Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 5491 -IND

STAFF APPRAISAL REPORT

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

December 17, 1986

Projects DepartmentEast Asia and Pacific Regional Office

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

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

US$l = Rp 1,650Rp 100 = US$ 0.06061Rp 1 million = US$606.06

GOVERNMENT OF INDONESIA AND PLNFISCAL YEAR (FY)

April 1 - March 31

WEIGHTS AND MEASURES

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

ABBREVIATIONS

BAKOREN - National Energy BoardBAPPENAS - National Development Planning BoardBWI - Beka-Worley International of New ZealandDGEP - Directorate-General of E.ectric Power, Ministry of Mines

and EnergyEHV - Extra High VoltageJABOTABEK - Jakarta, Bogor, Tangerang and Bekasi areaLMK - Testing and Research Center of PLNLNG - Liquified Natural GasLRMC - Long Run Mzcginal CostMIS - Management Information SystemMME - Ministry of Mines and EnergyPCR - Preece, Cardew and Rider of the UKPERTAMINA - National Oil and Gas CompanyPLN - National Electricity AuthorityPMAS - Project Management Advisory ServicePPE - Engineering Services Center of PLNPUSDIKLAT - PLN's Center for Education and TrainingRE - Rural ElectrificationROR - Financial Rate of Return

FOR OMCIL USE ONLY

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SUMMARY ...................................... iv

I. ENERGY SECTOR AND ELECTRICITY SUBSECTOR ................... 1Energy Resources.... ..... a............ 1Institutions in the Energy Sector ................... 2The Electricity Subsector ............................... . 3PLN's Organization . . . 3PLN's Facilities ................... ... ***.. 3Sector Development Issues, Objectives and Strategy ........ 3Captive Generation . . . 4Pricing ................................................... 4Institutions and Manpower ................................ . 4Import Substitution ....................................... 5Bank Role and S ttategy .............................ae g ...y 5Bank's Earlier Operations and PLN's Performance ........... 6

(I. THE POWER MARKET AND THE DEVELOPMENT PROGRAM .............. 7The Market .............................................. . . 7Demand .................................................... 7PLN's Facilities ................. ..................*. . . .. . 8Development Program .... 8

III. THE BENEFICIARY ........................................... 9Institutional Development ................................. 9Accounting and Budgeting .................................. 12Billing and Collection ..................................... 13Audit and Internal Control ........ 13Insurance ......................... 14

This report was prepared on the basis of the appraisal carried out byV.P. Thakor (Senior Power Engineer) and J. Chang (Financial Analyst) duringNovember/December 1984. An update of the appraisal was carried out byV. P. Thakor (Senior Power Engineer) and S. K. Bhatnagar (Financial Analyst)in September 1986.

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

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Page No.

IV. THE PROJECT ............................................... 14Project Objeciev e. 14Project Dei nrt....i 15Transmission and Substations........... .............. 16Distribution ........... b .... . ........................ 917Testing and Research Center.......ee..................... 18Consulting Services............9.................. oo... 19Cost Estimate..o..o.....t....l9.......................... 19Financing Plal...an0....... 21Engineering and Constructions..t.ri 2..........21Procurement.9ooe ... 22Implementation Schedulec...e.... ............ ............. 23Disbursemnent.............o.......... .............. ... . . 23Ecooy........lo..gy0 ........ 23

V. FINANCIAL ANALYSIS 23Past Results esul.. t.s.... *....*....-..........0. .... 23Present Position............... a......... .............. *. .*. * * * *6 6 *6 * 24Regional Operationsor.a t .o........ .............. 26Performance Monitoring..... ... ........ *..............o. 27Taxefs..... ... *.................. 28Taxes... 29Financing Policy c...... y.0-.. ....................... 29Future Performance ... a n....6 e 666666 ............ 30Asset Revaluation. .. ut.....o.... ............. 33

VI. JUSTIFICATION ... ............. o .........- .........666.*..* 33Transmission and Substations.... ....... ** ...... 34Distribution....... 6666 ..... G .. .. .. .. . .. 34Economic Rate of Return ..... ..... . ........ ...... 35Risks ................ .. 66.... .. .36

VII. AGREEMENTS REACHED, AND RECOMMENDATIONS 36Agreements Reached ................ 666 .36

Condition of Effetiveness .37Recommendations.....9 ............6....†37

ANNEXES

Annex 1 Growth of PLN's Consumers and SalesAnnex 2 Growth of Captive Power in IndonesiaAnnex 3 Peak Load, Production and Installed Capacity, Java SystemAnnex 4 Peak Load, Production and Installed Capacity, Outside JavaAnnex 5 Investment Program-IndonesiaAnnex 6 Investment Program-JavaAnnex 7 Organization Charts for MME and PLNAnnex 8 PLN: Performance IndicatorsAnnex 9 Sensitivity of Efficiency ParametersAnnex 10 Transmission Lines and Substations Covered by the Project

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Annex 11 Tabl.s 1 - Cost Estimate for Transmission Lines andSubstations

Table 2 - Cost Estimate for DistributionAnnex 12 Implementation ScheduleAnnex 13 Disbursement ScheduleAnnex 14 PLN's Financial Statements - Past Results and ForecastsAnnex 15 Notes and Assumptions for the Financial ForecastsAnnex 16 PLN's Tariff,Tables 1, 2, 3.Annex 17 Table 1 - PLN's Fuel Consumpton Statistics

Table 2 - Domestic and World Prices of PetroleumProducts.

Annex 18 Calculations of the Internal Economic Rate of ReturnTables 1, 2, 3

Annex 19 Selected Documents and Data Available in the Project File.

MAPS

IBRD 12453 R6IBRD 17207 R2

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INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Loan and Project Summary

Borrower: Republic of Indonesia

Beneficiarr: National Electricity Authority (PLN)

Amount: $226.0 million equivalent.

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

Onlending Terms: The proceeds of the loan will be onlent from theGovernment of Indonesia (GOI) to PLN for 20 years includ-ing a grace period of 5 years; the onlending rate will beequal to the Bank's standard variable interest rate plusno less than a quarter percent for administrationcharges. The Governmnent will bear the foreign exchangerisk.

ProjectDescription: The proposed project would support government objectives

to promote productive activities and to improve thewelfare of the population through the provision ofelectric power, and also to improve the economic andtechnical efficiency of energy supply and uce. Inparticular, the proposed project would: (a) expandtransmission and substation facilities in Java toefficiently utilize the planned addition to generatingcapacity during the period from 1986/87 to 1990/91; (b)extend distribution facilities in the Jakarta, Tangerang,Bogor and Bekasi areas to supply electricity toindustries, commercial consumers and about 250,000 newresidential consumers in urban and rural areas; (c) expandPLN's center for testing and certifying indigenousproducts and for researching utility-oriented problems;(d) provide consulting services to (i) assist PLN'sEngineering Services Center; (ii) continue the detailedengineering of a coal-fired thermal power plant at Paitonin East Java; and (iii) define and implement measures toimprove PLN's operating efficiency.

Risk: The principal risk relates to possible delays inimplementing the transmission and substations component ofthe project because of difficulties in land acquisition.Advance action has been initiated by PLN to help preventsuch delays.

v

Cost Estimate: Local Foreign Total----- (US$ million)

Transmission linesand substations 74.6 128.6 203.2

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

Total Base Cost 97.1 209.7 306.8

Physical contingencies 7.4 16.2 23.6Price contingencies 21.5 14.3 35.8

Total Project Cost /a 126.0 240.2 366.2

Interest during construction - 20.0 20.0

Total financing required 126.0 260.2 386.2

Financing Plan: Local Foreign Total

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

Total 126.0 260.2 386.2

Estimated Dibsursement: Bank FY 1988 1989 1990 1991 1992

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

Rate of Return: 17% for PLN's investment program for Java for the period1987 to 1991.

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

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

I. THE ENERGY SECTOR AND ELECTRICITY SUBSECTOR

Energy Resources

1.01 Oil. Indonesia is richly endowed with energy resources includingoil, natural gas, coal, hydropower and geothermal energy. Oil and natural gasnow account for almost all of total commercial energy consumption. Whileundiscovered oil reserves are estimated at 10-40 billion barrels, provenresources are 9.5 billion barrels. Though the production capability is about1.9 million barrels per day, the current production leveL is about 1.3 millionbarrels per day, due to OPEC production quotas.

1.02 Natural Gas. The estimated proven remapling natural gas reserve asof January 1984 was about 80 trillion cu ft (TCF)P of which 90% is non-asso-ciated and can be developed independently of oil. However, major reserves aregenerally located away from population and industrial centers. The Arun fieldin North Sumatra has 14 TCF and Natuma in the South China Sea, 41 TCF. About5.0 TCF of reserves are proven offshore Java of which about 2.6 TCF are in theEast and 2.3 TCF are in the West. Production of natural gas reached 1,580billion cu ft in 1985. Half of this was exported as liquidifed natural gas(LNG) to Iapan from Arun and Badak. LNG production was about 15 million tonsin 1985.- Gas pipelines have been laid to domestic steel and fertilizerfactories and domestic consumption is expected to increase by about 8.0% peryear.

1.03 Coal. Indonesia's coal reserves are believed to be as high as 20billion tons, mostly located in West and South Sumatra and Kalimantan. Whileproduction is currently about 530,000 tons per year, major increases areplanned by GOI. Work started early in 1982 on a 3.0 million ton per year mineat Bukit Asam and on a 0.6 million ton per year mine at the nearby Muara Tigacoal field. Proven reserves in this area are over 400 million tons. Aprogram to raise the coal production at Ombilin in West Sumatra to 1.3 milliontons per year mainly for export, is also being implemented by GOI. In addi-tion, in 1981, GOI entered into a number of production-sharing agreements withprivate foreign and Indonesian joint-venture companies for the exploration andexploitation of coal reserves in Kalimantan. Coal reserves defined by thesecontractors and expected to be economically recoverable, amount to about1.0 billion tons. The South Sumatra and Kalimantan coal has a potential forsustaining a large program of coal fired power generation in the country.

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

2/ 1 ton of LNG = 1.2 tons of oil equivalent.

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1.04 Hydropower. Indonesia's total hydroelectric resources are large butdevelopment is limited by their geographic distribution relative to demand.The greatest potential (over 35%) lies in Irian Jaya where the demand is lessthan one percent of total domestic demand, while Java, which accounts for 80%of current consumption, has less than 10% of the total potential. Existinghydroelectric installations aggregate to 2,028 MW; they are located in Java(1,235 MK), Sumatra (612 MW), and Sulawesi (181 MW). Schemes with an aggre-gate capacity of about 1,000 MW are currently under construction. TheNational Electricity Authority (PLN), assisted by Nippon Koei of Japan, hascarried out a systematic countrywide resource survey using funds from IBRDLoan 1365-IND, that has produced an inventory of hydroelectric sites. Thesurvey is being followed up with various prefeasibility and feasibilitystudies of the promising hydroelectric sites; prefeasibility studies of 21such hydro schemes were financed under Loan 1365-IND. In addition,prefeasibility studies for 20 sites and feasibility studies for 6 sites arebeing financed under Loan 2300-IND.

1.05 Geothermal. Surface manifestations of geothermal energy are foundon all islands except Kalimantan, but only a few sites have been investigatedand only one, Kamojang in West Java, has been developed. It is believed thatpotential eserves may approach 10,000 MW, distributed as follows: Java 5,500MW; Sulawesi 1,400 MW; Sumatra 1,100 MW; other islands 2,000 MW. GOI, incollaboration with the Government of New Zealand, initiated development of theKamojang field in 1976. The first 30 MW generating set was commissioned forcommercial operation in January 1983; the Twelfth Power Project (Loan2214-IND) provides for the expansion of the station by 110 MW. Furtherdevelopment potential exists in Kamojang. In 1982, PERTAMINA (The NationalOil and Gas Company) entered into a joint operation contract with Union Geo-thermal, a subsidiary of Union Oil of California, for development of the Salakfield in West Java. A potential of 100-200 MW has been proven by explora-tions. Also, PERTAMINA has explored geothermal fields in the Dieng and Drajatareas in Java. The economic viability of developing these fields is understudy.

Institutions in the Energy Sector

1.06 The principal agency responsible for implementing governmentpolicies in the energy sector is the Ministry of Mines and Energy (MME). MMEwas established in 1978 to coordinate all activities in the energy sector andcontrol tie three state enterprises responsible for the execution ofgovernment policies in the energy subsectors; PERTAMINA for oil and gas, P.N.BATUBARA for coal and PLN for electricity. Other ministries and agencies arealso involved in the sector; for example, the Ministry of Public Works primar-ily deals with hydropower resource surveys, the Ministry of Agricultureoversees forestry products, and the National Atomic Energy Commission isresponsible for nuclear development. In order to ensure appropriatecoordination of energy policy, an inter-ministerial National Energy Board(BAKOREN) to oversee sectoral development was established. BAKOREN issupported by a technical committee (PTE) consisting of senior officials indifferent departments, chaired by the Directoe General of Electric Power andNew Energy (DGEP).

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The Electricity Subsector

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

PLN's Organization

1.08 PLN was established as a public corporation (Perum) underPresidential Decree No. 18 of 1972, with responsibility for the generation,transmission and distribution of electricity and the planning, constructionand operation of electricity supply facilities. PLN is managed by a board ofdirectors headed by a President Director, who is appointed by the Presidentand is accountable to the Ministry of Mines and Energy. The PresidentDirector has authority for all day-to-day operations of PLN. The boardcurrently includes five other directors with functional responsibility,respectively, for planning, construction, opetations, finance and adminis-tration. Operational responsibility devolves to 17 regions, and responsi-bility for major construction to 14 project managers. Also reporting to theboard are several staff units responsible for power research, education andtraining, management services, an internal audit unit called the CorporationInspectorate, and the Java system operation and control unit. An engineeringservices unit was added in 1985 (para. 3.08).

PLN's Facilities

1.09 PLN is the dominant entity in the electricity subsector. In1985/86, it had 5,240 MW of installed generationg capacity--1,680 MW of steam(oil fired), 800 MW of steam (coal fired), 930 MW of gas turbines, 740 MW ofdiesel, 1,060 MW of hydroelectric and 30 MW of geothermal (para. 2.06). PLNalso operates over 11,600 km of transmission lines at 70, 150 and 500 kV andabout 86,000 km of distribution lines.

Sector Development Issues, Objectives and Strategy

1.10 Since oil has been Indonesia's major export commodity, the majorthrust of the Government's energy policy is to maintain the level of exportearnings by diversification of domestic consumption away from oil to alterna-tive and more economic resources such as coal, hydropower, geothermal andgas. The Government's strategy is to use the electricity sector as the prin-cipal agent for the implementation of this policy. The other major objectivesof the sector are to increase the welfare of the population through anincrease in the proportion of electrified households-from the current lowlevel of about 14% to a level of about 40% over the next 10 years and tosupport economic development through the supply of electricity to productive

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users in urban and rural areas. The extension of electricity supply will alsocontribute to the objective of reducing oil consumption through substitutionof kerosene and diesel oil in applications where electricity is more economi-cal. Currently, PLN has forinuLated a 10-year investment program amounting toabout US$15 billion equivalent to achieve these objectives (para. 2.07).

Captive Generation

1.11 Due to nonavailability of electricity supply from the grid, a largenumber of industriaL and commercial establishments produce electricity fortheir own use. The growth of this "captive" power was very rapid in the1970s, and their installed capacity is comparable to the generating capacityof PLN. S';;ce the captive power generation is largely diesel based andgenerally more expensive than PLN's supply, it is the policy of the Covernmentto favor the replacement of uneconomic captive generation by PLN's supply asrapidly as this can be extended to reach them and to license new captiveplants only when they are more economic or where PLN cannot supply.

Pricing

1.12 Following the increases in international oil prices in the 1970s,petroleum products in Indonesia were highly subsidized. However, the Govern-ment has moved rapidly to remove the subsidies in the past four years. Aftera total increase of about 225Z since December 1981, the weighted average ofdomestic prices of petroleum fuels in September 1986 was slightly above theaverage international price, although the kerosene price remained at about 75%of the international level (Annex 17, Table 2). Electricity prices have beenincreased by about 130Z since 1981, resulting in the current average price ofabout 96.0 Rp/kWh, which was equivalent to USO8.5/kWh prior to the devaluationain September 1986 but amounts to USC5.8/kWh after devaluation. Mainly becauseof the devaluation, adjustments will be needed to fully reflect the long runmarginal cost of supply both in the level and structure of the currenttariff. The proposed project would address this need (para. 5.16).

Institutions and Manpower

1.13 Weak institutions and scarcity of trained manpower continue toconstrain rapid and efficient implementation of the energy strategy in spiteof the progress that has been achieved. In the electricity sector, PLN hasmade considerable progress not only in achieving a rapid expansion (its salesgrew by over 300Z in the ten year period 1974/75 to 1984/85), but also ingearing up for implementing an even greater program in the future. The FourthFive-Year plan (1984/85 to 1988/89) had set a target of increasing PLN's salesby 150% from about 10,000 GWh in 1983/84 to about 25,000 GWh in 1988/89.These targets have since been scaled down in view of the deterioratingeconomic environment and financial constrants; the sales target for 1988/89being about 19,000 CWh. To meet even this reduced goal, PLN needs toimplement and operate projects and systems of growing size and increasingtechnical and managerial complexity. PLN also needs to continuously enhanceand improve its capabilities in all areas of management to manage such rapidgrowth. Special emphasis on project management, engineering, finance andaccounts, and manpower development is needed. Also, a great deal of effort to

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improve PLI's ability to efficiently operate and maintain the increasinglycomplex facilities currently under installation and planned for the futurewill be needed.

Import Substitution

1.14 The electricity industry is capital intensive with high importrequirements. About 60Z of PLN's total proposed investment in the ten yearperiod 1984/85 to 1993/94 is expected to be in foreign exchange, amounting toover USS10 billion. The Government has placed great emphasis on the reductionin the import content of the program by promoting, inter alia, increased useof local consultants for engineering and the progressive manufacture ofselected equipment within the country. The implications of this policy forPLN are twofold. One, a need to have stronger engineering capability withinPLN to supervise and guide the work of consultants and two, a need to developits Testing and Research Center to undertake a program of product testing,quality control and guidance to local manufacturers, for the products forwhich it is a dominant purchaser (para. 4.18).

Bank Role and Strategy

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

1.16 The Bank is also providing considerable technical assistance forinstitutional development in the energy sector. A number of assistance

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efforts have been devised for PLN in such important areas as project manage-ment, planning, power market survey, hydro survey, accounting, manpowerdevelopment and training, and are financed with Bank funds. Furthermore, inthe coal subsector, various steps are being initiated for institutional andmanoower development under two Bank-assisted projects: the Bukit Asam CoalMining Development and Transportation Project (Loan 2079-IND) and the CoalExploration Engineering Project (Loan 2153-IND). In the p,as subsector, astudy on liquified petroleum gas (LPG) was financed under Credit 898-IND andan energy pricing study is being financed under a Bank loan for the GasDistribution Project (Loan 2690-IND).

1.17 The Bank's involvement with the electricity subsector in Indonesiahas gone through two distinct phases and has now entered the third and mostcrucial phase. In the first phase (1968-1977), the Bank's work was directedtoward creating an autonomous nat-onai entity to deal with the sectoralproblems and after PLN's creation in 1972, to help put in place procedures andsystems to manage and improve its then small-scale operations. In the secondphase (1978-83), the primary thrust of the Bank's work has been to enable PLNto undertake rapid expansion of its supply facilities (sales increased 122% inthe period) and, coupled with efforts to evolve integrated grids (particularlyin Java), to take full advantage of advanced technologies to reduce supplycosts. The fruits of this effort will be reaped in the period 1985-89 withthe commissioning of large power plants at Suralaya (1,600 MW), Saguling (700MW), and Cirata (500 MW) with an overlay of a 500 kV transmission grid. Thecosts of electricity supply will significantly drop in real terms in theseyears. The current phase of the Bank's involvement is focused partly oncontributing to the financing of Indonesia's massive power programs to meetits development needs, and more so, to build on the foundations laid in thesecond phase to transform PLN into a modern and mature utility like others inthe region through a major emphasis on institutional objectives. Theseinclude greater financial autonomy, better operating efficiencies, andimproved engineering and research capabilities. The proposed projectaddresses these concerns and provides technical assistance, inter alia, forthe efficiency improvement measures. Suitable efficiency improvement measureshave been agreed with PLN. Action plans have been formulated and theirimplementation would be monitored.

Bank's Earlier Operations and PLN's Performance

1.18 Since 1969, the Bank Group has provided US$2,083 million for powergeneration, transmission and distribution facilities through fourteen separateprojects. Four distribution projects (Credits 165-IND and 334-IND, and Loans1259-IND and 2056-IND) rehabilitated and expanded the distribution facilitiesin the greater Jakarta area. Ten power projects (Credit 399-IND and Loans1127-IND, 1365-IND, 1513-IND, 1708-IND, 1872-IND, 1950-IND, 2214-IND, 2300-INDand 2443-IND) assisted PLN to expand electricity generation capacity in Java,to provide a strong all-Java 500 kV grid, to extend distribution facilities inJava, to reduce system transmission and distribution losses and to introduce aprogram of mini hydro development in Sumatra. Project Performance AuditReports on the first six projects (Credits 165-IND. 334-IND, 399-IND and Loans1127-IND, 1259-IND, and 1365-IND) have been issued and the lessons learnedfrom these operations are being applied to subsequent operations. They relate

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mainly to the need for timely appointment of consultants, and delays inprocurement and construction.

1.19 PLN's implementation capacity has grown substantially since theBank's early association with it. All Bank financed projects have been or arebeing implemented as designed and have generally been within the estimatedcost. However, delays of the order of six months to two years in implementa-tion have been experienced compared to the appraisal estimates. The growingsize and complexity of the projects, coupled with cumbersome procedures forthe appointment of consultants, award of contracts, opening of letters ofcredit, and budget approvals, have been responsible for most of the delays.Implementation schedules for Bank financed projects, however, have generallybeen optimized to international standards with little slack to accommodate thedelays which can occur in a still-maturing utility like PLN. Moreover, stepsare being taken at the entity and national level to streamline budgeting andprocurement procedures.

II. THE POWER MARKET AND THE DEVELOPMENT PROGRAM

The Market

2.01 Principal sources of electricity supply in Indonesia are PLN andself generation (captive) mainly by industries. Electricity consumption inthe country grew rapidly in the last decade from about 50 kWh to 150 kWh percapita.

2.02 Captive generation, which accounted for over 50% of the market in1974/75, and has continued to maintain at that level. There is evidence tosuggest that the share of captive generation may have increased during theperiod 1982/83 to 1985/86, because of large installations such as Asaham,Krakatau Steel, Cibinong Cement etc. which PLN was not able to supply.Annex 1 shows the growth in PLN's supply facilities, and Annex 2 shows thegrowth in captive p.ant in Indonesia.

2.03 In spite of the rapid growth, the level of consumption of electri-city in Indonesia is low, at about 150 kWh per capita compared to a level ofabout 550 kWh per capita in Egypt cr about 350/400 kWh per capita in Thailandand Philippines. The level is even lower than that in India and Pakistanwhich have much lower per capita GDP.

2.04 Low level of electricity consumption is primarily due to lack ofsupply facilities and low access to the network for the residential and othersectors. In 1985/86, only 14% of all households in Indonesia were electri-fied. The electrification ratio was about 16% in Java and about 11% off Java.

Demand

2.05 It is clear from different studies that the potential demand forelectricity is still large and PLN's sales are supply constrained. There is apotential for rapid growth in PLN's sales as supply capacity expands- This issupported by the fact that, while PLN's sales in the period 1982-1985 grew byabout 12Z p.a., the growth in the electricity consumption in the country was

about twice as large, the additional growth mainly coming from the use ofprivate generation by industry. The addition to PLN's sales is contributed bythree factors, viz (a) extension of supply to new areas for residential andother sectors; (b) gradual takeover of supply to industries currently usingtheir own diesel plant and (c) growth in consumption with GDP growth.

PLN's facilities

2.06 PLN's total installed capacity by end 1985/86 was 5,240 MW, out ofwhich 3,841 MW (73%) was in Java. Nearly 64Z of the capacity uses petroleumfuels. Table 2.3 shows the breakdown of the generating capacity in Java andOutside Java.

Table 2.3: PLN'S GENERATING CAPACITY (MARCH 31, 1986)(MW)

Type Java Outside Java Total (%)

Steam (coal) 800 - 800 15.3Steam (oil) 1,500 180 1,680 32.0Gas turbines 630 300 930 17.7Diesel - 740 740 14.1Hydro 881 185 1,066 20.3Ceothermal 30 - 30 0.6

Total 3,841 1,399 5,240 100.0

Development Program

2.07 In the latest review.i of PLN's investment program, PLN hasestablished the following target of sales and generating capacity for the year1990/91:

1985/86 (Actual) 1990/91Java Other Islands Java Other Islands

Sales (GWh) 10,C52 2,654 19,450 5,206Z growth - - 14.1 14.4

Capacity (MW) 3,841 1,399 6,112 2,781X growth - - 9.7 14.7

Peak demand 2,178 716 4,269 1,271Z growth - - 14.4 12.2

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2.08 The above projections are considerably lower than those set at thebeginning of the Fourth Five Year Plan (Repelita IV) whi-ch commenced fromApril 1, 1984, where sales targets for 1988/89 were about the same as thecurrent targets for 1990/91. The slow down in the sales growth in 1983/84 and1984/85 was largely due to (a) sluggishness in economic growth; (b) resourceconstraints for investments in supply facilities; and (c) delays in projectimplementation. The resource constraint has particularly affected the shorterlead time components ef the investment program viz. transmission and distribu-tion projects. As r. result of the ongoing program of construction of generat-ing plants, capacity addition of about 1,800 MW will take place in Java duringthe three year per.od 1987 to 1989. Matching expansion of transmission, sub-stations and distribution facilities is a high priority task to derive maximumbenefit from the investment program.

2.09 The investment program formulated by PLN is the least cost expansionprogram for achieving the planned objectives. Annexes 3 and 4 give thegeneration expansion plans for Java and outside Java for the period 1985/86 to1993/94. Annexes 5 and 6 give the investment requirements for Indonesia andJava respectively.

2.10 In order to ensure soundness of the development program, the Bankhas the following agreements with the GOI and PLN, which will be continued inthe proposed loan:

(a) PLN will prepare, review with the Bank and implement a customerconnection program each year;

(b) PLN and GOI will review annually with the Bank PLN's developmentplan and investment budget to enable the Bank to express its viewson the priorities and the balance among the generation, transmissionand di6tribution investments; and

(c) The Gavernment will provide sufficient funds to finance PLN'scapital expenditures as reviewed and agreed with the Bank.

III. THE BENEFICIARY

3.01 The borrower of the proposed loan would be the Government ofIndonesia (GOI) and the beneficiary would be PLN, the sole government-ownednational power utility in Indonesia. PLN's organization was described inparas. 1.07 and 1.08. Annex 7 gives the organization charts for MME and PLN.

Institutional Development

3.02 Over the past years PLN has grown impressively from a department ofa ministry to become one of the largest utilities in the country. Since1977/78, PLN has connected new consumers at an average annual rate of abouthalf a million per year, increasing from about 350,000 in 1978/79 to about800,000 in 1985/86. Its sales increased at an average rate of about 17.4% forthe period 1977/78 to 1985/86, from about 3,500 GWh to 12,700 GWh. During

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this period, performance indicators such as the number of consumers peremployee and the energy sold per employee improved (Annex 8).

3.03 During the next five years, PLN is expected to continue to growrapidly (para. 2.07). The rapid expansion of supply facilities requireincreasingly complex technical and managerial tasks, for which PIN will needto develop rapidly in several areas.

3.04 Areas which need strengthening have been recognized and technicalassistanc- is either already underway or planned, in many cases with thesupport from the Bank. These programs are designed to support PLN's effort todeal with problems, which can be grouped into the following major areas, viz.(a) planning, (b) project formulation and management, (c) managementinformation systems, (d) efficiency improvements and (e) training.

(a) Planning

3.05 Through the years, PLN has gradually strengthened its technicalplanning activities. Also, PLN set up a corporate planning unit in 1981 and amarket survey unit in 1982 with Government agreeing to provide necessarypolicy guidelines and data to PLN for improving the quality of the surveyresults. Both these units need to be strengthened in coming years.Procedures for the formalization of the review and approval of the demandforecasts were agreed under the Fourteenth Power Project (Loan 2443-IND) andinstituted. The review of the investment program recently undertaken by theBank (para. 1.15) has identified further areas of improvement necessary whichare being followed up. Also, PLN prepares a rolling 10-year financialforecast and financing plan based on its long-term investment program, but theprocess has to be further refined.

3.06 In November 1984, for the first time PLN's Board issued a five-yearcorporate plan defining corporate objectives for all areas of PLN'sfunction. Such an effort has to be further developed to convert theobjectives into specific action plans for different areas and units.

(b) Project Management

3.07 In order to improve the project implementation monitoring, under theEighth Power Project (Loan 1708-IND), the Bank financed a Project ManagementAdvisory Services (PMAS) assignment, which specifically addressed all aspectsof project management. The reporting system recommended by PMAS is imple-mented for major projects to monitor the progress and to control the expendi-tures. PLN has also set up a Central Project Services Group in theDirectorate of Construction to monitor the progress of major projects andliaise with field organizations. These initiatives are being furtherdeveloped and consolidated.

3.08 It was agreed under the Fourteenth Power Project (Loan 2443-IND)that in the interest of integration of expertise and optimum use of scarceskilled manpower, PLN should unify project formulation, engineering, design,procurement, and construction monitoring under an Engineering Services Center(PPE). A decree to establish the center was issued on May 10, 1985. Its head

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has been selected and a decree for its staffing by the reorganization of theexisting Directorates of Planning and Construction, is expected to be issuedby the end of 1986. The proposed project provides for consulting services forthe development of the center (para. 4.21). This step will improve PLN'sability to design and implement projects and reduce its dependance onconsultants.

(c) Management Information Systems

3.09 Currently, PLN is developing information systems in the followingareas, some of which are being developed with Bank financing: (i) operation;(ii) project management (Eighth Power Project); (iii) finance and accounting(Eleventh Power Project); and (iv) personnel and manpower development (TwelfthPower Project). Steps are now being taken to evolve a general managementinformation system which will draw upon the subsystems. The local consultingfirm of PT Utama, assisted by the U.K. consultants, PA International arecurrently carrying out this work and is being financed from the ThirteenthPower Loan (2300-IND). In these efforts, local counterpart staff assignmentis emphasized in order to ensure the transfer of know-how and effective main-tenance of the system by local staff once the systems are installed foroperation.

(d) Efficiency Improvement

3.10 To monitor the efficiency improvement performance in the regions,PLN has introduced a system of targets and objectives for specific indicatorswhich include, among others, sales, system losses, consumers' connections,billing collections, etc. The Bank has given, and will continue to give, fullsupport to these initiatives. During the appraisal of the proposed project,sensitivity tests were performed to assess the financial implications ofefficiency improvements in PLN's operational and financial management(Annex 9). These tests show that one of the most important areas of effi-ciency improvement is the reduction in transmission and distribution losses,which after a steadily reducing trend for several years, increased in 1983/84(Annex 8). Loan 2214-IND provided funds for the study of the causes, theirseggregation, formulation of steps to monitor and correct the problems andprocurement of necessary equipment and materials. New Zealand consultants,Beca-Worley International, are currently assisting PLN in these steps.Intensive action has been initiated by PLN, based on these studies, to controland reduce losses, as a result of which Losses reduced from 20.8% in 1983/84to 19.6% in 1985/86. An action plan to control and further reduce the losseshas been prepared by PLN and reviewed by the Bank. PLN has agreed to theimplementation of this action plan in FY86/87 and thereafter. Also under thepresent project, PLI'i has prepared and agreed to implement an action plan forimproving efficiency and reducing costs of its operations by use of gasinstead of oil at selected locations, improved maintenance of thermal plants,fuel efficiency improvement, improved maintenance and rennovation of dieselplants, rennovation of old hydrostations, etc. (para. 4.22).

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(e) Training

3.11 As of Karch 31, 1986, PLU had about 51,OOO employees of whom about39,000 are employed on the permanent payroll. PLN has no difficulty inrecruiting staff at levels up to technical high school, but less than 3% ofthe staff have full university degrees. To address the manpower problems, PLNestablished a separate department for education and training. This depart-ment, known as Pusdiklat, plays an important supporting role and manages sixtraining centers with a staff of over 200, including about 50 trained instruc-tors. PLN has also established a subdirectorate for manpower planning anddevelopment.

3.12 The Bank has been supporting PLN's training activities and humanresources development efforts. Early IDA credits and Bank loans helped inestablishing five training centers. The Ninth Power Project (Loan 1872-IND)provided for an advanced training school for training in the operation ofthermal power plants at Suralaya, with a facsimile digital training simulatorwhich has been completed. Under the Tenth Power Project (Loan 1950-IND) onthe-job training was arranged in the country with the help of consultants inselected areas, e.g., civil works contract administration, power systemplanning and operation, and power market surveys. The Twelfth Power Project(Loan 2214-IND) includes a large training component to reorganize and enlargethe entire manpower development, training and personnel management functionsfor middle and lower level staff. It also provides for starting five moretraining centers, improving job performance evaluation systems and introducingin-house management training. Expatriate assistance involving about 30 man-years is well under way, with the assistance of Pacific Engineers andConstruction Company of Taiwan, which will provide a framework for futureeffort in this area.

3.13 Lack of trained staff is also a major constraint in PLN's accountingareas. PLN has made an effort to recruit qualified and experienced accoun-tants to fill more senior posts. PLN has a crash program of training inaccounting practices and procedures under an Asian Development Bank (ADB)loan. The consultancy assignment to improve PLN's accounting and budgetingsystems, financed by the Bank under Loan 2056-IND, includes an intensivetraining program for counterpart staff; this program is being implementedsuccessfully. PLN is also implementing a program for the training of seniorand middle level personnel in technical and financial areas, which issupported from bilateral assistance as well as the Bank's Twelfth Power Loan(2214-IND).

Accounting and Budgeting

3.14 PLN's present accounting system follows generally accepted prin-ciples and normal utility practices. But this system, which was originallyinstalled in the early 1970s, needs redesigning and restructuring because ithas become increasingly ineffective due to the increased complexity and volumeof accounting transactions. As a state company, PLN's budgets are subjectedto review by a supervisory board and are approved by the Government. PLN'sinternal procedures for budget preparation and monitoring actual expendituresare not very effective. Coordination among various departmental units and

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between regional offices is also weak. Under the Eleventh Power Project(Loan 2056-IND), funds have been provided for consultancy services to assistPLN in setting up a more appropriate accounting system, and to strengthenprocedures for budgetary control. The consultants (Pamintori in associationwith Coopers & Lybrand, Australia) completed the assignment in late 1985. PLNplans to implement the new systems under the next phase. The Bank willcontinue its support in these areas. The new accounting system will alsocover a management information system utilizing computer facilities foraccounting and financial reporting. In addition, PLN is to carry out severalstudies, supported by ADB financing. A study to improve PLN's inventorycontrol, which is currently being carried out by consultants, is expected tobe completed in December 1987. Another study to improve its propertyaccounting and cost accounting systems, and training of account staff is alsobeing initiated.

Billing and Collections

3.15 Bills are prepared on a monthly basis. Computer billing is utilizedat the computer center at the headquarters in Jakarta. Collection performanceis generally satisfactory. The receivable position of general consumeraccounts has been kept at about one and one-half months of the yearly billing.However, collections from some government users (including the Armed Forcesand local governments) have not been as prompt.

3.16 The Government has been aware of the unsatisfactory paymentperformance of government users. In 1983, the MME issued instructions jointlywith the Ministries of Finance, Defense, and Home Affairs to expedite paymentsby government users to PLN. Overdue government accounts receivables werereduced from over one year in 1981/82 to about five months of billing in1983/84. As a result of continued efforts by the concerned ministries andPLN, the overdue government accounts receivables were further reduced to abouttwo months (62 days) of billing in 1985/86, and are currently Less than twomonths (54 days) of billing. An existing covenant, which requires thatamounts owed to PLN by all government users in aggregate will not be overdueby more than two months of total yearly billings for such users, will continueunder the proposed loan.

Audit and InternaL Control

3.17 PLN's accounts are required by its charter to be audited byGovernment auditors. The audits are carried out following generally acceptedauditing practices and standards. The audit reports are acceptable to theBank. Earlier, PLN used to experience subst 2tial delays in completing theconsolidated accounts for audit. During the last three years, PLN has madespecial efforts to expedite the closing of all regional accounts; it is nowable to complete the consolidated accounts for audit six months after theclose of the fiscal year. P1N has also taken measures to train its regionalaccounting staff and has begun to prepare plans to computerize large districtsto expedite accounts processing. The FY84/85 audited accounts with report andthe unaudited accounts for FY85/86 were submitted to the Bank on time.

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3.18 PLN has an effective internal audit group which reports to thePresident Director for various special investigations, in addition to keepinggeneral and project accounting matters under review.

Insurance

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

IV. THE PROJECT

Project Objectives

4.01 The project supports several of the sector objectives. First, byensuring that the investments in transmission and distribution during the nextthree to four years proceed at the desired level, it would reduce the cost ofelectricity by optimizing the productivity of ongoing investments in genera-tion projects (para. 2.08). The extension of the network will enable PLN tosupply electricity to unelectrified areas to serve residential, commercial andindustrial consumers. In Java, the waiting lists of industrial consumersalone amount to about 500 MW. Extension of the PLN's supply will reduce thegrowth of uneconomic captive generation. Second, the project will be used asa vehicle for improving PLN's engineering capability by pi-viding technicalassistance for the development of the new Engineering Services Center,resulting in more efficient use of scarce engineer-ng talent. Third, theTesting and Research Center (LMK) of PLN will be equipped to play an expandedrole in the testing and certifying of indigenously produced equiprlent.Fourth, the project will further the objective of strengthening PLN's finan-cial position by ensuring continued attention to measures necessary to achievethis objective, including tariff change and efficiency improvements. Fifth,the project provides for technical assistance for furthering some of the effi-ciency improvement measures. Finally, the project supports the engineering ofthe proposed coal fired power plant at Paiton in East Java, which is theimportant next step in the energy diversification strategy.

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Project Description

4.02 The project comprises the following:

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

(b) Construction of 20 kV and 220/380 V distribution facilities inJakarta, Bogor, Tangerang and Bekasi areas (Jabotabek);

(c) Equipment for the Testing and Research Center (LMK) of PLN;

(d) Consulting services for:

(i) efficiency improvement measures;

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

(iii) development of the Engineering Services Center (PPE) in PLN.

4.03 In 1981, using funds from the Sixth Power Loan (1365-IND), BecaWorley International (BWI) of New Zealand reviewed the development require-ments for the transmission and distribution program till 1987. Their report,dated April 1982, identified additional requirements which have resulted inseveral projects financed by OECF, ADB, KfW, export credits, etc. PLN hascarried out further studies to define the total required program of transmis-sion and substation development in Java during the period 1986-90, to matchthe ongoing program of g erating capacity additions in the same period, whichamount to over 1,800 A review of the ongoing transmission projects withrespect to the needed program has identified the balance of requirements forJava, which are proposed for financing in this project.

4.04 The distribution component of the project covers the requirements ofthe expansion of distribution facilities in Jakarta, Bogor, Tangerang andBekasi (Jabotabek) areas up to the middle of 1990. The studies for theirrequirements were carried out by PLN, following up on the studies carried outby SOFRJ.EC of France in 1979/80, to identify requirements up to 1990.

4.05 These two components of the project are designed to ensure that thedevelopment of transmission and distribution facilities will remain in balancewith the growth of generation capacity in Java.

4.06 Most of the planning and initial design work connected with theproject has been carried out by PLN. However, to assist in the detaileddesign, contract coordination and constructien management of the transmissionand substation work, PLN has selected consultants (para. 4.26).

3/ Suralaya - 800 MW, Cirata - 500 MW, Gresik - 400 MW, Kamojang - 110 MW.

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Transmission and Substations

4.07 The scope of the transmission lines component of the project, interms of physical construction involved, is as follows:

Item East Java Central Java West Java Jabotabek Total

150 kV OH lines 25.0 80.5 53.0 15.0 173.5length in route km

70 kV OH lines - - 219.0 10.0 229.0length in route km

150 kV UC cables 10.0 - 39.0 49.0length in route km

4.08 The quantities of substation equipment covered by the project are asfollows:

Item Unit Quantity

150 kV and 70 kV transformers MVA 1,411150 kV and 70 kY switching bays for(a) Lines No. 76(b) Transformers No. 46(c) Bus couplers No. 14

20 kV switchgear units 393Substation buildings units 25

4.09 Annex 10 gives the complete list of transmission lines and sub-stations covered by the project.

4.10 Land Acquisition. In view of the difficulties experienced in thepast with the acquisition of land for substations and rights of way for thetransmission lines, advance action has been initiated for them in this proj-ect. Out of the 25 new substations proposed to be constructed, land isalready purchased for 10 locations. Out of the remaining fifteen locations,twelve are in West Java and Jakarta areas. It was agreed with PLN that thelocations will be selected and inventoried by December 1987 and Ehe landacquired no later than March 1988, except for the sites in Budikemuliaan andSetiabudi, which will be acquired no later than June 1988.

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4.11 For transmission lines in Central Java and East Java, surveys andinventories have been completed while for those in West Java and Jakartaareas, surveys will be completed by July 1987 ard inventories completed byOctober 1987. Land compensation will be completed for all lines by March1988. To accomplish this task, special task forces will be set up in theMajor Projects (Transmission) Group of PLN.

4.12 Transformer Relocation Program. To improve the utilization ofstepdown transformers of 150kV and 70 kV substations, included in the project,a comprehensive transformer relocation program is proposed. It was agreedwith PLN during negotiations that such a plan will be implemented to suit theproject implementation schedule.

4.13 Flexibility. Due to long lead times for procurement of transmissionlines and substation equipment, PLN has encountered difficulties in respondingquickly to requests from industrial consumers for supply of power in areasrequiring installation of new 150 kV or 70 kV substations. As a result,industries are obliged to purchase their own generating equipment, mostlydiesel plants, even though it may be uneconomic to do so (para. 1.11). Inorder to respond to such situations, it is proposed to provide flexibility inthis project to use materials procured under the project for meeting urgentneeds for power supply to consumers at locations which may not be covered bythe currently envisaged list of substations (Annex 10). Also, the proposalscovered by the project are derived on the basis of current expectation ofdemand growth in different areas in Java, which could change, requiring alter-ation to the physical components of lines and substations. PLN has alreadystandardized the transmission lines and substation designs which will permitsuch changes to be made without difficulty. The cost estimate providesphysical contingencies of 10% to permit increase in the quantities of mater-ials required to cover such variations. PLN has agreed to review annually,the plan for substations and transmission lines included in this project,starting December 31, 1987, to identify the changes necessary, and thereafterpresent them to the Bank to affect change in the list of proposed transmissionlines and substations in Java, with the consent of the Bank.

Distribution

4.14 Jaka5ta, Bogor, Tangerang and Bekasi (Jabotabek) cover an area ofabout 5,700 km and a population of over 10 million. The population ofJakarta City in 1985/86 was estimated to be 7.3 million and growing at about4.5% p.a. The percentage of electrified households was 58% in Jakarta, 24% inTangerang, 30% in Bogor, and 10% in Bekasi. In 1985/86, the electricity salesin this area accounted for about 36% of PLN's sales in the whole country.Also industrial and commercial consumers, amounting to over 200 MW of load,are on PLN's waiting list for supply in this area.

4.15 The Bank has been involved in the reinforcement and expansion of thedistribution system in this area from the early stages through Credits 167-INDand 334-IND and Loan 1259-IND, which are successfully completed. Also, Loans2056-IND and 2443-IND cover the ongoing expansion of the network. The formerwill be completed by the middle of 1987 and the latter by the middle of1988. The project includes the estimated requirements for the extension of

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the distribution facilities in this area for the two year period from mid-1988to mid-1990.

4.16 The estimated quantities of materials required for the project areshown in the table below:

JakartaUnit Tangerang Bogor Bekasi Total

MV overhead lines km 170 32 13 215MV cables km 1,024 119 48 1,191LV lines km 2,030 290 97 2,417Substations(a) Pole mounted No. 227 50 18 295(b) Others No. 1,041 121 48 1,210Service entrance No. 190,334 50,755 12,690 253,779

4.17 There were considerable delays in the procurement cycle in theEleventh Power Project (Loan 2056-IND), and the Fourteenth Power Project(Loan 2443-IND), which has resulted in delays in implementation and disburse-ments. In order to avoid such delays both GOI and PLN have agreed to takespecial steps to complete the procurement process for this project expedi-tiously. It is agreed that the contracts for distribution equipment will befinalized by August 1987, for transmission lines by September 1987 and forsubstations and underground cables by October 1987.

Testing and Research Center

4.18 The Testing and Research Center (LMK) of PLN is responsible for thetesting of electrical power equipment including certification of localproducts and assistance to the power equipment industry, as well as appliedresearch on problems relevant to PLN's operations. Its current facilitiesinclude Electrical Laboratory, Fuel, Gas and Chemical Laboratory, the HydroPower Laboratory, the Electrical Power System Reseaech Unit and the SurveyUnit. It has a total staff of about 200 engineers and technicians.

4.19 In 1985, the French Covernment and EDF provided grant funds toprepare a master plan for the LMK's development for the next 15 years. EDFconnenced this work in May 1985 and has prepared interim reports defining theneeds in a phased manner for three 5-year periods. The final report isexpected by early 1987. The project provides for a part of the funds neededfor the first five-year period, primarily for the purchase of additionalequipment for the existing laboratories, to enable them to augment andmodernize the test facilities. For the establishment of new laboratories suchas short circuit testing laboratories, pollution study laboratory, hydroresearch laboratory and thermal laboratory, further detailed studies will becarried out, with bilzteral assistance.

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Consulting Services

4.20 Funds for commencing the design and detailed engineering for athermal power plant in East Java (at Paiton) were provided in Loan 2056-INDand Loan 2300-IND. Sargent & Lundy of the USA and Integ of Canada, inassociation with the Local consulting firm of PT Citaconas, have beenappointed following Bank guidelines. They completed the design work andspecifications for turbine generators, steam generators and othe- majorcomponents in early 1986. However due to slower than expected g iwth indemand and resource constraints, the tenders have not been issu-d. It isexpected that the issue of tenders will be authorized by early 1987.Therefore, extension of their services is now required for procurement, postcontract engineering and contracts coordination work. The project providesfor the continuation of the work involved for tender evaluation and post-contract engineering for the period of about one year, involving about 250 manmonths of expatriate effort.

4.21 As agreed under Loan 2443-IND, PLN has established an EngineeringServices Center (para. 3.08). It is proposed to employ services ot aconsulting engineering firm to help in the development of the cent_r. Theproject provides for such services amounting to about 500 man-months spreadover a period of about three years. Terms of reference for the services andshort list of consultants were agreed with the Bank and proposals receivedfrom them are under evaluation. The appointment of consultants is expected byMarch 31, 1987.

4.22 The project also provides for technical assistance to enable PLN toformulate in detail and carry out certain efficiency improvement measures(para. 1.17 and 3.10), which include: (a) renovation of hydro-plants atPlengan, Ketenger, Lamajan and Jelok in Java; (b) improvement in the avail-ability factor of Suralaya coal fired thermal plant; (c) improvement of thedata base for distribution systems, including detailed mapping; (d) train-ing. The assistance may be in the form of individual experts or consultingfirms to be selected in accordance with the Bank's guidelines. These willamount to about 150 man-months of consultant services and will be executed in1987 and 1988.

Cost Estimate

4.23 Annex 11, Tables I and 2 give the detailed cost estimate for thetransmission lines, substations &nd Cistribution components of the project.All costs are based on December 1986 prices; physical contingencies are at 10lfor transmission and substations (par&. 4.13) and at 5S for distribution. Theprice contingencies. calculated on the basis of the following inflationfactors, amount to 10.8Z of the base cost plus physical contingencies:

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Year 1987 1988 1989 1990 1991and after

Foreign 3.0 1.0 1.0 1.0 3.5Local 10.0 5.0 3.5 3.5 3.5

4.24 Table 4.1 summarizes the project cost estimate. The costs areinclusive of taxes and duties, estimated to be US$9.7 million equivalent. Thetotal project cost, net of taxes, is US$356.5 million equivalent.

Table 4.1: STNTMARY PROJECT COST ESTIKATE

Item Local Foreign Total Local Foreign Total Foreign cost- US$ million -- -Rp billion ---- as Z of total

1. Transmission linesand substations 74.6 128.6 203.2 123.1 212.2 335.3 63.3

2. Distribution 17.5 62.1 79.6 28.9 102.4 131.3 78.03. Testing & Research Center 1.0 5.0 6.0 1.6 8.3 9.9 83.34. Consulting ,ervices for:

Paiton 1.0 4.0 5.0 1.7 6.6 8.3 80.0Engineering Center 2.0 8.0 10.0 3.3 13.2 16.5 80.0Efficiency improvement 1.0 2.0 3.0 1.6 3.3 4.9 66.7

Total Base Cost 97.1 209.7 306.8 160.2 346.0 506.2 68.3

5. Physical contingencies1OZ for (1) and5Z for (3) 7.4 16.2 23.6 12.2 26.7 38.9 68.6

6. Price contingencies 21.5 14.3 35.8 35.5 23.6 59.1 39.9

Total Project Cost 126.0 240.2 366.2 207.9 396.3 604.2 65.6

7. Interest duringconstruction - 20.0 20.0 - 33.0 33.0 100.0

8. Total Financingrequired 126.0 260.2 386.2 207.9 429.3 637.2 67.4

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Financing Plan

4.25 The financing plan for the project would be as shown below. It isproposed to finance about 87Z of the foreign cost of the project from theproposed loan amounting to about 58.5% of the project cost, including theinterest during construction. GOI and PLN are in the process of finalizingarrangements for financial assistance from the Government of the FederalRepublic of Germany to cover the foreign exchange cost of goods and servicesrequired for the construction of transmission lines and substations in CentralJava. The proceeds of the Bank loan, which would be made to COI, would beonlent to PLN under a subsidiary loan agreement, the signing of which will bea condition of loan effectiveness. The onlending rate will be equal to theBank's standard variable interest rate plus no less than a quarter percent foradministration charges. The foreign exchange risk would be borne by GOI. Ithas been agreed that GOI would make available adequate funds for the projectand for PLN's overall agreed investment program.

US$ MillionSource Local Foreign Total Z

Cofinancing from Germany - 14.2 14.2 3.7IBRD - 226.0 226.0 58.5GOI/PLN 126.0 20.0 /a 146.0 37.8

Total 126.0 260.2 386.2 100.0

/a Interest during construction.

Engineering and Construction

4.26 PLN carried out the feasibility studies for the transmission andsubstation component of this project. It has also completed most of the pre-liminary survey and design work and prepared specifications and procurementdocuments for them. Consultants have been selected for assisting PLN intender evaluation, contract negotiations, post contract engineering work andconstruction management of the project. The total work is divided betweenthree local consulting firms, each assisted by a foreign consultant, whichare, PT Citaconas in association with Ewbank Preece (UK) for West Java; PTIndra Karya in association with Fichtner (W. Germany) for Central Java; and PTEncona in association with WJEC (Japan) for East Java. These arrangementshave been accepted by the Bank and the work is being financed under Loan2443-IND.

4.27 The engineering and construction of the distribution component ofthe project is being carried out by PLN's own distribution staff. The tenderdocuments for distribution materials have been finalized and bids have been

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invited. The staff in the Jabotabek area is already implementing the ongoingprogram of the expansion of the distribution network (Loan 2056-IND) and issufficiently experienced for the proposed program. All procurement wil' becentrally carried out by PLN's staff at the head office.

Procurement

4.27 Except for concrete poles required for distribution which will beprocured by local competitive bidding, all equipment and related servicesfinanced under the proposed Bank loan shall be procured by internationalcompetitive bidding (ICB), in accordance with the Bank's procurement guide-lines. Qualifying domestic manufacturers would be eligible for a preferencein bid evaluation of 15% or the import duty, whichever is lower. The Bankfinanced items will include (a) transmission towers, conductors, insulators,and accessories; (b) transformers; (c) 150 kV cables; (d) 150 kV, 70 kV and 20kV switchgear, control cables and accessories; (e) substation equipment;(f) distribition materials including 20kV and 400 V cables, distributiontransformers, circuit breakers and meters; (g) concrete poles; and(h) Consulting Services. The construction of the transmission and distribu-tion networks financed by GOIIPLN funds will be carried out by following localcompetitive bidding procedures in accordance with the Government guidelines,which are acceptable to the Bank. Consultants will be engaged in accordancewith the Bank guidelines. Table 4.2 summarizes the procurement arrangements.

Table 4.2: PROCUREMENT ARRANGEMENTS

Procurement MethodTotal

IGB LCB Other N.A. cost

Transmission, substations 204.0 93.0 14.2/a 37.0/b 348.2and distribution (204.0) (8.0) (212.0)

Technical Assistance - - 18.0 - 18.0(14.0) (14.0)

204.0 93.0 32.2 37.0 366.2(204.0) (8.0) (14.0) (226.0)

/a Cofinancing from the Federal Republic of Germany.Th For land acquisition, taxes, duties, administration and o-zerheads.

Note: Figures in parenthesis indicate financing from the proposed Bank loan.

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4.29 All bidding packages for goods financed by the Bank and estimated tocost over US$1,000,000 equivalent would be subject to the Bank's prior reviewof procurement documents, which covers all the foreseen centracts.

Implementation Schedule

4.30 Annex 12 gives the implementation schedule for the project. Theconstruction of the transmission lines and substation is expected to besubstantially completed by the end of 1990 and the distribution equipment isplanned to be installed by the middle of 1990. The project implementation isexpected to be completed in all respects by December 31, 1991.

Disbursement

4.31 The Bank loan woulu be disbursed against approved contracts and willcover: (a) 100% of foreign expenditures for directly imported equipment andmaterials; (b) 100% of ex-factory expenditures for locally manufactured items;(c) 70% of local expenditures for other items procured locally (ex-shelf);(d) 80% of local expenditures (ex-factory cost) for concrete poles; and(e) 80Z of local expenditures for the services of local consultants and 1OOZof foreign expenditures for the services of other consultants. No disburse-ments will be made for expenditures prior to the loan signing. To the extentpracticable, withdrawal applications will be aggregated in the amount ofUS$100,000 or more prior to submission to the Bank.

4.32 Annex 13 gives the disbursement schedule for the proposed Bankloan. The disbursements against this loan are expected to be faster than theregional profile in the third and the fourth year because of the advancedstate of preparation of the project and also because the Bank loan would bedisbursed against procurement of goods and services only.

Ecology

4.33 Transmission and distribution projects will be designed and carriedout in accordance with the current technological practices and will causeminimum disturbance to the environment. Also, PLN will coordinate the routingof the lines and the land acquisition with local authorities to reduce theiradverse impact. No environmental hazards are foreseen.

V. FINANCIAL ANALYSIS

Past Results

5.01 When PLN was established, no accounting system was in operation, andaccounts were not properly recorded. The Bank's first lending operation(Credit 165-IND, 1969) financed consultancy services to assist PLN in settingup an accounting system. The first balance sheet and related statementsrevealed that PLN had been incurring losses. Over the years, PLN has advancedconsiderably from the near chaotic conditions in the late 1960s to a reason-ably sound organization in the 1980s. However, despite the growth in PLN'soperation, its financial results in recent years have been uneven. Highlights

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of the operations are given below in Table 5.1. Historical financialstatements are given in Annex 14.

Table 5.1: PLN OPERATING RESULTS FY79180-FY84/85

1979/ 1980/ 1981/ 19821 19831 1984/Fiscal year 80 81 82 83 84 85

Energy sales (CWh) 5,340 6,523 7,845 9,101 10,000 11,039Operating revenues (Rp bln) 156 284 356 535 787 1,111Operating expenses (Rp bln) 178 258 375 571 800 1,119Operating income (Rp bln) (22) 26 (19) (36) (13) (8)Average revenue (RpIkWh) 27.3 41.4 43.3 56.6 76.0 97.8Net income (Rp bln) (26) 20 (20) (41) (32) (46)Operating ratio (X) 114 91 105 107 102 101Rate of return (S) (3.7) 3.5 (1.9) (2.9) (0.9) (0.4)Self-financing ratio (Z) 20 28 30 29 22 17

lote: (1) Assets are revalued from PY79/80 onwards in accordance with GovernmentRegulation No. 45/1986 dated October 2, 1986 (para. 5.29).

(2) Self-financing ratio computed on a three-year average (current plus twoprevious).

5.02 During the period of FY79/80 through FY84/85, PLN's operatingrevenues and expenses increased at about the same rate averaging about 45Xp.a. The increase in expenses was mainly due to the rapid rise in the fuelprices during this period. Although PLN's energy sales increased by about 17%p.a. and the average tariff increased by nearly 3.6 times over the sameperiod, the increases in operating revenues were just enough by 1984 to meetthe increases in its costs of operation, resulting from fuel cost increases aswell as inflation and depreciation.

5.03 P1N's operating performance showed an improving trend in FY84/85 asa result of the various measures it initiated to improve its operational effi-ciency (para. 3.10); it was able to meet the indicative targets of the self-financing ratio, as projected under the Fourteenth Power Project (Loan 2443-IND). This was mainly because of (i) high percentages of consumers' contribu-tions and depreciation in its internal sources, and (ii) lower level ofrealized capital expenditures than originally projected.

Present Position

5.04 PLN's selected comparative financial indicators for FY85/86 andFY86/87 are given in Table 5.2, and detailed financial statements are includedin Annex 14. The data for FY85/86 is based on unaudited financial statements,and that for FY86/87 is based on PLN's estimates.

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Table 5.2: PLN'S SELECTED COMPARATIVE FINANCIAL INDICATORS

Fiscal year 1985/86 1986/87(Actual) /a (Estimate)

Energy sales (GWh) 12,706 14,694Average tariff (Rp/kWh) 96.6 95.8Operating income (Rp billion) /b (5) 20Net income (Rp billion) (51) (122)Rate of return (X) /c (0.2) 0.5Operating ratio (%) 100 99Debt service coverage (times) 1.4 1.8Current ratio (times) 2.1 2.3Debt as Z debt plus equity /d 36 41Self-financing ratio (X) /e 20.3 15.4

/a Unaudited.7b After depreciation on revalued fixed assets in operation.Tc On average of net revalued fixed assets in operation less revalued con-

sumers' contributions./d Including consumers' contribution but excluding revaluation surplus.7e Three-year moving average (current plus two previous years).

5.05 PLN'S unaudited financial operating results for FY85/86 show a con-tinuation of the improving trend in its operating performance, which wasobserved in FY84/85 (para. 5.03). The estimated outcome for FY86/87 indicatesfurther improvement in that year. In July 1986, the Government reduced theprices of industrial fuel oils (diesel, and residual- fuel oil) by 10% andsimultaneously reduced the electricity tariff by 6% for industrialconsumers. This measure had an impact of improving PLN's operating resultssince the reduction in operating costs as a result of decreases in fuel priceswas higher than the loss of revenue due to reduced rates. PLN's rate ofreturn (ROR) on net revalued assets is estimated to be about 0.5% in FY86/87compared to -0.2% in FY85/86 and -0.9Z in FY83/84. The self-financing ratiosfor FY86187 would, however, be at a level of about 15%, compared to 202 inFY85/86 and 22% in FY83/84. This decline is mainly because debt servicepayments would absorb a larger share of the internally generated funds asrepayments on some of the on-lent foreign loans have now started.

5.06 Despite noticeable improvement in its operating performance duringthe last 2-3 years (paras. 5.03 and 5.05), PLN is unable to satisfy therevenue covenant adopted under the Fourteenth Power Project (Loan 2443-IND) in1984, which requires PLN to achieve an ROR of not less than 6% in FY85/86, andannual RORs of not less than 8% in the fiscal years tnereafter. For PLN tohave achieved the covenanted RORs for FY85/86 and FY86/87, tariffs would haveto have been increased by about 13% at the beginning of FY85/86, and by about5% in FY86/87. The Government, however, did not permit any tariff increase,as it believed that a tariff increase would have reduced the pressure on PLN

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to improve its efficiency. The Government also considered that PLN'sfinancial performance needed to be evaluated in a broader context because oftbe inherent differences among its regional operations.

Regional Operations

5.07 When PLN's operations are separated into Java and outside Javaoperations, the contrast between the results of the two operations isstriking. This is illustrated in Table 5.3.

Table 5.3: SUMMARY OF PLN'S OPERATING RESULTSFY85/86 AND FY86/87

(Rp billion)

FY85/86 /a FY86/87 /bOutside Outside

Java Java Indonesia Java Java Indonesia

Operating revenues 981 282 1,263 1,135 319 1,454Operating expenses 882 386 1,268 955 479 1,434Operating income 99 (104) (5) 180 (160) 20Rate of return (Z) 4.9 (13.7) (0.2) 6.7 (15.0) 0.5

/a Unaudited.7T PLN estimate.

5.08 While in FY85/86, PLN incurred a huge loss in its outside Javaoperations, its Java operations actually generated a net operating profit ofRp 99 billion with an estimated ROR of about 4.9Z. For FY86/87, PLN's operat-ing losses in its outside Java operations are estimated to be Rp 160 billionor about 50% higher than the level in FY85/86, but for its Java operations,the net operating profit is expected to increase to about Rp 180 billion withan ROR of about 6.7%.

5.09 The main reason for this vastly different performance between Javaand outside Java operations is that, under a uniform national tariff system,the electricity supply in Java is through the interconnected grid and withlarger plants and, therefore, at a lower cost compared with outside Java,where expensive diesel generation is the main source of electricity supply.Electricity sales outside Java account for only about 20% of PLN's totalsales, but the operating costs account for over 30% of PLN's total operatingcosts. Tnis disparity in PLN's regional financial operating performance isexpected to continue in the next few years, when more economical and energyefficient thermal and hydro plants are connected to the Java grid.

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Performance Monitoring

5.10 The Government, PLN and the Bank have reviewed jointly whether therevenue covenant currently applicable to PLN (para. 5.06), is appropriate forPLN's operations as a whole and whether PLN realistically can be expected toachieve the financial objectives underlying the covenant.

5.11 PLN's operations in Java, which account for about 80% of its totalenergy sales, are profitable (para. 5.08). These operations, which includelarge central power stations which supply electricity through an intercon-nected grid sy_tem, are at a scale which is reaching a level comparable to,and have conditions which are similar to, those prevailing in other largeutilities in the region. While PLN carries out at the Government's direction,both inside and outside Java, a variety of socially-oriented operations suchas its rural electrification programs which are not of a commercial nature,their sLare of and financial impact on the operations in Java is relativelysmall compared to that in the operations outside Java. By most standards,PLN's operations in Java are considered well-established and sufficiently com-mercially-oriented to warrant their performance to be measured by normalutility yardsticks.

5.12 PLN's operations outside Java differ substantially from those inJava, and are highly unprofitable (paras. 5.08 and 5.09). These operations,which are small-scale and are dispersed over a large number of islands,encompass over 600 separate power generation and supply networks. As they arebased largely on diesel, these networks have a high cost of energy genera-tion. Moreover, with isolated load centerr and limited demand, transmissionand distribution losses are much higher than in Java, and the overall energysupply costs are high. Since socially-oriented activities constitute theirmajor portion, PLN's operations outside Java remain largely noncommercial innature and have a significant adverse impact on PLN's overall finances. PLNis, however, not able to set a tariff outside Java which is higher than inJava because Government considers a country-wide uniform tariff to bedesirable to meet social and regional development objectives. The Governmentand PLN, however, recognize that over a period of time these operations shouldbecome self-sustaining and, eventually profitable.

5.13 As a means for improving its overall financial performance, PLNproposes to implement certain measures to enhance the efficiency of its opera-tions, both in Java and outside Java (para. 3.10). These improvements are,however, not expected to alter significantly in the medium term the opera-tional differences between the two types of operations. In view of thesedifferences, it is proposed to adopt separate financial performance targetsfor the two operations, and to modify the requirements of the existing revenuecovenant as follows:

(a) PLN shall from time to time take all such measures as shall berequired to realize for its Java operations, no later than in itsfiscal year 1988/89 and in each of its fiscal years thereafter anannual rate of return of not less than eight percent (8U); and

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(b) PLN shall from time to time take all such measures as shall berequired with respect to its non-Java operations to produce for eachof its fiscal years after its fiscal year ending on March 31, 1990,total revenues equivalent to not less than the sum of non-Javaoperations': (i) total operating expenses; and (ii) the amount bywhich debt service requirements exceed the provision for depre-ciation.

Agreements with the Government and PLN have been reached that under theproposed loan the existing revenue covenant for PLN as a whole will bereplaced by an ROR covenant for PLN's Java operations, and a break-evencovenant for PLN's non-Java operations, as outlined above.

5.14 In addition to the efficiency improvement measures proposed to beundertaken for PLN's operations in Java and outside Java (para. 3.10), tariffincreases as well as appropriate adjustments in the tariff structure would benecessary for PLN to achieve the proposed financial performance targets forthese operations (para. 5.13). The timing and the size of the tariff adjust-ments required will be determined on the basis of the review of the adequacyof its tariffs, which PLN is currently required to carry out before December31 of each year (para. 5.24).

5.15 Accounting for PLN's Java and non-Java operations is separate exceptfor overhead expenses and debt service payments which are, at present, diffi-cult to separate except on a notional basis. It was agreed with PLN thatinitially the overhead expenses and debt service payments could be allocatedon the basis of unit sales of energy, and that PLN will pursue the separationof debt service payments on the basis of actual debt and related servicepayments. For monitoring the performance under the proposed revenuecovenants, PLN has agreed to provide the Bank with separated historical finan-cial results (beginning with its fiscal year 1986/87) and forecasts on a proforma basis, but not separate audited financial statements. This arrangementis considered satisfactory.

Tariffs

5.16 PLN's present tariff schedules comprise 17 consumer categories. Forall except the smallest domestic class, two-part charges are applied, and forindustrial and large commercial consumers time-of-day pricing is in effect.Provision can be made for surcharges to cover cost increases. Variation ofsurcharges requires the Minister's approval. Alteration of the basic rate,however, requires Presidential approval. The present tariff structure and thehistory of past tariff increases are given in Annex 16. The average level ofthe current tariff was about 15X lower than the estimated average long runincremental cost of supply, prior to devaluation in September 1986; thedevaluation would increase this gap. Appropriate tariff adjustments areenvisaged under the proposed project (paras. 5.14 and 5.25).

5.17 The present basic rate schedules were introduced by PLN in May 1980to structure its electricity tariffs according to the Long Run Marginal Cost(LRMC) pricing principles, as agreed with the Bank under the Seventh PowerProject (Loan 1513-IND). However, from 1980 to 1983, all tariff increases

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were effected entirely thr9qgh changes in the energy charges. The failure toadjust the demand charges -' had distorted the tariff structure in two ways.The first relates to the allocation of electricity charges between fixedcharges (demand charge) and variable charges (energy charge). The Governmentand PLN have already moved toward. their reduction in 1984 and it is expectedthat further progress will be made in the coming years. The second relates tothe issue arising out of the cross subsidy between different categories ofconsumers, e.g. commercial and affluent residential consumers compensating forlow tariff for small residential consumers. While no major changes in thelatter policies are foreseen, the Bank has advocated reduction in suchdistortions.

5.18 Under the Fourteenth Power Project, an agreement was reached thatPLN would periodically review its LRMC and tariffs, and discuss the resultswith GOI and the Bank. This convenant will continue under the proposed loan.

Taxes

5.19 In accordance with the prevailing tax legislation effective since1984, PLN is subject to a 10% Value Added Tax (VAT) and to corporate incometax. The Government currently bears the VAT on the foreign contracts, and PLNbears it on the local contracts; this policy is assumed to continue throughoutthe forecast period. With respect to corporate income tax, the currentIndonesian tax code permits the use of accelerated depreciation of assets inoperation, instead of the straight-line method used by PLN in its financialaccounting. As a result, PLN does not expect to pay any corporate income taxfor its fiscal year 1986/87, and during the forecast period. In calculatingthe rate of return, however, any income tax payments will be taken intoaccount.

Financing Policy

5.20 During the past five years, PLN's tariff adjustments have beeneffected mainly to offset the increases in fuel costs resulting from oil priceincreases (Annex 17). With negligible or negative net income, PLN's majorsources of internal funds have been depreciation and consumers' contribu-tions. The Government, in the past, provided PLN with substantial fundingmainly in the form of equity. Although PLN is authorized by its charter toborrow from local and foreign lenders and to issue its own obligations, theGovernment in practice secures all foreign borrowings on behalf of PLN andbears all foreign exchange risk. Due to growing budgetary constraints facingthe Government, foreign borrowings through on-lending arrangements have becomeincreasingly important. In addition, the Government is allowing PLN to borrow

4/ "Energy charge" is the charge per kWh based on metered consumption ofelectricity. "Demand charge" is the fixed component of a customer's billwhich is designed to recover the "capacity costs" (e.g. depreciation,finance charges) of the capacity the utility must keep to meet peakdemands.

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from government-owned banks ag,subsidized interest rates to finance its localcost investment expenditures-

5.21 PLN's financing plan for the five-year period FY87/88-FY91/92 ispresented, and compared to the previous five-year period FY82/83-FY86/87, inTable 5.4.

Table 5.4: COMPARISON OF FINANCING PLANS

FY82/83 - FY86/87 FY87/88 - FY91/92Billion Rp z Billion Rp X

Capital expenditure 5,712 100.00 17,810 100.0

Financed by:

Net internal sources /a 1,067 18.7 3,423 19.2Borrowings 2,624 45.9 11,045 62.0Government contribution 2,021 35.4 3,342 18.8

Total 5,712 100.0 17,810 100.0

/a Includes consumer's contributions and deposits.

5.22 In the projected financing plan for the five-year period FY87/88-FY91/92, PLN estimates the Government's contribution to be about Rp 3,342 bil-lion or about 19Z, compared to about 35Z for the previous five-year period.PLN's own contribution from its internal sources is projected to remain atabout the same level (19%). The financing gap is proposed to be filled bysubstantially increasing both local and foreign borrowings which would coverabout 62% of the financing requirements.

Future Performance

5.23 PLN's forecast financial performance for the period FY86/87 throughFY92/93, and related income statements for its operation in Java and outsideJava are summarized in Table 5.5. Detailed projections are given ir. Annex 14,with notes and assumptions given in Annex 15.

5/ The domestic capital market has been used by companies only to a verysmall extent to raise finance through the issuance of bonds. These bondsare without tax exemption status and are not very attractive in themarket. Tendering of PLN's bonds in the local market is not likely to bea major source of its local financing in the near future.

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Table 5.5: PLN'S FINANCIAL PERFORMANCE FY85/86-FY92/93

1985/ 1986/ 1987/ 1988/ 1989/ 1990/ 1991/ 1992/Fiscal year 86 87 88 89 90 91 92 93

Average tariff (Rp/kWh)PIZ total 96.6 95.8 95.4 118.8 126.9 139.3 139.3 139.3- Increase (x) (1.2) (0.8) (0.4) 24.5 6.8 9.7 0.0 0.0Java 95.0 94.2 93.8 116.8 124.7 136.8 136.8 136.8- Increase (2) (1.0) (0.8) (0.4) 24.5 6.8 9.7 0.0 0.0Outside Java 102.9 102.2 101.8 126.7 135.3 148.5 148.5 148.5- Increase (2) (2.1) (0.7) (0.4) 24.5 6.8 9.7 0.0 0.0

Energy sales (CWh)PLN total 12,706 14,694 16,967 19,430 21,983 24,656 27,560 30,762Java 10,052 11,661 13,477 15,438 17,421 19,450 21,619 24,029Outside Java 2,654 3,033 3,490 3,992 4,562 5,206 5,941 6,733

Operating revenues(Rp billion)PLN total 1,263 1,454 1,673 2,372 2,863 3,518 3,935 4,396Java 981 1,135 1,307 1,853 2,231 2,728 3,033 3,373Outside Java 282 319 366 519 632 790 902 1,023

Operating expenses(Rp billion)PLN total 1,268 1,434 1,695 1,999 2,301 2,568 2,899 3,296Java 882 955 1,183 1,426 1,621 1,778 2,028 2,284Outside Java 386 479 512 573 680 790 871 1,012

Operating income (Rp billion)PLN total (5) 20 (22) 373 562 950 1,036 1,100Java 99 180 124 427 610 950 1,005 1,089Outside Java (104) (160) (146) (54) (48) 0 31 11

Rate of return (Z) /bPLN total (0.2) 0.5 (0.4) 4.9 5.4 7.5 6.8 6.1Java 4.9 6.7 3.6 8.0 8.0 10.6 9.6 8.8Outside Java (13.7) (15.0) (8.9) (2.4) (1.8) 0.0 0.7 0.2

Ratios for PLNCurrent ratio (times) 2.1 2.3 2.0 1.6 1.6 1.7 1.7 1.8Debt/equity ratio (Z) /c 36/64 41/59 51/49 54/46 56/44 56144 56/44 55/45Self-financing ratio (i} /d 20 15 16 16 17 21 25 29Debt service coverage (times) 1.4 1.8 1.6 2.1 1.7 2.0 2.2 2.4

/a Actual (unaudited).7i On revalued rate base.7c Excluding revaluation surplus.71 Three-year moving average (current plus two previous years).

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5.24 Under the proposed revenue covenants, PLN will be required toachieve: (a) for its operations in Java, an annual rate of return of not Less8% by no later than FY88/89 and to maintain it at or above that level forfiscal years thereafter; and (b) for its operations outside Java, a break-evensituation by no later than FY90/91 (para. 5.13). In addition, PLN will, byDecember 31 of each year, review the adequacy of its tariffs and determine thetiming and quantum of tariff adjustments required to meet these objectives(para. 5.14). This covenant will be repeated under the proposed loan.

5.25 In the financial projections, the proposed revenue covenant for theoperations in Java would be met in FY88/89 when a tariff increase of about 25%is projected to be required at the beginning of that year. Smaller annualtariff increases would be required in later years of the forecast period, tomaintain the rate of return at a level above 8%. A tariff increase in 1987is, however, not considered practicable by Government, as it is trying tocontain inflation following the recent (September 1986) currency devaluation,and has declared its intention to maintain the prices of essential commoditiesas well as limit price increases by state enterprises to the extent possible.

5.26 The proposed revenue covenant for the operations outside Java isprojected to be met in FY90/91, with the tariff increases projected during theforecast period, along with the implementation of the action plan to improvethe efficiency of operations outside Java (paras. 5.13).

5.27 PLN's overall financial performance is also projected to improveover the forecast period, and its overall annual rates of return would be inthe 5-7Z range from FY88/89 onwards, compared to -0.2% in FY85/86. However,in spite of such significant improvements in its rate of return performance,PLN's self-financing ratios during the period FY87/88-FY90/91 are projected toremain in the 16-21% range, but would gradually improve to about 29% inFY92193. This is because PLN's annual capital expenditures (includinginterest during construction) in FY90/91 are expected to be nearly three timesthe level in FY85/86 when its self-financing ratio was about 20%. One of thereasons for the lack of improvement in the projected self-financing ratios isthe increase in the amount of investment in Rupiah terms because of theSeptember 1986 currency devaluation. The forecasts also assume that PLN would.inance an increasingly larger share of its investment program (55-70%)through local and foreign borrowings, and rely less on Government contribution(paras. 5.21 and 5.22). On this basis, debt as percentage of debt plus equity(excluding revaluation surplus) is expected to rise from about 41% in FY86/87to 56% in FY89/90 and stabilize thereafter; the projected debt service cover-age ratio is expected to be about 1.6 to 2.0 times for most of the years ofthe forecast period. This is still considered satisfactory. The existingcovenant binding PLN to a minimum 1.5 times debt service coverage willcontinue under the proposed loan to ensure PLN's prudent debt management.

5.28 The Government currently assumes the foreign exchange risk on theforeign debt borrowed to finance all public corporations and this policy isassumed to continue.

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Asset Revaluation

5.29 PLN's assets have teen revalued periodically. The last detailedrevaluation was done in FY79/80 as required of all public corporations underinstructions of tho Ministry of Finance. The re%aluation was recorded in thebooks and was accepted by the Bank. Fixed assets acquired after March 31,1979 are appraised at cost. Following the currency devaluation in September1986, Government hao issued Regulation No. 45/1986 dated October 2, 1986providing for the revaluation of assets of business and public corporations,acquired through September 12, 1986. The Regulation specifies the annualrevaluation factors for the years 1970 to 1986 for adjusting the asset valuesas of January 1, 1987, and corporations have untiL December 31, 1987 to com-plete this process. Since FLN's fixed assets are already revalued uptoMarch 31, 1979, under the Regulation it needs to carry out asset revaluationonly with respect to the period after that date. PLN has already prepared, ona preliminary basis, such a revaluation of its assets for the period FY79/80-FY86/87.

5.30 Under the Fourteenth Power Project (Loan 2443-IND), PLN agreed tocarry out annual revaluation of its operating assets, accumulated deprecia-tion, work in progress and consumers' contributions, for the purpose of therate of return calculation. Towards this end, PLN was required to prepare inconsultation with Government and the Bank a report on the methodology to beused for the annual revalmiation. During negotiations, PLN's proposed methodo-logy for asset revaulation for purposes of monitoring performance under therate ctf return covenant was reviewed. Under the proposed methodology, whichhad been reviewed and accepted by an interministerial committee of the Covern-ment, asset revaluation for the period FY79/80-FY86/87 would be based on therevaulation factors and guidelines contained in Government RegulationNo. 45/1986 (para. 5.29), and when an appropriate Covernment directive (sucha Covernment Regulation No. 45/1986) is unavailable, the assets would berevalued on the basis of the Electrical Installations Index issued byIndonesia's Central Bureau of Statistics. However, for purposes of financialprojections, weighted annual escalation rates for foreign and localcomponents, as mutually agreed between PLN and the Bank, would be used. Theproposed methodology is considered satisfactory, and financ il projectionshave been prepared on that basis.

VI. JUSTIFICATION

6.01 The justification of the project rests on the need to provide theBank's support to the electricity sector and PLN through a c-acial period ofits growth and development (para. 1.17). The technical assistance componentsof the project will help the institutional development. As discussed in para.2.08, PLN needs to expand its transmission and distribution facilities rapidlyas part of an overall expansion program, to satisfy large demand reflected inlong waiting lists and to er.tend supply to unelectrified areas. Thegenerating capacity in Java is expected to increase from the 1985/86 level of3,841 MW to about 6.100 MW in 1990/91 (Annex 3), mainly by the addition ofKamajang (110 MW,, Cirata (500 MW), Suralaya (800 MW), and Cresik (400 MW),which are already under implementation. The first three projects are financed

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in part by earlier Bank loans. Also, PLN has a list of over 500 KW of largeindustrial consumers who have already contracted for supply or with whomnegotiations for supply are in progress. Additionally, extensions of PLN'ssupply to hitherto unelectrified areas is proposed in such a way as tomaintain a balance between generation, transmission and distributionfacilities. To attain this objective the investment program for thetransmission and distribution facilities in Java up to 1990191 is planned asfollows (Annex 6):

1986/87 1987/88 1988/89 1989/90 1990/91 Total- --- -US$ milLions (1985 prices) -- … -

Transmission andsubstations 160.9 111.8 150.1 167.8 177.5 768.1

Distribution 286.7 299.5 319.8 347.2 376.1 1,629.3

Total 447.6 411.3 469.9 515.0 553.6 2,397.4

6.02 The proposed project includes those transmission and substationprojects which would be commissioned in the period 1988 to 1990 and are nototherwise financed. Other lending agencies involved in the financing of theprogram in Java include ADB, OECF, KfW, ODA, and loans from Belgium, France,Korea, Yugoslavia and the Federal Republic of Germany.

Transmission and Substations

6.03 Each of the proposed transmission and substation facilities includedin the project was justified on the basis of detailed technical study on thebasis of (a) supplying new loads; (b) avoiding overloading of existing facili-ties; or (c) improving system reliability. About 25 of the 46 substationsincluded in the project are at new locations (Annex 10), in each of which theproposed substation is a lower cost alternative than establishing or extendingdiesel generating facilities or extending distribution at 20 kV.

6.04 The proposed project along with the other ongoing projects willincrease the 150 kV and 70 kV substation capacity in Java from a total of6,000 MVA in 1985 to about 9,000 MVA in 1990, which is consistent with theprojected growth in the peak demand from about 2,200 KW to 4,000 MW.

Distribution

6.05 The distribution component of the project is justified for support-ing the augmentation and expansion of distribution facilities in the Jabotabekarea which provides nearly 36% of PLN's saLes (para. 4.14).

6.06 The number of consumers in Jakarta/Tengerang area grew from about293,000 in 1978/79 to about 1,080,000 in 1985/86 and the sales grew from

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1,510 GWh to 4,543 GWh in the same period, corresponding to growth rate of20.5Z and 17.0Z respectively. PLN's current targets are to connect 1.7 mil-lion consumers by 1990/91, a growth rate of about 9.0% p.a. The electrifica-tion ratio in the area is projected to increase from 55% to 65Z. The electri-fication ratios in Bogor and Bekasi which were 28% and 10% respectively in1985/86 will increase to 45% and 17% respectively in the same period. Thesetargets are reasonable and within the implementation capability of PLN.

Economic Rate of Return

6.07 In projects involving transmission and distribution networks whereit is difficult to assess the benefits attributable to the specific componentsof the expansion program and where the schemes represent an area and timeslice of a total development program, it is appropriate to evaluate theeconomic rate of return of the entire program rather than attempt separateeconomic analysis of the components. In the case of this project, theeconomic analysis of the PLN's investment program in Java for the period 1987-1991 of which the current project is a part, was carried out. Annex 19 setsout the details.

6.08 The economic analysis was carried out using the investment costs forgeneration, transmission and distribution facilities which would be put inplace during the period. The generating plants being added amount to about1,800 MW, mainly consisting of Cirata (500 MW), Suralaya (800 NW), Gresik (400NW), and Kamojang (110 MW). Investments on these plants incurred prior to1986/87 were included in the cost stream. The capital costs were shadowpriced by using a composite factor of 0.925, derived by using a shadow pricefactor of 0.8 for locally procured equipment and materials which account forabout 20% of the investments and a factor of 0.65 for unskilled labor whichconstitutes about 10% of the cost of the program. The balance of theinvestment costs were not shadow priced since PLN would import equipment andmaterials on which it pays no duties or taxes and the foreign exchange rate isequal to its shadow price of foreign exchange in Indonesia. The incrementaloperation and maintenance costs, including fuel, were derived from thecomputer simulation of system operation for the period under study. Fuelcosts have been valued at border prices, in September 1986.

6.09 The benefits are derived by using the estimated incremental salesthat would result from the proposed investments. In addition to revenues toPLN, consumer surplus has been quantified, on the basis of "willingness topay" of industrial and residential consumers.

6.10 The willingness to pay for industrial consumers was estimated by twomethods. Oner there is ample evidence that industrial consumers are willingto pay the cost of electricity provided by captive diesel plant (para. 1.11),which is in the range of Rp 100 to 175 per kWh, depending on the size of theinstallation and the usage pattern. Considering PLN's current average _evenueper KWh from industrial consumers of about Rp 74 per kWh, the willingness topay would be in the range of 1.3 to 2.3 times the current tariff. As analternative approach, a demand curve was constructed using availableinformation which showed that some autoproducers are willing to pay up tothree times PLN's tariff and over 50% of them are willing to pay over 1.5

- 36 -

times the cost of PLN's supply. Based on such a survey the consumers' surplusfor the industrial consumers was estimated at 1.7 times PLN's industrialtariff (Annex 18, Table-3). For the present analysis, a conservative factorof 1.5 is used.

6.11 Willingness to pay for residential consumers has been recentlyestimated in a Bank study entitled "Indonesia: Rural Electrification Reviec"(Report No. 6144-IND of November 1986). The study concludes that thewillingness to pay for presidential consumers is of the order of 2.0 to 2.5times the prevailing tariff, including the benefits for substitution ofkerosene for lighting and other uses of electricity such as increasedlighting, use of electrical appliances and television. On a conservativebasis a multiplier of 2.0 is used for the calculation of IERR.

6.12 Currently, PLN's average tariff to commercial consumers isrelatively high (about Rp 166 per KWh). Hence the willingness to pay isequated to current tariff. Similarly, for the Government users and publicsupply such as street lighting and mosques, the willingness to pay may be nohigher than the current tariff and the multiplier factor has been taken as1.0.

6.13 The IERR for the investment program in Java works out to 17X. Itwould reduce to 15Z if the investment costs increase by 10Z or if the saleswent down by 10%.

6.14 The FIRR using financial costs and revenue to PLN as benefits is8%. This shows that the tariff is still somewhat below the cost of supply.If tariff is increased by 20%, as is expected, the FIRR would go up to 11%.

Risks

6.14 The risk in the implementation of the transmission and substationprojects is primarily one of delay that may occur in the acquisition of landfor substations and right of way for the construction of overhead lines(para. 4.10). PLN has already initiated advance action to avoid suchdelays. A satisfactory action plan for completing the acquisition to suit theproject implementation schedule has also been agreed with PLN. There are nounusual risks in the implementation of the distribution component of theproject.

VII. AGREEMENTS REACHED AND RECOMMENDATIONS

Agreements Reached

7.01 During negotiations, the following items were discussed andagreements reached:

(1) With PLN

(a) PLN will carry out, in consultation with the Bank, an action planfor controlling and reducing transmission and distribution losses in1986/87 and thereafter (para. 3.10);

- 37 -

(b) PLN will carry out, in consultation with the Bank, an action planfor efficiency improvements for all its operations (para. 3.10)

(c) PLN will acquire land for substations and right-of-way fortransmission lines in accordance with a satisfactory schedule(para. 4.10 and 4.11);

(d) PLN will carry out a comprehensive transformer relocation programfor substations included in the project in accordance with animplementation schedule satifactory to the Bank (para. 4.12); and

(e) PLN will review annually the plan for transmission lines and sub-stations included in the project, commencing December 31, 1987, toidentify any changes necessary, and thereafter adjust the plan in amanner satisfactory to the Bank (para. 4.13);

(2) With GOI and PLN

(a) An agreed financial and operational program with measures includingsufficient tariff increases as well as appropriate adjustments inthe tariff structure will be implemented to enable PLN to achievefor its Java operations, a rate of return on revalued net assets ofnot less than 8%, no later than in its fiscal year 1988/89, and ineach of its fiscal years therafter (paras. 5.13 and 5.14); and

(b) An agreed financial and operational program with measures includingefficiency improvement and tariff increases as necessary will beimplemented to enable PLN to achieve breakeven in its operationsoutside Java by no later than in its fiscal year 1990/91(paras. 5.13 and 5.15).

Condition of Effectiveness

7.02 Signing of the subsidiary loan agreement between GOI and PLN (para.4.25) will be a condition of the effectiveness of the proposed loan.

Recommendations

7.03 With the above agreements and understanding, the proposed project issuitable for a loan of $226 million for a period of 20 years including a5-year grace period, at the standard variable interest rate, to the Republicof Indonesia.

- 38 -

ANNEX I

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Growth of PLN's Consumers and Sales

Fiscal Number of Connected Salesyear consumers load MVA in GWh

1975/76 1,140,745 1,426.4 2,804(5.0%) (13.0%) (14.7%)

1976/77 1,208,538 1,594.5 3,082(5.8%) (11.8%) (10.1Z)

1977/78 1,413,068 1,933.5 3,527(16.9%) (21.3%) (14.6%)

1978/79 1,784,001 2,448.5 4,270(26.2%) (26.6%) (21.6%)

1979/80 2,246,657 3,063.4 5,343(25.9Z) (25.1%) (24.6%)

1980/81 2,591,067 3,588.0 6,440(15.3%) (17.1%) (20.5Z)

1981/82 3,232,075 4,502.9 7,845(24.7Z) (25.5%) (21.8%)

1982/83 3,802,419 5,269.6 9,101(17.6%) (17.0%) (16.0%)

1983/84 4,406,077 6,126.7 10,008(15.9X) (16.3%) (10.0%)

1984/85 5,133,231 7,120.7 11,041(16.5%) (16.2%) (10.4%)

1985/86 5,953,293 8,149.9 12,706(16.0%) (14.5%) (15.1%)

Source: PLN.

- 39 -ANNEX 2

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Growth of Captive Power in Indonesia

Fiscal Connected Not connec-year to PLN ted to PLN Total Increase

(HvA) M- (%)

1974/75 622.7 1,447.6 2,070.3 18.0

1975176 688.4 1,598.8 2,287.2 10.4

1976/77 731.5 1,670.0 2,401.5 5.0

1977/78 807.1 1,767.1 2,574.2 7.0

1978179 848.8 1,860.9 2,709.7 5.0

1979/80 872.2 1,911.5 2,783.7 3.0

1980/81 878.3 1,930.6 2,808.9 0.9

1981/82 879.7 1,933.9 2,813.6 0.2

1982/83 900.8 2,073.1 2,973.9 5.7

1983/84 891.8 2,447.0 3,338.4 12.3

1984/85 977.0 2,606.4 3,583.4 7.3

1985/86 642.6 3,440.1 4,082.7 13.9

Note: The above excludes the following major installations:

Krakatau 400.0 MWP.T. INCO 165.0 MU"ASAHAN 603.0 MW'ARUN LNG 165.0 MWCALTEX Oil 152.5 MW

Source: PLN.

- 40 -

ANNEX 3

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Peak Load, Production and Installed CapacityJava System

1985/86 1986/87 1987/RB 1988/S9 1989/90 1990/91 1991/92 1992/93 1993/94

Sales (GWh) 10,052 11,661 13,477 15,438 17.421 19,450 21,619 24.029 26,672Rate of growth (X) 14.6 16.0 15.6 14.6 12.8 11.7 11.2 11.0 11.0T&D losses (%) 19.4 17.3 16.7 15.7 14.7 13.7 13.0 13.0 13.0Grosa generation (GWh) 13,366 15.050 17.381 19,689 21,965 24,222 26,634 29.600 32,856System peak load (MW) 2,245 2,527 2,918 3,306 3,688 4,067 4,472 4,970 5,517System load factor (Z) 68 68 68 68 68 68 68 68 6S

Installed Capacity (MW)

HydroBasis 535 531 531 531 531 531 531 531 531Madas Lintang 0 0 0 0 0 16 16 16 16Sagullng 350 700 700 700 700 700 700 700 700Mrica 0 0 0 0 180 180 180 180 180Sengguruh 0 0 0 29 29 29 29 29 29Kesauben 0 0 0 0 0 33 33 33 33Cirata 0 0 0 500 500 500 So0 500 1.000Jatigede 0 0 0 0 0 0 0 0 175Cilizan 0 0 0 0 0 10 10 10 10Tulungagung 0 0 0 0 0 30 30 30 30Kedungombo 0 0 0 0 0 23 23 23 23

Subtotal (MW) 881 1,231 1,231 1.760 .,940 2.052 2,052 2,052 2,552

Oil Fired SPPBasis 1.500 1,500 1,450 1.450 1,400 1,400 1.400 1,400 1.400Gresik #3-4 0 200 400 400 400 400 400 400 400

Subtotal 1,500 1,700 1,850 1.850 1,800 1,800 1.800 118(0 1,R00

Coal Fired SPPSuralaya #1-6 800 B00 800 1,200 1,600 1,600 1,600 1,600 1,600Paiton #1-4 0 0 0 0 0 0 0 800 1,200Central Java 0 0 0 0 0 0 0 0 0

Subtotal 800 800 800 1,200 1,600 1,600 1.600 2,400 2,800

Geothermal PlantsKamajang #1-3 30 30 140 140 140 140 140 140 140

Subtotal 30 30 140 140 140 140 140 140 140

Gas Turbines 630 630 630 630 545 520 520 480 440

Total (MW) 3,841 4.191 4.251 5.180 6,025 6,112 6,112 6.872 7,732

- 41 -

ANNEX 4

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Peak Load, Production and Installed Capacity Outside Java

1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94

Sales (GWh) 2,653 3,033 3,490 3,992 4,562 5,206 5,941 6,733 7,608Increases (Z) 17.0 14.3 15.1 14.4 14.3 14.1 14.1 13.3 13.3LOsses T6D (M)/a 21.2 20.8 19.3 19.0 18.5 18.0 15.9 15.3 15.0Gross generation (GWhTi 3.534 4,033 4,550 5,184 5.886 6,674 7,420 8,336 9,419System peak (KW) 733 794- 896 1,003 1,120 1,270 1,412 1,560 1,762System LF (Z) 55 58 58 59 60 60 60 61 61

Installed Capacity (NW)HydroBasis 124 124 124 124 124 124 124 124 124Kini hydro 5 11 11 12 53 53 52 52 52Asahan I #1 - - - -- - 90

Asahan II /b 50 50 50 50 50 50 50 50 50Singkarak Ti - - - - - - - - 50Tas I fl-4 - - - - 16 16 16 16 16Tanggari I #1-2 - - 17 17 17 17 17 17 17Bakaru #1-2 - - - - - 126 126 126 169

Total 179 185 202 203 260 386 385 385 525

SteamBasis 50 50 50 50 50 50 50 50 50Belawan #1-4 130 130 130 130 260 260 260 260 260

Total 180 180 180 180 310 310 310 310 310

Steam CoalOmbilin #1-2 - - - - - - 50 100 100Bukit Asam #1-2 - - 130 130 130 130 130 130 130Banjaruasinol - - - - - - - 50Loakulu d1-2 - - - - - - - - so

Total - - 130 130 130 130 180 230 330

Geothermal _ _ _ _Diesel 740 1,139 1,444 1,570 1.588 1,655 1,667 1,722 1,725Gas Turbine 300 300 300 300 300 300 285 221 167

Total (MW) 1.399 1,804 2,256 2,383 2,588 2,781 2.827 2,868 3,057

/a With respect to sent out energy

/b Import form INALUM 219 GWh

_ 42 -

ANN S

INDOIESIA

POWER TRANSMISSION AND DISTRINITION PROJECT

Investment Proarm- Indonesia

Total86187 87/88 88(89 89190 90(91 91192 92193 93/94 86/93

Diesel Fc 113.8 60.5 21.5 24.2 16.9 21.7 17.2 10.3 286.2Le 43.8 22.2 10.7 8.8 8.3 8.4 6.8 3.5 112.5

as- turbine Fc 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Lc 0.0 0.0 0.0 o.n 0.0 0.0 0.0 0.0 0.0

Rydro Fe 185.9 195.5 170.0 113.1 155.9 203.3 256.6 268.4 1,548.7Le 123.2 137.9 96.4 80.5 119.2 141.1 159.5 140.7 998.4

Steam oil Fc 54.2 86.1 74.2 30.1 9.5 0.0 0.0 0.0 254.1Lc 13.0 19.7 19.7 6.5 1.7 0.0 0.0 0.0 60.7

Stea coal Fc 143.8 94.8 143.3 233.8 307.9 388.8 375.5 416.3 2,104.2Lc 536.4 48.7 67.6 92.7 112.9 125.5 147.4 195.0 826.2

Geo:hermsl Fc 5.1 13.8 32.1 42.5 33.0 23.5 13.4 3.7 167.1Le 2.7 5.9 10.2 10.7 7.6 4.6 2.0 0.5 44.5

Nuclear Fc 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Le 0.o 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Transmission Fc 63.6 30.2 44.2 76.3 77.8 40.0 26.8 29.9 388.8Lc 36.8 18.5 35.8 48.6 33.8 18.9 16.6 22.3 231.3

Substation Fc 87.7 50.9 67.5 78.7 105.3 64.0 43.8 22.6 520.5Lc 22.9 25.4 33.5 41.3 41.4 26.4 17.1 11.1 219.0

Consumer Ft 19.4 21.3 24.0 26.3 29.5 30.9 33.6 35.7 220.7Le 45.3 49.8 55.9 61.3 68.8 72.2 78.3 83.4 514.9

MV line Ft 52.0 57.9 64.4 71.3 77.8 82.8 89.1 55.5 551.0Le 123.0 136.7 151.6 168.3 182.4 194.7 209.3 107.9 1,274.0

LV line Fc 47.0 52.1 57.9 64.1 70.0 74.4 80.2 49.9 495.6Lc 110.6 122.9 136.4 151.4 164.1 175.1 188.2 97.1 1,145.8

Dist transformer Fc 7.7 9.5 9.6 10.5 11.8 12.3 13.4 14.3 88.0Lc 18.1 19.8 22.3 24.4 27.4 28.8 31.2 33.3 205.4

Subtotal Ft 780.7 671.6 708.5 770.8 895.3 941.8 949.6 915.9 6,634.1Lc 602.9 633.2 666.9 723.8 800.8 830.5 892.9 729.6 5,880.6

Total 1,383.5 1,304.8 1,375.5 1,494.6 1,696.1 1,772.2 1,842.5 1,645.5 12,514.7

Note: 1. All costs in constant 1985 USS million.

2. Includes rural electrification.

- 43 -ANNEX 6

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Investment Program Java

Total86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 86/93

Diesel F_ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Dec 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Gas turbine Fc 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.3 9.3Lc 0.0 0.0 0.0 0.0 o.n 0.0 0.0 2.6 2.6

Hydro Fc 173.9 155.0 97.4 26.3 44.6 27.4 31.2 44.1 600.0Lc 105.6 94.1 42.8 11.5 19.0 14.8 12.R 17.0 317.8

Steam Oil Fe 49.5 62.4 36.3 11.2 0.0 0.0 0.0 0.0 158.4Lc 7.9 9.5 7.8 1.4 0.n 0.0 0.0 0.0 26.7

Steas Coal Fc 135.5 90.4 134.0 199.8 242.3 297.4 294.6 355.9 1,749.9Le 29.2 47.1 65.4 81.4 91.2 99.6 125.8 180.3 720.1

Geothermal Fc 5.1 13.8 32.1 40.6 25.7 10.7 4.3 o.n 132.3Lc 2.7 5.9 10.2 10.2 8.4 3.2 1.3 0.0 40.0

Nucledr PC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Lce 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Transmission Fc 46.1 24.8 35.7 52.5 58.4 20.3 2.0 0.9 240.9Ic 26.5 15.9 25.4 33.5 23.n 5.7 0.7 0.2 131.0

Substation Fc 71.2 47.3 61.4 54.9 69.1 41.6 25.3 7.2 378.0Lc 17.1 23.8 27.6 26.9 27.0 15.6 7.8 1.7 147.5

Consumer Fc 13.5 13.9 14.9 15.8 17.7 18.1 18.5 19.6 131.9I.e 31.4 32.4 34.7 36.8 41.4 42.2 43.1 45.7 307.7

MV ltne Fc 35.3 36.9 39.4 42.9 46.3 47.2 49.0 30.4 327.4Ic 82.6 86.7 92.5 101.2 108.2 110.4 114.9 59.2 755.7

LV line Fc 31.7 33.2 35.4 38.5 41.6 42.5 44.0 27.4 294.4I.e 74.3 78.0 83.2 91.0 97.3 99.3 103.4 53.2 679.6

Dist. transformer Fc 5.4 5.5 5.9 6.3 7.1 7.2 7.4 7.8 52.6I. 12.5 12.9 13.8 14.7 16.5 16.8 t;.2 18.2 122.7

Other investment Fe 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0I. 19.1 17.A 17.9 17.9 19.7 18.4 18.1 17.6 146.5

Subtotal Fc 567.2 483.3 492.6 488.8 552.7 512.4 476.4 502.6 4,n75.9Ic 409.0 424.3 421.4 426.6 449.5 426.1 445.1 395.9 3,397.9

Total 976.2 907.6 914.0 915.4 1,002.2 938.5 921.5 898.4 7,473.7

Note: 1. All costs in constant 1985 USS million.

2. Tncludes rural electrification.

INOOaSAYRANDuSON ANO OIsTIM1to POECY

Of gonizotlon Chart d4 nIe Minilty dt Mine, and En,ergy

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- 45- Ac= 7

INDONESIATRANSMISSON AND DISIRIMWlON PROJECT

Orgonizadlon Chart of PLN

d I LN _ 5p hoo d N bglan DM lodo l-o PADof ~~~~~~~~SPOCIal Ana af AC"h

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- 46 -

ANNCX 8

INDONESIA

POWlER TRANSHISSION AND DISTRIBUTION PROJECT

PLN: Performance Indicators

1978/79 1979180 1980/81 1981/82 1982/83 1983/84 1984/t5 1985/86

1. Installed capacity (KW) 2.288 2.5i6 2,555 3,032 3,253 3,935 4,515 5,240

2. Peak demand (NW) 1,033 1,276 1.577 1.876 2.285 2.413 2.603 2,966

3. Capacity utilization (2)t(l) 0.4S 0.50 0.62 0.62 0.67 0.61 0.58 0.57

4. Energy production (CGh) 5,723 7,004 8,420 10,138 11,847 13.392 14,777 16,899

5. Sale. (CWh) 4.270 5,340 6,523 7,845 9,101 10.000 11,039 12,706

6. Z grovth in males 21.1 25.0 22.2 20.3 16.0 9.9 10.4 15.1

7. Losses with station use (2) 25.4 23.7 22.5 22.6 23.1 25.3 25.3 25.6vithout station use (S) 22.9 19.5 19.1 18.7 19.1 20.8 20.6 19.7

8. Number of consumers 1,784.001 2.246.657 2.591,067 3.232,075 3,802,419 4.406,077 5,133.231 5.953,293(Z growth) (26.2) (25.9) (15.3) (24.7) (17.6) (15.9) (16.5) (16.0)

9. Average revenue per kWh sold(Rp) 27.4 27.3 41.4 43.3 56.6 76.0 97.8 96.6

10. Average fuel coat per kWh (Rp) 7.0 9.4 14.3 16.2 28.4 53.8 62.4 55.1

11. Total manpower (employees) 28,872 29,499 32,946 35,791 39.962 44.909 49,696 51.290

12. Consumers per employee 62 76 83 90 95 98 103 116

13. Salem per employee (HWh) 148 181 198 219 228 223 222 248

14. Average fuel per kWh in centralthermal plants (oil) (liter) 0.32 0.30 0.30 0.30 0.29 0.27 0.29 0.29

15. Rate of return on revaluedrate base (Z) 2.3 -3.7 3.5 -1.9 -2.9 -0.9 -0.4 -0.2

16. Operattng ratio (Z) 89 114 91 105 107 102 101 100

17. Current ratio (times) 4.1 4.5 4.5 3.4 2.4 2.2 2.5 2.1

18. Debt/equity ratio (Z) 4/96 7/93 10/90 14/86 17/83 27/73 32/68 36/64

19. Debt aervice coverage ratio(times) - - - 10.1 6.8 3.6 2.4 1.4

20. Self-financiag ratio (Z) 21.0 20.0 28.4 29.6 29.1 22.2 17.0 20.3

21. Overall customers accountsreceivable (dy's sales) 85 68 66 74 65 68 53 49

Source: PLN.

- 47 _ANNEX 9Page 1

INDONESIA

TRANSMISSION AND DISTRIBUTION PROJECT

Sensitivity of Efficiency Parameters

1. This Annex reviews the financial implications of PLN's efficiencyimprovements in some areas of its operational and financial management, andattempts to quantify some of the effects in terms of the targets assumed inthe financial forecast for the period 1986/87 to 1990/91 (Annexes 14 and 15).

Fuel Consumption and Cost

2. PLN's primary source of energy generation has been fuel oil. Duringthe past five years, its fuel efficiency has shown a modest improving trend,as given in Annex 17.

3. While PLN's fuel efficiency has been improving, its fuel cost hasbeen steadily increasing as a result of government's policy of removing domes-tic oil subsidies. As shown in Annex 17, the average price of PLN's fuel oilincreased by over 4.8 times over the period of 1981/82 to 1985/86. Fuel costhas become the single most important element in its operating expenses, risingfrom about 40% of the total operating expenses in 1981/82 to about 56% in1985/86. Sensitivity tests show that an efficiency improvement in fuel con-sumption over the period 1986/87 to 1990/91 by 1% would result in an estimatedaverage annual saving equivalent to about Rp 10 billion.

System Losses

4. PLN's transmission and distribution (T&D) losses were 24Z in1974/75, and subsequently reduced to 19% in 1982/83. But, they increased to20% in 1983/84 mainly due to the slowdown in investment in transmission anddistribution and increases in unauthorized/unaccounted for consumptions. Dur-ing the last two years, PLN, with assistance from consultants who arecurrently studying the causes of high system losses and formulating steps tomonitor and correct problems, has initiated intensive action to control andreduce losses. As a result, losses reduced to 19.6Z in 1985/86. At thislevel, the T&D losses are considerably higher than many neighboring countries(Malaysia 7.6%; Thailand 9.9Z; and Korea 6.8%; all in 1982/83). Clearly,there is ample scope for improving the system losses. PLN will need tocontinue its efforts to control and reduce losses through appropriatepreventive measures. Over the period 1986/87 to 1990/91, a decreasing trendis assumed to again prevail, reaching from 18 in 1986/87 to 14.6% in1990/91. A sensitivity test shows that if the T&D system losses were toremain at the level of 18.0% over the period 1986/87 to 1990/91, PLN's fuelcost could be expected to increase by a total about Rp 116 billion for thesame period, or about Rp 29 billion per annum.-

1/ Improvements in system losses will help to reduce the production costs,especially the fuel costs, to meet a given level of sales.

- 48 -ANNEX 9Page 2

Labor Productivity and Salaries

5. During the period 1981/82 through 1985/8'g PLM's total employeesincreased by about 43% from 35,791 to 51,290. Labor productivity improvedover the same period in terms of customers per employee (from 90 to 116) andMWh sold per employee (from 219 to 248). While these figures are low byinternational standards, the improving trend over the past five years isencouraging. Over the five-year period 1986/87 to 1990/91, the improvingtrend is expected to continue with the sales per employee reaching from about280 MWh in 1986/87 to about 405 MWh in 1990/91.

Accounts Receivables and Collection

6. PLN's accounts receivables from general customers are good, and itsposition with respect to government entities has improved significantly duringthe past two years and is currently satisfactory. It is important that PLNcontinues its efforts to improve its collection performance. The settlementof overdue accounts and prompt payment of current accounts by governmentcustomers involve time-consuming interministerial discussions and negotia-tions. Also, the instaLlment payment procedures by Armed Forces have causedthe considerable accumulation of accounts receivables. Under Power XIV (Loan2443-INUD, June 1984), the Government agreed to ensure that PLN's total overdueaccounts receivables from government entities would not exceed 60 days. Whilethis requirement is currently being met, it needs to be kept under continuousreview.

7. Although efficiency improvement in collection performance may nothave immediate direct impact on PLN's operating expenses, its financial impli-cation is not insignificant. The financial projections assume that the totalaccounts receivables position during the forecast period 1986/87 to 1990/91would be maintained at a level of 50 days achieved in 1985/86. If, forexample, PLN8's total receivables in 1988/89 were to be at 60 days instead ofthe 50 days assumed in the projections, then P1WN's working capital positionfor that year would be increased by about Rp 63 billion.

Inventory Management

8. Because of the widespread distribution of PLN's regional operationsand its construction activities in outer islands, PLN's inventory levels arehigher than a normal utility operating in a closed geographical area. Table 1shows that PLN's positions in 1984/85 were slightly higher than or comparablewith neighboring countries.

9. PLN's internal investigation has revealed that its inventory manage-ment needs considerable strengthening. Actions have 'oeen planned or taken toimprove efficiency in this area. A sensitivity test ahows that if the inven-tory level (excluding fuel) were to =aintain at a level double the projectedone in 1990/91, the resulting inc-ease ,i working capital requirement would beabout Rp 200 billion.

- 49 _

ANNEX 9Page 3

Table 1: INVENTORY MANAGEMENT

PLN Malaysia Korea(1984/85) (1984/85) (1982/83)

Inventory (excludirg fuel):- as X of average gross fixed assets 5.5 5.4 4.0- as x of construction expenditure 13.2 27.7 15.4

Cash Management and Liquidity

10. The overriding objectives of cash management include providing fundsfor day-to-day transaction needs, developing and implementing programs andproviding for overall liquidity. An effective cash management program dependsan continued review of the current pattern of income receipts and disburse-ments, known future requirements, and other sources of funds. In this regard,PIN's cash management needs considerable strengthening. A review of PLN'scash balance indicates that the level fluctuates widely from year to year. Itis important that PLN formalize its cash management functions, develop moresophisticated cash-control techniques and prepare accurate regular daily andother periodical cash-flow forecasts.

11. External factors also contribute to the fluctuation in PLN's cashbalance levels. First, PLN depends on the Government's approval for capitalexpenditures, but the budget approval and release procedures are complex andtime-consuming. In addition, because the cost of local borrowing from commer-cial banks is high (interest rates of 18-20% p.a.), PLN is increasingly rely-ing on borrowings from Government banks at Government subsidized interestrates (currently 6% p.a.). However, PILN's borrowings from Government banksare subjected to Government's lengthy approval. Any delay has thus reducedthe flexibility and effectiveness of PLN's cash management. It is essentialthat the Government expedite budget and borrowing approvals and streamline therelease procedures to avoid any unnecessary delays and uncertainties.

-50_ ANNEX 10Page 1 of 3

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Transmission Lines and Substations Covered by the Project

A. Transmission Lines

Name Description Route km

East JavaDarao Grande Branch 150 KV - 2 CCT 5.0 kmSukolilo - Ngagel 150 KV - 2 CCT, UGC 4.5 kmNgagel - Simpang 150 KV - 2 CCT, UGC 5.5 kmTandes - Krian 150 KV - 2 CCT 20.0 km

Central JavaJogya Barat Incomer 150 KV - 2 x 2 CCT 8.0 kmPurwodadi Incomer 150 KV - 2 CCT 7.0 kmKlaten - Wonogiri 150 KV - 1 CCT 35.0 kmUngaran - Tanggung 150 KV - 2 CCT 30.0 kmWates Incomer 150 KV T Connection 0.5 km

West JavaRangkasbitung - Menes 70 kV - 1st CCT 42.0 kmCigereleng - Lamajan(Rerouting part of Exist. line) 70 kV - 2 CCT 25.0 km

Sumadra - Pameungpeuk 70 kV - 1st CCT 37.0 kmJatibarang - Haurgeulis 70 kV - 1st CCT 42.0 kmHaurgeulis - Sukamandi 70 kV - 1st CCT 45.0 kmPadalarang - Cibabat 150 kV - 2 CCT 16.0 kmKiaracondong Incomer 150 kV - 2 x 2 CCT 5.0 kmKosambilama-Rengasdengklok 70 kV - 1st CCT 28.0 kmBanjar - Majenang 150 kV - 2 CCT 32.0 km

JabotabekBekase-Narunda - Cakung 150 kV - 2 CCT; UGC 10.0 kmMuarakarang - Gambir(Budi Kemullan) 150 kV - 2 CCT; UGC 15.0 km

Cibinong - Cileungsi 70 kV - 2 CCT 10.0 kmCikararg Incomer 150 kV - 2 CCT 5.0 kmCikupa Incomer 150 kV - 2 x 2 CCT 5.0 kmCawaug - Setiabudi 150 kV -2 CCT UGC 14.0 kmPondok - Kelapa Incomr 150 kV - 2 CCT 3.0 kmKadang Sapi Incomer 150 kV - 2 CCT 2.0 km

-51 ANNEX 10Page 2 of 3

B. Substations

Voltage Transformer NumberLocation (kV) capcity (HVA) of bays Remarks

East JavaDarmo Grande 150 1 x 50 4 New S/SNgagel 150 1 x 20 4 New S/SSimpang 150 1 x 50 4 New S/SKrian 150 Nil 2 --

Tandes 150 Nil 2 --

Sukolilo 150 Nil 2 --

Central JavaUngaran 150 Nil 2 --

Wonogiri 150 1 x 16 2 New S/SPekalongan 150 1 x 30 1Jogya Barat 150 1 x 30 3 New S/SPurwodadi 150 - 3 New S/STanggung 150 - 4 New S/SKlaten 150 - 3Wates 150 - 1 New S/SMajenang 150 - 2 --

West JavaMenes 70 1 x 10 1 New S/SRangkasbitung 70 - 1 --

Jatibarang 70 - 1 --

Cibabat 150 2 x 60 5 New S/SKiaracondong 150 2 x 60 7 New S/STasikmalay 150 1 x 15 1 --

Pamengpeuk 70 1 x 10 1 New S/SHaurgeulis 70 1 x 10 3 New S/SLamajan 70 - 2Sumadra 70 - 4 New S/SKosambi Baru 150 1 x 30 3Cigelereng 150 1 x 60 1 --

Cilegon 150 - 3Sumedang 70 1 x 10 1 --

Kracak 70 1 x 10 1 New S/SPadalarang 150 - 2 --

Santusa 70 - 3 New S/SRengas Dengklok 70 1 x 10 1 New S/SSukamandi 70 - 1 --

Banjar 150 - 2 --

-52- ANNEX 10Page 3 of 3

Voltage Transformer NumberLocation (kV) capcity (MVA) of bays Remarks

JabotabekCikarang 150 2 x 30 5 New S/SCileungsi 70 1 x 30 4 New S/SMuarakarang 150 2 -

Cikupa 150 2 x 60 7 New S/SMarunda 150 2 x '.0 7 New S/SGambir/BudiKemuliaan 150 2 x 60 5 New S/S

Cibinong 70 - 2 -

Kadang Sapi 150 2 x 60 MVA 6 New S/SCawang 150 - 2 --

Satiabudi 150 2 x 60 MVA 6 New S/SPondok Kelopa 150 2 x 60 MVA 7 New S/S

ANNE 1153 - Table 1

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Cost Estimate for Transmission Lines and Substations

Item Local Foreign Total-- US$ million -

Transmission lines 10.8 15.7 26.5

Transformers 9.2 13.0 22.2

NV and LV materials 4.3 10.4 14.7

Substations(a) Conventional 23.8 21.8 45.6(b) GIS 6.2 14.5 20.7

150 kV UG cables 5.2 53.2 58.4

Land for substations 15.1 - 15.1

Total Base Cost 74.6 128.6 203.2

ANNEX 11Table 2

- 54 -

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Cost Estimate for Distribution

Item Local Foreign Total---- - US$ million

MV overhead lines 0.5 1.4 1.9

MV cables 4.9 23.2 28.1

LV overhead lines 4.3 13.8 18.1

Substations(a) Pole mounted 0.4 0.8 1.2(b) Others 5.8 13.4 19.2

Service entrance 1.6 9.5 11.1

Total Base Cost 17.5 62.1 79.6

INDONESIATRANSMISSION AND DISTRIBUTION PROJECT

Implementation Schedule

YEAR 1966 1917 49t 1190 10

ACTIVITIES QUARTER 1 2 3 4 1 2 3 4 1 2 3 4 4 2 3 4 1 2 3 4

A. TRANSMISSION AND SUBSTATiONS

I. Survey

2. Preparotion of Bid Docurments

3. Tendering

4. Evolutlion

5. GOI Approval

6. IBRD Approval

7. Controcts Neogotiotions _A

S. Manufocture & Delivery _ _ = = = _

9. Construction -- - -

B. DISTRIBUTION

1. Preparation of Bid Documents

2. TendorIN

3. Evaluation

4. GOI Approval

6. IBRO Approval

6. Controcts Negotiations

7. Manufacture & DelIvery _ _=

Sw. Construction I - -I -I -

Word ank-306:3

\

- 56 - ANNEX 13

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Disbursement Schedule

Cumulative ZDisbursement disbursement pro-

Bank FY Semester Semester Cumulative Z file (AEP Power)-- (US$ million) ---

88 I 1.0 1.0 0.4 2.0II 10.0 11.0 5.0 8.0

89 I 25.0 36.0 16.0 17.0II 35.0 71.0 31.0 30.0

90 I 35.0 106.0 47.0 43.0II 40.0 146.0 65.0 54.0

91 I 40.0 186.0 82.0 65.0II 24.0 210.0 93.0 73.0

92 I 12.0 222.0 98.0 80.0II 4.0 226.0 100.0 86.0

ANNEX 14Table !

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN - Past Financial Results

Income Statements(Rp billion)

Fiscal year 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85

Sales increase (X) 25.5 22.2 20.8 16.0 9.9 10.4Energy sales (GWh) 5,340 6,523 7,845 9,101 10,000 11,039Average price (Rp/kWh) 27.3 41.4 43.3 56.6 76.0 97.8

Energy revenue 146 271 340 514 760 1,080Other operating revenue 10 13 16 21 27 31

Total Revenues 156 284 356 535 787 1,111

Operating ExpensesFuel/bulk power 52 99 131 283 477 712Operations 66 86 123 143 165 203Depreciation 60 73 121 145 158 204

Total Expenses 178 258 375 571 800 1,119

Operating Income (22) 26 (19) (36) (13) (8)

Other income (net) (4) (6) 1 - - (14)

Gross interest 12 12 29 33 63 143Less: interest duringconstruction 12 12 27 28 44 119

Interest Charged toOperations - - 2 5 19 24

Net Income /a (26) 20 (20) (41) (32) (46)

Rate base /b 588 737 976 1,218 1,497 1,998

Rate of return (2) (3.7) 3.5 (1.9) (2.9) (0.9) (0.4)

Operating ratio (2) 114 91 105 107 102 101

/a Before taxes (see para. 5.19).7T Based on revaluation of fixed assets from FY1979/80 onwards, in accordance with

Government Regulation No. 45/1986 dated October 2, 1986 (see para. 5.29).

-58- ANNEX 14Table 2

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN - Past Financial Results

Balance Sheets(Rp blllion)

Fiscal year 1979/80 1980/81 1981182 1982/83 1983/84 1984/85

ASSETSFLxed AssetsPlant In service 885 1,223 1,718 2,124 2,771 3,710Less: Accumulated

depreciation 60 143 276 435 614 842Net plant in service 825 1,090 1.442 1,689 2,157 2,868Work in progress 656 856 1,057 1,370 1,878 2,148

Total Net Flxed Assets 1,481 1,946 2,499 3,059 4,035 5,016

Current AssetsCash 71 136 179 237 142 131Inventories 58 79 96 108 173 213Receivables 34 63 86 122 169 186Other current assets 25 23 23 30 38 44

Total Current Assets 188 301 384 497 522 574

Other Assets - - - 1 1 18

TOTAL ASSETS 1.669 2,247 2,883 3.557 4,558 5,608

EQUITY AND LIABILITIESPaid-in capital 998 1,189 1,468 1,779 2,017 2,442Retained earnings (20) (8) (33) (70) (97) (143)Revaluation reserve 399 634 811 930 1,083 1,238

Total Equity 1,377 1,815 2.246 2,639 3,003 3,537

Long-term debt (net) 88 151 276 417 866 1,302Current liabilities 42 67 112 208 235 227Other liabilities /a 162 214 249 293 454 542

TOTAL EQUITY AND=521jITYAND 1,669 2,247 2.883 3.557 4,558 5,608

Debt X of debt + equity /b 7 10 14 17 27 32Current ratio (times) - 4.5 4.5 3.4 2.4 2.2 2.5

/a Including consumers' contributions.71; Including consumers- contributions, but excluding revaluation surplus.

ANNEX 14-59 Table 3

INWNESTA

POWER TRANSHISSION AND DISTRIBUTION PROJECT

PLN - Past Financial Results

Funds Flow Statements(Rp billion)

Fiscal year 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85

Internal Sources of FundaNet income before Interestand tax (26) 20 (20) (36) (13) (22)

Depreciation 60 73 121 145 158 204Consumers contributions andother adjustments 63 42 28 42 65 56

Total Internal Funds 97 135 129 1'1 210 238

Operational RequirementsVariation working capital 10 23 (5) (30) - 55Debt repayment - - 8 11 21 52Interest charged to operations - - 2 5 19 24

Total OperationalRequirement 10 23 5 (14) 40 131

Total capital investment 295 303 496 585 981 1,030

Balance to be Financed 208 191 372 420 811 923

Financed byBorrowings 46 64 137 167 478 488Government contributions 183 192 278 311 238 425

Total Capital Sources 229 256 415 478 716 913

Cash Increase/Decrease 21 65 43 58 (95) (10)

Debt service coverageratio (times) - - - 10.1 3.6 2.4

Contribution to construction:3-year average (X) 20.0 28.4 29.6 29.1 22.2 17.0

- 60- ANN 14Table 4

INDONESIA

PO%EX TRANSKISSION JAUD DISTRIRUTION PIOJECT

PLN - Indonesia Operations

Income Statements(Rp blllon)

Actual /a Estimte ProlectionFiscal year 1985/86 1986/87 1987/88 1988/89 1989190 1"90/91 1991/92 1992193

Energy sales (Swh) 12,706 14,694 16,967 19,430 21.983 24,656 27.560 30,762Sales lncreass (Z) 15.10 15.65 15.47 14.52 13.14 12.16 11.78 11.62

Average price (Rp/kWh) 96.61 95.83 95.44 118.80 126.92 139.26 139.26 139.26Average price lncreass (Z) (1.24) (0.81) (0.40) 24.47 6.84 9.72 0.00 0.00

Operatlng Rev nuesEnergy revenue 1,227 1,408 1,619 2,308 2,790 3.434 3,840 4,287Other operating revenue 36 46 54 64 73 84 95 109

Total Revenue 1.263 1.454 .6 3 2.372 2.863 3,518 3,935 4,396

Operatlsg ExpenseoFuel and lubrlcatlng oil 766 776 937 1.016 1,110 1,191 1,342 1,512Power purchased 10 15 15 15 15 15 15 15Personnel expense 118 133 141 150 159 168 178 189Repair/maintenance 75 115 109 150 214 271 324 395Depreciation 254 350 445 618 750 865 980 1,121Other expenses 45 45 48 50 53 58 60 64

Total Expenses 1,268 1.434 1.695 1.999 2.301 2.568 2.899 3.296

Operating Income (5) 20 (22) 373 562 950 1.036 1.100

Nonoperating Income 8 7 9 12 15 20 26 34Nonoperating expense 28 18 18 18 18 18 18 18

Other Income (Net) (20) (11) (9) (6) (3) 2 8 16

Net Income Before Interest (25) 9 (31) 367 559 952 1.030 1.116

Total Interest 87 212 381 538 718 901 882 894Less: I.D.C. 61 81 244 302 341 479 475 479Interest charged to operations 26 131 137 236 377 422 407 415

Net Income (51) (122) (168) 131 182 530 633 701

Rate base 2,783 3.754 5.128 7,548 10,350 12,654 15,209 18.076Rate of return (X) (0.18) 0.53 (0.43) 4.94 5.43 7.51 6.81 6.09

Operatiag ratio (Z) 100 99 101 84 80 73 74 75

/a Unaudited.

-61- AU 14Table S

INDOUSIA

POMME T3RAN9NSSIOK AMD DISTIIIITION PROJECT

nLN - Java OperationA

Incom Statements(Rp billion)

Actual /a Estliate ProlectionFiscal year 198546i 1986/87 1987788 1968189 1989/90 1990/91 1991/92- 1992/93

Energy sales (Glh) 10,052 11,661 13,477 15,438 17,421 19.450 21.619 24.029Sales Increase C?) 14.61 16.00 15.58 14.55 12.84 11.65 11.15 11.1S

Averge price (Rp/klh) 94.95 94.18 93.80 116.75 124.73 136.63 136.63 136.83Average price Lncreame (Z) (1.04) (0.81) (0.40) 24.47 6.84 9.70 0.00 0.00

Operating RevenuesCnergy revenue 954 1,098 1,264 1,802 2.173 2.661 2.958 3.286Other operating revenue 27 37 43 51 S8 67 75 8S

Total Revenues 981 1.135 1,307 1.853 2.231 2.728 3.033 3.373

Operating ExpensesFuel and lubricating oll 551 543 680 752 610 890 1,000 1,120Power purchased 6 11 11 11 11 11 11 11Prmonnel expenae 72 76 81 86 91 96 102 108Repalr/lmaintenance 40 56 74 114 144 163 200 234Depreclation 176 231 297 422 520 .569 665 758Otber expenses 37 38 40 41 45 49 so 53

Total Expenme. 882 9S5 1.183 1.426 1,621 1.778 2.028 2.284

Operating Income 99 180 124 427 610 950 1.005 1.089

Nonoperating income 7 5 7 9 12 16 20 27-onoparating expense 23 14 14 14 14 14 14 14

Other Income (Net) (16) (9) (7) (5) (2) (2) 6 13

Net Income Before Interest 83 171 117 422 608 952 1.011 1.102

Total lnterest 70 1fi6 303 427 569 711 692 698Less: I.D.C. 48 64 194 240 270 378 373 374

Interest charged to operations 22 104 109 187 299 333 319 324

Net Income 6t 67 8 235 309 619 693 778

Rate base (revalued) 2,024 2.690 3,488 5,332 7,625 8.992 10.482 12,441Rate of return (S) 4.89 6.69 3.56 8.00 8.00 10.56 9.59 8.75

Operating ratlo (2) 90 84 91 77 73 65 67 66

/a Unaudited.

-62 - ANNEX 14

TWbl 6

INDONESIA

POWZR TRANSNISSION AND DISTRIBUTION PROJECT

PLN - Outside Java Operatlons

Income Statement(Rp billion)

Actual /a Estimate ProlectionFiscal year 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

Energy sales (GWh) 2,654 3,033 3,490 3,992 4,562 5,206 5,941 6,733Sales increase (2) 17.00 14.30 15.07 14.38 14.28 14.12 14.12 13.33

Average price (Rp/kWh) 102.92 102.18 101.80 126.73 135.28 148.48 148.48 148.48Average price increase (Z) (2.07) (0.72) (0.37) 24.48 6.75 9.70 0.00 0.00

Operating RevenuesEnergy revenue 273 310 355 506 617 773 882 999Otber operating revenue 9 9 11 13 15 17 20 24

Total Revenues 282 319 366 519 632 790 902 1.023

Operating ExpensesFuel and luburicating oil 215 233 257 264 300 301 342 392Power purchased 4 4 4 4 4 4 4 4Personnel expense 46 57 60 64 68 72 76 81Repair/maintenance 35 59 35 36 70 108 134 161Depreciation 78 119 148 196 230 296 315 363otber expenses 8 7 8 9 8 9 10 11

Total Expenses 386 479 512 573 680 790 871 1.012

Operating Income (104) (160) (146) (54) (48) 0 31 11

Nonoperating Income 1 2 2 3 3 4 6 7NonoperratIng expense 5 4 4 4 4 4 4 4

Other Income (Net) (4) (2) (2) (1) (1) 0 2 3

Net Income Before Interest (108) (162) (148) (55) (49) 0 33 14

Total interest 17 44 78 111 149 190 190 196Less: I.D.C. 13 17 50 62 71 101 102 105Interest charged to operations 4 27 28 49 78 89 88 91

Net Income (112) (';9) (176) (104) (127) (89) (55) (77)

Rate base (revalued) 759 1,064 1,640 2,216 2,725 3.662 4,727 5.635Rate of return (Z) (13.70) (15.S4) (8.90) (2.44) (1.76) 0.00 0.66 0.20

Operating ratio (2) 137 150 140 110 108 100 97 99

/a Unaudlted.

-63 ANu 14Tabla 7

IIIDONESIA

POWER TRANSMISSION AND DISTRIIITION PROJECT

PL - Indontela Operations

alance Sheets(Rp billion)

Actual /a Estimte PtoiectlonFlscal year 1985/86 1986/87 1987/88 1988/89 -1989 90 1990/91 1991/92 1992/93

ASSETSFixed AssetsPlant in service 5.011 6.667 9,085 12,993 16.429 19,613 23,940 28.201Lass: Accu-. depreciation 1,137 1,608 2,135 2.800 3,599 4,577 5,666 6,985

Operating plant 3.874 5.059 6.950 10,193 12.830 15,086 18,274 21.216

Work in progress 2.502 3.345 4,255 3,738 4,044 5,297 6,20S 7.681

Total Fixed Assets 6,376 8.404 11.205 13.931 16.874 20,383 24,483 28,897

Current AssetsCash and bank 124 124 298 372 478 547 57C 625Accounts receivable 168 193 222 316 382 470 526 587'lventories 279 251 188 220 257 298 342 401other current assets 86 87 96 105 116 127 140 154

Total Current Assets 657 655 804 1,013 1.233 1,442 1,585 1.767

Other assets 20 20 20 20 20 20 20 20

TOTAL ASSETS 7.053 9.079 12.029 14,964 18.127 21,845 26,088 30.684

EQUITY AND LIABILITIESZnuityPald-in capital 3.001 3.489 3.989 4,629 5,313 6,045 6.831 7.675Retained earnings (194) (316) (484) (353) (171) 359 997 1,698Revaluation surplus 1,436 1.904 2.332 2,579 2,823 3,118 1,831 4,688

Total Equity 4,243 5,077 5.837 6.855 7,964 9,522 11,659 14,061

Long-term debt (LTD) 2,010 2,856 4.866 6.581 8,419 10,333 12,158 14.023Less: Current portion 143 127 225 393 491 509 521 522

Net long-tera debt 1.867 2.729 4.641 6.188 7.928 9.824 11,637 13.SO1

Current LiabilitiesCurrent portion of LTD 143 127 225 393 491 509 521 522Accounts payable 131 131 157 188 226 271 326 391Other current liabillties 37 26 31 37 45 54 64 78

Total Current Liabilities 311 284 413 618 762 834 911 991

Consuners' contributions 475 801 912 1.032 1,148 1,275 1,413 1,569

Otber liabilities /b 157 188 226 271 325 390 468 562

TOTAL EQUITY & LIA". 7.053 9.079 12.029 14.964 18.1M27 21.845 26,088 30.684

Current ratio (tiues) 2.1 2.3 2.0 1.6 1.6 1.7 1.7 1.8

Debt as 2 debt plus equity 36 41 51 54 56 56 56 55

Accounts recelvable (days) 50 50 50 50 50 50 50 50

Unadlted./b Including consumers' deposits.

ANNEX 14-64 Table 8

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN - Indonesia Operations

Funds Flow Statements(Rp billion)

Actual /a Estleate ProjectionFiscal year 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

SOURCES OF FUNDSInternal SourcesNet income before interest (25) 9 (31) 367 559 952 1,044 1,116Depreciation 254 350 445 618 750 865 980 1,121Consumers' contributions 50 109 111 120 116 127 138 156Other 40 31 38 45 54 65 78 94

Total Internal Sources 319 499 563 1,150 1.479 2.009 2,240 2,487

Debt ServiceDebt repayment 136 67 127 225 393 491 509 521Interest 26 131 137 236 377 422 407 415

Total Debt Service 162 198 264 461 770 913 916 936

Net Internal S.urces 157 301 299 689 709 1,096 1,324 1,551

External BorrowingsExisting borrowings 578 363 543 414 117 - - -Future borrowings - 550 1,594 1,525 2,114 2,404 2.334 2.387

Total Borrowings 578 913 2,137 1,939 2,231 2,404 2,334 2.387

Government equity 559 488 500 640 684 732 786 844

TOTAL SOURCES 1,294 1.702 2.936 3,268 3,624 42444 4,782

APPLICATIONS OF FUNDSCapital ExpenditureConstruction expenditure 1,360 1,614 2,574 2,796 3,108 3.600 3,891 4,199Interest during construction 61 81 244 302 341 479 475 479

Total CapitalExpendlture 1,421 1,95 2.818 3,098 3,449 4,079 4,366 4,678

Changes In worklg capital (127) 7 118 170 175 153 78 104

TOTAL APPLICATIONS 1,294 1.702 2.936 3.268 3.624 4,232 4,444 4.782

Annual debt servicecoverage ratio (times) 1.41 1.81 1.57 2.14 1.70 1.99 2.21 2.39

Self-Financing Ratio (2)Annual 20.48 17.35 12.60 19.14 18.59 24.79 29.25 31.943-year moving average

(current + 2 past years) 20.32 15.41 15.82 16.32 16.98 21.12 24.62 28.83

/a Unaudited.

ANNEXI 14

- 65 - Table 9

INDONESIA

POWER TRANSKISSION AND DISTRIBUTION PROJECT

PLN - Indonesia, Java and Outside Java Operstlons

Calculatlons of Rate Base(Rp billion)

Fiscal year 1984/85 1985/86 1986/87 1987188 1988/89 1989/90 1990/91 1991/92 1992/93

Indonesia Operations

Gross fixed assets (revalued) 3,710 5,011 6,667 9,085 12.993 16,429 19,613 23,940 28,201

Less: Accumulated depreciation 842 1,137 1,608 2,135 2,800 3,599 4,527 5,666 6,985

Net Flxed Assets In Operation 2.868 3,874 5,059 6.950 10.193 12,830 15,086 18.274 21,216

Less: Consumers' contributions(revalued) 552 625 801 953 1,094 1,229 1,378 1,564 1,774

Balance 2,316 3.249 4,258 5,997 9.099 11,601 13,708 16,710 19,442

Rate Base - 2,783 3,754 5.}28 7,548 10.350 12,654 15.209 18,076

Java Operations

Gross fixed assets (revalued) 2,674 3.689 4,711 6,204 9,441 12,016 13,568 16,643 19,461

Less: Accumulated depreciation 580 784 1.099 1,453 1.907 2,461 3,073 3,845 4,738

Met Fixed Assets in Operation 2,094 2,905 3.612 4.751 7.534 9.555 10.495 12.798 14.723

Less: Consumers' contributions(revalued) 449 503 634 754 866 974 1,091 1,237 1,402

Ba'lance 1,645 2,402 2,978 3,997 6.668 8,S81 9,404 11,561 13.321

Rate Base - 2.024 2.690 3.488 5,332 7.625 8,993 10.482 12,441

Outside Java Operations

Gross fixed assets (revalued) 1,036 1,322 1,956 2.881 3.552 4,413 6,045 7,297 8,740

Less: Accumulated depreciation 262 353 509 682 893 1,138 1,454 1,P21 2,247

Net Fixed Assets in Operation 774 969 1,447 2,199 2,659 3,275 4.591 5.476 6.493

Less: Consumers- contributions(revalued) 103 122 167 199 228 255 287 327 372

Balance 671 847 1.280 2.000 2.431 3.020 4.304 5,149 6,121

Rate Base - 759 1,064 1.640 2,216 2,725 3.662 4,727 5,635

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN - Outside Java Operations

Break-Even Revenue Covenant Monitoring Indicators(Rp billion)

Actual /a Estimate ProjectionFiscal year 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93

Revenues'TpEiFiTing revenues 282 319 366 519 632 790 902 1,023Net nonoperating income (4) (2) (2) (1) (1) 0 2 3

Total Revenues 278 317 364 518 631 790 904 1,026

Total Oeerating Expenses 386 479 512 573 680 790 871 1.012or whicn: Depreciation -78 WTW' TIT I5' 3b6 O

Debt ServiceInterest charged operations 4 27 28 49 78 89 88 91Interest during construction 13 17 50 62 71 101 102 105Debt repayment 21 14 26 46 82 104 110 114

Total Debt Service 38 58 104 157 231 294 300 310

Excess of debt service over depreciation - - - - 1 - -

Revenues required for break-even 386 479 512 573 681 790 871 1,012

Total revenues as Z of revenues required forbreak-even 72 66 71 90 93 100 104 101Operating ratio 137 150 140 110 108 100 97 99

/a Unaudited.

o i.-

- 67- ANNEX 15

Page 1

INDONESIA

TRANSMISSION AND DISTRIBUTION PROJECT

Notes and Assumptions for the Financial Forecasts

1. Inflation has been taken into account at the following rates (X):

1991 andYear:1985 1986 1987 1988 1989 1990 after

Offshore costs /a 0.7 12.0 3.0 1.0 1.0 1.0 3.5

Local costs /b 4.5 13.0 10.0 5.0 3.5 3.5 3.5

/a Including indirect offshore costs, excluding fuel.7D Excluding indirect offshore costs and fuel.

2. Separation of accounts of PLN's operations in Java and outside Javais based on individual accounts maintained by PLN for each of its regionalunits. These accounts are separate except for overhead expenses and debtservice payments which, for the purposes of financial projections, have beenallocated proportionately on the basis of unit sales of energy.3. Revenues assume a tariff increase of about 25% at the beginning ofFY88/89, and further tariff increases of about 7% in FY89/90 and about 10% inFY90/91 for PLN to achieve and maintain (i) for its operations in Java, annualrates of return of not less than 8% from FY88/89 onwards; and (ii) for itsoperations outside Java a break-even situation from FY90/91 onwards. A coun-trywide uniform tariff is assumed throughout the forecast period.

4. Fuel/bulk power is derived directly from PLN's planting schedule.The fuel costs for FY86/87 and beyond are based on PLN's Financial ProjectionReport, dated November 12, 1986; all costs have been adjusted to reflect thecurrency devaluation in September 1986. The fuel prices to PLN are notescalated on the assumption that the current domestic fuel prices will remainat or above the projected international prices through FY92/93.

5. Operating expenses, other than fuel and personnel expenses, havebeen forecast taking into account the facilities expected to be in use eachyear, and subject to foreign and local cost inflation, as approprigte.Personnel expenses are assumed to increase at an overall rate of 6Z p.a. inline with expected productivity gains.

6. Depreciation is based on the application of PLN's normal rates(straight-line method) to assets revalued annually. For purposes of corporate

- 68 -

ANNEX 15Page 2

income tax, the current Indonesian tax code permits the use of the acceleratedmethod of depreviation of assets in operation instead of the straight-linemethod.

7. Financing. Average terms of foreign borrowings are assumed to be20 years' repayment period with 5 years' grace, and at an average interestrate of 10% p.a. Average terms of local borrowings, which are to be fromGovernment-owned banks, are asiumed to be 12 years with two years' grace, atan interest rate of 6% p.a.; any interest charges in excess of 6Z p.a. areassumed to be borne directly by Government.

8. Capital expenditures are based on PLN's investment program (Annex 5)and exclude costs of geothermal steam field development which are assumed tobe incurred by another agency. The 10% Value Added Tax (VAT) on the foreigncontracts is assumed to be borne by Government, and on the local contracts itis assumed to be borne by PLN.

9. Net fized assets, work in progress and consumers' contributions arerevalued annually, up to FY86/87 according to Government RegulationNo. 45/1986, dated October 2, 1986, and from FY87/88 onwards, according toweighted annual escalation rates (foreign and local). The rate base is theaverage of the revalued net fixed assets in operation, less revalued con-sumers- contributions. The rate base does not include work in progress.

10. Customer accounts receivables ari assumed at 50 days of energyrevenues.

11. Transmission and Distribution (T&D) system losses are assumed toreduce by about 2% in FY86/87 to a level of about 18Z, and to graduallydecline thereafter to a level of about 13.3Z in FY92/93.

12. Substitution of fuel oil in selected existing plants in Java bynatural gas is assumed by FY88/89 when gas-based generation is projected toaccount for about 20% of total energy generation in Java.

13. For PLN's operations outside Java, implementation of an action planto improve the efficiency of these operations (e.g., reduction of T&D systemlosses) and to reduce costs, is assumed for the forecast period.

14. All projections are assumed net of Corporate tax.

-69 ANNEX 16Table 1

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN's TariffExplanation of the Tariff Categorieson Basl. Tariffs of Electricity, 1986

Tariffcategory Contracted power Explanation of tariff category

S1 to 200 VA For small consumers (low voltage)

S2 250 VA to 200 kVA For social institutions (low voltage)

RI 250 VA to 500 VA For simple residential service (low voltage)

R2 501 VA to 2,200 VA For small residential service (low voltage)

R3 2,201 VA to 6,600 VA For medium residential service (low voltage)

R4 6,601 VA and over For large residential service (low voltage)

Ul 250 VA to 2,200 VA For small commercial service (low voltage)

U2 2,201 VA to 200 kVA For medium commercial service (low voltage)

U3/MV 201 kVA and over For large commercial service (medium voltage)

U4 _ For temporary service (low voltage)

II Up to 99 kVA For industrial & hotel service (low voltage)

12 100 kVA to 200 kVA For industrial & hotel service (low voltage)

I3lMV 201 kVA and over For industrial & hotel service (mediumvoltage)

I4/HV 5,000 kVA and over For industrial service (high voltage)

GI 250 VA to 200 kVA For office service (low voltage)

G2/MV 201 kVA and over For office service (medium voltage)

J - For street lighting service (low voltage)

Source: PLN Finance Department.

POWIR TIWASIISSIOWI D.bTRIUtITION PROJMCT

PLN' T?srlff

History of Tariff Adlusteents, 1980/81-1986/87

2980 (may) 1982 (February) 1983 (Februsry) 1984 (March) 1986 (Auguet)Tariff Deeand Energy Average Demand Energy Average De!mnd Energy Average Demand Energy Avorage De-and Energy Averagecategory charge charge price charge charge price chager charge price charge cbarge price charge charge price

(Rp/kVA) (Rp/kVh) (Ip/kVh) (Rp/kVA) (Rp/kWh) (Rp/kWh) (Rp/kVA) (Rp/kWh) (Rp/kWh) (Rp/kVA) (Rp/kWh) (Rp/kWh) CIp/kVA) (kp/kWh) (tp/kWh)

Si - - - - - - /a - - /b - - lb - -

82 1,600 15.00 27.13 1,600 22.00 34.12 1,600 35.00 48.01 2,100 43.50 6M.57 2,100 43.50 62.42

f1 1.600 27.00 38.34 1,600 37.50 48.85 1,600 36.00 67.19 2,100 70.50 85.19 2,100 70.50 88.15

R2 1,600 33.50 43.75 1,600 45.50 55.76 1,600 67.00 77.60 2,100 84.50 9R.41 2,100 84.50 100.41

R3 2,800 45.00 67.56 2,800 63.50 66.08 2,600 97.00 119.76 3,680 126.50 156.42 3,080 126.50 162.58

14 2,800 57.57 77.05 2,800 79.50 99.08 2,800 117.50 137.36 3,680 158.00 184.10 3,680 158.00 188.67

Ul 2,800 47.30 66.16 2,800 66.00 84.67 2,800 99.50 119.36 3,680 134.00 160.10 3,680 134.00 165.72

U2 2,800 49.00 75.16 2,800 70.00 96.17 2,600 108.50 135.68 3,680 150.00 169.73 3,680 150.00 190.89

U3/2 °W 0 WBP 3;0.00 49.51 1,750 LWP - 74.0 63.46 ,70 pP * 70.00 2,300 r - 158.00 223.17 2,300 P 1s8.00 LWIP - 34.00 ~~~~~LWI? 46.50 0 7 0OP - 99.00 OP * 99.00

U4 - 125.00 125.00 - 160.00 160.00 - 221.00 221.00 - 307-00 307.00 - 307.00 307.00

HI 2,800 40.00 53.53 2,800 54.50 68.03 - - - - - - - - -

H2 1,750 29.00 34.95 1,750 38.50 44.45 - - - - - - - - -

11 1,750 WIP? 29.00 41.77 1 750 VIP *49.00 53.33 1,750 Op -851.50 74.03 2,300 P * 106 00 9 2,300 P- 97.50 92.61LVBP -20.00 * LVI? 30.50 O .0 AMOP - 66.00 2. OP. 60.50 921

12 ,750 WIP - 29.00 36.12 175f LVBP 46.50 46.09 1,750 p 77.00 67.39 2,300 P 6 200.00 65.51 2,300 P- 92.50 84.53' LVI? 20.00 * LWB? 29.00 OP -48.00 Op - 62.30 up 57.50

13/MV 2,600 LVIP p 20.00 29.91 1,600 VIP 44.00 38.19 1,600 p -68.50 56.17 2,100 P 96.50 75.88 2,100 P 0.50 73.51LWAP 20.00 ~~~LWIP 27.50 OP 43.00 OP -60.30 OF - 6.60

14 /HV 1,500 WLP 27.00 26.61 1.500 wIP 40.00 34.01 1,500 Pp 538.00 44.88 1,970 p 81250 61.13 2,970 P 7;°00 57.57LWBF 19.00 ~~~LVUP - 25.50 OP -37.00 OP - 52.00 0OF 48.30

a1 2,800 32.50 48.48 2,800 46.00 62-00 2,800 71.00 89.92 3,680 96.00 120.86 3,680 96.00 124.75G2/XV 1,500 UVIP 30 34355 1,500 PP 742.0 00 62.25 00 84.92

62/H 2,500 VIp30 * 600 4.0 1,300 P~- 7.0 6.5 1,970 p - 99.0 6.2 1,970 1 * 99.00 87.95LVIP 21.50 LVI?P 30.00 0P?700O - 65.00 OP * 65.00

J - 32.50 32.50 - 41.00 41.00 - 56.50 56.50 76.50 76.50 - 76.50 76.50

Averaer 42.23 53.91 74.72 98.32 95.47

/a Tariff S 100 VA - fp 2.010/month /b Tariff S 100 VA * Rp 2,510/month150 VA a fp 3,015/month 150 VA - Rp 3,765/month200 VA a Rp 4,020/month 200 VA * Rp 5,025/month

Note' WIP - P - Peak hours (18:00-22:00)LVWI - OP - Off-peak hours (22s00-18.00)For 1983 the tariff category is simplified to 17 tarifl categories. HI and 12 (for hotel consumers with low voltgge) have been grouped into 11 and 12. respectively.

Source. PLN finance Departmnt.

ANNME 16-71 - Table 3

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN's TariffAverage Unit Price of Electrlclty Sold by Major Consumers

(Rp/kWh)

Tariff category 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85

Residential 29.42 29.51 29.55 49.43 49.50 64.09 85.01 102.15

Commercial 45.07 34.98 33.99 63.92 68.45 90.17 123.73 167.43

Industrial 24.74 23.72 23.58 31.77 33.08 42.84 58.15 77.39

building 27.24 27.57 27.40 42.59 43.78 58.17 79.18 101.41

Lightlngs 19.62 20.10 20.10 33.84 35.18 44.90 59.56 78.02

Source: PLN Finance Department.

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

PLN's Fuel Consumption Statistics

The date of 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1985/86fuel price increase 04/01/77 04/01/78 04/05/79 05/01/80 01/04/82 01/07/83 12/01/84 1984/85 04/01/85

HishapeedDiesel (HSD) Kl 720,110 768,219 680,251 842,441 688,290 1,036,041 955,827 932,951 843,071

Average rice of:Fuel (HSD) Rp/l 25.00 25.00 35.00 52.50 85.00 145.00 220.00 220.00 242.00Average in an FY Rp/l 25.65 25.76 34.79 51.34 60.48 97.13 157.08 221.97 338.00

Fuel efficiency:Diesel 1/kwh 0.321 0.302 0.300 0.303 0.303 0.302 0.301 0.298 0.295Gas turbine 1/kwh 0.473 0.476 0.474 0.464 0.466 0.486 0.467 0.458 0.465

Industrial DieselOil (IDO) Kl 45,252 31,773 16,116 18,254 11,945 34,067 41,756 92,269 31,100

Average price of:Fuel (IDO) Rp/l 22.00 22.00 30.00 45.00 75.00 125.00 200.00 200.00 220.00Average in an FY Rp/l 24.95 24.54 39.78 45.45 54.47 90.33 140.87 205.53 226.19

Fuel efficiency:Diesel 1/kwh 0.304 0.322 0.320 0.325 0.323 0.324 0.293 0.301 0.314

Residual KI 340,707 430,232 885,235 1,161,981 1,368,273 1,773.652 2,035,247 2,182,650 2,133,351

Average price of:Fuel (RESIDUAL) Rp/l 22.00 22.00 30.00 45.00 75.00 125.00 200.00 200.00 220.00Average in an FT Rp/l 22.12 22.27 29.47 42.54 53.17 86.78 141.39 203.58 224.82

Fuel efficiency:Steam oil 1/kwh 0.320 0.319 0.302 0.298 0.300 0.286 0.282 0.278 0.283

Lube Oil Kl 3,049 3,387 4,124 4,993 5,713 5,956 6,426 6,330 6,875

Transportation Rp/l 272.51 309.19 421.19 568.08 592.75 590.75 596.12 616.20 678.33

Total KI 1,109,418 1,233,611 1,585,726 2,027,699 2,274,185 2,849,716 3,039,256 3,214,200 3,014,397Average price of:Fuel Rp/l 23.00 23.00 31.67 47.50 78.33 131.67 206.67 206.67 227.33Average In a FY Rp/l 25.22 25.29 32.87 47.52 56.52 -9-.41 146.45 209.79 230.99

Sourcei PLN Finance Departsent.

-73 - ANNEX 17Table 2

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Domestic and World Prices of Petroleum Products(As of September 1985)

Share Ratio ofof con- World Domestic prices domestic to

Category sumption price /a Old /b New Jc world price(Z) -- - (Rp/liter) ---- (%)

Aviation turbo 2.7 240 300 250 1.09

Gasoline super 0.4 218 440 440 2.12

Gasoline regular 16.3 208 385 385 1.95

Kerosene 29.2 231 165 165 0.75

Motor diesel 30.0 235 220 200 0.89

Industrial diesel 6.2 221 220 200 0.95

Fuel oil 15.2 124 220 200 1.75

Total/Average 100.0 202 234 222 1.10

/a Based on estimated average price of Indonesian crude at $12.50 per barrel,converted at 159 liters/barrel.

/b Old price before July 10, 1986.

/c New price after July 10, 1986, includinc, 10X VAT.

Source: Estimates by Bank staff. RSI note dated September 19, 1986.

- 74 _ANNEX 18Table I

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Calculations of the Internal Econoic Rste of Return

Incre- Incremental ConsumerInvestments Produc- mental Fuel Fuel O&N contri- Total

Gene- Shadow tion production cost cost cost bution costration T 6 D Total price (GWh) (GWh) ------ USS million ------- -

1984 261.4 - 261.4 241.8 -- 6.4 - 248.31985 392.6 - 392.6 363.2 - - - - 16.4 - 379.51986 416.5 - 416.5 385.3 14,723 - 255.6 - 26.8 - 412.01987 373.0 464.8 837.8 775.0 16,867 2.144 303.9 48.3 47.7 -76.8 794.11988 204.0 531.0 735.0 679.9 19,109 4,386 273.2 17.6 66.1 -76.8 686.71989 38.6 582.0 620.6 574.1 21.305 6,582 227.9 -27.8 81.6 -76.8 551.01990 0 625.5 625.5 578.6 23.537 8,814 244.2 -11.4 97.2 -76.8 587.61991 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.81992 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.81993 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.81994 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.81995 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.81996 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.81997 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.81998 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.81999 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.A2000 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.82001 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.82002 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.82003 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 n 85.82004 0 0 0 0 23.537 8.814 244.2 -11.4 97.2 0 85.82005 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.R2006 0 0 0 0 23,537 8,814 244.2 -11.4 97.2 0 85.82007 0 0 0 n 23,537 8.814 244.2 -11.4 97.2 0 85.82008 0 0 0 0 23,537 8,814 244.2 * -11.4 97.2 0 85.82009 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.82010 0 0 0 0 23.537 8,814 244.2 -11.4 97.2 0 85.82011 0 0 n 0 23,537 8.814 244.2 -11.4 97.2 0 85.8

Notes: 1. The generatlon investements are for the projects scheduled to be commissioned in the period 1987 to1990.

2. Fuel costs have been worked out by operation simulation by PLN. The costs are assessed at theinternational level, prevailing in September 1986, a. follows: coal, S40 per tonne; fuel oil, U.M8.0per liter.

3. Shadow Pricing About 60% of the investment program consists of equipment and materials imported atoffshore prices. As there is no shadow price for the foreign exchange, this component does not needshadow pricing. Out of the remaining 40%, about 207 would be for local materials with shadow pricefactor of 0.80, IOZ for unskilled labor with shadow price factor of 0.65 and 102 for skilled labor withshadow price factor at 1.0, since skilled labor is scar'e. Hence the composite shadow price factor forthe total investment cost works out to 0.925.

- 75 -ANNEX I8Table 2

INDnNESIA

POWFR TRANSMISSION AND DISTRIHUTION PROJECT

Calculation of the Internal Economic Rate of Return

AdditionalSales Incremental sales Revenue at economic benefit

Resi- Corn- Indus- Reti- Cor- Indus- average Resi- Indus-dential mercial trial Total dencial mercial trial Total tariff dential trial Total------------ (CWh) ------------ __…---- …---C(Wh) ------------ --------- (US$ million) ----------

1984 - - - - - - - - - - - -

1985 - - - - - - - - - - - -

1986 4,622 2,276 4,511 11,4f9 - - - - - - - -1;87 5.218 2,302 5,465 12,985 596 26 954 1.576 91.7 38.7 21.5 60.21988 5,833 2,755 6,915 15,103 1,211 479 2O104 3,694 215.n 78.7 45.0 123.71989 6,499 3.084 7,460 17,04:1 1,877 8H8 2,949 5.634 327.9 122.0 66.3 188.31990 7,249 3,458 8,321 19,028 2.627 1,182 3,810 7.619 443.4 170.7 85.7 256.41991 7,249 3.458 8,321 19,028 2,627 1,182 3,810 7,619 443.4 170.7 85.7 256.41992 7,249 3,458 A,121 19,028 2,627 1,12 1,810 7,619 443.4 170.7 H5.7 256.41993 7,249 3,458 8,121 19.028 2,627 1,182 3,810 7,619 443.4 17n.7 85.7 256.41994 7,249 3,458 8,321 19,028 2,627 1,182 3,810 7,h19 443.4 170.7 85.7 256.41995 7,249 3,458 8,321 19,C028 2,627 1,182 3,810 7,619 441.4 170.7 85.7 25h.41996 7,249 3,458 R,321 19,02R 2,627 1,'12 3,810 7,619 443.4 170.7 H5.7 256.41997 7,249 3,458 R,321 19,028 2,627 .1iH2 1,810 7,619 443.4 170.7 85.7 256.419q8 7.249 3,458 R.121 19,028 2.627 1,182 3,810 7,619 443.4 17n.7 85.7 256.41999 7,249 3,458 8,321 19,028 2,627 1.182 3,810 7,619 443.4 170.7 R5.7 256.42000 7,249 3,458 8,321 19,023 2.,t2 1,182 3,810 7,ftjq 443.4 170.7 85.7 256.42Q01 7.249 3.458 8.321 q,028 2.627 1,1H2 3,810 7,619 443.4 170.7 85.7 256.42002 7,249 3.458 8,121 19.028 2,627 1,182 3,810 7,619 443.4 170.7 R5.7 25h.42003 7,249 3,458 8,321 19,028 2,627 1.182 3,810 7,619 441.4 170.7 85.7 256.42004 7.249 3,458 8,121 19,028 2,627 3,182 3,810 7,619 443.4 170.7 85.7 256.42005 7,249 3,45H 8,321 19,028 2.627 1,182 3,810 7,619 443.4 170.7 85.7 256.42006 7,249 3,458 8,321 19,028 2.,h27 1,182 3,810 7,619 443.4 170.7 85.7 256.42007 7,249 3,45R 8,321 19,028 2,627 1,182 1,811) 7,619 443.4 170.7 85.7 256.42008 7,249 3,458 8,121 19,n28 2,627 1,182 3,H10 7,619 443.4 170.7 85.7 256.42009 7,249 3,458 8,321 19J,02 2,627 1,182 3,810 7,619 443.4 170.7 85.7 256.4201n 7,249 3,458 8,121 19,028 2,627 1,182 3,H10 7,619 443.4 170.7 85.7 2S6.42011 7,249 3,458 8,321 19,028 2,h27 1,382 3,8I1( 7,6l9 443.4 170.7 85.7 25h.4

Notes: 1. Average Tariff in 1986 - Rp 96.0 - lISa' 5.82 per kWh.2. Average revenue from Residential - Rp 107 - 1V1S6.5 per kWh.

Average revenue from Cotmurc1al - Rp Iht, - 1S111.1 per kWh.Average revenie from Indusitrv - Rp 73.S - ISft 4.45 per kWh.

3. Additional Economic Benefit calculeted aS tollows; (see nara h.111 and h.Il):Residrntial. at ITS 6.5 Per kWh

Induistrial at USt 2.225 per kWh.

-76 - ANNEX 18

Table 3

INDONESIA

POWER TRANSMISSION AND DISTRIBUTION PROJECT

Demand Curve for Industrial Consumers

Based on information gathered in Indonesia by the Bank mission inSeptember/October 1984, for the review of the PLN-s investment program, thefollowing demand curve for industrial consumers was estimated.

Z auto producers' Time r'urrentwillingness to PLN-s tarffpay at least (P)

0 3 P10 2.25 P20 2 P30 1.82 P40 1.7 P50 1.56 P60 1,43 P70 1.3 P80 1.2 P90 1.08 P

100 1. P

The average willingness to pay on the above basis is 1.7 P.

- 77 -ANNEX 19Page 1

INDONESIA

TRANSMISSION AND DISTRIBUTICZ PROJECT

Selected Documents and Data Available in the Project File

Reports on the Sector

1. IBRD Rep,:rt "Indonesia: Issues and Options in theEnergy Sector ....... ...................... ...... 3543-IND of 1981

2. Legislation Affecting PLN .......................... Electricity Act of1985

3. Organization and Job Descriptions of PLN (based onSeptember 1981, Decree of the MME) .............. 1981

4. Final Accounts of PLN ............................... 1984/85 and 1985/86

5. Audit Reports of PLN ............................... 1984/85

6. Financial Forecasts (1986187 - 1992/93) and Working Papers

7. Commercial Statistics, 1984/85

8. Annual Financial Information, PLN........a ........... 1984/85

9. The Decree of the President of the Republic of Indonesia No. 3 of theYear 1983, Concerning the Procedures of Promoting and Supervising Depart-mental Agency (PERJAN), Public Corporation (PERUM) and Limited LiabilityState Corporation (PERSCRO), dated February 17, 1983

1G. The Decree of the President of the Republic of Indonesia No. 28 of theYear 1983, Concerning Amendment to Decree No. 3 of the Year 1983, datedNovember 28, 1983

11. Financing PLN's Future Investment Program, September 1983, AdvisoryGroup, GOI

12. (a) PLN Tariff History, 1983, PLN; (b) Electricity Basic Tariff, 1986,PLN

13. Long Run Marginal Cost Study, 1986, PLN

14. Government Regulation No. 45/1986 dated October 2, 1986, concerning theadjustment of prices or acquisition values of assets in connection withthe change of the Rupiah exchange rate.

15. The Decree of PLN Board of Directors, No. 185/DIR/85 on the CorporateFive-Year Plan ..................................... 1984/85-1988/89

- 78 - ANNEX 19

Page 2

16. Laboratory Strengthening of the Electric Power Research Center, PLNReport of Nov. 24, 1984 and EDF draft reports, 1986

17. Java Transmission and Substation Project Proposals, PLN Report ofDecember 1984.

18. Supplement to (17) - PLN Report of September 1986.

19. Jabotabek Distribution System Development Project Proposal and Feasibil-ity Study for period 1986/87-1987/88, PLN Report 30/84 and update ofSeptember 1986.

20. Action Plan for Loss Reduction - by PLN consisting of:

(a) status of Loss Reduction Program, July 1985; and(b) status of Loss Reduction Program, September 1986.

21. Action Plan for Efficency Improvement - by PLN.

(a) Improvement in PLN's Financial Performance - A Report, 1986/87-1990/91.

(b) Compilation of actions and targets.

-~~~~~ o s- THAILAND '05* 1r

Bondo Ace" QNhJ

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PHILIPPINES PLN GENERATING CAPACITIES BY REGIONSFlCH 31. IM1

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INDONESIA'POWER TRANSMISSION AND DISTRIBUTION PROJECT

MAJOR POWER PLANTS AND MAIN TRANSMISSION LINESUNDER CONSTRUCTIN

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DECEMBER 1g8