 456 514 813

Subtotal 3,043 3,686 4,146 5,200

Operating Surplus (Deficit) (385) (803) (778) (512)

Ratios: Working 98 112 108 94Operating 114 128 123 111

26. Despite an 86% increase in passenger traffic (passenger-km)during the 1976-79 period, ESS's financial performance was consistentlyweak with only limited operating cash surpluses in FY1976 and FY1979 andsubstantial operating deficits. In fact, the deficit portrayed above isunderstated in that insufficient funds have been spent on yearly maintenancerequirements. The Phase I consultants, MCS, estimate that to achieve adequatelevels of maintenance, present maintenance expenditures should be doubled.Further, depreciation was estimated from a reconstructed historical assetbase. Estimates of depreciation based on revalued assets are more than fourtimes the depreciation values depicted above. Thus, with proper maintenanceexpenditures and the recording of depreciation computed from a revalued assetbase, the operating finances of ESS's ongoing activities would be subject tosignificantly higher cash and operating deficits.

- 78 -


27. ESS's disappointing financial experience in these years can belargely explained by the Government's failure to increase tariffs sufficientlytb offset increases in operating expenses. During the 1976-79 period, freightand passenger tariffs increased an average of only 30%, while working expensesincreased about 70% due primarily to inflation. Working expenses are dominatedby staff costs which have risen by more than 200% in the 1976-79 period as aresult of the Government policy of permitting annual wage increases designedto bring civil service salaries closer to private sector levels. This trendhas been continuing in the current fiscal year with wage increases of about 50%only partially balanced by freight and passenger tariff increases of about 17%.As a result, ESS's financial position in 1981 is expected to weaken further.

28. Presently, PJKA's accounting system is centralized with the resultthat separate cash flow and balance sheet data for ESS and the other eksplo-tasis are not available. This and other deficiencies in PJKA's accountingsystem were noted during the appraisal of the First Railway Project.Accordingly, arrangements were made under that project to engage consultantsto improve the railway's financial accounting. The consultants, (S. Parman &Co.--Indonesia, associated with Coopers & Lybrand) devised a completely newaccounting system which has been approved by the Government and PJKA. The newaccounting system provides for separate accounts and financial statements ineach of the eksplotasis. To facilitate the introduction of the accountingsystem to ESS, modifications to the system were recently developed to permitthe separation of coal and non-coal costing data. The consultants are proceed-ing with the implementation of the accounting system for ESS. Live operationsof the new system are expected to commence in April 1982. Under the presentarrangement, the implementation work covering the FY1980 period was financedby PJKA. The Project includes financing for the final stage of implementation,to be carried out by consultants in accordance with terms of reference accept-able to the Bank.


December 1981

- 79 -


INDONESIA--BUKIT ASAM COAL MINING DEVELOPMENT AND TRANSPORTATION PROJECT

THE MUARA TIGA COAL MINE

1. General

1.1 It has been proposed that easily accessible outcrops of the MuaraTiga Coal deposit should be mined with simple open pit methods in order tomake up for possible production shortfalls of the Bukit Asam mine. The follow-ing is a short description of the deposit, the envisaged mining plan andtransportation modes and estimates of related operating and capital costs.

2. Geology

2.1 The Muara Tiga deposit is located immediately west of the antici-pated Bukit Asam Mining Area boundary and the stratigraphical sequence of thedeposit is relatively similar to that of Bukit Asam. It is easy to correlatethe coal seams between the two areas, except for the southern part of theMuara Tiga deposit where the two B-coalseams converge to form one seam.

2.2 Drilling of parts of the Muara Tiga deposit has taken placeand a report by MTDC and PNTB in 1980 indicates total coal resources to be69 million tons with about 14 million tons in the proven category. Consi-dering the geological conditions, angle and depths of the coalseams, over-burden thickness, distance to the envisaged coal transfer station, drainageconditions and suitable haulage road location, PTBA has decided to mine coaloutcrops in the northern and central part. Based on 17 boreholes in theseareas, the reserves and overburden quantities to be removed have been cal-culated and are shown in table below:

Muara Tiga--Proposed Mining Production

Overburden StrippingCoal & interburden ratio(tons) (cubic meter) (cubic meter/ton)

North Area (A and B seams) 3,431,000 5,337,000 1.6Central Area (C seam) 634,000 2,560,000 4.0

Total 4,065,000 7,897,000 1.9

2.3 Coal quality of A and B seams are similar to the quality of A andB seams in the Bukit Asam area with an average calorific value of 5500kcal/kg. C-seam quality is less known, but analysis so far completed showscalorific values in the range of 5,500-7,500 kcal/kg. An additional 8 bore-holes will be drilled by the end of 1981 to firm up the coal quality data.Drilling results combined with planned trenching will also increase theaccuracy of overburden/interburden quantity estimates.

- 80 -


3.1 Planned production is as follows:

Muara Tiga--Production Plan(000 tons)

Fiscal Year -Coal Overburden

1982 200 5001983 400 1,0001984 600 1,5001985 750 2,0001986 750 2,0001987 750 2,000

The overburden quantities 1982 include prestripping, bench preparation andremoval of weathered surface coal which cannot be sold.

3.2 The mine development entails construction of a 3,000-meter longmain haulage road and a water diversion channel, including drainage ditchesto protect the proposed mining area from flooding during heavy rains. The12 meterwide main haulage road will connect the mining area with the trainloading station in the current PJKA coal yard. A service shop and a smallsite office will be built.

3.3 Mining will start in the North (A-B seam) area which will be minedwith a method similar to conventional strip mining. The central area will bemined with standard open pit benching. Coal will be loaded by track- andwheel-loaders into 20-ton off-highway articulated trucks and transported outof the mine to a stockyard for reloading into 7-ton trucks which will haul thecoal to the train laading station. As soon as the Bukit Asam coal loadingsystem is operational in 1984, Suralaya coal will be transported to thatsystem-s distribution point and handled in the same way as the Bukit Asamcoal. Coal for other customers will continue to be handled through theexisting PTBA yard.

3.4 Overburden material will be dumped in selected locations whichwould not interfere with possible future mining on a larger scale. It isplanned that overburden removal by a contractor will begin in March/April1982 and coal production will start in June of the same year. The actualmining of coal will be managed by PTBA with new equipment while overburdenremoval, as mentioned above, as well as the transport from the mine to thetrain loading station will be done by contractors. In the latter case, PTBAwill provide the contractor with trucks and loaders and thus the investmentfor these are carried by PTBA.

3.5 During full production, 750,000 tons of coal annually, the mainequipment employed will be:

- 81 -


Muara Tiga--Equipment Requirementsat Full Production of 750,000 Tpy

Equipment Number of Units

20-ton trucks 5Wheel loaders 7Track loader 1Dozers 5Graders 27-ton trucks 20Backhoe excavator 1

4. Operating Costs

4.1 Mine operating cost estimates are based on past experience in theAir Laya pit with similar equipment and the following assumptions:

(i) Manpower: 200,000 tpy 160 employees750,000 tpy 250 employees

(ii) Working hours: Dry Season: 7 days work with two8-hour shifts per day

Wet Season: 6-day week with two5-hour shifts per day

(iii) Working day per year: Coal mining: 250 daysOverburden removal: 210 days

(iv) Equipment hours per year: Trucks : 2,500 hoursLoaders: 3,000 hoursDozers : 3,000 hours

4.2 Estimated mine operating costs for the Muara Tiga pit are sum-marized in table below:

- 82 -


Muara TigaMine Operating Costs(US$ '000 1981 terms)

Fiscal Year 1982 1983 1984 1985 1986 1987

Labor 414 452 564 648 648 648Equipment Operation 1,184 1,949 2,661 3,326 3,326 3,326Contractor Overburden/Removal 2,500 5,000 10,000 10,000 10,000 10,000Administration/General

Services 1,050 1,050 1,050 1,050 1,050 1,050

Total 5,148 8,451 14,275 15,024 15,024 15,024

Annual Coal Production('000 tons) 200 400 600 750 750 750

Operating Cost $ per toncost (F.O.R.) 25.7 21.1 23.8 20.0 20.0 20.0

10% contingencies are included. High costs per ton in 1982 include mineprestripping and bench preparation. In 1984 mining of the Central areawith high stripping ratio (cubic meter of overburden per ton coal) starts.

5. Capital Costs

5.1 Total capital costs are estimated to be US$15.5 million spread overthe first 4 years of the 7-year project. Estimates as shown below include10% contingencies.

Capital Cost Estimates(U$$ -000 1981 terms)

Mining Equipment 4,230Transport Equipment 1,670Haul Road Construction 800Drainage 140Mine Services 1,965Coal Transfer Station 1,595Road extension/Bridge Improvement 260Miscellaneous 990

Total 11,650Import Duties 3,575

Grand Total 15,225

6. Development Schedule

6.1 The development schedule is very tight and calls for immediatestart-up of the following activities:


(i) Haul road construction;(ii) Drainage/water diversion;

(iii) Tendering for overburden removal; and(iv) Tendering for mine, transport and service equipment

6.2 Overburden removal will start in March/April 1982 and coal productionwill commence in June 1982. The production build-up to 750,000 tons annuallywill only take place if that quantity of coal is required to cover any coaldeficit from shortfalls in Bukit Asam coal production. Current implementationschedules for the Bukit Asam project as well as the Suralaya Power plantconstruction certainly imply a coal deficit and it is at present assumed thatMuara Tiga will have to be developed urgently and have a capacity of 750.000tons per year by 1985. Close monitoring of the progress of the two projectsis necessary in order to determine more clearly the amount of the possiblecoal deficit and subsequent appropriate production build-up of the MuaraTiga mine.

Industrial Projects DepartmentDecember 1981

ANNEX 3-3

-84-

IMEBMIA

9Mgl ASAM COAL NININ(, DYU=IMI AMO SNUIIS nw=1nar2hTnaL cMT To P3CT NA11M of muILm" caUT

r°j E

L 1I

I.~~~~~~~~~~~~~~~~~~~~~~~~~~~t

Pacific Projctsl Depatmetofl^5et

December 1981>tzI A/ CPCS tCPCS |

I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7 17 xr.st A .

track Aerka -AsSistant Assistant AssiattIlt~~ ~~~~~~~~S Advfte Adi isor.i Advisor.t

I _ L _~~~~~~~~~~~~~~~~~~~~~~~~CC CCNS

ndstia Prjet DeatetEs AsaInPacifc Pro ets DepartmenttDecember e 198|1lok

- 85 -



P.T. Pengembangan Armanda Niaga Nasional (PT-PANN)--Past Financial Results a/

Income Statements 1978-80(Rupiah Million)

1978 1979 1980 b/

Income from Operations

Leases 837.0 1,225.1 2,527.2

Installment Sales 82.2 94.3 227.2Commitment Fee - 55.6 88.8

Subtotal 919.2 1,375.0 2,843.3

Cost of Operations

Ship Maintenance 87.6 86.9 174.4Depreciation 419.9 644.0 1,392.5General/Administrative 258.1 218.2 276.4

Bad Debts 161.5 65.0 74.7

Subtotal 927.2 1,014.1 1,918.0

Net Operating Income ( 8.0) 360.9 925.3

Non-Operational Income

Penalties on late payments 122.6 196.4 162.9Exchange rate difference 201.5 36.6 15.6

Ship deliveries 196.0 166.9 132.9

Other 36.6 103.0 119.9Subtotal 556.7 502.9 431.3

Other Costs

Bank interest 435.7 757.5 1,016.4Other 95.1 75.2 13.4

Subtotal 530.8 832.7 1,029.8

Profit before Taxes 17.9 31.0 326.8

Taxes 5.6 6.8 71.8

Profit after taxes 12.3 24.2 255.0

a/ Totals may not add due to rounding.

b/ Unaudited.



P.T. Pengembangan Armanda Niaga Nasional (PT-PANN)--Past Financial Results a/

Balance Sheet, per December 1978-80TRuipiah Million)

1978 1979 1980 b/

ASSETS

Current Assets:Cash & Bank Deposits 862.6 921.5 1,819.1Receivables 784.8 946.8 1,562.5Other Current Assets 397.2 562.6 1,362.9

Subtotal 2,044.6 2,430.9 4,744.5

Long-Term Assets:Installments Receivable 1,446.1 2,026.6 4,809.0

Fixed Assets:

Ships under lease 8,316.0 13,148.3 19,745.5Ships under construction 2,486.3 18,801.0 986.1Other fixed assets 76.2 85.6 102.0(Accumulated depreciation) (875.8) (1,512.4) (2,917.7)

Subtotal 10,002.7 13,522.5 17,915.9

Other Assets 40.1 - 13.7

TOTAL ASSETS 13,533.5 17,980.0 27,483.1

LIABILITIES

Short-Term Debt 1,881.3 1,515.6 1,833.0

Long-Term DebtIBRD 1,327.6 3,852.5 8,510.0Other 3,342.0 2,900.0 2,399.3Subtotal 4,579.6 6,752.5 10,909.3

CAPITAL 7,019.7 9,634.6 14,306.4

RETAINED EARNINGS 53.0 77.2 434.3

TOTAL LIABILITIES & EQUITY 13,533.5 17,980.0 27,483.1

a/ Totals may not add due to rounding.bI Unaudited.


- 87 -



Detailed Capital Cost Estimates (1981 Base Cost Estimates)

---- Rupiah billion ---- ---- US$ Million ----Local Foreign Total Local Foreign Total

MINE SYSTEM

Land and Improvement 31.5 3.6 35.1 50.4 5.8 56.2Buildings, Foundations 12.7 1.6 14.3 20.3 2.5 22.8Main Mining Equipment 2.2 104.1 106.3 3.5 166.5 170.0Mining Support Equipment 2.3 24.9 27.2 3.7 39.9 43.6General Electrical Equipment 0.6 12.2 12.8 0.9 19.5 20.4Insurance during construction 0.4 1.3 1.7 0.7 2.1 2.8

Subtotal49.7 147.7 197.4 79.5 236.3 315.8

Engineering/Project Management:

- Consultant Services 10.1 23.0 33.1 16.1 36.8 52.9- Owners' Engineer - 1.6 1.6 - 2.6 2.6

Subtotal 10.1 24.6 34.7 16.1 39.4 55.5

Training 2.8 1.4 4.2 4.4 2.2 6.6Operational Assistance 3.0 10.2 13.2 4.8 16.4 21.2

Subtotal5.8 11.6 17.4 9.2 18.6 27.8

Preoperating and Start-up Costs:

- PTBA Project Management 3.9 - 3.9 6.2 - 6.2- Physical Operations 15.8 8.9 24.7 25.3 14.3 39.6

Subtotal 19.7 8.9 28.6 31.5 14.3 45.8

BASE COST 85.2 192.9 278.1 136.3 308.6 444.9

Physical contingencies 12.1 9.5 21.6 19.3 15.2 34.5Price Escalation Allowance 28.0 40.5 68.6 44.9 64.9 109.8

TOTAL MINE SYSTEM 125.3 242.9 368.3 200.5 388.7 589.2

- 88 -




Rupiah billion ---- ---- US$ Million ----Local Foreign Total Local Foreign Total

MINE TOWNSITE

Streets and Roads :3.7 1.3 4.9 5.9 2.0 7.9Water Supply 1.1 0.6 1.8 1.8 1.0 2.8Sewerage System 0.6 0.3 0.9 1.0 0.5 1.5Electric Power Distribution 1.1 0.9 2.1 1.8 1.5 3.3New Community Facilities 3.4 3.1 6.5 5.4 5.0 10.4New Housing 11.6 0.7 12.3 18.5 1.1 19.6Insurance during Construction 0.1 0.2 0.2 0.1 0.3 0.4

Subtotal 21.6 7.1 a/ 28.7 34.5 11.4 a/ 45.9


- Contracted Services 2.6 - 2.6 4.2 - 4.2- Owner's Engineer 0.1 0.3 0.4 0.1 0.5 0.6

Subtotal 2.7 0.3 3.0 4.3 0.5 4.8

Training - 0.1 0.1 - 0.1 0.1


- PTBA Project Management 0.4 - 0.4 0.7 - 0.7- Physical Operations 0.2 - 0.2 0.3 - 0.3

0.6 - 0.6 1.0 - 1.0

BASE COST 24.9 7.5 32.4 39.8 12.0 51.8


TOTAL MINE TOWNSITE 47.6 7.7 53.3 76.2 12.2 88.4

a/ Indirect foreign exchange costs.

- 89 -

ANNEX 4-1

Page 3 of 6



---- Rupiah billion ---- ---- US$ MillionLocal Foreign Total Local Foreign Total

ICERTAPATI TERMINAL

Equipment and Overhaul 0.6 1.5 2.1 1.0 2.4 3.4Civil Works 0.1 - 0.1 0.1 - 0.1Insurance During Construction 0.0 0.0 0.0 0.01 0.01 0.02

Subtotal 0.7 1.5 2.2 1.11 2.41 3.52

Engineering/Project Management

- Consultant Services - 0.3 - - 0.5 0.5

Training - - - - 0.02 0.02

- PTBA Project Management - - - 0.02 - 0.02

BASE COST 0.7 1.8 2.5 1.13 2.93 4.06


TOTAL KERTAPATI TERMINAL 0.9 2.3 3.2 1.5 3.6 5.1

- 90 -



Detailed Capital Cost Eistimates (1981 Base Cost Estimates)


TARAHAN TERMINAL

Equipment 0.5 10.7 11.2 0.8 17.1 17.9Civil Works and Erection B.3 7.1 15.4 13.3 11.4 24.7Insurance During Construction 0.1 0.1 0.2 0.1 0.2 0.3

Subtotal 8.9 17.9 26.8 14.2 28.7 42.9


- Turnkey Contractor Services :1.1 2.9 4.0 1.8 6.1 7.9- Owner-s Engineer 0.4 1.0 1.4 0.6 1.6 2.2

Subtotal :1.5 3.9 5.4 2.4 7.7 10.1

Training 0.7 0.7 1.3 1.0 1.0 2.0Operational Assistance - 1.0 1.0 - 1.6 1.6

Subtotal 0.1 1.7 2.3 1.0 2.6 3.6


- PTBA Project Management 0.6 - 0.6 1.0 - 1.0- Physical Operations 0.2 0.2 0.4 0.4 0.2 0.6

Subtotal 0.9 0.2 1.0 1.4 0.2 1.6

BASE COST 11.9 23.6 35.4 19.0 39.2 58.2


TOTAL TARAHAN TERMINAL 2C).5 30.1 50.6 32.8 50.8 83.6

- 91 -



Detailed Capital Cost Estimates (1981 Base Cost Estimates) a/


RAILWAY/COMMUNICATIONS

Equipment:

- Line Locomotives - 9.0 9.0 - 14.5 14.5- Coal Wagons and Vans 0.1 10.0 10.0 0.1 16.0 16.1- Misc. or rail equipment - 4.6 4.6 - 7.4 7.4- Upgrade TABA cars 0.2 2.8 3.0 0.3 4.5 4.8- Communications System 6.5 10.3 16.9 10.5 16.5 27.0

Subtotal 6.8 36.7 43.5 10.9 58.9 69.8

Civil Works and Erection:

- Upgrade Existing rail lines 12.8 24.5 37.3 20.5 39.2 59.7- Rail extensions and relocations 3.4 1.6 5.0 5.4 2.6 8.0- Rehabilitate signals 2.5 1.1 3.6 4.0 1.7 5.7- Upgrade Maintenance Shops 0.8 1.3 2.2 1.4 2.0 3.4- Temporary Facilites 1.1 2.0 3.1 1.7 3.2 4.9

Insurance during Construction 0.2 0.5 0.7 0.3 0.8 1.1

Subtotal 27.6 67.7 95.4 44.2 108.4 152.6


- Consultant Services 5.4 10.7 16.1 8.7 17.1 25.8

Training 4.7 3.9 8.6 7.5 6.2 13.7Operational Assistance 0.9 2.5 3.4 1.5 4.0 5.5

Subtotal 5.6 6.4 12.0 9.0 10.2 19.2


- Accounting system Implem. 0.4 0.6 1.1 0.7 1.0 1.7- ESS (Block B) Project Manag. 8.8 - 8.8 14.1 - 14.1- Physical Operations 1.8 0.1 1.8 2.8 0.1 2.9

Subtotal 11.0 0.7 11.7 17.6 1.1 18.7

BASE COST 49.7 85.5 135.2 79.5 136.8 216.3

Physical Contingencies 9.2 8.2 17.4 14.8 13.1 27.9Price Escalation Allowance 18.6 14.2 32.8 29.7 22.8 52.5

TOTAL RAILWAY/COMMUNICATIONS 77.5 107.9 185.4 124.0 172.7 296.7

a/ Cost estimates are MCS Milestone 6 estimates escalated to 1981 prices,with the following revisions:

- added cost of implementing new accounting system

- reduction in cost of communications system for amount alreadyshown under Mining System

- transfer of $14.1 million of indirect foreign cost from "Local"to "foreign"

- added cost of ESS Project Management of Block B





SHIP

Vessel - 12.3 12.3 - 19.7 19.7Service vehicles - 0.1 0.1 - 0.1 0.1Civil works and erection 0.4 0.1 0.4 0.6 0.1 0.7Insurance during Construction 0.0 0.0 0.0 0.03 0.01 0.04

Subtotal 0.4 12.4 12.8 0.63 19.91 20.54

Engineering/Project Management -- 1.1 1.1 - 1.8 1.8

Training 0.2 0.4 0.6 0.3 0.7 1.0

Preoperating and Start up 0.3 0.1 0.4 0.5 0.1 0.6

BASE COST 0,.9 14.0 14.9 1.4 22.5 23.9

Physical Contingencies 0.1 2.5 2.6 0.1 4.0 4.1Price Escalation Allowance 0.4 3.3 3.7 0.6 5.3 5.9

TOTAL SHIP 1.3 19.9 21.2 2.1 31.8 33.9


December 1981

- 93 -

ANNEX 4-2

INDONESIA--BUKIT ASAM COAL MINING AND TRANSPORT FROlJECT

PTBA--CONSOLIDATED WORKING (:APITAL SCHEDULE(RlIPIAH MILLIONS--CURRENT TERMS)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

CURRENr ASSETSCASH4 316 115 726 387 550 684 29661 2.028 2.228 2,451 2.696 2,973 3,193 3,326ACCOUNTS RECEIVABLE 468 580 787 4,008 5,284 10,321 14,567 125405 17,097 18,178 20,171 21,283 23,293 24,576INVENTORIES 428 164 308 1,447 2,163 :3.905 16,529 21,927 23,455 2S,49t 28,343 10,586 32,318 32,672

SUBTOTAL CURRENT ASSETS 1,212 859 1,521 5,842 7,997 14,910 32,757 39,360 42,780 46,120 51,210 54,842 58,804 60.574

CURRENr LIABILITIESACCOUNTS PAYABLE 199 135 179 2,701 3,646 5,685 9,293 9,986 9,102 21,621 12,395 13,409 24,667 15,829

SUBTOTAL CURRENT IAB. 199 135 179 2,701 3,646 5,685 9,293 9,986 9,102 11,621 12,395 13,409 14,667 25,829

WO9 lNG CAPITAL 1,013 724 1,342 3,141 4,151 9,225 23,464 29,374 33,678 34,499 38,815 41,433 44,137 44 745CHmNGE IN WORKING CAPITAL 1,013 (289) 618 1,799 1,210 4,874 14,239 S,910 4,304 821 4,316 2,618 2,704 608

INDUSTRIAt PROJECTS DEPARTMENTREPORT PREPAREDI12/03/81

INDONESIA--PUKII ASAM COAL MINING AND TRANSPORT PROJlE.CTPJKA/ESS--CONSOL.IDATED WORKING CAPIrAL SCHEDULE (1)

(RUPIAH MILLION--CURRENT TERMS)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

CURRENT ASSETSACCOUNTS RECEIVABLE - - -2,806 2t631 5,010 7,390 7,974 8,685 9,456 10,146 11.074 12,254 13,315INVENTORIES - _ - 246 287 419 75356 604 656 713 774 841 914 993

SUBTOTAL CURRENT ASSETS - - - 3,052 2,918 5,429 7,946 8,578 9,341 10,169 10,920 11,915 13,168 14,308

CURREN1 LIABTlLiTIFSACCOUNTS PAYABLE - - - 171 201 304 411 447 487 530 576 627 683 744

_-- --- --- -- - -- - -- - -- - -______ __ _ ____ -- -- -- -- ------_ _ _ _ ____ ____ _... _

SUBTOTAL CURRENT LIAB. - - - 171 201 304 411 447 487 530 576 627 683 744

WORKING CAPITAL - - - 2,881 2,717 5,125 7,535 8,131 8,854 9,639 10,344 11,2B8 12,485 13,564CHANGE IN WORKfNG, CAPITAL - - 2,881 (164) 2,408 2,410 S96 723 785 705 944 1,197 1,079

(1) CALCULArED ON A NON-CASH BASIS,INDUSTRIAL PROJECTS DEPARTMENTREFORT PREFARED: 12/07/81

- 94 -

ANNEX 4-3


Disbursement Schedule for Bank Loan(US$ million)

Calendar Quarterly Disbursement Cumulative DisbursementYear/Quarter Amount % Total Amount % Total

1982 IV 30.5 16.5 30.5 16.5

1983 I 6.9 3.7 37.4 20.2II 8.7 4.7 46.1 24.9III 9.1 4.9 55.2 29.8IV 12.5 6.8 67.7 36.6

1984 I 12.3 6.7 80.0 43.3II 9.7 5.2 89.7 48.5III 11.2 6.1 100.9 54.6IV 21.7 11.7 122.6 66.3

1985 I 34.5 18.6 157.1 84.9II 7.7 4.2 164.8 89.1III 5.6 3.0 170.4 92.1IV 5.6 3.0 176.0 95.1

1986 I 4.1 2.2 180.1 97.3II 3.1 1.7 183.2 99.0

III 0.7 0.4 183.9 99.4IV 0.6 0.3 184.5 99.7

1987 I 0.3 0.2 184.8 99.9II 0.1 0.1 184.9 100.0III 0.1 - 185.0 100.0

185.0 100.0


- 95 -

ANNEX 5Page 1 of 8


International Market for Steam Coal and Anthracite

1. This annex presents a brief description of the world coal marketsituation--first, reserves, production and trade; and second, internationalpricing trends and coal contracts. This description is intended to providegeneral background information for the discussion of the Indonesian contextand, specially, the market for Bukit Asam coal, given in Chapter V. Moredetailed information is available in the various reports and documents listedin the "Selected Documents and Data Available in the Project File"--(SectionG, page vi).

A. World Coal Reserves, Production and Trade

1. Reserves

2. World coal resources and reserves are geographically widely dis-tributed with over 80 countries reporting coal occurrences. Technicallyand economically recoverable reserves are estimated at 636 billion tons ofcoal equivalent (tce), about 230 years of present coal consumption, and knowncoal resources are estimated to be nearly 16 times larger than reserves.Little data on world anthracite resources are available as most countriesdo not distinguish anthracite data from that on other types of coal; however,anthracite resources have been estimated at about 20 billion tce.

World Coal Resources and Reserves by Region

Technically and Economic-Geological Resources ally Recoverable Reserves(billion tce) (%) (billion tce) (%)

Industrialized Countries a/ 3,434 33.9 325 51.0Developing Countries 6,461 63.8 246 38.7CPEs b/ 230 2.3 65 10.3

Total 10,125 100.0 636 100.0

Source: Coal Development Potential and Prospects in Developing Countries.IBRD Report No. 2630, October 1979.

a/ Includes South Africa.b/ Includes People's Republic of China.

- 96 -

ANNEX 5Page 2 of 8

2. Production

3. In 1950, coal was the world's most important source of energy,accounting for 59% of primary energy production, while oil provided only 30%.By 1973, coal's share of world energy supplies had fallen to 29%, whereasoil's share had increased to 51%. While nearly 60% of the oil produced wastraded--mostly from the Middle East to Europe, the United States and Japan--only 8% of world coal production was traded, of which three-quarters wascoking coal used for steel production.

4. However, the sharp oil price increases of 1973 and 1979 have renewedthe interest in steam coal, since it is plentiful worldwide, the technologyof mining, moving and using it is well established, and it can be widely usedin electricity generation and in many industrial applications, notablycement and chemical industries. Price competitiveness with oil and securityof supply are expected to stimulate coal production, which is projected toincrease by 180% from 1960 output to 6,300 million tce by 2000 as shown in thetable below:

Past and Projected World Steam Coal Production, 1960-2000(million tce)

Annual Average Growth (%)1960 1970 1980 1990 2000 1960/70 1970/80 1980/90 1990/2000

2,327 2,387 3,100 4,700 6,300 0.3 2.7 4.3 3.0

Source: Bank staff estimate.

5. The rate of growth of future world coal production, especially inthe period 1990-2000 could be higher, depending on the growth of futureworld energy requirements and coal's share of energy consumption. The recentreport of a coal study group 1/, for example, projected a possible world coalproduction of 6,780 million tce in 2000--which would imply an annual growthrate of 3.7% from 1990-2000.

6. World reserves are sufficient to support these projected futureproduction levels, but long lead times are required to prove reserves and opennew mines. Depending on the nature of the deposit, one to three years may berequired for exploration and pre-investment work, and an additional two tofour years to develop and open the mine. Furthermore, transportation infra-structure required to link the mineEs with coal markets--e.g., railroads,pipelines and ports--may take even longer to develop than the mines. Thus,the actual levels of production achieved in the mid- to late 1990s will dependon investment decisions made in the late 1980s and early 1990s.

1/ Coal-Bridge to the Future, Report of the World Coal Study, 1980.

- 97 -

ANNEX 5

Page 3 of 8

3. Consumption/Demand

7. In 1960, electrical utilities, industry and the household/commercialsector were all important markets for coal in industrialized countries.However, by 1976, over 65% of OECD coal consumption was for power generation,and the combined share of industry, commercial/household had decreased toonly 18%, a result of substitution by oil and gas. The remaining 17% wasmetallurgical coal used for steel making. For the future, electricity pro-duction is expected to be the dominant market for coal, although as much as12% of coal could be used for feedstock for synthetic fuels production, i.e.,coal gasification and liquefaction, if there is a strong shift to coal.The OECD pattern of coal consumption can be considered representative forworld consumption.

Past and Projected OECD Consumption of Coal by Sector a/

1960 1976 2000Steam Coal million tce % million tce % million tce %

Electricity 326 37 609 65 1,332-1,854 66-61generation

Industry 164 18 97 10 227- 394 11-13Synthetic Fuels 27 3 7 1 77- 357 4-12Domestic, Commercial,

Transportation 223 25 71 7 39- 56 2- 2Subtotal Steam Coal 740 83 784 83 1,675-2,661 83-88

Metallurgical Coal 153 17 164 17 333- 371 17-12

Total 893 100 948 100 2,008-3,032 100

Source: Estimates for 1960 and 1976, Steam Coal Prospects to 2000, IEA,1978; estimates for 2000, Coal--Bridge to the Future, Report ofthe World Coal Study, 1980.

a/ Excludes energy uses and losses estimated at 66 million tce in 1960 and63 million tce in 1976.

4. Steam Coal Trade

8. Coal is a bulky, dirty commodity that is expensive to move overlong distances, relative to oil. Historically, most coal was used forindustrial purposes or power generation close to the minesite so that trans-portation requirements were minimal. In 1970, total coal trade was 200 mil-lion tce, consisting of about 180 million tce of coking coal and anthracite,and only 20 million tce of steam coal. But now, coal's renewed price competi-tiveness with oil is expected to stimulate increased use and imports of steamcoal by energy-importing countries in Europe and the Far East as follows:

- 98 -

ANNEX 5Page 4 of 8

Historical and Projected World Steam Coal Trade, 1970-2000(million tce)

Exports 1970 1980 1990 2000

Australia 2 8 40 110Canada - 1 10 25South Africa - 21 50 80USA 2 3 44 120Other Market Economies 1 - 22 36Net Imports from CPEs 15 20 42 60

Total 20 53 208 431

Imports

Europe 16 42 123 236Japan - 2 34 75Other Asia 1 3 39 103Other 3 6 12 17

Total 20 53 208 431

Source: Steam Coal Prospects to 2000, IEA, 1978, and Bank staff estimates.

9. The major exporting countr:Les--Australia, Canada, South Africa andthe US--have considerable competitive export potential if a higher demandemerges. Recent studies by various groups 1/ indicate a possible range ofsteam coal trade of 156-287 million tce in 1990 and 273-657 million tce in2000. The higher end of the range would be largely the result of substan-tially higher imports by six countries--France, FR Germany, Italy, Japan,Korea and Taiwan, and would be supplied by increased exports from all of thefour major exporters, but especially the US as follows:

1/ Including Coal Resources, World Energy Conference (1977); Steam Coal tothe Year 2000, International Energy Agency (1978); Coal--Bridge to theFuture, World Coal Study (1980):; and The Growth of Steam Coal Trade1980-90, H. P. Dewey (1980).

- 99 -

ANNEX 5Page 5 of 8

Possible Range of Steam Coal Imports and Exports in 1990 and 2000(million tce)

Exporters 1990 2000 Importers 1990 2000

Australia 36- 50 75-115 France 14- 51 26-100Canada 4- 15 10- 50 Germany, FR 18- 28 10- 72South Africa 45- 60 55-100 Italy 11- 30 16- 45USA 30- 67 65-252 Other Europe 52- 58 84-116Other (exc. CPE) 15- 35 25- 60Net CPE 26- 60 43- 80 Sub-Total Europe 95-167 136-333

Total 156-287 273-657 Japan 24- 57 53-121

Korea 20- 30 36- 88Taiwan 8- 12 12- 65Other Asia 2- 5 4- 26

Sub-Total Asia(excl. Japan) 30- 47 52-179

Other 7- 16 14- 20

Total 156-287 255-653

Source: Bank staff estimate.

5. Anthracite Trade

10. The principal use of anthracite is as an energy source either inthe form of briquets for hand-fired furnaces in space heating or for elec-tric power generation. Anthracite can also be used in a blend with cokingcoal for coke manufacture. Other commercial and industrial uses includecement and lime burning, substitute for coke in foundries, manufacture ofbricks and tiles and other applications where clean, continuous heat isessential, i.e., tin and nickel processing in Indonesia and Malaysia.

11. Total world production of anthracite has grown moderately duringthe last 20 years, reaching approximately 200 million tons in 1977 or about6% of total world coal production. Production trends in market economycountries have shown a decrease by about 33% between 1957 and 1977 and thisdecrease, predominantly in Western Europe and the US, resulted from a decliningdemand attributable to anthracite's relative disadvantages vis-a-vis otherfuels for heating. The patterns of development in anthracite production incentrally planned economies (CPEs) has been quite different, showing anincrease by about 80% during the 1957-77 period (3% per annum). Even thoughlittle information is available, it seems that energy policies in the CPEs,coupled with the availability of reserves and a trend to develop local re-sources, have made increased anthracite production possible, especially in the

- 100 -

ANNEX 5Page 6 of 8

Asian countries. The US and the People's Republic of China (PRC) have largedeposits, as does the USSR. The Democratic People's Republic of Korea, theRepublic of Korea and Vietnam are also producers with significant reserves.

B. International Pricing of Steam Coal

1. Price Trends

12. Steam Coal. Coal prices roughly paralleled oil price trends until1973/74, when oil prices quadrupled while coal prices only doubled. From1974-80, fob thermal coal prices as measured in real terms remained fairlyconstant, whereas crude oil prices increased by a factor of four during thesame period. Following the 1979/80 oil price hikes, thermal coal importrequirements increased sharply; as a result, market conditions tightened verymuch and 1980 fob prices increased by 20% in real terms, as summarized below:

Comparison of FOB Steam Coal and OPEC Oil Prices, 1973-81(US$ per tce)

FOB Australian Steam Coal Prices OPEC Oil PricesCurrent Terms Constant 1980 Terms Current Terms Constant 1980 Terms

1973 12-15 29-36 14 331979 24-30 27-34 96 1081980 30-36 30-36 134 1341981 40-50 37-46 173 159

Source: Coal Week, Bank staff estimates.

13. On a delivered basis, steam coal prices are now US$60-65 per tce,cif Europe, and US$50-55 per tce, cif Japan, compared with oil at US$170-180per tce. Depending on coal quality, transportation requirements and environ-mental protection measures, steam coal for new power generating or industrialplants may be up to 40% cheaper than oil on a delivered basis. 1/

14. Anthracite. Prices for anthracite are dependent primarily on thequality and sizing of the coal, shipping costs, and energy pricing policies inthe countries concerned, as well as the economic availability of alternativeenergy sources. In the international anthracite market, prices declinedover the period 1950 to 1974 as anthracite was substituted by more convenientand cheaper energy sources. However, this trend has now reversed, and Japaneseanthracite importers have experienced price increases of 45% during 1976-80.The quoted average 1981 fob price for PRC contracts is US$64.90.

15. Historically, Indonesian anthracite prices have failed to keep pacewith the overall anthracite market. The table below shows average contractedprices for Bukit Asam anthracite exported to the South East Asia marketsduring 1976-80.

1/ Mid 1981 export prices for long-term coal contracts have reachedA $45-50/ton f.o.b. for 6700 kcal/kg coal with spot prices reaching asmuch as A $54-56/ton.

- 101 -

ANNEX 5Page 7 of 8

Indonesia--Average Anthracite Export Price FOB Kertapati(US$/ton)

Year Ended March 31 Price

1977 34.911978 33.501979 35.041980 35.35

Not only are these prices substantially lower than those received by Vietnamand the PRC, for example, but PNTB rarely obtained its contracted price, dueto unreliable supply and quality variances. In early 1981, however, stepshave been taken to put Bukit Asam coal on a more competitive basis. PTBA hasprobed the anthracite market to determine what price it will bear and hassuccessfully increased anthracite prices in some contracts to US$65/ton fobKertapati, which is in line with prices being received elsewhere in themarket.

16. Though coal mining costs are not likely to increase much in realterms in the forthcoming decade, the rising costs of competitive fuels and ofnew infrastructure to increase coal supply are likely to push coal prices upin real terms. The extent of these increases over the coming two decades willdepend primarily on coal½s demand/supply balance. Following the 20% realprice increase for steam coal in 1980, major new mines--which were previouslyuneconomic to develop--are expected to come on stream in the mid-1980s which,by increasing coal supply, should temper real price increases in the 1990s ascompared to the 1980s. Various market sources forecast an annual real priceincrease of fob steam coal prices as follows:

Steam Coal--Real Term International Price Increase Projections, 1980-95

Index (1980=100) Average Annual Growth (%)Source 1985 1990 1995 1980/85 1985/90 1990/95

Major Oil CompanyStudy 126 159 175 4.8 4.8 1.9

Consultant StudyEuropean Market 111 137 158 2.0 4.3 2.9Far East Market 106 124 135 1.2 3.2 1.7

Bank Staff 1.0-2.0 1.0-3.0 0-4.0

17. The supply of steam coal on the Far East market is expected to grow,particularly considering Australia's current and future role as a large low-cost producer. However, most of Australia-s projected production to 1985 hasalready been committed and little will be available for new customers. Thus,for the purpose of projections, it is assumed that coal prices will increaseby 1.5% annually in real terms until 1985. The rate between 1985 and 1995 cou'be anywhere from 0% to 4%, depending on the actual supply/demand situation;

- 102 -

ANNEX 5Page 8 of 8

a real increase of 2% annually in real terms between 1985 and 1995, with aconstant price thereafter, has been assumed. The latter appears justified,given the vast resources which can be developed profitably at the projectedprices.

18. Future price projections Eor anthracite are difficult to make asthe scarcity of information about anthracite prevents any detailed analysis.It is assumed that due to anthracite's increased competitiveness as an attrac-tive (smokeless, intense heat) energy source, and because of its advantageover steam coal in regard to transporting costs per unit of delivered energy,a preference for higher quality--anthracite--coal will develop in the future.For the purpose of projections, it has been assumed that anthracite pricesshould increase faster than those for steam coal, and an annual growth of3% until 1995--equivalent to the expected annual price increase for oil--hasbeen assumed.

2. Coal Contracts

19. International steam coal trade has involved relatively small coalquantities in the past; therefore, no steam coal contract pattern has beenestablished.

20. Present contracts for steam coal as well as anthracite are short-term, generally ensuring deliveries from three to five years and still smallannual volumes ranging from 250-500 thousand tpy (exceptionally as high as1.0 million tons) and include cost escalation and renegotiation provisions.It is expected, however, that future thermal coal contracts will have toprovide for larger quantities over longer periods--e.g., 1-3 million tpy for10-15 years-if greater reliance on coal is to be developed in internationalmarkets.

21. Australian coal exporters are in the process of introducing intosteam coal contracts a feature similar to what has been successfully used inthe iron ore and coking coal trade; i.e., although these contracts are longterm, prices are being negotiated annually. New long-term steam coal con-tracts include a pricing period of two-to-three years. Base prices includeproduction costs, actual transport costs which are passed on in full to theconsumer, and escalation rates. Every 2 years, all price components are tobe renegotiated in light of the latest supply/demand conditions. Due to theuncertainty surrounding future steam coal supply/demand conditions, it isexpected that most new contracts will adopt this "Australian formula."



INDONESIA - Bukit Asam Coal Mining Development and Transportation Project

PTBA -- Assumptions for Financial Projections

1. The financial forecast of PTBA's future operations is based onthe costs and revenues associated with the operations of the mine (at theAir Laya pit in 1981, the Muara Tiga mine during 1982-87 and the BukitAsam mine starting 1984), the townsite and the terminals ultimately tosupport a coal production capacity of 3.0 million tpy of steam coal and115,000 tpy of anthracite and a labor force of 2,950. In addition, PTBAfinancial projections also include transportation charges by PJKA and Bahtera/PANN which are passed on to PTBA's coal customers. The major assumptionsunderlying PTBA's financial projections are discussed below.

2. Escalation Indices. Financial projections for PTBA as given inAnnexes 6-2 through 6-5 are made in current terms. The following escalationassumptions have been made in the preparation of these projections:

Escalation Indices

Local ForeignYear Costs Costs

1981 18% 9.0%1982 14% 8.5%1983 10% 7.5%1984 10% 7.5%1985 10% 7.5%1986 onwards 10% 6.0%

Operating Costs

3. Mine production costs for the new and existing steam coal operationsat the Air Laya and Muara Tiga pits and for anthracite operations at the Subanpit are based on the coal production schedule given in Annex 6-2. Thesecosts are expected to develop as shown in the table below:

- 104 -

INDONESIA--BUIIT ASAM COAL MINING AND TRANSPORT PROJECT

PTBA--MINING PRODUCTION COSTS ANNEX 6-1(RUPIAH MILLIONS--CURRENT TERMS) Page 2 of 5

1981 1992 1983 1984 1985 1986 1997 1988 1999 1990 1991 1992 1993 1994

STEAM COAL

OUKIT ASAM--SURALAYALABTRIALS-SUP P IS105 264 613 9,238 10,161 11,157 12,273 13,500 14,892 15,822 17,080MATERIALs S SUPPLIES - - 2E3 589 1,888 26,066 30,061 32,069 34,952 3,s979 41915 43,912 46,543

FUEL - - - ~~~ ~~~ ~~~ ~~84 92 59 742 816 897 987 1,085 1,18S 1,263 1,365

SUBTOTAL - - - 420 95 9 ,4 60 36,046 41,038 44,123 48,212 53,564 57,995 61,037 64,988

BUKIT ASAM--NON-SURALAYALABOR - - - - - - - 1,9e9 2,184 2,402 2,642 2,915 3,097 3,343MATERIALS I SUPPLIES - - - - - - - 5,983 6,277 6,841 7,630 8,204 8S603 9,110FUEL - - - - - - - 160 176 193 212 233 247 267

SUBTOTAL - - - - - - - 8,032 8,637 9,436 10,484 11,352 11,947 12,720

MUARA TIGA PITLABOR - 298 379 520 657 722 223 - - - - - - -EOUIPMENT OPERATION - 816 1,459 2,147 2,85 .$3,096 924 - - - - - - -CONTRACT 0/B REMOVAL - 2,757 5,984 12P909 13,S76 14,894 4,443 - - - - - - -

SUBTOTAL - 3,871 7,822 15,576 17,419 28,712 5,590 - - - - - - -

AIR LAYA PITLABOR 2,114 - - * - - - - - - - - -MATERIALS I SUPFLY 448 - - - - -B- - - - - -

FUEL 339 - - - - - - - - - - - -

SUBTOTAL 2,901 - - - - - - - -- -

SUBTOTAL STEAM COAL 2,901 3,871 7,822 15,996 18,313 21,272 41,636 49,070 52,760 57,648 64,048 69,347 72,9B4 77,708

ANTHRACITE

SUBAN PIT'LABOR , 528 167 644 839 913 1,004 1,104 1,215 1,335 1,469 1,615 1,780 1,198 2,154MATERIALS 1 SUPPLIES 109 134 212 293 326 361 397 437 480 528 581 640 704 774FUEL 30 57 71 69 135 86 69 76 84 92 102 112 123 136

-- - - - - - - - - - - -- - - - - - -- - - - - - -- -- - -- - -- - -- --- -- -- - - -

SUBTOTAL ANTHRACITE 667 758 927 1,201 1,374 1,451 1,570 1,728 1,899 2,089 2,298 2,532 2,785 3,064

SUBTOTAL MINING COSTS 3,568 4,629 8,749 17,197 19,737 22,723 43,206 10,790 54,659 59,737 66,346 71,879 75,769 8o,772

INDUSTRIAL PROJECTS lDEPARTMENTREPORT PREPARED:10/16/S1

4. Coal handling costs and revenues are shown in the table below forthe upgraded Kertapati terminal and the new Tarahan terminal.

INtONESIA--BUNIT ASAM COAL MINING AND TRANSPORT PROJECT

PROJECTED REVENUES AND EXFENSES--KERTAPATI TERMINAL

(RUPIAH MILLIONS--CURRENT TERMS)

i981 .19B2 1983 1984 1981 1986 1987 1988 1989 1990 1991 1992 1993 1994

COAL HANDLED (000 TONS) 106 116 146 170 170 170 170 170 180 210 210 210 210 210

COAL HANDLING REVENUE 419 527 773 991 1,090 1,199 1,319 1,450 1,688 2,166 2,382 2,625 2,88E 3,176

DIRECT OPERATING COSTSLABOR 96 134 183 214 238 262 288 317 348 ,383 421 464 110 561MATERIALS L SUFPLIES 112 163 229 282 342 405 440 532 540 588 655 715 779 18sFUEL 3 4 S 7 I . 9 10 11 12 13 15 16 18 19

SUBTOTAL 211 301 417 503 590 676 738 860 900 984 1,091 1,195 1,307 769

OPERATING REVENUE 208 226 356 488 100 523 581 590 788 1,182 1,291 1,430 1,581 2,407

DEPRECIATIONEXISTING ASSETS 189 189 189 189 189 189 99 99 99 99 99 99 99 99NEW--NON-SURALAYA - - 179 179 179 179 179 208 208 208 208 208 262 262

SUBTOTAL 189 189 368 368 368 368 278 307 307 307 307 307 361 361

OPERATING INCOHE 19 37 112) 120 132 155 303 283 481 875 984 1,123 1,220 2,046

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED: 10/16/81

- 105 -


INDONgSIA--BUNIT ASAM COAL MINING AND TRANSFORT PROJECT

PROJECTED REVENUES AND EXPENSES--TARANAN TERMINAL

(RUPIAH MILLIONS--CURRENT TERMS)

1981 1982 1983 1984 1985 1986 1987 19S8 1989 1990 1991 1992 1993 1994

COAL HANDLED (000 TONS) - - - 785 910 1,S25 2,445 2,445 2,445 2,445 2,445 2,445 2,445 2P445COAL HANDLING REVENUE - - - 3,532 4,065 8,764 11,397 11,595 11,802 i2,031 12,277 12,556 12,852 13,175DIRECT OPERATING COSTSLABOR - - - 187 - 205 562 494 543 597 657 722 796 876 963MATERIALS I SUPPLIES - - - 392 426 1,302 1,622 1,752 1,S92 2,047 2,212 2,399 2,596 2,811FUEL - - 9 21 56 112 131 144 158 174 192 211 232

SUBTOTAL - - - 588 652 1,920 2,228 2,426 2,633 2,862 3,108 3,387 3,683 4t006

OPERATING REVENUE - - - 2,944 3,413 6,844 9,169 9,169 9,169 9,169 9,169 9,169 9,169 9t169DEPRECIATION

NEW--SURALAYA - - - - 2,232 2,283 2,283 2,283 2,347 2,374 2,374 2,374 2,594 2,594

SUBTOTAL - - - - 2,232 2,283 2,283 2,283 2,347 2,374 2,374 23 2,594 29594

OPERATING INCOME - - - 2,944 1,181 4,561 6,886 6,B86 6,822 6,795 6,795 6.795 6,575 6,575

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPARED:10/Et/81

5. Administrative costs are based on the transfer of much of theadministrative function of other PTBA representative office in Jakarta tothe minesite at Tanjung Enim by the end of the first year of Project imple-mentation, i.e., by mid-FY1983. A breakdown of PTBA's projected adminis-trative costs is given in the table below:

INDONESIA--BUKIT ASAM COAL MINING AND TRANSPORT FROJECT

PTBA--ADMINISTRATIVE COSTS

(RUPIAH MILLION--CURRENT TERMS)

1981 1982 1983 1984 1905 1956 1987 1988 1989 1990 1991 1992 1993 1994

TANJUN6 ENIM OFFICE

LA8DR - - 394 753 1,417 1,579 1,737 1,911 2,103 2,313 2,545 2,004 3,084 2,551MATERIALS/SUPPLIES - - 189 306 847 1,609 1,732 1,907 2,148 2,231 2,454 2,704 2,974 1-272SUPTDOTAL - - 583 1,0S9 2,264 3,188 3,469 3,898 4,251 4,544 4,999 55O8 6,058 3,S43

MINE TOWNSIIE

LABOR - 124 272 299. 329 362 399 438 482 530 584 64 70MATERIALS/SUPPLIES - - 164 725 798 878 965 1,062 1,167 1,284 1,412 1,556 1,712 1,883FUEL - - 27 121 133 147 161 177 195 215 2.36 260 286 315…-- _ _ _- - - - - _- - - - - _- - - - - _- - - - - _- - - - - _- - - - - _- - - - - -- - - - - - _ _ _ - - _ _ _ - - _ _ _ - - _ _ _ - - _ _ _ - -SUBTOTAL - - 315 1,118 1,230 1,354 1,488 1,638 1,000 1,981 2,178 2,400 2,640 2,905

OTHER ADMIN. COSTS (1)

LABOF. 514 800 427 462 774 861 947 1,042 1,146 1,261 1,387 1,528 1,680 1.46gMATERIALS/SUPFLIES 582 407 205 520 802 1,188 1,289 1,455 1,583 1,682 1,050 2,039 2,242 1,574

SUPTOTAL 1,096 1,207 632 982 1,576 2,049 2,236 2,497 2,729 2,943 3,237 3,567 3,922 3,043

TOTAL ADMINISTRATIVE COSTS 1S096 1,207 1,530 3,159 5,070 6,591 7,193 8,033 8,780 9,468 10,414 11,475 12,620 9,791

(1) INCLUDES.ALL PTBA ADMIN. COSTS THRU MID CY19I3,WHEREUPON THE JAKARTA OFFICE WILL SE MOVED TOTANJUNG ENIM. THEREAFTER, INCLUDIES EXISTING MINEOPERATIONS AND TERMINALS.

INDUSTRIAL PROJECTS DEFARTMENTREPORT PREPARED: 10/16/B1

- 106 -


6. Working Capital Requirements. PTBA's working capital require-ments are based on forecast current aLssets and liabilities as follows:

(a) Cash: six weeks' salaries and wages.

(b) Inventories: three months" fuel and six months- materialssupplies.

(c) Accounts Receivable: one month's revenues from coal sales.

(d) Accounts Payable: three months' fuel and materials andsupplies, and two months' transportation charges.

Projections of working capital requirements for PTBA's consolidated operationsare given in Annex 4-2.

7. Revenues. PTBA revenues from coal sales are based on the followingprice assumptions:

(a) for steam coal sales during 1981-83, a f.o.b. coal price forTanjung Enim of US$32/ton in 1981 terms has been assumed.This price will increase during 1982/83 in line withinflationary increases.

(b) for steam coal sales to PLN for Suralaya, a 1981 base priceprice for imported Australian coal of Bukit Asam quality,plus an estimated US$13/ton shipment and handling cost fromAustralia. The base price of US$44 is assumed to increase inreal terms by 1.5% per year through FY 1985, by 2% from FY1986-94, and to remain constant thereafter. The combinedbase and transport price is then assumed to increase withinflation. The sales price of Bukit Asam coal to Suralayais set at the delivered price of imported coal in FY1984 andFY1985, the first years of coal production for Suralaya. Apricing period of two years has been assumed in line withinternational practice, i.e., the contract would be renego-tiated to reflect the market price of imported coal everytwo years. In the intermediate year, the sale price isassumed to be adjusted for nominal annual increases in mineoperating costs and actual transport tariff increases.

(c) for steam coal sales to all other Bukit Asam customersstarting FY84 a US$44 fob price in 1981 terms has beenassumed. This corresponds to PLN's price taking intoaccount transport and handling differential. Real termincrease are equivalent to those assumed for PLN.

- 107 -


(d) for anthracite sales a 1981 base price of US$60/ton f.o.r.Tanjung Enim (US$65/ton f.o.b. Kertapati) is assumed to increaseby 3% p.a. through FY1994 and to remain constant in real termsthereafter.

8. Taxes and Duties. It is assumed that PTBA will be approved forexemption from taxes and duties under Government Regulation No. 21 (1976)which provides for entities which qualify:

(a) exemption from import taxes and duties for the firstten years of Project implementation, and

(b) reduced income taxes for the first ten years to 35%,followed by a tax rate of 45% of net profit before tax.


- 108 -ANNEX 6-2

INhDNESIA--BUSIT ASAM COAL MINING AND TRANSPORT PROJECT

PTBA--COAL PRODUCTION, SALES AND REVENUES

tUSTOOO--CURRENT TERMS)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

COAL PRODUCTION (000 TONS)

STEAM COAL

STEAM COAL 1,~JS I,IJ8- 200 400 64 1i6g 2.8 3,040 3,040 3,040 3,040 3.040 3,040 3,040AIR LAYA 200 - - - - - - - - - - - - -

SUBTOTAL 200 20Q 400 730 1,195 2,360 3,040 3,040 3,040 3,040 3,040 3,040 3,040 3,040ANTARACITE SO 60 90 115 115 115 115 115 115 115 115 115. lS 115.

TOTAL PRODUCTION 250 260 490 845 1,310 2,475 3,155 3,155 3,155 39155 3.155 3,155 3.155 3,155

LESS: OWN USE 40 40 40 40 - - - - - - - - - ;STOCKPILES--MINE - - - 40 - - 30 20 30 - - - - -

-- TARAHAN - - - - - - 20 20 - - - - - -

SUBTOTAL 40 40 40 8o - - so 40 30 - - - - -

COAL AVAILABLE FOR SALE 210 220 450 765 1.310 2,475 3,105 3,115. 3,125 3,155 3.155_ 3,155 3.155 3,155-

.3AL SALES 4000 TONS)

STEAM COAL'LN--SURALAYA - - - 785 910 1.825 2,445 2Y445 2,445 2,445 2.445 2,445 2,445 2,445LN--MINE-MOUTH PLANT - - - - 150 400 400 400 400 400 400 400 400 400PT BATURAJA 80 8O sO 80 80 80 80 100 100 100 100 100 100 100IANSKA -- 35 35 lS 35 35 35 35 35 35 35 35 35 35J-NA 24 24 18 - - - - - - - - - -

OTHERS 56 21 21 20 20 20 20 20 30 60 60 60 60 60

S-UBTOTAL 160 160 160 938 1.195 2,360 2,980 3,000 3.010 3.040 3,040 3,040 3,040 3,040

ANTHRACITE 50 60 90 115 ' 115 115 lTS 115 15 115 115 - 115 111S_- - -- -- -- -- -- -- -- -- -- ---- ___ _______ .___ _____ _______ _ -- - _--_-- - -- - - ------- ____

TOTAL SALES 210 220 250 1.053 1,310 2,475 3,095 3,115 3,125 3,155 3,155 3,155 3,155 3,155

-DAL PRICE (US$/T74)

STEAM COALPLN--SURALAYA 57.00 62.00 67.00 73.00 79.00 82.00 93.00 97.00 10.O00 113.00 126.00 132.00 145.00 152.00FLN--MINE-MOUTH PLANT 44.00 48.00 52.00 56.00 61,00 66,00 71,00 77.00 83.00 90.00 98.00 106.00 114.00 123.00PT BATURAJA 35.00 41.00 47.00 61.00 66.00 71.00 77.00 83.00 90,00 97.00 106.00 115.00 123.00 133.00BANGKA 37.00 44.00 51.00 60.00 66.00 71.00 76.00 83.00 89.00 97.00 105.00 114.00 123.00 132.00PUKA 32.00 37.00 43.00 56.00 61,00 66.00 71.00 77.00 83.00 90.00 98.00 106.00 114.00 123.00OTHERS 37.00 44.00 S1.00 60.00 66.00 71.00 76.00 83.00 B9.00 97.00 105.00 114.00 123.00 132.00

ANTHRACITE 67.00 75.00 83.00 91.00 100.00 109,00 118.00 130.00 141.00 155.00 169.00 184.00 201.00 219.00

C8AL REVENUES (USNOQO)

STEAM COALPLN--SURALAYA - - - 57,305 71,890 149.650 227,385 237,165 264,060 276,285 308,070 322,740 354,525 371,640PLh--MINE-MDUTH PLANT - - - - 9,110 26,400 28,400 30,B00 33,200 36,000 39,200 42,400 45,600 499200PT BATURAJA 2,800 3,280 3,760 4,880 5,280 5.680 6,160 8,300 9,000 9,700 10,600 11,500 12,300 13,300BAN8KA - 1,540 1,785 2,100 2,310 2,485 2,660 2.905 3,115 3,395 3,675 3.990 4,305 4,620FPJA 768 888 1.032 1,008 - - - - - - - -OTHERS 2,072 924 1.071 1,200 1.320 1.420 1,520 1.660 2,670 5.020 6,300 6,840 7,380 7,920

, - -- -- - _---_ _ _ __ _ _ _ _---- _-- -- _------ ------ _--- --- ------ ------- _------ _--- --- _ ------ _------- - -----_---- --_------

SUBTOTAL 5,640 6.632 7.648 66,493 89,950 185,635 266,125 280,830 312,045 331,200 367,845 387,470 424.110 446,680

ANTHRACITE 3,350 4.500 7,470 10.465 11.500 12.535 13.570 14,950 16.215 17,825 19.435 21,160 23,115 25,185

7TTAL REVENUES 8,990 11.132 15.118 76F958 101.450 198.170 279,695 295,780 328,260 349,025 387,280 408,630 447.225 471.865

TOTAL REVENUES(RUPIAH MILLION) 5,619 6.958 9.449 48,099 63,406 123,856 174,809 184,863 205S163 218,141 242,050 255,394 279.516 294,916

:NDUSTRIAL PROJECTS DEPARTMENTEPORT PREPARED-iO/16/81

-109 - ANNE 6-3

INDONESIA--44JK1T A!LAM COAL MINING AND TRANSPORT (ROnJFI:T

PTBA--CONSIILIJtATEII INCOME STATEMENT

(REIPIAN MILLIONS--CURRENT TERMS)

1981 1982 1983 1984 1985 1906. 198/ 1988 1989 1990 1991 1992 1993 1994

COAL PRIODUCTION

STEAM COAL 200 200 400 730 1,195 2.360 3,040 3,040 3,040 34,040 3,040 3,040 3,040 3,040ANTHRACITE 50 60 90 115 115 115 115 115 115 115 115 115 liS 115

SUBTOTAL 250 260 490 845 1,310 2,475 3,155 3.155 3,155 3,155 3,155 3,155 51.555 3,155

COAL- SALES

STEAM COAL 160 160 160 938 1,195, 2,360 2,980 34,000 3,010 3,040 3.040 3,040 3.040 3,040ANTHRACITE .90 40 90 115 11s TIS 115 115 115 115 115 115 115 115

SURTOTAL 210 220 250 1,05:5 1,310 2,475 3.09S5 3,115 3, 125 3,155 3,1S5 3,155 1, 155 3,155

COAL REVENUES

STEAM COAL 3,529 4.145 4,780 41,550 56,2719 116,022 166,328 175,519 195,028 207,000 229,903 242,169 265,069 279,175ANTHRACITE 2,094 7,6(8 3 4,669 6,541 7,188 7,834 8,481 9,344 10,134 11.141 12,147 13,225 14,447 15,741

TOTAL COAL REVENUES 5,619 6,938 9,449 48,099 63,406 123,856 174,809 184,863 205,163 218,141 242,050 255,394 279,516 294,916

OPERAI INS, EXPENSES

MINING COSTS

BUKir ASAM--SURALAYA - - - 420 945 2,560 36,046 41,038 44,123 48,212 53.564 57,995 61,037 64,988BUKIT A~SAM--NON-SURALAYA - - - - - - - 8,032 8.637 9,436 10,484 11,352 11,847 12,720

SUBTOTAL - - - 420 945. 7,560 36,044 49,070 52,760 57.648 64.048 69,347 72,984 77,708MUARA TOGA - 3,871 7,822 15,5 76, 17,419 18,712 5,590 - - -- ---AIR LATA 2,901 - - - - - - - - -- ---

SUBTOTAL 2,90 3I 7 ,2 1594 1,6 2,272 41.634 49,070 52,760 51,648 64,048 69,347 72,984 77.708ANTHRACITE 667 758 927 1,201 1,374 1,451 1,570 1,728 1,899 2.089 2,298 -2,532 -2,785 -3,064

SUBTOiTAL MINING COSTS 3.568 4,629 8,749 12,197 19,737 22,723 43,206 510,798 54.659 59,737 66,346 71,879 75,769 80.772

COAL HANDILING

EERTAPATI 211 3Sf 417 503 580 676 738 860 900 984 1,091 1,19S 1,3507 769TARAIIAN - - - 588 .652 1,920 2,228 2,426 2.633 2.862 3,108 3,387 3,683 4,006

SUATOlA) COAL HANDILING 211 301 417 1,091 1,242 2,596 2.966S 3.286 3.533 3.846 4,199 4,58R2 4,990 4.775

T RANSP OR TATICON

RAIL 1 PANSFORTSURALAYA - - - 8.95_4 11,233 23,i 383 43,471 46,908 5J,090 55.623 S9,680 65,142 72,085 79,323 FBATURAJA 245 306 343 377 411 411 448 488 532 580 632 689 751 819KERTAPATI 280 415 578 435 692 954 322 896 977 5,065 1,161 -1,265 -1,379 -1.503

SURTOTAL, RAILWAT 633 721 971 9.964 12,336 24, 548 44.741 48,292 52.599 57.268 61,473 67,096 74,215 80,645

SEA TRANSPORTLEASE - - - 5.440 8,000 8,000 8,000 8.000 0.000 8.000 8,000 8,000 8,000 8,000IF'ERATING COS;TS - 40 ¶7510 .390 4503 720 800 890 990 1,090 1,220 1,360FUEL - - - 125 429 635 723 845 852 1,081 1,172 1,264 1,347 -1.467

SUBTOTAL SHIPPING- - - 5.8905 8,959 9,025 9.373 9,565 9,752 9.971 10.162 10,354 10.567 10,827

SPIRTOTAI TRANSPORT 633 721 971 15,771 21,295 3.3,5735 54,114 57.857 62,351 67,239 71,635 77,450 84,782 91,472

ADMINISTRATION/OVERHEADS

TANJUNI ENIN OFFICE - - 583 1.059 2,264 3,188 2k,469 3.898 4,251 4.544 4.999 5.S08 6,058 3,843MINkIGlOYSITE - - 31 5 1, 1 13 1,230 1,354 1,468 1,638 1,800 1,981 2,178 2,400 3,440 2,905OTHER ADMIN. COSTS 1.096 1,207 632 982 1,576 2.049 2,236 2,f497 2,729 2.943 3.237 -3,567 -3.922 -3,043

SUBSlOTAL AEFMIN/OVERHEAOS 1,096 1,207 1.530 3.159 3,070 61,591 , 193 8,033 8.780 9~,468 10,414 11,475 12,620 9.791

TOTAL OPERATING EXPENSES 5.508 6,858 11,617 772E 47,744 65,483 107.479 119,974 129.32.3 140,290 352,594 165,386 178,161 186,810

NET OPERATING REVENUE i11 100 (2,168) 10,861 16,062 50.373 61,330 64,889 73.840 77.851 89,456 90,008 101,355 108,106LESS:

DIE PRE C IATIONEXISTING ASSETS 1,065 1,065 1,065 1.035 1.035 463 3556 248 248 248 248 248 2248 248NEW ASOFTS;--7iUKI( ASAM, PMOJECT - - 169 149 19.578 19.990 21,275 21,841 20.412 21,674 22.474 22,720 23,413 23,162NEW ASSETS--SUVIT ASAN, NON-PROJECT - - 179 179 179 179 1,909 2.608 2,608 2,608 2.608 2,608 1,222 262NEW AET-MIRAIIGA - 640 1 ,2(J0,O 1,970 2,400 2,400 670 - - -CAPITALI2ATION OF PEE-IFS - - - - -- 1,910 1,910 1,810 1,910 1.910 1,910 1.910 1,910LAPTIALIJI)IO Ot 06 30, - - - - 434 434 434 434 ... 434 ... 434 __434

SUA TITAL 1,065 t1.70'5 2,49.3 3. 303 23,1t72 22.032 26.120 21,061 25,672 24.874 27.6/4 27,920 27,427 26.016

OPERATING INCOME (954) (1,6011 ( 4,8611 7.73 (7,130) 353 41 41,210 37,828 50,160 50,877 61,782 62,088 73,928 02,090

INTEREST INCOME - - - - - - - - --

TOTAL INCOMiE (954) (1,605) (4,861) 7.5178 (7,130) 21,341 41,210 37.8758 50.168 50,i97 7 61,782 62,080 73,928 82,080

LNTM:fRER ExT6ENSEE - - 3,300 36.791 33.944 351,345 28,392 2518 21,442 17.332 -

iAlE(EFOkE rAXES (954) ( 1,601,) ( 4,461) 7.978 (7,130Q) (3,039) 4,919 3.884 11,623 22,505 36,664 40,646 56.596 82,090

LESS:

OAX ES - - - 2,652 - - 1,722 1.31Y 6.508 7.905 16.499 18,291 25,668 36.941

NET INCOME (75,41 (1. 601) (4,86t) 4.824~ (7,130) (3,039) 3,187 _2,525 -12,235 -14,680 -20,165 22,355 31.128 -45.149

ONIFF0,TRL15 PRI(JECIS ('EPARTMENTREPOnRT PREPARE0U.2/04/Sl

110 -

ANNEX 6-4

INDONESIA--BUKIT ADAM COAL MININO, AND TRANSPOkT PROJECT

PTBA--CONSOI.IPATFD_S(lUTCF.S ANDI APPLICATIONS OF FUNDS

(RUPIAH MIL.LIONS--CURRENT TERMS)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

SnURIES

OPERATING INCOME (954) (1,605) (4.861) 7,578 (7,130) 35.341 41,210 37.828 50 , 168 510977 61,782 600f,8 73.929 82,090DEPRECIATION 1.065 1,705 2.693 3.303 23,192 23.03:' 26.120 27.061 25,6;2 26,874 277,674 27,920 27,427 -26,016

FUNDS FROM OPERATIONS III 100 (2,1681 10,881 16,062 58,373 67,33i M4,889 75,840 77,851 89.4b6 90.000 101,355 (08,106

INCREASE IN:LI (LEST

(1480 - J5.438 33.250 28,000 7.125 - - - - - --KFW - 5.813 1:5,875 "9.000 1.313 - - - -- -EDC/CIDA - 3.313 11.375 10.12h 1.688 EXF'SRT CREDIT - 4,125j 27t688 51,1438 1/7.70 --O GOVERNMENT DEBT - - - -27,000 27,70 D- -

SUSTOTAL LOANS -28.689 86,108 98.563 514.876 27 200 - - - --

EGtITIIF'ROJFCT 10,100 59,740 137,775 20,29 2.95 7,100 - - - - - -MUARA TIGA - 3,675 2.500 4,063 1,438 - - - - - - ---B1ffJ5iEf ALLiOrATION - - 2.211 - - - - - - - --

SUBTOTAL EIyQUITY 10.0100 63,365 142.486 24.-348 4 2p73,4 8 3 - -,3- -3- 7_,l,0_0----- --7--100-- --------- ---------------

SUBTUTAL 10,100 92.054 22. '412,911 87.239 34.300 - - - - ---

TOTAL SOURCES 10.211 92p.154 226.5,06 133o7Y2 98,301 92.673 6k7,330 64,889 75,040 77,851 99,456 90,000 101.755 t08otC6

APPLICAT IONS

CAPITAL INVESTMENTSPROJECT--MINE 8.063 71.875 165.625 72,000 29.461 25,88S5 5.,300 3,900 4,300 8,200 2,300 4.100 2,200 Woo0

--TOWNSITE 375 688 8,000 18,188 F8,8/5 18,938 13,067 14125 4,188 - - -----KERlAPATI %88 1,000 - - - - - - - - -----TARAHAN 500 99188 34.688 4.875 1,408 - - - - - - ----OP. ASSISTANCE - - ----- : ,350 -5,610 -4,990O 2,915 2,770 ---- ----- ---- ----

SUBTOTAL 9,126 84,751 208.313 9N,063 45.774 5.0,433 23.353 14,940 112 8,8200 2,300 4,100 2.200 8,800

MUARA (bGA - 3.625 2.P000 4,06 1, l438 - - - - - - ---INT. DUR. CONSTR. - 3.940 15.025 20,535 70.525 - - - - - ---

SUBTOTAL INVESTMEWTS 9,126 92,316 225,888 119,661 77,337 50,433 27.353 14,940 1128 8,200 27000 4.100 2.200o 8,8300.

INTEREST EXPENSE - - - - 38.3580 .36.291 3:4,94 4 31,345 28,192 25,1 1 821.442 17.332 -

LOAN REPAYMENTS1880 - - - - - - 4,~~~~~~~~~~~~~~~~~~~~~~~.:5!.0 5.100 5.710 6:,400 7,170?( 8/20 8.4 1.

KFW 63~~-- - - - 1,:0 (.830 2, 0 00 2,270 21,570 2'.-~ 3. 220 3,6:0EDC/CIDA - - - - - - 1.440 1.610 1,810 2,020 ' 2.2/0 2,540 2,R40 3.170EXPflAr CREDIT - - - - - - 5.490 6.150O 6,890 7,7110 8,640 9 ,660 10,640 12, 140GOIVERNMENT DEBT - - - - - - 2,948 31,297 3,695 4,137 4,635 5.190 5.817 6PS15

SUBTOTAL REPAYM4ENTS - - - - - - 16.058 17,987 20,155 2 2, 557 :5.285 28,310 31.707 35,515

INCREAUO: ENIWCiKKINO CAPITAL 1.013 (289) 618 1,799 1.210 4,874 14,.W7 ,91 0 4,304 821 4,316 2.618 2,704 608

TAYES - - - 2.652 - - -722' 1,35Y 9,53 7,8 ,905, ',,4?9 18,2iY: 25,468 36,941TOTAL APPLICArIONS 10,139 92.077 226,506 124,1'12 78,541 Qi,681 91,663 74.140 73 ,46 L. 067.875 773.520 874.701 79.411 81.864

CASH SURPLUS (LOSS) 72 127 - 9,680 (9,754 (1.014) 124,311(.1'h2SI) 2.190 9,9/6 15,938 !, ,247 21.944 26,242

ArC. CASH SURPLUS (LOnSS) 72 199 199 9,87Y 9 79633 28.4 19 4,28,1 (4.965) (2,725) 7,201 23.139 39,386 60,330 86.572

INDUSTRIAL PR:OJECTS DEPARTMENT

REPIIRr PREPAREI: (2/08/81

- 111 - ANNEX 6-5

INDONESIA--HUhIT ASAn COAL MINING AND TRANSPORT RROJFCT

PTBA--CONSOLIDATED BALANCE SHEET

(RUPIAH MILLIONS--CURRENT TERNS)

1981 1982 1983 19E4 190:. 1986 1987 1988 1989 1990 1991 1992 1993 1994

CURkFNI ASSETS

CASH 388 314 425 10.266 30-183 29,303 51947 (2,937) (547) 9.652 25,835 41,359 63,523 89,898ACCOUNTS RECEIVABLF 468 580 787 4,00E 5,284 10,321 14,567 15,405 17,097 18,178 20,171 21,283 23.293 24.076INVENTORIES 428 164 508 1,44/ 2,161 3,905 16.529 21,927 23,455 259491 28,343 30,586 32,318 32.672

- ---- -- ---- --- -- - - - - - - - - - - - - - - -- - - -- - --- -- - - -- - - -------- ------- - - _- ------- - -

SUBTOTAL CURRENT ASSETS 1,284 1,05R 1,720 15,721 37,630 43,5?9 37,043 34,395 40,005 53,321 74,349 93,228 119.134 141,146

FIXED ASSFTS

PLANT I EZI'UI1PMNT 9,126 101,442 327,330 446,991 '24,A F' 574,7A! 598.114 613,054 6?4,.12 632,512 634,812 638,912 641,112 647,512LESS: At,C. DEPRFCIATInN I,0 2,771) 4 .1 d,746 i,9e ')4,S9O 8R1910 :'081,:t 133,843 160,/17 188t,71 216,311 243,736 260,754

NET PLANT A EOUIPMENT 8,061 98,672 3;1,867 438,225 492,370 519,771 517,004 504,883 490,469 471,795 446,421 422,601 397,374 380.158--- -- --- -- -- --- -- - - - - - - --- -- - - -- - - -- - - ------- ----_ -- - --- -- - - - - - -

TOTAL ASSETS 9,345 99,730 323,587 453,946 530,000 s63,3c0 554,04? 539.27f 530,474 525.136 520,770 515,829 516.508 527,304

CURRENI LIAPILITIES

ACCOUNTS PAYABLE 199 135 179 2,701 3,646 5,6R5 9-293 9,986 9-102 11,621 12.395 13,409 14,667 15,829CURRENT PORTION LT DEBT - - - - - 17,2 0 19,320 21,.50 240.30 ;7,160 30,410 34,060 38,150 42,720

_ - -- - - -- - - - - - - - - - - - - - - - - - - - - -- - - -- - --- --- - - -- - - - -- -- ----

SUBTOTAL CURRENT LIAB. 199 135 179 2,701 3,646 22,93s 28,613 31,636 33,332 38,781 42.805 47,469 52,817 s8,549

LON,'-TiRm LAPIILITIES

LONG-TERM DEPT - 28,689 114,877 213,440 268,316 2/8,266 260,138 239,821 217,0C6 191,599 163,064 131,104 95,307 55,222

EQUITY ANI CAPITAL

PAID-IN CAPITAL 10.100 73,46S 21I,951 240,299 267,662 2/4.762 274.762 2/4.762 274,762 274.762 274,762 274.762 274,762 274,762REfAINEI, EARNINGS l9I (,h914 t?,4.'0) (2,494) (9,4241 (12,663) (9,4663 (6,941) 0,294 19,974 40.139 62,494 93-622 138,771

SUMfDTAL FGUITY I CAP. 9,14A 10,906 20.,531 237,sQs 2.),019 167,O9 265,2 96 ;67,8?2 200,0=6 294,736 314,901 337,256 368,384 413,3!

TOTAL LIAB. EQULITY 9,345 99,730 323,58/ 4S3,946 530,00O 563,300 554,041 539,278 530.414 525,116 520,770 515,829 516,508 527,304=====_ ======= =: ====-,55=z==== 5====5m= ======f ==.===== =m====== ====~=== ======= ======= ====-== ===

WORKING CAPIIAL 1,013 724 1,342 3,141 4,351 9,225 23,464 29,374 33,678 34,499 38,P15 41,433 44,037 44,745CHANGE IN WO0NING CAPITAL 1,013 (289) 618 1,799 1,210 4,84 14,239 5,910 4.304 821 4,316 2,618 2,704 608

RAT U ANALYSIS

CURRENT 6.45 7.84 9.61 5.82 10.32 1.90 1.29 1.09 1.20 1.37 1.74 1.96 2.26 2.510l'ICR 4.30 6.62 6.77 5.28 9.73 1.73 0.72 0.39 0.50 0.72 1.07 1.32 1.64 1.96

DEBT/EQUITY - 0.40 0.55 0.90 1.04 1.13 1.05 0.98 0.86 0.74 0.61 0.49 0.36 0.24DEfs SERVICE COVERAGE - - - - - 1.52 1.29 1.25 1.47 1.53 1.77 1.81 2.07 3.04

INDUSTRIAL PROJECTS DEPARTMENTREPORT PREPAREBI 12/08/81

112 -



Financial Rate of Return--Assumptions and Calculations

1. The rates of return, both for the financial and economic return,have been calculated on an incrementa,l basis. The analysis compares cost/benefit streams for a scenario "with the Project" with the cost/benefitstreams that would have occurred "without the Project." The respectivescenarios for the railroad component are given in Annex 6-7. Below the"with" and "without" cases are defined for all other components, i.e.mine, townsite, terminals and the ship.

2. "With the Project" - 3.0 million tpy at Bukit Asam. The cost andbenefit streams are based on the basic Project description outlined inChapter III and detailed in Annexes 6-1 to 6-5. The financial nominal streamshave been adjusted to reflect 1981 real term increases. This case, in parti-cular, assumes that at full production 2.4 million tpy will be shipped toSuralaya, 0.4 million to the mine mouth plant, and up to 0.2 million tpy tomiscellaneous customers. In addition, PTBA would produce and ship viaKertapati 115,000 tpy of anthracite.

3. "Without the Project." In the case where the Project would notbe implemented, it can realistically be assumed that the Government wouldcontinue to support a mining operation for social and regional economicreasons as it has for the past ten years. It is, therefore, assumed thatsteam coal and anthracite production at Bukit Asam would be rehabilitatedto meet a regional demand of up to 600,000 tpy of steam coal and 115,000tpy of anthracite. The cost streams are detailed in the Project File andinclude:

(a) for the mine, exploitation, of Muara Tiga at a rate of600,000 tpy during the 1982-89 period. Thereafter,opening of Bukit Asam for a 600,000 tpy truck andshovel operation. Capital costs include mining equip-ment as outlined in Annex 3-2 for Muara Tiga as well asUS$65 million to cover interim power investments,upgrading of social infrastructure and PTBA engineering/management expenses in case the Bukit Asam Project wouldnot be implemented. The operating cost stream includesproportional administration cost for Jakarta and TanjungEnim offices. Cost of the 115,000 tpy anthracite pro-duction is identical to that in the "With the Project"case.

(b) for the terminals, rehabilitation of Kertapati as envisagedunder the "With" case. The investments at Tarahan would notbe needed.

- 113 -


(c) no investments for a ship, as no increased transshipmentabove the present volume handled by Kertapati is en-visaged.

The benefit stream assumes that even "without the Project" the Governmentwill raise coal prices f.o.b. Tanjung Enim from the present average of US$16.50/ton to US$32/ton in 1981. Thereafter, coal prices would be increased annuallyup to the opportunity cost of importing coal from Australia, which would bereached not later than 1989. While this is a logical scenario, it is highlyunlikely that the Government would implement such onerous coal price increaseswithout the Project, i.e., this assumption penalizes the Project's incrementalrate of return.

4. Below are the incremental cost/benefit streams for the PTBA,rail and ship components, respectively. The detailed cost streams areprovided in the Project File (Chapter I).

5. Furthermore, to calculate the incremental cost benefit streamsassuming an additional 3.0 million tpy from a second mine in SouthSumatra, the following scenario is considered:

Sufficient coal reserve data are available on deposits adjacent toBukit Asam to assume that a second 3.0 million tpy can be opened by 1988. Thecost streams for an additional 3.0 million tpy to be shipped on the Southernrail route via Tarahan to Suralaya include:

(a) for the mine, 15% higher capital and operating costs in1981 real terms than at Bukit Asam. This assumptionreflects the possibility of real-term cost increases forcoal mining equipment over the next decade and the pos-sibility of thicker overburden and lower-quality coalat a second mine.

(b) for the rail, terminal and shipping components, the incre-mental capital and operating costs prepared by MCS forMilestone 6 for the 5.5 million tpy alternative have beenused.


- 114 - ANFE 6Page 3 of 5

INDONESIA--BUKIT ASAM COAL MINING A TRANSPORT PROJECT

MINE COMPONENT--COST/BENEFIT STREAMS FOR FINANCIAL RATE OF RETURN ANALYSIS

(Rupiah million--mid-FY1981 terms)

Mina Towvsite TarahanCapital Capital Capital Operating Coal

Period Costs Costa Coats Costs 3venues

1 8056.25 600.00 830,00 0,00 0,002 56946.88 960.00 1.3180.00 831.25 0.003 126635,63 9540400 48850400 15000+00 0400

4 48132.50 20050.00 6400.00 52.35.63 29000.005 20204.38 8770.00 1.940,00 5404.38 38193.756 13688,75 9260.00 0,00 6434.3B 79106.257 13207.50 5250,00 0.00 17453.75 102606.258 3956.25 2460.00 350.00 15995.00 1.00468.759 18.75 0.00 350o00 13980,00 99443,7510 -128.13 0.00 350.00 11630.00 99068.7511 -940.63 0,00 350.00 12260.00 103900.0012 2146.88 0.00 350.00 121.50,00 102731.2513 2371.88 0.00 350.00 11520.00 106856.2514 -1378.13 0.00 350.00 11100.00 105393.7515 -128,13 0+00 350.00 11100.00 105393.7516 -940.63 0.00 350.00 11100.00 105393.7517 2146.88 0.00 350.00 1.1100.00 105393.75i1 2371.88 0,00 350.00 11.100i 00 105393.7519 -1378.13 0.00 350.00 11100.00 105393.7520 -128.13 0+00 350.00 11.1100.00 1.05393.7521 -940.63 0.00 350.00 1.11.00,00 105393.7522 2146.88 0.00 350.00 .1 11.00.00 105393.7523 2371.88 0.00 350.00 1:1.100.00 1.05393.7524 -1378.13 0+00 350.00 :1.1100.00 1.05393.75

25 -128.13 0.00 350.00 111.004+'00 105393.7526 -940.63 0.00 350.00 :11100400 105393.7527 2146.88 0.00 350.00 11100.00 105393.7528 2371.88 0.00 350.00 1.11.00,00 IO05393.7529 -1378.13 0.00 350.00 111.(0.0() 1.05393.7530 -128.13 0.00 350,00 11100.00 105393.7531 -3312.50 0.00 350.00 11100.00 105393.7532 - 225.00 0+00 350.00 1.11.0000 105393.7533-34 0.00 0.00 350.00 111.100,00 1.05393.75


ANNEX 6-6- 115 - Page 4 of 5

INDONESIA--BUKIT ASAM COAL MINING AND TRANSPORT PROJECT

RAIL COMPONENT--COST/BENEFIT STREAMS FOR FINANCIAL RATE OF RETURN ANALYSIS

(Rupiah million--mid-FY1981 terms)

Capital Operating Working RailPeriod Costs Costs Capital Tariff

1 9350 0 0 02 57510 0 0 03 53525 0 0 04 31090 960 1493 61895 2780 995 353 71366 0 ]840 1409 136917 1180 2650 1306 235528 1380 2650 299 235319 5400 2650 336 2373010 0 2650 337 2392211 580 2650 280 2376612 6550 2650 348 2401913 4180 2650 409 2461114 290 2650 341 2475915 0 2650 287 2458216 0 2650 282 2438817 680 2650 280 2419618 160 2650 279 2403119 400 2650 277 2383120 0 2650 274 2364221 0 2650 271 2345122 0 2650 398 2402223 13170 2650 511 2521224 5800 2650 443 2591525 6530 2650 402 2632626 380 2650 305 2613327 0 2650 298 2591428 70 2650 296 2570029 160 2650 293 2548830 40 2650 290 2527031 0 2650 287 2505032 0 2650 285 2484033 220 2650 287 2465134 520 2650 284 24463

Industrial Projects Department/East Asia & Pacific Projects

December 1981

116 ~~~~~~~ANNEX 6-6-116 - Page 5 of 5

INDONESIA--BUKIT ASAM COAL MINING AND TRANSPORT PROJECT

SHIP COMPONENT--COST/BENEFIT STREAMS FOR FINANCIAL RATE OF RETURN ANALYSIS

(Rupiah million--*mid-FY1981 terms)

Capital Operating FuelPeriod Costs Costs Costs Lease

1 370 0 0 02 3690 0 0 03 8225 0 0 04 4960 130 260 35755 240 260 360 48906 0 260 390 46157 0 260 440 43508 0 260 440 40159 0 270 440 387510 0 270 440 365511 0 270 440 344512 0 270 440 325013 0 280 420 307014 0 280 420 289515 0 280 420 273016 4360 280 420 670517 8480 290 420 850518 4880 290 420 802519 330 290 420 757020 0 290 420 714021 0 300 420 481022 0 300 420 454023 0 300 420 428524 0 310 420 404025 0 310 420 381026 0 310 420 259527 0 310 420 339028 0 320 420 320029 0 320 420 302030 0 320 420 285031 0 330 420 268532 0 330 420 253533 0 330 420 239034 0 340 420 2255


- 117 -


RAILWAY COMPONENT - ASSUMPTIONS FOR FINANCIAL AND ECONOMIC RATES OF RETURN

A. Definition of Non-Project Investments in "With Project"/"Without Project" Cases

In both the "with" and "without" Project cases, the non-Projectinvestment program is based on the non-Project traffic forecasts given inAnnex 3-1. In the "without" Project case, the track and structures wouldbe designed for a 13-ton axle load; accordingly, the rolling stock requirementsare based on 13 ton axle load vehicles. Comparable non-Project investments forthe "with" Project case are based on upgrading the track to an 18-ton axleload standard. The difference between the non-Project investment programsfor the "with" and "without" Project cases is small in comparison to the sizeof the Project investment program presented in Chapter IV. Details of the"with" and "without" Project cases are set forth below:

- 118 -


1. Proposed Upgrading of Fixed Installations"Without" Suralaya Coal Traffic:

- Track Sleepers lantenings Points 6Crossings

1984/85 35.0 km From 13.7 to km 48.7 Replacing R3 by R.14 7350 W _ 20

1985/86 36.2 km From 48.7 to km 84.9 Replacing R3 by R14 7602 W - 20

1985/86 38.0' km From Muara Znim to Lahat Replacing R2 by s/h R3 37000 W 114000 32

1986/87 26.4 km From km 122.5 to km 148.9 Replacing R3 by R14 7128 W _ 10

1986/87 38.0 km From Lahat to Paduraksa Replacing R2 by s/h R3 57000 14 114000 28

'987188 37.6 km Fron km 84.9 to km 122.5 Replacing 23 by R14 56400 W 1128C0 20

1987/88 38.0 km From Paduraksa to Tatnjungning Replacing R2 by s/h R3. 57000 W 1140C0 28

1988/89 30.1 km From km 148.8 to km 179.9 Replacing R3 by R14 .45150 W 90300 20

1988/8q ..38.0 km From Tanjungnine to Labuklinggau Replacing R2 by s/h R3 57000 W 114000 32

- Bridges NIL

- Signals Replace 30 stations on the South line in 5 years from FY1981to FY1985. Replace 16 stations between Muaraenim andLubuklinggau in 5 years from FY1986 to FY1990 using secondhand material salvaged from the Java Lines.

- Service Vehicles

Replace 4 service vehicles per year throughout program.

- Buildings Repair and extend stations as required as the signallingsystem is upgraded at each station.

- Housing Replace 8 houses per year throughout program.

- Workshops and Workshop Equipment

Tanjung Karang Rebuild and equip the existing running shop tocater to the servicing of the diesel locomotives,goods wagons and passenger coaches over 2 years,FY1982 and FY1983.

Lahat Rebuild and equip the main workshop to providethe overhaul facility for the major overhaulof the diesel locomotive fleet, goods wagonfleet and passenger coach fleet over 3 yearsfrom FY1984 to FY1986.

Kertapati Rebuild and equip the existing steam runningshop to cater to running inspection of thediesel locomotives, goods wagons and theservicing and minoir repair to the passengercoach fleet over 2 years, FY1987 and 1988.

- 119 -


2. Proposed Upgrading of Fixed Installations"With" Suralaya Coal Traffic:

- Track I1plAcement Sleepers Fasten±nRs Points trossint

1984/85 38 km Muarsenim to Lahat R3 57 000 (w) 114 000 321985/86 38 km Lahat to Padukeraa R3 57 000 (w) 114 000 281986/87 38 km Padukarsa to Tanjungning R3 57 000 (w) 114 000 281987188 38 km Tanjungning to Lubuklinggau R3 57 000 (w) 114 000 321988/89 38 km Prabumulih to Serdang .R14 - 1965 64 975 (c) 129 000 261989/90 39 km Serdang to Kertapati R14 - 1965 66 300 (w) 132 600 20

230 km 294 300 (w) 718 550 16664 975 (c)

otet: (c) - Concrete(w) - Wood

- Bridges (upgrade existing bridges originally insallaed for 18-tonaxle load)

FY1984 and FY1985--140 ton each year Prabumulih to Kertapatifor a total of 280 tons.

- Signals and Communications

FY1985 to FY1993: Replace existing Signal and TelecommunicationSystem to Lubuklinggau at a rate of 2 unitsper year for signals and 2 units per yearfor telecommunications (total of 18 units each).

- Service Vehicles

Replace 4 per year (total of 26) from FY1985 to FY1993.

- Buildings Replace 1 station per year (total of 9) from FY1985 to FY1993.

- Housing Replace 8 houses per year (total of 72) from FY1985 to FY1993.

- Workshops and Workshop Equipment

Upgrade facilities at Kertapati passenger coash fleetfrom FY1984 to FY1986.

B. Assumptions for Financial Projections

The methodology and principal bases and assumptions underlying theforecasts are presented below:

(i) Revenues: Project revenues have been developed from the coal productionschedule (Annex 6-3) and the tariffs discussed in para. 6.23.

- 120 -


(ii) Working Expenses: Forecasts of working expenses are based on a detailedcosting exercise undertaken by consultants. It is assumed that, in additionto existing ESS staff, about 500 new employees will be needed to handle theProject traffic. Fuel and maintenance have been projected in line with thegrowth in traffic. The increase in working expenses in nominal terms hasbeen projected on the basis of inflation rates presented in para. 4.05;

(iii) Depreciation is calculated on the basis of revalued assets. Assetsprocured during the Project period are assumed to have an average life of32 years. Calculations include the effect of ESS's proposed schedule for theretirement and replacement of assets;

(iv) Debt Service: For the purpose of the financial projections, the offshorefinancing of the railway portion of the Project is treated as "imputed debt"of ESS at an interest charge of 12% p.a. (repayable over 20 years, includingone year of grace);

(v) Short-term deposits are assumed to earn 12% p.a.;

(vi) Receivables are proportional to freight and coal-traffic;

(vii) Inventories are assumed to expand to approximately five months of mate-rials expense and three months of fuel expenses by FY1984;

(viii) Accounts payable vary with working expenses; and

(ix) A minimum cash requirement of approximately three months of workingexpense is assumed.

East Asia and Pacific Projects Department

December 1981

121 -

ANNEX 7Page 1 of 2


Economic Rate of Return--Assumptions and Calculations

1. The incremental economic rate of return is based on the "with"and "without' cases for a 3.0 million tpy Bukit Asam mine and additional3.0 million tpy from a second South Sumatran mine given in Annexes 6-6 and6-7. The financial cost/benefit streams in real terms have been adjustedto

- exclude all taxes, in particular, income taxes whichPTBA will start paying in FY1987 and import taxes andduties for which exemption will terminate by 1990;

- include the full economic cost of fuel and electricityto Indonesia, thus excluding the major subsidy elements.

No shadow pricing of labor has been used. While the Project will employup to 2,000 originally, unskilled persons, major training expenses areincluded in the Project and their salary corresponds to their market valueshortly after production start-up. In line with the practice in otherIndonesian projects, no shadow pricing has been used for the Project'sforeign exchange benefits and costs.

2. The benefit stream reflects the opportunity cost of importingalternative fuels; i.e. either importing coal from Australia or Bunker C.As this would free high quality Indonesian crude for export the differentialis also taken into account as outlined below:

(a) the opportunity cost of importing coal from Australia.As detailed in Annex 5, Indonesia would have to pay US$44/ton fob Australia in 1981 terms to import coal "of similarquality" to Bukit Asam coal. As Suralaya would not beequipped to receive, on a continuous basis, the required coalquantities of up to 2.4 million tpy, it has been assumed thatspecial medium-term charter arrangements for delivering andunloading coal at Suralaya would be required until major pierand unloading facilities could be constructed-by FY1986. Thecost of providing these intermediate arrangements has beenestimated at US$22/ton in 1981 terms. Thereafter, long-termship charter f.a.s. costs have been estimated at US$13/ton in1981 terms. The coal component is estimated to increase at1.5% through 1985 and 2% p.a. until 1995 but constant there-after; the shipping component is to increase by 4% p.a. until1990; the unloading component has been assumed constant overthe entire forecast period.

- 122 -

ANNEX 7Page 2 of 2

(b) the opportunity cost of importing fuel. In case fuel wouldhave to be used at the Suralaya power plant, Indonesia wouldimport "Bunker C" crude, because higher-quality Indonesian oilcan be exported at a premium. 1981 prices of "Bunker C"from the Middle East average to date US$34.5/barrel or aboutUS$35/barrel f.a.s. Suralaya. A real growth of oil pricesby 1.2% has been assumed in 1982 and 2.6% p.a. thereafter.

(c) export differential for high quality Indonesian crude.Indonesian crude has been consistently sold at a premiumcompared to average OPEC oil prices as outlined below:

Crude Petroleum Prices(US$ barrel FOB)

1978 1979 1980 1981

OPEC Average 12.73 19.92 31.35 33.78Sumatran Crude 13.56 20.65 31.50 37.00Attaka Crude 14.11 23.09 34.25 38.50

For the purpose of rate of return and foreign exchangebenefit calculations, it has been assumed that a 10%premium will be maintained in the future.


IBRD 13232R1o o $ r . ,, \ \.~~~~~~~~~~~~~~_THAILAND - -10 1020 KT PHILIPPINES

- ' ~N .. - - ^ . Al L A BRUNEI

41~~~~~~

KALIMANTANSULAWESI

L0.~~~~~~~~~~~~~~~~~~~~~ ~~~SUMBAWA_ -Pad anlan-_

-20 2

', - BANGKA,'

K5 " --( -* 'E -~ _ alembang

N< ' \., Lubuklinggau -

\\ (;E P i ~Muara Perabumufih

_40 Bengkulu4 f Tanjung En m

\ & *. _>, 0 ' Y8B~~atutaia _

\ > \ ) \x ~Kota bum iINDONESIA

BUKIT ASAM COAL MINING '< Tanjungkarang

AND TRANSPORT PROJECT Telukbetun gPanjang

RAILWAYS - a----- ~ ~ EXISTING TRACK

60 _ EXISTING TRACK TO BE REHABILITATED Sura6aya°i -- akar---- NEW TRACK EXTENSION : .

ROADS Labuha

PROPOSED SHIPPING ROUTE Bandun

POWER PLANT AND UNLOADING FACILITIES '- -

- - TRANSMISSION LINES -

PORTS- - -- - PROVINCIAL BOUNDARIES

This map has been prepared by the World Bank's staff esolunicely for the oon'enienceo 50 100 150 200 of the readers of the repor to rh,ch ,t in ettached. The denomin,ations soed end the

KILOMETERS .- boundaries shown on this map do not imply. on the part of the World Bank and itsMILES iaffiliates, any judgme.nt on the legal status of any terrtory or any endo-sment or

0ILES ' - t50 100 150 acceptance of such boundaries

1000 102° 1040 106M