Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 20637

IMPLEMENTATION COMPLETION REPORT(CPL-35010; SCL-3501A; SCPD-3501S)

ON A

LOAN

IN THE AMOUNT OF US$ 423.6 MILLION

TO THE

GOVERNMENT OF INDONESIA

FOR THE

SURALAYA THERMAL POWER PROJECT

June 21, 2000

Energy and Mining Sector unitEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective - ICR Mission - February 2000)

Currency Unit = Indonesia Rupiah (Rp)Rp. 1000 = US$ 0.14

US$ I = Rp. 7200

FISCAL YEAR

January I to December 31

ABBREVIATIONS AND ACRONYMS

BOD - Biological Oxygen DemandCOD - Chemical Oxygen DemandDGEED - Directorate-General for Electricity and Energy DevelopmentEIA - Environmental Impact AssessmentEIRR - Economic Internal Rate of ReturnESP - Electrostatic PrecipitatorHGI - Hardgrove Grindability IndexGOI - Government of IndonesiaICR - Implementation Completion ReportIPP - Independent Power ProducerLOLP - Loss of Load ProbabilityNERC - North American Electric Reliability CouncilMIS - Management Information SystemsMME - Ministry of Mines and EnergyOPRC - Operational Procurement Review CommitteePJB I - Java Bali Power Company IPLN - State Electricity CorporationPPA - Power Purchase AgreementPPE - Engineering Services Center of PLNPSR - Project Summary ReportQAG - Quality Advisory GroupROR - Rate of ReturnSAR - Staff Appraisal Report

Vice President: Jemal-ud-din KassumCountry Manager/Director: Mark Baird, EACIF

Sector Manager/Director: Yoshihiko Sumi, EASEGTask Team Leader/Task Manager: Kurt Schenk, EASEG

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CONTENTS

Page No.1. Project Data 1

2. Principal Performance Ratings I3. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 35. Major Factors Affecting Implementation and Outcome 8

6. Sustainability 107. Bank and Borrower Performance 128. Lessons Learned 13

9. Partner Comments 1410. Additional Information 14Annex 1. Key Performance Indicators/Log Frame Matrix 16Annex 2. Project Costs and Financing 17Annex 3. Economic Costs and Benefits 19Annex 4. Bank Inputs 23Annex 5. Ratings for Achievement of Objectives/Outputs of Components 25Annex 6. Ratings of Bank and Borrower Performance 26Annex 7. List of Supporting Documents 27

Annex 8. ICR Mission Aide-Memoire 28Annex 9. Borrower's Completion Report 36

Map: IBRD No. 2361OR

Project ID: P003916 Project Name: SURALAYA THERMAL POWERTeam Leader: Kurt F. Schenk TL Unit: EASEGICR Type: Core ICR Report Date. June 23, 2000

1. Project Data

Name: SURALAYA THERMAL POWER LIC/TFNNumber: CPL-35010;SCL-350 IA;SCPD-350 IS

Country/Department: INDONESIA Region: East Asia and PacificRegion

Sector/subsector: PT - Thermal

KEY DATESOriginal Revised/Actual

PCD: 05/30/90 Effective: 12/23/92 12/23/92Appraisal: 06/13/91 MTR:Approval: 06/30/92 Closing: 09/30/99 09/30/99

Borrower/lImplementing Agency: Republic of Indonesia/State Electricity Corporation (PT PLN (Persero))Other Partners: ADB, KfW, Export Credit

STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Gautam KajiCountry Manager: Mark Baird M. HaugSector Manager: Yoshihiko Sumi P. R. SchererTeam Leader at ICR: Kurt Schenk V.P. ThakorICR Primary Author: Kurt Schenk; Yuling Zhou;

Selina Wai Sheung Shum;Thomas Walton; Mariko Ogawa.

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: U

Sustainability: UN

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S S

Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:The objectives of the project as stated in the Staff Appraisal Report dated June 3, 1992 were to: (a)expand PLN's generating capacity in Java; (b) promote the economic use of coal for electricity generation;(c) develop PLN's institutional capacity to operate and maintain thermal power plants; and (d) strengthenPLN's financial capacity.

The objectives were clearly defined and consistent with GOI's strategy of meeting the country's energyrequirements at least cost, by substituting oil consumption by alternative more economical fuels (such ascoal, gas and hydropower), and by promoting the environmentally sustainable production and utilization ofenergy resources. The objectives were also in line with the Bank's energy sector strategy (to satisfy unmetelectricity demand and to promote decentralization) as well as its previous work in Indonesia, in particular,the financing of the first four units of the Suralaya Tlhermal Power Plant, the first coal-fired power plant inIndonesia, through the Eight, Ninth, Twelfth and Fourteenth Power projects (Loans 1708-IND, 1872-IND,2214-END, and 2243-IND).

The objectives were clear, relevant and largely realistic. As part of the Bank's sectoral dialogue with GOIand PLN, an Electricity Tariff Automatic Adjustment Mechanism was introduced by Presidential Decree inOctober 1994 (Keppres 68/94). In addition, a Financial Advisor, financed by the Project, was hired inAugust 1997 to advise PLN as PLN's financial situation deteriorated rapidly due to the financial crisis inthe region and the imminent economic collapse in Indonesia.

3.2 Revised Objective:The original objectives were maintained throughout the Project.

3.3 Original Components:The original design of the Project included thle following components: (a) construction of 3x600 MWcoal-fired units (Nos. 5, 6 and 7) at Suralaya, and a 5OOkV transmission line from Cilegon to Cibinongwith associated substations, to enable evacuation of power to the demand centers in Java; (b) consultingservices for engineering design and construction supervision of the proposed units: (c) feasibility study fora high voltage submarine cable link between Java and Sumatra; (d) engineering and design of a thermalpower plant at Banjarmasin in South Kalimantan; (e) consulting services for institutional development; and(f) training of PLN's staff in public utility practices.

The site for the Suralaya power plant was developed to accommodate sevenl units. Units 1-4, each with400 MW capacity, were commissioned between August 1985 and October 1989 with financing from Bankloans. Although the original size for units 5-7 was 500 MW each, subsequent studies, including anEnvironmental Impact Assessment, showed that the optimum unit size should be 600 MW. This changewas consistent with the faster than expected power demand growth in Java and also allowed best utilizationof the potential of the Suralaya site. The project also provided for reinforcement of the 500 kV grid so thatthe total 3,400 MW at the Suralaya site could be transmitted to the major load centers in Java.

3.4 Revised Components:The above components were not revised.

3.5 Quality at Entry:The Project was selected by the World Bank's Quality Advisory Group (QAG) for a Rapid SupervisionAssessment in July 1997, which concluded that the project had a sound design, that procurement,relationships with the Borrower and other stakeholders, and the realism of the Project's performance

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ratings, were highly satisfactory. The Project received a satisfactory overall assessment with a highlysatisfactory focus on development impact. This ICR also rates the quality of entry as "satisfactory".

At appraisal, the technical risks and project management risks associated with the Project, includingpossible delays in implementation, were assessed as low. This assessment was made in line with PLN'sgeneral technical capacity and the extensive experience gained from building the Paiton coal-fired powerplant and the first four units of Suralaya. The Project did benefit from excellent project management andall the units were completed either on or ahead of schedule. Environmental risks were also adequatelyassessed in the EIA and mitigation measures proposed and implemented. The following risks were,however, not identified at appraisal perhaps due to overly optimistic expectations:

* Commercial risks associated with coal supply: according to the original arrangement, coal was to bedelivered from only one supplier. However, due to various reasons, the main supplier could in factonly meet about 80% of the coal needs, thus the balance has to be obtained from other sources.Multi-suppliers caused variations in the coal quality, which in turn has impaired the efficient operationof Suralaya.

* Risks related to under-utilization of Suralaya: although the Project did achieve the benefits ofgenerating electricity at least cost and increasing levels of reliability in Java-Bali, it achieved suchbenefits to a lesser-than-expected degree due to over-capacity and decreased load growth levels inPLN's Java-Bali system.

In addition, the financial crisis that hit the country in 1997, which was beyond GOI/PLN's control andcould not be foreseen at Project appraisal, affected the Project adversely. It caused substantial deteriorationof PLN's financial performance (thus resulting in liquidity problems and shortage of counterpart funding,which, fortunately, did not adversely affect project implementation as the Project was largely completed bythat time).

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:Despite the achievement of all physical objectives, the overall outcome of the Project is rated as marginallyunsatisfactory mainly because of: (i) PLN's financial capacity was not strengthened during theimplementation of the Project; on the contrary, it deteriorated substantially during the late years of theProject due to the financial crisis; and (ii) low economic viability of the Project. The lower rates of returnare due primarily to delayed realization of the incremental energy sales revenues, and the lower averagetariff given the sharp depreciation of the Rupiah. The achievement of the Project's objectives is detailedbelow.

Objective 1: To expand PLN's electricity generating capacity through completion of the SuralayaThermal Plant. With the successful completion and operation of the 3x600MW units 5-7 at Suralaya,this objective has been satisfactorily achieved. The completed Suralaya Thermal Power Station, with atotal installed capacity of 3,400 MW, is a major contributor to economic development in Java and toemployment in the local area.

Objective 2: To promote the economic use of coalfor electricity generation. This objective has beensatisfactorily achieved. Coal is now supplied from several coal mines in the country on a long- orshort-term basis through open bidding. The increasing use of coal spurred the development of competitivecoal mining facilities, which are also contributing to increased coal exports. In addition, compared to coal,

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oil is more exportable and contributor to value added. Therefore, substitution of oil with coal as fuel forpower generation promotes the economic use of coal. At present, Indonesia's hydrocarbon sector producesabout 500 million barrels of crude oil and condensate a year, and 3 trillioni cubic feet of natural gas, bothfor domestic consumption and export. This generates about US$ 7.5 billion per annum, which represents27% of the Government's total revenues and 7 % of GDP, at the current exchange rate. GOI's vision for thehydrocarbon sector includes (i) the ability of meeting the domestic demand for oil and gas, as well as toprovide fuel for Indonesia's economic growth, (ii) maximize the generation of revenue for the country, (iii)ensure security of supply, and (iv) develop national capabilities in the sector.

Objective 3: To develop PLN's institutional capacity to operate and maintain thermal power plants.This objective has been achieved through successful completion of the associated TA activities. In fact, theachievement is beyond the objective as stated: not only the targeted 55 engineers were trained in efficientutility management including power plant engineering and design, as well as operation and maintenanceaspects of large, modem thermal power planits; but also studies were conducted in organization and humanresource planning as well as benchmarking. In addition, a study was completed leading to theestablishment of a more autonomous unit within PLN responsible for electricity transmission in Java-Bali.

Objective 4: To strengthen PLN's financial capacity. This objective was not achieved, since PLN'sfinancial position has weakened dramatically during the tenure of the Project. Since 1994, prior to theonset of the crisis, PLN was moderately profitable but nonetheless was unable to achieve the target RORlevel of 8%. However, PLN was able to comply with the debt service coverage covenant of 1.5 times untilthe final crisis in 1997. Four main factors contributed to this outcome: (i) failure of GOI to implementneeded tariff increases; (ii) high cost of power purchased from IPPs; (iii) lack of competitive pressure onPLN to drive costs down; and (iv) the financial crisis and resulting depreciation of the Rupiah that hit thecountry in 1997. Currently, PLN is unable to service its debts to GOI and to meet its payment obligationsto IPPs.

Since the financial crisis in 1997, PLN has become technically insolvent; its profitability, liquidity andcapital structure have continued to deteriorate. PLN's financial difficulties are attributable, in part, to thesharp decrease of its average revenue in US dollar terms from the pre-crisis level (7 US¢/kWh in 1996 to2.8 US¢/kWh in 1999) while the lion share of its expenses (fuel, power purchase costs and debt service)are denominated in foreign currency. Mainly due to concerns over political repercussions, the tariffadjustments anticipated earlier did not materialize in 1999. Further, fixed obligations under IPP contractsare increasing rapidly, despite over capacity of power generation for Java Bali system for at least the shortterm. Consequently, PLN reported operating loss of Rp. 5.5 trillion (US$ 0.7 billion) and its rate of returnon revalued net fixed assets was negative 9. .% in 1999. Its net loss amounted to Rp. 11.4 trillion (US$ 1.4billion), thus continuing the rapid erosion of its equity (by a total of 46% over the past two years). In1999, GOI supported to help PLN cover its cashflow deficit, amounted to (a) Rp. 2.3 trillion for equityinvestment in PLN's capital expenditures; and (b) Rp. 11.6 trillion for deferred debt service due to GOI. Insum, government support for PLN in 1999 totaled Rp. 13.9 trillion [or US$1.7 billion, increased from Rp.10.7 trillion (or US$1 billion) in 1998].

Based on GOI's agreement with the IMF on rationalization of energy prices in January 2000, PLN'saverage tariff was increased by about 29% effective April 1, 2000, with small consumers (<900 VA) notsubjected to any tariff increase. At the same time, its petroleum fuel costs would also be increased. For theyear 2000, PLN's average tariff is projected to increase by about 33% to 293 Rp/kWh (or about US3.9¢/kWh); its net loss is projected to decrease to Rp. 7.7 trillion mainly due to increases of revenue andgovernment subsidy, and decrease of interest payment, despite increases of payment obligations to IPPs ofabout Rp. 10 trillion. Under the scenario that IPPs will be paid at the "best estimated negotiated price"

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(about Rp. 4.2 trillion), total government support needed is estimated at Rp. 16.5 trillion (or about US$ 2.4billion), including increased GOI cash subsidy to about Rp. 3.9 trillion, plus the aforementioned deferral ofdebt service due to GOI and equity for PLN's capital expenditures.

4.2 Outputs by components:The Project completed satisfactorily all the components as stated in the SAR. The design of the Projectwas generally satisfactory except that there was no concrete Project component in support of the objectiveto strengthen PLN's financial position.

Construction of three 600 MW coal-fired units at Suralaya: The achievement of this component israted as highly satisfactorily. Suralaya units 5-7 were built under budget and ahead of schedule and withexemplary project management. SAR dates for commercial operation for units 5-7 were 6/97, 12/97 and6/98 respectively (i.e., a six-month interval), while the actual dates were 6/97, 9/97 and 12/97, on or aheadof schedule. The 500 kV transmission line between Cilegon and Cibinong and associated substations, werecommissioned without any major problems. Routing of the line was selected so as not to disrupt humansettlements, agricultural land or forest areas. Land acquisition for the tower footings was done smoothly,with compensation at market prices.

Engineering, Design, and Construction Supervision. Project Management was exemplary, with smoothcooperation among all the parties concerned. The contract for engineering services was awarded onDecember 13, 1991 to a foreign firm in association with a local firn, which provided experienced andprofessional assistance to PLN through specialized technical advice, transfer of knowledge, design review,contract management and construction supervision and so on. The project team was adequately staffed.Throughout the Project, the consulting firm overcame many difficulties (including being not paid on timeand taking the risk of working before approval of contract amendment - refer to Section 10) and workedclosely with PLN both in the design office established in Jakarta and in the construction office on the plantsite. The associated Project engineering firm also benefited from the new technology introduced atSuralaya.

Feasibility study for a high voltage submarine cable link between Java and Sumatra. The output of thisProject component is deemed satisfactory. The study, finalized in 1994, concluded that it is technically andeconomically feasible to establish a HVAC link of 200 MW capacity between Java and Sumatra, whichcould be converted to an IHVDC link at a later date. The study concluded that the link could be used, in themedium term, to supply the Tanjung Karang area in Soutlh Sumatra with power available in Java, and inthe longer term, to exchange power between the two islands on a limited basis. Although the proposed linkmay still be attractive to PLN at present, the feasibility study would need to be updated to consider thechanging supply-demand balance situation in the region taking advantage of the economies of scale (both interms of the cost of new capacity and the cost of energy) of the larger generating plant that is installed onthe Java-Bali system.

Engineering and Design for a Thermal Power Plant at Banjarmasin. This activity was satisfactorilyconcluded. It provided the design basis for the Banjarmasin coal-fired plant (2x65 MW), a componentbeing financed under the on-going Sumatera and Kalimantan Power Project (Loan 3761-IND).

Institutional Development and Training. This component was completed satisfactorily. The TA activitiesconducted under the Project facilitated strengthening of PLN's organization, enhancing its institutionalefficiency, and the establishment of more autonomous business units. In particular the conclusions andrecommendations of the Study on Human Resource Development and Planning are largely included in

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PLN's reform and restructuring plans, of "hic' Performance Appraisal System has already beenimplemented. An internal regulation has been I d by PLN on the Remuneration System, which isexpected to be implemented soon, once its impac - the Pension Plan is thoroughly reviewed. In addition,competencies and gaps have been defined as parn human resource development; special training has beenprovided for mid- and top-level managers. The Human Resource Information System has been completed,and Human Resource Planning is being undertaken in parallel with the ongoing Corporate Restructuring ofPLN.

Senior Financial/Corporate Advisor. A Senior Advisor to the President Director of PLN was hired inAugust 1997 for a period of two years to assist PLN in coping with the financial crisis. Although it isdifficult to assess the impact of the advisor in assisting PLN's President Director in the decision makingprocess, the advisor has played a strategic role in assisting in coming to grips with the restructuringprocess of PLN, and in sorting out various pressing issues such as those associated with the IPPs. PLNhas stated that it was very satisfied with the advice obtained.

4.3 Net Present Value/Economic rate of retur,:The Project was part of PLN's dynamic least cost expansion program for the Java-Bali system. The EIRRcalculated for the Project at appraisal was based on the incremental economic costs and benefits associatedwith PLN's investment time slice corresponding to the Project's implementation period (between 1991/92and 1997/98) of this least cost program. According to the appraisal projections, the EIRR was 20 percentwith consumer surplus, or 11 percent without consumer surplus. The EIRR was recalculated with the samemethodology and for the same time slice but based on projections at Project completion. The ex-post EIRRwas 12 percent with consumer surplus, and would be negative without taking into account consumersurplus, much lower than the appraisal estimates, indicating that PLN's investment program during the timeslice may not be economically viable. Major contributing factors include: (i) PLN's average tariff atcurrent level (about 3 USO/kWh) is well below the pre-crisis level (about 7-8 US¢/kWh, which would allowfull cost recovery and a reasonable return on investment); (ii) reduced electricity sales; and (iii) impact ofIPPs with their high levelized tariffs of power purchase. Recalculating the economic benefits with PLN'slatest projected tariff increase (to 8.9 US¢/k;Wh in 1991 constant price by 2003 and beyond) resulted in anEIRR of 19 percent with consumer surplus, and 8 percent without consumer surplus.

The SAR also presented a generation cost analysis for different sources of power (i.e. 600 MW coal, 600MW combined cycle (CC), 600 MW nuclear, and 55 MW geothermal) for the Java-Bali system. Theanalysis was repeated during preparation of this ICR (but excluding the 600 MW nuclear alternative, as itis not viable for Indonesia at present). The levelized cost of generation over the assumed lifetime for thethree altematives is as shown below. Even though PLN's Java-Bali investment program for the time slicecorresponding to the implementation period of the Project (which was an integral part of the investmentprogram) is not economically viable as mentioned above, it is clear that the coal-fired Suralaya Project isstill the most economical among the alternatives available.

Levelized Busbar Cost(0/kWh)600 MW 600 MW 55 MW

Description Coal CC GeothermalCapital Cost 2.0 1.7 1.8Fuel Cost 1.2 1.8 4.0O & M Fixed 0.5 0.4 0.4O & M Variable 0.06 0.09 0.20Total Generation Cost 3.7 4.0 6.4

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4.4 Financial rate of return:

A financial rate of return was neither calculated at project appraisal, nor at project completion.

4.5 Institutional development impact:Overall, the institutional development impact of the Project is rated as substantial. As discussed above

(paras. 4.1 and 4.2), the Project provided a framework for greater decentralization of management, and the

creation of more autonomous business units, as well as human resources development and planning.

Although some of the recommendations have not been implemented at the time of financial crisis, they have

been incorporated into the Corporate and Financial Restructuring Program that PLN is presently

undertaking with assistance from both the Bank and ADB. PLN understands that the sooner it introduces

the marked improvements to the way in which it manages, develops and rewards its human resources, the

better it will be able to introduce and sustain improved levels of company performance which the current

economic crisis will demand as the only way of staying in business. In addition, the Financial Advisor

provided impartial advice at the time PLN needed it most. The training of 55 engineers has been favorable;

their expertise is now being used by PLN successfully in the design, engineering and construction of

coal-power plants.

4.6 Environmental impactThe power station, situated about 100 km west of Jakarta, was built initially with an infrastructure to

support the installation of seven power generating units. For an installed capacity of 3,400 MW and an

annual coal consumption of about 9 million tons, Suralaya has a significant impact on the environment.However, Suralaya is equipped with appropriate environmental mitigation measures to take into account

the following: (a) thermal pollution caused by cooling water discharge to the sea; (b) water pollution caused

by discharge of effluents from the plant; (c) air pollution caused by particulate matter, sulfur dioxide(S02), and nitrous oxides; and (d) disposal of plant solid wastes including bottom and fly ash, sludge,

garbage, etc. The plant uses a 1.7 km discharge channel to reduce impact of heated effluent discharges on

coal and marine habitats.

To minimize the likelihood of adverse impacts on ambient air quality, low sulfur coal was specified atappraisal (0.5% total S). The coal being obtaining from the PT Bukit Asam (80% of plant supply) had an

average total sulfur content of 0.25% in 1999. The remainder (20%) came from three other sources, onlyone of which exceeded the 0.5% limit. Electrostatic precipitators (ESP) for Unit 5-7 were designed for a

particulate removal efficiency of 99.5% and have been meeting that standard. Stack emissions for S02

and NOx from Units 5 - 7 have been consistently within standards during the year of data examined(1999).

Influent cooling water temperature averaged 29 °C during 1999, and the average outfall temperature was

34.2 °C, well below the limit of 40.0 'C. Effluent from the sewage treatment plant contained negligible

concentrations of BOD, COD and total dissolved solids concentration, easily complying with standards.Boiler blow down water and water treatment plant effluent were subject to the same standards (pH, copper,

nickel and iron). Data for 1999 show no compliance problems. Effluent from the oil separators was withinstandards according to the 1999 annual averages. Runoff and leachate from the ash disposal area arecollected in a settling pond that is in urgent need of dredging. In some sections it has no freeboard, and the

berm has been overtopped in heavy rains this year. The pond effluent is sampled for 11 metals. Accordingto samples taken in August 1999, the settling pond supernatant met all metal standards and the Suralaya

flyash is not considered to be toxic waste. Chlorine is used to prevent growth of algae and other biomass in

the plant cooling system. The free chlorine concentration is maintained at 0.3 mg/l. Annual monitoring by

Gadja Madah University does not reveal any significant deterioration in the marine ecosystem that can be

attributed to Suralaya. The quality of nearby coral reefs has declined slightly, but the reason identified by

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the scientists is sedimentation caused by tree-cutting and land development

Ash handling, sale for reuse, and disposal are the major environmental clhallenges the plant faces. Whereasthe plant (units 1-7) had at one time been selling as much as 70% of flyash for reuse, only 10-15% iscurrently being sold. The ash disposal site is therefore filling more rapidly, but it is still expected to havecapacity until 2007-8 even if flyash sales dc not improve. Gadja Madah University is investigating a rangeof new flyash use options for PLN. In the meantime, the disposal site needs road improvement,compaction, and other actions to stabilize the slope of the piles which have exhibited a tendency to slide inheavy rain.

As predicted at appraisal, the construction of the transmission lines did not prove to have anyenvironmental problem. The routing of the lines did not disrupt human settlements, nor agricultural land orforest areas. PLN paid market prices for the tower footings acquired. There were no resettlement issuesassociated with the project.

5. Major Factors Affecting Implementation and Outcome

5 1 Factors outside the control of government or inplementing agency:The economic crisis that hit the country in 1997 has impacted substantially the financial situation of PLN.The sharp depreciation of the Rupiah greatly increased the cost to PLN of its US$-denominated long-termpayment obligations. These include debt service payments on foreign loans on-lent by Government,take-or-pay fuel supply agreements for gas and geothermal steam (backed by standby letters of creditsissued by state banks), and take-or-pay power purchase agreements with IPPs (backed by "comfort" lettersissued by Government). As a result, PLN is currently unable to fully service its debt and to meet itspayment obligations to IPPs.

The crisis has also affected the electricity demand in the country. PLN's previously rapid sales growth,particularly on Java, slowed considerably, leaving it with a mounting excess of baseload generationcapacity as new plants came on stream. A lower demand growth rate and attendant reduction in salesgrowth rate combined with the current low average tariff have decidedly affected the economics of theProject. As the demand picks up, coal quality improves (see para 5.3), and other efficiency measures areimplemented (see para 6. 1), the capacity factors of the units will equal or exceed the benchmark uponwhich the economic analysis was based. There are already some improvements in capacity factors in 2000.

5.2 Factors generally subject to government control:(a) The Pace of Sector Reform has proceeded at a much slower pace than anticipated. A technicalassistance activity, undertaken in 1996 under Cirata 11 project (Ln 3602-IND), provided a set ofrecommendations which served as a blueprint for Sector Reform and Restructuring. The recommendationsof this technical assistance provided the underpinnings for the Government's Power Sector RestructuringPolicy, which was launched in August 1998. The Policy calls for far reaching changes in the power sector,including the unbundling of PLN and subsequent privatization in phases. It is expected that the Policyframework will be instrumental in providing a sound foundation of PLN's and the sector's medium andlonger-term viability. To promote the gains so far achieved, the Bank is providing timely technicalassistance (under Loan 3978-IND) for corpo:rate and financial restructuring of PLN. The FinancialAdvisor which was funded under this project, also provided timely input to PLN in this critical time.

(b) Tariff adjustments: In addition to the financial crisis, GOI's continued failure to approve theneeded tariff increases greatly contributed to the deterioration of PLN's financial position.

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(c) Change in Customs Clearance Procedures: In October 1995, the GOI introduced change incustoms regulations with the import master list and the authority under which it needs to be certified before

the customs authorities release the items being imported under the list. This change, introducedretroactively without consideration of the impairment it could cause in the implementation of ongoing

projects, resulted in several critical steam generator components and other materials being held up for

customs clearance for much longer than before; thus precious erection time was lost. Although Unit 5 was

not significantly affected since imported equipment had already been delivered to the site, it affected Units

6 and 7. Generally speaking, the Project would have been completed earlier had the regulation change not

been made.

5.3 Factors generally subject to implementing agency control:(a) Good Project Management. Project planning, management, and coordination provided by PLN

and the other parties involved were exemplary. The Project was implemented by an extensive critical path

schedule which controlled engineering, procurement, manufacturing, construction and commissioningactivities. Despite the factors (as discussed above and below) that have affected the projectimplementation, the Project was commissioned ahead of schedule. The timely completion of the Project

also reflects PLN's overall strong technical capability as well as the experience gained from the earlier

Bank financed thermal power projects (Paiton and Units 1-4 of Suralaya).

(b) Technical Issues

3 Fire in the Secondary Air Heaters of Unit 5. During commissioning ol September 22, 1996 (due to

an unexpected trip of the station service transformer), a fire broke out in Unit 5, causing a two and half

month delay to its commercial operation. The Contractor accepted full responsibility for the incidentand provided all repairs at no additional cost to PLN. The availability of duplicate spare parts for Unit

7 was instrumental in minimizing the schedule impact on Unit 5. Units 6 and 7 were fortunately

unaffected by this incident.

* Temperature in DCIS and Turbine Hall. Shortly after commissioning Unit 5-7, it was noted that the

temperature in the DCIS and the Turbine Hall was higher than specifications, which could lead to

potential technical problems. Additional work was therefore needed by the Contractor to bring the

temperature within specifications. Though taking longer than expected time, the issue was solved

satisfactorily before loan closing.

* Black Start Capability. Although the original design for Suralaya did not require black-startcapability, subsequent events during a serious blackout in April 1997 made it necessary to provide

black-start capability. To this end, 2x20 MW gas turbines have been installed at the site.

* Coal Quality. According to the original agreement, all coal supply for Suralaya should have beenobtained from one local supplier. Apparently due to unsatisfactory prices in the domestic market, this

supplier is presently supplying only 80% of the contracted quantity. The balance is then procured in the

spot market from several other suppliers. While this arrangement allows some limited competition on

coal supply, it also presents some technical problems as regards coal quality due to the variable nature

of the coal characteristics of the various suppliers (i.e. calorific value, ash content, sulfur content,

nitrogen, grindability). The substandard quality of the coal is impairing somewhat the efficient

operation of Suralaya. The Bank has persistently requested PLN to deal with the contract breach bythe main supplier as well as coal quality.

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(c) PLN's Excess Reserve Capacity. In the face of double digit sales growth rates in the 90's andapprehension of having to face power outages and the attendant high cost of i. rruptions of service, PLN'splanning approach was to maintain an overexpanded system in Java-Bali, that is, one with large regionalreserve margins. This was justified on the basis that a high reserve margin was necessary to avoid thecosts of power interruptions to thle economy, and to hedge against the risk of unreliability of existingthermal plants, and the possibility of implementation delays, particularly on the commissioning oftransmission lines and substations (i.e. about 10 months for power plant and 13 months for transmissionprojects). Under subsequent loans, a generating capacity margin covenant was introduced to request PLNto take all such actions as shall be necessary to reduce the realized reserve margin in the Java-Bali Systemto 30% by December 31, 1999 (including present IPP commitments in Java-Bali, the capacity reservemargin was over 45% on loan closing). This covenant has not been complied with. It is clear thatcommitted private power additions and the reduction of sales growth rates will not allow PLN to achieve areasonable level of reserve capacity margin (i.e. 20-25% range) till the 2002-4 time frame. The annualizedcarrying costs of the excess capacity have been variously estimated to vary between US$ 150 - 400 million.In light of its financial woes, PLN has started to implement an under-planning approach based on1 morerealistic demand projections.

(d) Timely Action on Counterpart Fund in. During the last stages of Project implementation in 1997,the economic crisis and PLN financial difficulties were affecting the Project, particularly as regardscounterpart funding. The Project was restructured with unnecessary loan proceeds canceled and the LoanAgreement amended to allow for 100% of local financing (i.e. Bank loan disbursement percentage forcertain local expenditures to increase from 65% to 100% excluding taxes) effective from April 1, 1997 andOctober 31, 1999. This timely action relieved considerably the pressure on1 PLN to pay the contractor'sinvoices and allowed the Project to be comp. eted with no delays.

5.4 Costs andfinancing:The estimated total project cost at appraisal (excluding interest during construction) was $2,024.5 million.The latest estimate of the actual project cost is $1,453.1 million equivalent, resulting in a cost under-run ofabout 28.2%. This cost under run was achieved largely due to: (a) competition under Bank ICBprocedures; (b) world-wide decline in equipmnent and materials; and (c) conservative cost estimates.

Including interest during construction, the total actual project financing required was $1,602.7 million (vs.$2,360.5 million at appraisal), of which, Banik loan provided $299.5 million (vs. $433.6 at appraisal) andGOI/PLN provided $424.6 million (vs. $813.8 million at appraisal), and the balance of $878.6 million (vs.$1,113.1 million at appraisal) from other financiers (including ADB and export credits).

The original amount of the Bank loan was $423.6 million. At the requests of the borrower, two partial loancancellations were made during project implementation in August 1996 and August 1998 with respectiveamounts of $100 million and $32.2 million; resulting in the revised loan amount of $294.1 million. Thefinal disbursement is $282.2 million; and the undisbursed balance of $9.2 million will be canceled uponclosure of the loan account.

6. Sustainability

6.1 Rationale for sustainability rating.Due to the economic crisis in the country and PLN's deteriorated financial situation, the sustainability ofthe Project objectives appears to be uncertain. Unless the financial situation of PLN improves in the shortto medium term, the sustainability of the Project may be impaired through perhaps lack of maintenance

- 1 0 -

budget at PLN/PJB 1, deterioration of the transmission system to evacuate power from Suralaya, anddissipation of the commitmnent for reform and restructuring, on which the restoration of PLN's financialviability rests.

Over the short to medium term, PLN is facing the challenge to cope with a difficult period of transition,within the context of a highly uncertain operating environment that is to a certain extent beyond the controlof the company. With a view to restoring the financial sustainability of the sector, GOI publicly launched aPower Sector Restructuring Policy in August 1998. International consultants (financed under the SecondPower Transmission and Distribution Project, Loan 3978-IND) are expected to be mobilized shortly toassist GOI/PLN in the implementation of the corporate and financial restructuring of PLN. Within thecontext of GOI's restructuring policy, various remedial measures have recently been initiated by GOI/PLNto put the company on the road to financial recovery, including: (a) expenditure reduction and efficiencyenhancement; (b) tariff rationalization; (c) rationalization of IPP contracts; (d) debt relief, and (e) debtrestructuring. Under the Presidential Decree No. 166 dated December 18, 1999, a ministerial levelcommittee for the restructuring of PLN was set up and chaired by the Coordinating Minister of Economy,Finance and Industry. Other members of the committee include four ministers (Mining and Energy,Finance, State Enterprise and Foreign Affairs). However, the degree and pace of PLN's financial recoveryremain unclear at this point.

On the institutional side, the policy framework established in August 1998 for sector reform, whichprovides the blueprint for sectoral restructuring, is expected to facilitate a reversal PLN's dramaticdownturn in financial viability. Moreover, it is expected that the framework will also be instrumental inproviding a sound foundation for the medium and longer-term viability of the sector as a whole and of PLNin particular. In addition, PLN is starting to institute some changes in the way it develops and rewardshuman resources, which is expected to have a positive impact on PLN's performance.

In addition, PLN is implementing a system-wide Efficiency Improvement Program to improve theavailability and heat rates of generating units, as well as reduce the duration time of inspection and extendthe interval between inspections. As a result, the cost savings at PJBI (which is responsible for operatingof the Suralaya) alone were expected to be Rp. 54.9 billion ($7.3 million equivalent) in 1999. The effect ofthis program is also felt in Unit 5 where the realized availability in 1999 was 98% (compared to a NERCStandard of 81%), and the heat rate was reduced from 2,590 Kcal/kWh in 1997 to 2,478 Kcal/kWh in1999. The target heat rate is 2,310 Kcal/kWh.

Technically, Suralaya Thennal Power Plant is of good quality and the generation units have operated athigh availability since commissioning. Suralaya is well maintained under a predictive maintenance regime(as opposed to time-based maintenance) that has been recently introduced. The average plant availabilityfor Suralaya units 5-7 in 1999 was 80% (98% for Unit 5, 77% for Unit 6, and 69% for Unit 7) comparedto 75% in 1998. As of March 2000, average plant capacity factors have improved over those in previousyears, with values of (for 3 months only): 64% for Unit 5; 76% for Unit 6, and 68% for Unit 7, slightlylower than the 70% target, due to a number of causes, including unit deratings caused by bad coal quality;scheduled maintenance; excess capacity; and reduced demand. As regards excess capacity, PLNgeneration assets are expected to be fully utilized by 2001 to maintain an LOLP of I day/year, at whichtime additional demand would need to be met by IPPs alone as PLN does not have any new generationproject in the pipeline. Industrial sales growth rate was about 4% in 1999, which bodes well for economicrecovery and the full utilization of Suralaya.

6.2 Transition arrangement to regular operations:

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All Units 5-7 completed under the Project lhave been handed over to PJB 1 for operation and maintenance.All the units are now fully operational. PJB1 is one of the few relatively autonomous generationsubsidiaries under PLN and has the technical capability to operate and maintain the units at Suralaya,which is perhaps PLN's most important power plant in Java-Bali integrated system. However, PJB 1budget highly depends on PLN's bulk power purchase tariff (about 155 Rp/kWh at present), which,according to PJB 1, may not be sufficient to cover costs at present. It is to noted, however, that under thePower Sector Restructuring Policy for corporate and financial restructuring of PLN, the optimal numberand composition of independent generating companies, or Gencos, is to be reviewed, given theGovernment's objectives conceming competitive markets operations and privatization. In the context of theon-going corporate and financial restructuring of PLN, a different entity other than PJB 1 may beresponsible in the future for the operation and maintenance of the Project.

7. Bank and Borrower Performance

Bank7. 1 Lending:Identification of the Project components and analysis of technical, financial, environmental, and economicissues during project preparation and appraisal were satisfactory. The Project objectives fitted well with theprevailing sectoral objectives. Project preparation and appraisal were comprehensive. The procurementand other implementation arrangements were adequate. The development of an environmental managementplan for Suralaya was thorough and provided the basis for the clear-cut and fair agreements reached duringnegotiations.

7.2 Supervision:Supervision of the Project is rated as highly satisfactory. 12 supervision missions (including the ICRmission) were fielded in combination with missions for other projects/activities, at about 2 missions peryear on average. Timilg of supervision mission was generally satisfactory and the duration of the missionswas well planned, taking into account the sectoral work that went along with the mission objectives.Although the Task Managers were changed three times during Project implementation, this did not hamperthe continuity and effectiveness of the supervision efforts because of overlap of team members. Projectimplementation progress was reported on a timely and regular basis throughout the life of the Project.Procurement was handled satisfactorily, although the problem with Memorandum Number 5 (refer toSection 10) was allowed to fester too long without taking a final decision for a line of action. The IP(Implementation Progress) was either rated "Highly Satisfactory" or "Satisfactory", while the DO(Development Objective) rating was downgraded to 'unsatisfactory' when the financial situation of PLNdeteriorated in 1997, and was kept so till loam closing (September 30, 1999).

The Bank took proactive actions on loan proceeds cancellations once loan savings were identified; the Bankalso responded quickly to PLN's deteriorated financial situation by restructuring the Project and amendingthe Loan Agreement to allow increase of the Bank loan disbursement percentage for local expenditure(excluding payment of taxes) to 100% from April 1998 to January 2000, which relieved considerably thepressure on PLN to pay the contractors. Fortunately, the wrenching economic crisis in the region did notaffect the completion of the Project.

7.3 Overall Bank performance:Overall, the Bank performance is rated as satisfactory. The Bank maintained continuous contact witlh PLNand other stakeholders which provided the basis for taking quick actions when required. In addition, theBank's dialogue with PLN and the Government focused on much more than the agreed objectives of thespecific project and provided a significant contribution to the identification of the sector issues which werediscussed regularly with PLN and Government.

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Borrower7.4 Preparation:The performance of the Borrower is rated as satisfactory during Project preparation. PLN prepared theProject with excellent technical quality and realistic implementation arrangements. The Project fit well intoPLN's priority investment program and was in line with the Govemment's overall sector strategy.

7.5 Government implementation performance:The Govemment's performance during implementation was deemed satisfactory, although marginally so.Counterpart funds were made available in a timely manner except close to project completion when theAsian crisis was in full swing and PLN's financial performance was deteriorating drastically. GOIofficially launched in August 1998, though later than expected, the Power Sector Restructuring Policy,which provided the framework to restructuring of the power sector including PLN. During the projectimplementation, three issues related to the Government should be noted: (a) GOI did not approve the tariffincrease as required due to political sensitivity, which substantially affected PLN's financial situation; (b)GOI has not been proactive in addressing the issues of under-capitalization of PLN, and (c) a change in theclearance procedures introduced by GOI early 1996 caused problems in obtaining customs clearance forseveral critical components, with the result that precious plant erection time was lost trying to sort out theproblem. Fortunately, this did not affect the timely completion of the project as a whole.

7.6 Implementing Agency:Performance of PLN is rated as highly satisfactory on the technical side with highly effective Projectcoordination with consultants, suppliers, contractors and subcontractors. It implemented the Project aheadof the schedule and below the budget. PLN's procurement activities were fairly on time.

However, as discussed in Section 4, PLN's financial performance has not been satisfactory. It's financialposition has deteriorated dramatically during the tenure of the Project, though mainly due to factors(including the financial crisis, high cost of IPPs, and GOI's unwillingness to approve required tariffincrease) beyond its control. As a result, PLN was unable at any time during the Project period to fullycomply with the financial covenants established for it under the project.

Overall, the performance of the implementing agency is rated as satisfactory.

7. 7 Overall Borrower perJormance:Overall, the Borrower's performance was satisfactory. The GOI and PLN were fully committed to thesuccessful completion of the Project on the physical construction side; and the GOI launched the importantpolicy framework for power sector reform; however, PLN's financial position deteriorated substantially.

8. Lessons Learned

* In addition to quality at entry, full commitment from both the borrower and the implementing agency,as well as close coordination among the key players (suppliers, contractors, consultants, donors,owners), good project management, and extensive supervision are key factors, contributed to thesuccessful and timely completion of the Project.

* Bank quick action to respond to the financial crisis situation by increasing the loan disbursementpercentages for local expenditures was instrumental in avoiding any potential delays due to shortage ofcounterpart funds.

* Project cost estimates should be more realistic and robust, to avoid large amounts of cancellation of the

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Bank loan (about 33% of the Bank original loan amount was canceled under the Project).

* The high cost of the IPPs has been a contributing factor to the failure of the Project to meet its financialobjective and has adversely affected the economics of PLN's entire investment program, indicating theneed for thorough risk analysis in aihighly uncertain operating environment, particularly in a sectorundergoing major structural reform.

* The use of a "rate of return on revalued assets" covenant to measure financial performance is notappropriate for a company like PLN w:ith a very large and lumpy investment program.

9. Partner Comments

(a) Borrower/implementing agency:Borrower's own evaluation report is attached as Annex 9.

(b) Cofinanciers:ADB's Project Completion Report for Surai.aya (May 1999) recorded the following:

"Reduction in the overall project cost by 23 percent compared to the appraisal estimate was achieved as aresult of strong international competitive bidding and the worldwide decline in demand for power plantequipment. The main objectives of the Project were achieved with the commissioning of units 5-7 of theSuralaya Thermal Power Plant and their supplying of electricity to the grid. It is unfortunate that as aresult of the financial crisis, the full benefits of the Project cannot be utilized in the time frame originallyenvisaged. However, with gradual improvement of the economic, load growtlh is expected to be resumedagain. Overall, the Project is considered generally successful. The TA accompanying the Project achievedits objectives in benefiting PLN, and is considered generally successful as well."

(c) Other partners (NGOs/private sector):None.

10. Additional Information

Memorandum No. 5. PLN signed an agreement on December 13, 1991 with a foreign firm in associationwith a local firm to provide Engineering and Design Consultancy Services, as well as ConstructionManagement and Start Up support for Suralaya Units 5, 6 & 7. The original agreement was for a value ofUS$ 33.463 million plus Rp 12.996 billion. The Services were to be provided in two stages: Stage I forpreliminary engineering and the preparations of bid documents for major contract packages, funded by acompleted Bank loan (Ln 3349-IND), and Stage II for the balance of services to complete the work, fundedby the Bank loan for Suralaya.

After the invitation for proposal for the above services had been issues by PLN, a study concluded that thesize of the individual units, which were 500 MW or the last three units in the original design could beincreased to 600 MW each for an ultimate plant capacity of 3,400 MW (Units 1-4, 400 MW). Theincremental capacity of 300 MW gave rise to the need for several additional studies to be made by theEngineers. The Engineers were also required by the Bank to compress the implementation schedule from 9months to 6 months between commissioning of the three units.

Even though the out of scope work was already identified immediately after contract signing, PLN wasreluctant to start processing any contract amendment so soon after securing the Govemment's approval to

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the original contract. Also, the full extent of scope changes was not yet final. Although the Bankpersistently requested PLN to regularize the scope of work of the Engineer, PLN did not attempt to do sountil October 1996. This caused the Engineer to work under a contract for which payment could not bemade; in October 1996 the Engineer was out of pocket by about US$ 14 million. In October 4, 1996 PLNsent to the Bank Memorandum No. 5 to amend the Engineer's Contract to support an additional of 711 rn/mto complete all the activities in the contract.

Because of the large sums of money in Memorandum No. 5, the matter was discussed at an OPRC meetingwhich decided that Memorandum No. 5 should be reviewed by an independent entity. OPRC agreed onpayment of 50% of the expenditures covered in Memorandum No. 5 to the Engineer, and the remaining50% was subject to an examination by an auditor of the book of the Engineer to verify that the man-monthsclaimed have actually been expended under the Contract Agreement have already been so expended. Aconditional NOL was issued in March 1997. KPMG Peat Marwick was selected to do this auditing work.On September 17, 1997 KPMG submitted their report which satisfactorily verified the man-months anddirect expenses and confirmed deliverables to visible activities.

It is to be noted that the manner in which the contract was "manipulated" by PLN is neither normal nordesirable. Most of the additional tasks to be accomplished under the contract were known duringnegotiations and prior to contract signing. It is difficult, therefore to justify the five year delay in puttingthe proposal together for appraisal of the additional costs involved. Nevertheless and in spite of thisunfortunate event and out of pocket expenses by the Engineer, there was no measurable impact on projectmanagement.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Indicator SAR Tarsget ActualCommercial Operation:

* Unit #5 06/97 06/97* Unit #6 12/97 09/97* Unit #7 06/98 12/97

Training of PLN O&M Engineers 55 55

Indicator Benchmark Actual1998 1999 03/2000

Utilization and EfficiencyCapacity Factor (CF, %)

* Unit #5 70 62 69 64* Unit #6 70 34 50 76* Unit #7 70 65 43 68

Equivalent Availability Factor (EAF, %)* Unit #5 80 79 98 80* Unit #6 80 58 77 95* Unit #7 80 87 69 85

Standard Coal Consumption (g/kWh)* Unit #5 455 479 462 451* Unit #6 455 449 449 451* Unit #7 455 463 440 450

Gross Thermal Efficiency (%)* Unit#5 36 34.8 36.1 37.4* Unit #6 36 37.2 37.1 37.4* Unit #7 36 36.1 38.0 37.4

Environmental ProtectionESP Efficiency (%) at

* Unit #5 99.5 n.a. n.a. n.a.* Unit #6 99.5 n.a. n.a. n.a.* Unit #7 99.5 n.a. n.a. n.a.

System Reliability in Java-Bali* SAIFI (times/customer/year) - 12.4 13.1 n.a.* SAIDI (hours/customer/year) - 9.8 8.9 n.a.

Note: a/ ESP efficiency in 1997 was 99.75%, 99.81% and 99.88% for Units 5/6/7respectively; and has not been tested since then.

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ millioni equivalent)Appraisal ActuallLatest PercentageEstimate Estimate Appraisal

Project Cost By Component US$ million US$ millionTurbine generator and ancillaries 253.40 198.02 78.15Steam generators and ancillaries 627.50 689.45 109.87Piling and circulating water channels 52.90 40.90 77.32Marine works 29.70 22.79 76.73Main civil works 99.00 50.72 51.23Stacks 29.50 25.47 86.34Steelworks and cladding 36.80 26.15 71.06Ash and coal handling plants 96.70 77.53 80.18Mechanical and electrical works 203.00 155.46 76.58Substation and transformers 49.00 30.18 61.59500 kV transmission system 75.00 70.77 94.36Own administration and supervision 6.80 9.06 133.24Housing colony 9.40 0.00 0Technical assistance (engineering & other TA) 61.40 56.58 92.15

Total Baseline Cost 1630.10 1453.08Physical Contingencies 107.20Price Contingencies 287.20

Total Project Costs 2024.50 1453.08Interest during construction 336.00 149.63 44.53

Total Financing Required 2360.50 1602.71

Project Costs by Procurement Arrangements (Appraisal Estimate)(IJSS million eauivalent)

Procurement MethodExpenditure Category

.__________________ .ICB NCB Other2 N.B.F Total Costs1. Works 70.90 0.00 0.00 136.90 207.80

(45.70) (0.00) (0.00) (0.00) (45.70)2. Goods 365.60 0.00 0.00 1365.20 1730.80

(318.30) (0.00) (0.00) (0.00) (318.30)3. Services 0.00 0.00 77.30 0.00 77.30

(0.00) 0'0.00) (69.60) (0.00) (69.60)4. Miscellaneous 0.00 0.00 0.00 8.60 8.60

(0.00) 1'0.00) (0.00) (0.00) (0.00)

Total 436.50 0.00 77.30 1510.70 2024.50MEN_ 4A! L o.00) (69.60) (0.00) (433.60)

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Project Costs by Procurement Arrangements (Actual/Latest Estimate)SS million equivalent)

Procurement MethodExpenditure Category

ICB NCB Other2 NB.F Total Costsl. Works 48.26 0.00 0.00 50.72 98.98

(37.77) (0.00) (0.00) (0.00) (37.77)2. Goods 213.70 0.00 0.00 1074.76 1288.46

(206.97) (0.00) (0.00) (0.00) (206.97)3. Services 0.00 0.00 56.58 0.00 56.58

(0.00) (0.00) (54.74) (0.00) (54.74)4. Miscellaneous 0.00 0.00 0.00 9.06 9.06

(0.00) (0.00) (0.00) (0.00) (0.00)

Total 261.96 0.00 56.58 1134.54 1453.081 (244.74) (0.00) (54.74) (0.00) (299.48)

I/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2/ Includes civil works and goods to be procured through national shopping, consulting services, services of

contracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component(in US$ million equivalent)

Component A- Draisal Estimate Actual/Lat st Estimaite Percentaee of AvDraisalBank PLN/GOI CoF. Total Bank PLN/GOI CoF. Total Bank PLN/GOI CoF. Total

Turbine generator 7.38 190.64 198.02Steam generator 158.17 531.27 689.44Piling & C.W. channel 40.90 40.90Marine works 5.24 5.24Main civil works 17.55 20.24 30.48 68.27Stacks 20.22 5.25 25.47Steelworks & cladding 23.51 2.64 26.15Ash and coal handling 1.91 8.65 66.97 77.53Mechanical & electrical 152.82 2.64 155.46Substation & transformers 28.73 1.46 30.195OOkV transmission sys. 11.52 59.26 70.78Own admin & supervision 9.06 9.06Housing colonyTechnical assistance I I _I_I __ 54.74 1.83 56.57 1 1 1 _

Total financing required 433 60 477.80 1,113.10 2,024.50 29948 274.98 878.62 1.453.08 69.07 57.55 78.93 71.77

Note the following:* Appraisal financing plan by components and by financiers is not available.* CoF (cofinancing) includes loans from ADB, export credits and other sources.* The estimated Bank financing include $10 million from Loan 3349-IND.* The actual Bank financing include $10 million disbursed under Loan 3349-IND; excluding this amount,

the actual Bank financing valued by the borrower in the above table would be $289.48 million, which isdifferent from the actual disbursement of $282.15 million valued by the Bank; the gap was due tofluctuations of exchange rates as the Bank and the borrower valued the transactions in terms of USD ondifferent dates.

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Annex 3: Economic Costs and Benefits

Economic Internal Rate of Return (EIRR)

Appraisal Estimate Ex-post Estimate19.98% on PLN's investment program in Java for 12.40% on PLN's investment program in Java for1991/92 through 1997/98 (that the Bank financed 1991/92-1998, the period that the Bank-financedproject was a part) at the prevailing tariffs and project ended up covering, including consumerincluding consumer surplus. If the consumer surplus. Without consumer surplus the revenuesurplus is not taken into account, the EIRR is streams are all negative and hence the EIRR cannot10.96%. be re-evaluated.

The ex-post calculations are shown in Tables I and 2 below. Table 1, the base case, is evaluated witlh theprevailing tariff. Table 2 is a case study for the expected tariff increases to 8.9 ¢/kWh in 1991 constantprices by 2003 and beyond. The assumptions are available on file as part of the supporting documentslisted in Annex 7.

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Table 1. Suralaya Steam Coal Power Plant Project (Units 5, 6 & 7)

Calculation of EIRR on Java Investment (1991/92 - 1998)

Base Case (without tariff increase) (US$: Million)

Year Investment Total Total Revcnue Consumer Total Total tenefitc - Costs

Shadow Sales Incr. Sales Surplus Benelit Cost Revenue Total

Price (GWh) at avg. tariff Benefit

(1)_______ L . ___________ 2) (3) ( -(2 (2) -(3)

1989 0 0 0 0 0

1990 0 0 0 0 0

1991 1,249 25,078 0 0 0 0 1,257 -1,257 -1,257

1992 1,628 27,838 2,760 179 188 366 1,785 -1,606 -1,4191993 1,626 31,213 6,135 430 329 758 1,933 -1,504 -1,175

1994 1,946 34,638 9,560 627 451 1,078 2,291 -1,664 -1,213

1995 2,819 40,134 15,056 934 526 1,460 3,284 -2,350 -1,8241996 1,815 45,936 20,858 1,308 737 2,044 2,458 -1,151 -414

1997 1,385 51,511 26,433 1.494 1,186 2,680 2,095 -600 586

1998 579 51,078 26,000 509 1,521 2,030 1,343 -833 6871999 0 51,078 26,000 702 1,310 2,012 783 -81 1,229

2000 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2001 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752002 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752003 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2004 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752005 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752006 0 51,078 26,000 1,048 1.310 2,357 783 265 1,5752007 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752008 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2009 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2010 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752011 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2012 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2013 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2014 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2015 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2016 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752017 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

2018 0 51,078 26,000 1,048 1.310 2,357 783 265 1,575

2019 0 51,078 26,000 1,048 1,310 2,357 783 265 1,5752020 0 51,078 26,000 1,048 1.310 2,357 783 265 1,5752021 0 51,078 26,000 1,048 1,310 2,357 783 265 1,575

EIRR with consumer surplus 12.40%/,

a/ Average tariff in US censtkWh referred to 1991 as base year are: 6.54 in 1991; 6.47 in 1992; 7.00 in 1993;

6.56 in 1994; 6.20 in 1995; 6.27 in 1996; 5.65 in 1997; 1.96 in 1998; 2.70 in 1999; and 4.03 in 2000.

b/ Additional economic benefits for residential and industrial consumers are:

Residential (in US cent/kWh): 11.16 in 1991; 10.70 in 1992; 9.41 in 1993; 8.07 in 1994; 6.75 in 1995; 6.86 in 1996;

S.10 in 1997; 8.42 in 1998; 7.68 in 1999.

Industrial (in US cent/kWh): 5.65 in 1991; 5.42 in 1992; 4.07 in 1993; 3.76 in 1994; 2.36 in 1995; 2 49 in 1996;

3.45 in 1997; 6.06 in 1998; 4.80 in 1999.c/ EIRR at average tariff is not evaluated since net revenue cash-flow is all negative.

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Table 2. Surclaya Steam Coal Power Plant Project (Units 5, 6 & 7)

Calculation of EIRR on Java Intestment (1991192 - 1998)

With Tariff Increase Million US$

Year Investment Total Total Revenue Consumer Total Total Benerisc - COstShadow Sales Incr. sales Surplus benefit cost Revenue Total

Price (GWh) at avg. tariff benefit

___ _ -_ _fl) _ (2) f3) , (1) - (3) ____-_(3)

1989 0 0 0 0 01990 0 0 0 0 0

1991 1,249 25,078 (l0 0 0 1,257 -1,257 -1,257

1992 1,628 27,838 2.76( 179 188 366 1,785 -1,606 -1.4191993 1,626 31,213 6,135 430 329 758 1,933 -1,504 -1,175

1994 1,946 34,638 9,56C 627 451 1,078 2,291 -1,664 -1.2131995 2,819 40,134 15,056 934 526 1,460 3,284 -2,350 -1.8241996 1,815 45,936 20,858 1,308 737 2,044 2,458 -1,151 -414

1997 1,385 51,511 26,433 1,494 1,186 2,680 2,095 -600 586

1998 579 51,078 26,000 509 1,521 2,030 1,343 -833 687

1999 0 51,078k 26,000 702 1,310 2,012 783 -81 1.229

2000 0 51,078 26,000 1,048 1,310 2.357 783 265 1,5752001 0 51,078 26,000 1,314 1,310 2,624 783 531 1,8412002 0 51,078 26,000 2,139 1,310 3,449 783 1,356 2.6662003 0 51,078 26,000 2,313 1,310 3.623 783 1,530 2,8402004 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402005 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402006 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402007 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402008 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,840

2009 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402010 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402011 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402012 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402013 0 51,078 26,000 2,313 1,310 3.623 783 1,530 2,8402014 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2.8402015 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402016 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402017 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,8402018 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,840

2019 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,840

2020 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2.8402021 0 51,078 26,000 2,313 1,310 3,623 783 1,530 2,840

EIRR without Consumer Surplus 7.74%

EIRR with Consumer Surplus 19.18%,

a/ Average tariff in US cent/kWh referred to 1991 as base ! ear are: 6.54 in 1991; 6.47 in 1992; 7.00 in 1993;6.56 in 1994; 6.20 in 1995; 6.27 in 1996; 5.65 in 1997; 1.96 in 1998; 2.70 in 1999;4-03 in 2000,5.05 in 2001;8.23 in 2002; and 8.90 in 2003.

b/ Additional economic benefits for residential and industrial consumers are:Residential (in US cent/kWh): 11.16 in 1991; 10.70 in 1992; 9.41 in 1993; 8.07 in 1994; 6.75 in 1995; 6.86 in 1996;

8. 10 in 1997; 8.42 in 1998; 7.68 in 1999.Industrial (in US cent/kWh): 5.65 in 1991; 5.42 in 1992; 4.07 in 1993; 3.76 in 1994; 2.36 in 1995; 2.49 in 1996;

3.45 in 1997; 6.06 in 1998; 4.80 in 1999.

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Comparative Generation Costs

Table 3 compares the costs of generation for various sources of power, including coal, combined-cycle andgeothermal. Nuclear was left out (which was included in the Staff Appraisal Report) as it is at present nota viable alternative for Indonesia.

Table 3. Levelized Busbar Cost of Alternatives

CombinedDescription Unit Coal Cycle GeothermalInstalled Capacity (MW) 600 600 55Capital Cost ($/kW) 900 700 1000Discount Rate % 12 12 12Disc. Rate (12%) pu 0.1275 0.134 0.1275Life Time 25 20 25Ann. Capital Cost ($/kW-Year) 115 94 127Ann. 0 & M Fixed Cost ($/kW-Year) 27.0 21.0 30.0Fuel Type Coal GasHeat Content (kcal/kg, btulscf) 5300 1000Fuel Price ($/ton, $/MMbtu) 28.0 2.53Thermal Efficiency (%) 37 48Heat Rate (kcal/kWh) 2324 1792Fuel Cost ($/kWh) 0.012 0.018Capacity factor (%)c1st year 55 50 80* 2nd year 60 55 80* 3rd year 65 60 80* 4th year 70 65 80Capiial Cost (0/kWh) 2.0 1.7 1.8Fuel Cost (0/kWh) 1.2 1.8 4.0O & M fixed (¢/kWh) 0.5 0.4 0.4O & M Variable (¢/kWh) 0.06 0.09 0.20Total Generation Cost (CkWh) 3.7 4.0 6.4

Ratio to coal 1.0 1.1 1.7Ratio to combined cycle 0.9 1.0 1.6

Source: PLNAll costs are expressed in US$ as of January 1999Discount rate 12%Fuel price escalation rate is I % per year

Other assumptions are available on file as part of the supporting documents listed in Annex 7.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Nc. of Persons and Specialty Performn ce Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/Preparation06/90 2 Engineers

I Financial Analyst

11/90 2 EngineersI Financial Analyst

Appraisal/Negotiation04/91 3 Engineers

I Financial Analyst

07/91 2 EngineersI Financial Analyst

Supervision05/93 2 Engineers S HS

I Financial AnalystI Env. Specialist

06/94 1 Engineer HS HS

03/95 1 Engineer S HSI Env. Specialist

09/95 1 Engineer HS HS

03/96 2 Engineers HS HS

11/96 2 Engineers HS HS

07/97 1 Engineer HS HS

11/97 2 Engineers S S2 EconomistsI Procurement Specialist

07/98 2 Engineers S UI Env. Specialist

12/98 2 Engineers S UI Financial Analyst

04/99 2 Engineers S UI Financial AnalystI Operations Officer

- 23 -

ICR02/00 2 Engineers S U

I Financial AnalystI Operations Officer1 Env. Specialist

(b) Staff.

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ (,000)

Identification/Preparation 29.1 N/AAppraisal/Negotiation 66.5 N/ASupervision 105.2 N/AICR 8.1 N/ATotal 208.9 N/A

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=NModest, N=Negligible, NA=Not Applicable)

RatingMacro policies O H O SU O M O N * NASector Policies O H *SUOM O N O NA

E Physical *H OSUOM ON ONAN Financial O H OSUOM O N O NAM Institutional Development 0 H 0 SU 0 M 0 N 0 NAf Environmental O H *SUOM O N O NA

SocialZ Poverty Reduction O H OSUOM O N * NA[ Gender O H O SU O M O N * NAN Other (Please specify) O H OSUOM O N * NA

X Private sector development 0 H O SU O M 0 N 0 NA2 Public sector management 0 H 0 SU 0 M 0 N 0 NAZ Other (Please specify) OH O SU O M O N * NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

F Lending OHS OS OU OHUM Supervision *HS OS OU OHUN Overall OtHS * S C U O HU

6.2 Borrower performance Rating

Z Preparation O HS * S C U O HUZ Government implementation performance 0 HS 0 S 0 U 0 HUZ Implementation agency performance 0 HS 0 s 0 U 0 HUE Overall O HS * S C U O HU

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Annex 7. List of Supporting Documents

1. ADB's Project Completion Report on the Power XXII Project (Loan No. 11 72-INO), May 1999.2. Auditor Report in Engineering Services Contract for Suralaya Steam Power Plant Units 5, 6 and 7 byKPMG Peat Marwick, 17 September 1997.3. Engineer's Project Completion Report.4. Environmental Assessment Summary for Suralaya, June 5, 1991.5. Assumptions on ex-post calculation of Economic Internal Rate of Return (EIRR).

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Annex 8

Suralaya Thermal Power ProjectICR Mission

Aide-Memoire

February 2000

Project Objectives

1. The objectives of the Project as stated in the SAR are: (a) to expand PLN's electricitycapacity through completion of the Suralaya Thermal Power Plant; (b) to promote the economicuse of coal for electricity generation; (c) to develop PLN's institutional capacity to operate andmaintain thermal power plants; and (d) to strengthen PLN's financial Capacity.

Project Components

2. The Project includes the following components: (a) construction of three 600 MW coal-fired units at Suralaya, including associated works, and a 500 kV transmission line from Cilegon toCibinong with associated substations; (b) consulting services for engineering design andconstruction supervision of the proposed units; (c) feasibility study for a high voltage submarinecable link between Java and Sumatra; (d) engineering and design of a thermal power plant atBanjarmasin in South Kalimantam; (e) consulting services for institutional development, and (f)training of PLN staff in public utility practices.

Preparation for the ICR

3. The mission reviewed with PLN the ICR' process and requirement, and collected data andinformation for its preparation. The mission also visited the site and followed-up on someoutstanding issues.

4. In addition, the mission provided advice to PLN for preparing its own evaluation report,which will he attached unedited to the ICR. The evaluation report should include: (a) anassessment of the project objectives, design, implementation and operation experience; (b) anevaluation of the borrower's own performance during the evolution and implementation of theproject, with special emphasis on lessons learned that may be relevant in the future; and (c) anevaluation of the performance of the Bank, and cofinanciers or other partners during the evolutionand implementation of the project, including the effectiveness of the relationships among theborrower, the Bank, cofinanciers and other partners, with special emphasis on lessons learned.

Project Overview

5. In spite of various initial delays in the contract awards by about 8 months, and othermishaps, Suralaya Units 5, 6 and 7 were commissioned with a minimum of delay. Duringcommissioning of Unit 5 a fire broke out in the secondary air heaters which contributed a 2 I/2

months delay to Unit 5. Unit 6 was accepted for Commercial Operation within contract schedule

Core Accountability ICR.

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and Unit 7 three months ahead of schecdule2 . Excellent project management and good coordinationefforts by PLN, Consulting Engineer, Contractors, and the Bank contributed to this exemplaryimplementation record despite having 1.3 main contracts for the Project's scope of work. The 500kV reinforcement of the grid was corrmmissioned successfully with the construction of a 130 kmsingle-circuit line between Cilegon-Ci'binong-Saguling and expanding the substations at Cilegonand Cibinong. No problems have been experienced with the transmission line nor the substations.Resettlement was minor and land accluisition issues were successfully resolved. The 500 kVtransmission line and substations were energized on 30 July 1996.

6. DCIS Room Temperature. Thle Contractor (Stone & Webster) completed the additionalwork by September 30, 1999 as requested in previous mission. The DCIS temperature can now bemaintained within the range of 21-24 CC. The DCIS specifications require the temperature to bemaintained at about 23 'C. However, if not set correctly, the DCIS temperature can be reduced toabout 18.5 'C at which time condensation will occur with the possibility of damage to the sensitiveelectronic control cards. The mission advised PLN/PJBI to regularly inspect the temperaturesetting in the AC system and maintain Ihe temperature level close to the 23°C design specificationtemperature.

7. Turbine Hall Temperature. PLN/PJB 1 indicated that the temperature in the turbine hallcan now be maintained in the range of 34-39 'C if the temperature outside is about 29°C. This is a5-10 'C incremental over the ambient temperature. The specifications require a five degree Celsiusdifferential above ambient. The mission observed that the temperature inside the 2"d floor of theturbine hall is still uncomfortably high. The design basis for the additional work by the Contractor(Stone & Webster) would decrease the temperature of the turbine hall by at least 1fO. Thecommissioning/performance test requires that the three units be available during the test, asituation which is now possible. PLN/PJB 1 indicated that the commissioning test will be carriedout in shortly. The mission requested l'LN/PJB1 to (a) carefully review the Contractor's designafter the commissioning test; (b) write a letter to Contractor requiring design modifications ifwarranted by a review of the commissioning test data; and (c) carefully check all equipment thatmay be affected by the high temperature in the various floors in the turbine hall, particularly on the2nd floor (mezzanine floor). At the wrap-up meeting, PLN indicated that some temperature testshave already been carried out and the temperatures are seemingly within specifications.

8. Air-Monitoring System. A new air-monitoring system (also provided by Stone&Webster), to replace the lighting-damaged weather station, has been placed into operation andmeteorological monitoring has already begun. The mission advised PJBI/PLN to recalibrate thestation. The following environmental clata is now collected: S02, NoX, NO, N02, PM10, andwind speed and direction as required at appraisal. The mission requested that (a) PLN provide forthe proper maintenance to the air-monitoring system as the tendency is usually to neglect it; (b) as

2 Commercial Operation of Unit 5: SAR: 5 March 1997. Actual: 25 June 1997.Unit 6: SAR: 16 September 1997. Actual 10 September 1997.Unit 7: SAR: March 1998. Actual 19 December 1997.

3 Because of limited space within the ground floor and the mezzanine floor, the grating betweenfloors is very limited. The heat load in the turbine hall is about 6,078,502 BTU/hir. With a 20% safety factor,the selected ventilation system requires an air flow of 187,608 Cfm to reduce the temperature of the turbinehall by 1°C. To reduce the temperature of the turbine call by 2°C would have required an air flow of over500,000 Cfm which would have increased the cost for the additional work considerably.

- 29 -

the new asset has not been transferred to PJBI, the mission requested for PLN to finalize thetransfer to PJBl so the responsibility of operation and maintenance of the facility is normalized.

9. Coal supply situation. As PT Bukit Asam (PTBA) is only delivering 80% of contractedamounts, PJBI is required to purchase the balance in the spot market from other suppliersincluding PT Kideco, PT Berau, and Kalimantan (KUD)4. Coal deliveries in 1999 from thevarious suppliers amount to 6,955,266 Kgs for PTBA, 512,098 for PT Kideco, 737,328 for PTBerau and 210,270 for KUD for a total of 8,414,962 Kgs. PJBI is at present negotiation with coalsuppliers regarding tonnage and price. The spot market suppliers are providing good competitionand PTBA has reduced its price form Rp 167,000 per ton, to Rp 155,000 per ton, as the spot marketsuppliers are submitting coal supply offers at very competitive prices. PJB I indicated that it wouldconsider increasing the tonnage from selected spot market suppliers if the price is advantageousand so provide an incentive to the selected spot supplier to increase investments in the mine andfurther reduce prices. However, the downside to this arrangement is the inhomogeneous nature ofthe coal as the coal characteristics of the various suppliers, particularly as regards to the ashcontent, varies.

10. Coal Quality. Notwithstanding the above, the mission indicated that is very concernedabout the coal quality being delivered to the site by the various suppliers. The quality of the coal isspecified in the contractual arrangements, but suppliers, apparently do not mind being penalized forthe bad quality of coal delivered. The bad quality of the coal, as well as its inhomogeneous nature(i.e. as the coal delivered from the various suppliers has different characteristics), are impairing theefficient operation of Suralaya, producing frequent unit deratings (see next para) which affect thespinning reserve in the Java-Bali system and hence the integrity of the system (see also Attachment5). Derating levels up to 50% of full capacity in some units is not infrequent. PLN/PJBI alsoindicated that the January rains were also a cause of the derating loading levels at Suralaya. Themission requested that PLN investigate carefully the cause of these derating and take whateveraction is required to normalize the situation as the integrity of the Java-Bali system is of paramountimportant for economic recovery.

11. Operational Performance. Plant availability (i.e. EAF) for Suralaya units 5-7 improved in1999 with a value of 80% compared to 75% in 1998. Unit availabilities in 1999 were 98%, 71%,and 72% for units 5-7, respectively. Previous mission reported units 5-7 availabilities in 1998 of79%, 58% and 88%. Coal related problems (i.e. coal quality) are still an issue, particularly as coalis procured from various suppliers. The mission is very concerned about the frequent intermittentderatings of Suralaya. P3B indicated that the dispatch of Suralaya is cumbersome due to thesederatings, many times made in real time, which require the demand to be supplied from moreexpensive oil-fired plant (i.e. Muaratawar, Grati and Tambaklorok). The mission requestedPLN/PJB I to (a) to careful inspect the quality of coal from suppliers; and (b) investigate all means

4

Coal Properties from Suppliers

Item PT Bukit PT Berau PT Kideco KalimantanAsam (KUD)

Calorific value, kcaUkg 5,150 5,142 5,098 5,302Ash content % 4.09 3.97 1.87 6.62Sulfur content % 0.25 0.78 0.19 0.30Nitrogen % 0.70 0.83 0.80 0.82HGI 49 49 50 48

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necessary to decrease the derating levels at Suralaya since it is contributing to inefficient operationof the system5 .

12. Efficiency Improvement Program. PLN is implementing a system wide EfficiencyImprovement Program6 to improve units availability, reduce plant heat rates, reduce the durationtime of inspection and extend the interval between inspections. The savings at PJB I alone areexpected to be RP 54.9 billion in 1999. The effect of this program is already evident in Unit 5where the realized EAF in 1999 was 98% (compared to a NERC Standard of 81%), and the hearrate was reduced from 2,590 Kcal/kWh in 1997 to 2,478 Kcal/kWh in 1999. The target heat rate is2,310 Kcal/kWh. The mission indicated that it was very pleased with these measures, which are inline with the Arthur Andersen recommendations7.

Technical Assistance

13. The technical assistance for Suralaya was satisfactorily carried out. The principalcomponents of institutional development consisted of human resource planning and development(HRPD) and training. Regarding HRPD, regulations for a perfornance system have beenimplemented within PLN and a remuneration system is almost 100% complete. A competencyassessment has been performed for mid- and top managerial levels and special training has beengiven where appropriate. The HR information system is almost 100% complete. HR planning isbeing undertaken in parallel with the Corporate and Financial Restructuring of PLN which isunderway. A training program under Suralaya for onsite and offshore training was established inthe design, and operation and maintenance of thermal power plants. In total about 12,000 person-weeks of training was provided.

14. Under another TA for Suralaya, a feasibility study for a HV submarine cable was alsocarried (in 1994) to deternine the various options for interconnections between Java and Sumatra.The study concluded that the preferred option is in the range of 140 MW and 200 MW. As theexpected average annual peak demand growth rate in South Sumatra is expected to be in the rageof 12-14% (medium growth scenario) in the year 2000-2005, the study has been revisited in 1999by the Ministry of the International Trade and Industr! with the conclusion that an interconnectionwould provide economic benefits and would allow surplus capacity to be interchanged betweenSouth Sumatra and West Java.

Environmental issues

15. Fulfillment of Envirolniental Impact Management Commitinten2ts. Because this is theICR mission, one objective of the field visit was to review the extent to which PLN successfullycarried out the environmental management and monitoring activities recommended in theANDAL/RKL/RPL and summarized in the SAR. The overall finding is that the plant staff

The cost of oil generation is 3-4 hig:her than from coal.

6 Under Phase I, PLN efficiency drive, the savings in year 2000 are expected to amount to RP 198billion for PJB1, PJB2, P3B and JEDU cormbined. Phase II of the efficiency drive will concentrate on areduction of capital expenditures and financiag, as well as improvement in human resources and informationtechnology. Phase III will extend PLN's Efficiency Improvement Program to Outside Java.

7 Operational Efficiency and Effectiveness Review of PT PLN (Persero), Final Report, December1999.8 Feasibility Study of Submarine Linie Between Java-Sumatra, March 2000, Japan Extemal TradeOrganization (JETRO). The recommendation is for the interconnector to be commissioned in 2004.

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(particularly the Environment Unit) has taken not only the management and monitoring plans butalso the associated record keeping and reporting quite seriously. Any environmental data themission requested was readily available.

16. The status of air quality management actions is summarized below.

> To minimize the likelihood of adverse impacts on ambient air quality, low sulfur coal wasspecified (< 0.5% total S). The coal being obtaining from Bukit Asam (80% of plant supply)had an average total sulfur content of 0.25% in 1999. The remainder (20%) came from threeother sources, only one of which exceeded the 0.5% limit.

> Electrostatic precipitators (ESP) for Unit 5-7 were designed for a particulate removal efficiencyof 99.5% and have been meeting that standard. ESP for Units 3 and 4 operated at 96.6 and95.1% efficiency according to the last full year of data available (1998), although the standardwhen they were installed was 93.7%. ESP in Units I and 2 are not achieving standards andrequire modifications that will be scheduled after alterations to the units' ash handling systemsare completed (by the end of 2000).

> Stack emissions for S02 and NOx from Units 5 - 7 have been consistently within standardsduring the year of data examined (1999). The number of "bad" readings indicates that moreattention to instrument maintenance is needed, but the fact that most of these occurred in thefirst half of the year suggests an improving trend. Instruments on Units I and 2 were evidentlyout of order for most of the year but showed compliance with S02 and NOx emission limits inDecember. Stack instrumentation has still not been installed on Units 3 and 4 despitereminders in Aide Memoires dating back to July 1998.

t Compliance with the 20% opacity standard has evidently been difficult. The 1999 data forUnits 1, 2 and 5 - 7 include few minimum readings below 20% and minimal in the 40 -60% range are not uncommon. Plant environmental staff reported that Suralaya's opacitystandard was originally set at 40%, then lowered to 20%.

> Ambient air quality standards, on the other hand, have not been a problem. Annual highand low readings for the period 1995 to 2000 show that none of the applicable standards(S02, NOx and PM1O) has ever been exceeded at any of the 11 sampling locations.

> It should be noted that to date the ambient air quality measurements have had to be takenmanually. The instrumentation at the three automated meteorological and air qualitymonitors has been replaced, but telemetry problems were not resolved until January 2000.All three stations are now reporting hourly data to the main control room, but it is clearfrom readings that recalibration is required. The stations have not yet been taken over bythe operating company, but environmental staff has been trained in operation andmaintenance. The mission was assured that adequate O&M budget would be availabledespite reports to the contrary.

17. The status of water quality management actions is summarized below.

> Influent cooling water temperature averaged 29°C during 1999, and the average outfalltemperature was 34.20 C, well below the limit of 40.00 C.

> Effluent from the sewage treatment plant contained negligible concentrations of BOD,COD and total dissolved solids concentration, easily complying with standards.

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> Boiler blow down water ancl water treatment plant effluent were subject to the samestandards (pH, copper, nickel and iron). Data for 1999 show no compliance problems.

> Effluent from the oil separators was within standards according to the 1999 annualaverages.

> Runoff and leachate from the ash disposal area are collected in a settling pond that is inurgent need of dredging, which the mission was told will occur in March. In some sectionsit has no freeboard, and the berm has been overtopped in heavy rains this year. The pondeffluent is sampled for 1 1 metals. According to samples taken in August 1999, the settlingpond supematant met all metal standards and the Suralaya flyash is not considered to betoxic waste.

> Chlorine is used to prevent growth of algae and other biomass in the plant cooling system.The free chlorine concentration. is maintained at s 0.3 mg/l.

> Annual monitoring by Gadj a Madah University does not reveal any significantdeterioration in the marine ecosystem that can be attributed to Suralaya. The quality ofnearby coral reefs has declined slightly, but the reason identified by the scientists issedimentation caused by tree-cutting and land development.

18. Ash handling, sale for reuse, and disposal are the major environmental challenges the plantfaces. It is clear that the flyash collection and conveyance systems for Units I - 4 are still notfunctioning properly. The result is large amounts of fine dust that can potential affect the health ofemployees as well as the condition and useful life of nearby equipment, including for exampleswitchgear and associated cooling system for machinery in Units 5 - 7. Modifications to the ashhandling equipment for Units 1 - 4 are expected to be completed by the end of 2000.

19. Whereas the plant had at one time been selling as much as 70% of flyash for reuse, only10-15% is currently being sold. The ash disposal site is therefore filling more rapidly, but it is stillexpected to have capacity until 2007-S even if flyash sales do not improve. Gadja Madah isinvestigating a range of new flyash use options for PLN. In the meantime, the disposal site needsroad improvement, compaction, and other actions to stabilize the slope of the piles which haveexhibited a tendency to slide in heavy rain. The mission also suggested that PLN not becomefixated on sale of flyash, because in actuality giving the flyash to contractors at no cost is still acheaper altemative to having to find a new disposal site sooner than intended or having to pay tohave the flyash hauled to a more distant disposal point.

20. Outstanding Environmental Issues. To summarize, the following conditions requireattention to ensure that Suralaya's environmental impacts will continue to be minimal:

> dredge ash settling pond;> complete modifications of flyasli collection and conveyance systems, Units I - 4;> complete repairs to ESP for Units 1 and 2;> install stack emission monitoring instrumentation for Units 3 and 4, and improve operating

reliability through better inspect.on and maintenance;> recalibrate automated air/meteorology stations and fund and implement an effective

maintenance program for the equipment; and> continue planning for alternative flyash reuse and disposal options.

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Recalculation of Economic Internal Rate of Return (EIRR).

21. At appraisal, the Project was part of PLN's dynamic least cost expansion program for theJava-Bali system. Suralaya units 5-7 operate at high efficiency as a base-loaded plant with anaverage heat rate of 2,314 Kcal/kWh at a 100 % loading level. Using the same methodology as inthe SAR, the EIRR has been recalculated as 11.8 % including consumer surplus. With theprevailing tariff the net revenue is negative and hence the EIRR cannot be re-evaluated. PLN willsubmit to the Bank a re-evaluated EIRR based on a tariff prevailing before the crisis along with themajor assumptions and detailed calculations, as well as a comparative analysis of generation costsfor various alternatives, by end of February 2000.

Loan Disbursement

22. The original loan amount was $423.6 million. Partial loan proceeds cancellations weremade in the aggregate amount of $132.2 million, resulting a revised loan amount of $291.4 million.As of February 3, 2000, $282.2 million has been disbursed, accounting for 96.8% of the revisedloan amount. The undisbursed balance of $9.2 million is likely to be canceled upon closure of theloan account.

Performance Indicators

23. The mission reviewed with PLN the Project performance indicators as shown inAttachment 1. It was agreed that PLN will review by February 17, 2000.

Next Steps

24. It was agreed that (a) PLN's own evaluation report will be submitted to the Bank by mid-March 2000 and (b) PLN will provide an update of the perfornance indicators by end of February2000.

25. The mission advised PLN that a draft ICR is expected to be sent to PLN by end of March2000. PLN will forward its comments, if any, to the Bank by no later than April 30, 2000.

9 On the basis of the incremental costs and sales resulting from the implementation of the least-costplan for the Java-Bali system for the period 1991/92 - 1997/98.

- 34 -

Attachment 1

Key Indicators for Project Operation

Indicator Benchmark 1998 Actu 03/2000

Utilization and EfficiencyCapacity Factor (CF, %)

* Unit #5 70 62 69 64* Unit #6 70 34 50 76* Unit #7 70 65 43 68

Equivalent Availability Factor (EAF, %)

* Unit #5 80 79 98 80

* Unit #6 80 58 77 95* Unit #7 80 87 69 85

Standard Coal Consumption (g/kWh)* Unit #5 455 479 462 451

* Unit #6 455 449 449 451* Unit #7 455 463 440 450

Gross Thermal Efficiency (%)* Unit #5 36 34.8 36.1 37.4* Unit #6 36 37.2 37.1 37.4

* Unit #7 36 36.1 38.0 37.4

Environmental ProtectionESP Efficiency (%) a/

* Unit #5 99.5 n.a. n.a. n.a.* Unit #6 99.5 n.a. n.a. n.a.

* Unit #7 99.5 n.a. n.a. n.a.System Reliability in Java-Bali

* SAIFI (times/customer/year) - 12.4 13.1 n.a.

* SAIDI (hours/customer/year) 9.8 8.9 n.a.

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Annex 9

Suralaya Thermal Power Project(IBRD Loan No. 3501-IND)

Borrower's Completion Report

I. Project objectives.

The objectives of the proposed project were to:

A. Meet the increasing demand for electrical generation within industrializing West Java.B. Shifting the consumption of fuel resources from natural gas and oil to coal, natural gas and oil are

primary export product for which Indonesia receives significant revenue.C. Extended the capabilities of PLN's design of steam power plant projects.D. To provide considerable employment opportunities in West Java area for construction and

operation.

II. Achievement of project objective.

Suralaya steam power plant Unit 5, 6 and 7 3 X 600 MW achieved the goal of providing acommercially operating power station addition in five years from award of the contract.

This should be considered a significant accomplishment to the success of PLN ability to providereliable power to the Java-Bali power grid. The new units are principally being operated as base loadunit to maximize the benefit to our country. As of 24 March 1998, the total unit generation is aslisted: Unit 5: 914.984 MWh, Unit 6: 694.157 MWh, Unit 7: 562.796 MWh with fuel resources coal.

PLN project training was provided by an extensive program of Transfer of Technology presentationsprovided by the consultant and offshore and onsite training by the contractors. The Suralaya projecttraining program was a composite program provide by the: Civil works (C55), Stacks (C58), Steamgenerator and ancillaries (C60), Turbine generator and ancillaries (C61), Ash handling plant (C62),Mechanical & electrical works (C63), Coal handling plant (C64), Compressed gas insulated bus(C65A), Power transformer (C65B), 150 kV substation (C65C). This project provided employmentfor 7300 manpower during implementation of total project for construction and operation.

III. Implementation report and major factors affecting the project

Engineering, design and construction supervision of 3 x 600 MW of Suralaya Steam Power Plant(Units 5,6 and 7) were conducted by PT.PLN (Persero) Jasa Enjiniring, consultant Black & VeatchInternational in association with PT.Encona Engineering Inc. agreement No.178 PJ/070/199l/M hasbeen successfully complete.

The project were subdivided of 13 construction packages: Piling and Circulating Water Channel(C5 1), Marine Works (C53), Civil Works (C55), Steelwork and Cladding (C57), Stacks (C5 8), SteamGenerators and Ancillaries (C60), Turbine Generators and Ancillaries (C61), Ash Handling Plant(C62), Mechanical and Electrical works (C63), Coal Handling Plant (C64), Compressed GasInsulated Bus (C65A), Power Transformer (C65B), 150 kV Substation (C65C).

Unit 5 of lx 600 MW the project was started on 19 February 1993 with the turbine generator contract.Units 6 and 7 were started at six months interval. The final package of the contract was awarded July

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1994. Unit 5 of lx600 MW was declared commercial operation 25 June 1997, Unit 6 of 1 x 600 MWwas declared commercial operation 10 September 1997, Unit 7 of lx600 MW was declaredcommercial operation 19 December 1997.Completion of overall project was finished two monthsahead of schedule.

Status of mid March 1998 project allocated cost US$ 1,898,500,000 and in the implementation thecontracts for the project were awardecd at a total cost of US$ 1,423,762,000. The overall project costis approximately 30 percent lower than original project estimate.

PLN's also ensured compliance with the loan term achievement of continuous operation as especiallyon base-load time during lifetime of the plant.

IV. Bank performance

The economic evaluation of the project was carried out on actual basis of the tariff, sales andexchanges rates before crisis condition.

PLN's financial and economic performance regarding the project now is dependent on themaximization of the utilization of this project on the base load time. In PLN's view the performanceof the Bank was satisfactory throughout all phases of the project from the preparation to completion.

Only the C60 contractor for Steam generators and ancillaries experienced difficulties with loanagreements between the Ministry of Finance and USEXIM, JEXJM. The opening of the letters ofcredit were impacted by these delays. Tfhe letters of credit for JEXIM were opened on 27 October1994. The letters of credit for USEXIMvI were opened on 23 May 1995. Letter of credit numbers wererequired for processing of the Master lists for shipment of equipment and material to Indonesia.

V. Borrower Performance.

The perfornance of PLN's was generally satisfactory and improvements were achieved by using theexperienced gained in previous project.

The planned schedule to award all contract between February 1993 and November 1993, the contractwere actually awarded between Februaiy 1993 and July 1994 which is a variation delay on theoriginal schedule of 8 months. The reason for this delay was shifting of scope of supply from Turbinegenerator contract to the steam generator and mechanical electrical contract and the difficulties inevaluation of the large steam generator contract.

The Suralaya Units 5,6 and 7 was completed two months ahead of schedule.

VI. Operation

A. Initial operationTrial operation were divided into two phases:1. Operation of common equipment

- Desalination plant 23 May 1996.- Water treatment plant 13 November 1996.- Coal handling plant Unit 5 on 20 December 1996.- Coal handling plant Unit 6 on 26 March 1996.- Coal handling plant Unit 7 on 19 September 1996.

2. Operation of generating units- Unit 5 of I x 600 MW on 16 December 1996.

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- Unit 6 of I x 600 MW on 20 March 1997.- Unit 7 of I x 600 MW on 19 September 1997.

B. Commercial operation1. Operation of common equipment under the jurisdiction of PLN subsidiary PT

PLN(Persero) PJB-I Unit Pembangkit Suralaya.2. Operation of generating units under the jurisdiction of the Load Dispatching Center

PT.PLN (Persero) P3B Jawa Bali:- Unit 5: 1 x 600 MW 25 June 1997.- Unit 6: 1 x 600 MW 10 September 1997.- Unit 7: 1 x 600 MW 19 December 1997.

VII. Main findings and key lessons learned

The project contracts were subdivided into 13 (thirteen) main contracts; this significantly increasedthe coordination effort required to complete the project. The turbine island procurement wassubdivided into Turbine Generator and Ancillaries (C61) and to Mechanical & Electrical Works(C63); this also significantly increased the coordination effort.

Base on the above matters, we have to pay more attention to the subdivision of the contracts, so thatthe same problem does not recur in the future.

Contracts should be awarded on the basis of a single responsible contractor and not as a jointoperation. Joint operation leaves the owner with difficult control over the contract should one memberdefault or otherwise not be capable of completing the work. The primary contractor shall be capableof completing the entire scope of work.

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