IEG Report Number: ICRR14880 ICR Review Independent Evaluation Group 1. Project Data: Date Posted: 10/16/2015 Country: Indonesia Project ID: P077175 Appraisal Actual Project Name: Id-domestic Gas Project Costs (US$M): 122.10 81.57 Market Development Project L/C Number: L4810; L7755 Loan/Credit (US$M): 80.00 61.77 Sector Board: Energy and Mining Cofinancing (US$M): Cofinanciers: Board Approval Date : 12/13/2005 Closing Date: 03/31/2011 10/31/2013 Sector(s): Oil and gas (100%) Theme(s): State-owned enterprise restructuring and privatization (50% - P); Pollution management and environmental health (25% - S); Infrastructure services for private sector development (25% - S) Prepared by: Reviewed by: ICR Review Group: Coordinator: Ranga Rajan George T. K. Pitman Christopher David IEGPS1 Krishnamani Nelson 2. Project Objectives and Components: a. Objectives: The project development objectives as stated in the Loan Agreement (Schedule 2, page 14) was: "To improve economic efficiency and reduce pollution in Indonesia by expanding the use of natural gas in the Borrower's domestic market” . The Project Development Objective as stated in the Project Appraisal Document (page 4) was: "To improve economic efficiency and reduce pollution by substituting natural gas for more expensive and more polluting fuels, such as diesel, fuel oil and coal." In line with IEG practice, this review is based on the project development objectives as stated in the Loan Agreement. b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components: There were two components: (a) Gas Distribution Infrastructure : (estimated cost at appraisal US$86.97 million: actual cost at closure US$64.56 million). This component aimed at supporting gas sales to industrial customers in Indonesia's provinces of Banten and West Java, which accounted for more than 60 percent of the demand in West Java. The planned activities included (i) Construction of 300 steel pipelines 4-16 inches in diameter with a cumulative length of about 185 km along with control valves, fittings and corrosion control facilities in the two provinces. (ii) Construction of class 150 steel pipelines of 4-16 inches in diameter with a cumulative length of about 71.4 kilometers, along with control valves, fittings and corrosion control facilities in the two provinces (iii) Installation of five off-take and two regulating stations. (iv) Installation of about 210 customer metering and regulating stations, (v) Installation of a Supervisory Control and Data Acquisition (SCADA) system for pressure and flow control, and monitoring. and, (vi) Provision of radio and telecommunications equipment, Information Technology (IT) support and emergency response equipment. (b): Capacity Building: (estimated cost at appraisal US$6.20 million: actual cost at closure US$12.21 million. This component planned to provide assistance to the staff of the implementing agency, PT Perusahaan Gas Negara (Persero) TBK (hereafter referred to as PGN) in building staff capacity in the areas of financial management, infrastructure planning, gas marketing, gas utilization, distribution system safety and integrity management and gas transmission and compression. Although the project components were not revised, some technical outputs and activities under component a were revised following the first project restructuring (discussed below).(ICR, pages 8-9) d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Project Cost: At appraisal, the estimated baseline cost was US$93.17 million. In addition, there were costs associated with physical and price contingencies (US$6.80 million and US$4.31 million),Value Added Tax (US$10.43 million) and Interest during construction (US$7.40 million).The total appraised cost was US$122.10 million. The actual cost at closure was US$81.57 million, or 66.9% of the appraisal estimate. The actual cost at closure was lower than the appraised estimate due to changes in project activities. Following the first project restructuring, the total length of class 300 pipelines to be financed by the Bank was reduced from the appraisal estimate of 256 km to 123 km. This change was due to a combination of factors: (i) the decision by PGN to build branch lines in the Greater Jakarta and Karawang areas using its own funds for expediting connection to new customers; (ii) the route of a pipeline in the Jakarta area was realigned to meet municipal requirements and qualify for the necessary work permits. Substantial changes were made also to the technical specifications of the Supervisory Control and Data Acquisition (SCADA) System and Telecommunications system packages. Changes were made in the specifications of the SCADA system to incorporate an additional back-up master control system for system reliability, and open access architecture; and the specifications of the telecommunication equipment were changed to match the redesign of the SCADA system. The planned location for the Serpong off-take system was replaced by two off-take states at Bitung (Bitung 2 and 3) due to the difficulties associated with finding suitable land at Serpong. Financing: The original approved IBRD loan amount was US$80.00 million. At completion, US$61.77 million had been disbursed. A total of US$18.2 million was cancelled from the loan at project closure. There was external financing for complementary sector activities - including US$500 million from private investors for further field development and US$485 million from the Japan Bank for International Cooperation (JBIC) to PGN for a transmission project to increase gas supply to West Java- the South Sumatera to West Java (SSWJ) transmission line and a distribution line in West Java. Borrower Contribution : At appraisal, the Borrower's contribution was estimated at US$42.30 million. At closure, their contribution was less than planned at US$20.00 million primarily because project beneficiaries (such as private companies and industries converting to natural gas from alternative fuels) had also invested considerable amounts, including some costs that were originally expected to be covered either by the Bank Loan or by PGN (such as installing project financed metering and regulating sections). The costs covered by non-government sources were, however, neither systematically estimated at appraisal nor recorded during implementation (ICR, page 35). Dates: There were three level-two project restructurings. The first restructuring on January 5, 2011, extended the project closing date by 36 months to March 31, 2014 to March 31. 2014 to allow time for completing the redesign of the SCADA system (discussed in Section 2c). The second restructuring on July 4, 2011, led to the cancellation of US$10.6 million from the Loan. The third restructuring on February 1, 2013, besides cancelling US$7.6 million of the Loan, advanced the project closing date from March 31, 2014 to October 30, 2013 to enable completion of all project activities by then. 3. Relevance of Objectives & Design: a. Relevance of Objectives: High: At appraisal the project development objectives were highly relevant to the national energy sector security of Indonesia. Encouraging investments in the natural gas sector by providing incentives for the large industrial users of gas (such as power stations, fertilizer and chemical factories and other energy intensive industries) to switch from alternative fuels (such as oil, diesel and coal) to gas was important in the Indonesian context for several reasons. One, although Indonesia’s potential for producing natural gas (estimated at more than 2.5 trillion cubic meters), was among the largest in the region, domestic consumption of gas by power and medium-sized enterprises was among the lowest in the region as a proportion of total energy national consumption. Two, natural gas was relatively inexpensive and less polluting than other fossil fuels. Three, Indonesia’s falling oil production had resulted in it becoming a net importer of oil and refined petroleum products, the main alternatives to natural gas in Indonesia. The project development objective to expand use of natural gas in the domestic market was also highly relevant to the Government’s implementation of the Oil and Gas Law enacted in 2001 which gave Indonesia the first modern legal framework to fundamentally reform the oil and gas sector through (a) gradual development of a competitive market, (b) the establishment of an implementing body for upstream activities and an independent regulatory agency for downstream activities; (c) the unbundling of the traditional vertically integrated oil and gas business. The project development objective were relevant to the Bank strategy at appraisal and consistent with the Country Assistance Strategy (CAS), approved by the Board on October 29, 2003. The CAS identified the need for overcoming the low rate of investment and weak public services, as the two major impediments to reducing poverty in Indonesia. The objectives remain relevant to the current country strategy agreed with Indonesia. The Country Partnership Strategy (CPS) for the fiscal years of 2013-2015 was aligned with the Government’s “Master Plan for Acceleration and Expansion of Indonesia's Economic Development 2011-2025. This plan identified the need for promoting growth and reducing poverty through providing conducive macro-economic and regulatory conditions for accelerating and expanding investments. b. Relevance of Design: Substantial The statement of desired outcomes is clear, although there is no reference to the institutional strengthening dimensions of the project. The linkages between the project activities, their outputs and the intended outcome is logical: and the intended outcomes were, for the most part, measurable. Component (a) activities (such as supporting gas sales to industrial customers) were relevant to the expansion of the gas distribution network in the two provinces. Component (b) activities (such as capacity-building activities to the staff of (PGN) in the areas of financial management, infrastructure planning, gas marketing, gas utilization, distribution safety system and integrity management, gas transmission and compression can be expected to improve the financial, operational and planning skills of the PGN staff. The other aspects of design such as capacity building support to the PGN for implementing the recommendations of the ongoing studies on rationalization of the natural gas pricing system and to meet the requirements of the new law for addressing the barriers to entry in the gas sector can be expected to contribute to the restructuring of PGN. To mitigate procurement risks, the design incorporated an Anti-corruption plan and strategy (discussed in section 11). The combination of these activities was expected to contribute to the project development objective of improving economic efficiency and reducing pollution in Indonesia through expanding the use of natural gas in Indonesia, and to the higher level objectives of increasing Indonesia's national energy security by using more of its abundant natural gas domestically. 4. Achievement of Objectives (Efficacy): The efficacy of the project objective – to improve economic efficiency and reduce pollution in Indonesia by expanding the use of natural gas in the Borrower’s territory – is assessed in relation to its two objectives. (1). To improve economic efficiency (of the gas sector in Indonesia) by expanding the use of natural gas. (2).To reduce pollution by expanding the use of natural gas in Indonesia. Project outputs, which were common to the two objectives, were as follows: Outputs  The gas distribution network of Banten province in West Java was expanded, and the Banten supply main line and reticulation mains were completed at project closure as targeted.  The gas distribution network of Jakarta/Karawang in West Java was as expanded, and the Jakarta/Karawang main line and reticulation mains were completed at project closure, as targeted. The PGN used its own funds to build branch lines in the Greater Jakarta/Karawang area to expedite the connection of new customers.  All off take stations of the West Java gas distribution network were expanded as targeted.  The Supervisory Control and Data Acquisition (SCADA) and the Telecommunication Systems were installed and commissioned into service at the project closure stage for assisting PGN with system control and security, gas metering, and financial transaction settlements as targeted. The SCADA system consisted of: One Master Control Station (MCS), One Back up Master Control System, ten off take stations, twenty big customers, seven district offices, ten Automatic Meter Readers, twenty-five pressure monitoring devices and two Object Linking and Embedding Process Control (OPC) Tunneling.  252 Metering and Regulating Stations were delivered to customers including 88 in Banten and 164 in West Java). This exceeded the target value of 210 set at appraisal.  Special Operations and Management tools and equipment were procured as per the target.  The plan for restructuring of PGN was adopted in the selected project areas as targeted.  A Long-Term Technical Collaboration Services Contract for assisting PGN in building capacity for PGN staff (in the areas of engineering and planning, operations and integrity management system, quantitative risk assessment, gas transmission and review of Information Technology) was completed as targeted.  Safety and Integrity Management Systems were established and operational by mid-2009 and a Health Safety and Environment Management Committee was established as targeted.  Although the plan for providing Third Party Access (TPA) to PGN’s Gas Distribution networks was completed as targeted, it had not been adopted at project closure.  A Gas Pricing Study for efficient pricing of gas was completed by PGN and submitted to the Bank in 2006 as targeted.  Draft Methodology and Implementation Rules for transmission and distribution targets were developed and sent to the Bank as targeted. Outcomes. Objective 1. To improve economic efficiency (of the gas sector in Indonesia ) by expanding the use of natural gas ; Substantial. All targets were either realized or exceeded,  According to the statistics maintained by PGN, their sales of natural gas sales increased to 650 Million standard Cubic Feet per day (Mscfd) as compared to the target of 423 Macfd. This represented a 153% increase relative to the target value.  At closure, there were 598 conversions to natural gas by new customers at project closure, as compared to the target of 120 customers. This represented a 498% increase relative to the target value. The new customers, were mainly large industrial users of gas (such as electricity power plants and other industries, commercial and small medium enterprises, and residential energy consumers) who accounted for 97% of PGN’s gas sales. Objective 2. To reduce pollution in Indonesia by expanding the use of natural gas in the Borrower’s domestic market. Substantial. All targets were realized and all were significantly exceeded. Not all of the outcomes however can be attributed to this project. While a precise assessment of attribution is not possible, it is reasonable to conclude that expansion of the use of natural gas, played a significant role in reducing pollution in Indonesia. Outcomes: The substitution from other fossil fuels (such as fuel oil, diesel and coal) to gas mainly by industrial users in the project region led to reductions in emissions from major pollutants. The methodology followed for calculating pollutant emissions was by multiplying emission coefficients of pollutants by energy consumed (PAD, page 23). The reduction in emission due to substitution of other fossil fuels by gas at project closure were:  Emission of Sulphur Dioxide was reduced to 90,180 tons a year as compared to the target of 56,000 tons.  Emission of Nitrogen Oxide was reduced to 108,948 tons a year as compared to the target of 68,000 tons.  Emission of Total Suspended Particles was reduced to 51,230 tons a year as compared to the target of 32,000 tons.  Emission of Carbon Dioxide Equivalents was reduced to 2,645,376 tons a year as compared to the target of 1,653,000 tons 5. Efficiency: Substantial: Economic and Financial Efficiency : At appraisal, an economic analysis was conducted for the investment component of the project (expansion of gas distribution infrastructure) The input costs included both construction costs, and estimates associated with life cycle Operation and Maintenance (O&M). The economic benefits of the project (cash flow from sales of gas to PGN) was based on the assumption that the economic value of gas was equal to the consumers’ willingness-to-pay for gas. The analysis was carried out using two scenarios: (i) "with the project" scenario, and the benefits were assumed to come through the investments in gas transmission and distribution networks, and (ii) "without the project" scenario, under the assumption that without the project the industries would continue to rely on fuel oil and diesel. The ex-post Economic Internal Rate of Return EIRR was 64%, or three times the ex ante EIRR of 20%. Operational and Administrative Efficiency There were operational and administrative inefficiencies which led to implementation delays and thereby to the extension of the project closing date by 36 months from March 31, March 31, 2014. Despite being ready for implementation in February 6, 2006, the project started three to five months later, due to factors such as delays associated with the initial poor quality of bidding documents and the unfamiliarity of the Project Management Consultant with procurement procedures and Bank guidelines. Changes in the scope of works after the bidding documents had been issued (such as with the specification of the SCADA and Telecommunication packages) delayed the finalization of bidding documents. The project, however, closed six months earlier than rescheduled on October 31, 2013, as all activities had been completed by then. a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return (FRR) at appraisal and the re-estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal Yes 20% 71% ICR estimate Yes 64% 79% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The project development objectives were highly relevant to the country and relevance of design was rated as Substantial. Efficacy of the two objectives, “ to improve economic efficiency (of the gas sector in Indonesia) by expanding the use of natural gas” and “to reduce pollution in Indonesia by expanding the use of natural gas." is rated as Substantial. All outcome targets were either achieved or exceeded. Efficiency was rated as Substantial, with an EIRR above appraisal estimates, although there were operational and administrative inefficiencies and the project closing date was extended by 28 months, not the 34 months anticipated. a. Outcome Rating: Satisfactory 7. Rationale for Risk to Development Outcome Rating: There is a risk to development outcome that the new customers who were connected with natural gas infrastructure would revert to other fossil fuels. This risk is deemed to be low in view of the considerable capital costs associated with the remodeling process for switching back to other fossil fuels from natural gas. Further, the price of natural gas was the more cost-effective option for industrial users without the subsidies on fuel oil and diesel. The ICR (page 28) reports that the government’s 2005 policy decision "appears to be irreversible” The policy recommendations regarding the Third Party Access regime - and thereby opening the sector to competition - had not been adopted by the government at project closure. In the absence of binding legislation, there is a modest risk to development outcome. a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: a. Quality at entry: Preparation of this project built upon the experience of prior Bank financed energy sector projects in Indonesia (Gas Distribution Project in West Java and North Sumatra, Gas Utilization Project in Surabaya and other towns in the vicinity of East Java, and the Java – Bali Power Sector Restructuring and Strengthening Project). Ex post reviews of these project indicated that in addition to expanding the physical network, issues regarding gas pricing and restructuring of PGN needed to be addressed for the development of the energy sector. The design reflected this by having, in addition to investments for expanding natural gas distribution networks, an incentive structure to encourage investments in the market, sector, such as by providing Third Party Access. The implementation arrangements were suitable as PGN , the implementing agency had prior experience with the financial and procurement policies of the multilateral organizations (having already implemented two Bank financed projects and an Asian Development Bank financed gas infrastructure expansion project) and projects financed by Japan Bank for International Cooperation (JBIC). Financial and Safeguard policy issues and Fiduciary issues were adequately addressed and since the project was linked to a transmission project financed by JBIC, the Environmental Impact Assessment Report prepared at appraisal was approved by JBIC as well. Risks directly associated with the project were identified, including a substantial risk related to weakness in country control environment and financial accountability systems. An Anti-Corruption Action Plan was formulated to address concerns about endemic corruption in the country. The plan identified potential corruption risks and specified mitigation measures, and since the project mainly financed activities pertaining to building new gas infrastructure, the corruption plan focused on reducing the potential for corruption around procurement related issues. Even so, there were some shortcomings in M&E, as its design did not have adequate indicators to measure the effectiveness of the technical assistance components of the project. Quality-at-Entry Rating: Moderately Satisfactory b. Quality of supervision: Project supervision was adequately carried out through regular missions, of which there were nine. Although the ICR (page 30) does not provide details in terms of the continuity of the team, the evidence indicates that the supervision team was proactive in identifying problems and addressing the issues that arose during the project implementation phase, such as by working effectively with the PGN’s newly appointed Project Management Consultant to prepare terms of reference and evaluating key procurement packages in the initial years of the project. With regards to safeguards, the ICR reports satisfactory compliance with safeguard policies. Financial management was reported to be generally adequate and there were no procurement issues. There were minor shortcomings. The supervision team missed the opportunity for formally restructuring the project, when there were significant changes in the Component One activities as discussed earlier. This led to the cancellation of US$18.2 million of the Loan. Changes in the scope of works and specifications of SCADA and telecommunication systems, after bidding documents had been issued, led to delays in finalizing the bidding documents. There was very little information on the outputs and outcomes during supervision in the critical areas of gas policy and regulatory reforms. Quality of Supervision Rating : Moderately Satisfactory Overall Bank Performance Rating : Moderately Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: The government’s strong commitment to the project was evidenced by the following: (i) the government implemented some, though not all of the project’s recommended reforms towards developing Third Party Access Regime in the natural gas sector. (ii) By 2013, the government had further divested shares in PGN, with the public holding 43.03 percent of PGN’s shares and the balance by the government. Government Performance Rating Moderately Satisfactory b. Implementing Agency Performance: The project was implemented by PGN. As indicated earlier the agency had prior experience in implementing Bank and donor financed projects. The project management unit was located at the PGN head office in Jakarta and reported to the PGN's Board of Directors through the Director of Operations. The implementing agency was also able to self-finance a large package due to the significant savings generated by a strong competition for goods and works. Despite the initial delay of one year, with the extension of the closing date PGN was able to commission into service all the gas transmission and distribution infrastructure by project closure. The agency followed the Anti-Corruption Action Plan during the project implementation phase, and with the exception of one issue which was resolved, the agency regularly submitted Anti-Corruption Implementation Progress Reports. The implementing agency met the financial covenants as there were no known issues of corruption relating to this project at project closure. Implementing Agency Performance Rating : Moderately Satisfactory Overall Borrower Performance Rating : Moderately Satisfactory 10. M&E Design, Implementation, & Utilization: a. M&E Design: The key project development indictors (an increase in utilization of natural gas and reduction of air pollutant emissions) were appropriate and could be measured. The key intermediate outcome indicator - the physical delivery of new gas distribution infrastructure in the project area - was appropriate. There was no specific key project development indicator for measuring “efficiency" and the M&E design was weak with respect to the measurement of the effectiveness of the technical assistance components of the project. b. M&E Implementation: The data from the statistical system maintained by PGN was used for monitoring gas sales and the number of customers converted to gas. The ICR (page 14) notes that the collection of the M&E data was carried out effectively by the PGN through implementation phase. c. M&E Utilization: The results of M&E were utilized both for tracking progress and measuring the impacts of the investment financed by the project. M&E Quality Rating: Modest 11. Other Issues a. Safeguards: The project was classified as a “Category A" project under OP/BP4.01 Environmental Assessment. The safeguard policy for Involuntary Resettlement (OP4.12) was triggered for the project mainly due to its link to the upstream and downstream infrastructure investments financed by other investors (such as the JBIC financed transmission project), who also benefitted from the Bank investments. An Environmental Management Plan (EMP) was prepared at the appraisal stage based on the results of an Environmental Impact Assessment Report that had been conducted earlier. The plan was prepared on the basis of public consultations and was disclosed as required under Indonesia's Legal and Institutional System widely known by its acronym - The AMDAL (Analisis Mengenai Dampak Lingkungan Hidup. The plan was approved by the JBIC as well. The plan identified the possible adverse environmental impacts, and the procedures and measures to be taken to mitigate such impacts. The ICR (page 15) notes that environmental safeguards compliance of the project was satisfactory. During project implementation, PGN also took steps to mainstream environmental management into its corporate activities, through establishing an Environmental Coordination Office in 2008, and through having a fully staffed Committee for Health, Safety and Environmental Management. Involuntary Resettlement : A Resettlement Action Plan (RAP) was prepared by the implementing agency to comply with AMDAL procedures. Since the gas pipelines of the project were to be built primarily in urban and industrial areas, there was potential for disruption to businesses, residents and other facilities on account of construction activities. The PGN agreed to compensate any affected businesses for potential loss of income according the General Policy on Land Acquisition and Compensation. The land acquisition process was deemed to be satisfactory by the Bank and there was compliance with the social safeguards policies at closure (ICR page 17). b. Fiduciary Compliance: Financial Management : At the appraisal the financial management risks were deemed to be moderate, and the risk mitigation measures included: (i) the adoption of quarterly financial management reports. (ii) external audits by leading private sector accounting firms. and (iii) strengthened procedures for validating and approving payments to contractors. The ICR (page 18) reports that quarterly financial management reports were submitted for the most part in a timely fashion, and that the audits were unqualified. Procurement: Although the overall project risk for procurement was assessed as average, corruption and collusive practices were perceived as nation-wide issues. To mitigate procurement risks, the design incorporated the following features: (i) An Anti-corruption plan and strategy with enhanced disclosure provisions for transparency, reducing the potential for fraud and nepotism through general stakeholder oversight, complaints handling mechanism to be enforced independent investigation; (ii) the hiring of an external project management company. (iii) A detailed procurement plan and construction schedule; and, (iv) the hiring of a firm for third-party inspection to certify quality of goods and works. The overall procurement process was deemed to be satisfactory.(ICR, page 18). There were no reported cases of misprocurement. c. Unintended Impacts (positive or negative): d. Other: 12. Ratings: ICR IEG Review Reason for Disagreement/Comments Outcome: Satisfactory Satisfactory Risk to Development Negligible to Low Moderate Outcome: All the policy recommendations regarding the Third Party Access regime were not adopted by the government and in the absence of binding legislation, there is a modest risk to development outcome. Bank Performance: Moderately Moderately Satisfactory Satisfactory Borrower Performance : Moderately Moderately Satisfactory Satisfactory Quality of ICR: Satisfactory NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons: Two main lessons are summarized from the ICR. (1) Institutions are as important as infrastructure for ensuring the sustainability of reforms in the energy sector . Since regulatory and policy reforms are critical to market transformation, the supervision of the project needs to pay as much attention to fundamental policy reforms as it does to the delivery and commissioning of physical infrastructure and its impacts. (2) Careful specifications of systems is necessary at the design stage to reduce delays during project implementation. In the case of this project, greater clarity from the start in specifying the SCADA and telecommunication systems would have reduced the procurement delays. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR reported both outputs and outcome of the project. It was candid in its discussion of problem areas and also clear in explaining how issues were resolved. For the most part, it was concise, and the discussion of the findings and recommendation of the energy sectors studies financed by the Bank were useful The ICR however rated components and not objectives. More information could have provided also on the quality of the Bank Supervision. There is no information on the frequency of missions and the quality of the team in terms of technical expertise and continuity. a.Quality of ICR Rating : Satisfactory