Documentof The World Bank FOR OFFICIAL USE ONLY ReportNo. 7122-IND STAFF APPRAISAL REPORT INDONESIA POWER SECTOR EFFICIENCY PROJECT MA/Y 25, 1989 Industry and Energy Division Country Department V Asia Regional Office This document has a restricted distribudon and may be used by recipients only In the pedormance of their official duties. Its contents may not otherwise be disclosed without World Bank authozation. I Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 7122-IND
STAFF APPRAISAL REPORT
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
MA/Y 25, 1989
Industry and Energy DivisionCountry Department VAsia Regional Office
This document has a restricted distribudon and may be used by recipients only In the pedormance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authozation. I
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CURRENCY EQUIVALENTS
Currency Unit - Indonesia Rupiah (Rp)(As of January 1989)
BAKOREN - National Energy BoardBAPPENAS - National Development Planning AgencyDGEP - Directorate-General of Electric Power, Ministry of Mines
and EnergyEHV - Extra High VoltageESMAP - Energy Sector Management Assistance ProgramGOI - Government of IndonesiaIERR - Internal Economic Rate of ReturnJABOTABEK - Jakarta, Bogor, Tangerang and Bekasi areaLMK - Testing and Research Center of PLNLNG - Liquified Natural GasLRMC - Long Run Marginal CostMIS - Management Information SystemMME - Ministiy of Mines and EnergyPERTAMINA - National Oil and Gas CompanyPLN - State Electricity CorporationPMAS - Project Management Advisory ServicePPE - Engineering Services Center of PLNPUSDIKLAT - PLN's Center for Education and TrainingRE - Rural ElectrificationREPELITA - Five-Year Development PlanROR - Rate of Return
FOR OFFICIAL USE ONLY
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
Table of Contents
Page No.LOAN AND PROJECT SUMMARY ..................................... iv
I. ENERGY SECTOR AND ELECTRICITY SUBSECTOR ...................... 1
Sectoral Context ............................................. 1Energy Resources ........ . ................................... 1Institutions in the Energy Sector ............................ 3The Electricity Subsector .................................... 3PLN's Organization ........................................... 3Sector Objectives and Priorities ............................. 4Rationalization of Energy Prices ............................. 5Liberalization of the Institutional Framework ................ 6Bank Role and Strategy ....................................... 7Bank's Earlier Operations and PLN's Performance .............. 9
II. THE POWER MARKET AND THE DEVELOPMENT PROGRAM ................. 10
The Market ................................................... 10Demand ....................................................... 10PLN's Facilities ............................................. 10Development Program .......................................... 11
III. THE BENEFICIARY .............................................. 13
Institutional Development .................................... 13Accoun-ing and Budgeting ......................... 15Billing and Collection ....................................... 16Audit and Internal Control ................................... 16Insurance .................................................... 17
IV. THE PROJECT ................ 18 .
Background ................................................... 18Rationale for Bank Involvement ............................... 18Project Objectives ........................................... 18Project Description .......................................... 19Diesel Efficiency ............................................ 19Hydro Renovation .. 21
This report was prepared on the basis of the appraisal carried out byV.P. Thakor (Principal Power Engineer), A. Liebenthal (Senior EnergyEconomist) and S.K. Bhatnagar (Financial Analyst) in November/December 1987and updated in February/March 1989.
This docun.ent 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.
Annex 2 Growth of PLN's Consumers and SalesAnnex 3 Growth of Captive Power in IndonesiaAnnex 4 Peak Load, Production and Installed Capacity in JavaAnnex 5 Peak Load, Production and Installed Capacity Outside JavaAnnex 6 Investment Program - IndonesiaAnnex 7 Investment Program - JavaAnnex 8 PLN: Performance IndicatorsAnnex 9 Diesel Generation Efficiency Program - Cost EstimateAnnex 10 Hydro Renovation - Plant Details and Scope of WorkAnnex 11 Hydro Renovation - Cost EstimateAnnex 12 Java Distribution Expansion Program
Table 1 - Scope of WorkTable 2 - Cost EstimateTable 3 - List of Contracts
Annex 13 Discribution Management - Terms of Reference for ConsultingServices
Annex 14 Java Telecommunications - Cost EstimateAnnex 15 Corporate Planning and Financial Planning - Terms of Reference for
Annex 17 Disbursement ScheduleAnnex 18 PLN's Financial Statements - Past Results and Forecasts
(Tables 1-10)Annex 19 Notes and Assumptions for the Financial ForecastsAnnex 20 PLN's Tariff
Table 1 - Explanation of Tariff Categories in the Basic Tariff ofElectricity, 1989
Table 2 - History of Tariff Adjustments, 1982-1989Table 3 - Average Revenue from Electricity Sold, by MajorConsumers
Annex 21 Table 1 - PLN's Oil Consumption StatisticsTable 2 - Domestic and World Prices of Petroleum Products
Annex 22 Calculations of the Internal Economic Rate of Return (Tables 1 and2)
Annex 23 Selected Documents and Data Available in the Project File
MAPS
IBRD 12453 R8IBRD 20711
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INDONESIA
POWER SECTOR EFFICIENCY PROJECT
Loan and Project Summary
Borrower: Republic of Indonesia
Beneficiary: State Electricity Corporation (PLN)
Amount: US$337.0 million equivalent
Terms: Repayable in 20 years. including five years of grace, at thestandard variable interest rate.
OnlendingTerms: The proceeds of the loan will be onlent from the Government of
Indonesia (GOI) to PLN for 20 years including a grace periodof 5 years; the onlending rate will be equal to the Bank'sstandard variable interest rate plus fees of 1.90X. TheGovernment will bear the foreign exchange risk.
ProjectDescription: The proposed project would support government objectives to
improve the economic, technical and institutional efficiencyof the electricity subsector and improve the welfare of thepopulation through the supply of electric power. Specifi-cally, the proposed project would: (a) support a program toimprove the efficiency of operation of diesel generatingunits; (b) renovate old hydro plants to extend their life andrecover derated capacity; (c) extend distribution facilitiesto supply about 893,000 new consumers in Java in 1990/91 and1991/92; (d) extend PLN's telecommunications facilities;(e) provide technical assistance to (i) improve diesel plantefficiency; (ii) improve operation and maintenance of steampower plants; (iii) improve distribution system management;(iv) strengthen corporate and financial planning functions;and (v) improve general accounting and cash management.Included as well will be the training of PLN's staff in theabove areas.
Risks: There is no significant risk in the implementation of theproposed project. The principal concern will be to avoiddelays in the implementation. Advance action has already beeninitiated by PLN, for appointment of consultants and thepreparation of bid documents, to help prevent such delays.
Rate of Return: The IERR ranges from 152 to 322 for the hydro renovation and182 for PLN's investment program, of which the distributioncomponent of the project is a part.
/a The costs are inclusive of taxes and duties, estimated to be USC12.9million equivalent.
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
I. THE ENERGY SECTOR AND ELECTRICITY SUBSECTOR
Sectoral Context
1.1 Indonesia is richly endowed with energy resources including oil, gas,coal, hydropower and geothermal energy. Since the country depends on oil fora major part of its exports, and its earnings therefrom have been decliningsince 1981, a major objective of the Government's energy policy has been tomaintain the level of export earnings by diversification of domestic energyconsumption away from heavy reliance on petroleum products (which account for88Z of commercial energy consumption" towards alternative fuels for whichthere is a nonexportable surplus (gas and coal) or which are nontradeable(hydropower and geothermal). The power subsector is playing a central role inthis respect. It offers the most important market for the alternative fuels,and promotes their development in such a way as to take advantage of economiesof scale in infrastructure. Electricity also substitutes petroleum fuels inindustrial and domestic usage.
Energy Resources
1.2 Oil. Indonesia's resources of original oil-in-place have been esti-mated at about 70 billion barrels, and the proven remaining recoverablereserves at about 8-10 billion barrels. Though production had reached a peakof 1.7 million barrels per day in 197', as a result of the gradual depletionof reserves and, since 1983, OPEC production quotas, production declined to&oout 1.3 million barrels per day in 1987, and is expected to continue atabout 1.1-1.3 million barrels per day until the year 2000.
1.3 Natural Gas. The estimated proven remaining natural gas reserves areabout 80 trillion cubic feet (TCF) 1/ of which 902 is nonassociated and can bedeveloped independently of oil. However, major reserves are generally locatedaway from population and industrial centers. The Arun field in North Sumatrahas 14 TCF and Natuna in the South China Sea, 41 TCF. About 5.0 TCF ofreserves are proven offshore Java of which about 2.7 TCF are in the East and2.3 TCF are in the West. Production of natural gas reached 1.7 TCF in 1987.Half of this was exported as liquefied natural gas (LNG) to Japan from Arunand Badak. LNG production was about 16.8 million tons in 1987.2/ Domesticconsumption is only about 0.3 TCF/year at present but is expected to growrapidly through the 1990s as reserves on and offshore Java are developed andthe power sector becomes a major consumer. A major issue that the GOI iscurrently addressing to facilitate this development is the formulation of a
1/ 1 TCF of gas = 175.7 million barrels of oil equivalent.
2/ 1 ton of LNG = 8.8 barrels of oil equivalent.
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pricing ,iolicy that would encourage gas producers to develop the resource andthe power sector and other consumers to use gas in lieu of petroleum products.
1.4 Coal. Indonesia's coal reserves are believed to be as high as 25billion tons,3/ mostly located in Sumatra and Kalimantan. While production iscurrently 2.7 million tons per year. major increases are planned by GOI. Workon a three million ton-per-year mine at Bukit Asam and on a 0.6 million ton-per-year mine at the nearby Muara Tiga coal field is nearing completion.Proven reserves in this area are over 600 million tons. A program to raisethe coal production at Ombilin in West Sumatra to 1.3 million tons per year,mainly for export, is also being implemented by GOI. In addition, in 1981,GOI entered into a number of production-sharing agreements with privateforeign and Indonesian joint-venture companies for the exploratio.a and exploi-tation of coal reserves in Kalimantan. Coal reserves already def4.ned by thesecontractors and expected to be economically recoverable amount to about 700million tons. The South Sumatra and Kalimantan coals have the potential forsustaining a large program of coal-fired power generation in the country andalso provide for exports.
1.5 Hydropower. Indonesia's total hydroelectric resources are large butdevelopment is limited by their geographic distribution relative to demand.The greatest potential (over 35Z) lies in Irian Jaya where the de' nd is lessthan 1? of total domestic demand, while Java, which accounts for c0Z of elec-tricity consumption, has less than 1OZ of the total potential. Ex4istinghydroelectric installations aggregate to 2,807 MW; they are mostly located inJava (1,840 MW), Sumatra (736 MW), and Sulawesi (203 MW). Schemes with anaggregate capacity of about 300 MW are currently under construction. TheState Electricity Corporation (PLN), has carried out a systematic countrywideresource survey, that has produced an inventory of hydroelectric sites. Thesurvey is being followed up with various prefeasibility and feasibilitystudies of the promising hydroelectric sites.
1.6 Geothermal. Surface manifestations of geothermal energy are found onall islands except Kalimantan. Several sites have been investigated and one,Kamojang in West Java, has been developed. It is believed that potentialreserves may approach 10,000 MW, distributed as follows: Java, 5,500 MW;Sulawesi 1,400 MW; Sumatra 1,100 MW; other islands 2,000 MW. GOI initiateddevelopment of the Kamojang field in 1976. The first 30 MW generating set wascommissioned in 1983, and the expansion of the station by 110 MW, wascompleted in 1987. Further development potential exists in Kamojang. In1982, PERTAMINA (The National Oil and Gas Company) entered into a joint opera-tion contract with Union Geothermal, a subsidiary of Union Oil of California,for development of the Salak field in West Java. A potential of over 200 MWhas been proven by exploration. Also, PERTAMINA has explored geothermalfields in the Dieng and Drajat areas in Java, which appear promising forfurther development. A decision has been taken to develop the Salak andDrajat fields to the extent of 110 MW each, during the next five years.
3/ 1 ton of coal = 4.3 barrels of oil equivalent.
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Institutions ir. the Energy Sector
1.7 The principal agency responsible for implementing government policiesin the energy sector is the Ministry of Mines and Energy (MM3). MME wasestablished in 1978 to coordinate all activities in the energy sector andcontrol the three state enterprises responsible for the execution of govern-ment policies in the energy subsectors; PERTAMINA for oil and gas, P.N.Batubara for coal, and PLN for electricity. Other ministries and agencies arealso involved in the sector; for example, the Ministry of Public Worksprimarily deals with hydropower resource surveys, the Ministry of Agricultureoversees forestry products, and the National Atomic Energy Commission isresponsihle for nuclear development. In order to ensure appropriate coordina-tion of energy policy, the GOI established an interministerial National EnergyBoard (BAKOREN) to oversee sectoral development. BAKOREN is supported by aTechnical Committee (PTE) consisting of senior officials in differentdepartments, chaired by the Director General of Electric Power and New Energy(DGEP). The organization chart of the MME is shown in Annex 1, Chart 1.
The Electricity Subsector
1.8 The electricity subsector is regulated by MME through the DirectorGeneral of Electric Power and New Energy (DGEP). The subsector comprises:(a) PLN, the State Electricity Corporation; (b) captive plants installed byprivate parties for their own use; and (c) a small number of cooperativeswhich were set up to provide electricity in certain rural areas remote fromPLN supply systems. An Electricity Act was passed in 1985 ,Law No. 15). Itconsolidates earlier decrees, and permits private and cooperative participa-tion in the electricity subsector. The DGEP is the chairman of theSupervisory Board which oversees PLN's operations and reviews PLN's investmentplans, budgets and tariffs.
PLN's Organization
1.9 PLN was established as a public corporation (Perum) underPresidential Decree No. 18 of 1972, with responsibility for the generation,transmission and distribution of electricity and the planning, constructionand operation of electricity supply facilities. PLN is managed by a board ofDirectors headed by a President Director, who is appointed by the Presidentand is accountable to the Ministry of Mines and Energy. The PresidentDirector has authority for all operations of PLN. The Board currentlyincludes five other directors with functional responsibility, respectively,for planning, construction, operations, finance and administration.Operational responsibility devolves to 17 regions, and responsibility formajor construction to 12 project managers. Also reporting to the Board areseveral staff units responsible for power research, education and training,management services, an internal audit unit called the CorporationInspectorate, the Java system operation and control unit, and a newly estab-lished Engineering Services Center (para. 3.7). PLN's organization chart isshown in Annex 1, Chart 2.
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Sector Obiectives and Priorities
1.10 In view of Indonesia's rich endowment in energy resources, the mainobjectives of the sector may be summarized as followst
(a) to maximize export earnings by promoting the development oftradeable energy resources, including oil, gas and coall and
(b) to meet the country's growing energy requirements in a least costway, and conserve exportable petroleum reserves, by encouragii>he domestic market to substitute oil consumption by alternativefuels for which there is a nonexportable surplus (gas and coal) orwhich are nontradeable (hydro-power and geothermal).
The underlying developmental objective should be, of course, to improve thewelfare of the population, both directly, by keeping its energy expenseslow, and indirectly, by stimulating economic activity through the provisionof energy in a cost-effective way and the maximization of export earnings.In this regard, a subsidiary objective has been to use the energy sector asone of the means for reducing the developmental imbalance between urban andrural areas, and between Java and the Outer Islands. This objective isbeing pursued through the implementation of uniform countrywide prices forpetroleum products and electricity, and the promotion of ruralelectrification.
1.11 The major priorities associated with the pursuit of the aboveobjectives are the following:
(a) in regard to export markets, the uncertainties associated with thefuture level of petroleum, LNG and coal prices, as well as theresource constraints on the economy, make it advisable to continuewith the current policy of relying on foreign investors to absorba major part of those risks and invest in the development of theresources;
(b) in regard to domestic markets, the uncertainties associated withthe future level of demand make it advisable to improve the feasi-bility of the relatively large infrastructure investments throughthe coordinated development of coal and gas. Here also, theresource constraints on the economy point to the need to attractforeign investors;
(c) in regard to increasing the efficiency and reducing the costs ofthe sector, it is desirable to introduce transparency in thefunding of the socially directed loss making operations and alsoto introduce competitive pressure in some areas;
(d) in regard to the energy sectoi's contribution to rural develop-ment, the very limited implementation capacity of Governmentagencies in rural areas (as well as budget constraints) make itadvisable to establish a framework which would encourage thedevelopment of community self-help and private initiatives to meetthe needs of rural areas.
As outlined in the Bank's 'Energy Options Review" (Report No. 6583-IND,August 1987), the desirable policy framework to achieve the aboveobjectives and priorities would include establishment of efficient energyprices and liberalization of the institutional framework.
Rationalization of Energy Prices
1.12 In the pricing area, the policy objective should be to minimizedistortions in domestic prices, using economic costs and netback value asthe norms. Specifically:
(a) the level of the electricity tariff needs to be maintained such asto enable the power sector to fund a reasonable share of itsinvestment program through self-generated funds, and the structureof the tariff needs to be miintained to signal to the differentclasses of consumers the economic cost (i.e., LRMC) of electricitysupply (para. 5.20);
(b) the prices for pr!mary fuel resources that are nontradeable or ofwhich Indonesia has a nontradeable surplus (coal, natural gas andgeothermal), need to be set between a ceiling imposed by the costof competing fuels and a floor dictated by their own economic cost(i.e., their LRMC); and
(c) the prices of petroleum products, particularly kerosene anddiesel, need to be adjusted to correct existing distortions in therelation between domestic and international prices.
1.13 To assist the Government in achieving the energy pricing objec-tives, an "Energy Pricing Policy Study" is being funded under the GasDistribution Project (Loan 2690-IND). Also, under the proposed project theGOI has agreed to specific proposals for institutionalizing the process ofreview of the energy prices, including the prices of petroleum fuels (LPG,kerosene, gasoline, diesel, fuel oil), gas, geothermal steam, coal andelectricity. The proposals consist of the following:
(a) establishment of an Interdepartmental Energy Pricing Task Force toreview and to advise Government on energy prices--the SteeringCommittee for the Energy Pricing Policy Study would be the coregroup for this; and
(b) establishment of an Energy Pricing Unit in MME to provide analyticalsupport and technical data to the Task Force--the counterpart teamfor the Energy Pricing Policy Study could be the core group for this.
An action plan with a time frame for the establishment of these units andtheir proposed functions was agreed with the Bank during the negotiations ofthe proposed loan (para. 4.3).
Liberalization of the Institutional Framework
1.14 In addition to the rationalization of energy prices, the achieve-ment of the long-term objectives of the sector will require the liberali-zation of the institutional framework. In the power subsector, this policydirection can be pursued through:
(a) encouragement of the financial autonomy of PLN by reducing its depen-dence on the Government budget, and giving it responsibility forinvestment and commercial decisions; and
(b) encouragement of private sector investment in situations where itmay be able to produce electrical energy at a cost competitive withthat of PLN.
1.15 Segregated Information on Rural Electrification. As an importantstep towards financial autonomy, PLN needs to obtain a better understanding ofthe costs associated with its substantial socially-directed activities (e.g.,rural electrification), particularly in its operations outside Java. Thesocially-directed activities impose a growing financial burden on PLN. Toassess the impact on its finances of such activities, PLN has agreed to insti-tute a system for segregating information on rural electrification activities,as a proxy for socially-directed activities (para. 5.18).
1.16 Coordination with Private Generation. In regard to the encouragementof private sector involvement, a first step will require the coordination ofgeneration between PLN and existing privately owned captive generation capa-city, of which there are about 2,900 MW in Java and 4,600 MW in all ofIndonesia. Thus, the initial objectives would be to:
(a) enable PLN to save in the installation of reserve capacity requiredfor system reliability by encouraging capacity assistance agreementsbetween PLN and major industrial captive generation plants. Aboutten such captive plant users in Java currently have an installedgenerating capacity of over 1,000 MW; and
(b) encourage cogeneration by industrial units that may be able toproduce electrical energy at a cost competitive with that of PLNby using industrial waste (e.g., wood waste, rice husks,bagasse), combined heat and power generation (cogeneration), or forother reasons.
1.17 For both these measures, it is necessary to prepare a suitableregulatory framework and establish model administrative and operating agree-ments. During the negotiations of this proposed loan the Government hasagreed to establish basic rules and regulations, covering legal, technical andcommercial aspects to captive power in coordination with PLN's system, formutual benefit. Draft interim rules and regulations will be prepared byNovember 30, 1989. Thereafter, during an initial period of one year, pilotprojects will be used to gain experience.
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Bank Role and Strategy
1.18 The above sectoral objectives have been supported through the Bank'sinvolvement with the electricity subsector, which has gone through threedistinct phases. In the first phase (1968-77), the Bank's work was directedtowards creating an autonomous national entity to deal w'th power supplyproblems and, after PLN's creation in 1972. to help put in place proceduresand systems to manage and improve its then small-scale operations. In thesecond phase (1978-84), the primary thrust of the Bank's work was to enablePLN to rapidly expand its supply facilities and, coupled with efforts toevolve integrated grids (particularly in Java), to take advantage of advancedtechnologies to reduce supply costs. The fruits of this effort are now beingreaped with the commissioning of large power plants at Suralaya (1,600 MW),Saguling (700 MW), and Cirata (500 MW) with an overlay of 500 kV transmissiongrid. The current phase of the Bank's involvement focuses partly on contri-buting to the financing of Indonesia's massive power programs to meet itsdevelopment needs, and even more, on building on the foundations laid in thesecond phase to transform PLN into a modern and mature utility by emphasizinginstitutional objectives. These objectives include greater financialautonomy, better operating efficiency, and improved corporate and financialplanning capability. The proposed project addresses these concerns andsupports investments in distribution facilities and a package of efficiencyimprovement measures (para. 4.3). In the future, the Bank will continue tosupport the development of the power subsector with the objectives of (i)improving the efficiency of PLN; (ii) enabling PLN to become more commerciallyoriented and financially self-supporting; (iii) maintaining electricity pricesat economically and financially appropriate levels; (iv) assisting in thepreparation and implementation of a least cost investment program; and (v)guiding and supporting institutional development to meet the sector's evolvingneeds. Also, the Bank would pursue two main objectives for efficient develop-ment of the rural electrification program: (i) reducing the cost of supply torural areas by optimising design and construction standards; and (ii) encou-raging the mobilization of village resources, from private and cooperativeenterprises.
1.19 In addition to the development of the electricity subsector, the Bankhas in recent years broadened its support of sectoral objectives throughgrowing involvement in sector-wide policy dialogue. This broadening beganwhen the Bank carried out a study of energy sector issues and prepared areport entitled "Indonesia: Issues and Options in the Energy Sector" in 1981.The report confirmed that alternatives to oil must be developed quickly forelectricity generation and recommended that this strategy should be extendedto such other sectors as industry, transportation and households. It empha-sized the need for efficiency pricing, stronger institutions and manpowerdevelopment as major objectives. In 1984, the Bank carried out a detailedreview of PLN's 1984/85-1993194 investment plan. The findings supported thegeneral direction of the plan but suggested a scaling down and some measuresfor improving investment efficiency. These findings, which were accepted bythe Government, were presented in a report entitled 'Indonesia: Power SectorInvestment Review' (Report No. 5486, September 1985). Also, the Bank studiedpossible improvements in the efficiency of operation of thermal and hydroplants and of maintenance of diesel plants and presented its findings in areport entitled 'Indonesia: Power Generation Efficiency Study' (Report No.
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0508/6, February 1986). This was followed up by a more detailed reportentitled "Diesel Generation Efficiency Improvement Study, (Report No. 095/88of December 1988). The Government and PLN have accepted the recommendationsof these reports. In addition, the Bank reviewed the rural electrificationprogram in Indonesia and presented its findings in a report entitledwIndonesia: Rural Electrification Options Review.' (Report No. 6144-IND,November 1986). The Bank also financed a set of three gas-related studiesthrough the Fifth Technical Assistance Credit, including the 'City Gas Dis-tribution Study', the 'Gas Utilization Study' and the 'LPG Feasibility Study'.In 1987, an 'Energy Options Review' (Report No. 6583-IND) assessed the priori-ties for energy sector development and recommended a strategy for their imple-mentation. Most recently, the Bank has undertaken an 'Institutional Develop-ment Review' of the power sector, which will, inter alia, analyze regulatoryand organizational issues to promote efficient institutlonal development.
1.20 The Bank has also been involved in the coal and gas slubsectorsthrough the Bukit Asam Coal Mining Development and Transportation Project(Loan 2079-IND) the Coal Exploration Engineering Project (Loan 2153-IND), andthe Gas Distribution Project (Loan 2690-IND). The Gas Distribution Projectincludes an Energy Pricing Policy study, which is expected to be completed inAugust 1989. In the future, the Bank will continue to support the broadobjectives of the sectoral development through pursuit of the followingstrategy:
(a) Promote the development of nontradeable natural gas, particularly inJava, which appears to be the most economic fuel for use in powergeneration. Since the presentation of the "Energy Options Review',progress has been made in the acceptance of the gas option for powergeneration, particularly gas from the offshore fields in East Java(KODECO and ARCO). Prospects also exist for gas supply from onshorefields in Central Java (CEPU and others) but little action has beentaken to explore these fields. By coordinating the development ofgas and power strategies, the Bank can provide an impetus for morerapid development of economical gas supply to industries andhouseholds as well. The Bank would also have a role in helping GOIto devise suitable institutional and financing arrangements whichwould attract private sector participation in gas-fired power plants.
(b) Promote the growth of coal mining primarily to meet the short andmedium terms needs of the power sector. In this respect, coalproduction from South Sumatra mines will need to be stepped up toabout 5.0 MT per year to meet the requirements at Suralaya from 1990.In addition to the mining capacity, augmentation of theinfrastructure facilities (railway, port and shipping) will beneeded. Also, a production and transportation capacity of about 2.5million tons of coal per year will be needed from Kalimantan tosupply the next coal fired thermal plant in East Java at Paiton,scheduled for commissioning in 1993/94.
(c) Based on the "Energy Pricing Policy Study', further the dialogue withthe Government on implementing policies and plans for the pricing of
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primary energy resources including diesel oil, residual fuel oil,kerosene, natural gas, LPG, and geothermal steam and electricity.
The Bank's Earlier Operations and PLN's Performance
1.21 Since 1969, the Bank Group has provided US$2,309 million for powergeneration, tranamission and distribution fbcilities through 15 separateprojects. Six transmission and distribution projects (Credits 165-IND and334-IND, and Loans 1259-IND, 2056-IND, 2443-IND and 2778-IND) rehabilitatedand expanded the distribution facilities in Java. Ten power projects (Credit399-IND and Loans 1127-IND, 1365-IND, 1513-IND, 1708-IND, 1872-IND, 1950-IND,2214-IND, 2300-IND and 2443-IND) assisted PLN to expand electricity generationcapacity in Java, to provide a strong all-Java 500 kV grid, to extend distri-bution facilities, to reduce system transmission and distribution losses, andto introduce a pilot program of mini-hydro development in Sumatra. ProjectPerformance Audit Reports and Project Completion Reports on the first sevenprojects (Credits 165-IND, 334-IND, 399-IND and Loans 1127-IND, 1259-IND,1365-IND and 1513-IND) have been issued. Also, PCR's for the Eighth, Ninthand Tenth Power Projects (Loans 1708-IND, 1872-IND, and 1950-IND) arefinalized. They conclude that these projects achieved the objectives set outat the time of the appraisal and were implemented within the budget. Takentogether, these projects have enhanced PLN's institutional capabilities,particularly its capability to carry out a rapid system expansion program.Currently, PLN handles an investment expenditure of over $1.0 billion andconnects over one million new consumers, each year. However, the problemsencountered in the earlier projects, relating to the need to reduce implemen-tation delays by timely appointment of consultants, and speedier procurementand construction, still persist, though to a reduced extent. PLN and GOI areboth aware of them and are addressing them at the institutional as well as thenational levels. The Bank has been actively associated with the Government inthe resolution of these issues, which are common to many sectors.
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II. THE POWER MARKET AND THE DEVELOPMENT PROGRAM
The Market
2.1 Principal sources of electricity supply in Indonesia are PLN andself-generation (captive) mainly by industries. Electricity consumption inthe country grew rapidly in the last decade from about 50 kWh per capita in1977 to 200 kWh per capita in 1988.
2.2 The share of captive generation, which accounted for over 602 ofcapacity in 1976/77, had declined to about 43Z in 1987/88 and, although cap-tive generation capacity has continued to increase in recent years, a moreimportant trend has been a rapid shift by industrial users from exclusivereliance on captive generation to use of captive generation for standbypurposes only. Annex 2 shows the growth in PLN's consumers and sales, andAnnex 3 shows the growth in captive plants in Indonesia.
2.3 Notwithstanding rapid growth, the level of consumption of electricityin Indonesia remains low, at about 200 kWh per capita, compared to a level ofabout 550 kWh per capita in Egypt or about 350/400 kWh per capita in Thailandand the Philippines. Indonesian per capita electricity usage is even lowerthan that in India and Pakistan, both of which countries have lower per capitaGDP.
Demand
2.4 The low level of electricity consumption is primarily due to lack ofsupply facilities and access to the network for the residential and othersectors. In 1987/88, only 24Z of all households in Indonesia were electri-fied. The electrification ratio was about 27Z in Java and about 192 off Java.
2.5 Several studies have shown that the potential demand for electricityis still large and that there is a potential for rapid growth in PLN's salesas supply capacity expands. This is supported by the fact that, even thoughPLN's sales in 1982-88 grew by about 142 a year, additional growth in electri-city consumption was supported by expanding use of private generation byindustry. The rapid growth in PLN's sales originates from three sources,viz., (a) extension of supply to new areas for residential and other users;(b) gradual take-over of supply in industries currently using their own dieselplant; and (c) growth in consumption by existing customers as a result ofrising output and income.
PLN's Facilities
2.6 PLN's total installed capacity in 1987/88 was 6,421 MW, of which4,280 MW (67X) was in Java. About 602 of the capacity uses petroleum fuels.Table 2.1 shows the breakdown of the generating capacity in Java and OutsideJava.
2.7 PLN's investment program in Java is designed to meet the followingimportant targets by the end of the Government's Fifth Five-Year DevelopmentProgram (Repelita V) in 1993/94: (a) a 751 electrification ratio in urbanareas (up from 542 in 1988), (b) a 292 electrification ratio in rural areas(up from 16Z in 1988), and (c) the substitution of 802 of the captive genera-tion in Java, which is currently 3,225 MVA (Annex 3). The Bank views thesetargets as attainable if the supply can be expanded to meet them, althoughthey should be close to the economic limits of the market (i.e., to meetingthe 'unmet" demand for PLN's electricity).
2.8 Based on these expansion targets and the projected growth in theindustrial and commercial demand, the electricity sales forecasts, shown inTable 2.2., have been agreed for the planning of the system expansion program.
2.9 Annexes 4 and 5 summarize the least-cost generation expansion plansfor Java and Outside Java for the period 1988189 to 1994/95 based on theprojected sales targets. The corresponding investment requirements forIndonesia and Java are shown in Annexes 6 and 7.
2.10 As a measure to ensure soundness of the development program, the Bankhas reached the following agreements with the GOI and PLN, which are insubstance the same as those reached under the Power Transmission andDistribution Project (Loan 2778-IND);
(a) Each year, PLN and GOI will review with the Bank PLN's developmentplan and investment budget so that the Bank can express its views onthe priorities and the balance among the generation, transmission,and distribution investments; and
(b) The Government will ensure that PLN has access to sufficient funds tofinance its capital expenditures as reviewed and agreed with theBank.
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III. THE BENEFICIARY
3.1 The borrower of the proposed loan would be the Government ofIndonesia (GOI) and the beneficiary would be PLN, the so:.e government-ownednational power utility in Indonesia. PLN's organization was described inpara. 1.9.
Institutional Development
3.2 Over the past ten years PLN has grown impressively. Since 1977/78,PLN has connected new consumers at an average rate of about 680,000 per year,increasing from about 370,000 in 1978/79 to about 1,200,000 in 1987/88. Itssales increased at an average annual compound rate of about 17Z in1977/78-1987/88, from 3,530 GWh to 17,077 GWh. Annex 8 summarizes selectedperformance indicators for PLN, which show gains on many fronts.
3.3 During the next several years, PLN is expected to continue to growrapidly (para. 2.9). The rapid expansion of supply facilities involvesincreasingly complex technical and managerial tasks, for which PLN will needto continue to strengthen its institutional capacity. Areas that needstrengthening have been recognized, and actions and programs are eitheralready underway or planned, in many cases with assistance from the Bank.These actions and programs are designed to support PLN's efforts in thefollowing major areas, namely, (a) planning; (b) organization and management;(c) improvement in operating efficiency; and (d) manpower development andtraining.
(a) Planning
3.4 Through the years, PLN has strengthened its technical planningactivities in the areas of generation, transmission and distribution. Thegeneration and transmission planning functions are now well established in PLNand are functioning smoothly. The emphasis now rests on improving theplanning, operation, maintenance and management of distribution facilities,for which responsibility is largely dispersed in PLN's regional offices. Theproposed project provides for technical assistance for the strengthening ofPLN's distribution management functions (para. 4.22).
3.5 PLN set up a corporate planning unit in 1981, and its first five-year corporate plan defining corporate objectives for all of its major func-tions was issued in 1984. However, the process of corporate planning in PLNis yet to develop into a substantive activity. Factors that have hampered theeffectiveness of corporate planning in PLN have been the lack of appropriateorganizational structuring of the function, inadequate staffing, and insuffi-cient familiarity of management and staff with modern corporate and strategicplanning techniques and procedures. There is also need for better coordina-tion among PLN's functional directorates (planning, construction, operations,finance, and administration, including human resources) on planning matters,and for their active involvement in the corporate planning process. Closercoordination between the corporate planning and financial planning functionsis particularly important, since financial objectives are a critical set of
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corporate objectives, and it is essential that both the corporate and finan-cial plans are better integrated. The corporate planning and financialplanning functions need to be further strengthened, both organizationally andtechnically. The Board of Directors of PLN fully supports this concept and,as part of the 1988 reorganization of PLN, has already set up planning unitsin the functional directorates and the regional offices, with the corporateplanning division in the planning directorate having the responsibility forthe overall coordination of the planning activities (para. 3.6). Staffing ofthese planning units is substantially complete. PLN requires external techni-cal assistance to help develop further its corporate and financial planningfunctions, including training focused on corporate and financial planningobjectives, techniques and procedures; assistance in the initial planningexercise to facilitate and guide the planning process, and to observe theeffectiveness of the training; and overview assistance until the planningprocesses are functioning effectively. The proposed project provides for suchtechnical assistance (para. 4.32).
(b) Organization and Management
3.6 Annex 1, Chart 2 shows PLN's organization chart. The organizationalstructure is basically centralised. However, decentralization of functions andresponsibilities to the regional managers is a necessity that has been recog-nized. In December 1987, PLN implemented a reorganization within its func-tional directorates at its headquarters and in its regional offices to stream-line the planning, programming, budgeting, operational and evaluation activi-ties. Under this reorganization, planning and evaluation units have been setup in each functional directorate and regional office, and the responsibilityfor the overall coordination of these activities is vested in the correspondingunits in the Directorate of Planning. To decentralize further, the regionalmanagers have been assigned a larger role in the preparation of their annualprograms and budgets, and greater responsibility and accountability forcarrying out their operational functions. These organizational changes are astep in the right direction and are expected to help improve the overallefficiency and effectiveness of PLN. In view of the expected substantialgrowth in PLN's operations, the need for a further review of PLN's institu-tional development was recognized. Towards this end, a review of the adequacyof the institutional framework in the power sector, including the role of PLNand its relationship with the Government, was undertaken by the Bank inFebruary/March 1989. The results of this review will be presented in a Bankreport and discussed with the Government.
3.7 As agreed under the Fourteenth Power Project (Loan 2443-IND), PLN hasestablished an Engineering Services Center (PPE) where activities such asproject formulation, engineering, design, procurement and constructionmonitoring are unified. The staffing of the center has been accomplished, andconsultants funded ux.der the Power Transmission and Distribution Project (Loan2778-IND) are already in place to assist PLN in developing the center. Anoverall management information system is also being developed, which will drawupon various subsystems (e.g., operations, project management, finance andaccounting, personnel and manpower development) to provide PLN managers withmore timely and accurate information on operational activities. PLN is beingassisted in this work by consultants whose services are being financed from theThirteenth Power Project (Loan 2300-IND).
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(c) Improvement in Operating Efficiency
3.8 Annex 8 shows some of the performance indicators for PLN for theyears 1979/80 to 1981/88. which indicate significant achievements in severalareas. However, further improvements are possible and necessary. Under thePower Transmission and Distribution Project (Loan 2778-IND), PLN agreed tocarry out an action plan for such improvements, which is under implementation.The major components of this action pla. are: (i) efficiency improvement indistribution including reduction in losses; (ii) conversion of selected oil-fired thermal plants to gas-firing; (iii) improvements in the operation ofmajor thermal power plants; (iv) improvements in the operation and maintenanceof diesel power plants, including their relocation and rehabilitation; and (v)renovation of small hydro plants. The proposed project supports theimplementation of this plan; the agreement to carry out the action plan iscontinued under the proposed loan.
(d) Manpower Development and Training
3.9 As of March 31, 1988, PLN had about 51,200 employees of whom about36,700 are employed on the permanent payroll. PLN has no difficulty inrecruiting staff educated at levels up to technical high school, but less than3Z of the staff have university degrees. To address its training problems,PLN has a separate department for training. This department, known asPUSDIKLAT, plays an important role in PLN's efforts to upgrade the skills ofits technical and administrative staff, and manages ten training centers witha staff of about 470, including about 180 trained instructors. PLN expendsconsiderable effort in the training of staff not only within the organization,but also through student scholarship and foreign training. These efforts havebeen largely successful. In 1987/88, about 3,800 staff received training ofvarious duration; of these staff, about 1,900 received training at thePUSDIKLAT, about 1,700 domestically outside PUSDIKLAT, and about 200 outsideIndonesia.
3.10 The Bank has been supporting PLN's training activities and humanresources development efforts, including the establishment of several trainingcenters. Currently, three major training efforts are well underway withassistance provided under the Twelfth Power Project (Loan 2214-IND). Theyare, (il technical assistance to reorganize and enlarge the entire manpowerdevelopment, training and personnel management functions for middle- andlower-level staff; (ii) setting-up new training centers, for thermal powerplants, transmission lines and middle-level managers; and (iii) a program forthe training of senior- and middle-level personnel outside Indonesia in tech-nical and financial areas. Progress under these activities has been satisfac-tory. The proposed project provides for specific training activities in theareas of diesel plant operations, distribution management, corporate andfinancial planning, general accounting and cash management (paras. 4.9, 4.22,4.32-4.35).
Accounting and Budgeting
3.11 PLN's accounting system, installed in the early 1970s, followsgenerally accepted accounting principles, and normal utility practices, but itneeds upgrading to keep pace with the growing complexity and volume ofaccounting transactions. There is need for improvement with respect to the
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completeness and accuracy of fixed asset accounting, depreciation, inventoryaccounting and accounts receivables. The accounting system needs to producemore accurate information in a timely manner, for use by PLN managers inmaking decisions. Also, PLN's internal procedures for preparing budgets andmonitoring actual expenditures need to be strengthened through bettercoordination among and participation by the various functional directoratesand regional offices in the process, to enhance the budget's value as amanagement tool.
3.12 Under the Eleventh Power Project (Loan 2056-IND), funds were providedfor management consultancy for developing an integrated system for budgeting,accounting, and financial reporting. This study is complete and its recommen-dations are in various stages of implementation. PLN has engaged or isengaging consultants to improve fixed assets accounting, cost accounting, andinventory management. Since 1987, PLN is implementing an action plan toimprove its accounting practices and functions by (i) establishing a uniformaccounting system, (ii) improving related support systems, (iii) sensitizingconcerned non-financial managers and staff to the importance of timely andaccurate accounting, (iv) uipgrading the skills of the accounting staff throughin-house and external training courses, and (v) computerizing the accountingprocess. The proposed project provides for technical assistance to improvethe appropriateness and adequacy of PLN's accounting policies and systems, andto prepare relevant updated accounting manuals (para. 4.34). Through itsrecent reorganization, PLN is also attempting to improve coordination betweenits departments and its regional offices in the areas of budget preparation,and monitoring and evaluation of performance as discussed in para. 3.6.
Billing and Collections
3.13 Bills are prepared monthly. Computer billing is utilized at thecomputer center at the headquarters in Jakarta. Overall collection perfor-mance is generally satisfactory. The receivables position of general consumeraccounts has been good, as it has been kept at about one and one-half monthsof the yearly billing. The collections from government users (including theArmed Forces and local governments), who account for about 1O of its totalsales, has also improved in recent years. The Government has taken variousmeasures to reduce overdue government accounts--from over one year in 1981/82to under two months' billing now. A covenant under Loan 2778-IND requiresthat amounts owed to PLN by all government users will not be overdue in theaggregate by more than two months of total billings to such users. Thiscovenant will continue under the proposed loan.
Audit and Internal Control
3.14 PLN's accounts are required by its charter to be audited byGovernment auditors. The audits are carried out following generally acceptedaccounting practices and standards. The audit reports in recent years havereceived qualified opinions from the auditors. In the latest report forFY 1987/88, the qualification related to its inventory accounts. The magni-tude of discrepancies is not so large as to render the accounts unacceptable;the Bank has, therefore, considered them acceptable. Since 1983, PLN has madespecial efforts to expedite the closing of accounts and has succeeded incompleting them usually within six months after the close of the fiscal year
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as stipulated by Government for all public corporations. PLN is also takingmeasures to train its accounting staff and has prepared computerization plansto expedite accounts processing (para. 3.12). Government audits normally takeabout three months. While the unaudited accounts are generally finalized andreceived in time, there are still delays in auditing of accounts. Thesedelays have been largely due to protracted discussions between PLN and theauditors on matters that have been the subject of qualified opinions from theauditors. As these delays are expected to be transitory, the audit covenantunder Loan 2778-IND, that requires PLN to submit to the Bank its unauditedaccounts no later than six months, and the audited financial statements andthe report of such audits no later than nine months after the end of eachfiscal year, will be cortinued under the proposed loan.
3.15 PLN has an effective internal audit group which reports to thePresident Director for various special investigations, in addition to keepinggeneral and project accounting matters under review.
Insurance
3.16 PLN currently carries transit and marine insurance on equipment andmaterials in transit. Projects under construction are covered by thecontractor's all risk and erection insurance. Fire and other hazards on mostof the assets in operation are as yet self-insured. In view of the geogra-phical spread of PLN's assets, any single loss would be relatively small bycomparison with total assets and operations, and this policy has been acceptedby the Bank. However, some very large projects have recently been completedand others nw under implementation would result in a greater concentration ofassets in certain locations than in the past. As agreed under the FourteenthPower Project (Loan 2443-IND), with assistance from a local insurance company,PLN carried out a review of its insurance practices and requirements. As aresult of the review, PLN took out commercial insurance for all the majoroperating plant and equipment at the Muara Karang and Suralaya thermal plants.Under the proposed loan, an understanding was reached that major works, plantand equipment at other large projects such as the recently completed Saguling,Cirata and Mrica hydroelectric plants and the proposed Paiton Thermal PowerProject, would be insured with outside agencies.
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IV. THE PROJECT
Background
4.1 As discussed in para. 3.8, intensive dialogue has taken place betweenthe Bank and the Government on institutional development and efficiency issuesin the power sector in connection with the Power Transmission and DistributionProject (Loan 2778-IND), which was approved in January 1987. As a result ofthat project, ar action plan was prepared for the improvement of the effi-ciency of PLN. Also, the sector work carried out by the Bank suggestedseveral actions by the Government that would improve the sector's efficiency.This project supports a package of actions, which, when taken together withother ongoing actions, will improve the efficiency of the sector in financial,technical and institutional development areas. To improve the financialperformance of PLN and, at the same time to meet the financial performancetargets agreed between the Bank and PLN (para 5.7), an average increase of 25?in electricity prices has been implemented, effective from April 1, 1989.
Rationale for Bank Involvement
4.2 As discussed in para. 1.18, in the early years of the Bank's associa-tion with PLN, effort was concentrated on transforming PLN from a departmentof government to an autonomous entity. In subsequent years, the Bank assistedPLN in the rapid expansion and integration of its supply facilities. Pastoperations have emphasized different aspects of the efficiency of the institu-tion and the sector, such as implementation of the least cost investmentprogram, training, improvements in project design and implementation, lossreduction, etc. In an era of resource constraints, drawing the greatestbenefit possible from existing assets has a high priority. The proposedproject is designed to improve PLN's capacity to manage the existing andrapidly expanding system efficiently. Given the Bank's close relationshipwith and knowledge of PLN, it is well placed to help the authorities implementa program to enhance the managerial, operational, and financial efficiency ofthe sector.
Pro3ect Obiectives
4.3 The project aims to focus the attention of PLN and the Government onthe sector's efficiency and to implement selected actions in a time-boundmanner to utilize resources more efficiently. Specifically, the project willimprove the operation of PLN's diesel, hydro and steam power plants anddistribution facilities, and provide investment funds to augment distributionfacilities and the telecommunications network. Also targeted for improvementare corporate planning, financial planning, accounting and cash managementfunctions. To enhance the strategic objectives outlined in paras. 1.10 to1.17, the following actions are agreed with GOI and PLN under the proposedloan.
(a) establishing institutional mechanism to review and advise theGovernment on all price adjustments in the energy sector (para.1.13);
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(b) establishing an information system that vill provide costs for therural electrification component of PLN's investments and operations(paras. 1.15 and 5.18); and
(c) introducing suitable regulatory and contractual measures to utilizesome of the captive (in-house) generating capacity, along witn PLN'sfacilities, to reduce investment costs and to promote economiccogeneration by industries (paras. 1.16 and 1.17).
Project Description
4.4 The project comprises investment and technical assistance components.The investment components will include: (a) improvement in the operation andmaintenance of diesel power plants, including their relocation and rehabilita-tion; (b) renovation of small hydro plants in Java to recover derated capacityand maximize energy output; (c) implementation of a distribution investmentprogram to support the projected increase in sales and consumers; and (d)augmentation of PLN's telecommunications facilities. The technical assistancecomponents will inclade assistance, inter alia, for improving: (a) operationof diesel power plants; (b) operation and maintenance of steam power plants;(c) operation, maintenance and management of distribution facilities; (d) gen-eral accounting, and cash management; and (e) financial planning and corporateplanning functions. The technical assistance component will also includetraining relevant to the above areas.
Diesel Efficiencv
4.5 To meet the electricity needs of about 402 of the country's popula-tion in hundreds of islands other than Java, PLN has extensively used dieselgenerators. In 1987/88 the total capacity of diesel generators outside Javawas about 1,420 MW; the total number of units exceeded two thousand, installedin over six hundred locations. Efficient operation and maintenance of theseunits is a formidable task because of the vast geographical area covered andthe diversity of the capacities, models and manufacturers of the engines.
4.6 Responding to PLN's desire to improve the operation and maintenanceof its diesel plavnt, a Bank mission carried out a review of the needs underthe UNDP/World Baik "Energy Sector Management Assistance Program (ESMAP)l andpresented its findings in a report entitled 'Power Generation EfficiencyStudy" (Report No. 050/86 of February 1986). Further work on the dieselefficiency improvement program was carried out in 1987 by the Bank under thesame program, funded by a grant from the Government of the Netherlands. Areport containing detailed reccmmendations was finalized in December 1988(Report No. 095/88). Also, since November 1987, using funds from a grant bythe Government of the Netherlands, a full-time expatriate diesel expert hasbeen appointed as an Engineering Advisor, resident in Indonesia, to advise PLNin the formulation and implementation of various components of the dieselefficiency program. The Engineering Advisor is solely accountable to PLN andacts strictly as an advisor.
4.7 The six major activities to be conducted under this program aredescribed below:
(a) Compile an accurate inventory of all diesel generating units.
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(b) Recover derated capacity of diesel units by rehabilitation, wheretechnically and economically justified. An initial survey of unitsrated above 500 kW, indicates that 82 units, with a total installedcapacity of 133 MW, each of which is derated by more than 202, havean aggregate derating of 49 HW or 37Z. These include 29 units atfive locations surveyed by the ESMAP team (para. 4.6), with a totalinstalled capacity of about 100 MW, derated by about 37 MW.
(c) Relocate selected diesel units to better match the demand and thesupply capability. Relocation of 73 diesel units in the capacityrange of 100 kW to 400 kW has already been determined to be desirableand is under implementation. Further relocation needs will beidentified and :mplemented.
(d) Develop and implement new wavs of maintaining the diesel units toimprove their availability, i- iabillity and fuel efficiency. Some ofthe steps proposed inclu(ie £e:i-.tion of mobile maintenance teams,wider use of transportable j2½;.el units for small rural systems,implementation of computer-b.<ed maintenance management systems,establishment of a specialist operation and maintenance support groupand selective privatization of maintenance.
Ce) Develop and implement more intensive and extensive training programsfor about 1,700 operation and maintenance staff associated with unitswith a capacity over 250 kW which constitute about 84Z of the totalinstalled diesel capacity.
(f) Improve inventory management for spare parts, including purchase,warehousing, and distribution. The activity will lead to theestablishment of a computerized inventory management system.
4.8 To prepare further and implement these components of the project inan efficient and coordinated manner, PLN has established a full-time team,which includes one senior officer at the level of Subdivision Chief and twoother officers. Also, a steering committee has been set up to provide policyguidance and management support to the working team. This is chaired by theChief of the Operations Planning Division and includes the chiefs ofOperations, Logistics, Operations Evaluation and Rural hlectrificationDivisions. Also, close coordination is established with the System PlanningDivision, Personnel Planning Division and PUSDIKLAT (training).
4.9 Assistance of consultants will be needed for the activities (d), (e)and (f) described in para. 4.7. In January 1989, PLN prepared a ProjectFormulation Report defining the scope of this technical assistance component,including training, to request the Government of the Netherlands for itsfunding. An agreement has been reached between GOI and the Government of theNetherlands, under which the latter will provide 2.0 million Guilders in 1989to finance the activities. The agreement is expected to be extended to coverthe three year period 1989/90 to 1991/92 and the total estimated cost of 20million guilders. It has not yet been possible to finalize the scope of reha-bilitation activity and its costs. More investigations will be carried out oneach plant and unit needing rehabilitation. The selection of diesel plants
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for rehabilitation would be done on the basis of a detailed cost/benefitanalysis. Reports containing such information will be submitted to the Bankfor review. The proposed loan will provide $10 million to be used over aperiod of three to four years to finance the implementation of the approvedrehabilitation projects. Cofinancing is also expected from the Government ofthe Netherlands for the rehabilitation of some diesel units supplied by Dutchmanufacturers. Annex 9 gives a cost estimate for the various activitiesdiscussed above.
Hydro Renovation
4.10 The project will include renovation of seven small hydro plants inJava. Annex 10 gives details of each plant and the scope of work. Table 4.1summarizes the information.
Table 4.1: HYDRO RENOVATION AND E.YPECTED BENEFITS
Year of Nominal Capacity/energyName commissioning capacity (MW) gain
4.11 The scope of work includes rehabilitation of generating equipmentincluding turbines, generators, governors and exciters; renovation or replace-ment of electrical aquipment such as transformers, control panel instrumenta-tion and protective relays; and repair and painting of penstocks, at allstations. The proposals also include civil works to provide (a) an additionalwaterway at Ubrug; (b) a modification of water intake at Kracak; (c) enlargedwater discharge from Jelok and Timo; (d) enlargement of daily pondage capacityat Giringan; and (e) enlarged water storage capacity and improved intake atKetenger.
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4.12 The responsibility for the engineering and coordination of thisproject is assigned to the newly established Engineering Services Center (PPE)of PLN (para. 3.7), which will establish a project team for this purpose.Detailed investigations and designs for the civil works will be carried out byPPE staff, assisted by local consultants, where necessary. PPE will beassisted by the staff of PLN's Research and Testing Institute (LMK) for theinvestigation of the scope of penstock renovation work. PLN also obtainedassistance from Sulzer and Charmille of Switzerland, who are the originalsuppliers of most of the generating equipment, to define the scope of work forthe generating equipment. The cost of about US$200,000 for this work is beingfunded from the Power Transmission and Distribution Project (Loan 2778-IND).
4.13 The implementation of the rehabilitation works, including the civilworks, are expected to stretch over a period of about four years. Therenovation of the generation equipment and penstocks is expected to becompleted in about two and a half years. In the coordination and supervisionof the renovation works, the PPE team will be assisted by consultants, who arebeing selected following the Bank's guidelines. About 150 man-months areestimated for the consulting engineering services, of which about 100 will befrom local consultants.
Distribution
4.14 Demands on PLN to expand its distribution facilities have been heavyover the past few years; the number of consumers served by PLN in Java havegrown from about 1.0 million in 1977178 to about 5.4 million in 1987/88, anannual average growth rate of about 18.52. In the process of this rapidgrowth, it has not been possible to achieve a high-level of efficiency in thedistribution system. Improving efficiency of the distribution facilitiesrequires a three-pronged approach:
(a) maintaining a proper balance between the investments in generation,transmission and distribution facilities. Distribution expansionshould keep pace with the growth in sales to maintain desiredstandards of service quality, at minimum cost;
(b) upgrading the quality of operation and maintenance of thedistribution network by better equipment, procedures and training ofstaff; and
(c) minimizing costs by better planning, improved standards of designand construction, and reduction of technical and nontechnicallosses.
4.15 In the past, investments in distribution facilities have laggedbehind sales growth and consumer connections. This has contributed to lowreliability and high distribution losses. Since the relatively short timehorizon for planning and constructing distribution facilities makes themunsuitable for funding by external agencies, PLN largely depends on internalfunds or Government contributions for financing distribution investments.Consequently, in periods of financial stringency, distribution investments are
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curtailed, creating imbalance and inefficiencies in the system. In order toprovide a stable financial environment under which distribution investmentscan be planned and implemented, this project includes the financing of a two-year timeslice of the distribution investment program (excluding ruralelectrification) in Java for 1990/91 and 1991/92. It also provides for tech-nical assistance to improve distribution management in Java (para. 4.22). Inthe Power Transmission and Distribution Project (Loan 2778-IND), approved bythe Bank in January 1987, a similar approach was used to fund primarily 150 kVand 70 kV transmission lines and substations in Java. The proposed projectwill complement the earlier project by financing the requirements forexpanding non-rural distribution in the whole of Java island at voltages of 20kV and below.
4.16 The distribution investment program for Java, including ruralelectrification, for 1989/90-1991/92, incorporates targets for consumerconnections shown in Table 4.2
4.18 The corresponding targets of physical construction of medium-voltagelines, low voltage lines, and distribution transformers are as shown inTable 4.4.
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Table 4.4: CONSTRUCTION TARGETS
1990/91 1991/92
MV lines (kmc) /a 4,459 5,077
LV lines (kmc) 4,164 4,905
Distribution Transformers (MVA) 1,241 1,387
Consumer Connections 440,650 452,820
.a kmc means circuit kilometers.
4.19 Annex 12 , Tables 1, 2 and 3 give details of the physical quantitiessubdivided under PLN's four Wilayahs (regions) viz: East Java, Central Java,West Java and Jakarta, the cost estimate and a list of proposed contracts fordistribution materials. The Bank loan would finance Lots LA, 1B, 2A, 2B, 2C,3, 4, 5, 6, 8, 10A, lOB, 11 and 12, listed in Table 3 of Annex 12.
4.20 All distribution expansion is proposed to be carried out by theextension of the grid supply. Detailed plans for the expansion are developedby PLN for each year for each Wilayah covered by the project, using rankingcriteria that include: (a) distance from the grid; (b) demand density interms of number of consumers per km2; (c) construction cost per consumer andper kVA of connected load; (d) estimated energy sales per unit of investment;and (f) considerations of equitable regional development.
4.21 Detailed reports containing such plans for each Wilayah will besubmitted to the Bank for review and comments in July 1989. It was agreedthat such plans will be updated each year thereafter, i.e., by March 31, 1990for the year 1990/91, and by March 31, 1991 for the year 1991/92, andsubmitted to the Bank for review and comments prior to implementation.
4.22 The project includes technical assistance to strengthen PLN's manage-ment of the planning, design, construction, operation and maintenance of itSdistribution facilities. Consulting services will be procured for such apurpose following the Bank's guidelines. Agreed terms of reference for theconsulting services are attached (Annex 13). The consultants are expected tobe appointed by December 31, 1989. The total estimated requirement for theservices will be about 230 man-months of which about 100 will be from localconsultants.
Telecommunications
4.23 Efficient operation, maintenance and management of a power utilityrequires a reliable telecommunications network. The communications require-ments fall in three categories vizs (i) operational communications related tothe safety and efficiency of the power system requiring "real-time' functions
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of system control, protection and switching; (ii) communications related tocoordination of operations, maintenance and construction activities; and (iii)general administrative and commercial communications. These functions havedifferent requirements of reliability, speed and quality. PLN utilizes commu-nications facilities such as power-line carrier, radio (VHF) and publictelephones to meet its current needs.
4.24 Recognizing the need to augment and upgrade its communicationsfacilities to meet the requirements of the expanding network, studies werecommissioned to prepare a master plan for telecommunications requirements forthe period 1985-2000, using funds from the Twelfth Power Project (Loan 2214-IND). This resulted in a "Design Report for Java Trunk System" in August1985, and a 'Supplementary Report* in May 1986. The requirements were definedin terms of phasing for each five-year period. The detailed technicalrequirements for the first development phase were presented in a report inMarch 1987, entitled 'Java West Telecommunications System - TechnicalProposal.' This report provides the basis of the scope of the telecommunica-tions component included in the proposed project.
4.25 The project will provide a trunk telecommunications network in WestJava, using fiber-optic cables, which will be superimposed on and integratedwith the existing telecommunications facilities. In order to minimize theinstallation costs, existing towers carrying the power transmission lines willbe used for supporting the fiber-optic cables. About 500 km of fiber-opticcables would be required. Also included are fiber-optical transmissionsystems, multiplexing stations, terminals and a transit private automaticexchange with 800 lines at Cawang in Jakarta. Annex 14 provides the costestimate for the proposed system.
4.26 Detailed design and tender documents have already been prepared. Theproject will be implemented by a single contract, to be procured by ICB, whichwill include supply, erection, initial maintenance and training.
4.27 The scope of the services of the past consultant ended with thepreparation of the tender documents. PLN has invited proposals from an agreedshortlist of consultants, for the implementation phase of the project, inaccordance with the terms of reference agreed with the Bank. The consultingservices are estimated to require about 80 man-months.
Technical Assistance
4.28 The project provides for technical assistance to improve PLN's opera-tions, maintenance and management in several areas, with the assistance ofeither individual expatriate specialists or with the help of consulting firmsand provision of equipment and software as necessary for this purpose. Thescope of such assistance in the areas of diesel generating plants and themanagement of distribution facilities was discussed in paras. 4.9 and 4.22.Additional areas for technical assistance are: (i) improvement in the opera-tion and maintenance of major thermal power plants; (ii) strengthening ofcorporate and financial planning activities; and (iii) improvements in cashmanagement and accounting functions. Funding of the first area is excludedfrom this project since technical assistance is already in progress with agrant from the British Overseas Development Assistance program.
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Thermal Power Plants
4.29 Suralaya coal-fired steam power plant, funded from earlier BankLoans, vas selected as a target for efficiency improvement. The plantcurrently has 3 x 400 MW units under operation and one more similar unit isexpected to be added in late 1989. With a capacity of 1,600 MW operating atbase load, this plant would generate about 9,000-10,000 GWh of electricalenergy each year, or about 40S of the total electricity generation in Java in1990/91. PLN has already taken steps including an intensive training programfor the operation and maintenance staff, funded by grant from the BritishOverseas Assistance program, that have resulted in impressive improvement inthe station performance in the last two years, as illustrated in Table 4.5below:
Table 4.5: PERFORMANCE OF SURALKYA POWER PLANT
Availability (Z) Plant factor (Z) /aUnit 1 Unit 2 Unit 1 Unit 2
/a Plant factor is the ratio of actual production to the theoreticalproduction capacity.
4.30 Actions to sustain this improvement have been identified and inprogress. They include:
(a) plant betterment in areas such as ash disposal and coal unloading;
(b) improvement in practices for water conditioning, housekeeping, andperformance monitoring; and
(c) training for the operation, maintenance and management staff.
4.31 PLN already operates a simulator training school at Suralaya foroperator training and has established a central thermal power training centerat Suralaya. These activities were funded from the Ninth and the TwelfthPower Projects (Loans 1872-IND and 2214-IND). PLN has also strengthened theoperation and maintenance organization at the Suralaya plant and addedspecialized functions such as an efficiency engineer.
Corporate Planning and Financial Planning
4.32 The need to strengthen PLN's corporate planning and financialplanning functions, and the objectives of strengthening these functions were
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discussed in para. 3.5. In view of their substantial interrelationship, tech-nical assistance for these activities will be carried out jointly, in twophases over a period of about two-and-a-half years. The first phase, lastingabout six months, would lead to the preparation of a master plan for theimprovement of the corporate and financial planning functions in PLN. Thesecond phase, lasting about two years, would include (a) assistance during onefull cycle of the annual corporate planning process, to ensure that thisfunction will be carried out in future without external assistance; and (b)assistance in acquiring and using a suitable utility financial planningsoftware package.
4.33 Terms of reference for the technical assistance, agreed with PLN, arepresented in Annex 15. The consultants are expected Lo be appointea byJanuary 31, 1990. About 140 man-months will be required for the services, ofwhich about 60 man-months will be from local consultants.
Accounting
4.34 The need for technical assistance to improve PLN's accountingpolicies and systems, and to prepare upda&Ld accounting manuals was discussedin para. 3.12. Terms of reference for conisulting services for such technicalassistance have been finalized in consultation with the Bank. PLN has invitedproposals from several accounting firms in Indonesia, having association withforeign firms, for their services. It is expected that the consultants willbe appointed by December 31, 1989.
Cash Management
4.35 PLN often holds substantial bank balances in current deposits tomaintain liquidity. The system for providing timely information concerningfuture receipts and disbursements is currently not well developed; hence theneed for strengthening cash management and planning functions. Localconsultants have been appointed to assist PLN in improving the efficiency ofits financial management through an active program of cash management todefine and achieve a desired level of liquidity, which would include cashbalances and facilities for both short-term investment and short-termborrowings, the creation of a short- and intermediate-term cash forecastingmodel, and training of appropriate staff in cash management techniques.
4.36 Draft terms of reference for the consultancy work were agreed withthe Bank. PLN will finance the services from its own funds.
Cost Estimate
4.37 Annexes 9, 11, 12, and 14 provide the detailed cost estimates for thediesel, hydro renovation, distribution and telecommunications components ofthe project. All costs are based on December 1988 prices and derived fromrecent tenders. Physical contingencies are set at 5Z. The price contingen-cies, calculated using the inflation factors shown in Table 4.6, amount toabout IOZ of the base cost plus physical contingencies.
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Table 4.6: INFLATION FACTORS (Z)
1989 1990 1991 onwards
Foreign 5.3 5.3 4.1Local 9.0 9.1 5.2
4.38 Table 4.7 sumnarizes the project cost estimate. The costs are inclu-sive of taxes and duties, estimated to be US$12.9 million equivalent. Thetotal project cost, net of taxes, is US$584.1 million equivalent. PLN isexempt from taxes on imported equipment but pays 102 value-added tax (VAT) onall local contracts.
Table 4.7: SUMMARY PROJECT COST ESTIMATE
U_ milIlIon RD billion Foreign asItem Local For7ign Total Local Foreign Total X of total
Total Prolect Cost 181.9 424.6 665.6 224.23 721.82 946.05 76.8
Interest during construction - 40.5 40.6 - 68.86 68.86 100.0
Total Financing Required 181.0 46S.1 597.0 224.28 790.67 1.014.90 77.9
a Excludes cost of about U522.0 million equivalent for the Improvement of the operation andmaintenance of steam power plants financed by a Britiah ODA grant.
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Financing Plan
4.39 The financing plan for the project, as shown in Table 4.8 below, wasagreed.
Table 4.8: FINANCING PLAN(US$ million)
Source Local Foreign Total Z
Cofinancing from the Governmentof the Netherlands - 20.0 20.0 3.3
/a Corresponds to the interest during construction.
4.40 As discussed in para. 4.9, cofinancing from the Netherlands, consist-ing of grants and concessional funds, is expected to finance the technicalassistance component and a part of the rehabilitation component of the dieselprogram. Cofinancing will also be arranged for some of the equipment for dis-tribution. It was agreed that the Government will finalize the cofinancingarrangements by March 31, 1990.
4.41 The proposed loan will finance 72 3Z of the foreign cost of theproject or 56.5Z of the project cost, including the interest during construc-tion. The proceeds of the Bank loan, which would be made to GOI, would beonlent to PLN for 20 years including a grace period of 5 years, under a subsi-diary loan agreement, the signing of which will be a condition of loan effec-tiveness. The onlending rate will be the Bank's standard variable interestrate plus fees of 1.90Z to cover administrative charges, and a part of theforeign exchange risk that will be borne by the Government.
Procurement
4.42 All equipment and related services financed under the proposed Bankloan will be procured by international competitive bidding (ICB), except thefollowing:
(a) spare parts and other materials required for small diesel rehabilita-tion subprojects will be procured by local competitive bidding proce-dures in accordance with the Government guidelines, which are accep-table to the Bank. Also, materials required for diesel rehabilita-tion estimated to cost less than US$50,000 equivalent per contract,up to an aggregate amount not exceeding US$2.0 million equivalent maybe procured by selected shopping procedures in accordance with Bankguidelines;
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(b) renovation of the turbines and governors for old hydro plants will beentrusted to the original suppliers, Sulzer and Charmille ofSwitzerland, by direct negotiations. This is considered the mostefficient and economical procurement procedure for the 11 smallturbines involved, for which only the original suppliers have thedesign data; and
(c) the rewinding and renovation of generators for hydro plants will beimplemented following limited international bidding by firmsspecialized for such work, since such work is highly specialized andonly a few international firms are competent to execute it to therequired standards.
4.43 The Bank loan will finance the procurement of the following items:(a) diesel rehabilitation; (b) hydro renovation; (c) distribution equipment;(d) telecommunications; (e) consulting services connected with hydrorenovation, distribution management, telecommunications, corporate andfinancial planning, accounting and training.
4.44 For all consulting services to be financed under the proposed loan,consultants will be selected and engaged in accordance with the Bank guide-lines. In the ICB procedures for the procurement of equipment, domesticmanufacturers would be eligible for a preference in bid evaluation of 152 orthe import duty whichever is lower. Table 4.9 summarizes the procurementarrangements. All bidding packages for goods financed by the Bank loanestimated to cost over US$1,000,000 equivalent will be subject to the Bank'sprior review of procurement documents, which will cover over 902 of theprocurement volume.
Total 814.0 145.0 6.0 1.5 69.0 21.0 666.6(811 6) (8.0) (6.0) ( i ) (I -- ) - (87. 0)
L Following procedures of the cofinanclers or International and local shopping procedures forBank funds.
/b Includes taxes and duties (paid by the owner), administration and overheads.
Note: Figures In parentheses indicate amounts finane d from the proposed Bank loan.
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Implementation Schedule
4.45 Annex 16, Charts 1, 2 and 3, give the implementation schedules forthe hydro renovation, distribution expansion and telecommunications componentsof the project respectively. The distribution expansion and the telecom-munication components will be completed by the middle of 1992, while the hydrorenovation will be completed by the end of 1993. The project implementationis expected to be completed in all respects by June 30, 1994. The closingdate of the loan will be December 31, 1994.
Disbursement
4.46 The Bank loan will be disbursed against approved contracts and willcover: (a) 100Z of foreign expenditures for directly imported equipment andmaterials; (b) 10OZ of ex-factory expenditures for locally manufactured items;(c) 652 of local expenditures for other items procured locally (ex-shelf); and(d) 100? of expenditures for the services of consultants. No disbursementswill be made for expenditures prior to the loan signing. To the extentpracticable, withdrawal applications will be aggregated in amounts ofUS$100,000 or more prior to submission to the Bank.
4.47 Annex 17 gives the disbursement schedule for the proposed Bank loan.The disbursements against this loan are expected to be faster than the profilefor power projects in Indonesia because of the high proportion of thedistribution component which covers a two-year timeslice and where the Bankloan would be disbursed against procurement of goods only.
Ecology
4.48 No environmental hazards are foreseen in the implementation of thisproject. The proposed measures to improve the operation and maintenance ofdiesel plants should, if anything, reduce pollution due to exhaust gases andnoise. The hydro renovation program does not envisage any encroachment onland resources or human habitats. The distribution component will be carriedout in accordance with current technological practices and will cause minimumdisturbance to the environment. PLN uses insulated conductors for the low-voltage overhead lines, which minimizes the requirement of tree cutting fortheir construction and maintenance. Suralaya steam power plant where theefficiency improvement measures are concentrated, was funded by previous Bankloans (1708-IND and 1872-IND) and has been designed to meet the Bank'senvironmental guidelines. Efficiency improvement measures that will beundertaken will ensure that the design objectives are achieved or exceeded.
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V. FINANCIAL ANALYSIS
Past Results
5.1 PLN's financial operating results for 1980181 to 1987/88 aresummarized in Table 5.1. Historical financial statements are given in Annex18.
Table 5.1: SUMMARY OF PLN'S FINANCIAL OPERATING RESULTS,
1960/61-1967/U8
Fiscal yer 1980/61 1981/82 1962/83 1983/84 1984/8S 1966/66 1966/87 1987/88
Current ratio (times) 4.6 8.4 2.4 2.2 2.6 2.1 1.3 1.1
La Based on revalued assets (par&. 6.26).Lb Three-year moving average (current plus two precoding years)./c Excluding revaluation surplus.
5.2 During 1981/82-1985/86, PLN's operating revenues and expensesincreased at about the same rate, averaging about 35? p.a. PLN's energy salesgrew at an average annual compound rate of about 142. Although the average
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revenue per kWh sold increased by 18.52 p.a. over the period, PLN'sprofitability was negative. This situation resulted from the Government'spolicy during this period of permitting tariff increases that were justadequate to meet the increases in operating costs, caused mainly by increasesin fuel prices. Nevertheless, throughout this period, PLN had comfortableliquidity, good debt service coverage, and an adequate capital structure as aresult of substantial paid-in capital. The Government enabled PLN to proceedwith the sizeable investment program by providing equity capital, whichreflected in its healthy debt/equity ratio and debt service coverage. In1986/87, PLN achieved a positive operating income, a positive net income, anda positive rate of return (3.42) on net revalued assets. PLN's net internalgeneration of funds in 1986/87 was about Rp 394 billion (US$232 million) andits annual self-financing ratio (SFR) was 23.02 on a total capital investmentof about Rp 1,712 billion (US$1,007 million). Its operating ratio (91X) anddebt service coverage ratio (2.6 times) showed significant improvements, andits debt to total capitalization ratio (excluding revaluation surplus)increased to about 402.
5.3 The outcome for 1987/88 showed a substantial deterioration in PLN'sfinancial performance compared to that in 1986/87, due to several factorsincluding (a) the devaluation of the Indonesian currency in September 1986;(b) inflation; and (c) substantial increases in the proportion of oil-basedgeneration in 1987/88 compared to 1986/87, mainly due to the drought of 1987.To meet an increase of about 152 in sales, PLN's operating expenses in 1987/88increased by 262. resulting in an operating ratio of 1002 and a ROR of -0.12.As a result, the debt service coverage declined to 1.1 times and the annualSFR was about 1Z. The Government did not permit tariff adjustment during1988, which resulted in further deterioration of PLN's financial performancein 1988/89 (para. 5.10). However, the Government approved on March 27, 1989,an average increase of about 252 in the electricity rates effectiveApril 1, 1989, which is expected to restore and improve PLN's profitability(para. 5.11).
Regional Operations
5.4 Considerable disparity exists in PLN's regional operating perfor-mances. PLN's Java operations, which include large central power stationssupplying electricity through an interconnected grid system, are largelycommercially-oriented and profitable. PLN's non-Java operations are mainlysmall-scale and dispersed over a large number of islands, and encompass over600 separate generation and supply networks. Most of them are highly unprofi-table, and have a negative impact on PLN's overall finances. The selected1986/87-1987/88 financial indicators for PLN's Java and non-Java operations,presented in Table 5.2, illustrate the substantial operational differencesbetween the two operations.
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Table 5.2: SELECTED FINANCIAL INDICATORS FOR PLN AND ITS JAVAAND NON-JAVA OPERATIONS, FY 1986/87 - 1987/88
FY 1996/37 FT 1987/StJava Non-Java Total PLN Java Non-Java Total PUN
Rate of return (X) 8.7 -11.1 3.4 4.2 -10.9 -0.1Operating ratio (X) 78 135 91 88 142 100
5.5 In 1986/87, PLN's Java operations generated an operating profit of Rp247 billion, with a ROR of about 8.7Z, which exceeds the 82 ROR target of thecurrent revenue covenant (para. 5.7). The non-Java operations, however,incurred an operating loss of Rp 114 billion with a ROR of about -11.12, andthereby brought down PLN's overall operating profit to Rp 133 billion and theROR to 3.4Z. Nevertheless, the operating results of PLN's non-Java operationsshowed an improving trend in 1986/87 compared to the results in 1985/86.While the non-Java sales increased by about 212 in 1986/87, the relatedoperating expenses increased by about 13.8Z, and the ROR improved to -11.1Zfrom -14.2Z in 1985/86.
5.6 The factors discussed in para. 5.3 impinged heavily on PLN's Javaoperations, for which the operating ratio rose from 78Z in 1986/87 to 882 in1987/88, largely as a result of an increase of about 32Z in fuel expensesbecause of 192 higher oil-based generation and 15Z lower hydro generation.Also, the Java operations' rate base grew by about 28Z from 1986/87 to 1987/88due to the addition of new assets, the cost of about 802 of which was affectedby the rupiah devaluation, and asset revaluation. As a result, the ROR forthe Java operations declined in 1987/88 to 4.2Z.
Financial Objectives
5.7 In the revenue covenant agreed under the Power Transmission andDistribution Project (Loan 2778-IND, 1987), PLN was required to: (a) realizefor its Java operations, by no later than its fisca. year 1988/89 and in eachfiscal year thereafter, an annual ROR of not less than 8Z, and (b) for itsnon-Java operations, achieve a break-even situtation in each of its fiscalyears beginning with fiscal year 1990/91, i.e., total revenues equivalent tonot less than the sum of their (i) total operating expenses, and (ii) the
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amount by which debt service requirements exceed the provision fordepreciation. A covenant under Loan 2778-IND also required PLN to carry outan action plan for efficiency improvements for all its operations, in a mannerto ensure that the break-even requirements of the revenue covenant for thenon-Java operations are achieved.
5.8 The principal financial objectives underlying the revenue covenantare that PLN should achieves in the short term, sufficient overall profit-ability for it to cover its operating expenses, realize positive annual ratesof return, meet its debt service requirements, maintain adequate liquidity,and self-finance about 20Z of its annual capital expenditures; and in themedium term, to improve its profitability further to self-finance about 30-352of its capital expenditures, and rely mostly on borrowings to finance thebalance, confining the Government's contributions to programs that involve thebuilding of infrastructure rapidly and supplying electricity to the targetedlow income groups at affordable rates. Such a strategy should enable theshare of PLN's retained earnings in total equity to rise, with the debt/totalcapital ratio remaining below 552 and the debt service coverage staying above2.0 times. To achieve these financial objectives, PLN will need to undertakemeasures to improve the efficiency and reduce the costs of its operations(para. 3.8), and the Government will need to permit tariff adjustments forincreases in costs due to fuel price rises, inflation and exchange ratedepreciation.
Present and Future Performance
5.9 PLN's actual financial performance for 1986/87-1987/88, the estimatefor 1988/89 and projections for 1989/90 through 1994/95 and related incomestatements for its Java and non-Java operations are summarized in Table 5.3.Detailed estimates and projections are given in Annex 18, and notes andassumptions underlying the projections are given in Annex 19. In the projec-tions, the sales growth and investment requirements for the Java and non-Javaoperations are based on the PLN's latest demand forecasts and the relatedpower development plan agreed with the Bank (paras. 2.8 and 2.9).
LI On r-valued rate bas..Lk Excluding revaluation surplus./e Three-year aeving average (current plus two provious years).
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5.10 As mentioned in para. 5.3, the financial performance of PLN is expectedto deteriorate in 1988/89 compared to 1987/88. The operating ratio for the Javaoperations is estimated to rise from 87Z in 1987J88 to 94? in 1988/89. With anestimated growth of about 35? in the rate base for 1988189, the ROR in that yearfor Java operations would decline to 1.52 from the 4.2? achieved for 1987/88,with PLN's ROR becoming negative (-1.1?) and the annual SFR remaining about 1Z.
5.11 With the adjustment of its tariff, effective April 1, 1989 (para. 5.3),PLN's financial position is expected to improve substantially in 1989/90, withthe ROR for the Java operations rising to 8? and that of PLN as a whole to about4.9?, with an annual self-financing ratio (SFR) of about 20?. PLN will achievefurther improvements in its financial position through efficiency gains, if thetariff is adjusted periodically to compensate for changes in those costs thatare outside PLN's control, such as fuel costs, exchange rate depreciation andinflation. In the financial projections, which are based on constant fuelprices, the tariff is assumed to be adjusted annually by 4? for fiscal yearsafter 1989/90 to absorb the impact of increases in operating costs and in therate base assumed in the financial forecasts.
5.12 As reflected by its projected operating ratios, PLN's overall profit-ability would improve substantially over the projection period, and its overallannual rate of return would rise from about 4.9Z in 1989190 to about 9.6Z in1994/95. The capital structure would remain satisfactory; the debt as apercentage of debt plus equity (excluding revaluation surplus) would rise from41? in 1987/88 to 512 in 1994/95, and its debt service coverage ratio would bewell in excess of 2.0 throughout the projection period. An existing covenantunder Loan 2778-IND requires that, unless the Bank shall otherwise agree, PLNmay not incur any additional debt unless a reasonable forecast of its netrevenues after expenditures for each year during the term of the debt to beincurred shall be at least 1.5 times its projected debt service requirements.This covenant will continue under the proposed loan. PLN's current ratio isexpected to be about two times through most of the projection period; this wouldprovide adequate liquidity. With the projected level of financial performance,PLN would meet the principal financial objectives underlying the revenuecovenant (para. 5.8).
5.13 The financial projections show that during the forecast period, theprofitability of PLN's Java operations would improve substantially, with theoperating ratio declining and the annual ROR rising, respectively, from theestimated 94Z and 1.5? in 1988/89 to 74? and 8Z in 1989/90, and thereaftercontinuing to improve to 64? and 11.8? in 1994/95. Consequently, the Javaoperations would meet from 1989/90 onwards the ROR target of the revenuecovenant (para. 5.7). PLN's operations outside Java would be unable, however,to achieve a financial break-even situation in 1990/91 (projected operatingratio of 107? and operating loss of Rp 55 billion), as required under therevenue covenant (para. 5.7), agreed under Loan 2778-IND. Crucial to reachingthe financial break-even outside Java is the implementation by PLN of an actionplan for sales promotion, efficiency improvement, and cost reduction in theoperation of a large number of isolated, scattered small systems. Based on thecurrent plans for system expansion and cost reduction, the financial projections
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show that the operating ratio for the operations outside Java wou'd improve to1012 in 1991/92 and a financial break-even would be achieved in 1992/93, whenthe operating ratio is projected to be 942. In view of the above, under theproposed loan the test years for the financial performance targets in the agreedrevenue convenant are revised as follows:
(a) an annual rate of return of not less than 8Z for the Java operationsin FY 1989/90 and fiscal years thereafter; and
(b) a break-even situation for the non-Java operations, beginning withFY 1992/93.
5.14 In the financial projections, PLN's capital expenditures projectedfor 1989/90-1994/95 are derived from the investment requirements and least-cost expansion plans discussed in paras. 2.8-2. . These capital expenditures(including interest during construction) total about Rp 29,110 billion(US$17,123 million) in current prices. The financing plan assumed in thefinancial projections for the Repelita V (1989/90-1993/94), is presented andcompared to that for the Repelita IV (1984/85-1988/89) in Table 5.4. Detailsare given in Annex 18.
Table 5.4: COMPARISON OF FINANCING PLANS
Repelita IV Repelita VFiscal year 1984/85 - 1988/89 1989190 - 1993/94
/a Including consumers' contributions and deposits, and adjusted for changesin working capital.
5.15 In the projected financing plan for the Repelita V (1989/90-1993/94),the Government's contribution is estimated to ue about 192, compared to about402 for the Repelita IV period, with the annual contribution declining to 16Z in1991/92, and to 9Z in 1993/94. PLN's own contribution from its internal sourcesis projected to increase from about 7? during Repelita IV to about 31Z duringRepelita V, with annual SFRs increasing from about 20? in 1989/90 to about 38?in 1993/94. Borrowings would cover about 502 of the financial requirementsduring the Repelita V, almost at the same level as in the Repelita IV.
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Performance Monitoring
5.16 The revenue covenant agreed under Loan 2778-IND (para. 5.7), whereseparate financial performance targets are adopted for PLN's Java and non-Javaoperations, will be retained under the proposed loan. The target years would,however, be revised under the proposed project, as discussed in para. 5.13.
5.17 For monitoring the financial performance under the revenue covenantsfor PLN's Java and non-Java operations, PLN has been providing the Bank, asagreed during negotiations of the loan for the Power Transmission andDistribution Project (Loan 2778-IND), with separated historical financialresults (beginning with its fiscal year 1986187) and forecasts on a proformabasis, but not separate audited financial statements. Accounting for PLN's Javaand non-Java operations is separate except for overhead expenses, and debtservice payments, which have been difficult to separate except on a notionalbasis. It was also agreed with PLN that, while initially the overhead expensesand debt service payments could be allocated on the basis of unit sales ofenergy, PLN will pursue the separation of debt service payments on the basis ofactual debt and related service payments. Simultaneously, there is also a needto pursue a financing strategy that provides a higher proportion of equitycontribution and concessional funding to investments outside Java, which have ahigher social content. These objectives will be pursued as a part of ongoingdialogue with GOI and PLN.
5.18 As an important step towards improved efficiency, PLN needs to obtain abetter understanding of the costs associated with its substantial socially-directed activities (e.g., rural electrification), particularly in the opera-tions outside Java, which are not commercially viable and pose a growing burdenon PLN (paras. 5.4-5.5). To assess the impact on its finances of such activi-ties, PLN has agreed to implement a system for segregating financial andoperating information on rural electrification activities both for Java andoutside Java operations, which, as a first step, will serve as a proxy forsocially-directed activities. The data generated by this system would provide abasis for the Government to assess the extent to which it should assist PLN tosustain and expand the agreed socially-directed electrification programs. Underthe proposed loan, it was agreed with PLN that such information will be compiledand submitted to the Bank, along with the annual accounts.
Tariffs
5.19 PLN's current tariff schedules, which became effective April 1, 1989,comprise 21 consumer categories, compared to 17 consumer categories in theprevious schedules. A separate tariff category has been established for largesocial institutions, and three new tariff categories have been established forthe hotels that were previously included in the industrial consumer categories.For all except the smallest domestic class, two-part charges are applied. For
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medium and large industrial, and large commercial consumers, and for largeoffice buildings, time-of-day pricing is in effect. The current tariff scheduleand the history of past tariff increases are given in Annex 20.
5.20 Under the Power Transmission and Distribution Project (Loan 2778-IND),agreements were reached that (a) PLN will periodically review its long runmarginal cost (LRMC) and tariff structure, and discuss the results of the reviewwith the Government and the Bank, and (b) before December 31 in each year, PLNwill review the adequacy of its tariffs to meet the requirements of the revenuecovenants (para. 5.7). Such a review will take into account the results of thereview of the LRMC-based structure and an action plan for efficiency improve-ments to achieve, inter alia, the requirements of the break-even revenuecovenant for the non-Java operations (para. 5.7). These covenants will becontinued under the proposed loan.
5.21 In September 1987, PLN completed a study of its LRMC of supply in Java,which was reviewed by the Bank. The study indicated that PLN's average revenuein 1987/88 would have been Rp 106.3/kWh if the tariff of each consumer categorywas set at the estimated LRMC of supply in Java. With the current tariffschedule, PLN's average revenue in 1989/90 is estimated to be Rp 115.8/kWh. Thecurrent level of the electricity tariff is close to or above the LRHC of supplyfor all categories of consumers except small social institutions, and smallresidential and small industrial consumers. The abovementioned LMRC study alsoindicated that there was a need to apportion a larger percentage of the electri-city price to the demand charge (fixed charge) for all categories of consumers,and to increase the peak energy charges for several consumer categories, parti-cularly for industrial consumers. Under the current tariff effective April 1,1989, the demand charge has been raised by 50Z for all categories of consumers,and energy charges have been raised significantly for both peak and off-peakuses of electricity. Two issues remain in the current structure of tariffs.The first is the continuation of the substantial cross-subsidy to small socialinstitutions, small residential consumers and small industrial consumers, all ofwhom continue to be charged rates that are lower than the LRMC of supply; andsecond, there is a scope for recovering a larger proportion of revenue throughthe demand charge (fixed charge) rather than the energy charge. These matterswill be kept under review as part of the Bank's ongoing dialogue with theGovernment and PLN in the context of the periodic reviews of the adequacy ofelectricity tariffs.
Taxes
5.22 In accordance with the prevailing tax legislation effective since 1984,PLN is subject to a 1OZ value-added tax (VAT) and to corporate income tax. TheGovernment currently bears the VAT on the foreign contracts, and PLN bears it onthe local contracts; this policy is assumed to continue throughout the projec-tion period. With respect to corporate income tax, the current Indonesian taxcode permits the use of accelerated depreciation of assets in operation, insteadof the straight-line method used by PLN in its financial accounting. As aresult, PLN does not expect to pay any corporate income tax for its fiscal year1988/89, and during the projection period. In calculating the rate of return,however, any income tax payments will be taken into account.
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Financing Policy
5.23 The Government provides substantial financial assistance to PLN invarious forms, the most important of which is equity. PLN is authorized by itscharter to borrow from local and foreign lenders and to issue its own obliga-tions. However, in line with its policy for all State Corporations, theGovernment secures all foreign borrowings on behalf of PLN and bears the foreignexchange risk.
5.24 PLN prepares long-term development rlans for corporate and nationalplanning purposes, and also prepares multiyear financial forecasts and financingplans. Based on these plans, the Government approves PLN's capital expendituresand the operating budget one year at a time. Although the system of annualbudget approval will continue, formulation of a long-term financing strategy isessential in view of the inherently long-term nature of electric utilityplanning; most investment projects in the electricity sector have a multi-yearexecution period. Preparation of a long-term financing strategy, where theparameters of the capital structure of PLN -- including the shares therein ofPLN's retained earnings, Government equity and debt -- are defined, helps inmore substantive policy discussions between PLN and the Government. Therefore,an existing covenant (Loan 2778-IND) relating to this aspect of financialplanning will be continued under the proposed loan. This covenant requiresthat, as part of its ongoing annual planning activities, PLN should prepare aten-year financial forecast based on its proposed development plan, and alsoprepare for the first five years of the forecast period a financing plan thatshould indicate the amount of external financing and the appropriate mix ofequity and debt, and if possible the potential sources of financing. Thecovenant also requires that PLN's development plan, and related financialforecast and financing plan should be reviewed and adopted by its Board, andthat these plans and the forecast should be submitted to and discussed with theGovernment and the Bank.
5.25 It is desirable that PLN should bear the foreign exchange risk on theBank loan onlent to it by the Government. However, the Government has a policyof bearing the foreign exchange risk for all the borrowings for the publicsector corporations (PERUM). In the Bank's past loans in the power sector, theGovernment had not accepted any fee in the onlending rate to PLN, to cover theforeign exchange risk. However, under the proposed loan, as a step in thisdirection, the Government has agreed to charge fees to PLN, over the Bank'sstandard variable interest rate, of 1.9Z to cover administrative charges and apart of the foreign exchange risk (para. 4.41).
Asset Revaluation
5.26 PLN's assets have been revalued periodically. The last detailedrevaluation was done in 1979/80 as required of all public corporations underinstructions of the Ministry of Finance. The revaluation was recorded in thebooks and was accepted by the Bank. Fixed assets acquired after March 31, 1979are appraised at cost. Following the currency devaluation in September 1986,the Government issued Regulation No. 45/1986 dated October 2, 1986, providingfor the revaluation of assets of businesses and public corporations, acquiredthrough September 12, 1986. The Regulation specifies the annual revaluation
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factors for the years 1970 to 1986 for adjusting the asset values as of January1. 1987, and corporations had until December 31, 1987 to report the revalueddata. PLN has also prepared a revaluation of its assets for 1979180-1986/87based on the Regulation; however, it has not yet been recorded in the books.The methodology for asset revaluation was discussed during the loan negotia-tions. and found satisfactory to the Bank. A covenant, under Loan 2778-IND,that requires PLN to revalue annually its fixed assets (including work inprogress and consumers' contributions) and accumulated depreciation for thepurposes of the rate of return and break-even calculations undpr the revenuecovenant (paras. 5.7 and 5.16), is continued under the proposeu loan.
- 43 -
VI. JUSTIFICATION
6.1 The justification for the project rests on the need to provide theBank's support to the Government of Indonesia and PLN, in their effort toimprove the efficiency of the subsector through a package of actions involvinginvestments, technical assistance and policy actions (paras. 4.2 and 4.3).Details of the expected benefit for each of the investment components of theproject are provided in the following paragraphs. The overall impact of theproject would be reflected in such performance indicators of PLN as (a) distri-bution losses; (b) utilization of installed generating capacity of hydro, dieseland steam power plants; (c) reduction of generation reserve margin to achievethe desired reliability of supply; (to, fuel cost per unit; (e) manpower produc-tivity in terms of employees per unit sold, and employees per consumer served;and (f) efficiency of utilization of investments. Annex 8 summarizes these andother performance indicators of PLN for the period 1979/80 to 1987/88. It isexpected that the various indicators would show improved performance as a resultof the project and other ongoing efforts. Capacity utilization should improvefrom 55? to 651, the reserve margin should fall from 45? to 35?, the systemlosses should fall from about 192 to 16?, and the fuel consumption for dieselgenerating units should reduce by about 3Z.
Diesel Efficiency
6.2 Diesel generating capacity of 1,420 MW in 1988, provided about 602 ofthe installed capacity outside Java. Over 2,000 diesel units are installed inover 600 locations (para. 4.5). Various components of the diesel efficiencyprogram are designed to address the whole range of problems involving planning,operation, maintenance, rehabilitation and training. The benefits of such aprogram will be obtained in terms of better capacity utilization, better avail-ability, reduced future investments and better fuel efficiency. It will beensured that for each subproject under this category, approved for funding fromthe Bank loan, the economic rate of return will exceed 15?.
Hydro Renovation
6.3 Renovation of seven old hydro plants will serve two objectives viz:(a) extension of the useful life of such plant components as turbines, genera-tors and penstocks; and (b) recovery of derated capacity and enhancement ofenergy capability to the extent of 24 MW and 110 GWh (para. 4.10). Tne IERR onthe proposed investments, without taking into account the life extensioncomponent of the benefit, is in the range of 15? to 32Z for various plantsincluded in the program.
Telecommunications
6.4 It is important for a power system to have efficient telecommunicationsfacilities to support its functions of system control, operation coordination,load dispatching, safety and protection of equipment, operation, maintenance andadministration. The project will augment PLN's telecommunications facilitiesnot only to overcome the existing deficiencies but also to initiate the inte-grated longer-term development of such facilities.
- 44 -
Distribution
6.5 PLNI needs to expand its distribution facilities to satisfy the demandfor electrizity from existing consumers as well as to extend supply to unelec-trified areas. As discussed in para. 2.4, only 27S of the households in Javaare currently electrified. The development plans (para. 2.7) target an increasein the household electrification ratio to reach 752 in urban areas and 29Z inrural -reas by the end of 1993194. Investments required for generation facili-ties to reach the electrification targets up to 1991/92 are committed andongoing. The generating capac~ity in Java will increase from to 6,100 MW in1989/90 with the completion of plants already under construction which will beadequate to meet the demand till the end of 1991/92. Also the necessary invest-ments in transmission facilitie3 are committed and ongoing, mainly through thePower Transmission and Distribution Project (Loan 2778-IND). The proposedproject provides funds for the distribution facilities that are required tomaintain a balance between generation, transmission and distribution facilities,in this period.
6.6 The growth in the number of consumers connected to the PLN system inJava and PLN's sales over the past five years has been rapid as shown in Table6.1 below.
Table 6.1: GROWTH IN CONSUMER CONNECTIONS AND SALES IN JAVA
6.7 As discussed in paras. 2.7 and 2.8, unmet demand for electricity isstill large and economic justification exists to extend the supply network asrapidly as the resources permit. The program agreed with the Government and PLN
- 45 -
under the proposed project is within PLN's capacity to implement, justified fromthe viewpoint of balanced development of generation, transmission and distribu-tion facilities, and consistent with the availability of financial resources.
Economic Rate of Return
6.8 In projects involving distribution networks where the benefits attribu-table to the specific components of the expansion program are difficult toassess and where the schemes represent an area and time slice of a totaldevelopment program, it is approlriate to evaluate the economic rate of returnof the entire program rather than attempt separate economic analysis of thecomponents. For this project, an economic analysis of the PLN's investmentprogram in Java for the period 1988/89-1991/92 of which the current project is apart, was carried out. Annex 22 sets out the details.
6.9 The economic analysis uses the investment costs for generation, trans-mission and distribution facilities that would be put in place during theperiod. Investments for the generating plants (para. 6.5) incurred prior to1987/88 are included in the cost stream. A shadow price factor of 0.8 is usedfor locally procured equipment and materials which account for about 20Z of theinvestments and a factor of 0.65 is used for unskilled labor which constitutesabout 1OX of the cost of the program. The balance of the investment costs arenot shadow priced since PLN would import equipment and materials on which itpays no duties or taxes. The foreign exchange rate is its shadow price inIndonesia due to an open foreign exchange environment. The incremental fuelcosts are derived from the computer simulation of system operation for theperiod under study. Fuel costs have been valued at economic prices derived inDecember 1988.
6.10 The benefits are derived by using the estimated incremental sales thatwould result from the proposed investments. In addition to revenues to PLN,consumer surplus has been quantified on the basis of *willingness to pay' ofindustrial and residential consumers.
6.11 The willingness to pay for industrial consumers is estimated by twomethods. One, there is ample evidence that industrial consumers are willing topay the cost of electricity provided by captive diesel plant (para. 1.16), whichis in the range of Rp 120 to 200 per kWh, depending on the size of the installa-tion and the usage pattern. Considering PLN's average revenue per kWh fromindustrial consumers of about Rp 90, the willingness to pay would be in therange of 1.3 to 2.2 times the current tariff. In an earlier study, a demandcurve was constructed using available information which showed that someindustrial consumers were willing to pay up to three times PLN's tariff and over50Z of them were willing to pay over 1.5 times the cost of PLN's supply. Basedon such a survey the consumers' surplus for the industrial consumers wasestimated at 1.7 times PLN's industrial tariff. For the present analysis, afactor of 1.5 is used.
6.12 Willingness to pay for residential consumers estimated in a Bank studyentitled 'Indonesia: Rural Electrification Review" (Report No. 6144-IND,November 1986). The study concludes that the willingness to pay for residentialconsumers is of the order of 2.0 to 2.5 times the prevailing tariff, mainlyconsisting of the benefits for substitution of kerosene for lighting and otheruses of electricity such as additional lighting, use of electrical appliancesand television. For the present analysis, a multiplie- of 2.0 is used.
- 46 -
6.13 PLN's average tariff to commercial consumers is relatively high (aboutRp 200 per kWh). Hence the willingness to pay is equated to the current tariff.Similarly, for the Government users and public supply such as street lightingand mosques, the willingness to pay may be no higher than the current tariff andthe multiplier factor has been taken as 1.0.
6.14 The IERR for the investment program in Java works out to 18X. It wouldfall to 162 if the investment costs increase by 102 or if sales decline by 10X.The IERR, with only revenue at current tariff as a benefit (ignoA:ing consuaersurplus), works out to about 92.
Risks
6.15 There are no major risks associated with the implementation of thevarious components of the proposed project. One possible risk is that theimplementation of some of the components may be delayed compared to the proposedschedules. However, PLN has already initiated action to appoint consultants andestablish project implementation units to minimize the possibility of delays.Special attention will be devoted to timely completion of procurementactivities, where delays could be experienced due to the rather cumbersomeprocedures that exist in Indonesia.
-47-
VII. AGREEMENTS REACHED AND RECOMMENDATIONS
Agreements Reached
7.1 During the negotiations, the following agreements were reached:
With GOI
(a) The Governmert will (i) establish an interdepartmental energypricing task force to review and advise Government on energy prices,and (ii, establish and maintain within its Ministry of Mines andEnergy, an energy pricing unit that would be responsible forproviding analytical and technical support to the task force(para. 1.13).
(b) The Government will prepLre and implement, in consultation with theBank, an action plan for introducing suitable regulatory andcontractual measures to utilize some of the captive (in-house)generating capacity in industry, along with PLN's facilities,to reduce investment costs and to promote economic cogeneration byindustry (paras. 1.16 and 1.17).
With PLN
(a) PLN will review annually the plan for distribution expansion inJava, commencing March 31, 1990, to identify any changes necessary,and thereafter adjust the plan and implement it in a mannersatisfactory to the Bank (para. 4.21);
(b) For the purpose of carrying out the rehabilitation of diesel plants,PLN shall prepare and submit to the Bank for its approval reportscontaining their evaluation and justification (para. 4.9);
(c) PLN will provide the Bank with segregated financial and operatinginformation on rural electrification activities, along with itsannual accounts (para. 5.18);
7.2 The following agreements reached during the negotiations are insubstance the same as those reached under the Power Transmission andDistribution Project (Loan 2778-IND):
(a) Review of PLN's development plans and investment program (para.2.10);
(b) Overdue electricity accounts of Government users (para. 3.13);
(c) Audited accounts and reports (para. 3.14);
(d) Action plan for efficiency improvement (para. 3.8);
(e) Debt limitation (para. 5.12);
- 48 -
(f) Revenue requirements (paras. 5.13 and 5.16). The test years for theachievement of the financial targets are revised as folltws:
(i) for the Java operations--FY1989/90, and fiscal years thereafter;and
(ii) for the non-Java operations--FY1992/93, and fiscal yearsthereafter;
(g) LRMC and tariff review (para. 5.20);
(h) Financing plan for the investment program (para. 5.24); and
(i) Asset revaluation (para. 5.26).
Condition of Effectiveness
7.3 Signing of the subsidiary loan agreement between GOI and PLN (para.4.41) will be a condition of the effectiveness of the proposed loan.
Recommendations
7.4 With the above agreements and understandings, the proposed project issuitable for a loan of US$337 million for a period of 20 years including afive-year grace period, at the Bank's stAndard variable interest rate, to theRepublic of Indonesia.
INDONEI
O*gak9n haed <Xho MW1d MhW ald EWgf
D4 W L&tI rGd~~~~~ I I I I
PI PIW-P1
ANNEX 150 Chairt 2
INDONESAPOWER SECTOR EWCIENCY PROJECT
Ogoniotlon Ctwd ot PWN
| d | r R~~~~~~~~~~~~~PN Regon Ict K to * DSvKi Aj. of Ah:h
Coriart on_ _N Regn IInspectorate Noft 9Jtm
Dwectorate do|f Dwe&of&e of |PRN Regnm I
Main Pra~ ~~~~~~lanigAdfwdabn ctRa
C; astrunction t nusad
r etorate. of PL Reio VLpnoo West Bllmontun
Suerth andon oTr-Ensr SuioaSot. enrlan
Main Project PUN Reon Vi
NCath SUKItsonoE imnton
Main PfEqecl PLN Region VllGeneroFtion ond Trnrsln __ North onci Central
West Sumatra Sul
Main Project PLN Reon VillGeneration and Transmission _S_uSc ncw SauthEa
South Sumatra . Lmpung. SulkeiiJambi and Blengkulu
WofldBarflecPLN I
Sct ndSEhEast=kSDu
| Iiain Projfect PLN Region XTransmmsson __mma JavaEast Jcavo
MamPren c PLN Rego xithermolPDe Fih. West and Eas
Easwr Nusa TenWior
Main Project PLN D~ribtonGenemratn (Thernal) rnb Trrans- .. _East Jrava
ffLsdon - Central Jaw
MainPret l_§ PLN DztributionI yFo Powr= Central Jav|C entfol Java
r Main Pect l | ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PLN Distriution|TmrdrnsOmi Wsst Jas and Jokarl et vv rrava|Rama - E H V TrZNuon and LDC I.
Java Outside Java Indomei Fiscal Connected Not connec- Connected Not connec- Connoeted Not connec-year to PLN ted to PLN Total Increase to PLN ted to PLN Total Increae to PLN ted to PLN Total Increase
without station use (X) 19.5 19.1 18.7 19.1 20.8 20.6 19.8 19.6 18.78. Number of consumers 2,246,657 2,745,176 3,232,075 3,802,421 4,406,047 5,133,231 5,953,293 8,9e6,580 8,203,349
(S growth) (26.9) (22.2) (17.7) (17.6) (16.9) (16.6) (16.0) (17.0) (1?.8)9. Average revenue per kWh sold (Rp) 27.3 41.4 43.3 56.5 76.0 97.8 96.6 93.6 92.610. Average fuol cost per kWh sold (Rp) 9.4 14.3 16.2 28.4 53.8 62.4 64.4 48.3 50.611. Total manpower (employees) 30,130 32,951 36,791 39,962 44,909 49,696 51,290 61,671 51,20312. Consumers por employee 76 83 90 96 98 103 116 135 16O13. Sales per employee (MWh) 177 198 219 228 223 222 248 287 334 in14. Average fuel per kWh in central
thermal plants (oil) (liter) 0.30 0.30 0.30 0.29 0.27 0.29 0.29 0.29 0.3015. Rate base (Rp billion) La - 737 976 1,218 1,497 1,998 2,779 3,867 5,09316. Rate of return on revalued
rate base (X) -3.7 3.6 -1.9 -3.0 -0.9 -0.4 -0.3 3.4 -0.117. Operating ratio (S) 114 91 105 107 102 101 101 91 10018. Current ratio (times) 4.5 4.5 3.4 2.4 2.2 2.5 2.1 1.3 1.119. Debt/equity ratio (X) 7/93 10/90 14/88 17/83 27/73 32/68 36/64 40/60 41/6920. Dobt service coverage ratio
Diesel Generation Efficiency Program - Cost Estimate(USS million)
Local Foreign Total
Rehabilitation 2.0 13.0 15.0
Relocation 1.0 - 1.0
Maintenance improvement 1.0 4.0 5.0
Training 1.0 4.0 5.0
Total 5.0 21.0 26.0
- 59- ANEX 10Page 1
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
Hydro Renovation - Plant Details and Scope of Work
Ubrug
1. This station has a total capacity of 17.1 NW. Of the three units(horizontal francis), two units (5.4 MW each) were installed in 1924 and one(6.3 MW) in 1939. They were manufactured by Stork of the Netherlands (Lic.Charmilles). Two of the three penstocks were installed in 1924 and one in1939. They have a minimum diameter of 1.7 meters.
2. Present Situation. The main problem at this station is that thefull installed capacity cannot be utilized because of the waterway restric-tions. The units are still in good condition, mainly because of the reducedload operation. The maximum output from the units are limited to 5.0 MW eachbecause of generator restrictions. The draft tube has some cavitation belowthe runner; this problem could be improved by airation of the draft tube. Oneof the governors is hunting. There are no spare parts available for thegovernors. The old penstocks have never been inspected or repairedinternally.
Proposal for Renovation
3. Civil Work. An increase in the water discharge capacity from 10 to25 m3/s is planned. This increase is possible by the construction of anadditional waterway and an additional weir. This modification will result inenergy production increase of 47 GWh/annum. The penstock will be inspectedinternally and overhauled.
4. Turbines. For the full capacity operation of the station, the unitswill be renovated. A runner of new design can increase the efficiency byabout 4%. The governors will be overhauled.
5. Generators. On the Generator No. 2 the stator winding, stator coreand rotor winding have to be replaced. On the unit nos. 1 and 3 diagnostictests are proposed before finalizing the scope of renovation.
Kracak
6. This station has a total capacity of 16.5 MW. There are three units(vertical francis) of 5.5 MW each, two unit installed in 1924 and one in1950. The turbines were manufactured by Stork, Netherlands (Lic. Charmilles).There are two penstocks installed in 1926 and 1954.
7. Present Situation. The installed capacity cannot be used fullybecause of waterway restriction. Currently three units are used as follows:one unit for base operation @ 4.5 MW for 24 hours; two units for peak service
- 60 - ANNEX 10Page 2
for eight hours e 4.5 MN. The limitation to 4.5 MW is caused by generatorrestrictions. Turbine no. 2 was inspected through the draft tube and showedthat the runner blades have suffered cavitation and the discharge section isin bad condition. The two penstocks haven't been inspected or overhauled frominside since installation. One governor is out of operation. No spare partsare available.
Proposal for Renovation
8. Civil Work. Accordi g to the civ l work study the actualdischarge can be enlarged from 11 m3 /s to 12.4 mIls. This modification willimprove the energy production from 60.5 GWh .-' 82.1 GWh. The penstock will beinspected and their interior will be overhauled.
9. Turbines. The turbines need a thorough overhaul. By installing newrunners, an efficiency gain of approximately 2% is possible. The governorswill be overhauled and/or replaced.
10. Electrical. Generator Nos. 1 and 2 will have to be rewound andtheir cores will be restacked. On the unit no. 1, a diagnostic test isproposed.
Lamajan
11. This station has a capacity of 19.2 MW. The three turbines (verti-cal francis) have each a capacity of 6.4 MW; two were installed in 1924 andone in 1934. The turbines were manufactured by Stork of the Netherlands(Lic. Charmilles). The penstocks of this station (two, with a diameter 1.3 mand 480 m long) were installed in 1925.
12. Present Situation. This station is used mainly for baseproduction. The water supply cascades from Plengan and from Lamajan toCikalong station. Inspection has showed that the main components of thestation such as penstock, main valves, turbines, governor, auxiliary equipmentare in a bad shape. The unit are derated from 6.4 MW to 6.0 MW each. Thewater contains silt and creates erosion of the wearing parts.
13. Proposal for Renovation. This station has a relative high capacityoutput with a high capacity factor (52Z) and since the water supply to theCikalong station depends on this station, its reliability is important. Ageneral overhaul of this station is proposed. Also, purchase of new turbinerunners is proposed.
14. Electrical. The stator winding and stator core will be replaced forall three units. On unit no. 2, the rotor winding will be changed.
Plengan
15. In Plengan Station, four units (horizontal francis) with a total ca-pacity of 5.3 MW are installed; three turbines are dated 1921 having a capaci-ty of 1.1 MW each and are of Escher Wyss design. One turbine is dated 1958and has a capacity of 2.0 MW, manufactured by Maier KG Germany (Lic. Voith).
- 61 - AMN 10
Page 3
There are two penstocks (diameter 1.1 m, 203 m long) installed in 1923 and1958, respectively.
16. Present Situation. The condition of the three units is rathergood. The new turbine has cavitation problem since installation. The tailrace level was raised by 0.4 m after the fourth unit was installed. Theturbine no. 4 had a crack in spiral shell near the stay ring. A new weldedspiralcase is on order. The capacity of the four units is limited to 4.3 Mi-(3 x 0.9 MW and 1.6 MW). The restriction of capacity is mainly caused bygenerator limitations.
17. Governors. The governors are not working satisfactionally. Spareparts are not available.
18. Proposal for Renovation. Still to be finalized.
Ketenger
19. This station has two pelton turbines, each 3.75 MW. The turbineswere installed in 1939 and were manufactured by Charmilles, Switzerland.There is one penstock with a diameter of 800 mm.
20. Present Situation. Units are in good condition. The actual outputfor unit one is limited to 3.2 MW because of generator restrictions.Currently, the station has a max. output capacity of 4 MW.
Proposal for Renovation
21. Civil Work Part. The main problem of this station is to improve thecapacity. A proposal to install a second penstock was examined but it wasfound that the water availability isn't large enough to justify a secondpenstock. It is proposed to enlarge the storage capacity and improve thewater intake to improve the peak capacity.
22. Turbines. Improving the runner geometry would result in anefficiency gain of 7.5% at optimum operating load and approximately 10% atfull load.
23. Governors. No spare parts are available. The Governors may need tobe replaced.
24. Electrical. Diagnostic tests are proposed for the generators. Thetwo transformers will be replaced.
Jelok and Timo
25. Jelok and Timo are cascade hydro plants. Jelok is upstream ofTimo.
- 62 - ANNEX 10Page 4
Jelok
26. This station has an installed capacity of 20.4 MW. The four units(horizontal francis) of 5.1 MW each are dated 1937 (three) and 1957 (one).The turbines were manufactured by Escher Wyss, Switzerland. The two penstockswere installed in 1937 and 1957, respectively.
Timo
27. This station has an installed capacity of 12.5 MW. The three unitsof 4.17 NW each are dated 1960.
Present Situation
Jelok
28. The general condition of this station is good, except for thepenstock. Its maximum output is limited to 15 MW, due to excessive pressuredrop.
Timo
29. The rated discharge from jelok is 14.5m 3/sec whereas the capacityof Jelok-Timo waterway is about 7 m /sec. Therefore, the plant cannot operateat full capacity.
Proposal for Renovation
30. Civil Work-Jelok. The penstock will be overhauled.
31. Civil Work-Timo. Construction of an additional waterway from Jelokto Timo is proposed to increase the capacity of Timo station from 8.6 MW to 12MW and increase the energy production by about 21 GWh.
Giringan
32. This station has a capacity of 3.2 MW. There are three horizontalfrancis units. One turbine of 1.4 MW was installed in 1937, manufactured byEscher Wyss, Switzerland and two turbines of 0.9 MW were installed in 1955,manufactured by S5ork, Netherlands (Lic. Charmilles). Two penstocks with acapacity of 4.0 m Is were installed in 1937.
33. Present Situation. The station capacity is derated from ?.2 MW to2.45 MW, mainly due to generator limitations. The water contains silt thatcauses heavy wear. The governors for units 1 and 2 are out of operation. Thepenstock has never been inspected or overhauled from inside.
Proposal for Renovation
34. Civil Work. An additional steel (or concrete) pipe is planned fromtte intake to the reservoir to increase the water capacity fr3m 2.33 to 3.13m /s. Enlargement of capacity of daily pondage from 11,800 m to 16,800 m is
- 63 - ANNEX 10Page 5
also planned. These modifications will increase the energy production byabout 5.4 CWh/annum. The penstock will be overhauled.
35. Turbine. Unit three (1937) will be renovated to restore theoriginal capacity; a runner of new design will improve the efficiency byapproximately 6%. The wearing parts will be replaced by those with erosionresistant materials. The governors will be overhauled.
36. Generators. The stator winding and the core of unit no. 1 generatorwill be replaced. Also the rotor winding will be replaced. Diagnostic testswill be carried out on unit nos. 2 and 3 to determine the scope of work. Twotransformers will be replaced.
- 64 - ANNEX 11
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
Hydro Renovation: Cost Estimate(US$ million)
Tur- Gene- Trans- Reser- Water Pen-Station bine rator former voir conduit stock Total
Ubrug 1.40 0.30 0.00 0.00 6.50 0.90 9.10
Kracak 1.20 0.40 0.16 0.00 1.25 1.26 4.27
Lamajan 1.40 0.30 0.00 0.00 0.00 0.59 2.29
Plengan 0.30 0.00 0.00 0.00 0.00 0.21 0.51
Ketengar 0.40 0.02 0.00 0.21 0.25 0.71 1.59
Jelok and Timo 0.00 0.00 0.00 0.00 1.00 1.21 2.21
Giringan 0.13 0.08 0.00 0.14 0.32 0.12 0.79
Total Base Cost 4.83 1.10 0.16 0.35 9.32 5.00 20.76
Distribution Management ProgramTerms of Reference for Consulting Services
1. GENERAL
Perusahaan Umum Listrik Negara (PLN) is an agency of the Ministry ofMines and Energy of the Republic of Indonesia, and is responsible for thegeneration, transmission and distribution of electric power to the public inthe whole country.
Distribution of power to the consumers in the island of Java is theresponsibility of 4 (four) Distribution Regions respe2tively for MetropolitanJakarta, West-, Central- and East Java. Each Distribution Region is subdi-vided into Branches and Sub-branches. The Distributicn Office is responsiblefor overall planning and coordination, P'.so for the implementation of large-scale distribution expansions and conne..tion of larger consumers. The BranchOffices assisted by Sub-branch Offices are responsible for the whole range ofconsumer services: connection of new consumers, billing of existing ones, andthe operation and maintenance of distribution facilities. Some basic data andinformation re.ated to Java's four Distribution Regions can be found in theAttachment.
Efforts to satisfy demands caused by the low electrification ratioand rapid development of the industry have resulted in rapid ii,crease in sales(currently 16? annually) and new connections (currently more than 700,000 newconsumers annually). In order to ensure that the distribution facilities workat the desired standards of efficiency and reliability, in the environment ofrapid growth it is necessary to (a) upgrade the quality of operation andmaintenance by better equipment, procedures and training of staff; and(b) minimize costs by better planning, improved standards of design and con-struction and reduced losses.
Some of the ongoing efforts in the field of distribution include:(i) a loss reduction program funded by IBRD, (ii) distribution expansionprojects funded by IBRD (Jakarta), ADB (West and East Java), Kuwait and AbuDhabi Funds (West Java), USAID (Central Java), (iii) distribution controlcenters (Jakarta and Bandung/West Java), (iv) distribution mapping (WestJava), (v) computerized distribution planning (CADPAD), (vi) hot line mainte-nance funded by ADB, and others.
2. OBJECTIVE OF THE SERVICES
PLN desires to initiate and implement a program, with the assistanceof a team of foreign and local consultant's personnel, to improve the manage-ment, operation and maintenance of the distribution facilities in Java.
- 69 - ANNEX 13
Page 2
The objective of the program will be to upgrade all aspects of thedistribution management including planning, design, construction, maintenance,operation, organization, and reporting system to provide better service toconsumers.
The program should address the needs for the training of staff andimprovement in organization. The scope of involvement of private contractorsin the construction, operation and maintenance of distribution facilities alsoneeds to be reviewed and defined. During the course of this assignment theconsultant shall provide maximum possible transfer of knowledge to the localstaff.
3. SCHEDULE OF SERVICES
A. Phase One
In the first phase of the assignment, lasting over a period of aboutsix months, the consultant will develop a comprehensive, detailed Master Planwhich will include:
(a) Evaluation and analysis of PLN's current distribution managementpractices and identification of the main issues and constraints indistribution management--technical, institutional, environmental andothers;
(b) Projection and analysis of PLN's needs and obligations for 5-7 yearsahead, reflecting the growth of demand and desired supply capability;
(c) Determination of the goals and results to be achieved in the variousareas of distribution management, to enable PLN to improve itsoverall performance;
(d) Development of a Master Plan including the selection of appropriateaction programs for achieving the goals;
(e) Preparation of a schedule of implementation showing all majoractivities and key dates, including monitorable milestones;
(f) Determination of the organizational development needs for smoothimplementation of the program, and in doing so identifying worksinherent with PLN as a power utility and works that could be executedby contractors. In this context, the adequacy of the authority,responsibility and the accountability of the Distribution Officesneeds to be determined, to achieve efficient management;
(g) Developing the manpower requirements within PLN and measures toimprove utilization of contractors' capabilities; and
(h) Budget requirement to support the proposed program.
- 70 - ANNEX 13Page 3
In executing the first phase, the Consultant will work closely with aCounterpart Team of PLN's staff and ensure complete exchange of informationbetween the Consultant and PLN. PLN's management will review and approve eachmilestone report of the Master Plan.
It is expected that a Team of three expatriate experts assisted bypersonnel from a local Consultant will be required for the implementation ofthe first phase, which will conclude with the submission of a Master Plansatisfactory to PLN's management.
B. Phase Two
In the second phase of the assignment, lasting over a period of abouttwo years, the consultant will assist in the implementation of the MasterPlan. The activities of the Consultant shall include, but not be limited toachieving the following objectives:
(a) assistance in the development of a computerized distribution andconsumer information system, providing:- common data base,- mapping of distribution facilities and consumer's connection,- software for technical analysis of distribution data for
distribution planning and consumer administration.Development of the system's hardware and software shall be compatiblewith PLN's proposed Java trunk telecommunication network;
(b) regview and improvement of standard designs for new distributionfacilities reflecting requirements to minimize losses, to allowextended area coverage, to achieve desired reliability and tominimize costs;
(c) review and improvement of standard manuals for different constructionphases including survey for line routing, tower spotting, cablelaying, stringing of conductors, erection of distributiontransformers, inspection, commissioning, etc;
(d) review of operational procedure and manuals to improve reliabilty andefficiency;
(e) improvement in the capabilities within PLN for the maintenance of thedistribution system;
(f) review and improvements in the centralized and distributedprocurement practices and tendering;
(g) review and improvement in the budgetary procedures to have bettercontrol and accountability along with the flexibility to respond tosituations requiring quick actions;
-71 - ANNEX 13Page 4
(h) training of PLN's staff in the required areas of distributionmanagement;
(i) improvement in organization; and
(j) improvement of service to the consumers.
The services during phase two is expected to require four expatriatesassisted by local Consultant's personnel working together with PLN'sCounterpart Team.
4. REPORTING SYSTEM
Monthly and quarterly reports on the progress of the first and secondphases are to be submitted by the Consultant, covering:
- the status of the works under the contract, indicating progress madeand setting forth plans for the ensuing period,
- an administrative report covering expenditures incurred and personnelemployed under the contract.
5. INVOLVEMENT OF LOCAL CONSULTING FIRM
The foreign Consultant is encouraged to promote the involvement oflocal Consultants in carrying out his services in Indonesia and assigningmaximum possible responsibilities to them. Also, he should foster technologi-cal exchange between expatriate and local engineers. The involvement of thelocal Consultant is expected to include:
- participation in survey work, data collection and interviews with thestaff of PLN's Head Office and Distribution Offices,
- participation in all major meetings and preparation of reports,- involvement in the preparation of the Master Plan and the different
action programs,- supervision and monitoring of program implementation.
Perusahaan Umum Listrik Negara (PLN), is an Agency of the Ministry ofMines and Energy of the Republic of Indonesia, and is responsible for thegeneration, transmission and distribution of electric power to the public inthe whole country. PLN currently is experiencing high growth in its sales andrate of connection, reaching a m.llion new consumers every year. To keep upwith high potential demand, PLN has to expand its power supply facilitiesrapidly, adding more than 1,000 MW of generation capacity every year and theassociated transmission, substation and distribution system.
The long-term objectives are to provide adequate and continuouselectricity supply with satisfactory reliability and quality, equitably in thewhole country, at a price affordable to the general public. In meeting theseobjectives, PLN has to face numerous issues, and sometimes conflicting rolesas a development agency but also as a business entity, affecting its short-term as well as longer-term operations.
To address the key issues and to pursue its objectives in aneffective and efficient manner, PLN needs to develop further its CorporatePlan, to be able to formulate corporate strategies under uncertain andchanging situations, derive appropriate action programs, monitor theirimplementation and evaluate results. This rolling Corporate Plan is reviewedannually.
II. OBJECTIVE OF THE SERVICES
PLN desires to initiate and implement a program, with the assistanceof a firm of expatriate experts supported by loca. experts, for theimprovement of its corporate and financial plannis.j functions.
The objective of this program will be to enhance all aspects of PLN'scorporate planning and financial planning processes, including determiningcorporate and financial objectives, identifying key issues, developingstrategic approaches, preparing monitorable action programs and evaluating theresults. The program shall also assist PLN in acquiring a suitable utilityfinancial planning software package.
The program shall also address the needs for the training of staffand organizational improvements. During she course of this assignment theconsultant shall provide maximum transfer of knowledge to the local staff.
- 74 _ ANNEX 15Page 2
III. SCHEDULE OF SERVICES
A. Phase One
In the first phase of the assignment, lasting over a period of aboutsix months, the consultant shall conduct activities leading to the preparationof a detailed Master Plan for the improvement of PLN's corporate and financialplanning functions, which will include:
(a) Sensitizing PLN management and staff to the need for an overallcorporate plan and an appropriate financial plan, by conductingseminars for the top management, corporate planning staff and liaisonrepresentatives from each planning function within the differentdirectorates and operating units in PLN.
(b) Evaluating and analyzing PLN's current planning management practices,and identifying technical, institutional, environmental and otherproblem areas causing ineffective planning, specifically when relatedto the hierarchical levels of decision making in the company:
- involvement of top management in formulating the overallcorporate strategy,
- responsibilities of the officers in the different directoratesfor the preparation of operational programs as derived from theoverall corporate strategy, giving due consideration to theconstraints faced by the company,
- further elaboration of these programs into tacticallactionprograms, and the interfacing with proposals from the operationalunits.
(c) Reviewing the time schedules and planning methodologies currently inuse in PLN to prepare long-term plans, medium-term programs andannual budgets, and identifying possible improvements, including theneed to acquire a commercial software package for utility financialplanning.
(d) Identifying the organizational and manpower development needs, asrequired for the smooth implementation of the program.
(e) Developing a Master Plan for the improvement of corporate andfinancial planning functions, showing all major activities and keydates, in sufficient detail including monitorable milestones.
In executing the first phase, the consultant will work closely with acounterpart team of PLN's staff, and ensure complete exchange of informationbetween the consultant and PLN. PLN's management will review and approve eachmilestone report of the Master Plan.
It is expected that a team of three expatriates assisted by personnelfrom a local consultant will be required for the implementation of the firstphase, which will conclude with the submission of the Master Plan satisfactoryto PLN's management.
ANNEX 15Page 3
B. Phase Two
In the second phase, lasting over a period of about two years, theconsultant will assist in the implementation of the Master Plan. Theactivities of the consultant shall include, but not be limited to:
Corporate Planning
(a) Assisting, during one full cycle of the annual corporate planningprocess, through provision of appropriate planning techniques andmethodologies, while analyzing the need for further improvement ofthe existing planning mechanism and procedures.
(b) Developing standard procedures and techniques for corporate planning,including development of modelling techniques appropriate to thesituations and conditions prevailing in Indonesia, and other means toachieve the required level of coordination in the planning process,and applying them in the following corporate planning cycle.
(c) Assisting PLN's operational units (3-4 units) in implementing thecorporate strategy by translating the corporate plan intotactical/action programs.
(d) Training of personnel to improve their skills and knowledge inpreparing the different stages of the planning process: identifyingkey issues, setting objectives, formulating alternative plans andprograms to achieve objectives, analyzing and evaluating data andinformation pertaining to the implementation of the plans/programs.
(e) Making optimum use of the overall Management Information System, andother information systems for the planning process.
(f) Continuing to provide overview assistance until the corporateplanning function in PLN is performing effectively without externalassistance.
Financial Planning
(a) Assisting PLN in acquiring a commercially available Utility FinancialPlanning software package. Providing further assistance by modifyingthe package to enable greater applicability tc PLN, and providingadequate training to the financial planning staff in the use of thepackage.
(b) Strengthening and enhancing the process of financial planning byproviding instructions in the creation and use of primary planningassumptions, establishing more definite planning timeframes,providing instruction and training in the creation and uses cfscenario analysis.
(c) Continuing to provide overview assistance until the financialplanning function in PLN is performing effectively without externalassistance.
- 76 - ANNEX 15Page 4
The services during phase two are expected to reqaire four expatriateexperts for the first year and two for the second year, assisted by localexperts, working together with PLN's counterpart team.
IV. REPORTING SYSTEM
Monthly and quarterly reports on the progress of the first and secondphase are to be submitted by the consultant, covering:
- the status of the work under the contract, indicating progress madeand setting forth plans for the ensuing period,
- an administrative report covering expenditures incurred and personnelemployed under the contract.
V. INVOLVEMENT OF LOCAL CONSULTING FIRM
The foreign consultant is encouraged to promote the involvement oflocal consultants in carrying out his services in Indonesia and assigningmaximum possible responsibilities to them. Also, he should fostertechnological exchange between expatriate and local staff. The involvement ofthe local consultant is expected to include:
- participation in survey work, data collection and interviews with thestaff of PLN's Head Office and Regional Offices,
- participation in all major meetings, and preparation of reports,
- involvement in the preparation of the Master Plan and the differentaction programs,
- supervision and monitoring of program implementation.
INDONESIA: POWER SECTOR EFFICIENCY PROJECTImplementatlon Schedule for Hydro Renovation Component
/b Based on revoluatton of fixed asseta from FY?9/80 onwards, in accordance with Governmnt Regulation No.46/1986 dated October 2, 1986 (see para. 5.28).
- 82 - ANNEX 16
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
PLN - Post Financial Rosults
Balance Sheets(Rp billion)
Fiscal year 1980/81 1981/02 1982/83 1983/84 1984/86 1986/89 1966/87 1967/68
ASSETS-F7-d AssetsPlant In service 1,238 1,718 2,124 2,771 S,710 5,002 6,638 8,785Loev: Accumulated depreciation 143 276 486 614 842 1,136 1,504 2,153Net plant in service 1,090 1,442 1,689 2,157 2,869 3,866 5,249 6,582Work in progress 856 1,067 1,370 1,878 2,148 2,608 3,192 4,089
1. Inflation has been taken into account at the following rates (Z):
1992 andYear: 1987 1988 1989 1990 1991 after
Offshore costs /a 9.8 5.3 5.3 5.3 4.1 4.1
Local costs /b 9.3 9.0 9.0 9.0 5.2 5.2
/a Including indirect offshore costs, excluding fuels./b Excluding indirect offshore cost and fuels.
2. Separation of accounts of PLN's operations in Java and outside Javais based on individual accounts maintained by PLN for each of its regionalunits. These accounts are separate except for overhead expenses, which, forthe purposes of financial projections, have been allocated proportionately onthe basis of unit sales of energy. In the financial projections, consumers'contributions have also been allocated in a similar manner.
3. Energy sales are based on the sales forecasts that have been agreedfor the planning of PLN's system expansion program (para. 2.8).
4. Revenues for FY89/90 are based on an average tariff increase of 25Zthat became effect April 1, 1989. For fiscal years thereafter, the tariff isadjusted annually by 4? to absorb the impact of increases in operating costs(other than fuel), and on the rate base assumed in the financial forecasts.Efficiency gains are assumed to be internalized to improve the financialperformance of PLN so that it can undertake an increasing precentage of self-financing of its rapidly growing investment program.
5. Fuel/bulk power for FY89/90 is based on the budget, and for FY90/91and beyond is derived from PLN's computer simulation of system operation. Thefuel costs are calculated on the basis of current domestic fuel prices chargedto PLN, plus transportation costs. The fuel prices to PLN are not escalated,on the assumption that any increases during the forecast period will be passedon to PLN's electricity customers through its tariff.
6. Operating expenses, other than fuel and personnel expenses, have beenforecast taking into account the facilities expected to be in use each year,and subject to foreign and local coss_64flation, as appropriate. Personnel
-92- ANNEX 19Page 2
expenses are assumed to increase at an overall rate of 61 p.a. in line withexpected productivity gains. Repair and maintenance expenses for PLN's Javaand non-Java operations are estimated at 1.12 and 1.6Z of their respectiverevalued gross fixed assets in operation during the preceding fiscal year.
7. Depreciation is based on the application of PLN's normal rates(straight-line method) to assets revalued annually. For purposes of corporateincome tax, the current Indonesian tax code permits the use of the acceleratedmethod of depreciation of assets in operation instead of the straight-linemethod.
8. Financing. Terms of foreign borrowings are assumed to be 20 yearsincluding 5 years' grace, at average interest rates of 102 p.a. inFY89/90-FY90/91, and 11 p.a. in FY91/92 and thereafter. Terms of localborrowings, which are to be from Government-owned banks, are assumed to be 12years including two years' grace, at interest rates of 182 p.a. from FY89/90onwards.
9. Capital expenditures are based on PLN's investment program (Annexes 6and 7) to meet the projected sales growth (para. 3 above), and exclude costsof geothermal steam field development, which are assumed to be incurred byanother agency. The 102 Value Added Tax (VAT) on the foreign contracts isassumed to be borne by Government, and on the local contracts it is assumed toby borne by PLY.
10. Gross fixed assets, work in progress and consumers' contributions arerevalued annually, up to FY86/87 according to Government Regulation No.45/1986, date October 2, 1986, and from FY87188 onwards, according to weightedannual escalation rates (foreign and local). The rate base is the average ofthe revalued net fixed assets in operation, less revalued consumers' contribu-tions. The rate base does not include work in progress.
11 Customer accounts receivables are assumed at 40 days of energyrevenues.
12. Transmission and Distribution (T&D) system losses are estimated todecline by about 0.72 in FY88/89 to a level of about 182 and are assumaed todecline gradually thereafter to a level of about 14.32 in FY94195.
13. Substitution of fuel oil in the existing oil-fired plant at Gresik inJava by natural gas is assumed to be completed in two phases duringFY90/91-FY92/93 when gas-based generation is projected to account for about172 of total energy generation in Java.
14. For PLN's operations outside Java, implementation of an action planto improve the efficiency of these operations (e.g., reduction of T&D systemlosses) and to reduce costs, is assumed for the forecast period.
15. All projections are net of Corporate tax. Based on the currentIndonesian tax code, PLN does not expect to pay any corporate income taxduring the projection period (para. 5.22).
Table 1- 93 -
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
PLN's Tariff
Explanation of the Tariff Categoriesin the Basic Tariffs of Electricity, 1989
Tariffcategory Contracted power Explanation of tariff category
Sl to 200 VA For small consumers (lr; voltage)S2 250 VA to 200 kVA For small to medium soclal institutions (low
voltage)S3 201 kVA and over For large social institutions (medium
voltage)
R1 250 VA to 500 VA For small residential service (low voltage)R2 501 VA to 2,200 VA For small residential service (low voltage)R3 2,201 VA to 6,600 VA For medium residential service (low voltage)R4 6,601 VA and over For large residential service (low voltage)
U1 250 VA to 2,200 VA For small commercial service (low voltage)U2 2,201 VA to 200 kVA For medium commercial service (low voltage)U3 201 kVA and over For large commercial service (medium voltage)U4 For temporary service (low voltage)
I1/H 250 VA to 99 kVA For small hotel industry service (lowvoltage)
I2/H 100 kVA to 200 kVA For medium hotel industry service (lowvoltage)
I3/H 201 kVA and over For large hotel industry service (mediumvoltage)
Ii 450 VA to 13.9 kVA For small industrial service (low voltage)I2 14 kVA to 200 kVA For medium industrial service (low voltage)
| I3 201 kVA and over For medium industrial service (mediumvoltage)
I4 10,000 kVA and over For large industrial service (high voltage)
Gl 250 VA to 200 kVA For small to medium office service (lowvoltage)
G2 201 kVA and over For large office service (medium voltage)
1 Tariff Si: 100 to 200 VA * Rfp 1,48 to 2935/meonthTariff S- 100 to 200 VA a RD 2.010 to 4 020/oonthTariff Si: 100 to 200 VA a Rp 2 510 to 8.025/monthTariff S' 60 to 200 VA . R 1,750 to S450/month
Note; W* P P eak hora (18:00-22:00)
LWUP a OP . 0ff-peak ours (22:00-18:00) x
Ieoy Lsu'ecw
For 1983, the tariff ategory as reduced to A7 ;4riff etegories. Categories H (now I /) and ; (noI for hotel conauar with lew volte were OrOed inteo I ae dX
reectively. For 1989. the tariff cat. ry is ax anded from 17 to 21 cteore 1,ti cit*
end eaparete tariff categoric. (I /14I I MI) aov. been established frotel consumeers cith lo. andl urm voltage., who wore previosly grouped with induetrial cgnaeaeer at
corresponding voltage.* (I1 12 anh 23). The lverag price ahown for 1986 relate, to th. tariff cateori i 1969.
SouPce: PIN Finance Department.
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
PLN's Tariff
Average Revenue from Electricity Sold, by Major Consumers
a Generation Investments ore for the projects schduled to be comissioned 196/60-1900/91.TAD invstments from 196/6-1090/91 are total planned (Annex 6).OUM cost are ostimated at 1.5C of the Investments.Shadow pricing: About 606 of the Investment program consist of qgaipment and materials imported at offshore prices. Thiscomponent does not need shado pricingp Out of the remaining 40%, about 206 would be for local mtrlIals with shado price factorof 0.80, 1OX for unsklIled labor with shado price factor of 0.6 ond 10% for skileod labor with a shadow price J ctor of 1.0since skilIld labor Is *carce. The composite shadow price facter for the total lnvestmnt cost works out to 0.926.
/f Fuel costs have ben workod out using an operatlon simulation model. The economic costa of fuel are as follows: coaI, U5624 perton; fuol oil, UStO.10 per liter; diesel, USS0.17 per liter; natural gas, USS1.40 per Mcf; geothermal steam, USS0.029 per kWh.
.
INDONESIA
POWER SECTOR EFFICIENCY PROJECT
Calculations of the Internal Economic Rate of Return
FY Sales Ineroental sales Revenue Addl econoei bfit.b Benefitsond- R Rooi- Co_er- Indus- Gla Corner- Indus- at average ResI Total minusing dential einl Public trial Total dential cirl Public trial Total tariff a dential trial Total benefits costs
Aver tariff a Rp 113.2 per kWh a US# 6.66 per kWh.Z Additronol economic benefit for residential and industrial consumrs calculated as follow, (me paras. 6.11 and 6.12):
Residential : Avrage revenue per kWh * Rp 123.26 = USe 7.26;Additional economic benefit a US$ 7.26 per kWh. >
Industrial : Average revenue per kWh a Rp 91.2 a US4 5.36;Additional economic bensift * US# 2.68 rar kWh.
Notes: (1) 1ERW - 10.8X.(2) IERR with only revonue at prevoiling tariff as benofit * 8.63
- 100 - ANNEX 23Page I
INDONESIA
POWER SECTOR EFFICIENCY
Selected Documents and Data Available in the Proiect File
Reports on the Sector
1. Legislation Affecting PLNa Electricity Act of 1985.
2. Final Accounts of PLN, 1987/88.
3. Audit Report of PLN, 1987/88.
4. Financial Forecasts (1988/89-1994/95) and Working Papers.
5. Commercial Information, 1986/87, PLN.
6. Annual Financial Information, 1986/87,PLN
7. The Decree of the President of the Republic of Indonesia No. 3 of the Year1983, Concerning the Procedures of Promoting and Supervising DepartmentalAgency (PERJAN), Public Corporation (PERUH) and Limited Liability S-teCorporation (PERSCRO), dated February 17, 1983.
8. The Decree of the President of the Republic of Indonesia No. 28 of theYear 1983, Concerning Amendment to Decree No. 3 of the Year 1983, datedNovember 28, 1983.
9. Electricity Basic Tariff, 1989 PLN.
10. Long Run Marginal Cost Study, 1987, PLN.
11. Government Regulation No. 45/1986 dated October 2, 1986, concerning theadjustment of prices or acquisition values of assets in connection withthe change of the Rupiah exchange rate in September 1986.
12. The Decree of PLN Board of Directors, No. 185/DIR/85 on the CorporateFive-Year Plan (1984/85-1988/89).
13. The Decree of PLN Board of Directors, No. 090/DIR/87 on the Action Planfor Improving Accounting Functions, 1987/88-1989/90.
14. The Decree of PLN Board of Directors, No. 097/DIR/87 on Action Plan forImproving Consumer Administration, 1987/88-1989/90.
15. Circular letter No. 013/PST/1987 regarding Report on Rural Electricity, byPLN's Board, dated October 5, 1987.
AMX 23- 101 - Page 2
16. Java Distribution Project Scope 1990/91-191/92 - Report by PLN (April 25,1989).
17. Hydroelectric Generating Plants Improvement Program: Renovation of HydraPower Plants, June 1987 (Report by PLN).
18. Java West Telecommunications Systems Technical Proposal, March 1987,Report by Jeca Worley International.
19. Diesel Generation Efficiency Improvemont Studys Joint UNDP/World Bankreport No. 09i/88 of December 1988.
20. PLN's Investment Program (1987/88-2000/01) Scenario 4B1C, of Februrary1989.
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