ICRR 10701 Report Number : ICRR10701 ICR Review Operations Evaluation Department 1. Project Data : Date Posted : 07/12/2000 PROJ ID : P003916 OEDID: OEDID : L3501 Appraisal Actual Project Name : Suralaya Thermal US$M ) Project Costs (US$M) 2024.50 1453.08 Power Country : Indonesia Loan/ US$M ) Loan /Credit (US$M) 433.60 299.48 Sector, Major Sect .: Thermal, Electric US$M ) Cofinancing (US$M) 1113.10 878.62 Power & Other Energy L/C Number : L3501 FY ) Board Approval (FY) 92 Partners involved : ADB, KfW, Export Closing Date 09/30/1999 09/30/1999 Credit Prepared by : Reviewed by : Group Manager : Group : Kevin Warr Alain A. Barbu Ridley Nelson OEDST 2. Project Objectives and Components a. Objectives The project had four objectives : 1. Expand the State Electricity Corporation's (PLN) generating capacity in Java 2. Promote the economic use of coal for electricity generation 3. Develop PLN's institutional capacity to operate and maintain thermal power plants 4. Strengthen PLN's financial capacity b. Components The project had six components : 1. Construction of 3x600 MW coal-fired units at Suralaya and a 500kV transmission line from Cilegon to Cibinong with associated substations to enable evacuation of power to the demand centers in Java 2. Consulting services for engineering design and construction supervision of the proposed units 3. Feasibility study for a high voltage submarine cable link between Java and Sumatra 4. Engineering and design of a thermal power plant at Banjarmasin in south Kalimantan 5. Consulting services for institutional development 6. Training of PLN's staff in public utility practices c. Comments on Project Cost, Financing and Dates The total project cost, excluding interest during construction, was US$ 1453.08 million, which was US$571.42 million under the appraisal estimate. The cost under-run was the result of competition under Bank International Competitive Bidding procedures, the worldwide decline in equipment and materials, and conservative cost estimates . Taking into account interest during construction, the total project cost was US$ 1602.68 million. The Bank provided loans in the amount of US$ 433.60 million, only US$299.48 million of which was disbursed, due to cost savings. The actual Bank financing included US$ 10 million disbursed under Loan 3349. Cofinancing for US$878.60 million, was provided by ADB, KfW and export credits . The project closed on time. 3. Achievement of Relevant Objectives : 1. Expand the State Electricity Corporation's (PLN) generating capacity in Java : This objective was achieved . 3x600MW units 5-7 at Suralaya have been completed . The completed Suralaya Thermal Power Station, with a total installed capacity of 3,400 MW, operating efficiently at or near expected capacity, is a major contributor to economic development in Java and to employment in the area . 2. Promote the economic use of coal for electricity generation : This objective was achieved . Coal is now supplied from several mines in the country on a long - or short-term basis through open bidding . The increased use of coal spurred the development of competitive coal mining facilities, which are also contributing to increased coal exports. Since oil is more exportable than coal, as well as a contributor to value added, the substitution of oil with coal as fuel for power generation promotes the economic use of coal . 3. Develop PLN's institutional capacity to operate and maintain thermal power plants : This objective as substantially achieved. Fifty-five engineers were trained in efficient utility management, including power plant engineering and design, as well as the operation and maintenance aspects of large, modern thermal power plants. In addition, studies were conducted in organization and human resource planing as well as benchmarking. A study was also completed leading to the establishment of a more autonomous unit with in PLN responsible for electricity transmission in Java -Bali. 4. Strengthen PLN's financial capacity : This objective was not achieved. PLN's financial situation weakened substantially during the project . Since 1997, PLN has become technically insolvent and its profitability, liquidity and capital structure have continued to deteriorate . There were four factors that contributed to PLN's financial difficulties: (i) the Asian financial crisis and resulting depreciation of the Rupiah; (ii) the failure of the Government to implement needed tariff increases; (iii) the high cost of power purchased from Independent Power Producers; and (iv) the lack of competitive pressure on PLN to drive down costs . 4. Significant Outcomes /Impacts : The expansion of PLN's electricity generating capacity in Java is notable, especially since the Suralaya Thermal Power Station contributes to Java's economic development and to employment in the area . Also, the initial steps taken by PLN to restructure itself are encouraging, particularly in light of the financial difficulties it faces . 5. Significant Shortcomings (including non -compliance with safeguard policies ): There are two significant shortcomings, both having to do with PLN's financial insolvency : 1. The Government did not approve the tariff increase as required, due to political sensitivity . This substantially affected PLN's financial situation . 2. The Government has not been proactive in addressing the issues of PLN's under -capitalization. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Marginally This rating coincides with the ICR's rating Unsatisfactory of the project's outcome. While project's primary physical objectives were fully met, these accomplishments only partially offset the severe deterioration of PLN's finances. Institutional Dev .: Substantial Substantial Sustainability : Unlikely Uncertain OED rates the project's sustainablity as uncertain, primarily on financial grounds . Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : 1. Bank flexibility in increasing the loan disbursement percentages in response to major financial crises can contribute to the successful and timely completion of a project's physical components . 2. Project cost estimates should be more realistic and robust, fully taking into account the benefits to be derived from International Competitive Bidding procedures and thus, avoiding large cancellations of the Bank's loan (for instance, about 33 percent of this project's loan ). 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The quality of the ICR is satisfactory . It is generally well-written and thorough, with the exception of a few editing oversights.