CIRCULATING COP~Y FILE Copy TO K RIURNE TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1642-IND REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR A FOURTH POWER PROJECT May 28, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Currency Unit = Indonesian Rupiah (Rp.) US$1.00 = Rp 415 1 Rupiah = $0.0024 1 million Rupiah = $2,410 Fiscal Year April 1 - March 31 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF INDONESIA FOR A FOURTH POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Indonesia for the equivalent of US$41.0 million to help finance a Fourth Power Project. The loan would have a term of 25 years, including five years of grace, with interest at 8-1/2 percent per annum. The Government would relend the proceeds of the loan to PLN (the National Power Company) at the same rate of interest and for the same repayment period. How- ever, the interest on the loan to PLN would be capitalized during the grace period and the Government would bear the foreign exchange risk. PART I - THE ECONOMY 2. The latest economic report on Indonesia "Indonesia: Development Prospects and Needs" of April 15, 1975 (708-IND) described and analyzed the structure of production and incomes, the recent changes in the avail- ability of resources, and the medium and longer-term outlook for the Indonesian economy. Country data are shown in Annex 1. 3. In 1969, at the start of Indonesia's First Five-Year Plan, the per capita income of the Indonesian population was probably no higher than half a century ago. A majority of the population lived below a minimum welfare standard, especially on Java. Most-were dependent exclusively or primarily on agriculture, where farms were generally very small. Under- employment was widespread. While the inflation of the mid-1960s had been overcome, infrastructure was still in very poor condition. 4. The Government's efforts during the First Five-Year Plan period (April 1, 1969 - March 31, 1974) were successful in putting the economy on the road towards development. Most physical objectives were achieved or nearly so, and there was very substantial rehabilitation of run-down infra- structure and government enterprises in agriculture and manufacturing. In- vestments increased at a very fast rate, -rising from 9 to 19 percent of GNP. While 57 percent of Government development expenditures were financed from abroad, the reliance on foreign financing was much smaller than the level rate of nearly 80 percent foreseen in the Plan. Real GDP increased at an annual rate of over 7 percent. GNP per capita in current prices reached about $120 in 1973. The Government instituted programs for the labor in- tensive rehabilitation of infrastructure and other programs which created substantial incomes and employment. In all, however, given the annual in- crease in the labor force of about one million, one cannot be confident that the employment situation improved during the First Plan period, and from available information it is difficult to judge whether a significant part of the poorest section of the population participated in the gains of development. - 2 - 5. The Second Five-Year Plan (April 1, 1974 to March 31, 1979) builds on the achievements of the First Plan. While the First Plan dealt mainly with the urgent needs for stabilization under conditions of great scarcity of resources, progress has been such that the Second Plan can give much more weight to such problems as employment, equitable distribution, regional growth, and education. The Plan identifies a num- ber of specific low-income target groups and, in general, adopts an employment-oriented development strategy. It aims at a continued growth in investments, needed both because capital intensity will tend to in- crease as the rehabilitation phase draws to an end, and because more socially-oriented investments will be made. Overall, the Plan expects GDP to grow at 7.5 percent per annum. 6. Over the decade 1961-71, Indonesia's population grew by 2.1 per- cent a year. However, as a result of changes in the age distribution and declining mortality, the current growth rate is estimated at 2.5 percent. Even under the most optimistic assumptions with regard to fertility de- cline, the growth rate would only come down gradually, and the population would nearly double by the end of the century. While Indonesia still has substantial unutilized land reserves in the outer islands, 1/ these are limited in relation to the expected population increase, and a further large increase in population pressures - already severe on the inner islands 2/ - must be expected. Since 1969, the Government has been operating and gradually extending a family planning program. The number of acceptors has been increasing rapidly. The Second Five-Year Plan foresees a continued vigorous and much more comprehensive attack on the population problem. 7. During the rest of the 'seventies', average annual additions to the labor force are estimated at 1.2 million, increasing to more than 1.4 million in the years 1980-85. Tn addition, substantial underemployment exists, and there is the risk that even relatively simple technological improvements may eliminate some existing employment. The Second Plan's projections show that employment growth would almost keep up with the growth in the labor force, but the employment thrust of the Plan needs to be further strengthened if an appreciable increase in real labor earnings - and a wider spread of the benefits of development - is to be attained. 8. A further acceleration in Indonesia's development efforts should be possible, given the recent favorable developments in its exports,. and especially the large increase in the price of oil. Between 1972/73 3/ and 1/ All islands except Java, Madura and Bali. 2/ Java, Madura and Bali. 3/ Indonesian fiscal year April 1, 1972 - March 31, 1973. - 3 - 1975/76, the net oil contribution to the balance of payments as well as to the Government budget is expected to increase by roughly $2.5 billion, or $20 per capita. In nominal terms, this is equivalent to about 22 percent of the gross national income in 1972/73. In terms of real goods and serv- ices available to Indonesia, the gain is however much smaller. The main offsetting factor is the large increase in import prices over the three years. Taking this into account, only 30 percent of the original gain remains; in 1972/73 prices, the net gain is $6 per capita or $750 million for the economy as a whole, equivalent to 6.5 percent of the 1972/73 GNP. 9. In terms of the budget, part of the increase in oil revenues has been used to protect the domestic consumer and the economy against the sharp price rises in international markets through subsidies on major imported commodities (rice, fertilizer, wheat, sugar). The prices of these commodi- ties have risen faster than those of imports in general. Net of current subsidies, the gains in the 1975/76 budget (as compared to 1972/73) amount to only about 4.5 percent of the current (non-oil) GNP. Of this amount, more than half ($700 million in current prices), is being channeled toward toward public investments. The remainder is being used for current expendi- tures and for payments due for the subsidies of the preceding year. 10. From September 1972 to March 1974, the Indonesian economy was under severe inflationary pressure, initially because of a bad harvest in the Fall of 1972, and subsequently as a result of the worldwide increase in commodity prices and the boom conditions in Indonesia itself. By early 1974, the annual rate of inflation had reached nearly 50 percent. The Government took a number of measures to remedy the situation in April 1974. At approximately the same time, international prices of most com- modities started to fall. Since then, the annual rate of inflation in Indonesia has declined to about 15 percent and the Government has relaxed some of the earlier measures. 11. Recently, Indonesia's balance of payments and budgetary position have been affected by the inability of PERTAMINA - Indonesia's petroleum company - to meet all its financial obligations. During 1974/75 PERTAMINA, which had undertaken a large and diversified investment program for most of which it had not arranged medium- or long-term financing, faced serious liquidity problems. It began to withhold the legally obligatary pass- through to the Government of part of the revenues received from the for- eign companies, as well as taxes due on its own net income. In addition, PERTAMINA failed to meet payments due on certain of its short-term foreign borrowings and some of its other obligations and it faced the prospect of large similar obligations coming due in 1975/76 which it was not likely to be able to meet. Decisive corrective action was taken early in March 1975. The Government resolved to assist PERTAMINA so as to enable it to meet the outstanding debt service obligations. Furthermore, in order to assure orderly and coordinated borrowing in the international market, PERTAMINA and all other state enterprises were instructed to refrain from independent borrowing abroad, and Bank Indonesia was made responsible for raising from international commercial sources the needed funds on their behalf. A system- atic review of PERTAMINA's on-going investment projects and its investment plans as well as contracts related thereto is currently underway with a view to alteration, reduction and other steps where necessary. The results are likely to have a favorable bearing on the pattern of investment in the years immediately ahead and to result in closer control of major investment activities undertaken by state enterprises. However, the with- holding by PERTAMINA of part of the payments due on account of oil company profits to pay foreign obligations and the advance of funds by Bank Indonesia for payment of such obligations resulted in levels of foreign exchange re- serves at the end of 1974/75 of less than $1 billion or about 2.5 months of imports. For 1975/76, the Government expects to receive all of the pay- ments due from the operations of foreign oil companies and PERTAMINA which are made by and through PERTAMINA. It also expects a modest increase in foreign exchange reserves during that year, partly reflecting planned Bank Indonesia medium-term borrowing from private banks abroad designed in effect to refund PERTAMINA's short-term obligations. 12. Indonesia has a substantial potential for further productive investment, employment and income growth. In agriculture, a vigorous pur- suit of on-going programs in irrigation, development of new varieties and technical services, provision of credit and current inputs, etc., promises to yield high returns. In addition, development of new areas of food or tree crops - partly in conjunction with a rapidly growing transmigration program - has high priority. If production,' employment and incomes grow rapidly, demand for agricultural products - especially the high-value ones - will also accelerate, and there will be a need to improve market- ing and transport facilities. The industrial potential is good, both for modern capital-intensive natural resource-based activities and for more labor-intensive, partly export-oriented industries. Industrial activity needs to be widely spread to enlarge rural family income; this has impli- cations for the choice and location of future infrastructure projects. In addition, there is a serious backlog of economic infrastructure re- quirements in many areas, and a need to improve social infrastructure over wide areas of the country. 13. With the increase in resources which have become available since the Second Plan was prepared, the Government is now clearly set on a course of accelerated growth in investment, employment and incomes to realize Indonesia's potentials and improve the welfare of the broad masses of the people. With a determined effort to mobilize additional resources, and a judicious use of them - and assuming an international economy which is reasonably favorable to Indonesia - very significant progress can be made in this direction. One important element in this strategy will be to increase employment at such a rate that the labor market would tighten significantly. This in turn would create self-reinforcing tendencies, as incomes and demand rise throughout the economy. Thus, the wide spread of the gains of development is not only a prime objective, but also a vital tool in the overall strategy. Improvement in the labor market situation will depend critically on the direct creation of substantial new work opportunities by the Government in agriculture and in urban and rural public works. 14. The resources needed to implement an accelerated investment, employment and income growth strategy are substantial. Assuming only a modest overall increase in the capital intensity of the investment program, and an efficient use of resources, investments would have to double between 1975 and 1980 (for an annual growth rate of 15 percent). Investment would increase from 23 percent of non-oil national income in 1975 to 29 percent in 1980 which, in current prices, implies an increase from $3 billion in 1973 to $6.5 billion in 1975 and nearly $20 billion in 1980. 15. With regard to the foreign exchange requirements for such an investment progran it appears that, assuming relatively favorable devel- opments in the export sector (including oil), commitments of foreign funds to the extent of about $14 billion over the six-year period 1975-1980 will be necessary; for the first four years the necessary commitments are esti- mated at $2 billion per annum. In the interest of keeping the debt serv- ice reasonable, providing for the contingency of a lower oil income, and leaving room for future borrowing to sustain import growth in the 1980's when export prospects look less favorable, it will be necessary to borrow at least three-fourths of the foreign funds on concessional or semi-con- cessional terms. Under such a borrowing program, and assuming increased borrowing after 1980, the debt service ratio would reach 10 percent in 1.980 and about 18 percent in the late 1980's. With more pessimistic assumptions about future prices and exportslof oil, and only a partial adjustment of imports, the debt service ratio could rise to 15 percent in 1980 and 25 percent in the late 1980's. Even with a foreign borrowing of $14 billion over the next six years, the net transfer from abroad would drop from 6.6 percent of the non-oil national income in 1973 to 2.5 percent in 1975, 2 percent in 1980 and 1.5 percent in 1985. The Inter-Governmental Group for Indonesia (IGGI) met recently to consider Indonesia's long-term development needs and prospects and related 'foreign assistance requirements. The indications were that at least in 1975/76 the prospects that these re- quirements would be met were reasonably favorable. 16. Along with the foreign inflows estimated in the paragraph above the domestic savings rate would have to be raised from an estimated 21 per- cent of the non-oil national income in 1975 to over 27 percent in 1980 to achieve the proposed investment and growth targets. While this will be difficult, the Government appears committed to it. One important source of additional savings would be the gradual reduction of subsidies, which will become easier to achieve if prices of imported commodities continue to fall. It would also be desirable to increase some taxes for reasons of equity. 17. The Government will also have to take steps to strengthen its capacity to implement its expanding and complex development program, which involves large numbers of people over vast geographical areas. To achieve the objectives, the administrative apparatus and procedures of the Govern- ment may have to be adapted in important ways. In this context, it appears that the tendencies toward decentralization of decision making and delega- tion of responsibility need to be strengthened. Much attention needs to be given to staff requirements of Government agencies, and a massive training - 6 - effort mounted to ensure the availability of adequate staff to carry out the various programs. To the extent that these training and staffing efforts would take time, temporary use of additional expatriate expertise may have to be considered if the development objectives are to be attained. PART II - BANK GROUP OPERATIONS IN INDONESIA 18. As indicated in Part I, Indonesia will continue to need substan- tial external financial and technical assistance to expand and improve infrastructure and to expand production capabilities and employment oppor- tunities in agriculture, mining, forestry, manufacturing, construction and services. With the continued growth of the economy, the Covernment will also need to devote increasing attention to ensuring that the benefits of development are distributed widely. Programs to increase the produc- tivity of smallholder farmers and to resettle farmers from Java on pres- ently unutilized areas in the outer islands, the expansion of labor-in- tensive industry in Java, the development of new industrial activities in Java and the outer islands, family planning, water supply, education, health and other social programs will therefore have an important place in the development strategy. during the period of the Second Plan. The work of both the Bank's headquarters and Resident Staff has been oriented toward these objectives. 19. As of April 30, 1975, Indonesia had received 37 IDA credits amounting to $561.8 million artd six Bank loans amounting to $317.5 million. IFC investments total $58.4 million. Future lending to Indonesia is ex- pected to be in the form of Bank loans and IFC investments. The Bank Group accounted for about 4.5 percent of Indonesia's total outstanding public debt at the end of 1974. By 1978 it is expected to account for less than 11 per- cent of total outstanding debt and less than 5 percent of Indonesia's annual debt service obligations. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1975, and notes on the execution of ongoing projects. 20. In accordance with the priorities of Indonesia's Five-Year Plans, about one-third of Bank Group lending to date has been for agriculture. IDA has e,tended four credits to help rehabilitate Government agricultural estates, producing principally rubber, oil palm and tea, six to assist rehabilitation and expansion of irrigation systems servicing millions of smallholders on Java, two for fisheries and one each for improved deeds multiplication, beef cattle development, smallholder rubber development, sugar industry rehabilitation and smallholder tea development. Industry is of growing importance to the Indonesian economy and the Bank Group has assisted in six projects in this sector: two to expand PIJSRI's fertilizer production capacity, two for BAPINDO and one for the Private Development Finance Company of Indonesia (PDFCI) to help these development finance companies expand their industrial lending and one for Indonesia's first industrial estate project. Other sectors to which loans and credits have - 7 - been extended are power, transportation, telecommunications, education, population, urban housing improvement and water supply. In addition, four credits have been made to assist the Government in preparing and formulating appropriate development programs and projects. 21. The first IDA credit to Indonesia was made in 1968, and almost half of all loans and credits have been made since June 1972. Bank lending to Indonesia began only in June 1974. The program has increased rapidly from a relatively small base, and consequently the undisbursed portion of loans and credits is substantial. Moreover, several credits have financed proj- ects planned for execution over extended periods. Many, in addition, have been associated with institutional reforms involving, inter alia, the creation and reorganization of program and project authorities, drafting of new charters and the enactment of new legislation, all of which has taken time. Thus, a number of projects have experienced delays in the initial stages of implementation, and some are inherently slow disbursing. How- ever, the performance of most project agencies has improved continuously as organizational improvements have begun to take effect and Indonesian staff have become more experienced in project execution. Despite the improved administrative capabilities, most development projects, includ- ing those financed by the Bank Group, have been adversely affected by cum- bersome budgetary, procurement and customs clearance procedures. The Indonesian authorities recognize the need to streamline procedures and are considering steps necessary to accomplish this. As a first step, the Gov- ernment has requested and weIhave arranged for assistance under the Fourth Technical Assistance Credit (Credit 451-IND) to establish an effective control system in the National Develoment Planning Board (BAPPENAS) to monitor the progress of development projects. Additional measures to im- prove project administration are now under consideration by the Government. 22. The future Bank lending program is intended to continue to sup- port the Government's efforts to speed up economic growth and to ensure that the benefits of development are distributed widely. Specifically, it will give high priority to agriculture, concentrating on broad programs of support to increase production of rice and other crops on the inner islands and to expand resettlement and agricultural production on the less populated outer islands. Emphasis will also be given to socially- orientecd projects in the fields of population and nutrition, education and urban development. The Bank program will also continue to provide support for the Government in developing the additional industrial capacity and infrastructure which are essential to economic growth. Projects for natural resource surveying and mapping, transmigration and rural development, education, marine transport and highways have been appraised and are expected Lo be ready for presentation in the first half of FY1976. - 8 - PART III - THE POWER SECTOR Background 23. Historically, the power sector in Indonesia has been very weak, anid the lack-of an adequate power supply has constrained economic growth. Prior to Independence in 1949, the very limited electric power facilities were operated by privately-owned companies mainly for lighting purposes in major cities. In the mid-1950's, the Goverrnment nationalized these companies giving responsiblity for power to the Ministry of Public Works ,od Power. Due to new and inexperienced management, inadequate financial planning and control, and a shortage of foreign exchange for procurement of spare parts, the Government was unable to prevent serious deterioration of plant and equipment or to undertake any significant expansion of capac- ity. As a result, the Government coald not satisfy the rapidly accelerating demand for residential and industrial power, and this led to substantial, highi-cost, private investment in "captive" generating facilities. 24. During the period of the First Five-Year Development Plan the Government concentrated its efforts in the power sector principally on rehabilitating existing facilities together with modest establishment of new facilities. During this period, public generating capacity in- creased by about 40 percent, but the increase in demand for power far exceeded increases in capacity. The present publicly installed capac- ity of 7 watts per capita and the electricity consumption of 17 kwh per capita are among the lowest in the world. The Second Five-Year Plan therefore provides for a very substantial increase in generation capacity and in related transmission and distribution facilities. PLN 25. In 1965, Perusahaan Listrik Negara (PLN) was created as the national electricity authority under the direct control of the Ministry of Public Works and Electric Power. PLN had little autonomy and was almost totally dependent on Government budgetary allocations, partly out of for- eign aid, to meet its financial requirements. Responsibility for planning and implementing new construction continued to rest with the Ministry of Public Works. At the time of the first Bank Group involvement in the power sector in 1969, PLN suffered from extreme organizational and financial wetakness. The division of responsiblity between the Government and PLN was not clearly defined, financial records were chaotic and the company was suffering serious financial losses. To help improve this situation, the Bank Group helped finance (under IDA Credits 155 and 334-IND) a compre- hensive management consultant effort for which the French firm, SOFRELEC, was selected with Peat, Marvick and Mitchell as sub-contractors for account- ing. After a two-year period, SOFRELEC was able to help PLN to reconstruct its records, assess physical facilities, verify and settle outstanding con- sumer accounts, recommend an appropriate tariff structure, prepare a func- tional organizational plan and initiate standard procedures for accounting, - 9 - inventory control and consumer administration. Many of these recommenda- tions are now being implemented. However, further efforts are necessary to improve system planning, construction management and personnel adminis- tration. The proposed project provides for personnel training and man- agement assistance in these and other important areas to help PLN imple- ment SOFRELEC recommendations. 26. SOFRELEC also helped to prepare a new charter for PLN, which was put into effect in 1972. The new charter gives PLN sole authority except as it may delegate to generate, transmit and distribute power and to con- struct, own and operate power facilities in accordance with sound commercial practices. While the improved charter gives PLN greater authority, the Min- istry of Public Works and Power maintains broad control over PLN's external borrowing, investment program and personnel policies. This situation re- flects a conscious Government policy of retaining close supervision over important sectors of the economy and the public enterprises which operate therein. The management board consists of a President-Director and four directors responsible, respectively, for planning, construction, operations and administration (including finance). The President-Director reports to the Minister of Public Works and Power and the Directors report in their respective fields to the President-Director. PLN has a total staff of 21,160. However, there are an insufficient number of highly trained staff and substantial upgrading of skills ig necessary. A large program of overseas fellowships and in-country training is included in the pro- posed project to improve the level of staff competence. 27. With the improvement in financial records, it was clear at the time of the appraisal of the Third Power Project (Credit 399-IND) in late 1972 that PLN's financial position was even weaker than had been previously realized. To solve this problem, PLN in agreement with the Bank prepared a financial recovery plan, which was incorporated as a central element of the Third Power Project. The plan covers all aspects of PLN's opera- tions and is designed to improve PLN's management capabilities and finan- cial situation so that it can by 1978/79 cover, through sales revenues, all operating costs, including adequate provision for depreciation and bad debts, as well as taxes. Thereafter, PLN would cover through sales rev- enues all operating costs and make a reasonable contribution toward new capital investments (Section 4.03(a) Project Agreement). Indications are that the interim target of 80 percent revenue/cost coverage has been attained in 1974/75. A progress report on the Recovery Plan was submitted to the Executive Directors of the Bank on July 16, 1974 (IDA/ Sec M74-230). During 1975/76, PLN, under its recovery plan, will con- centrate on improving the performance of the construction department by streamlining procurement, contract management and budgeting procedures. Attention will also be given to strengthening PLN's on-going training program and introducing a comprehensive insurance system. PLN will con- tinue to implement its recovery plan under the proposed project (Schedule 2, Part B of the Loan Agreement and Section 2.04, Project Agreement). - 10 - Present Facilities and Expected Growth 28. During the First Five-Year Plan period, electricity sales in West Java increased at an average annual rate of more than 16 percent. This growth would have been even higher if PLN had been able to expand its capacity more rapidly. A recently-completed study by its consultant, Chas. T. Main, indicates that PLN would have to increase its supply capac- ity at an annual rate of 32 percent in West Java to satisfy the potential demand by 1982. At present, PLN has a supply capability of about 325 MW in West Java. As of November 1974, PLN had additional applications pending in West Java for 330 MVA for 1975 and 210 MVA for 1976. To meet this demand alone would require a tripling of generating capacity in two years. Due to PLN's inability to satisfy rapidly expanding demand for power, private cap- tive plant now accounts for between 40-60 percent of total installed capac- ity (public plus captive). To cope with the rapidly growing power demand, PLN has begun installing gas turbines as a stop-gap measure until the first base-load unit at Muara Karauig is commissioned in late 1977. In order to help create a sound basis for further power development on Java, Credit 399 provided funds for a system development study which will establish power sector investment priorities. Consultants (Preece Cardew, and Rider) have been selected, and the study was beguin in November 1974. 29. The appraisal report estimates that PLN will be able to increase sales at an average annual rate of about 14 percent during the period of the Second Five-Year Plan and at 25-30 percent thereafter. To achieve this rate of growth, PLN will need to invest an estimated $2.8 billion between now and 1983 to provide about 3,000 MW of generation capacity and related transmission and distribution facilities. It will also need to continue to devote major efforts to improving its organizational effi- ciency. But even with organization improvements and relaxation of finan- cial constraints, it is unlikely that PLN can fully satisfy the growing demand for power during the coining decade. Bank Participation in the Power Sector 30. After a review in 1969 of deficiencies in the power sector in Indonesia, IDA provided two Credits in 1969 and 1972 (Nos. 165 and 334-IND), totaling $55 million, which focused on the rehabilitation and expansion of distribution facilities in. the Jakarta area. Despite delays due to cumbersome construction management and procurement procedures and an increase in the foreign exchange costs of the program, substantial progress has been made in alleviating institutional bottlenecks and in completing these projects. A third IDA Credit (No. 399-IND) in 1973 provided $46 million to assist with the development of the first two 100 MW units of the Muara Karang power station near Jakarta. Due mainly to international inflation, but also as a result of some changes in project scope, the total estimated cost of the project has increased by $54 million or more than 100 percent including a $30 million increase in foreign exchange costs above the appraisal report estimate; the Govern- ment will finance all the additional cost. Agreement has been reached - 11 - with PLN on a revised list of items to be financed under Credit 399; under these arrangements, IDA would not contribute to financing minor equipment or the general construction contract(s) for Units 1 and 2. The proposed project as well as future Bank projects now under prep- aration would further assist PLN in increasing generation capacity at Muara Karang and other sites and in continuing the expansion of its transmission and distribution network in West Java. PART IV - THE PROJECT Background 31. The proposed project is one of a series identified by the Bank Group as high priority investments needed to increase power generation, transmission, and distribution within the Jakarta-West Java region of Indonesia. A Bank mission appraised the proposed project in December 1974. Negotiations were held in April 1975. The leader of the Govern- ment's negotiating team was Mr. Ely Soengkono, Secretary General, Min- istry of Public Works and Power. Appraisal Report (No. 766-IND) on the proposed project is being circulated to the Executive Directors separately. A loan and project summary is contained in Annex III of this report. Project Description 32. The proposed project would provide for the expansion of the Muara Karang thermal power station near Jakarta by the addition of a third non-reheat, oil-fired generating unit of 100 MW capacity. When commissioned in 1979, this unit will increase the total installed capac- ity available to the West Java and Jakarta area to about 900 MW. The project also includes the engineering design of a fourth unit at Muara Karang of 200 MW capacity and for a study of a new site for a thermal power station in West Java to be commissioned early in the 1980's. To strengthen PLN's staff capabilities the project includes the construc- tion, equipment, and advisors for three technical training centers; an overseas fellowship program for supervisory personnel; and six man- agement advisors to serve for a two-year period after the present SOFRELEC team concludes its work in mid-1976. As under Credit 399, the next stages of PLN's financial recovery plan are incorporated in the project. Cost Estimates and Financing Plan 33. The estimated total financial cost of the project is $69.5 mil- lion, including interest during construction on the proposed Bank loan. The estimated foreign exchange component amounts to $50.4 million. The cost estimates for equipment and construction were prepared by Black & Veatch International (BVI) of the USA, the consulting firm retained - 12 - by PLN for engineering design of the first two units at Muara Karang. Cost estimates for major items of equipment are based on the bid prices for units 1 and 2 which included an option for unit 3. The cost estimates provide for a physical contingency of five percent for equipment and 10 percent for construction, which is reasonable because the project design is well advanced. Price contingencies averaging about eight percent have been estimated for major equipment items on the basis of escalation provisions included in the bid proposals. Appropriate price contingencies have been included for small items of equipment and civil works to take into account estimated levels of domestic and international inflation. The overall price contingencies amotnt to about.21 percent of project costs including allowances for physical contingencies. 34. The proposed Bank loan of $41.0 million would provide 59 percent of the total financing required for the project. The proposed loan would finance the foreign exchange requirements of the project, except interest during construction and the training center equipment, which would be financed by PLN. 35. The Bank loan would be made to the Government for a term of 25 years, including five years of grace. Unlike under previous power projects in Indonesia, where the proceeds of IDA credits were made avail- able by the Government to PLN in the form of equity, the proceeds oE the proposed Bank loan would be relent to PLN under a subsidiary loan agree- ment acceptable to the Bank; conclusion of this agreemeLnt is a condition of effectiveness of the proposed Bank loan. The subsidiary loan would be on the same repayment terms and interest rate as the Bank loan. Licwevet, interest would be capitalized during the grace period; the Government would bear the foreign exchange risk. The Government's contribution to project costs not financed by the proposed Bank loan is expected to be made available to PLN in the form of equity. The decision to pass on the proceeds of the Bank loan as a loan rather than equity was based on PLN's improved financial position and resulting capacity to service debt in the future. Procurement and Disbursement 36. Bids for the supply of major equipment for the first two gen- eration units at Muara Karang included option offers for the third unit, which remain valid until November 1975. PLN intends to accept these options, since the prices are reasonable and this would allow the third unit to be completed at least six months sooner than would otherwise be possible. Additional advantages can be expected through equipment stand- ardization and simplified engineering and construction work. This is acceptable to the Bank. Other items of equipment would be procured on the basis of new tenders, in accordance with Bank Guidelines on interna- tional competitive bidding; for purposes of bid comparison, qualified local manufacturers would receive a margin of preference of 15 percent or the level of customs duties, whichever is less. In the interest - 1 3 - of economic and expeditious project implementation, the general con- struction contract(s) would be tendered for all three units together, and in accordance with Bank Guidelines. A margin of preference for local contractors has not been provided because the general construction is basically a supply and erection contract with substantial foreign cost involved and beyond the capability of local contractors. However, local contractors would, in all probability, be associated with the work as sub-contractors. 37. The Bank loan would be disbursed for 100 percent of the for- eign exchange costs of supply contracts for imported equipment and mate- rials and 95 percent of the ex-factory price of such items contracted locally; 100 percent of the foreign exchange cost of consultant services and training fellowships; and 30 percent of the cost of the general construction contracts up to $12.4 million. By disbursing 30 percent for the general construction contract, an amount equivalent to the for- eign exchange component for unit 3, the Bank will be closely associated with the construction of all three units. PLN's Future Financial Position 38. As indicated in paragraph 27, PLN has made satisfactory progress in meeting the interim targets set out in its financial recovery plan, and present indications are that it will reach its target of covering operating costs through sales revenues by 1978/79. In 1973, PLN increased its tariff level by 40 percent. Current charges have been further increased to reflect the higher fuel costs established in April of this year. The need for future tariff increases will depend on the rate at which PLN is able to improve its operational efficiency. This matter will be kept under close and continuing review to ensure that PLN increases its tariffs as necessary to meet the targets set out in its recovery plan and at the same time in- creases its efficiency. 39. In order to guard against PLN incurring an excessive debt burden, a covenant requiring Bank concurrence for borrowing whenever the maximum future annual debt service would not be covered by the most recent actual annual net revenues was agreed during negotiations (Section 4.05 of the Project Agreement). 40. In the past, unpaid bills posed a serious problem for PLN. Government agencies were particularly slow in paying their electricity bills. The IDA Credit Agreement for Credit 334-IND contained a covenant requiring Government agencies to pay their debts promptly and they have. A similar covenant requiring payment when due is incorporated in the Loan Agreement for the proposed project (Section 3.03). Accounts receivabl-e for non-government customers have been reduced to an acceptable level of about three months billing; a covenant to maintain this position has been included in the proposed Project Agreement (Section 4.06). - 14 - Project Benefits 41. At present, industrial expansion is seriously constrained by the lack of an adequate power supply and improvements in the public power sector are essential if the Indonesian economy is to grow as anticipated by more than 7 percent annually in the next five years. The most efficient immediate means of increasing the installed capacity in West Java is the expansion of the Mluara Karang thermal power station in Jakarta. To make maximum use of the site it is necessary to proceed quickly with the installation of a third 100 MW unit and the engineering design of two larger 200 MW units to complete the station. This procedure will ensure the largest increase in generating capacity in the shortest possible time and at the least cost. The rate of return based on costs and rev- enues estimated to be in effect at the time of project commissioning is expected to be 19 percent for unit 3 and 17 percent for all three units combined. The higher return for unit 3 alone is the result of certain investments in facilities common to the entire Muara Karang Plant having been included in the cost of the first two units. The project conforms wiLh environmental control standards recommended by the U.S. Environmental Protection Agency, and no major ecological problems are expected. 42. The proposed project would continue the close association of the Bank with the efforts being taken to strengthen PLN. Both the Government. anid PLN, itself, recognize the problems of continuing institutional weakness and are, with the assistance of consultants, taking steps to increase PLN's management efficiency, financial viability, and staff productivity. PART V - LEGAL INSTRUMENTS AND AUTHORITY 43. The draft Loan Agreement between the Bank and the Republic of Indo- nesia, the draft Project Agreement between the Bank and Perusahaan Unum Listrik Negara, Supplemental Letters to the Agreements, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 49. Features of the Agreements of special interest are referred to in paragraphs 27, 39 and 40 of this report. 50. I am satisfied that the proposed loan would comply with the Articles of Agremeent of the Bank. PART VT - RECOMMENDATION 51. 1 recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President Washington, D.C. May 28, 1975 Acne, I Page 1 of Pages 0OUNTNT DATA - INDONESIA ARNA POPULATION DENSITY i7f7639 km5 163m2lo (eid-1972) Per kstof arabla land SOCIAL DDICATORS Reference Countries Indone-ia ida7d-nh IndIa Pbilipnin"I 190 90 7 9 170 c r7 GNP PER CAPITA U9$ (ATIAS BASIS) ~ .90 - 70 /a Ill 2210 Crude birth rate (par thousnd) ..LI' /h,,c Crde death rate (per thousad) 21?i1 Wnant nortality rate (per thousand live births) 125 /d .. itO 120n-mo / ,d 80 Life expectanc.y at birth (er)Lb i8 LEi 50 50 truce reprud lacin rt 2.8 3.2 ~b 3.1 Ih 2.9 /h 3.3 Pepulto grnah rate 2.0 2.0 h 2. 2.3L 3.0 / Population grooth rate -bu-a S ..It1, j Age ec.rnuare (p.s-ner) 15-646 5~L. 53, Il/on 53 Age dapeodenoy ratio A00.9 0.90 0. . Focool dPependey ratio A( I'~ lSdi . 1.5 Urban pepulatinn as percent uf tetal 15 /i.l 07 Li. * 20 L. 32 Lk Famly planningi No, of acceptors oolte (thoo.) . 175 .. . 09 No. of ..uers (9 uf earned sse). . EMPiOIKENT Total laborefarce (thoausands) 3h6,6')f LI 60,100 jd 22,3CC 221,000 /dp. 13,200L P.,r.entage employed Isan utr 68L 621 71dl ,4 6 Percetage u-enloyed 71 7i27 7d75 INCOMr, DISTRIBUJTION Percentof na~`tionai income received by highest 5% ... 7 1 25L±. 2 Parcet ufnational boone re-etud by highest 20% ..62 4.o 53 L. 6L. Pretof national isane r--eted by Il..eat 20% ...9. 5 Ls, Pecet of naticoa1 income received 9 1oeut 60% .. ..320p 02 DISTRIBUTION CF LAND OEERSHIP % nonod by top 10% of -c-n-re .. .34 9 nood by osallest 10% of oaners .. Lin HEALTH AND NUTRITION Poplaio pr pyoio35,000 ar 27,650 7,600 /.,t 6,800 9,0 Population pr oursig person SatlO722,230 7jf 5,110 1390 I, Population Per hospita,l bed 1,610 / 1,720 8ci220a. 1,620 Lt E 50 / Per oapit. calorie supply as 9 of requiremnte/ 62 /c.x 82 14 80 90 82 Per caPita Protein supple -tota (gr-as per day L 3 oa 3 .63L Of uhlich, anieal and pule 15 /01 i .16 22 Li. Death rate 1-6 years /7 L E IRTCA TION Adjuot.d /8 prinary school enrollseot rotio 6 p 17 59 9/c 12ba Adjuat.d Z aseconary ochoul snr-1lset ratio 4 60Io 712 79/c 1ac 65L2 Years of schooling pro-Ided, first and asend Ienl 1 6it cO if V cational eorptloent aa 9 of soc. school enrollment 20/a 28 .. 6 /oo I Adult literacy rote 9 ~~~ ~ ~~39 4 56 /d,.i ..36 /cda 72 /el HOUGOINO Aesra ge No. of persos per roes (urbao) 1.7 /4 - ..- ..A/ Percent of occuplsd units without piped water ... 6 .i t4 Acces.s in elnotniolty (as 9cCf total pepulatlon) ..3.... * Peccoct of c'uca pupulati on coo...ctod to sl1-triolty _p. * /do CONSUMPT ION Radio r-celoar per 1000 ppulatlon 7 116 6 23 /a ii ' Pos--ger cars per 1000 pepuletloc2Ia1/ ILnI Elnotrictpeer consumption (kwh p.c.) 1 2 ? 02 I0 a 255 Cenrint ono0 ption p.c. kg par year 191 01202 iNotc, Fig-re rnfrr rut- to tb. latost penlode o to adaac ofenromnt eprauebodyegke n tbn itnieni ye.r. Latout periods refer in prinoipir t /6,itrbutton b g and sa of nationa pop.lula nooe tie Yoor 1956-60 u- 1966-70, the latent ye.r. In pm-in- /4 rten taarereueoin fralnonremesa- cipe to 1960 and 1970. liebhd by USDO, oonoc, kRnnorch Seroine prolide for a etilmu Li. ?Th Per Copin aOP. eitiie lo ut onkit pri"c fc locnnof 6O gre- of total protein per day, and 20 gram of yeas-athor than 150l0,coloalotd by tho owen onorin aIml aand pulan protein, of ouch 10 gram sho-ld he animal techniqe cci,172ardAsbiio protein. These etnndardoar -.nne..bat 100a tuas those of 75 12 A-erae number of doughte.o p-r aua of rej,crdorti-o grain of total protein and 23 grow of animal proteio as an ogo. asuroge for the norld, prcpooad by FAO in the Third World Food Z4 Popul%tion groth mien -r for the decodon ondiog in S_s.cY. 1,960 nod 1970. /7 San stadi.n h-e suggested that crude death rates of children 14Aeln. of Poplatiao -oder 15 -id 65 and avon to pop.1O- agee 1 through 4 may be iced 00 a firet oppra.tisthon indea of tico of ngo15-6h for age depondo..oy s-tio and to labor Inaint itin force of agac 15-66 for emonoic dependency ratio. /j Perontage enrlledof orspnigpopilatlos of school oge /4 AO referesnna Letadarde represent phyniolagi-1l r- an defined for e... hcountry. qulreneti or normal activity and hoalth, taking /0 1972; /b 1965-70; ac Nolatet; /d 1971; le 1962; /f Projections, 1973: /&- 196,1-56: 16 1960-7%; j, MNuiiopalitiee, regency capitals and other place. wi-th urban cbaracteriteico; L4 For tie dofioitioc of ccb-bu, non /1 nofhi, Yearbob 1972, page 1561h /k For tho definitioni f urban , eft UN Deacgraphin Yerboob 1972, page 155; LA. 161; Li97?73; I. AID entimate of 1obof force in age group 15-5;lN eetgvnofgr flO ilo boned on the 1971 pupuotionceu. The difference is due ta chongon in tho dafinition of o nrkor. In tie 1971 .e...o pernono ..re classified only on the basis of their main aotivitie-; thin led to tie exclusion of snvorol categorieo, onch as honoeoi-e; /~1966-67; Lp. Households; /4 1967-68; /r 196L; In Thubaiorn, the reginLor, not all ocrblog to the country; 7 1969; /c Gon-enn.et only; Ž, 1968; o Including rura hospitals; I. 1961-63; Li i969-71; /~ 1969-70; LI- Not inoloding Went lrian; lab Accyrc.bmate enoio npercenige of population ~in i to inn age grou.p; Ion Notfimte ouch incl,idnncerae todentn; Iod 1,967; lae Approteote enroLlmet 00 percentage of population in li-is age group; /a ipt ndo rca nnl za 1965; /ob Puilic education; lni 15 Yoam and over; Zaj_ Definition not a-nilale; /ab Population of ten yoaro and ovr boned an one poroent aoole dtat of 1971; lal Inports only; /an Hattin of populatio, under 15 and 65 and over to total labor force; /an G-ophi-aI ineroato; Innide or cutoide; lan Percent of doelliicge. Thle Philippines boo been selected on an objectIve county fur It. geagraphlc-i cie riynd enoeof ito oppamet nore advanced stage of seonom Ic develo1pment. ANNEX I Page 2 of 3 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GTRCWrH (%, constant prices) US$ Mln. % 1960 -65 1965 -70 1973 GNP at Market Prices 15369 100.0 1.9 4.9 8.0 Gross Domestic Investment 2911 18.9 3.3 11.5 17.0 Gross National Saving 2083 13.6 5.8 5.1 20.8 Current Account Balance 828 q.)l - Exports of Goods, NFS 2957 19.2 1.5 7.8 24.8 Imports of Goods, NFS 3170 20.6 0.2 10.9 21.4 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN. 1971 Y Value Added Labor Force2/ V. A. Per Worker US$ Mln. _Mln. us $ _ Agriculture 4243 43.6 30.5 c9.0 139 63 Industry 1877 1.9.3 3.0 6.8 626 285 Services 3609 37.1 8.3 18.8 435 198 Unallocated - - 2.4 5.4 Total/Average.... -ota/Avrag ~ 9' 100.0 -0.2 100.0 220 100.0 GOV:R-NBNT FINANCE General Government Central Government ( NMln.) - of GDP ( oBln) %of GDP 197 197 196 -7 7/7 1973 1972 nirlernt Receipts 977 14.8 12.9 Current Expenditure 9_ 70 10.7 12.9 Current Surplus 273 401 3.1. Capital Expenditures 273 7.2 6.4 External Assistance (net) 208 3.1 363 MONEY, CIEDIT and PRICES 1969 1970 1971 1972 1 71Bi1ion Rp outstanding end period) Money and Quasi Money 230 315 432 690 987 1-I Bank credit to Public Sector 60 57 129 57 37 2 Bank Credit to Private Sector 172 306 451 599 8'7 1125 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 8.5 9.4 11.4 15.2 10.. General Price Index (Sept. 1966=100) 545 612 638 680 891 1253 Annual percentage changes ins General Price Index 17.7 12.3 0.2 6.6 31.0 40.6 Bank credit to Public Sector 33.3 - 5.0 126.3 - 55.8 - 35.1 - 94.6 Bank credit to Private Sector 91.'. 77.9 47.4 32.8 49.8 25,4 NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period co0ed, 1/ Conversion at an exchange rate of' Rp. 390 - US $1, 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. not available not applicable ANNEX I Page 3 of 3 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1972-74) 1972 1973 1974 US$Mln 7. (Millions US $)Pre- Est. Exports of Goods, NFS 1757 2957 6842 Oil 23014 59.7 Imports of Goods, NFS 1875 3170 5832 Rubber 362 9.4 Resource Gap (deficit = -) -ITd -23 Tul Timber 520 13.5 Tin 98 2.5 Interest Payments (net) - 46 - 72) Coffee 84 2.2 Workers' Remittances - - ) -1236 Other Factor Paymients (net) -318 -543) Net Transfers,. -364 -615 -1236 All other commodities 493 12.7 Balance on Current Account 482 -828 - 226 Total 3001 100,0 Direct Foreign Investment 258 290 454 EXTERNAL DEBT, DECEmBER 31, 19Th Net MLT Borrowing Disbursements 447 624 US $ Mn Amnortization - 70 -138 .. Subtotal 5 635 Public Debt, incl. guaranteed 51o* Capital Grants .. .. .. Non-Guaranteed Private Debt Other Capital (net) 181 208) -176 Total outstanding & Disbursed Other items n.e.i .298 62) / TIcrease in Reserves (+) 432 325 687 DEBT SERVICE RATIO for 1973- Cross Reserves (end year) 574 806 1470 Net Reserves (end year) 458 783 1470 Public Debt, incl. guaranteed 7.8 Non-Guaranteed Private Debt Fuel and Related Materials Total outstanding & Disbursed Imports 4 5 of which: Petroleum 2 2 Fxports 877 1348 4688 of which: Petroleum 877 1348 4688 IBRD/IDA LENDING, ( April_30. 1975 ) (Million Uss) RATE OF EXCHAIGE IBRD IDA outstanding 6 Disbursed 3 r1 22947 Through july 1971 Since Auust 1971 undisbursed 3.1 322, JUETS $.100 Rp 375 T 1. 00 = U$0 415 Outstanding incl. Undisbursed 317. 56i.8 pq~ 1.00- US $ 0.0027 Ila 1.00 = US $ 0.0024 3 1/ Ratio of debt service to exports of goods and non-factor services, with oil exports net of factor payments and imports of the oil sector. * Preliminary estimate . not available . not applicable May 28, 1975. ANNEX II Page 1 of 1.1 paces TPE T O_iBU; O'H_BAIK GROUP OPER2ATIONS IN INDONESIA A. S?'.72>1F' OF RAIT, LO,AN.S -ANTO IDA CREDITS (as of April 30, 1975) Loan/ US$ Mi--illion C,redit Flisc]. Amount (less cancellations) Number Year Purpose Bank TDA Undisbursed 127 L969 Irrigation RehabiliV'tion 5.0 0.1 154 1969 Highway 28.0 0.8 155 1969 Agricultural Estates 16.0 0.5 165 1970 Electricity Distribution 15.C 0.2 193 1970 PIJSRI Fertilizer 35.0 1.6 194 1970 Second 4gricultural Estates 17.0 4.9 195 1970 Second Irrigation Rehabilitation 18.5 5.3 210 1971 Telecommunications Expansion 12.8 2.8 211 1971 Fisheries 3.5 1.9 219 1971 Education 4.6 2.3 220 1971 Third Irrigatior Peh-bilitat.iorn 14.5 3.6 ,46 1971 Seeds 7.5 4.2 259 1971 Tea 15.0 5.9 96o 1971 Second Highway 34L.0 13.5 275 1972 Third Technical Assistance '.0 1.6 288 197? Second Eclduictiton 6.3 5.9 '?89 197 Foulrth Irrir-ation Rehabillitation 12.5 4.7 300 197' Population 13.? 96 310 1972 D eveoornent Finance Co. (aR/ 7-O I) 10. 0 3.1 318 197? Inter-Island Fleet Rehabilitation 8.5 5.7 319 1972 Fou,rth Acr-ricultur,il Esta-;tes 11.0 7.7 334 1979 Secold ElecLrici'ty Distri5iation h0.0 30.5 355 1973 Beef Cattle DeveloDment 3.6 3.1 358 1973 No.th Suatra 3Sal lholder Development 5.0 4.1 387 1073 Third ,d ition 13.5 . . .. 13.513.5 388 1 73 17lil rd Hi_Thw.-r 14.0 10.6 :99 1973 WelL ,1Jva Therna. Power 46.0o 45.3 400 1973 Srnai ho!der arind Private Esta-te 'Pea 7.8 7.5 o05 1973 Sulgar Industryv Rehabilitation $0.0 48.7 428 1974 ilao 3AdLuTI Industrial Estate 16.5 16.2 436 197'1 PIL\rate DeveI ninernt Finn-ce "o. (DPFCI) 10.0 1 0.o 451 197T L ½o0 Cc;hnAcKlssistan e 5.0 n4.7 1J7;7 102i Sl T3ra 16.0 15.8 l480 1974 aFisheri.es Credit 6.5 6.5 514 1974 tJJhw 1 iur Tr-i ;io'l F -'.ns. on 30.0 29.3 r)05 1974 Railway 48.0 48.o j104 1975 Jakarta Urban Develooment, 25.0 2201 104i9 a/ 1975 Five Ci ties !Trl.ter Supply 1v.5 Th.5 1]054 1975 Developmen, Finance CO. (EAPIND0 II) 50.0 49.8 1089 1975 Second Ferti'lizer Expansion PUSH!. IIl)1L5.0 115.0 1100 i-' 1975 Sicth Irri.ratinn 65.0 65.0 317.5 561.8 646.5 a! Not yet effective L NTNE ( II Page 2 of 11 pages A. ST. uL... OF BANK LO,".NS AND IDI CREDITS (as of April 30, 1975) US$ Million A.Pnount (less cancella-tions) Banik IDA Undisbursed Total 317.5 561.8 646.5 Total now outsts-anding 3 5___ 317.5 518 6!. Amrount sold 0.05 of wlhich has been repaid 0.0 0.05 Total now held by Bank 317.45 561.8 and IDA (Prior to exchange adjustmrent) Total undisbursed 314.4 332.1 646.5 StATEMENT OF IFC INVESTMENTS (as of April 30, 1975) Fiscal Type of US$i Mi3lion Year Oblipor Business Loan Equity Total 1971 P.T. Semen Cibinorig Cement 10.6 2.5 13.1 1971 P.T. Unitex Textiles 2.5 0.8 3.3 19'71 P.T. Primatexco Indonesia. Textiles 2.0 0.5 2.5 1971 P.T. Kabel Indonesia Cables 2.8 0.4 3.? 197? P.T. Daralon Textile Manuf.Corn. Textiles 4.5 1.5 6.o 1973 P.T. Jakarta Int. Hoteel Tourism 11.0 11.0 1973 P.T. Semen Cibinong Cement 5E.1 0.7 6.1 1974 P.T. Primatexco Indonesia0 Textiles 2.0 0.3 2.3 1974 P.T. Monsanto Pan Electronics Electronic pdts. 0.9 - 0.9 1974 P.T. PDFCI Devlp. Fin. Co. - 0.5 0.5 1974 Kamaltex Textiles 2.4 0.6 3.0 1974 Semen Cibinong Cement 5.0 1.5 6.5 Total 49.1 9.3 58.4 Less Sold or re- 19.6 1,4 20.9 paid and can- celled Total now held 29.5 7.9 37.5 Undisbursed (including parti- 6.4 1.6 8.0 cipant's portion) ANNEX II Page 3 of 11 pages PROJECTS IN EXECUTION 1/ Cr. No. 127 Irrigation Rehabilitation: US$5 Million Credit of September 6, 1968; Closing Date: December 31, 1975 All the equipment supplied under the credit is being well util- ized and disbursements are 98 percent of appraisal timetable. Completion of the project is expected to be delayed in order to complete much needed additional drainage work, the financing of which was not provided for under the credit. These additional costs will be met by the Government. The revised economic rate of return on the project, which was calculated at 50 percent at appraisal, is now expected to be about 25 percent. The closing date has been postponed to December 31, 1975. Cr. No. 154 Highway: US$28 Million Credit of June 20, 1969; Closing Date: December 31, 1975 Rehabilitation work was substantially completed prior to the original closing date. However, it was necessary to postpone the closing date by one year to December 31, 1975 to complete procurement of a small amount of equipment and materials. Cr. No. 155 Agricultural Estates: US$16 M,illion Credit of June 20, 1969; Closing Date: December 31, 1975 With recent improvements in management and much higher interna- tional prices the financial situtation of the estate groups is improving. The field and factory standards have now been raised to a good technical level and the management has been advised to concentrate on cost control in order to prepare for the time when produce prices are less attractive than they are today. The combined efforts of the management, consultants and IDA supervision missions are yielding good results. Cr. No. 165 Electricity Distribution: US$15 Million Credit of October 29, 1969; Closing Date: June 30, 1975 See comment for Credit No. 334. The closing date has been postponed by 18 months to June 30, 1975. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced eval- uation of strengths and weaknesses in project execution. ANNEX II Page 4 of 11 pages Cr. No. 193 PUSRI Fertilizer: US$35 Million Credit of June 15, 1970 (as amended May 1973); Closing Date: December 31, 1975 The urea plant has successfully passed its performance test and is operating at close to rated capacity. The gas gathering and transmission system is also completed and sufficient gas is being delivered to the plant. Disbursements are expected to be completed by the closing date of December 31, 1975. Cr. No. 194 Second Agricultural Estates: US$17 Million Credit of June 15, 1970; Closing Date: June 30, 1975 After initial delays, there have been considerable improvements in management and these, combined with high prices for palm oil and rubber, have resulted in a much stronger financial position, particularly for the oil palm group (PNP VI). On the rubber group (PNP IV) more effort is necessary to improve fertilizer application and tapping methods. With the rapid expansion of investment on both estate groups, there is a need to employ expertise in financial planning and management, which are now the main constraints on efficient development. Cr. No. 195 Second Irrigation Rehabilitat.ion: US$18.5 Million Credit of June 15, 1970; Closing Date: November 30, 1976 Problems of quality and progress of construction still exist, but the consultants are tackling these vigorously, and the situation is improving, although not sufficiently to make up for earlier delays. Costs are likely to double the overall appraisal estimate, due to in- flation, but the Government will provide any-additional funds required. Completion of disbursements will be about two years behind the original schedule. The economic rate of return is however still more than 20%. Cr. No. 210 Telecommunications Expansion: US$12.8 Million Credit of July 13, 1970; CLosing Date: December 31, 1975 Contracts for all equipment have been awarded. The closing date has been postponed by 18 months due to delays in delivery of goods. The Government has increased the tariffs to achieve the required rate of return and a new charter for PERUMTEL has also been published. Cr. No. 211 Fisheries: US$3.5 Million Credit of July 13, 1970; Closing Date: June 30, 1976 The project supplies funds for the construction of 30 fully equipped skipjack boats and technical assistance. It is about 24 months behind the original schedule due to delays in engaging the consultants and in executing the contracts for the shore facilities. No further delay is anticipated. There have been very substantial project cost ANNEX II Page 5of 1.1 pages increases (from $4.3 million to $8.5 million). Because of the greatly increased skipjack prices, however, the project is still expected to be financially viable. Cr. No. 219 Education: US$4.6 Million Credit of November 6, 1970 Closing Date: December 31, 1976 Project implementation is satisfactory. Civil works for the five Technical Training Centers (TTCs) have been completed. All furniture deliveries and installation have also been completed. About 90% of the equipment has been purchased and about 60% delivered and installed. Three TTCs commenced operation in April 1975 and the remaining two, will commence in June 1975. All will operate at full capacity by January 1976 when the new academic year begins. Over 500 technical teachers have completed or are about to complete their training. Technical assistance financed by the U.K. for the project is also satisfactory. Disbursement has improved considerably. Revised total project cost is now about 40% above appraisal estimate. The Government will finance the cost overrun. The project is expected to be completed ahead of schedule. Cr. No. 220 Third Irrigation Rehabilitation: US$14.5 Million Credit of November 6, 1970; Closing Date: December 31, 1975 Construction remains about two to three years behind schedule partly because of problems with preparation of contract documents and subsequently due to inflation. These have now been mostly overcome. While no further delays are e5pected, it is unlikely that the time lost could be regained. There has been a considerable increase in overall project costs, which is being met by the Government. The economic rate of return for the project is still over 21 percent. Cr. No. 246 Seeds: US$7.5 Million Credit of May 14, 1971; Closing Date: September 30, 1977 Project implementation is behind schedule due to initial delays in organization, management, procurement and provision of budgetary funds. Tne latest supervision mission has reported that developnent of the seed fann is hampered by the slow execution of a contract to develop irrigation infrastructure and the seed processing plant. The contract for irrigation infrastruCtujre has been renegotiated. The establishment of rice-seed research facilities at the project site is behind schedule due to diffi- culties in recruiting the necessary technical assistance and delays in providing the required facilities and the equipment. The contract for research technical assistance has now been signed and with the reorgani- zation of the Government's research program, this component of the project is expected to proceed rapidly. The seeds certification service is per- forming well and development of the Klaten Seed District is progressing satisfactorily. This project is being kept under frequetit supervision. ANNEX II Page 6 of 11 pages Cr. No. 259 Tea: US$15 Million Credit of June 14, 1971; Closing Date: June 30, 1978 Agricultural achievements to date have far exceeded appraisal expectations necessitating construction and rehabilitation of 3 additional factories. Project completion estimated for December 1977 can probably be advanced by up to one year. Rising costs are creating pressure on fund availabilities and the main challenge for the two PTP's will be to de- crease working capital requirements, reduce overhead and indirect costs and improve labor productivity. Cr. No. 260 Second Highway: US$35 Million Credit of June 24, 1971; Closing Date: September 30, 1975 All construction work is now satisfactorily under way. However, the delay caused initially by slow progress in mobilizing contractors, difficulties in equipment delivery, heavy rains and land slides will result in the project being completed about one year behind schedule. Design standards for the road sections have been slightly lowered and some savings will therefore be achieved. These and other savings are expected to offset construction cost increases. Cr. No. 275 Third Technical Assistance: US$4.0 Million Credit of December 29, 1971; Closing Date: December 31, 1975 Progress on this pr6ject is satisfactory. The closing date has been postponed to complete disbursements for ongoing studies. Cr. No. 288 Second Education: US$6.3 Million Credit of March 9, 1972; Closing Date: December 31, 1976 Working drawings and furniture and equipment lists for all project institutions have been completed. Physical facilities will be completed and all project institutions will begin operations by the end of 1976. The government has agreed to provide additional funds to meet the cost overruns due to inflation. Postponement of the closing date by about one year is likely to be necessary. Cr. No. 289 Fourth Irrigation Rehabilitation: US$12.5 Million Credit of March 9, 1972; Closing Date: June 30, 1977 Civil works and equipment purchase for the main project, Pekalen- Sampean, are proceeding but completion of civil works will be about two years behind schedule. Due to inflation, project costs are likely to be substantially higher than appraisal estimates. Consultants for the various studies are at work with their counterparts. Groundwater in- vestigations have been delayed due to procurement difficulties. The rehabilitation and storage feasibility studies are on schedule. Dis- bursements are also on schedule. ANNEX II Page 7 of 11 pages Cr. No. 300 PopTlation: US$13.2 Million Credit of April 20, 1972; Closing Date: June 30, 1978 Although progress is being made under this project, implementa- tion continues to be hampered by management weaknesses. Lack of clear administrative direction has resulted in overall delays in securing bud- getary funds- and problems of program coordination. Procurement contracts for vehicles and other equipment have been awarded and UNICEF is assisting in the procurement of materials and supplies necessary for various popula- tion control programs. The civil works component is behind schedule, but is now proceeding more rapidly as the capacity of the implementing agency gradually improves. The field worker progran has expanded more rapidly than expected when the project was appraised. This project is being super- vised closely. Cr. No. 310 Development Finance Co. (BAPINDO I): US$10 Million Credit of June 7, 1972; Closing Date: December 31, 1976 This credit is fully committed. Disbursements are expected to rise rapidly. Cr. No. 318 Inter-Island Fleet Rehabilitation: US$8.5 Million Credit of June 28, 1972; Closing Date: September 30, 1976 Progress on this project is satisfactory and disbursements are expected to rise. Cr. No. 319 Fourth Agricultural Estates: US$11 Million Credit of June 28, 1972; Closing Date: June 30, 1981 The physical progress of the project is ahead of the appraisal schedule and the financial position of the estate group is satisfactory. Cr. No. 334 Second Electricity Distribution: US$40 Million Credit of September 29, 1972; Closing Date: December 31, 1976 The Jakarta distribution program financed from Credits 165-IND and 334-IND (together $55 million) has encountered substantial foreign cost increases ($7.0 million) and implementation delays due to procure- ment problems and cumbersome management procedures. Many of these diffi- culties have been resolved, but it is unlikely that the project can be completed before mid-1978, two years behind the original schedule. Cr. No. 355 Beef Cattle Development: US$3.6 Million Credit of January 31, 1973; Closing Date: March 31, T98 Progress on this project for development of beef cattle produc- tion in the outer islands has suffered from serious delays caused largely by problems in securing Government funds and in clearance of documents by Indonesian Government departments and consequent lack of essential equipment. Land acquisition and procurement of cattle are proving more ANNEX II Page 8 of 11 pages difficult than expected, and there has been a substantial increase in total project costs. The means of improving project performance are currently being discussed with the Government. Cr. No. 358 North Sumatra Smallholder Development: US$5 Million Credit of February 14, 1973; Closing Date: December 31, 1981 This project has suffered from severe financial and organiza- tional difficulties due primarily to the lack of experience of project management, the remote location of the project and inadequate Central Government support. The Resident Staff has been following the project closely. The rubber replanting program is behind schedule, but with progrets now being made it may be possible to accelerate the program in accordance with appraisal estimates. Government has taken a number of steps to overcome the problems and accelerate project implementation. Project progress will continue to be closely monitored. Cr. No. 387 Third Education: US$13.5 Million Credit of June 1, 1973; Closing Date: December 31, 1981 Project implementation is proceeding on schedule, except for a 10-month delay in equipment procurement which has now been overcome. Manuscript testing of the first set of texts has been completed. About 34 million textbooks are scheduled to be printed in August, 1975. Dis- tribution of textbooks to all primary schools is now being planned and will necessitate the use of a number of government agencies. Staff in the provinces have been trained in the use of the textbooks and train- ing courses have commenced for teachers. Lack of travel funds in the provinces has impeded teacher training, but it is expected that this difficulty will be overcome as the project management, which is effec- tive, becomes more familiar with government procedures. Project costs are now estimated at $56 million, 44% above the original estimate because of increased costs of paper and teacher training. The Government is ex- pected to meet all cost increases. Cr. No. 388 Third Highways: US$14 Million Credit of June 1, 1973; Closing Date: June 30, 1977 Construction bidding and consultant selection have been pro- ceeding on schedule. Some cost increases, due to inflation, are expected. Cr. No. 399 West Java Thermal Power: US$46 Million Credit of June 22, 1973; Closing Date: June 30, 1978 Bids received in November 1974 for the first two 100 mw units at Muara Karang were about 65 percent higher than estimated at the time of appraisal. This, together with construction cost increases, has resulted in an increase in the total project cost of more than 100 percent. The Government will finance the additional cost. PLN has satisfactorily met the first year targets in its financial recovery plan provided for under the terms of the credit agreement. ANNEX II Page 9 of 11 pages Cr. No. 400 Smallholder and Private Estate Tea: US$7.8 Million Credit of June 22, 1973; Closing Date: March 31, 1982 The project nurseries are well managed and where rehabilitation has taken place results are encouraging. Technical questions related to loan applications by farmers have been resolved and BRI is expected to proceed with extending credits to tea growers. The contract of the financial advisor to BRI has been extended for another year. Progress on this project is satisfactory. Cr. No. 405 Sugar Industry Rehabilitation: US$50 Million Credit of June 26, 1973; Closing Date: June 30, 1979 Bids for equipment required for first phase major rehabilitation have been received; a substantial cost overrun is expected, which the Gov- ernment has agreed to finance. Some organizational problems are now being resolved and disbursements are expected to rise. Cr. No. 428 Pulo Gadung Industrial Estate: US$16.5 Million Credit of Septmber 14, 1973; Closing Date: December 31, 1978 Despite recent increase in construction costs, the project remains financially viable because revenues from the sale of plots has risen proportionately. Construction has fallen behind schedule due to land acquisition problems, but developed land is being occupied as fast as it is made available. While there is still a backlog of applications for industrial plots, the rate, of new applications has fallen off during recent months and the estate is intensifying its promotional efforts. Cr. No. 436 Private Development Finance Company of Indonesia (PDFCI): US$10 Million Credit of November 2, 1973; Closing Date: December 31, 1978 After a long start-up period and difficulties in finding and recruiting qualified local staff, PDFCI has now reached the operating stage. Its commitments are rising at a satisfactory rate. Cr. No. 451 Fourth Technical Assistance: US$5 Million Credit of January 2, 1974; Closing Date: December 31, 1976 Progress under the project is satisfactory. Cr. No. 479 Bali Tourism: US$16.0 Million Credit of June 4, 1974; Closing Date: August 31, 1979 Progress under this project is slightly behind schedule due to the lack of experience of the implementing agency and difficulties in coordination with other Government organizations. This situation has steadily improved as local staff have gained experience and project advisors have taken up their positions. Final design of the infrastruc- ture and hotel training school is underway. Preliminary lease negotia- tions with potential hotel investors are expected to begin in mid-May. ANNEX II Page 10 of 11 pages Cr. No. 480 Fisheries Credit: US$6.5 Million Credit of June 4, 1974; Closing Date: June 30, 1979 This credit became effective on January 8, 1975 and is prog- ressing satisfactorily. Cr. No. 514 Jatiluhur Irrigation Extension: US$30.0 Million Credit of October 3, 1974; Closing Date: December 31, 1980 This credit became effective on January 10, 1975 and the work will commence soon. Loan No. 1005 Railway: US$48.0 Million Loan of June 4, 1974; Closing Date: December 31, 1978 Procurement of material and equipment was delayed due to poor procurement organization and inadequate budget allocations for 1974/75; however, this situation has improved since PJKA retained the services of an international procurement agency. Due largely to a lack of spare parts an increasing number of locomotives have dropped out of service, causing a decline in freight traffic. To attain financial viability as agreed in the Loan Documents, PJKA needs to increase revenues by at least 10%. Therefore, in May 1975 freight tariffs were substantially increased. A draft of the detailed recovery program for FY1975, due to the Bank in September 1974, has not been received. Loan No. 1040 Jakarta Urban levelopment: US$25.0 Million Loan of September 27, 1974; Closing Date: December 31, 1977 The first year of the two-year Kampung Improvement Program has been satisfactorily completed. The second year's activities are well underway with first year savings being applied to increase the water stupply beyond originally planned levels. The newly formed National Urban Development Corporation is currently seeking consultants both to assist in the development of their operations and to prepare urban projects in other cities. Full responsibility for supervision of consultants designing the Klender Site and Service scheme has been transferred to NUDC so as to ensure preparation of a design with standards appropriate to the low- income target population. Loan No. 1049 Five Cities Water Supply: US$14.5 Million Loan of October 31, 1974; Closing Date: June 30, 1980 This loan became effective May 21, 1975. Loan No. 1054 Development Finance Co. (BAPINDO II): US$50 Million Loan of November 30, 1974; Closing Date: December 31, 1976 This loan became effective January 14, 1975 and is proceeding satisfactorily. ANNEX II Page 11 of 11 pages Loan No. 1089 Second Fertilizer Expansion: US$115 Million Loan of February 28, 1975; Closing Date: August 31, 1978 This loan became effective on April 29, 1975. Loan No. 1100 Sixth Irrigation Project: US$65 Million Loan of April 1, 1975; Closing Date: June 30, 1982 This loan is expected to become effective by the end of June 1975. ANNEX III Page 1 of 3 FOURTH POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Indonesia. Beneficiary: Perusahaan Umum Listrik Negara (PLN). Amount: US$41 million equivalent in various currencies. Terms: 25 years including five years of grace at 8-1/2 percent. Relending Terms: Same terms as above with interest being capitalized during the grace period. Project Description: The proposed project consists of: (a) Construction of the third 100 MW, non-reheat, oil fired thermal generating unit at the Muara Karang plant in Jakarta; (b) Physical investigation of a proposed site in West Java for the next thermal power plant, as well as engineering services for the fourth unit of 200 MW at Muara Karang; and (c) Advisory services, training, and fellowships. Project Costs: The table below summarizes the costs of the project. ANNEX III Page 2 of 3 % of Local Foreign Total % of Total Foreign Exchange -------------------(US$ Million)------------------- Muara Karang Unit No. 3 Site Development 3.5 --- 3.5 5 General Construction 4.2 8.7 12.9 19 67 Equipment and Materials .1 18.7 18.8 27 99 Engineering .3 3.6 3.9 6 92 Capital Cost 8.1 31.0 39.1 56 79 Physical Contingencies .8 2.0 2.8 4 71 Price Contingencies 3.5 5.4 8.9 13 61 Sub-Total 12.4 38.4 50.8 73 76 Site Investigation .3 .7 1.0 1 70 Training and Advisory Services 6.4 3.3 9.7 14 34 Sub-Total 19.1 42.4 61.5 88 69 Interest during Construction --- _8.0 8.0 12 100 Total Project Cost 19.1 50.4 69.5 100 73 Financing Plan: The proposed loan of US$41 million would finance the foreign exchange cost of the project exclusive of interest during construction and equipment for the training centers, or about 59 percent of the total cost. The remaining 41 percent of the project cost would be provided by GOI. ANNEX III Page 3 of 3 Estimated Disbursements: --------- (US$ Million)------------- Bank FY 1976 1977 1978 1979 1980 Annual 1.5 8.9 20.4 8.2 2.0 Cumulative 1.5 10.4 30.8 39.0 41.0 Procurement: Major equipment items would be procured on the basis of options quoted by bidders for the first two units at Muara Karang. Tenders for these bids were issued under terms of IDA Credit No. 399-IND in accordance with Bank Group Guidelines. Smaller items would also be procured after international competitive bidding in accordance with the Guidelines. A 15 percent margin of preference or the level of actual customs duties, whichever is less, would be accorded to qualified local manufacturers. The general con- struction contract for the units 1-3 would be ten- dered on the basis of international competitive bidding. Consultants: PLN has retained engineering consultants Black & Veatch International (BVI) for the project and for the design of the fourth generating unit at Muara Karang. Consultants have yet to be selected for the study of a proposed site for a new thermal power station in West Java. Economic Rate of Return: The economic rate of return for Unit 3 at Muara Karang is 19 percent. For all three units it is 17 percent because some facilities common to all three units were included in the costs for the first two units. Appraisal Report: Report No. 766-IND, dated May 20, 1975. East Asia and Pacific Projects Department INDONESIA POWER SYSTEMS IN JAVA MARCH 31, 1974 t JAKARTA /~ns m 9 !08 109 110 111 112 113 Cifnncin Manno Prok)lB00I P~~~~~~~~~~~~~~~~~~~~~~~~~OWER PLANT TRANSMISSION LINES - Kon300 EXISTING(MW) PROPOSEMI X ROPOSED PLN's O,svribnsi Numbers j3000/ / AnGoe IR HYDRO 'A S A FEASIBILITY STUDY 30Kv LINES DOtibusiBovnd.ries5 | / G.';;; l-5. 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