Page 1 CONFORMED COPY LOAN NUMBER 4712-IND Project Agreement (Java-Bali Power Sector Restructuring and Strengthening Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and PT PERUSAHAAN LISTRIK NEGARA Dated October 1, 2003 Page 2 LOAN NUMBER 4712-IND PROJECT AGREEMENT AGREEMENT, dated October 1, 2003, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and PT PERUSAHAAN LISTRIK NEGARA (PLN). WHEREAS (A) by the Loan Agreement of even date herewith between the Republic of Indonesia (the Borrower) and the Bank, the Bank has agreed to make a loan to the Borrower in the amount of one hundred forty one million Dollars ($141,000,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that PLN agree to undertake such obligations toward the Bank as are set forth in this Agreement; and (B) by a subsidiary loan agreement to be entered into between the Borrower and PLN, part of the proceeds of the loan provided for under the Loan Agreement will be made available to PLN on the terms and conditions set forth in said PLN Subsidiary Loan Agreement; and WHEREAS PLN, in consideration of the Bank’s entering into the Loan Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Loan Agreement, the Preamble to this Agreement and the General Conditions (as so defined) have the respective meanings therein set forth. Page 3 - 2 - ARTICLE II Execution of the Project Section 2.01. (a) PLN declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Loan Agreement, and, to this end, shall carry out Part A of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering, public utilities and economic practices, and social and environmental standards acceptable to the Bank, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for Part A of the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Bank and PLN shall otherwise agree, PLN shall carry out Part A of the Project in accordance with the Implementation Program set forth in Schedule 2 to this Agreement. Section 2.02. Except as the Bank shall otherwise agree, procurement of the goods and consultants’ services required for Part A of the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 1 to this Agreement. Section 2.03. (a) PLN shall carry out the obligations set forth in Sections 9.04, 9.05, 9.06, 9.07, 9.08 and 9.09 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of the Project Agreement and Part A of the Project. (b) For the purposes of Section 9.07 of the General Conditions and without limitation thereto, PLN shall: (i) prepare, on the basis of guidelines acceptable to the Bank, and furnish to the Bank not later than six (6) months after the Closing Date or such later date as may be agreed for this purpose between the Bank and PLN, a plan designed to ensure the continued achievement of the Project’s objectives; and (ii) afford the Bank a reasonable opportunity to exchange views with PLN on said plan. Section 2.04. PLN shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Bank shall otherwise agree, PLN shall not take or concur Page 4 - 3 - in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) PLN shall, at the request of the Bank, exchange views with the Bank with regard to progress of Part A of the Project, the performance of its obligations under this Agreement and under the Subsidiary Loan Agreement, and other matters relating to the purposes of the Loan. (b) PLN shall promptly inform the Bank of any condition which interferes or threatens to interfere with the progress of Part A of the Project, the accomplishment of the purposes of Loan, or the performance by PLN of its obligations under this Agreement and under the Subsidiary Loan Agreement. ARTICLE III Management and Operations of PLN Section 3.01. PLN shall carry on its operations and conduct its affairs in accordance with sound administrative, financial, engineering and public utilities practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. PLN shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and public utilities practices. Section 3.03. PLN shall take out and maintain with responsible insurers, or make other provision satisfactory to the Bank for, insurance against such risks and in such amounts as shall be consistent with appropriate practices. ARTICLE IV Financial Covenants Section 4.01. (a) PLN shall maintain a financial management system, including records and accounts, and prepare financial statements, all in accordance with accounting standards acceptable to the Bank, consistently applied, adequate to reflect its operations and financial condition and to register separately the operations, resources and expenditures related to Part A of the Project. Page 5 - 4 - (b) PLN shall: (i) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with auditing standards acceptable to the Bank, consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than six months after the end of each such year, (A) certified copies of the financial statements referred to in paragraph (a) of this Section, for such year as so audited, and (B) an opinion on such statements and report of such audit, by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning such records, accounts and financial statements, and the audit thereof, and concerning said auditors, as the Bank may from time to time reasonably request. Section 4.02. (a) Without limitation upon PLN’s reporting obligations set out in paragraph 8 of Schedule 2 to this Agreement, PLN shall prepare and furnish to the Bank a Financial Monitoring Report, in form and substance satisfactory to the Bank, which: (i) sets forth sources and uses of funds for Part A of the Project, both cumulatively and for the period covered by said report, showing separately funds provided under the Loan, and explains variances between the actual and planned uses of such funds; (ii) describes physical progress in Project implementation, both cumulatively and for the period covered by said report, and explains variances between the actual and planned Project implementation; and (iii) sets forth the status of procurement under Part A of the Project, as at the end of the period covered by said report. (b) The first FMR shall be furnished to the Bank not later than 60 days after the end of the first calendar quarter after the Effective Date, and shall cover the period from the incurrence of the first expenditure under Part A of the Project through the end of such first calendar quarter; thereafter, each FMR shall be Page 6 - 5 - furnished to the Bank not later than 60 days after each subsequent calendar quarter, and shall cover such calendar quarter. Section 4.03. (a) Except as the Bank shall otherwise agree, PLN shall earn: (i) for its fiscal year ending December 31, 2004, an annual return of not less than 2.5% of the average current net value of PLN's fixed assets in operation; (ii) for its fiscal year ending December 31, 2005, an annual return of not less than 4% of the average current net value of PLN's fixed assets in operation; (iii) for its fiscal year ending December 31, 2006, an annual return of not less than 5% of the average current net value of PLN's fixed assets in operation; and (iv) for each of its fiscal years after its fiscal year ending on December 31, 2006, an annual return of not less than 6% of the average current net value of PLN's fixed assets in operation. (b) Before December 1 in each of its fiscal years, PLN shall, on the basis of forecasts prepared by PLN and satisfactory to the Bank, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Bank the results of such review upon its completion. (c) If any such review shows that PLN would not meet the requirements set forth in paragraph (a) for PLN's fiscal years covered by such review, PLN shall promptly take all necessary measures in order to meet such requirements. (d) For the purposes of this Section: (i) The annual return shall be calculated by dividing PLN's net operating income for the fiscal year in question by one half of the sum of the current net value of PLN's fixed assets in operation at the beginning and at the end of that fiscal year. (ii) The term "net operating income" means total operating revenues less total operating expenses. (iii) The term "total operating revenues" means revenues from all sources related to operations. (iv) The term "total operating expenses" means all expenses related to operations, including administration, adequate maintenance, taxes and payments in lieu of taxes, and provision for depreciation on a straight-line basis at a rate of not less than 8% per annum of the average current gross value of PLN's fixed Page 7 - 6 - assets in operation, or other basis acceptable to the Bank, but excluding interest and other charges on debt. (v) The average current gross value of PLN's fixed assets in operation shall be calculated as one half of the sum of the gross value of PLN's fixed assets in operation at the beginning and at the end of the fiscal year, as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to the Bank. (vi) The term "current net value of PLN's fixed assets in operation" means the gross value of PLN's fixed assets in operation less the amount of accumulated depreciation, as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to the Bank. Section 4.04. (a) Except as the Bank shall otherwise agree, PLN shall not incur any debt unless a reasonable forecast of the revenues and expenditures of PLN shows that the estimated net revenues of PLN for each fiscal year during the term of the debt to be incurred shall be at least 1.5 times the estimated debt service requirements of PLN in such year on all debt of PLN including the debt to be incurred. (b) For the purposes of this Section: (i) The term "debt" means any indebtedness of PLN maturing by its terms more than one year after the date on which it is originally incurred. (ii) Debt shall be deemed to be incurred: (A) under a loan contract or agreement or other instrument providing for such debt or for the modification of its terms of payment on the date of such contract, agreement or instrument; and (B) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into. (iii) The term "net revenues" means the difference between: (A) the sum of revenues from all sources related to operations and net non-operating income; and (B) the sum of all expenses related to operations including administration, adequate maintenance, taxes and Page 8 - 7 - payments in lieu of taxes, but excluding provision for depreciation, other non-cash operating charges and interest and other charges on debt. (iv) The term "net non-operating income" means the difference between: (A) revenues from all sources other than those related to operations; and (B) expenses, including taxes and payments in lieu of taxes, incurred in the generation of revenues in (A) above. (v) The term "debt service requirements" means the aggregate amount of repayments (including sinking fund payments, if any) of, and interest and other charges on, debt. (vi) The term "reasonable forecast" means a forecast prepared by PLN not earlier than twelve months prior to the incurrence of the debt in question, which both the Bank and PLN accept as reasonable and as to which the Bank has notified PLN of its acceptability, provided that no event has occurred since such notification which has, or may reasonably be expected in the future to have, a material adverse effect on the financial condition or future operating results of PLN. (vii) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in another currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtainable for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Bank. Section 4.05. PLN shall, at least every three years, commencing for its fiscal year ending December 31, 2005, revalue its fixed assets in accordance with sound and consistent methods of valuation, acceptable to the Bank. Page 9 - 8 - ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Loan Agreement becomes effective. Section 5.02. This Agreement and all obligations of the Bank and of PLN thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify PLN thereof. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telex or facsimile to the party to which it is required or permitted to be given or made at such party’s address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. Deliveries made by facsimile transmission shall also be confirmed by mail. The addresses so specified are: Page 10 - 9 - For the Bank: International Bank for Reconstruction and Development 1818 H Street, NW Washington, DC 20433 United States of America Cable address: Telex: Facsimile: INTBAFRAD 248423 (MCI) or (202) 477- 6391 Washington, D.C. 64145 (MCI) For PLN: PT. Perusahaan Listrik Negara (Persero) Jalan Trunojoyo Block M 1/135 Kebayoran Jakarta 12160 Republic of Indonesia Telex: Facsimile: 4715647248 (62) (21) 7204929 Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of PLN may be taken or executed by the President Director or such other person or persons as the President Director shall designate in writing, and PLN shall furnish to the Bank sufficient evidence of the authority and the authenticated specimen signatures of each such person. Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. Page 11 - 10 - IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in Jakarta, Republic of Indonesia, as of the day and year first above written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Andrew Steer Authorized Representative PT PERUSAHAAN LISTRIK NEGARA By Eddie Widiono Suwondo Authorized Representative Page 12 - 11 - SCHEDULE 1 Procurement Section I . Procurement of Goods Part A : General Goods shall be procured in accordance with the provisions of Section I of the “Guidelines for Procurement under IBRD Loans and IDA Credits” published by the Bank in January 1995 and revised in January and August 1996, September 1997 and January 1999 (the Guidelines) and the following provisions of Section I of this Schedule. Part B : International Competitive Bidding 1. Goods shall be procured under contracts awarded in accordance with the provisions of Section II of the Guidelines and paragraph 5 of Appendix 1 thereto. 2. The following provisions shall apply to goods to be procured under contracts awarded in accordance with the provisions of paragraph 1 of this Part B. (a) Preference for domestically manufactured goods The provisions of paragraphs 2.54 and 2.55 of the Guidelines and Appendix 2 thereto shall apply to goods manufactured in the territory of the Borrower. (b) Notification and Advertising The invitation to bid for each contract estimated to cost $10,000,000 equivalent or more shall be advertised in accordance with the procedures applicable to large contracts under paragraph 2.8 of the Guidelines. Part C : Review by the Bank of Procurement Decisions 1. Procurement Planning Prior to the issuance of any invitations to bid for contracts, the proposed procurement plan for Part A of the Project shall be furnished to the Bank for its review and approval, in accordance with the provisions of paragraph 1 of Appendix 1 to the Guidelines. Procurement of all goods and works shall be undertaken in accordance with Page 13 - 12 - such procurement plan as shall have been approved by the Bank, and with the provisions of said paragraph 1. 2. Prior Review With respect to each contract for goods estimated to cost the equivalent of $500,000 or more, the procedures set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelines shall apply. 3. Post Review With respect to each contract not governed by paragraph 2 of this Part, the procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply. Section II . Employment of Consultants Part A : General Consultants’ services shall be procured in accordance with the provisions of Sections I and IV of the “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” published by the Bank in January 1997 and revised in September 1997, January 1999 and May 2002 (the Consultant Guidelines), paragraph 1 of Appendix 1 thereto, Appendix 2 thereto and the following provisions of this Section. Part B : Quality- and Cost-based Selection Except as otherwise provided in Part C of this Section, consultants’ services shall be procured under contracts awarded in accordance with the provisions of Section II of the Consultant Guidelines, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to quality- and cost-based selection of consultants. Part C : Other Procedures for the Selection of Consultants 1. Quality-based Selection Services for information technology related institutional capacity building and training under Part A.3 of the Project may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 through 3.4 of the Consultant Guidelines. Page 14 - 13 - 2. Selection Based on Consultants’ Qualifications Services for information technology related institutional capacity building and training under Part A.3 of the Project estimated to cost less than $100,000 equivalent per contract, up to an aggregate amount not to exceed $200,000 equivalent, may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. Part D : Review by the Bank of the Selection of Consultants 1. Selection Planning A plan for the selection of consultants, which shall include contract cost estimates, contract packaging, and applicable selection criteria and procedures, shall be furnished to the Bank for its review and approval prior to the issuance to consultants of any requests for proposals. Such plan shall be updated every 12 months during the execution of Part A of the Project, and each such updating shall be furnished to the Bank for its review and approval. Selection of all consultants’ services shall be undertaken in accordance with such selection plan (as updated from time to time) as shall have been approved by the Bank. 2. Prior Review With respect to each contract for the employment of consulting firms estimated to cost the equivalent of $200,000, the procedures set forth in paragraphs 2, 3 and 5 of Appendix 1 to the Consultant Guidelines shall apply. 3. Post Review With respect to each contract not governed by paragraph 2 of this Part, the procedures set forth in paragraph 4 of Appendix 1 to the Consultant Guidelines shall apply. Page 15 - 14 - SCHEDULE 2 Implementation Program 1. PLN shall maintain until completion of the Project, the PLN Project Implementation Unit, responsible for the coordination of the implementation of Part A of the Project, headed by a qualified and experienced officer, said Unit to be provided at all times with adequate funds and other resources and staffed by qualified and experienced personnel in adequate numbers as shall be necessary to accomplish its objectives. 2. PLN shall maintain until completion of the Project, the PLN Project Java-Bali Unit, responsible for the monitoring of the implementation of Part A of the Project, headed by a qualified and experienced officer, said Unit to be provided at all times with adequate funds and other resources and staffed by qualified and experienced personnel in adequate numbers as shall be necessary to accomplish its objectives. 3. In carrying out Part A.1 and A.2 of the Project, PLN shall carry out the EMP and implement the resettlement policy framework and any resettlement action plan to be prepared in accordance with such framework, all in a manner satisfactory to the Bank. 4. In carrying out Part A.2 (b) of the Project, PLN shall obtain the Bank’s prior approval for each proposed substation extension. 5. In carrying out Part A.4 (a) of the Project, PLN shall, not later than December 31, 2003, furnish to the Bank for comments, a detailed time-bound action plan and, promptly thereafter, carry out such action plan taking into account the Bank’s comments, if any, such action plan to include: (a) that PLN shall, not later than December 31, 2006, carry out the restructuring of PLN’s Java-Bali generation subsidiaries, PT Indonesia Power, and PT PJB, into four or more new generation corporate subsidiaries; (b) that PLN shall, not later than December 31, 2006, carry out the separation of PLN’s transmission and distribution business units for the Project Provinces into corporate transmission and distribution subsidiaries; and (c) that PLN shall, not later than September 30, 2007, establish independent successor generation, transmission and distribution companies from PLN’s operations in the Project Provinces. Page 16 - 15 - 6. PLN shall, by October 15 in each year, commencing October 15, 2004, and until completion of the Project, furnish to the Bank for comments PLN’s annual power development and investment program, and, shall, thereafter, carry out such program taking into account the comments of the Bank, if any. 7. PLN shall, by December 1 in each year, commencing December 1, 2003, and until completion of the Project, furnish to the Bank for comments PLN’s ten-year financing plan and forecasts, and, shall, thereafter, revise such plans and forecasts taking into account the Bank’s comments, if any. 8. PLN shall: (a) maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the indicators set forth in Schedule 3 to this Agreement, the carrying out of Part A of the Project and the achievement of the objectives thereof; (b) prepare, under terms of reference satisfactory to the Bank, and furnish to the Bank, not later than January 15, April 15, July 15, and October 15 of each year, commencing January 15, 2004, and until completion of the Project, quarterly progress reports on the implementation of Part A of the Project; (c) prepare, under terms of reference satisfactory to the Bank, and furnish to the Bank, on or about December 31 of each year, commencing December 31, 2004, a report integrating the results of the monitoring and evaluation activities performed pursuant to paragraph (a) of this Section, on the progress achieved in the carrying out of Part A of the Project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of Part A of the Project and the achievement of the objectives thereof during the period following such date; and (d) review with the Bank, by March 31 in each year, commencing March 31, 2005, or such later date as the Bank shall request, the report referred to in paragraph (c) of this Section, and, thereafter, take all measures required to ensure the efficient completion of Part A of the Project and the achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Bank’s views on the matter. Page 17 - 16 - SCHEDULE 3 Performance Indicators Output FY04 FY05 FY06 FY07 Closing Date Output Indicators 1. Implementation of 500kV substation expansion At least 50% completed x 2. Implementation of 150 kV substation expansion At least 50% completed x 3. Implementation of the enterprise resource planning rollout Completed x 4. Progress with corporate restructuring technical assistance x x 5. Progress in environmental management capacity building technical assistance Action plan completed Implemen -tation completed Outcome/Impact Indicators 1. Increased dispatch capability of generation units at Paiton, Grati, and Gresik x 2. Reduced substation loading at Mandirancan, Krian and Klaten x 3. Improved voltage @ 150kV at sub-stations under the Project to within 10% of x Page 18 - 17 - nominal voltage