Document of The World Bank FOR OFFICIAL USE ONLY Report No: 78198-ID PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$325 MILLION TO THE REPUBLIC OF INDONESIA FOR THE SECOND POWER TRANSMISSION DEVELOPMENT PROJECT (SCATTERED TRANSMISSION LINES AND SUBSTATIONS PHASE II) June 4, 2013 Indonesia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 2013) Currency Unit = Indonesian Rupiah (IDR) IDR 1,000 = US$0.102854 US$1 = IDR 9722.5 INDONESIA- GOVERNMENT FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities kWh Kilowatt hour Land Acquisition and Resettlement Policy ADB Asian Development Bank LARAPF Frmwk Framework Land Acquisition and Resettlement Action CPS Country Partnership Strategy LARAP Plan CRED Construction and Renewable Energy MW Megawatt Directorate DSCR Debt Service Cover Ratio NCB National Competitive Bidding EASIS Indonesia Sustainable Development Unit NPV Net Present Value EMP Environment Management Plan ORAF Operational Risk Assessment Framework ESMF Environment and Social Management PIP Project Implementation Plan Framework ERP Enterprise Resource Planning System PMC Project Management Consultant FD Finance Directorate PMO Regional Project Management Office GAF Governance and Accountability PMU Project Management Unit Framework Planning and Affiliation Development GDP Gross Domestic Product PLAD Dietre Directorate O PT Perusahaan Listrik Negara (Persero)- (Indonesia's State-owned Power Company International Bank for Reconstruction IBRD PSO Pubhec Service Obhigation and Development Rencana Usaha Penyediaan Tenaga Listrik ICB International Competitive Bidding RUPTL PT PLN (Persero)- PLN Long-term Expansion Plan Strategic Procurement and Primary Energy IFR Interim Financial Report SPPE Dietre Directorate IPP Independent Power Producer TA Technical Assistance IPPF Indigenous People Planning Framework VAT Value-added Tax IPTD Indonesia Power Transmission VSL Variable-Spread Loan Development Project Regional Vice President: Axel Van Trotsenburg Country Director: Stefan G. Koeberle Sector Director: John A. Roome Acting Sector Manager: George Soraya Task Team Leader: Anh Nguyet Pham TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ......................................................... 1 B. Sectoral and Institutional Context. ....................................... 1 C. Higher Level Objectives to which the Project Contributes ................... 4 II. PROJECT DEVELOPMENT OBJECTIVES ...........................................................4 A. PDO........................................................ 4 B. Project Beneficiaries ..................................... ........ 4 C. PDO Level Results Indicators......................5.... ............5 III. PROJECT DESCRIPTION ......................................................................................... 5 A. Project Components ..................................... ........ 5 B. Project Financing ..................................... .......... 5 IV. IM PLEM ENTATION .................................................................................................. 6 A. Institutional and Implementation Arrangements ..................... ..... 6 B. Results Monitoring and Evaluation .......................... ......... 7 C. Sustainability................................................ 7 V. KEY RISKS AND MITIGATION MEASURES...................................................... 7 A. Risk Ratings Summary Table ................................... 7 B. Overall Risk Rating Explanation .............................. ...... 8 VI. APPRAISAL SUM M ARY ........................................................................................... 8 A. Economic and Financial Analyses .......................... .......... 8 B. Technical .............................................. ......... 11 C. Financial Management................11..... ..................11 D. Procurement ......................................... ............... 11 E. Governance and Accountability Framework ..................... ....... 12 F. Social (including Safeguards) ...................................... 12 G. Environment (including safeguards) ................................. 13 Annex 1: Results Framework and Monitoring ....................................................................14 Annex 2: Detailed Project Description.................................................................................. 15 Annex 3: Implementation Arrangements ............................................................................. 17 Annex 4: Operational Risk Assessment Framework (ORAF)..............................................30 Annex 5: Implementation Support Plan ................................................................................ 33 PAD DATA SHEET Indonesia Indonesia Second Power Transmission Development Project (Scattered Transmission Lines and Substations Phase II) (P123994) PROJECT APPRAISAL DOCUMENT EASTASIA AND PACIFIC EASIS Basic Information Project ID Lending Instrument EA Category Team Leader P123994 Investment Project B - Partial Assessment Anh Nguyet Pham Financing Project Implementation Start Date Project Implementation End Date 01-August-2013 30-Jun-2018 Expected Effectiveness Date Expected Closing Date 31-January -2014 31-Dec-2018 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President George Soraya John A. Roome Stefan G. Koeberle Axel van Trotsenburg Borrower: Ministry of Finance Responsible Agency: PT PLN Contact: Murtaqi Syamsuddin Title: Director of Planning and Risk Management Telephone 62-21-7251234 Email: murtaqi@pln.co.id No.: Project Financing Data(in USD Million) [X] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee Total Project Cost: 346.43 Total Bank Financing: 325.00 Total Cofmancing: Financing Gap: 0.00 Financing Source Amount Borrower 21.43 International Bank for Reconstruction and 325.00 Development Total 346.43 Expected Disbursements (in USD Million) Fiscal 2014 2015 2016 2017 2018 2019 0000 0000 0000 Year Annual 10.00 80.00 100.00 80.00 55.00 0.00 0.00 0.00 0.00 Cumulati 10.00 90.00 190.00 270.00 325.00 325.00 0.00 0.00 0.00 ve Proposed Development Objective(s) The development objective of the proposed project is to meet growing electricity demand and increase access to electricity in the Project Area through strengthening and expanding the capacity of the power transmission networks in the Project Area in a sustainable manner. The Project Area includes selected parts of Java, Bali islands, East Indonesia and West Indonesia. Components Component Name Cost (USD Millions) Extension and rehabilitation of 150/20 kV substations and 70/20 kV 325.00 substations in Project Area and construction of new 150/20 kV substations in Project Area Institutional Data Sector Board Energy and Mining Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Co- Mitigation Co- benefits % benefits % Energy and mining Transmission and 100 Distribution of Electricity Total 100 O I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Financial and private sector development Infrastructure services for private sector 90 development Environment and natural resources Climate change 10 management Total 100 Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X] Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [X] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X] Does the project meet the Regional criteria for readiness for implementation? Yes [ X] No I Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X Legal Covenants Name Recurrent Due Date Frequency Loan Agreement Section 5.01 05-Nov-2013 Description of Covenant The Additional Condition of Effectiveness consists of the following, namely that the Subsidiary Loan Agreement has been executed on behalf of the Borrower and the Project Implementing Entity. Name Recurrent Due Date Frequency Project Agreement Schedule Section L.A X Throughout Project implementation Description of Covenant The Project Implementing Entity shall maintain, throughout Project implementation, the Directorate of Planning and Affiliation Development, Directorate of Finance, and Directorate of Strategic Procurement and Primary Energy and the Project Management Unit with an adequate institutional framework, functions, and resources, including competent personnel in adequate numbers, as shall be required for the purposes of Project implementation. Name Recurrent Due Date Frequency Project Agreement Schedule Section I.B.3(a) X Throughout Project implementation Description of Covenant All Sub-projects need to meet the Eligibility Criteria described in the Project Agreement and in the Project Implementation Plan Name Recurrent Due Date Frequency Project Agreement Schedule Section I.B.3(b) X Throughout Project implementation Description of Covenant The Project Implementing Entity shall provide to the Bank the Project Implementing Entity's rolling investment plan, including those activities that constitute proposed Group 2 Sub-projects no later than January 15 in each year of Project implementation. Name Recurrent Due Date Frequency Project Agreement Schedule Section I.D X Throughout Project implementation Description of Covenant The Project Implementing Entity shall carry out the Project in accordance with the safeguards instruments listed in the Project Agreement, including the specific provisions to Environmental Management Plans, to Land Acquisition and Resettlement and to Indigenous Peoples Name Recurrent Due Date Frequency Project Agreement Schedule Section II.A X Yearly Description of Covenant The Project Implementing Entity shall monitor and evaluate the progress of the Project and prepare Project Report. Each such report shall cover the period of one calendar year, and shall be furnished to the Bank no later than forty five days after the end of the period covered by such report. Name Recurrent Due Date Frequency Project Agreement Schedule Section II.B.2 X Quarterly Description of Covenant The Project Implementing Entity shall prepare and furnish to the Bank, interim un-audited financial reports for the Project covering the preceding quarter, in form and substance satisfactory to the Borrower and the Bank no later than forty five days after the end of each calendar quarter. Name Recurrent Due Date Frequency Project Agreement Schedule Section II.B.3 X Yearly Description of Covenant The Project Implementing Entity shall have its financial statements audited by independent auditors acceptable to the Borrower and the Bank, in accordance with consistently applied auditing standards acceptable to the Borrower and the Bank. Each such audit shall cover one fiscal year of the Project Implementing Entity and be submitted to the Bank no later than 6 months after the end of the period. Name Recurrent Due Date Frequency Project Agreement Schedule Section II.B.4 X Yearly Description of Covenant The Project Implementing Entity shall maintain a debt service coverage ratio of 1.5 times. Team Composition Bank Staff Name Title Specialization Unit Dhruva Sahai Sr Financial Analyst Sr Financial Analyst EASWE Sri Oktorini Program Assistant Program Assistant EACIF Richard Jeremy Spencer Country Sector Coordinator Peer Reviewer SASDE Leiping Wang Lead Energy Specialist Senior Energy Specialist SASDE Cristina Hernandez Program Assistant Program Assistant EASWE Anh Nguyet Pham Senior Energy Specialist Team Leader EASIS Zhentu Liu Senior Procurement Senior Procurement EASR2 Specialist Specialist Mariangeles Sabella Senior Counsel Senior Counsel LEGES Christina I. Donna Financial Management Financial Management EASFM Specialist Specialist Franz Gemer Lead Energy Specialist Peer Reviewer EASVS Dayu Nirma Amurwanti GAC Specialist EACIF Husam Mohamed Beides Lead Energy Specialist Peer Reviewer MNSEG Melinda Good Chief Counsel Senior Counsel LEGES Andrew Daniel Sembel Environmental Specialist EASIS Puguh Imanto Energy Specialist Operations Officer EASIS Hung Tan Tran Power Engineer Power Engineer EASVS Yash Gupta Senior Procurement Senior Procurement EASRI Specialist Specialist Marcelino Madrigal Senior Energy Specialist Peer Reviewer SEGEN Makoto Takeuchi Senior Energy Specialist Senior Energy Specialist EASWE Non Bank Staff Name Title Office Phone City Ninin Dewi Social Safeguards Bandung Specialist Warren H. Waters Consultant Social Ottawa Safeguards Penelope Ferguson Environment Safeguards Christchurch Consultant Kazim Saeed Economist KARACHI Locations Country First Administrative Location Planned Actual Comments Division  I. STRATEGIC CONTEXT A. Country Context 1. Indonesia has made remarkable progress over the last decade in terms of macroeconomic and political stability. Macroeconomic performance since the late 1990s has seen consistent output growth and a rapid decline in external imbalances. With inflation under control and rising incomes, Indonesians have been enjoying improving living standards and poverty levels have fallen, although many remain close to the poverty line. Indonesia was less affected by the global economic downturn of 2008-09 than most economies, and by late 2009 the economy had recovered to grow faster than pre-crisis averages. The outlook is that Indonesia's economic momentum will continue to build, with growth rising above 6 percent in 2011, and with scope for growth to average 7 percent by mid-decade, despite the weaker global economic outlook. Indonesia's fiscal position also remains strong, providing the government with options for providing additional resources for meeting infrastructure development priorities. Successful implementation of priority infrastructure projects will be essential for Indonesia to emerge as a strong middle income country in the coming decade. B. Sectoral and Institutional Context 2. Indonesia's power industry experienced rapid expansion from the early 1980s to the late 1990s. Although significantly weakened by the Asian Financial Crisis, the power sector has been gradually recovering, especially in the past few years. By the end of 2010, the total installed generation capacity of the national power system reached 31,656 megawatt (MW), making it one of the largest in Southeast Asia. On the other hand, Indonesia's national average electricity consumption of 629 kilowatt hours (kWh) per capita and electrification ratio of 66.5 percent in 2010 is low compared with other countries in the region. 3. The geography of Indonesia as well as the distribution of population and economic activities divides the electricity systems in Indonesia into three distinctly different parts: (i) the Java Bali interconnected power system with nearly three quarters of the country's installed generation capacity; (ii) over 20 isolated small power grids with generation capacity ranging from 12 MW to around 2,000 MW on major islands, and over a thousand isolated mini-grids in remote rural areas on Java-Bali and outer islands. The Java-Bali system is a large and modern power system with relatively strong high voltage transmission networks, which provides electricity to over 60 percent of the population and economic activity in Indonesia. Most of the small grids, on the other hand, are much less sophisticated. 4. The state owned national power company, PT Perusahaan Listrik Negara (Persero) (PLN) has the mandate for providing electricity in Indonesia. It is a vertically integrated power company, generating, transmitting and distributing most of the electricity in the country. PLN dominates the generation subsector with 26,895 MW of installed capacity and the 24 Independent Power Producers (IPPs) account for the remaining 4,761 MW. It also acts as the single authorized buyer at the wholesale level in the power market and the sole provider of electricity transmission and distribution services in Indonesia. 1 5. Indonesia's GDP growth has been projected to reach 7 percent by mid-decade based on domestic drivers of growth. PLN's long terms expansion plan (UPTL)1 2010-2019 projects electricity demand growing at over 9 percent annually over the next 10 years. Huge investments will be required by the sector to keep pace with economic growth and significantly increase electricity access rates. The RUPTL envisages an annual average investment of about US$10 billion for the next 10 years. Although the private sector will finance part of the capacity expansion, PLN is expected to invest around US$5.8 billion per year, including US$1.8 billion for the expansion of transmission systems, for which it is solely responsible. 6. The power sector is now facing the following major challenges to sustain economic growth and social development: * Steep investment requirements to keep up with growth: Significant investments from both the public and private sectors are required to meet fast growing energy demand, and to increase access to modern, and sustainable energy solutions for all. PLN's financial viability is critical to the financial viability of the power sector and therefore the sector's ability to attract adequate amounts of capital. * Electrification levels remain low, especially outside Java-Bali. The current national electrification rate is only 71.23 percent in 2011 leaving around 70 million2 people without access to grid electricity, forcing them to resort to costly and unreliable forms of electricity supply. Toward the Government's target of electrifying 90 percent of Indonesian households by 2020, electrification has not been progressing adequately especially outside Java-Bali where PLN's operating costs are higher, poverty is more prevalent and population densities are often lower. Compared with Java-Bali, PLN's cost of service is typically 20-30 percent higher in the more densely populated areas of the larger islands (Sumatra, Kalimantan, and Sulawesi) and between 50-200 percent higher in the smaller islands (Nusa Tenggara, Maluku, and Papua).3 These higher operating costs present a hurdle: greater electrification means a higher need for the public service obligation (PSO) subsidy. But it also translates into a need for reducing transmission and distribution losses. * Heavy reliance on oil in generation fuel mix. PLN's heavy reliance on oil means Indonesia is paying more for power than it needs to and is largely responsible for the financial difficulties of Indonesia's power sector. Yet this need not be so, since Indonesia has abundant natural resources. Coal development is concentrated in East and South Kalimantan. Natural gas reserves and development are concentrated in East Kalimantan, Papua, and South Sumatra. Out of the 75,000MW of technically feasible hydropower potential, 30 percent is in Papua, 30 percent in Kalimantan, 20 percent in Sumatra, and 14 percent in Java-Bali. Geothermal potential is in Sumatra and Java. Indonesia's dominant energy demand center is the island of Java, where there are relatively few energy resources and in consequence oil represents over 27 percent of fuel for thermal power 1 Rencana Usaha Penyediaan Tenaga Listrik PT PLN (Persero) (RUPTL). 2 PLN Statistics 2011. World Bank (2011). One Goal, Two Paths: Achieving Universal Access to Modern Energy in EAP. Page 114. 2 generation which is many times more than comparator countries. A major challenge is to switch to lower and less volatile cost sources for power generation. * While abundant renewable resources are largely unexploited, the rapid increase of coal in the generation fuel mix may expose the country to environmental risks, both local and global. According to PLN's long-term capital investment plan, the share of coal in the generation fuel mix will increase from around 35 percent today to roughly 70 percent by 2020. The magnitude of this expansion is raising concerns about the likely negative environmental impact in the heavily populated areas of Java and Bali, and in the environmentally sensitive areas of some of the outer islands. Indonesia's greenhouse gas emissions will continue to grow at a much faster pace than most of its neighbors. Although Indonesia is rich in renewable energy resources, especially geothermal, hydropower and biomass, the lack of incentives and regulatory certainty, combined with the relatively weak institutional capacity of major national and local institutions, as well as the weak and low coverage of transmission networks has hindered the rapid development of these indigenous and clean energy resources. Furthermore, Indonesia has large gas resources, including unconventional gas that can be exploited for power generation. Other than the isolated grids in remote areas where diesel may be the least- cost fuel for power generation, renewable energy and gas must be used to serve current demand and support the electrification effort. * Current electricity tariffs are insufficient to cover the cost of supply of the national power utility (PLN), leading to high Government subsidies. The electricity price level, though increased by around 6 percent in July 2010, can cover only about two-thirds of the cost of delivered electricity. PLN's financial viability is reliant upon the Government's PSO subsidy. The PSO was around US$5.8 billion or 37 percent of PLNs' total revenues in 2010, and reached about US$10 billion in 2011, raising doubts about the long-term sustainability of this financial support mechanism. An unsuitable tariff policy means that those who do not need subsidy also benefit from the PSO. The availability of the PSO also weakens incentives for PLN to reduce inefficiencies. Tariffs below cost recovery levels are also the main barrier for improving energy efficiency in the economy at large and for shifting energy production and consumption to a low-carbon development path. 7. The government's strategy for delivering reliable and affordable electricity focuses on: (a) facilitating private investments and increasing public financing to grow supply capacity; (b) improving the generation fuel mix based on domestic resource availability by increasing the share of coal, natural gas and renewable energy; (c) rationalizing the electricity tariff and subsidy regime; and (d) further strengthening institutional capacity and improving the management efficiency of PLN. Gol's effort to deliver reliable electricity and its electrification effort require the strengthening of transmission networks to reduce generation costs, including through the inter-connection of isolated mini-grids outside Java-Bali currently using diesel. While this is taking place, transformation capacity at the medium-voltage level also needs to be enhanced to avoid over-loading of transformers (over-loading increases technical losses). This project is intended to support these efforts. 3 C. Higher Level Objectives to which the Project Contributes 8. The Country Partnership Strategy (CPS) for Indonesia FY2013-2015 is aligned with the Government's development priorities in their pro-growth, pro-job, pro-poor and pro-environment focus. The Government is committed to accelerating infrastructure and energy development to meet the country's economic growth target and to improve equity and poverty reduction. The proposed project will contribute to improving Indonesia's electric power infrastructure to meet demand, reduce its costs and increase access, and thus helping competitiveness, business environment and poverty reduction. 9. The project complements other investment operations and technical assistance (TA) activities in the Bank's energy program, which is based on programmatic engagement in four areas, notably (i) continuing to support energy infrastructure to meet demand in sustainable manner and enhance reliability and quality of supply; (ii) scaling up support for renewable energy and natural gas; (iii) increasing access to modem energy and (iv) improving energy efficiency. Each pillar combines TA supporting capacity building, analytical and advisory activities (AAA), underpinning policy dialog and specific investment operations in selected areas. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 10. The development objective of the proposed project is to meet growing electricity demand and increase access to electricity in the Project Area through strengthening and expanding the capacity of the power transmission networks in the Project Area in a sustainable manner. 11. The Project Area includes selected parts of Java and Bali islands, East Indonesia and West Indonesia.4 B. Project Beneficiaries 12. Direct beneficiaries of the project include people who receive and will receive electricity supply directly from new additional substation capacity financed by the project, a population of 29.5 million, inclusive of 15.7 million in Java-Bali, 6.3 million in Sumatra, 2.9 million in Kalimantan and 4.6 million in Sulawesi. 50.1 percent of beneficiaries will be women (based on 2011 population data). The project will neither directly promote nor sustain any gender inequalities in the country. Increased access to electricity will in general benefit both men and women, however regional and global evidence suggests that women in particular benefit.5 4 For the Project, "East Indonesia" consists of all provinces of Kalimantan island, South Sulawesi, Central Sulawesi and South East Sulawesi Provinces or other provinces as may be agreed between WB and PLN. "West Indonesia" consists of all provinces of Sumatra island. 5 According to the EAP Companion to the World Development Report 2012, "Toward Gender Equality in East Asia and Pacific": While lack of electricity affect both female- and male-led enterprises, evidence suggests that such constraints may be more onerous among small and informal firms than among larger firms and, therefore, may constrain female-led enterprises disproportionately. In Indonesia female-led enterprises tend to be smaller, more precarious, less capital-intensive and less productive than male-led enterprises (Indonesia Country Gender Action Plan). Furthermore, having access to electricity extends the hours available for both productive and leisure activities, particularly for women and girls (World Bank, 2012). 4 C. PDO Level Results Indicators 13. Achievement of the development objective will be assessed through an increase in electricity sales, as well as increases of availability of transformer capacity in the substations being financed as a result of the strengthening and expansion the capacity of the transmission systems in the areas. III. PROJECT DESCRIPTION A. Project Components 14. The proposed project includes a single component with two parts described below (details are provided in Annex 1). * Extension and rehabilitation of selected existing 150/20 kV substations and 70/20 kV substations in the Project Area, including adding one or more new transformers and associated equipment; and/or replacing existing transformers with new transformers and associated equipment with higher capacity and * Construction of selected new 150/20 kV substations in the Project Area, including installation of transformers and associated equipment. 15. In parallel with the project, PLN will implement a TA program to improve its capacity to operate the transmission and distribution systems in more efficient and transparent manner through introduction of smart grid technologies. The TA program with an estimated cost of US$2 million will be financed by a grant provided by the Australian Government as a complementary activity to IPTD2. The TA will be supervised together with the project. B. Project Financing Lending Instrument 16. PLN in agreement reached with the Ministry of Finance has selected a LIBOR based IBRD Variable Spread Loan in US$ currency, commitment-linked, annuity-based repayment, with total maturity of 21 years including 7.5 years grace period. Project Cost and Financing 17. Total financing requirement of the proposed project is estimated at US$346.43 million, inclusive of US$325 million by IBRD and US$21.43 million by PLN. The Bank will finance the supply and installation of all the equipment and civil works, including contingency; and PLN will finance land acquisition, taxes, interest during construction, the front-end fee and project management costs. Detailed information on costs and financing sources is provided in Table 1 and Table 2 below. 5 Table 1. Project Costs by Component and Use of Financing Local Foreign Total Project Cost By Component and/or Activity .omil Fomin oil $ million $ million $ million A. Infrastructure Expansion, Rehabilitation & Construction of Substations 45.18 272.82 318.00 B. Service Project Management 8.00 - 8.00 C. Land Acquisition and Compensation 6.30 - 6.30 Total Baseline Cost 59.48 272.82 332.30 Contingency Physical 0 0 0 Price 7.00 7.00 Tax (VAT) 1.81 - 1.81 Total Project Costs 61.29 279.82 341.11 Interest During Construction - 4.53 4.53 Front-End Fee - 0.79 0.79 Total Financing Required 61.29 285.14 346.43 Table 2. Project Costs by Component and Source of Financing PLN IBRD Total Project Cost By Component and/or Activity ln . mil $ million $ million $ million A. Infrastructure Expansion, Rehabilitation & Construction of Substations - 318.00 318.00 B. Service Project Management 8.00 - 8.00 C. Land Acquisition and Compensation 6.30 - 6.30 Total Baseline Cost 14.30 318.00 332.30 Contingency Physical - - - Price 7.00 7.00 Tax (VAT) 1.81 - 1.81 Total Project Costs 16.11 325 341.11 Interest During Construction 4.53 4.53 Front-End Fee 0.79 0.79 Total Financing Required 21.43 325.00 346.43 Notes: Base costs are at 2012 price level. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 18. PLN will be the implementing agency. The Planning and Affiliation Development Directorate (PLAD) of PLN will be responsible for overseeing and coordinating project implementation, including monitoring and reporting. A Project Management Unit (PMU) led by the PLAD has already been established to take this responsibility. Procurement activities will be managed centrally by the Strategic Procurement and Primary Energy Directorate (SPPE). A Procurement Committee will be established at PLN headquarters consisting of representatives of related functional departments and the respective regional project management offices (PMOs). 6 Six PMOs in Java-Bali, Sumatra, Kalimantan and Sulawesi will be directly in charge of managing construction of sub-projects; three of these PMOs are experienced in working on Bank projects. Disbursement and financial reporting will be carried out by PLN Finance Directorate (FD) with the support of the six PMOs. A Project Management Consultant (PMC) will be employed by PLN within a month after the effectiveness of the project to support the PMU and other units to carry out their responsibilities under the project. 19. The Project Implementation Plan (PIP), prepared by PLN was reviewed by the Bank and found satisfactory. The PIP will be adopted by PLN for the project implementation before June 6, 2013. B. Results Monitoring and Evaluation 20. PLN has maintained an adequate statistics system which provides sufficient data to monitor the project outcomes such as electricity sales at the project areas. Project physical progress and the related intermediate outcome indicators will be monitored by the six regional PMOs. The PLAD with the assistance of the PMC will compile the data and monitor overall project implementation performance. C. Sustainability 21. The GOI is committed to strengthening the electricity sector's institutional capacity, especially PLNs' management efficiency. The GOI is fully aware of the need to make substantial investments in the power infrastructure, including transmission systems and made it recently one of its highest priority areas for public spending in coming years. 22. At the project level, PLN has demonstrated commitment through its approvals process and the preparation time. Each sub-project was identified by PLN as a priority and PLN itself has demonstrated commitment to improved service quality and meeting increasing demand. PLN has fully complied with the Bank's requirements in the preparation of the project documents. It has also confirmed the deployment of adequate staff resources and counterpart funds for implementing the Project. 23. Besides continued borrower commitment, the sustainability of the project relies on continued growth in demand for power in Indonesia and matching the transmission system growth with expansion of generation capacity and pace of rural electrification. Demand growth appears robust, while the issue of increasing generation capacity and acceleration of rural electrification is well understood at all levels of GOI and PLN. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table 3. Risk Rating Summary Table Stakeholder Risk Rating Implementing Agency Risk 7 - Capacity Moderate - Governance Moderate Project Risk - Design Low - Social and Environmental Low - Program and Donor Low - Delivery Monitoring and Sustainability Low Overall Implementation Risk Moderate B. Overall Risk Rating Explanation 24. This is a technically simple project to be implemented by an established power utility which has successfully implemented similar projects financed by the Bank. However, the overall risk for project implementation is rated as moderate due to possibly weak capacity of the new PMOs in Kalimantan and Sulawesi and constraints in PLN capacity in procurement management. Potential risks are summarized in the Operational Risk Assessment Framework (Annex IV). VI. APPRAISAL SUMMARY A. Economic and Financial Analyses Economic Analysis 25. Economic analyses were conducted to compare the projected cost/benefit stream of the no project' case (no upgrading/extension despite sub-station overloading) with those of the 'with project' case. The analysis calculated the economic internal rates of return (IRR) and the present value of net cash flow (NPV) for each of the six investments. The sub-projects which involve additions to four inter-connected systems (Java-Bali, Sumatra, South Sulawesi and South Kalimantan) were analyzed as aggregate investments for a time-slice of 2015-16. The two individual sub-projects involving the West Kalimantan and Central Kalimantan systems were analyzed individually. Sensitivity analyses were run on the returns and NPVs by introducing negative impacts in three key parameters: capital investment costs rising by 15 percent, the electricity demand growth rate falling by 50 percent, and the gap between the willingness-to-pay and cost narrowing by 15 percent. Switching values for the key parameters were also calculated to identify the value which is a threshold between project viability and unviability. 26. The results of the economic analyses (Table 4) show that the planned investments are economically justified and largely robust. The returns/NPVs were generally found to be robust to the three sensitivity scenarios as well as a scenario with all three simultaneously. The detailed analysis is available in project files. 8 Table 4. Summary of Economic Analysis Economic Imm South South West Central mm----- .RR by Sulawesi Kalimantan Kalimantan Kalimantan region M Base Case 45% 56% 55% 58% 42% 60% Capital cost 41% 50% 51 % 55% 39% 56% increase by 15% Electricity 43% 41% 42% 40% 27% 40% demand growth rate falls by 50% Gap between 29% 47% 47% 52% 37% 54% WTP and cost narrows by 15% All impacts 24% 30% 34% 33% 22% 33% Financial Analysis 27. PLN is a state-owned entity that is structured to operate on commercial principles. However due to the Government's policy of keeping electricity tariffs below the cost of power supply for most consumer categories, PLN's financial condition continues to rely on a Government public service obligation (PSO) subsidy. This PSO subsidy which covers the shortfall between electricity tariffs and PLN's cost of power supply,6 and which the Government is legally required to pay, was Rp. 93 trillion (45 percent of PLN's revenues) in 2011, and Rp. 103 trillion (44 percent of PLN's revenues) in 2012.7 The higher PSO subsidy in 2012 reflects an 8.5 percent increase in the number of customers (3.9 million new customers), and a rise in PLN's operating costs as a result of increases in the utilization of coal, and natural gas.8 28. PLN continued to remain profitable during 2012 with a net profit of Rp. 7.8 trillion (US$0.8 billion) as compared to a net profit of Rp. 7.2 trillion (US$0.8 billion) in 2011. PLN's 6 The Government is obliged to pay a public service obligation subsidy under the State Owned Enterprise Law 19/2003 which mandates that the Government cover any financial shortfall that would arise as a direct result of one of its policies. This would include the Government having established a retail electricity tariff that is on average less than the full cost of providing electricity to consumers. In addition, MOF Decree No. 11 1/PMK.02/2007 ensures that the difference between sales and cost of production is covered. PLN has advised the World Bank, that based on its adoption of an Indonesian accounting standard, ISAK 8 which is based on IFRIC 4 (IFRS) and EITF 01-8 (US GAAP), the capacity charge component of its power purchase agreements will be treated as lease payments. PLN is preparing ISAK 8 compliant financial projections to gauge the potential implications of this proposed accounting treatment on PLN's financial statements. The World Bank is monitoring the situation to measure the impact if any of the new accounting treatment on PLN's financial condition. The 2012 amounts shown in this analysis have however been adjusted to non-ISAK 8 levels to ensure consistency with PLN's historical financial statements, and its current financial projections. 8 PLN's cost of gas increased from Rp. 11.4 trillion (US$1.3 billion) in 2011, to Rp. 22.4 trillion (US$2.3 bn) in 2012 due to PLN having substituted fuel oil for gas in a few of its CCGT plants and having secured LNG at approx. US$14-15/mmbtu to supply Muara Karang. PLN's cost of coal increased from Rp. 19.2 trillion (US$2.1 billion) in 2011 to Rp. 26 trillion (US$2.7 billion) in 2012 due to the commissioning of an additional 3,798.5 MW of coal fired generation capacity during 2012. 9 operating revenues (excluding PSO) increased from Rp. 115 trillion (US$12.7 billion) in 2011 to Rp. 129 trillion (US$13.4 billion) in 2012. A major contributor to this increase in operating revenues is the approximately 10 percent increase in energy sales volume, and the uprating of capacity of urban customers9 resulting in higher tariff revenues from these customers. However, given the role played by the PSO subsidy in PLN's financial position, liquidity rather than profitability is the primary measure of PLN's financial condition. 29. PLN also remains sufficiently liquid'o and it has adequate headroom to cover its ongoing investment program and its operations," provided the Government continues to pay its PSO subsidy to PLN in a full and timely manner. PLN has demonstrated the ability to borrow from both the local and global financial markets to meet its investment needs.12 However, PLN's ability to leverage additional financing to cover future investments will remain contingent upon the Government meeting its financial obligation to PLN, and its commitment to the tariff reform agenda. 30. PLN's Financial Projections. PLN expects both average annual sales revenues, and revenues excluding Government subsidies to grow at an average annual rate of about 9.8 percent during 2013-17. PLN's operating costs are expected to continue to be higher than its operating revenues excluding subsidies throughout the projection period. As a result, government subsidies are expected to remain substantial averaging Rp. 93.8 trillion (US$10 billion) during the projection period. Net income, after taxes, is expected to average Rp. 15.4 trillion (US$1.7 billion) during 2013-17 and is expected to average 5.5 percent of total revenues. This net income level is attainable mainly due to the expected high sales growth, and the expected decline in the use of fuel oil in the generation mix. PLN is also expected to remain sufficiently liquid over the projection period with an average year-end cash balance of Rp. 13.1 trillion (US$1.4 billion). 31. Monitoring PLN's Financial Condition. In the context of the above financial projections, the key financial measure to monitor PLN's financial viability would be its liquidity. This liquidity ensures that the company can meet its financial obligations and is able to raise the funds needed for its capital investment program. An evaluation of PLN's 2012 audited financial statements indicates that PLN's liquidity remained largely unchanged from 2011 to 2012. In addition, PLN had sufficient cash at year end 2012 to meet its financial obligations.13 On January 18, 2012, PLN received a ratings upgrade to Baa3 by Moody's, and on December 13, 2011, a BBB - rating from Fitch, both of which are investment grade ratings, and are the same ratings as those accorded to the sovereign. However, PLN is also undertaking a significant investment program while the sector is undergoing a reform in pricing and subsidies.14 PLN's financial condition would therefore need to be monitored in the next few years to ensure that its financial strategy remains relevant to keep it on a strong financial footing. 9 104,000 urban customers were uprated from 450 VA to 1,300 VA, and the proportion of new customers above 450 VA also increased during 2012. 10 PLN's liquidity is estimated to remain about the same from Rp. 22 trillion (US$2.4 billion) in 2011 to Rp. 22.6 trillion (U$2.3 billion) in 2012. PLN's debt service coverage ratio is estimated to be 1.68 x during 2012 on a non-ISAK 8 basis. 12 During 2012, PLN issued a US$1 billion global medium term note (5.25% interest and 30 year maturity). 13 PLN had a 2012 year-end cash balance of Rp. 22.6 trillion (US$2.3 billion). 14 The Government has approved a 15 percent tariff increase during 2013 to be implemented gradually each quarter. 10 32. In view of PLN's current and projected financial information, the financial covenant of the debt service coverage ratio (DSCR) of 1.5 times which is the same ratio as the ongoing Java Bali Power Sector Restructuring and Strengthening project, (Loan 7758-ID), the Additional Financing Loan for the Extended Deployment of an Enterprise Resource Planning System (Loan 7905-ID), the Power Transmission Development Project, (Loan 7940-ID), and the Upper Cisokan Pumped Storage Hydropower Project (Loan 8057-ID) is considered to be appropriate for this project.15 33. A detailed analysis of PLN's financial condition is provided in the project files. B. Technical 34. Feasibility studies (technical-economic reports) of the proposed sub-projects in Group 1 were reviewed and found to be satisfactory. All the proposed sub-projects in Group 1 and Group 2 form parts of PLN's least cost power system expansion plan. The proposed sub-projects in Group 1 were verified through regional load flow and stability analyses to ensure that system reliability and security requirements are met. PLN planning approach and methodology were reviewed during preparation of the IPTD project and found acceptable. Technical design approach of individual sub-projects was also reviewed and found meeting Indonesian technical standards and consistent with international standards. C. Financial Management 35. A financial management assessment was conducted by the Bank and actions to strengthen PLN's financial management capacity have been agreed upon with PLN. The assessment concludes that with the implementation of the actions, the proposed financial management arrangements will satisfy the Bank's minimum requirements under OP/BP 10. The financial management risk is assessed as "moderate". Annex 3 provides additional information on financial management implementation arrangement. The detailed financial management capacity assessment and arrangements are available in the project files. D. Procurement 36. A procurement assessment was carried out which concludes that PLN has adequate experience and capacity to carry out procurement activities related to the proposed project. PLN is familiar with Bank procurement procedures through its experience with the on-going investment projects financed by the Bank. The assessment identified several key issues and risks which could arise during implementation such as (i) possible confusion between national and PLN procurement regulations and Bank's Procurement Guidelines and between different versions of the Bank procurement guidelines applied for IPTD2 and other on-going Bank- financed projects; (ii) Uncertainty in the capacities and workload of the procurement committee and its committee members; (iii) Complicated review procedures due to high-value contracts that may lead to delay; (iv) Ineffective coordination between Directorate of Strategic Procurement and Primary Energy, Directorate of Construction and Renewable Energy and Regional PMOs for contract management Mitigation measures were discussed and agreed with PLN. The 1 PLN's debt service coverage is estimated to be 2.1x as of end 2011. 11 procurement risk after mitigation is assessed as moderate. The procurement plan for the project was received by the Bank and found to be acceptable. It will be updated annually (or as required) to reflect the project implementation needs. A brief summary of the procurement capacity assessment and project procurement arrangement are provided in Annex 3. More details are available in the project files. E. Governance and Accountability Framework 37. A Governance and Accountability Framework (GAF) was developed for the project to mitigate fraud and corruption risks. It was based on the GAF for IPTD which has proved to be effective. The GAF summarizes the actions that have been agreed to and will be undertaken by PLN to reinforce project governance, thereby enhancing transparency of project activities, increasing public accountability, and reducing opportunities for corruption, collusion or fraud. The GAF is available in project files. F. Social (including Safeguards) 38. The project will result in improvement of the quality and adequacy of power supply in the project areas and therefore it has positive impacts for people and local communities. Land acquisition process, including public consultation and satisfactory compensation for the population residing in the project areas, is the main social issue of the project. Since land acquisition is limited, the adverse impact is assessed as modest and manageable. No land acquisition is required for the 37 sub-projects in the first phase of investment (Group 1). No indigenous people as defined by OP 4.10 are present in, or are collectively attached to the project areas for the investment in Group 1 and the proposed sub-projects in the second phase (Group 2). However, as PLN can update replace or propose new sub-projects in Group 2, these sub-projects may be located in the areas where indigenous people are present. 39. PLN prepared a Land Acquisition and Resettlement Policy Framework (LARAPF) and an Indigenous People Planning Framework (IPPF) to guide the land acquisition process and if applicable, indigenous people development plan for sub-projects in Group 2 and Land Acquisition and Resettlement Action Plans (LARAPs) for two new sub-projects in Group 2. The two frameworks and LARAPs were reviewed and found to meet the Banks' requirements. The land acquisition and resettlement policy framework incorporates priorities to, inter alia, women headed households and; the IPPF targets that indigenous women, men and women's associations are involved in relevant consultations. The institutional capacity of PLN and the project implementation arrangement has also been reviewed and is regarded as being adequate for implementation of the social safeguards instruments. 40. All the draft final documents were disclosed on PLN website in January 2012 and the final LARAPF and IPPF were disclosed on PLN website in March 2013. The draft final documents were also disclosed at the InfoShop in Washington D.C. in January 2012 and the final LARAPF and IPPF were disclosed there in April 2013. 41. Due diligence was conducted to identify any potential social liabilities of the existing substations for which land acquisition was completed in the last couple of years and which are to 12 be rehabilitated or extended under the project. The due diligence found that the land acquisition has been in compliance with the national regulations and no controversial issue was recorded. G. Environment (including safeguards) 42. The project is rated a Category B project. Environmental impacts are likely to be modest, non-sensitive and reversible and in every case, mitigation measures can be designed to reduce the negative impacts. No cultural property or natural habitat are critically impacted or will be impacted by the sub-projects. PLN prepared an Environment Management Plan (EMP) for Upgrades for all sub-projects in Group 1, an Environment and Social Management Framework (ESMF) to guide environment management process for sub-projects in Group 2 and EMPs for two new substations proposed to be built under Group 2. The institutional capacity of PLN and the environment safeguards implementation arrangement were reviewed and are regarded as being adequate. 43. The ESMF and EMPs were publicly disclosed in the same way and together with the social safeguards documents mentioned above. All draft final documents were disclosed on PLN website in January 2012 and the final ESMF and EMP for Upgrades were disclosed on PLN website in March 2013. The draft final documents were also disclosed at the InfoShop in Washington D.C. in January 2012 and the final ESMF and EMP for Upgrades were disclosed there in April 2013. 13 Annex 1: Results Framework and Monitoring Project Development Objectives PDO Statement The development objective of the proposed project is to meet growing electricity demand and increase access to electricity in Project Area through strengthening and expanding the capacity of the power transmission networks in the Project Area in a sustainable manner. Project Development Objective Indicators Cumulative Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection Electricity Sales in Gigawatt-hour Annually after PLN Statistics by PLN Planning & Risk project areas for Group 1 (GWh) completion (ICR) Distribution Units Management Directorate Growth in electricity Annually after PLN Statistics by PLN Planning & sales in project areas for Percentage 100 0 0 0 0 135 2016 and at Distribution Units Affiliation Development Group 2 in Java-Bali completion (ICR) Directorate Growth in electricity Annually after sales in project areas for Percentage 100 0 0 0 0 144 2016 and at PLN Statistics by PLN Planning & Affiliate Group 2 in East completion (ICR) Distribution Units Development Directorate Indonesia cmlto IR Growth in electricity Annually after PLN Planning & sales in project areas for Percentage 100 0 0 0 0 145 2016 and at PLN Statistics by Affiliation Development Indonesia completion (ICR) Directorate Intermediate Results Indicators Cumulative Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection Progress in Procurement Project Office PLN Planning & and Contract Completion Percentage 0 25 50 75 100 100 Semi annual Projet offc Affiliation Development for Group 1 Directorate Progress in Procurement Project Office PLN Planning & and Contract Completion Percentage 0 0 25 50 75 100 Semi annual Projet offc Affiliation Development for Group 2 Progress Reports Directorate Commissioned capacity Kilovolt-Ampere Project Office PLN Planning & of transformer 0 0 0 0 2,010,000 2,010,000 Semi annual Affiliation Development substations for Group 1 (KVA) Progress Reports Directorate Commissioned capacity Kilovolt-Ampere PLN0PlProject Office Nli g & of transformer (KA ,3,0 eiana Proget Roffc Affiliation Development substations for Group 2 (KVA) Progress Reports Directorate 14 Annex 2: Detailed Project Description 1. The project includes a single component, all aimed at improving 150 kV and 70 kV sub- transmission network in Java-Bali, East Indonesia and West Indonesia. Descriptions of the project are provided below. 2. The project will contain more than one sub-project, involving either new construction of a 150/20 kV substation or upgrading of an existing 150/20 kV or 70/20 kV substation by adding one or more new transformer and associated equipment at each substation or by replacing one or two existing transformers with new transformers and associated equipment having higher capacity. 3. Each sub-project will require procurement of equipment, construction, installation and commissioning of newly procured goods. Upgrading generally will use the existing premise but in some cases, small additional land may be required. New construction will require land acquisition; clearance of sites; construction of foundations and control house; installation of transformers, control and protection equipment and outgoing 150 kV and 20 kV feeders. A new substation may require a short 150 kV transmission line (up to 5 km long) to connect the substation to the existing network and in a few cases, upgrading of an existing road. 4. For each sub-project, the Bank will finance the supply of goods and installation works. Other costs such as engineering, compensation, administration, taxes and interest during construction will be financed by PLN. 5. The project will be implemented in phases. The first phase will consist of sub-projects (Group 1) which have been fully appraised and are ready for implementation upon approval of the project by the World Bank's Board of Executive Directors. The second phase will consist of sub-projects (Group 2) which will be brought forward by PLN when their preparation is complete. Each sub-project of Group 2 will be appraised by the Bank's team against of a set of eligibility criteria and will be accepted for financing only after the appraisal confirms that it meets the criteria. Sub-projects will be financed on a first-come, first-appraised basis until all IBRD funds allocated to the project are fully committed. 6. Thirty seven sub-projects are included in Group 1. All are expansion and rehabilitation of existing substations with total additional transformer capacity of 2130 MVA. Seventy sub- projects are envisaged under Group 2 with total additional transformer capacity of 4130 MVA, including 27 new substations. 7. The sub-project eligibility criteria listed below were agreed by PLN and the Bank's team: * The sub-project will contribute to the objective of the project; * The feasibility study and technical design of the sub-project meet Indonesian Technical Standards; * The sub-project should have an economic rate of return of at least 10 percent, calculated using a methodology acceptable to the Bank; 15 * The sub-project EMPs and, if applicable, LARAPs and IPDPs have been prepared and disclosed, satisfactory to the Bank in accordance with the respective safeguards frameworks adopted by PLN; * All necessary clearances/approvals for implementing the sub-project, including the feasibility study and environmental certificate have been given by the relevant authorities; and * Procurement and implementation plans satisfactory to WB have been prepared and the sub-project is ready for implementation. 8. Candidate sub-projects for Group 2 have been identified. However changing priorities and availability of alternative sources of financing during implementation may result in changes to the list of Group 2. 16 Annex 3: Implementation Arrangements Project Institutional and Implementation Arrangements Project Implementation Institutional Arrangement 1. PLN will implement the project through its functional directorates at its headquarters and six regional project management offices16 (PMOs). The Planning and Affiliation Development Directorate (PLAD) of PLN will be responsible for overseeing and coordinating project implementation, including preparation for the sub-projects in Group 2 and overall project monitoring and reporting. A Project Management Unit (PMU) has been established and the Head of the Corporate Planning Division of the PLAD is the chairman of the PMU (also called the PMU Coordinator). The Head for Construction Administration Division of the Construction and Renewable Energy Directorate (CRED) is the Deputy PMU Coordinator. The PMU is the focal point between the Bank team and other PLN units participating in the project. 2. Six PMOs, reporting to the Director of the CRED are responsible for land acquisition, environment management, contract management and construction supervision of their respective sub-projects. The PMOs are also in charge of preparation of the safeguards documents for sub- projects in Group 2. Each PMO assigns its Planning and Environment division to coordinate preparation, construction and reporting of their respective sub-projects and assigns its branch offices at the provincial level (Unit Pembangunan Konstruksi- UPK) to handle land acquisition and supervision of construction. 3. Construction and installation of equipment will be undertaken by contractors, who will be procured through international competitive bidding. Procurement activities will be managed at PLN headquarters. The procurement plan and bidding documents will be handled by the Procurement Planning Division of the PLAD. Actual procurement will be managed by the Strategic Procurement and Primary Energy Directorate (SPPE). A Procurement Committee, chaired by a manager of SPPE, will be established to carry out the procurement. After contracts are signed, they will be transferred to the respective PMO. 4. PLN's Finance Directorate (FD) will handle disbursement and financial reporting with support from the Finance, Administration and Human Resources Divisions of the six PMOs. Measures to address capacity constraints 5. To improve coordination among various units at PLN Headquarters and Project Offices and between PLN and the World Bank during implementation, a Project Management Consultant (PMC), consisting of at least three specialists (with technical, financial and environment/social experiences) will be employed by PLN within a month after the project becomes effective. The PMC, financed by PLN funds, will report to the PMU Coordinator and provide support to PLAD 16 Project Office for Java-Bali I (Unit Induk Pembangunan V -UIP V)); Project Office for Java-Bali II (Unit Induk Pembangunan VII- UIP VII); Project Office for Sumatra I (Unit Induk Pembangunan II- UIP II) ; Project Office for Sumatra II (Unit Induk Pembangunan III- UIP III); Project Office for Kalimantan (Unit Induk Pembangunan X- UIP X) and Project Office for Sulawesi, Maluku and Papua (Unit Induk Pembangunan XIII-UIP XIII) 17 and other PLN units to carry out their responsibilities under the project. To improve procurement coordination, SPPE will appoint a procurement coordinator for the project and will update the Bank of any change in procurement coordination. Financial Management, Disbursements and Procurement Financial Management 6. The financial management assessment was conducted by the Bank and actions to strengthen PLN's financial management capacity were agreed upon with PLN. The assessment concludes that with the implementation of the actions, the proposed financial management arrangements are adequate to provide, with reasonable assurance, accurate and timely information on the status of the loan required by the Bank. 7. Risks may arise from lack of coordination among project offices and the treasury department located at PLN Head office, as follows (1) based on previous project experience, this condition has contributed to slow payment process, and (2) expenditures paid under the project were not accounted for in the PLN records on a timely basis. The financial specialist of the PMC will be responsible for improving financial management coordination during project implementation. Budgeting and Flow of Funds 8. PLN's budget is prepared bottom-up from decentralized units before being moderated centrally. Any major changes in the budgets need prior approval. The IBRD loan will finance only supplies and installation of components. Direct payment, reimbursement and special commitment method of disbursement will be used. Flow of funds may be affected by possible delay in Parliament's annual approval of Sub Loan Agreement budget, which could cause delays in availability of funds to PLN. Internal Control 9. PLN has adequate internal controls in place on preparation and approval of transactions and segregation of duties. Financial management procedures and policies are documented in a manual. All changes in finance/accounting policies and procedures are formalized through the issuance of circulars by the Finance Director. 10. PLN has an internal audit department at Head Office reporting to the President Director. This department and its units undertake internal audits based on an annual work program. The proposed project will be included in the internal audit annual work program of the department. Accounting and Reporting 11. All project transactions will follow the existing PLN system and will be included in the PLN financial statements. PLN currently uses two accounting systems. Six offices including Jakarta (Head Office) have implemented Enterprise Resource Planning System (ERP) but other 18 offices are still using Magic, a DOS-based system. Due to these different systems, PLN uses excel spreadsheets to consolidate accounts for financial reporting. 12. To have better project information on financial progress, PLN will continue to separately report the project transactions to the Bank on a quarterly basis through Interim Financial Reports (IFRs). PLN will submit IFRs to the Bank no later than 45 days after the end of each calendar quarter. The PMC consultant will ensure that this will be delivered on timely basis and all transactions therein have been accounted in the PLN book of records. External Audit Arrangement 13. PLN will be audited by a public accounting firm. A copy of the audited financial statements of the company, along with the auditor's opinion will be submitted to the Bank not later than six months after the end of each year. The audited financial statement will be publicly available. The auditor of PLN will provide information about the loan, use of funds and their opinions concerning the use of funds separately within the main audit report of PLN. There is no outstanding audit report under the existing projects. Audit report for FY 2012 was submitted to the Bank on time. Disbursement Arrangement 14. The disbursement methods would be (1) Direct payment and (2) Reimbursement method, and (3) Special Commitment, subject to the minimum amount per withdrawal application at US$100,000, except the last withdrawal application. Any expenditures or invoices below the minimum amount need to be paid by PLN and consolidated for submission to the Bank for reimbursement when the amount reaches the minimum of US$100,000 equivalent. Project expenditures to be fully financed by the Bank are expected to come from few contracts with substantially high payment amounts to be claimed through direct payment or special commitment. Table A3.1 specifies the categories of Eligible Expenditure and the percentage of expenditure that may be financed out of the loan. PLN counterpart funds of $21.43 million will fully finance land acquisition, taxes, interest during construction, the front-end fee and project management costs. Table A3.1: Eligible Expenditure Amount of the Loan Percentage of Category Allocated Expenditures to be (expressed in USD) financed (exclusive of Taxes) Goods and works for the Project 325,000,000 100% TOTAL AMOUNT 325,000,000 15. Applications for requesting direct payment and reimbursement will be supported by: (i) list of payments against contracts that are subject to the Bank's prior-review, together with records evidencing eligible expenditures e.g. copies of receipts, supplier invoices; and/or (ii) statement of expenditures (SOEs) for all other expenditures. Applications for requesting direct payment and reimbursement shall be supported by records evidencing such expenditures and evidences of payments made in case of reimbursements. All documentation evidencing 19 expenditures shall be retained by PLN and shall be made available to the auditors for audit and to the Bank and its representatives if requested. Procurement Assessment and Arrangements 16. Assessment of the agency's capacity to implement procurement. As this is a repeater project following the IPTD, PLN will essentially keep the same institutional arrangements as for the IPTD. 17. An assessment of the capacity of the Implementing Agency identified several key issues and risks concerning procurement that could arise when implementing the project, and measures necessary for mitigation. They are as follows: * Uncertain capacities of committee members and workload of procurement committee. The procurement committee, which will handle all procurement activities, will be established annually before the project is launched, and could be constrained if they had to simultaneously procure a large number of contracts: PLN should designate within a month of Project Effectiveness or earlier adequate staff with sufficient expertise and plan the procurement activities in a way to balance the workload of the committee. Also before the first bidding process is launched training should be provided by PLN, supported by the Bank, to the committee members to strengthen the capacity of the committee. * Complicated Review Procedures due to High-value Contracts. It is expected that some of the contracts will have the value at the level of US$30 million, and therefore stringent review procedures will be applicable by both PLN and the World Bank. This may cause additional delay. To address this risk, it was agreed with PLN that a detailed schedule of procurement activities for all the contracts will be prepared. PLN will closely monitor the progress of each procurement package against the agreed procurement plan and submit an updated progress report to the Bank at least on a quarterly basis. * Delay of progress. Experience with the first transmission project shows that delay may happen due to inconsistencies between documents prepared by the two consultants and inadequate coordination of the procurement activities. To mitigate this risk, PLN should designate before the bidding documents for Group 1 are submitted to the World Bank for review, specific staff (Procurement Manager) in the project team who will be responsible for coordinating procurement activities and monitoring progress, and the Procurement Planning, Engineering and Technology Division should ensure consistency of bidding documents. * Coordination among Directorate of Planning and Affiliation Development, Directorate of Strategic Procurement and Primary Energy and Directorate of Construction (including regional offices) for contract management. Because procurement will be centralized at the headquarters of PLN and implementation will be managed at the regional level, there may be gaps between procurement and contract management. PLN will ensured that the CRED (including regional PMOs) should be consulted, where required, on technical matters during the procurement process and be informed of the 20 outcome of the completed procurement and contracting process so as to ensure smooth transfer after contracts are signed. * Possible confusion between different versions of World Bank Guidelines. For this project, the applicable World Bank Procurement/Consulting Guidelines are the versions in January 2011, while PLN has been following the World Bank Procurement/Consulting Guidelines of older versions for their previous projects. There may be confusions among the procurement staff of PLN due to different versions of the Guidelines. PLN will organize training in early stage of the project and the World Bank team will provide assistance so as to clarify the changes under the new Guidelines. * Strengthening transparency and accountability A Governance and Accountability Framework was developed and will be implemented by PLN which includes disclosure of information for transparency, civil society participation for oversight, complaint handling mechanism, sanctions and remedies, etc. 18. Based on the above analysis, the initial risk assessment for project procurement is "substantial". However, with the agreed mitigations, the procurement risk is rated as "moderate". 19. Applicable Guidelines and Thresholds. The procurement for the proposed project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011; and the provisions stipulated in the Legal Agreements. The following prior-review and procurement method thresholds are recommended: Table A3.2 - Procurement Thresholds Prior Review Procurement Method Thresholds (US$) Thresholds ICB NCB Shopping QCBS QBS CQS Least SSS IC (US$) Cost Goods 500,000 and >1,000,0 <1,000,000 <50,000 N/A N/A N/A N/A N/A N/A the first NCB 00 contract Works 5,000,000 and >10 <10 <50,000 N/A N/A N/A N/A N/A N/A the first NCB million million contract Consulting 100,OOOSSS: Firms All N/A N/A N/A Default TBD <300 N/A N/A N/A Competitive: ,000 Individuals N/A N/A N/A N/A N/A N/A N/A All N/A N/A SSS: All 20. Procurement Plan. The project will be implemented in two groups. All the substations in Group 1 have been identified and appraised, and those for Group 2 will be appraised with progress of the project. At project appraisal, PLN prepared a Procurement Plan for implementing Group 1 of the project, which provides the basis for the procurement methods and review requirements by the World Bank. This plan was agreed between PLN and the Word Bank, and is available in the project's files. Once the project is approved, it will be made available at PLN 21 and the World Bank's external website. The Procurement Plan will be updated in agreement with the World Bank annually or as required to reflect the actual project implementation needs (including the contracts for Group 2) and improvements in institutional capacity within PLN. 21. The Procurement Plan (for Group 1) is summarized as follows: A. Goods, Works, and Non Consulting Services Table A3.3 - Good, works, and non-co sulting series contracts Estimated Review Expected Pre- Domestic by Bd Contract Cost Procuremen Pr- Dmsi yBid No CotatCs rcrmn qualificatio Preference Bank (Description) (USD t Method Opening million) n (yes/no) (yes/no) (Prior/ Date Post) Supply and Installation for Extension of 150 kV Transformer Bays for Scattered Substation SS-1 Group 1 in ICB No Yes Prior Speb - Lot 1: Java-Bali 22.07 Regions - Lot 2: Outside Java- 18.15 Bali Regions Supply of 150 kV Power Transformers Extension of 150 kV TRF Scattered Substations September -2 GroupI in: ICB No Yes Prior 2013 - Lot 1: Java-Bali 17.84 Regions - Lot 2: Outside Java- 11.17 Bali Notes: Price Adjustment will be used for all contracts B. Consulting Services No consulting service is expected at the stage of project appraisal. 22. Frequency of Procurement Supervision. In addition to the prior review supervision to be carried out from World Bank offices, the capacity assessment of PLN recommends one implementation support mission every six months during the first eighteen months. The frequency of procurement supervision (including special procurement supervision) will be further defined after the first eighteen months. Environmental and Social (including safeguards) Project types, locations and impact assessment 23. Project types and locations. Project investments (sub-projects) are spread in various urban, peri-urban and rural areas in Java, Bali, Sulawesi, Kalimantan and Sumatra islands. The 22 project involves two types of sub-projects; (i) expansion or rehabilitation sub-projects and (ii) new sub-projects. For expansion and rehabilitation sub-projects, the key activity is to install new transformers and associated equipment at 150 kV or 70 kV and 20 kV or to replace existing transformers and associated equipment with new ones with higher capacity in the existing substations. Most of expansion sub-projects do not require land acquisition with exception of some which require insignificant additional pieces of land, normally adjacent to the existing substations. 24. For new substations, the key activity is to construct new substations which have one or two transformers and associated equipment at 150 kV and 20 kV, a control room and ancillary equipment. A new substation requires an enclosed, leveled site free of any vegetation or human habitation (except for substation operators), typically of about two hectares of land. New substations may be connected to an existing transmission line, or be part of a new transmission line development. In case the new substation requires a short 150 kV transmission connection and upgrading of an existing road, these structures require additional permanent and temporary land acquisition. New sub-project sites can be, and normally are, selected flexibly within a certain area to minimize the impacts of such structures. 25. Social Impacts. The project will result in improvement of the quality and adequacy of power supply in the project areas. Positive social impacts to people and community in the project areas include better electricity supply both in quality and quantity for those existing electricity customers and connection to the electricity grid for new customers. Access to reliable and quality electricity is the key ingredient for economic growth and improvement of quality of life for households and local communities. Land acquisition process including public consultation and satisfactory compensation for the population residing in the project areas is the main social issue of the project. Since land acquisition is limited, the adverse social impact is expected to be modest and manageable. 26. Land Acquisition and Resettlement. All 37 sub-projects in Group 1 are for expansion or upgrading of the existing substations involving no land acquisition. At the time of appraisal, 71 sub-projects are proposed for Group 2 including 27 new sub-projects and 44 expansion or rehabilitation sub-projects among which 33 expansion sub-projects involving some land acquisition. 27. Indigenous Peoples. Site visits and screening undertaken by the task team has determined that Indigenous Peoples as defined by OP 4.10 are not present in, nor have collective attachment to the project area under the proposed sub-projects of the first group. Similarly, no natural and/or critical habitats will be impacted by the sub-projects of the first group. However, as PLN can update, replace or propose new sub-projects in the second group, these sub-projects may be located in areas where indigenous people/communities are present, or have impacts on natural habitats. 28. Environmental Impacts. Environment impacts are likely modest, non-sensitive and reversible and, in every case, mitigation measures can be designed to reduce the negative impacts. All three components are classified as Category B as defined by paragraph 8(b) of OP 4.1. 23 29. The following impacts are identified during construction for rehabilitation and expansion of 150/20 kV and 70/20 kV substations: (i) increased level of dust and noise from the use and movement of machinery; (ii) non-toxic solid waste during construction; (iii) oil spill or leakage from machinery or transformers; (iv) possible discovery of PCBs and (v) worker health and safety from existing EMF. Impacts during operation include (i) oil leaks from transformers; (ii) fire and emergency preparedness; (iii) solid wastes and (iv) worker health and safety. Other issues for equipment upgrades and additions that have been identified include managing potential legacy soil contamination and storage and disposal of old transformers. For new substations, in addition to the above impacts, other issues include the management of vegetation clearance and sediment and erosion control. No long-term adverse impact is envisaged due to the project activities. Key Measures taken or to be taken by the Borrower to Address Safeguards Policy Issues 30. Social Safeguards. PLN prepared the Land Acquisition and Resettlement Policy Framework, Indigenous Peoples Planning Framework (IPPF) and the Land Acquisition and Resettlement Action Plans (LARAPs) for two new sub-projects of Group 2. The frameworks and two LARAPs was reviewed and found to meet the Bank requirements. 31. The LARPF provides guidance for preparing and implementing the land acquisition of the sub-projects in Group 2. It follows general principles of land acquisition and resettlement that conform with the World Bank's OP 4.12 on Involuntary Resettlement and include requirements for preparing the LARAP for sub-projects proposed for financing, including the process of LARAP approval and implementation; socioeconomic survey and inventory of affected people and assets; compensation scheme and categories of affected persons; institutional responsibilities; monitoring and evaluation and the grievance mechanism. 32. The LARAPs of two new sub-projects which are proposed for Group 2 were reviewed. The land required for each substation is about 20,000m2 (2 hectares) and are owned by only one land owner and four land owners respectively. No significant impact to the land owners was found as the lands are not used for productive purpose and none of the owners earns income from the lands. Permanent land will be compensated in the form of land substitution or cash at market value. Crops and trees will be compensated at market value or be replaced. 33. Due diligence was conducted for Batulicin substation in South Kalimantan province, for which the land acquisition was completed in 2010 and the project will finance the expansion of the substation. The due diligence found that the land acquisition was in compliance with the national regulations and no controversial issue was recorded. 34. Indigenous Peoples Planning Framework (IPPF) provides guidance for the preparation and implementation of Indigenous Peoples Plans in Group 2, if the proposed sub-projects are expected to affect indigenous peoples. The Framework includes guidance for screening of indigenous peoples in the project area, preparation of Social Assessment when necessary, the main principles to be followed, reporting, monitoring and documentation and the grievance mechanism. The Framework describes how the project implementing unit can ensure that free, 24 prior and informed consultations are undertaken, in a language spoken by, and location convenient for, potentially affected indigenous people. The views of indigenous people are to be taken into account during preparation and implementation of any sub-project, while respecting their current practices, beliefs and cultural preferences. The outcome of the consultations will be documented into the sub-project documents. 35. Environmental Safeguards. PLN prepared an EMP for Upgrades which covers all expansion and rehabilitation sub-projects in Group 1, an Environmental and Social Management Framework (ESMF) for sub-projects in Group 2 and EMPs for two new sub-projects in Group 2. The ESMF and the EMP for Upgrades were reviewed and found to meet Bank requirements. The draft EMPs for two stand-alone new substations were also reviewed and found satisfactory. 36. The ESMF provides guidance for preparation, appraisal and implementation of Environmental Management Plans and the roles and responsibilities of each institution involved in preparation and implementation of the sub-projects proposed for Group 2. In addition, Environmental Codes of Practice (ECOP- standard environmental specifications for contractors) and Chance Find Procedures have been developed for physical works as part of the EMP and ESMF. 37. The EMP for Upgrades covers a large number of small, discrete substation upgrade and / or extension sub-projects across five PLN Project Offices. This approach replaces a large number of repetitive and identical EMPs. These projects have very small footprints, mostly within the boundaries of existing substations, and the severity and risk environmental and social impacts are low. The potential environmental and social issues of most of these sub-projects are very similar (with few exceptions which will be separately addressed in the EMP). Furthermore, since all subcomponents will be owned by PLN, the EMP aspects of institutional arrangements, occupational health and safety, and emergency preparedness and response systems are established by PLN corporate policy and will be the same for all of the sub-projects. 38. The EMP contains standard mitigation and monitoring plans to cover typical impacts from upgrading equipment and installing new equipment at substations, including worker health and safety, earthworks and solid and hazardous waste management. The EMP also contains standard EMP monitoring, reporting and review processes to streamline processes across the Project Offices and the sub-projects. 39. Public Consultations and Disclosure. All social and environmental safeguard documents mentioned above were publicly disclosed nationally and locally for at least two weeks and comments sought from the public from December, 2011, to January, 2012. The final draft documents were sent for disclosure to the InfoShop in Washington D.C. in January, 2012 and the final safeguards frameworks and EMPs for Upgrades were disclosed there in April 2013. 40. Disclosure and consultation notices were broadcasted online and through newspapers at the locations of the PLN Offices from December 28, 2011, to January 10, 2012. Documents were available from PLN in Indonesian language (hard copies in the offices and a soft copy on the PLN website) for the public to read and comment on. Each of the PLN Provincial Project Offices where the sub-projects are located advertised an 'open office' for the 10 working days 25 during the advertisement period where people could drop in to discuss the project with staff knowledgeable about the project. Consultation details were recorded in the final versions of the documents. The final draft documents were disclosed on PLN website in January 2012 and the final safeguards frameworks and EMPs for Upgrades were disclosed on PLN website in March 2013. 41. Capacity for Implementation. PLN has experience in preparing and implementing two on-going transmission projects financed by the World Bank. A dedicated unit within the Planning and Affiliation Development Directorate at PLN headquarters is responsible for coordinating environmental and social issues of the project. The unit's manager and staff who are also coordinating other World Bank financed projects have adequate knowledge and experience with the Bank policies. The unit was responsible for the preparation of ESMF, LARPF, and IPPF and during implementation continues to be in charge of overall coordination and reporting. 42. All six PMOs are staffed with dedicated environment and social staff, who are familiar with the Indonesian regulation on environment, EIA and EMP processes (called Amdal and UKL/UPL respectively) and land acquisition. The PMOs for Java-Bali and the PMO for Sumatra 2 (South Sumatra) have experience with implementation of WB-financed projects. The PMOs for Sumatra 1 (North Sumatra), Kalimantan, and Sulawesi have no previous experience with a WB project but each has competent environment and social specialists as full time permanent staff. The PMOs are directly responsible for preparation and implementation of EMPs and, if required, LARAPs and IP Plans. 43. During preparation, environmental and social staff of all six PMOs received training in EMP, LARAP and IPPF from the Bank team in October, 2011. During supervision, further training will be provided to PLN staff in charge of social and environmental management. Progress of EMP, LARAP, and IP preparation and implementation will be carefully monitored. Governance and Accountability Framework (GAF) 44. As IPTD2 is a follow up of the ongoing IPTD, this framework will reinforce measures outlined in the Governance and Accountability Framework of the preceding project which presents a regular review mechanism by PLN allowing constant evaluation of the internal risk review and monitoring, and provides reference to improvements of the existing system which are underway. 45. The previous Framework is built upon PLN's guidelines on Good Corporate Governance (GCG) established since 2003 and built upon the principles of transparency, accountability, responsibility, independence, and fairness. According to the GCG guidelines, the project has to be reviewed by the Risk Management Division under the Director of Commerce and Management of Risk and Compliance prior to being approved by the Board of Directors. Risks evaluated include those associated with the delivery of project objectives, reputational risks, social and environment risks and risks of fraud and corruption. Risk criteria have been established and risk ratings are determined based on the likelihood of impacts and mitigation measures are proposed. A summary of the risk review discussion is to be presented to the 26 shareholders as part of the quarterly management report to shareholders. PLN's own internal risk assessment and the proposed mitigation measures for the IPTD2 will complement actions outlined in the GAF as agreed with PLN. 46. With the changes in the corporate structure and issuance of new policies affecting governance, the 2003 Guideline on GCG is to be revised to include, among many, the 2008 Ministry of State Owned Enterprise's GCG principles and the Stock Exchange and Financial Service Authority (OJK) disclosure requirements. PLN is required to comply with OJK regulations as it issued Global Medium Term Notes. The revised Guidelines will be finalized in 2012, subject to approval by the Board of Directors and Shareholders. The Enterprise Risk Management will be updated and enhanced, although the changes will not apply retroactively. There is both internal and external compliance audit against PLN's GCG policies, a summary of which is reported annually and published online through its website, www.pln.go.id. In 2010, the compliance rate was at 88.12 percent (subsequently PLN was awarded a Good Rating) by BPKP, acting as the external auditor. The compliance audit also produced a series of recommendations, based on which PLN will revise its Board Manual and the 2005 Code of Conduct to improve performance evaluation and internal control. 47. The following provides a summary of the action plan. The full GAF is available in the project files. * Enhanced Disclosure Provisions and Transparency. As a limited corporation, PLN has to comply with disclosure policy defining the types of information to be disclosed. Based on the Freedom of Information Act and OJK regulations, PLN has disclosed information including those related to the Act of Incorporation, managerial reports (financial reports, audit reports), Board of Directors and Commissioners, guidelines on good corporate governance, corporate actions taken, and mechanism of goods and services. The information is available online through www.pln.go.id. * Civil Society Participation in Oversight. Enhanced participation of shareholders and project stakeholders will also be achieved through proactive communications, including with local government of the five regional project offices. In March 2012, PLN signed a Memorandum of Understanding (MoU) with Transparency International (TI) to cooperate on enhancing transparency in procurement and new customer connection. With TI's support it is envisaged that contractors, suppliers, and consultants will have to sign a pact declaring that they will not engage in fraudulent and corrupt behavior. * Complaints Handling Mechanism. A system is in place and available channels are displayed in the project's communication materials such as bid documents, public notices at the project site, and PLN's website. In order to improve effective handling of complaints and protection of whistleblowers, the development of a system is currently underway. The first study proposing different whistleblowers' system alternatives is proposed to the Board of Directors, incorporating PLN's own experience and the practice of other State Owned Enterprises, such as Pertamina. The system is expected to be finalized in 2012. 27 * Sanctions & Remedies. Clear sanctions and remedies are an important final step in the effort to fight against corruption. Any person (government, non-government, consultant, contractor, etc.) can be sanctioned if sufficient evidence is found for corrupt practices. In all procurement and consultant contracts, evidence of corruption, collusion or nepotism will result in termination of the relevant contract, possibly with additional penalties imposed (such as fines, blacklisting, etc.) and in accordance with Bank and Government regulations. In addition, requirements in the contract will enable PLN to terminate consultants or contractors for poor performance in accordance as stipulated in the contracts. * Mitigating Collusion, Fraud & Nepotism. PLN will undertake measures to build the capacity of the five regional offices to be able to effectively apply fiduciary measures stipulated in the internal procedures, as well as the Bank Guidelines and fiduciary annexes under this PAD. Transparent and clear progress of project activities delivered under this project with appropriate oversight also will reduce the risk of poor delivery of contracts. Contractors will be required to take pictures of activities and/or physical progress as part of their report, to be uploaded on PLN's website at regular intervals. An independent audit of PLN will also be conducted and will include a paragraph explaining the loan, the status of funds used and opinions on the use of the funds. The risk of corrupt practices arising from land acquisition and resettlement will be addressed separately through the Bank's social safeguard framework. PLN is also required to report and disclose conflict of interest transactions, and transactions with related parties as required by Bapepam. The disclosure is expected to mitigate against transactions with conflict of interest situations. Monitoring & Evaluation 48. PLN has maintained an adequate statistics system which provides sufficient data to monitor the project outcomes. Data on electricity sales and newly connected customers are recorded for each province by PLN regional distribution units quarterly. PMOs report to the Director of the Construction and Renewable Energy on construction progress, contract management issues and invoices handling on quarterly and annual basis. PLN Finance Directorate records data on disbursement progress. 49. Project physical and safeguards progress will be monitored by the six PMOs. Initially progress monitoring will focus on implementation of LARAP and EMPs. After procurement is completed and contracts are transferred to the PMOs, construction progress and EMPs will be monitored followed by testing and sub-project commissioning. PMOs will prepare bi-annual progress reports to send to PLAD and the WB. 50. The PLAD with the assistance of the PMC will monitor overall project implementation progress, including procurement and financial management. It will prepare an integrated progress report on annual basis, incorporating data from PMO reports and data on procurement and financial management from PLN departments. The progress reports will also include updates 28 of project outcome indicators on an annual basis. The cost of data collection, monitoring and evaluation will be covered by the administrative budget of PLN and no extra budget is required. 29 Annex 4: Operational Risk Assessment Framework (ORAF) Risks Stakeholder Risk Rating Low Risk Description: Risk Management: To the extent that this operation might been Such concern was not an issue during preparation. The team will monitor this issue during implementation. seen as encouraging the building of new coal- Resp: Both Status: In Stage: Both Recurrent: Due 30-Jun-2018 Frequency: fired power plants or greater mining of coal for Progress Date: existing plants, there is likely to be a concern from environmental groups that may have the ability to affect the achievement of project development objectives. Capacity Rating Moderate Risk Description: Risk Management: Financial Management Financial Management PLN will hire a Project Management Consultant, including a financial specialist to support financial management- Lack ofe cooinaiamn ete regiNa PQmOs related issues within a month after the effectiveness of the loan. Training will be provided to the PMOs and PLN and the Financial Directorate at PLN HQ may result in slow payments and poor record of staff before effectiveness of the loan and during implementation. expenditures. Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 28-Feb-2014 Frequency: Three out of six PMOs are not familiar with Due mentat Date: project administration, project payment ion verification process and Bank requirements on Risk Management: financial reporting. Procurement Procurement: Initial training was provided to PLN staff in charge of procurement on new procurement guidelines in before Some members of Procurement Committee project signing and will be repeated during implementation. PLN agreed to appoint a procurement coordinator for the project to improve coordination with the Bank team. 30 members may not be familiar with WB Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 3 1-Oct-2013 Frequency: procurement. Possible confusion between Gol Due mentat Date: procurement regulations and Banks' ion procurement guidelines and between different versions of WB procurement guidelines. Weak coordination with the Bank team may lead to delay in procurement process. Governance Rating Moderate Risk Description: Risk Management: Risk-averse attitude in regard to governance Role and responsibilities of each agency were well described in the PIP. Trainings on procurement and financial issue may lead delays in project procurement management will help to increase confidence in project procedures. and contract management. Resp: Client Status: Not Yet Stage: Imple Recurrent: Due 30-Jun-2018 Frequency: Due mentat Date: ion Design Rating Low Risk Description: Risk Management: Unknown quality of subprojects in Group 2 Proposed subprojects are technically simple while PLN has adequate technical standards in line with which PLN will propose for financing during international practice. The Bank team will appraise each subproject against an agreed set of eligibility criteria implementation. before accepting for financing under the project. Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 30-Jun-2018 Frequency: Due mentat Date: ion Social and Environmental Rating Low Risk Description: Risk Management: PMOs are not familiar with safeguards Training on safeguards frameworks and preparation of safeguards documents will be provided to the PMOs frameworks when prepare safeguards plans for during implementation. PLN will employ a Project Management Consultant, including an environment/social subprojects in Group 2. PLN Environment Unit expert to support the Environment Unit and PMOs during implementation. at the PMU is also in charge of other donor Resp: Both Status: Not Yet Stage: Imple Recurrent: Due 30-Apr-2014 Frequency: investment programs and can be overloaded. Due mentat Date: ion Program and Donor Rating Low 31 Risk Description: Risk Management: Low risk as the donor supported component In parallel with the project, PLN will implement a TA program to improve its capacity to operate the transmission was removed from the project and will be and distribution systems in a more efficient and transparent manner through the introduction of smart grid implemented as a parallel activity. technologies. The TA program with an estimated cost of US$2 million will be financed by a grant provided by the Australian Government as a complementary activity to IPTD2. The TA will be supervised together with the project. Resp: Client Status: Not Yet Stage: Imple Recurrent: Due To be Frequency: Due mentat Date: determined ion Delivery Monitoring and Sustainability Rating Low Risk Description: Risk Management: Demand growth in project areas may be lower Project design allows changes in the list of investments in Group 2 to meet actual demand growth in various areas than projected which reduces the economic across the project islands. PLN has an established data collection and reporting system which the task team will viability and sustainability of the investments. rely on for project monitoring. As subprojects are scattered in five large Resp: Client Status: Not Yet Stage: Imple Recurrent: Due 31-Dec-2018 Frequency: islands, monitoring of progress can be difficult Due mentat Date: and delayed. ion Overall Implementation Risk: Moderate Risk Description: Moderate rating was selected for project implementation mainly because of the possibly weak capacity of the PMOs in Kalimantan and Sulawesi and limited capacity of PLN in procurement handling. 32 Annex 5: Implementation Support Plan Strategy and Approach for Implementation Support 1 . The phased approach of the proposed project requires a higher level of activities by both clients and the Bank team during implementation. In parallel with implementation of the sub- projects already approved in Group 1, PLN will continue preparation of project documents for sub-projects in Group 2 before bringing them forward to the Bank team for appraisal. The strategy for implementation support has been developed based on this specific nature of the project. It aims at making the support to the client for implementation of its dual functions more efficient and focus on the implementation of the risk mitigation measures defined in the ORAF. * Procurement: Initially, there are 2 large ICB contracts (US$30-40 million) to be procured for Group 1 sub-projects. When Group 2 sub-projects will be fully appraised and approved to be included in the project, another round of procurement will be carried out. The Bank team will provide implementation support by: (a) providing training to members of the procurement committee and related staff in the regional project offices and PLN two engineering consultants who are in charge of preparation of procurement documents; (b) reviewing procurement documents and providing timely feedback to the procurement committee; and (c) providing detailed guidance on the Bank's procurement guidelines to the procurement committee and engineering consultants; and (d) monitoring procurement progress against the detailed procurement plan developed by PLN. * Financial management: Supervision will review the project's financial management system, including but not limited to accounting, reporting and internal controls. Supervision will also cover sub-projects on a random sample basis. The Bank team will also work with the project management consultant to assist PLN in improving coordination among different departments and units for financial management and reporting. * Environmental and social safeguards: The Bank team will supervise and provide support to PLN for the implementation of the EMPs for Upgrades for the sub-projects under Group 1. In parallel, the Bank team will provide support to the regional PMOs to prepare LARAP, EMPs and IP as necessary for new sub-projects and other sub-projects to be proposed for Group 2. Training will be provided to relevant staff from PMOs and PLN environment unit at the Headquarters for preparation and supervision of implementation of the safeguards plan. * Anti Corruption: the Bank team will supervise the implementation of the agreed Governance and Accountability Framework. * Other issues: Some sector level risks, such as the electricity tariff issue, will not be addressed at the project level but at the portfolio level through the Bank's policy dialogue with the government and PLN. However, as they are tightly related to the financial viability of PLN, especially its debt service coverage ratio (DSCR), the team will watch 33 these issues closely and work with PLN to examine possible remedial actions should the DSCR fall below the covenant threshold. Implementation Support Plan 2. Most of the Bank team members, including the task team leader will be based in the Indonesia country office and other country offices in the region to ensure timely, efficient and effective implementation support to the client. Timely monitoring and support to PLN will be mainly provided by the team members in the country offices. Formal supervision will be carried out semiannually; field trips will be made on need basis not only for sub-projects under implementation but also for new sub-projects proposed for Group 2. Detailed inputs from the Bank team are outlined below: * Technical inputs. Power engineering inputs are required to review of bidding documents and of bid evaluation reports to ensure fair competition through proper technical specifications in the bidding documents and fair assessment of the technical aspects of the bids. The inputs are required for at least two rounds of procurement for two groups of sub-projects. During construction and commissioning, technical supervision is required to ensure contractual obligations are met on technical grounds. Field visits by the team's power engineer will be conducted on a semi-annual basis throughout project implementation. * Fiduciary requirements and inputs. Upfront training will be provided by the Bank's financial management specialist and procurement specialist before the commencement of project implementation. The team will also help PLN identify capacity building needs to strengthen its financial management capacity and to improve procurement management efficiency. Both financial management and procurement specialists will be based in the country office to provide timely support. Formal supervision of financial management will be carried out semi-annually, while procurement supervision will be carried out on a timely basis as required by the client. It is estimated that around two staff-weeks will be required for the financial management specialist annually, and around four staff-weeks from the procurement specialist annually in the first three years of the project implementation, and around two staff-weeks thereafter. * Safeguards. Inputs from an environment and a social specialist are required throughout the project implementation. Training will be provide to PLN staff on preparation of safeguards instruments following ESMF, LARPF and IPPF and on monitoring and reporting. Supervision will focus on the implementation of the agreed land acquisition and resettlement plan. Field visits for supervision are required on a semi-annual basis. During appraisal of new sub-projects proposed for Group 2, some field trips are envisaged. Both social and environmental specialists are country office based. * Financial review of PLN corporate finance. Input is required from a financial specialist for regular review of PLN's financial status to verify compliance of financial covenants. This exercise will be combined with other WB financed projects implemented by PLN. Semi-annual review and field visit will be required. 34 * Operational. An operations officer based in the country office will provide day to day supervision of all operational aspects and coordination with the client and among Bank team members. The main focus of implementation support is summarized below: Time Focus Resource Estimate Partner Role First Technical and procurement review of the Power engineer: 4.0 SWs; NA three bidding documents; Procurement specialist(s): 4.0 SWs; years Procurement training; FM training and supervision; FM specialist: 2.0 SWs Review of LARAP for Group 2, provision of Social specialist: 4.0 SWs training and supervision; Review of EMPs for Group 2, provision of Environmental specialist(s): 4.0 SWs training and supervision; Institutional arrangement and project Operations officer: 8.0 SWs supervision coordination; Team leadership; Appraisal of sub-projects of IlL: 6.0 SWs Group 2 Last two Project construction; Power engineer: 2.0 SWs NA years Procurement specialist(s): 2.0 SWs; Environment and social monitoring & Environmental specialist(s): 4.0 SWs reporting; Social specialist: 4.0 SWs Financial management, disbursement and FM specialist: 2.0 SWs reporting; Operations officer: 8.0 SWs. Financial situation of PLN. Financial analyst: 2.0 SWs Task leadership TTL: 6.0 SWs Note: SW - Staff-Week The staff skills mix required is summarized below Skills Needed Number of Staff Weeks Number of Trips Comments Operations Officer 8 SWs annually Fields trips as required. Country office based Power Engineer 4 SWs first three year, then 2 SWs Two annually in the following years Procurement 4 SWs annually the first three One Country office based years, then 2 SWs in the following years Social specialist 4 SWs annually Fields trips as required. Country office based Environment specialist 4 SWs annually Fields trips as required. Country office based Financial management 2 SWs annually Fields trips as required. Country office based specialist Sector financial analyst 2 SWs annually one Task team leader 6 SWs annually two Country office based 35 36