Third Telecommunications
  Report No: ; Type: Report/Evaluation Memorandum ; Country: Indonesia; Region: East Asia And Pacific; Sector: Telecommunications &
                            Informatics; Major Sector: Telecommunications & Informatics; ProjectID: P003973


  INDONESIA: Third Telecommunications Project (Loan 3182-IND)

        The Indonesia Third Telecommunications Project, supported by Loan 3182-IND for US$350.0 million
equivalent, was approved in FY90. The loan was closed in FY97, two years behind schedule. A total of US$48.9
million was canceled, mostly due to cost savings. Co-financing totaling about US$162 million was provided by
KFW (Germany) and OECF (Japan). The Implementation Completion Report (ICR) was prepared by the East
Asia Regional Office. A summary of the completion report prepared by the Borrower is attached to the ICR. No
comments were received from co-financiers.

          The project's objectives were to: (i) assist the Government in improving overall management of the
telecommunications sector; (ii) enhance the institutional capacity of PERUMTEL (which became TELKOM in
1991), the state-owned utility responsible for domestic telecommunications; and (iii) support the cost-93
investment plan encompassing, inter alia, the modernization and expansion of existing switching facilities,
the connection of about 475,000 lines in seven major cities, and computer systems to improve network
maintenance and operation; (ii) a broad institutional development program for PERUMTEL encompassing
technical assistance (part of it through a twinning arrangement), studies and training in the area of network
planning and operation, human resource management, accounting and financial control systems, project design
and management: and (iii) technical assistance to the Ministry of Tourism, Post and Telecommunications (MTPT)
to improve its sector planning, policy and regulation capabilities either met or exceeded. The Bank-funded
project, which was reduced in scope (by about 30 percent) as a result of substantial cost savings, was efficiently
carried out, albeit with some initial delays due to difficulties in securing rights of way. Its su achievements in
terms of network expansion and efficiency and quality of service improvements: new connections averaged
300,000 per year between 1989 and 1994, or an average yearly growth of 28 percent (versus 17 percent planned);
labor productivity improved from 39 employees per line in 1990 to 17 in 1994 (versus an original target of 20);
unit network development costs have been reduced from US$3,000 per line in 1990 to US$1,200 in 1994; and
long-distance call completion improved from 23 percent to 43 percent during the same period (also exceeding the
original target of 35 percent). On the institutional and policy front, changes have also gone beyond expectations:
PERUMTEL was corporatized (and renamed TELKOM) in 1991 and partially privatized in 1995 (through an
international public share offering); the legal and regulatory framework was amended to permit private sector
participation and to foster competition in both basic and non-basic services; and TELKOM was recently split
into seven regional operating companies, five of which are managed by international private companies. The
Bank has been closely associated with the design and implementation of this successful sector restructuring
strategy through a series of four loans totaling more than one billion dollars, starting with the Technical
Assistance Loan (FY84) --which preceded, and prepared the ground for, the Third Project-- and continuing with
the still ongoing Fourth and Fifth projects which followed it (Loans 3482-IND and 3904-IND approved in FY92
and FY95).

         The Operations Evaluation Department (OED) rates project outcome as highly satisfactory, institutional
development impact as substantial and sustainab performance is rated as highly satisfactory (as in the ICR),
primarily on account of the effectiveness of its incremental approach to sector assistance whereby through a mix
of instruments it has been able since 1984 to progressively broaden the scope of its policy dialogue in the sector,
with lasting impact.

        Two lessons can be drawn from this project: (i) active participation and commitment of all key
stakeholders is a prerequisite for successful reform of a public monopolistic utility; and (ii) continuity of
Borrower, beneficiary and Bank staff goes a long way in helping develop and maintain a close dialogue on critical
and potentially controversial policy issues.

        OED rates the ICR as exemplary, as it presents a thorough, candid and perceptive assessment of the
experience and lessons of the project.

No audit is planned.