Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15876

IMPLEMENTATION COMPLETION REPORT

INDONESIA

POWER SECTOR EFFICIENCY PROJECT(LOAN 3097-IND)

JUNE 28, 1996

Industry and Energy Operations DivisionCountry Department IIIEast Asia and Pacific Region

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

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CURRENCY EQUIVALENTS

Currency Unit Indonesian Rupiah (Rp)US$ 1 .00 = Rp 2,246Rp 1.000 = US$ 0.45

WEIGHTS AND MEASURES

I metric ton (t) 1.00 kilograms (kg)I liter (1) 0.0063 barrels (bbl)I kilometer (kin) = 0.6215 miles (mi)1 kilovolt (kV) = 1.000 volts (V)I Megavolt-ampere (MVA) = 1.000 kilovolt-amperes (kVa)I Megawatt (MW) = 1,000 kilowatts (kW)I Gigawatt hoUr (GWh) I million kilowatt hours (kWh)

FISCAL YEAR OF BORROWER

April I - March 31

ABBREVIATIONS AND ACRONYMS

BAKOREN National Energy BoardBAPPEDA Provincial Planninig CommissionBAPPENAS National Development Planning AgenlcyD1131K Directorate Cieneral of Cooperatives

Busi1ess Promotion

DGEED Directorate General of Electric Power andEnergy Development

DIVDES PLN's Rural Electrification DivisionESMAP Energy Sector Managemenit Assistance ProgramGOI Government of IndonesiaEIRR Economic Internal Rate of ReturnKUD Village CooperativeLNG Liquefied Natural GasMIS Maanagement Information SystemMME Ministry of Mines and EnergyMOCSE Miiistry of CooperativesMSA Managemenit Services AgreementMOF Ministry of FinanceNGO Noon-Governimenlt OrganizationPERTAMINA National Oil and Gas CompanyPlN State Electricity Corporation (P.T. PLN (Persero))POLA Subcontracting SchemePMU Project Management UnitPUSDIKLAT PLN's Center for Education and TrainingRE Rural ElectrificationREPELITA Five-Year Developmenit PlanREPS Rural Electrification Planning System

FOR OFFICIAL USE ONLY

Table of Contents

Preface .............. iEvaluation Summary .............. ii

Part I Project Implementation Assessment

A. Statement/Evaluation of Objectives. B. Achievement of Objectives .2C. Major Factors Affecting the Project'6D. Project Sustainability .7E. Bank Performance .8F. Borrower Performance .8G. Assessment of Outcome .9H. Future Operations .91. Key Lessons Learned .10

Part II Statistical Tables

Table 1: Summary of Assessments .12Table 2: Related Bank Loans/Credits .13Table 3: Project Timetable .15Table 4: Loan Disbursements .15Table 5: Key Indicators for Project Implementation .16Table 6: Key Indicators for Project Operation .16Table 7: Studies included in the Project .18Table 8A: Project Costs .19Table 8B: Project Financing .19Table 9: Economic Costs & Benefits (EIRR) .20Table 10: Status of Legal Covenants .21Table I 1: Compliance with Operational Manual Statements .22Table 12: Bank Resources: Staff Inputs .22Table 13: Bank Resources: Missions .23

Annex

A. Mission's Aide Memoire .26B. Operational Plan .31C. Borrower's Evaluation Report .33D. Ex-post Calculation of Economic Internal Rate of Return .35

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 wiLhout World Bank authorization.

IMPLEMENTATION COMPLETION REPORTINDONESIA

POWER SECTOR EFFICIENCY PROJECT(LOAN NO. 3097-IND)

PREFACE

This is the Implementation Completion Report (ICR) for the Power SectorEfficiency Project in Indonesia, for which Loan No. 3097-IND, in the amount of US$ 337million equivalent was approved on June 22, 1989 and made effective on October 6,1989. Cofinancing for the project was provided by the Government of Netherlands to theextent of US$ 10 million equivalent.

The loan closing date was extended by one year. to December 31, 1995 (originalclosing date was December 31 , 1994). A partial loan proceeds cancellation in the amountof US$ 16 million was made in December 1994. The loan account was closed on May14, 1996, with an undisbursed balance of US$ 11.7 million canceled.

The ICR was prepared by Stephen Howes. Financial Economist, and YulingZhou, Operations Officer, EA3IE, and reviewed by Peter R. Scherer, Chief, EA3IE, andRichard A. Calkins, Operations Adviser, EA3DR.

Preparation of this ICR was begun in January 1996 prior to the Bank's ICRmission to Indonesia from March 11 to 22, 1996. It is based on material in the projectfile, and on information and comments provided by the implementing agency, PT PLN(Persero). The aide memoire of the ICR mission is attached as Annex A. The borrower'sown evaluation report is attached as Annex C.

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IMPLEMENTATION COMPLETION REPORTINDONESIA

POWER SECTOR EFFICIENCY PROJECT(LOAN NO. 3097-IND)

EVALUATION SUMMARY

Introduction

1. Bank involvement in the electricity subsector in Indonesia began in 1968. For the firsttwo decades, the focus was on first the creation of a national electric utility (which occurred in1972) and then on system expansion. By the time of the late eighties, attention was beginning toshift more to sectoral efficiency. The Power Sector Efficiency Project supported the traditionalobjective of system development by financing PLN's distribution expansion needs. But it alsoresponded to the increased focus on efficiency by packaging together a number of technical andinstitutional components to improve the operating efficiency of some of PLN's existing assets(diesel and hydro power plants) as well as to improve organizational efficiency. The totalamount of the loan was US$ 337.0 million. The loan was signed on July 21, 1989, and becameeffective on October 6, 1989. The loan closing date was extended by one year to December 31,1995.

Project Objectives

2. The overall objective of the project was to improve the economic, technical andinstitutional efficiency of the power sector. To support this overall objective, the project hadthree specific objectives:

(i) Physical objective: to improve the operation of PLN's generation, transmission anddistribution facilities by: (a) improving the operation and maintenance of selecteddiesel power plants; (b) renovating seven small hydropower plants in Java to recovercapacity and maximize energy output; (c) investing in distribution facilities tosupport PLN's projected sales increases in 1990-91 and 1991; (d) augmenting PLN'stelecommunications facilities in Java; and (e) providing technical assistance andtraining in the operation of diesel power plants, operation and maintenance of majorsteam power plants, and the operation, maintenance and management of distributionfacilities;

(ii) Institutional objective: to strengthen the administrative, financial and managementfunctions of PLN, by providing technical assistance and training in generalaccounting and cash management, and financial and corporate planning; and

(iii) Policy objective: to introduce appropriate efficiency-improving policy measures by:(a) establishing an institutional mechanism to review and advise the Government onall price adjustments in the energy sector; (b) establishing an information system toprovide costs for the rural electrification component of PLN's investments and

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operations; and (c) introducing suitable regulatory and contractual measures toutilize some of the captive generating capacity to reduce investment costs andpromote cogeneration by industry.

3. The objectives remained unchanged for the duration of the project. They were important,clear and, for the most part, realistic. While the project was not especially risky or demanding,the number of objectives and sub-objectives is indicative of the complexity of the project.

Implementation Experience and Results

4. The project's outcome was satisfactory. It was successful in substantially achievingphysical, policy and institutional objectives. These achievements would seem to be highlysustainable. Physical program targets were generally met, though not on time, and in some casesexceeded. The technical assistance components were in general successful. The policycomponents were substantially met, though not fully and not without significant delays. The re-estimated economic internal rate of return (EIRR) is 15.7%, slightly below the SAR's estimate of18.3%.

5. The actual cost of the project (excluding IDC) was US$ 434.1 million, compared to anappraisal estimate of US$ 556.5. The main cost difference was on the distribution investmentcomponent. Other cofinancing resources were originally intended to help finance PLN'sdistribution facilities in 1990/91 and 1991/92. However, the source of the cofinancing was neveridentified and no distribution cofinancing ended up being included in the project. In addition,there was a partial loan cancellation in the amount of US$ 16.0 million from the unallocatedfunds in January 1995 upon the request of the Borrower. The remaining undisbursed balance ofabout US$ 11.7 million was canceled in May 1996 when the loan account was closed.

6. The SAR estimate of time from loan signing to physical completion was about 60months. This implementation period had to be extended by 12 months, mainly because of thedelays in selecting consultants and protracted procurement procedures for equipment andmaterials.

7. In terms of implementation, the Borrower's procurement practices and consultantselection procedures substantially delayed procurement of both goods and consultants. Anincrease in fuel prices, while welcome in itself, made the break-even covenant for PLN'soutside-Java operations impossible to meet; good project preparation, on the technical side wasan important factor contributing to the project's success.

8. Both the Bank's and the Borrower's performance under the project has been satisfactory.

Summary Of Findings, Future Operations, And Key Lessons Learned

9. The outcome of the project is satisfactory. The project met most of its physical,institutional and policy objectives and the benefits from the project are highly likely to besustainable.

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10. It is expected that the project will be operated as planned. The physical components havebeen taken over by PLN's various operational departments, become an integrated part of PLN'soperations and will be productive for many years. Results and recommendations from thetechnical assistance have already been or are being incorporated into PLN's managementpractices. The Bank will continue to monitor the project's operation through its on-goinglending and institutional development programs and policy dialogue with GOI/PLN. Operationalplans to ensure the sustainability of the outcome achieved under the project discussed with PLNduring the ICR mission and are attached to this ICR.

11. Several specific key lessons, which have operational and strategic implications for thedesign of future power sector projects, can be drawn from this project:

(a) Covenants: experience with the captive power and energy pricing covenants indicatesthat, to be effective, covenants should be realistic, dated, backed up by research andaction plans, and systematically pursued and reviewed.

(b) Establishment of a central Project Management Unit (PMU) could have benefitedthe overall project coordination and accountability. If a PMU is not established, then,as a minimum, implementation reports on all individual components should be requiredupon their completion.

(c) Technical assistance: well-targeted technical assistance, which is taken ownership ofby PLN, can be very productive. Bank's supervision of technical assistance activitiesshould focus not only on process and minimizing delays, but also on substance andlinks with Bank's policy dialogue.

(d) Performance monitoring: Although improvements in PLN efficiency was the aim ofthe project, there was no regular performance monitoring during supervision. Explicitperformance monitoring has been built into the Bank's most recent loan to PLN for theSecond Power Transmission & Distribution Project (Loan 3978-IND).

(e) Cumbersome procurement processes are a leading cause of project implementationdelays. PLN's procurement processes result in a lengthy procurement cycle addingdelays and unnecessary costs to the projects that it undertakes. Speedier procurementprocessing and more efficient inventory management and materials handling are key toincreasing efficiency of the investment program.

IMPLEMENTATION COMPLETION REPORTINDONESIA

POWER SECTOR EFFICIENCY PROJECT(LOAN 3097-IND)

PART I. PROJECT IMPLEMENTATION ASSESSMENT

A. STATEMENT/EVALUATION OF OBJECTIVES

1. The overall objective of the project was to increase the efficiency of the powersector in Indonesia. The project had three main objectives, each with its own sub-objectives:

(i) Physical objective: to improve the operation of PLN's generation,transmission and distribution facilities:

(a) by improving the operation and maintenance of selected diesel powerplants operated by PLN, including their rehabilitation and relocation asrequired;

(b) by renovating seven small hydropower plants operated by PLN in Javato recover capacity and maximize energy output;

(c) by investing in distribution facilities to support PLN's projected salesincreases in 1990-91 and 1991;

(d) by augmenting PLN's telecommunications facilities in Java; and

(e) by providing technical assistance and training in:

* operation of diesel power plants;* operation and maintenance of major steam power plants;* operation, maintenance and management of distribution facilities;

(ii) Institutional objective: to strengthen the administrative, financial andmanagement functions of PLN, by providing technical assistance and trainingin:

* general accounting and cash management;* financial planning and corporate planning; and

(iii) Policy objective: to introduce appropriate efficiency-improving policymeasures:

(a) by establishing an institutional mechanism to review and advise theGovernment on all price adjustments in the energy sector;

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(b) by establishing an information system to provide costs for the ruralelectrification component of PLN's investments and operations; I and

(c) by introducing suitable regulatory and contractual measures to utilizesome of the captive generating capacity to reduce investment costs andpromote cogeneration by industry.

2. The objectives remained unchanged for the duration of the project. They wereimportant, clear and. for the most part, realistic. While the project was not especiallyrisky or demanding, the number of objectives and sub-objectives is indicative of thecomplexity of the project.

3. Financial covenants: In addition to the covenants supporting the above policyobjectives, there were important financial covenants. Of these, the most important oneswere to achieve annually an eight per cent rate of return on PLN's Java operations and toachieve break-even on PLN's outside-Java operations beginning FY1990/91. The lattercovenant was successively rolled-over. In 1994, both covenants were replaced underLoan 3761-IND by a single eight percent rate-of-return covenant for PLN's entireoperation in Indonesia.

B. ACHIEVEMENT OF OBJECTIVES

Overall Project Objective

4. Overall objective: The overall objective of the project was to increase sectoralefficiency. PLN, the national utility, has gone over the period of the project (1990-1995)from being a loss-maker to being a substantial profit-maker without an increase in the realvalue of tariffs. This indicates an underlying improvement in efficiency. The projectselected several technical targets to measure sectoral efficiency improvements, e.g.,capacity utilization and system losses. Most of these targets were achieved or exceeded(see Table 6 in Part II). In retrospect though, these targets were not very demanding.Moreover, any overall gains in sectoral efficiency can not be attributed to this one projectwhich constituted only a small part of PLN's overall investment program during theproject period. Moreover, although improving efficiency was the stated objective of theproject, the largest component was in fact distribution expansion. To judge the success ofthe project, its success in meeting its specific objectives should be assessed. This is donebelow.

5. Internal rate of return: For practical purposes, it is impossible to separate out thebenefits attributable to the individual power projects that form a part of a least-costdevelopment plan. Project justification was therefore based in the SAR on PLN's entiredevelopment program for Java for the time period, 1988/89-1990/91, of which the project

1' This is regarded as a policy objective since cost separation would be required as a basis for explicit subsidy-setting for rural electrification.

was envisaged to be a part. This delivered a forecast economic internal rate of return(EIRR) of 18.3%. This EIRR has been recalculated using updated data for the period1989/90-1995/96 which, due to implementation delays, is the period the project ended upcovering. The re-estimated EIRR is 15.7%. The detailed ex-post EIRR calculation ispresented in Annex D.

6. One reason why the ex-post EIRR fell short of the appraisal estimate is the over-expansion in generating capacity which occurred in the early 90's. Starting in 1991, PLNbegan accelerating its system expansion based on a perception at that time that demandgrowth would outstrip earlier forecasts. This turned out to be over-optimistic. While theincrease in peak load between 1989/90 and 1994/95 was almost on target (3,379 MWactual vs. 3,227 MW forecast at project appraisal), the actual increment in generatingcapacity turned to be 4,600 MW, far greater than the appraisal forecast of 2,600 MW.This issue has been repeatedly raised by the Bank in its policy dialogue. In a recent loanfor the Second Power Transmission and Distribution Project, PLN covenanted to achievea reserve margin of 30% by 1999.

Review of Physical Objectives

7. Diesel rehabilitation and relocation: A total of 109 units were rehabilitatedusing Bank funding for a gain of 143 MW. This exceeded the SAR target of 82 units fora capacity gain of 133 MW. Over the same period (1991/92-1994/95), an additional 28units were rehabilitated using Dutch funds and an additional 21 units using PLN's ownfunds. The rehabilitation using Dutch sources was less than expected due to thetermination of Dutch aid to Indonesia in June 1992. Substantial relocation of diesel unitswas also carried out using PLN's own funds. Between 1991/92 and 1994/95, 125 unitswith a total capacity of 65 MW were relocated. This exceeded the SAR target of 73units. Total cost for the rehabilitation was US$ 18.3 million, compared to the SARestimate of US$ 18.4 million.

8. Small hydropower renovation: The Bank loan provided for the procurement andinstallation of electrical and mechanical equipment, and engineering and constructionsupervision of renovation works on seven hydro power stations. During dismantling ofthe turbines and generators, new problems were found at most plants, and, instead of the11 generating units identified in the feasibility study, 22 units were refurbished. Thestations are now in commercial operation and the taking over certificate (TOC) has beenissued to all units except one for which the turbine was damaged during the test run. Theincreased scope led to an increased cost by about 77% (from US$ 24.1 million to US$42.6 million), but the re-estimated EIRRs (given in Table 6e) are still impressive (12-35%ex-post vs. 15-32% ex-ante).

9. Distribution investment: The project was originally intended to finance PLN'sJava non-rural distribution investment program for the years of 1990/91 and 1991/92.However, on account of procurement delays, delivery of the materials financed under theloan was not complete until March 1995, about three years behind schedule. The projecttherefore financed instead PLN's 1993/94 and 1994/95 Java non-rural distributionprogram. This change in the time-slice makes the SAR investment targets for 1990/91

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and 1991/92 irrelevant as project targets. However, it can be noted from Table 6a (in PartII, Statistical Tables) that PLN achieved or exceeded mrost of its distribution targets in1990/91, but not in 1991/92, due to a budget shortage.

10. The actual cost of the distribution component was much lower than the SARestimate ($328 million versus $471 million). In the SAR, US$ 68 million of cofinancingfunds for distribution expansion were included in the cost estimates. However, the sourceof the cofinancing was never identified and no distribution cofinancing ended up beingincluded in the project.

11. Expansion of PLN's telecommunicationsfacilities: The project initially includedthe provision of trunk telecommunications facilities in West Java (about 500 km of fiberoptic cables), but this was later amended to extend the network to Central Java. The loanfinanced equipment and engineering services and construction supervision.Commissioning of new facilities took place in June 1995, with final hand-over scheduledfor June 1996. The final performance of the network was measured duringcommissioning and was demonstrated to have met or exceeded the requirements of thecontract in all areas. PLN now has a comprehensive and modern communicationsnetwork to support all of its operations in West Java and part of Central Java. Thenetwork also has much spare capacity, and PLN is currently considering various optionsto increase utilization.

12. Because of the extended scope of work as mentioned above, the actual cost wentup to US$ 28.9 million from the SAR estimate of US$ 16.3 million.

Review of Institutional Development Objectives

13. Training in the operation of diesel power plants: Funding for training and forthe purchase of training equipment was to be provided under a Dutch grant. However,the suspension of all Dutch aid to Indonesia in June 1992 resulted in limitedimplementation of this component.

14. Training in the operation and maintenance of major steam power plants: Thiswas funded by UK ODA prior to loan effectiveness (beginning in 1987-88), and was notsupervised as part of the project.

15. Distribution Management Program (DMP): The consultancy for this componentwas undertaken between 1991 and 1993. The consultants developed a DMP Master Plan,which identified (first in October 1991) 14 activities to be undertaken to improve PLN'sdistribution management. PLN established in early 1994 a Working Group headed byPLN's Director of Operations and a Steering Committee headed by the President Directorto carry out priority implementation of three activities: customer information system,distribution information system and data communications. Although there has not yetbeen a comprehensive follow-up, the Working Group is still in operation and variouspilots have been initiated. Further follow-up initiatives arising from this consultancy willbe undertaken by PLN's Jakarta distribution operations under the Bank financed Second

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Power Transmission and Distribution Project (Loan 3978-IND), for which the loanagreement was signed in March 1996.

16. Technical assistance for general accounting and cash management: Theimpetus for this TA came from the fact that in the eighties PLN's audited accounts weredelayed and received qualified opinions on a number of occasions (including 1985/86 and1986/87, received during the course of the project preparation). The general accountingconsultancy, aimed at improving PLN's accounting policies and systems, and preparingupdated accounting manuals, commenced in September 1991 (about 18 months behindthe schedule) and was completed in December 1994. New accounting policies, in linewith the best international practices. have been implemented and accompanying manualscompleted, and relevant training undertaken. PLN's accounts have been produced morequickly and have received unqualified opinions from the auditors in recent years.

17. Draft TOR for improving PLN's cash management were agreed with the Bank.PLN hired local consultants using its own funds prior to the loan approval. Much of thework was also completed prior to the loan approval due to the delays in the projectprocessing. This component was not supervised by the Bank.

18. Technical assistance for financial and corporate planning: The consultancycommenced in October 1991 and continued throughout the remainder of the projectperiod. The consultants prepared a Master Plan for Corporate Planning in April 1993.The plan recommended establishment of a separate corporate planning division andconsolidation of corporate and financial planning activities with additional staffing.These recommendations were largely adopted. A corporate planning division wasestablished by PLN in 1995. The consultants also assisted PLN in preparation of a five-year corporate plan (1994-1998) and an Action Plan for PLN's InstitutionalDevelopment, which was endorsed by the PLN Board. Many recommendations wereimplemented in a major reorganization. For improvement of financial planning, theconsultants developed a new software which is replacing the old one used within PLN.The new software is an improvement in several ways, and has been officially adopted byPLN, though currently the old and new software are being used in parallel runs. Furthertraining is required and planned for use in the new software, which will be especiallyuseful in producing consolidated financial projections since PLN now has twosubsidiaries, with more intended.

Review of Policy Support Objective

19. Institutional mechanism to advise GOI on energy price adjustments: One of theobjectives of the project was to have GOI take a coordinated approach for price setting byestablishing a energy pricing task-force and a supporting technical energy pricing unit. Infact, the task-force was never established; the energy pricing unit also was not created,but the work was assigned to the energy planning directorate within MME. In hindsight,it is clear that energy prices are adjusted too infrequently to make the establishment of anenergy pricing task force a feasible proposition. However, progress was made on theunderlying goal of improving energy pricing. In 1993, GOI aligned domestic petroleum

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fuel prices to international prices (except for kerosene); and in 1994, an automaticadjustment mechanism was implemented for the electricity tariff.

20. Information system to provide costs for PLN's rural electrification program:PLN does now provide separate income statements for its rural electrification program.Although the segregation of accounts requires further development, some progress wasmade towards this objective.

21. Utilization by PLN of captive generating capacity: Another stated policyobjective of the project was to link captive generating capacity to the PLN grid. Anaction plan for a pilot to achieve this objective was tabled at the loan negotiations, but itlacked concrete policies and little progress was made. This led to a more fundamentalrethink, which resulted in an agreement between the Bank and GOI that the latter wouldimplement a Small Power Purchase Tariff, under which PLN would offer a purchased-power tariff to small (including captive) generators that would reflect PLN's avoided costof power generation. This was implemented in December 1995, and provides a possiblevehicle by which this objective of the project can be achieved, although with considerabledelay. In addition, the unbundling currently underway on Java will lead eventually to anopen-access regime, under which captive, PLN and private generators will compete tosell power through the grid directly to distribution companies and other large end-users.

Compliance with Financial Covenants

22. While delay of the project contributed to an important tariff increase, fullcompliance with financial covenants was achieved only by successive "roll-overs" of oneof the covenants. The project was delayed after appraisal for over a year in order to securea tariff increase required to meet the existing rate-of-return (ROR) financial covenants.This strategy was successful. The Government approved an average increase in tariffrates of about 25% effective April 1, 1989. This enabled PLN to meet the 8% ROR targetfor Java. However, PLN was never able to achieve break-even outside of Java where itsoperations are far less profitable. Indeed, when GOI increased fuel prices (in accordancewith Bank advice), the outside-Java position deteriorated due to a heavy reliance ondiesel. Compliance with the break-even covenant could only be achieved by repeatedpostponement of the target date. Not surprisingly, having different financial targets fordifferent regions when a principle of uniform tariffs implied both regions would face thesame tariffs proved unworkable. The move back to a single ROR covenant in 1994 waswell-advised.

C. MAJOR FACTORS AFFECTING THE PROJECT

Implementation Record

23. The implementation of the project was satisfactory. Physical and institutionalproject components were completed, and targets met or exceeded. Implementation was,however, characterized by substantial delays. For those components for which the SAR

gave implementation schedules, the delays were between one and three years (the longestdelay was for the distribution component).

Major Factors Affecting the Project

24. Procurement of goods and consulting services: The Borrower's procurementpractices and consultant selection procedures substantially delayed procurement of bothgoods and consultants. This was a key contributing factor in the one year loan extension.There were lengthy delays between bid closing date and bid evaluation, delays betweenreceipt of Bank's no objection letter (NOL) and preparation of final contract document,and in posting of the performance bonds by contractors.

25. Increase infuelprices: The increase in fuel prices, while welcome in itself, madethe break-even covenant for PLN's outside-Java operations impossible to meet onaccount of its reliance on oil.

26. Good project preparation: The extensive technical pre-project preparation workwas an important factor contributing to the project's success. Some of the preparationwas financed by PLN under earlier projects. The diesel renovation componentpreparation was directly contributed by the Bank under the Energy Sector ManagementAssistance Program (ESMAP).

D. PROJECT SUSTAINABILITY

27. The achievements and benefits of the project are sustainable. The physicalinvestments will be productive for many years. In particular, the telecommunicationsproject has provided PLN with a state-of-the-art communications technology which willprovide valuable service to the company for years to come provided that some of theinitiatives currently under consideration to increase its utilization are undertaken. Resultsand recommendations from the technical assistance have already been or are beingincorporated into PLN's management practices. For example, the accounting TAproduced manuals which are now the basis of PLN's accounting. PLN's corporateplanning has been upgraded, and some of the restructuring detailed with the help of thecorporate planning consultants has been undertaken. PLN has decided to adopt the newfinancial planning software developed under the financial planning consultancy, and itsfinancial planning has already improved greatly. Recommendations from the DMP TAare still being pursued by PLN, including under the Second Power Transmission andDistribution Project (Loan 3978-IND).

28. Operational Plans to ensure the sustainability of results achieved under the projectwere discussed and agreed with PLN's management during the ICR mission. These plansare presented in Annex B.

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E. BANK PERFORMANCE

29. Overall, the Bank's performance has been satisfactory. With regards toidentification, the project was innovative for the sector, both in terms of specificcomponents (e.g. telecommunications) and the general thrust of the project. It was thefirst power project in Indonesia to make efficiency improvement an explicit projectobjective alongside system expansion.

30. With regards to preparation, as commented earlier, one reason for the project'ssuccess was the extensive technical pre-project preparation work. Some of this wasfinanced by PLN under earlier projects. The diesel renovation preparation wascontributed directly by the Bank under the ESMAP project. Loan preparation was alsoused effectively in the tariff dialogue. Approval of the Board was made conditional on asubstantial tariff increase. The only area where preparation was less than thorough was inrelation to some of the policy components which were not all well thought through(paras. 19 and 21).

31. Appraisal was also carried out successfully. The major risk was correctlyidentified, namely procurement delays. Attempts were made to mitigate these risks,though these proved unsuccessful. The implementation plan for the project componentswas simple, but sufficiently clear to quantify the extent of the delays which occurred.Performance indicators were provided for the physical, but not the institutional,components of the project. Project complexity could have been reduced at the time ofappraisal by removing from the project particular components which were to be financedby PLN or other (unspecified) donors and which inevitably went unsupervised.

32. During supervision, the Bank successfully maintained good working relationswith PLN. A total of seven supervision missions were fielded during the projectimplementation period. Specialists were brought out to supervise particular componentswhen required. The project was supervised by two task managers, with no discerniblenegative impact on project continuity and outcome. The weaker aspects of supervisionwere technical assistance, where the emphasis was on process (reducing delays) ratherthan substance, and the monitoring of covenants which was neglected. In addition, thelack of regular performance monitoring undermined the project objective of increasingsector efficiency.

33. Project implementation involved no deviations from Bank policies andprocedures.

F. BORROWER PERFORMANCE

34. PLN's and GOI's performance was satisfactory. Macroeconomic and sectoralpolicies were generally favorable and improving. The project was carried outsuccessfully and targets were met. Counterpart funds were available and audit

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requirements were met. Ownership was, in the main, taken of the technical assistance,close cooperation ensured knowledge-transfer, and ongoing use is now being made of theconsultants' work. Against this overall satisfactory rating, two less positive aspects of theborrower's performance must also be noted. First, as mentioned previously, the projectsuffered from substantial delays in implementation due to lengthy procurement timesdriven by requirement imposed by GOI procurement procedures, as well as cumbersome,lengthy and inefficient procurement procedures and practices internal to PLN. Second,although compliance with covenants was satisfactory in general, not all covenants werecomplied with (see paras. 19-22).

G. SUMMARY ASSESSMENT OF OUTCOME

35. The outcome of the project is satisfactory. The projects met most of its physical,institutional and policy objectives and the benefits from the project are likely to besustainable.

36. The EIRR for the project has been re-estimated at 15.7%. Individual EIRRs forthe hydro renovation component were also calculated and ranged from 12-35% with acumulative EIRR at 25%. Individual EIRRs for the renovated diesels were not calculateddue to a lack of data.

H. FUTURE OPERATIONS

37. It is expected that the project will be operated as planned. The physicalcomponents have been taken over by PLN's various operational departments and havebecome an integrated part of PLN's entire operations. Proper training has beenconducted and comprehensively documented operation and maintenance procedures havebeen put in place. In order to make better use of the capacity of the Java West OperationsTelecommunications System (JWOTS) financed under the project, a joint utilizationprogram is being developed with PT Telkom, the national telecommunications companyin Indonesia. Furthermore, the JWOTS system provides many types of datacommunications interfaces linking all PLN sites and is suitable for establishing a widearea network, which is currently at the planning phase. To implement the activitiesidentified by the Distribution Management Program (DMP), PLN has setup steeringcommittees as well as working groups, and various DMP pilots have been initiated.

38. Plans for future operations are presented in Annex B. The Bank will continue tomonitor the project's operation through its on-going lending and institutionaldevelopment programs and policy dialogue with GOI/PLN.

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I. KEY LESSONS LEARNED

39. Several specific key lessons, which have operational and strategic implications forthe design of future power sector projects, can be drawn from this project. These arediscussed in the following.

40. Covenants: Experience with the captive power and energy pricing covenantsindicates that, to be effective, covenants should be (a) realistic, (b) dated, (c) backed upby research and action plans, and (d) systematically pursued and reviewed.

41. Establishment of a central Project Management Unit (PMU) could benefitoverall project coordination and accountability: The project did not require PLN, theimplementing agency, to establish a central project management and implementationsupervision unit. As a result, no senior PLN manager was responsible for monitoringprogress and the outcome of the project, and for initiating corrective actions in a timelymanner. This also made it difficult for the Bank to supervise the project while adding tothe time and financial resources devoted to the supervision activity. If a PMU is notestablished, then at least implementation reports on all individual components should berequired upon their completion.

42. Technical Assistance: Well-targeted technical assistance programs (such as thefinancial planning and accounting financed under the project), which are taken ownershipof by PLN, can be very productive. Bank's supervision of technical assistance activitiesshould focus not only on process and minimizing delays, but also on substance and linkswith Bank's policy dialogue. For example, the corporate planning and DMP technicalassistance recommendations are only now being taken up by the Bank under the SecondPower Transmission and Distribution Project (Loan 3978-IND).

43. Performance monitoring: Although improvements in PLN efficiency was theaim of the project, there was no regular performance monitoring during supervision.Explicit performance monitoring has since built in the Bank's loans to PLN starting withthe Second Power Transmission & Distribution Project (Loan 3978-IND).

44. Cumbersome procurement processes are a leading cause of projectimplementation delays: PLN's procurement process results in a lengthy procurementcycle adding delays and unnecessary costs to projects that it undertakes. Speedierprocurement processing and more efficient inventory management and materials handlingare key to increasing the efficiency of its investment program.

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IMPLEMENTATION COMPLETION REPORT

INDONESIA

POWER SECTOR EFFICIENCY PROJECT

(LOAN 3097-IND)

PART II. STATISTICAL TABLES

Table 1: Summary of AssessmentTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 1 1: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

- 12 -

Table 1: Summary of Assessments

A. Achievement of Obectives Substantial Partial Negligible Not applicable

Macro Policies El E ElSector Policies El El ElFinancial Objectives El El ElInstitutional Development i: El [=

Physical Objectives El El ElPoverty Reduction E El ElGender Issues Ej I EOther Social Objectives El El 0l

Environmental Objectives E El ElPublic Sector Management El E ElPrivate Sector Development E El ElOther (specify) El El El

B. Proiect Sustainability Likely Unlikely Uncertain

('I) (V) (V) I

C. Bank Performance satisfactory Satisfactory Deficient

(V) (V) (V') l

Identification El El

Preparation Assistance El ElAppraisal E El

Supervision l E

D. Borrower Performance satisfacto Satisfactory Deficient

Preparation El El

Implementation - Physical E El- Institutional E El

Covenant Compliance E ElOperation (if applicable) E El

Highly HighlyE. Assessment of Outcome satisfactrv Satisfactor Unsatisfactory unsatisfactory

El) El) El) (V)

- 13 -

Table 2: Related Bank Loans/Credits

Loan/credit title Purpose/Description Year of Statusapproval

Loan 2506-IND Comprising: (a) a distribution system for Jakarta and the 1981 Completed inEleventh Power regencies of Bogor, Tangerang and Bekasi (Jabotabek) 1988Project in West Java, involving about 450 km of kV cables, 760

km of 20 kV overhead lines; (b) a 150 kV voltagesystem, involving 5 new substations in Jakarta, 46 km ofunderground double-circuit 150 kV cables and 980MBA of transformers; (c) engineering of the next base-load thermal power unit (at Paiton) in Java; (d)engineering of the Extra High Voltage (EHV) Central-East Java transmission line; and (e) managementconsultancy for further improvements in PLN's financialplanning and control systems.

Loan 2214-IND Comprising: (a) construction of 110 (2 x 55) MW 1982 Completed inTwelfth Power extension of Kamojang geothermal power station in 1991Project West Java; (b) construction of the third 400 MW thermal

generating unit at Suralaya, including engineeringservices for the third and fourth generating units; (c)distribution system improvements in Java, NorthSumatra and South Sulawesi; (d) a mini-hydrodevelopment program in North Sumatra; and (e) trainingfacilities and services to assist PLN's manpowerdevelopment program.

Loan 2443-IND To construct and install the third and fourth 400 MW 1984 Completed inFourteenth Power thermal generating units at Suralaya in West Java; to 1992Project extend the distribution network in Jakarta, Bogor,

Tangerang and Bekasi (Jabotabek), East Java andCentral Java; and to provide consulting services forengineering and construction supervision oftransmission lines and substations in Java and forengineering and design of hydro projects.

Loan 3098-IND To provide for the construction of the Paiton coal-fired 1989 Completed inPaiton Thermal power plant with an initial capacity of 800 MW and an 1995Power Project ultimate capacity of 4,000 MW in East Java; associated

500 kV and 150 kV transmission system; and technicalassistance to strengthen capacity of Ministry of Minesand Energy in environmental matters and train PLNpersonnel in power plant technology.

- 14 -

Table 2: Related Bank Loans/Credits (Cont'd)

Loan/credit title Purpose/Description Year of Statusapproval

Loan 350 1-IND The project includes: (a) the construction of three coal- 1992 ImplementationSuralaya Thermal fired units of 600/MW each at Suralaya, including underway;Power Project associated works and a 500 kV transmission line from closing in 1999

Cilegon to Cibinong, with associated substations; (b)consulting services for engineering, design andconstruction supervision of the proposed units; (c)feasibility study for a high voltage submarine cablelink between Java and Sumatra; (d) engineering anddesign of a thermal power p-ant at Banjarmasin inSouth Kalimantan; (e) consulting services forinstitutional development; and (f) training of PLN'sstaff in public utility practices.

Loan 3602-IND Its components are: (a) implementation of Phase 11 of 1993 ImplementationCirata the Cirata hydroelectric development on the Citarum underway;Hydroelectric River in West Java; (b) consulting services for the closing in 1999Phase 11 Project engineering and construction supervision; (c) studies

to upgrade hydrological and environmental data bases,and improve data collection practices; (d) studies toupdate PLN's hydroelectric inventories, and determinepre-feasibility of selected schemes; (e) studies toidentify options to enhance environmental conditionsin the existing PLN reservoirs on the Citarum River,and training of PLN staff in environmentalmanagement; (f) training of PLN's staff in dam safetyand instrumentation monitoring; (g) power sectorinstitutional and regulatory framework studies for theGovernment of Indonesia (GOI); (h) studies aimed atassisting GOI to determine a long-term strategy forfinancing power sector investments; and (i) pre-construction stage engineering services.

Loan 3978-[ND To improve customer service by (a) increasing the 1996 Not yet effectiveSecond Power physical capacity, efficiency, and reliability of theTransmission and Java-Bali transmission system and distributionDistribution Project network; and (b) promoting sector efficiency,

competition, and private sector participation byimplementing functional decentralization of StateElectricity Corporation (PLN) operations in Java-Baliand developing effective regulatory oversight andinstitutions. The project has two principalcomponents: (a) the restructuring of and investment inPLN's operations; and (b) the development ofregulatory oversight.

- 15 -

Table 3: Project Timetable

Steps in Project Cycle Date Planned Date Actual/Latest Estimate

Identification (Executive Project Summary) 08/86 08/08/86

Preparation 04/30/87

Appraisal 11/19/87 11/19/87

Negotiations 05/11/89 05/11/89

Letter of Development Policy (if applicable) N.A.

Board Presentation 06/22/89

Signing 07/21/89

Effectiveness 10/19/89 10/06/89

First Tranche Release (if applicable) N.A.

Midterm review (if applicable) N.A.

Second (and Third) Tranche Release (if applicable) N.A.

Project Completion 06/30/94 06/30/95

Loan Closing 12/31/94 12/31/95

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$ million)

FY90 FY91 FY92 FY93 FY94 FY95 FY96 Total

Appraisal Estimate 1.0 66.0 191.0 288.0 333.0 337.0 - 337.0

Actual 0.3 6.2 71.6 151.1 253.0 288.3 309.3 309.3

Actual as % of Estimate 30.0 9.4 37.5 52.5 76.0 85.5 - 91.8

Date of Final Disbursement May 14, 1996

(An undisbursed balance of US$ 11.7 was canceled.)

LUS$16 million was canceled from the loan effective January 30, 1995.

- 16-

Table 5: Key Indicators for Project Implementation

1. Key Implementation Indicators inSAR/ President's Report Estimated Actual

None n.a. n.a.

II. Modified Indicators (if applicable) n.a. n .a.

II. Other Indicators (if applicable) n.a. n.a.

Table 6: Key Indicators for Project Operation

I. Key Operating Indicators in SAR/President's Report SAR Actual/Estimated Re-estimated

1. General performance improvement (from a baseline of1986/87 actuals):

* Capacity utilization to improve from 55% to: a/ 65% 64% b/

* Reserve margin to fall from 45% to: 35% 36% b/* T&D losses to fall from about 19% to: 16% 12%

* Fuel consumption for diesel generating units should 3% n.a.reduce by:

2. Hydro renovation - ERR ranaing: 15% - 32% 12% - 33%

II. Modified Indicators (if Applicable) n.a. n.a.

III. Modified Indicators for Future Operation (if applicable) n.a. n.a.

Note: a/ Reserve margin = (generating capacity - peak load) / (generating capacity).b/ Actuals for 1994.

Table 6a: Java Distribution Investment Implementation

1990/91 1991/92 b/ 1992/93 1993/94 1994/95Target/c Actual Target/c Actual Actual Actual Actual

MV Line (kmc) a/ 4,459 4,684 5,077 2,265 2,934 3,250 10,992LV Line (kmc) 4.164 3,894 4,905 925 7,074 10,405 21,509Distr.Transformer(MVA) 1,241 680 1,387 314 451 756 2,179Consumer Connections 440,650 728,657 452,820 573,937 1,169,385 1,250,248 3,700,082

Note: a/ kmc - circuit kilometers;b/ 1991/92 actual fell short of targets due to lower than expected budgets; as shown, the actual

construction picked up in later years.c/ Targets from SAR

- 17-

Table 6b: Hydro Renovation Benefits

Nominal SAR Estimated (lain Actual Gain a/

Plant Name Capacity Capacity Energy Capacity Energy(MW) (MW) (GWh) (MW) (GWh)

Ubrug 17.1 8.0 47.0 4.3 4.4

Kracak 16.5 8.0 21.6 9.7 33.4

Lamajan 19.2 2.1 8.0 4.3 9.2

Ketenger 7.5 1.8 8.0 3.1 6.9

Jelok & Timo 32.9 3.4 21.0 5.2 21.2

Giringan 3.2 0.8 5.6 1.2 8.5

Plengan 5.3 1.1 1.0 1.3 3.7

Total 101.7 25.2 112.2 29.1 87.3

Note: a' The actuals fell short of estimates for Ubrug because of the deficiency in the original designwhich did not take into account appropriately of the local water supply level. Consequently, amuch reduced investment program was implemented.

b/l "Actual Gain" is engineer estimate at the project completion.

Table 6c. Hydro Renovation IRRs

SAR Re-EstimatedEstimated (09/30/95)

Ubrug Ranging from 15-32%. 21.5

Kracak 28.9

Lamajan 26.7

Ketenger 19.7

Jelok & Timo 35.3

Giringan 11.7

Plengan 13.5

- 18 -

Table 7: Studies Included in Project

Purpose as DefinedStudy at Appraisal/Redefined Status Impact of Study

1. Study for the To improve PLN's accounting Completed New accountingImprovement policies and systems, and to prepare manuals adopted;of General updated accounting manuals. unqualified auditorAccounting opinion.

2. Distribution To upgrade all aspects of PLN's Completed DMP Master PlanManagement distribution management for Java adopted and variousProgram including customer service, pilots initiated.(DMP) planning procedures, design

standards, construction methods,maintenance practices, operationsprocedures, organization,information and monitoringsystems.

3. Corporate To enhance PLN's corporate and Completed Establishment of aand Financial financial planning process, separate corporatePlanning including determining corporate and planning division,

financial objectives, identifying key consolidation ofissues, developing strategic corporate andapproaches, preparing monitorable financial planningaction programs and evaluating activities; newresults; to assist PLN in acquiring a financial projectionsuitable utility financial planning model.software package, and also toaddress the needs for staff trainingand organizational improvements.

- 19-

Table 8A: Project Costs

Appraisal Estimate (US$M) Actual/Latest Estimate(US$M)

Item Local Foreign Total Local Foreign Total

Costs Costs Costs Costs

Diesel program 3.4 15.0 18.4 5.5 12.8 18.3

llydro renovation 17.(0 7.1 24.1 8.0 34.6 42.6

Distribution 101.( 369.6 470.6 162.7 165.5 328.2

Telecommunications 3.4 12.9 16.3 5.9 23.0 28.9

Consulting services - Hydro renovation 1.2 1.6 2.8 1.4 4.0 5.4

- Telecommunication 1.2 2.3 3.5 1.0 2.4 3.4

Technical assistance

Distribution management 1.2 3.5 4.7 0.7 2.6 3.3

Diesel efficiency 2.3 9.2 11.5 - - a/

Corporate and financial planning 0.6 1.7 2.3 1.2 2.3 3.5

Accounting and cash management 0.6 1.7 2.3 0.0 0.5 0.5

Total Project Cost 131.9 424.6 556.5 186.4 247.7 434.1

Interest during construction - 40.5 40.5 - 47.6 47.6

Total Financing Required 131.9 465.1 597.0 186.4 295.3 481.7

Note: a/ Component not executed due to termination of the Dutch aid.b/ All actual costs for local procurement/construction and consulting services include 10% VAT.

Table 8B: Project Financing

Appraisal Estimate (USSM) Actual/Latest Estimate(US$M)

Source Local Foreign Total Local Foreign Total

Costs Costs Costs Costs

Cofinancing from Gov. of the Netherlands - 20.0 20.0 - 10.0 10.0

IBRD 337.0 337.0 77.0 232.3 309.3

Other cofinancing - 67.6 67.6 - - a/

PLN 131.9 40.5 172.4 109.4 53.0 162.4

TOTAL 131.9 465.1 597.0 186.4 295.3 481.7

Note: a/ The other cofinancing resource was intended to finance the distribution facilities in 1990/91 and1991/92. However, the source of the cofinancing was never identified and no distributioncofinancing ended up being included in the project.

- 20 -

Table 9: Economic Costs and Benefits

Appraisal Estimate Re-estimate

Base Case IERR (%) 18.3% on PLN's investment 15.7% on PLN's investmentprogram from 1988/89 - program from 1989/90 -1990/91 1995/96

Major Costs (US$ million)

Investment (cumulative) 3,194 9,168Fuel (Max. Incr.) 106 528O&M (Max. Incr.) 48 473

Major Benefits

Max. incr. sales (GWh) 6,896 24,031Max. incr. revenue at average 455 1,754tariff (US$ million)Max. incr. benefits (US$ million) 704 2,637

For detailed calculations, see Annex D.

The large differences between estimated and re-estimated costs and benefits are dueto the difference in time-slices used for the appraisal estimate and for the re-estimate.The re-estimate also uses updated (1995) prices.

- 21 -

Table 10: Status of Legal Covenants

Original RevisedAgreement Section Covenant Present fulfillment fulfillment Description of covenant Comments

l______ type status date dateLoan 3.01b) 3 C Subsidiary loan agreement between GOT Condition of

and PLN. effectiveness3.04 GOI to:

3.04(a) 12 NC A) establish and maintain task-force fromMOF, MME and BAPPENAS to reviewand advise GOI on all price adjustments in

l__________ energy sector3.04(b) 12 CP B) establish and maintain energy pricing Task assigned to a

tinit within MME to support above task- Directorate in MMEtorce

3.04(c) 10 NC C) prepare, review with Bank and Now beingimplement action plan with suitable implemented withregulatory and contractual measures to Small Power Purchaseutilize captive generation capacity in PLN Tariff

~~~~~~~~~~~~~gridll___ ____ _______gi

4.01(a) 9 ( Review annually potential changes in loadgrowth of Java power and variations ofPLN's development program.

4.01(b) 9 PLN/GOI would review with Bank itsnannual investment plan for the next FY.

4.01(c) II Review annual PLN's development plan andl ~~~~~~~~~~~~~~~~~~associated financial forecast and financingl

_ ~~~~~~~~~~~~~~plan4.02 2 C' Ensure all GOI electricity bills paid within

I _ _ _ ~~~~~~~~~~~~~~~two nionths

4.03 C 3/31!90 Obtain required cofinancing Dutch cofinancingl______ ________ _________________________________ obtained.

6.01 3 C' Subsidiary loan agreement executed

Proiect 2.06 9 C PLN to review with Bank its distribution Being implementedl________ .__________ expansion plan for Java

2.07 10 C PLN to provide to Bank a report containing Implementedjustification for each diesel rehabilitationcarried out under project

2.08 5 CP PLN to carry out action plan for efficiency Efficiency improved,improvement, including targets for non-Java but no operationalso that non-Java operations break-even targets and no break-

even4.01 i C PLN to submit audited accounts, and other

financial information, including segregatedRE accounts

4.02 2 C' PLN to review periodically with Bank itsl_____ LRMC and tariff structure4.03 1 C PLN to revalue fixed assets

4.04 5 C PLN to maintain projected debt-servicel_________ _________ coverage of at least 1.5

4.05 5 C PLN to prepare ten-year financial forecastl_____ ________ _______ _______ and review with Bank

Project 4.06(a) 2 C PLN to achieve 8% ROR for Java-Bali Covenant modifiedfrom 1989-90 under Ln 3761-IND to

require ROR not lessl l than 8 % for PLN as a

whole, commencing______ _ _ _ _ _ _ _ ________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ from FY 94/95.

4.06(a) 2 PLN to achieve break-even for outside-Java Not applicable, asl______ _________ __________ from 1992-93. described above.

4.06(b) 2 C PLN to review adequacy of tariffs to meet___________________ _______ _ __________4.06(a) targets

- 22 -

Covenant types:I1. = Accounts/audits 8. Indigenous people2. Financial performance/revenue generation from 9. = Monitoring, review, and reporting

beneficiaries 10. Project implementation not covered bv categories 1-93. - Flow and utilization of project funds I I. Sectoral or cross-sectoral budgetary or other resource4. = Counterpart funding allocation5. Management aspects of the project or executing 12 = Sectoral or cross-sectoral policy/ regulatory/institutional

agency action6. = Environmental covenants 13 = Other7. = Involuntary resettlement

Present Status:C = covenant complied withiCD= complied with after delayCP = complied with partiallyNC= not complied with

Table 11: Compliance with Operational Manual Statements

Statement Number and Title I Describe and comment on lack of compliance

There are no OMS relevant to the Project that have not been complied with and/or been acted against.

Table 12: Bank Resources: Staff Inputs

Planned Revised ActualStage of _________

Project Cycle Weeks US$ Weeks US$ Weeks US$

Preparation to appraisal n.a. n.a. n.a. n.a. 54.60 n.a.

Appraisal n.a. n.a. n.a. n.a. 24.39 n.a.

Negotiation through Board approval n.a. n.a. n.a. n.a. 33.08 n.a.

Supervision n.a. n.a. n.a. n.a. 67.21 n.a.

Completion n.a. n.a. n.a. n.a. 6.10 n.a.

TOTAL n.a. n.a. n.a. n.a. 185.38 n.a.

- 23 -

Table 13: Bank Resources: Missions

Performance RatingStage of Month/ Number Weeks Specialized Implemen- Develop- Types of Problems

Project Cycle Year of in Staff Skills tation mentPersons Field Represented Status Objectives

Through Appraisal 02/87 3 3 Power Eng. Preparation n/aThrough Appraisal ~~~~~Energy Econ.

Fin. Analyst05/87 2 3 Power Eng. Preparation n/a Preparation progress reported

Fin. Analvst to be slow.08/87 3 3 Power Eng. Pre- n/a Preparation progress reported

Energy Econ. appraisal to be slowFin. Analyst

11/87 2 3 Power Eng. Appraisal n/aFin. Analyst

02/88 3 3 Power Eng. Preparation n/aAppraisal through Energy Eeon.Board Approval Fig. Analyst

09/88 3 3 Power Eng. Post- n/a As above.Energy Econ. appraisalFin. Analyst

02/89 3 2 Power Eng. Post- n/aFin. Analyst appraisal

Board Approval - - -

throughEffectiveness

Supervision 02/90 3 3 Power Eng. I I Delays in TAFin. AnalystEnergyEconomist

11/90 2 2 Power Eng. I n/a (i) DecentralizedFin. Analyst procurement worked out for

diesel rehabilitation; (ii)increased scope for hydrorehab; (iii) delay indistribution component

04/91 3 2 Power Eng. 1 2 (i) Delay in most2 Fin. components; (ii) PLN reportAnalysts argues little potential in

linking captive power to thegrid; (iii) no use made ofcontingency fund for dieselrehabilitation

10/91 2 3 Power Eng. 1 2 (i) Request to PLN toFin. Analyst monitor diesel efficiency; (ii)

no progress on captive power03/92 3 2 Power Eng. I 2 (i) PLN's Corporate Planning

Fin. Analyst, Unit remained understaffed;Op. Officer (ii) need for close liaison

between various consultants.

- 24 -

Table 13: Bank Resources: Missions (Cont'd)

Performance RatingStage of Month/ Number Weeks Specialized Implemen- Develop- Types of Problems

Project Cycle Year of in Staff Skills tation mentPersons Field Represented Status Objectives

Supervision 11192 2 3 Power Eng. I 2 (i) Progress on the dieselFin. Analyst efficiency program was slow;

(ii) GOI had not establishedan energy pricing unit asagreed.

04/93 2 2 Power Eng. l 2 Little progress made on theFin. Analyst evolution of the regulatory

and contractual measures toutilize captive generatingcapacity.

04/94 2 3 Power Eng. l 2 (i) No progress in captive-Fin Analyst PLN coordination, but

dialogue on small powerpurchase tariff begun; (ii)extension and reallocation ofloan identified as required.

11/94 2 3 Power Eng. S S (i) Disbursement one yearFin. Analyst and implementation two

years behind appraisalschedules; (ii) corporate &financial planning andaccounting TAs not yetachieved full benefits forPLN.

11/95 1 4 Power Eng. S S (i) ICR initiated; (ii) onehydro turbine damaged,

l____________ ____________ ___________ delaying completionCompletion 03/96 3 1 Power Eng.

Fin. Econ.l__________ ______ _ _ _ _ _ _ _ _ _ _ _ _ _ Op. Officer

- 25 -

IMPLEMENTAION COMPLETION REPORT

INDONESTA

POWER SECTOR EFFICIENCY PROJECT

(LOAN 3097-IND)

ANNEXES

ANNEX A: MISSION'S AIDE MEMOIREANNEX B: OPERATIONAL PLANANNEX C: BORROWER'S EVALUATION REPORTANNEX D: CALCULATION OF ECONOMIC INTERNAL

ECONOMIC OF RETURN

ICR Mission Aide Memoire - 26 - Annex A

ANNEXA

INDONESIAPOWER SECTOR EFFICIENCY PROJECT

(LOAN 3097-IND)

IMPLEMENTATION COMPLETION REPORT (ICR) MISSION

AIDE MEMOIRE

Introduction

1. This Aide Memoire records the findings of a World Bank Mission comprising Mr.Stephen Howes, Mrs. Judith Magyari and Mr. Yuling Zhou, who visited Indonesia duringMarch 11 through March 22, 1996, for preparation of the Implementation CompletionReport (ICR) for the Power Sector Efficiency Project (Loan 3097-IND). The missionrecords its thanks to PLN staff for the assistance provided in the ICR preparation andacknowledges the courtesies and cooperation extended to it during its visit.

Activities Undertaken by Mission

2. The mission: (i) collected the data necessary to prepare the statistical tables in theICR; and (ii) reviewed other background data to develop its analysis. Discussions wereheld with PLN staff to better understand and interpret the available data. The project wasassessed with regard to the degree of achievement of the objectives, prospects of itssustainability, Bank and Borrower performance, and the lessons learned. In addition, themission provided advice and support to the Borrower for preparing its own contributionto the ICR.

Overall Project Objective

3. The overall objective of the project was to increase sectoral efficiency. PLN hasgone over the period of the project (1990-1995) from being a loss-maker to being asubstantial profit-maker without an increase in the real value of tariffs. This indicates anunderlying improvement in efficiency. The project selected targets for four technicalindicators to measure sectoral efficiency, i.e., capacity utilization, reserve margin, systemlosses, and fuel consumption. Some, but not all, of the sectoral targets were reached.Realistically though, any overall gains in sectoral efficiency cannot be attributed to thisone project which constituted only a small part of PLN's overall investment program. Tojudge the success of the project, its specific activities and objectives should be assessed.

ICR Mission Aide Memoire - 27 - Annex A

Review of Investment Activities

4. Diesel Rehabilitation and Relocation A total of 109 diesel units wererehabilitated using Bank funding for a capacity gain of 143 MW. This exceeded the SARtarget of 82 units for a capacity gain of 133 MW. Over the same period (1991/92 -1994/95), an additional 28 units were rehabilitated using the Dutch funds and anadditional 21 units using PLN's own funds. The rehabilitation using the Dutch financingwas less than expected due to the termination of Dutch aid to Indonesia in 1992.Substantial relocation of diesel units was also carried out using PLN's own funds.Between 1991/92 and 1994/95, 125 units with a total capacity of 65 MW were relocated.This exceeded the SAR target of 73 units.

5. Hydro Renovation The Bank loan provided for the procurement and installationof electrical and mechanical equipment, and engineering and construction supervision ofrenovation works on seven hydro stations. During dismantling of the turbines andgenerators new problems were found at most plants, and instead of the 11 generatingunits identified in the feasibility study, 22 units needed to be refurbished, which causedcost increase. Refurbishment of the 22 generating units was completed. The stations arein commercial operation and the taking over certificate (TOC) has been issued to all butone unit for which the turbine was damaged during the test run.

6. Distribution Investment The project was intended to finance PLN's Java non-rural distribution investment program for the years of 1990/91 and 1991/92. However,delivery of the materials financed under the loan was not complete until March 1995,about three years behind schedule, so the project thus financed instead PLN's 1993/94and 1994/95 Java non-rural distribution program. This change in the time-slice makesthe SAR investment targets for 1990/91 and 1991/92 irrelevant as project targets.However, it can be noted that PLN achieved or exceeded most of its distribution targets in1990/91, but not in 1991/92, due to a budget shortage.

7. Expansion of PLN's Telecommunications Facilities The project initially includedthe provision of trunk telecommunications facilities in West Java (about 500 km of fiberoptic cables), but this was later amended to extend the network to Central Java. The loanfinanced equipment and engineering services and construction supervision.Commissioning of new facilities took place in June 1995, with final hand-over scheduledfor May/June 1996. The final performance of the network was measured during thecommissioning and system availability tests and was demonstrated to have met orexceeded the requirements of the contract in all areas. PLN now has a comprehensiveand modern communications network to support all of its operations in West Java andpart of Central Java. The network also has the spare capacity to satisfy additional needsin the medium term.

ICR Mission Aide Memoire - 28 - Annex A

Review of TA Activities

8. Distribution Management Program (DMP) The consultancy was undertakenbetween 1991 and 1993. The consultants developed a DMP Master Plan which identified14 activities to be undertaken to improve PLN's distribution management. PLNestablished in early 1994 a Working Group and a Steering Committee to carry outpriority implementation of three activities: customer information system, distributioninformation system and data communications. Although there has not yet been acomprehensive follow-up, various pilots have been initiated. Further follow-up initiativesarising from this consultancy will be undertaken under the Bank financed Second PowerTransmission and Distribution Project.

9. Technical Assistance for General Accounting The general accountingconsultancy, aimed at improving PLN's accounting policies and systems, and preparingupdated accounting manuals, commenced in September 1991 (about 18 months behindschedule) and was completed in December 1994. New accounting policies, which in themain follow best international practice, have been implemented and accompanyingmanuals completed, and relevant training undertaken. PLN's recent accounts havereceived unqualified auditor opinions (in contrast to the late eighties).

10. Technical Assistance for Financial and Corporate Planning The consultancycommenced in October 1991 (about 18 months behind schedule) and continuedthroughout the remainder of the project life. The consultant prepared a Master Plan forCorporate Planning in April 1993. The plan recommended establishment of a separatecorporate planning division and consolidation of corporate and financial planningactivities with additional staffing. These recommendations were largely adopted. Acorporate planning division was established by PLN in 1995. The consultant alsoassisted PLN in preparation of a five-year corporate plan (1994-1998) and an Action Planfor PLN's Institutional Development, which was endorsed by the PLN Board. Manyrecommendations were implemented in a major reorganization. For improvement offinancial planning, the consultant developed a new software which is replacing the oldone used within PLN. The new software is an improvement in several ways, and hasbeen officially adopted by PLN, though currently the old and new software are beingused in parallel runs. Further training is required and planned for use in the new software,which will be especially useful in producing consolidated financial projections since PLNhas created new subsidiaries.

Review of Policy Support Objectives

11. Institutional Mechanism to Advise GOI on Energy Price Adjustment One of thestated objectives of the project was to have GOI take a coordinated approach for pricesetting by establishing a energy pricing task-force and a supporting technical energypricing unit. In fact, the task-force was never established; the energy pricing unit alsowas not created, but the work was assigned to the energy planning directorate within

ICR Mission Aide Memoire - 29 - Annex A

MME. In hindsight, it is clear that energy prices are adjusted too infrequently to makethe establishment of an energy pricing task force a feasible proposition. However,progress was made on the underlying goal of improving energy pricing. In 1993, GOIaligned domestic petroleum fuel prices to international prices (except for kerosene); andin 1994, an automatic adjustment mechanism was implemented for the electricity tariff.

12. Utilization by PLN of Captive Generating Capacity Another stated policyobjective of the project was to link captive generating capacity to the PLN grid. Anaction plan for a pilot to achieve this objective was tabled at the loan negotiations, but itlacked concrete policies and little progress was made. This led to a more fundamentalrethink, which resulted in an agreement between the Bank and GOI that the latter wouldimplement a Small Power Purchase Tariff, under which PLN is now offering apurchased-power tariff to small (including captive) generators that reflect PLN's avoidedcost of power generation. This was implemented in December 1995, and provides apossible vehicle by which this objective of the project can be achieved, although withconsiderable delay.

Summary Assessment

13. Economic Rate of Return (ERR) The mission received an initial re-estimation ofthe ERR for PLN's Java investment program during the project life. Subject to furtherreview of the data, it appears that the estimated ERR at project appraisal (18%) will beachieved. Individual ERRs for the hydro renovation component were calculated andranged between 13% and 31% with an average of 24%, showing that the SAR estimates(15% to 32%) have been met.

14. Overall, the project performance vis-a-vis its objectives is satisfactory. However,it should be noted that the project suffered from substantial delays in implementation (inthe order of one-and-a-half to three years) mainly due to lengthy procurement times.These in turn were driven by the requirements imposed by both GOI and PLNprocurement procedures. Both these were significant contributing factors to the one-yearloan closing date extension. In addition, the project only partially achieved its policyobjectives in relation to the utilization of captive generation and energy price setting.

Project Sustainability and Operational Plan

15. The project achievements and benefits are sustainable. The physical investmentswill be productive for many years. In particular, the telecommunications program hasprovided PLN with a state-of-the-art communications network which will providevaluable services to the company for years to come. Results and recommendations fromthe technical assistance have already been or are being incorporated into PLN'smanagement practices.

ICR Mission Aide Memoire - 30 - Annex A

16. Operational plans to ensure sustainability of the outcomes achieved under theproject were discussed with PLN during the mission, and are attached to this aidememoire.

Disbursement.

17. PLN indicated that there were a small number of payments, valued atapproximately $1 million, which became, or would become, due after the loan closingdate of December 31, 1995. The mission advised PLN to prepare an application for atransfer of these payments to an alternative loan.

Next Steps

18. The mission's draft final ICR, reflecting the above findings, is expected to be sentto GOI and PLN by May 1, 1996. It was agreed that PLN will forward its comments, ifany, to the Bank on the draft ICR by no later than May 15, 1996. The ICR will befinalized and printed in June 1996.

Operational Plan - 31 - Annex B

ANNEX B

POWER SECTOR EFFICIENCY PROJECT(LOAN 3097-IND)

OPERATIONAL PLAN

Diesel Power Plants

PLN has established comprehensively documented maintenance procedures for dieselgeneration sets. These procedures for maintenance of diesel power plants have beendistributed to all regions where diesel generation sets have been installed. Theprocedures detail the type and frequency of maintenance to be provided and have anestablished reporting system to monitor adherence to procedures. Reports are submittedto operations division in the head office quarterly. Maintenance is carried out inaccordance with manufacturers' specifications, a copy of which is held for each dieselgeneration set.

Distribution Network

Maintenance on the distribution network in Java is managed by the four distributionunits. Patrols of lines take place on a regular basis and any deficiencies are noted andcorrected. In addition, a faults service is in place to provide rapid response to faults asthey occur. The maintenance and faults are conducted in accordance with the proceduresfor quality, reliability and efficiency indicators of electric supply.

Hydro Power Plants

The completion report, being prepared by the consultant, will outline future operationalplan for the seven hydro power plants renovated under the project. Basically, all thehydro plants are being operated on a 24-hour basis, depending on the availability ofwater. Several indicators are used to measure the performance of these plants. Amongthem are: energy capacity targets, plant factor and operating/maintenance cost (less orwithin 0.5%-1% of the capital cost). Additional works have been identified by theconsultants for each of the seven plants for operational safety and reliability as well as forimprovement of efficiency. These works will be carried out according to their priorityorder upon approval by the PLN Board.

Java West Operations Telecommunications System (JWOTS)

Design tools and guidelines have been developed by the consultants for operation,maintenance and expansion of the system. Extensive training has been conducted by the

Operational Plan - 32 - Annex B

consultants and contractors which provided PLN staff with essential knowledge and skillsfor system maintenance and design. The system has the capacity to support future growthof PLN's power systems. In order to make better use of the system capacity, a joint useprogram is being developed with PT Telkom. After a successful trial installation, PTTelkom is now requesting further installations in Central Java and negotiations are nowunderway. Furthermore, the system provides many types of data communicationsinterfaces linking all PLN sites and is suitable for the establishment of a wide areanetwork (WAN). Such a WAN is seen as a high priority by many PLN departments andthese interfaces are beginning to be used on a trial basis. A proposal is being developedby PLN to establish a WAN.

Corporate and Financial Planning

A separate Corporate Planning Division has been established to institutionalize thisactivity.

The new financial planning software, SIMUL, requires final customization. This will becompleted, and PLN's old software, FINPRO, will be converted to EXCEL to aidcompatibility. SIMUL will be maintained and updated as required. Training of staffoutside HQ will be undertaken so that financial projections can be made at theresponsibility center level. SIMUL's capacity to consolidate financial statements will beutilized so that it remains useful in an unbundled PLN.

General Accounting

The manuals arising from the study will be updated as required by new events, forexample, the recent creation by PLN of two generating subsidiaries.

Distribution Management Program (DMP)

The DMP Master Plan, developed by the consultants under the project, identified 14activities to be undertaken to improve PLN's distribution management. PLN establishedin early 1994 a Working Group and a Steering Committee to carry out priorityimplementation of three activities: customer information system, distribution informationsystem and data communications. Various pilots have been initiated and other follow-upinitiatives arising from the consultancy will be undertaken under the Bank financedSecond Power Transmission and Distribution Project.

Borrower Evaluation - 33 - Annex C

ANNEX C

POWER SECTOR EFFICIENCY PROJECT(LOAN 3097-IND)

BORROWER'S EVALUATION REPORT

EVALUATION OF THE BANK'S PERFORMANCE

Bank's performance during the evolution and implementation of the project was generallysatisfactory. The efforts were very constructive during the process of projectimplementation. Bank's involvement was steadily maintained throughout the projectcircle. During the project preparation and appraisal, Bank had sent competent missionsso the scrutinizing process in establishing the project objective, and also in assessing ofthe project cost, scope of work, financing plan and time schedule of the project could beaccomplished successfully. Bank has involved in establishing Staff Appraisal Report(SAR) particularly in the assessment of cost planning, scope of work, source of finance,time schedule, and delivered suggestions during cost revision and scope of worknegotiations. During the project implementation, Bank assisted PLN in supervision ofprocurement, project time schedule, cost disbursement and PLN got some advice insolving the pending issues prior to the date when the loan was nearly closed. Bankextended the period of the loan by 1 year which reflected the mutual understandingbetween the Bank and the Borrower (PLN).

EVALUATION OF THE BORROWER'S OWN PERFORMANCE

During the project implementation, PLN has made its endeavor to improve the process.However, delays occurred during the recruitment of Consultants and procurementprocesses.

THE EFFECTIVENESS OF THE RELATIONSHIP BETWEEN THE BANK ANDTHE BORROWER DURING THE EVALUATION AND IMPLEMENTATION OFTHE PROJECT

The relationship between the Bank and PLN was good. Most of the problemsencountered were clearly identified by both parties and relevant actions to solve theproblem were promptly agreed and taken.

In particular, good mutual understanding was achieved selecting least cost materials.

Borrower Evaluation - 34 - Annex C

ASSESSMENT OF THE OUTCOME

The main objectives of the project were not only to focus the attention of PLN and GOIon the sector's efficiency and to implement selected actions in a timely manner to utilizeresources more efficiently, but also to build PLN's institutional capacity in the fields ofcorporate planning, financial planning, accounting and cash management functions, anddistribution management program.

With regards to the operational improvement, PLN rehabilitated 109 Diesel Plants withtotal capacity 143 MW using the IBRD financing and relocated of 125 Diesel Plants withtotal capacity of 65 MW. The project was developed and implemented new ways ofmaintaining Diesel Units including improved inventory management for spare parts.

The project also renovated 22 units on 7 Hydro Electric Plants in Java with total capacitygained of 25 MW.

In the field of telecommunications, the project provided PLN with a trunktelecommunications network in West and Central Java using fiber optic cables whichsuperimposed on and integrated with PLN's existing telecommunications facilities.

To cope with the rapid demand growth, the project has complemented the earliertransmission and substation network projects financed by the Bank with expanding nonrural distribution in the whole area of Java at voltages of 20 kV and below. The projectexpanded distribution facilities in Java with 8.751 kmc MV lines, 9.744 kmc LV lines,1.708 MVA distribution transformers and 1.011 . 153 new consumers. This distributionproject also included technical assistance to strengthen PLN's management of theplanning, design, construction, operation and maintenance of the distribution facilities.

On the institutional capacity building side, PLN's staff gained significant experience fromthe technical assistance. As a result, the corporate and financial planning functions hasbeen strengthened and the cash management and accounting functions improved.

In summary, the project outcome can be rated satisfactory. The successful elements ofthe Project should be used as reference for similar projects in future.

KEY LESSONS LEARNED

To maintain the agreed project schedule and to minimize implementation delays, it's veryimportant for PLN to improve it's internal procurement procedures.

The project was a very complex one with many independent components. A centralproject management within Supervision Division of PLN could have facilitated theoverall project coordination and implementation.

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