Report No. 982a-IND Indonesia: Appraisalof a Second Shipping Project FILE COPY April 15, 1976 Transportation Division East Asia and Pacific Region FOR OFFICIAL USE ONLY Document of the World Bank Thisdocument has a restricteddistribution and may be usedby recipients only inthe performance of theirofficial duties. Itscontents may not otherwise bedisclosed withoutWorld Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 982a-IND
Indonesia: Appraisal ofa Second Shipping Project FILE COPYApril 15, 1976
Transportation DivisionEast Asia and Pacific Region
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.
1 metric ton (t) = 1,000 kilograms (kg)1 kilogram (kg) = 2.046 pounds (lb)1 kilometer (km) = .62 statute mile1 knot = 1.8520 kilometer per hour (km/h)
PRINCIPAL ABBREVIATIONS AND ACRONYMS USED
BAPINDO - Bank Pembangunan Indonesia (State Development Bank)BAPPENAS - National Planning CouncilBIMCO - Baltic and International Maritime ConferenceBKI - Biro Klasifikasi Indonesia (Indonesian Classification
Bureau)DOC - Department of CommunicationsDWT - Deadweight tons; approximate cargo capacity in tonsCL - Germanischer Lloyd, a classification societyLMCO - Inter-governmental Maritime Consultative OrganizationINSA - Indonesian National Shipowners AssociationLTFD - Long-Term Fleet Development StudyMCD - Maritime Credit Department (in BAPINDO)NORAD - Norwegian Agency for International DevelopmentOECF - Overseas Economic Cooperation Fund (Japan)PANN - P.T. Pembangunan Armada Niaga Nasional
(National Fleet Development Corporation)PELNI - P.N. Pelayaran Nasional Indonesia
(National Shipping Company)RLS - Regular Liner Services of Inter-Island ShippingSEACOW - Directorate General of Sea Communications of the
Department of Communications
FISCAL YEAR
April 1 - March 31
FOR OFFICIAL USE ONLY
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Table of Contents
Page No.
SUMMARY AND CONCLUSIONS ...... ......................... i-iv
I. INTRODUCTION ....................................... 1
II. BACKGROUND . .... 2...................................... 2
A. Transport - General ............... . ............... 2B. Maritime Sector ....... ............................ 2
III. ORGANIZATIONS INVOLVED IN THE PROJECT ............. 5
A. The Government ...... ............................. 5B. Directorate General of Sea Communications .. ...... 6C. Ship Owners and Operators ..... ........... 6D. Other Organizations ......I . ....................... 9
IV. THE PROJECT ........................................... 11
A. Description .................... ....... 11B. Cost Estimates ................................... 12C. Financing Plan ................................... 14D. Project Execution and Procurement ....... ......... 16E. Technical Assistance and Consultants ...... ....... 18F. Training ......................................... 20G. Disbursement ..................................... 20H. Environmental Impact ..... ........................ 21I. Project Risks ...... .............................. 21J. Possible Future Developments ..................... 22
V. FINANCIAL REVIEW ...................................... 22
A. Introduction ..................................... 22B. The Forecast Financial Position of PANN .... ...... 22C. Tariff and Tax Implications of the Project .... ... 25D. Financial Implications of the Project for PELNI .. 25
This report was prepared by Messrs. G.F. Bain (Shipping Specialist),F. Chapman (Financial Analyst), S.Y. Park (Economist) and with assistancefrom R. Ullmann (Financial Analyst).
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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VI. ECONOMIC EVALUATION ................................ 27
A. General ......................................... 27B. Traffic .................... 27C. Shipping Capacity and Productivity .............. 28D. Economic Rate of Return on the Project ......... 29
VII. RECOMMENDATION ....................................... 30
ANNEXES
1. Progress of Ship Rehabilitation Project (Credit 318-IND)
2. Transport Planning and Non-Maritime Transport Activities in Indonesia
3. Summary of Consultants' Analysis of Existing Regular Liner ServiceFleet Expansion Alternatives
Attachment 1 - Age and Deadweight of Inter-Island Fleetas of June 1973
Attachment 2 - Age and Deadweight of Licensed RLS Fleetas of June 1973
4. Technical Assistance and Training Program and Main Points to beIncluded in Consultants' Terms of References
Attachment 1 - Summary of Technical Assistance Relatedto Shipping Program
5. P.N. PELNI
Attachment 1 - Operational ForecastAttachment 2 - Consolidated Profit and Loss StatementsAttachment 3 - Consolidated Balance SheetsAttachment 4 - Consolidated Source and Application of Funds
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6. P.T. PANN
Attachment I - Ship Procurement ProgramAttachment 2 - Schedule of Ship DeliveriesAttachment 3 - New Ships, used ships, and Rehabilitation
ProgramAttachment 4 - P.T. PANN Projected Income StatementAttachment 5 - P.T. PANN Projected Balance SheetAttachment 6 - P.T. PANN Source and Application of Funds
Attachment 1 - Average Annual Costs of Maintenance, Lubricationand Bunker by Age and Size of Ships
Attachment 2 - Revenue of Typical PELNI ShipsAttachment 3 - Daily Operating Cost of PELNI Ships
TABLES
1. Indonesian Fleet by Category and Size Classes, 19742. Shipping Acquisition and Rehabilitation Program3. Disbursement Schedule4. Alternative Projections of Freight Traffic and Shipping
Capacity Requirements5. Passenger Traffic
CHARTS
1. No. 9677 - Organization of Directorate General ofSea Communications
2. No. 9604 - Cause and Effect Relationship3. No. 9575 - Standard Ship Types
MAPS
1. No. IBRD-11493
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
SUMMARY
i. The pattern of natural resource and population distributionin Indonesia makes it important to maintain an extensive inter-islandshipping service to ensure sound economic development of the country. Inlight of this, the Bank has been actively engaged in assisting shippingdevelopment in Indonesia.
ii. The Government of Indonesia has requested the Bank to assistin financing a part of the costs of a Five-Year Inter-Island Fleet Develop-ment Program prepared with the assistance of Dutch consultants, MaritimeResearch Centre. The Long Term Fleet Development Study (LTFD) concludedthat even if the productivity of the existing ships improved by 40%, afterscrapping the poor quality ships, and if port turn-around time improved,there would still be a growing shortage of shipping during the next fiveyears and beyond. The Consultant's proposals were intended to meet theinter-island shipping requirements of Indonesia during its Second Five-Year Development Plan (Repelita II), 1975-79. The program prepared bythe consultants consists of purchase of 134 new ships totalling about195,600 deadweight tons (dwt) to achieve a 265 ships fleet of about 338,000dwt at an approximate cost of about US$587 million equivalent by 1979. Theestimated cost included certain technical assistance.
iii. The scope of the program suggested by the consultants has beenreduced and the proposed project, agreed to by the Government, would finance,in addition to technical assistance, about 60% of the shipping tonnage in-cluded in the LTFD at a cost of US$195 million equivalent. The projectscope was reduced because of: (i) the uncertainty with regard to the hightraffic growth assumed in the preparation of the program; (ii) the need foran additional economic study to determine an optimum size of the fleet; and(iii) the financial constraints of the Government. The project would empha-size rehabilitation of existing ships and purchase of used ships rather thanpurchasing only new ships as the consultants had suggested.
iv. The tonnage to be financed by the proposed project is required tomeet part of the growing demand for shipping during the next five years.The project will consist of (a) rehabilitation of 54,500 dwt of existinginter-island ships, demonstrated to be economically sound and technicallyand financially feasible; (b) scrapping of about 70,000 dwt of ships thatcannot be rehabilitated; (c) procurement of about 52,000 dwt of used cargoships; (d) procurement of 50,250 dwt of standard design new cargo and cargo-passenger ships of 750, 1,000, 1,500 and 2,500 dwt; (e) a technical assistanceand training program designed to support and improve inter-island fleet
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operations and planning, and the training of marine officers and engineers;and (f) a study to determine the further needs for shipping during Repelita II,the second five-year plan (1975-1980), and to 1990.
v. The total project would cost about US$195.2 million equivalent orUS$201.5 million including interest during construction, of which it is pro-posed that the Bank finance US$54 million equivalent. The Government wouldfinance this amount using the proposed loan, bilateral aid already securedfrom Japan and Norway, funds to be provided through BAPINDO, cash generationby PANN, export credits from Norwegian banks, and commercial loans from aconsortium of Norwegian, United States, and Singapore banks. All of theproject ships would be acquired by Pembangunan Armada Niaga Nasional (PANN),the national fleet development corporation, established in 1974 to rebuildthe nation's shipping fleet, and leased or sold to Indonesian shippingcompanies.
vi. The proposed Bank loan would be made to the Government, loan pro-ceeds, together with other required funds, would be made available to PANNunder a financing agreement between the Government, PANN and BAPINDO. Fundsfrom the proposed loan would be used to finance: (a) procurement and deliveryof used ships to be obtained from the international market through PANN's ship-brokers, (b) rehabilitation and modification of ships carried out under negotiatedcontracts as is now done for Credit 318-IND and (c) a technical assistanceprogram and an economic study.
vii. The Directorate General of Sea Communications (SEACOM) of theDepartment of CommunicEtions will have the overall supervisory responsibilityfor the project, which will be executed by PANN and BAPINDO. SEACOM, BAPINDOand PANN will require additional technical assistance from internationallyrecruited advisors, the cost of which is included in the project.
'viii. PANN's present capital is owned 60% by the Government and 40% byBAP1TDO. Equity of Rp 2.0 billion (US$4.8 million) has already been paid-inand PANN has commenced operations with a small staff. The balance of equityneeds, estimated to be about Rp 37.0 billion (US$89.1 million equivalent) orjust under 50% of total project cost, and about the same amount of debt, willbe provided by foreign credits and loans, the proposed loan, BAPINDO and PANNcash generation. Borrowing by PANN for new ship procurement would be bydirect Government loans of up to 15 years at 12% including one year ofgrace; borrowing for used ship procurement would be for up to ten years in-cluding one year of grace and for rehabilitation would be for up to fiveyears, with one year of grace, and would be via both Government loans at 12%p.a. and by loans obtained from BAPINDO at 15% p.a.
ix.. PANN would lease or sell the ships it acquires to Indonesian ship-ping companies which are operationally competent, are judged to be able torepay lease or sales costs, which have been appraised and which have agreedto undertake improvements set out in a Development Agreement forming partof the sale or lease. Sales of new ships would be for 10% cash with the
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balance to be repaid at 10% p.a. for 15 years including six months grace afterdelivery. Used ships sales would be for 30% cash by delivery with the 70%remaining balance to be repaid at 10% p.a. for up to 10 years including sixmonths grace after delivery. Leases of new ships would be for up to 15 yearsat 10% p.a.; of used ships for up to 10 years at 10% p.a. Ships rehabilitatedby PANN would be leased for up to 5 years at 10% p.a. including three monthsgrace after delivery. In all cases a 1% commitment fee will be charged.Lease payments will be due in advance. The terms of leases and sales contractswould be such as to permit PANN to recover the cost of ships, operating ex-penses and interest on borrowed funds plus a net margin representing about4% return on its equity. PANN, with a weighted average cost of debt of 12.5%,would obtain a 3.75% net margin between its lease rate of 10% and its totalweighted cost of capital (about 6.25%). All but about US$4.0 million of theproposed loan would be made available to PANN, half as equity and half asloan at 12% per annum. On this basis PANN's financial position would besatisfactory.
x. In order to enable shipping companies to meet the lease paymentsdue to PANN and to maintain a satisfactory financial position, the Govern-ment has agreed: (i) to an annual review and adjustment of freight tariffsto permit an efficiently operated company to earn an adequate return and(ii) to satisfactorily reimburse P.N. Pelayaran Nasional Indonesia (PELNI)for Government ordered operations. This is required especially for PELNIwhich will be one of the major beneficiaries of the proposed project.Technical assistance for PELNI to prepare a plan of action, within 15 monthsof signing the proposed loan, to improve its operation is included in theproposed project.
xi. Successful execution of the project is essential for continuedsound development of the Indonesian economy by ensuring economical and re-liable sea communications to various population, production and marketingcenters of this archipelago nation. The quantifiable benefits of the projectwould yield an economic rate of return of about 18%. The rate of return forthe new ships would be about 15% and for used ships about 19%. Rehabilita-tion yields an economic return of over 100%. With a 20% cost increase and 10%reduction in benefits, the overall return would still be over 11%; with a10% cost increase and a 10% reduction in benefits, the return would be 13%.
xii. Risks in carrying out the project as projected are deemed to bemainly financial and could be substantial. They would arise from lax enforce-ment of the safety and ship classification regulations by the Government andcontinued operation of obsolete and unsafe ships which would undercut freightrates and would result in operators of leased ships being unable to pay theirleases. Measures have been proposed to reduce these risks. A plan to scrap70,000 dwt shipping as ships are added to the fleet or rehabilitated hasbeen agreed.
xiii. The project provides a suitable basis for a Bank loan of US$54 mil-lion to the Government of Indonesia for a term of 15 years, including threeyears of grace.
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
I. INTRODUCTION
1.01 The Government of Indonesia has requested the Bank's assistancein financing part of the cost of its Five-Year Fleet Development Programprepared with the assistance of Netherlands consultants, Maritime ResearchCentre. The current program is designed to meet the inter-island shippingrequirement of Indonesia during its Second Five-Year Development Plan(Repelita II), 1974-1979.
1.02 The proposed project which has been agreed to by the Governmentwould finance about 60% of the tonnage included in the program suggested bythe consultants, leaving the balance of short term requirements and addi-tional needs to 1990 to be determined on the basis of a ffurther economicstudy. The project consists of scrapping and rehabilitating existing shipsand adding used and new ships to the fleet. The proposed loan of US$54 mil-lion equivalent would finance 28% of the project's foreign exchange cost.The balance of the funds would come from Japanese and Norwegian bilateralaid, BAPINDO, the Norwegian export credit organization (EKSPORTFINANS) andNorwegian, United States and Singapore commercial banks.
1.03 The Bank Group's first shipping credit (Credit 318-IND), madein 1972, was directed to rehabilitating ships of the Regular Liner Service(RLS) of Indonesia's inter-island shipping. An initial delay was experiencedin getting the project started because of the need to set up the MaritimeCredit Department (MCD) in Bank Pembangunan Indonesia (BAPINDO), throughwhich the credit funds were channelled. There was a steep cost increase inship rehabilitation over that estimated during appraisal necessitating acut-back in the project's scope. However the Credit, now 78% committed,is expected to be fully disbursed before the revised closing date ofSeptember 30, 1977 (Annex 1).
1.04 There have also been three credits and one loan for highways,(Credits 154-IND, 260-IND, 388-IND and Loan 1236-INa as well as a loan forrailways (Loan 1005-IND). A fertilizer distribution loan (Loan 1139-IND)was made in 1975. Progress on all projects has been slow but no majordifficulties have arisen. A port project is under preparation.
1.05 This report is based on the consultants' study, data suppliedby the Government and ship operators in Indonesia, and the findings ofan appraisal mission composed of Messrs. G.F. Bain (Shipping Specialist),T. DeLaney (Financial Analyst) and S.Y. Park (Economist), which visitedIndonesia in November/December 1974. Messrs. F. Chapman and R. Ullmann(Financial Analysts) also participated in the preparation of this report.Government delay in deciding on the project composition as well as the finan-cial plan necessitated further missions in June and October 1975. Govern-ment discussions with Norwegian officials were completed in February 1976and the financing plan agreed.
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II. BACKGROUND
A. Transport - General
2.01 The Indonesian transport system consists mainly of inter-islandmarine services, highways and railways. The marine services comprise RegularLiner Services (RLS) between more than 100 specified ports, unscheduled(tramping) services, and ocean-going shipping. Land transport is welldeveloped in Java with extensive railway and highway networks, whereas inSumatera, railways have only been developed in some parts, and the road net-work is limited to basic links between principal cities. On Fhe otherislands, except for a small railway on Madura, transport facilities arelimited to a few roads in areas around ports and towns. Air transport volumeis still small but has increased rapidly in the last few years.
2.02 The Government's strategy, as set forth in the Second Five-YearPlan (Repelita II), is to continue to gradually upgrade the country'sexisting transport facilities. This provides a sound basis for furthereconomic growth. Additional new infrastructure will also be built for(i) exploitation of new resources, (ii) support of the Government's regionaldevelopment policies, and (iii) improvement of rural transport. Roughly17% of Repelita II expenditure, Rs 1,800 billion including Governmentexpenditure of Rp 718 billion, is earmarked for transport. A descriptionof transport planning and of transport sector activities on land, inlandwater, and air is given in Annex 2.
B. Maritime Sector
(a) General
2.03 The Indonesian shipping fleet, excluding an undetermined numberodf sailing craft, consists of about 1,055 registered vessels having a totaldeadweight tonnage (dwt) of 1,159,000 (Table 1). Supplemented by shipswhich are hire-purchased or chartered, mainly oil tankers and oil industrysupply vessels, the operating fleet was considerably greater. As well ascan be determined from inadequate records, Indonesia in mid-1974 had 57oceangoing general cargo ships owned by seven major and a number of minorcompanies; some 423 local vessels which had an average tonnage of under 200dwt and normally engage in coastal voyages of under 200 miles; and about 336inter-island registered ships of 500 dwt and over, totalling some 426,000dwt owned by 56 companies. Of the inter-island fleet ships, 209 totalling220,000 dwt owned by 47 companies were licensed in the RLS.
2.04 The country has about 300 ports scattered over the archipelago butabout 70% of traffic volume is concentrated in ten of them. The major portsare in Java, Sumatera, Sulawesi and Kalimantan. Port and customs procedurespresent a serious impediment to transport flows in Indonesia and improvementthereto could result in significant increases in port capacity and a reduc-tion in shipping costs. However, due to institutional rigidities, majorimprovements cannot be expected in the near future (para 2.09).
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2.05 Studies of short-term port requirements have been completed byconsultants, NEDECO (Netherlands), and main ports are being improved withassistance from the Asian Development Bank (ADB), the Netherlands and Japan.Preparation of master plans for the ports of Surabaya, Belawan and Panjang,financed by UNDP with ADB as executing agency and carried out by consultants,Sir William Halcrow (U.K.), have been completed. A master plan study ofTanjung Priok (Jakarta), the largest general cargo port (handling about 30%of the country's total traffic) was completed in September 1975 by consult-ants, Swan Wooster (Canada), financed under IDA Technical Assistance (Credits216-IND and 275-IND). Appraisals by the Bank for Tanjung Priok and by ADBfor other port projects are underway. The Government recognizes the importanceof improving port operations and is devoting some Rp 15.0 billion (US$36 mil-lion) of its 1975-76 budget to port improvements.
2.06 Indonesian cabotage law, like that of most countries, reservesthe domestic trade for vessels owned and operated by Indonesian shippingcompanies; in addition, the Government has arranged with Singapore thatone half of the Indonesia-Singapore trade will be reserved for Indonesianships. Domestic shipping services were formally established in 1969 and,following the pattern of earlier times, classified into three categories:local, special and inter-island trades. Licensing of shipping companiesin each of these sections is supplemented by the licensing of inter-islandRLS routes designed to provide trade links among the various islands andto ensure service even when seasonal transport demand might tend to divertships to more profitable routes.
(b) Regular Liner Services (RLS)
2.07 In 1975, the RLS system consisted of 28 trunk or main routes,20 feeder routes, and 18 routes which serve Singapore. These 66 routesserve about 140 ports (see Map IBRD 11493) with varying frequency andregularity. The RLS system is continually under review by the Governmentand the number of ships serving each route is adjusted quarterly where neces-sary. The RLS section of the inter-island fleet, comprising 47 companies,is dominated by the Government-owned company, P.N. Pelayaran NasionalIndonesia (PELNI), which owns 40% of the total RLS tonnage of about220,000 dwt. Many RLS companies own only a few ships; about 20 of themown only two ships which is the minimum number of ships required by lawfor engaging in stevedoring businesses (para 3.05). A large part of theRLS fleet is overage; in 1974, 35% by number were over 20 years old, 53%were between 11 and 20 years of age and only 12% were under 10 years of age.Given the poor maintenance practices prevalent, the consequent frequentbreakdowns and long repair times, only about 35% of the total fleet operatedover 300 days a year in 1972, with 47% operating less than 200 days per year.Poor productivity 1/ of these ships also stems from inordinately high port
1/ Measured by the cargo tons carried per year per deadweight ton ofshipping. Current values for productivity are 10 to 12 tons/dwt andare about half of what might be expected.
time and delays so that the present ratio of port-to-sea time is 2:1; a ratioof 0.7:1 is considered to be possible. The Government agreed during negotia-tions to commence the introduction of unitized cargo handling in the RLSfleet in order to reduce port time. Further operational improvements will beincluded in the proposed port loan for Tanjung Priok and have been recommendedby the ADB consultants. A description of the RLS fleet is contained inAnnex 3.
2.08 A three-year fleet rationalization program starting in 1972 wasplanned by the Government in connection with the First Shipping Credit(Credit 318-IND). The program, in addition to emphasizing the enforcementof regulations, and providing technical assistance to ship repair facilities,was expected to improve the RLS by rehabilitating ships and by scrappingobsolete ships (Annex 1). It was also expected to improve the operationalperformance of RLS shipping companies, through conditions attached torehabilitation subloans of the Credit. Lax enforcement of safety standardsdelayed the ship scrapping program. The upsurge of traffic in 1973 and1974, and the Government's need to secure shipping for the emergency trans-port of rice during the 1972/73 drought caused additional delays in removingships from operations to make repairs. Nevertheless, the tonnage oflicensed ships in the RLS fleet in 1975 has been reduced by about 20% sinceearly 1972.
2.09 Progress has been made in consolidating and improving the opera-tions of shipping companies through formation of groups to share the use ofcargo-shed facilities. Stevedoring and RLS freight rates have beenseparated. Freight tariffs for the RLS were raised by 20% in 1973, 20%in 1974, and 25% in July 1975. These tariffs are related to costs (para 5.08).Port operations, particularly in the main ports, have improved partly as aresult of Government action on an Association suggestion for the formationof a high-level inspection and review team. A regrouping of stevedoringcompanies is required to produce further improvements and is recommendedin the proposed port loan. Three main shipyards which receive technicalassistance under Credit 318-IND have substantially improved both the qualityand quantity of their work, particularly rehabilitation work on RLS ships.Considering the difficulties of implementing change and the short timeinvolved, progress made in executing the fleet rationalization program isencouraging. Nevertheless, much remains to be done, including furtherphysical rehabilitation and stricter enforcement of shipping safety regula-tions. The Government published revised safety rules in October 1975 re-quiring each ship to pass a new safety inspection in 1976 and has agreedto revise its basic safety rules (para 4.12 and Annex 4).
2.10 Rapid improvement in economic conditions in Indonesia in recentyears has been reflected in growing volumes of ocean and inter-island trade.The excess capacity in the inter-island fleet in 1971 when the trafficvolume was 1.9 million tons disappeared by 1973 when RLS traffic rose to 2.5million tons. By early 1974, shippers were offering premiums on freight rates
in order to obtain service. With the current slow down of economic activity,a temporary oversupply of shipping capacity may reappear. But even if portoperations and customs procedures are improved, thereby increasing averageship productivity, there would still be a growing shortage of shipping duringthe next five years and beyond. To overcome this shortage, as well as forother reasons stated below, the Government has decided to provide a financialincentive to increase investment in and utilization of inter-island ship-ping. This incentive would be via relending of funds to shipowners at 10%p.a. which is about 5% p.a. lower than the current long term lending rate inIndonesia.
2.11 The provision of incentives is a sound policy in view of the factsthat: (i) all but a few shipping operators are financially weak and cannotprocure ships or pay for them on normal terms, though many are operationallyacceptable; (ii) the maintenance of reliable transport service among theislands of the archipelago is of vital economic and political importance;and (iii) tariff increases required to pay for the new capital for shippinghave to be minimized in order to reduce adverse developmental impacts indistant islands. If shipowners could borrow from the international capitalmarket with the guarantee of the Government, they could borrow at about 9%to 10% p.a. By borrowing directly from the international capital market andallowing PANN to re-lend the proceeds at 10% p.a., the Government is pro-viding competitive financial terms to Indonesian shipowners and relievingthem of a foreign exchange risk.
III. ORGANIZATIONS INVOLVED IN THE PROJECT
A. The Government
3.01 The Department of Communications (DOC) is responsible, amongother things, for the administration of the maritime sector. It includesa planning bureau, finance, personnel, and secretariat groups, and aResearch and Development Board and a Training Board. Separate DirectoratesGeneral for Air, Land, and Sea Communications, Tourism, and Postal Servicesand Telecommunications are responsible to the Minister.
3.02 In the maritime sector, the Minister is responsible for issuinglegally binding decrees which may set or alter freight rates for the RLSand tariffs for port and stevedoring operations as well as regulate ship-ping activities, including classification of ships and issuance of safetyand operating certificates. By delegation from the Minister of Finance,the Minister of Communications may appoint the supervisory board of statecompanies in the transport and communication sectors and may supervisesuch companies. This is the case, in the maritime sector, for PELNI(paras 3.06-3.08) and the newly formed shipping development company, P.T.Pembangunan Armada Niaga Nasional (PANN) (paras 3.09-3.11).
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B. Directorate General of Sea Communications
3.03 The Directorate General of Sea Communications (SEACOM) isresponsible for all maritime operations through its directorates of ship-ping 1/, ports and dredging, traffic, shipyards, navigational aids andcommunications, and coast guard (Chart 1). The Director General and nearlyall of his present directors have been involved in the planning and executionof Credit 318-IND for rehabilitation of the inter-island shipping fleet.SEACOM has received bilaterally financed technical assistance for shippingoperations from the Netherlands and Japan, and for navigational aids andcommunications from a number of countries. A description of this technicalassistance is contained in Annex 4.
C. Ship-Owners and Operators
(a) The Private Sector
3.04 There are 55 private shipping companies with 230 ships aggregating174,000 dwt licensed to operate in the Indonesian inter-island trade. Ofthese, 46 operate in the RLS. Only eight companies in the private sectorhave qualified for rehabilitation loans from BAPINDO, the project executingagency (para 3.12) under Credit 318-IND. It is unlikely that many morewill prove creditworthy and therefore be capable of buying ships under theproposed project. The majority of the companies are poorly managed and donot maintain adequate finances or records, and many operate unsafe, poorlymaintained (para 2.07) and technically inadequate ships (Chart 2). Somecompanies, perhaps 15 to 20 at most, carry out efficient operations andmaintenance, and are perhaps making profits. However, many of these moreefficient companies, owned by "non-indigenous" operators, are excluded byMinistry of Finance regulations from access to credit of the state banks;they would, however, be able to buy or lease ships from PANN (para 3.09)under its rules.
3.05 The decree 2/ establishing the licensing of shipping companiesrequires ownership of a minimum of two ships in order to engage in stevedoring.This requirement seems to have been responsible for the proliferation ofshipping companies (about 27 out of the total of 55 private shipping com-panies) having only two ships and weak financial condition. The requirementwas originally designed to improve and extend stevedoring in ports in outlyingregions, which are served infrequently. However, as such services are nowadequate, the link between stevedoring and shipping should be made optional;this change was also recommended by the LTFD. Separation of the two functionsmay result in the sale, charter or scrapping of ships, particularly thoseowned by "two ship" companies, and lead to the gradual appearance of a small
1/ This Directorate licenses shipping companies and assigns routes andtonnage to each route. A subsidiary organization assigns ships tothese routes in consultation with ship-owners and operators.
2/ Presidential Decree of 2 of 1969.
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group of stronger companies. The implementation of the change could be madeeasier by the separation of payments for shipping and stevedoring functionsin the revised cost-based RLS tariff. The Government has been made awareof these views and will take them into consideration as it moves to strengthenthe structure of the industry.
(b) P.T. Pelayaran Nasional Indonesia (PELNI)
3.06 Government-owned PELNI is the largest inter-island shipping com-pany in Indonesia. It carries about two-thirds of inter-island RLS pas-senger traffic, 40% of cargo and operates its own large stevedoring andforwarding divisions. Its 49 ships, 21 of which have been rehabilitatedunder Credit 318-IND during the past two years, represent about 40% of RLSship tonnage. PELNI will continue to be a major factor in RLS operationsin the future. It will be a major beneficiary of the proposed loan, thoughnot a direct party to it.
3.07 PELNI has been a financially and operationally troubled companyfor many years. Since 1972, the Netherlands has financed, at the Government'srequest, a team of six advisors to assist in improving PELNI management andoperations. So far, the advisors have had limited success in having theiradvice accepted and, thus, in raising PELNI's productivity and operationalcapability to a reasonable standard. Yet, they believe that PELNI's pro-ductivity could be doubled by reducing port time, by better maintenance,and by reducing deviation from schedules and routes. A number of operatinggoals to be achieved by 1979 have been proposed by the advisors and areincluded in detail in Annex 5. These have the objective of increasingPELNI productivity by 1979. The present advisory services will be continuedto March 1977, under Netherland bilateral aid and will be extended underthe project until March 1979 (para. 4.20).
3.08 PELNI's management has not responded adequately to many of theadvisors' suggestions, with the result that the company still has severeoperational problems which must be overcome. This is a serious problemif PELNI is to continue to be the backbone of the RLS system. A newmanagement was installed in late 1975 with a view to achieving operationaland financial improvements and reducing the need for budgetary assistance re-quired from the Government, amounting to Rp. 3.4 billion over the past two years.In view of the inability of PELNI to make a profit, even when freight trafficand revenues increased and sound advice was given by its advisors, a thoroughreview of the company's operations leading to a specific plan of action isprovided for in the project. The Government has agreed to retain consultantswithin three months of signing the proposed loan, to prepare a recovery plan(para. 4.22 and Annex 4).
(c) P.T. Pembangunan Armada Niaga Nasional (PANN)
3.09 PANN was organized as a commercial company in May 1974 on theadvice of the LTFD and the Japanese shipping advisors to SEACOM to procureand lease ships to financially weak RLS ship-owners. It commenced operations
with an initial equity of Rp 2.0 billion (US$4.8 million equivalent) and plansto to acquire 47 new and 47 used ships utilizing Japanese and Norwegian exportcredits and loans from BAPINDO and the proposed loan. It has access to Govern-ment budget funds only through Government purchase of equity and it operates inall respects as a commercial company. The company's lack of experience requiresactive participation of BAPINDO (para 3.12) in the execution of the project, forthis reason the Government decided that PANN would be owned in the initialyears 40% by BAPINDO with the remaining shares in the hands of the Govern-ment 1/. PANN will act as a financial intermediary and will acquire all theproject ships after arranging for their sale or lease to acceptable shippingcompanies on terms adequate to recover the capital invested, interest costson its borrowings, and a profit margin from which its expenses would be paid.As ships would be fully insured at replacement value (para 3.16), PANN wouldincur risk only when ship operators did not earn sufficient revenues to meetpayments on their leases. With ships assigned to specific routes, with freighttariffs linked to capital and operating costs and under yearly review (para.5.08), and with a more efficient PELNI to operate any ships of privateoperators whose leases may be in default, PANN's financial position would besecure assuming that the forecast cargo tonnages (para 6.02) are offered.Default on PANN leases by the private sector would result in financialdifficulties for PANN. The Government has agreed to adequately compensatePELNI in the event that PELNI would incur arrears to PANN or BAPINDO as aresult of operations carried out at the Government's request. Difficultiesarising from defaults may also be ameliorated by the transfer of the shipsinvolved to PELNI or to other operators. A description of PANN operations andfinances is given in Chapter V and Annex 6.
3.10 PANN has a Board of Supervisors, or Dewan Komisaris, to setoverall policy and to supervise major financial matters and a Board ofManagement, or Direksi, to operate the company 2/. The top executives whohave been appointed are experienced and satisfactory to the Bank. PANN's
1/ BAPINDO's risk exposure in PANN via loans and equity could exceed thelimits for lending to individual companies noted in its "Policy State-ment" prepared in connection with the Bank's industrial loans. TheGovernment has agreed to limit BAPINDO's share ownership and its loanexposure in accordance with the "Policy Statement" (para. 4.11). ThusBAPINDO's share at PANN equity will decline in the future.
2/ The Dewan is composed of the President of PANN; the President of P.T.Jakarta Lloyd, one of Indonesia's largest shipping companies engaged inocean shipping; the Managing Director BAPINDO's Maritime Credit Depart-ment; and SEACOM's Director Shipbuilding. The Direksi is composed ofthe President of PANN, a Vice President of Sales and Purchases, and aTechnical Vice-President. In the future, PANN may have additionaldirectors.
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charter is satisfactory. It was agreed during negotiations that PANN'sDireksi would seek Dewan approval each quarter for the investment programfor the coming quarter, based on the annual approval by the shareholdersof an investment plan. These arrangements are satisfactory and are incor-porated in PANN's "Policy Statement Memorandum" (Annex 7). PANN hasappointed Indonesian legal counsel (Gani Djemat and Associates, Indonesia)and auditors (P.T.SGV-UTOMO, 1/ Indonesia) satisfactory to the Bank. Itwill also retain internationally recruited financial and technical advisorsacceptable to the Bank to assist in ship acquisition and in training staff(para 4.21). PANN will also retain BAPINDO, under a two year contractacceptable to the Bank, to undertake appraisals of lessees and ship purchasersand to train PANN appraisal staff.
3.11 PANN discussed its proposed plan of operations with the Bank duringnegotiations and has prepared an outline of its proposed leasing and ship salespolicies and procedures. Agreement on procurement procedures and the form andcontent of sale and lease documents to be used was reached during negotiations(paras 4.14 to 4.19 and Annex 7).
D. Other Organizations
(a) Bank Pembangunan Indonesia (BAPINDO)
3.12 This major state-owned development bank has received two creditsand one loan from the Bank Group for industrial finance and ship rehabilita-tion totalling US$68.5 million. A detailed review and appraisal of BAPINDOis contained in the Bank's Appraisal Report, 526a-IND, dated October 22,1974. The Association's first industrial credit of US$10 million (Credit310-IND) was fully committed within three years. A second industrial loan(1054-IND) for US$50 million equivalent was made by the Bank on November 20,1974. Disbursement by BAPINDO was initially slow, but is now satisfactory.The Bank will continue to maintain its close relationship with BAPINDO.
3.13 A Maritime Credit Department (MCD) was organized within BAPINDOin connection with Credit 318-IND in mid 1972. The MCD is staffed withcompetent personnel and provided with advisors in ship finance and repairformerly financed by UNDP under a Bank executed contract. The contractsof the advisors will be renewed until mid February 1978 and financed fromthe proposed new loan (para. 4.23). The MCD under BAPINDO's key executiveswho are technical and financial experts, has operated satisfactorily. Aftera slow start, the volume of MCD operations increased sharply in 1974 and1975. Credit 318-IND is about 78% committed by BAPINDO but due to sharpcost increases since the original repair estimates were made in 1972, onlyabout half the tonnage forecast will be repaired. BAPINDO's maritimeportfolio as of December 31st 1975 consisted of Rp. 10,458 million in longterm loans, of which loans made under the Credits 310-IND and 318-INDaccounted for Rp. 2,349 million (22%) and loans from BAPINDO's own fundsRp. 2,025 million (20%) while the balance Rp. 6,084 million (58%) has been
1/ A joint venture of Sycip Gorres Velayo and Co. and P.T. Utomo.
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submitted for re-imbursement under Loan No. 1054-IND. Arrears of principaland interest at December 31st 1975 amounted to 10% of the portfolio orRp. 1,043 million. Rp. 554 million of these arrears were accounted for byPELNI. By the end of February 1976 repayments on a number of the outstandingaccounts had been made and arrears were reduced to Rp. 821 million (Annex 1).Rp. 156 million of the reduction resulted from an agreed rescheduling ofinstalments of principal in one case where the impact of fleet repairs onoperations has drastically reduced cash generation temporarily. In thefirst week of March 1976, PELNI reduced its arrears by Rp. 117 millionthus leaving Rp. 437 million arrears outstanding. This payment reducedtotal arrears to Rp. 704 million representing 6.7% of the MCD investmentportfolio.
(b) Biro Klasifikasi Indonesia (BKI)
3.14 Indonesian law requires that every Indonesian ship over 100gross tons 1/ be registered with the ship classification society, BiroKlasifikasi Indonesia (BKI). All ships in the RLS, and most of the inter-island fleet, must be classified. BKI standards, although similar to thoseof many international societies, are uncertain in application. Becausemany of its surveyors lack training and experience, the survey of workspecified for repair and the actual work done is often inferior or incomplete.Through bilateral aid from the Federal Republic of Germany, training of BKIpersonnel has proceeded since 1971 under the direction of the experts ofGermanischer Lloyd (GL), an internationally recognized ship classificationgroup. This training is expected to be financed under bilateral aid fromGermany. However, should such aid not be available it will be financed by aNorwegian grant until July 1978 (para. 4.20 and Annex 4).
3.15 Besides safety, a major purpose of ship classification is to maintainminimum technical standards so as to realize lower insurance premiums. Inorder to achieve this purpose, as well as to ensure a sound execution ofits project, the Association required that Credit 318-IND be disbursed onlywhere ships were dually classified. 2/ In order to continue the process ofimprovement of survey work, and to support the process of familiarizing theinsurance market about BKI, the Government has agreed to cause BKI's shipclassification standards to conform to those of any internationally recognizedship classification society acceptable to the Bank. Dual classificationof all ships acquired or rehabilitated by PANN from the proceeds of theproposed Loan will be maintained until each ship has passed its firstquadrennial survey after acquisition.
1/ A measure of cubic capacity within a ship.
2/ Classification by BKI and an internationally recognized classificationgroup is required. GL has arranged that no extra fee will be chargedfor dual BKI/GL registration, so most dual classing is presently withGL.
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3.16 Insurance of ships in Indonesia to cover all risks is expensiveand usually is quoted at from 4% p.a. to 6% p.a. of the value of ships.Goveriment regulations require that all insurance be placed with anIndonesian company which may then reinsure about 25% internationally. Ex-perience with Credit 318-IND indicates that it is difficult to elicit acompetitive market response for ship insurance in Indonesia. The proposedloan will ensure the continuation of technical assistance on navigationalaid and communications, as well as provide for training of engineers andnavigators (para 4.25). These measures may reduce the casualty rate atsea. PANN has agreed to hire a qualified insurance executive and to require"iall risk" coverage on replacement cost for all of its ships and for shipsin which it has a beneficial interest to be included in all leases, hirepurchase, and sales contracts. PANN has agreed to seek fleet insurance fromnational and international insurance companies in order to select the bestcoverage at the lowest cost.
IV. THE PROJECT
A. Description
4.01 The project will finance the rehabilitation of existing vesselsand the procurement of about 60% of the additional tonnage included in thefive-year program proposed by the LTFD. As the consultants' traffic forecast,on which their recommendations were based, appears to be too optimistic, thebalance of tonnage, not financed under the current program will be subjectto further economic study. While the total program proposed by the con-sultants for the period to the end of 1979 is estimated to cost not lessthan US$587 million equivalent at current prices and to provide 195,655 dwt,the proposed project will cost only about US$195 million - 33% of the totalproposed program cost - but will provide about 60% of the tonnage proposedby the consultants. The lower cost is due to emphasis on purchasing usedships and rehabilitation of existing ships whereas the program proposed bythe consultants envisaged only the purchase of new ships. All but about US$5.4million of the project cost will be in foreign exchange. The proposed Bankloan of US$54 million equivalent will provide 28% of the foreign exchangerequired.
4.02 The first priority of the project is the continuation of therehabilitation program and the scrapping of over age and technically defi-cient ships which are too costly to repair. The second priority is procure-ment of used cargo ships and new cargo and cargo-passenger ships of standarddesign in the 750, 1,000, 1,500 and 2,500 dwt classes (Chart 3). Emphasis isalso placed on the continuation of existing, and the initiation of new tech-nical assistance and training programs, with the assistance of bilateral andother lenders.
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4003 The project forms a part of the program of reconstructing and expand-ing the inter-island fleet. This program provides about 53,750 dwt of newships, 59,500 dwt of used ships to be acquired outside Indonesia and the re-habilitation of 54,500 dwt of operational ships (Table 2). The projectconsists of the following elements:
(a) Rehabilitation, where economically sound and technicallyand financially feasible, of 54,500 dwt of existing inter-island ships;
(b) procurement of about 47 used cargo ships, totalling about52,000 dwt, in the 1,000, 1,500 and 2,500 dwt classes(about 41, 4, and 2 in each class, respectively);
(c) procurement of 47 new standard cargo and cargo-passengerships, totalling about 50,250 dwt, in the 750, 1,000,and 1,500 dwt classes (about 13, 21 and 13 in each class);
(d) scrapping of about 70,000 dwt of existing inter-islandships of over 500 dwt which cannot be economicallyrehabilitated;
(e) a technical assistance and training program, designed tosupport and improve inter-island fleet operations andplanning, and the trainin.g of marine officers and engineers;and
(f) a study to determine shipping requirements during the remainderof Repelita II and the period up to 1990.
The balance of eight used and four new ships required to complete the Govern-ment's program, totalling 7,500 dwt and 3,500 dwt respectively, will beacquired (i) by transfer to PELNI as equity of two new ships provided by1972 Japanese bilateral aid and, (ii) by private finance already arrangedby several shipping companies.
33. Cost Estimate8
4.04 The proiect is estimated to cost about US$195 million equivalent ofwhich 97% is foreign exchange. This includes delivery costs of US$8.5 mil-lion equivalent, and a physical contingency of US$2.5 million equivalent toprovide for modification of some used ships to suit them for Indonesianservice. Mhe project cost excludes interest during construction of US$6.3million equivalent which will be financed by PANN from its cash generationrpara 5.03), Prices of new ships are based on fixed price contracts already
signed with Indonesian, Japanese and Norwegian shipyards. These contractswere based on detailed specifications satisfactory to the Bank. Shipyardprices were checked using a man-hour and materials list and, considering theCredit terms involved, appear to be reasonable. The Government has stated that
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the new ship prices obtained from Norwegian shipyards, taken together withthe credit terms involved, are the lowest obtained from a number of offersmade by various countries. Used ship prices are expected to remain stableduring the procurement period to mid-1977 and no provision for escalationis believed necessary. Costs of rehabilitation, mainly to be undertakenin Indonesia, are for labor, steel and equipment. These costs, amountingto US$9.5 million equivalent, are assumed to inerease by 15% in 1976, 10%in 1977 and in 1978, and by 7.5% in 1979. Estimated project costs bycategory are given below and are detailed in Annexes 4 and 6, Attachment 9.
Million Rupiah Million US$ %Local Foreign Total Local Foreign Total Project
/b For ships already ordered and to be built in Indonesia; these may be financedfrom Loan 1054-IND.
/c From PANN cash generation (para 5.03).
/d Includes funds from Euro-American consortium banks.
4.06 A Japanese Overseas Economic Cooperation Fund (OECF) loan ofUS$25.0 million equivalent at 2.75% p.a. over 30 years including 10 years ofgrace has already been made. The Norwegian Government has made a grantof Nkr. 70 million (US$12.5 million) to be used for a variety of purposesinc:Luding US$2.2 million equivalent to finance certain technical assistancere!lated to the project (Annex 4). When the grant agreement becomes effective,a loan of Nkr. 492 million (US$87.8 million) will be made by A/S EKSPORTFINANS,the Norwegian export credit bank, to Indonesia for 15 years, including threeyears of grace, at 8-1/2% p.a. plus a single fee of 1.9%. This loan willcover 90% of the cost of ships and tugs (the latter not included in theproject) to be obtained under contract from a group of Norwegian and Indonesian
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shipyards. At the same time, and to provide for 10% of the cost required tocomplete the Norwegian ship finance, a consortium of banks, including Bankof America NT&SA, Continental Illinois Bank and Trust Company of Chicago,den Norske Creditbank, and Nordic Bank Ltd. will make a loan of US$12.0million equivalent in kroner to the Government 1/ of which about US$10.0million equivalent would be used for the project. This loan is for fiveyears ending June 15, 1981 and carries management and commitment fees of3/4% each. It is made at a rate of 1-7/8% over the rate quoted from timeto time by designated reference banks for three or six month Eurodollardeposits.
4.07 The financial resources provided and to be provided by the creditand loans noted above are more than sufficient for the new ship part of theproject and specific technical assistance elements related to the project.The proposed Bank loan of US$54.0 million equivalent would be for 15 years,including three years of grace, at its current lending rate. All of theseloans would be made to the Government which would assume the foreign exchangerisks on repayments. Funds obtained from BAPINDO and any other local banks,estimated to be about US$15.0 million equivalent, would be obtained at 15%p.a., the current term lending rate, for periods determined by the type ofship to be procured. These funds would be made available for project financeunder a financing agreement, satisfactory to the Bank, to be signed betweenthe Government and PANN and BAPINDO prior to effectiveness of the proposedloan.
4.08 Funds for acquiring inter-island ships in excess of the require-ments of the project may become available from bilateral lenders and/orforeign credits and could be applied to a subsequent project if it isidentified. Due to uncertainties about the tonnage of ships required, trafficgrowth and cargo handling (para 6.10), agreement has been reached with theGovernment that, pending the results of the economic study and a review ofshipping requirements, the Bank may, after consultations with the Government,reduce its participation in the project if more than 12,000 dwt of inter-island ships are acquired outside the project.
(b) Flow of Funds and Use of the Proposed Loan
4.09 The Government would re-lend to PANN as debt, using Bank Indonesiaand BAPINDO for administrative purposes, about half of the funds providedby external lenders at an interest rate of 12% p.a. for up to 15 yearsincluding one year of grace for the purchase of new ships; up to ten yearsincluding one year of grace for used ships; and for five years including oneyear of grace for rehabilitation of existing ships. These funds will bemade available to PANN as required under the terms of its shipbuilding con-tracts and ship purchase and rehabilitation agreements. The other half of the
1/ The total financing to be provided from Norwegian sources amounts toUS$112.3 million equivalent of which US$99.7 million equivalent wouldbe used for the project.
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external funds would be passed on to PANN by the Government as equity. Loansby BAPINDO would also be made directly to PANN, repayable over the samerepayment periods as under Government loans to PANN for new and used shipsprocurement and ship rehabilitation.
4.10 The proceeds of the proposed Bank loan would be used (i) to procureall of the used ships included in the project and to pay the foreign ex-change cost of modifying them for service in Indonesia, (ii) for rehabilita-ting existing ships, (iii) provide the foreign exchange cost of used shipdelivery to Indonesia, and (iv) for the foreign exchange cost of specificelements of the technical assistance program and of the economic study.
4.11 Repayment by PANN to BAPINDO and the Government would be related tocollections. BAPINDO's interest in any ship it finances, and which issubsequently sold by PANN, will be protected by adequate amounts of shipmortgages. Agreement on lending and re-lending terms and conditions to beincluded in a subsidiary financing agreement, to be agreed as a condition ofeffectiveness of the proposed loan, has been reached with the Government,RAPINDO and PANN during negotiations (paras. 4.09 and 5.04). Agreement hasalso been reached during negotiations that the Government's loan and equitycontribution to PANN will be made available in a regular and timely fashionrelated to PANN's needs; and that the Government will ensure that (i) BAPINDOresources amounting to a maximum of about US$15.0 million equivalent will beprovided to be loaned to PANN, on terms and conditions acceptable to the Bank;and (ii) BAPINDO will abide by its-covenants to and agreements with the Bankon account of the previous Bank loans and credits.
D. Project Execution and Procurement
(a) Project Execution
4.12 The project will be executed by PANN and BAPINDO, with the assis-tance of consultants acceptable to the Bank, under the supervision of SEACOM.BAPINDO, for the first two years of the project and subsequently PANN, willprepare a comprehensive appraisal report on the shipping enterprise seekingto lease or buy ships from PANN (Annex 7). This report will make recom-mendations about the measures to be taken to improve the enterprise and tobe embodied in a Development Agreement between PANN and the shipping enter-prise forming part of the lease or sale. On approval of this appraisal byPANN alone in the case of new ships and by PANN and the Bank in the case ofused ships, PANN will procure ships for lease or sale. In order to ensurethat all shipping companies are involved in the Government's program, im-proved means of enforcing existing regulations related to safety, theclassification of ships, and the financial and operational state of shippingcompanies would also be required. DOC and SEACOM have issued the necessaryadministrative orders to enforce the existing and revised safety and classi-fication regulations in effect and to enable PANN and BAPINDO to executethe project properly. NKI, SEACOM, PANN and BAPINDO will be assisted byconsultants in carrying out their responsibilities under the project.
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4.13 Successful project implementation also requires removing fromservice over age and/or technically deficient ships, with the objective ofscrapping 70,000 dwt of existing inter-island licensed ships of over 500 dwtwhich cannot be economically rehabilitated by December 31, 1979. Agreementhas been reached with the Government that it will prepare, by August 31, 1976,and cause to be undertaken, on a basis agreed with the Bank 1/, a specificscrapping and rehabilitation program tied to a specific program of acquisitionof new and used ships.
(b) Procurement
4.14 Procurement of new ships under agreements between the Government,Norway and Japan has been arranged by PANN using specifications acceptableto the Bank and developed by naval architects, Bureau voor Scheepsbouw (BvS)(Netherlands), who are satisfactory to the Bank and are financed by theNetherlands. Twenty new ships will be procured from Norwegian shipyards undercommercial arrangements and six from Indonesian shipyards. Seven new shipswill be built in Japan and five OECF financed ships will be built in Indonesia.Nine ships will be built in Indonesia using BAPINDO funds under proceduresestablished for Loan 1054-IND (Annex 6, Attachement 1).
4.15 Used ship procurement is more complex than is new ship procurementbecause the ships to be acquired are mainly located at a great distance fromIndonesia and can only be inspected at times and places difficult to arrangemuch in advance. Such purchases, being non-standardized, require negotiationof the sale price and the time of availability, and require detailed inspectionand, sometimes, repair or modification to bring them up to classificationstandard before they can be used for Indonesian service. Internationalcompetitive bidding is inappropriate for the purchase of used ships in thenumber and variety contemplated. Instead PANN's consultant naval architect-surveyors, shipbrokers (exclusively representing PANN), and residentfinancial and technical advisors will assist in identifying and procuring,through a canvass of the international market, appropriate used ships andnegotiating purchase and as necessary, repair contracts for them. Theestimated cost of used ships to be acquired will be included in theappraisal report to be approved by the Bank and more closely determinedon the signing by PANN of an internationally accepted sale form. After aninspection of the ship in question PANN will notify the Bank of the finalprice and, if the Bank agrees, will proceed to acquire the ship under a
1/ A committee has been set-up by SEACOM to develop the details ofthe scrapping program. The Government has agreed in principle thatany ship over 20 years of age and/or that cannot be rehabilitatedeconomically should be scrapped.
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letter of credit guaranteed by the Bank. Used ship procurement contractsof PANN will be based on documents satisfactory to the Bank 1/ and will con-tain arrangements satisfactory to the Bank covering verification of relevantdocuments and cost prior to disbursement. The detailed procedures aredescribed in Annex 7.
4.16 International competitive bidding is also impractical in the caseof rehabilitation of ships as each repair costs a relatively small amountand may involve the purchase of a wide variety of proprietary parts. It isproposed to continue the procedures established for ship rehabilitation underCredit 318-IND. This work will be undertaken mainly in Indonesian shipyards.Funds for shipyard improvement are available from a variety of sources,including the Bank's recent industrial loan (Loan 1054-IND) and a numberof possible foreign joint ventures now under discussion.
4.17 A procedure and check-list of documentation and important procure-ment and operating considerations have been discussed with PANN and BAPINDOand are incorporated in a "Policy Statement Memorandum" agreed on duringnegotiations (Annex 7) to be adopted by PANN's Dewan Komisaris and used bythe Direksi in carrying out PANN operations.
4.18 The proposed loan would also finance about US$1.0 million equivalentfor specialized equipment suitable for a maritime training school. It isexpected that procurement of this equipment will be undertaken, underarrangements satisfactory to the Bank, by the Inter-governmental MaritimeConsultative Organization (IMCO) acting as procurement agent for theGovernment using, so far as is practicable, the procedures set out in theBank "Guidelines for Procurement". Where these procedures are deemed to beimpracticable by the Bank, procurement will be made through internationalshopping.
4.19 Agreement has been reached with the Government during negotiationsthat legislation providing for registering ship mortgages during the deliveryvoyage of ships acquired and sold overseas will be promulgated. In themeantime PANN has agreed that it will not sell its ships until they willhave arrived in Indonesia, where mortgage security exists. Copies of allPANN project appraisals and summaries of all contracts and leases enteredinto by PANN will be made available to the Bank for information. BAPINDOwill, similarly, forward to the Bank copies of its project appraisalsrelating to any purchase of used ship or to any rehabilitation undertaken.Agreement on these procedures was reached during negotiations.
E. Technical Assistance and Consultants
4.20 During the past three years, a substantial technical assistanceand training program has been underway in the maritime sector. This program
1/ Procurement of used ships will also use standard forms, i.e., Japaneseand Norwegian Sales forms. An appraisal of the shipping company anda Development Agreement will also be approved by the Bank prior toprocurement.
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has been funded by bilateral lenders, UNDP, ADB, and the Association. Theprograms directly related to the improvement of inter-island shipping aredescribed in Annex 4. Some of these programs must be continued in connec-tion with the proposed project. These are: assistance to BKI, trainingof ship inspectors, advisory and planning services to SEACOM, training ofcrews, communications advisory services, and advisory services to PELNIand BAPINDO, described in more detail in paras 4.22 and 4.23. While someof these activities have already been funded for up to two additional years,it is prudent to ensure the continuation of these projects. The Govern-ment has agreed to apply to the bilateral lenders now financing these projectsfor their continuation until the end of 1978 or the end of the first quarterin 1979. Should such finance not be available, the Government will continueto finance these projects under arrangements acceptable to the Bank. In thecase of advisory services to SEACOM, PELNI, and BAPINDO funds are includedin the proposed loan to provide the required technical assistance to theseinstitutions.
4.21 Several new programs have also been included in the proposed projectand are described in detail in Annex 4. They are provision of instruc-tors and equipment for training marine engineers and deck officers describedmore fully in Section F, below; technical assistance to PANN amounting toabout US$0.3 million equivalent over three years for resident financial andtechnical advisors, a large overseas training program financed by NORAD for802 man-months for SEACOM, PANN, and PELNI, provision of instructors andequipment for a shipyard training centre, also financed by NORAD, advisoryservices for the revision of shipping safety regulations; management con-sultant services for a review of PELNI operations noted in para. 3.08; andthe economic study of future shipping requirements.
4.22 In the case of PELNI, funds for continuing the present advisoryteam from March 1977 to March 1978 have been included in the proposed loanwith the agreement of the Government in case further Netherlands financingis not available. The Netherlands has agreed to act for the Bank inadministering any contract extension required. The services of a recognizedmanagement consultant experienced in shipping are required to review PELNI'sprocedures and operations. This study will be initiated within three monthsof signing the proposed loan with a view to preparing a plan of actionacceptable to the Bank within the following 12 months, and implementing it.Additional services for PELNI are likely to result from the management con-sultant's report and provision has been made in the loan for about 108 man-months of specialist services for carrying out and supervising improvedshipboard maintenance and repair services. Should PANN or shipyards requireadditional technical assistance, these funds would also be available.
4.23 With the assistance of its advisors, BAPINDO is considered to besufficiently experienced and able to undertake initial preparation ofappraisal reports to be used as basis of PANN's leasing and sales of ships.To continue the advisory services, the contracts for the two existing MCDadvisors will be extended until the end of February 1978. Funds have been
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included in the Bank's proposed loan for this purpose. The extension ofthese advisors' contracts has been requested by BAPINDO and agreed to bythe Government (para. 4.26).
4.24 The total amount of technical assistance included in the projectis US$6.4 million equivalent, of which about US$1.3 million is to financeexisting programs and US$5.1 million is for financing new programs. Theforeign exchange cost of the technical assistance program is estimated tobe US$6.0 million equivalent. Of this, NORAD will provide US$2.3 millionequivalent and the proposed loan US$3.8 million equivalent. The latter wouldfinalnce about 570 man-months of consulting services at an average annual costof US$64,000 equivalent and US$1.0 million equivalent of training equipment.1:n the event that any of the US$3.7 million equivalent of funds proposed to beprovided by the Bank are not required, they will be reallocated for ship pro-curement and/or rehabilitation. The Bank has obtained agreement from NORAD thatNORD will consult the Bank about the terms of reference and qualificationof the consultants to be financed by it. In special cases the Government willrequest bilateral donors to extend certain existing technical assistancearraingements to be financed by the proposed project. Agreement has beenreached during negotiation that the technical assistance program described-in paras 4.20 to 4.23, and in Annex 4, will be undertaken.
J. Training
4.25 A training program for ship crews and marine officers is includedi-n :the proposed technical assistance component of the loan (Annex 4). Bi-Ilateral aid from Japan will finance crew training and the training courseswill be organized by four Japanese experts (24 man-months). Further crewtraining is included in the NORAD program and amounts to about 200 man-months. The Bank has agreed to a program with the Government for trainingof1 navigating and engineering officers involving an estimated 294 man-monthsof assistance in planning, training and instruction preceded by a threenionlzh survey to determine the precise need for instructors and equipment.1he training program has the objective of doubling the annual output oftrainees by 1980 to reach 400 per year. The officers' training programproposed would be financed by the proposed loan and is expected to beexecuted by IMCO which has carried out similar projects in Brazil and Egypt.Equipment procurement for this part of the project would be based on a14s: to be prepared by an IMCO survey team and will be agreed by the Bank.
(>7 Disbursement
,426 The proposed Bank loan would finance 60% of each ship rehabilitationor modification done in Indonesia and 100% of each rehabilitation or modifi-cation done abroad, 100% of the foreign exchange cost of procurement anddelivery costs of each secondhand ship, 100% of the foreign exchange costof foreign consultants and technical assistance and equipment for thetraining program, and 80% of costs of Indonesian consultants and experts.No retroactive financing of ship procurement will be required. It is pro-posed to finance retroactively up to US$200,000 equivalent for technical
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of action for PELNI, for technical assistance contracts concluded afterJanuary 31, 1976. Conditions of disbursement from the proposed loan wouldbe as follows: When requesting disbursement for the purchase or rehabilita-tion of a ship an application will be submitted to the Bank together with:(i) an appraisal by BAPINDO and PANN for the technical, operational andfinancial conditions of the shipping enterprise concerned and of its ships;(ii) a statement from SEACOM indicating which ships, if any, of the shippingenterprise concerned are to be rehabilitated or scrapped; (iii) a certifiedcopy of the Development Agreement between PANN and the shipping enterpriseconcerned executed pursuant to the provisions of the Project Agreement;and (iv) (a) in respect of the purchase of a used ship, a description ofthe ship, certified copies of the purchase contract and the bill of sale, acertificate issued by SEACOM that the ship meet the Government's licensingrequirements and will be registered, a deletion certificate, confirmation byPann that the ship is acceptable, and a certificate issued by an inter-nationally recognized ship classification society acceptable to the Bankthat the ship is in class; or (b) in respect of the rehabilitation of aship, a description of the rehabilitation works to be carried out, a certi-fied copy of that contract between PANN and the shipyard that shall carryout such works, and certificates issued by SEACOM and BKI showing that therehabilitation works are designed to meet at least the Government's shippingregulations and BKI's classification standards. A disbursement schedule isgiven in Table 3. A forecast implementation schedule is included in Annex 8.
H. Environmental Impact
4.27 There are no Indonesian regulations dealing with the pollutionof the sea by inter-island ships. Indonesia is a member of IMCO and is,therefore, bound by international conventions when they are in force. Todate, few IMCO anti-pollution of the sea conventions are in force, althoughmany countries have adopted the conventions related to oil pollution. Thenew ships to be procured by PANN will be equipped with sewage tanks andoily water separators meeting the IMCO specifications. Used ships to beacquired under the project which would have been operating in, mainly,European and Japanese territorial waters will meet the relevant anti-pollutionrequirements.
I. Project Risks
4.28 Because the proposed project is based on estimates of trafficgrowth and will provide for only a modest expansion of the existing inter-island fleet (paras 6.09 and 6.10), there is only a small chance that theships provided under the project would be underutilized or that theeconomic results of the project would be adversely affected (para 6.13).However, a major risk is that continued lax enforcement of safety and shipclassification society rules would result in a reduced ship scrapping andrehabilitation program and continued operation of many obsolete and unsafevessels. These risks would arise from the undercutting of freight rates byowners of ships having little or no book value and, as a result, shipownerswho have leased project ships would be unable to secure sufficient freightat going rates to pay for the costly new assets. Major financial risks would
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then have to be faced. Proposals have been made to deal with thesepossibilities through new administrative orders of SEACOM calling fortimely and proper ship inspection (para 3.15), by stricter enforcement ofregulations (para 4.12), by improvements to shipping companies and throughbetter training (paras. 4.12 and 4.25), by the implementation of the scrap-ping and rehabilitation program (para 4.13), and by increased freight rates(para 5.08).
J. Possible Future Developments
4.29 The present project covers only a part of the RLS fleet expan-sion plan proposed by the consultants. A study, which would be carried outduring the next 18 months as part of the project, will determine the scaleof additional shipping requirements to 1979 as well as make a traffic pro-jection to 1990 (para 6.10). Additional loans for ship procurement areforeseen, as is a continuation of technical assistance, particularly trainingfor navigators and marine engineers for at least the next five years.Technical assistance needs of shipyards may be met by commercial sources,possibly as part of the joint venture agreements or through continuation ofbilateral aid. An expanded technical training program for shipyards willalso be required. Improvement of port operators will continue to be anurgent task for the Government.
V. FINANCIAL REVIEW
A. Introduction
5.01 Though PANN is the major recipient of the proposed loan, PELNIis expected to lease and operate about half of the ships involved. In-come to PANN depends on the earnings of RLS operators but, except for PELNIand the seven small companies which have received rehabilitation loans underCredit 318-IND, financial records are unavailable. It has therefore beendecided to forecast the financial position of PANN and, by analyzing theimplications for PELNI of its participation in the project, to attempt toinfer implications for the RLS fleet as a whole. The financial implicationsaffect both existing laws and the tariff. It must be emphasized, however,that the financial projections made are largely on the basis of assumptionsas given briefly in para 5.02 and in detail in Annexes 5 and 6. Nevertheless,they serve to indicate the financial positions of PANN and PELNI during andfollowing project execution and are considered reasonable.
B. The Forecast Financial Position of PANN
.5.02 PANN will acquire all the project ships (47 new and 47 used) andwill operate as a commercial leasing company earning net revenues from thenet margin it maintains between its lending interest rate and its weightedcost of capital; a 3.75% net margin will provide sufficient revenue. Thus,with PANN's income derived from a 10% interest rate included in its sale
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or lease calculations, it would be able to acquire 50% debt at a weightedaverage cost of about 12.5%, blending the 15% cost of funds from BAPINDOwith funds from the Government at 12%, and still earn an amount equal toabout 4% on its equity. 1/ These financing assumptions, used in preparingthe financial forecasts for PANN4, were agreed during negotiations. Detailsof the projections and assumptions used are summarized below and, togetherwith a procurement and disbursement schedule for PANN, are detailed inAnnex 6.
5.03 The total acquisition cost to PANN of the project ships (plustechnical assistance to PANN) to the end of 1979 is about Rp. 81.1 billion(US$195.4 million) including interest during construction and delivery costs. .fJOf this amount, PANN would contribute about Rp 3.1 billion (US$7.4 million)from its own cash generation. The balance of Rp 78.0 billion (US$188.0 mil-lion) is assumed to be made available in equal amounts of debt and equity. 3/With about Rp. 5.9 billion (US$14.2 million) of debt from BAPINDO funds, theGovernment will be obliged to provide at least an additional Rp 33.1 billion(US$79.8 million) as debt and Rp 39.0 billion (US$94.0 million) as equity,including the Rp 2.06 billion already provided (para 3.09).
5.04 PANN, having acquired new or used ships, or financed rehabilitationof existing ships in the fleet, will sell or lease them at acquisition cost,including interest during construction and delivery costs, if applicable, toqualified Indonesian ship operators. It is expected that about half of allof PANN's leasing will be to PELNI. Loans for sales of new ships, with aminimum 10% cash deposit and a 1% commitment fee, would be for a maximum of15 years, including six months grace after delivery and at an interest rateof 10% p.a. Leases of new ships would be for varying periods of time with amaximum of 15 years, at an interest rate of 10% with a 1% commitment fee,and would be payable quarterly in advance. Used ships of up to 10 years ofage would be sold to shipping companies at acquisition cost, with 10% downpayment and 20% on delivery of the ship, with financing over a maximum of10 years including 6 months' grace after delivery, at an interest rate of10% p.a. Leases for used ships would be on similar terms to those for newexcept that the maximum term would be 10 years. Sales and lease terms wouldprovide PANN with the net revenues noted in para 5.02. Leases will actuallybe of varying periods, on the expiration of which the leases would be revisedto reflect the depreciated replacement cost of the ships, as agreed duringnegotiations. The cost of rehabilitating ships would be recovered from theship operator over five years, including three months grace after delivery,at an interest rate of 10% p.a. and with a 1% commitment fee. As noted inpara 4.13, preparation of a program of rehabilitation and scrapping tiedto a specific program of used and new ship acquisition was agreed duringnegotiations.
1/ This ignores any earnings from reinvestment of surplus cash accruing toPANN which, over the period 1976-1992, would accumulate to over Rp 55billion. It is likely that the bulk of these funds would be re-investedon more ships, thus increasing PANN's earnings.
2/ Included here for conservative estimating. Included also is the acquisi-tion of the ships noted in para 3.09. See also Annex 6, Attachment 1.
3/ PANN's debt to equity ratio may rise from 50:50 initially to 65:35 bythe time procurement is completed.
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5.05 The cash flow for the period 1974 to 1979 (as given in Annex 6,Attachment 8), shows that the Bank's loan provides about 27% of the resourcesrequired by PANN to carry out the project. Cash generation by PANN during thisperiod is equivalent to 30% of the proposed loan. PANN would earn a net incomei1n 1978, by which time procurement is expected to be largely completed. PANN'sftnimces are detailed in Annex 6 and are summarized below for the period 1974-1982:
P.T. PANNProfit and Loss and Cash Generation, 1974-82
5.06 By 1980, when the project has been implemented, PANN's debt servicecoverage will be 1.5 its current ratio 1.9 and debt will be about 38% ofcombined debt and equity. These ratios are satisfactory.
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P.T. PANNBalance Sheet, 1980
Rp. million
Total Current Assets 8,271Net Fixed Assets 61,123Other 549
Total Assets 69,943
Current Liabilities 4,353Long Term Debt 24,790Reserve for Losses 818Equity 39,982
Total Liabilities and Equity 69,943
C. Tariff Implications of the Project
5.07 The RLS freight tariff, increased by about 20% in 1973, 20% in1974 and with a further increase of about 25% in 1975, is a commodity tariffbased on a constant factor plus a mileage allowance. It applies to shipoperations only 1/ and has been calculated to produce about an 8% return ontotal capital invested in a modern efficiently operated ship of a repre-sentative size on a representative route.
5.08 lIost existing ships have little or no book value. Therefore,aside from the inefficiency of operations, it might be supposed that thecurrent tariff would yield adequate returns. But the present poor financialcondition of most RLS companies and PELNI belies this. Poor productivity,diversion of cash flow from the industry because of outmoded pricing policiesand poor management are common. As costly new assets are introduced into thefleet by the project and leased to RLS companiess, their cash requirementswill increase sharply, even if company operations improve. The Governmenttherefore intends to continue a yearly review of planning for the inter-island fleet, including tariffs based on costs, and to make adjustmentsrequired to produce adequate returns on investments in shipping companies.This was discussed and agreed during negotiations.D. Financial ImpD. Financial Implications of the Project for PELNI
5.09 PELNI now makes profits only from terminal operations and steve-doring while its shipping activities incur losses. Partly due to closeconsultation among PELNI and its advisors, BAPINDO and the Bank, some im-provements have been achieved in PELNI's operations over the past two years.Additionally, in 1974 PELNI received about Rp. 2.8 billion (US$6.7 million
1/ Other tariffs are published for on-board and shore-side stevedoring,terminal operations, and forwarding. Port charges cover a separategroup of costs.
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equivalent) in new equity from the Government, with a further Rp 0.6 billion(JS$1.5 million equivalent in 1975, which was used to reduce medium andlong-term debt. Repair costs, particularly in foreign shipyards, and lossesin the catering department have been reduced. As a result of these and otheractions such as the freight tariff increases referred in para 5.07, losseswere reduced by over 75% between 1973 and 1975 (Annex 5, attachment 2). Asof December 31, 1975 PELNI was in arrears in repayments on account ofrehabilitation loans received from BAPINDO in an amount of Rp. 512 million.In the budget for 1976, a further Rp 2.7 billion (US$6.4 million equivalent)is expected to be received from the government as additional equity. Rp 1.7billion of this will be used to reduce long term debt. The remainder,together with additional debt of Rp 600 million and cash generation of aboutRp 900 million by PELNI will finance investment in ships and terminalfacilities (Annex 5, Attachment 4). Nevertheless PEL-I, whose losses in thefirst quarter of 1975 increased sharply, mainly due to an accident at sea,is forecast to earn a small consolidated net profit only in 1980, after theproposed project is completed. A small positive cash flow is estimated toappear in 1979, increasing annually thereafter. These forecasts, however,are based on the assumption of a 80% increase in productivity by 1979, withPELNI leasing half of the project ships. The assumptions are furtherdetailed in Annex 5.
5.10 Forecasts of important aspects of PELNI costs and revenues, usingthe assumptions noted in Para 5.09 and Annex 5 are set out below. They arecapable of being achieved only through an improved management and the im-provements proposed and referred to above.
5.11 Thus, about Rp. 6.9 billion (US$16.6 million) in cumulative lossesfrom shipping operations is forecast to occur between 1974 and 1979. However,the above figures take no account of any increases in tariffs arising fromthe annual reviews referred to in para 5.08; an increase, in real terms, ofabout 20% would be sufficient to enable PELNI to earn an annual net surplusits shipping activities. Assuming that the balance of the industry leasesthe remaining 50% of project ships, and that the position of private companiesis no worse than that of PELNI, 1/ the proposed tariff reviews should enablePELNI and other companies to earn revenues sufficient to repay leases andprovide, together with the measure noted in para 5.08, funds for future
1/ In fact the position of efficiently run private companies should bebe better than that of PELNI, as the latter has to operate certainunprofitable routes, due to assignments given by the Government.
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investment in shipping. Bearing in mind that PELNI's poor financial outlookreflects that of the whole industry, it becomes essential to set reasonabletargets for PELNI to achieve by the end of about 1979. The proposed manage-ment consultant study (para 4.22) is intended both to set targets for PELNIand to indicate what may be possible for the balance of the RLS fleet ifactions for similar recovery plans are taken. It will also be necessary toreview the position as more up-to-date PELNI results become available.
VI. ECONOMIC EVALUATION
A. General
6.01 The scattered geography of Indonesia, the fact that about two-thirds of the country's 130 million population are concentrated in thesmall island of Java, and that most of the natural resources are locatedin other under-populated islands, mean that shipping is of crucial im-portance for economic development of Indonesia. Implementation of many ofthe programs of Repelita II depends to a large extent on improved shippingservices which the proposed project is intended to help realize. Thetransmigration of people from over-populated Java to other islands, improvedagriculture and development of agriculture-based industries in the outerislands, and exchange of processed goods and raw materials between the moredeveloped Java and the other islands, all depend on shipping. In thisregard, providing adequate and reliable inter-island shipping services inIndonesia is similar in importance to the maintaining of an adequate landtransport system in many other countries. Herein lies the basic justificationof the proposed investment in shipping.
B. Traffic
(a) Freight Traffic
6.02 As projected in the Bank's First Shipping Project--appraisal re-port, total inter-island cargo traffic has grown at 7% p.a. from 2.8 milliontons in 1969 to 3.6 million tons in 1973. If traffic continued to grow at7% p.a. it would reach 5.6 million tons in 1979. The LTFD, however, hasforecast cargo traffic to grow about 15.5% p.a. for the 1974-79 period.Total inter-island traffic in 1979 was therefore forecast by LTFD to reach8.2 million tons, of which about 6.0 million tons would be handled by RLSships compared to 2.5 million tons in 1973. The LTFD forecast was basedon the assumption that the Government's plan for Repelita II would be fullyexecuted during the plan period. But there is now considerable uncertaintyas to whether the plan targets will be achieved. In view of this, theLTFD traffic forecasts for the RLS may well be optimistic. On the otherhand, in light of the recent quickening pace of development of the Indonesianeconcmy, the past rate of growth of 7% p.a. could very well be surpassedduring the Repelita II period and it is likely that the actual rate of growth
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of freight traffic to be realized would probably be somewhere between 10,'% and151%, but perhaps closer to 10%. Projections based on alternative assumedrates of growth are shown in Table 4.
(b) Passenger Traffic
6.03 In the immediate Post-World War II years, inter-island passengertraffic was between 600,000 and 800,000 passengers a year, growing at anaverage annual rate of perhaps 4%; it fell drastically to about 250,000by 1965; and then grew to about 350,000 by 1970; but fell again to 310,000in 1972 due to irregular and unreliable services (see Table 5).
6.04 The LTFD projected that passenger traffic would reach 976,000in 1979, an 18% annual compound growth during the seven years between 1972and 1979 (see Table 5). This is a very high rate of growth, but if shipsare available and reliable services are provided, it may be attained.
6.05 Additional passenger liner services are now planned only for theJakarta-Belawan service. On other routes mixed passenger/cargo vesselsare proposed. Passenger traffic does not, therefore, have an appreciableinfluence on the total tonnage required in the project; it only determinesthe number of ships that have to be equipped with passenger facilities.
C. Shipping Capacity and Productivity
6.06 The proposed project is intended to improve the average produc-tivity of the fleet through rehabilitation, and adding new and used ships.Increased average productivity depends on scrapping old ships, increasingthe number of days a ship is in service, i.e., not under repair, reducingport days, and on proper management and scheduling.
6.07 Average ship productivity in Indonesia, based on data providedby INSA, shows a low figure of nine to ten cargo tons per dwt for 1972. Eventhis low productivity level will rapidly decrease to the 1969-70 level offour or five tons if no rehabilitation of the old ships takes place. TheLTFD estimated that if about 80 ships of the 1973 RLS fleet with less than200 commission days a year were scrapped by 1979 and if 134 new ships hav-ing over 300 days per year operations were added to the fleet by 1979, theaverage productivity could increase to 17.7 tons per dwt. This productivi-ty level, however, could also be achieved if the load factor were to beincreased and the turn-around time shortened. These improvements dependon maintaining a regular and reliable schedule and on improved ship main-tenance and port operations and facilities. While the project will improveregularity of shipping services, improvement of port operations and facili-ties will take more time.
6.08 After rehabilitation, the number of service days per ship peryear would be considerably improved. New ships would be in operation forabout 330 days per year, and used and rehabilitated ships for at least260 days per year. On this basis, the average productivity could reach,aL least, about 15 tons per dwt.
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6.09 On completion of the proposed project, the number and tonnageof RLS ships would be as follows in 1979:
No. of Ships Total Tonnage
Existing Fleet /a(remaining in 1979) 106 140,200
New Ships Purchased 51 53,750Used Ships Purchased 55 59,500
Total 212 253,450
/ac After scrapping about 70,000 dwt of obsolete tonnage and rehabilitatingabout 54,500 dwt of useable ships.
6.10 Table 3 shows the shipping capacity required for each year be-twveen 1973 and 1979 on various assumptions regarding traffic growth and:tipping productivity increase. It is clear from the Table that the snip-pizg tornage after the completion of the proposed project would be adequatevo nandle the 1979 traffic volume either if the traffic grew only at 7%03.a., and 15 tons/dwt productivity is attained, or if it grew at 10% withaa asverage productivity of ,7.7 tons/dwt. If these conditions are notfaet, addItional shipping capacity would be required before 1978. Theanount of additional tonnage needed by 1979 in excess of that provided
tunder the project is dependent entirely on the rate of traffic growth andproductivity improlrement. These factors must be closely monitored duringproject execution, Because another shipping project would require at leasta year's preparation time, the basis for fleet planning should be set up assoou as possible. Agreement on an early start on this project preparationu'iork was reached during negotiations and funds for financing a study havebeen included in the proposed loan (Annex 4).
I. Economic Rate of Return on the Project
6.11 The estimated benefits of the nroject consist o. (i) reducedni? operating costs, (ii) increased snlp productivity, and (iii) increased
eco'aomic activity catered to by the additional shipping capacity. Benefitsunder (i) and (ii) are assumed to be realized by rehabilitation and thepurchase of used ships. The tonnage of net ships to be purchased representsadditional capacity and their benefits would accrue in the form of increasedeconomic development shown on (iii) above. Since data with which to quantifythe economic development effects are not available, the net revenuefrom ship operation based on the current tariffs are used as proxy for thebenefits of increased economic activity. Details of the estimates of benefitswill be found in Annex 9.
6.12 On the basis of a seven-year average economic life for the re-habilitated ships, ten and 20-year econoimic life for used and new shipsrespectively, the overall project would have a rate of return of about 18Z,with used ships alone having a return of about 19%, and new ships about 15%.
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Return on the rehabilitation part of the project is very high. The benefitsarising during the three-year project period alone are more than the totalcost of rehabilitation, which means that the return on this part of theproject is well over 100%.
6.13 The sensitivity of the calculated economic return was checked,based on assumed variations in both costs and benefits. Since benefitsare estimated on a very conservative basis, it is unlikely that their vari-ation would be large. On the cost side also, since the estimate is real-istic, no wide variation is expected except for price rises due to infla-tion. Inflationary price rises are likely to be offset by similar increaseson the benefit side since the benefits represent the savings in ship operatingcosts and the increases in revenues. In view of the above, the possiblevariations in costs and benefits are limited to 10%. If the cost aloneincreased by 10% with no change in the benefits, the project's economicreturn would fall to about 15%; also if the benefits decreased by 10%with no increase in the cost, the rate of return would be about 15%. Ifthe cost increased by 10% and the benefits decreased by 10%, the project'sreturn would be about 13%; in the unlikely event that costs increased by20% while benefits fell by 10%, the project return would be a little over11%.
VII. RECOMMENDATION
7.01 During negotiations, agreements were reached:
(a) with the Government that:
(i) it will adequately compensate PELNI, on abasis satisfactory to PANN and BAPINDO, in the eventthat PELNI would incur arrears to PANN or BAPINDOas a result of operations carried out at Governmentrequest (para 3.09 and 4.11);
(ii) it will cause BKI's ship classification standards toconform to those of an internationally recognizedclassification society (para 3.15);
(iii) a Financing Agreement satisfactory to the Bank willbe signed between the Government, PANN and BAPINDO tospecify: (a) the proposed lending terms and relendingterms, (b) that loans and equity v-ill be made availableto PANN in a regular and timely fashion related toPANN's needs, and, (c), that about US$15.0 millionof resources will be made available for the projectfrom BAPINDO (para 4.11);
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(iv) a program to scrap 70.000 dwt of shipping by December 31,1979 will be prepared by August 1976 and implemented inrelation to the acquisition and rehabilitation of projectships (para 4.13);
(v) a comprehensive maritime training program will becarried out (para. 4.25);
(b) with PANN that:
(i) auditors, legal counsel, and financial and techni-cal advisers acceptable to the Bank will be retained(para 3.M10);
(ii) the content of lease and sales documents; its procure-Tent procedures, and its "Policy Statement Memorandum"wi1l be satisfactory to the Bank (para 3.11 and 4.17);
(iii) it will hire an insurance executive, seek the mosteconomical fleet policies from national and inter-national insurance brokers, and purchase "all risk"'insurance onthe replacement cost of its ships (para3, ;6);
'c). with PA1,N and BAPITDO that:
(i) a contract, satisfactory to the Bank, between PANN andBAPINDO for BAPIN-0h to undertake appraisals of lesseesand Duyers of PZ'A7i ships will be concluded (para 3.10);and
(ii) copies of all appraisal reports and development agree-ments with shipping en arprises will be forwarded tothe Bank (para 4.19).
'i D02 A condition of loan effectiveness would be that the financingagreement, satisfaztory to the Bank, para ;>o01(a)(fii,i and the Project!greement would be signed (para 4.06).
The project forms a suitable basis for a Banik loan of US$54.0vlll3ion to the Government of Indonesia to be repaid over a period of 15y7ears including three years of grace.
April 1976
ANNEX 1Page 1
INDONES IA
APPRAISAL OF A SECOND SHIPPING PROJECT
Progress of Ship Rehabilitation Project (Credit 318-IND)
Introduction
The credit for US$8.5 million equivalent was signed on June 29,1972 to finance a project consisting of:
(a) a rehabilitation program to repair about 160,000 dwtof Inter-Island and Regular Liner Service (RLS) shipping(US$7.0 million);
(b) provision of technical assistance for three shipyards(US$1.5 million); and
(c) provision, via UNIDF and blatera-'l aid, of technicalasisistance for 'the. establish-ment of a Naritime CreditDepartment in the State Developmenc Baank (BAPINDO), f'ra fong-term fleet developiment studv, and for technicalassistance to the Indonesian ship zlassif'cation or-ani-zatio,n and to thie Indonesian National Sh4powners Associa-ti,on (INSA)
T],4R project is progrSslcg slowlj;, but sli funds for sL,p rehabili-tacton art. exe cte Lbte o tite; b-y t-e enid of ?9,76 or early l 97 T heBank h'Pas agreed to the request of z½.he C > .e rnment tc exterd t ne cl½sing d a t eu.sntii SepteMber 30, 1977, All of lhe crfi ginal cosnltant Service contracts(,for shipyard assistance, advisory to T'S3, an. ad visors to BAP3INDWI, whichfiaanced 'the rehab fl.tanLoz) have t:pi red Onl'y Lhe last noted was extendedto February 1976. Thi'ze services wV,Iz. xe extended -until Febrsary 1978under the Proposed second shipping loan.
iio BAPINDO has cortiitted about 78t of e credit. Delays in Bankdisbu-, sements are attrLbutable to.-:o 'leng4phy repair time, delays in schedulingrepairs, and slowness in applying for rd imbursement. Steps are being takento reduce these delays. Due to the long tiTWe elapse. between initiatingship surveys in early 1971 and commencement of lending in mid-1973, the poorquality of some of these surveys, cessation of normal repairs and consequent
ANNEX 1Page 2
further deterioration in the ships after the initial surveys, lack of en-foreemient of rules by Goverfnment and the resulting sharp cost increases,the available funds will repair only about half of the tonnage originallyestimated to be repaired under the rehabilitation program.
Progress of the Pr_iSct
1. The project which, in addition to funds rrom Credit 318 uses fundszricO an Industrial Credit (Credit 310-IND) is progressing slowly. A sumaryof the situation as of December 27, 1975 is as follows:
Cr. 310 Cr. 318 Total
V.N ships rehabi.)Jttated or io progress 13 29 42No4 to be rehabu1d.1tated by '9/30/77 /a - 13 13f, I 0I 930/ 7 7 13 42 55
Diea& eight tornnage 168,000Project costs ($000) 11,400.ost per deadweight ton 67.86
/a Including US$897,000 of projects finhncced by BAPINDO's own funds.
2, A number of ships which were li cnsed in the RLS at the time ofapppraisal and wnhch subsequently Lad becn :emporarily licensed for use on0onean routes, were rehabilitated unde-r Credit 310, This was due to thewording of the Lce-n Agreement for Credit 318 which Unimted lerding tolicensed RLS inter-island ships. For purposes of assessing the rehabiicitationscheme, those ships rehabilita.;e under CreS`.z 310 should be included in thetotals. There were 10 ships ir this categet-&- total'ling 21,7/.. The repair
of these ships involved sub-prcjects of US$1 9 million including BAPINPJOloans of US$1.5 million. IDA reimburs.m-nents of US$1.2 i1n,.lion fc-r tcaeseprojects hnas beern made under Credit 310. in addition, BAPINDO his loanedabout US5200,000 of its own funds for ship rzs?airs for three ships 3durt) ) .
ANNEX IPage 3
3. Thus, the total ship rehabilitation program will eventually pro-bably involve 55 ships of 92,141 dwt; repairs of US$13.95 million; BAPINDOloans of US$11.6 million; and IDA reimbursement, both already received andexpected, of US$8.2 million. All of these expenditures are likely to becommitted by the end of 1976 or early in 1977.
4. While IDA disbursement approvals at February 29, 1976 of US$5.3million (US$4.2 million under Credit 318 plus US$1.1 million under Credit310) are lower than the estimate during appraisal - US$8.4 million as ofDecember 31, 1975 - the shortfall is due to (a) substantial time lags resultingfrom the finalizing of shipyard accounts which the shipowners do not want toaccept, or pay for, until presented and (b) disputes arising after presentationin which more time is lost while a final account is developed. As some (inmost cases, much) work is added and done after the original repair estimateand contract has been made, such disputes are inevitable. In an attempt toimprove the pace of disbursements, BAPINDO has now insisted on progresspayments being made under ship-repair contracts. Heretofore, the IDA pro-hibition against retroactive finance has weighed against BAPINDO paymentof all or part of an account, in case unexpected delays were to stretch outthe repair period and imperil further reimbursement by IDA. Contracts arenow to be signed in advance of repairs which authorize up to 50% of coststo be reimbursed prior to completion. This will speed disbursements. TheAssociation has agreed to waive the 90-day rule in such cases. As of mid-December, 1975 two such contracts have been signed.
5. Nevertheless, for inter-island ship rehabiiitation the two Creditstaken together are being utilized financially about as was expected forCredit 318. Measured against expectations of physical achievement, theCredit will have accomplished less. At the end of 1975, 27% of the expectednumber and 41% of the expected ttonnage of ships have been rehabilitatedwith total project costs of US$8.8 million as of that date. By the completionof the project on September 30, 1977, 39% of the expected number of shipsand about 55% of the expected tonnage could be rehabilitated by the US$13.95million of projects noted in para 3. The eventual total dollar value ofrepairs was expected to be US$11.4 million at the time of appraisal. Thiswas estimated to result in the repair of 142 ships totaling 168,000 dwt.Sharp cost increases - from an estimated US$67.86 per dwt to an average ofUS$151.40 per dwt - are accounted for by price changes, original underestimates of the work, and rapid deterioration of ships because of poormaintenance in the two-year period from the original surveys until theactual work was started. It is difficult to apportion the increased costbetween these items, but a reasonable estimate of the US$83.54 per dwtdifference (123% increase on original estimate) is as follows:
Accounted for by:
(i) Original physical contingency 5%(ii) Added physical contingency reflecting poor
original survey 17%
ANNEX I
Page 4
(iii) Original price contingency 15%(iv) Added price contingency (1971-74) 50%(v) Increased cost of deterioration and poor
maintenance 36%
Weighted Average Increase 123%
6. Many of 142 ships originally surveyed have been scrapped, manyare no longer in the RLS (though they may be sailing), and some wererepaired to a lower standard. A number of applications, made prior toJune 30, 1973 deadline (which had to be met if access to an interest rateof 9-1/4% was to be protected) were withdrawn after mid-1973. Uncertaintiesfollowing the January 15, 1974 riots in Jakarta also caused some furtherwithdrawals. The Credit was slow in being utilized by the privat:e sector,but was vigorously pursued by t:he state shipping company. As of December,1975 BAPINDO had committed loans to nine borrawers for a total of US$8.98million.
7. In early 1973, BAPINDO estimated that it would be feasible torehabilitate only 89 of the original 142 ships surveyed in 1971. Of the 89,32 have been committed under Credit 318 and 7 under Credit 310, and 6 havebeen repaired by BAPINDO funds. A further 9 await final decision, 21 werewithdrawn, and 14 were rejected. The balance, plus some of the ships notedpreviously as withdrawn or rejected, have either been scrapped or are stillsailing with special dispensation from laws which restrict their operationif not classified by the Indonesian ship classification society, BiroKlassifikasi Indonesia (BKI).
8. Four consultant contracts, each of 2 years duration have beencorapleted. Two of these involved technical assistance to three shipyardsand resulted in some substantial improvement in the quantity and qualityof work undertaken. Two of the shipyards in question are the subject ofjoint venture negotiations with a foreign shipyard. Another consultantcontract involved UNDP-finance and Bank executed technical assistance toINSA. This was less successful becausL of the reluctance of shipowners'to avail themselves of the services provided.
9. A fourth consultant contract for advisory services rendered to thestate bank, BAPINDO was extended for a third year and expired at the end of1975. This contract for services of a financial and technical adviser wasfinanced by UNDP and was once more extended to February 1976. It has beena successful and important part of the project. The contract for twoad.visors has been further extended to February 1978 as part of the proposedlcpan and will assist in further rehabilitation to be undertaken during 1976and 1977.
10. Credit 318 is expected to be committed by the end of 1976, or early1977, unless PELNI does not borrow from BAPINDO to rehabilitate five eligibleships with an estimated repair cost of US$1.465 million, now under consider-ation. Additional ships will be rehabilitated under the proposed secondshipping loan.
April 1976
ANNEX 2Page 1
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Transport Planning and Non-MaritimeTransport Activities in Indonesia
The Transport Sector
General
1. The Indonesian transport system depends chiefly upon inter-islandmarine services as well as upon highways and railways. The marine servicescomprise Regular Liner Service (RLS) between specified ports as well asunscheduled (tramping) services and ocean going shipping. Land transportis well developed in Java with an extensive railway and highway network,whereas in Sumatera railways have only been developed in some parts, andthe road network provides the basic links between principal cities. Onthe other islands, except for a small railway on Madura, facilities arelimited to a few roads in areas around ports and towns. Air transportvolume is still small but has increased rapidly in the last few years.
2. GDP was the equivalent of about US$16.3 billion in 1973 or aboutUS$130 per capita. The economy grew during the First Five-Year Plan and in1975 at over 7% p.a. The Second Five-Year Plan projects continuation of thegrowth pattern from the previous plan period but with greater emphasis onindustrial expansion, particularly in basic industry; transport is projectedto grow at the rate of 10% p.a. With the increase in oil prices, substantialnew resources have become available to the Government and have already beencommitted to expanding investment. Indonesia's export earnings are expectedto rise further from US$4.4 billion in 1974 to US$11.4 billion in 1980 andto provide the necessary foreign exchange and savings for additional increasesin the rate of investment. The Government is also stressing the balanceddevelopment of all regions in Indonesia and the opening up of remote areas.All the foregoing trends will place large new demands on the transport systemand may well require transport to be expanded in excess of the projected 10%p.a. if the demands are to be met.
3. The Government's strategy as set forth in the Second Five Year Plan(Repelita II) is to continue the rehabilitation program for infrastructureincluding the gradual upgrading of the country's existing transport facilities.This will be supplemented by the provision of new infrastructure for (i) ex-ploitation of newly discovered resources, (ii) support of the Government'sregional policies and (iii) improvement of rural transport infrastructure.
4. The contribution of transport to GDP virtually stagnated for mostof the 1960's but grew at nearly 11% p.a. in constant prices over the FirstPlan period as the economy recovered. The Government's policy in the First
ANNEX 2Page 2
Five-Year Plan emphasized rehabilitation of transport facilities and thecondition of infrastructure and the transport fleet has improved markedlyas a result. In addition, some fleet expansion took place, particularly inroad transport and aviation. The primary aim of the Government's SecondFive-Year Plan in the transport sector is to create substantial capacityincreases both by additional investment and by improved productivity, throughcompletion of unfinished rehabilitation work and further strengthening ofsectoral institutions and organizations.
5. As a result of its enlarged oil income, the Government has expandedexpenditures under the 1974-75 and 1975-76 development budgets over thelevels projected in the Second Plan documents. The increase for transportis almost the same as for the budget as a whole and, other than differentialacceleration of expenditures in some transport activities, the Governmenthas not indicated a shift in its sectoral strategy. Over the Second Planperiod, investments for transport in the public sector (assuming continuationof development expenditures at increased levels) and by the private sectorare estimated at about Rp 1,800 billion (US$4.3 billion, in 1973 prices)roughly 17% of total investments; about 56% of this will flow through thepublic sector under various central and local governments' development bud-gets with the remainder being financed privately, particularly for thepurchase of road and other transport vehicles. While investment projectionswere based on very limited data, particularly regarding local governmentexpenditures, the proportion devoted to transport falls within the rangemost frequently observed in similar economies.
Transport Planning, Policy and Coordination
6. Responsibility for planning and policy formulation in the transportsector is divided at the national level between two departments, Department ofPublic Works (DPW) for roads, and the Department of Transport, Communicationsand Tourism (DOC) for other modes. Investment proposals are formulated at themodal level in these departments and then submitted by them to the NationalPlanning Council (BAPPENAS) for review. Project proposals, which normallyinclude cost-benefit analyses, are then individually reviewed and approved bythe Ministry of Finance. Project cost-benefit analyses are frequently made byconsultants and thus have not represented an overwhelming burden on thelimited number of Indonesian transport specialists. Nevertheless, as thenumber and complexity of analyses is increasing, the Government intends toemploy one or two expatriate experts financed under an IDA Technical AssistanceCredit (275-IND) to help the MOC in reviewing investment proposals from itsconstituent agencies.
7. Modal planning is hindered by the lack of trained staff and by thelimited and irregular flow of data. Nevertheless, planning of highways inDGH has been greatly strengthened in recent years with the assistance of theHPAT and will receive significant assistance under the proposed loan. Rail-way planning will be improved under the current Bank loan for the railways,and national ports planning, which is urgently needed to coordinate theports with each other and with shipping and land transport, will be givenspecial attention in the proposed Bank loan for the port of Jakarta (para
ANNEX 2Page 3
1.04 and Annex 1). The Government has initiated training programs for trans-port planning staff and is pursuing several means to improve the availabilityof information, among them the provision of another expert financed fromTechnical Assistance Credit 275-IND to work with DOC on data problems. Thetraining of Indonesian staff as well as improvements in modal planning anddata operation will take time and it will be some years before these essen-tial prerequisites to a national transport plan and to improved transportcoordination will become available.
8. The Government wields considerable influence over the operationof the transport system, not only through provision of infrastructure andownership of important transport enterprises in all modes but through ratesetting and other regulatory activities. While it has not formulated anexplicit transport policy, the Government has identified areas requiringspecial attention, particularly financial objectives and control of publicsector transport firms and pricing policy. At present, accounting systemsvary widely among sectoral enterprises and means are not available tocompare financial performance or to set standards. The Government's deci-sion on rates must frequently be made without analysis of costs, demandfactors or the effect on competing modes. Two experts, financed fromTechnical Assistance Credit 275-IND, are now advising DOC in these areaswith the aim of making the Government's activities more consistent andeffective, improving the return on its investments in the sector and ensur-ing that it considers all relevant economic factors in transport pricing.Improved information is also considered vital to better sector managementand will be aided by the measures described in para 2.09.
Road Transport
9. The extra-urban public highway network totals 86,264 km. The roadsare classified as "national" (10,628 km), "provincial" (24,466 km) and "dis-trict" (kabupaten) (51,170 km), indicating their relative importance andthe basis for defining administrative, financial and executive proceduresassociated with construction and maintenance. In addition to the publichighway network, agricultural estates and oil companies construct and main-tain their own roads. Tables 1 and 2 show the public network by classifica-tion and by surface type.
10. In 1974, registered four-wheel vehicles (excluding military anddiplomatic) totalled about 535,000 of which 338,000 were cars, 166,000trucks and 31,000 buses (Tables 5 and 6). The number of vehicles actuallyin use is considerably less; on the basis of 1972 inspection records, onlyabout two-thirds of trucks and buses registered were then on the road.The rapid expansion of vehicle registrations over the last five years (bynearly 70%) has been reflected in a significant reduction of the averagevehicle age which dropped from 12.1 years in 1969 to 10.6 years in 1972.Most trucks still have only two axles but recent additions to the fleettypically have somewhat higher carrying capacities than the older vehicles(previously about 3.5 m tons, now 4 to 5 m tons).
ANNEX 2Page 4
Railways
11. Railways are confined (with one minor exception in Madura) totwo islands: about 4,700 km on Java and 2,000 km on Sumatera. The rail-ways, which were built during the 70 years prior to World War II to moreprimary commodities to foreign markets, suffered with declining exportsin the 1950's and 1960's and, as with most public infrastructure inIndonesia, they were allowed to deteriorate. Limited rehabilitationtook place during the First Five-Year Plan and freight traffic recoveredsignificantly, at about 7% p.a. in m ton-km, while passenger trafficafter many years of decline is starting to show an upward trend. Dueto long neglect in replacing of overage assets and poor maintenancefacilities, railway operations have remained deficient.
12. With better performance, the railway could continue to make animportant contribution to the economy, especially along high densityfreight corridors in Java and on certain sections of the Sumatera railwaynetwork and in moving the growing volumes of industrial bulk commodities.Accordingly, the railway has formulated a comprehensive program of modern-ization and rehabilitation coupled with technical assistance which formedthe basis of a Bank Railway Project (Loan 1005-IND), in June 1974, and ispresently being implemented. The proposed action program, which hasrecently started, includes acquisition of locomotives and rolling stock,improvement and modernization of maintenance of assets, reorganizationof management, further phased staff reduction and modernization of account-ing. Important performance targets have also been agreed: by 1979-80,the railway is to cover all operating costs including depreciation and earna small return on investment (1-1/4%); average net train loads are expectedto be increased in Java from 110 m tons in 1973 to 162 in 1979 and carturn-around time reduced from 8.3 to 7.3 days.
Inland Waterways
13. Commercial river transport extends to 10,000 km of navigablewaterways. The most important river traffic is logs. Fourteen rivers inKalimantan and Sumatera totalling 4,000 km were recently studied by con-sultants, Research and Development (Belgium), and the Government is in-stalling better navigational aids but no major improvement works arecontemplated. The Government is also planning to expand "pioneer" servicesby river craft in some of the remote regions.
Pipelines
14. Pipelines are under the control of the state-owned oil company,Pertamina. A product pipeline from Cilacap to Jogjakarta is already inuse; another line from Cilacap to Bandung is presently under construction;when open it will divert significant amounts of petroleum products fromthe railway. A gas gathering pipeline system was financed by IDA in 1972in Sumatera to supply gas for the PUSRI II fertilizer plant (Credit 193-IND)
ANNEX 2Page 5
and will be extended to supply PUSRI III and PUSRI IV under Bank Loan1089-IND. Another gas line is under construction in Java to supplygas for the proposed West Java fertilizer plant at Jatibarang and a steelplant near Merak.
Aviation
15. In 1972 about 95% of domestic civil air traffic movement inIndonesia passed through 27 airports (about one-third of these movementsthrough Jakarta) and recent improvements were concentrated in these fa-cilities to permit use by modern aircraft which could handle the rapid risein traffic most efficiently. As a result, 19 airports can now accept jetsas against only 3 at the start of the First Plan. While landing fieldshave been improved, substantial deficiencies persist in aeronautic communi-cations, navigational aids and air traffic control. In line with the rapidrise in traffic (nearly three times between 1968-1972), the capacity of thecivil aviation fleet has been expanded and the types of aircraft diversified.The number of planes has, however, been reduced with the replacement of lowcapacity older aircraft by more efficient equipment. Most of the needs inthe aviation subsector are for equipment for which bilateral financing islikely to be available. The Government is studying the construction of anew international airport for Jakarta and is presently reviewing a reporton this subject by consultants, Aviation Planning Services (Canada). Duringthe Second Plan, the Government also intends to promote the construction oflanding fields in the remote districts which will be provided with a sub-sidized service by low capacity aircraft.
April 1976
ANNEX 3Page 1
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Summary of Consultants' Analysis of Existing Regular LinerService Fleet and of Fleet Expansion Alternatives
Introduction
1. Consultants (Maritime Research Centre, Netherlands) retained bythe Government and financed by Netherlands aid, made a study of the inter-island and Regular Liner Service (RLS) fleets in connection with the LongTerm Fleet Development Study (LTFD). A sum-ary of their analysis andproposals for provision of transport services over the period 1975 to 1979is given below. Indicative forecasts were then made up to 1990.
Aging of the 1973 Fleet
2. There were about 324 ships registered in the inter-island fleetin 1973, of which 187 were licensed to operate in the RLS. For analyticalpurposes, and to assist in making projections based on scrapping, tradeforecasts and ages of ships, the Consultants studied changes in the inter-island cargo fleet between 1972 and 1973, (Attachment 1) because vesselscould be shifted among the various sections of the fleet according to thelicensing process. Licensing is related to seasonal needs for shipping;to the requirements of the Government for meeting needs in out-ports notnormally served regularly; and to the ebb and flow of trade to nearbycountries, for which trade some of the inter-island fleet is suitable.
3. The Consultants carried out detailed studies of the inter-islandfleet structure in the base year 1973 in order to gain an insight intowhat might be the attrition to 1979, the first forecast year, assumingcertain scrapping. The 1979 fleet was then forecast using replacement forscrapped ships and with certain assumptions concerning ship productivityand cargo availability, and routes.
4. The details of the 1973 fleet are given in Attachments 1 and 2.In broad outline the tonnage and age structure of the RLS fleet of 187ships in 1973 was:
ANNEX 3Page 2
dwt Year of Build (Age)
Under 600 33% prior to 1955 (+20) 35%600 - 1,000 31% 1955 - 1964 (11-20) 53%
1,000 - 2,000 24% after 1964 (0-10) 12%Over 2,000 12%
100% 100%
The aging of this fleet to 1979, assuming no scrapping, would mean thatmany ships would be over 25 years of age by that date. As the useful andeconomic life of ships in Indonesia is currently estimated to be under 20years, large numbers would have to be scrapped. Of the 324 ships in the1973 inter-island fleet, 118 or 36% would be over 25 years old in 1979.Figures for the RLS section are similar, but by deadweight classes theyvary substantially. While no ships of 3,000 to 4,000 dwt would be over25 years old in 1979, 50% of the 1,600 to 2,000 dwt class, 52% of the 400to 800 dwt class, and 41% of the 1,200 to 1,600 dwt class would be in thatcategory.
Rehabilitation
5. The Consultants studied the possibilities for further rehabilita-tion of ships in the 1973 fleet and concluded that only 10 ships, in add'tionto the 53 then reported by BAPINDO likely to be rehabilitated under theFirst Shipping Credit, would be rehabilitated by the end of 1979. Thisestimate was based mainly on age but also on cost estimates made early in1973. Since then, with sharp increases in the cost of new and used ships,rehabilitation became economically attractive even at costs substantiallyin excess of the current average cost of US$146/dwt. This is shown in thecalculations below which have been made by Bank staff.
Assumed Lease Costs (Capital Only)Rehabilitated Used New
Ships Ships Ships
Cost per dwt $200 $700 $1,800Lease Terms 5 yr. at 15% 10 yr. at 15% 16 yr. at 15%Annual Cost, dwt $ 59.60 $139.30 $302.22
Add Other Costs:
(i) Costs of non-standardizedships (+15%) $ 68.54 $160.19 -
(ii) Use of less ProductiveShips (+6%) 72.65 169.80
Total Cost Ratio 1 2.3 4.1
ANNEX 3Page 3
6. Even assuming a greater penalty in costs than allowed for in theabove figures, the attractiveness of rehabilitation and the high cost ofnew ships is evident. Of the 1973 fleet of 187 shiLps, 81 units were foundto be in good condition, 45 in barely acceptable condition, and 61 in poorcondition. As deterioration will continue among the non-rehabilitated ships(unless the operators substantially alter their maintenance procedures),a further decline in the availability of the fleet for operations is implied.Unless rehabilitation increases, scrapping of many more than half of the118 ships to be over 25 years of age in 1979 is likely.
Commission Days
7. The Consultants, working with indicative 1972 data, concludedthat only 35% of the fleet operated more than 300 commission days per year;t8% of the fleet achieved between 200 and 300 commission days; and 45% hadless than 200 days per year. Adjusting the available data to show commissiondays according to age of ships in 1973 revealed that the proportions hadshifted so that 41% had over 300 days and 40% had under 200 days. ThisLfnprovement was a short-term result of the rehabilitation program and re-f'lected the increased traffic available which induced ship owners to repairtheir ships and to operate them more efficiently.
1973 Fleet Capability in 1979
8. Consultants assumed that rehabilitated ships could operate forover 300 days per year and that proper maintenance would take place afterrehabilitation as a result of loan agreements calling for annual dry docking.It was further assumed that 10% of the old ships with good performance wouldsurvive by the end of the seventies, while 20% would have reduced perform-ance (from 200 to 300 days p.a.). The balance (70%), would show poor per-formance of under 200 days per year. Finally, they assumed that half ofthe ships built from 1955 to 1965 would show a lower technical availabilityby the end of the decade than currer':ly.
9. Available records and estimates were then used to calculate probablecommission days according to size class. This analysis indicated that about80 RLS ships, all likely to have under 200 commission days per year, shouldbe scrapped in the 1973 to 1979 period.
10. Seventy-two of the 80 ships proposed to be scrapped were builtprior to 1955, 8 were built between 1955 and 1964. A scrapping programtotalling 70,600 dwt was proposed for 1975-1979, with from 12,000 to 20,000dwt scrapped per year. It was also clear that, without further rehabilita-tion, the efficiency of the 1979 fleet would not be sufficient to meet theproductivity levels indicated to be required in order to carry the forecastcargos available. To the extent, then, that further rehabilitation is notcarried out, more new ships will be needed to provide for the forecast cargoavailability.
ANNEX 3Page 4
11. These assumptions led to changes in the 1973 RLS fleet forecastto be available in 1979, as shown below:
Number of Ships Forecast to beAvailable Each Year To Be
There will be only 106 ships, or 57% of the 1973 fleet available for opera-tions in 1979. Even this number will not be available unless the rehabilita-tion and repair of ships is continued.
Replacement and Expansion
12. In order to obtain the number of ships to be required in 1979,Consultants projected the yearly increase in traffic from 1973 to theforecast 1979 level. Productivity of the RLS fleet in cargo tons carriedper deadweight ton was 12.2 in 1973, far below the levels obtainable withproper operations but significantly above the 9.0 tons/dwt recorded in1972. Forecasts of yearly productivity to reach a target of 17.7 tons/dwtwere made by the Consultants based on a variety of factors including esti-mates of unloading and loading efficiency to be attained in the ports.These forecasts were used to estimate the yearly shipping tonnage requiredeach year as shown below. A building program was derived from this:
13. Consultants then studied two processes by which the 1979 fleetcould be expanded to meet forecast requirements. One process involvedadding only new ships, the other involved adding a mix of new and used
ANNEX 3Page 5
ships. These estimates are given below and include some small ships whichwould be phased out of the RLS though they are currently sailing in thatfleet.
1979 FLEET FORECAST
Alternative I Alternative IIRemain- Adding RLS Adding Adding Remains RLSing 1973 New Fleet New Used 1973 FleetShips Ships 1979 Ships Ships Ships 1979
Ia These ships, while sometimes now used in the RLS would not be so usedafter 1979.
14. Addition of 56 secondhand ships of the 700 and 1,500 dwt classesfrom among ships built prior to 1965 was proposed. The fleet including usedships was assumed to have slightly less productivity so that a total of 252ships rather than 235 ships of the major RLS classes were considered to benecessary. Of the ships to be added, 21 of the under 1,000 dwt, 44 of the1,000 to 2,000 dwt class, and 10 of the over 2,000 dwt class were judged torequire passenger accommodations.
j5. Thus the recommendations for shipping until 1979 were for fleetexpansion and replacement via:
(a) Used and New Ships
26 used ships of 700 dwt 18,200 dwt30 used ships of 1500 dwt 45,000 dwt
63,200 dwt90 new ships of 1400 dwt average size 126,000 dwt
(b) New Ships
49 ships of 945 dwt 46,305 dwt72 ships of 1650 dwt 118,800 dwt13 ships of 2350 dwt 30,550 dwt
195,655 dwt
ANNEX 3Page 6
Long Range Requirement
16. Based estimates of 21.6 million tons per year traffic and shipproductivity in 1990 of 25 tons/dwt, the Consultants estimated that, afterallowance for scrapping, the following number of new ships would berequired between 1979 and 1990.
125 ships of 945 dwt 118,125 dwt212 ships of 1650 dwt 349,800 dwt149 ships of 2350 dwt 350,150 dwt
818,075 dwt
17. Investment in ports, excluding dredging and beaconage, would berequired at a level of about Rp. 27.0 billion per year to 1990 in order toaccomplish the hanlding of 25 tons per dwt of shipping, the Consultantsestimated.
April 1976
INWjNES'-A
APPRAISAL OF A SECOND SHIPPING PROJECT
Age and Deadweight of Inter->sland Fleet as of lb June 1973(OOO'e of Tons)
Source: List of Inter-island Shipping Companies and their Fleet (activities 1972-1973); issued by theDirektorat Lalu Lintas Dan Angkutan Laut; June 14th 1973.
Apri- La
INDONESIA
APPRALISAL OF A SECOND SHIPPING PROJECT
Age and Deadweight of Ligenmed RLS Fleet as of 114 June 19273(Number of Ships)
Source: List of Inter-island Shipping Companies and their Fleet (activities 1972-1973); issued by theDirektorat Lalu Lintas Dan Angkutan Laut; June 14th 1973.
.pri-L .L970
ANNEX 4Page 1
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Technical Assistance and Training Program andMain Points to be Included in Consultants'
Terms of Reference
1. There are twenty technical assistance projects related to theshipping project. Of these, five, costing US$705,000 equivalent, arenow financed by German, Japanese and Netherlands bilateral aid for periodsof up to two years. Seven technical assistance projects with an estimatedtotal cost of US$2,424,000 equivalent will be financed by the NorwegianAgency for International Aid (NORAD). One of these seven (US$510,000equivalent) is the provision of funds to extend the current German pro-jects of assistance to Biro Klassifikasi Indonesia (BKI) should continuedGerman aid not be available after July 1976. Two projects (US$414,000equivalent) are based on UNDP projects which were in an advanced stageof negotiation prior to the reduction of UNDP funds.
2. The proposed Bank loan will finance the balance of eight pro-jects with an estimated cost of US$4,046,000 equivalent. One of the pro-jects (US$245,000 equivalent) replaces UNDP financing for a project for whichfunding has expired. Another project (US$560,000 equivalent) provides forcontinuing two projects now financed by Netherlands bilateral aid, should thataid not be available after the planned expiry dates in March 1977.
3. Thus a total of US$6,470,000 of technical assistance is directlyrelated to and is included in the project finance. Of this 37% (US$2,424,000equivalent) will be supplied by NORAD and the Government, and 63% (US$4,046,000equivalent) by the Bank and the Government.
4. NORAD and the Government agreed with the Bank that all terms ofreference for experts NORAD will finance will be discussed and agreed withthe Bank. NORAD will also supply information to the Bank on the trainingprograms to be financed by Norway. The Bank has received assurances from theNetherlands that the Directie Internationale Technische Hulp (DTH) would bewilling to act as a contractor in extending the two projects referred toin para 2 above.
(a) On-going Projects
5. The Federal Republic of Germany has extended its technicalassistance by consultants, Germanischer Lloyd (GL) to BKI until July 1976.
6. Japanese shipping advisors to SEACOM and crew training andcommunications advisory services have been arranged until 1978.
ANNEX 4Page 2
7. Netherlands advisory teams for management assistance to PELNI(72 man-months) and for planning services to SEACOM (72 man-months)expire in Mlarch 1977 (para 2, above).
(b) New Projects
8. New technical assistance projects are required for assistanceto PANN; for training marine officers and engineers and shipyard workers;for a revision of maritime regulations; for a management consultantreview of PELNI; for additional maintenance and training services; andfor economic and planning studies. These are described below and are sum-marized in Attachment I to this Annex.
9. PANN will require assistance in procurement and supervision ofnew ship construction, in organizing the financial arrangement with lessees,and in assessing prospective charterers of ships it acquires. It willrequire assistance with the procurement of used ships which may be located,and must be inspected, in widely spread geographical areas at unpredictabletimes. Consultant naval architects/surveyors, legal counsel, and residentfinancial and technical advisors will be retained under terms of referencesatisfactory to the Bank to provide local and overseas advisory servicesand liaison in Indonesia,, particularly for the procurement of used ships.Ninety-two man months of such services will be financed by NORAD. Financialservices and advice to PANN would be rendered by BAPINDO on a mutually agreedbasis satisfactory to the Bank. PANN, with the agreement of the Bank, would
also retain shipbrokers to be its exclusive representatives in solicitingoffers for the sale to PANN of used ships. The two resident advisors forfinance and technical matters would be appointed with the agreement of theBank using terms of reference approved by the Bank. NORAD will finance 48 manmonths of these services.
10. Training Assistance, both in the form of equipment and instruction,is essential to improve the quality and increase the number of officers andengineers. The latter have the main responsibility for maintenance, which ispoorly done in Indonesia. The program is based on an existing proposaldeveloped over the past few years with some bilateral assistance, to doublethe output of maritime establishments to 400 persons per year within fiveyears. UNDP had been asked by the Government to fund the program and a pro-ject document for an initial survey of requirements had been agreed. TheInter-governmental Maritime Consultative Organization (IMCO) had been design-ated as executing agency. Due to the shortage of UNDP funds this project wasdeferred and the Government asked the Bank to include funds in the proposedloan for this project. This has been done and, due to the unique circumstancesand the experience of IMCO, the Bank has agreed to IMCO carrying out the train-project, subject to the Bank's agreement on terms of reference and the list ofing equipment required. IMCO would procure the agreed supplies and equipmentunder procedures contained in the Bank's "Guidelines for Procurement," asagent for the Government, and the Bank would disburse to suppliers directly.
ANNEX 4Page 3
11. A shipyard training center, the first stage of which is to befinanced by NORAD, will be surveyed and organized in Indonesia inconnection with the local ship construction program.
12. Revision of Indonesian maritime regulations: These regulations,currently applicable to inter-island shipping, are out-of-date and arebased on 1935 Netherlands regulations. A revision is overdue and theprospect of increased shipbuilding and of ship acquisitions resultingfrom the Government's maritime expansion plans, makes such a revisionurgent. Technical assistance for an expert for about 18 months is re-quired for producing a draft of revised regulations. This procedure waseffective in the Philippines and is practicable in Indonesia. The expertwould be financed bv NORAD and his terms of reference have been agreedwith the Bank. Implementation of the regulations may be undertaken inconnection with further Bank involvement in the sector.
13. Assistance to PELNI: PELNI, the major state-owned shippingcompany, has received bilateral technical assistance in the form of ad-visory services since 1970 and from a team of advisors since 1973. Thecompany has improved its operations somewhat with the advice of thisteam. It has 57 ships in operation, 21 of which have been rehabilitatedwith funds derived in part from the Association's Credits 318-IND and310-IND. Its fleet is, then, in reasonable condition. The company hasloan agreements with its banker, BAPINDO, made in connection with reha-bilitation which refer to implementation of certain recommendations ofthe bilateral advisors. Nevertheless PELNI has not been able to succes-fully control its costs or to increase substantially its proportion ofsailing days to days in service. It is currently in arrears on its pay-ments on loan made by BAPINDO. A management consultant is required toreview the company's status, structure, operations, management, and tech-nical capabilities, and draw-up a timed p'lcn of improvement. This isnecessary because PELNI is the only company able to assume the mainresponsibility for operating PANN ships if, for any reason, the lesseesdefault; and because an improvemenL of PELNI operations is an importantrequirement for meeting RLS transport needs. The Bank will finance thistechnical assistance project; terms of reference have been agreed onduring negotiations and an appointment acceptable to the Bank, will takeplace within three months of loan signing. A plan for implementingrecommendations has been agreed.
14. An economic study of RLS shipping requirements will be carriedout with a view to preparing an optimum investment program in shippingduring Repelita II (1975-1979). Such an optimization analysis is neces-sary to supplement the analysis of the LTFD Study which is based on acost minimization model in which the traffic demand was considered asgiven and the main purpose of the investigation was to minimize thecost of meeting the given demand. Since the proposed Second ShippingProject forms a part of Repelita II shipping investment program, thepurpose of the study is to establish the additional, if any, shipping
ANNEX 4Page 4
tonnage requirements, and to estimate their economic benefits, not onlyin terms of improving the efficiency of the existing shipping activitiesbut also the contribution which the investment in shipping will make indeveloping the economy, particularly that of the outlying islands. Sucha study is necessary to prepare and support a possible third shippingproject. Terms of reference have been agreed with the Government andarrangements have been made for one expert, to be financed under the pro-posed loan, to be added to an existing Netherlands team undertakingplanning for SEACOM.
15. Additional services for shipping will be required when thePELNI management consultant reports (for example, additional maintenanceinspection services and internal training) and when the shipyard trainingsurvey is completed. It was considered prudent to provide for these items.
April 1976
Attachlent 1Page 1
TECHTIICAL ASSISTLITCERelated to Shipping Program
1. I:FNAlKlCD BY "OFW IAN; CRDITLocal F.E. Total
(a) Overseas Training '382 nan months
(i) for PAW-- - 92 man months(ii) for PMZNI - 200 man months(iil) other SEACOM, BKI - 510 man months - $800,000 $80,000
'b) 3hipyard Training Center - Phase I24man months
Instruction, training equipment,facilities $50,000 $600,000 $650,000
c) Provision for Continuing BKI Team.108 man months - to be used only ifGerman aid unavailable.
2 year program to end 1978(2 mTen x h year; a4 -en x 2 years) $50,000 $510,000 $510J,00
d) Advisors for P.T. Pann - 48 man months
Resident financial and technicaladvi sors $143,000 $245,000 $268,000
(el Revision of Ship Safety Rules18 man nonths - one expert $26,000 $100,0C0 $126,000
T.otal Funded by Nlorwegian Credit $t169,000 $2,255,000 $2,4214,00
2. FINANCED BY OTHFU 3ILATERAL AID
(a) Germr - technical assistance to3K ~FTA22) - Funded to July 1J76 for 2 men $5,000 $50,000 $55,000
(b) Japan - FTA 102, 24 man monthsCrew training - 4 experts fororganizing training courses $2,000 $52,000 $60,000
(c) Japan - Teleconmmunicationsadvisors - 12 man maonths $4,000 $26,000 $30,000
1/ These costs are to cover namely cash costs of Indonesian nationals in trainingand are not comparable to those for foreign expatriates resettled in Indonesiaa.s employees of consulting companies.
April 1976
TNEX 4Attachment 1Page 2
(d) NetherlandsLocal F.E. Total
(i) PELNI advisory team (FTA 11?) -72 man months - funded to M-arch 1)77.6 experts, project underway $35,000 $240,000 $275,000
(ii) Sea Transport Planning (FTA 126) 72 man mths.funded to M-arch 1977 - 6 expertsproject underway 35,000 250,000 285 000
Total Funded by Other Bilateral Aid $87,000 $618,000 $705,000
3. FINANCED BY WORLD BANK
(a) BAPINDO Advisors - 48 man monthsResident financial and technicaladvisors 60,000 185,000 245,000
(b) Maritime Training Academies294 man months
(i) 6-month survey and 8 experts for3 years and shipboard training 100,000 1,450,000
(ii) Provision for equipment 1,000,000 2,550,000
(c) Provision for Continuing PETLI AdvisoryTeam (FTA 119) - 72 man months _
6 experts for one year. 35,000 240,000 275,000
(d) Management Consultant - Study of PELNI36 man months
To be concluded in 12 months 10,000 216,000 226,000
(e) Provision of Additional Service for ShippingEngineering services (including acceptablelocal consultants) 30,000 300,000 330,000
(f) Provision for Continuing FTA 12672 man months - 6 experts for one year 35,000 250,000 285,000
(g) Economic Study of Future Fleet -12 man months - 1 man to be added to FTA 126Team for one year. 10,000 125,000 135,000
Total to be financed by World Bank $280,000 3,766,000 4,o46,ooo
AkNEX 4Attachment 1Page 3
4. SUN~MRY OF FDTAXICING SOURCES Local F.E. Total
(a) NORWAY $169,000 $2,255,000 $2 L2t4 000
(b) OTHER BILATERAL SOURCES 87,000 618,000 705,000
(c) WORLD BANK 280,000 3,766,000 4,o11 °6,000
$536,000 $6,639,000 $7,175,000
5. SUMIMARY OF PROJECT ITEMS
(a) to ATN 43,000 336,800 373 L80
(b) to Government from
(i) Norway 126,000 1,, io,200 2,044,200(ii) World Bank 280,000 3,766,000 4,046,000
$hoo,Ooo $5,68L,200 $6,090,200
TOTAL PROJECT TECHNICAL ASSISTANCE $449,000 $6,021,0300 $6,470,000
April 1976
ANNI'X 5Page I
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
P.N. PELNI
A. The Present Outlook for PELNI
1. An examination of PELNI finances provides a basis for determiningthe financial future of the industry. PELNI's importance is emphasized bythe fact that in case of default by a private operator to PANN, PELNI wouldlikely assume the defaulted lease(s) and operate the ship(s). PELNI,recipietnt of 21 rehabilitation loans from BAPINDO under Credit 318, has a57 ship fleet in reasonably good operating condition. It received aboutUS$6.7 million (Rp. 2.8 billion) in additional equity from the Governmentin 1974 with a further $1.5 million (Rp. 0.6 billion) in 1975, as a resultof the efforts of the Minister of Communications, BAPINDO, and the Bank toimprove its financial condition by reducing PELNI's long-term debt. PELNIis expected to receive a further injection of equity amounting to aboutUS$6.4 million (Rp. 2.7 billion) in 1976, of which about US$4 million(Rp. 1.7 billion) will be used to further reduce long term debt (aboutUS$5.1 million (Rp. 2.1 billion) at the end of 1975). Expenses related torepairs undertaken in foreign shipyards have also been reduced. Losses havebeen cut by over 75% between 1973 and 1975 due to increases in freight tariffsof 20% in 1973, 20% in 1974 and about 25% in 1975, and some progress has beenmade in internal accounting. Lack of cost control is now one of PELNI manage-ment's main problems. Better control over shipping operations is the key tofuture improvements. These matters are under review by the advisors and willbe examined by the proposed management consulting technical assistance project.
B. Future Prospects
General
2. PELNI advisors, who have worked closely with BAPINDO and theResident Staff to effect improvements, have proposed a number of operatinggoals to be achieved by 1979, and they are summarized in para 3). If thesegoals can be achieved by 1979, and if adequate cost controls can also beestablished, PELNI can play the major role assigned to it in the proposedproject and become financially viable by 1980. The PELNI management studyto be undertaken by consultants as part of the proposed project would reviewthese goals and, if necessary, amend them so that PELNI could functionat least as successfully as is forecast herein.
ANNEX 5Page 2
Operational Forecast
3. The operational goals referred to above and which are discussedbelow, combine to produce an 80% increase in PELNI's productivity (Attachment1). Equally important, achievement of this increase in productivity will bemandatory if PELNI's future financial results are to be realized. In orderto review these goals, and to achieve needed administrative and organiza-tional improvements, the Government has agreed thMt gn internationally re-cognized shipping management consultant will be retained to produce a time-phased plan of action. The increase in PELNI's productivity factor, there-fore, represents one of the major inputs in the company's financial forecasts.
4. Projections of PELNI's financial position up to 1979 are attached,and the assumptions on which the projections have been made are detailedbelow:
(a) Tonnage Carried - PELNI's tonnage forecast is based onrevenue tons. PELNI must rely on revenue tons because theratio between weight tons and revenue tons is unknown.The LTFD report forecasts are made in terms of weight tons.
(b) Load Factor - Revenue tons carried divided by availablecapacity. Although a gradual improvement is assumed,such an improvement depends heavily on the organizationof the future RLS (licensing, route structure, competition,etc.).
(c) Repair Days - Gradually decreasing due to a younger fleetand better planning and organization.
(d) Sea Days/Port Days Ratio - A gradual improvement is assumed.This improvement is of critical importance and is heavilydependent on increased Port efficiency (labor productivity,number of shifts per iay, night facilities, etc.) and ship-board cargo handling equipment (type of gear, palletizing,stowage, etc.).
(e) Sea Days - Calculated as follows: number of days in ayear (365), minus repair days, times one over one plusseadayl portday ratio.
(f) Average Distance - Gradually decreasing due to a moreefficient distribution of cargo. Although the LTFDmentions an average distance of 620 miles, PELNI'saverage will be higher due to service requirements toWest Irian not usually offered by other members of theRLS.
ANNEX 5Page 3
(g) Average Speed - Increasing slightly due to improvedship reliability and higher speeds of new ships.
Load factor x Sailing Says x Speed/Hour x 24(h) Productivity Ratip - P Avrg=DsacAverage Distance
(i) Tonnage Required - Based on PELNI's share of the total RLStonnage in 1979.
(j) Passengers Carried - Although no accurate data exists inIndonesia regarding the extent of inter-island passengertraffic, PELNI believes its ships carry a minimum oftwo-thirds of the total. Approximately 50% of PELNI'sfuture gains in passenger traffic are based on attractingmore existing traffic from other RLS operations due tobetter and more reliable ships (Table 3).
Financial Prospects
5. PELNI's profit and loss forecasts, based on management trafficestimates, appear in Attachment 2. The financial forecasts assume no increasein the present tariff but do assume an 80% increase in PELNI's productivity by1979.
6. Except for two ships acquired as equity in 1976 from a Japaneseaid commitment all future PELNI ships will be acquired from PANN under lease.This situation would continue until PELNI became able to service additionaldebt fromn net cash income, when PANN would act as purchasing agent for PELNI.Under the proposed project PELNI would lease 46 ships having an acquisitioncost, including delivery costs, of US$110 million (Rp. 46 billion). Theseships represent 46% of project tonnage and 55% of project cost.
7. PELNI's diverse operations now result in net profits only fromterminal operations. Shipping activities, even after allowing for profitsfrom passenger operations, have continually incurred losses. Profits fromshipping or on a consolidated basis are not expected in the period of theforecast. However, the Government has agreed to review, annually, shippingtariffs in the light of costs and any tariff increases granted in the lightof such reviews should improve PELNI's shipping operating financial results.Additional details, including a sources and uses of funds statement appearsin Attachment 4.
Financial Assumptions
8. Aside from the tariff increases received by the RLS in 1973, 1974and 1975, referred to in Section A above, no additional increases have been
ANNEX 5Page 4
built into the forecasts outlined in Attachments 1 to 4. These forecasts doinclude operating efficiencies outlined in para 4. The majority of futureexpense forecasts are based on the high cost structure of the past and donot reflect the future reductions due to fleet upgrading and better manage-ment. The assumptions are:
(a) All revenues are based on the present tariff structure.
(b) Freight revenues based on tonnage carried times presentaverage tariff rate on an assumed average distance.
(c) Passenger revenues equal number of passengers timesaverage fare per person.
(d) Commissions equal 7% of total freight and passengerrevenues.
(e) Passenger expense, assumed to be 18% of passenger revenues,is based on past experience.
(f) Port expenses increase proportionately to tonnage carried.
(g) Bunker fuel costs at present prices rise in proportionto total tonnage times sailing days.
(h) Depreciation for existing PELNI fleet is based on 10%declining balance.
(i) PANN lease payments are based on an interest rate of10% per year.
(j) Management costs are assumed to increase at 5% per year,or less than the rise in tonnage.
(k) Terminal income increases are based on tonnage factor
(1) Terminal costs are chiefly labor.
(m) All other expenses include funding past pension costsand writing off doubtful accounts.
(n) Forecast variable costs (fuel, port call costs, port laycost, cargo cost, commissions and passenger costs) aregiven below for the years 1976-1979.
Reduction in Long Term Debt 791 2,450 675 17672 - 581 120 120
Total Application 1,267 2,474 1,269 4,289 581 120 120
Net Change in dorKing Capital (630) 1,572 "I4 (51) (485) (483) 277Net Working Capital Beginning of Period (91) (721) 851 1,365 1,314 829 346Net 'Working Capital End of Period (721) 851 1,365 1,314 829 346 623 e
Source: PELNI and Bank Staff
ANNEX 6Page 1
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
P. T. PANN
A. Principal Assumptions Unerlying Financial Forecast
1. PANN's charge-out rate is assumed to be 10% per annum, or2-1/4% quarterly.
2. PANN's average borrowing rate is assumed to be 12.4% per annum,or 3.1% quarterly.
3. All ships are assumed to be passed on by PANN to its customerson lease terms. PANN's customers will make equal payments on a quarterlybasis beginning in the quarter prior to receiving the ship.
4. Payments were scheduled by ship program in the following manner:
New - 15 years - 60 quarterly payments
Used - 10 years - 40 " "
Rehabilitated - 5 years - 20 " "
5. Depreciation, or the return of PANN's principal, was not computedon an actuarial basis but, for simplification purposes, on the straight linemethod.
6. All of PANN's new and used ship customers are assumed to signa binding agreement, inter alia, prior to their acquisition of vessels.
7. Commitment fees represent 1% of loans and leases on all new andused ships and will be paid by PANN's customers at the time of contractsigning. Such fees are to be used as a reserve for possible loan losses.
8. Insurance expenses have not been taken into consideration inthis forecast.
9. It has been assumed that PANN pays no income taxes.
10. It has been assumed further that PANN will retain all inter-nally generated funds to assist in the financing of the project. Afterproject completion, PANN will use internally generated funds to eitherpay dividends to the Government or finance subsequent ship acquisitions.
ANNEX 6Page 2
11. PANN's owners will declare no cash dividends, or return ofcapital prior to the liquidation of the company's long-term debt.
12. The Government will inject equity capital into the company'scapital structure in equal proportion to long-term debt.
13. Annual escalation factors, computed by quarter, were added tothe base price of the rehabilitation programs on the following basis:1976, 15%; 1977 and 1978, 10%; and 1979, 7.5%. Escalation was notapplied to new and used ship purchases.
14. Interest during construction was computed at 12% per year, or3% per quarter, on all outstanding loan funds by ship (new and used)or by tonnage (rehabilitation).
15. Delivery costs were calculated at an average of US$120,000for all new and used ships. Since most ships would be purchased or builtin Europe and Japan, these costs reflect the many expenses pertaining totransfer, registration and mortgage fees, sailing expenses to Indonesiaand, in the case of used ships, surveyor costs, legal fees, etc.
16. P.T. PANN is assumed to receive loans for new ships on a 15years, one year grace period basis; for used ships on a 10 years, oneyear grace period base and for rehabilitation on a five years, one yeargrace basis.
B. Notes to Financial Projections
17. Low profitability in the first years is caused because deprecia-tion was assumed on a straight-line basis. To be exact, one would have touse the capital portion of each annuity as depreciation since the incomeof P.T. PANN is the interest differential between borrowing and lending anddepreciation, i.e., capital recovery should be neutralized. This wouldshow higher profits at the beginning of the project life but reduced pro-fits in the last third of the project period.
18. The borrowing rate of P.T. PANN is assumed to be 12.4% p.a.This is a weighted average between borrowing from BAPINDO at 15% (US$15.0million) and borrowings from official sources (US$79.6 million) at 12% (assumeabout 50% equity and 50% debt (para 5.03)).
19. Under the above assumptions, the Government would be able toprice its equity contribution at between 3% to 4% which would still allowa large enough spread to cover operating expenditures.
April 1976
ANNEX 6Attachment 1
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Ship Procurement ProgramP.T. PANN
New Ships Used Ships
13 x 750 = 9,750 dwt 41 x 1,000 = 41,000 dwt13 x 950 = 12,350 ' 1 x 1,200 = 1,200 it8 x 980 7,840 " 3 x 1,500 = 4,5008 x 1,700 = 13,600 " 2 x 2,500 5,0005 x 1,650 = 8.25o
47 ships 51,790 dwt 47 ships 51,700 dwt
1. New Ships (all fixed prices) (US$000)
(a) Indonesian Shipyards 1975 750 dwt I 1,652.2(20 ships) 750 ' II 1,679.4
NOTE: i/ Actua] tim.ing of ship deliveries say vary from thAt shown below.2/ Slight discrepancies between these figores and those given in the Aenne Lo the
agreed Minutes of Negotiations are of individual ship tonnages.
April 1976
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
SHIP COST ESTIMATES (P.T. PANN)(Rupish millions)
----- __- ______------------------- - ------- 1. NEW ianS---------- --------------------------------- 2. USED SHIIPS_------ _ --------Ships Interest during Delivery Total Ships Interet ur S - TDa ivry … tt
Year Quarter No. Dwt Base Cost Construction Cost Cost No. Dwt Bsse Cost Construction Cost Cost
Surplus (Deficit) for year 1,946 (1,855) 6h1 4 502 (116) 1,285 2,405 3,593 14,076_ °74T
Cash Beginning of Year - 1,946 191 734 1,236 1,120 - 2,40 5,998 10,0714Cashi End of Year 1,946 91 (314 1,3 ,2 ,4405 05981,74114,2814
April 1976 0
ANNEX 7Page 1
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Procedures for the Execution ofthe Project
A. General
1. PANN shall invite Shipping Eaterprises to apply to PANN for thepurchase or lease of a new or used ship or the rehabilitation of one ormore of the ships then owned and operated by such Enterprises.
2. Upon receipt of such application and upon the request of PANN,BAPINDO shall, pursuant to a consultancy agreement between PANN and BAPINDO,carry out an appraisal of the technical, operational and financial con-ditions of the applicant Shipping Enterprise and of its ships.
3. On the basis of the application, the appraisal and the advice ofits consultants, PANN shall decide whether the applicant Shipping Enterpriseis eligible for assistance under the Project and, if so, the form suchassistance shall take, and the terms and conditions upon which it shall bemade available.
4. Subsequently, PANN shall inform SEACOM of its decision and furnishto SEACOM such information as SEACOM may require, and shall obtain fromSEACOM a statement indicating what ships, if any, of the applicant ShippingEnterprise shall be rehabilitated or scrapped.
5. Thereafter, if the Shipping Enterprise is eligible for assistanceunder the Project, PANN shall enter into a Development Agreement with theShipping Enterprise specifying the terms and conditions under which shipswill be made available to the Enterprise by PANN or be rehabilitated.
6. Ships constructed to the order of, or purchase by, PANN shallbe sold or leased to Shipping Enterprises. PANN may sell ships tocreditworthy Shipping Enterprises on terms pursuant to which the salesprice will be paid to PANN in installments subject to interest on thebalance of the sales price outstanding from time to time.
7. Ship rehabilitation under the Project shall be carried outby PANN under arrangements whereby PANN will lease the ship to be reha-bilitated from the Enterprise and lease it back to the Enterprise uponcompletion of the rehabilitation.
ANNEX 7Page 2
B. Appraisal of Shipping Enterprises
8. The appraisal of Shipping Enterprises referred to in paragraph A.2of this Annex shall be carried out, at least during the first two years, byBAPINDO's Maritime Credit Department pursuant to a consultancy agreement withPANN. During this period of two years, staff of PANN will assist BAPINDO'sstaff in making the appraisals with the intention that at the end of thisperiod further appraisals will be done solely by PANN's staff.
9. The appraisal shall to the extent possible include inter alia thefollowing:
(a) An inspection of the ships owned by the Shipping Enter-prise and operated in inter-island carriage. The in-spections shall be carried out with due regard to theregulations of SEACOM and in consultation with BKI.The inspection report shall provide the technicalspecifications and age of the ships; state their valueas estimated on the basis of appropriate valuationprinciples and procedures; specify what ships, if any,meet the Borrower's licensing requirements and BKI'sclassification standards or may be rehabilitated orare recommended for scrapping; and state for eachship that may be rehabilitated what repairs or modi-fications must be made to the ship or its equipmentto meet such requirements and standards or to improveits productivity, as well as the estimated cost ofrehabilitation. In those cases where lack of timeor physical difficulty of access make it impracticalto inspect all ships of an Enterprise before com-pletion of the appraisal suitably qualified reportswill be made on ships not inspected and every reasonableendeavor will be made to inspect such ships at a laterdate and to report on the results of the inspection.
(b) An evaluation of the staff of the Shipping Enterprise,with special emphasis on- management, organizationand administration of the Enterprise; salary and wagestructure; accounting; planning and budgeting;navigational qualifications; routine maintenance;internal and external communications; and passengerand cargo handling. The evaluation report shallmake detailed recommendations on the actions tobe taken to correct any deficiencies found, includingwithout limitation training required and the employ-ment of consultants.
(c) An evaluation of the operations of the ShippingEnterprise, producing, on the basis of reliable
ANNEX 7Page 3
data on past operations and realistic forecastsof future operations (including the effect of theEnterprise's participation in of the Project), andon an annual basis, detailed information coveringthe two fiscal years immediately preceding and the twofiscal years immediately following the year in whichthe evaluation is made as well as the current fiscalyear, and in outline forecasts for the third, fourthand fifth fiscal years immediately following the yearin which the evaluation is made, on: routes covered;revenues earned per ton or ton-mile or, if possible,the ratio between weight ton and revenue ton; numberof passengers carried; load factor; repair days;seadays-portdays ratio; seadays; average distancetravelled each year per ship; average speed per ship;productivity ratio (i.e., tons carried or ton-miles
sold each year per dead weight ton); crew-ton ratioor crew per ton-mile sold ratio for each ship; andtotal tonnage required each year to meet demand on theroutes concerned. The evaluation report shall makedetailed recommendations on the actions considered tobe required to improve the Enterprise's operationsand financial condition.
(d) A financial appraisal of the Shipping Enterprise, basedon its financial statements and records for the im-mediately preceding fiscal year, audited by qualifiedindependent auditors (or, if such audit was not made andcannot be completed in time, reviewed by BAPINDO), andon realistic forecasts of revenues and costs, and cover-ing the periods referred to in the preceding paragraph(c). The financial appraisal report shall include adetailed analysis of past and future balance sheets,statements of income and expenses and related statementsand shall specify inter alia the debt-equity ratiosand current ratios for said periods. The appraisalreport shall make detailed recommendations on the actionsto be taken to improve the financial condition of theEnterprise, and shall recommend financial targets to bemet by the Enterprise.
C. Terms and Conditions on which PANN will make AssistanceAvailable to Shipping Enterprises
10. PANN shall on the basis of the appraisal report and SEACOM's state-ment referred to in paragraph A hereof conclude a Development Agreement inform and substance acceptable to the Bank with each eligible Shipping Enter-prise stating the terms and conditions on which assistance will be madeavailable.
ANNEX 7Page 4
I1. Only Shipping Enterprises that are considered to be able to meetall their foreseeable financial obligations to PANN shall be eligible.
12. Each Development Agreement shall be entered into on terms andconditions adequate to protect the interests of the Bank and PANN, andshall inter alia:
(a) Specify the main particulars of the new or used shipsto be acquired by PANN for sale or lease to the ShippingEnterprise and the ships of the Enterprise to be reha-biliated with the assistance of PANN or to be scrapped.
(b) Require the Shipping Enterprise to enter into agreementswith PANN for the sale (on cash or credit terms asappropriate or lease to the Enterprise of any new or usedship acquired by PANN pursuant to the Development Agreement,and such sale or lease agreements shall be substantially inaccordance with the form of sale or lease agreement attachedto the Development Agreement.
(c) Require the Shipping Enterprise to rehabilitate any shipthat is to be rehabilitated under the Development Agree-ment from resources otherwise available to the Enterprise;or, alternatively, if the rehabilitation of the ship is tobe financed by PANN, to lease and deliver the ship to PANNand, upon completion of its rehabilitation, to lease theship back from PANN under a lease agreement substantiallyin accordance with the form of lease agreement attached tothe Development Agreement.
(d) Require the Shipping Enterprise to deliver to PANN, bythe date specified in the Development Agreement, theregistration certificate and sailing permit of any ofits ships to be scrapped, or evidence that thesecertificates have been cancelled or that the ship hasbeen struck off the Indonesian ship register.
(e) Require PANN: (i) to purchase or to rehabilitate theships to be purchased or rehabilitated by PANN pursuantto the Development Agreement with due diligence andefficiency, in conformity with appropriate financial,administrative, engineering and shipping practices, andat reasonable costs which shall not exceed the maximumcost figures specified in the Development Agreement, assuch maximum cost figures may be amended from time totime by agreement between the parties to that Agreement,with the consent of the Bank if such costs are to befinanced out of the proceeds of the Loan; and (ii) to
ANNEX 7Page 5
arrange for the training of staff of the Shipping Enterprisein the operation and maintenance of the ships so purchased
or rehabilitated.
(f) Require the Shipping Enterprise:
(i) to manage its affairs, carry on its operations(including without limitation the adequate andtimely maintenance of its ships) and plan itsfuture expansion in accordance with appropriatefinancial, administrative and shipping practicesunder the supervision of experienced and com-petent management assisted by competent staffin adequate numbers;
(ii) to maintain adequate records and to have itsaccounts and financial statements for each ofits fiscal years audited by a qualified in-dependent auditor;
(iii) to take out and to maintain, or to authorize PANNto take out and to maintain for the acount andbenefit of the Enterprise, with responsibleinsurers insurance against such risks and in suchamounts as shall be consistent with appropriatepractice, providing without limitation for all-risk insurance in respect of each of the ships ofthe Enterprise for the full replacement value ofsuch ships and for the assignment to PANN of theinsurance proceeds if and to the extent requiredto cover the Enterprise's obligations towardsPANN in respect of such ship;
(iv) to furnish to PANN such information as PANNshall request concerning the operations and financialcondition of the Shipping Enterprise, to permitrepresentatives of PANN and the Bank to inspectthe ships of the Shipping Enterprise and anyrelevant records and documents; and
(v) to perform such other obligations as shall be
designed to improve the operations and financialcondition of the Shipping Enterprise and shallbe specified in the Development Agreement.
(g) Permit PANN to exercise appropriate remedies in the eventthat the Shipping Enterprise will have failed to performany of its obligations under the RehabilitationAgreement.
ANNEX 7Page 6
D. Procurement of Used Ships
13. PANN shall procure the used ships specified in the DevelopmentAgreements in accordance with the following procedures.
14. PANN shall, through its shipbroker and surveyor consultants, secureoffers for the sale of used ships that will be less than ten years old atthe date of their purchase by PANN' and that meet the requirements of theShipping Enterprises as specified in their respective Development Agreements.If an offer is made, PANN shall, prior to its acceptance, make an inspectionof the ship.
i5. PANN shall send a copy of the inspection report to SEACOM andBK1 and obtain statements:
(a) from SEACOM that the ship qualifies for licensing ininter-island shipping, or, if not, a statement of thealterations to be made so to qualify the ship; and
(b) from BKI that the ship meets BKI's classification stan-dards, or, if not, a statement of the alterations tobe made to permit the ship to meet such standards.
16. On the basis of the inspection report and BKI's statement, PANNshall prepare a final report and recommendation on the purchase of the ship.PANN shall furnish copies of the inspection report and its final report andrecommendations to the Enterprise and consult the Enterprise thereon.
17. If PANN and the Enterprise decide that the ship is suitable, PANNshall negotiate with the shipowner the sale of the ship to PANN and arrangefor the repairs and alterat½ons required, if any. If PANN accepts the shipand if during the predelivery drydock inspection PANN considers it necessaryor desirable to carry out any repairs or modifications to the ship PANN shallobtain an estimate of the cost thereof and arrange for such repairs ormodifications.
E. Rehabilitation of Ships of Shipping Enterprises
18. The rehabilitation of ships pursuant to the Development Agree-ments shall be carried out in accordance with the following procedures.
19. If the Shiipping Enterprise shall decide that the rehabilitationof a ship will not be financed by PANN, the Shipping Enterprise shall enterinto a contract acceptable to PANN for rehabilitation of the ship with aqualified and experienced shipyard which contract shall provide inter aliathat the rehabilitation works shall include at least the modifications to bemade to the ship puisuant to the survey report referred to in paragraph B.2(a)of this Annex. PANN shall promptly notify SEACOM of such decision.
ANNEX 7Page 7
20. If the ship's rehabilitation is to be financed by PANN, the Enter-prise shall lease and deliver the ship to PANN under a lease agreement whichshall run for not more than five years. PANN shall enter into a contract forrehabilitation of the ship with a shipyard selected by PANN in consultationwith the Enterprise and after prudent shopping. The ship rehabilitationworks contract shall provide inter alia for a rehabilitation cost which,unless otherwise agreed between PANN and the Shipping Enterprise with theconsent of the Bank, shall not exceed the maximum cost figure specified inthe Development Agreement with the Enterprise, and for the execution of allmodifications to be made to the ship pursuant to the inspection reportreferred to in paragraph B.2(a) of this Annex. Upon completion of the reha-bilitation works, PANN shall lease the ship back to the Enterprise.
F. Terms and Conditions of Sales and Leases by PANN
21. Sales of Ships by PANN
(a) Sales of ships by PANN shall be made under arrangementswhereby the purchase price of the ship shall be paideither in cash upon delivery of the ship to the Ship-ping Enterprise or in installments.
(b) At the request of the Shipping Enterprise PANN shallsell to the Enterprise the ships constructed or pur-chased under of the Project, under a purchaseagreement substantially in accordance with the formof purchase agreement attached to the DevelopmentAgreement with the Enterprise.
(c) If the Enterprise is creditworthy, PANN shall at therequest of the Enterprise finance a portion of theconstruction cost or the purchase price of the shipby permitting the Enterprise to pay such portion ofthe purchase price in installments. The portion ofthe purchase price to be paid in installments shallnot exceed 90% of the purchase price. The Enterpriseshall pay interest at the rate of 10% per annum onthe portion of the purchase price outstanding fromtime to time. In addition, the Enterprise shallupon signing of the purchase agreement pay to PANNa one-time commitment fee equal to 1% of the portionof the purchase price to be paid in installments.For newly constructed ships, the installment periodshall not exceed fifteen years including a graceperiod of not more than six months after the de-livery of the ship to the Enterprise; for used ships,the installment period shall not exceed ten years
ANNEX 7Page 8
including a grace period of not more than sixmonths after the delivery of the ship to theEnterprise. All debt service obligations ofthe Enterprise to PANN shall be secured by afirst mortgage on the ship.
22, Leases of Ships by PANN
(a) If the newly constructed or used ship cannot be soldto the Shipping Enterprise, PANN shall lease the shipto the Enterprise at a lease price that shall be cal-culated on the basis of amortization of the acquisi-tion cost of the ship to PANN and interest at therate of 10% per annum on the unamortized portion ofsuch cost outstanding from time to time. New shipsshall be amortized over not more than 15 years; usedships shall be amortized over not more than 10 years.Upon signing of the lease, the lessee shall pay toPANN a one-time commitment fee of 1% of the valueof the ship on the basis of which the lease price iscalculated. The lease price may be revised on termi-nation or renewal of the lease to reflect the ship'sdepreciated replacement cost. The lease agreementshall be substantially in accordance with the formof lease agreement attached to the Development Agree-ment with the Enterprise.
(b) If the ship is rehabilitated by PANN, the ship shall,upon completion of its rehabilitation, be leased backto the Shipping Enterprise under a lease agreementsubstantially in accordance with the form of leaseagreement attached to the Development Agreement withthe Enterprise. The total lease price shall be deter-mined on the basis of the following:
(i) amortization of the cost of rehabilitation ofthe ship; and
(ii) 10% per annum of the unamortized cost ofrehabilitation.
Upon signing of the lease, the lessee shall pay to PANN aone-time commitment fee of 1% of the cost of rehabilitationof the ship. The lease period shall not exceed 5 yearsafter the date on which the rehabilitated ship is recom-missioned to service. All obligations of the ShippingEnterprise towards PANN pursuant to the lease agreementshall be secured by a first mortgage on the ship.
April 1976
ANNEX 7Attachment 1Page 1
P.T. PANN
Policy Statement Memorandum
1. Management and Budgeting
Budget and review - The Dewan Komisaris at its quarterly meetingprior to the commencement of each quarterwill give approval to the Direksi to executethe functions stated in Art.9 C 1.1 (a), l(b)of PANN's charter for the quarter in questionand this approval will be based on the annualworking program and budget approval by theshareholders.
Quarterly review of budgeted performance eachquarter covering four prior quarters will becarried out by Dewan and Direski.
- Submission of quarterly reports to World Bankin agreed form will include details of pay-ments due and receipts for each lease/sale.
Lease/sale terms - Sale/leasing terms and conditions to:
New Ships - Sale:
- minimum 10% cash payment paidon delivery of the ship
- maximum terms of payments 15years
- interest rate 10%
- 1% commitment fee (lump sum onsigning)
- 6 months of grace after delivery.
lease:
- no down payment is required
- lease hire to be paid quarterlyin advance
- maximum terms of lease 15 years- interest rate 10%- 1% commitment fee (lump sum
on signing)
ANNEX 7Attachment 1Page 2
Used ships - Sale
- none to be acquired over 10
years old- to be required 10% down pay-ment on signing of the contractand 20% on delivery in Indonesiaof the ship.
- maximum term of payment 10 years- interest rate 10%
- 1% commitment fee (lump sum
on signing)- 6 months grace after delivery.
lease:
- none to be acquired over 10
years old- no down payment
- maximum term of payment 10 years- interest rate 10%
- 1% commitment fee (lump sum
on signing)- lease hire to be paid quarterly
in advance on delivery inIndonesia.
Rehabilitation
- maximum rehabilitation costs
normally to be about 1/2 ofcomparable used ship price
- no rehabilitation of ship of over20 years of age
- interest rate to be included incharter to be 10%
- 1% lump sum commitment fee ofrehabilitated cost on signing
- maximum term of lease to 5
years including up to 3 monthsof grace after delivery.
Options to purchase
- all leases to be firm for the period ofthe lease. The lessee has the optionto purchase the ship on payment of thelast month hire (on terms as statedin the lease) provided the lesseehas fulfilled his obligations accordingto the provision of that contract/lease.
ANNEX 7Attachment 1Page 3
Lease/sale documents
- all leases and sale contracts andprocurement documents to be preparedin a standard form inn agreementwith Bank and submitted with applic-ation for reimbursement.
Dual class for PANN's ships
- During the course of payment by lesseeor buyer on any ships in which Pannhas a beneficial interest, such ship will:
(a) New Ships - when a new ship constructed at Indonesianshipyard, be single class by BureauKlasifikasi Indonesia (BKI) as well asconforming to all Indonesian Laws.
- when a new ship constructed at ashipyard abroad, be either singleclass by BKI, but supervised onbehalf of BKI by an internationallyrecognized classification society(new ships in Japan) or dual classby BKI and an internationally re-cognized classification society(new ships in Norway) as well asconforming to all Indonesian laws.
- be single class BKI (unless decideddifferently by the Government) fornewly built ships as soon as the shipis delivered to Indonesia.
(b) Used Ships - When a used ship, if classed by aninternationally recognized classifi-cation society having a cooperationagreement with BKI, be changed to dualclass with BKI as well as conforming toall Indonesian laws. Dual class willbe maintained until the ship passes itsnext special survey. After that, classmay be single BKI.
ANNEX 7Attachment 1Page 4
- when a used ship, if classed by a class-ification society not having a coopera-tion agreement with BKI, be changed intoa dual class with BKI and an interna-tionally recognized classificationsociety having a cooperation agreementwith BKI as well as conforming to allIndonesian laws. Dual class will bemaintained until the ship passes itsnext special survey. After that, classmay be single BKI.
(c) RehabiliatedShips - When a rehabilitated ship, be dual
classed by BKI and an internationallyrecognized classification society aswell as conforming to all Indonesianlaws. Dual classification will bemaintained until the ship passes itsnext special survey. After that classmay be single BKI.
Foreign Loans - PANN will, should it be the beneficiary ofany foreign loan, provide the lender with acopy of this policy statement and of theWorld Bank project document and will notmake any agreement with such lender whichnegates the provisions of the policy state-ment and/or of the project documents.
Lease/sale - Leases or sales shall only be concluded withwhere obligation companies which are considered to be ablein arrears and willing to meet their foreseen financial
obligations to PANN.
Insurance of ships - PANN will insure (or cause to be insured)for "all-risk" at replacement cost, any shipwhich it owns or in which it has a bene-ficial interest.
- Such insurance on all ships in which PANNhas a beneficial interest will be adjustedfrom time to time, in accordance with thebest business practice, to reflect the cost ofreplacing ships should they become a totalloss. Suitable coverage for damage willalso be included in the policies.
ANNEX 7Attachment 1Page 5
- Pann will solicit sources of "all-risk"coverage and will continually attempt tosecure reduction of premiums by the use offleet policies, with reasonable deductibles,and will, through national insurance compa-nies, seek proposals from national, inter-national and regional insurance companies inorder to select the best coverage at thelowest cost.
- For this purpose an experienced insuranceexecutive will be hired by Pann.
Training - Pannn will seek to arrange for training of itsexecutives and operational staff by arrange-ments with its shipbroker and its financialadviser and with shipyard and classificationsocieties. It will draw up a comprehensivetraining proposal for submission to the Bankwithin six months of the loan being signed.The intention is to develop adequate,practical and formal training programs.
Technical assistance - Pann, in consultation with its financial andtechnical advisers will prepare a program oftechnical assistance requirements coveringthe project period, i.e. until the end of1978, for discussion with the Bank andother lenders. After agreement the programwill be put in hand in a timely manner. Itis expected that, in addition to training,technical assistance may include technicalservices, accounting services, and necessarysupport equipment and material.
2. Financial - PANN will not borrow without Dewan approvalGuideliunes based on forecasts of PANN's cash flow, income
statement, and balance sheet which will bedesigned to reflect, to the extent feasible, onan annual and five-year basis, the sources anduses of funds, the return on total capital andon equity capital employed, the weighted averageborrowing rate, the working capital and reservesfor bad debts and the profit or loss incurred.
- Pann will not permit its debt to exceed 65% ofcombined debt and equity.
ANNEX 7Attachment 1Page 6
- Pann will maintain a weighted average costof its debt such that, weighted together witha 3% notional return on its equity, its totalcosts of capital (equity plus debt) will notexceed 7.7% of its total capital.
- PANN shall earn revenues sufficient to achievea minimum 3% rate of return on its equity.
- PANN will, for tax purposes, claim depre-ciation on all assets at the maximum rateallowable or at such a rate as to minimizeits tax liabilities.
- no dividends or return of capital will bedeclared during the first five year ofoperations. After that no dividends orreturn of capital shall be declared exceptafter providing for debt repayment, foradequate reserves for losses, and for anyincrease in working capital appropriate inview of the both then current costs of shipsand PANN's operating costs.
- all assets acquired shall be taken on thebooks at the time of acquisition atacquisition cost.
- Pann will base its leases or other timepayment contract in the first instance onthe acquisition cost of the ships.
- Mortgage interests of second parties willbe expressed on the mortgage deed.
April 1976
I'DONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Implementation Schedule
HIALF-YEAR PERIODS OF CALMDAR YEARS
1275 1976 1,77 127T 1)7)::vent 2 ½n -2/2 ½ 2/2 ½ 2/2 ½ 2/2
'. Agree:aent on Legal Docs. x
2. Tech. Asst. to PA-IN, TORAD
(a) Fin. 5.v Tech. Advisors Retained x
(b) Other, Legal, Accounting, etc. x
3. Tech. Asst. to Govt.
study iriplementation(a) Revision of Ship Safety x-x X_--------------
Regulations, IORAD
(b) 'ar-itime Training Center x---- x _---- i2e.tmentation _____xStudy & Advisors
(c) Management Study of PM, VI
i) Starts x
ii) Report x
iii) Agree on Plan of Acticn x
iv) Start Plan of Action x…------ ipl…e…ent…ation…x
(d) Econonic Study Starts, Ends. x-----------x
L. New & Used Ship Procurement,Starts x-------------------------------------------------
Benefits from replacing the obsolete existing ships with moreefficient ships would be the reduction in the operating cost and the increasein the productivity of the ships. The unit benefits were estimated asfollows:
(a) Operating Cost Savings
The main categories of costs that vary with ships' age and stateof repair are maintenance (both floating repair and docking and runningrepair), lubrication and consumption of fuel. Based on data supplied bySEACOM and PELNI these costs were compared in Attachment 1 for three typesof ships - 20 year old ships, 10 year old ships and new ships. The per dwtper operating day total of those costs are:
20 year old ships Rp 26510 year old ships Rp 130New ships Rp 78
The average number of operating days per year for differentships are assumed to be as follows:
20 year old ships 180 days10 year old ships 260 daysNew ships 330 days
Operating cost saving was calculated for the existing numberof commission days for those ships to be replaced, the additional commissiondays for rehabilitated and used ships being taken into account in theestimate of productivity increase. The rehabilitated and used ships willhalve the per dwt operating cost from Rp 265 per day to Rp 130. Multiplyingthis by 180 days, the total annual operating cost saving per dwt is Rp 24,300.
(b) Productivity Increase
Productivity increase is calculated using estimated additional netrevenue per dwt (based on the existing tariff) as proxy. According to PELNIdata the typical RLS ship in reasonable repair seem to earn a gross revenue
ANNEX 9Page 2
of Rp 744 per dwt a day on the basis of estimated 260 commission days (seeAttachment 2) and the average daily operating cost per dwt is Rp 334 (seeAttachment 3). This leaves a net revenue of Rp 410. Since we assume 260commission days, the additional commission days after rehabilitation oracquisition of used ships over the typical existing (20 year old) used shipswould be 80 days a year. By multiplying the net daily revenue per dwt ofRp 410 by 80 days, we get Rp 32,800 which is the per dwt net revenue peryear due to rehabilitation and used ship purchase.
The total annual benefit of rehabilitation and used ship purchaseper dwt is therefore as follows:
Operating cost savings Rp 24,300Net additional revenue Rp 32,800
Rp 57,100
The amount of annual benefit per dwt equals about 80% of the per dwt costof rehabilitation or about 20Z of the estimated acquisition price of onedwt of used ships.
Net Increase in Tonnage
The benefits from the net increase in tonnage to be realized byacquisition of new ships would be only the increase in net revenue which isused as proxy for production increase. Similar to the case of used ships,the new ships are expected to produce a net revenue of Rp 410 per dwt daily.Multiplying Rp 410 by 330, the number of commission days a year, we getRp 135,300 which is the annual net revenue per dwt of new ships. The annualnet revenue so calculated is an equivalent of about 13.8% of the estimatedacquisition cost of new ships of Rp 984,000 per dwt.
April 1976
INDONESIA
APPRAISAL OF A SECOND SHIPPING PROJECT
Average Annual Costs of Maintenance, Lubrication and Bunkerby Age and Size of Ships
(Rp. Millions)
20-Year Old Ships 10-Year Old Ships New Ships575 600 t 720 750 1,000 1,500 750 1,000 1,500 2,500dwt dwt dwt dwt dwt dwt dwt dwt dwt dit
T 0 T A L 524 73,640 337 177,841 108 206S123 43 256,306 41 406,325 2 38,790 1,o55 1,159,025
Source: Directorate General of Sea 5ommunications
April 1)76
TABLE 2
INDONESIA
APPRAISAL CF A SECCND SHIPPING PROJECT
Shipping Acquisition and Rehabilitation Program
GIDI S~2ping rogramAc3uired B PANN Acquired By Private Compnes(First Phase, 1974-19797 *An4S5 rrojec-i7 -Non-FANN)
A. New Ships
Class Number Total Class Number Total Class Number Total
750 15 11,250 750 13 9,750 750 2 1,500
1,000 23 23,000 1,000 21 21,000 1,000 2 2,000
1,500 13 .19,500 1,500 13 19,500 - - -
Total 51 53,750 Total 47 50,250 Total 4 3,500
B. Used Ships
750 2 1,500 - - - 750 2 1,500
1,000 47 47,00' 1,000 41 41,000 1,000 6 6,000
1,500 4 6,000 1,500 4 6,000 - - _
2,500 2 5.000 2,500 2 5,000 - _ _
Total 55 59,500 Total 47 52,000 Total 8 7,500
C". Rehabilitation
Total 54,500 54.500
Grand Total 167.750 156,750 1.0ooo
April 1976
TABLE 3
INDCKESIA
APPRAISAL (F A SEC ND SHIYPING PROJECT
IBRD Fiscal Year Cumulative TotalAnd Quarter Ending Disbursement
1975/76
June 30, 1976 0.2
1976/77
September 30, 1976 10.8
December 31, 1976 20.3
March 31, 1977 28.5
June 30, 1977 35.4
1977/78
September 30, 1977 42.4
December 31, 1977 48.3
March 31, 1978 49.5
June 30, 1978 50.5
1978/79
September 30, 1978 51.2
December 31, 1978 51.9
March 31, 1979 52.6
June 30, 1979 53.3
1979/80
September 30, 1979 53.8
December 31, 1979 54.0
April 1976
INDONESIA
APPRAISAL CF A SECOND SHIPPING PROJECT
Alternative Projections of Freight Trafficand Shipping Capacity Requirements
Assumed AnnualGrowth Rate 15.5% 10% 7%
Freight Shipping Capacity Freight Shipping Capacity Freight Shipping CapacityTraffic Needed (Thousand dwt) Traffic Needed (Thousand dwt) Traffic Needed (Thousand dwt)(Millions With Per dwt (Millions With Per dwt (Millions With Per dwtof Tons) Productivity of of Tons) Productivity of of Tons) Productivity of
I ~~~~~~~~~~~~~~~~~~~~Laid-up Vessels_ ~~~~~~~~~~~~~~~~~Breakdown Delays-Bad service o L Low Working Poor Ship Efficiency
-Irregular sailings Low Productivity Nominal Profit Capital Dependency on ShippersNo marketing effort Load Factors Ratios (1I or Net Losses feficits Supplier Credits
_ ~~~~~~~~~~~No Schedules
Working CapitalLoans Borrowing
-Inefficient route patterns
-Freight wars-High capacity cost
CapitalHighClCapital
Debt & H.P.Repayments
Cash -flIow
F ~~~~~~Capital
L(2 __ Lack of A
Equity
Key: (If Low productivity ratios are also due to inadequate ports, port facilities, and trained personnel.(2) As a result of the lack of equity, companies resort to more debt, thereby repeating the cycle.
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